10-K 1 d33641e10vk.htm FORM 10-K e10vk
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the fiscal year ended December 31, 2005
 
OR
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the transition period from           to
Commission File Number 000-51360
Liberty Global, Inc.
(Exact name of Registrant as specified in its charter)
     
State of Delaware   20-2197030
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
 
12300 Liberty Boulevard
Englewood, Colorado
(Address of principal executive offices)
  80112
(Zip Code)
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:
Large Accelerated Filer þ            Accelerated Filer o            Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-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: $10.893 billion.
The number of outstanding shares of Liberty Global, Inc.’s common stock as of February 22, 2006 was:
226,041,245 shares of Series A common stock;
7,323,570 shares of Series B common stock; and
234,863,543 shares of Series C common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the Registrant’s 2006 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
 
 


 

LIBERTY GLOBAL, INC.
2005 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
             
        Page
         
 PART I
   Business     I-1  
   Risk Factors     I-37  
   Unresolved Staff Comments     I-45  
   Properties     I-45  
   Legal Proceedings     I-45  
   Submission of Matters to a Vote of Security Holders     I-46  
 PART II
   Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities     II-1  
   Selected Financial Data     II-5  
   Management’s Discussion and Analysis of Financial Condition and Results of Operations     II-6  
   Quantitative and Qualitative Disclosures About Market Risk     II-44  
   Financial Statements and Supplementary Data     II-51  
   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     II-51  
   Controls and Procedures     II-51  
   Other Information     II-51  
 PART III
   Directors and Executive Officers of the Registrant     III-1  
   Executive Compensation     III-1  
   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     III-1  
   Certain Relationships and Related Transactions     III-1  
   Principal Accountant Fees and Services     III-1  
 PART IV
   Exhibits and Financial Statement Schedules     IV-1  
 2005 Incentive Plan
 2005 Nonemployee Director Incentive Plan
 Compensation Policy for Nonemployee Directors
 Form of Indemnification Agreement between the Registrant and its Directors
 Form of Indemnification Agreement between the Registrant and its Executive Officers
 Contract Extension Letter
 List of Subsidiaries
 Consent of KPMG LLP
 Consent of KPMG AZSA & Co.
 Consent of KPMG AZSA & Co.
 Consent of Finsterbusch Pickenhayn Sibille
 Consent of KPMG LLP
 Information Re: Absence of Consent of Arthur Andersen LLP
 Consent of Ernst & Young LTDA
 Consent of KPMG LLP
 Certification of President and CEO
 Certification of Senior VP and Co-CFO (Principal Financial Officer)
 Certification of Senior VP and Co-CFO (Principal Accounting Officer)
 Section 1350 Certification


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PART I
Item 1. BUSINESS
General Development of Business
Liberty Global, Inc. (LGI) is an international broadband communications provider of video, voice and Internet access services, with consolidated broadband operations in 19 countries (excluding Norway) outside of the continental United States at December 31, 2005, primarily in Europe, Japan and Chile. Through our indirect wholly owned subsidiary UGC Europe, Inc. (UGC Europe) and its wholly owned subsidiaries UPC Holding B.V. (UPC Holding) and Liberty Global Switzerland, Inc. (LG Switzerland) (collectively, Europe Broadband), we provide video, voice and Internet access services in 13 European countries at December 31, 2005 (excluding Norway). Through our indirect controlling ownership interest in Jupiter Telecommunications Co., Ltd. (J:COM), we provide video, voice and Internet access services in Japan. Through our indirect 80%-owned subsidiary VTR GlobalCom, S.A. (VTR), we provide video, voice and Internet access services in Chile. We also have (i) consolidated direct-to-home 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 B.V. (chellomedia), which also provides telecommunications and interactive digital services and owns or manages investments in various businesses in Europe. Certain of chellomedia’s subsidiaries and affiliates provide programming and other services to Europe Broadband.
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. We refer to these assets and subsidiaries of Liberty Media prior to June 2004, collectively as LMC International. 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. As used in this document, the terms “we”, “our”, “our company”, and “us” may refer, as the context requires, to LGI and its predecessors and subsidiaries.
On June 15, 2005, we completed certain mergers whereby LGI acquired all of the capital stock of UGC that LMI did not already own and LMI and UGC each became wholly owned subsidiaries of LGI (the LGI Combination). In the LGI Combination, (i) each outstanding share of LMI Series A common stock, LMI Series B common stock and LMI Series C common stock was exchanged for one share of the corresponding series of LGI common stock, and (ii) each outstanding share of UGC Class A common stock, UGC Class B common stock and UGC Class C common stock (other than those shares owned by LMI and its wholly owned subsidiaries) was converted into the right to receive for each share of common stock owned either (i) 0.2155 of a share of LGI Series A common stock and 0.2155 of a share of LGI Series C common stock (plus cash for any fractional share interest) or (ii) $9.58 in cash. Cash elections were subject to proration. The aggregate cash consideration paid to UGC’s stockholders in the LGI Combination was just under $0.7 billion.
On September 6, 2005, LGI effected a stock split in the form of a stock dividend (the Stock Dividend) of LGI Series C common stock to holders of record of LGI Series A and Series B common stock as of 5:00 p.m., New York City time, on August 26, 2005, which was the record date for the Stock Dividend (the Record Date). In the Stock Dividend, holders received one share of LGI Series C common stock for each share of LGI Series A common stock, and one share of LGI Series C common stock for each share of LGI Series B common stock, held of record as of the Record Date. Unless otherwise indicated, all LGI and LMI share and per share amounts presented herein have been retroactively adjusted to give effect to the Stock Dividend,

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notwithstanding the fact that no shares of LGI Series C common stock were issued and outstanding prior to September 6, 2005.
Unless indicated otherwise, convenience translations into U.S. dollars are calculated as of December 31, 2005.
Recent Developments
Contributions and Acquisitions
Pursuant to a contribution agreement between Sumitomo Corporation (Sumitomo) and us, on December 28, 2004, our 45.45% equity interest in J:COM and a 19.78% equity interest in J:COM owned by Sumitomo were combined in a holding company named LGI/ Sumisho Super Media, LLC, formerly known as LMI/ Sumisho Super Media, LLC (Super Media). As a result of these transactions, we held a 69.68% non-controlling interest in Super Media, and Super Media held a 65.23% controlling interest in J:COM at December 31, 2004.
On February 18, 2005, J:COM announced an initial public offering of its common shares in Japan. Under the terms of the operating agreement of Super Media, our casting or tie-breaking vote with respect to decisions of the management committee of Super Media became effective upon this announcement. As a result, we began accounting for Super Media and J:COM as consolidated subsidiaries effective as of January 1, 2005. On March 23, 2005, J:COM completed its initial public offering and Sumitomo contributed to Super Media a portion of the 12.25% equity interest in J:COM that Sumitomo had retained following the December 2004 contribution. In April 2005, the underwriters in J:COM’s initial public offering exercised their over-allotment option and in September 2005, Sumitomo contributed the balance of its equity interest in J:COM to Super Media. After giving effect to the foregoing, as of December 31, 2005, we held a 58.66% controlling interest in Super Media and Super Media held a 62.65% controlling interest in J:COM.
On January 7, 2005, chellomedia acquired an 87.5% interest in Zone Vision Networks Ltd. (Zone Vision) from its shareholders. The consideration for the transaction consisted of $50 million in cash and 351,110 shares of LGI Series A common stock and 351,110 shares of LGI Series C common stock, which are subject to certain vesting conditions. As part of the transaction, chellomedia contributed to Zone Vision the 49% shareholding it already held in Reality TV Ltd. and chellomedia’s Club channel business. Zone Vision is a company focused on the ownership, management and distribution of pay television channels of third parties and its own channels.
On February 10, 2005, UPC Broadband Holding BV, an indirect wholly owned subsidiary of UGC Europe (UPC Broadband Holding), acquired 100% of the shares in Telemach d.o.o., a broadband communications provider in Slovenia, for cash consideration of 71 million ($91.4 million at the transaction date).
On April 1, 2005, a subsidiary of UPC Holding exercised its call right and purchased the remaining 19.9% minority interest in UPC Broadband France SAS (UPC Broadband France) that it did not already own for 90.1 million ($116 million at the transaction date) in cash, taking our ownership in UPC Broadband France to 100%. UPC Broadband France is the owner of our French broadband video and Internet access operation, which includes Suez-Lyonnaise Télécom SA (Noos), a provider of digital and analog cable television services and high-speed Internet access services in France, which we acquired in July 2004.
On April 13, 2005, VTR, which at the time was a wholly-owned subsidiary of UGC, completed its combination with Metrópolis Intercom S.A. (Metrópolis), a Chilean broadband distribution company. Prior to the combination, LMI owned a 50% interest in Metrópolis, with the remaining 50% interest owned by Cristalerías de Chile S.A. (CCC). As consideration for CCC’s interest in Metrópolis, (i) VTR issued 11.4 million shares of its common stock to CCC, representing 20% of the outstanding economic and voting shares of VTR subsequent to the transaction, (ii) VTR assumed certain indebtedness owed by Metrópolis to CristalChile Inversiones S.A., an affiliate of CCC, in the amount of CLP6.1 billion ($10.5 million at the transaction date), and (iii) UGC granted CCC the right to put its 20% interest in VTR to UGC at fair value, subject to a minimum purchase price of $140 million, which put is exercisable beginning on April 13, 2006 and expires on April 13, 2015. Final regulatory approval for the combination, which was obtained in March 2005, imposed certain conditions on the combined entity. The most significant of these conditions require that the combined entity (i) re-sell broadband capacity to third party Internet service providers on a wholesale basis;

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(ii) activate two-way capacity 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.
On May 9, 2005, our indirect wholly owned subsidiary, UPC Ireland B.V. (UPC Ireland), entered into an agreement to acquire MS Irish Cable Holding B.V. (MS Irish Cable), subject to regulatory approval. MS Irish Cable acquired NTL Communications (Ireland) Limited, NTL Irish Networks Limited and certain related assets (together NTL Ireland) with funds provided by a loan from UPC Ireland. UPC Ireland closed the acquisition of MS Irish Cable on December 12, 2005, following receipt of regulatory approval. The total cash purchase price for the acquisition was 333.4 million ($428.2 million at May 9, 2005) (excluding direct acquisition costs). NTL Ireland, Ireland’s largest cable television operator, provides cable television and broadband Internet services to residential customers and managed network services to corporate customers in Ireland.
On September 30, 2005, J:COM purchased all of the outstanding shares of Odakyu Telecommunication Services Co., Ltd., now known as J:COM Setamachi Co. Ltd. (J:COM Setamachi) for cash of ¥9,200 million ($81 million at the transaction date). J:COM Setamachi provides cable television and high speed Internet access services in Japan, including Tokyo’s Setagaya ward and the cities of Machida, Kawasaki and Yokohama.
On October 14, 2005, we acquired, through an indirect wholly owned subsidiary, 7.7 million shares of Telenet Group Holding NV (Telenet) for cash of 160.2 million ($193.7 million at the transaction date) in connection with Telenet’s initial public offering. After giving effect to this acquisition and Telenet’s initial public offering, we and Belgian Cable Investors LLC (Belgian Cable Investors), a partnership that is majority owned and controlled by us, increased our combined economic ownership in Telenet from 14.1% to 19.89% but will continue to exercise voting control over a total of 21.5% of the Telenet shares. Belgian Cable Investors additionally holds call options to acquire 25.4 million shares in Telenet.
On October 14, 2005, UPC Romania S.A., our indirect wholly owned subsidiary, completed its acquisition of Astral Telecom S.A. (Astral) from a group of Romanian entrepreneurs and foreign investors for a cash purchase price of $407.1 million. Astral is one of Romania’s largest broadband telecommunications operators.
On October 24, 2005, LG Switzerland completed the purchase of all the issued share capital of Cablecom Holdings AG (Cablecom), which is the indirect parent company of Swiss cable operator Cablecom GmbH, for a cash purchase price of CHF2.8 billion ($2.2 billion at the transaction date). The acquisition was funded through a combination of (i) a 550 million ($667 million at the borrowing date) split-coupon floating rate payment-in-kind loan (PIK Loan) borrowed by LG Switzerland, (ii) a new offering of 300 million ($363 million at the borrowing date) 8.625% Senior Notes due 2014 by UPC Holding, and (iii) available cash.
On November 23, 2005, a subsidiary of chellomedia acquired the 50% interest it did not already own in certain businesses that provide thematic television channels in the Iberian market (Spain and Portugal) (IPS). We acquired the 50% interest for $62.8 million.
On December 14, 2005, we increased our indirect ownership of Austar United Communications Ltd. (Austar) from a non-controlling interest to a controlling interest, which was 54% (51% on a fully diluted basis) as of December 31, 2005, for net cash consideration of A$204.9 million ($154.9 million at the transaction date). Austar provides satellite pay television services, Internet access and mobile telephony services to subscribers in regional and rural Australia and the cities of Hobart and Darwin.
On March 2, 2006, our subsidiary, UPC Austria GmbH, acquired all the outstanding shares of Inode Telekommunidationsdienstleistungs GmbH (Inode) for cash consideration of 93 million ($111 million at the transaction date). Inode is one of Austria’s leading DSL companies.
Other smaller transactions during 2005 and early 2006 include: J:COM’s 2005 increase of its interest in Cable Television Kobe, Inc. from 20.4% to 65.13%; J:COM’s 2005 acquisition of an approximate 92% equity interest in Chofu Cable, Inc.; UPC Romania S.A.’s 2005 acquisition of Conex Sat SRL; chellomedia’s 2005

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acquisition of the content business of Canal+ Netherlands; J:COM’s 2006 acquisition of an 81% equity interest in Rokko Island Cable Vision Co. Ltd.; and J:COM’s 2006 increase of its interest in Kansai Multimedia Service from 25.75% to 64.0%.
Dispositions
On December 19, 2005, we agreed to sell our Norwegian cable business, UPC Norge AS (UPC Norway). Following receipt of Norwegian regulatory approval, on January 19, 2006, we completed the sale of UPC Norway for 448 million ($542 million at the transaction date).
On November 8, 2005, we received cash consideration of 276.4 million ($325.6 million at the transaction date) in connection with the disposition of our 19% ownership interest in SBS Broadcasting S.A. SBS Broadcasting S.A. was a commercial television and radio broadcasting company in Europe.
During 2005, we also sold our interest in Fox Pan America Sports, LLC (FPAS), Torneos y Competenias S.A. (TyC), EWT Holding GmbH (EWT), The Wireless Group plc and a subscription right with respect to Cablevision S.A. FPAS develops and operates multiple Spanish language subscription television and radio services. TyC is an independent producer of Argentine sports and entertainment programming. EWT owns a broadband communications provider in Germany. The Wireless Group is a commercial radio group in the United Kingdom and Cablevision S.A. is a broadband communications provider in Argentina. In addition, on February 16, 2006, we received $88 million as cash consideration for our 10% interest in Sky Mexico, a direct-to-home satellite provider.
Financings
On March 8, 2005, the senior secured credit facility of UPC Broadband Holding (the UPC Broadband Bank Facility) was amended to permit indebtedness under: (i) Facility G, a new 1.0 billion term loan facility maturing in full on April 1, 2010; (ii) Facility H, a new 1.5 billion term loan facility maturing in full on September 30, 2012, of which $1.25 billion was denominated in U.S. dollars and then swapped into euros through a 7.5 year cross-currency swap; and (iii) Facility I, a new 500 million revolving credit facility maturing in full on April 1, 2010. In connection with this amendment, 167 million of Facility A, the previously existing revolving credit facility, was cancelled, reducing Facility A to a maximum amount of 500 million. The proceeds from Facilities G and H were used primarily to prepay all amounts outstanding under existing term loan Facilities B, C and E, to fund certain acquisitions and pay transaction fees. Borrowings under Facilities A and I can be used to fund acquisitions and for general corporate purposes. As a result of this amendment, the weighted average maturity of the UPC Broadband Bank Facility was extended from 4 years to 6 years, with no amortization payments required until 2010, and the weighted average interest margin on the UPC Broadband Bank Facility was reduced by 0.25% per annum. The amendment also provides for additional flexibility on certain covenants and the funding of acquisitions.
On July 29, 2005, UPC Holding, the owner of our 100% interest in UPC Broadband Holding, issued 500 million ($607 million at the borrowing date) aggregate principal amount of its 7.75% Senior Notes. The net proceeds were used for general corporate purposes. In addition, on October 10, 2005, UPC Holding issued 300 million ($363 million at the borrowing date) principal amount of 8.625% Senior Notes. The net proceeds of this offering were ultimately used to finance the acquisition of Cablecom. Both of these issues of Senior Notes mature on January 15, 2014, and are secured by a first ranking pledge of all shares of UPC Holding.
On October 7, 2005, pursuant to a PIK Loan Facility Agreement dated September 30, 2005, as amended and restated on October 10, 2005, LG Switzerland borrowed a 550 million ($667 million at the borrowing date) PIK Loan with a split-coupon floating rate, maturing in 9.5 years. The net proceeds from the PIK Loan, less 50 million ($60.9 million at the borrowing date) placed in escrow to secure cash interest payments, were used to finance the acquisition of Cablecom. The PIK Loan is an unsecured senior debt of LG Switzerland that is structurally subordinated to all indebtedness of Cablecom and its subsidiaries.
At the time of our acquisition of Cablecom, its subsidiary Cablecom Luxembourg SCA (Cablecom Luxembourg) had outstanding senior fixed rate notes and senior secured floating rate notes (Cablecom

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Luxembourg Senior Notes). Pursuant to the indentures governing the Cablecom Luxembourg Senior Notes, Cablecom Luxembourg was required to make an offer to purchase the Cablecom Luxembourg Senior Notes at 101% of their principal amount as a result of our obtaining control of Cablecom. On December 8, 2005, Cablecom Luxembourg purchased the tendered Cablecom Luxembourg Senior Notes. On January 20, 2006, Cablecom Luxembourg redeemed the balance of the floating rate Cablecom Luxembourg Senior Notes not tendered in the “change of control” offer for 102% of their principal amount. The purchase of Cablecom Luxembourg Senior Notes pursuant to the change of control offer and the optional redemption was funded by borrowings of term loans under a facilities agreement entered into by Cablecom Luxembourg and its subsidiary, Cablecom GmbH, dated December 5, 2005 (the Cablecom Luxembourg Bank Facility). The Cablecom Luxembourg Bank Facility provides for two term loan facilities to Cablecom Luxembourg with maximum aggregate borrowings of CHF1.33 billion ($1.011 billion). In addition, Cablecom GmbH has a CHF150 million ($114 million) revolving credit facility.
On December 15, 2005, J:COM executed a ¥155 billion ($1.314 billion) credit facility agreement with a syndicate of banks led by The Bank of Tokyo-Mitsubishi, Ltd., Mizuho Corporate Bank, Ltd. and Sumitomo Mitsui Banking Corporation (the J:COM Credit Facility). Borrowings may be made under the J:COM Credit Facility on a senior, unsecured basis pursuant to three facilities: a ¥30 billion five-year revolving credit loan; a ¥85 billion five-year amortizing term loan; and a ¥40 billion seven-year amortizing term loan. On December 21, 2005, the proceeds of the term loans were used, together with available cash, to repay in full outstanding loans totaling ¥128 billion ($1.1 billion at the transaction date) under J:COM’s then existing credit facilities. Borrowings under the revolving loan may be used by J:COM for general corporate purposes.
In addition to the above financings, during 2005, certain of our subsidiaries entered into other smaller financings. VTR modified its Chilean peso-denominated senior secured credit facility, originally consummated in December 2004 (VTR Bank Facility), increasing the VTR Bank Facility to CLP$175.5 billion ($341.4 million). Borrowings under this facility during 2005 were used to repay debt to third parties assumed in the Metrópolis acquisition, partially repay debt to our subsidiaries and pay in full debt to an affiliate of VTR’s other stockholder, CCC. In connection with our acquisition of IPS, an indirect wholly owned subsidiary entered into a secured credit facility for 65 million ($76.9 million). Borrowings from this facility were used to purchase the remaining 50% of IPS.
* * * *
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. 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. The following include some but not all of the factors that could cause actual results or events to differ materially from anticipated results or events:
  •  economic and business conditions and industry trends in the countries in which we operate;
 
  •  currency exchange risks;
 
  •  consumer disposable income and spending levels, including the availability and amount of individual consumer debt;
 
  •  changes in television viewing preferences and habits by our subscribers and potential subscribers;
 
  •  consumer acceptance of existing service offerings, including our newer digital video, voice and Internet access services;

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  •  consumer acceptance of new technology, programming alternatives and broadband services that we may offer such as our digital migration project in The Netherlands;
 
  •  our ability to manage rapid technological changes and grow our digital video, voice and Internet access services;
 
  •  the regulatory and competitive environment in the broadband communications and programming industries in the countries in which we, and the entities in which we have interests, operate;
 
  •  competitor responses to our products and services, and the products and services of the entities in which we have interests;
 
  •  continued consolidation of the foreign broadband distribution industry;
 
  •  uncertainties inherent in the development and integration of new business lines and business strategies;
 
  •  spending on foreign television advertising;
 
  •  capital spending for the acquisition and/or development of telecommunications networks and services;
 
  •  our ability to successfully integrate and recognize anticipated efficiencies from the businesses we acquire;
 
  •  problems we may discover post-closing with the operations, internal controls and financial statements of businesses we acquire;
 
  •  uncertainties associated with product and service development and market acceptance, including the development and provision of programming for new television and telecommunications technologies;
 
  •  future financial performance, including availability, terms and deployment of capital;
 
  •  the ability of suppliers and vendors to timely deliver products, equipment, software and services;
 
  •  the outcome of any pending or threatened litigation;
 
  •  availability of qualified personnel;
 
  •  changes in, or failure or inability to comply with, government regulations in the countries in which we operate and adverse outcomes from regulatory proceedings, including regulatory initiatives in The Netherlands;
 
  •  government intervention that opens our broadband distribution networks to competitors;
 
  •  our ability to successfully negotiate rate increases with local authorities;
 
  •  changes in the nature of key strategic relationships with partners and joint venturers;
 
  •  uncertainties associated with our ability to satisfy conditions imposed by competition and other regulatory authorities in connection with acquisitions; and
 
  •  events that are outside of our control, such as political unrest in international markets, terrorist attacks, natural disasters, pandemics and other similar events.
You should be aware that the video, voice and Internet access services industries are changing rapidly, and, therefore, the forward-looking statements of expectations, plans and intent in this 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.

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Financial Information About Operating Segments
Financial information about our reportable segments appears in note 21 to our consolidated financial statements included in Part II of this report.
Narrative Description of Business
Overview
Broadband Distribution
We offer a variety of broadband distribution services over our cable television systems, including analog video, digital video, Internet access and telephony. Available service offerings depend on the bandwidth capacity of our cable 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-point microwave distribution systems, or “MMDS”. In select markets, we also offer mobile telephony services using third party networks. We operate our broadband distribution businesses in Europe principally through UGC Europe; in Japan principally through J:COM, a subsidiary of Super Media; in The Americas principally through VTR and Liberty Cablevision of Puerto Rico Ltd. (LCPR); and in Australia principally through Austar. Each of UGC Europe, Super Media, VTR, LCPR and Austar is a consolidated subsidiary.

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The following table presents certain operating data, as of December 31, 2005, 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, the islands of the Caribbean and the countries of Central and 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, 2005
                                                                                                     
                    Video   Internet   Telephone
        Two-way                    
    Homes   Homes   Customer   Total   Analog Cable   Digital Cable   DTH   MMDS   Homes       Homes    
    Passed(1)   Passed(2)   Relationships(3)   RGUs(4)   Subscribers(5)   Subscribers(6)   Subscribers(7)   Subscribers(8)   Serviceable(9)   Subscribers(10)   Serviceable(11)   Subscribers(12)
                                                 
Europe**
                                                                                               
 
The Netherlands
    2,645,800       2,521,600       2,239,500       3,009,700       2,150,300       85,300                   2,521,600       478,100       2,396,300       296,000  
 
Switzerland(13)
    1,802,200       1,710,100       1,571,300       2,043,900       1,410,900       106,300                   1,467,400       340,500       1,417,600       186,200  
 
France
    4,611,700       3,361,600       1,618,800       1,921,800       928,600       563,800                   3,361,600       295,000       2,370,500       134,400  
 
Austria
    957,500       954,200       584,100       926,100       455,900       44,000                   954,200       275,900       920,500       150,300  
 
Ireland
    887,200       225,800       576,900       601,800       321,500       141,000             113,900       225,800       25,000       24,200       400  
 
Sweden
    421,600       287,500       298,500       389,100       240,000       58,600                   287,500       90,500              
 
Belgium
    156,600       156,600       146,500       167,800       127,000       5,500                   156,600       35,300              
                                                                         
   
Total Western Europe
    11,482,600       9,217,400       7,035,600       9,060,200       5,634,200       1,004,500             113,900       8,974,700       1,540,300       7,129,100       767,300  
                                                                         
 
Poland
    1,914,800       932,200       1,023,300       1,124,600       1,000,900                         932,200       122,500       825,200       1,200  
 
Hungary
    1,035,700       885,700       996,300       1,145,900       731,400             171,100             885,700       135,200       888,200       108,200  
 
Czech Republic
    743,000       402,100       431,400       486,400       298,300             112,500             402,100       75,600              
 
Romania
    1,913,800       944,100       1,338,100       1,411,600       1,333,900       4,000                   818,800       55,200       661,100       18,500  
 
Slovak Republic
    429,200       238,000       305,000       323,300       256,900             17,300       28,300       223,200       20,800              
 
Slovenia
    125,300       79,300       108,300       126,400       108,300                         79,300       18,100              
                                                                         
   
Total Central and Eastern Europe
    6,161,800       3,481,400       4,202,400       4,618,200       3,729,700       4,000       300,900       28,300       3,341,300       427,400       2,374,500       127,900  
                                                                         
   
Total Europe
    17,644,400       12,698,800       11,238,000       13,678,400       9,363,900       1,008,500       300,900       142,200       12,316,000       1,967,700       9,503,600       895,200  
                                                                         
Japan**
                                                                                               
 
J:COM
    7,296,600       7,288,000       2,002,800       3,460,400       1,064,100       620,800                   7,288,000       864,200       6,624,200       911,300  
                                                                         
The Americas**
                                                                                               
 
Chile
    2,171,900       1,285,100       900,400       1,425,700       751,200       6,800                   1,285,100       303,000       1,281,700       364,700  
 
Puerto Rico
    331,000       331,000       114,400       160,700       56,700       55,600                   331,000       32,000       331,000       16,400  
 
Brazil
    15,100       15,100       15,100       16,600                         15,100       15,100       1,500              
 
Peru
    66,800       30,300       12,300       14,100       10,800                         30,300       3,300              
                                                                         
   
Total The Americas
    2,584,800       1,661,500       1,042,200       1,617,100       818,700       62,400             15,100       1,661,500       339,800       1,612,700       381,100  
                                                                         
Australia**
                                                                                               
 
Austar
    2,417,500             471,900       474,800             8,000       466,800                                
                                                                         
Total Continuing Operations
    29,943,300       21,648,300       14,754,900       19,230,700       11,246,700       1,699,700       767,700       157,300       21,265,500       3,171,700       17,740,500       2,187,600  
                                                                         
Disc Operations — Norway
    523,000       270,800       375,700       464,300       334,300       31,000                   270,800       69,500       178,200       29,500  
                                                                         
Grand Total
    30,466,300       21,919,100       15,130,600       19,695,000       11,581,000       1,730,700       767,700       157,300       21,536,300       3,241,200       17,918,700       2,217,100  
                                                                         

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  * Excludes systems owned by affiliates that were not consolidated for financial reporting purposes as of December 31, 2005, or that were acquired after December 31, 2005. Also excludes 3.1 million households to which J:COM provides only retransmission services of terrestrial television signals. Subscriber information for recently 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.
  **    With respect to Chile, Japan and Puerto Rico, residential multiple dwelling units with a discounted pricing structure for video, Internet or telephony services are counted on an equivalent bulk unit (EBU) basis. Commercial contracts such as hotels and hospitals are counted by all our subsidiaries on an EBU basis. 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.
 
  (1)  Homes Passed are homes that can be connected to our networks without further extending the distribution plant, except for DTH and MMDS homes. Our Homes Passed counts are based on census data that can change based on either revisions to the data or from new census results. With the exception of Austar, we do not count homes passed for DTH. With respect to Austar, we count all homes in the areas that Austar is authorized to serve. With respect to MMDS, one home passed is equal to one MMDS subscriber.
 
  (2)  Two-way Homes Passed are homes passed by our networks where customers can request and receive the installation of a two-way addressable set-top converter, cable modem, transceiver and/or voice port which, in most cases, allows for the provision of video and Internet services and, in some cases, telephone services.
 
  (3)  Customer Relationships are the number of customers who receive at least one level of service without regard to which service(s) they subscribe. We exclude mobile customers from customer relationships.
 
  (4)  Revenue Generating Unit is separately an Analog Cable Subscriber, Digital Cable Subscriber, DTH Subscriber, MMDS Subscriber, Internet Subscriber or Telephone Subscriber. A home may contain one or more RGUs. For example, if a residential customer in our Austrian system subscribed to our digital cable service, telephone service and high-speed broadband Internet access service, the customer would constitute three RGUs. Total RGUs is the sum of Analog Cable, Digital Cable, DTH, MMDS, Internet and Telephone Subscribers. In some cases, non-paying subscribers are counted as subscribers during their free promotional service period. Some of these subscribers choose to disconnect after their free service period.
 
  (5)  Analog Cable Subscriber is comprised of video cable customers that are counted on a per connection basis. In Europe, we have 1.37 million “lifeline” customers that are counted on a per connection basis, representing the least expensive regulated tier of basic cable service, with only a few channels. An analog cable subscriber is not counted as a digital cable subscriber.
 
  (6)  Digital Cable Subscriber is a customer with one or more digital converter boxes that receives our digital video service. We count a subscriber with one or more digital converter boxes that receives our digital video service as just one subscriber. A digital subscriber is not counted as an analog subscriber. In The Netherlands where our mass digital migration project is underway, a subscriber is moved from the analog cable subscriber count to the digital cable subscriber count when such subscriber accepts delivery of our digital converter box and agrees to accept digital video service regardless of when the subscriber begins to receive our digital video service. The digital video service and the digital converter box are provided at the analog rate for six months after which the subscriber has the option to discontinue the digital service or pay an additional amount to continue to receive the digital service.
 
  (7)  DTH Subscriber is a home or commercial unit that receives our video programming broadcast directly to the home via a geosynchronous satellite.
 
  (8)  MMDS Subscriber is a home or commercial unit that receives our video programming via a multipoint microwave (wireless) distribution system.

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  (9)  Internet Homes Serviceable are homes that can be connected to our broadband networks, where customers can request and receive Internet access services.
(10)  Internet Subscriber is a home or commercial unit or EBU with one or more cable modems connected to our broadband networks, where a customer has requested and is receiving high-speed Internet access services. Such numbers do not include customers that receive services via resale arrangements.
(11)  Telephone Homes Serviceable are homes that can be connected to our networks, where customers can request and receive voice services.
 
(12)  Telephone Subscriber is a home or commercial unit or EBU connected to our networks, where a customer has requested and is receiving voice services. Telephone subscribers as of December 31, 2005, exclude an aggregate of 92,800 mobile telephone subscribers in The Netherlands, Switzerland and Australia. Mobile telephone services generate a significantly lower average revenue per unit than broadband or Voice-over-Internet Protocol or “VOIP” telephone services. Also, such numbers do not include customers that receive services via resale arrangements.
 
(13)  Included in the subscribers for Switzerland are 25,000 digital cable, 35,800 Internet access and 19,300 telephony subscribers serviced over partner networks, but for which we have the direct customer billing relationship.
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 video-on-demand, or “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 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 subscriber 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 contractors. We operate our programming businesses in Europe principally through our subsidiary chellomedia; in Japan principally through our affiliate Jupiter TV Co., Ltd., formerly known as Jupiter Programming 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.
Operations
Europe — UGC Europe, Inc.
Our European operations are conducted through our wholly owned subsidiary, UGC Europe, which provides services in 13 countries in Europe, excluding Norway in which our operations were sold in January 2006. UGC Europe’s operations are currently organized into two principal divisions: Europe Broadband and chellomedia. Through its Europe Broadband division, UGC Europe provides video, high-speed Internet access, telephony and mobile services over its networks and operates the largest cable network in each of The Netherlands, Austria, Poland, Hungary, Czech Republic, Slovak Republic, Slovenia and Switzerland and the second largest cable network in France, in each case in terms of number of video subscribers. UGC Europe’s high-speed Internet access service is provided over the Europe Broadband network infrastructure generally under the brand name chello. Depending on the capacity of the particular network, UGC Europe may provide up to seven tiers of high-speed Internet access. For information concerning the chellomedia division, see “— chellomedia and Other.”

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Provided below is country-specific information with respect to the broadband distribution services of the Europe Broadband division:
The Netherlands
The Europe Broadband division’s networks in The Netherlands, which we refer to as Broadband-Netherlands, passed 2.6 million homes and had 2.2 million analog cable subscribers, 85,300 digital cable subscribers, 478,100 Internet subscribers, 296,000 telephony subscribers and 61,300 mobile telephony subscribers as of December 31, 2005. Forty percent of The Netherlands households receive at least analog cable service from Broadband-Netherlands. Broadband-Netherlands’ subscribers are located in six broad regional clusters, including the major cities of Amsterdam and Rotterdam. Its networks are 95% upgraded to two-way capability, with 95% of its video cable subscribers served by a network with a bandwidth of at least 860 MHz.
Broadband-Netherlands provides video cable services to almost 100% of its homes passed. Eighty-two percent of Broadband-Netherlands’ homes passed are capable of receiving digital cable service. Broadband-Netherlands offers its digital cable subscribers a digital entry package of 42 channels and a digital basic tier with 72 channels with an option to subscribe for up to 15 additional general entertainment, movie, sports, music and ethnic channels and an electronic program guide. Broadband-Netherlands’ digital cable service also offers 56 channels of near-video-on-demand, or “NVOD”, services and interactive services, including television-based email.
Broadband-Netherlands offers five tiers of chello brand high-speed Internet access service with download speeds ranging from 384 Kbps to 20 Mbps. Twenty-one percent of its video cable subscribers also receive its Internet access service, representing 99% of its Internet subscribers. Multi-feature telephony services are also available from Broadband-Netherlands to 91% of its homes passed. Thirteen percent of its video cable subscribers also receive its telephony services, representing almost 100% of its telephony subscribers. At December 31, 2005, 2.4 million two-way homes in Broadband-Netherlands’ service area were VoIP ready for service.
Through arrangements with an incumbent telecommunications operator, Broadband-Netherlands began testing in 2005 an offer of its high speed Internet access service products and its VoIP telephony products to 660,000 households outside its existing footprint using asymmetric digital subscriber line, or “ADSL”, technology. These services are provided as a bundled offer on the unbundled local loop of the telecommunications operator’s network and currently there are 3,000 customers.
Broadband-Netherlands offers a self-install option for all of its Internet access services, allowing subscribers to install the technology themselves and save money on the installation fee. Broadband-Netherlands also offers a self-install option for its digital cable services. Ninety percent of its new Internet subscribers have chosen to self-install their new service, and almost all of its new digital subscribers have chosen to self-install their new service.
In August 2005, Broadband-Netherlands launched a mobile offer into the market available to all consumers in The Netherlands. The product is a pre-paid mobile offering. Broadband-Netherlands is operating as a mobile virtual network operator reselling leased network capacity. Broadband-Netherlands had 61,300 mobile customers at December 31, 2005.
On October 1, 2005 Broadband-Netherlands started a new digital migration project, which we refer to as “digital-for-all” (D4A). D4A is a long-term project with the objective to give almost all (2 million of the 2.2 million) of the Broadband-Netherlands video cable customers a digital interactive television box within the next two years. D4A is a combination of a push strategy and a pull strategy. Broadband-Netherlands will proactively and systematically offer the new box to different groups of customers (push) and actively market the new digital interactive product (pull). The box and the digital service are provided at no extra cost for the first six months after the box is accepted at the door. Thereafter, the consumer will have 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.

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France
The Europe Broadband division’s networks in France (including Noos), which we refer to as Broadband-France, passed 4.6 million homes and had 928,600 analog cable subscribers, 563,800 digital cable subscribers, 295,000 Internet subscribers and 134,400 telephony subscribers as of December 31, 2005. Its major operations are located in Paris and its suburbs, including the Marne la Vallee area east of Paris, Strasbourg, Orleans, Le Mans, the suburbs of Lyon, the southeast region, and other operations spread throughout France. Its network is 73% upgraded to two-way capability, with 96% of its video cable subscribers served by a network with a bandwidth of at least 750 MHz.
Broadband-France’s digital cable platform is available to 90% of its homes passed. The digital platform offers a number of options in terms of packages — from 52 channels for the entry-level tier to more than 100 channels for the premium tier. Programming includes series, general entertainment, youth, sports, news, documentary, music, lifestyle and foreign channels. With all tiers, Broadband-France offers a number of movie premium packages, a pay-per-view service, numerous “a la carte” channels and several Canal+ channels. Broadband-France intends to migrate most of its analog cable subscribers to this new digital platform through attractive bundling offers. Broadband-France also provides lifeline service typically consisting of five to ten channels depending on the area.
Broadband-France offers three tiers of chello and Noos brand high-speed Internet access service with download speeds ranging from 512 Kbps to 10 Mbps. Fourteen percent of its video cable subscribers also receive Internet service, representing 73% of its Internet subscribers. Eight percent of its Internet subscribers subscribe to its telephony services, but not to its video cable services.
During 2005, Broadband-France has been extending the telephony service footprint of its network through the deployment of VoIP telephony service and as a consequence multi-feature telephony services were available from Broadband-France to 51% of its homes passed as of December 31, 2005. Six percent of its video cable subscribers also receive telephony service, representing 5% of its telephony subscribers. Eighteen percent of its telephony subscribers subscribe to its Internet services, but not to its video cable services.
Switzerland
The Europe Broadband division’s networks in Switzerland, which we refer to as Broadband-Switzerland, passed 1.8 million homes and provided video cable services to 1.4 million analog subscribers and 106,300 digital subscribers, broadband Internet services to 340,500 subscribers and telephony services to 186,200 subscribers as of December 31, 2005. Included in these subscriber numbers are 25,000 digital cable, 35,800 Internet and 19,300 telephony subscribers serviced over partner networks. Over 55% of Swiss television households receive analog cable service from Broadband-Switzerland. Its nationwide network with a bandwidth of 606 MHz is 70% upgraded to two-way capability.
Broadband-Switzerland markets analog cable services to 100% of its homes passed. For 64% of our 1.4 million analog subscribers, Broadband-Switzerland 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 percent of Broadband-Switzerland’s homes passed are capable of receiving digital cable service. Broadband-Switzerland offers its digital cable subscribers a digital entry package consisting of 88 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 makes movies and other programs available on demand to all of the digital customers. In January 2006, Broadband-Switzerland announced the introduction of a digital television recorder (DVR), enabling users to create a personalized television experience. Our digital cable service is sold directly to the end user as an add-on to our analog cable services.
Broadband-Switzerland offers six tiers of broadband Internet access service with download speeds ranging from 150 Kbps to 6 Mbps. Seventy percent of Broadband-Switzerland’s homes passed are capable of receiving broadband Internet. Twenty percent of its video cable subscribers also receive its Internet access service. In addition, Broadband-Switzerland continues to offer dial-up Internet services on a limited basis.

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Telephony services are available from Broadband-Switzerland to 70% of its homes passed. Eleven percent of its video cable subscribers also receive its telephony services. In June 2005, Broadband-Switzerland launched “Unlimited 24”, the first flat rate telephone plan in Switzerland. In addition, Broadband-Switzerland has begun offering digital telephony services through VoIP.
Broadband-Switzerland offers managed wireless area networks and voice services as well as value-added services such as security, messaging and hosting to the business market in Switzerland. The acquisition of Unified Business Solutions in May 2005 provided Broadband-Switzerland with a suite of converged voice and data products and an established customer base. As of December 31, 2005, Broadband-Switzerland had 1,927 business customers.
Broadband-Switzerland provides full or partial analog television signal delivery, network maintenance services and engineering and construction services to other cable operators in Switzerland, which we refer to as our “partner networks”. Broadband-Switzerland also offers digital television, broadband Internet and telephony service to the analog cable subscribers of those partner networks that enter into service operating contracts with Broadband-Switzerland. Broadband-Switzerland has the direct customer billing relations with the subscribers who take these services on the partner networks. These service operating contracts permit us to offer some or all of our digital television, broadband Internet and fixed-line telephony products directly to those partner network subscribers and, as a result, have expanded the addressable markets for our digital products. In exchange for our right to provide digital products directly to the partner network subscribers, we pay to each partner network a share of the revenue we generate from those subscribers.
With the launch of a mobile pre-paid offer in December 2005, Broadband-Switzerland 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.
Austria
The Europe Broadband division’s networks in Austria (excluding the Austrian portion of Broadband-Switzerland’s network), which we refer to as Broadband-Austria, passed 957,500 homes and had 455,900 analog cable subscribers, 44,000 digital cable subscribers, 275,900 Internet subscribers and 150,300 telephony subscribers as of December 31, 2005. Broadband-Austria’s subscribers 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 it operates owns, directly or indirectly, 5% of the local operating company of Broadband-Austria. Broadband-Austria’s network is almost entirely upgraded to two-way capability, with 98% of its video cable subscribers served by a network with a bandwidth of at least 750 MHz.
Broadband-Austria provides a single offering to its analog cable subscribers that consists of 34 channels, mostly in the German language. Broadband-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. Broadband-Austria’s premium content includes first run movies and specific ethnic offerings, including Serb and Turkish channels.
Broadband-Austria offers four tiers of chello brand high-speed Internet access service with download speeds ranging from 256 Kbps to 2.6 Mbps and a student package. Broadband-Austria’s high-speed Internet access is available in all of the cities in its operating area. Forty-two percent of its video cable subscribers also receive its Internet access service, representing 76% of its Internet subscribers. Ten percent of its Internet subscribers subscribe to telephony services, but not to its video cable services.
Multi-feature telephony services are available from Broadband-Austria to 96% of its homes passed. Broadband-Austria offers basic dial tone service as well as value-added services. Broadband-Austria also offers a bundled product of fixed line and mobile telephony services in cooperation with the third largest mobile phone operator in Austria under the brand “Take Two.” More than 65% of its telephony subscribers subscribe to this product. Twenty-one percent of Broadband-Austria’s video cable subscribers also receive its telephony service, representing 71% of its telephony subscribers. Eighteen percent of its telephony subscribers subscribe

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to Internet service, but not to its video cable services. In March 2006, Broadband-Austria will begin offering telephony services through VoIP.
Sweden
The Europe Broadband division’s network in Sweden, which we refer to as Broadband-Sweden, passed 421,600 homes and had 240,000 analog cable subscribers, 58,600 digital cable subscribers and 90,500 Internet subscribers as of December 31, 2005. It operates in the greater Stockholm area on leased fiber from Stokab AB, a city controlled entity with exclusive rights to lay cable ducts for communications or broadcast services in the city of Stockholm. These lease terms vary from 10 to 25 years, and the majority expire beginning in 2012 through 2018. Its network is 68% upgraded to two- way capability, with all of its video cable subscribers served by a network with a bandwidth of at least 550 MHz.
Broadband-Sweden provides all of its video cable subscribers with a lifeline service consisting of four “must-carry” channels. In addition to this lifeline service, Broadband-Sweden offers an analog cable package with 12 channels and a digital cable package with up to 80 channels. Its program offerings include domestic, foreign, sport and premium movie channels, as well as digital event channels such as seasonal sport and real life entertainment events. Twenty-three percent of the homes served by Broadband-Sweden’s network subscribe to the lifeline analog cable service only. To complement its digital offering, Broadband-Sweden also offers its subscribers 32 channels of NVOD service.
Broadband-Sweden offers four tiers of chello brand high-speed Internet access service with download speeds ranging from 128 Kbps to 24 Mbps, including symmetrical options up to 8 Mbps. Thirty percent of its video cable subscribers subscribe to its Internet service, representing almost 100% of its Internet subscribers.
Ireland
The Europe Broadband division’s network in Ireland, which we refer to as Broadband-Ireland, which comprises the networks of NTL Ireland and Chorus Communications Ltd., passed 887,200 homes and had 321,500 analog cable subscribers, 141,000 digital subscribers, 113,900 MMDS subscribers, 25,000 Internet subscribers and 400 telephony subscribers as of December 31, 2005. Broadband-Ireland is Ireland’s largest video cable service provider, based on customers served. Its cable network is 25% upgraded to two-way capability, with all of its video cable subscribers served by a network with a bandwidth of at least 860 MHz.
Broadband-Ireland offers an analog cable package with up to 22 channels and a digital cable package with up to 89 channels. Its program offerings include domestic, foreign, sport and premium movie channels, as well as digital event channels such as seasonal sport and real life entertainment events. Broadband-Ireland also distributes up to seven Irish channels and produces a local sports channel. To complement its digital offering, Broadband-Ireland also offers its subscribers 22 channels of premium service.
Broadband-Ireland offers three tiers of chello brand high-speed Internet access service with download speeds ranging from 1 Kbps to 3 Mbps. Eight percent of its video cable subscribers subscribe to its Internet service, representing almost 100% of its Internet subscribers.
Belgium
The Europe Broadband division’s network in Belgium, which we refer to as Broadband-Belgium, passed 156,600 homes and had 127,000 analog cable subscribers, 5,500 digital cable subscribers and 35,300 Internet subscribers as of December 31, 2005. Its operations are located in certain areas of Leuven and Brussels, the capital city of Belgium. Broadband-Belgium’s network is fully upgraded to two-way capability, with all of its video cable subscribers served by a network with a bandwidth of 860 MHz.
Broadband-Belgium’s analog cable service, consisting of all Belgium terrestrial channels, regional channels and selected European channels, offers a basic package of 41 channels in Brussels and 40 channels in Leuven. In Leuven, Broadband-Belgium also offers an expanded analog cable package, including a “starters pack” of three channels that can be upgraded to 15 channels. This programming generally includes a selection of European and United States thematic satellite channels, including sports, kids, nature, movies and general

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entertainment channels. Broadband-Belgium also distributes three premium channels that are provided by Telenet (Prime) in Leuven. In the Brussels area, Broadband-Belgium also offers, in cooperation with BeTV S.A., a digital pay television package consisting of 6 premium channels and 58 thematic channels.
Broadband-Belgium offers five tiers of chello brand high-speed Internet access service with download speeds ranging from 256 Kbps to 16 Mbps as well as a student package. Sixteen percent of its video cable subscribers also receive Internet access service, representing 61% of its Internet subscribers.
Poland
The Europe Broadband division’s networks in Poland, which we refer to as Broadband-Poland, passed 1.9 million homes and had one million analog cable subscribers, 122,500 Internet subscribers and 1,200 telephony subscribers as of December 31, 2005. Broadband-Poland’s subscribers are located in regional clusters encompassing eight of the ten largest cities in Poland, including Warsaw and Katowice. Forty-nine percent of its networks are upgraded to two-way capability, with 98% of its video cable subscribers served by a network with a bandwidth of at least 550 MHz. Broadband-Poland continues to upgrade portions of its network that have bandwidths below 550 MHz to bandwidths of at least 860 MHz and anticipates to upgrade a further 20% of all homes passed in 2006.
Broadband-Poland offers analog cable subscribers three packages of cable television service. Its lowest tier, the broadcast package, includes four to 12 channels and the intermediate package includes 13 to 22 channels. Eighteen percent of the homes served by Broadband-Poland’s network subscribe to lifeline analog cable service only. The higher tier, the full package, includes the broadcast package, plus up to 30 additional channels with such themes as sports, kids, science/educational, news, film and music. For an additional monthly charge, Broadband-Poland offers two premium television services, the HBO Poland service and Canal+ Multiplex, a Polish-language premium package of three movie, sport and general entertainment channels.
Broadband-Poland offers five different tiers of chello brand high-speed Internet access service in portions of its network with download speeds ranging from 256 Kbps to 12 Mbps. Throughout 2005, Broadband-Poland has been aggressively expanding its Internet ready network in Warsaw, Krakow, Gdansk and Katowice to extend its offering of Internet access services to more of its existing cable footprint. Ten percent of its video cable subscribers also receive its Internet service, representing 82% of its Internet subscribers.
During the fourth quarter of 2005, Broadband-Poland rolled out VoIP multi-feature telephony services to 43% of its homes passed. Broadband-Poland offers basic dial tone service as well as value-added services. Approximately 0.1% of Broadband-Poland’s video cable subscribers also receive its telephony service, representing 98% of its telephony subscribers.
Hungary
The Europe Broadband division’s networks in Hungary, which we refer to as Broadband-Hungary, passed one million homes and had 731,400 analog cable subscribers, 171,100 DTH subscribers, 135,200 Internet subscribers and 108,200 telephony subscribers, as of December 31, 2005. Eighty-six percent of its networks are upgraded to two-way capability, with 64% of its video cable subscribers served by a network with a bandwidth of at least 750 MHz.
Broadband-Hungary offers up to four tiers of analog cable programming services (between four and 60 channels) and two premium channels, depending on the technical capability of the network. Five percent of the homes served by Broadband-Hungary’s network subscribe to the lifeline analog cable service only. Programming consists of the national Hungarian terrestrial broadcast channels and selected European satellite and local programming that consists of proprietary and third party channels.
Broadband-Hungary offers three tiers of chello brand high-speed Internet access service with download speeds ranging from 512 Kbps to 3 Mbps. Broadband-Hungary provides these broadband Internet services to 126,200 subscribers in 18 cities, including Budapest. It also had 9,000 ADSL subscribers at December 31, 2005, on its twisted copper pair network located in the southeast part of Pest County. Ten percent of its video cable

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subscribers also receive its Internet service, representing 56% of its Internet subscribers. Five percent of its Internet subscribers subscribe to telephony services, but not to its video cable services.
Broadband-Hungary offers traditional switched telephony services over a twisted copper pair network in the southeast part of Pest County. Broadband-Hungary offers VoIP telephony services over its cable network in Budapest. As of December 31, 2005, Broadband-Hungary’s telephony subscribers included 46,300 VoIP customers. Nine percent of Broadband Hungary’s video cable subscribers also receive its telephony service representing 61% of its telephony subscribers. Six percent of its telephony subscribers subscribe to its Internet services, but not to its video cable services.
Czech Republic
The Europe Broadband division’s network in the Czech Republic, which we refer to as Broadband-Czech, passed 743,000 homes and had 298,300 analog cable subscribers, 112,500 DTH subscribers and 75,600 Internet subscribers as of December 31, 2005. Its operations are located in more than 80 cities and towns in the Czech Republic, including Prague and Brno, the two largest cities in the country. Fifty-four percent of its networks are upgraded to two-way capability, with 51% of its video cable subscribers served by a network with a bandwidth of at least 860 MHz. Broadband-Czech offers two tiers of analog cable programming services, with up to 31 channels, and two premium channels. Twenty-two percent of the homes served by Broadband-Czech’s network subscribe to the lifeline analog service only.
Broadband-Czech offers four tiers of chello brand high-speed Internet access service with download speeds ranging from 256 Kbps to 6 Mbps. Ten percent of its video cable subscribers also receive its Internet service, representing 73% of its Internet subscribers.
Romania
The Europe Broadband division’s networks in Romania, which we refer to as Broadband-Romania, passed 1.9 million homes and had 1.3 million analog cable subscribers 4,000 digital cable subscribers, 55,200 Internet subscribers and 18,500 telephony subscribers, as of December 31, 2005. Broadband-Romania’s systems served nine of the top 12 cities in Romania with 54% of its subscriber base in nine cities. Forty-nine percent of its networks are upgraded to two-way capability, with 65% of its video cable subscribers served by a network with a bandwidth of at least 600 MHz. Broadband-Romania continues to upgrade its medium size systems to 600 MHz.
Broadband-Romania offers analog cable service with 24 to 40 channels in all of its cities, which include Romanian terrestrial broadcast channels, European satellite programming and regional local programming. Three extra basic packages of six to 18 channels each and Premium Pay TV (HBO Romania, Telesport and Adult) are offered in the main cities.
Broadband-Romania offers three tiers of high-speed Internet access service branded UPC and Astral Online with download speeds ranging from 256 Kbps to 1.5 Mbps. Four percent of its video cable subscribers also receive its Internet service, representing 97% of its Internet subscribers.
During the fourth quarter of 2005, Broadband-Romania extended the VoIP telephony deployment of its acquired subsidiary Astral to its own networks and has rolled out VoIP multi-feature telephony services to 34% of its homes passed in the aggregate. Broadband-Romania offers basic dial tone service as well as value-added services. One percent of Broadband-Romania’s video cable subscribers also receive its telephony service representing 100% of its telephony subscribers.
Broadband-Romania, through Astral, also offers a wide range of voice, leased line and high speed broadband data products to 4,000 large business customers and over 9,000 small office at home or “SOHO” customers.
Slovak Republic
The Europe Broadband division’s network in the Slovak Republic, which we refer to as Broadband-Slovak, passed 429,200 homes and had 256,900 analog cable subscribers, 17,300 DTH subscribers, 28,300 MMDS

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subscribers and 20,800 Internet subscribers as of December 31, 2005. Fifty-five percent of its networks are upgraded to two-way capability, with 52% of its video cable subscribers served by a network with a bandwidth of at least 750 MHz. In some areas like Bratislava, the capital city, its network is 99% upgraded to two-way capability.
Broadband-Slovak offers two tiers of analog cable service and three premium services. Its lower-tier, the lifeline package, includes four to nine channels. Fifteen percent of the homes served by Broadband-Slovak’s network subscribe to the lifeline analog service only. Broadband-Slovak’s most popular tier, the basic package, includes 16 to 42 channels that generally offer all Slovak terrestrial, cable and local channels, selected European satellite programming and other third-party programming. For an additional monthly charge, Broadband-Slovak offers three premium services — HBO, Private Gold and the UPC Komfort package consisting of six thematic third-party channels.
In Bratislava, Broadband-Slovak offers five tiers of chello brand high-speed Internet access service with download speeds ranging from 256 Kbps to 4 Mbps. Seven percent of its video cable subscribers also receive Internet access service, representing 80% of its Internet subscribers.
Slovenia
The Europe Broadband division’s network in Slovenia, which we refer to as Broadband-Slovenia, passed 125,300 homes and had 108,300 analog cable subscribers and 18,100 Internet subscribers at December 31, 2005. Sixty-three percent of its networks are upgraded to two-way capability, with 100% of its analog cable subscribers served by a network with a bandwidth of at least 860 MHz. Broadband-Slovenia systems mainly serve Ljubljana, the capital city.
Broadband-Slovenia’s most popular tier, the basic package, includes on average 50 video and 20 radio channels and generally offers all Slovenian terrestrial, cable and local channels, selected European satellite programming and other third-party programming. For an additional monthly charge, Broadband-Slovenia offers one premium movie service.
Broadband-Slovenia offers five tiers of high-speed Internet access service with download speeds ranging from 256 Kbps to 5 Mbps. Seventeen percent of its video cable subscribers also receive Internet access service, representing 98% of its Internet subscribers.
chellomedia and Other
UGC Europe’s chellomedia division provides interactive digital products and services, produces and markets thematic channels, operates a digital media center, operates a competitive local exchange carrier business under the brand name Priority Telecom and owns or manages our investments in various businesses in Europe. Below is a description of the operations of the chellomedia division:
  •  Interactive Services. Interactive television services and entertainment accessed over the Internet are both expected to play a significant role in the Europe Broadband division’s businesses. chellomedia’s Interactive Services division develops and delivers applications and services for television and personal computers. For television, these include electronic program guides, interactive portals and enhanced services such as multiscreen mosaics. For the web, the division’s services include entertainment portals across the Europe Broadband footprint, video on demand to personal computers and television streaming to personal computers. This group aggregates content for the interactive television and web portals, publishes these portals and handles the group’s business relationships with partners in advertising and sponsorship and sells television and web services to third parties. Interactive services have been launched by Broadband-Netherlands and Broadband-Austria, as discussed above.
 
  •  Programming. chellomedia’s programming operations include the following:
  Transactional Television. Transactional television is another component of the Europe Broadband division’s digital service offerings and currently offers 56 channels of NVOD programming through Broadband-Netherlands and Broadband-Austria, 32 channels of NVOD programming through Broad-

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  band-Sweden, and 16 channels of NVOD programming through Broadband-Switzerland. Transactional television provides digital customers with a wide range of Hollywood blockbusters and other movies. Transactional television is also in the process of developing VOD services for the Europe Broadband division and third-party cable operators. The VOD service will provide VOD subscribers with enhanced playback functionality and will give subscribers access to a broad array of on-demand programming, including movies, live events, local drama, music videos, kids programming and adult programming.
 
  Global Thematics. chellomedia produces and markets a number of widely distributed multiterritory 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) and art house basic movies (Europa Europa). In addition, chellomedia has a channel representation business, which represents both wholly owned and third party channels across Europe. In January 2005, chellomedia acquired an 87.5% interest in Zone Vision, which owns and operates three of our thematic programming channels.
 
  chellomedia Benelux. With the acquisition of the content business of Canal+ Netherlands in October 2005, chellomedia now delivers a premium sports channel (Sport 1) and a premium movie channel (Film 1) in The Netherlands.
 
  The channels originate from chellomedia’s digital media center, or “DMC,” located in Amsterdam. The DMC is a technologically advanced production facility that services Europe Broadband 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, then transmits the final product to various customers in numerous countries through affiliated and unaffiliated cable systems and DTH platforms.
 
  chellomedia Iberia. In November 2005, chellomedia acquired the remaining 50% interest in IPS that it did not already own, which 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, Panda and Canal Cocina) and two joint venture channels with A&E (Canal de Historia and The Biography).

  •  Priority Telecom. Priority Telecom NV (Priority Telecom) is a facilities-based business telecommunications provider that provides voice services, high-speed Internet access, private data networks and customized network services to over 7,800 business customers primarily in its core metropolitan markets in The Netherlands, Austria and Norway. The current direct and indirect shareholding of chellomedia in Priority Telecom is 62% of the outstanding ordinary shares and, as a result of chellomedia’s holding, directly or indirectly, of 100% of Priority Telecom’s A shares and convertible preference shares, 98% of the total issued share capital. In February 2006, chellomedia announced that it intends to make a cash offer for the outstanding ordinary shares of Priority Telecom that it does not already own. This offer is subject to certain conditions, including receipt of a fairness opinion.
 
  •  Investments. chellomedia is an investor in branded equity ventures for the development of country-specific programming, including Xtra Music, MTV Networks Polska, Fox Kids Poland and Sports 1. chellomedia also owns or manages UGC Europe’s minority interests in other European businesses. These include a 25% interest in PrimaCom AG, which owns and operates a cable television and broadband network in Germany; a 50% interest in Melita Cable PLC, the only cable television and broadband network in Malta; a 25% interest in Telewizyjna Korporacja Partycypacyjna S.A., a DTH programming platform in Poland; and the indirect investment in Telenet, which is the largest provider of broadband cable services in Belgium and which investment is described below.
  chellomedia Investments purchased 7.7 million shares of Telenet in its initial public offering that closed in October 2005. As a result of the purchase, chellomedia Investments and Belgian Cable Investors, a partnership majority owned and controlled by our indirect wholly owned subsidiary Belgian Cable Holdings, increased their combined economic ownership in the ordinary shares of Telenet from

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  14.1% to 19.89%. In addition, Belgian Cable Investors holds certain call options, expiring in 2007 and 2009 (subject to earlier expiration in certain circumstances), to acquire an additional 10.1% and 15.3%, respectively, of the outstanding equity of Telenet from existing shareholders. The call options are priced at 20 per share as to 6.8 million shares and 25 per share as to 18.7 million shares.
 
  Belgian Cable Investors holds its indirect 12.18% interest in Telenet common stock through two entities, which we refer to as the Investcos. The Investcos hold in the aggregate 12.86% of the Telenet common stock. Through a shareholders agreement among Belgian Cable Investors and the other unaffiliated investors in the Investcos, Belgian Cable Investors controls the voting and disposition of the Telenet common stock owned by the Investcos, plus an additional 0.93% of the Telenet common stock directly owned by certain of the other investors in the Investcos for a total of 13.79% of the Telenet common stock. Through these arrangements and chellomedia Investment’s ownership of 7.71% of the Telenet common stock purchased in the Telenet initial public offering, we control, subject to the shareholders agreement in effect between the Investcos, Belgian Cable Investors and certain other large shareholders of Telenet, the voting and disposition of 21.5% of the currently outstanding common stock in Telenet.
 
  We hold 78.4% of the common equity interests and 100% of the preferred equity interests in Belgian Cable Investors. Pursuant to an agreement with the unaffiliated investor that holds the remaining 21.6% of the common interests in Belgian Cable Investors, such investor has the right to require Belgian Cable Holdings to purchase all of such 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 the investor 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 following December 2009. In addition, the Investco shareholders agreement and the Telenet shareholders agreement both contain rights of first offer and rights of first refusal that run for the benefit of Belgian Cable Investors and the Investcos, respectively, and in some circumstances burden their interests.

Japan
Our Japanese operations are conducted primarily through Super Media and its subsidiary J:COM, and through Jupiter TV. As of December 31, 2005, we owned a 58.66% controlling ownership interest in Super Media and Super Media owned a 62.65% controlling ownership interest in J:COM. As described above under “Recent Developments”, we began accounting for Super Media and J:COM as consolidated subsidiaries, effective as of January 1, 2005. As of December 31, 2005, we owned a 50% ownership interest in our affiliate Jupiter TV.
Jupiter Telecommunications Co., Ltd.
J:COM is a leading broadband provider of bundled entertainment, data and communication services in Japan. J:COM is currently the largest multiple-system operator, or “MSO”, in Japan, as measured by the total number of homes passed and customers. J:COM passed 7.3 million homes and had one million analog cable subscribers, 620,800 digital subscribers, 864,200 Internet subscribers and 911,300 telephony subscribers at December 31, 2005. J:COM operates its broadband networks through 19 managed local cable companies, which J:COM refers to as its managed franchises, 17 of which were consolidated subsidiaries as of December 31, 2005. J:COM owns a 45% equity interest and a 50% equity interest in its two unconsolidated managed franchises. J:COM’s two unconsolidated managed franchises served 111,400 video cable subscribers (analog and digital), 47,600 Internet subscribers and 59,100 telephony subscribers as of December 31, 2005.
Eighteen 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.

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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 networks are upgraded to two-way capability, with all of its cable subscribers 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. Each of J:COM’s managed franchises uses 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’s basic analog service consists of approximately 47 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 Japanese movie channel, the Shop Channel, a home-shopping network, J Sports 1, 2, 3 and Sports-i, four 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. J:COM’s basic digital service currently includes approximately 66 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 basic digital service includes 15 high-definition channels. For an additional fee, digital cable subscribers may also receive VOD and up to nine pay-per-view channels not available to J:COM’s analog cable subscribers. J:COM also offers both its basic 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 3.1 million additional households in its consolidated managed franchises as of December 31, 2005.
J:COM offers high-speed Internet access in all of its managed franchises through its wholly owned subsidiary, @NetHome Co., Ltd, and through its affiliate, Kansai Multimedia Services (KMS). These Internet access services offer downstream speeds of either 8 Mbps or 30 Mbps. At December 31, 2005, J:COM held a 25.8% interest in KMS, which provides high-speed Internet access in the Kansai region of Japan. On January 6, 2006, KMS became a consolidated subsidiary when J:COM acquired an additional 38.2% of KMS. Since August 2005, 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 speeds up to 100 Mbps. At December 31, 2005, 77% of the Internet subscribers in J:COM’s consolidated managed franchises also received its video cable services.
J:COM currently offers telephony services over its own network in 14 of its consolidated franchise areas. In these franchise areas, J:COM’s headend facilities contain equipment that routes calls from the local network to J:COM’s telephony switches, which in turn transmit voice signals and other information over the network. J:COM currently 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. At December 31, 2005, 79% of the telephony subscribers in J:COM’s consolidated managed franchises also received video cable services. In April 2005, J:COM launched a telephony service using VoIP technology in its Sapporo franchise. In October 2005 and in December 2005, J:COM began offering VoIP telephony service in a system in its Kansai franchise and in its Chofu franchise, respectively.
In addition to its 19 managed franchises, J:COM owns non-controlling equity interests, between 5.5% and 20.0%, in two cable franchises and an MSO that are operated and managed by third-party franchise operators.
J:COM sources its programming through multiple suppliers including its affiliate, 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

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services. J:COM and Jupiter TV each currently 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 began offering VOD services to its digital customers in all of its franchises in 2005. 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 currently held through Super Media, an entity that is owned 58.66% by us and 41.34% by Sumitomo Corporation. Pursuant to the operating agreement of Super Media between Sumitomo and us, 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 18.75% 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 accounting 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 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, 2005, 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 movie channel (Movie Plus), a golf channel (Golf Network), a shopping channel (Shop Channel, in which Jupiter TV has a 70% interest and Home Shopping Network has a 30% interest), 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 Zone Vision Enterprises. 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.

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The market for multi-channel television services in Japan is highly complex with multiple cable systems, DTH satellite platforms, and more recently, alternative broadband service providers. Cable systems in Japan served 18.2 million homes at December 31, 2005. 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, currently serve 5.8 million households. 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, 2005, ranging from 15.4 million homes for Shop Channel (which is carried in many compensation systems as well as in multi-channel cable systems) to 0.6 million homes for more recently launched channels, such as Reality TV Japan.
Each of the channels in which Jupiter TV has an interest, except for Discovery HD, is also currently offered on SkyPerfecTV1, a digital satellite platform that delivers approximately 180 channels 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 a significantly smaller number of channels. 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 direct-to-home satellite 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 Jupiter Satellite Broadcasting Corporation 2 (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 between 2006 and 2011. 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, 2005, ranging from 3.5 million homes for Shop Channel (which is carried as a free service to all DTH subscribers) to 0.5 million homes for more recently launched channels, such as Reality TV Japan.
Distribution of multichannel 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, 2005, ranging from 0.1 million homes for Shop Channel (which is carried as a free service to broadband television subscribers) to 0.01 million homes for lesser distributed channels, such as Movie Plus.
Jupiter TV operates Jupiter VOD, a 50% owned joint venture with J:COM, which has access to 0.6 million VOD-enabled digital cable subscribers at December 31, 2005. 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 Internet service providers.
Eighty-six percent of Jupiter TV’s consolidated revenue for 2005 was attributable to retail revenue generated by the Shop Channel. Cable operators are paid distribution fees to carry the 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 Shop Channel to its DTH subscribers. Alternative broadband platforms are also paid a fixed rate fee per subscriber that is able to view Shop Channel through their platform. After Shop Channel, J Sports Broadcasting’s four sports channels generate the most revenue of the channels in which

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Jupiter TV has an interest. The majority of this revenue is derived from cable and satellite subscriptions. Currently, 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), a provider of cable television and high speed Internet access services in Japan that served 102,500 video cable subscribers (analog and digital) and 58,500 Internet subscribers at December 31, 2005. Our interest in Mediatti is held through Liberty Japan MC, LLC (Liberty Japan MC), a company of which, as of December 31, 2005, we owned 94.6% and Sumitomo owned 5.4%.
At December 31, 2005, Liberty Japan MC owned a 36.4% voting interest in Mediatti and an additional 6.64% interest that had limited veto rights. In January 2006, Liberty Japan MC converted its limited voting shares into ordinary common shares. In February 2006, Liberty Japan MC acquired additional shares of Mediatti increasing its voting interest to 46.09%, all of which now consists of ordinary common shares. As of February 2006, we owned 95.2% of Liberty Japan MC and Sumitomo owned 4.8%. Until February 2006, Sumitomo had the option to increase its ownership interest in Liberty Japan MC to up to 50% but did not exercise that option.
Liberty Japan MC, Olympus Mediacom L.P. (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 both the Olympus put right and the Liberty Japan MC call right expire without being exercised during the first exercise period, either may thereafter exercise its put or call right, as applicable, until October 2010.
The Americas
Our operations in the Americas are conducted primarily through our 80% owned subsidiary VTR in Chile and our wholly owned subsidiary Liberty Cablevision of Puerto Rico. We also have subsidiaries that are broadband providers operating in Brazil and Peru and 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, CCC, has a put right which will allow CCC 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, such put right being exercisable beginning on April 13, 2006 and ending on April 13, 2015.

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VTR GlobalCom S.A.
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 high-speed 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. VTR’s network passed 2.2 million homes and had 751,200 analog cable subscribers, 6,800 digital cable subscribers, 303,000 Internet subscribers and 364,700 telephony subscribers at December 31, 2005.
All of VTR’s video subscribers are served via wireline cable, with the vast majority via aerial plant. VTR’s network is 59.2% upgraded to two-way capability with a bandwidth of 750 MHz. VTR has an approximate 89% market share of cable television services throughout Chile and an approximate 98% market share within Santiago. VTR’s channel lineup consists of 32 to 81 channels segregated into two tiers of analog cable service: a basic service with 32 to 68 channels and a premium service with 11 channels. VTR offers basic tier programming similar to the basic tier program lineup in the United States, including 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 with programming options similar to its analog premium service. During 2006, VTR plans to move its premium analog customers to its digital platform.
VTR offers several alternatives of always on, unlimited-use high-speed Internet access to residences and SOHO offices under the brand name Banda Ancha in 30 communities within Santiago and 19 cities outside Santiago. Subscribers can purchase one of 17 services with download speeds ranging from 128 Kbps to 10 Mbps. For a moderate to heavy Internet user, VTR’s Internet service is generally less expensive than a dial-up service with its metered usage. To provide more flexibility to the user, VTR also offers Banda Ancha Flex, where a low monthly flat fee includes the first 200 minutes, with metered usage above 200 minutes. Thirty-three percent of VTR’s video cable subscribers also receive Internet service, representing 83% of its Internet subscribers.
VTR offers telephony service to customers in 25 communities within Santiago and 18 cities outside Santiago. 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 also offers telephony services to its two-way homes passed by applying VoIP. Fourteen percent of VTR’s telephony subscribers are served using VoIP technology. Thirty-three percent of VTR’s video cable subscribers also receive telephony service, representing 68% of its telephony subscribers.
VTR is subject to certain regulatory conditions as a result of the combination with Metropolis 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 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. In December 2005, the Subsecretaria de Telecomunicaciones of Chile awarded VTR regional concessions for wireless local telephone service in the frequency band of 3400-3600 MHz. Using this spectrum, VTR plans to offer broadband telephony and data services through Worldwide Interoperability for Microwave Access (WiMax) technology. WiMax is a wireless alternative to cable and DSL for the last mile of broadband access. WiMax will allow VTR 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 cable. The issuance of the WiMax license has, however, been challenged by a third party. VTR believes the challenge is without merit but it may delay its construction plans for WiMax.

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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 regulatory authorities to own and operate their respective distribution systems and to offer services across them. In some countries, these licenses and registrations are non-exclusive and of limited duration. In most countries where we provide video programming services, we must comply with restrictions on 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, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Poland, Portugal, Slovakia, 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. Although not an EU Member State, Romania is seeking to join the EU in 2007 and its laws are strongly influenced by EU directives since it will need to comply with these directives in order to join the EU. 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, have revised the regulatory regime concerning communications services across the EU. They include the following:
  •  Directive for a New Regulatory Framework for Electronic Communications Networks and Services (referred to as the Framework Directive);
 
  •  Directive on the Authorization of Electronic Communications Networks and Services (referred to as the Authorization Directive);
 
  •  Directive on Access to and Interconnection of Electronic Communications Networks and Services (referred to as the Access Directive);
 
  •  Directive on Universal Service and Users’ Rights relating to Electronic Networks and Services (referred to as the Universal Service and Users’ Rights Directive);
 
  •  Directive on Privacy and Electronic Communications (referred to as the Privacy Directive); and
 
  •  Directive on Competition in the Markets for Electronic Communications and Services (referred to as the Competition Directive).
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

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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 10 countries that joined the EU on May 1, 2004 were to ensure compliance with the Directives as of the date of accession. Measures seeking to implement the Directives are in force in most Member States. Of those EU countries in which we operate, only Belgium still needs to bring into force laws seeking substantially to implement the Directives.
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 Commission of European Communities (EC 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 will often be found to have SMP in the termination of calls on our own network. In addition, in some countries we may be found to have SMP in the wholesale distribution of television channels. Some national regulators may also seek to find that we have SMP in the wholesale broadband Internet market. Although we would vigorously dispute this last finding, there can be no assurance that such finding will not be made. 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 EC 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 five 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.

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“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 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 EC Commission announced a call for input on a review of the regulatory framework described above. In early 2006, they made comments on their future views of the 18 predefined markets. Their review will progress through 2006 and, at some point, may lead to fresh EU level legislation and/or a review of 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 territories in which we operate. 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 EC Commission issued a proposal for a new Directive at the end of 2005. The draft will be subject to amendment and adoption by the European Council and the European Parliament. 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.
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.

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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.
Austria
Austria has a communications law that broadly transposes the Directives. The NRA is in the process of analyzing the 18 predefined markets to determine if any operator or service provider has SMP. We have been found to have SMP in the call termination market on our own telecommunications network, together with all other network operators. This has led to a system of call termination price control via benchmarking with prices charged by the incumbent operator.
France
France has a communications law that broadly transposes the Directives. The NRA is in the process of analyzing the 18 predefined markets to determine if any operator or service provider has SMP. We have been found to have SMP in the call termination market on our own telecommunications network, together with all other network operators. This has led to a variety of requirements, including the obligation to provide interconnection and access to, and use of, specific network facilities, non-discrimination, transparency and a prohibition against charging excessive prices.
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 on 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.
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.
The Netherlands
Historically, in many parts of The Netherlands, Europe Broadband has been a party to contracts with local municipalities that control aspects of our Netherlands business, including, in some cases, pricing and package composition. Most of these contracts have been eliminated by agreement, although some contracts are still in force and under negotiation. In some cases there is litigation ongoing with certain municipalities resisting our attempts to move away from the contracts.
The Netherlands has a communications law that broadly transposes the Directives. Onafhankelijke Post en Telecommunicatie Autoriteit (OPTA), The Netherlands NRA, has, with one exception, finished its analysis of the 18 predefined markets in order to determine which, if any, operator or service provider has SMP. OPTA has concluded that we do not have SMP in The Netherlands broadband market and so no obligations have been placed on us there.
At the end of December 2005, we were declared by OPTA to have SMP in the market related to call termination on our own network. Obligations imposed are to provide access to interconnecting operators on a

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transparent and reasonable basis along with tariff regulation, which will be derived from the regulated interconnect charges of Royal KPN N.V. (KPN).
As to the wholesale broadcast market, we have been held to have SMP in the distribution of both free to air and pay television programming. As a result, OPTA may require us to provide access to content providers and packagers who are seeking to distribute content over our network using their own conditional access platform, which content is not already part of our own basic tier television offering. This access must be offered at cost oriented prices regulated by OPTA. Further we would be obliged to grant program providers access to our basic tier offering in certain circumstances in line with current laws and regulations. OPTA has indicated that requests for access must be reasonable and that a request by a third party that has an alternative infrastructure or that would result in disproportionate use of available network capacity would not likely be considered reasonable. We have not yet, however, seen a final decision from OPTA as to the exact scope of these obligations. This decision is expected in the first quarter of 2006.
In addition, since late 2005, OPTA has been discussing with the EC Commission a market outside the 18 predefined markets relating to the retail delivery of radio and television packages in The Netherlands and the obligations it proposes to impose. The proposed obligation included retail price regulation on a cost oriented basis of the analog package, a requirement to indicate to customers which part of the subscription fees relate to network costs and which relate to programming costs, and a requirement to unbundle analog video services from other services. In December 2005, the EC Commission approved OPTA’s revised proposal for regulation in this retail market on the basis that it was limited to one year and that OPTA would not intervene in cable operators’ retail prices as long as these do not increase by more than the CPI increase. OPTA may, while monitoring the market, seek further powers to regulate cable end-user pricing in the future. We have not yet seen a final decision from OPTA as to the exact scope of proposed obligations. This is expected in the first quarter of 2006.
Switzerland
As Switzerland is not a member of the European Union, it is not obliged to follow European Union 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 new 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 is currently undergoing a comprehensive restatement in order to keep current with technological and market developments such as digitalization and convergence and a new version is expected to enter into force in 2007. This could lead to material changes in the Swiss regulatory regime.
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.
The Telecommunications Act is currently under review aiming to strengthen competition in the telecommunication markets and to increase transparency for customers. If implemented as currently discussed in the Swiss Parliament, such new legislation would replace the licensing system by a system of notification and introduce unbundling of the local loop for telephony and data services. Any form of unbundling, however, would be restricted to the network of Swisscom AG (Swisscom), the incumbent telecommunications operator. The new

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Telecommunications Act is expected to enter into force the earliest in 2006. This could lead to material changes in the Swiss regulatory regime.
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 Swiss Price Regulation Act, 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 have entered into a contract with the price regulator that determines the retail prices for analog television services until the end of 2006.
Under the Swiss Act on Cartels and other Restraints of Competition, or Cartels Act, in preliminary proceedings we have been obliged to provide access to our network to a content provider in Switzerland that has exclusive rights to a significant portion of the premium and sports content distributed in Switzerland. Although the injunction has been lifted by the Federal Court, the main proceedings are pending and we may be forced to continue allowing this third party content provider to provide its service over our network through its own conditional access platform.
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 facilities and the provision of cable television services. The Wire Telecommunications Law is the basic law in Japan governing wire telecommunications, and it regulates all wire telecommunications equipment, including cable television 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 any of the items included in the original license application. The Cable Television Broadcast Law also provides that any business that wishes to furnish cable television services must file prior notification with the MIC before commencing service. This notification must identify the service areas, facilities and frequencies 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 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).
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.

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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 facilities or its operation of cable television services.
Regulation of the Telecommunications Industry. As providers of high-speed 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 previously regulated Type I and Type II carriers. Type I carriers were allowed to carry data over telecommunications circuit facilities which they install or on which they hold long-term leases meeting certain criteria. Type I carriers included common carriers, as well as wireless operators. Type II carriers, including telecommunications circuit resale carriers and Internet service providers, carried data over facilities installed by others. Under the Telecommunications Business Law, Type I carriers were allowed to offer the same kinds and categories of services as Type II carriers. Because our businesses carry data over telecommunications circuit facilities, which they installed in connection with their telephony and high-speed Internet access and existing cable lines, our businesses were Type I carriers.
Effective April 1, 2004, amendments to the Telecommunications Business Law eliminated the distinction between Type I (facilities-based) and Type II (service-based) carriers. Type I carriers previously were subject to more stringent licensing and tariff requirements than Type II carriers. The amendments will make it easier for entities to enter the Japanese telecommunications market, particularly those carriers who wish to own and operate their own facilities on a limited scale. Larger carriers with facilities exceeding a certain size will be required to register with the MIC, while smaller carriers may enter the market just by providing notice to the MIC. The amendments also allow any carrier to discontinue business by providing notice to their users and ex-post notification to the MIC.
Under these amendments, carriers who provide Basic Telecommunications Services, defined as telecommunications that are indispensable to the lives of the citizenry as specified in MIC ordinances, will be required to provide such services in an appropriate, fair and stable 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. The terms and conditions as well as charges and tariffs for the provision of telecommunications services for Type I carriers were strictly regulated, but under these amendments, carriers may generally negotiate terms and conditions with their users (including fees and charges) except those relating to Basic Telecommunications Services.
Under these amendments, interconnection with telecommunications carriers was also deregulated. Telecommunications 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.
The Americas
Chile
Cable and telephony applications for permits and concessions are submitted to the Ministry of Transportation and Telecommunications, which, through the Subsecretary of Telecommunications, or Subtel, is responsible for regulating, granting permits and concessions, registering and supervising all telecommunications providers. Wireline cable television permits are non-exclusive and granted for indefinite terms. Wireless television permits have renewable terms of 10 years, while telecommunication concessions (for example, for fixed or mobile telephony) have renewable 30-year terms. Wireline and wireless permits and concessions require operation in accordance with a technical plan submitted by the licensee together with the permit or concession

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application. VTR has cable permits in most major and medium sized markets in Chile. Cross ownership between cable television, Internet access and telephony is also permitted.
In general, the General Telecommunications Law of Chile allows telecommunications companies to provide service and develop telecommunication infrastructure without geographic restrictions or exclusive rights to serve. Chile currently has a competitive, multi-carrier system for international and local long distance telecommunications services. Regulatory authorities currently determine prices charged to customers for local telecommunications services provided by incumbent local fixed telephony operators until the market is determined to be competitive. Charges for access (prices for terminating calls in fixed or mobile networks), other interconnection services and unbundling services are determined for all operators, whether or not incumbent. To date, the regulatory authorities have determined prices charged to customers by the dominant local wireline telephony providers and the interconnection and unbundling tariffs for several other operators (including our local telephony company). In all cases, the authorities determine a maximum rate structure that shall be in force for a five year period. Local service providers with concessions are obligated to provide service to all customers that are within their service area or are willing to pay for an extension to receive service. Local providers, whether or not incumbent, must also give long distance service providers equal access to their network connections at regulated prices.
Competition
Markets for broadband distribution, including cable and satellite distribution, 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 Europe Broadband on market share is based on information published by Screen Digest and Dataxis for the third quarter of 2005. 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. For Chile, the percentage information is based on internal market studies, information obtained from public filings by competitors and market information published by the International Data Corporation.
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 (systems that transmit satellite signals containing video programming, data and other information to receiving dishes of varying sizes located on the subscriber’s premises); (3) satellite master antenna television systems, commonly known as SMATVs, which generally serve condominiums, apartment and office complexes and residential developments; (4) MMDS operators; (5) digital terrestrial television, or “DTT”, broadcasters; (6) other cable operators in the same communities that we serve; (7) 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; 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 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, France 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 as well as expanding our new services, such as digital television, VOD, high-definition television, and personal video recorders.

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  •  Europe. The competitive situation in Europe tends to vary from country to country, which is partly reflective of the respective country’s history. For example in some countries, such as Belgium, Switzerland and The Netherlands, there has long been high cable penetration and in Austria and France there are long-established satellite platforms. Nevertheless, broad competitive trends can be seen in many of the European countries in which we operate.
  For video services the key competition has traditionally come either from over the air broadcasts or from satellite distribution. In other countries competition from SMATV or MMDS can be a factor. 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.
 
  Also, television over DSL networks is either provided directly by the owner of that network or by a third party and 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, 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.
 
  Austria. In Austria we are the largest cable company based on number of video cable subscribers. Our primary competition for video services is from free-to-air television received via satellite and from digital DTH platforms. Approximately 50% of Austrian households receive free television compared to approximately 37% of Austrian households served by cable services. Within the footprint covered by Broadband-Austria, 52% of the homes passed subscribe to our cable services (analog and digital). Broadband-Austria may face increased competition in the future from developing technologies. An incumbent telecommunications operator, Telekom Austria AG (Telekom Austria), has recently launched television via a broadband internet connection, or “IPTV”, and the public broadcaster, ORF, has announced it will launch DTT services in early 2006.
 
  France. France is one of the most competitive markets in which we operate, with multiple video distribution platforms, including cable, satellite, ADSL, DTT and, more recently, mobile telephony. The penetration of pay television services is significantly lower in France than other European countries. Within the footprint of Broadband-France, 33% of the homes passed subscribe to our cable services (digital and analog). This represents slightly less than 6% of the total market, compared to a slightly higher percentage for NC Numericable SA (the largest cable operator). Broadband-France also competes with DTH satellite service and IPTV operators. Satellite television penetration is approximately 17% of the total market and the two largest operators, CanalSat S.A. and TPS (television par satellite), have announced an agreement to merge. According to New Television Insider (February 21, 2006), the combined subscriber base of the two platforms would be approximately 3.7 million. Subscriptions for IPTV services offered by five providers, including the incumbent telecommunications operator, are expected to grow as these operators can offer bundled services. To maintain and improve its market share, Broadband-France offers attractive digital programming packages.
 
  Hungary. In Hungary, we are the largest cable service provider based on number of video cable subscribers. Of the Hungarian households receiving cable television, 36% subscribe to our service. In addition, Broadband-Hungary provides satellite service to 4% of the Hungarian households. Broadband-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 purchased a majority stake), which has announced plans to offer a DSL-IPTV service later this year and is currently offering a VOD service to Internet subscribers of its ISP subsidiary.
 
  Netherlands. The Netherlands has one of the highest cable penetration rates in Europe with 94% of all households having a cable service. Broadband-Netherlands services 37% of the total video households.

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  Satellite television penetration is 8% of the total video households. In addition to satellite television, we face competition from the DTT service, Digitenne, and from IPTV products.
 
  KPN, the incumbent telecommunications operator, provides a wireless digital television product and has announced the launch of its IPTV service in the second quarter of 2006, which would include VOD, an electronic program guide and a personal video recorder. With its nationwide telecommunications network and ability to offer bundled triple play services, KPN is expected to be a significant competitor.
 
  Switzerland. Currently, 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, has announced plans to launch IPTV in 2006. In 2005, Swisscom acquired a controlling interest in Cinetrade Group which, among other things, packages and distributes premium pay television content through its subsidiary, Teleclub AG, including sports and movies for which it holds exclusive rights. Swisscom has also launched a wholesale digital television service for cable network operators, including set top boxes and exclusive content, and we expect Swisscom to seek to establish relationships with other cable network operators in Switzerland, including our partner networks, by offering this service.

  •  Japan. Our principal competition in our Japanese cable television business comes from alternative distributors of television signals, including DTH satellite television providers and DTT, as well as from other distributors of video programming using broadband networks. Our current competitors in the satellite television industry include Japan Broadcasting Corporation and WOWOW Inc., which offer broadcast satellite analog and broadcast satellite digital television, and SkyPerfecTV for communications satellite digital television. An amendment to the Law Concerning Broadcast on Telecommunications Service, which became effective in January 2002, has given broadcast companies, which do not have their own facilities, the ability to provide broadcasting services over lines owned by other telecommunications companies. As a result, our Japanese operations face increasing competition from video services offered by broadband providers, established fixed-line telecommunications providers, including NTT and KDDI Corporation (KDDI), and other FTTH-based video service providers, including Opticast, Inc. and K-Opticom Corporation. Other cable television companies are not considered significant competitors in Japan due to the fact that their franchise areas rarely overlap with ours, and the investments required to install new cable would not be justified considering the competition in overlapping franchise areas. As of December 31, 2005, J:COM’s share of the multi-channel video market in Japan was 7%.
 
  •  The Americas. In Chile, VTR competes primarily with DTH satellite service providers in Chile. As of December 31, 2005, VTR’s share of the video market in Chile was 87%, compared to 7% for DTH satellite service providers and 6% for all others. VTR may face competition in the future from video services offered by or over the networks of fixed-line telecommunications operators using DSL or ADSL technology or FTTH networks or new DTH carriers which might enter into the market. For example, CTC has announced plans to launch IPTV in 2006. To effectively compete, VTR plans to test its digital platform in additional neighborhoods in 2006.
Internet
With respect to 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 Internet service providers (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

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and high-speed 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.
  •  Europe. Across Europe, our key competition in this product market is from the offering of Internet access products using various DSL based technologies both by the incumbent phone companies and third parties. In some countries, third party ISPs now offer services with speeds up to 20 Mbps (enabled by local loop unbundling and improved ADSL technologies (ADSL2+)). These services are priced very competitively and have allowed these ISPs to gain market share. It is expected that the same will occur in other markets as local loop unbundling fees are lowered. The relative lack of FTTH networks at present means that these have, so far, posed a competitive threat in only limited areas. Equally, broadband wireless services are not yet well established. However, increased competitive pressure from both these directions is likely.
  Broadband-Austria’s largest competitor with respect to Internet access services is an incumbent telecommunications company, Telkom Austria. Telkom Austria provides services via DSL. In addition, Broadband-Austria faces competition from unbundled local loop access by operators who can offer Internet services for lower costs. To compete, Broadband-Austria is offering its triple play option at a discount for subscribers who switch from another provider.
 
  In France, our largest competitors are the DSL operators, with the incumbent telecommunications companies serving 65% of the market, followed by DSL operators with access to the unbundled local loop. As a result, cable operators, including Broadband-France, have only a 6% market share of the total broadband Internet subscribers. Broadband-France has 51% of cable broadband subscriptions.
 
  In Hungary, the Internet market is growing rapidly. Our primary competitor is the incumbent telecommunications company Magyar Telekom. Currently, Broadband-Hungary provides Internet services to 21% of the total broadband Internet market.
 
  In The Netherlands, we face competition from KPN, the largest provider, and unbundled local loop providers. Currently, Broadband-Netherlands provides Internet services to 12% of the total broadband Internet market.
 
  In Switzerland, Swisscom is the largest provider of Internet access services, with an estimated market share of two-thirds of all broadband Internet customers. Broadband-Switzerland serves 20% of all residential broadband Internet customers and 55% of such customers in its network coverage area. As fully unbundled, shared or bitstream access to Swisscom’s network has not yet been implemented in Switzerland, alternative DSL services providers are currently reliant on Swisscom’s wholesale offering or are required to construct their own access network to provide Internet access services.
  •  Japan. In Japan, we compete directly with ADSL providers, such as Softbank Corporation, that offer broadband access to subscribers. ADSL providers often offer their Internet access services at a cost lower than ours. We also compete with FTTH providers that offer broadband Internet access through fiber-optic lines. FTTH-based players, including NTT, Usen Corporation, Tokyo Electric Power Company Incorporated, KDDI and K-Opticom Corporation, currently offer Internet access services through FTTH. Internet access using FTTH technology has become more widely available, and pricing for these services has declined. If continued technological advances or investments by our competitors further improve the services offered through ADSL or FTTH, or make them more affordable or more widely available, cable modem Internet access may become less attractive to our existing or potential subscribers. As of December 31, 2005, J:COM’s share of the high-speed (128 kbps and greater) Internet access market in Japan was 4%.
 
  •  The Americas. In Chile, VTR faces competition primarily from non-cable-based Internet service providers such as Telefónica S.A and Entel S.A. VTR expects increased pricing pressure as these

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  companies bundle their Internet access service with other services. As of December 31, 2005, VTR’s share of the high-speed (128 kbps and greater) Internet access market in Chile was 43%, compared to 38% for Telefónica and 19% for all others.

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.
  •  Europe. Across Europe our telephony businesses are generally rather small compared to the existing business of the incumbent phone company. The incumbent telephone companies remain our key competitor but mobile operators and new entrant VoIP operators offering service across broadband lines are also important in these markets. Generally, we expect telephony markets to remain extremely competitive.
  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 in Hungary via our copper wire telephony network and via VoIP over our cable plant. In France, in addition to the incumbent telephone company France Telecom S.A.’s dominance of the telephony market, the national unbundling of the local loop has allowed ISPs to provide VoIP services at competitive prices. To effectively compete in France, Broadband-France has been offering telephony services via VoIP since mid 2005.
 
  In The Netherlands, KPN is the dominant telephony provider, but all of the large MSOs, including Broadband-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 as the unbundling of the local loop is implemented.
 
  In addition to our fixed line telephony service, we offer mobile telephony in Austria, The Netherlands and Switzerland. In Austria, we offer a bundle of fixed line and mobile telephony in a co-branding arrangement with the telephony operator One GmbH. In August 2005, we began offering a prepaid mobile service in The Netherlands via the Orange network owned by France Telecom SA. Recently we began offering mobile telephony services in Switzerland under the Cablecom brand for business and residential customers.
  •  Japan. In Japan, our principal competition in our telephony business comes from NTT and KDDI. We also face increasing competition from new common carriers in the telephony market, as well as ISPs, such as Softbank Corporation, and FTTH-based providers, including K-Opticom Corporation. Further, in December 2004, Japan Telecom Co. Ltd., and in February 2005, KDDI, introduced low-cost fixed-line telephony services. Many of these carriers offer VoIP, and call volume over fixed line services has generally declined as VoIP and mobile phone usage have increased. If competition in the fixed-line telephony market continues to intensify, we may lose existing or potential subscribers to our competitors. As of December 31, 2005, J:COM’s share of the fixed-line telephone market in Japan was

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  2%. J:COM also intends to offer a mobile telephony service in a co-branding arrangement in 2006 with WILLCOM, Inc.
 
  •  The Americas. In Chile, VTR faces competition from the incumbent telecommunications operator, CTC, and other telecommunications operators such as Telsur, GTD Chile S.A. and Entel S.A. CTC and Telsur operators have substantial experience in providing telephony services, resources to devote to the provision of telephony services and longstanding customer relationships. VTR is also facing stiff competition from wireless telephony providers such as Telefónica Móviles S.A., Smartcom PCS and Entel PCS Telecomunicaciones S.A. and indirect access providers. Competition in both the residential and business telephony markets is expected to increase over time with certain market trends and regulatory changes, such as general price competition, number portability, the replacement of fixed-line with mobile telephony, and the growth of VoIP services. VTR offers its telephony over its cable network or via VoIP. As of December 31, 2005, VTR’s share of the fixed-line telephony market in Chile was 12%, compared to 73% for CTC and 15% for all others.

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, 2005, our consolidated subsidiaries and we had an aggregate of approximately 21,600 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 21 to our consolidated financial statements included in Part II of this report.
Available Information
All our filings with the Securities and Exchange Commission 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.
Item 1A. RISK FACTORS
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:
  •  risks that relate to our operating in overseas markets and being subject to foreign regulation;
 
  •  risks that relate to the technology used in our businesses and the competition we face;
 
  •  risks that relate to our investments and other financial matters;

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  •  other risks, including risks that relate to our capitalization and the obstacles faced by anyone who may seek to acquire us and risks that relate to the LGI Combination in which LMI and UGC became our subsidiaries.
The risks described below and elsewhere in this Annual Report on Form 10-K are not the only ones that relate to our results of operations, financial condition, business and operations or an investment in our stock. The risks described below are considered to be the most material. However, 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. 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:
  •  longer payment cycles by customers in foreign countries that may increase the uncertainty associated with recoverable accounts;
 
  •  difficulties in staffing and managing international operations;
 
  •  economic instability;
 
  •  potentially adverse tax consequences;
 
  •  export and import restrictions, tariffs and other trade barriers;
 
  •  increases in taxes and governmental royalties and fees;
 
  •  involuntary renegotiation of contracts with foreign governments;
 
  •  changes in foreign and domestic laws and policies that govern operations of foreign-based companies; and
 
  •  disruptions of services or loss of property or equipment that are critical to overseas businesses due to expropriation, nationalization, war, insurrection, terrorism or general social or political unrest.
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

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exchange rate fluctuations. The primary exposure to foreign currency risk for us is to the euro and the Japanese yen 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. Programming businesses are subject to regulation on a country by country basis, including programming content requirements, requirements to carry specified programming, service quality standards, price controls and ownership restrictions. Consequently, such businesses must adapt their ownership and organizational structure as well as their services 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 European Union and the regulatory authorities in several countries in which we do business are considering what access rights, if any, should be afforded to third parties for use of existing cable television networks. If third parties were to be 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.
We may determine to 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. Even if we were successful in acquiring new businesses, the integration of new businesses may present significant challenges, including: realizing economies of scale in interconnection, programming and network operations; eliminating duplicative overheads; and integrating 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 will be subject to the risk of revocation or loss of our telecommunications and media licenses. In certain operating regions, the services provided by our businesses require receipt of a license from the appropriate national, provincial and/or local regulatory authority. In those regions, regulatory authorities may have significant discretion in granting licenses, including the term of the licenses, and are often under no obligation to renew them when they expire. The breach of a license or applicable law, even if inadvertent, can result in the revocation, suspension, cancellation or reduction in the term of a license or the imposition of fines. In

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addition, regulatory authorities may grant new licenses to third parties, resulting in greater competition in territories where our businesses may already be licensed. In order to promote competition, licenses may also require that third parties be granted access to our bandwidth, frequency capacity, facilities or services. There can be no assurance that we will be able to obtain or retain any required license, or that any renewal of a required license will not be on less favorable terms.
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.

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Our digital migration project in The Netherlands may not generate anticipated levels of incremental revenue. In our digital migration project, we provide a digital converter box and digital video service at no incremental charge to the analog rate for six months to those analog customers who accept delivery of the digital box and agree to accept the services. After the six-month 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. Further incremental revenue would be generated as we offer additional tiers of services and additional box functionality for additional fees. We are still at any early stage of the rollout of this project. 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. Our systems are vulnerable to damage from a variety of sources, including telecommunications failures, 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. 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.
A catastrophe at one or more of the locations where our critical cable network systems are housed could cause serious harm to our business. Our cable operations in each country where we conduct business are dependent on a variety of sophisticated critical systems, which support various aspects of those cable network operations. 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. If one or more of these locations were to be subject to fire, natural disaster, terrorism including electronic sabotage, power loss or other catastrophe, we would not be able to pass transmission signals over the portion of our cable network that is served by those location. This would likely cause serious harm to our business. We cannot assure you that any disaster recovery, security or service continuity protection measures we have, or may develop or take in the future, will be sufficient.
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, high-speed Internet access and telecommunications in many of the regions in which we operate are highly competitive and highly fragmented. In the provision of video services we face competition from other cable television service providers, DTH service providers, DTT broadcasters and video over ADSL providers, among others. Our operating businesses in The Netherlands, France and Japan are facing increasing competition from video services provided by or over the networks of incumbent telecommunications operators. In the provision of telephone services, we face competition from the incumbent telecommunications operators in each country in which we operate. These operators have substantially more experience in providing telephone services and have greater resources to devote to the provision of telephone services. In addition, in many countries, we face competition from wireless telephone providers, facilities-based and resale telephone operators, VoIP providers and other providers. In the provision of Internet access services and online content, we face competition from incumbent telecommunications companies and other telecommunications operators, other cable-based Internet service providers, non-cable based Internet service providers, Internet portals and satellite, microwave and other wireless providers. The Internet services offered by these competitors include both traditional dial-up access services and high-speed access services. Digital subscriber line is a technology that provides high-speed Internet access over traditional telephone lines. Both incumbent and alternative providers offer digital subscriber line services. We expect digital subscriber line to be an increasingly strong competitor in the provision of Internet services.
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

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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, 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 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.
Some of our operating businesses depend upon third parties for the distribution of their products and services. In certain operating regions, our businesses require access to utility poles, roadside conduits and leased fiber that interconnect their headends and/or connect their headends to telecommunications facilities of third parties. This infrastructure is, in some cases, owned by regional utility companies or other third party administrators, and access to the infrastructure is licensed to our businesses. In other operating regions, the transmission of cable programming content to regional headend facilities is accomplished via communications satellites owned by third parties, who, in some cases, are competitors. We cannot assure you that our businesses will be able to renew any existing access agreements with these third parties or enter into new agreements for additional access rights, which may be necessary for the expansion of our businesses in these regions. Any cancellation, delay or interruption in these access rights would disrupt the delivery of our products and services to customers in the affected regions. In addition, the failure to obtain additional access rights from such third parties could preclude expansionary efforts in these operating regions. We also cannot assure you that any alternative distribution means will be available in these regions, on reasonable terms or at all.
Factors Relating to Certain Financial Matters
We may not report net earnings. Prior to the LGI Combination, LMI’s net loss from continuing operations amounted to $13.7 million for the year ended December 31, 2004. We are the successor to LMI and, upon the closing of the LGI Combination, LMI’s historical financial statements became our historical financial statements. Our net loss from continuing operations amounted to $83.6 million for the year ended December 31, 2005. 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. Some of our operating subsidiaries are subject to loan agreements or bank facilities 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

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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:
  •  borrow more funds;
 
  •  pay dividends or make other upstream distributions;
 
  •  make investments;
 
  •  engage in transactions with us or other affiliates; or
 
  •  create liens on their assets.
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:
  •  fund capital expenditures or acquisitions that could improve their value;
 
  •  meet their loan and capital commitments to their business affiliates;
 
  •  invest in companies in which they would otherwise invest;
 
  •  fund any operating losses or future development of their business affiliates;
 
  •  obtain lower borrowing costs that are available from secured lenders or engage in advantageous transactions that monetize their assets; or
 
  •  conduct other necessary or prudent corporate activities.
We are typically prohibited from or significantly restricted in accessing the net cash of our subsidiaries that have outstanding credit facilities.
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.
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.

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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
John C. Malone has significant influence over corporate matters considered by us and our stockholders. John C. Malone beneficially owns shares of our common stock representing 24.3% of our aggregate voting power as of February 28, 2006. By virtue of Mr. Malone’s voting power in our company as well as his position as our Chairman of the Board, Mr. Malone has significant influence over the outcome of any corporate transaction or other matters submitted to our stockholders for approval, including the election of directors, mergers, consolidations and the sale of all or substantially all of our assets. 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:
  •  authorizing a capital structure with multiple series of common stock: a Series B that entitles the holders to ten votes per share; a Series A that entitles the holders to one vote per share; and a Series C that, except as otherwise required by applicable law, entitles the holder to no voting rights;
 
  •  authorizing the issuance of “blank check” preferred stock, which could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt;
 
  •  classifying our board of directors with staggered three-year terms, which may lengthen the time required to gain control of our board of directors;
 
  •  limiting who may call special meetings of stockholders;
 
  •  prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of the stockholders;
 
  •  establishing advance notice requirements for nominations of candidates for election to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings;
 
  •  requiring stockholder approval by holders of at least 80% of its voting power or the approval by at least 75% of our board of directors with respect to certain extraordinary matters, such as a merger or consolidation of our company, a sale of all or substantially all of our assets or an amendment to our restated certificate of incorporation or bylaws; and
 
  •  the existence of authorized and unissued stock, which would allow our board of directors to issue shares to persons friendly to current management, thereby protecting the continuity of our management, or which could be used to dilute the stock ownership of persons seeking to obtain control of our company.
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.

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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.
In connection with the closing of the LGI Combination we and LMI received an opinion of Skadden, Arps, Slate, Meagher & Flom LLP to the effect that, for U.S. federal income tax purposes, and provided the spin off would otherwise have qualified as a tax-free distribution under Section 355 of the Code to Liberty Media and the Liberty Media stockholders, the LGI Combination should not cause the spin off to fail to qualify as a tax-free distribution to Liberty Media under Section 355(e) of the Code. In rendering such opinion, Skadden, Arps, Slate, Meagher & Flom LLP relied upon factual representations and covenants, including those contained in certificates of officers of us, LMI and UGC, and customary factual assumptions. Any inaccuracy in the representations, covenants and assumptions upon which such tax opinion is based could alter the conclusions reached in such opinion. Neither we nor LMI requested a ruling from the Internal Revenue Service as to the effect, if any, that the LGI Combination would have on the spin off. Therefore, there can be no assurance that the Internal Revenue Service will agree with the conclusions in the opinion of Skadden, Arps, Slate, Meagher & Flom LLP.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
During 2005, we leased our executive offices in Denver, Colorado, and we lease offices in Englewood, Colorado, which are now our executive offices. 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 equipment (including converter boxes) 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.
Item 3. LEGAL PROCEEDINGS
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, United Pan-Europe Communications NV (UPC), a wholly owned subsidiary of UGC Europe, received a notice that certain former shareholders of Cignal Global Communications filed a

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lawsuit against UPC in the District Court in Amsterdam, The Netherlands, claiming $200 million on the basis that UPC failed to honor certain option rights that were granted to those shareholders in connection with the acquisition of Cignal by Priority Telecom. UPC 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, UPC believes that the Cignal shareholders’ claims are without merit and intends to defend this suit vigorously. In December 2003, certain members and former members of the Supervisory Board of Priority Telecom were put on notice that a tort claim may be filed against them for their cooperation in the initial public offering. On May 4, 2005, the court rendered its decision dismissing all claims of the former Cignal shareholders. On August 2, 2005, an appeal against the district court decision was filed. Subsequently, when the grounds of appeal were filed in November 2005, only damages suffered by nine individual plaintiffs, rather than all former Cignal shareholders, continued to be claimed. Based on the share ownership information provided by the plaintiffs, the damage claims remaining subject to the litigation are approximately $28 million in the aggregate before statutory interest. The remaining former Cignal shareholders may initiate separate proceedings prior to the expiration of the statute of limitations.
Class Action Lawsuits Relating to the LGI Combination. Since January 18, 2005, twenty-one lawsuits have been filed in the Delaware Court of Chancery, and one lawsuit 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 and 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.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.

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PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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. On September 6, 2005, we effected a stock split in the form of a Stock Dividend of LGI Series C common stock to holders of record of LGI Series A and LGI Series B common stock. Unless otherwise indicated, all LGI and LMI share and per share amounts presented herein have been retroactively adjusted to give effect to the Stock Dividend, notwithstanding the fact that no shares of LGI Series C common stock were issued and outstanding prior to September 6, 2005.
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 our 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, as adjusted for the Stock Dividend, of shares of LGI Series A, LGI Series B and LGI Series C common stock for the periods indicated:
                                                   
    Series A   Series B   Series C
             
    High   Low   High   Low   High   Low
                         
Year Ended December 31, 2005
                                               
 
First quarter
  $ 24.50     $ 21.81     $ 26.33     $ 23.76     $ 23.56     $ 21.12  
 
Second quarter
  $ 24.86     $ 20.86     $ 26.10     $ 22.89     $ 23.62     $ 20.27  
 
Third quarter
  $ 27.35     $ 23.40     $ 29.00     $ 24.92     $ 26.38     $ 22.39  
 
Fourth quarter
  $ 27.20     $ 21.66     $ 29.36     $ 22.15     $ 26.01     $ 20.60  
Year Ended December 31, 2004
                                               
 
Second quarter
  $ 19.52     $ 17.46     $ 21.62     $ 20.33     $ 19.06     $ 17.49  
 
Third quarter
  $ 19.01     $ 14.69     $ 21.62     $ 17.84     $ 18.81     $ 15.06  
 
Fourth quarter
  $ 24.28     $ 17.08     $ 25.84     $ 18.96     $ 23.23     $ 16.70  
Holders
As of February 22, 2006, there were approximately 3,214, 155 and 3,275 record holders of LGI Series A, LGI Series B and LGI 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 shareholder).
Dividends
We have not paid any cash dividends on LGI Series A, LGI Series B and LGI 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

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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.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of December 31, 2005, with respect to shares of our common stock authorized for issuance under our equity compensation plans.
Equity Compensation Plan Information
                           
            Number of
            securities available
    Number of securities       for future issuance
    to be issued upon   Weighted average   under equity
    exercise of   exercise price of   compensation plans
    outstanding options,   outstanding options,   (excluding securities
    warrants and   warrants and   reflected in the first
Plan category   rights(1)   rights(1)   column)
             
Equity compensation plans approved by security holders:
                       
Liberty Global, Inc. 2005 Incentive Plan (As Amended and Restated Effective March 8, 2006)
                       
 
LGI Series A common stock
    2,181,361     $ 22.98       39,282,805 (5)
 
LGI Series B common stock
    1,568,562     $ 20.10          
 
LGI Series C common stock
    3,749,923     $ 20.29          
Liberty Global, Inc. 2005 Non-employee Director Incentive Plan (As Amended and Restated Effective March 8, 2006)(2)
                       
 
LGI Series A common stock
    92,152     $ 21.82       9,815,696 (6)
 
LGI Series B common stock
        $          
 
LGI Series C common stock
    92,152     $ 20.67          
Liberty Media International, Inc. Transitional Stock Adjustment Plan(2)(3)
                       
 
LGI Series A common stock
    980,074     $ 17.47        
 
LGI Series B common stock
    1,498,154     $ 19.85          
 
LGI Series C common stock
    2,478,228     $ 17.44          
UGC Plans(4)
                       
 
LGI Series A common stock
    3,278,451     $ 18.61        
 
LGI Series B common stock
        $          
 
LGI Series C common stock
    3,129,530     $ 18.01          
Equity compensation plans not approved by security holders:
                       
 
None
                   
                       
Totals
                       
 
LGI Series A common stock
    6,532,038               49,098,501 (5)(6)
                       
 
LGI Series B common stock
    3,066,716                  
                     
 
LGI Series C common stock
    9,449,833                  
                     

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(1)  In addition to the option information included in this table, there are outstanding under the various incentive plans restricted shares of our common stock and stock appreciation rights (each a SAR) with respect to shares of our common stock. Upon exercise, the appreciation of the SAR, which is the difference between the base price of the SAR and the then-market value of the underlying series of our common stock or in certain cases, if lower, a specified price, may be paid in shares of the applicable series of our common stock. For further information, see note 14 to our consolidated financial statements.
 
(2)  Prior to LMI’s spin off from Liberty Media, Liberty Media approved each of the nonemployee director incentive plan and the transitional plan in its capacity as the then sole shareholder of LMI.
 
(3)  The transitional plan was adopted in connection with LMI’s spin off from Liberty Media to provide for the supplemental award of options to purchase shares of our common stock and restricted shares of our common stock, in each case, pursuant to adjustments made to outstanding Liberty Media stock incentive awards in accordance with the anti-dilution provisions of Liberty Media’s stock incentive plans. No additional awards will be made under the transitional plan.
 
(4)  The UGC Plans are comprised of the UnitedGlobalCom, Inc. 1993 Stock Option Plan, amended and restated as of January 22, 2004; the UnitedGlobalCom, Inc. Stock Option Plan for Non-Employee Directors, effective June 1, 1993, amended and restated as of January 22, 2004; the UnitedGlobalCom, Inc. Stock Option Plan for Non-Employee Directors, effective March 20, 1998, amended and restated as of January 22, 2004; and the UnitedGlobalCom 2003 Equity Incentive Plan, effective September 1, 2003. Awards outstanding under each of these plans were converted into awards with respect to our common stock in the LGI Combination. No additional awards will be made under these plans.
 
(5)  The incentive plan permits grants of, or with respect to, our Series A common stock, Series B common stock or Series C common stock subject to a single aggregate limit of 50 million shares (of which no more than 25 million shares may consist of Series B shares). As of December 31, 2005, an aggregate of 39,282,805 shares of common stock were available for issuance pursuant to the incentive plan (of which no more than 23,372,168 may consist of Series B shares).
 
(6)  The nonemployee director incentive plan permits grants of, or with respect to, our Series A common stock, Series B common stock or Series C common stock subject to a single aggregate limit of 10 million shares (of which no more than 5 million shares may consist of Series B shares). As of December 31, 2005, an aggregate of 9,815,696 shares of common stock were available for issuance pursuant to the nonemployee director incentive plan (of which no more than 5 million shares may consist of Series B shares).
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
None.

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Issuer Purchases of Equity Securities
The following table sets forth information concerning our company’s purchase of its own equity securities during the fourth quarter of the fiscal year ended December 31, 2005:
                             
    (a)   (b)   (c)   (d)
            Total number of   Approximate dollar
            shares purchased as   value of shares that
            part of publicly   may yet be purchased
    Total number of   Average price   announced plans   under the plans or
Period   shares purchased(1)   paid per share   or programs   programs
                 
October 1, 2005 through October 31, 2005
    Series  A:  400,000     Series A: $24.59     Series  A:  400,000     $ 190,162,000  
October 1, 2005 through October 31, 2005
    Series  C:  200,000     Series C: $23.30     Series  C:  200,000     $ 185,502,000  
December 1, 2005 through December 31, 2005
    Series A: 1,648,231     Series A: $22.91     Series A: 1,648,231     $ 147,744,000  
December 1, 2005 through December 31, 2005
    Series C: 1,255,859     Series C: $21.21     Series C: 1,255,859     $ 121,107,000  
                           
Total
    Series A: 2,048,231           Series A: 2,048,231          
                           
      Series C: 1,455,859           Series C: 1,455,859          
                           
 
(1)  On June 20, 2005, we announced the authorization of a stock repurchase program. Under the program, we may acquire from time to time up to $200 million in LGI Series A common stock and LGI Series C common stock. At December 31, 2005, we had acquired LGI Series A common stock and LGI Series C common stock at an aggregate cost of $78,893,000 under the stock repurchase program. Subsequent to December 31, 2005, we repurchased 2,698,558 and 1,504,311 additional shares of LGI Series A and LGI Series C common stock, respectively, for aggregate cash consideration of $89,357,000. In addition, on March 8, 2006, our Board of Directors approved a new stock repurchase program under which we may acquire an additional $250 million in LGI Series A common stock and LGI Series C common stock. These stock repurchase programs may be effected through open market transactions and/or privately negotiated transactions, which may include derivative transactions. The timing of the repurchase of shares pursuant to the program will depend on a variety of factors, including market conditions. These programs may be suspended or discontinued at any time.

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Item 6. SELECTED FINANCIAL DATA
The following tables present selected historical financial information of (i) certain international cable television and programming subsidiaries and assets of 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, 2005, 2004, 2003 and 2002 and for the each of the four years ended December 31, 2005. Data for other periods has been derived from unaudited information. This information is only a summary, and you should read it together with our consolidated financial statements included elsewhere herein.
                                         
    December 31,
     
    2005(1)   2004(2)   2003   2002   2001
                     
        as adjusted(3)            
    amounts in thousands
Summary Balance Sheet Data:
                                       
Investment in affiliates
  $ 789,066     $ 1,865,642     $ 1,740,552     $ 1,145,382     $ 423,326  
Other investments
  $ 569,059     $ 838,608     $ 450,134     $ 187,826     $ 916,562  
Property and equipment, net
  $ 7,991,292     $ 4,303,099     $ 97,577     $ 89,211     $ 80,306  
Intangible assets, net
  $ 10,839,879     $ 3,280,552     $ 693,530     $ 696,057     $ 701,935  
Total assets
  $ 23,378,529     $ 13,702,363     $ 3,687,037     $ 2,800,896     $ 2,169,102  
Debt and capital lease obligations, including current portion
  $ 10,114,972     $ 4,992,746     $ 54,126     $ 35,286     $ 338,466  
Stockholders’ equity
  $ 7,816,446     $ 5,237,083     $ 3,418,568     $ 2,708,893     $ 2,039,593  
                                         
    Year Ended December 31,
     
    2005(1)   2004(2)   2003   2002   2001
                     
        as adjusted(3)            
    amounts in thousands, except per share amounts
Summary Statement of Operations Data:
                                       
Revenue
  $ 5,151,332     $ 2,531,889     $ 108,390     $ 100,255     $ 139,535  
Operating income (loss)
  $ 251,184     $ (314,891 )   $ (1,455 )   $ (39,145 )   $ (122,623 )
Share of earnings (losses) of affiliates(4)
  $ (22,949 )   $ 38,710     $ 13,739     $ (331,225 )   $ (589,525 )
Earnings (loss) from continuing operations(5)
  $ (83,591 )   $ (13,709 )   $ 20,889     $ (329,887 )   $ (820,355 )
Earnings (loss) from discontinued operations(6)
  $ 3,494     $ (7,772 )                  
Net earnings (loss)
  $ (80,097 )   $ (21,481 )   $ 20,889     $ (329,887 )   $ (820,355 )
Earnings (loss) from continuing operations per common share (pro forma for spin off)(7)
  $ (0.20 )   $ (0.04 )   $ 0.07       N/A       N/A  
Earnings (loss) from discontinued operations per common share
  $ 0.01     $ (0.03 )           N/A       N/A  
Earnings (loss) per common share
  $ (0.19 )   $ (0.07 )   $ 0.07       N/A       N/A  
 
(1)  Prior to 2005, we accounted for our interest in Super Media/ J:COM using the equity method. As a result of a change in the corporate governance of Super Media that occurred on February 18, 2005, we began accounting for Super Media and J:COM as consolidated subsidiaries effective January 1, 2005. In

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addition, on June 15, 2005, we completed the LGI Combination 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. We also completed a number of other acquisitions during 2005. For additional information, see note 5 to our consolidated financial statements.
 
(2)  Prior to January 1, 2004, the substantial majority of our operations were conducted through equity method affiliates, including UGC, J:COM and Jupiter TV. In January 2004, we completed a transaction that increased our company’s ownership in UGC and enabled our company to fully exercise our voting rights with respect to our historical investment in UGC. As a result, UGC has been accounted for as a consolidated subsidiary and included in our consolidated financial position and results of operations since January 1, 2004. For additional information, see note 5 to our consolidated financial statements.
 
(3)  As further discussed in note 22 to our consolidated financial statements, we have retrospectively adjusted our consolidated financial statements to apply the concepts set forth in EITF 05-08 to our income tax accounting for the UGC Convertible Notes that were issued in April 2004.

(4)  Effective January 1, 2002, we adopted SFAS 142, which, among other matters, provides that goodwill, intangible assets with indefinite lives and excess costs that are considered equity method goodwill are no longer amortized, but are evaluated for impairment under SFAS 142 and, in the case of equity method goodwill, APB Opinion No. 18. Share of earnings (losses) of affiliates includes excess basis amortization of $92,902,000 in 2001.
(5)  Our net loss in 2002 and 2001 included our share of UGC’s net losses of $190,216,000 and $439,843,000, respectively. Because we had no commitment to make additional capital contributions to UGC, we suspended recording our share of UGC’s losses when our carrying value was reduced to zero in 2002. In addition, our net loss in 2002 included $247,386,000 of other-than-temporary declines in fair values of investments, and our net loss from continuing operations in 2001 included $534,962,000 of realized and unrealized losses on derivative instruments.
 
(6)  On January 19, 2006, we sold 100% of UPC Norway and reclassified our consolidated financial statements to present UPC Norway as a discontinued operation. UPC Norway was a subsidiary of UGC, which we did not consolidate prior to 2004. For additional information, see note 5 to our consolidated financial statements.
 
(7)  Earnings (loss) per common share amounts were computed assuming that the shares issued in the spin off were outstanding since January 1, 2003. In addition, the weighted average share amounts for periods prior to July 26, 2004, the date that certain subscription rights were distributed to stockholders pursuant to a LMI Rights Offering by us, have been increased to give effect to the benefit derived by our company’s stockholders as a result of the distribution of such subscription rights. All LGI share and per share amounts have been retroactively adjusted to give effect to the September 6, 2005 Stock Dividend. For additional information, see note 3 to our consolidated financial statements.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is intended to assist in providing an understanding of our financial condition, changes in financial condition and results of operations and should be read in conjunction with our consolidated financial statements. This discussion is organized as follows:
  •  Overview. This section provides a general description of our business and recent events.
 
  •  Results of Operations. This section provides an analysis of our results of operations for the years ended December 31, 2005, 2004 and 2003.
 
  •  Liquidity and Capital Resources. This section provides an analysis of our corporate and subsidiary liquidity, consolidated cash flow statements, and our off balance sheet arrangements and contractual commitments.
 
  •  Critical Accounting Policies, Judgments and Estimates. This section discusses those accounting policies that contain uncertainties and require significant judgment in their application.

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  •  Quantitative and Qualitative Disclosures about Market Risk. This section provides discussion and analysis of the foreign currency, interest rate and other market risks that our company faces.
Unless otherwise indicated, convenience translations into U.S. dollars are calculated as of December 31, 2005.
Overview
We are an international broadband communications provider of video, voice and Internet access services with consolidated broadband operations in 19 countries (excluding Norway) outside of the continental United States at December 31, 2005, primarily in Europe, Japan and Chile. Through our indirect wholly owned subsidiaries, UPC Holding and LG Switzerland (collectively, Europe Broadband), we provide video, voice and Internet access services in 13 European countries. LG Switzerland holds our 100% ownership in Cablecom, a broadband communications operator in Switzerland. Through our indirect controlling ownership interest in J:COM, we provide video, voice and Internet access services in Japan. Through our indirect 80%-owned subsidiary VTR, we provide video, voice and Internet access services in Chile. We also have (i) consolidated 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 chellomedia, which also provides telecommunication and interactive digital services and owns or manages investments in various businesses in Europe. Certain of chellomedia’s subsidiaries and affiliates provide programming and other services to Europe Broadband.
As a result of the June 15, 2005 consummation of the LGI Combination, our ownership interest in UGC, the ultimate parent of UPC Holding and VTR prior to the LGI Combination, increased from 53.4% to 100%. However, in connection with VTR’s April 13, 2005 acquisition of a controlling interest in Metrópolis, a broadband communications provider in Chile, UGC’s ownership interest in VTR decreased from 100% to 80%. At December 31, 2005, we owned an indirect 36.75% interest in J:COM through our 58.66% controlling interest in Super Media and Super Media’s 62.65% controlling interest in J:COM. We began consolidating Super Media and J:COM on January 1, 2005. Prior to that date we used the equity method to account for our investment in Super Media/ J:COM.
In addition to the LGI Combination and the consolidation of Super Media/ J:COM, we have completed a number of acquisitions during the past 18 months that have expanded our footprint and the scope of our business. In Europe, we acquired (i) Noos, a broadband communications provider in France, on July 1, 2004, (ii) PHL, the immediate parent of Chorus, a broadband communications provider in Ireland, on May 20, 2004, (iii) Telemach, a broadband communications provider in Slovenia, on February 10, 2005, (iv) a controlling interest in Zone Vision, a video programming company in Europe, on January 7, 2005, (v) Astral, a broadband communications provider in Romania, on October 14, 2005, and (vi) Cablecom, a broadband communications provider in Switzerland on October 24, 2005. In another transaction in Europe, UPC Ireland, through its contractual relationship with MS Irish Cable and MSDW Equity, began consolidating NTL Ireland, a broadband communications provider in Ireland, effective May 9, 2005, and on December 12, 2005, UPC Ireland acquired a 100% interest in NTL Ireland through its acquisition of MS Irish Cable from MSDW Equity. In the following discussion and analysis of our results of operations, we collectively refer to the May 9, 2005 consolidation, and the December 12, 2005 acquisition of NTL Ireland as the “acquisition” of NTL Ireland, with such acquisition considered to be effective as of May 1, 2005 for purposes of comparing our 2005 and 2004 operating results. In Japan, J:COM acquired an approximate 92% ownership interest in Chofu Cable on February 25, 2005 and a 100% interest in J:COM Setamachi on September 30, 2005. Chofu Cable and J:COM Setamachi are broadband communications providers in Japan. As noted above, VTR acquired a controlling interest in Metrópolis on April 13, 2005. In addition, on December 14, 2005 we completed a transaction that increased our indirect ownership of Austar from a 36.7% non-controlling ownership interest to a 55.2% controlling interest. Prior to this transaction, we accounted for our investment in Austar using the equity method of accounting. We have also completed a number of less significant acquisitions in Europe and Japan.

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For additional information concerning our closed acquisitions, see note 5 to our consolidated financial statements.
As further discussed in note 5 to our consolidated financial statements, our consolidated financial statements have been reclassified to present our broadband operations in Norway as discontinued operations. Accordingly, in the following discussion and analysis, the operating statistics, results of operations and financial condition that we present and discuss are those of our continuing operations.
In general, we are seeking to build a portfolio of broadband and video programming businesses that have strong prospects for future revenue and operating cash flow (as defined below and in note 21 to our consolidated financial statements) growth. Therefore, we seek to acquire entities that have strong growth potential at prudent prices and sell businesses that we believe do not meet this profile. In this regard, we began an auction process in the fourth quarter of 2005 with respect to our Scandinavian assets which led to the sale of UPC Norway in January 2006 and we continue to evaluate a possible sale of our broadband operating segment in Sweden. We also seek to maintain our debt at levels that provide for attractive equity returns without assuming undue risk.
Through our subsidiaries and affiliates, we are the largest broadband communications operator outside the United States in terms of subscribers. At December 31, 2005, our consolidated subsidiaries owned and operated networks that passed approximately 29.9 million homes and served approximately 19.2 million revenue generating units (RGUs), consisting of approximately 13.8 million video subscribers, 3.2 million broadband Internet subscribers and 2.2 million telephony subscribers.
In general, we are focused on growing our subscriber base and average total monthly revenue from all sources (including non-subscription revenue such as installation fees or advertising revenue) per average RGU (ARPU) by launching bundled entertainment, information and communications services, upgrading the quality of our networks where appropriate, leveraging the reach of our broadband distribution systems to create new content opportunities and entering into strategic alliances and acquisitions in order to increase our distribution presence and maximize operating efficiencies.
Including the effects of acquisitions, we added a total of 5.7 million RGUs during 2005. Excluding the effects of acquisitions, we added total RGUs of 1.3 million during 2005, including RGUs added by entities that we acquired or began consolidating during 2005 after their respective acquisition or consolidation dates. Most of our internal RGU growth is attributable to the growth of our Internet access and digital telephony services, as significant increases in digital video RGUs were largely offset by declines in analog video RGUs. In addition to RGU growth, we also focus on increasing the average revenue we receive from each household by increasing the penetration of new services through product bundling or other means. We plan to continue increasing revenue and operating cash flow in 2006 by making acquisitions, selectively extending and upgrading our existing networks to reach new customers, migrating more customers to our digital video offerings, which include premium programming and enhanced pay-per-view services.
Our analog video service offerings include basic programming and expanded basic programming in some markets. We tailor both our basic channel line-up and our additional channel offerings to each system according to culture, demographics, programming preferences and local regulation. Our digital video service offerings include basic programming, premium services and pay-per-view programming, including near video-on-demand (NVOD) and video on demand (VOD) in some markets. We offer broadband Internet access services in all of our broadband 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 eight countries in Europe, and in Japan, Chile and Puerto Rico, primarily over our broadband networks. We also have begun offering digital telephony services in The Netherlands, Switzerland, France, Austria, Hungary, Poland, Romania, Japan, Chile and Puerto Rico through Voice over Internet Protocol (VoIP), and in 2006, we plan to launch VoIP telephony services in most of our remaining broadband markets in Europe.

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From an operational perspective, we expect that our ability to maintain or improve our organic growth rates (i.e., growth rates excluding the effects of foreign currency exchange rate fluctuations and acquisitions) for revenue and operating cash flow will be impacted primarily by our ability to continue to achieve organic RGU growth during 2006. In general, we expect that RGU growth in our digital video, telephony and broadband Internet services will more than offset declines in subscribers to our analog video services. In Europe, the positive impact of organic RGU growth during 2006 is expected to be somewhat offset by relatively flat, and in some cases, lower prices charged for Europe Broadband’s existing services as a result of competitive and, to a lesser extent, regulatory factors. Our ability to maintain our organic growth rates for revenue in Europe will also be impacted by Europe Broadband’s ability to migrate customers from analog to digital video services in The Netherlands and successfully grow VoIP telephony services by increasing penetration in markets already launched or launching this product in new markets. Europe Broadband’s operating and SG&A costs are expected to increase on an organic basis in 2006 as a result of higher network operations, customer care and customer acquisitions costs associated primarily with organic RGU growth and the migration of analog video subscribers to digital video services in The Netherlands. In both Japan and Chile, we expect to rely primarily on continued RGU growth to maintain or improve our organic growth rates for revenue and operating cash flow in 2006 as we expect prices charged for all broadband services offered by J:COM and VTR to remain relatively flat. No assurance can be given that our expectations with respect to the factors that will influence our 2006 organic growth rates will not vary from actual results.
The video, telephony and Internet access businesses in which we operate are capital intensive. Significant capital expenditures are required to add customers to our networks, including expenditures for equipment and labor costs. As video, telephony and Internet access technology changes and competition increases, we may need to increase our capital expenditures to further upgrade our systems to remain competitive in markets that might be impacted by the introduction of new technology. No assurance can be given that any such future upgrades could be expected to generate a positive return or that we would have adequate capital available to finance such future upgrades. If we are unable to, or elect not to, pay for costs associated with adding new customers, expanding or upgrading our networks or making our other planned or unplanned capital expenditures, our growth could be limited and our competitive position could be harmed.
Results of Operations
Due in large part to the January 1, 2005 change from the equity method to the consolidation method of accounting for our investment in Super Media/ J:COM, our historical revenue and expenses for 2005 are not comparable to the corresponding 2004 amounts. Additionally, due to the January 1, 2004 change from the equity method to the consolidation method of accounting for our investment in UGC, our historical revenue and expenses for 2004 are not comparable to the corresponding 2003 amounts. Accordingly, 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. 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 2005, 2004 and 2003 are also affected by acquisitions, including our acquisitions of Noos and Chorus during 2004, our acquisitions of Cablecom, NTL Ireland, Astral, Telemach, Zone Vision, and Metrópolis, and J:COM’s acquisitions of Chofu Cable and J:COM Setamachi, during 2005. As we have consolidated UGC since January 1, 2004, the primary effect of the LGI Combination for periods following the June 15, 2005 transaction date has been an increase in depreciation and amortization expense as a result of the application of purchase accounting. In the following discussion, we quantify the impact of acquisitions on our results of operations. The acquisition impact is calculated as the difference between current and prior year amounts that is attributable to the timing of an acquisition.
Changes in foreign currency exchange rates have a significant impact on our operating results as all of our operating segments, except for Puerto Rico, have functional currencies other than the U.S. dollar. Our primary exposure is currently to the euro and Japanese yen. In this regard, 40% and 32% of our U.S. dollar

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revenue during 2005 was derived from subsidiaries whose functional currency is the euro and Japanese yen, respectively. In addition, our operating results are impacted by changes in the exchange rates for the Swiss franc, Chilean peso, Hungarian forint and other local currencies in Europe.
At December 31, 2005, we owned an 80% interest in VTR and, through our interest in Super Media, an indirect 36.75% interest in J:COM. However, as we control both VTR and Super Media/ J:COM, 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 VTR, J:COM and other less significant majority owned subsidiaries are reflected in minority interests in losses (earnings) of subsidiaries, net in our consolidated statements of operations. For additional information, see note 5 to our consolidated financial statements. It should be noted that our ability to consolidate J:COM is dependent on our ability to continue to control Super Media, which will be dissolved in February 2010 unless we and Sumitomo mutually agree to extend the term. If Super Media is dissolved and we do not otherwise control J:COM at the time of any such dissolution, we will no longer be in a position to consolidate J:COM. When reviewing and analyzing our operating results, it is important to keep in mind that other third party entities own significant interests in J:COM and VTR and that Sumitomo effectively has the ability to prevent our company from consolidating J:COM after February 2010.
Discussion and Analysis of our Reportable Segments
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 (i) UGC during 2003 and (ii) J:COM during 2004 and 2003. The revenue, operating expenses, SG&A expenses and operating cash flow of UGC for 2003 and J:COM for 2004 and 2003 are 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. Further, we could not, among other things, cause any non-controlled affiliate to distribute to us our proportionate share of the revenue or operating cash flow of such affiliate. Additionally, our reportable segments have been reclassified for all periods to present our broadband operations in Norway as discontinued operations.
All of the reportable segments set forth below provide broadband communications services, including video, voice and Internet services. The Europe Broadband operating segments provided services in 13 European countries at December 31, 2005. Other Western Europe includes our operating segments in Ireland, Sweden and Belgium. Other Central and Eastern Europe includes our operating segments in Poland, Czech Republic, Slovak Republic, Romania and Slovenia. VTR provides video, voice and Internet access services in Chile. J:COM provides video, voice and Internet access services in Japan. Our corporate and other category includes (i) certain less significant operating segments that provide DTH satellite services in Australia, and video programming and other services in Europe and Argentina, broadband communication services in Puerto Rico, Brazil and Peru, and (ii) our corporate segment. Intersegment eliminations primarily represents the elimination of intercompany transactions between Europe Broadband and chellomedia.
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 21 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) as well as an analysis of operating cash flow by reportable segment for 2005, as compared to 2004, and 2004, as compared to 2003. 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, (iii) the percentage change from period to period, after removing foreign currency effects (FX), and (iv) the percentage change from period to

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period, after removing FX and the effects of acquisitions. The comparisons that exclude FX assume that exchange rates remained constant during the periods that are included in each table. As discussed under Quantitative and Qualitative Disclosures about Market Risk below, we have significant exposure to movements in foreign currency rates.
As discussed above, acquisitions have significantly affected the comparability of the results of operations of our reportable segments. 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, 2005 and 2004
                                                       
                    Increase (decrease)
                    excluding
             
    Year Ended December 31,   Increase (decrease)       FX and
                acquisitions
    2005   2004   $   %   FX %   %
                         
    amounts in thousands, except % amounts
Europe (Europe Broadband)
                                               
 
The Netherlands
  $ 780,934     $ 730,483     $ 50,451       6.9       6.9       6.9  
 
Switzerland
    122,078             122,078       N.M.       N.M.        
 
France
    513,762       312,948       200,814       64.2       64.2       6.5  
 
Austria
    322,196       306,479       15,717       5.1       5.0       5.0  
 
Other Western Europe
    321,377       174,389       146,988       84.3       85.1       7.0  
                                     
   
Total Western Europe
    2,060,347       1,524,299       536,048       35.2       35.2       6.4  
                                     
 
Hungary
    281,707       217,429       64,278       29.6       27.7       27.7  
 
Other Central and Eastern Europe
    370,560       252,064       118,496       47.0       35.6       13.9  
                                     
   
Total Central and Eastern Europe
    652,267       469,493       182,774       38.9       31.9       20.3  
                                     
     
Total Europe (Europe Broadband)
    2,712,614       1,993,792       718,822       36.1       34.5       9.7  
Japan (J:COM)
    1,662,105       1,504,709       157,396       10.5       13.5       11.0  
Chile (VTR)
    444,161       299,951       144,210       48.1       35.6       17.6  
Corporate and other
    407,564       285,507       122,057       42.8       43.2       20.7  
Intersegment eliminations
    (75,112 )     (47,361 )     (27,751 )     (58.6 )     (58.9 )     (58.9 )
                                     
Total LGI before elimination of equity affiliates
    5,151,332       4,036,598       1,114,734                          
Elimination of equity affiliate (J:COM)
          (1,504,709 )     1,504,709                          
                                     
 
Total consolidated LGI
  $ 5,151,332     $ 2,531,889     $ 2,619,443                          
                                     
 
N.M. — Not Meaningful
The Netherlands. The Netherlands’ revenue increased 6.9% during 2005, as compared to 2004, on both a U.S. dollar and local currency basis. The majority of the local currency increase during 2005 is attributable to higher average RGUs, as increases in broadband Internet and telephony RGUs were only partially offset by declines in video RGUs. Higher ARPU also contributed to the local currency increase during 2005. The increase in ARPU reflects the net effect of the positive impact of rate increases in January 2005 for video services and the negative impact of decreases in ARPU from broadband Internet 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 broadband Internet RGUs, resulted in a 2.6% decrease in The Netherlands’ revenue from broadband Internet services during 2005, as compared to 2004. We believe that the competitive factors that gave rise to the decline in The Netherlands’ broadband Internet revenue during 2005 will continue to impact our ability to increase broadband Internet revenue in The Netherlands during 2006.

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In October 2005, we initiated a program to migrate substantially all of our analog video subscribers to digital video services in The Netherlands by providing digital set-top boxes to analog video subscribers at no charge and discounting the digital video services for a limited period of time following subscriber acceptance of the digital set-top box. To the extent that digital video subscribers are retained after the promotional pricing period has elapsed, we will experience an increase in ARPU derived from video services in The Netherlands. No assurance can be given as to the percentage of new digital video subscribers that will be retained after the promotional period has elapsed, and accordingly, as to the impact of this program on our future operating results.
Certain rate increases implemented by UPC NL in The Netherlands had been under investigation by NMA, the Dutch competition authority. On September 28, 2005, the NMA informed UPC NL that it had closed its investigation with respect to the price increases for our analog video services in 2003-2005. The NMA concluded that our price increases were not excessive and therefore UPC NL did not abuse what NMA views as our dominant position in the analog video services market. The incumbent telecommunications operator in The Netherlands has filed an appeal of the NMA decision. UPC NL believes the appeal is inadmissible. The NMA is expected to make a decision during the first quarter of 2006. In another matter, OPTA, the Dutch national regulatory agency, had proposed imposing retail price regulation on a cost oriented basis for UPC NL’s analog cable television offerings and requiring the unbundling of analog video services from other services. Following consultation with the European Commission, OPTA’s proposal was approved on the basis that it would be limited to a period of one year and that OPTA will only intervene if price increases exceed the CPI increase. After 2006, OPTA may again seek approval from the European Commission to maintain or expand its regulatory powers in this retail market. Adverse outcomes from future regulatory initiatives by OPTA could have a significant negative impact on UPC NL’s ability to maintain or increase its revenue in The Netherlands. For additional information, see note 20 to our consolidated financial statements.
France. France’s revenue increased $200,814,000 during 2005, as compared to 2004. The effect of the July 1, 2004 Noos acquisition accounted for $180,734,000 of the 2005 increase. Excluding the increase associated with the Noos acquisition and foreign exchange rate fluctuations, France’s revenue increased $20,198,000 or 6.5% during 2005, as compared to 2004. The majority of the local currency increase is attributable to increases in the average number of broadband Internet, telephony and digital video RGUs during 2005. Higher ARPU resulting primarily from growth in France’s digital video and broadband Internet services also contributed to the increase.
Austria. Austria’s revenue increased 5.1% during 2005, as compared to 2004. Excluding the effects of foreign exchange rate fluctuations, Austria’s revenue increased $15,324,000 or 5.0%. This increase is primarily attributable to increases in the average number of broadband Internet RGUs during 2005. A slight increase in ARPU also contributed to the increase during 2005. The increase in ARPU reflects 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, due primarily to increased competition.
Other Western Europe. Other Western Europe’s revenue increased $146,988,000 during 2005, as compared to 2004. The effects of the Chorus and NTL Ireland acquisitions accounted for $136,317,000 of such increase. Excluding the increases associated with these transactions and foreign exchange rate fluctuations, Other Western Europe’s revenue increased $12,127,000 or 7.0% during 2005, as compared to 2004. The increase during 2005 is due primarily to an increase in ARPU and, to a somewhat lesser extent, increases in the average number of broadband Internet and digital video RGUs. The increase in ARPU is primarily due to increases in the proportion of video subscribers selecting the digital product.
Hungary. Hungary’s revenue increased 29.6% during 2005, as compared to 2004. Excluding the effects of foreign exchange rate fluctuations, such increase was $60,228,000 or 27.7%. The majority of this increase is attributable to higher ARPU, due primarily to rate increases in January 2005 for video services. Increases in the average number of broadband Internet, telephony and DTH RGUs and, to a lesser extent, analog RGUs, also contributed significantly to the increase during 2005. The increase in telephony RGUs was primarily

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driven by VoIP telephony sales. Approximately one fifth of the overall local currency increase during 2005 relates to growth in the comparatively low margin telephony transit service business. Due to the expiration of the contract for telephony transit service this revenue may not recur in 2006.
Other Central and Eastern Europe. Other Central and Eastern Europe’s revenue increased $118,496,000 during 2005, as compared to 2004. The effects of the Telemach and Astral acquisitions and another less significant acquisition accounted for $54,658,000 of such increase. Excluding the increases associated with these acquisitions and foreign exchange rate fluctuations, Other Central and Eastern Europe’s revenue increased $35,036,000 or 13.9% during 2005, as compared to 2004. The majority of the increase is attributable to growth in average RGUs. Higher ARPU also contributed significantly to the increase in 2005. 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.
Japan (J:COM). J:COM’s revenue increased $157,396,000 during 2005, as compared to 2004. The effect of the Chofu Cable and J:COM Setamachi acquisitions and another less significant acquisition accounted for approximately $37,696,000 of such increase. Excluding the increases associated with these acquisitions and the effects of foreign exchange rate fluctuations, J:COM’s revenue increased $165,518,000 or 11.0% during 2005, as compared to 2004. This increase is primarily attributable to increases in the average number of telephony, broadband Internet and video RGUs during 2005, as compared to 2004. The effect of J:COM’s RGU growth was partially offset during 2005 by lower ARPU. The lower ARPU is attributable to the negative effects of a decrease in customer call volumes, an increase in the amount of bundling discounts as a result of a higher number of services per household and lower installation revenue. The negative effects of these factors on ARPU were partially 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. The lower installation revenue is primarily attributable to an increase in promotional discounts offered to new customers, partially offset by an increase in the number of installations performed.
Chile (VTR). VTR’s revenue increased $144,210,000 during 2005, as compared to 2004. The estimated effects of the Metrópolis acquisition accounted for approximately $53,972,000 of such increase. Excluding the increase associated with the Metrópolis acquisition and foreign exchange rate fluctuations, VTR’s revenue increased $52,791,000 or 17.6% during 2005, as compared to 2004. This increase is due primarily to growth in the average number of VTR’s broadband Internet, telephony and video RGUs. Higher ARPU also contributed to the increase.

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Revenue — Years ended December 31, 2004 and 2003
                                                       
                    Increase (decrease)
                    excluding
             
    Year Ended December 31,   Increase (decrease)       FX and
                acquisitions
    2004   2003   $   %   FX %   %
                         
    amounts in thousands, except % amounts
Europe (Europe Broadband)
                                               
 
The Netherlands
  $ 730,483     $ 617,488     $ 112,995       18.3       7.7       7.7  
 
France
    312,948       113,842       199,106       174.9       150.2       3.1  
 
Austria
    306,479       266,387       40,092       15.1       4.7       4.7  
 
Other Western Europe
    174,389       106,962       67,427       63.0       52.4       6.8  
                                     
   
Total Western Europe
    1,524,299       1,104,679       419,620       38.0       26.0       6.4  
                                     
 
Hungary
    217,429       165,310       52,119       31.5       18.8       18.8  
 
Other Central and Eastern Europe
    252,064       197,108       54,956       27.9       18.6       18.6  
                                     
   
Total Central and Eastern Europe
    469,493       362,418       107,075       29.5       18.7       18.7  
                                     
     
Total Europe (Europe Broadband)
    1,993,792       1,467,097       526,695       35.9       24.2       9.4  
Japan (J:COM)
    1,504,709       1,233,492       271,217       22.0       12.7       12.7  
Chile (VTR)
    299,951       229,835       70,116       30.5       15.8       15.8  
Corporate and other
    285,507       263,020       22,487       8.5       3.2       3.2  
Intersegment eliminations
    (47,361 )     (55,169 )     7,808       14.2       21.9       21.9  
                                     
Total LGI before elimination of equity affiliates
    4,036,598       3,138,275       898,323                          
Elimination of equity affiliates
    (1,504,709 )     (3,029,885 )     1,525,176                          
                                     
 
Total consolidated LGI
  $ 2,531,889     $ 108,390     $ 2,423,499                          
                                     
The Netherlands. The Netherlands’ revenue increased 18.3% in 2004, as compared to 2003. Excluding the effects of foreign exchange rate fluctuations, such increase was 7.7%. This increase is primarily attributable to an increase in ARPU, due primarily to higher average rates for video services and the increased penetration of broadband Internet services. These factors were somewhat offset by reduced tariffs for telephony services as lower outbound interconnect rates were passed through to the customer to maintain the product at a competitive level in the market. The average number of RGUs in 2004 was slightly higher than the comparable number in 2003 as increases in broadband Internet and telephony RGUs were largely offset by a decline in video RGUs.
France. France’s revenue increased 174.9% in 2004, as compared to 2003. The effect of the Noos acquisition on July 1, 2004 accounted for $167,524,000 of the increase. Excluding the increase associated with the Noos acquisition and foreign exchange rate fluctuations, France’s revenue increased $3,529,000 or 3.1% during 2004, as compared to 2003. This increase is primarily attributable to an increase in the average RGUs in 2004, as compared to 2003. Video, broadband Internet and telephony services all contributed to this increase. A decrease in the ARPU from telephony services partially offset the positive impact of the RGU increases. The lower telephony revenue is attributable to lower tariffs from telephony services, as lower outbound interconnect rates were passed through to the customer to maintain the service at a competitive level in the market, as well as reduced outbound telephony traffic as more customers migrate from dial-up Internet access to broadband Internet access and migrate from fixed-line telephone usage to cellular phone usage.
Austria. Austria’s revenue increased 15.1% during 2004, as compared to 2003. Excluding the effects of foreign exchange rate fluctuations, such increase was 4.7%. This increase is primarily attributable to growth in

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the average number of RGUs during 2004, as compared to 2003. This subscriber growth is primarily attributable to an increase in broadband Internet service RGUs.
Other Western Europe. Other Western Europe’s revenue increased $67,427,000 during 2004, as compared to 2003. The effects of Chorus accounted for $48,693,000 of such increase. Excluding the increase associated with the Chorus acquisition and foreign exchange rate fluctuations, Other Western Europe’s revenue increased $7,325,000 or 6.8% during 2004, as compared to 2003. This increase is due to increases in both average RGUs and ARPU. Both video and broadband Internet RGUs increased in 2004, as compared to 2003.
Hungary. Hungary’s revenue increased 31.5% during 2004, as compared to 2003. Excluding the effects of foreign exchange rate fluctuations, such increase was 18.8%. This increase is due to increases in both the ARPU and the average number of RGUs in 2004, as compared to 2003, which resulted primarily from growth in direct-to-home satellite distribution (DTH) and analog television services and, to a lesser extent, broadband Internet services.
Other Central and Eastern Europe. Other Central and Eastern Europe’s revenue increased 27.9% during 2004, as compared to 2003. Excluding the effects of foreign exchange rate fluctuations, such increase was 18.6%. This increase is due primarily to an increase in the ARPU and the average number of RGUs, which resulted primarily from the continued successful sale of broadband Internet services. An overall increase in the average number of broadband Internet, analog cable and DTH RGUs in 2004, as compared to 2003, also contributed to the increase.
Japan (J:COM). J:COM’s revenue increased $271,217,000 during 2004, as compared to 2003. Excluding the effects of foreign exchange rate fluctuations, such increase was 12.7%. The local currency increase is primarily attributable to a significant increase in the average number of RGUs in 2004, as compared to 2003. Most of this RGU increase is attributable to growth within J:COM’s telephony and broadband Internet services. An increase in ARPU also contributed to the increase in local currency revenue. The increase in ARPU is primarily attributable to the full-year effect of cable television service price increases implemented during 2003 and increased penetration of J:COM’s higher-priced broadband Internet service. These factors were somewhat offset by a reduction in the price for one of J:COM’s lower-priced broadband Internet services and a decrease in customer call volumes for J:COM’s telephony service.
Chile (VTR). Chile’s revenue increased $70,116,000 during 2004, as compared to 2003. Excluding the effects of foreign exchange rate fluctuations, such increase was 15.8%. This increase is due primarily to growth in the average number of subscribers to video, broadband Internet and telephony services during 2004, as compared to 2003. This RGU growth is due primarily to improved direct sales, mass marketing initiatives and lower subscriber churn. Chile’s ARPU remained relatively flat from period to period.

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Operating Expenses of our Reportable Segments
Operating expenses — Years ended December 31, 2005 and 2004
                                                       
                    Increase (decrease)
                    excluding
             
    Year Ended December 31,   Increase (decrease)       FX and
                acquisitions
    2005   2004   $   %   FX %   %
                         
    amounts in thousands, except % amounts
Europe (Europe Broadband)
                                               
 
The Netherlands
  $ 251,828     $ 205,802     $ 46,026       22.4       22.7       22.7  
 
Switzerland
    51,631             51,631       N.M.       N.M.        
 
France
    257,569       165,489       92,080       55.6       55.5       0.4  
 
Austria
    119,098       115,373       3,725       3.2       3.2       3.2  
 
Other Western Europe
    144,134       71,568       72,566       101.4       102.4       2.4  
                                     
   
Total Western Europe
    824,260       558,232       266,028       47.7       47.9       9.5  
                                     
 
Hungary
    122,073       93,247       28,826       30.9       29.0       29.0  
 
Other Central and Eastern Europe
    145,340       103,255       42,085       40.8       29.9       7.3  
                                     
   
Total Central and Eastern Europe
    267,413       196,502       70,911       36.1       29.5       17.6  
                                     
     
Total Europe (Europe Broadband)
    1,091,673       754,734       336,939       44.6       43.1       11.6  
Japan (J:COM)
    690,127       621,035       69,092       11.1       14.4       11.6  
Chile (VTR)
    177,543       116,131       61,412       52.9       39.8       14.1  
Corporate and other
    291,162       216,386       74,776       34.6       35.0       13.9  
Intersegment eliminations
    (64,990 )     (36,758 )     (28,232 )     (76.8 )     (77.4 )     (77.4 )
                                     
Total LGI before elimination of equity affiliates
    2,185,515       1,671,528       513,987                          
Elimination of equity affiliate (J:COM)
          (621,035 )     621,035                          
                                     
 
Total consolidated LGI
  $ 2,185,515     $ 1,050,493     $ 1,135,022                          
                                     
 
N.M. — Not Meaningful
General. Operating expenses include programming, network operations, customer operations, customer care and other direct costs. Programming costs, which represent a significant portion of our operating costs, are expected to rise in future periods as a result of the expansion of service offerings and the potential for price increases. Any cost increases that we are not able to pass on to our subscribers through service rate increases would result in increased pressure on our operating margins.
Europe Broadband. Europe Broadband’s operating expenses increased $336,939,000 during 2005, as compared to 2004. The aggregate effects of the Noos, Cablecom, NTL Ireland, Chorus, Astral and Telemach acquisitions and another less significant acquisition, accounted for $237,744,000 of such increase. Excluding the increases associated with these acquisitions and foreign exchange rate fluctuations, Europe Broadband’s operating expenses increased $87,407,000 or 11.6% during 2005, as compared to 2004, primarily due to the following factors:
  •  Increases in direct programming and copyright costs of $34,995,000 during 2005 primarily due to subscriber growth on the digital and DTH platforms, and to a lesser extent, increased content, higher intercompany charges from chellomedia for programming and consumer price index rate increases, offset, in part, by the termination of an unfavorable programming contract in May 2005.

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  •  Increases in interconnect costs of $10,913,000 during 2005, primarily due to growth in telephony transit service activity in Hungary and growth in VoIP telephony subscribers in The Netherlands, France, Hungary, Poland and Romania. A portion of the Hungary increase may not recur in 2006 due to the expiration of Hungary’s telephony transit service contract.
 
  •  Increases in salaries and other staff related costs of $24,100,000 during 2005, primarily reflecting increased staffing levels including increased use of temporary personnel, particularly in the customer care and customer operations areas, to sustain the higher levels of activity resulting from:
  •  higher subscriber numbers;
 
  •  the greater volume of calls per subscriber in The Netherlands and elsewhere that the increased proportion of digital video, broadband Internet and telephony subscribers give rise to compared to an analog video subscriber;
 
  •  The Netherlands’ program to migrate subscribers from analog video to digital video services, which was launched in October 2005 and is expected to continue throughout 2006;
 
  •  increased customer service standard levels; and
 
  •  annual wage increases.
  •  Increases in network related expenses of $8,515,000 during 2005, primarily driven by higher costs in The Netherlands and Hungary.
 
  •  Increases in bad debt and collection expenses of $4,896,000 due largely to the significant increase in revenue.
 
  •  Increases in outsourced labor and consultancy fees of $4,000,000 during 2005, driven by projects to increase service levels, network improvements and development of new products in certain of our operations, primarily the launch of mass-market digital service in The Netherlands.
Japan (J:COM). J:COM’s operating expenses increased $69,092,000 during 2005, as compared to 2004. The effects of the Chofu Cable and J:COM Setamachi acquisitions and another less significant acquisition accounted for approximately $16,890,000 of such increase. Excluding the increases associated with these acquisitions and the effects of foreign exchange rate fluctuations, J:COM’s operating expenses increased $72,040,000 or 11.6% during 2005, as compared to 2004. This increase primarily is due to increases of (i) $23,708,000 in salaries and other staff related costs as a result of increased staffing levels; (ii) $22,814,000 in programming and related costs as a result of growth in the number of digital video customers; and (iii) $10,988,000 in telephony interconnect costs due primarily to growth in telephony customers. Increases in network operating expenses, maintenance and technical support costs associated with RGU growth and the expansion of J:COM’s network and the effects of other individually insignificant items accounted for the remaining increase.
Chile (VTR). VTR’s operating expenses increased $61,412,000 during 2005, as compared to 2004. The estimated effects of the Metrópolis acquisition accounted for approximately $29,834,000 of such increase. Excluding the increase associated with the Metrópolis acquisition and foreign exchange rate fluctuations, VTR’s operating expenses increased $16,374,000 or 14.1% during 2005, as compared to 2004. This increase, which is primarily attributable to growth in VTR’s subscriber base, includes (i) increases in labor and other staff related costs; (ii) increases in local and cellular access charges, due primarily to an increase in customer traffic, and in the case of local access charges, an increase in rates and (iii) increases in technical service and maintenance costs.

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Operating expenses — Years ended December 31, 2004 and 2003
                                                       
                    Increase (decrease)
                    excluding
             
    Year Ended December 31,   Increase (decrease)       FX and
                acquisitions
    2004   2003   $   %   FX %   %
                         
    amounts in thousands, except % amounts
Europe (Europe Broadband)
                                               
 
The Netherlands
  $ 205,802     $ 204,186     $ 1,616       0.8       (8.5 )     (8.5 )
 
France
    165,489       64,676       100,813       155.9       132.4       3.7  
 
Austria
    115,373       100,720       14,653       14.5       4.0       4.0  
 
Other Western Europe
    71,568       36,505       35,063       96.0       84.8       9.6  
                                     
   
Total Western Europe
    558,232       406,087       152,145       37.5       25.4       (1.8 )
                                     
 
Hungary
    93,247       73,800       19,447       26.4       13.8       13.8  
 
Other Central and Eastern Europe
    103,255       83,529       19,726       23.6       14.4       14.4  
                                     
   
Total Central and Eastern Europe
    196,502       157,329       39,173       24.9       14.1       14.1  
                                     
     
Total Europe (Europe Broadband)
    754,734       563,416       191,318       34.0       22.3       2.6  
Japan (J:COM)
    621,035       542,242       78,793       14.5       5.7       5.7  
Chile (VTR)
    116,131       96,965       19,166       19.8       5.9       5.9  
Corporate and other
    216,386       189,681       26,705       14.1       7.2       7.2  
Intersegment eliminations
    (36,758 )     (45,505 )     8,747       19.2       26.6       26.6  
                                     
Total LGI before elimination of equity affiliates
    1,671,528       1,346,799       324,729                          
Elimination of equity affiliates
    (621,035 )     (1,284,023 )     662,988                          
                                     
 
Total consolidated LGI
  $ 1,050,493     $ 62,776     $ 987,717                          
                                     
Europe Broadband. Europe Broadband’s operating expenses increased $191,318,000 during 2004, as compared to 2003. The aggregate effects of the Noos and Chorus acquisitions accounted for $110,661,000 of such increase. Excluding the increases associated with these acquisitions and foreign exchange rate fluctuations, Europe Broadband’s operating expenses increased $14,830,000 or 2.6% during 2004, as compared to 2003, primarily due to the following factors:
  •  an increase in customer operation expenses as a result of higher numbers of new and reconnecting subscribers during 2004, as compared to 2003. This higher activity level required Europe Broadband to hire additional staff and use outsourced contractors;
 
  •  an increase in direct programming costs related to subscriber growth and, in certain markets, an increase in channels on the analog and digital platforms;
 
  •  a decrease due to net cost reductions across network operations, customer care and billing and collection activities. These reductions were due to improved cost controls across all aspects of the business, including more effective procurement of support services, lower billing and collections charges, with bad debt charges in particular reduced in The Netherlands, and the increased operational leverage of the business;
 
  •  an increase in intercompany costs for broadband Internet services under the revenue sharing agreement between Europe Broadband and chellomedia;
 
  •  a decrease related to reduced telephony direct costs in 2004, as compared to 2003, primarily due to decreases in outbound interconnect rates;

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  •  an increase due to annual wage increases; and
 
  •  a decrease due to cost savings in The Netherlands resulting from a restructuring plan implemented in the second quarter of 2004 whereby the management structure was changed from a three-region model to a centralized management organization.
Japan (J:COM). J:COM’s operating expenses increased $78,793,000 during 2004, as compared to 2003. Excluding the effects of foreign exchange fluctuations, such increase was $30,908,000 or 5.7%. These local currency increases primarily are due to an increase in programming costs as a result of subscriber growth and improved service offerings. Increases in network maintenance and technical support costs associated with the expansion of J:COM’s network also contributed to the increases.
Chile (VTR). VTR’s operating expenses increased $19,166,000 during 2004, as compared to 2003. Excluding the effects of foreign exchange fluctuations, such increase was $5,721,000 or 5.9%. The local currency increase primarily is due to increases in (i) domestic and international access charges, (ii) programming costs, and (iii) the cost of maintenance and technical services. Such increased costs were largely driven by RGU growth.
SG&A Expenses of our Reportable Segments
SG&A expenses — Years ended December 31, 2005 and 2004
                                                       
                    Increase (decrease)
                    excluding
             
    Year Ended December 31,   Increase (decrease)       FX and
                acquisitions
    2005   2004   $   %   FX %   %
                         
    amounts in thousands, except % amounts
Europe (Europe Broadband)
                                               
 
The Netherlands
  $ 168,182     $ 148,943     $ 19,239       12.9       12.9       12.9  
 
Switzerland
    26,922             26,922       N.M.       N.M.        
 
France
    158,946       101,685       57,261       56.3       56.8       6.1  
 
Austria
    65,851       68,799       (2,948 )     (4.3 )     (4.1 )     (4.1 )
 
Other Western Europe
    66,075       39,141       26,934       68.8       70.0       9.5  
                                     
   
Total Western Europe
    485,976       358,568       127,408       35.5       35.8       7.3  
                                     
 
Hungary
    51,256       41,727       9,529       22.8       21.7       21.7  
 
Other Central and Eastern Europe
    77,950       54,331       23,619       43.5       32.6       15.6  
                                     
   
Total Central and Eastern Europe
    129,206       96,058       33,148       34.5       27.8       18.3  
                                     
     
Total Europe (Europe Broadband)
    615,182       454,626       160,556       35.3       34.1       9.6  
Japan (J:COM)
    335,681       294,077       41,604       14.1       17.3       13.0  
Chile (VTR)
    115,168       75,068       40,100       53.4       40.3       18.9  
Corporate and other
    139,063       120,518       18,545       15.4       16.6       13.4  
Inter-segment eliminations
    (10,122 )     (10,603 )     481       4.5       4.8       4.8  
                                     
Total LGI before elimination of equity affiliates
    1,194,972       933,686       261,286                          
Elimination of equity affiliate (J:COM)
          (294,077 )     294,077                          
                                     
 
Total consolidated LGI
  $ 1,194,972     $ 639,609     $ 555,363                          
                                     
 
N.M. — Not Meaningful
General. SG&A expenses include human resources, information technology, general services, management, finance, legal and marketing costs and other general expenses.

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Europe Broadband. Europe Broadband’s SG&A expenses increased $160,556,000 during 2005, as compared to 2004. The aggregate effects of the Noos, Cablecom, NTL Ireland, Chorus, Astral, and Telemach acquisitions, and another less significant acquisition, accounted for $111,405,000 of such increase. Excluding the increases associated with these acquisitions and foreign exchange rate fluctuations, Europe Broadband’s SG&A expenses increased $43,816,000 or 9.6% during 2005, as compared to 2004, primarily due to:
  •  Increases in sales and marketing expenses and commissions of $28,320,000 during 2005, reflecting the cost of marketing campaigns designed to promote RGU growth, and support the growth of VoIP telephony services, and the launch of mass-market digital video services in The Netherlands. An increase in the number of gross subscriber additions for broadband Internet and telephony services, particularly in The Netherlands, also contributed to the increase.
 
  •  Increases in salaries and other staff related costs of $8,243,000 during 2005, reflecting increased staffing levels, particularly in The Netherlands, in sales and marketing and information technology functions, as well as annual wage increases.
 
  •  Increase in outsourced labor and consultancy cost of $7,083,000 during 2005, reflecting the development of new products in certain of our operations, primarily the launch of mass-market digital service in The Netherlands.
The increase in Europe Broadband’s SG&A expenses were partially offset by decreases in certain SG&A expenses, primarily the decrease of audit and legal expenses of $9,604,000 reflecting the conclusion of certain litigation and lower fees attributable to our internal controls attestation process.
Japan (J:COM). J:COM’s SG&A expenses increased $41,604,000 during 2005, as compared to 2004. The effects of the Chofu Cable and J:COM Setamachi acquisitions and another less significant acquisition accounted for approximately $12,660,000 of such increase. Excluding the increase associated with these acquisitions and the effects of foreign exchange rate fluctuations, J:COM’s SG&A expenses increased $38,230,000 or 13.0% during 2005, as compared to 2004. This increase primarily is attributable to increases in labor and related overhead costs associated with an increase in the scope of J:COM’s business. The increase also reflects higher marketing, advertising and promotional costs, including costs incurred in connection with J:COM’s rebranding initiative during the first half of 2005.
Chile (VTR). VTR’s SG&A expenses increased $40,100,000 during 2005, as compared to 2004. The estimated effects of the Metrópolis acquisition accounted for approximately $16,057,000 of such increase. Excluding the increase associated with the Metrópolis acquisition and foreign exchange rate fluctuations, VTR’s SG&A expenses increased $14,188,000 or 18.9% during 2005, as compared to 2004. This increase, which is largely attributable to growth in VTR’s subscriber base, reflects increases in labor and related costs and in sales commissions.

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SG&A expenses — Years ended December 31, 2004 and 2003
                                                       
                    Increase (decrease)
                    excluding
             
    Year Ended December 31,   Increase (decrease)       FX and
                acquisitions
    2004   2003   $   %   FX %   %
                         
    amounts in thousands, except % amounts
Europe (Europe Broadband)
                                               
 
The Netherlands
  $ 148,943     $ 126,357     $ 22,586       17.9       7.0       7.0  
 
France
    101,685       37,231       64,454       173.1       147.9       9.5  
 
Austria
    68,799       57,714       11,085       19.2       8.2       8.2  
 
Other Western Europe
    39,141       24,254       14,887       61.4       50.0       10.7  
                                     
   
Total Western Europe
    358,568       245,556       113,012       46.0       32.9       8.0  
                                     
 
Hungary
    41,727       31,029       10,698       34.5       21.0       21.0  
 
Other Central and Eastern Europe
    54,331       46,917       7,414       15.8       7.0       7.0  
                                     
   
Total Central and Eastern Europe
    96,058       77,946       18,112       23.2       12.6       12.6  
                                     
     
Total Europe (Europe Broadband)
    454,626       323,502       131,124       40.5       28.0       9.1  
Japan (J:COM)
    294,077       262,932       31,145       11.8       3.5       3.5  
Chile (VTR)
    75,068       62,919       12,149       19.3       6.3       6.3  
Corporate and other
    120,518       111,693       8,825       7.9       1.6       1.6  
Intersegment eliminations
    (10,603 )     (9,664 )     (939 )     (9.7 )     (0.8 )     (0.8 )
                                     
Total LGI before elimination of equity affiliates
    933,686       751,382       182,304                          
Elimination of equity affiliates
    (294,077 )     (723,515 )     429,438                          
                                     
 
Total consolidated LGI
  $ 639,609     $ 27,867     $ 611,742                          
                                     
Europe Broadband. Europe Broadband’s SG&A expenses increased $131,124,000 during 2004, as compared to 2003. The aggregate effects of the Noos and Chorus acquisitions accounted for $61,061,000 of such increase. Excluding the increases associated with these acquisitions and foreign exchange rate fluctuations, Europe Broadband’s SG&A expenses increased $29,521,000, or 9.1% during 2004, as compared to 2003, primarily due to:
  •  an increase in marketing expenditures to support subscriber growth and new digital programming services, particularly in The Netherlands;
 
  •  annual wage increases; and
 
  •  increased consulting and other information technology support costs associated with the implementation of new customer care systems in several countries and a subscriber management system in Austria.
These increases were partially offset by continuing cost control across all aspects of the business and cost savings resulting from The Netherlands’ restructuring that was implemented during the second quarter of 2004.
Japan (J:COM). J:COM’s SG&A expenses increased $31,145,000 during 2004, as compared to 2003. Excluding the effects of foreign exchange rate fluctuations, such increase was $9,203,000 or 3.5% during 2004, as compared to 2003. This local currency increase primarily is attributable to the net effect of (i) increased labor and other overhead costs associated primarily with increases in J:COM’s RGUs, and (ii) reduced marketing personnel and advertising and promotion expenses.
Chile (VTR). VTR’s SG&A expenses increased $12,149,000 during 2004, as compared to 2003. Excluding the effects of foreign exchange rate fluctuations, such increase was $3,964,000 or 6.3%. The local currency

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increase primarily is due to (i) an increase in commissions as a result of subscriber growth, (ii) an increase in marketing costs in response to increased competition, (iii) annual wage increases, and (iv) higher legal, accounting and other professional advisory fees due in part to the initiation of our internal controls attestation process. The impact of the foregoing items was partially offset by a one-time credit of $4,695,000 in December 2004 for the reversal of accrued withholding tax as a result of the forgiveness of management fees payable to UGC.
Operating Cash Flow of our Reportable Segments
Operating cash flow is the primary measure used by our chief operating decision maker to evaluate segment operating performance and to decide how to allocate resources to segments. As we use the term, operating cash flow is defined as revenue less operating and SG&A expenses (excluding depreciation and amortization, stock-based compensation and impairment, restructuring and other operating charges or credits). We believe operating cash flow is meaningful because it provides investors a means to evaluate the operating performance of our segments and our company on an ongoing basis using criteria that is used by our internal decision makers. Our internal decision makers believe operating cash flow is a meaningful measure and is superior to other available GAAP measures because it represents a transparent view of our recurring operating performance and allows management to readily view operating trends, perform analytical comparisons and benchmarking between segments in the different countries in which we operate and identify strategies to improve operating performance. For example, our internal decision makers believe that the inclusion of impairment and restructuring charges within operating cash flow would distort the ability to efficiently assess and view the core operating trends in our segments. In addition, our internal decision makers believe our measure of operating cash flow is important because analysts and investors use it to compare our performance to other companies in our industry. For a reconciliation of total segment operating cash flow to our consolidated earnings (loss) before income taxes, minority interests and discontinued operations, see note 21 to our consolidated financial statements. Investors should view operating cash flow as a measure of operating performance that is a supplement to, and not a substitute for, operating income, net earnings, cash flow from operating activities and other GAAP measures of income.

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Operating Cash Flow — Years ended December 31, 2005 and 2004
                                                       
                    Increase (decrease)
                    excluding
             
    Year Ended December 31,   Increase (decrease)       FX and
                acquisitions
    2005   2004   $   %   FX %   %
                         
    amounts in thousands, except % amounts
Europe (Europe Broadband)
                                               
 
The Netherlands
  $ 360,924     $ 375,738     $ (14,814 )     (3.9 )     (4.2 )     (4.2 )
 
Switzerland
    43,525             43,525       N.M.       N.M.        
 
France
    97,247       45,774       51,473       112.5       111.4       28.8  
 
Austria
    137,247       122,307       14,940       12.2       11.9       11.9  
 
Other Western Europe
    111,168       63,680       47,488       74.6       74.9       10.5  
                                     
   
Total Western Europe
    750,111       607,499       142,612       23.5       23.2       3.1  
                                     
 
Hungary
    108,378       82,455       25,923       31.4       29.1       29.1  
 
Other Central and Eastern Europe
    147,270       94,478       52,792       55.9       43.5       20.1  
                                     
   
Total Central and Eastern Europe
    255,648       176,933       78,715       44.5       36.8       24.3  
                                     
     
Total Europe (Europe Broadband)
    1,005,759       784,432       221,327       28.2       26.3       7.9  
Japan (J:COM)
    636,297       589,597       46,700       7.9       10.7       9.3  
Chile (VTR)
    151,450       108,752       42,698       39.3       27.7       20.3  
Corporate and other
    (22,661 )     (51,397 )     28,736       55.9       55.3       26.6  
                                     
Total LGI before elimination of equity affiliates
    1,770,845       1,431,384       339,461                          
Elimination of equity affiliate (J:COM)
          (589,597 )     589,597                          
                                     
 
Total
  $ 1,770,845     $ 841,787     $ 929,058                          
                                     
 
N.M. — Not Meaningful
On a local currency basis, Europe Broadband and VTR, and to a lesser extent, J:COM experienced declines in their respective 2005 operating cash flow margins (operating cash flow divided by revenue). We expect that Europe Broadband’s overall operating cash flow margins will improve slightly in 2006 as the positive effects of (i) cost reductions and efficiencies resulting from the integration of our 2005 acquisitions and (ii) higher utilization of customer fulfillment and billing platforms are expected to more than offset the negative effects of (i) increased direct costs associated with new voice and digital video customers, (ii) higher customer acquisition costs associated with RGU growth and (iii) the continuing effects of increased competition. In The Netherlands, our program to migrate subscribers from analog to digital video services, our ongoing launch of VoIP, and competitive factors are expected to adversely impact operating cash flow margins during 2006. J:COM management expects that J:COM’s operating cash flow margin will be somewhat negatively impacted by (i) increased programming costs related to increased high definition television content and anticipated increases in digital video subscribers, (ii) the negative initial impact on margins of recent acquisitions, and (iii) costs associated with new initiatives. In Chile, we expect that operating cash flow margins will improve somewhat in 2006 if we are able to continue to achieve efficiencies and cost reductions from the integration of the operations of VTR and Metrópolis. No assurance can be given that our expectations with respect to operating cash flow margins will not vary from actual results. For additional discussion of the factors contributing to the changes in operating cash flow of our reportable segments, see the above analyses of revenue, operating expenses and SG&A expenses.

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Operating Cash Flow — Years ended December 31, 2004 and 2003
                                                       
                    Increase (decrease)
                    excluding
             
    Year Ended December 31,   Increase (decrease)       FX and
                acquisitions
    2004   2003   $   %   FX %   %
                         
    amounts in thousands, except % amounts
Europe (Europe Broadband)
                                               
 
The Netherlands
  $ 375,738     $ 286,945     $ 88,793       30.9       19.5       19.5  
 
France
    45,774       11,935       33,839       283.5       255.5       (21.0 )
 
Austria
    122,307       107,953       14,354       13.3       3.5       3.5  
 
Other Western Europe
    63,680       46,203       17,477       37.8       28.0       2.6  
                                     
   
Total Western Europe
    607,499       453,036       154,463       34.1       22.8       12.9  
                                     
 
Hungary
    82,455       60,481       21,974       36.3       23.8       23.8  
 
Other Central and Eastern Europe
    94,478       66,662       27,816       41.7       31.8       31.8  
                                     
   
Total Central and Eastern Europe
    176,933       127,143       49,790       39.2       28.0       28.0  
                                     
     
Total Europe (Europe Broadband)
    784,432       580,179       204,253       35.2       23.9       16.2  
Japan (J:COM)
    589,597       428,318       161,279       37.7       27.2       27.2  
Chile (VTR)
    108,752       69,951       38,801       55.5       38.0       38.0  
Corporate and other
    (51,397 )     (38,354 )     (13,043 )     (34.0 )     (17.7 )     (17.7 )
                                     
Total LGI before elimination of equity affiliates
    1,431,384       1,040,094       391,290                          
Elimination of equity affiliates
    (589,597 )     (1,022,347 )     432,750                          
                                     
 
Total
  $ 841,787     $ 17,747     $ 824,040                          
                                     

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Discussion and Analysis of our Historical Operating Results
Years ended December 31, 2005 and 2004
General
As noted above, the effects of our January 1, 2005 consolidation of Super Media/ J:COM, and acquisitions have affected the comparability of our results of operations during 2005 and 2004. Unless otherwise indicated in the discussion below, the significant increases in our historical revenue, expenses and other items during 2005, as compared to 2004, are primarily attributable to the effects of these transactions. For more detailed explanations of the changes in our revenue, operating expenses and SG&A expenses, see the Discussion and Analysis of Reportable Segments that appears above.
Revenue
Our total consolidated revenue increased $2,619,443,000 during 2005, as compared to 2004. The effects of acquisitions and the consolidation of Super Media/ J:COM accounted for $2,274,023,000 of such increase. Excluding the effects of these transactions and foreign exchange rate fluctuations, total consolidated revenue increased $277,312,000 or 11.0% during 2005, as compared to 2004. As discussed in greater detail under Discussion and Analysis of Reportable Segments above, most of these increases are attributable to RGU growth.
Operating expense
Our total consolidated operating expense increased $1,135,022,000 during 2005, as compared to 2004. The effects of acquisitions and the consolidation of Super Media/ J:COM accounted for $1,003,367,000 of such increase. Excluding the effects of these transactions and foreign exchange rate fluctuations, total consolidated operating expense increased $105,315,000 or 10.0% during 2005, as compared to 2004. As discussed in more detail under Discussion and Analysis of Reportable Segments above, these increases generally reflect increases in (i) programming costs, (ii) labor costs, (iii) interconnect costs, and (iv) less significant increases in other expense categories. Most of these increases are a function of increased volumes or levels of activity associated with the increase in our customer base.
SG&A expense
Our total consolidated SG&A expense increased $555,363,000 during 2005, as compared to 2004. The effects of acquisitions and the consolidation of Super Media/ J:COM accounted for $466,971,000 of such increase. Excluding the effects of these transactions and foreign exchange rate fluctuations, total consolidated SG&A expense increased $74,631,000 or 11.7% during 2005, as compared to 2004. As discussed in more detail under Discussion and Analysis of Reportable Segments above, these increases generally reflect increases in (i) marketing, advertising and commissions and (ii) labor costs. The increases in our marketing, advertising and commissions expenses primarily are attributable to our efforts to increase our RGUs and launch new product initiatives. The increases in our labor costs primarily are a function of the increased levels of activity associated with the increase in our customer base.
Stock-based compensation expense
A summary of our stock-based compensation expense is set forth below:
                   
    Year Ended December 31,
     
    2005   2004
         
    amounts in thousands
LGI common stock
  $ 29,011     $ 135,455  
J:COM common stock
    23,147       7,221  
Other
    7,073        
             
 
Total
  $ 59,231     $ 142,676  
             

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We record stock-based compensation that is associated with LGI common stock, J:COM common stock, and certain other subsidiary common stock. The stock-based compensation expense associated with J:COM common stock consists of the amounts recorded by J:COM pursuant to its stock compensation plans, and amounts recorded by LGI with respect to LGI’s subsidiary stock plan pursuant to which certain LGI officers have an indirect interest in J:COM. As a result of adjustments to certain terms of the former UGC and LMI stock incentive awards in connection with (i) their respective rights offerings in February 2004 and July 2004 and (ii) the LGI Combination in June 2005, most of the LGI stock incentive awards outstanding at December 31, 2005 are accounted for as variable-plan awards. The stock-based compensation expense for 2004 includes a $50,409,000 charge to reflect a change from fixed-plan accounting to variable-plan accounting as a result of modifications to the terms of UGC stock options in connection with UGC’s February 2004 rights offering. Other fluctuations in our stock-based compensation expense during 2005 are largely a function of changes in the market price of the underlying common stock. The increase in J:COM stock-based compensation expense is primarily attributable to an increase in J:COM’s stock price since its IPO in March 2005. Due to the use of variable-plan accounting for most of the outstanding LGI and J:COM stock incentive awards, stock-based compensation expense with respect to such stock incentive awards is subject to adjustment in future periods based on the market value of the underlying common stock and vesting schedules, and ultimately on the final determination of market value when the incentive awards are exercised. For additional information concerning stock-based compensation, see notes 3 and 14 to our consolidated financial statements.
Depreciation and amortization
Our total consolidated depreciation and amortization expense increased $539,115,000 during 2005, as compared to 2004. The effects of the consolidation of Super Media/ J:COM, acquisitions and the LGI Combination accounted for $636,031,000 of such increase. Excluding the effect of these transactions and foreign exchange rate fluctuations, depreciation and amortization expense decreased $102,240,000 or 11.2% during 2005, as compared to 2004. This decrease is due primarily to (i) the impact of certain of Europe Broadband’s information technology and other assets becoming fully depreciated during the last half of 2004 and (ii) the impact during the 2004 periods of Europe Broadband’s acceleration of the depreciation of certain customer premise equipment that was targeted for replacement.
Impairment of long-lived assets
We incurred impairment charges of $8,320,000 and $69,353,000 during 2005 and 2004, respectively. The 2005 amount includes a $7,550,000 impairment charge to reduce the carrying value of the intangible asset associated with our franchise rights in Puerto Rico to its estimated fair value of $155,900,000. The 2004 amount includes (i) a $26,000,000 impairment charge as a result of our assessment of the recoverability of enterprise level goodwill that was associated with one of our consolidated subsidiaries, (ii) a $16,623,000 impairment charge recorded by UGC to write-down the long-lived assets of certain telecommunications operations in Europe, (iii) $10,955,000 related to the write-down of certain of Europe Broadband’s tangible fixed assets in The Netherlands, and (iv) other less significant charges.
Restructuring and other operating charges (credits), net
We incurred restructuring and other operating charges (credits) of $(2,753,000) and $28,901,000 during 2005 and 2004, respectively. The 2004 amount includes $21,660,000 related to the restructuring of Europe Broadband’s operations in The Netherlands. The 2005 amount includes (i) a $7,709,000 reversal of the reserve recorded by The Netherlands during 2004 due to our 2005 decision to reoccupy a building and (ii) other individually insignificant amounts. For additional information, see note 17 to our consolidated financial statements.
Interest expense
Our total consolidated interest expense increased $147,146,000 during 2005, as compared to 2004. Excluding the effects of foreign currency exchange rate fluctuations, interest expense increased $149,502,000 during

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2005, as compared to 2004. This increase is primarily attributable to a $5,122,226,000 increase in our outstanding indebtedness during 2005, most of which is attributable to debt incurred or assumed in connection with the Cablecom Acquisition, the consolidation of Super Media/ J:COM and other acquisitions. The increase also includes the net effect of (i) a $35,170,000 increase associated with non-cash interest expense representing the net increase during 2005 in the estimated fair value of certain mandatorily redeemable securities issued by the Investcos, (ii) a $7,790,000 increase in the interest expense incurred during 2005 on the UGC Convertible Notes, which were issued in April 2004, and (iii) a $7,484,000 decrease in interest expense resulting from lower amortization of deferred financing costs, due primarily to debt extinguishments and the application of purchase accounting. Most of the net increase in the estimated fair value of the mandatorily redeemable securities of the Investcos is associated with the increased liquidity of the underlying Telenet shares following the Telenet IPO. For additional information concerning Telenet, see note 6 to our consolidated financial statements. An increase in our weighted average interest rate during 2005 also contributed to the overall increase in interest expense.
Interest and dividend income
Our total consolidated interest and dividend income increased $12,155,000 during 2005, as compared to 2004 due primarily to dividends received on shares of ABC Family Worldwide, Inc. Series A preferred stock. We acquired a 99.9% interest in this preferred stock from Liberty Media in connection with the June 2004 spin off. The impact of this increase was partially offset by a decrease in guarantee fees received from J:COM, due primarily to the elimination of most of such guarantees in connection with J:COM’s December 2004 bank refinancing. An increase in the interest earned on our weighted average cash and cash equivalent balances also contributed to the increase.
Share of earnings (losses) of affiliates, net
The following table reflects our share of earnings (losses), net of affiliates including any other-than-temporary declines in value:
                   
    Year Ended December 31,
     
    2005   2004
         
    amounts in thousands
Jupiter TV
  $ 27,759     $ 14,644  
Telenet
    (33,494 )      
Austar
    13,100       976  
Mediatti
    (6,909 )     (2,331 )
Metrópolis
    (6,782 )     (8,355 )
Super Media/ J:COM
          45,092  
Other
    (16,623 )     (11,316 )
             
 
Total
  $ (22,949 )   $ 38,710  
             
Our share of earnings (losses) of affiliates includes losses related to other-than-temporary declines in the value of our equity method investments of $29,187,000 and $25,973,000 during 2005 and 2004, respectively. For additional information, see note 6 to our consolidated financial statements.

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Realized and unrealized gains (losses) on derivative instruments, net
The details of our realized and unrealized gains (losses) on derivative instruments, net are as follows for the indicated periods:
                   
    Year Ended December 31,
     
    2005   2004
         
    amounts in thousands
Cross-currency and interest rate exchange contracts
  $ 216,022     $ (64,097 )
Embedded derivatives
    69,999       23,032  
Foreign exchange contracts
    11,682       196  
Call and put contracts
    8,780       1,713  
Total return debt swaps
          2,384  
Other
    3,490       997  
             
 
Total
  $ 309,973     $ (35,775 )
             
The increase in the unrealized gains on the UPC Broadband Holding cross currency and interest rate swaps and caps is attributable to the net effect of (i) larger notional amounts in 2005, as compared to 2004, (ii) market movements with respect to the appreciation of the U.S. dollar exchange rate compared to the euro that caused the value of these contracts to increase, and (iii) market movements with respect to lower interest rates which decreased the market value of the contracts.
The unrealized gains (losses) reported for the embedded derivatives primarily relate to the embedded derivative component of the UGC Convertible Notes and the prepaid forward sale of News Corp. Class A common stock. For additional information, see note 10 to our consolidated financial statements.
Foreign currency transaction gains (losses), net
The details of our foreign currency transaction gains (losses) are as follows for the indicated periods:
                   
    Year Ended December 31,
     
    2005   2004
         
    amounts in thousands
U.S. dollar debt issued by our European subsidiaries
  $ (219,794 )   $ 35,684  
Euro denominated debt issued by UGC
    64,173       (51,903 )
Yen denominated cash held by LGI subsidiary
    (33,234 )     7,408  
Euro denominated cash held by UGC
    (16,668 )     26,192  
Intercompany notes denominated in a currency other than the entities’ functional currency
    (10,644 )     46,206  
Euro denominated debt issued by European subsidiary
    10,539        
Repayment of yen denominated shareholder loans(1)
          56,061  
Other
    (3,772 )     (2,134 )
             
 
Total
  $ (209,400 )   $ 117,514  
             
 
(1)  On December 21, 2004, we received cash proceeds of ¥43,809 million ($420,188,000 on December 21, 2004) in connection with the repayment by J:COM and another affiliate of all principal and interest due to our company pursuant to then outstanding shareholder loans. In connection with this transaction, we recognized in our statement of operations the foreign currency translation gains that previously had been reflected in accumulated other comprehensive earnings (loss).

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Gain on exchange of investment securities
We recognized a pre-tax gain aggregating $178,818,000 during 2004 on exchanges of investment securities including a $168,301,000 gain which is attributable to the July 19, 2004 conversion of our investment in Telewest Communications plc Senior Notes and Senior Discount Notes into 18,417,883 shares or approximately 7.5% of the issued and outstanding common stock of Telewest. This gain represents the excess of the fair value of the Telewest common stock received over our cost basis in the Senior Notes and Senior Discount Notes.
Other-than-temporary-declines in fair value of investments
We recognized other-than-temporary declines in fair values of investments of $3,403,000 and $18,542,000 during 2005 and 2004, respectively. The 2005 amount represents the excess of the carrying cost over the fair value of ABC Family preferred stock held by us at December 31, 2005. The 2004 amount includes $12,429,000 representing the excess of the carrying cost over the fair value of the Telewest shares held by us at December 31, 2004.
Gains (losses) on extinguishment of debt
We recognized a gain (loss) on extinguishment of debt of ($33,700,000) and $27,977,000 during 2005 and 2004, respectively. The 2005 loss includes (i) a $21,066,000 write-off of unamortized deferred financing costs in connection with the December 2005 refinancing of the J:COM Credit Facility, and (ii) a $11,980,000 write-off of deferred financing costs in connection with the March 2005 refinancing of the UPC Broadband Holding Bank Facility. The 2004 gain includes a $31,916,000 gain recognized in connection with the first quarter 2004 consummation of the plan of reorganization of UPC Polska, Inc., an indirect subsidiary of UGC.
Gains on disposition of non-operating assets, net
We recognized gains on disposition of non-operating assets, net, of $115,169,000 and $43,714,000 during 2005 and 2004, respectively. The 2005 amount includes (i) a $89,069,000 gain in connection with the November 2005 disposition of our 19% ownership interest in SBS, (ii) a $62,678,000 loss resulting primarily from the realization of cumulative foreign currency losses in connection with the April 2005 disposition of our investment in TyC, (iii) a $40,527,000 gain recognized in connection with the February 2005 sale of our Subscription Right to purchase newly-issued Cablevisión shares in connection with its debt restructuring, (iv) a $28,186,000 gain on the January 2005 sale of UGC’s investment in EWT, and (v) a $17,261,000 gain on the June 2005 sale of our investment in The Wireless Group plc. The 2004 amount includes (i) a $37,174,000 gain on the sale of News Corp. Class A common stock, (ii) a $25,256,000 gain in connection with our April 2004 contribution of certain equity interests to Jupiter TV, (iii) a $16,407,000 net loss on the disposition of 18,417,883 Telewest shares, (iv) a $10,000,000 loss on the sale of Sky Multi-Country, and (v) a $6,878,000 gain associated with the redemption of our investment in certain bonds.
Income tax benefit (expense)
We recognized income tax benefit (expense) of ($29,849,000) and $13,800,000 during 2005 and 2004, respectively. The tax expense for 2005 differs from the expected tax expense of $17,778,000 (based on the U.S. federal 35% income tax rate) due primarily to (i) the impact of certain permanent differences between the financial and tax accounting treatment of interest and other items associated with intercompany loans, investments in subsidiaries, and other items that resulted in nondeductible expenses or tax-exempt income in the tax jurisdiction, (ii) the reduction of deferred tax assets in The Netherlands due to an enacted tax law change, (iii) an increase due to the impact of differences in the statutory and local tax rate in certain jurisdictions in which we operate, and (iv) the tax effect of state and foreign taxes for our operations, including a net increase in deferred tax expense recorded for the increase in the estimated blended state tax rate used to compute our net U.S. deferred tax liabilities due to inclusion of UGC in the U.S. consolidated tax return. The items mentioned above are offset by (i) the realization of taxable foreign currency gains and losses in certain jurisdictions not recognized for financial reporting purposes, (ii) losses recognized on dispositions of

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consolidated investments for which no deferred taxes were historically provided, and (iii) a net decrease in our valuation allowance established against deferred tax assets, including a tax benefit of ¥7,539 million ($68,655,000 at the average rate for the period) recognized in 2005 associated with the release of valuation allowances by J:COM, that is largely offset by the establishment of valuation allowances in other jurisdictions against currently arising deferred tax assets. The tax expense for 2004 differs from the expected tax benefit of $66,932,000 (based on the U.S. federal 35% income tax rate) primarily due to the reduction of UGC’s deferred tax assets as a result of tax rate reductions in The Netherlands, France, the Czech Republic, and Austria. For additional information, see note 12 to our consolidated financial statements.
Years ended December 31, 2004 and 2003
As noted above, the comparability of our 2004 and 2003 operating results were significantly affected by the January 1, 2004 consolidation of UGC. For more detailed explanations of the changes in our revenue, operating expenses and SG&A expenses, see the Discussion and Analysis of Reportable Segments that appears above. Unless otherwise indicated below, the significant increases in our revenue and expenses during 2004, as compared to 2003, are attributable to the consolidation of UGC.
Stock-based compensation charges
We incurred stock-based compensation expense of $142,676,000 and $4,088,000 during 2004 and 2003, respectively. The 2004 amount, which includes $116,661,000 of compensation expense related to stock incentive awards issued by UGC, was primarily a function of higher UGC and LMI stock prices, changes from fixed-plan to variable-plan accounting and additional vesting of stock incentive awards. As a result of adjustments to certain terms of the former UGC and LMI stock incentive awards that were outstanding at the time of their respective rights offerings in February 2004 and July 2004, most of the UGC and LMI stock incentive awards outstanding at December 31, 2004 were accounted for as variable-plan awards. A $50,409,000 first quarter 2004 charge was recorded by UGC to reflect a change from fixed-plan accounting to variable-plan accounting in connection with UGC’s February 2004 rights offering.
Interest and dividend income
Interest and dividend income increased $40,620,000 during 2004, as compared to 2003. The increase includes $23,823,000 that is attributable to the January 1, 2004 consolidation of UGC. The remaining increase is primarily attributable to dividend income on the ABC Family preferred stock, a 99.9% interest in which was contributed by Liberty Media to our company in connection with the spin off.
Share of earnings of affiliates, net
Our share of earnings of affiliates increased $24,971,000 during 2004, as compared to 2003. Such increase primarily is attributable to increases in our share of the net earnings of J:COM and, to a lesser extent, Jupiter TV. Such increases were partially offset by write-downs of our investments in Torneos y Competencias S.A. and another entity that distributes programming in Latin America to reflect other-than-temporary declines in the fair values of these investments. The increase in J:COM’s net earnings is primarily attributable to revenue growth due to increases in the subscribers to J:COM’s telephony, Internet and video services. For additional discussion of J:COM’s operating results, see Discussion and Analysis of Reportable Segments above. During 2003, we did not recognize our share of UGC’s losses as our investment in UGC previously had been reduced to zero and we had no commitment to make additional investments in UGC. For additional information, see note 6 to our consolidated financial statements.

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Realized and unrealized gains (losses) on derivative instruments, net
The details of our realized and unrealized gains (losses) on derivative instruments are as follows:
                   
    Year Ended December 31,
     
    2004   2003
         
    amounts in thousands
Cross-currency and interest rate exchange contracts
  $ (64,097 )   $  
Embedded derivatives
    23,032        
Total return debt swaps
    2,384       37,804  
Call and put contracts
    1,713        
Foreign exchange contracts
    196       (22,626 )
Other
    997       (2,416 )
             
 
Total
  $ (35,775 )   $ 12,762  
             
For additional information concerning our derivative instruments, see note 8 to our consolidated financial statements.
Foreign currency transaction gains (losses), net
The details of our foreign currency transaction gains (losses) are as follows:
                   
    Year Ended December 31,
     
    2004   2003
         
    amounts in thousands
Repayment of yen denominated shareholder loans
  $ 56,061     $  
Euro denominated debt issued by UGC
    (51,903 )      
Intercompany notes denominated in a currency other than the entities’ functional currency
    46,206        
U.S. dollar debt issued by our European subsidiaries
    35,684        
Euro denominated cash held by UGC
    26,192        
Yen denominated cash held by LGI subsidiary
    7,408        
Other
    (2,134 )     5,412  
             
 
Total
  $ 117,514     $ 5,412  
             
Income tax benefit (expense)
We recognized income tax benefit (expense) of $13,800,000 and ($27,975,000) during 2004 and 2003, respectively. The 2004 tax benefit differs from the expected tax benefit of $66,932,000 (based on the U.S. federal 35% income tax rate) due primarily to (i) the realization of taxable foreign currency gains in certain jurisdictions not recognized for financial reporting purposes, (ii) the impact of certain permanent differences between the financial and tax accounting treatment of interest and other items associated with cross jurisdictional intercompany loans and investments; (iii) a net increase in UGC’s valuation allowance associated with reserves established against currently arising tax loss carryforwards that were only partially offset by the release of valuation allowances in other jurisdictions, and (iv) the reduction of UGC’s deferred tax assets as a result of tax rate reductions in The Netherlands, France, the Czech Republic, and Austria. Certain of the released valuation allowances were related to deferred tax assets that were recorded in purchase accounting and accordingly, such valuation allowances were reversed against goodwill. The items mentioned above were partially offset by (i) the recognition of tax losses or deferred tax assets for the sale of investments or subsidiaries, as well as certain permanent differences between financial and tax accounting treatment of other items associated with investments in subsidiaries, (ii) a deferred tax benefit that we recorded during the third quarter of 2004 to reflect a reduction in the estimated blended state tax rate used to compute our net

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deferred tax liabilities; such reduction represents a change in estimate that resulted from our re-evaluation of this rate upon our becoming a separate tax paying entity in connection with the spin off, and (iii) the reversal of a deferred tax liability originally recorded for a gain on extinguishment of debt in a 2002 merger transaction as a result of the emergence of Old UGC from bankruptcy in November 2004. The difference between the actual tax expense and the expected tax expense of $17,111,000 (based on the U.S. Federal 35% income tax rate) during 2003 is primarily attributable to foreign, state and local taxes. For additional details, see note 12 to our consolidated financial statements.
Liquidity and Capital Resources
Sources and Uses of Cash
Although our consolidated operating subsidiaries have generated cash from operating activities and have borrowed funds under their respective bank facilities, we generally do not expect to access the resources of our operating subsidiaries or business affiliates. Moreover, the terms of the instruments governing the indebtedness of certain of our subsidiaries, including UPC Broadband Holding and Cablecom Luxembourg, restrict our ability to access the assets of these subsidiaries. In light of these factors, we and each of our operating subsidiaries perform separate assessments of our respective liquidity needs. Accordingly, we discuss separately below our corporate level and our subsidiary level current and future liquidity.
Corporate Liquidity
The details of the U.S. dollar equivalent balances of our consolidated cash and cash equivalents at December 31, 2005 are set forth in the following table (amounts in thousands):
             
Cash and cash equivalents held by:
       
LGI and its non-operating subsidiaries
  $ 660,763  
Europe Broadband:
       
   
UPC Holding
    14,556  
   
UPC Broadband Holding and its unrestricted subsidiaries
    48,154  
   
Cablecom Luxembourg and its unrestricted subsidiaries
    85,479  
J:COM
    299,140  
VTR
    41,263  
Other operating subsidiaries
    52,845  
       
 
Total cash and cash equivalents
  $ 1,202,200  
       
The cash and cash equivalent balances of $660,763,000 held by LGI and its non-operating subsidiaries represented available liquidity at the corporate level at December 31, 2005. Our remaining unrestricted cash and cash equivalents of $541,437,000 at December 31, 2005 were held by our operating subsidiaries as set forth in the table above. As noted above, we generally do not anticipate that any of the cash held by our operating subsidiaries will be made available to us to satisfy our corporate liquidity requirements. As described in greater detail below, our current sources of corporate liquidity include (i) our cash and cash equivalents, (ii) our ability to monetize certain investments, and (iii) interest and dividend income received on our cash and cash equivalents and investments. From time to time, we may also receive distributions or loan repayments from our subsidiaries or affiliates and proceeds upon the disposition of investments and other assets or upon the exercise of stock options.
The primary uses of cash held by LGI and its non-operating subsidiaries have historically been investments in affiliates and acquisitions of consolidated businesses. We intend to continue expanding our portfolio of international broadband and programming assets. Accordingly, our future cash needs are expected to include funding for acquisitions of consolidated business, additional investments in and loans to existing affiliates, funding new investment opportunities, and funding our corporate general and administrative expenses and interest payments on the UGC Convertible Notes.

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UGC has issued 500.0 million ($591.6 million) principal amount of 13/4% euro-denominated UGC Convertible Notes due April 15, 2024. Interest is payable semi-annually on April 15 and October 15 of each year. For additional information, see note 10 to our consolidated financial statements.
On June 20, 2005, we announced the authorization of a stock repurchase program. Under the program, we may acquire from time to time up to $200 million in LGI Series A common stock and LGI Series C common stock. Through December 31, 2005, we have repurchased 2,048,231 and 1,455,859 shares of LGI Series A common stock and LGI Series C common stock, respectively, for aggregate cash consideration of $78,893,000. Subsequent to December 31, 2005, we repurchased 2,698,558 and 1,504,311 additional shares of LGI Series A common stock and Series C common stock, respectively, for aggregate cash consideration of $89,357,000. In addition, on March 8, 2006, our Board of Directors approved a new stock repurchase program under which we may acquire an additional $250 million in LGI Series A common stock and LGI Series C common stock. These stock repurchase programs may be effected through open market transactions and/or privately negotiated transactions, which may include derivative transactions. The timing of the repurchase of shares pursuant to the program will depend on a variety of factors, including market conditions. These programs may be suspended or discontinued at any time. For information concerning certain call agreements that we have entered into in connection with our stock repurchase activities, see Quantitative and Qualitative Disclosures about Market Risk below.
In connection with the closing of the LGI Combination, we issued 65,694,765 shares of each of LGI Series A common stock and LGI Series C common stock (including 2,067,786 of each series of stock that were issued to subsidiaries of UGC) and paid cash consideration of $703,535,000 (including direct acquisition costs of $9,018,000) to acquire the shares of UGC common stock that we did not already own. For additional information concerning the LGI Combination, see note 5 to our consolidated financial statements.
In August 2005, we entered into a prepaid forward sale transaction with respect to 5,500,000 shares of News Corp. Class A common stock. In consideration for entering into the forward contract, we received approximately $75 million. For additional information, see note 10 to our consolidated financial statements.
We believe that our current sources of liquidity are sufficient to meet our known liquidity and capital needs through 2006. However, in the event that a major investment or acquisition opportunity were to arise, we expect that we would be required to seek additional capital in order to consummate any such transaction.
As noted above, we began consolidating Super Media/ J:COM effective January 1, 2005. The consolidation of Super Media/ J:COM did not have a material impact on our liquidity or capital resources as both our company and J:COM have continued to separately assess and finance our respective liquidity needs. See separate discussion of the liquidity and capital resources of J:COM below.
Subsidiary Liquidity
Europe Broadband (UPC Holding and LG Switzerland). As detailed in the table above, UPC Holding, LG Switzerland and their consolidated subsidiaries held aggregate cash balances of $148,189,000 at December 31, 2005. In addition to its cash and cash equivalents, Europe Broadband’s sources of liquidity include borrowing availability under its existing credit facilities and its operating cash flow.
At December 31, 2005, Europe Broadband’s debt included debt of UPC Broadband Holding, UPC Holding, LG Switzerland and Cablecom Luxembourg. The debt of UPC Broadband Holding includes outstanding euro denominated borrowings under four Facilities of the UPC Broadband Holding Bank Facility aggregating $2,277,837,000 in equivalent U.S. dollars and U.S. dollar denominated borrowings under two Facilities aggregating $1,775,000,000. Two additional euro denominated Facilities (Facility A and Facility I) under the UPC Broadband Holding Bank Facility can be used to finance additional permitted acquisitions and for general corporate purposes, subject to covenant compliance. Based on the December 31, 2005 covenant compliance calculations, the aggregate amount that was available for borrowing under these Facilities was approximately 229 million ($271 million), subject to the completion of UPC Holding’s fourth quarter bank reporting requirements. On January 24, 2006, a portion of the proceeds from the sale of UPC Norway of

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approximately 175 million ($214 million at the transaction date) were applied toward the prepayment of Facility I. The amount repaid may be reborrowed subject to covenant compliance.
On July 29, 2005, UPC Holding issued 500 million ($607 million at the borrowing date) principal amount of 7.75% Senior Notes.
On October 24, 2005, LG Switzerland completed the purchase of all of the issued share capital of Cablecom, the parent company of a Swiss cable operator, for a cash purchase price before direct acquisition costs of CHF2.826 billion ($2.212 billion at the transaction date). The Cablecom Acquisition was funded through a combination of (i) a 550 million ($667 million at the borrowing date), 9.5 year split-coupon floating rate PIK Loan entered into by LG Switzerland, (ii) a new offering of 300 million ($363 million at the borrowing date) principal amount of 8.625% Senior Notes due 2014 by UPC Holding, a sister corporation of LG Switzerland and (iii) available cash on hand. At the acquisition date, Cablecom reported outstanding debt of CHF1.7 billion ($1.4 billion at the transaction date), including CHF1.278 billion ($998 million at the transaction date) principal amount of the Cablecom Luxembourg Senior Notes.
On December 5, 2005, Cablecom Luxembourg and Cablecom GmbH entered into the Cablecom Luxembourg Bank Facility with certain banks and financial institution lenders. The Cablecom Luxembourg Bank Facility provides the terms and conditions upon which (i) the lenders have made available to Cablecom Luxembourg two term loans (Facility A and Facility B) in an aggregate principle amount not to exceed CHF1.330 billion ($1.011 billion) and (ii) the revolving lenders under Cablecom GmbH’s Existing Revolving Credit Facility have agreed to make available to Cablecom GmbH and certain of its subsidiaries a revolving credit facility in an aggregate principal amount not to exceed CHF150 million ($114 million) in replacement of the Existing Revolving Facility. Borrowing availability under the revolving credit facility is subject to covenant compliance. As discussed below, Facility A was partly drawn in December 2005 and both Facility A and Facility B were fully drawn subsequent to December 31, 2005.
In connection with the Cablecom Acquisition, under the terms of the Indentures for the Cablecom Luxembourg Senior Notes, Cablecom Luxembourg was required to effect the Change of Control Offer for the Cablecom Luxembourg Senior Notes at 101% of their respective principal amounts. Pursuant to the Change of Control Offer, Cablecom Luxembourg on December 8, 2005 used CHF268,711,000 of proceeds from the Facility A term loan under the Cablecom Luxembourg Bank Facility to (i) purchase CHF132,983,000 ($101,719,000 at the transaction date) of the Cablecom Luxembourg Series A CHF Notes, (ii) purchase 42,817,000 ($50,456,000 at the transaction date) of the Cablecom Luxembourg Series A Euro Notes, (iii) purchase 39,984,000 ($47,118,000 at the transaction date) of the Cablecom Luxembourg Series B Euro Notes, and (iv) fund the costs and expenses of the Change of Control Offer. All of the purchase amounts set forth above include principal, call premium and accrued interest.
On January 20, 2006, Cablecom Luxembourg used the remaining availability under the Facility A and Facility B term loans to fund the Redemption of all the Cablecom Luxembourg Floating Rate Notes that were not tendered in the Change of Control Offer.
For additional information concerning the debt of Europe Broadband, see note 10 to our consolidated financial statements.
On October 14, 2005, we completed the acquisition of Astral, a broadband telecommunications operator in Romania for a cash purchase price of $407,074,000, before direct acquisition costs.
On May 9, 2005, we announced that our indirect subsidiary UPC Ireland had signed a sale and purchase agreement to acquire MS Irish Cable subject to regulatory approval. MS Irish Cable acquired NTL Ireland from the NTL Group on May 9, 2005 with funds provided by a loan from UPC Ireland. As we were responsible for all losses to be incurred by MSDW Equity in connection with its acquisition, ownership and ultimate disposition of MS Irish Cable, we were required to consolidate MS Irish Cable and its subsidiaries, including NTL Ireland, upon the closing of MS Irish Cable’s acquisition of NTL Ireland. On December 12, 2005, following the receipt of regulatory approval, UPC Ireland completed its acquisition of MS Irish Cable. The total purchase consideration for this acquisition was 349,437,000 ($448,796,000 at May 9, 2005),

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including direct acquisition costs of 16,025,000 ($20,582,000 at the transaction date). For additional information, see note 5 to our consolidated financial statements.
In April 2005, a subsidiary of UPC Broadband Holding exercised the call right acquired in connection with the July 2004 Noos acquisition and purchased the remaining 19.9% minority interest in UPC Broadband France that it did not already own for 90,105,000 ($115,950,000 at the transaction date) in cash.
On February 10, 2005, we acquired 100% of the shares in Telemach, a broadband communications provider in Slovenia, for 70,985,000 ($91,370,000 at the transaction date) in cash.
On January 19, 2006, we completed the sale of 100% of UPC Norway, to an unrelated third party for cash proceeds of approximately 448 million ($542 million on January 19, 2006). For additional information, see note 5 to our consolidated financial statements.
For information concerning Europe Broadband’s capital expenditure requirements, see the discussion under Consolidated Cash Flow Statements below.
We believe that Europe Broadband’s current sources of liquidity are sufficient to meet its known liquidity and capital needs through 2006. However, to the extent that we plan to grow Europe Broadband’s business through acquisitions, we expect that Europe Broadband will need additional sources of financing, most likely to come in the form of debt financing and/or corporate cash.
J:COM. At December 31, 2005, J:COM held cash and cash equivalents of $299,140,000 that were denominated in Japanese yen. In addition to its cash and cash equivalents, J:COM’s sources of liquidity include borrowing availability under its existing credit facilities and its operating cash flow.
On December 15, 2005, J:COM executed a ¥155 billion ($1.314 billion) credit facility agreement with a syndicate of banks led by The Bank of Tokyo-Mitsubishi, Ltd., Mizuho Corporate Bank, Ltd. and Sumitomo Mitsui Banking Corporation (the J:COM Credit Facility). Borrowings may be made under the J:COM Credit Facility on a senior, unsecured basis pursuant to three facilities: a ¥30 billion ($254 million) five-year revolving credit loan (the Revolving Loan); a ¥85 billion ($721 million) five-year amortizing term loan (the Tranche A Term Loan); and a ¥40 billion ($339 million) seven-year amortizing term loan (the Tranche B Term Loan). On December 21, 2005, the proceeds of the term loans were used, together with available cash, to repay in full outstanding loans totaling ¥128 billion ($1.1 billion at the transaction date) under J:COM’s then existing credit facilities. Borrowings under the revolving loan may be used by J:COM for general corporate purposes.
At December 31, 2005, J:COM’s debt includes Japanese yen denominated borrowings pursuant to the J:COM Credit Facility aggregating approximately ¥125 billion ($1,059,771,000), capital lease obligations aggregating ¥38.5 billion ($326,603,000), and other borrowings aggregating approximately ¥21.603 billion ($183,158,000). At December 31, 2005, J:COM had ¥30 billion ($254,345,000) of borrowing availability pursuant to the J:COM Credit Facility. For additional information concerning J:COM’s debt, see note 10 to our consolidated financial statements.
On September 30, 2005, J:COM paid cash of ¥9,200 million ($81,022,000 at the transaction date) and assumed debt and capital lease obligations of ¥5,480 million ($48,261,000 at the transaction date) to purchase 100% of the outstanding shares of J:COM Setamachi. J:COM immediately repaid ¥3,490 million ($30,735,000 at the transaction date) of the assumed debt. J:COM Setamachi is a broadband communications provider in Japan.
On March 23, 2005, J:COM received net proceeds of ¥82,043 million ($774,283,000 at March 23, 2005) in connection with an IPO of its common shares, and on April 20, 2005, J:COM received additional net proceeds of ¥8,445 million ($79,117,000 at April 20, 2005) in connection with the sale of additional common shares upon the April 15, 2005 exercise of the underwriters’ over-allotment option. J:COM used a portion of the net proceeds received in March 2005 to repay ¥50 billion ($472 million at March 23, 2005) of certain outstanding bank borrowings.

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On February 25, 2005, J:COM completed a transaction with Sumitomo, Microsoft and our company whereby J:COM paid aggregate cash consideration of ¥4,420 million ($41,932,000 at the transaction date) to acquire each entities’ respective interests in Chofu Cable, a Japanese broadband communications provider, and to acquire from Microsoft equity interests in certain telecommunications companies. Our share of the consideration was ¥972 million ($9,221,000 at the transaction date). As a result of this transaction, J:COM acquired an approximate 92% equity interest in Chofu Cable.
For information concerning J:COM’s capital expenditure requirements, see the discussion under Consolidated Cash Flow Statements below.
Management of J:COM believes that J:COM’s current sources of liquidity are sufficient to meet its known liquidity and capital needs through 2006. However, to the extent that J:COM management plans to grow J:COM’s business through acquisitions, J:COM management believes that J:COM may need additional sources of financing, most likely to come in the form of debt or equity financing or a combination of both.
VTR. At December 31, 2005, VTR held cash and cash equivalents of $41,263,000 in equivalent U.S. dollars. In addition to its cash and cash equivalents, VTR’s primary source of liquidity is its operating cash flow.
VTR has a Chilean peso-denominated seven-year amortizing term senior secured credit facility (as amended) totaling CLP175.502 billion ($341,437,000). In July 2005, VTR borrowed CLP14.724 billion ($25,456,000 as of the transaction date) under the VTR Bank Facility to fund the repayment of an existing obligation to CTC. On September 9, 2005, the VTR Bank Facility was amended to improve the maturity and other terms of the existing facility. On September 20, 2005, VTR completed the syndication of the amended VTR Bank Facility, raising proceeds of CLP70.674 billion ($132,262,000 as of September 20, 2005). These proceeds were used to repay a total of $119,578,000 in shareholder loans and accrued interest owed to our subsidiaries and $10,415,000 to repay a loan and accrued interest owed to CCI. For additional information, see note 10 to our consolidated financial statements.
On April 13, 2005, VTR completed its previously announced combination with Metrópolis, a Chilean broadband communications company. Prior to the combination, LMI owned a 50% interest in Metrópolis, with the remaining 50% interest owned by CCC. As consideration for CCC’s interest in Metrópolis, (i) VTR issued 11,438,360 shares of its common stock to CCC, representing 20% of the outstanding economic and voting shares of VTR subsequent to the transaction, (ii) VTR assumed certain indebtedness owed by Metrópolis to CCI in the amount of CLP6.067 billion ($10,533,000), and (iii) UGC granted CCC the right to put its 20% interest in VTR to UGC at fair value, subject to a minimum purchase price of $140 million, which put is exercisable beginning on April 13, 2006 and expires on April 13, 2015. The acquisition of CCC’s interest in Metrópolis included the assumption of $25,773,000 in debt payable to CTC and CLP30.335 billion ($51,773,000 at April 13, 2005) of bank debt. The bank debt was repaid in April 2005 and the debt to CTC was repaid in July 2005 using proceeds from the VTR Bank Facility. The final regulatory approval for the combination, which was obtained in March 2005, imposed certain conditions on the combined entity. The most significant of these 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 capacity on 2.0 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.
For information concerning VTR’s capital expenditure requirements, see the discussion under Consolidated Cash Flow Statements below.
We believe that VTR’s existing sources of liquidity are sufficient to meet its known liquidity and capital needs through 2006. However, if VTR were to make a significant acquisition, we believe that VTR may need additional sources of financing, most likely in the form of debt or equity financing or a combination of both.
Other Subsidiaries.
Certain of our consolidated businesses other than Europe Broadband, J:COM and VTR completed transactions that affected our liquidity during 2005.

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On December 14, 2005 we paid net cash consideration of A$204,909,000 ($154,952,000 at the transaction date) to increase our indirect ownership of Austar from a 36.7% non-controlling ownership interest to a 55.2% controlling interest. As a result of this transaction, we began consolidating Austar. Prior to obtaining a controlling interest in Austar, UGC used the equity method to account for its indirect investment in Austar. For additional information, see note 5 to our consolidated financial statements.
On November 23, 2005, Plator Holdings, an indirect subsidiary of chellomedia, paid cash consideration of $62,812,000 to acquire the 50% interest that it did not already own in certain businesses that provide thematic television channels in Spain and Portugal, which we refer to as IPS. Plator Holdings financed the purchase price with new bank borrowings. Following the transaction, Plator Holdings indirectly holds its interests in IPS through its 100% ownership interests in Nidlo B.V., Iberian Programming Services C.V. and Multicanal Iberia SL. Prior to this transaction, we used the equity method to account for our investment in IPS.
On November 8, 2005, we received cash consideration of 276,432,000 ($325,554,000 at the transaction date) in connection with the disposition of our 19% ownership interest in SBS. In addition, we completed a number of less significant dispositions during 2005. For additional information, see note 5 to our consolidated financial statements.
In connection with the October 14, 2005 Telenet IPO, (i) one of our indirect subsidiaries, chellomedia Investments, purchased 7,722,918 of Telenet’s ordinary shares on October 14, 2005 for an aggregate cash purchase price of 160,221,000 ($193,667,000 at the transaction date) and (ii) 72,962,000 ($88,181,000 at the transaction date) of the mandatorily redeemable securities previously issued by the Investcos to third parties were redeemed. For additional information, see note 6 to our consolidated financial statements.
In January 2005, chellomedia acquired the Class A shares of Zone Vision. The consideration for the transaction consisted of (i) $50,000,000 in cash, before considering direct acquisition costs of $2,154,000, and (ii) 351,110 shares of LGI Series A common stock and 351,110 shares of LGI Series C common stock valued at $14,973,000. As part of the transaction, chellomedia contributed to Zone Vision its 49% interest in Reality TV Ltd. and chellomedia’s Club channel business. Zone Vision is a programming company focused on the ownership, management and distribution of pay television channels. The Zone Vision shares purchased by chellomedia represent an 87.5% interest in Zone Vision on a fully diluted basis.
Consolidated Cash Flow Statements
Our cash flows are subject to significant variations based on foreign currency exchange rates. See related discussion under Quantitative and Qualitative Disclosures about Market Risk below. See also our Discussion and Analysis of Reportable Segments above.
Due to the fact that we began consolidating Super Media/ J:COM on January 1, 2005 and UGC on January 1, 2004, our cash flows for 2005 and 2004 are not comparable to the respective prior year cash flows. Accordingly, the following discussion focuses separately on our cash flows for 2005 and 2004.
2005 Consolidated Cash Flow Statement. During 2005, we used net cash provided by our operating activities of $1,576,102,000 net cash provided by financing activities of $2,191,842,000 and $1,326,915,000 of our existing cash and cash equivalent balances (excluding a $160,152,000 decrease due to changes in foreign exchange rates) to fund net cash used in our investing activities of $4,934,707,000.
The net cash used by our investing activities during 2005 includes cash paid in connection with the LGI Combination of $703,535,000, cash paid for acquisitions of $3,584,442,000, capital expenditures of $1,194,993,000, net proceeds received upon dispositions of $464,501,000, and the net effect of other less significant sources and uses of cash. For additional information concerning our 2005 acquisitions, see note 5 to our consolidated financial statements.
Europe Broadband and VTR accounted for $585,514,000 and $98,576,000, respectively of our consolidated capital expenditures during 2005, and $330,028,000 and $41,685,000, respectively, during 2004. Excluding FX, we expect the 2006 capital expenditures of Europe Broadband and VTR to significantly exceed the comparable 2005 amounts due primarily to: (i) the effects of acquisitions, (ii) initiatives such as our plan to

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invest more aggressively in digital television in The Netherlands and our efforts to continue the growth of our VoIP telephony services in Europe and Chile; (iii) increased costs for customer premise equipment as we expect our operating segments in Europe and Chile to add more customers in 2006 than in 2005; (iv) increased expenditures for new build and upgrade projects to expand services and improve our competitive position, and to meet increased traffic and certain franchise commitments; and (iv) other factors such as information technology upgrades and expenditures for general support systems. The expected increase in capital expenditures from 2005 to 2006 is largely in line with the expected increase in revenue as a result of acquisitions and RGU growth. In this regard, we expect that the 2006 capital expenditures of Europe Broadband and VTR, as a percentage of local currency revenue, will fall within a range of 25% to 27% and 28% to 30%, respectively. In future periods, we expect Europe Broadband and VTR to continue to focus on increasing the penetration of services in their existing upgraded footprint and efficiently deploying capital aimed at services that result in positive net cash flows.
J:COM accounted for $354,705,000 of our consolidated capital expenditures during 2005. J:COM uses capital lease arrangements to finance a significant portion of its capital expenditures. From a financial reporting perspective, capital expenditures that are financed by capital lease arrangements are treated as non-cash activities and accordingly are not included in the capital expenditure amounts presented in our consolidated statements of cash flows. Including $145,115,000 of expenditures that were financed under capital lease arrangements, J:COM’s capital expenditures aggregated $499,820,000 during 2005. The majority of J:COM’s capital expenditures during 2005 was associated with RGU growth and the related purchase and installation of customer premise equipment. J:COM management expects this trend to continue in 2006 as RGU growth is again expected to account for the majority of J:COM’s capital expenditure requirements in 2006. The impact of recent acquisitions is also expected to result in higher capital expenditures for J:COM in 2006, as compared to 2005. Due to these factors, J:COM management currently expects that, excluding FX, J:COM’s aggregate 2006 capital expenditures (whether financed with cash or capital lease arrangements) will exceed the 2005 amount and fall within a range of 30% to 32% of J:COM’s 2006 revenue.
The actual amount of the 2006 capital expenditures of Europe Broadband, VTR and J:COM may vary from the expected amounts disclosed above for a variety of reasons, including changes in (i) the competitive or regulatory environment, (i) business plans, (iii) current or expected future operating results and (iv) the availability of capital. Accordingly, no assurance can be given that actual capital expenditures will not vary from the expected amounts disclosed above.
During 2005, the cash provided by our financing activities was $2,191,842,000. Such amount includes net proceeds received on a consolidated basis from the issuance of stock by subsidiaries of $873,554,000 (including $853,400,000 of proceeds received by J:COM in connection with its IPO) and net borrowings of debt and capital lease obligations of $1,555,251,000.
2004 Consolidated Cash Flow Statement. During 2004, we used net cash provided by our financing activities of $2,232,578,000 and net cash provided by operating activities of $743,308,000 to fund an increase in our cash and cash equivalent balances of $2,516,362,000 (excluding a $66,756,000 increase due to changes in foreign exchange rates) and net cash used in our investing activities of $526,280,000.
During 2004, the net cash used by our investing activities was $526,280,000. Such amount includes net cash paid for acquisitions of $509,696,000, capital expenditures of $487,617,000, investments in and loans to affiliates and others of $256,959,000 and other less significant uses of cash. For additional information concerning our acquisitions during 2004, see note 5 to our consolidated financial statements. UGC accounted for $480,133,000 of our consolidated capital expenditures during 2004.
The above-described uses of our cash for investing activities were partially offset by proceeds received upon repayment of principal amounts loaned to affiliates of $535,074,000 and proceeds received upon dispositions of investments of $315,792,000 and other less significant sources of cash. The proceeds received upon repayment of affiliate loans primarily represent the third and fourth quarter repayment of yen-denominated loans to J:COM and another affiliate. The proceeds received upon dispositions of investments relate primarily to the sale of our Telewest and News Corp. securities.

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During 2004, the cash provided by our financing activities was $2,232,578,000. Such amount includes net proceeds of $735,661,000 from the LMI Rights Offering, contributions from Liberty Media of $704,250,000, net proceeds received on a consolidated basis from the issuance of stock by subsidiaries of $488,437,000, and net borrowings of debt of $444,027,000.
     Off Balance Sheet Arrangements and Aggregate Contractual Obligations
Off Balance Sheet Arrangements
At December 31, 2005, J:COM guaranteed ¥11,074 million ($93,887,000) of the debt of certain of its affiliates. The debt maturities range from 2007 to 2017.
In the ordinary course of business, we have provided indemnifications to (i) purchasers of certain of our assets, (ii) our lenders, (iii) our vendors, and (iv) other parties. In addition, we have provided performance and/or financial guarantees to local municipalities, our customers and vendors. Historically, these arrangements have not resulted in our company making any material payments and we do not believe that they will result in material payments in the future.
Our equity method investment in Mediatti is owned by our consolidated subsidiary, Liberty Japan MC. Olympus, another shareholder of Mediatti, has a put right that is first exercisable during July 2008 to require Liberty Japan MC to purchase all of its Mediatti shares at the then fair value. If Olympus exercises such right, the two minority shareholders who are party to the shareholders agreement may also require Liberty Japan MC to purchase their Mediatti shares at the then fair value. If Olympus does not exercise such right, Liberty Japan MC has a call right that is first exercisable during July 2009 to require Olympus and the minority shareholders to sell their Mediatti shares to Liberty Japan MC at the then fair value. If both the Olympus put right and the Liberty Japan MC call right expire without being exercised during the first exercise period, either may thereafter exercise its put or call right, as applicable, until October 2010.
Pursuant to the agreement with CPE governing Belgian Cable Investors, CPE has the right to require BCH to purchase all of CPE’s interest in Belgian Cable Investors for the then appraised fair value of such interest during the first 30 days of every six-month period beginning in December 2007. BCH has the corresponding right to require CPE to sell all of its interest in Belgian Cable Investors to BCH for appraised fair value during the first 30 days of every six-month period following December 2009. For additional information, see note 6 to our consolidated financial statements.
As further described in note 5 to our consolidated financial statements, Zone Vision’s Class B1 shareholders have the right, subject to vesting, to put 60% and 100% of their Class B1 shares to chellomedia on January 7, 2008 and January 7, 2010, respectively. chellomedia has a corresponding call right.
In connection with the April 13, 2005 combination of VTR and Metrópolis, CCC acquired an option to require UGC to purchase CCC’s equity interest in VTR at fair value, subject to a $140 million floor price. This option is exercisable by CCC beginning on April 13, 2006 and expires on April 13, 2015. We have reflected the $7,997,000 fair value of this put obligation at December 31, 2005 in other current liabilities in our consolidated balance sheet. For additional information, see note 6 to our consolidated financial statements.
     Commitments and Contingencies
For a description of our contingent liabilities related to certain legal proceedings, see note 20 to our consolidated financial statements.
We operate in numerous countries around the world and accordingly we are subject to, and pay annual income taxes under, the various income tax regimes in the countries in which we operate. The tax rules and regulations in many countries are highly complex and subject to interpretation. In the normal course of business, we may be subject to a review of our income tax filings by various taxing authorities. In connection with such reviews, disputes could arise with the taxing authorities over the interpretation or application of certain income tax rules related to our business in that tax jurisdiction. Such disputes may result in future tax and interest assessments by these taxing authorities. We have recorded an estimated liability in our

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consolidated tax provision for any such amount that we do not have a probable position of sustaining upon review of the taxing authorities. We adjust our estimates periodically because of ongoing examinations by and settlements with the various taxing authorities, as well as changes in tax laws, regulations, interpretations, and precedent. We believe that adequate accruals have been made for contingencies related to income taxes, and have classified these in long-term liabilities based upon our estimate of when the ultimate resolution of the contingent liability will occur. The ultimate resolution of the contingent liability will take place upon the earlier of (i) the settlement date with the applicable taxing authorities or (ii) the date when the tax authorities are statutorily prohibited from adjusting the company’s tax computations. Any difference between the amount accrued and the ultimate settlement amount, if any, will be released to income or recorded as a reduction of goodwill depending upon whether the liability was initially recorded in purchase accounting.
Video distribution, Internet, telephony and content businesses are regulated in each of the countries in which we operate. The scope of regulation varies from country to country, although in some significant respects regulation in European markets is harmonized under the regulatory structure of the European Union. Adverse regulatory developments could subject our businesses to a number of risks. Regulation could limit growth, revenue and the number and types of services offered. In addition, regulation may restrict our operations and subject them to further competitive pressure, including pricing restrictions, interconnect and other access obligations, and restrictions or controls on content, including content provided by third parties. Failure to comply with current or future regulation could expose our businesses to various penalties.
In addition to the foregoing items, we have contingent liabilities related to legal proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible we may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In our opinion, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to our consolidated financial statements.
Contractual Commitments
As of December 31, 2005, the U.S. dollar equivalent (based on December 31, 2005 exchange rates) of our consolidated contractual commitments, classified by their currency denomination, are as follows:
                                                             
    Payments due during year ended December 31,
     
    2006   2007   2008   2009   2010   Thereafter   Total
                             
    amounts in thousands
Debt (excluding interest)
  $ 175,804     $ 320,190     $ 313,063     $ 350,149     $ 2,545,153     $ 6,006,210     $ 9,710,569  
Capital leases (excluding interest)
    94,143       76,585       64,238       54,313       45,015       54,485       388,779  
Operating leases
    122,419       107,990       80,456       60,935       49,876       163,538       585,214  
Programming, satellite and other purchase obligations
    252,575       78,553       39,438       18,740       9,441       60,008       458,755  
Other commitments
    143,111       16,164       6,485       4,563       4,447       10,129       184,899  
                                           
   
Total
  $ 788,052     $ 599,482     $ 503,680     $ 488,700     $ 2,653,932     $ 6,294,370     $ 11,328,216  
                                           
 
Projected cash interest payments on debt and capital lease obligations*
  $ 657,090     $ 596,393     $ 555,502     $ 544,269     $ 431,243     $ 963,492     $ 3,747,989  
                                           
 
Based on interest rates and contractual maturities in effect as of December 31, 2005.
Programming commitments consist of obligations associated with certain of our programming contracts that are enforceable and legally binding on us in that we have agreed to pay minimum fees, regardless of the actual number of subscribers to the programming services or whether we terminate cable service to a portion of our subscribers or dispose of a portion of our cable systems. Satellite commitments consist of obligations

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associated with satellite services provided to our company. Other purchase obligations include commitments to purchase customer premise equipment that are enforceable and legally binding on us.
Other commitments consist of commitments to rebuild or upgrade cable systems and to extend the cable network to new developments, and perform network maintenance, and other fixed minimum contractual commitments associated with our agreements with franchise or municipal authorities. The amount and timing of the payments included in the table with respect to our rebuild, upgrade and network extension commitments are estimated based on the remaining capital required to bring the cable distribution system into compliance with the requirements of the applicable franchise agreement specifications.
In addition to the commitments set forth in the table above, we have commitments under agreements with programming vendors, franchise authorities and municipalities, and other third parties pursuant to which we expect to make payments in future periods. Such amounts are not included in the above table because they are not fixed or determinable due to various factors.
Critical Accounting Policies, Judgments and Estimates
The preparation of these financial statements required us to make estimates and assumptions that affected the reported amounts of assets and liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from those estimates under different assumptions or conditions. Critical accounting policies are defined as those policies that are reflective of significant judgments and uncertainties, which would potentially result in materially different results under different assumptions and conditions. We believe our judgments and related estimates associated with the carrying value of our long-lived assets, the valuation of our acquisition related assets and liabilities, the carrying value of our investments, capitalization of our construction and installation costs, our income tax accounting and our accounting for derivative instruments to be critical in the preparation of our consolidated financial statements. These accounting estimates or assumptions are critical because of the levels of judgment necessary to account for matters that are inherently uncertain or susceptible to change.
Carrying Value of Long-lived Assets
The aggregate carrying value of our property and equipment, intangible assets and goodwill (collectively, long-lived assets) that were held for use comprised 81% and 55% of our total assets at December 31, 2005 and 2004, respectively. Pursuant to SFAS 142 and SFAS 144, we are required to assess the recoverability of our long-lived assets.
SFAS 144 requires that we periodically review the carrying amounts of our property and equipment and our intangible assets (other than goodwill and indefinite-lived intangible assets) to determine whether current events or circumstances indicate that such carrying amounts may not be recoverable. If the carrying amount of the asset is greater than the expected undiscounted cash flows to be generated by such asset, an impairment adjustment is recognized. Such adjustment is measured by the amount that the carrying value of such assets exceeds their fair value. We generally measure fair value by considering sale prices for similar assets or by discounting estimated future cash flows using an appropriate discount rate. For purposes of impairment testing, long-lived assets are grouped at the lowest level for which cash flows are largely independent of other assets and liabilities. Assets to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell.
Pursuant to SFAS 142, we evaluate the goodwill, franchise rights and other indefinite-lived intangible assets for impairment at least annually on October 1 and whenever other facts and circumstances indicate that the carrying amounts of goodwill and indefinite-lived intangible assets may not be recoverable. For purposes of the goodwill evaluation, we compare the fair value of each of our reporting units to their respective carrying amounts. If the carrying value of a reporting unit were to exceed its fair value, we would then compare the implied fair value of the reporting unit’s goodwill to its carrying amount, and any excess of the carrying

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amount over the fair value would be charged to operations as an impairment loss. Any excess of the carrying value over the fair value for franchise rights is charged to operations as an impairment loss.
Considerable management judgment is necessary to estimate the fair value of assets; accordingly, actual results could vary significantly from such estimates.
In 2005, 2004 and 2003, we recorded impairments of our long-lived assets aggregating $8,320,000, $69,353,000 and nil, respectively. For additional information, see note 9 to our consolidated financial statements.
Fair Value of Acquisition Related Assets and Liabilities
We allocate the purchase price of acquired companies or acquisitions of minority interests of a subsidiary to the identifiable assets acquired and liabilities assumed based on their estimated fair values. In determining fair value, we are required to make estimates and assumptions that affect the recorded amounts. Third party valuation specialists generally are engaged to assist in the valuation of certain of these assets and liabilities. Estimates used in valuing acquired assets and liabilities include, but are not limited to, expected future cash flows, market comparables and appropriate discount rates, remaining useful lives of long-lived assets, replacement costs of property and equipment, fair values of debt, and the amounts to be recovered in future periods from acquired net operating losses and other deferred tax assets. Our estimates in this area impact the amount of depreciation and amortization, impairment charges, interest expense and income tax expense or benefit that we report in the periods following the acquisition date. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain.
Carrying Value of Investments
The aggregate carrying value of our available-for-sale, cost and equity method investments comprised 6% and 20% of our total assets at December 31, 2005 and 2004, respectively. We account for these investments pursuant to SFAS 115, SFAS 142 and APB 18. These accounting principles require us to periodically evaluate our investments to determine if a decline in fair value below the cost basis is other-than-temporary. If a decline in fair value is deemed to be other-than-temporary, the cost basis of the security is written down to fair value. Writedowns for cost investments and available-for-sale securities are included in the consolidated statements of operations as other-than-temporary declines in fair values of investments. Writedowns for equity method investments are included in share of earnings (losses) of affiliates.
The primary factors we consider in our determination are the length of time that the fair value of the investment is below our company’s carrying value and the financial condition, operating performance and near term prospects of the investee. In addition, we consider the reason for the decline in fair value, be it general market conditions, industry specific or investee specific; changes in stock price or valuation subsequent to the balance sheet date; and our intent and ability to hold the investment for a period of time sufficient to allow for a recovery in fair value. If the decline in fair value is deemed to be other-than-temporary, the cost basis of the security is written down to fair value. In situations where the fair value of an investment is not evident due to a lack of a public market price or other factors, we use our best estimates and assumptions to arrive at the estimated fair value of such investment. Our assessment of the foregoing factors involves a high degree of judgment and accordingly, actual results may differ materially from our estimates and judgments.
Our evaluation of the fair value of our investments and any resulting impairment charges are determined as of the most recent balance sheet date. Changes in fair value subsequent to the balance sheet date due to the factors described above are possible. Subsequent decreases in fair value will be recognized in our consolidated statement of operations in the period in which they occur to the extent such decreases are deemed to be other-than-temporary. Subsequent increases in fair value will be recognized in our consolidated statement of operations only upon our ultimate disposition of the investment.

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In 2005, 2004 and 2003, we recorded other-than-temporary declines in the fair values of our (i) cost and available-for-sale investments aggregating $3,403,000, $18,542,000 and $6,884,000, respectively, and (ii) equity method investments aggregating $29,187,000, $25,973,000 and $12,616,000, respectively. For additional information, see note 6 to our consolidated financial statements.
Capitalization of Construction and Installation Costs
In accordance with SFAS 51, Financial Reporting by Cable Television Companies, we capitalize costs associated with the construction of new cable transmission and distribution facilities and the installation of new cable services. Capitalized construction and installation costs include materials, labor and applicable overhead costs. Installation activities that are capitalized include (i) the initial connection (or drop) from our cable system to a customer location, (ii) the replacement of a drop, and (iii) the installation of equipment for additional services, such as digital cable, telephone or broadband Internet service. The costs of other customer-facing activities such as reconnecting customer locations where a drop already exists, disconnecting customer locations and repairing or maintaining drops, are expensed as incurred. Significant judgment is involved in the determination of the nature and amount of internal costs to be capitalized with respect to construction and installation activities.
Income Tax Accounting
We are required to estimate the amount of tax payable or refundable for the current year and the deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts and income tax basis of assets and liabilities and the expected benefits of utilizing net operating loss and tax credit carryforwards, using enacted tax rates in effect for each taxing jurisdiction in which we operate for the year in which those temporary differences are expected to be recovered or settled. This process requires our management to make assessments regarding the timing and probability of the ultimate tax impact of such items. Net deferred tax assets are reduced by a valuation allowance if we believe it more-likely-than-not such net deferred tax assets will not be realized. Establishing a tax valuation allowance requires us to make assessments about the timing of future events, including the probability of expected future taxable income and available tax planning opportunities. At December 31, 2005, the aggregate valuation allowance provided against deferred tax assets was $2,766,270,000. Actual income taxes could vary from these estimates due to future changes in income tax law or interpretations thereof in the jurisdictions in which we operate, our inability to generate sufficient future taxable income, differences between estimated and actual results, or unpredicted results from the final determination of each year’s liability by taxing authorities. Any of such factors could have a material effect on our current and deferred tax position as reported in our consolidated financial statements. A high degree of judgment is required to assess the impact of possible future outcomes on our current and deferred tax positions. For additional information, see note 12 to our consolidated financial statements.
Derivative Instruments
As further described in note 8 to our consolidated financial statements, we have entered into various derivative instruments, including interest rate and foreign currency derivative instruments. In addition, we have entered into other contracts, such as the UGC Convertible Notes, that contain embedded derivative financial instruments. All derivatives are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. If the derivative is not designated as a hedge, changes in the fair value of the derivative are recognized in earnings. With the exception of J:COM’s interest rate swaps in 2005, none of the derivative instruments that were in effect during the three years ended December 31, 2005 were designated as hedges.

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We use a binomial model to estimate the fair value of the derivative instrument embedded in the UGC Convertible Notes and certain call options that we hold with respect to Telenet ordinary shares. We also use the Black-Scholes option-pricing model to estimate the fair value of certain other derivative instruments that we hold. These models incorporate a number of variables in determining such fair values, including expected volatility of the underlying security, an appropriate discount rate and the U.S. dollar to euro exchange rate. Volatility rates are based on the expected volatility of the underlying security over the term of the derivative instrument, and are adjusted quarterly. U.S. dollar to euro exchange rates are based on published indices, and are adjusted quarterly. Considerable management judgment is required in estimating these variables. Actual results upon settlement of our derivative instruments may differ materially from these estimates.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk in the normal course of our business operations due to our investments in various foreign countries and ongoing investing and financial activities. Market risk refers to the risk of loss arising from adverse changes in foreign currency exchange rates, interest rates and stock prices. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. We have established policies, procedures and internal processes governing our management of market risks and the use of financial instruments to manage our exposure to such risks.
Cash and Investments
We invest our cash in liquid instruments that meet high credit quality standards and generally have maturities at the date of purchase of less than three months. We are exposed to exchange rate risk with respect to certain of our cash balances that are denominated in Japanese yen, euros, and, to a lesser degree, other currencies. At December 31, 2005, we and J:COM held cash balances of $11,015,000 and $299,140,000, respectively, that were denominated in Japanese yen and we held cash balances of $362,790,000 that were denominated in euros. These Japanese yen and euro cash balances are available to be used for future acquisitions and other liquidity requirements that may be denominated in such currencies.
We are also exposed to market price fluctuations related to our investments in equity securities. At December 31, 2005, the aggregate fair value of our equity method and available-for-sale investments that was subject to price risk was approximately $96 million.
Foreign Currency Risk
We are exposed to unfavorable and potentially volatile fluctuations of the U.S. dollar (our functional currency) against the currencies of our operating subsidiaries and affiliates. Any increase (decrease) in the value of the U.S. dollar against any foreign currency that is the functional currency of one of our operating subsidiaries or affiliates will cause the parent company to experience unrealized foreign currency translation losses (gains) with respect to amounts already invested in such foreign currencies. In addition, we and our operating subsidiaries and affiliates are exposed to foreign currency risk to the extent that we enter into transactions denominated in currencies other than our respective functional currencies, such as investments in debt and equity securities of foreign subsidiaries, equipment purchases, programming costs, notes payable and notes receivable (including intercompany amounts) that are denominated in a currency other than their own functional currency. Changes in exchange rates with respect to these items will result in unrealized (based upon period-end exchange rates) or realized foreign currency transaction gains and losses upon settlement of the transactions. In addition, we are exposed to foreign exchange rate fluctuations related to our operating subsidiaries’ monetary assets and liabilities and the financial results of foreign subsidiaries and affiliates when their respective financial statements are translated into U.S. dollars for inclusion in our consolidated financial statements. Cumulative translation adjustments are recorded in accumulated other comprehensive earnings (loss) as a separate component of equity. As a result of foreign currency risk, we may experience economic loss and a negative impact on earnings and equity with respect to our holdings solely as a result of foreign currency exchange rate fluctuations. The primary exposure to foreign currency risk for our company is to the

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euro and Japanese yen as 40% and 32% of our U.S. dollar revenue during 2005 was derived from subsidiaries whose functional currency is the euro and Japanese yen, respectively. In addition, we have significant exposure to changes in the exchange rates for the Swiss franc, Chilean peso, the Hungarian forint and other local currencies in Europe.
Several of our subsidiaries have outstanding foreign currency forward contracts. A currency forward is an agreement to exchange cash flows denominated in different currencies at a specified future date (the maturity date) and at a specified exchange rate (the forward exchange rate) agreed on the trade date. Changes in the fair value of these contracts are recorded in realized and unrealized gains (losses) on derivative instruments in our consolidated statements of operations. The following table summarizes our outstanding foreign currency forward contracts at December 31, 2005:
                         
    Amounts converted    
         
    Local currency   Foreign currency   Maturity dates
             
    amounts in thousands    
UPC Broadband Holding
    NOK     876,280     109,320       January 2006  
J:COM
    ¥       1,033,000     $ 8,882       February — May 2006  
VTR
    CLP 16,408,905     $ 30,000       January — December 2006  
LG Switzerland
    CHF     925,133     606,446       April 2007  
Austar
    AUD       62,987     $ 46,150       January 2006 — December 2007  
The relationship between the euro, Japanese yen, Chilean peso, Swiss franc and the Hungarian forint and the U.S. dollar, which is our reporting currency, is shown below, per one U.S. dollar:
                         
    December 31,   December 31,   December 31,
Spot rates:   2005   2004   2003
             
Euro
    0.8451       0.7333       0.7933  
Swiss Franc
    1.3153       1.1319       1.238  
Japanese yen
    117.95       102.41       107.37  
Chilean peso
    514.01       559.19       593.80  
Hungarian forint
    213.52       180.59       209.38  
                         
    Year ended December 31,
     
Average rates:   2005   2004   2003
             
Euro
    0.8043       0.8059       0.8806  
Swiss Franc
    1.2924       1.240       1.3452  
Japanese yen
    109.81       107.44       116.06  
Chilean peso
    558.42       609.22       686.04  
Hungarian forint
    199.49       202.84       228.73  
     Inflation and Foreign Investment Risk
Certain of our operating companies operate in countries where the rate of inflation is higher than that in the United States. While our affiliated companies attempt to increase their 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 reported 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. Our foreign operating companies are all directly affected by their respective countries’ government, economic, fiscal and monetary policies and other political factors.

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     Interest Rate Risks
We are exposed to changes in interest rates primarily as a result of our borrowing and investment activities, which include fixed and floating rate investments and borrowings by our operating subsidiaries that are used to maintain liquidity and fund their respective business operations. The nature and amount of our long-term and short-term debt are expected to vary as a result of future requirements, market conditions and other factors. Our primary exposure to variable rate debt is through the EURIBOR-indexed and LIBOR-indexed debt of UPC Broadband Holding, Cablecom Luxembourg and LG Switzerland, the TIBOR-indexed debt of J:COM and the TAB-indexed debt of VTR. UPC Broadband Holding, Cablecom Luxembourg, LG Switzerland, J:COM, VTR and certain other of our subsidiaries have entered into various derivative transactions pursuant to their policies to manage exposure to movements in interest rates. We use interest rate exchange agreements to exchange, at specified intervals, the difference between fixed and variable interest amounts calculated by reference to an agreed-upon notional principal amount. We also use interest rate cap agreements that lock in a maximum interest rate should variable rates rise, but which enable it to otherwise pay lower market rates. We manage the credit risks associated with our derivative financial instruments through the evaluation and monitoring of the creditworthiness of the counterparties. Although the counterparties may expose our company to losses in the event of nonperformance, we do not expect such losses, if any, to be significant.
Weighted Average Variable Interest Rate — At December 31, 2005, our variable rate indebtedness (exclusive of the effects of interest rate exchange agreements) aggregated approximately $7.6 billion, and the weighted-average interest rate (including margin) on such variable rate indebtedness was approximately 4.9% (5.7% exclusive of J:COM). Assuming no change in the amount outstanding, and without giving effect to any interest rate exchange agreements, a hypothetical 50 basis point increase (decrease) in our weighted average variable interest rate would increase (decrease) our annual consolidated interest expense and cash outflows by approximately $38 million.
     Derivative Instruments
Cross-currency and Interest Rate Contracts
Through our subsidiaries, we have entered into various derivative instruments to manage interest rate and foreign currency exposure. With the exception of J:COM’s interest rate swaps, which as discussed below, are accounted for as cash flow hedges, we do not apply hedge accounting to our derivative instruments. Accordingly, changes in the fair values of all other derivative instruments are recorded in realized and

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unrealized gains (losses) on derivative instruments in our consolidated statements of operations. The terms of significant outstanding contracts at December 31, 2005, were as follows:
Cross-currency and Interest Rate Swaps:
                                   
    Principal       Interest rate   Interest rate
    amount due   Notional   (on principal   (on notional
    from   amount due to   amount) due from   amount) due to
Maturity date   counterparty   counterparty   counterparty   counterparty
                 
    amounts in thousands        
UPC Broadband Holding:
                               
 
December 2011(1)
  $ 525,000     393,500       LIBOR + 3.0%       EURIBOR + 3.10%  
 
October 2012(2)
    1,250,000       944,000       LIBOR + 2.5%       6.06%  
                         
    $ 1,775,000     1,337,500                  
                         
Cablecom GmbH(3):
                               
 
April 2007
  193,333       CHF 299,792       9.74%       8.33%  
 
April 2007
    96,667       149,896       9.74%       8.41%  
                         
    290,000       CHF 449,688                  
                         
 
(1)  Swap contract effectively converts the indicated principal amount of UPC Broadband Holding’s U.S. dollar-denominated LIBOR-indexed floating rate debt to Euro-denominated EURIBOR-indexed floating rate debt.
 
(2)  Swap contract effectively converts the indicated principal amount of UPC Broadband Holding’s U.S. dollar-denominated LIBOR-indexed floating rate debt to Euro-denominated fixed rate debt.
 
(3)  Swap contract effectively converts the indicated principal amount of Cablecom Luxembourg’s Euro-denominated fixed-rate debt to CHF-denominated fixed-rate debt.
Holding all other factors constant, (i) an instantaneous increase of 10% in the value of the U.S. dollar relative to the euro at December 31, 2005 would have increased the aggregate value of the UPC Broadband Holding cross-currency and interest rate exchange contracts by approximately 172 million ($204 million), (ii) an instantaneous decrease of 10% in the value of the U.S. dollar relative to the euro at December 31, 2005 would have decreased the aggregate value of the UPC Broadband Holding cross-currency and interest rate exchange contracts by approximately 146 million ($173 million), and (iii) an instantaneous increase (decrease) in the relevant base floating rate of 50 basis points (0.50%) at December 31, 2005 would have increased (decreased) the aggregate value of the UPC Broadband Holding cross-currency and interest rate swaps and caps by approximately 67 million ($79 million).
Holding all other factors constant, (i) an instantaneous increase (decrease) of 10% in the value of the euro relative to the Swiss franc at December 31, 2005 would have increased (decreased) the aggregate value of the Cablecom GmbH and Cablecom Luxembourg cross-currency and interest rate exchange contracts by approximately $37 million and (ii) an instantaneous increase (decrease) in the relevant base floating rate (excluding margin) of 50 basis points (0.50%) at December 31, 2005 would have increased (decreased) the aggregate value of the Cablecom GmbH cross-currency and interest rate swaps by approximately $27 million.

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Interest Rate Swaps:
                       
        Variable    
        interest rate   Fixed interest
        due from   rate due to
Maturity date   Notional amount   counterparty   counterparty
             
    amounts in        
    thousands        
UPC Broadband Holding(1):
                   
 
January 2006
  525,000     EURIBOR     2.26%  
 
January 2006
    550,000     EURIBOR     2.33%  
 
April 2010
    1,000,000     EURIBOR     3.28%  
 
September 2012
    500,000     EURIBOR     2.96%  
                 
    2,575,000              
                 
LG Switzerland(2)
                   
 
April 2007
  560,072     EURIBOR     2.82%  
                 
Cablecom Luxembourg(3):
                   
 
December 2010
    CHF618,480     CHF LIBOR     2.19%  
 
December 2012
    711,520     CHF LIBOR     2.34%  
                 
      CHF1,330,000              
                 
Austar(4):
                   
 
December 2006
    AUD165,000     AUD LIBOR     5.67%  
 
January 2009
    115,800     AUD LIBOR     5.72%  
                 
      AUD280,800              
                 
Puerto Rico subsidiary(5):
                   
 
May 2007
  $ 31,875     LIBOR     3.75%  
 
May 2009
    31,875     LIBOR     3.98%  
                 
    $ 63,750              
                 
VTR(6):
                   
 
June 2012
    CLP140,401,800     TAB     7.01%  
                 
J:COM(7):
                   
 
June 30, 2009
    ¥33,798,240     TIBOR     0.52%  
 
December 30, 2009
    5,500,000     TIBOR     0.55%  
 
December 30, 2009
    1,500,000     TIBOR     0.69%  
 
December 30, 2009
    3,000,000     TIBOR     0.70%  
                 
      ¥43,798,240