UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

Form 10-K

 

Commission File Number 000-51360

 

Liberty Global, Inc.
(Exact name of Registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:
(303) 220-6600

 

Securities registered pursuant to Section 12(b) of the Act:

none

 

Securities registered pursuant to Section 12(g) of the Act:

Series A Common Stock, par value $0.01 per share

Series B Common Stock, par value $0.01 per share

Series C Common Stock, par value $0.01 per share

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ  No o

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No þ

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

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

 

 

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-1 of the Exchange Act.  Yes o  No þ

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates, computed by reference to the price at which the common equity was last sold, or the average bid and ask price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $8.9 billion.

 

The number of outstanding shares of Liberty Global, Inc.’s common stock as of February 16, 2007 was:

 

191,956,430 shares of Series A common stock;

7,284,384 shares of Series B common stock; and

192,147,050 shares of Series C common stock.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the definitive proxy statement for the Registrant’s 2007 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.

 

 

LIBERTY GLOBAL, INC.

 

2006 ANNUAL REPORT ON FORM 10-K

 

TABLE OF CONTENTS

 

 

General Development of Business

 

Liberty Global, Inc. (LGI) is an international broadband communications provider of video, voice and broadband Internet access services, with consolidated broadband operations at December 31, 2006, in 16 countries (excluding Belgium). Our operations are primarily in Europe, Japan and Chile. Through our indirect wholly owned subsidiaries UPC Holding BV (UPC Holding) and Liberty Global Switzerland, Inc. (LG Switzerland), we provide broadband communications services in 10 European countries (excluding Belgium). As described below, our broadband operations in Belgium ceased to be consolidated on December 31, 2006. LG Switzerland holds our 100% ownership interest in Cablecom Holdings AG (Cablecom), a broadband communications operator in Switzerland. The broadband communications operations of UPC Holding and LG Switzerland are collectively referred to as the UPC Broadband Division. Through our indirect controlling ownership interest in Jupiter Telecommunications Co., Ltd. (J:COM), we provide broadband communications services in Japan. Through our indirect 80% owned subsidiary VTR Global Com, S.A. (VTR), we provide broadband communications services in Chile. We also have (i) consolidated direct-to-home 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 our indirect wholly owned subsidiary Chellomedia BV (Chellomedia), which also provides 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 and some of our other broadband operations.

 

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. 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). 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 indicated otherwise, convenience translations into U.S. dollars are calculated as of December 31, 2006 and operational data, including subscriber statistics, are as of December 31, 2006.

 

Recent Developments

 

 

On March 2, 2006, our subsidiary, UPC Austria GmbH, acquired all the outstanding shares of INODE Telekommunikationsdienstleistungs GmbH (INODE) for cash consideration before direct acquisition costs of €93 million ($111 million at the transaction date). INODE is one of Austria’s leading digital subscriber line (DSL) companies.

 

On August 9, 2006, (i) our indirect subsidiary, Liberty Global Europe NV (Liberty Global Europe), signed a total return swap agreement with each of Aldermanbury Investments Limited (AIL), an affiliate of JP Morgan, and Deutsche Bank AG, London Branch (Deutsche), to acquire Unite Holdco III BV (Unite Holdco), subject to regulatory approvals, and (ii) Unite Holdco entered into a share purchase agreement to acquire for €322.5 million, subject to closing and post-closing adjustments, all interests in Karneval Media s.r.o. and Forecable s.r.o. (together Karneval) from ICZ Holding BV. On September 18, 2006, Unite Holdco acquired Karneval for aggregate cash consideration of €331.1 million ($420.1 million at the transaction date) before direct acquisition costs, including

€8.6 million ($10.9 million at the transaction date) of net cash and working capital adjustments. Karneval provides cable television and broadband Internet services to residential customers and managed network services to corporate customers in the Czech Republic. On December 28, 2006, following receipt of applicable regulatory approvals, Liberty Global Europe completed its acquisition of Unite Holdco and (indirectly) Karneval and settled the total return swap agreements, with each of AIL and Deutsche.

 

On September 28, 2006, J:COM paid aggregate cash consideration of ¥55.8 billion ($472.5 million at the transaction date) before direct acquisition costs to increase its ownership interest in Cable West Inc. (Cable West) from an 8.6% non-controlling interest to an 85.0% controlling interest. On November 15, 2006, J:COM paid aggregate cash consideration of ¥7,736 million ($65.5 million at the transaction date) to increase its ownership interest in Cable West to 95.6%. Cable West is a broadband communications provider in Japan. In connection with the acquisition of Cable West, J:COM entered into new term loan agreements in September 2006. See Financings below.

 

On November 13, 2006, an indirect majority owned subsidiary of Chellomedia, Belgian Cable Investors, a Delaware partnership (Belgian Cable Investors), exercised call options to purchase 6,750,000 shares of Telenet Group Holding NV (Telenet) for a total purchase price of €135.0 million ($172.9 million at the transaction date) before direct acquisition costs. We acquired those shares from various members of the Mixed Intercommunales, which are entities comprised of certain Flanders municipalities and Electrabel NV. The Mixed Intercommunales and certain of our subsidiaries are members of a syndicate (the Telenet Syndicate) that controls Telenet by virtue of the Telenet Syndicate’s collective ownership of a majority of the outstanding Telenet shares. Although we obtained sufficient governance rights to allow us to exercise voting control over Telenet, we could not exercise such control until February 26, 2007, when we obtained regulatory approval.

 

In addition, (i) in November 2006, LGI Ventures BV (LGI Ventures), formerly Chellomedia Investments BV, a wholly owned subsidiary of Chellomedia, paid cash consideration of €22.2 million ($28.4 million at the transaction date), before direct acquisition costs, to acquire 931,138 Telenet shares and 136,464 warrants to purchase Telenet shares from certain of our co-investors in Telenet, and (ii) in December 2006, Liberty Global Europe, the indirect parent of Chellomedia, paid cash consideration of €17.2 million ($22.5 million at the transaction date), before direct acquisition costs, to acquire 800,000 Telenet shares through open market purchases.

 

Also in November 2006, certain entities that are majority owned by Belgian Cable Investors (the Investcos) distributed 680,062 Telenet shares and 1,159 warrants to purchase Telenet shares to certain of our co-investors in Telenet in exchange for the redemption of Investcos securities that were held by these Telenet co-investors. These shares and warrants were in turn sold by the Telenet co-investors to LGI Ventures for cash consideration of €14.0 million ($18.0 million at the transaction date) before direct acquisition costs. The warrants acquired in these transactions are each exercisable for three Telenet shares.

 

In addition to the foregoing, during 2006, we completed various other smaller acquisitions in the normal course of business. See note 5 to our consolidated financial statements.

 

 

On January 19, 2006, we sold 100% of our Norwegian broadband communications operator, UPC Norge AS, to an unrelated third party for cash proceeds of approximately €444.8 million ($536.7 million at the transaction date).

 

On June 19, 2006, we sold 100% of our Swedish broadband communications operator, NBS Nordic Broadband Services AB, to a consortium of unrelated third parties for cash proceeds of Swedish krona (SEK) 2,984 million ($403.9 million at the transaction date) and the assumption by the buyer of capital lease obligations with an aggregate balance of approximately SEK 251 million ($34.0 million at the transaction date).

 

On July 19, 2006, we sold 100% of our French broadband communications operator, UPC France SA, to a consortium of unrelated third parties for cash proceeds of €1,253.2 million ($1,578.4 million at the transaction date), subject to post-closing adjustments.

On December 31, 2006, we sold UPC Belgium NV/SA (UPC Belgium), which owns and operates broadband communications systems in Belgium, to Telenet for cash proceeds of €184.5 million ($243.3 million at the transaction date), after deducting cash received to settle net cash and working capital adjustments of €20.9 million ($27.6 million at the transaction date). At that date, we had a 28.8% indirect interest in Telenet based on the number of Telenet shares then outstanding. Accordingly, we continue to hold an interest in UPC Belgium after the sale.

 

In addition, during 2006, we completed other smaller dispositions in the normal course of business. See note 6 to our consolidated financial statements.

 

 

UPC Holding.  On May 10, 2006, UPC Broadband Holding BV (UPC Broadband Holding), a wholly owned subsidiary of UPC Holding, amended its senior secured credit facility (the UPC Broadband Holding Bank Facility) to refinance the Facility F, G and H term loans thereunder with a portion of the borrowings of new Facility J and K terms loans under the UPC Broadband Holding Bank Facility. The amounts borrowed under Facilities J and K aggregated €1,800 million and $1,775 million, with each denomination split evenly between Facilities J and K. On July 3, 2006, UPC Broadband Holding entered into an additional facility accession agreement for Facility L, an €830 million multicurrency repayable and redrawable term loan facility under the UPC Broadband Holding Bank Facility. Facility L replaces Facility A, the €500 million multicurrency revolving credit facility, that was due to mature in June 2008, and the credit agreement under which Facility A was issued has been cancelled.

 

As of December 31, 2006, there are four facilities under the UPC Broadband Holding Bank Facility; Facilities I, J, K and L. Facilities I and L are repayable and redrawable term loans with maximum borrowing capacity of €500 million ($659.5 million) and €830 million ($1,094.7 million), respectively. At December 31, 2006, there were no borrowings outstanding under either Facility I or L. Borrowings under Facility I are due and payable in one installment on April 1, 2010. Borrowings under Facility L are to be repaid in one installment on July 3, 2012. At December 31, 2006, the amounts outstanding under Facilities J and K aggregated €1,695 million ($2,235.6 million) and $1,775 million. Amounts outstanding under each of Facilities J and K are to be repaid in one installment on March 31, 2013 and December 31, 2013, respectively.

 

J:COM.  In December 2005, J:COM entered into a credit facility agreement with a syndicate of banks (the J:COM Credit Facility). Originally, the J:COM Credit Facility consisted of three facilities: a ¥30 billion ($251.9 million) five-year revolving credit loan (the J:COM Revolving Loan); an ¥85 billion ($713.8 million) five-year amortizing term loan (J:COM Tranche A Term Loan); and a ¥40 billion ($335.9 million) seven-year amortizing term loan (J:COM Tranche B Term Loan). As discussed below, J:COM has refinanced the J:COM Tranche B Term Loan. Borrowings may be made under the J:COM Credit Facility on a senior, unsecured basis. On December 21, 2005, the proceeds of the J:COM Tranche A and Tranche B Term Loans were used, together with available cash, to repay in full outstanding loans totaling ¥128 billion ($1,100 million at the transaction date) under J:COM’s then existing credit facilities.

 

During April and May of 2006, J:COM refinanced ¥38 billion ($323 million at the transaction date) and ¥2,000 million ($18 million at the transaction date), respectively, of the J:COM Tranche B Term Loan with ¥20 billion of fixed-interest rate loans and ¥20 billion of variable-interest rate loans. These loans are each to be repaid in one installment on their respective maturity dates in 2013.

 

In connection with the September 2006 acquisition of Cable West, J:COM entered into (i) a ¥2,000 million variable-interest rate term loan agreement, (ii) a ¥20 billion seven-year fixed-interest rate term loan agreement, and (iii) a ¥30 billion syndicated term loan agreement. The ¥2,000 million ($17 million at the transaction date) and ¥20 billion ($169.7 million at the transaction date) term loans were fully drawn in September 2006, and ¥14 billion from the J:COM Revolving Loan was also drawn. The full amount of the ¥30 billion ($252.6 million at the transaction date) syndicated term loan was drawn on October 27, 2006, and a portion of the proceeds was used to repay the then outstanding balance of the J:COM Revolving Loan (¥14 billion or $117.9 million at the transaction date). The new term loans mature between 2011 and 2013. At December 31, 2006, ¥30 billion ($251.9 million) was available for borrowing under the J:COM Revolving Loan.

Cablecom.  On December 5, 2005, Cablecom Luxembourg S.C.A. (Cablecom Luxembourg) and Cablecom GmbH entered into a secured facilities agreement (the Cablecom Luxembourg Bank Facility) with certain banks and financial institutions as lenders. On January 20, 2006, Cablecom Luxembourg redeemed the balance of all of Cablecom Luxembourg’s senior secured floating rate notes that were not tendered prior to the expiration in December 2005 of the “change of control” offer, which Cablecom Luxembourg was required to effect in connection with our acquisition of Cablecom. The redemption price paid was 102% of the respective principal amounts of such senior secured floating rate notes, plus accrued interest through the redemption date. The redemption price was funded by borrowings of term loans under the Cablecom Luxembourg Bank Facility. The Cablecom Luxembourg Bank Facility provides for two term loan facilities with maximum aggregate borrowings of CHF 1,330 million ($1,090.3 million). Both of these term loans were fully drawn at December 31, 2006.

 

On October 31, 2006, Cablecom Luxembourg sold €300.0 million ($383.2 million at the transaction date) principal amount of its 8.0% Senior Notes due 2016 (the Cablecom Luxembourg New Senior Notes) pursuant to a purchase agreement dated October 26, 2006, among Cablecom Luxembourg, UPC Holding, JP Morgan Securities Ltd. and Deutsche. The net proceeds from the sale of the Cablecom Luxembourg New Senior Notes, together with available cash, has been placed into an escrow account (the Cablecom Luxembourg Defeasance Account) for the benefit of the holders of Cablecom Luxembourg’s 9.375% Senior Notes due 2014 (the Cablecom Luxembourg Old Fixed Rate Notes) in connection with the covenant defeasance of such Notes. This covenant defeasance eliminated substantially all of the covenants and other obligations of Cablecom Luxembourg contained in the Cablecom Luxembourg Old Fixed Rate Notes and the relevant indenture until redemption of the Cablecom Luxembourg Old Fixed Rate Notes on April 15, 2007. The cash deposited into the Cablecom Luxembourg Defeasance Account (€331.6 million or $437.4 million at December 31, 2006) is reserved for the payment of the principal, accrued interest and a call premium that will be due in connection with the April 15, 2007 redemption of the Cablecom Luxembourg Old Fixed Rate Notes.

 

The indenture for the Cablecom Luxembourg New Senior Notes provides that, on or after April 15, 2007, Cablecom Luxembourg and UPC Holding may, at their option, effect a series of transactions (the Cablecom Fold-In) under which Cablecom, the indirect parent company of Cablecom Luxembourg, and its subsidiaries would become indirect subsidiaries of UPC Holding. In the event that the Cablecom Fold-In occurs, Cablecom Luxembourg and UPC Holding may, at their sole option, assign (or otherwise transfer) Cablecom Luxembourg’s obligations under the Cablecom Luxembourg New Senior Notes to UPC Holding, at which time the terms (other than interest, maturity and redemption provisions) of such Notes, including the covenants, will be modified to become substantially identical to the terms of the existing senior notes of UPC Holding outstanding on the issue date of the Cablecom Luxembourg New Senior Notes. Similarly, the Cablecom Luxembourg Bank Facility contains an accession mechanism under which the term loan lenders have agreed to roll their participations in the term loans into the UPC Broadband Holding Bank Facility at the election of Cablecom Luxembourg subject to certain conditions.

 

VTR.  On September 20, 2006, VTR replaced its then existing bank credit facility with a new senior secured credit agreement (the VTR Bank Facility) consisting of (i) a CLP 122.6 billion ($229.5 million) Chilean peso-denominated seven-year amortizing term loan (the VTR Tranche A Term Loan), (ii) a $475 million U.S. dollar-denominated eight-year term loan due in 2014 (the VTR Tranche B Term Loan), and (iii) a CLP 13.8 billion ($25.8 million) Chilean peso-denominated six and a half-year revolving loan (the VTR Tranche C Revolving Loan.)

 

At closing on September 20, 2006, the full $475 million of the VTR Tranche B Term Loan was drawn. Proceeds were used to (i) repay the CLP 175.5 billion ($326.7 million on the transaction date) outstanding balance of VTR’s then existing bank credit facility, (ii) repay an intercompany loan payable to one of our subsidiaries ($50.7 million principal amount outstanding on the transaction date), (iii) pay financing fees and other transaction costs, and (iv) fund an increase in cash and cash equivalents to be used for capital expenditures and other general corporate uses.

 

LFP LLC.  We own a 99.9% 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 August 2 of the years 2017 and 2022.

 

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. LFP LLC has pledged all 345,000 shares of the ABC Family preferred stock as security for the borrowing, which matures on August 1, 2007. 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.

 

Austar.  On August 3, 2006, a subsidiary of Austar United Communications Limited (Austar) entered into a new senior secured debt facility (the Austar Bank Facility) with a syndicate of local and international banks. The Austar Bank Facility is comprised of three facilities: (i) a AUD 275.0 million ($216.8 million) five-year term loan facility; (ii) a AUD 300.0 million ($236.5 million) seven-year term loan facility; and (iii) a AUD 25.0 million ($19.7 million) six-year revolving loan facility. Borrowings under the Austar Bank Facility mature between 2011 and 2013. Austar used the borrowings under the Austar Bank Facility, together with available cash, (i) to repay all amounts outstanding under its old bank facility of AUD 190.0 million ($144.4 million at the transaction date) and (ii) to fund a AUD 201.6 million ($151.7 million at the transaction date) capital distribution to Austar’s shareholders on September 20, 2006, including a AUD 107.2 million ($80.7 million at the transaction date) distribution to our company.

 

Chellomedia.  On December 12, 2006, Chellomedia Programming Financing Holdco B.V. (Chellomedia PFH), an indirect subsidiary of Chellomedia, consummated a senior secured credit facility (the Chellomedia Bank Facility) with certain banks and financial institutions as lenders. The Chellomedia Bank Facility provides the terms and conditions upon which the lenders have made available to Chellomedia PFH the following: (a) four term facilities: (i) a seven-year €87.4 million ($115.3 million) term loan facility, (ii) a seven-year €17.6 million ($23.2 million) term loan facility, (iii) a seven-year $74.9 million term loan facility and (iv) a seven-year $15.1 million term loan facility; (b) a seven-year €25.0 million ($33.0 million) delayed draw facility (which may be drawn through June 8, 2007); and (c) a six-year €25.0 million ($33.0 million) revolving facility (which may also be drawn in Hungarian forints). As of December 31, 2006, the four term facilities have been drawn in full and the delayed draw facility and revolving facility have no outstanding borrowings. The proceeds of the four term facilities have been applied (i) to refinance the €65.0 million ($86.0 million at the transaction date) senior secured credit facility for Plator Holding B.V. dated November 23, 2005, (ii) to repay a €43.0 ($56.7 million at the transaction date) intercompany loan, and (iii) to loan €34.7 million ($45.8 million) and $90.0 million to its parent entities.

 

Puerto Rico.  On March 1, 2006, our Puerto Rico subsidiary refinanced its existing bank facility with a portion of the proceeds from a $150 million seven-year amortizing term loan under an amended and restated senior secured bank credit facility. This new bank credit facility also provides for a $10 million seven-year revolving loan.

 

 

During the first quarter of 2006, we purchased $121.1 million of our LGI Series A and Series C common stock pursuant to a stock repurchase program authorized in June 2005. In March 2006, our board of directors approved a new stock repurchase program under which we may acquire an additional $250 million of our LGI Series A and Series C common stock through open market transactions or privately negotiated transactions, which may include derivative transactions. The timing of the repurchase of shares pursuant to this program is dependent on a variety of factors, including market conditions. This program may be suspended or discontinued at any time. Under this program, we acquired $132.1 million of our LGI Series A and Series C common stock during the second and third quarters of 2006.

 

On June 21, 2006, we purchased 10,000,000 shares of our LGI Series A common stock at $25.00 per share and 10,288,066 shares of our LGI Series C common stock at $24.30 per share, for an aggregate purchase price of $500.0 million before direct acquisition costs, pursuant to two self-tender offers. On September 15, 2006, we purchased 20,000,000 shares of our LGI Series A common stock at $25.00 per share and 20,534,000 shares of our

LGI Series C common stock at $24.35 per share, for an aggregate purchase price of $1.0 billion before direct acquisition costs, pursuant to two modified Dutch auction self-tender offers. On January 10, 2007, we purchased 5,084,746 shares of our LGI Series A common stock at $29.50 per share and 5,246,590 shares of our LGI Series C common stock at $28.59 per share, for an aggregate purchase price of $300.0 million before direct acquisition costs, pursuant to two modified Dutch auction self-tender offers. Shares purchased pursuant to the foregoing tender offers are not applied against our previously announced stock repurchase program.

 

Pursuant to the foregoing stock repurchase programs and self-tender offers, during the year ended December 31, 2006, we repurchased a total of 32,698,558 shares of LGI Series A common stock at a weighted average price of $24.79 per share and 40,528,748 shares of LGI Series C common stock at a weighted average price of $23.35 per share, for an aggregate cash purchase price of $1,756.9 million, including direct acquisition costs. As of December 31, 2006, we were authorized under the March 2006 stock repurchase program to acquire an additional $117.9 million of LGI Series A and Series C common stock.

 

* * * *

 

Certain statements in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. To the extent that statements in this Annual Report are not recitations of historical fact, such statements constitute forward-looking statements, which, by definition, involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. In particular, statements under Item 1. Business, Item 2. Properties, Item 3. Legal Proceedings, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Item 7A. Quantitative and Qualitative Disclosures About Market Risk contain forward-looking statements. 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 evaluating these statements, you should consider the risks and uncertainties discussed under Item 1.A Risk Factors and Item 7.A Quantitative and Qualitative Disclosures About Market Risk, as well as the following list of some but not all of the factors that could cause actual results or events to differ materially from anticipated results or events:

 

 

 

The broadband communications services industries are changing rapidly, and, therefore, the forward-looking statements of expectations, plans and intent in this Annual 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 Annual 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.

 

 

Financial information about our reportable segments appears in note 22 to our consolidated financial statements included in Part II of this report.

 

 

Overview

 

 

We offer a variety of broadband distribution services over our cable television systems, including video, broadband Internet access and telephony. Available service offerings depend on the bandwidth capacity of our systems and whether they have been upgraded for two-way communications. In select markets, we also offer video services through direct-to-home satellite, or “DTH”, or through multi-channel multipoint (microwave) distribution

systems, or “MMDS”. 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, or “NVoD”, and video-on-demand, or “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 Austria, Chile, Czech Republic, Hungary, Ireland, Japan, The Netherlands, Poland, Puerto Rico, Romania, Slovak Republic, and Switzerland, primarily over our broadband networks. In Austria, Chile, Hungary, Ireland, Japan and The Netherlands, we provide circuit switched telephony services and voice-over-Internet-protocol, or “VoIP” telephony services. Telephony services in the remaining countries are provided using VoIP technology. In select markets, we also offer mobile telephony services using third party networks.

 

We operate our broadband distribution businesses in Europe principally through the UPC Broadband Division of Liberty Global Europe, Inc. (LG Europe); in Japan principally through J:COM, a subsidiary of LGI/Sumisho Super Media LLC (Super Media); in The Americas principally through VTR and Liberty Cablevision of Puerto Rico Ltd. (Liberty Puerto Rico); and in Australia principally through Austar. Each of LG Europe, Super Media, VTR, Liberty Puerto Rico and Austar is a consolidated subsidiary.

 

The following table presents certain operating data, as of December 31, 2006, with respect to the broadband distribution systems of our subsidiaries in Europe, Japan, The Americas and Australia. For purposes of this presentation, we refer to Puerto Rico and the countries of South America collectively as The Americas. This table reflects 100% of the operational data applicable to each subsidiary regardless of our ownership percentage.

 

Consolidated Operating Data
December 31, 2006

 

 

 

 

Additional General Notes to Tables:

 

With respect to Chile, Japan and Puerto Rico, residential multiple dwelling units with a discounted pricing structure for video, broadband Internet or telephony services are counted on an EBU basis. With respect to commercial establishments, such as bars, hotels and hospitals, to which we provide video and other services primarily for the patrons of such establishments, the subscriber count is generally calculated on an EBU basis by our subsidiaries. EBU is calculated by dividing the bulk price charged to accounts in an area by the most prevalent price charged to non-bulk residential customers in that market for the comparable tier of service. On a business-to-business basis, certain of our subsidiaries provide data, telephony and other services to businesses, primarily in The Netherlands, Switzerland, Austria, Ireland and Romania. We generally do not count customers of these services as subscribers, customers or RGUs.

 

While we take appropriate steps to ensure that subscriber statistics are presented on a consistent and accurate basis at any given balance sheet date, the variability from country to country in (i) the nature and pricing of products and services, (ii) the distribution platform, (iii) billing systems, (iv) bad debt collection experience, and (v) other factors adds complexity to the subscriber counting process. We periodically review our subscriber counting policies and underlying systems to improve the accuracy and consistency of the data reported. Accordingly, we may from time to time make appropriate adjustments to our subscriber statistics based on those reviews.

 

Subscriber information for acquired entities is preliminary and subject to adjustment until we have completed our review of such information and determined that it is presented in accordance with our policies.

Programming Services

 

We own programming networks that provide video programming channels to multi-channel distribution systems owned by us and by third parties. We also represent programming networks owned by others. Our programming networks distribute their services through a number of distribution technologies, principally cable television and DTH. Programming services may be delivered to subscribers as part of a video distributor’s basic package of programming services for a fixed monthly fee, or may be delivered as a “premium” programming service for an additional monthly charge or on a VoD or pay-per-view basis. Whether a programming service is on a basic or premium tier, the programmer generally enters into separate affiliation agreements, providing for terms of one or more years, with those distributors that agree to carry the service. Basic programming services generally derive their revenue from per-subscriber license fees received from distributors and the sale of advertising time on their networks or, in the case of shopping channels, retail sales. Premium services generally do not sell advertising and primarily generate their revenue from per subscriber license fees. Programming providers generally have two sources of content: (1) rights to productions that are purchased from various independent producers and distributors, and (2) original productions filmed for the programming provider by internal personnel or third party contractors. We operate our programming businesses in Europe principally through our subsidiary Chellomedia; in Japan principally through our affiliate Jupiter TV Co., Ltd. (Jupiter TV); in the Americas principally through our subsidiary Pramer S.C.A. and a joint venture interest in MGM Networks Latin America, LLC; and in Australia principally through our joint venture interest in XYZ Networks Pty Ltd. (XYZ Networks).

 

Operations

 

Europe — LG Europe

 

Our European operations are conducted through our wholly owned subsidiary, LG Europe, which provides services in 10 countries in Europe (excluding Belgium). LG Europe’s operations are currently organized into two principal divisions: UPC Broadband and Chellomedia. Through its UPC Broadband Division, LG Europe provides video, broadband Internet access, telephony and mobile services over its networks and operates the largest cable network in each of Austria, Czech Republic, Hungary, Ireland, Poland, Romania, Slovak Republic, Slovenia and Switzerland, in each case in terms of number of video subscribers. LG Europe’s broadband Internet access service is provided over the UPC Broadband Division network infrastructure generally under the brand name “chello”. Depending on the capacity of the particular network, LG Europe may provide up to nine tiers of broadband Internet access. For information concerning the Chellomedia Division, see “Chellomedia and Other” below.

 

Provided below is country-specific information with respect to the broadband distribution services of our UPC Broadband Division:

 

The Netherlands

 

The subscribers in UPC Broadband Division’s operations in The Netherlands, which we refer to as UPC Netherlands, are located in six broad regional clusters, including the major cities of Amsterdam and Rotterdam. Its cable networks are 97% upgraded to two-way capability, and almost all of its cable homes passed are served by a network with a bandwidth of at least 860 MHz. Thirty-five percent of video cable households in The Netherlands receive video cable service from UPC Netherlands. For its analog customers, UPC Netherlands offers 25 to 40 video channels, depending on a customer’s location, and 39 radio channels. The type of programming available to analog customers varies between locations.

 

In October 2005, UPC Netherlands initiated a program to migrate over time its analog video cable customers to digital video service, which we refer to as the “digital-for-all” or “D4A” program. Ninety-one percent of UPC Netherlands’ homes passed are capable of receiving digital cable service. In the D4A program, UPC Netherlands provides the customer with a digital interactive television box and, for a promotional period following acceptance of the box, the digital entry level service at no incremental charge to the customer over the standard analog rate. In 2007, UPC Netherlands will continue the D4A program; however, the promotional pricing period will be reduced from six months to three months and a more targeted approach to distributing the digital interactive box to subscribers will be implemented. As a result, the pace of the D4A program will be more gradual than when it was initially implemented.

At the end of the promotional pricing period, the customer has the option to discontinue the digital service or to pay an additional amount, on top of the standard analog rate, to continue the digital service. As of December 31, 2006, the promotional pricing period had elapsed for over 50% of UPC Netherlands’ digital video subscribers. Although we have had limited experience monitoring the disconnect patterns of this group of digital video subscribers, we are not seeing significant increases in subscriber disconnects in the initial weeks and months following the date that the promotional pricing period elapses. Due to the relatively short time frame that these digital video subscribers have been retained beyond the promotional pricing period, these results are not, however, necessarily an accurate indication of future subscriber retention rates.

 

The digital entry level service currently includes over 40 video channels and over 70 radio channels, an electronic program guide, interactive services and the functionality for NVoD service. For an additional incremental monthly charge, the digital subscriber may upgrade to a digital basic tier subscription which includes all the channels and features of the digital entry level service, plus an extra channel package of approximately 50 general entertainment, sports, movies, music and ethnic channels. Digital video customers may also subscribe to premium channels, such as Film 1 and Sport 1 NL, alone or in combination, for additional monthly charges. The NVoD service may be used for a separate fee for each movie or event ordered. UPC Netherlands expects to make true VoD services available to its digital video customers in 2007. Currently, a customer also has the option to upgrade the digital box to one with personal video recorder, or “PVR”, functionality for an incremental monthly charge and UPC Netherlands expects to make high definition, or “HD”, boxes available in 2007. A minimum subscription period of one year is required for customers upgrading to PVR or HD boxes or subscribing to premium channels.

 

UPC Netherlands offers six tiers of chello branded broadband Internet access service with download speeds ranging from 384 Kbps to 20 Mbps. Multi-feature telephony services are also available from UPC Netherlands to 93% of its homes passed. At December 31, 2006, 93% of two-way homes in UPC Netherlands’ service area were VoIP ready for service. Of UPC Netherlands’ customers (excluding mobile customers), 16% subscribe to two services (double-play customers) and 13% subscribe to three services (triple-play customers) offered by UPC Netherlands (video, broadband Internet and telephony).

 

UPC Netherlands offers a self-install option for its digital cable services and its broadband Internet access services, allowing subscribers to install the technology themselves and save money on the installation fee. Almost all of its new digital and broadband Internet subscribers have chosen to self-install their new service.

 

UPC Netherlands offers mobile service to all consumers in The Netherlands. The product is a pre-paid mobile offering. UPC Netherlands is operating as a mobile virtual network operator reselling leased network capacity. In addition, through Priority Telecom BV (Priority Telecom), UPC Netherlands offers a range of voice, broadband Internet access, private data networks and customized network services to business customers primarily in its core metropolitan networks.

 

Switzerland

 

UPC Broadband Division’s operations in Switzerland are operated by Cablecom. Cablecom provides video cable service to 55% of Swiss cable television households. Its cable networks are 70% upgraded to two-way capability and 70% of its cable homes passed are served by a network with a bandwidth of at least 606 MHz.

 

For 65% of its analog subscribers, Cablecom maintains billing relationships with landlords or housing associations, which typically provide analog cable service for an entire building and do not terminate service each time there is a change of tenant in the landlord’s or housing association’s premises. Seventy-four percent of Cablecom’s homes passed are capable of receiving digital cable service. Cablecom offers its digital cable subscribers a digital entry package consisting of 50 video channels and 30 radio channels and a range of additional pay television programming in a variety of foreign language program packages. The third television product is NVoD services, which is available to all of Cablecom’s digital cable customers. In 2006, Cablecom introduced a digital television recorder (DVR), enabling users to create a personalized television experience. Cablecom’s digital cable service is sold directly to the end user as an add-on to its analog cable services.

 

Cablecom offers nine tiers of broadband Internet access service with download speeds ranging from 300 Kbps to six Mbps. In January 2007, Cablecom launched a broadband Internet access product with a download speed of 10

Mbps. In addition, Cablecom continues to offer dial-up Internet services on a limited basis. Of Cablecom’s homes passed, 70% are capable of receiving Cablecom’s Internet services.

 

Telephony services are available from Cablecom to 70% of its homes passed. Cablecom was the first to offer a flat rate telephone plan in Switzerland, known as “Unlimited24”. In addition, Cablecom offers digital telephony services through VoIP.

 

Cablecom offers advanced data services to the Swiss business market. Cablecom provides broadband Internet access, multi-site data connectivity, virtual private network, security, messaging and hosting and other value added services to business customers on a retail basis. The acquisition of Unified Business Solutions in May 2005 provided Cablecom with a suite of converged voice and data products and an established customer base.

 

Cablecom provides full or partial analog television signal delivery services, network maintenance services and engineering and construction services to its partner networks. Cablecom also offers digital television, broadband Internet and fixed line telephony service directly to the analog cable subscribers of those partner networks that enter into service operating contracts with Cablecom. Cablecom has the direct customer billing relations with the subscribers who take these services on the partner networks. By permitting Cablecom to offer some or all of its digital television, broadband Internet and fixed line telephony products directly to those partner network subscribers, Cablecom’s service operating contracts have expanded the addressable markets for Cablecom’s digital products. In exchange for the right to provide digital products directly to the partner network subscribers, Cablecom pays to the partner network a share of the revenue generated from those subscribers.

 

At the end of 2005, Cablecom launched a pre-paid mobile telephony service, followed by the launch, at the beginning of 2006, of a post-paid offering. Therefore, Cablecom is the first telecommunications provider in Switzerland to offer television, Internet, fixed line telephony and mobile telephony — also known as “quadruple-play” — from a single provider. Of its customers (excluding mobile customers), 15% are double-play customers and 14% are triple-play customers.

 

Austria

 

UPC Broadband Division’s operations in Austria (excluding the Austrian portion of Cablecom’s network), which we refer to as UPC Austria, are located in regional clusters encompassing the capital city of Vienna, two other regional capitals and two smaller cities. Each of the cities in which UPC Austria operates owns, directly or indirectly, 5% of the local operating company of UPC Austria. UPC Austria’s cable network is almost entirely upgraded to two-way capability and 97% of its cable homes passed are served by a network with a bandwidth of at least 860 MHz.

 

UPC Austria provides a single offering to its analog cable subscribers that consists of 38 channels, mostly in the German language. UPC Austria’s digital platform offers more than 100 basic and premium television channels, plus NVoD, interactive services, television-based e-mail and an electronic program guide. UPC Austria’s premium content includes first run movies and specific ethnic offerings, including Serb and Turkish channels.

 

UPC Austria offers five tiers of chello branded broadband Internet access service with download speeds ranging from 600 Kbps to 16 Mbps and a student package. UPC Austria’s broadband Internet access is available in all of the cities in its operating area.

 

Multi-feature telephony services are available from UPC Austria to 96% of its homes passed. UPC Austria offers basic dial tone service as well as value-added services. UPC Austria also offers a bundle of fixed line and mobile telephony in a co-branding arrangement with the telephony operator One GmbH. In March 2006, UPC Austria began offering its telephony services through VoIP. Of UPC Austria’s customers (excluding mobile customers), 32% are double-play customers and 11% are triple-play customers.

 

UPC Austria, through INODE and Priority Telecom, offers a range of voice, data, lease line and asymmetric digital subscriber lines, or “ADSL”, services to business customers throughout Austria with a primary focus on cities, including Vienna, Graz, Klagenfurt, Villach, St. Polten, Dombirn, Leibnitz, Leoben, Salzburg, Linz and Insbruck.

Ireland

 

UPC Broadband Division’s operations in Ireland, which we refer to as UPC Ireland, include the networks of NTL Communications (Ireland) Limited, NTL Irish Networks Limited and certain related assets (collectively, NTL Ireland) and the networks of Chorus Communications Ltd (Chorus). UPC Ireland is Ireland’s largest video cable service provider, based on customers served. Its operations are located in five regional clusters, including the cities of Dublin and Cork. UPC Ireland’s cable network is 36% upgraded to two-way capability, and 36% of its cable homes passed are served by a network with a bandwidth of at least 550 MHz. UPC Ireland makes digital services available to 79% of its homes passed, including its MMDS customers. The UPC Ireland MMDS customers on the NTL Ireland networks receive digital service and the UPC Ireland MMDS customers on the Chorus networks can receive either analog or digital services.

 

UPC Ireland offers an analog cable package with up to 24 channels and a digital cable package with up to 140 channels. For the MMDS customers on the NTL Ireland networks, UPC Ireland offers a basic package of 19 digital channels. For the MMDS customers on the Chorus networks, UPC Ireland offers an analog cable package of up to 19 channels and a digital cable package of up to 66 channels. The program offerings for each type of service include domestic, foreign, sport and premium movie channels. In addition, digital customers can receive event channels such as seasonal sport and real life entertainment events. UPC Ireland also distributes up to seven Irish channels. To complement its digital offering, UPC Ireland also offers its digital subscribers 16 channels of premium service. In 2007, UPC Ireland plans to migrate to its digital cable service those of its analog cable customers who subscribe to premium services.

 

UPC Ireland offers four tiers of chello branded broadband Internet access service with download speeds ranging from one Mbps to six Mbps. UPC Ireland offers VoIP multi-feature telephony services to 11% of its homes passed. It offers basic dial tone service as well as value-added services. Of UPC Ireland’s customers, 9% are double-play customers.

 

Hungary

 

The cable networks of UPC Broadband Division’s operations in Hungary, which we refer to as UPC Hungary, are 93% upgraded to two-way capability, and 61% of its cable homes passed are served by a network with a bandwidth of at least 750 MHz. UPC Hungary offers up to three tiers of analog cable programming services (between six and 54 channels) and three premium channels, depending on the technical capability of the network. Seven percent of the video cable subscribers receive lifeline service only. Programming consists of the national Hungarian terrestrial broadcast channels and selected European satellite and local programming that consist of proprietary and third party channels.

 

UPC Hungary offers four tiers of chello branded broadband Internet access service with download speeds ranging from 512 Kbps to 6 Mbps. UPC Hungary provides these broadband Internet services to 193,300 subscribers in 22 cities, including Budapest. It also had 15,700 ADSL subscribers at December 31, 2006, on its twisted copper pair network located in the southeast part of Pest County.

 

UPC Hungary offers traditional circuit switched telephony services over a twisted copper pair network in the southeast part of Pest County. UPC Hungary offers VoIP telephony services over its cable network in Budapest. Of UPC Hungary’s customers, 12% are double-play customers and 5% are triple-play customers.

 

Other Central and Eastern Europe

 

UPC Broadband Division also operates networks in Czech Republic (UPC Czech), Poland (UPC Poland), Romania (UPC Romania), Slovak Republic (UPC Slovakia), and Slovenia (UPC Slovenia). In each of these operations, over 50% of the cable networks are upgraded to two-way capability, and over 50% of homes passed are served by a network with a bandwidth of at least 860 MHz.

 

 

 

 

Chellomedia and Other

 

LG Europe’s Chellomedia Division provides interactive digital products and services, produces and markets thematic channels, operates a digital media center and manages our investments in various businesses in Europe. Below is a description of the operations of our Chellomedia Division:

 

 

Chellomedia On Demand (Transactional Television). Chellomedia On Demand aggregates NVoD entertainment content into transactional television offers for UPC Broadband Division and other distributors throughout Europe. The main product category for NVoD services is feature movies. As of February 28, 2007, NVoD services are offered through UPC Broadband Division in The Netherlands, Austria and Switzerland and through non-affiliates in Norway and, until March 31, 2007, in Sweden. Chellomedia On Demand is developing VoD entertainment content for transactional television to be offered later in 2007 to UPC Netherlands’ customers. VoD services will include movies, international and local drama, documentaries and children’s entertainment.

 

Global Thematics. Chellomedia produces and markets a number of widely distributed multi-territory thematic channels. These channels target the following genres: extreme sports and lifestyles (Extreme), horror films (Horror), real life stories (RealityTV), women’s information and entertainment (Club and Romantica), art house basic movies (Europa Europa), science fiction and fantasy (Fantasy), and prime time movies (Thriller). In addition, Chellomedia has a channel representation business, which represents both wholly owned and third party channels across Europe.

 

Chellomedia Benelux. Chellomedia owns and manages a premium sports channel (Sport 1 NL) and a premium movie channel (Film 1) in The Netherlands. Sport 1 NL has exclusive pay television rights for a variety of sports, but it is primarily football oriented. These exclusive pay television rights expire at various dates through 2009. For Film 1, Chellomedia has exclusive pay television output deals with key Hollywood studios that expire at various dates through 2014.

 

The channels originate from Chellomedia’s digital media center, or “DMC”, located in Amsterdam. The DMC is a technologically advanced production facility that services UPC Broadband Division and third-party clients with channel origination, post-production and satellite and fiber transmission. The DMC delivers high-quality, customized programming by integrating different video elements, languages (either in dubbed or sub-titled form) and special effects and then transmits the final product to various customers in numerous countries through affiliated and unaffiliated cable systems and DTH platforms.

Chellomedia Iberia. Through its subsidiaries IPS C.V. and Multicanal S.L. (collectively IPS), Chellomedia owns and manages a suite of seven thematic channels carried on most major pay television platforms in Spain and Portugal. IPS has five wholly owned thematic channels (Canal Hollywood, Odisea, Sol Musica, Canal Panda and Canal Cocina) and two joint venture channels with A&E Television Networks (Canal de Historia and The Biography Channel).

 

Chellomedia Central & Eastern Europe. Chellomedia has a controlling 80% interest in a joint venture with an unrelated third party that owns and manages a sports channel (Sport 1 CEE). Sport 1 CEE is distributed through UPC Direct to UPC Broadband Division’s operations in Hungary, Czech Republic, Slovak Republic and Romania and to other broadband operators. The programming for Sport 1 CEE varies by country, but is predominately football-oriented. In addition, Chellomedia owns and operates Sport 2, a multiplex channel, which is distributed in Hungary.

 

 

Telenet Ownership. Telenet is the largest provider of broadband cable services in Belgium in terms of the number of subscribers. At December 31, 2006, we indirectly owned 29,092,474 or 28.8% of Telenet’s then outstanding ordinary shares, including 10,134,118 shares that were held by our indirect wholly owned subsidiaries, and 18,958,356 shares that were held through Belgian Cable Investors. The shares held by Belgian Cable Investors at December 31, 2006 include 6,750,000 shares that are held directly by Belgian Cable Investors and 12,208,356 shares that are held by the Investcos. The Investcos hold in the aggregate 12.1% of the Telenet common stock, all of which is attributable to Belgian Cable Investors.

 

Belgian Cable Holdings, a Delaware partnership and an indirect wholly owned subsidiary of LGI Ventures, owns a majority common equity interest and a 100% preferred interest in Belgian Cable Investors. Belgian Cable Holdings provided 100% of the funding for Belgian Cable Investors’ exercise of its call options to acquire 6,750,000 Telenet shares on November 13, 2006, as described above. In connection with this funding, the interest in Belgian Cable Investors of Cable Partners Belgium LLC (Cable Partners Belgium), an unrelated third party and a minority investor in Belgian Cable Investors, was diluted effective January 9, 2007, from 21.6% to 10.5%. As a result, Belgian Cable Holdings holds 89.5% of the common equity interests and 100% of the preferred interests in Belgian Cable Investors.

 

Belgian Cable Investors also holds certain call options, expiring in 2007 and 2009 (subject to earlier expiration in certain circumstances), to acquire an additional 18,668,826 shares in Telenet from existing shareholders at a price of €25.0 ($32.97) per share.

 

LGI Ventures also holds certain warrants that are exercisable at a price of €13.33 ($17.58) per share for 412,869 Telenet shares and the Investcos hold certain warrants that are attributable to Belgian Cable Investors and are exercisable at the same price per share for 79,251 Telenet shares. These warrants expire on August 9, 2009.

 

Cable Partners Belgium has the right to require Belgian Cable Holdings to purchase all of its 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. Belgian Cable Holdings has the corresponding right to require Cable Partners Belgium to sell all of its interest in Belgian Cable Investors to Belgian Cable Holdings for the appraised fair value during the first 30 days of every six-month period beginning in December 2009.

 

Telenet Shareholder Agreements. The shareholders agreement governing the Investcos contains both rights of first refusal in favor of Belgian Cable Investors and rights of first sale to which Belgian Cable Investors is subject in respect of a total of 1,475,960 warrants held by or attributed to other Investco shareholders that are convertible at a price of €13.33 ($17.58) per share into a total of 4,427,880 Telenet ordinary shares.

Under the agreement between the Telenet Syndicate shareholders (the Syndicate Agreement) we have the right (which we could not exercise until we obtained competition clearance from the European Commission on February 26, 2007) to nominate nine of the 17 members of the Telenet Board and the other Telenet Syndicate shareholders are obligated to vote for such nominees at the relevant Telenet shareholders meeting.

 

Under the Syndicate Agreement and the Telenet Articles of Association, certain Telenet Board decisions must receive the affirmative vote of varying majorities of the directors nominated by the other Telenet Syndicate shareholders in order to be effective. Based on the shareholdings of the other Telenet Syndicate shareholders at December 31, 2006, these special voting requirements currently apply only to certain minority-protective decisions including affiliate transactions, incurrence of debt in excess of that required to fund Telenet’s business plan and dispositions of assets representing more than 20% of Telenet’s fair market value.

 

Under the Syndicate Agreement, the subsidiaries through which we hold our interests in Telenet have rights of first offer in respect of market sales and offerings of Telenet shares by other Telenet Syndicate shareholders, subject to certain limited exceptions. All Telenet Syndicate shareholders, including the Investcos and LGI Ventures, are subject to mutual rights of first offer in respect of transfers to third parties of Telenet shares that are not effected through market sales or through a public or private offering and any transfer of certain warrants that are convertible into Telenet shares upon exercise.

 

Telenet Operations. Telenet offers video cable, broadband Internet and fixed and mobile telephony service in Belgium, primarily to residential customers in the cities of Flanders and Brussels. Telenet also offers a range of voice, data and Internet services to business customers throughout Belgium under the brand Telenet Solutions. As of December 31, 2006, Telenet reported 2.8 million RGUs, including 1.6 million cable television RGUs (including 226,000 interactive digital cable RGUs), 729,000 broadband Internet RGUs and 455,000 telephony RGUs (excluding mobile). Of Telenet’s subscribers, 21% are double-play customers and 15% are triple-play customers. UPC Belgium, which Telenet acquired on December 31, 2006, has an additional 137,300 cable RGUs and 41,900 broadband Internet RGUs.

 

Asia/Pacific

 

We have operations in Japan and Australia. Our Japanese operations are conducted primarily through Super Media and its subsidiary J:COM, and through Jupiter TV. As of December 31, 2006, we owned a 58.7% controlling interest in Super Media, Super Media owned a 62.5% controlling ownership interest in J:COM, and we owned a 50% ownership interest in our affiliate Jupiter TV. Our Australia operations are conducted primarily through Austar in which we owned a 53.4% controlling ownership interest at December 31, 2006.

 

Jupiter Telecommunications Co., Ltd.

 

J:COM is a leading broadband provider of bundled entertainment, data and communication services in Japan. As of December 31, 2006, J:COM is the largest multiple-system operator, or “MSO”, in Japan, as measured by the total number of homes passed and customers. J:COM operates its broadband networks through 24 managed local cable companies, which J:COM refers to as its managed franchises, 23 of which were consolidated subsidiaries as of December 31, 2006. J:COM owns a 45% equity interest in its one unconsolidated managed franchise. As described below, J:COM’s services include video, broadband Internet and telephony. Of its customers (excluding mobile customers), approximately 28% are double-play customers and approximately 22% are triple-play customers.

 

Twenty-three of J:COM’s managed franchises are clustered around three metropolitan areas of Japan, consisting of the Kanto region (which includes Tokyo), the Kansai region (which includes Osaka and Kobe) and the Kyushu region (which includes Fukuoka and Kita-Kyushu). In addition, J:COM owns and manages a local franchise in the Sapporo area of Japan that is not part of a cluster.

 

Each managed franchise consists of headend facilities receiving television programming from satellites, traditional terrestrial television broadcasters and other sources, and a distribution network composed of a

combination of fiber-optic and coaxial cable, which transmits signals between the headend facility and the customer locations. Almost all of J:COM’s cable networks are upgraded to two-way capability, with all of its cable homes passed served by a system with a bandwidth of 750 or 770 MHz. J:COM provides its managed franchises with experienced personnel, operating and administrative services, sales and marketing, training, programming and equipment procurement assistance and other management services. J:COM’s managed franchises use J:COM’s centralized customer management system to support sales, customer and technical services, customer call centers and billing and collection services.

 

J:COM offers analog and digital cable services in all of its managed franchises. J:COM analog television service consists of approximately 46 channels of cable programming and analog terrestrial broadcasting and broadcast satellite channels, not including premium services. A typical channel line-up includes popular channels in the Japanese market such as Movie Plus, a top foreign movie channel, the Jupiter Shop Channel, a home-shopping network, J Sports 1, J Sports 2 and Sports ESPN, three popular sports channels, the Discovery Channel, the Golf Network, the Disney Channel and Animal Planet, in addition to retransmission of analog terrestrial and satellite television broadcasts. At December 31, 2006, J:COM’s digital television service includes approximately 62 channels of cable programming, digital terrestrial broadcasting, and broadcast satellite channels, not including audio and data channels and premium services. The channel line-up for the digital service includes 18 HD channels. J:COM provides its digital cable subscribers VoD and, pay-per-view functionality, allowing those subscribers, generally for an additional fee, to receive programming that is not available to J:COM’s analog cable subscribers. In April 2006, J:COM introduced to its digital television customers a digital video recording service, which utilizes digital set top boxes equipped with an internal hard disk drive capable of recording up to 20 hours of digital HD programming and ability to record two programs in competing time slots. J:COM also offers both its analog and digital subscribers optional subscriptions for an additional fee to premium channels, including movies, sports, horseracing and other special entertainment programming, either individually or in packages. J:COM offers package discounts to customers who subscribe to bundles of J:COM services. In addition to the services offered to its cable television subscribers, J:COM also provides terrestrial broadcast retransmission services to more than four million additional households in its consolidated franchise areas as of December 31, 2006, including “compensation” households for which J:COM receives up-front fees pursuant to long-term contracts to provide such retransmission services.

 

J:COM offers broadband Internet access in all of its managed franchises through its wholly owned subsidiary, @NetHome Co., Ltd, and its subsidiary, Kansai Multimedia Services (KMS). These broadband Internet access services offer downstream speeds of mainly either 30 Mbps or 8 Mbps. At December 31, 2006, J:COM held a 76.5% interest in KMS, which provides broadband Internet access in the Kansai region of Japan. J:COM offers the J:COM NET Hikari service for multiple dwelling units connected to J:COM’s network by optical fiber cables. J:COM NET Hikari offers downstream speeds of up to 100 Mbps. In January 2007, J:COM announced plans to launch a very high-speed broadband Internet service for single dwelling units, individual homes and smaller apartment buildings. The new service, which is scheduled to launch in April 2007 in the Kansai area, will deliver downstream speeds of up to 160 Mbs and upstream speeds of 10 Mbs.

 

J:COM offers telephony services over its own network in all of its consolidated franchise areas. J:COM’s headend facilities contain equipment that routes calls from the local network to telephony switches (a majority of which J:COM owns), which in turn transmit voice signals and other information over the network. J:COM also utilizes VoIP technology in certain franchise areas. J:COM provides a single line to the majority of its telephony customers, most of whom are residential customers. J:COM charges its telephony subscribers a fee for basic telephony service (together with charges for calls made) and offers additional premium services, including call-waiting, call-forwarding, caller identification and three-way calling, for a fee. In partnership with WILLCOM, Inc, a personal handphone system service provider in Japan, in March 2006 J:COM began offering a mobile phone service called J:COM MOBILE. J:COM MOBILE customers receive discounted phone service when bundled with J:COM’s other telephone service, including free and discounted calling plans.

 

In addition to its 24 managed franchises, J:COM owns non-controlling equity interests of 5.5% and 20% in two cable franchises that are operated and managed by third-party franchise operators.

J:COM sources its programming through multiple suppliers, including Jupiter TV. J:COM’s relationship with Jupiter TV enables the two companies to work together to identify and bring key programming genres to the Japanese market and to expedite the development of quality programming services. J:COM and Jupiter TV each owns a 50% interest in Jupiter VoD Co., Ltd., a joint venture formed in 2004 to obtain VoD programming content to offer VoD services to J:COM franchises. J:COM now offers VoD services to its digital customers in a majority of its franchises. Because J:COM is usually a programmer’s largest cable customer in Japan, J:COM is generally able to negotiate favorable terms with its programmers.

 

Our interest in J:COM is held through Super Media, an entity that is owned 58.7% by us and 41.3% by Sumitomo Corporation (Sumitomo). Pursuant to the operating agreement of Super Media, our and Sumitomo’s entire interest in J:COM is now held through Super Media. Sumitomo and we are generally required to contribute to Super Media any additional shares of J:COM that either of us acquires and to permit the other party to participate in any additional acquisition of J:COM shares during the term of Super Media.

 

Our interest in Super Media is held through five separate corporations, four of which are wholly owned. Four individuals, including one of our executive officers, an officer of one of our subsidiaries and one of LMI’s former directors, own common stock representing an aggregate of 18.8% of the common equity in the fifth corporation, which owns a 4.3% indirect interest in J:COM.

 

Super Media is managed by a management committee consisting of two members, one appointed by us and one appointed by Sumitomo. The management committee member appointed by us has a casting or tie-breaking vote with respect to any management committee decision that we and Sumitomo are unable to agree on, which casting vote will remain in effect for the term of Super Media. Certain decisions with respect to Super Media require the consent of both members rather than the management committee. These include a decision to engage in any business other than holding J:COM shares, sell J:COM shares, issue additional units in Super Media, make in-kind distributions or dissolve Super Media, in each case other than as contemplated by the Super Media operating agreement. While Super Media effectively has the ability to elect J:COM’s entire board, pursuant to the Super Media operating agreement, Super Media is required to vote its J:COM shares in favor of the election to J:COM’s board of three non-executive directors designated by Sumitomo and three non-executive directors designated by us.

 

Because of our casting vote, we indirectly control J:COM through our control of Super Media, which owns a controlling interest in J:COM, and therefore consolidate J:COM’s results of operations for financial reporting purposes. Super Media will be dissolved five years after our casting vote became effective on February 18, 2005, unless Sumitomo and we mutually agree to extend the term. Super Media may also be dissolved earlier under certain circumstances.

 

Jupiter TV Co., Ltd.

 

Jupiter TV, an equity affiliate, is a joint venture between Sumitomo and us that primarily develops, manages and distributes pay television services in Japan on a platform-neutral basis through various distribution infrastructures, principally cable and DTH service providers, and more recently, alternative broadband service providers using fiber-to-the-home or “FTTH”, and ADSL platforms. As of December 31, 2006, Jupiter TV owned four channels through wholly or majority owned subsidiaries and had investments ranging from 10% to 50% in 14 additional channels. Jupiter TV’s majority owned channels are a home shopping network (Jupiter Shop Channel, in which Jupiter TV has a 70% interest and Home Shopping Network has a 30% interest), a movie channel (Movie Plus), a golf channel (Jupiter Golf Network), and a women’s entertainment channel (LaLa TV). Channels in which Jupiter TV holds investments include four sports channels owned by J Sports Broadcasting Corporation (J Sports Broadcasting), which is a 34% owned joint venture with Sony Broadcast Media Co. Ltd. (Sony), Fuji Television Network, Inc., SOFTBANK Broadmedia Corporation, Skyperfect Communications Inc. and Itochu Corporation; Animal Planet Japan, a one-third owned joint venture with Discovery Networks and BBC Worldwide; Discovery Channel Japan and Discovery HD through a 50% owned joint venture with Discovery Networks; AXN Japan, a 35% owned joint venture with Sony; and Reality TV Japan, a 50% owned joint venture with Zonemedia Enterprises Ltd., an indirect subsidiary of Chellomedia. Jupiter TV provides affiliate sales services and in some cases advertising sales and other services to channels in which it has an investment for a fee.

The market for multi-channel television services in Japan is highly complex with multiple cable systems, DTH satellite platforms and alternative broadband service providers. Cable systems in Japan served 19.3 million homes at December 31, 2006. A large percentage of these homes, however, are served by systems (referred to as compensation systems) whose service principally consists of retransmitting free television services to homes whose reception of such broadcast signals has been blocked. Higher capacity systems and larger cable systems that offer a full complement of cable and broadcast channels, of which J:COM is the largest in terms of subscribers, served 6.2 million households as of December 31, 2006. The majority of channels in which Jupiter TV holds an interest are marketed as basic television services to cable system operators, with distribution at December 31, 2006, ranging from 16.9 million homes for Jupiter Shop Channel (which is carried in many compensation systems as well as in multi-channel cable systems) to 870,000 homes for more recently launched channels, such as Discovery HD.

 

Each of the channels in which Jupiter TV has an interest, except for Discovery HD, is also offered on SkyPerfecTV1, a digital satellite platform that delivers approximately 160 linear video channels (24 hours a day) a la carte and in an array of basic and premium packages, from two satellites operated by JSAT Corporation (JSAT). Each of the channels, except for Reality TV Japan and Discovery HD, is also offered on SkyPerfecTV2, another satellite platform in Japan, which delivers approximately 65 linear channels (24 hours a day). Under Japan’s complex regulatory scheme for satellite broadcasting, a person engaged in the business of broadcasting programming must obtain a broadcast license that is perpetual, although subject to revocation by the relevant governmental agency, and then lease from a satellite operator the bandwidth capacity on satellites necessary to transmit the programming to cable and other distributors and DTH subscribers. In the case of distribution of Jupiter TV’s 33% or greater owned channels on SkyPerfecTV1, these licenses and satellite capacity leases are held through its subsidiaries, Jupiter Satellite Broadcasting Corporation (JSBC) and JSBC2, except for AXN Japan and the J Sports Broadcasting channels which hold their own licenses. The broadcast licenses and satellite capacity leases for those of Jupiter TV’s 33% or greater owned channels that are delivered by SkyPerfecTV2 are held by four other companies that are majority owned by unaffiliated entities. JSBC’s leases with JSAT for bandwidth capacity on JSAT’s two satellites expire in March 2007 when JSAT will convert to annual leases with service fees based on fixed rates for all JSBC’s channels. JSBC2’s lease with JSAT expires in May 2008. The leases for bandwidth capacity with respect to the SkyPerfecTV2 platform expire between 2012 and 2014. JSBC, JSBC2 and other licensed broadcasters then contract with the platform operator, such as SkyPerfecTV, for customer management and marketing services (sales and marketing, billing and collection) and for encoding services (compression, encoding and multiplexing of signals for transmission) on behalf of the licensed channels. The majority of channels in which Jupiter TV holds an interest are marketed as basic television services to DTH subscribers, with distribution at December 31, 2006 ranging from 3.5 million homes for Jupiter Shop Channel (which is carried as a free service to all DTH subscribers) to 416,000 homes for Jupiter Golf Network, which is a premium channel on one of the SkyPerfecTV platforms.

 

Distribution of multi-channel television services in Japan, through alternative broadband platforms, such as FTTH and ADSL, is not yet widespread. The majority of channels in which Jupiter TV holds an interest are marketed as basic television services to alternative broadband subscribers, with distribution at December 31, 2006, ranging from 166,000 homes for Jupiter Shop Channel (which is carried as a free service to broadband television subscribers) to under 100,000 homes for most other channels.

 

Jupiter TV operates Jupiter VoD, a 50% owned joint venture with J:COM, which has access to 922,000 VoD-enabled digital cable subscribers at December 31, 2006. Jupiter TV also operates Online TV, a 55% owned joint venture with SECOM Co. Ltd., Tohokushinsha Film Corporation and Nikkei Shinbun. Online TV is a content aggregation platform for broadband television services supplying channels, including the majority of channels in which Jupiter TV holds an interest, to several broadband Internet service providers.

 

Eighty-eight percent of Jupiter TV’s 2006 consolidated revenue was attributable to retail revenue generated by the Jupiter Shop Channel. Cable operators are paid distribution fees to carry the Jupiter Shop Channel, which are either fixed rate per subscriber fees or the greater of fixed rate per subscriber fees and a percentage of revenue generated through sales to the cable operator’s viewers. SkyPerfecTV is paid a fixed rate per subscriber distribution fee to provide the Jupiter Shop Channel to its DTH subscribers. Alternative broadband platforms are also paid a fixed rate fee per subscriber that is able to view Jupiter Shop Channel through their platform. After Jupiter Shop Channel, J Sports Broadcasting’s four sports channels generate the most revenue of the channels in which Jupiter

TV has an interest. The majority of this revenue is derived from cable and satellite subscriptions. As of year-end 2006, advertising sales are not a significant component of Jupiter TV’s revenue.

 

Sumitomo and we each own a 50% interest in Jupiter TV. Pursuant to a stockholders agreement we entered into with Jupiter TV and Sumitomo, Sumitomo and we each have preemptive rights to maintain our respective equity interests in Jupiter TV, and Sumitomo and we each appoint an equal number of directors provided we maintain our equal ownership interests. No board action may be taken with respect to certain material matters without the unanimous approval of the directors appointed by us and Sumitomo, provided that Sumitomo and we each own 30% of Jupiter TV’s equity at the time of any such action. Sumitomo and we each hold a right of first refusal with respect to the other’s interests in Jupiter TV, and Sumitomo and we have each agreed to provide Jupiter TV with a right of first opportunity with respect to the acquisition of more than a 10% equity position in, or the management of or any similar participation in, any programming business or service in Japan and any other country to which Jupiter TV distributes its signals, in each case subject to specified limitations.

 

Japan — Other

 

We also own an interest in Mediatti Communications, Inc. (Mediatti). Mediatti is a provider of cable television and broadband Internet access services in Japan with approximately 157,000 video customers and 90,000 broadband Internet customers. Our interest in Mediatti is held through Liberty Japan MC, LLC (Liberty Japan MC), a company of which, as of December 31, 2006, we owned 95.2% and Sumitomo owned 4.8%. At December 31, 2006, Liberty Japan MC owned a 45.6% voting interest in Mediatti.

 

Liberty Japan MC and certain affiliates of Olympus Capital (Olympus) and two minority shareholders of Mediatti have entered into a shareholders agreement pursuant to which Liberty Japan MC has the right to nominate three of Mediatti’s seven directors and which requires that significant actions by Mediatti be approved by at least one director nominated by Liberty Japan MC.

 

The Mediatti shareholders who are party to the shareholders agreement have granted to each other party whose ownership interest is greater than 10% a right of first refusal with respect to transfers of their respective interests in Mediatti. Each shareholder also has tag-along rights with respect to such transfers. 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 market 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 market 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 market value. If neither the Olympus put right nor the Liberty Japan MC call right is exercised during the first exercise period, either may thereafter exercise its put or call right, as applicable, until October 2010.

 

Australia

 

As of December 31, 2006, we owned a 53.4% controlling interest in Austar. Austar is Australia’s leading pay television service provider to regional and rural Australia and the capital cities of Hobart and Darwin. Austar also provides broadband Internet access and mobile telephony services to subscribers in these markets. Additionally, Austar has begun the development of a personal digital recorder, or “PDR”, to be offered to subscribers in 2007.

 

Austar’s pay television services are primarily provided through DTH satellite. FOXTEL Management Pty Ltd. (FOXTEL), the other main provider of pay television services in Australia, has leased space on an Optus C1 satellite. Austar and FOXTEL have entered into an agreement pursuant to which Austar is able to use a portion of FOXTEL’s leased satellite space to provide its DTH services. This agreement will expire in 2017. FOXTEL manages the satellite platform on Austar’s behalf as part of such agreement.

 

Austar’s DTH service is available to 2.4 million households, which is approximately one-third of Australian homes. Of Austar’s homes passed, 24% subscribe to Austar’s DTH service. Austar’s territory covers all of Tasmania and the Northern Territory and the regional areas outside of the capital cities in South Australia, Victoria, New South Wales and Queensland. Austar does not provide DTH service to Western Australia. FOXTEL’s service area is concentrated in metropolitan areas and covers the balance of the other two thirds of Australian homes. FOXTEL

and Austar do not compete with each other with the exception of the Gold Coast area in Queensland. Austar also operates a small digital cable network in Darwin.

 

Austar’s DTH service offers over 120 premier channels, NVoD and interactive services. Austar’s channel offerings include movies, sport, lifestyle programs, children’s programs, documentaries, drama and news. The NVoD service is comprised of 30 channels, dedicated to recently released movies. The interactive services include Sports Active, Weather Active and SKY News Active, three games services and more than 20 digital radio channels. For the base level service a subscriber receives 33 channels. In addition to residential subscribers, Austar also provides its television services to commercial premises including hotel, retail and licensed venues.

 

Austar owns a 50% interest in XYZ Networks. XYZ Networks is the exclusive owner and/or distributor of 11 key programming channels: Discovery Channel, Nickelodeon, Nick Jr., arena, The LifeStyle Channel, LifeStyle Food, Channel [v], Club [v], MAX, CMC and The Weather Channel. These channels are distributed throughout Australia. Austar’s partner in XYZ Networks is FOXTEL. Through XYZ Networks and other agreements, Austar has a number of long-term key exclusive programming agreements for its regional territory.

 

Austar offers a dial-up Internet service, which is outsourced and available throughout Australia. In addition, Austar offers mobile telephony services through reseller agreements.

 

Austar owns significant holdings of 2.3 GHz and 3.5 GHz spectrum throughout its regional territory. This spectrum is ideally suited for new Worldwide Interoperability for Microwave Access (WiMAX) based telecommunications services. In 2006, Austar launched WiMAX in two trial markets for broadband Internet services.

 

In addition to our interests in Austar, we own a 20% equity interest in Premium Movie Partnership (PMP), which supplies three premium movie-programming channels to both Austar and FOXTEL. PMP’s partners include Showtime, Twentieth Century Fox, Sony Pictures, Paramount Pictures and Universal Studios.

 

The Americas

 

Our operations in the Americas are conducted primarily through our 80% owned subsidiary VTR in Chile and our wholly owned subsidiary Liberty Puerto Rico. We also have subsidiaries that are broadband providers operating in Brazil and Peru, as well as a joint venture interest in MGM Networks Latin America and a subsidiary in Argentina, both of which offer programming content to the Latin America market. Our partner in VTR, Cristalerías de Chile S.A. (Cristalerías), has a put right which will allow Cristalerías to require us to purchase all, but not less than all, of its 20% interest in VTR at fair value, subject to a minimum price. This put right is exercisable until April 13, 2015.

 

VTR

 

Our primary Latin American operation, VTR, is Chile’s largest multi-channel television provider in terms of homes passed and number of subscribers, and is a leading broadband Internet access provider, and Chile’s second largest provider of residential telephony services in terms of lines in service. VTR provides services in Santiago, Chile’s largest city, the large regional cities of Iquique, Antofagasta, Concepción, Viña del Mar, Valparaiso and Rancagua, and smaller cities across Chile. Of VTR’s customers, 15% are double-play customers and 32% are triple-play customers.

 

All of VTR’s video subscribers are served by wireline cable, with the vast majority reached through aerial plant. VTR’s cable network is 64% upgraded to two-way capability and 79% of cable homes passed are served by a network with a bandwidth of at least 750 MHz. VTR has an approximate 80% market share of cable television services throughout Chile and an approximate 98% market share within Santiago. VTR’s channel lineup consists of 22 to 83 channels segregated into two tiers of analog cable service: a basic service with 22 to 68 channels and a premium service with an additional three to 15 channels. VTR offers basic tier programming similar to the basic tier program lineup in the United States, but includes more premium channels such as HBO, Cinemax and Cinecanal on the basic tier. As a result, subscription to its existing premium service package is limited because its basic analog package contains similar channels. VTR obtains programming from the United States, Europe, Argentina and Mexico. Domestic cable television programming in Chile is only just beginning to develop around local events such as soccer matches. VTR also offers a digital platform as a premium service with programming options of 42 video

channels, 40 music channels, 10 pay-per-view channels and VoD. Almost 58% of VTR’s homes passed are capable of receiving digital cable service, most of which are located in the greater Santiago area.

 

VTR offers several alternatives of always on, unlimited-use broadband Internet access to residences and SOHO offices under the brand name Banda Ancha in 25 communities within Santiago and 18 cities outside Santiago. Subscribers can purchase one of six services with download speeds ranging from 100 Kbps to 10 Mbps. For a moderate to heavy Internet user, VTR’s broadband Internet service is generally less expensive than a dial-up service with its metered usage.

 

VTR offers telephony service over its cable network to customers in 25 communities within Santiago and 18 cities outside Santiago via either switched circuits or VoIP, depending on location. VTR offers basic dial tone service as well as several value-added services. VTR primarily provides service to residential customers who require one or two telephony lines. It also provides service to SOHO customers. VTR offers telephony services through VoIP to its two-way homes passed. Almost 30% of VTR’s telephony subscribers are served using VoIP technology.

 

In December 2005, the Subsecretaria de Telecomunicaciones de Chile awarded VTR regional concessions for wireless service in the frequency band of 3400-3600 MHz. Using this spectrum, VTR plans to offer broadband telephony and data services through WiMax technology. WiMax is a wireless alternative to cable and DSL for the last mile of broadband access. VTR anticipates WiMax will allow it to expand its service area by 1.3 million homes and increase the number of two-way homes passed by 540,000 on a more cost-effective basis than if it had to install cable, thereby allowing VTR to meet its regulatory requirements for two-way homes passed by the end of 2007.

 

VTR is subject to certain regulatory conditions as a result of the combination with Metrópolis Intercom S.A. in April 2005. The most significant conditions require that the combined entity (i) re-sell broadband capacity to third party Internet service providers on a wholesale basis; (ii) activate two-way service to two million homes passed within five years from the consummation date of the combination; and (iii) for three years after the consummation date of the combination, limit basic tier price increases to the rate of inflation, plus a programming cost escalator. Another condition expressly prohibits us, as the controlling shareholder of VTR, from owning an interest, directly or indirectly through related parties, in any business that provides microwave or satellite television services in Chile. The DirecTV Group, Inc. (DirecTV) owns a satellite television distribution service that operates in Chile and elsewhere in the Americas. On December 12, 2006, Liberty Media announced publicly that it had agreed to acquire an approximate 39% interest in DirecTV. VTR and we have received written inquiries from Chilean regulatory authorities seeking to determine whether Liberty Media’s acquisition of the DirecTV interest would violate or otherwise conflict with the regulatory condition prohibiting us from owning an interest in Chilean satellite or microwave television businesses.

 

Regulatory Matters

 

Overview

 

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 or “EU”. 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.

 

Foreign regulations affecting distribution and programming businesses fall into several general categories. Our businesses are generally required to obtain licenses, permits or other governmental authorizations from, or to notify or register with, relevant local or national regulatory authorities to own and operate their respective distribution systems and to offer services across them. In most countries, these licenses and registrations are non-exclusive and, in some circumstances, they may be of limited duration. In most countries where we provide video services, we must comply with restrictions on, or requirements to carry, programming content. Local or national

regulatory authorities in some countries where we provide video services also impose pricing restrictions and subject certain price increases to prior approval or subsequent control by the relevant local or national authority.

 

Europe

 

Austria, Belgium, Bulgaria, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Sweden and the United Kingdom are Member States of the EU. As such, these countries are required to enact national legislation that implements EU directives. As a result, most of the markets in Europe in which our businesses operate have been significantly affected by the regulatory framework that has been developed by the EU. The exception to this is Switzerland, which is not an EU Member State and is currently not seeking any such membership. Regulation in Switzerland is discussed separately below.

 

Communications Services and Competition Directives

 

A number of legal measures, which we refer to as the Directives, are the basis of the regulatory regime concerning communications services across the EU. They include the following:

 

 

In addition to the Directives, the European Parliament and European Council made a decision intended to ensure the efficient use of radio spectrum within the EU. Existing EU member countries were required to implement the Framework, Authorization, Access and the Universal Service and Users’ Rights Directives by July 25, 2003. The Privacy Directive was to have been implemented by October 31, 2003. The Competition Directive is self-implementing and does not require any national measures to be adopted. The 12 countries that joined the EU since the date of the Directives should be in compliance with the Directives as of the date of their accession. Measures seeking to implement the Directives are in force in most Member States.

 

The Directives seek, among other things, to harmonize national regulations and licensing systems and further increase market competition. These policies seek to harmonize licensing procedures, reduce administrative fees, ease access and interconnection, and reduce the regulatory burden on telecommunications companies. Another important objective of the new Directives is to implement one new regime for the development of communications networks and communications services, including the delivery of video services, irrespective of the technology used.

 

Many of the obligations included within the Directives apply only to operators or service providers with “Significant Market Power” (SMP) in a relevant market. For example, the provisions of the Access Directive allow Member States to mandate certain access obligations only for those operators and service providers that are deemed to have SMP. For purposes of the Directives, an operator or service provider will be deemed to have SMP where, either individually or jointly with others, it enjoys a position of significant economic strength affording it the power to behave to an appreciable extent independently of competitors, customers and consumers.

 

As part of the implementation of certain of the Directives, the National Regulatory Authority or “NRA” is obliged to analyze 18 markets predefined by the European Commission (EU Commission) to determine if any

operator or service provider has SMP. Such markets are referred to as the 18 predefined markets. We have been found to have SMP in some markets in some countries and further such findings are possible. In particular, in those markets where we offer telephony services, we have been found to have SMP in the termination of calls on our own network. In addition, in some countries we have been found to have SMP in the wholesale distribution of television channels. NRAs might also seek to define us as having SMP in another of the 18 predefined markets or define and analyze additional markets, such as the retail market for the reception of radio and television packages. In the event that we are found to have SMP in any particular market, a NRA could impose certain conditions on us to prevent abusive behavior by us.

 

Under the Directives, the EU Commission has the power to veto the assessment by a NRA of SMP in any market not set out in their predefined list as well as any finding by a NRA of SMP in any market whether or not it is set out in the list.

 

Certain key elements introduced by the Directives are set forth below, followed by a discussion of certain other regulatory matters and a description of regulation for three countries where we have large operations. This description in not intended to be a comprehensive description of all regulation in this area.

 

Licensing.  Individual licenses for electronic communications services are not required for the operation of an electronic communications network or the offering of electronic communications services. A simple registration is required in these cases. Member States are limited in the obligations that they may place on someone who has so registered; the only obligations that may be imposed are specifically set out in the Authorizations Directive.

 

Access Issues.  The Access Directive sets forth the general framework for interconnection of, and third party access to, networks, including cable networks. Public telecommunications network operators are required to negotiate interconnection agreements on a non-discriminatory basis with each other. In addition, some specific obligations are provided for in this Directive such as an obligation to distribute wide-screen television broadcasts in that format and certain requirements to provide access to conditional access systems. Other access obligations can be imposed on operators identified as having SMP in a particular market. These obligations are based on the outcomes that would occur under general competition law.

 

“Must Carry” Requirements.  In most countries where we provide video and radio services, we are required to transmit to subscribers certain “must carry” channels, which generally include public national and local channels. In some European countries, we may be obligated to transmit quite a large number of channels by virtue of these requirements. Until recently, there was no meaningful oversight of this issue at the EU level. This changed when the Directives came into effect. Member States are only permitted to impose must carry obligations where they are necessary to meet clearly defined general interest objectives and where they are proportionate and transparent. Any such obligations must be subject to periodic review. It is not clear what effect this new rule is having in practice but we expect it to lead to a reduction of the size of must-carry packages in some countries.

 

Consumer Protection Issues and Pricing Restrictions.  Under the Directives, we may face various consumer protection restrictions if we are in a dominant position in a particular market. However, before the implementation of the Directives, local or national regulatory authorities in many European countries where we provide video services already imposed pricing restrictions. This is often a contractual provision rather than a regulatory requirement. Often, the relevant local or national authority must approve basic tier price increases. In certain countries, price increases will only be approved if the increase is justified by an increase in costs associated with providing the service or if the increase is less than or equal to the increase in the consumer price index, or “CPI”. Even in countries where rates are not regulated, subscriber fees may be challenged if they are deemed to constitute anti-competitive practices.

 

Other.  Our European operating companies must comply with both specific and general legislation concerning data protection, data retention, content provider liability and electronic commerce. These issues are broadly harmonized or being considered for harmonization at the EU level. For example, the EU recently agreed to a new Directive on data retention, which will likely increase the amount of data we must store for law enforcement purposes and the length of time we must store it.

 

In late 2005, the EU Commission announced a call for input on a review of the regulatory framework described above. In 2006, the EU Commission invited comments on the future of the 18 predefined markets. This review has

progressed through 2006 and, during 2007, is expected to lead to proposals for new legislation and a change to the list of the 18 predefined markets. Any such processes could lead to material changes in the regime described above.

 

Broadcasting.  Broadcasting is an area outside the scope of the Directives. Generally, broadcasts originating in and intended for reception within a country must respect the laws of that country. However, pursuant to another Directive, EU Member States are required to allow broadcast signals of broadcasters in another EU Member State to be freely transmitted within their territory so long as the broadcaster complies with the law of the originating EU Member State. An international convention extends this right beyond the EU’s borders into the majority of the European territories into which we sell our channels. This EU directive also establishes quotas for the transmission of European-produced programming and programs made by European producers who are independent of broadcasters. The EU legal framework governing broadcast television currently is under review and the EU Commission issued a proposal for a new Directive at the end of 2005. The draft (which had its first reading by the European Parliament in December 2006) is under discussion and subject to amendment by the European Council and the European Parliament who would jointly adopt any new Directive. Any new Directive adopted by these institutions would then be transposed into the laws of the various Member States over a defined timescale. Such a process could lead to substantial changes in the regulation of broadcasting; however, we do not expect any material effect on our programming business.

 

Competition Law and Other Matters

 

EU directives and national consumer protection and competition laws in many of our European markets impose limitations on the pricing and marketing of bundled packages of services, such as video, telephony and Internet access services. Although our businesses may offer their services in bundled packages in European markets, they are sometimes not permitted to make subscription to one service, such as cable television, conditional upon subscription to another service, such as telephony. In addition, providers cannot abuse or enhance a dominant market position through unfair anti-competitive behavior. For example, cross-subsidization having this effect would be prohibited.

 

As our businesses become larger throughout the EU and in individual countries in terms of service area coverage and number of subscribers, they may face increased regulatory scrutiny. Regulators may prevent certain acquisitions or permit them only subject to certain conditions.

 

The Netherlands

 

The Netherlands has a communications law that broadly transposes the Directives. Onafhankelijke Post en Telecommunicatie Autoriteit (OPTA), The Netherlands NRA, has finished its analysis of the 18 predefined markets, which are relevant to our business, in order to determine which, if any, operator or service provider has SMP. OPTA has found our subsidiary UPC Nederland BV (UPC NL) to have SMP in two of the 18 predefined markets (market 9 relating to call termination on individual public telephone networks, and market 18 relating to wholesale video broadcasting transmission services) and a third market not on the EU list (market 19 relating to retail transmission of radio and video services). With respect to market 9, the obligations imposed are to provide access to interconnecting operators on a transparent and reasonable basis along with tariff regulation. The tariff regulation is derived from the regulated interconnect charges of Royal KPN NV (KPN).

 

OPTA’s decision with respect to market 18 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 platform. 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 for 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 be further developed by the creation of guidelines by OPTA and/or by the development of case law.

The decision with respect to the retail market is limited to one year and will expire March 17, 2007. OPTA will not intervene in UPC NL’s retail prices as long as UPC NL does not increase its basic analog subscription fee by more than the CPI increase (which UPC NL did not do). Furthermore, the decision includes two additional obligations: (i) to continue to offer the analog video services on a standalone basis without requiring customers to buy other services and (ii) to publish on the website of UPC NL which part of the monthly subscription fees relates to programming costs.

 

UPC NL appealed all three decisions on the above-mentioned SMP findings. The decision on the appeal of the SMP findings in markets 18 and 19 is expected in second quarter 2007. A decision on the appeal of the SMP findings in market 9 is expected in March 2007.

 

Switzerland

 

As Switzerland is not a member of the EU, it is not obliged to follow EU legislation. However, the liberalization of the Swiss telecommunications market to a certain extent has moved in parallel, although delayed, with liberalization in the EU. The current regulatory framework governing telecommunications services in Switzerland was established on January 1, 1998, with the enactment of the Telecommunications Act and a concurrent restatement of the Radio and Television Act (RTVA). This regulatory regime opened both the telecommunications and cable television markets to increased competition.

 

The RTVA regulates the operation, distribution and redistribution, and receipt of radio and television programs. A distributor who creates a program and aims to broadcast such program requires a programming license. The redistribution of programs requires a redistribution license. As in the EU, must-carry rules require us to redistribute certain national and regional television and radio programs, such as programs of the Swiss Broadcasting Corporation. The RTVA has undergone a comprehensive review in order to keep up with technological and market developments. A revised RTVA was adopted by the Swiss Parliament in March 2006 and is expected to enter into force on April 1, 2007. It will include a number of changes affecting our business. The license system will be replaced by a notification system, which will mean that we will no longer be required to hold a programming license or a redistribution license.

 

Under the revised RTVA, the terms of carriage for programming, other than must carry programming, can be commercially negotiated subject to non-discrimination. The rules requiring us to carry certain programs will be expanded, but at the same time the maximum number of such channels will be fixed and broadcasters will only be permitted to use the digital distribution platform as long as it allows the provision of state of the art services, indicating that broadcasters in principle cannot request unbundled access to the digital platform.

 

To ensure interoperability or to maintain freedom of information, the authorities may, however, impose technical standards. In this regard, secondary legislation has been proposed which would force us to provide a conditional access module allowing reception of our digital television services over set top boxes provided by third parties.

 

The transmission of voice and data information through telecommunications devices is regulated by the Telecommunications Act. Such Act requires any operator that provides telecommunications services and independently operates a significant portion of a network to obtain a license. Dominant telecommunications service providers must provide interconnection to other providers on a non-discriminatory basis and in accordance with a transparent and cost-based pricing policy, stating the conditions and prices separately for each interconnection service. We have not been found to have a dominant market position under the Telecommunications Act, but cannot exclude the possibility that we might be in the future.

 

A revised Telecommunications Act was adopted by the Swiss Parliament in March 2006, aiming to strengthen competition in the telecommunication market, in particular by introducing the unbundling of the local loop by a formal act and to increase transparency for customers. The revised Telecommunications Act is expected to take effect on April 1, 2007. Only Swisscom AG (Swisscom), as the incumbent operator, will be required to provide full line access as well as bitstream access on a transparent, non-discriminatory and cost-based basis. The obligation to offer bitstream access will be limited to a period of four years. In addition, all operators will be required to take action against spamming. The licensing system will be replaced by a notification system. Universal service

obligations will be imposed, and all operators will be required to contribute to the costs for the provision of universal services if the licensees are not able to provide such services in a cost efficient manner.

 

Under the Act on the Surveillance of Prices, the Swiss Price Regulator has the power to prohibit price increases or to order price reductions in the event a company with market power implements prices that are deemed to be abusively high, unless the Swiss Price Regulator and the company can come to a mutual agreement. For purposes of the Act on the Surveillance of Prices, a price is considered to be abusively high if it is not the result of effective competition. We are subject to price regulation regarding our analog television offering and entered into a contract with the price regulator that determined the retail prices for analog television services until the end of 2006. As of 2007, we are no longer subject to an agreement with the Swiss Price Regulator. However, the Swiss Price Regulator has defined key terms regarding our products and prices until 2009, which we will have to take into account in order to avoid regulatory intervention on our pricing.

 

Hungary

 

Hungary has a communications law that broadly transposes the Directives. The NRA has virtually finished the process of analyzing the 18 predefined markets to determine if any operator or service provider has SMP with the only exception of relevance to our business being the ongoing analysis of the wholesale broadcast transmission market. The operations of our telephony subsidiary, Monor Telefon Tarsasag RT (Monor) have been found to have SMP in the call termination and origination market in our own telecommunications network, as well as in the markets for wholesale unbundled access and for wholesale broadband access, together with all other similar network operators. This has led to a variety of requirements, including the need to provide interconnection and access to, and use of, specific network facilities, non-discrimination, transparency, accounting separation and price control. We are also required to produce a wholesale ADSL offer on the Monor telecommunication network based on a discount from our retail prices (retail minus price regulation).

 

Monor has further been found to have SMP in a variety of retail markets relating to the provision of network access to business and to residential customers where our price increases have been capped at the rise in the CPI and in the markets for long distance and international calls for residential and business customers where we have been required to offer carrier pre-selection services.

 

Asia/Pacific

 

Japan

 

Regulation of the Cable Television Industry.  The two key laws governing cable television broadcasting services in Japan are the Cable Television Broadcast Law and the Wire Telecommunications Law. The Cable Television Broadcast Law was enacted in 1972 to regulate the installation and operation of cable television broadcast facilities and the provision of cable television broadcast services. The Wire Telecommunications Law is the basic law in Japan governing wire telecommunications, and it regulates all wire telecommunications equipment, including cable television broadcast facilities.

 

Under the Cable Television Broadcast Law, any business seeking to install cable television facilities with more than 500 drop terminals must obtain a license from the Ministry of Internal Affairs and Communications, commonly referred to as the MIC. Under the Wire Telecommunications Law, if these facilities have fewer than 500 drop terminals, only prior notification to the MIC is required. If a license is required, the license application must provide an installation plan, including details of the facilities to be constructed and the frequencies to be used, financial estimates, and other relevant information. Generally, the license holder must obtain prior permission from the MIC in order to change certain items included in the original license application. The Cable Television Broadcast Law also provides that any business that wishes to furnish cable television broadcast services must file prior notification with the MIC before commencing service. This notification must identify the service area and facilities to be used (unless the facilities are owned by the provider) and outline the proposed cable television broadcasting services and other relevant information, regardless of whether these facilities are leased or owned. Generally, the cable television provider must notify the MIC of any changes to these items.

Prior to the commencement of operations, a cable television provider must notify the MIC of all charges and tariffs for its cable television broadcast services. Those charges and tariffs to be incurred in connection with the mandatory re-broadcasting of television content require the approval of the MIC. A cable television provider must also give prior notification to the MIC of all amendments to existing tariffs or charges (but MIC approval of these amendments is not required, except for the aforementioned approval matters for mandatory re-broadcasting).

 

A cable television provider must comply with specific guidelines, including: (1) editing standards; (2) making its facilities available for third party use for cable television broadcasting services, subject to the availability of broadcast capacity; (3) providing service within its service area to those who request it absent reasonable grounds for refusal; (4) obtaining retransmission consent where retransmission of television broadcasts occur, unless such retransmission is required under the Cable Television Broadcast Law for areas having difficulties receiving television signals; and (5) obtaining permission to use public roads for the installation and use of cable.

 

The MIC may revoke a facility license if the license holder breaches the terms of its license; fails to comply with technical standards set forth in, or otherwise fails to meet the requirements of, the Cable Television Broadcast Law; or fails to implement a MIC improvement order relating to its cable television broadcast facilities or its operation of cable television broadcast services.

 

Regulation of the Telecommunications Industry.  As providers of broadband Internet access and telephony, our businesses in Japan also are subject to regulation by the MIC under the Telecommunications Business Law. The Telecommunications Business Law and related regulations subject carriers to a variety of licensing, registration and filing requirements depending upon the nature of their networks and services. Carriers may generally negotiate terms and conditions with their users (including fees and charges), except those relating to basic telecommunications services.

 

Carriers who provide Basic Telecommunications Services, defined as telecommunications that are indispensable to the lives of the citizenry as specified in MIC ordinances, are required to provide such services in an appropriate, fair and consistent manner. Carriers providing Basic Telecommunications Services must do so pursuant to terms and conditions and for rates that have been filed in advance with the MIC. The MIC may order modifications to contract terms and conditions it deems inappropriate for certain specified reasons.

 

Carriers, other than those exceeding certain standards specified in the Telecommunications Business Law (such as Nippon Telephone & Telegraph (NTT)), may set interconnection tariffs and terms and conditions through independent negotiations without MIC approval.

 

Telecommunication carriers that own their telecommunication circuit facilities are required to maintain such facilities in conformity with specified technical standards. The MIC may order a carrier that fails to meet such standards to improve or repair its telecommunication facilities.

 

Australia

 

Subscription television, Internet access and mobile telephony services are regulated in Australia by a number of Commonwealth statutes. In addition, State and Territory laws, including environmental and consumer protection legislation, may influence aspects of Austar’s business.

 

Broadly speaking, the regulatory framework in Australia distinguishes between the regulation of content services and the regulation of facilities used to transmit those services. The Australian Broadcasting Services Act 1992 (C’th) (BSA) regulates the ownership and operation of all categories of television and radio services in Australia and also aspects of Internet content. The technical delivery of Austar’s services is separately licensed under the Radiocommunications Act 1992 (C’th) (the Radiocommunications Act) or the Telecommunications Act 1997 (C’th), depending on the delivery technology utilized. Other legislation of key relevance to Austar is the Trade Practices Act 1974 (C’th), which includes competition and consumer protection regulation.

 

The BSA regulates subscription television broadcasting services through a licensing regime managed by the Australian Communications and Media Authority (ACMA). Austar and its related companies hold broadcasting licenses under the BSA. Subscription television broadcasting licenses are for an indefinite period. Each subscription television broadcasting license is issued subject to general license conditions, which may be revoked or varied

by the Australian Government, and may include specific additional conditions. License conditions include a prohibition on cigarette or other tobacco advertising; a requirement that subscription fees must be the predominant source of revenue for the service; a requirement that the licensee must remain a “suitable” licensee under the BSA; a requirement that customers must have the option to rent domestic reception equipment and a requirement to comply with provisions relating to anti-siphoning and the broadcast of R-rated material.

 

An additional obligation on subscription television licensees who provide a service predominantly devoted to drama programs is to spend at least 10% of its annual program expenditure on new Australian drama programs. Austar has made the required investments in such programming.

 

The BSA prohibits subscription television broadcasting licensees from obtaining exclusive rights to certain events that the Australia Government considers should be made freely available to the public. These events, which are specified on the “anti-siphoning list”, include a number of highly popular sporting events in Australia, and are currently protected until 2010.

 

Currently, under the BSA, a foreign person must not have “company interests” of more than 20% in a subscription television broadcasting license and foreign persons must not, in aggregate, have “company interests” of more than 35% in a subscription television broadcasting license. “Company interests” under the BSA include a beneficial entitlement to, or an interest in, shares of the company. The companies that hold the BSA licenses used by Austar to deliver its pay television services meet these requirements. Amendments to the foreign ownership rules in the BSA were passed in 2006, lifting these restrictions, although media is to be retained as a “sensitive” sector and foreign investment in the media sector is to remain subject to Treasurer approval. The amendments will be effective in 2007 at a date yet to be announced.

 

Changes to media laws were passed in October 2006 regarding the implementation of digital services by free-to-air television providers and use of the two spare terrestrial channels available throughout Australia. The changes set a date for analog switch-off between 2010-2012, relaxed simulcasting requirements as well as cross and media ownership restrictions, continued the moratorium on a fourth commercial network until the end of the switch-off period; and announced the intention to introduce a ‘use it or lose it’ scheme for anti-siphoning. One spare terrestrial channel has been made available for datacasting and narrowcasting channels and the second spare channel will be used for emerging new digital services such as mobile TV.

 

The BSA establishes a regime for the regulation of Internet content. Internet service providers or Internet content hosts are not primarily liable for the content of material carried on their service; however, once notified of the existence of illegal or highly offensive material on their service, they have a responsibility to remove or block access to such material.

 

In addition to licenses issued under the BSA, certain companies in the Austar group hold spectrum licenses issued under and regulated by the Radiocommunications Act. The Austar group currently holds 24 spectrum licenses in the 2.3 GHz Band and 26 licenses in the 3.5 GHz Band covering geographic areas similar to Austar’s subscription television areas. These licenses expire in 2015. The spectrum licenses authorize the use of spectrum space rather than the use of a specific device or technology. Austar is using this spectrum to provide WiMAX based broadband Internet services in two trial markets. Similar to the BSA, licenses issued under the Radiocommunications Act are subject to general license conditions and may be subject to specific license conditions, which can be added to, revoked or varied by written notice during the term of the license. Spectrum licensees must comply with core conditions of the license and be compatible with the technical framework for the bands. There are no restrictions on ownership/control of spectrum licenses except that the licensee must be a resident of Australia.

 

A subsidiary of Austar also holds a carrier license issued under the Telecommunications Act 1997 and a number of Austar companies operate as carriage service providers. These companies are required to comply with Australian telecommunications legislation, including legislation that establishes various access regimes. Companies in the Austar group provide dial-up and broadband Internet service and mobile telephony services. Internet service providers are considered carriage service providers for the purposes of the Telecommunications Act and must observe statutory obligations, including in relation to access, law enforcement and national security, and interception, and must become a member of the Telecommunications Industry Ombudsman scheme. Internet

service providers and Internet content hosts must also observe various industry codes of practice relating to Internet content and Internet gambling.

 

The Americas

 

Chile

 

As described above, VTR is subject to certain regulatory conditions as a result of its combination with Metrópolis Intercom S.A. in April 2005. These conditions are in addition to the regulations described below.

 

Video.  Cable television services are regulated in Chile by the Ministry of Transportation and Telecommunications (the Ministry). VTR has permits to provide wireline cable television services in the major cities, including Santiago, and in most of the medium-sized markets in Chile. Wireline cable television permits are granted for indefinite terms and are non-exclusive, meaning there may be more than one operator in the same service area. As these permits do not use the radio-electric spectrum, they are granted without ongoing duties or royalties. Wireless cable television services are also regulated by the Ministry. VTR has been awarded wireless fixed telephony concessions under which it plans to offer cable television services using its WiMax technology, which is allowed under the concessions. Wireless fixed telephony concessions are granted for renewable terms of 30 years. Such concessions are non-exclusive (subject to spectrum availability as determined by the Subsecretaria de Telecomunicaciones de Chile).

 

Cable television service providers in Chile are not required to carry any specific programming, but some restrictions may apply with respect to allowable programming. The National Television Council has authority over programming content, and it may impose sanctions on providers who are found to have run programming containing excessive violence, pornography or other objectionable content. Cable television providers have historically retransmitted programming from broadcast television, without paying any compensation to the broadcasters. However, certain broadcasters have filed lawsuits against VTR claiming that VTR breached their intellectual property rights by retransmitting their signals. The current state of the law in this area is unclear.

 

Internet.  Internet access services are considered complementary telecommunication services and, therefore, do not require concessions, permits or licenses.

 

Telephony.  The Ministry also regulates telephone services. The provision of telephony services (both fixed and mobile) requires a public telecommunication service concession. VTR has telecommunications concessions to provide wireline fixed telephony in most major and medium-sized markets in Chile. Telephony concessions are non-exclusive and have renewable 30-year terms. The original term of VTR’s wireline fixed telephony concessions expires in November 2025. Telephone long distance services are considered intermediate telecommunications services and, as such, are also regulated by the Ministry. VTR has concessions to provide this service, which is non-exclusive and has a 30-year renewable term.

 

Local service concessionaires are obligated to provide telephony service to all customers that are within their service area or are willing to pay for an extension to receive service. All local service providers, including VTR, must give long distance telephony service providers equal access to their network connections at regulated prices and must interconnect with all other public services concessionaires of the same type. Under the regulations, public services concessionaires of the same type are those whose systems are technically compatible among themselves.

 

The Chilean Antitrust Tribunal has found that the local telephone market in Chile is not competitive. As a result, the incumbent local telephony service provider in each market in Chile (typically Telefonica CTC) must have its local telephone service rates set by regulatory authorities. VTR is not the incumbent service provider in any of the telephony markets where it operates and, therefore, it is not subject to rate regulation. In the future, these telephony markets may be determined by the Chilean Antitrust Tribunal to be competitive, in which case the incumbent operators would no longer be subject to price regulation. Long distance service rates are not currently regulated, since the long distance market is considered highly competitive.

 

Interconnect charges (including access charges and charges for network unbundling services) are determined by the regulatory authorities. This rate regulation is applicable to incumbent operators and all local and mobile telephone companies, including VTR. The maximum rates that may be charged by each operator for the

corresponding service are made on a case-by-case basis, and are effective for five years. VTR’s interconnection rates were established in June 2002 and must be renewed in June 2007.

 

Competition

 

Markets for broadband distribution, including cable and satellite distribution, broadband Internet access and telephony services, and video programming generally are highly competitive and rapidly evolving. Consequently, our businesses expect to face increased competition in these markets in the countries in which they operate, and specifically as a result of deregulation in the EU. The percentage information for UPC Broadband on market share is based on information published by Screen Digest, for 2005, which includes estimates for 2006, and Dataxis for the third quarter of 2006. For Japan, all percentage information on market share is based on information obtained from the website of the Japanese Ministry of Internal Affairs and Communications, dated as of December 31, 2005, and internal market studies as of December 31, 2006. For Chile, the percentage information is based on internal market studies, information as of September 30, 2006 obtained from public filings by competitors and market information published by the International Data Corporation. The competition in certain countries in which we operate is described more specifically after the respective competition overview on video, broadband Internet and telephony.

 

Broadband Distribution

 

Video Distribution

 

Our businesses compete directly with a wide range of providers of news, information and entertainment programming to consumers. Depending upon the country and market, these may include: (1) over-the-air broadcast television services; (2) DTH satellite service providers; (3) digital terrestrial television, or “DTT”, broadcasters; (4) other cable operators in the same communities that we serve; (5) other fixed line telecommunications carriers and broadband providers, including the incumbent telecommunications operators, offering video products using DSL or ADSL technology or over fiber optic lines of FTTH networks; (6) satellite master antenna television systems, commonly known as SMATVs, which generally serve condominiums, apartment and office complexes and residential developments; (7) MMDS operators; and (8) movie theaters, video stores and home video products. Our businesses also compete to varying degrees with more traditional sources of information and entertainment, such as newspapers, magazines, books, live entertainment/concerts and sporting events.

 

In parts of Poland and Romania, our businesses face significant competition from other cable operators where our systems are over built, while in other countries the primary competition is from DTH satellite service providers, DTT broadcasters and/or other distributors of video programming using broadband networks. In some of our largest markets, including The Netherlands, Switzerland and Japan, we are facing increasing competition from video services offered by or over the network of the incumbent telecommunications operator. We seek to compete by offering attractive content and by upgrading our service offerings, such as digital television, to include the functionality for VoD, HD, PVRs and other advanced services.

 

 

For video services, the key competition has traditionally come either from over-the-air broadcasts or from satellite distribution. DTT is increasingly a competitive reality in Europe via a range of different business models from full-blown encrypted pay television offers on DTT to free-to-air. DTT is a growing service in most countries and further launches are expected. During 2006, we experienced increased competition for video services in Central and Eastern Europe due largely to the effects of competition from an alternative DTH provider that is competing with us in most of our Central and Eastern European markets. In the Slovak Republic, increased competition and other factors have resulted in the loss of a number of MMDS customers during 2006. In other countries, competition from SMATV or MMDS can be a factor.

Also, television over DSL networks, which is either provided directly by the owner of that network or by a third party, is fast becoming a significant part of the competitive environment. The ability of incumbent operators to now offer the so-called “triple-play” of video, broadband Internet and telephony services is expected to exert growing competitive pressure on cable-delivered video services. FTTH networks are, so far, rare in Europe although they are present or planned in a number of countries. In addition, there is increasing willingness from government and quasi-government entities in Europe to consider investing their money in such networks which would create a new source of competition.

 

Netherlands. The Netherlands has one of the highest cable penetration rates in Europe with 92% of all households subscribing to a cable service. UPC Netherlands provides video cable services to 35% of the total video cable households in The Netherlands. Satellite television penetration is 10% of the total video households. In addition to satellite television, we face competition from the DTT service, Digitenne, and from broadband Internet connection, or “IPTV”, products offered over DSL networks. KPN, the incumbent telecommunications operator, is the majority owner of Digitenne. KPN launched an IPTV service in the second quarter of 2006, which includes VoD, an electronic program guide, and a PVR. With its nationwide telecommunications network and ability to offer bundled triple-play services, KPN is expected to be a significant competitor.

 

Switzerland. We are the largest cable television provider in Switzerland based on number of video cable subscribers and are the sole provider in substantially all of our network area. There is limited terrestrial television in Switzerland and DTT is at present only available in parts of Switzerland. DTH satellite services are also limited due to various legal restrictions such as construction and zoning regulations or rental agreements that prohibit or impede installation of satellite dishes. Given technical improvements, such as the availability of smaller satellite antennae, as well as the continuous improvements of DTH offerings, we expect increased competition from satellite television operators. Swisscom, the incumbent telecommunications operator, launched its IPTV service in late 2006.

 

Austria. In Austria, we are the largest cable company based on number of video cable subscribers. Our primary competition for video customers is from free-to-air television received via satellite. Approximately 50% of Austrian households receive free television compared to approximately 38% of Austrian households receiving cable services. Fifty-one percent of the homes passed by UPC Austria’s network subscribe to our cable services (analog and digital). UPC Austria may face increased competition in the future from developing technologies. The incumbent telecommunications operator, Telekom Austria AG, launched an IPTV service in early 2006, and the public broadcaster, ORF, launched its DTT services in Vienna in October 2006, already reaching 70% of all households.

 

Hungary. In Hungary, we are the largest cable service provider based on number of video cable subscribers. Of the Hungarian households receiving cable television, 41% receive their cable service from UPC Hungary. In addition, UPC Hungary provides satellite service to 54% of Hungarian DTH households. Digi TV, a third party DTH service, launched in April 2006, provides new competition to our DTH satellite business branded UPC Direct. UPC Hungary faces competition from Antenna Hungaria Rt., a digital MMDS provider (recently purchased by Swisscom), and from the incumbent telecommunication company Magyar Telekom Rt. (in which Deutshe Telekom has a majority stake), which launched an IPTV service in early 2006 and offers a VoD service to Internet subscribers of its Internet service provider (ISP) subsidiary.

 

 

 

Internet

 

With respect to broadband Internet access services and online content, our businesses face competition in a rapidly evolving marketplace from incumbent and non-incumbent telecommunications companies, other cable-based ISPs, non-cable-based ISPs and Internet portals, many of which have substantial resources. The Internet services offered by these competitors include both traditional dial-up Internet services and broadband Internet access services using DSL, ADSL or FTTH, in a range of product offerings with varying speeds and pricing, as well as interactive computer-based services, data and other non-video services to homes and businesses. As the technology develops, competition from wireless services using WiMax and other technologies may become significant in the future. We seek to compete on speed and price, including by increasing the maximum speed of our connections and offering varying tiers of service and varying prices, as well as a bundled product offering and a range of value added services.

 

 

In The Netherlands, we face competition from KPN, the largest broadband Internet access provider, and operators using the unbundled local loop. As of December 31, 2006, UPC Netherlands provides broadband Internet services to 12% of the total broadband Internet market (or about 20% of our current footprint).

 

In Switzerland, Swisscom is the largest provider of broadband Internet access services, with an estimated market share of two-thirds of all broadband Internet customers. Cablecom serves 20% of all broadband Internet customers. As fully unbundled, shared or bitstream access to Swisscom’s network has not yet been implemented in Switzerland, alternative DSL service providers are currently reliant on Swisscom’s wholesale offering or are required to construct their own access network to provide broadband Internet access services.

 

UPC Austria’s largest competitor with respect to Internet access services is the incumbent telecommunications company, Telkom Austria. Telkom Austria provides services via DSL. In addition, UPC Austria faces competition from unbundled local loop access by operators who can offer broadband Internet services for lower costs. To compete, UPC Austria is offering its triple-play option at a discount for subscribers who switch from another provider.

 

In Hungary, the Internet market is growing rapidly. Our primary competitor is the incumbent telecommunications company, Magyar Telekom. As of December 31, 2006, UPC Hungary provides broadband Internet services to 19% of the total broadband Internet market.

 

 

 

Telephony

 

With respect to telephony services, our businesses face competition from the incumbent telecommunications operator in each country. These operators have substantially more experience in providing telephony services, greater resources to devote to the provision of telephony services and longstanding customer relationships. In many countries, our businesses also face competition from other cable telephony providers, wireless telephony providers, FTTH-based providers or other indirect access providers. Competition in both the residential and business telephony markets will increase with certain market trends and regulatory changes, such as general price competition, the introduction of carrier pre-selection, number portability, continued deregulation of telephony markets, the replacement of fixed line with mobile telephony, and the growth of VoIP services. As a result, we seek to compete on pricing as well as product innovation, such as personal call manager and unified messaging, and increasing the services we offer.

 

 

In The Netherlands, KPN is the dominant telephony provider, but all of the large MSOs, including UPC Netherlands, as well as ISPs, are now offering VoIP services and gaining market share. In Switzerland, we are the largest VoIP service provider, but Swisscom is the dominant fixed telephony service provider followed by two carriers that offer pre-select services. In the future we may face increased competition in Switzerland as the unbundling of the local loop is implemented.

 

In Austria and in Hungary, the incumbent telephone companies dominate the telephony market. Most of the competition to the incumbent telephone operators in these countries is from entities that provide carrier pre-select services. Carrier pre-select allows the end user to choose the voice services of operators other than the incumbent while using the incumbent’s network. We also compete with ISPs that offer VoIP services. In Austria, we serve our subscribers via our time division multiplex telephony platform and, beginning March 2006, via VoIP over our cable plant. In Hungary, we provide circuit switched telephony services over our copper wire telephony network and VoIP telephony services over our cable plant. We also launched our VoIP telephony service in the Czech Republic, Ireland, Poland and Slovak Republic in 2006.

 

 

 

Programming Services

 

The business of providing programming for cable and satellite television distribution is highly competitive. Our programming businesses directly compete with other programmers for distribution on a limited number of channels. Once distribution is obtained, these programming services compete, to varying degrees, for viewers and advertisers with other cable and over-the-air broadcast television programming services as well as with other entertainment media, including home video (generally video rentals), online activities, movies and other forms of news, information and entertainment.

 

Employees

 

As of December 31, 2006, we, including our consolidated subsidiaries, had an aggregate of approximately 20,500 employees, certain of which belong to organized unions and works councils. We believe that our employee relations are good.

 

Financial Information About Geographic Areas

 

Financial information related to the geographic areas in which we do business appears in note 22 to our consolidated financial statements included in Part II of this report.

 

Available Information

 

All our filings with the Securities and Exchange Commission (SEC) as well as amendments to such filings are available on our Internet website free of charge generally within 24 hours after we file such material with the SEC. Our website address is www.lgi.com. The information on our website is not incorporated by reference herein.

 

In addition to the other information contained in this Annual Report on Form 10-K, you should consider the following risk factors in evaluating our results of operations, financial condition, business and operations or an investment in our stock.

 

The risk factors described in this section have been separated into five groups:

 

 

Although we describe below and elsewhere in this Annual Report on Form 10-K the risks we consider to be the most material, there may be other unknown or unpredictable economic, business, competitive, regulatory or other

factors that also could have material adverse effects on our results of operations, financial condition, business or operations in the future. In addition, past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods.

 

If any of the events described below, individually or in combination, were to occur, our businesses, prospects, financial condition, results of operations and/or cash flows could be materially adversely affected.

 

Factors Relating to Overseas Operations and Foreign Regulation

 

Our businesses are conducted almost exclusively outside of the United States, which gives rise to numerous operational risks.  Our businesses operate almost exclusively in countries outside the United States and are thereby subject to the following inherent risks:

 

 

We are exposed to 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 any of our operating subsidiaries or affiliates will cause us to experience unrealized foreign currency translation losses (gains) with respect to amounts already invested in such foreign currencies. In addition, our company and our operating subsidiaries and affiliates are exposed to foreign currency risk to the extent that we or they 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 our respective functional currencies. 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 operating subsidiaries’ monetary assets and liabilities and the financial results of foreign subsidiaries and affiliates when their respective financial statements are translated into U.S. dollars for inclusion in our consolidated financial statements. Cumulative translation adjustments are recorded in accumulated other comprehensive income (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 us is to the Japanese yen and the euro due to the percentage of our U.S. dollar revenue that is derived from countries where these currencies are the functional currency. In addition, our operating results and financial condition are expected to be significantly impacted by changes in the exchange rates for the Swiss franc, the Chilean peso, the Hungarian forint and other local currencies in Europe.

 

Our businesses are subject to risks of adverse regulation by foreign governments.  Our businesses are subject to the unique regulatory regimes of the countries in which they operate. Cable and telecommunications businesses are subject to licensing eligibility rules and regulations, which vary by country. The provision of telephony services requires licensing from, or registration with, the appropriate regulatory authorities and entrance into interconnection arrangements with the incumbent phone companies. It is possible that countries in which we operate may adopt laws and regulations regarding electronic commerce which could dampen the growth of the Internet access services being offered and developed by these businesses. In a number of countries, our ability to increase the prices we charge for our cable television service or make changes to the programming packages we

offer is limited by regulation or conditions imposed by competition authorities or is subject to review by regulatory authorities. In addition, regulatory authorities may grant new licenses to third parties, resulting in greater competition in territories where our businesses may already be licensed, and may require that third parties be granted access to our bandwidth, frequency capacity, facilities or services. Programming businesses are subject to regulation on a country by country basis, including programming content requirements, requirements to make programming available on non-discriminatory terms, and service quality standards. In some cases, ownership restrictions may apply to broadband communications and/or programming businesses. Consequently, our businesses must adapt their ownership and organizational structure as well as their pricing and service offerings to satisfy the rules and regulations to which they are subject. A failure to comply with these rules and regulations could result in penalties, restrictions on such business or loss of required licenses.

 

Businesses that offer multiple services, such as video distribution as well as Internet access and telephony, or both video distribution and programming content, are facing increased regulatory review from competition authorities in several countries in which we operate, with respect to their businesses and proposed business combinations. For example, the regulatory authorities in several countries in which we do business have considered from time to time what access rights, if any, should be afforded to third parties for use of existing cable television networks and in certain countries have imposed access obligations. Depending on the terms on which third parties are granted access to our distribution infrastructure for the delivery of video, audio, Internet or other services, those providers could compete with services similar to those which our businesses offer, which could lead to significant price competition and loss of market share.

 

When we acquire additional communications companies, these acquisitions may require the approval of governmental authorities, which can block, impose conditions on, or delay an acquisition.

 

We cannot be certain that we will be successful in acquiring new businesses or integrating acquired businesses with our existing operations.  Historically, our businesses have grown, in part, through selective acquisitions that enabled them to take advantage of existing networks, local service offerings and region-specific management expertise. We expect to seek to continue growing our businesses through acquisitions in selected markets. Our ability to acquire new businesses may be limited by many factors, including debt covenants, availability of financing, the prevalence of complex ownership structures among potential targets and government regulation. In addition, we have faced increased competition for potential acquisition targets, primarily from private equity funds. Even if we were successful in acquiring new businesses, the integration of new businesses may present significant costs and challenges, including: realizing economies of scale in interconnection, programming and network operations; eliminating duplicative overheads; and integrating personnel, networks, financial systems and operational systems. We cannot assure you that we will be successful in acquiring new businesses or realizing the anticipated benefits of any completed acquisition.

 

In addition, we anticipate that most, if not all, companies acquired by us will be located outside the United States. Foreign companies may not have disclosure controls and procedures or internal controls over financial reporting that are as thorough or effective as those required by U.S. securities laws. While we intend to conduct appropriate due diligence and to implement appropriate controls and procedures as we integrate acquired companies, we may not be able to certify as to the effectiveness of these companies’ disclosure controls and procedures or internal controls over financial reporting until we have fully integrated them.

 

We may have to pay U.S. taxes on earnings of certain of our foreign subsidiaries regardless of whether such earnings are actually distributed to us, and we may be limited in claiming foreign tax credits; since substantially all of our revenue is generated through foreign investments, these tax risks could have a material adverse impact on our effective income tax rate, financial condition and liquidity.  Certain foreign corporations in which we have interests, particularly those in which we have controlling interests, are considered to be “controlled foreign corporations” under U.S. tax law. In general, our pro rata share of certain income earned by our subsidiaries that are controlled foreign corporations during a taxable year when such subsidiaries have current or accumulated earnings and profits will be included in our income when the income is earned, regardless of whether the income is distributed to us. This income, typically referred to as “Subpart F income”, generally includes, but is not limited to, such items as interest, dividends, royalties, gains from the disposition of certain property, certain currency exchange gains in excess of currency exchange losses, and certain related party sales and services income. In addition, a

U.S. stockholder of a controlled foreign corporation may be required to include in income its pro rata share of the controlled foreign corporation’s increase for the year in current or accumulated earnings and profits (other than Subpart F income) invested in U.S. property, regardless of whether the U.S. stockholder received any actual cash distributions from the controlled foreign corporation. Since we are investors in foreign corporations, we could have significant amounts of Subpart F income. Although we intend to take reasonable tax planning measures to limit our tax exposure, we cannot assure you that we will be able to do so or that any of such measures will not be challenged.

 

In general, a U.S. corporation may claim a foreign tax credit against its U.S. federal income taxes for foreign income taxes paid or accrued. A U.S. corporation may also claim a credit for foreign income taxes paid or accrued on the earnings of certain foreign corporations paid to the U.S. corporation as a dividend. Our ability to claim a foreign tax credit for dividends received from our foreign subsidiaries is subject to various limitations. Some of our businesses are located in countries with which the United States does not have income tax treaties. Because we lack treaty protection in these countries, we may be subject to high rates of withholding taxes on distributions and other payments from our businesses and may be subject to double taxation on our income. Limitations on our ability to claim a foreign tax credit, our lack of treaty protection in some countries, and our inability to offset losses in one foreign jurisdiction against income earned in another foreign jurisdiction could result in a high effective U.S. federal income tax rate on our earnings. Since substantially all of our revenue is generated abroad, including in jurisdictions that do not have tax treaties with the United States, these risks are proportionately greater for us than for companies that generate most of their revenue in the United States or in jurisdictions that have such treaties.

 

Factors Relating to Technology and Competition

 

Changes in technology may limit the competitiveness of and demand for our services, which may adversely impact our business and stock value.  Technology in the video, telecommunications and data services industries is changing rapidly. This significantly influences the demand for the products and services that are offered by our businesses. The ability to anticipate changes in technology and consumer tastes and to develop and introduce new and enhanced products on a timely basis will affect our ability to continue to grow, increase our revenue and number of subscribers and remain competitive. New products, once marketed, may not meet consumer expectations or demand, can be subject to delays in development and may fail to operate as intended. A lack of market acceptance of new products and services which we may offer, or the development of significant competitive products or services by others, could have a material adverse impact on our revenue, growth and stock price. Alternatively, if consumer demand for new services in a specific country or region exceeds our expectations, meeting that demand could overburden our infrastructure, which could result in service interruptions and a loss of customers.

 

Our digital migration project in The Netherlands may not generate anticipated levels of incremental revenue.  In our digital migration or D4A project, we provide a digital interactive television box and digital entry-level video service at no incremental charge to the analog rate during a promotional period to those analog customers who accept delivery of the digital box and agree to accept the services. After the promotional period, the subscriber may elect to return the box and discontinue the service or to continue the service by paying an incremental fee over the analog rate. The promotional period was for six months during 2006 and will be for three months during 2007. Further incremental revenue would be generated as we offer additional tiers of services and additional box functionality for additional fees. Failure to achieve sufficient levels of customer acceptance of our digital product or to generate sufficient incremental revenue from those customers who do subscribe to our digital service may adversely affect the operating results of our Netherlands operating segment and the return on our investment in this project.

 

Failure in our technology or telecommunications systems could significantly disrupt our operations, which could reduce our customer base and result in lost revenues.  Our success depends, in part, on the continued and uninterrupted performance of our information technology and network systems as well as our customer service centers. The hardware supporting a large number of critical systems for our cable network in a particular country or geographic region is housed in a relatively small number of locations. Our systems are vulnerable to damage from a variety of sources, including telecommunications failures, power loss, malicious human acts and natural disasters. Moreover, despite security measures, our servers are potentially vulnerable to physical or electronic break-ins, computer viruses and similar disruptive problems. Despite the precautions we have taken, unanticipated problems affecting our systems could cause failures in our information technology systems or disruption in the transmission

of signals over our networks. Sustained or repeated system failures that interrupt our ability to provide service to our customers or otherwise meet our business obligations in a timely manner would adversely affect our reputation and result in a loss of customers and net revenue.

 

We operate in increasingly competitive markets, and there is a risk that we will not be able to effectively compete with other service providers.  The markets for cable television, broadband Internet access and telecommunications in many of the regions in which we operate are highly competitive. In the provision of video services we face competition from other cable television service providers, DTH service providers, DTT broadcasters and video provided over FTTH networks or using DSL technology, among others. Our operating businesses in The Netherlands, Switzerland and Japan are facing increasing competition from video services provided by or over the networks of incumbent telecommunications operators. Our operating businesses in Central and Eastern Europe are facing increasing competition from other DTH providers. In the provision of telephone and broadband Internet access services, we primarily compete with the incumbent telecommunications operators in each country in which we operate. These operators typically dominate the market for these services and have the advantage of nationwide networks and greater resources than we have to devote to the provision of these services. In many countries, we also compete with other operators using the unbundled local loop of the incumbent telecommunications operator to provide these services, other facilities-based operators and wireless providers. Developments in the DSL technology used by the incumbent telecommunications operators and alternative providers as well as advances in wireless technology, such as WiMax, may improve the attractiveness of our competitor’s products and services and strengthen their competitive position.

 

The market for programming services is also highly competitive. Programming businesses compete with other programmers for distribution on a limited number of channels. Once distribution is obtained, program offerings must then compete for viewers and advertisers with other programming services as well as with other entertainment media, such as home video, online activities and movies.

 

We expect the level and intensity of competition to increase in the future from both existing competitors and new market entrants as a result of changes in the regulatory framework of the industries in which we operate, advances in communications technology, the influx of new market entrants and strategic alliances and cooperative relationships among industry participants. Increased competition may result in increased customer churn, reduce the rate of customer acquisition and lead to significant price competition, in each case resulting in decreases in cash flows, operating margins and profitability. The inability to compete effectively may result in the loss of subscribers, and our revenue and stock price may suffer.

 

We may not be able to obtain attractive programming at reasonable cost for our digital video services, thereby lowering demand for our services.  We rely on programming suppliers for the bulk of our programming content. We may not be able to obtain sufficient high-quality programming for our digital video services on satisfactory terms or at all in order to offer compelling digital video services. This may reduce demand for our services, thereby lowering our future revenue. It may also limit our ability to migrate customers from lower tier programming to higher tier programming, thereby inhibiting our ability to execute our business plans. Furthermore, we may not be able to obtain attractive country-specific programming for video services. This could further lower revenue and profitability. In addition, must-carry requirements may consume channel capacity otherwise available for other services.

 

Factors Relating to Certain Financial Matters

 

We may not report net earnings.  We reported losses from continuing operations of $334.0 million and $59.6 million during 2006 and 2005, respectively. In light of our historical financial performance, we cannot assure you that we will report net earnings in the near future or at all.

 

We may not freely access the cash of our operating companies.  Our operations are conducted through our subsidiaries. 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 ability of our operating subsidiaries to pay dividends or to make other payments or advances to us depends on

their individual operating results and any statutory, regulatory or contractual restrictions to which they may be or may become subject and in some cases our receipt of such payments or advances may be subject to onerous tax consequences. Most of our operating subsidiaries are subject to credit agreements or indentures that restrict sales of assets and prohibit or limit the payment of dividends or the making of distributions, loans or advances to stockholders and partners, including us. In addition, because these subsidiaries are separate and distinct legal entities they have no obligation to provide us funds for payment obligations, whether by dividends, distributions, loans or other payments. With respect to those companies in which we have less than a majority voting interest, we do not have sufficient voting control to cause those companies to pay dividends or make other payments or advances to any of their partners or stockholders, including us.

 

Certain of our subsidiaries are subject to various debt instruments that contain restrictions on how we finance our operations and operate our businesses, which could impede our ability to engage in beneficial transactions.  Certain of our subsidiaries are subject to significant financial and operating restrictions contained in outstanding credit agreements, indentures and similar instruments of indebtedness. These restrictions will affect, and in some cases significantly limit or prohibit, among other things, the ability of those subsidiaries to:

 

 

As a result of restrictions contained in these credit facilities, the companies party thereto, and their subsidiaries, could be unable to obtain additional capital in the future to:

 

 

In addition, some of the credit agreements to which these subsidiaries are parties require them to maintain financial ratios, including ratios of total debt to operating cash flow and operating cash flow to interest expense. Their ability to meet these financial ratios and tests may be affected by events beyond their control, and we cannot assure you that they will be met. In the event of a default under such subsidiaries’ credit agreements or indentures, the lenders may accelerate the maturity of the indebtedness under those agreements or indentures, which could result in a default under other outstanding credit facilities. We cannot assure you that any of these subsidiaries will have sufficient assets to pay indebtedness outstanding under their credit agreements and indentures. Any refinancing of this indebtedness is likely to contain similar restrictive covenants.

 

We are exposed to interest rate risks. Shifts in such rates may adversely affect the debt service obligation of our subsidiaries.  We are exposed to the risk of fluctuations in interest rates, primarily through the credit facilities of certain of our subsidiaries, which are indexed to EURIBOR, LIBOR, TIBOR or other base rates. Although we enter into various derivative transactions to manage exposure to movements in interest rates, there can be no assurance that we will continue to be able to do so at a reasonable cost.

 

Our substantial leverage could limit our ability to obtain additional financing and have other adverse effects.  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 our consolidated operating cash flow (as defined in note 22 to our consolidated financial statements). At December 31, 2006, our total consolidated outstanding debt and capital lease obligations was $12.2 billion, of which $1,384.9 million is due over the next 12 months. While we currently believe we will have the financial resources to meet our financial obligations when they come due, we cannot anticipate what our future condition will be. Our ability to service or refinance our debt is dependent primarily on our ability to maintain or increase our cash provided by operations and to achieve adequate returns on our capital expenditures and acquisitions. Accordingly, if our cash provided by operations declines or we encounter other material liquidity requirements, we may be required to seek additional debt or equity financing in order to meet our debt obligations and other liquidity requirements as they come due. In addition, our current debt levels may limit our ability to incur additional debt financing to fund working capital needs, acquisitions, capital expenditures, or other general corporate requirements. We can give no assurance that any additional debt financing will be available on terms that are as favorable as the terms of our existing debt. During 2006, we used our available liquidity to purchase $1,756.9 million of LGI Series A and Series C common stock. Any cash used by our company in connection with any future purchases of our common stock would not be available for other purposes, including the repayment of debt.

 

We are subject to increasing operating costs and inflation risks which may adversely affect our earnings.  While our operations attempt to increase our subscription rates to offset increases in operating costs, there is no assurance that they will be able to do so. Therefore, operating costs may rise faster than associated revenue, resulting in a material negative impact on our cash flow and earnings. We are also impacted by inflationary increases in salaries, wages, benefits and other administrative costs, the effects of which to date have not been material.

 

The liquidity and value of our interests in our subsidiaries and affiliates may be adversely affected by stockholder agreements and similar agreements to which we are a party.  We own equity interests in a variety of international broadband distribution and video programming businesses. Certain of these equity interests are held pursuant to stockholder agreements, partnership agreements and other instruments and agreements that contain provisions that affect the liquidity, and therefore the realizable value, of those interests. Most of these agreements subject the transfer of such equity interests to consent rights or rights of first refusal of the other stockholders or partners. In certain cases, a change in control of the company or the subsidiary holding the equity interest will give rise to rights or remedies exercisable by other stockholders or partners. Some of our subsidiaries and affiliates are parties to loan agreements that restrict changes in ownership of the borrower without the consent of the lenders. All of these provisions will restrict the ability to sell those equity interests and may adversely affect the prices at which those interests may be sold.

 

We do not have the right to manage the businesses or affairs of any of the companies in which we hold less than a majority voting interest. Rather, such rights may take the form of representation on the board of directors or a partners’ or similar committee that supervises management or possession of veto rights over significant or extraordinary actions. The scope of veto rights varies from agreement to agreement. Although board representation and veto rights may enable us to exercise influence over the management or policies of an affiliate, they do not enable us to cause those affiliates to take actions, such as paying dividends or making distributions to their stockholders or partners.

 

Other Factors

 

The loss of certain key personnel could harm our business.  We have experienced employees at both the corporate and operational levels who possess substantial knowledge of our business and operations. We cannot assure you that we will be successful in retaining their services or that we would be successful in hiring and training suitable replacements without undue costs or delays. As a result, the loss of any of these key employees could cause significant disruptions in our business operations, which could materially adversely affect our results of operations.

 

John C. Malone has significant voting power with respect to corporate matters considered by our stockholders.  John C. Malone beneficially owns outstanding shares of our common stock representing 25% of our aggregate voting power as of February 16, 2007. Including stock options held by Mr. Malone, the voting power of the shares beneficially owned by him was 30.7% at that date. By virtue of Mr. Malone’s voting power in our company, as well as his position as our Chairman of the Board, Mr. Malone may have significant influence over the outcome of any corporate transaction or other matters submitted to our stockholders for approval. Mr. Malone’s rights to vote or dispose of his equity interests in our company are not subject to any restrictions in favor of us other than as may be required by applicable law and except for customary transfer restrictions pursuant to incentive award agreements.

 

It may be difficult for a third party to acquire us, even if doing so may be beneficial to our stockholders.  Certain provisions of our restated certificate of incorporation and bylaws may discourage, delay or prevent a change in control of our company that a stockholder may consider favorable. These provisions include the following:

 

 

Our incentive plan may also discourage, delay or prevent a change in control of our company even if such change of control would be in the best interests of our stockholders.

 

LMI and UGC are parties to pending class action lawsuits relating to the LGI Combination.  LMI and UGC are parties to twenty-two lawsuits filed by third parties seeking monetary damages in connection with the LGI Combination. Predicting the outcome of these lawsuits is difficult; and an adverse judgment for monetary damages could have a material adverse effect on our operations.

 

LMI’s potential indemnity liability to Liberty Media if the spin off is treated as a taxable transaction as a result of the LGI Combination could materially adversely affect our prospects and financial condition.  LMI entered into a tax sharing agreement with Liberty Media in connection with LMI’s spin off from Liberty Media on June 7, 2004. In the tax sharing agreement, LMI agreed to indemnify Liberty Media and its subsidiaries, officers and directors for any loss, including any adjustment to taxes of Liberty Media, resulting from (1) any action or failure to act by LMI or any of LMI’s subsidiaries following the completion of the spin off that would be inconsistent with or prohibit the spin off from qualifying as a tax-free transaction to Liberty Media and to Liberty Media’s stockholders under Section 355 of the Internal Revenue Code of 1986, as amended (the Code) or (2) any breach of any representation or covenant given by LMI or one of LMI’s subsidiaries in connection with any tax opinion delivered to Liberty Media relating to the qualification of the spin off as a tax-free distribution described in Section 355 of the Code. LMI’s indemnification obligations to Liberty Media and its subsidiaries, officers and

directors are not limited in amount or subject to any cap. If LMI is required to indemnify Liberty Media and its subsidiaries, officers and directors under the circumstances set forth in the tax sharing agreement, LMI may be subject to substantial liabilities.

 

None.

 

During 2006, we leased our executive offices in Englewood, Colorado. All of our other real or personal property is owned or leased by our subsidiaries and affiliates.

 

Our subsidiaries and affiliates own or lease the fixed assets necessary for the operation of their respective businesses, including office space, transponder space, headend facilities, rights of way, cable television and telecommunications distribution equipment, telecommunications switches and customer premises equipment and other property necessary for their operations. The physical components of their broadband networks require maintenance and periodic upgrades to support the new services and products they introduce. Our management believes that our current facilities are suitable and adequate for our business operations for the foreseeable future.

 

From time to time, our subsidiaries and affiliates have become involved in litigation relating to claims arising out of their operations in the normal course of business. The following is a description of certain legal proceedings to which one of our subsidiaries or another company in which we hold an interest is a party. In our opinion, the ultimate resolution of these legal proceedings would not likely have a material adverse effect on our business, results of operations, financial condition or liquidity.

 

Cignal.  On April 26, 2002, Liberty Global Europe received a notice that certain former shareholders of Cignal Global Communications (Cignal) filed a lawsuit against Liberty Global Europe in the District Court in Amsterdam, The Netherlands, claiming $200 million on the basis that Liberty Global Europe failed to honor certain option rights that were granted to those shareholders in connection with the acquisition of Cignal by Priority Telecom. Liberty Global Europe believes that it has complied in full with its obligations to these shareholders through the successful completion of the initial public offering of Priority Telecom on September 27, 2001. Accordingly, Liberty Global Europe believes that the Cignal shareholders’ claims are without merit and intends to defend this suit vigorously. On May 4, 2005, the court rendered its decision dismissing all claims of the former Cignal shareholders. On August 2, 2005, an appeal against the district court decision was filed. Subsequently, when the grounds of appeal were filed in November 2005, only damages suffered by nine individual plaintiffs, rather than all former Cignal shareholders, continued to be claimed. Based on the share ownership information provided by the plaintiffs, the damage claims remaining subject to the litigation are approximately $28 million in the aggregate before statutory interest. A hearing on the appeal is scheduled for May 22, 2007.

 

On June 13, 2006, Liberty Global Europe, Priority Telecom, Euronext NV and Euronext Amsterdam NV were each served with a summons for a new action purportedly on behalf of all former Cignal shareholders. The new action claims, among other things, that the listing of Priority Telecom on Euronext Amsterdam in September 2001 did not meet the requirements of the applicable listing rules and, accordingly, the initial public offering was not valid and did not satisfy Liberty Global Europe’s obligations to the Cignal shareholders. Damages of $200 million, plus statutory interest, are claimed in this new action. The nine individual plaintiffs involved in the appeal proceedings referred to above conditionally claim compensation from Liberty Global Europe in this new action in the event that the court of appeals determines their claims inadmissible in the appeal proceedings.

 

Class Action Lawsuits Relating to the LGI Combination.  Since January 18, 2005, 21 lawsuits have been filed in the Delaware Court of Chancery, and one lawsuit has been filed 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 paid in connection with the LGI Combination and intend to vigorously defend this action.

 

None.

 

General

 

The capitalized terms used in PART II of this Annual Report on Form 10-K have been defined in the notes to our 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.

 

Market Information

 

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 in the LGI Combination. Unless the context otherwise indicates, pre-LGI Combination shares of LMI common stock or UGC common stock are presented in terms of the number of shares of LGI common stock issued in exchange for such LMI or UGC shares in the LGI Combination.

 

We have three series of common stock, LGI Series A, LGI Series B and LGI Series C, which trade on the Nasdaq National Market under the symbols “LBTYA,” “LBTYB” and “LBTYK,” respectively. Regular way trading in LGI Series A, Series B and Series C common stock began on June 8, 2004. The following table sets forth the range of high and low sales prices of shares of LGI Series A, Series B and Series C common stock for the periods indicated:

 

 

Holders

 

As of February 16, 2007, there were 2,746, 144 and 2,870 record holders of LGI Series A, Series B and Series C common stock, respectively (which amounts do not include the number of shareholders whose shares are held of record by banks, brokerage houses or other institutions, but include each such institution as one record holder).

 

Dividends

 

We have not paid any cash dividends on LGI Series A, Series B and Series C common stock, and we have no present intention of so doing. Payment of cash dividends, if any, in the future will be determined by our Board of Directors in light of our earnings, financial condition and other relevant considerations. Except for the foregoing, there are currently no restrictions on our ability to pay dividends in cash or stock, although credit facilities to which certain of our subsidiaries are parties would restrict our ability to access their cash for, among other things, our payment of dividends.

 

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

 

None.

Issuer Purchase of Equity Securities

 

None were purchased during the fourth quarter of 2006.

 

The following tables present selected historical financial information of (i) certain international cable television and programming subsidiaries and assets of LMI’s predecessor, LMC International, for periods prior to the June 7, 2004 spin off transaction, whereby LMI’s common stock was distributed on a pro rata basis to Liberty Media’s stockholders as a dividend, and (ii) LGI (as the successor to LMI) and its consolidated subsidiaries for periods following such date. Upon consummation of the spin off, LGI became the owner of the assets that comprise LMC International. The following selected financial data was derived from the audited consolidated financial statements of LGI and its predecessors as of December 31, 2006, 2005, 2004 and 2003 and for the each of the four years ended December 31, 2006. Data for 2002 has been derived from unaudited information. This information is only a summary, and should be read together with our consolidated financial statements included elsewhere herein.

 

 

 

 

 

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 and should be read in conjunction with our consolidated financial statements. This discussion is organized as follows:

 

 

Unless otherwise indicated, convenience translations into U.S. dollars are calculated as of December 31, 2006.

 

Overview

 

We are an international broadband communications provider of video, voice and broadband Internet access services with consolidated broadband operations at December 31, 2006 in 16 countries (excluding Belgium — see note 7 to our consolidated financial statements). Our operations are primarily in Europe, Japan and Chile. Through our indirect wholly owned subsidiaries, UPC Holding and LG Switzerland, we provide broadband communications services in 10 European countries (excluding Belgium). LG Switzerland holds our 100% ownership in Cablecom, a broadband communications operator in Switzerland. The broadband communications operations of UPC Holding and LG Switzerland are collectively referred to as the UPC Broadband Division. Through our indirect controlling ownership interest in J:COM, we provide broadband communications services in Japan. Through our indirect 80%-owned subsidiary VTR, we provide broadband communications 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 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 certain of our broadband operations, primarily in Europe.

 

Through our subsidiaries and affiliates, we are the largest international broadband communications operator in terms of subscribers. At December 31, 2006, our consolidated subsidiaries (excluding UPC Belgium) owned and operated networks that passed 27.6 million homes and served 19.4 million revenue generating units (RGUs),

consisting of 12.9 million video subscribers, 3.8 million broadband Internet subscribers and 2.7 million telephony subscribers.

 

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%. At December 31, 2006, we owned an indirect 36.6% interest in J:COM through our 58.7% controlling interest in Super Media and Super Media’s 62.5% 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 that have expanded our footprint and the scope of our business. In Europe, our recent acquisitions include:

 

 

UPC Ireland, through its contractual relationship with MS Irish Cable and MSDW Equity, began consolidating NTL Ireland effective May 1, 2005 for financial reporting purposes, 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, 2005 and 2004 operating results.

 

In connection with Unite Holdco’s September 18, 2006 acquisition of Karneval, Liberty Global Europe, through its August 9, 2006 agreements with AIL and Deutsche, began consolidating Unite Holdco effective September 30, 2006 for financial reporting purposes. On December 28, 2006, following the receipt of regulatory approvals, Liberty Global Europe completed its acquisition of Unite Holdco and settled the total return swap agreements with each of AIL and Deutsche. In the following discussion and analysis of our results of operations, we collectively refer to the September 18, 2006 consolidation and the December 28, 2006 acquisition of Karneval as the “acquisition” of Karneval, with such acquisition considered to be effective as of September 30, 2006 for purposes of comparing our 2006 and 2005 operating results.

 

In Japan, J:COM acquired (i) a 92% ownership interest in J:COM Chofu Cable on February 25, 2005, (ii) a 100% interest in J:COM Setamachi on September 30, 2005 and (iii) a controlling interest in Cable West on September 28, 2006. J:COM Chofu Cable, J:COM Setamachi and Cable West are broadband communications providers in Japan.

 

On April 13, 2005, VTR acquired a controlling interest in Metrópolis, a broadband communications provider in Chile. In connection with this transaction, UGC’s ownership interest in VTR decreased from 100% to 80%.

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.

 

We have also completed a number of less significant acquisitions in Europe and Japan. For additional information concerning our closed acquisitions, see note 5 to our consolidated financial statements.

 

On December 31, 2006 we completed the sale of our operations in Belgium to Telenet. Due to our continuing ownership interest in Telenet, we have not accounted for UPC Belgium as a discontinued operation. See note 7 to our consolidated financial statements.

 

As further discussed in note 6 to our consolidated financial statements, our consolidated financial statements have been reclassified to present UPC Norway, UPC Sweden, UPC France and PT Norway as discontinued operations. Accordingly, in the following discussion and analysis, the operating statistics, results of operations and cash flows that we present and discuss are those of our continuing operations.

 

From a strategic perspective, 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 22 to our 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. We also seek to leverage the reach of our broadband distribution systems to create new content opportunities in order to increase our distribution presence and maximize operating efficiencies. As discussed further under Liquidity and Capital Resources — Capitalization below, we also seek to maintain our debt at levels that provide for attractive equity returns without assuming undue risk.

 

From an operational perspective, we focus on achieving organic revenue growth in our broadband communications operations by developing and marketing bundled entertainment, information and communications services, and extending and upgrading the quality of our networks where appropriate. (As we use the term, organic growth excludes the effects of foreign currency exchange rate fluctuations and acquisitions.) While we seek to obtain new customers, we also seek to increase the average revenue we receive from each household by increasing the penetration of our digital video, broadband Internet and telephony services with existing customers through product bundling and upselling or by migrating analog video customers to digital video services that include various incremental service offerings, as described below. We plan to continue to employ this strategy to achieve organic revenue and RGU growth in 2007. Although we continue to believe that demand for our service offerings is strong, our ability to sustain our current level of organic revenue and RGU growth in future periods may be impacted by competitive, technological or regulatory developments outside of our control. Moreover, our ability to maintain or increase our monthly subscription fees for our service offerings is limited by competitive and, to a lesser extent, regulatory factors. As such, we expect that most of our organic revenue growth in 2007 will be attributable to RGU growth.

 

Including the effects of acquisitions, our continuing operations added a total of 2.5 million RGUs during 2006. Excluding the effects of acquisitions (RGUs added on the acquisition date), but including post-acquisition RGU additions, our continuing operations added total RGUs of 1.6 million during 2006. Most of our organic RGU growth is attributable to the growth of our broadband Internet access services and digital telephony (primarily through voice-over-Internet-protocol or VoIP), as significant increases in digital video RGUs were largely offset by declines in analog video RGUs.

 

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 and premium programming and, in some markets, incremental service offerings such as enhanced pay-per-view programming (including video-on-demand and near video-on-demand), personal video recorders and high definition television services.

 

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 broadband Internet access service through analysis of speed, data limits, market conditions and other factors.

 

We offer telephony services in Austria, Chile, Czech Republic, Hungary, Ireland, Japan, The Netherlands, Poland, Puerto Rico, Romania, Slovak Republic, and Switzerland, primarily over our broadband networks. In Austria, Chile, Hungary, Ireland, Japan and The Netherlands, we provide circuit switched telephony services and voice-over-Internet-protocol, or “VoIP” telephony services. Telephony services in the remaining countries are provided using VoIP technology. In select markets, we also offer mobile telephony services using third party networks.

 

The video, telephony and broadband 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 broadband 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.

 

Results of Operations

 

In addition to the Discussion and Analysis of our Historical Operating Results, we have also included an analysis of our operating results based on the approach we use to analyze our reportable segments. This approach includes J:COM’s revenue, operating expenses, SG&A expenses and operating cash flow on a consolidated basis during 2004, notwithstanding the fact that we used the equity method to account for J:COM during 2004. As further described below, we believe that the Discussion and Analysis of our Reportable Segments that appears below provides a more meaningful basis for comparing our revenue, operating expenses and SG&A expenses than does our historical discussion. The Discussion and Analysis of our Historical Operating Results immediately follows the Discussion and Analysis of our Reportable Segments.

 

The comparability of our operating results during 2006, 2005 and 2004 is affected by acquisitions, including (i) our acquisitions of INODE and Karneval, and J:COM’s acquisition of Cable West during 2006, (ii) our consolidation of J:COM, our acquisitions of Cablecom, NTL Ireland, Astral, Austar, IPS, Telemach, Zonemedia and Metrópolis, and J:COM’s acquisitions of Chofu Cable and J:COM Setamachi during 2005, and (iii) our acquisition of Chorus during 2004. 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 represents our estimate of the difference between the operating results of the periods under comparison that is attributable to the timing of an acquisition. In general, we base our estimate of the acquisition impact on an acquired entity’s operating results during the first three months following the acquisition date such that changes from those operating results in subsequent periods are considered to be organic changes.

 

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 Japanese yen and the euro. In this regard, 29.4% and 28.5% of our U.S. dollar revenue during 2006 was derived from subsidiaries whose functional currency is the Japanese yen and the euro, 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 December 31, 2006, we owned, an indirect 36.6% interest in J:COM that we hold through our interest in Super Media, an 80% interest in VTR and a 53.4% interest in Austar (which we report in our corporate and other category for segment reporting purposes). However, as we control Super Media/J:COM, VTR, and Austar, GAAP requires that we consolidate 100% of the revenue and expenses of these entities in our consolidated statements of operations. The minority owners’ interests in the operating results of J:COM, VTR, Austar and other less significant

majority owned subsidiaries are reflected in minority interests in losses (earnings) of subsidiaries, net, in our consolidated statements of operations. 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, the other member of Super Media, effectively has the ability to prevent our company from consolidating J:COM after February 2010.

 

Discussion and Analysis of our Reportable Segments

 

For purposes of evaluating the performance of our reportable segments, we compare and analyze 100% of the revenue and operating cash flow of our reportable segments regardless of whether we use the consolidation or equity method to account for such reportable segments. Accordingly, in the following tables, we have presented 100% of the revenue, operating expenses, SG&A expenses and operating cash flow of our reportable segments, notwithstanding the fact that we used the equity method to account for our investment in J:COM during 2004. The revenue, operating expenses, SG&A expenses and operating cash flow of J:COM for 2004 is then eliminated to arrive at the reported amounts. It should be noted, however, that this presentation is not in accordance with GAAP since the results of equity method investments are required to be reported on a net basis.

 

All of the reportable segments set forth below provide broadband communications services, including video, voice and broadband Internet access services. Certain segments also provide CLEC and other business-to-business communications (B2B) services. During 2006, our operating segments in the UPC Broadband Division provided services in 11 European countries, including our operations in Belgium, which we sold to Telenet on December 31, 2006. Other Western Europe included 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. J:COM provides broadband communications services in Japan. VTR provides broadband communications services in Chile. 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 category. Intersegment eliminations primarily represents the elimination of intercompany transactions between our UPC Broadband Division and Chellomedia.

 

During the second quarter of 2006, we changed our reporting such that we no longer allocate the central and corporate costs of the UPC Broadband Division to individual operating segments within the UPC Broadband Division. Instead, we present these costs as a separate category within the UPC Broadband Division. The UPC Broadband Division’s central and corporate costs include billing systems, network operations, technology, marketing, facilities, finance, legal and other administrative costs. During 2005 and 2004, the UPC Broadband Division’s central and corporate costs included certain programming costs that were considered to be in excess of market rates. Prior to July 1, 2006, our CLEC operations in The Netherlands and Austria were owned and managed by our indirect subsidiary, Priority Telecom, and included in our corporate and other category for purposes of segment reporting. Effective July 1, 2006, we integrated the Priority Telecom CLEC operations in The Netherlands and Austria with our existing operations in each country and began reporting these CLEC operations as components of our reportable segments in The Netherlands and Austria, respectively. Segment information for all periods presented has been restated to reflect the above-described changes and to present UPC Norway, UPC Sweden, UPC France and PT Norway as discontinued operations. Previously, UPC Norway and UPC Sweden were included in our Other Western Europe reportable segment, UPC France was presented as a separate reportable segment, and PT Norway was included in our corporate and other category. We present only the reportable segments of our continuing operations in the following tables. 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 (loss) before income taxes, minority interests and discontinued operations, see note 22 to our 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 2006, as compared to 2005, and 2005, as compared to 2004. In each case, the tables present (i) the amounts reported by each of our reportable segments for the comparative 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.

 

We also provide a table showing the operating cash flow margins (operating cash flow divided by revenue) of our reportable segments for 2006, 2005 and 2004 at the end of this section.

 

As discussed above, acquisitions have significantly affected the comparability of the results of operations of our reportable segments. For additional information, see the discussion under Overview above and note 5 to our consolidated financial statements.

 

Revenue of our Reportable Segments

 

Revenue — Years ended December 31, 2006 and 2005

 

 

General.  Revenue derived by our broadband communications operating segments includes amounts received from subscribers for ongoing services, installation fees, advertising revenue, mobile telephony revenue, channel carriage fees, telephony interconnect fees and amounts received from CLEC and other B2B services. In the following discussion, we use the term “subscription revenue” to refer to amounts received from subscribers, excluding installation fees and mobile telephony revenue.

 

The Netherlands.  The Netherlands’ revenue increased $66.6 million or 7.8% during 2006, as compared to 2005. Excluding the effects of foreign exchange rate fluctuations and an acquisition, The Netherlands’ revenue increased $51.3 million or 6.0%. This increase is attributable to an increase in subscription revenue and, to a lesser extent, higher non-subscription revenue.

 

The increase in subscription revenue during 2006 is due primarily to higher average RGUs, as increases in average telephony and broadband Internet RGUs were only partially offset by a decline in average video RGUs. The decline in average video RGUs includes a decline in average analog video RGUs that was not fully offset by a gain in digital video RGUs. The decline in average video RGUs is due largely to the effects of competition. A slight increase in the average monthly subscription revenue received per RGU (ARPU) also contributed to the increase, as the positive effects of (i) a January 2006 rate increase for analog video services and (ii) an increase of $6.6 million, due primarily to the release of deferred revenue (including $4.8 million of deferred revenue that was released during the fourth quarter of 2006) in connection with rate settlements with certain municipalities, were largely offset by the following negative factors:

 

 

As discussed below, we would expect our video services revenue to be positively impacted to the extent that new subscribers to our digital video services are retained beyond the applicable promotional period.

 

The increase in The Netherlands’ non-subscription revenue during 2006 is due primarily to increases in revenue from B2B services, mobile telephony services (including mobile handset sales) and interconnect fees, partially offset by lower revenue from installation fees. Revenue from B2B services, after taking into account intercompany eliminations, contributed $13.8 million to the increase in The Netherlands’ non-subscription revenue during 2006. Revenue from mobile telephony services was higher in 2006 primarily because such services were not offered by The Netherlands until the third quarter of 2005. The lower installation fees are principally related to a higher percentage of customers performing self-installations.

 

In October 2005, we initiated a program to migrate over time The Netherlands’ analog video cable customers to digital video service, which we refer to as the “digital-for-all” or “D4A” program. In the D4A program, we provide the customer with a digital interactive television box and, for a promotional period following acceptance of the box, the digital entry level service at no incremental charge to the customer over the standard analog rate. Effective January 1, 2007, this promotional pricing period was reduced from six months to three months. To the extent that digital video subscribers are retained after the promotional pricing period has elapsed, The Netherlands’ ARPU from video services will be positively impacted. As of December 31, 2006, the promotional pricing period had elapsed for over 50% of The Netherlands’ digital video subscribers. Although we have had only limited experience monitoring the disconnect patterns of this group of digital video subscribers, we are not seeing significant increases in subscriber disconnects in the initial weeks and months following the date that the promotional pricing period elapses. However, due to the relatively short time frame that these digital video subscribers have been retained beyond the promotional pricing period, these results are not necessarily an accurate indication of future subscriber retention rates.

 

The Netherlands has incurred significantly higher operating, marketing and other costs during 2006 as compared to 2005, in connection with the D4A program. Although a portion of these costs vary with our subscriber migration efforts, some costs, such as programming, vary with our digital video subscriber base and others remain somewhat fixed relative to our digital subscriber base. We are continually evaluating our approach to the D4A program in an attempt to determine the most cost-effective way to convert analog video subscribers to digital video subscribers. During the second half of 2006, we added a lower number of digital video RGUs as compared to the first half of 2006. This decline is principally associated with the adoption of a more selective approach to distributing digital interactive television boxes to subscribers. As a result of the adoption of this more selective approach, we expect a more gradual pacing of our D4A program in future quarters. As the pace of our digital video RGU additions slows, we expect that we will experience accompanying reductions in certain capital expenditures

and operating, marketing and other costs. As we cannot predict with certainty (i) the percentage of new digital video subscribers that will be retained after the promotional period has elapsed, (ii) the percentage of current analog subscribers that ultimately will be successfully migrated to the digital video service, and (iii) the amount of fixed and variable costs related to digital video services that The Netherlands will incur over the life of the D4A program and in the following periods, no assurance can be given as to the impact of this program on The Netherlands’ future operating results.

 

The rates charged for The Netherlands’ analog video services are subject to rate regulation. For a description of recent regulatory developments in The Netherlands, see note 21 to our consolidated financial statements. Adverse outcomes from regulatory initiatives could have a significant negative impact on our ability to maintain or increase revenue in The Netherlands.

 

Switzerland.  Switzerland’s revenue increased $649.7 million or 532.1% during 2006, as compared to 2005. This increase includes a $576.0 million increase that is attributable to the impact of the October 2005 Cablecom acquisition. Excluding the effects of foreign exchange rate fluctuations and the Cablecom acquisition, Switzerland’s revenue increased $40.6 million or 33.3%, including organic growth that occurred during the ten months ended October 31, 2006. Most of this increase is attributable to an increase in subscription revenue as the number of average broadband Internet, telephony and video RGUs was higher in 2006 as compared to 2005. ARPU increased slightly during 2006, as the positive effects of a January 2006 price increase for analog video services and a higher proportion of subscribers selecting digital video services over analog video services were only partially offset by lower ARPU from telephony and broadband Internet services. ARPU from telephony service decreased during 2006 primarily due to the impact of competitive factors. ARPU from broadband Internet services decreased during 2006 primarily due to customers selecting lower-priced tiers of service. Excluding organic revenue growth that occurred during the ten months ended October 31, 2006, Switzerland’s revenue increased 16.5% during the two months ended December 31, 2006, as compared to the corresponding prior year period in which we owned Cablecom. Due in part to the fact that we do not expect to increase our rates for analog video services in Switzerland during 2007, we expect that Switzerland’s revenue growth rate during 2007 will decline to a rate that will range from 8% to 10%.

 

Austria.  Austria’s revenue increased $91.0 million or 27.7% during 2006, as compared to 2005. This increase includes a $73.7 million increase that is attributable to the impact of the March 2006 INODE acquisition. Excluding the effects of the INODE acquisition and foreign exchange rate fluctuations, Austria’s revenue increased $13.0 million or 3.9%. The majority of this increase is attributable to an increase in subscription revenue, as the positive effects of higher average RGUs were partially offset by a slight decline in ARPU. The increase in average RGUs during 2006 is attributable to a significant increase in the average number of broadband Internet RGUs, as a small increase in the average number of telephony RGUs largely offset a small decrease in the average number of video RGUs. The slight decline in ARPU during 2006 is attributable to lower ARPU from broadband Internet and telephony services, primarily as a result of an increase in discounting due to competitive factors. In addition, ARPU from telephony services decreased due to (i) the 2006 introduction in Austria of VoIP telephony services, which generally are priced slightly lower than Austria’s circuit switched telephony service and (ii) lower telephony call volume resulting from increased customer usage of off-network calling plans. These negative factors were partially offset by the positive impact of a January 2006 rate increase for analog video services and an increase in subscribers selecting premium digital services. Telephony revenue in Austria decreased somewhat during 2006, as the negative effect of the decrease in telephony ARPU more than offset the positive impact of higher average telephony RGUs. Increases in revenue from B2B services, installation fees and other non-subscription revenue also contributed to the increase in Austria’s revenue.

 

Other Western Europe.  Other Western Europe’s revenue increased $78.2 million or 34.3% during 2006 as compared to 2005. This increase includes a $47.8 million increase that is attributable to the May 2005 NTL Ireland acquisition. Excluding the effects of the NTL Ireland acquisition and foreign exchange rate fluctuations, Other Western Europe’s revenue increased $24.3 million or 10.6%. Most of this increase is attributable to higher subscription revenue, as the number of average broadband Internet and video RGUs was higher in 2006 as compared to 2005. A slight increase in ARPU also contributed to the increase in subscription revenue, as the positive impact of a January 2006 rate increase for analog video services in Ireland was only partially offset by the

negative effects of (i) higher discounting due to competitive factors and (ii) an increase in the proportion of subscribers selecting lower-priced broadband Internet tiers.

 

Hungary.  Hungary’s revenue increased $25.7 million or 9.1% during 2006, as compared to 2005. Excluding the effects of foreign exchange rate fluctuations, Hungary’s revenue increased $41.6 million or 14.8%. This increase is attributable to an increase in subscription revenue that was only partially offset by a decrease in telephony transit revenue, as discussed below. Most of this increase in subscription revenue is attributable to increases in the average number of broadband Internet, telephony and DTH RGUs and, to a lesser extent, analog video RGUs. An increase in ARPU also contributed to the increase in subscription revenue as the positive effect of a January 2006 rate increase for analog video services was only partially offset by the negative impacts on ARPU of (i) an increase in discounting due to competitive factors, (ii) a higher proportion of customers selecting lower-priced broadband Internet tiers, (iii) growth in Hungary’s VoIP telephony services, which generally are priced lower than Hungary’s circuit switched telephony services, and (iv) lower telephony call volume. During each of the last three quarters of 2006, Hungary experienced slight organic declines in video RGUs, primarily due to the effects of competition from an alternative DTH provider. As noted above, Hungary’s comparatively low-margin telephony transit service revenue decreased by $10.3 million during 2006, as compared to 2005. This decrease is due to a lower volume of transit traffic since late 2005, when certain alternative providers of telecommunications services began directly interconnecting with traditional telecommunications networks, bypassing Hungary’s broadband networks.

 

Other Central and Eastern Europe.  Other Central and Eastern Europe’s revenue increased $207.8 million or 56.1% during 2006, as compared to 2005. This increase includes a $113.6 million increase that is attributable to the aggregate impact of the October 2005 Astral and the February 2005 Telemach acquisitions and other less significant acquisitions. Excluding the effects of these acquisitions and foreign exchange rate fluctuations, Other Central and Eastern Europe’s revenue increased $64.4 million or 17.4% during 2006. This increase is attributable to an increase in subscription revenue, as the number of average RGUs was higher in 2006 as compared to 2005. Higher ARPU during 2006 also contributed to the increase in subscription revenue. The growth in RGUs during 2006 is attributable to increases in the average number of broadband Internet, video and telephony RGUs, with most of the broadband Internet growth occurring in Poland, Romania and the Czech Republic, most of the video growth occurring in the Czech Republic and Romania, and most of the telephony growth attributable to the expansion of VoIP telephony services in Poland and Romania. ARPU increased during 2006 as the positive effects of rate increases for video services in certain countries and an increase in the number of customers selecting premium video services in Romania more than offset the negative effects of a higher proportion of broadband Internet subscribers selecting lower-priced tiers and higher discounting related to increased competition. During 2006, we have experienced increased competition for video RGUs in Central and Eastern Europe due largely to the effects of competition from an alternative DTH provider that is competing with us in most of our Central and Eastern European markets. In the Slovak Republic, increased competition and other factors have resulted in the loss of a number of multi-channel multi-point (microwave) distribution system (MMDS) RGUs during 2006.

 

J:COM (Japan).  J:COM’s revenue increased $244.2 million or 14.7% during 2006, as compared to 2005. This increase includes a $139.8 million increase that is attributable to the aggregate impact of the September 2006 Cable West, February 2005 J:COM Chofu Cable and the September 2005 J:COM Setamachi acquisitions and other less significant acquisitions. Excluding the effects of these acquisitions and foreign exchange rate fluctuations, J:COM’s revenue increased $212.1 million or 12.8%. Most of this increase is attributable to an increase in subscription revenue, primarily due to increases in the average number of J:COM’s telephony, broadband Internet and video RGUs during 2006. ARPU remained relatively constant, as the positive effects of an increased proportion of subscribers selecting digital video services over analog video services and higher-speed broadband Internet services over lower-speed alternatives were largely offset by the negative effects of an increase in product bundling discounts and lower telephony ARPU due to decreases in customer call volumes. Increases in construction services and advertising revenue and other non-subscription revenue also contributed to the increase in J:COM’s revenue.

 

VTR (Chile).  VTR’s revenue increased $114.7 million or 25.8% during 2006, as compared to 2005. This increase includes a $19.2 million increase attributable to the April 2005 Metrópolis acquisition. Excluding the effects of the Metrópolis acquisition and foreign exchange rate fluctuations, VTR’s revenue increased $68.6 million or 15.5%. Most of this increase is attributable to an increase in subscription revenue, due primarily to growth in the

average number of VTR’s broadband Internet, telephony and digital video RGUs. ARPU declined slightly during 2006, as the positive effects of (i) January and August 2006 inflation adjustments to rates for video services and (ii) an increase in the proportion of subscribers selecting digital video services over analog video services were more than offset by the negative impacts of an increase in product bundling and promotional discounts.

 

Revenue — Years ended December 31, 2005 and 2004

 

 

N.M. — Not Meaningful

 

The Netherlands.  The Netherlands’ revenue increased $63.6 million or 8.0% during 2005, as compared to 2004. Excluding the effects of foreign exchange rate fluctuations and an acquisition, The Netherlands’ revenue increased $44.4 million or 5.6%. The majority of this increase is attributable to an increase in subscription revenue, due primarily to higher average RGUs, as increases in average telephony and broadband Internet RGUs were only partially offset by a decrease in average video RGUs. ARPU during 2005 increased as compared to 2004, as the positive impact of a rate increase in January 2005 for video services was only partially offset by the negative impact of decreases in ARPU from broadband Internet and telephony services due to competitive factors and an increase in the proportion of broadband Internet customers selecting lower priced tiers. The decrease in broadband Internet ARPU, which was only partially offset by an increase in average broadband Internet RGUs, resulted in a slight decrease in The Netherlands’ subscription revenue from broadband Internet services during 2005, as compared to 2004. Increases in revenue from B2B services and other non-subscription revenue also contributed to the increase in The Netherlands’ revenue.

 

In October 2005, we initiated a program to migrate substantially all of our analog video subscribers to digital video services in The Netherlands. For further information on The Netherlands’ D4A program, see above discussion under Revenue — Years ended December 31, 2006 and 2005 — The Netherlands.

Austria.  Austria’s revenue increased $15.8 million or 5.0% during 2005, as compared to 2004. Excluding the effects of foreign exchange rate fluctuations, Austria’s revenue increased $15.4 million or 4.9%. Most of this increase is attributable to higher subscription revenue, due primarily to higher average broadband Internet RGUs during 2005. ARPU during 2005 increased slightly as compared to 2004, reflecting the net effect of (i) higher ARPU associated with rate increases in January 2005 for analog video services, (ii) lower ARPU from broadband Internet services reflecting competitive factors and an increase in the proportion of subscribers selecting lower tiered products and (iii) a decrease in ARPU from digital video services, primarily due to increased competition.

 

Other Western Europe.  Other Western Europe’s revenue increased $142.1 million or 165.0% during 2005, as compared to 2004. This increase includes a $128.5 million increase attributable to the aggregate impact of the Chorus and NTL Ireland acquisitions. Excluding the effects of these acquisitions and foreign exchange rate fluctuations, Other Western Europe’s revenue increased $13.5 million or 15.8%.

 

Most of this increase is attributable to higher subscription revenue, due primarily to an increase in ARPU. The increase in ARPU is primarily attributable to increases in the proportion of video subscribers selecting the digital product. A slightly higher average number of broadband Internet and digital video RGUs also contributed somewhat to the increase in subscription revenue.

 

Hungary.  Hungary’s revenue increased $64.0 million or 29.4% during 2005, as compared to 2004. Excluding the effects of foreign exchange rate fluctuations, Hungary’s revenue increased $59.9 million or 27.6%. Most of this increase is attributable to an increase in subscription revenue, due primarily to a higher average number of broadband Internet, DTH and telephony RGUs and, to a lesser extent, analog RGUs. Subscription revenue was also positively impacted by higher ARPU, due primarily to rate increases in January 2005 for video services. The increase in telephony RGUs was primarily driven by VoIP telephony sales. Increases in revenue from the comparatively low margin telephony transit service business and other non-subscription revenue also contributed to the increase in Hungary’s revenue.

 

Other Central and Eastern Europe.  Other Central and Eastern Europe’s revenue increased $118.0 million or 46.8% during 2005, as compared to 2004. This increase includes a $51.8 million increase attributable to the aggregate impact of the Telemach and Astral acquisitions and another less significant acquisition. Excluding the effects of these acquisitions and foreign exchange rate fluctuations, Other Central and Eastern Europe’s revenue increased $37.7 million or 14.9% during 2005, as compared to 2004. Most of this increase is due to an increase in subscription revenue attributable to growth in average RGUs and higher ARPU. The growth in RGUs during 2005 is primarily attributable to increases in the average number of broadband Internet and video RGUs, with most of the broadband Internet growth in Poland and the Czech Republic, and most of the video growth in Romania.

 

J:COM (Japan).  J:COM’s revenue increased $157.4 million or 10.5% during 2005, as compared to 2004. This increase includes a $29.9 million increase attributable to the aggregate impact of the Chofu Cable and J:COM Setamachi acquisitions and another less significant acquisition. Excluding the effects of these acquisitions and foreign exchange rate fluctuations, J:COM’s revenue increased $173.4 million or 11.5% during 2005, as compared to 2004. The increase is due to an increase in subscription revenue due primarily to increases in the average number of telephony, broadband Internet and video RGUs during 2005, as compared to 2004. ARPU remained relatively constant as the negative effects of a decrease in customer call volumes and an increase in the amount of bundling discounts were offset by 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. Non-subscription revenue decreased slightly during 2005 as a decrease in installation revenue, due primarily to increased discounting, was partially offset by individually insignificant increases in other items.

 

VTR (Chile).  VTR’s revenue increased $144.2 million or 48.1% during 2005, as compared to 2004. This increase includes a $52.8 million increase attributable to the impact of the Metrópolis acquisition. Excluding the effects of the Metrópolis acquisition and foreign exchange rate fluctuations, VTR’s revenue increased $53.9 million or 18.0% during 2005, as compared to 2004. Most of the increase is attributable to higher subscription revenue, primarily due to growth in the average number of VTR’s broadband Internet, telephony and video RGUs. Higher overall ARPU also contributed to the increase.

 

Operating expenses — Years ended December 31, 2006 and 2005