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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Amendment No. 2)
     
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the fiscal year ended December 31, 2004
 
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 000-50671
Liberty Media International, Inc.
(Exact name of Registrant as specified in its charter)
     
State of Delaware   20-0893138
(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:
(720) 875-5800
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
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. [     ]
Indicate by check mark whether the Registrant is an accelerated filer as defined in Rule 12b-2 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, as of the last business day of the registrant’s most recently completed second fiscal quarter: $5,174,572,000.
The number of outstanding shares of Liberty Media International, Inc.’s common stock as of February 28, 2005 was:
165,514,962 shares of Series A common stock; and
7,264,300 shares of Series B common stock.
Portions of the definitive proxy statement of the Registrant’s 2005 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.



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EXPLANATORY NOTE
The Registrant is filing this Amendment No. 2 on Form 10-K/A to its Annual Report on Form 10-K for the year ended December 31, 2004 in order to (i) make certain changes to the consolidated financial statements of Torneas y Competencias S.A., and (ii) correct certain typographical errors that appeared on page IV-41 and Exhibit 23.2 and Exhibit 23.3. Accordingly, the Registrant hereby amends and replaces in its entirety Item 15 of its Annual Report on Form 10-K for the year ended December 31, 2004.
* * *

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LIBERTY MEDIA INTERNATIONAL, INC.
FORM 10-K/A
(Amendment No. 2)
TABLE OF CONTENTS
             
        Page
         
PART IV
   Exhibits and Financial Statement Schedules     IV-1  

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PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) (1) FINANCIAL STATEMENTS
The financial statements required under this Item begin on page II-38 of this Annual Report.
(a) (2) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules required under this Item are as follows:
         
  IV-7
  IV-8
  IV-8
  IV-9
  IV-10
  IV-11
  IV-12
Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons:
   
 
Jupiter Telecommunications Co., Ltd. and Subsidiaries
   
      IV-13
      IV-14
      IV-16
      IV-17
      IV-18
      IV-19
 
Jupiter Programming Co. Ltd.
   
      IV-41
      IV-42
      IV-44
      IV-45
      IV-46
      IV-47

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Torneos y Competencias S.A.
   
    IV-70
    IV-71
    IV-72
    IV-73
    IV-74
    IV-75
UnitedGlobalCom, Inc.
   
    IV-93
    IV-94
    IV-95
    IV-96
    IV-97
    IV-100
    IV-101
 Consent of KPMG LLP
 Consent of KPMG AZSA & Co.
 Consent of KPMG AZSA & Co.
 Consent of Finsterbusch Pickenhayn Sibille
 Consent of KPMG LLP
 Certification of President & CEO
 Certification of Senior VP & Treasurer
 Certification of Senior VP & Controller
 Section 1350 Certification
(a) (3) EXHIBITS
Listed below are the exhibits filed as part of this Annual Report (according to the number assigned to them in Item 601 of Regulation S-K):
         
2 — Plan of Acquisition Reorganization, Arrangement, Liquidation or Succession:
  2.1     Agreement and Plan of Merger, dated as of January 17, 2005, among New Cheetah, Inc. (now known as Liberty Global, Inc.), the Registrant, UnitedGlobalCom, Inc. (“UGC”), Cheetah Acquisition Corp. and Tiger Global Acquisition Corp. (incorporated by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K, dated January 17, 2005)
3 — Articles of Incorporation and Bylaws:
  3.1     Restated Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Registrant’s Registration Statement on Form 10, dated April 2, 2004 (File No. 000-50671) (the “Form 10”))
  3.2     Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Registrant’s Registration Statement on Form 10, dated May 25, 2004 (File No. 000-50671) (the “Form 10 Amendment”))
4 — Instruments Defining the Rights of Securities Holders, including Indentures:
  4.1     Specimen certificate for shares of Series A common stock, par value $.01 per share, of the Registrant (incorporated by reference to Exhibit 4.1 to the Form 10)
  4.2     Specimen certificate for shares of Series B common stock, par value $.01 per share, of the Registrant (incorporated by reference to Exhibit 4.2 to the Form 10)
  4.3     Indenture, dated as of April 6, 2004, between UGC and The Bank of New York (incorporated by reference to Exhibit 4.1 to UGC’s Current Report on Form 8-K, dated April 6, 2004 (File No. 000-496-58) (the “UGC April 2004 8-K”))
  4.4     Registration Rights Agreement, dated as of April 6, 2004, between UGC and Credit Suisse First Boston (incorporated by reference to Exhibit 10.1 to the UGC April 2004 8-K)

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  4.5     Amendment and Restatement Agreement, dated March 7, 2005, among UPC Broadband Holding B.V. (“UPC Broadband”) and UPC Financing Partnership (“UPC Financing”), as Borrowers, the guarantors listed therein, and TD Bank Europe Limited, as Facility Agent and Security Agent, including as Schedule 3 thereto the Restated 1,072,000,000 Senior Secured Credit Facility, originally dated January 16, 2004, among UPC Broadband, as Borrower, the guarantors listed therein, the banks and financial institutions listed therein as Initial Facility D Lenders, TD Bank Europe Limited, as Facility Agent and Security Agent, and the facility agents under the Existing Facility (as defined therein) (the “2004 Credit Agreement”) (incorporated by reference to Exhibit 10.32 to UGC’s Annual Report on Form 10-K, dated March 14, 2005 (File No. 000-496-58) (the “UGC 2004 10-K”))
  4.6     Additional Facility Accession Agreement, dated June 24, 2004, among UPC Broadband, as Borrower, TD Bank Europe Limited, as Facility Agent and Security Agent, and the banks and financial institutions listed therein as Additional Facility E Lenders, under the 2004 Credit Agreement (incorporated by reference to Exhibit 10.2 to UGC’s Current Report on Form 8-K, dated June 29, 2004 (File No. 000-496-58))
  4.7     Additional Facility Accession Agreement, dated December 2, 2004, among UPC Broadband, as Borrower, TD Bank Europe Limited, as Facility Agent and Security Agent, and the banks and financial institutions listed therein as Additional Facility F Lenders, under the 2004 Credit Agreement (incorporated by reference to Exhibit 10.1 to UGC’s Current Report on Form 8-K, dated December 2, 2004 (File No. 000-496-58))
  4.8     Additional Facility Accession Agreement, dated March 9, 2005, among UPC Broadband, as Borrower, TD Bank Europe Limited, as Facility Agent and Security Agent, and the banks and financial institutions listed therein as Additional Facility G Lenders, under the 2004 Credit Agreement (incorporated by reference to Exhibit 10.39 to the UGC 2004 10-K)
  4.9     Additional Facility Accession Agreement, dated March 7, 2005, among UPC Broadband, as Borrower, TD Bank Europe Limited, as Facility Agent and Security Agent, and the banks and financial institutions listed therein as Additional Facility H Lenders, under the 2004 Credit Agreement (incorporated by reference to Exhibit 10.40 to the UGC 2004 10-K
  4.10     Additional Facility Accession Agreement, dated March 9, 2005, among UPC Broadband, as Borrower, TD Bank Europe Limited, as Facility Agent and Security Agent, and the banks and financial institutions listed therein as Additional Facility I Lenders, under the 2004 Credit Agreement (incorporated by reference to Exhibit 10.41 to the UGC 2004 10-K)
  4.11     Amendment and Restatement Agreement, dated March 7, 2005, among UPC Broadband and UPC Financing, as Borrowers, the guarantors listed therein, TD Bank Europe Limited and Toronto Dominion (Texas), Inc., as Facility Agents, and TD Bank Europe Limited, as Security Agent, including as Schedule 3 thereto the Restated Credit Agreement, 3,500,000,000 and US$347,500,000 and 95,000,000 Senior Secured Credit Facility, originally dated October 26, 2000, among UPC Broadband and UPC Financing, as Borrowers, the guarantors listed therein, the Lead Arrangers listed therein, the banks and financial institutions listed therein as Original Lenders, TD Bank Europe Limited and Toronto-Dominion (Texas) Inc., as Facility Agents, and TD Bank Europe Limited, as Security Agent (incorporated by reference to Exhibit 10.33 to the UGC 2004 10-K)
  4.12     The Registrant undertakes to furnish to the Securities and Exchange Commission, upon request, a copy of all instruments with respect to long-term debt not filed herewith
10 — Material Contracts:
  10.1     Reorganization Agreement, dated as of May 20, 2004, among Liberty Media Corporation (“Liberty”), the Registrant and the other parties named therein (incorporated by reference to Exhibit 2.1 to the Form 10 Amendment)
  10.2     Form of Facilities and Services Agreement between Liberty and the Registrant (incorporated by reference to Exhibit 10.3 to the Form 10 Amendment)
  10.3     Agreement for Aircraft Joint Ownership and Management, dated as of May 21, 2004, between Liberty and the Registrant (incorporated by reference to Exhibit 10.4 to the Form 10 Amendment)

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  10.4     Form of Tax Sharing Agreement between Liberty and the Registrant (incorporated by reference to Exhibit 10.5 to the Form 10 Amendment)
  10.5     Form of Credit Facility between Liberty and the Registrant (terminated in accordance with its terms) (incorporated by reference to Exhibit 10.6 to the Form 10 Amendment)
  10.6     Liberty Media International, Inc. 2004 Incentive Plan (incorporated by reference to Exhibit 10.1 to the Form 10 Amendment)
  10.7     Liberty Media International, Inc. 2004 Non-Employee Director Incentive Plan (incorporated by reference to Exhibit 10.2 to the Form 10 Amendment)
  10.8     Liberty Media International, Inc. 2004 Incentive Plan Non-Qualified Stock Option Agreement, dated as of June 7, 2004, between John C. Malone and the Registrant (incorporated by reference to Exhibit 7(A) to Mr. Malone’s Schedule 13D/ A (Amendment No. 1) with respect to the Registrant’s common stock, dated July 14, 2004 (File No. 005-79904))
  10.9     Form of Liberty Media International, Inc. 2004 Incentive Plan Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q, dated August 16, 2004 (File No. 000-50671) (the “LMI June 2004 10-Q”))
  10.10     Form of Liberty Media International, Inc. 2004 Non-Employee Director Incentive Plan Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.5 to the LMI June 2004 10-Q)
  10.11     Liberty Media International, Inc. Transitional Stock Adjustment Plan (incorporated by reference to Exhibit 4.5 to the Registrant’s Registration Statement on Form S-8, dated June 23, 2004 (File No. 333-116790))
  10.12     Description of Director Compensation Policy*
  10.13     Form of Indemnification Agreement between the Registrant and its Directors*
  10.14     Form of Indemnification Agreement between the Registrant and its Executive Officers*
  10.15     Stock Option Plan for Non-Employee Directors of UGC, effective June 1, 1993, amended and restated as of January 22, 2004 (incorporated by reference to Exhibit 10.7 to UGC’s Annual Report on Form 10-K, dated March 15, 2004 (File No. 000-496-58) (the “UGC 2003 10-K”))
  10.16     Stock Option Plan for Non-Employee Directors of UGC, effective March 20, 1998, amended and restated as of January 22, 2004 (incorporated by reference to Exhibit 10.8 to the UGC 2003 10-K)
  10.17     2003 Equity Incentive Plan of UGC, effective September 1, 2003 (incorporated by reference to Exhibit 10.9 to the UGC 2003 10-K)
  10.18     Amended and Restated Stockholders’ Agreement, dated as of May 21, 2004, among the Registrant, Liberty Media International Holdings, LLC, Robert R. Bennett, Miranda Curtis, Graham Hollis, Yasushige Nishimura, Liberty Jupiter, Inc., and, solely for purposes of Section 9 thereof, Liberty (incorporated by reference to Exhibit 10.23 to the Form 10 Amendment)
  10.19     Standstill Agreement between UGC and Liberty, dated as of January 5, 2004 (incorporated by reference to Exhibit 10.2 to UGC’s Current Report on Form 8-K, dated January 5, 2004 (File No. 000-496-58))
  10.20     Standstill Agreement among UGC, Liberty and the parties named therein, dated January 30, 2002 (terminated except as to (i) UGC’s obligations under the final sentence of Section 9(b) and (ii) Section 7B and the related definitions in Section 1 as set forth in, and as modified by, the Letter Agreement referenced in Exhibit 10.21)(incorporated by reference to Exhibit 10.9 to UGC’s Registration Statement on Form S-1, dated February 14, 2002 (File No. 333-82776))
  10.21     Letter Agreement, dated November 12, 2003, between UGC and Liberty (incorporated by reference to Exhibit 10.1 to UGC’s Current Report on Form 8-K, dated November 12, 2003 (File No. 000-496-58))
  10.22     Share Exchange Agreement, dated as of August 18, 2003, among Liberty and the Stockholders of UGC named therein (incorporated by reference to Exhibit 7(j) to Liberty’s Schedule 13D/ A with respect to UGC’s Class A common stock, dated August 21, 2003)

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  10.23     Amendment to Share Exchange Agreement, dated as of December 22, 2003, among Liberty and the Stockholders of UGC named on the signature pages thereto (incorporated by reference to Exhibit 4.5 to Liberty’s Registration Statement on Form S-3, dated December 24, 2003 (File No. 333-111564))
  10.24     Stock and Loan Purchase Agreement, dated as of March 15, 2004, among Suez SA, MédiaRéseaux SA, UPC France Holding BV and UGC (incorporated by reference to Exhibit 10.1 to UGC’s Current Report on Form 8-K, dated July 1, 2004 (File No. 000-496-58) (the “UGC July 2004 8-K”))
  10.25     Amendment to the Purchase Agreement, dated as of July 1, 2004, among Suez SA, MédiaRéseaux SA, UPC France Holding BV and UGC (incorporated by reference to Exhibit 10.2 to the UGC July 2004 8-K)
  10.26     Shareholders Agreement, dated as of July 1, 2004, among UGC, UPC France Holding BV and Suez SA (incorporated by reference to Exhibit 10.3 to the UGC July 2004 8-K)
  10.27     Amended and Restated Operating Agreement dated November 26, 2004, among Liberty Japan, Inc., Liberty Japan II, Inc., LMI Holdings Japan, LLC, Liberty Kanto, Inc., Liberty Jupiter, Inc. and Sumitomo Corporation, and, solely with respect to Sections 3.1(c), 3.1(d) and 16.22 thereof, the Registrant*
21 — List of Subsidiaries*
23 — Consent of Experts and Counsel:
  23.1     Consent of KPMG LLP**
  23.2     Consent of KPMG AZSA & Co.**
  23.3     Consent of KPMG AZSA & Co.**
  23.4     Consent of Finsterbusch Pickenhayn Sibille**
  23.5     Consent of KPMG LLP**
31 — Rule 13a-14(a)/15d-14(a) Certification:
  31.1     Certification of President and Chief Executive Officer**
  31.2     Certification of Senior Vice President and Treasurer**
  31.3     Certification of Senior Vice President and Controller**
32 — Section 1350 Certification**
 
  Filed with the Registrant’s Form 10-K, dated March 14, 2005
**  Filed herewith

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
  Liberty Media Corporation
  By  /s/ Bernard G. Dvorak
 
 
  Bernard G. Dvorak
  Senior Vice President and Controller
Dated: April 18, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
         
Signature   Title   Date
         
 
/s/ John C. Malone
 
John C. Malone
  Chairman of the Board, Chief Executive Officer, President and Director   April 18, 2005
 
/s/ Robert R. Bennett
 
Robert R. Bennett
  Vice Chairman   April 18, 2005
 
/s/ Donne F. Fisher
 
Donne F. Fisher
  Director   April 18, 2005
 
/s/ David E. Rapley
 
David E. Rapley
  Director   April 18, 2005
 
/s/ M. LaVoy Robison
 
M. LaVoy Robison
  Director   April 18, 2005
 
/s/ Larry E. Romrell
 
Larry E. Romrell
  Director   April 18, 2005
 
/s/ J. C. Sparkman
 
J. C. Sparkman
  Director   April 18, 2005
 
/s/ J. David Wargo
 
J. David Wargo
  Director   April 18, 2005
 
/s/ Graham E. Hollis
 
Graham E. Hollis
  Senior Vice President and Treasurer (Principal Financial Officer)   April 18, 2005
 
/s/ Bernard G. Dvorak
 
Bernard G. Dvorak
  Senior Vice President and Controller (Principal Accounting Officer)   April 18, 2005

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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Liberty Media International, Inc.:
Under date of March 11, 2005, we reported on the consolidated balance sheets of Liberty Media International, Inc. and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of operations, comprehensive earnings (loss), stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004, which are included in the Company’s annual report on Form 10-K for the year ended December 31, 2004. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules I and II in the Company’s annual report on Form 10-K for the year ended December 31, 2004. These financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG LLP
Denver, Colorado
March 11, 2005

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LIBERTY MEDIA INTERNATIONAL, INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Parent Company Information)
CONDENSED BALANCE SHEET
(Parent Company Only)
As of December 31, 2004
amounts in thousands
             
ASSETS
Current assets:
       
 
Cash and cash equivalents
  $ 1,069,996  
 
Derivative instruments
    56,011  
 
Other current assets
    621  
       
   
Total current assets
    1,126,628  
       
Investments in consolidated subsidiaries
    4,133,285  
Property and equipment, at cost
    7,597  
Accumulated depreciation
    (387 )
       
      7,210  
       
   
Total assets
  $ 5,267,123  
       
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
       
 
Accrued liabilities
  $ 3,927  
 
Derivative instruments
    5,257  
       
   
Total current liabilities
    9,184  
       
Other long-term liabilities
    31,133  
       
   
Total liabilities
    40,317  
       
Commitments and contingencies
       
Stockholders’ Equity:
       
 
Series A common stock, $.01 par value. Authorized 500,000,000 shares; issued and outstanding; 168,514,962 and nil shares at December 31, 2003 and 2004, respectively
    1,685  
 
Series B common stock, $.01 par value. Authorized 50,000,000 shares; issued and outstanding; 7,264,300 and nil shares at December 31, 2003 and 2004, respectively
    73  
 
Series C common stock, $.01 par value. Authorized 500,000,000 shares; no shares issued at December 31, 2004 or 2003
     
 
Additional paid-in capital
    7,001,635  
 
Accumulated deficit
    (1,662,707 )
 
Accumulated other comprehensive loss, net of taxes
    14,010  
 
Treasury stock, at cost
    (127,890 )
       
   
Total stockholders’ equity
    5,226,806  
       
   
Total liabilities and stockholders’ equity
  $ 5,267,123  
       

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LIBERTY MEDIA INTERNATIONAL, INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Parent Company Information)
CONDENSED STATEMENT OF OPERATIONS
(Parent Company Only)
For the seven months ended December 31, 2004
amounts in thousands
             
Operating costs and expenses:
       
 
Selling, general and administrative (SG&A)
  $ 8,535  
 
Stock-based compensation charges
    20,382  
 
Depreciation and amortization
    387  
       
   
Operating loss
    (29,304 )
       
Other income (expense):
       
 
Interest and dividend income
    8,673  
 
Realized and unrealized losses on derivative instruments, net
    (4,146 )
 
Other income, net
    1,465  
       
      5,992  
       
   
Loss before income taxes and equity in income of consolidated subsidiaries, net
    (23,312 )
Equity in income of consolidated subsidiaries, net
    76,743  
Income tax benefit
    5,763  
       
   
Net income
  $ 59,194  
       

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LIBERTY MEDIA INTERNATIONAL, INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Parent Company Information)
CONDENSED STATEMENT OF STOCKHOLDERS’ EQUITY
(Parent Company Only)
For the seven months ended December 31, 2004
                                                                   
                        Accumulated        
                other        
    Common stock   Additional       comprehensive   Treasury   Total
        paid-in   Accumulated   earnings (loss),   stock,   stockholders’
    Series A   Series B   Series C   capital   deficit   net of taxes   at cost   equity
                                 
    amounts in thousands
Balance at June 1, 2004
  $ 1,399       61             6,227,851       (1,721,901 )     (56,388 )           4,451,022  
 
Net earnings
                            59,194                   59,194  
 
Other comprehensive earnings
                                  70,398             70,398  
 
Adjustment due to issuance of stock by subsidiaries and affiliates and other changes in subsidiary equity, net of taxes
                      6,049                         6,049  
 
Common stock issued in rights offering
    283       12             735,366                         735,661  
 
Stock issued for stock option exercises
    3                   11,987                         11,990  
 
Repurchase of common stock
                                        (127,890 )     (127,890 )
 
Stock-based compensation
                      20,382                         20,382  
                                                 
Balance at December 31, 2004
  $ 1,685       73             7,001,635       (1,662,707 )     14,010       (127,890 )     5,226,806  
                                                 

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LIBERTY MEDIA INTERNATIONAL, INC.
SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(Parent Company Information)
CONDENSED STATEMENT OF CASH FLOWS
(Parent Company Only)
For the seven months ended December 31, 2004
amounts in thousands
                   
Cash flows from operating activities:
       
 
Net earnings
  $ 59,194  
 
Adjustments to reconcile net earnings to net cash provided by operating activities:
       
   
Stock-based compensation charges
    20,382  
   
Realized and unrealized losses on derivative instruments, net
    4,146  
   
Deferred income tax expense
    (4,417 )
   
Other noncash items, net
    30,582  
   
Changes in operating assets and liabilities
       
     
Receivables, prepaids and other
    (329 )
     
Payables and accruals
    2,242  
       
       
Net cash provided by operating activities
    111,800  
       
Cash flows from investing activities:
       
 
Investments in and loans to consolidated subsidiaries, affiliates and others
    323,538  
 
Net cash paid to purchase or settle derivative instruments
    (35,653 )
 
Other investing activities, net
    (36 )
       
       
Net cash used by investing activities
    287,849  
       
Cash flows from financing activities:
       
 
Net proceeds received from rights offering
    735,661  
 
Treasury stock purchase
    (127,890 )
 
Proceeds from stock option exercises
    11,990  
       
       
Net cash provided by financing activities
    619,761  
       
       
Net increase in cash and cash equivalents
    1,019,410  
       
Cash and cash equivalents:
       
         
Beginning of period
    50,586  
       
         
End of period
  $ 1,069,996  
       
         
Cash paid for interest
     
       
         
Net cash paid for taxes
  $ 4,383  
       

IV-11


Table of Contents

LIBERTY MEDIA INTERNATIONAL, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
                                                           
    Allowance for Doubtful Accounts
     
        Additions    
    Balance at   to costs       Balance at
    beginning   and       Deductions       end of
    of period   expenses   Acquisition   or write-offs   FCTA   Other   period
                             
    amounts in thousands
Year ended
December 31:
                                                       
 
2002
  $ 11,208       6,689             (1,162 )     (3,631 )           13,104  
 
2003
  $ 13,104       1,450             (2,076 )     1,469             13,947  
 
2004
  $ 13,947       22,663       51,400       (30,765 )     3,644       501       61,390  

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Table of Contents

Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Jupiter Telecommunications Co., Ltd. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Jupiter Telecommunications Co., Ltd. (a Japanese corporation) and subsidiaries as of December 31, 2003 and 2004, and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jupiter Telecommunications Co., Ltd. and subsidiaries as of December 31, 2003 and 2004, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
KPMG AZSA & Co.
Tokyo, Japan
February 14, 2005

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Table of Contents

CONSOLIDATED BALANCE SHEETS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES
                     
    December 31,
     
    2003   2004
         
    (Yen in thousands)
Current assets:
               
 
Cash and cash equivalents
  ¥ 7,785,978     ¥ 10,420,109  
 
Restricted cash
    1,773,060        
 
Accounts receivable, less allowance for doubtful accounts of ¥229,793 thousand in 2003 and ¥245,504 thousand in 2004
    7,907,324       8,823,311  
 
Loans to related party (Note 5)
          4,030,000  
 
Prepaid expenses and other current assets (Note 8)
    1,596,150       4,099,032  
             
   
Total current assets
    19,062,512       27,372,452  
Investments:
               
 
Investments in affiliates (Notes 3 and 5)
    2,794,533       3,773,360  
 
Investments in other securities, at cost
    2,891,973       2,901,566  
             
      5,686,506       6,674,926  
Property and equipment, at cost (Notes 5 and 7):
               
 
Land
    1,826,787       1,796,217  
 
Distribution system and equipment
    312,330,187       344,207,670  
 
Support equipment and buildings
    11,593,849       12,612,896  
             
      325,750,823       358,616,783  
 
Less accumulated depreciation
    (81,523,580 )     (108,613,916 )
             
      244,227,243       250,002,867  
Other assets:
               
 
Goodwill, net (Notes 2 and 4)
    139,853,596       140,658,718  
 
Other (Note 4 and 8)
    13,047,229       14,582,383  
             
      152,900,825       155,241,101  
             
    ¥ 421,877,086     ¥ 439,291,346  
             
The accompanying notes to consolidated financial statements are
an integral part of these balance sheets.

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Table of Contents

CONSOLIDATED BALANCE SHEETS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES
                     
    December 31,
     
    2003   2004
         
    (Yen in thousands)
Current liabilities:
               
 
Short-term loans
  ¥     ¥ 250,000  
 
Long-term debt — current portion (Notes 6 and 12)
    2,438,480       5,385,980  
 
Capital lease obligations — current portion (Notes 5, 7 and 12):
               
   
Related parties
    7,673,978       8,237,323  
   
Other
    1,800,456       1,291,918  
 
Accounts payable
    17,293,932       17,164,463  
 
Accrued expenses and other liabilities
    3,576,708       6,155,380  
             
   
Total current liabilities
    32,783,554       38,485,064  
Long-term debt, less current portion (Notes 6 and 12):
               
 
Related parties
    149,739,250        
 
Other
    72,092,465       194,088,485  
Capital lease obligations, less current portion (Notes 5, 7 and 12):
               
 
Related parties
    17,704,295       19,714,799  
 
Other
    3,951,900       2,560,511  
Deferred revenue
    41,635,426       41,699,497  
Severance and retirement allowance (Note 9)
    2,023,706       2,718,792  
Redeemable preferred stock of consolidated subsidiary (Note 10)
    500,000       500,000  
Other liabilities
    3,411,564       180,098  
             
   
Total liabilities
    323,842,160       299,947,246  
             
Minority interest
    1,266,287       974,227  
             
Commitments and contingencies (Note 14)
               
Shareholders’ equity (Note 11):
               
 
Ordinary shares no par value
    63,132,998       78,133,015  
   
Authorized 15,000,000 shares; issued and outstanding 4,684,535.74 shares at December 31, 2003
and 5,146,074.74 shares at December 31, 2004
               
 
Additional paid-in capital
    122,837,273       137,930,774  
 
Accumulated deficit
    (88,506,887 )     (77,685,712 )
 
Accumulated other comprehensive loss
    (694,745 )     (8,204 )
             
   
Total shareholders’ equity
    96,768,639       138,369,873  
             
    ¥ 421,877,086     ¥ 439,291,346  
             
The accompanying notes to consolidated financial statements are
an integral part of these balance sheets.

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Table of Contents

CONSOLIDATED STATEMENTS OF OPERATIONS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES
                             
    Year ended December 31,
     
    2002   2003   2004
             
    (Yen in thousands, except share and
    per share amounts)
Revenue (Note 5):
                       
 
Subscription fees
  ¥ 97,144,356     ¥ 123,214,958     ¥ 140,826,446  
 
Other
    19,486,170       19,944,074       20,519,825  
                   
      116,630,526       143,159,032       161,346,271  
                   
Operating costs and expenses:
                       
 
Operating and programming costs (Note 5)
    45,967,220       49,895,426       53,869,646  
 
Selling, general and administrative (inclusive of stock compensation expense of ¥61,902 thousand in 2002, ¥120,214 thousand in 2003 and ¥84,267 thousand in 2004) (Notes 5 and 11)
    44,266,444       43,650,593       44,311,685  
 
Depreciation and amortization
    30,079,753       36,410,894       40,573,166  
                   
      120,313,417       129,956,913       138,754,497  
                   
   
Operating income (loss)
    (3,682,891 )     13,202,119       22,591,774  
Other income (expense):
                       
 
Interest expense, net:
                       
   
Related parties (Note 5)
    (2,847,551 )     (4,562,594 )     (4,055,343 )
   
Other
    (1,335,400 )     (3,360,674 )     (6,045,939 )
 
Other income, net
    147,639       316,116       37,574  
                   
   
Income (loss) before income taxes and other items
    (7,718,203 )     5,594,967       12,528,066  
Equity in earnings of affiliates (inclusive of stock compensation expense of ¥2,156 thousand in 2002, ¥(2,855) thousand in 2003 and ¥9,217 thousand in 2004) (Note 11)
    235,792       414,756       610,110  
Minority interest in net (income) losses of consolidated subsidiaries
    196,498       (448,668 )     (458,624 )
                   
 
Income (loss) before income taxes
    (7,285,913 )     5,561,055       12,679,552  
Income taxes (Note 8)
    (256,763 )     (209,805 )     (1,858,377 )
                   
   
Net income (loss)
  ¥ (7,542,676 )   ¥ 5,351,250     ¥ 10,821,175  
                   
Per share data:
                       
 
Net income (loss) per share — basic and diluted
  ¥ (1,917 )   ¥ 1,214     ¥ 2,221  
Weighted average number of ordinary shares outstanding — basic and diluted
    3,934,286       4,407,046       4,871,169  
                   
The accompanying notes to consolidated financial statements are
an integral part of these statements.

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Table of Contents

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES
                                                   
                    Accumulated    
        Additional   Comprehensive       Other   Total
    Ordinary   Paid-in   Income   Accumulated   Comprehensive   Shareholders’
    Shares   Capital   (Loss)   Deficit   Loss   Equity
                         
    (Yen in thousands, except per share amounts)
Balance at January 1, 2002
  ¥ 47,002,623     ¥ 106,525,481             ¥ (86,315,461 )   ¥     ¥ 67,212,643  
                                     
Net loss
              ¥ (7,542,676 )     (7,542,676 )           (7,542,676 )
Other comprehensive income
                                             
                                     
Comprehensive loss
                  ¥ (7,542,676 )                        
                                     
Stock compensation (Notes 1 and 11)
          64,058                           64,058  
                                     
Balance at December 31, 2002
  ¥ 47,002,623     ¥ 106,589,539             ¥ (93,858,137 )   ¥     ¥ 59,734,025  
                                     
Net income
              ¥ 5,351,250       5,351,250             5,351,250  
Other comprehensive loss:
                                               
 
Unrealized loss on cash flow hedge
                    (694,745 )             (694,745 )     (694,745 )
                                     
Comprehensive income
                  ¥ 4,656,505                          
                                     
Stock compensation (Notes 1 and 11)
          117,359                           117,359  
Ordinary shares issued upon conversion of long-term debt; 750,250 shares at ¥43,000 per share (Note 6)
    16,130,375       16,130,375                           32,260,750  
                                     
Balance at December 31, 2003
  ¥ 63,132,998     ¥ 122,837,273             ¥ (88,506,887 )   ¥ (694,745 )   ¥ 96,768,639  
                                     
Net income
              ¥ 10,821,175       10,821,175             10,821,175  
Other comprehensive gain:
                                               
 
Unrealized gain on cash flow hedge
                    686,541               686,541       686,541  
                                     
Comprehensive income
                  ¥ 11,507,716                          
                                     
Stock compensation (Notes 1 and 11)
          93,484                           93,484  
Ordinary shares issued; 461,539 shares at ¥65,000 per share (Note 1)
    15,000,017       15,000,017                           30,000,034  
                                     
Balance at December 31, 2004
  ¥ 78,133,015     ¥ 137,930,774             ¥ (77,685,712 )   ¥ (8,204 )   ¥ 138,369,873  
                                     
The accompanying notes to consolidated financial statements are
an integral part of these statements.

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Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES
                                 
    Year ended December 31,
     
    2002   2003   2004
             
    (Yen in thousands)
Cash flows from operating activities:
                       
 
Net income (loss)
  ¥ (7,542,676 )   ¥ 5,351,250     ¥ 10,821,175  
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                       
   
Gain on forgiveness of subsidiary debt
          (400,000 )      
   
Depreciation and amortization
    30,079,753       36,410,894       40,573,166  
   
Equity in earnings of affiliates
    (235,792 )     (414,756 )     (610,110 )
   
Minority interest in net income (losses) of consolidated subsidiaries
    (196,498 )     448,668       458,624  
   
Stock compensation expense
    61,902       120,214       84,267  
   
Deferred income taxes
                45,591  
   
Provision for retirement allowance
    412,692       417,335       647,592  
   
Changes in operating assets and liabilities, excluding effects of business combinations:
                       
     
Decrease/(increase) in accounts receivable, net
    1,368,081       1,712,904       (431,162 )
     
Decrease in prepaid expenses and other current assets
    553,192       349,147       4,866  
     
(Increase)/decrease in other assets
    (1,651,599 )     (325,769 )     2,443,960  
     
(Decrease)/increase in accounts payable
    (3,124,486 )     171,705       (1,184,539 )
     
Increase in accrued expenses and other liabilities
    188,537       2,665,162       39,279  
     
Increase/(decrease) in deferred revenue
    2,768,512       458,315       (380,578 )
                   
       
Net cash provided by operating activities
    22,681,618       46,965,069       52,512,131  
                   
Cash flows from investing activities:
                       
 
Capital expenditures
    (48,108,176 )     (32,478,389 )     (31,792,956 )
 
Acquisition of new subsidiaries, net of cash acquired
    1,856,230             (442,910 )
 
Investments in and advances to affiliates
    (665,575 )     (172,500 )     (359,500 )
 
(Increase)/decrease in restricted cash
          (1,773,060 )     1,773,060  
 
Loans to related party
                (4,030,000 )
 
Acquisition of minority interest in consolidated subsidiaries
    (164,590 )     (25,565 )     (4,960,484 )
 
Other investing activities
    (650,729 )     (76,891 )     (69,427 )
                   
       
Net cash used in investing activities
    (47,732,840 )     (34,526,405 )     (39,882,217 )
                   
Cash flows from financing activities:
                       
 
Proceeds from issuance of common stock
                30,000,034  
 
Net increase/(decrease) in short-term loans
    36,984,965       (228,785,000 )     250,000  
 
Proceeds from long-term debt
    2,620,000       239,078,000       185,302,000  
 
Principal payments of long-term debt
    (2,082,335 )     (8,184,980 )     (210,097,730 )
 
Principal payments under capital lease obligations
    (9,293,487 )     (10,843,024 )     (11,887,363 )
 
Other financing activities
    (738,854 )     (3,464,440 )     (3,562,724 )
                   
       
Net cash provided by (used in) financing activities
    27,490,289       (12,199,444 )     (9,995,783 )
                   
Net increase in cash and cash equivalents
    2,439,067       239,220       2,634,131  
Cash and cash equivalents at beginning of year
    5,107,691       7,546,758       7,785,978  
                   
Cash and cash equivalents at end of year
  ¥ 7,546,758     ¥ 7,785,978     ¥ 10,420,109  
                   
The accompanying notes to consolidated financial statements are
an integral part of these statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES
1.  Description of Business, Basis of Financial Statements and Summary of Significant Accounting Policies
     Business and Organization
Jupiter Telecommunications Co., Ltd. (“Jupiter”) and its subsidiaries (the “Company”) own and operate cable telecommunication systems throughout Japan and provide cable television services, telephony and high-speed Internet access services (collectively, “Broadband services”). The telecommunications industry in Japan is highly regulated by the Ministry of Internal Affairs and Communications (“MIC”). In general, franchise rights granted by the MIC to the Company’s subsidiaries for operation of cable telecommunications systems in their respective localities are not exclusive. Currently, cable television services account for a majority of the Company’s revenue. Telephony operations accounted for approximately 10%, 13% and 15% of total revenue for the years ended December 31, 2002, 2003 and 2004, respectively. Internet operations accounted for approximately 23%, 24% and 25% of total revenue for the years ended December 31, 2002, 2003 and 2004, respectively.
The Company’s beneficial ownership at December 31, 2004 was as follows:
         
LMI/ Sumisho Super Media, LLC (“SM”)
    65.23%  
Microsoft Corporation (“Microsoft”)
    19.46%  
Sumitomo Corporation (“SC”)
    12.25%  
Mitsui & Co., Ltd. 
    1.53%  
Matsushita Electric Industrial Co., Ltd. 
    1.53%  
In August 2004, Liberty Media International, Inc. (“LMI”), SC and Microsoft made capital contributions to the Company in the following amounts: LMI: ¥14,065 million for 216,382 shares: SC: ¥9,913 million for 152,505 shares; and Microsoft ¥6,022 million for 92,652 shares. The shares of common stock issued in exchange for the capital contributions were based on fair value at the date of the transaction. As a result of the transaction, their beneficial ownership in the Company increased to 45.45%, 32.03% and 19.46%, respectively. The proceeds from the capital contributions were used to repay subordinated debt owed to each of LMI, SC and Microsoft in the same amounts as contributed by each shareholder respectively (see Note 6).
On December 28, 2004, LMI contributed all of its then 45.45% beneficial ownership interest and SC contributed 19.78% of its then ownership interest in the Company to SM, a company owned 69.7% by LMI and 30.3% by SC. As a result, SM became a 65.23% shareholder of the Company while SC’s direct ownership interest was reduced to 12.25%. SC is obligated to contribute its remaining 12.25% direct ownership interest in the Company to SM within six months of an initial public offering (“IPO”) in Japan by the Company.
The Company has historically relied on financing from its principle shareholders to meet liquidity requirements. However, in December 2004, the Company entered into a new syndicated facility and repaid all outstanding debt with its principal shareholders. For additional information concerning the 2004 refinancing, see Note 6.
Basis of Financial Statements
The Company maintains its books of account in conformity with financial accounting standards of Japan. The consolidated financial statements presented herein have been prepared in a manner and reflect certain adjustments which are necessary to conform to accounting principles generally accepted in the United States of America (“U.S. GAAP”). These adjustments include those related to the scope of consolidation, accounting for business combinations, accounting for income taxes, accounting for leases, accounting for stock-based compensation, revenue recognition of certain revenues, post-retirement benefits, depreciation and amortization and accruals for certain expenses.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
Summary of Significant Accounting Policies
(a) Consolidation Policy
The accompanying consolidated financial statements include the accounts of the Company and all of its majority-owned subsidiaries which are primarily cable system operators (“SOs”). All significant intercompany balances and transactions have been eliminated. For the consolidated subsidiaries with a negative equity position, the Company has recognized the entire amount of cumulative losses of such subsidiaries regardless of its ownership percentage.
(b) Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments with an initial maturity of three months or less.
(c) Allowance for Doubtful Accounts
Allowance for doubtful accounts is computed based on historical bad debt experience and includes estimated uncollectible amounts based on analysis of certain individual accounts, including claims in bankruptcy.
(d) Investments
For those investments in affiliates in which the Company’s voting interest is 20% to 50% and the Company has the ability to exercise significant influence over the affiliates’ operation and financial policies, the equity method of accounting is used. Under this method, the investment is originally recorded at cost and adjusted to recognize the Company’s share of the net earnings or losses of its affiliates. Prior to the adoption on January 1, 2002 of Statement of Financial Accounting Standard (“SFAS”) No. 142, Goodwill and Other Intangible Assets, the excess of the Company’s cost over its percentage interest in the net assets of each affiliate was amortized, primarily over a period of 20 years. Subsequent to the adoption of SFAS No. 142, such excess is no longer amortized. All significant intercompany profits from these affiliates have been eliminated.
Investments in other securities carried at cost represent non-marketable equity securities in which the Company’s ownership is less than 20% and the Company does not have the ability to exercise significant influence over the entities’ operation and financial policies.
The Company evaluates its investments in affiliates and non-marketable equity securities for impairment due to declines in value considered to be other than temporary. In performing its evaluations, the Company utilizes various information, as available, including cash flow projections, independent valuations, industry multiples and, as applicable, stock price analysis. In the event of a determination that a decline in value is other than temporary, a charge to earnings is recorded for the loss, and a new cost basis in the investment is established.
(e) Property and Equipment
Property and equipment, including construction materials, are carried at cost, which includes all direct costs and certain indirect costs associated with the construction of cable television transmission and distribution systems, and the costs of new subscriber installations. Depreciation is computed on a straight-line method using estimated useful lives ranging from 10 to 15 years for distribution systems and equipment, from 15 to 60 years for buildings and structures and from 8 to 15 years for support equipment. Equipment under capital leases is stated at the present value of minimum lease payments. Equipment under capital leases is amortized on a straight-line basis over the shorter of the lease term or estimated useful life of the asset, which ranges from 2 to 21 years.
Ordinary maintenance and repairs are charged to income as incurred. Major replacements and improvements are capitalized. When property and equipment is retired or otherwise disposed of, the cost and related

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Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
accumulated depreciation accounts are relieved of the applicable amounts and any differences are included in depreciation expense. The impact of such retirements and disposals resulted in additional depreciation expense of ¥1,315,484 thousand, ¥2,041,347 thousand and ¥2,558,513 thousand for the years ended December 31, 2002, 2003 and 2004, respectively.
During the first quarter of 2000, the Company and its subsidiaries approved a plan to upgrade substantially all of its 450 MHz distribution systems to 750 MHz during the years ending December 31, 2000 and 2001. The Company identified certain electronic components of their distribution systems that were replaced in connection with the upgrade and, accordingly, adjusted the remaining useful lives of such electronics in accordance with the upgrade schedule. The effect of such changes in the remaining useful lives resulted in additional depreciation expense of approximately ¥484 million for the year ended December 31, 2002. Additionally, after giving effect to the accelerated depreciation, the net loss per share increased by approximately ¥(123) per share for the year ended December 31, 2002. Such upgrades had been substantially completed by December 31, 2002.
(f) Goodwill
Goodwill represents the difference between the cost of the acquired cable television companies and amounts allocated to the estimated fair value of their net assets. The Company performs an assessment of goodwill for impairment at least annually, and more frequently if an indicator of impairment has occurred, using a two-step process. The first step requires identification of reporting units and determination of the fair value for each individual reporting unit. The fair value of each reporting unit is then compared to the reporting unit’s carrying amount including assigned goodwill. To the extent a reporting unit’s carrying amount exceeds its fair value, the second step of the impairment test is performed by comparing the implied fair value of the reporting unit’s goodwill to its carrying amount. If the implied fair value of a reporting unit’s goodwill is less than its carrying amount, an impairment loss is recorded. The Company performs its annual impairment test on the first day of October in each year. The Company has determined its reporting units to be the same as its reportable segments. The Company had no impairment charges of goodwill for the years ended December 31, 2002, 2003 and 2004.
(g) Long-Lived Assets
The Company and its subsidiaries’ long-lived assets, excluding goodwill, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to future net cash flows (undiscounted and without interest) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. The standard requires that obligations associated with the retirement of tangible long-lived assets be recorded as liabilities when those obligations are incurred, with the amount of the liability initially measured at fair value. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Company and its subsidiaries adopted SFAS No. 143 on January 1, 2003 and the adoption did not have a material effect on its results of operations, financial position or cash flows.
(h) Other Assets
Other assets include certain development costs associated with internal-use software capitalized, including external costs of material and services, and payroll costs for employees devoting time to the software projects.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
These costs are amortized over a period not to exceed five years beginning when the asset is substantially ready for use. Costs incurred during the preliminary project stage, as well as maintenance and training costs are expensed as incurred. Other assets also include deferred financing costs, primarily legal fees and bank facility fees, incurred to negotiate and secure the facility. These costs are amortized to interest expense using the effective interest method over the term of the facility. For additional information concerning the Company’s debt facilities, see Note 6.
(i) Derivative Financial Instruments
The Company uses certain derivative financial instruments to manage its foreign currency and interest rate exposure. The Company may enter into forward contracts to reduce its exposure to short-term (generally no more than one year) movements in exchange rates applicable to firm funding commitments that are denominated in currencies other than the Japanese yen. The Company uses interest rate risk management derivative instruments, such as interest rate swap and interest cap agreements, to manage interest costs to achieve an overall desired mix of fixed and variable rate debt. As a matter of policy, the Company does not enter into derivative contracts for trading or speculative purposes.
The Company accounts for its derivative instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No. 133. SFAS No. 133, as amended, requires that all derivative instruments be reported on the balance sheet as either assets or liabilities measured at fair value. For derivative instruments designated and effective as fair value hedges, changes in the fair value of the derivative instrument and of the hedged item attributable to the hedged risk are recognized in earnings. For derivative instruments designated as cash flow hedges, the effective portion of any hedge is reported in other comprehensive income until it is recognized in earnings in the same period in which the hedged item affects earnings. The ineffective portion of all hedges will be recognized in current earnings each period. Changes in fair value of derivative instruments that are not designated as a hedge will be recorded each period in current earnings.
The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking hedge transactions. This process includes linking all derivatives that are designated as fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company discontinues hedge accounting prospectively when (1) it is determined that the derivative is no longer effective in offsetting changes in the fair value of cash flows of a hedged item; (2) the derivative expires or is sold, terminated, or exercised; (3) it is determined that the forecasted hedged transaction will no longer occur; (4) a hedged firm commitment no longer meets the definition of a firm commitment, or (5) management determines that the designation of the derivative as a hedge instrument is no longer appropriate. Ongoing assessments of effectiveness are being made every three months.
The Company had several outstanding forward contracts with a commercial bank to hedge foreign currency exposures related to U.S. dollar-denominated equipment purchases and other firm commitments. As of December 31, 2002, 2003 and 2004, such forward contracts had an aggregate notional amount of ¥1,553,053 thousand, ¥3,134,242 thousand and ¥5,658,147 thousand, respectively, and expire on various dates through December 2005. The forward contracts have not been designated as hedges as they do not meet the effectiveness criteria specified by SFAS No. 133. However, management believes such forward contracts are closely related with the firm commitments designated in U.S. dollars, thus managing associated currency risk. Forward contracts not designated as hedges are marked to market each period. Included in other income, net, in the accompanying consolidated statements of operations are losses on forward contracts not designated as hedges of ¥11,589 thousand, ¥65,195 thousand and ¥72,223 thousand for the years ended December 31, 2002, 2003 and 2004, respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
In May 2003, the Company entered into several interest rate swap agreements and an interest rate cap agreement to manage variable rate debt as required under the terms of its facility agreement (see Note 6). These interest rate exchange agreements effectively convert ¥60 billion of variable rate debt based on TIBOR into fixed rate debt and mature on June 30, 2009. These interest rate exchange agreements are considered cash flow hedging instruments as they are expected to effectively convert variable interest payments on certain debt instruments into fixed payments. Changes in fair value of these interest rate agreements designated as cash flow hedges are reported in accumulated other comprehensive loss. The amounts will be subsequently reclassified into interest expense as a yield adjustment in the same period in which the related interest on the variable rate debt affects earnings. The counterparties to the interest rate exchange agreements are banks participating in the facility agreement, therefore the Company does not anticipate nonperformance by any of them on the interest rate exchange agreements. In December 2004, the Company entered into a new debt facility, which replaced its former facility (see Note 6). Under the terms of the new facility, the Company was required to cancel certain interest rate swap agreements and an interest rate cap agreement with an aggregate notional amount of ¥24 billion, as the counterparties elected not to participate in the new facility. Such agreements were canceled in January 2005. As a result, these agreements are no longer considered cash flow hedging instruments and their respective fair value changes were reclassified into interest expense, net in the accompanying consolidated statements of operations for the year ended December 31, 2004. The remaining aggregate notional amount of ¥36 billion of interest rate swap agreements have been permitted to be carried over to the new facility as the counterparties are participants in the new facility. The Company has re-designated such interest swap agreements as cash flow hedging instruments.
(j) Severance and Retirement Plans
The Company and its subsidiaries have unfunded noncontributory defined benefit severance and retirement plans which are accounted for in accordance with SFAS No. 87, Employers’ Accounting for Pensions.
     (k) Income Taxes
The Company and its subsidiaries account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
     (l) Cable Television System Costs, Expenses and Revenues
The Company and its subsidiaries account for costs, expenses and revenues applicable to the construction and operation of cable television systems in accordance with SFAS No. 51, Financial Reporting by Cable Television Companies. Currently, there is no significant system that falls in a prematurity period as defined by SFAS No. 51. Operating and programming costs in the Company’s consolidated statements of operations include, among other things, cable service related expenses, billing costs, technical and maintenance personnel and utility expenses related to the cable television network.
     (m) Revenue Recognition
The Company and its subsidiaries recognize cable television, high-speed Internet access, telephony and programming revenues when such services are provided to subscribers. Revenues derived from other sources are recognized when services are provided, events occur or products are delivered. Initial subscriber installation revenues are recognized in the period in which the related services are provided to the extent of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
direct selling costs. Any remaining amount is deferred and recognized over the estimated average period that the subscribers are expected to remain connected to the cable television system. Historically, installation revenues have been less than related direct selling costs, therefore such revenues have been recognized as installations are completed.
The Company and its subsidiaries provide poor reception rebroadcasting services to noncable television viewers suffering from poor reception of television waves caused by artificial obstacles. The Company and its subsidiaries enter into agreements with parties that have built obstacles causing poor reception for construction and maintenance of cable facilities to provide such services to the affected viewers at no cost to them during the agreement period. Under these agreements, the Company and its subsidiaries receive up-front, lump-sum compensation payments for construction and maintenance. Revenues from these agreements have been deferred and are being recognized in income on a straight-line basis over the agreement periods which are generally 20 years. Such revenues are included in revenue — other in the accompanying consolidated statements of operations.
See Note 5 for a description of revenue from affiliates related to construction-related sales and programming fees which are recorded in revenue — other in the accompanying consolidated statements of operations.
     (n) Advertising Expense
Advertising expense is charged to income as incurred. Advertising expense amounted to ¥4,425,004 thousand, ¥3,921,229 thousand and ¥2,915,403 thousand and for the years ended December 31, 2002, 2003 and 2004, respectively, and is included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
     (o) Stock-Based Compensation
The Company and its subsidiaries account for stock-based compensation plans to employees using the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”) and FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation — an Interpretation of APB No. 25. (“FIN No. 44”). As such, compensation expense is measured on the date of grant only if the current fair value of the underlying stock exceeds the exercise price. The Company accounts for its stock-based compensation plans to nonemployees and employees of unconsolidated affiliated companies using the fair market value based method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation, and Emerging Issues Task Force Issue 00-12, Accounting by an Investor for Stock-Based Compensation Granted to Employees of an Equity Method Investee (“EITF 00-12”). Under SFAS No. 123, the fair value of the stock based award is determined using the Black-Scholes option pricing method, which is remeasured each period end until a commitment date is reached, which is generally the vesting date. The fair value of the subscription rights and stock purchase warrants granted each year was calculated using the Black-Scholes option-pricing model with the following assumptions: no dividends, volatility of 40%, risk-free rate of 3.0% and an expected life of three years. Expense associated with stock-based compensation for certain management employees is amortized on an accelerated basis over the vesting period of the individual award consistent with the method described in FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. Otherwise, compensation expense is generally amortized evenly over the vesting period. Compensation expense is recorded in operating costs and expenses for the Company’s employees and nonemployees and in equity in earnings of affiliates for employees of affiliated companies in the accompanying consolidated statements of operations.
SFAS No. 123 allows companies to continue to apply the provisions of APB No. 25, where applicable, and provide pro forma disclosure for employee stock option grants as if the fair value based method defined in SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB No. 25

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
for stock-based compensation plans to its employees and provide the pro forma disclosure required by SFAS No. 123. The following table illustrates the effect on net income (loss) and net income (loss) per share for the years ended December 31, 2002, 2003 and 2004, if the Company had applied the fair value recognition provisions of SFAS No. 123 (Yen in thousands, except share and per share amounts):
                           
    2002   2003   2004
             
Net income (loss), as reported
  ¥ (7,542,676 )   ¥ 5,351,250       ¥10,821,175  
 
Add stock-based compensation expense included in reported net income (loss)
                 
 
Deduct stock-based compensation expense determined under fair value based method for all awards, net of applicable taxes
    (510,246 )     (454,172 )     (607,655 )
                   
Pro forma net income (loss)
  ¥ (8,052,922 )   ¥ 4,897,078       ¥10,213,520  
                   
Basic and diluted per share data:
                       
Net income (loss) per share, as reported (Yen)
    (1,917 )     1,214       2,221  
Net income (loss) per share, pro forma (Yen)
    (2,047 )     1,111       2,097  
     (p) Earnings Per Share
Earnings per share (“EPS”) is presented in accordance with the provisions of SFAS No. 128, Earnings Per Share. Under SFAS No. 128, basic EPS excludes dilution for potential ordinary shares and is computed by dividing net income (loss) by the weighted average number of ordinary shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue ordinary shares were exercised or converted into ordinary shares. Basic and diluted EPS are the same in 2002, 2003 and 2004, as all potential ordinary share equivalents, consisting of stock options, are anti-dilutive.
     (q) Segments
The Company reports operating segment information in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 defined operating segments as components of an enterprise about which separate financial information is available that is regularly evaluated by the chief operating decision-maker in deciding how to allocate resources to an individual segment and in assessing performance of the segment.
The Company has determined that each individual consolidated subsidiary and unconsolidated managed equity affiliate SO is an operating segment because each SO represents a legal entity and serves a separate geographic area. The Company has evaluated the criteria for aggregation of the operating segments under paragraph 17 of SFAS No. 131 and believes it meets each of its respective criteria. Accordingly, management has determined that the Company has one reportable segment, Broadband services.
     (r) Use of Estimates
Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period to prepare these consolidated financial statements in conformity with U.S. GAAP. Significant judgments and estimates include derivative financial instruments, depreciation and amortization costs, impairments of property and equipment and goodwill, income taxes and other contingencies. Actual results could differ from those estimates.
     (s) Recent Accounting Pronouncements
The FASB issued SFAS No. 123 (Revised 2004) (SFAS No. 123R) in December 2004. SFAS No. 123R is a revision of SFAS No. 123. SFAS No. 123R supersedes APB No. 25 and its related implementation guidance.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award. This statement is effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. We have not yet determined the impact SFAS No. 123R will have on our results of operations.
2. Acquisitions
The Company acquired varying interests in cable television companies during the periods presented. The Company utilized the purchase method of accounting for all such acquisitions and, accordingly, has allocated the purchase price based on the estimated fair value of the assets and liabilities of the acquired companies. The assets, liabilities and operations of such companies have been included in the accompanying consolidated financial statements since the dates of their respective acquisitions.
In January 2002, the Company purchased additional shares of its affiliate J-COM Media Saitama during a capital call for ¥500,000 thousand and purchased shares from existing shareholders of its affiliate J-COM Urawa-Yono for ¥10,080 thousand. After the purchases, the Company’s equity ownership increased to a 50.2% controlling interest in J-COM Media Saitama and a 50.10% controlling interest in J-COM Urawa-Yono. These transactions have been treated as step-acquisitions. The results of operations for both J-COM Media Saitama and J-COM Urawa-Yono have been included as a consolidated entity from January 1, 2002.
In March 2002, the Company purchased additional shares in its affiliate, @NetHome Co., Ltd (“@NetHome”), from SC at a price per share of ¥55,000 or ¥527,670 thousand and all of the shares held by At Home Asia-Pacific for ¥1.4 billion. After the purchases, the Company had an 87.4% equity interest in @NetHome. The purchases have been accounted for as a step-acquisition. The operations for @NetHome have been included as a consolidated entity from April 1, 2002. In March 2004, the Company purchased from SC the remaining outstanding shares of @NetHome for ¥4,860 million. After the purchase, @NetHome became a wholly owned subsidiary of the Company. The purchase has been accounted for as a step-acquisition. The Company recorded approximately ¥4.0 billion of goodwill for the excess consideration over the fair value of the net assets and liabilities acquired in the 2004 step-acquisition.
In March 2004, the Company purchased a controlling interest in Izumi Otsu from certain of its shareholders. The total purchase price of such Izumi Otsu shares was ¥160,000 thousand and gave the Company a 66.7% interest. The results of Izumi Otsu have been included as a consolidated subsidiary from April 1, 2004. In August 2004, the Company and certain shareholders entered into an agreement and merged Izumi Otsu into the Company’s 84.2% consolidated subsidiary, J-COM Kansai. After the merger, the Company has an 84.0% equity interest in J-COM Kansai.
In July 2004, the Company purchased a 100% controlling interest in Cable System Engineering Corporation (“CSE”), whose business is cable network construction and installation. The total purchase price of CSE was ¥577,210 thousand. No goodwill was recognized in connection with this acquisition. The result of operations for CSE have been included from August 1, 2004.
The impact to revenue, net income (loss) and net income (loss) per share for the years ended December 31, 2002, 2003 and 2004, as if the transactions were completed as of the beginning of those years, is not significant.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
The aggregate purchase price of the business combinations during the years ended December 31, 2002 and 2004 was allocated based upon fair values as follows (Yen in thousands):
                 
    2002   2004
         
Cash, receivables and other assets
  ¥ 7,039,726     ¥ 2,073,191  
Property and equipment
    16,565,501       791,856  
Goodwill
    3,690,538       4,228,117  
Debt and capital lease obligations
    (15,881,589 )      
Other liabilities
    (6,110,058 )     (1,395,471 )
             
    ¥ 5,304,118     ¥ 5,697,693  
             
3. Investments in Affiliates
The Company’s affiliates are engaged primarily in the Broadband services business in Japan. At December 31, 2004, the Company held investments in J-COM Shimonoseki (50.0%), J-COM Fukuoka (45.0%), Jupiter VOD Co. Ltd. (50.0%), Kansai Multimedia Service Co., Ltd. (“Kansai Multimedia”) (25.8%), CATV Kobe (20.4%) and Green City Cable TV Corporation (20.0%).
The carrying value of investments in affiliates as of December 31, 2003 and 2004 includes ¥730,910 thousand and ¥761,053 thousand of unamortized excess cost of investments over the Company’s equity in the net assets of the affiliates. All significant intercompany profits from these affiliates have been eliminated according to the equity method of accounting.
The carrying value of investments in affiliates as of December 31, 2003 and 2004 includes ¥2,019,000 thousand and ¥1,945,000 thousand of short-term loans the Company made to certain managed affiliates. The interest rate on these loans was 3.23% and 2.48% as of December 31, 2003 and 2004.
Condensed financial information of the Company’s unconsolidated affiliates at December 31, 2003, and 2004 and for each of the three years ended December 31, 2002, 2003 and 2004 are as follows (Yen in thousands):
                     
    2003   2004
         
Combined Financial Position:
               
 
Property and equipment, net
  ¥ 29,696,602     ¥ 29,578,096  
 
Other assets, net
    6,201,251       7,545,469  
             
   
Total assets
  ¥ 35,897,853     ¥ 37,123,565  
             
 
Debt
  ¥ 17,998,825     ¥ 15,577,345  
 
Other liabilities
    16,030,950       17,224,152  
 
Shareholders’ equity
    1,868,078       4,322,068  
             
   
Total liabilities and equity
  ¥ 35,897,853     ¥ 37,123,565  
             
                             
    2002   2003   2004
             
Combined Operations:
                       
 
Total revenue
  ¥ 18,218,205     ¥ 19,776,603     ¥ 21,784,795  
 
Operating, selling, general and administrative expenses
    (13,001,409 )     (13,430,881 )     (15,080,471 )
 
Depreciation and amortization
    (3,180,977 )     (3,682,641 )     (4,164,827 )
                   
   
Operating income
    2,035,819       2,663,081       2,539,497  
 
Interest expense, net
    (410,278 )     (478,609 )     (427,400 )
 
Other expense, net
    (558,636 )     (1,013,158 )     (428,107 )
                   
   
Net income
  ¥ 1,066,905     ¥ 1,171,314     ¥ 1,683,990  
                   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
4. Goodwill and Other Assets
The changes in the carrying amount of goodwill, net, for the years ended December 31, 2003 and 2004 consisted of the following (Yen in thousands):
                 
    2003   2004
         
Goodwill, net, beginning of year
  ¥ 139,827,277     ¥ 139,853,596  
Goodwill acquired during the year
    26,319       4,228,117  
Initial recognition of acquired tax benefits allocated to reduce goodwill of acquired entities (Note 8)
          (3,422,995 )
             
Goodwill, net, end of year
  ¥ 139,853,596     ¥ 140,658,718  
             
Other assets, excluding goodwill, at December 31, 2003 and 2004, consisted of the following (Yen in thousands):
                   
    2003   2004
         
Lease and other deposits
  ¥ 4,295,947     ¥ 4,313,742  
Deferred financing costs
    3,763,785       3,540,302  
Capitalized computer software, net
    3,022,557       3,351,115  
Long-term loans receivable, net
    300,380       270,885  
Deferred tax assets
          1,308,582  
Other
    1,664,560       1,797,757  
             
 
Total other assets
  ¥ 13,047,229     ¥ 14,582,383  
             
5. Related Party Transactions
The Company purchases cable system materials and supplies from third-party suppliers and resells them to its subsidiaries and affiliates. The sales to unconsolidated affiliates amounted to ¥3,484,288 thousand, ¥2,888,046 thousand and ¥2,385,495 thousand for the years ended December 31, 2002, 2003 and 2004, respectively, and are included in revenue — other in the accompanying consolidated statements of operations.
The Company provides programming services to its subsidiaries and affiliates. The revenue from unconsolidated affiliates for such services provided and the related products sold amounted to ¥815,287 thousand, ¥1,092,724 thousand and ¥1,379,744 thousand for the years ended December 31, 2002, 2003 and 2004, respectively, and are included in revenue — other in the accompanying consolidated statements of operations.
The Company provides management services to its subsidiaries and managed affiliates. Fees for such services related to managed affiliates amounted to ¥390,434 thousand, ¥468,219 thousand and ¥521,670 thousand for the years ended December 31, 2002, 2003 and 2004, respectively, and are included in revenue — other in the accompanying consolidated statements of operations.
In July 2002, the Company began providing management services to Chofu Cable Inc. (“J-COM Chofu”), an affiliated company that is 92% jointly owned by LMI, Microsoft and SC. Fees for such services amounted to ¥29,590 thousand, ¥60,882 thousand and ¥87,446 thousand for the years ended December 31, 2002, 2003 and 2004 respectively, and are included in revenue — other in the accompanying consolidated statements of operations. As part of the 2004 refinancing, J-COM Chofu became party to the Company’s new debt facility (see Note 6). At December 31, 2004, the Company had advanced ¥4,030 million of short term loans to J-COM Chofu and the interest rate on these loans were 2.48%.
The Company purchases certain cable television programs from Jupiter Programming Co., Ltd. (“JPC”), an affiliated company jointly owned by SC and a wholly owned subsidiary of LMI. Such purchases, including purchases from JPC’s affiliates, amounted to ¥2,879,616 thousand, ¥3,155,139 thousand and ¥3,915,345 thousand for the years ended December 31, 2002, 2003 and 2004, respectively, and are included in operating and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
programming costs in the accompanying consolidated statements of operations. Additionally, the Company receives a distribution fee to carry the Shop Channel, a majority owned subsidiary of JPC, for the greater of a fixed rate per subscriber or a percentage of revenue generated through sales in the Company’s territory. Such fees amounted to ¥614,224 thousand, ¥939,438 thousand and ¥1,063,678 thousand for the years ended December 31, 2002, 2003 and 2004, respectively, and are included as revenue — other in the accompanying consolidated statements of operations.
The Company purchased stock of affiliated companies from SC in the amounts of ¥1,112,750 thousand, ¥0 thousand, and ¥5,091,864 thousand in the years ended December 31, 2002, 2003 and 2004, respectively.
AJCC K.K. (“AJCC”) is a subsidiary of SC and its primary business is the sale of home terminals and related goods to cable television companies. Sumisho Lease Co., Ltd. and Sumisho Auto Leasing Co., Ltd. (collectively “Sumisho leasing”) are a subsidiary and affiliate, respectively, of SC and provide to the Company various office equipment and vehicles. The Company and its subsidiaries’ purchases of such goods, primarily as capital leases, from both AJCC and Sumisho leasing, amounted to ¥10,074,639 thousand, ¥6,087,645 thousand and ¥12,621,284 thousand for the years ended December 31, 2002, 2003 and 2004, respectively.
The Company pays monthly fees to its affiliates, @NetHome and Kansai Multimedia, based on an agreed-upon percentage of subscription revenue collected by the Company from its customers for the @NetHome and Kansai Multimedia services. Payments made to @NetHome under these arrangements, prior to it becoming a consolidated subsidiary, amounted to ¥1,585,691 thousand for the years ended December 31, 2002. Payments made to Kansai Multimedia under these arrangements amounted to ¥2,882,494 thousand, ¥3,226,764 thousand and ¥3,380,148 thousand for the years ended December 31, 2002, 2003 and 2004, respectively. Such payments are included in operating and programming costs in the accompanying consolidated statements of operations. In March 2002, @Net Home became a consolidated subsidiary of the Company (see Note 2). Therefore, since April 1, 2002, through @NetHome, the Company receives the monthly fee from its unconsolidated affiliates. Such service fees amounted to ¥480,356 thousand, ¥1,071,891 thousand and ¥1,242,550 thousand for the years ended December 31, 2002, 2003 and 2004, respectively, and are included in revenue-subscription fees in the accompanying consolidated statements of operations.
The Company has management service agreements with SC and LMI under which officers and management level employees are seconded from SC and LMI to the Company, whose services are charged as service fees to the Company based on their payroll costs. The service fees paid to SC amounted to ¥571,319 thousand, ¥706,303 thousand and ¥784,122 thousand for the years ended December 31, 2002, 2003 and 2004, respectively. The service fees paid to LMI amounted to ¥761,009 thousand, ¥714,986 thousand and ¥665,354 thousand for the years ended December 31, 2002, 2003 and 2004, respectively. These amounts are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
SC, LMI and Microsoft had long-term subordinated loans to the Company of ¥52,894,625 thousand, ¥52,894,625 thousand and ¥43,950,000 thousand, respectively, at December 31, 2003. In December 2004, the Company refinanced and replaced these subordinated shareholder loans under a new facility. See Note 6.
The Company pays fees on debt guaranteed by SC, LMI and Microsoft. The guarantee fees incurred were ¥413,128 thousand to SC, ¥361,627 thousand to LMI and ¥285,042 thousand to Microsoft for the year ended December 31, 2002. The guarantee fees incurred were ¥84,224 thousand to SC, ¥73,470 thousand to LMI and ¥51,890 thousand to Microsoft for the year ended December 31, 2003. The guarantee fees incurred were ¥41,071 thousand to SC, ¥41,071 thousand to LMI and ¥16,332 thousand to Microsoft for the year ended December 31, 2004. Such fees are included in interest expense, net-related parties in the accompanying

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
consolidated statements of operations. In December 2004 these guarantees were replaced by a guarantee facility with a syndicate of lenders. See Note 6.
6. Long-term Debt
A summary of long-term debt as of December 31, 2003 and 2004 is as follows (Yen in thousands):
                 
    2003   2004
         
¥140 billion Facility term loans, due fiscal 2005 — 2009
  ¥ 53,000,000     ¥  
¥175 billion Facility term loans, due fiscal 2005 — 2011
          130,000,000  
Mezzanine Facility Subordinated loan due fiscal 2012
          50,000,000  
8 yr Shareholder Subordinated loans, due fiscal 2011
    117,739,250        
8 yr Shareholder Tranche B Subordinated loans, due fiscal 2011
    32,000,000        
0% unsecured loans from Development Bank of Japan, due fiscal 2005 — 2019
    12,223,720        
Unsecured loans from Development Bank of Japan, due fiscal 2005 — 2019, interest from 0.65% to 6.8%
    3,895,400        
0% secured loans from Development Bank of Japan, due fiscal 2005 — 2019
    5,354,735       15,810,095  
Secured loans from Development Bank of Japan, due fiscal 2005 — 2019, interest at 0.95% to 6.8%
          3,614,200  
0% unsecured loans from others, due fiscal 2012
    57,090       50,170  
             
Total
    224,270,195       199,474,465  
Less: current portion
    (2,438,480 )     (5,385,980 )
             
Long-term debt, less current portion
  ¥ 221,831,715     ¥ 194,088,485  
             
2003 Financing
On January 31, 2003, the Company entered into a ¥140 billion bank syndicated facility for certain of its managed subsidiaries and affiliates (“¥140 billion Facility”). In connection with the ¥140 billion Facility, on February 6, 2003, the Company entered into eight-year subordinated loans with each of SC, LMI and Microsoft (“Principal Shareholders”), which initially aggregated ¥182 billion (“Shareholder Subordinated Loans”).
The ¥140 billion Facility was for the financing of Jupiter, sixteen of its consolidated managed affiliates and one managed affiliate accounted for under the equity method of accounting. The financing was used for permitted general corporate purposes, capital expenditures, financing costs and limited purchase of minority shares and capital calls of the affiliates participating in the ¥140 billion Facility.
The ¥140 billion Facility provided for term loans of up to ¥120 billion and a revolving loan facility up to ¥20 billion with the final maturity of June 30, 2009. ¥32 billion of the total term loan portion of the ¥140 billion Facility was considered provided by the shareholders under the Tranche B Subordinated Loans.
Interest was based on TIBOR, as defined in the ¥140 billion Facility, plus margin which changed based upon a leverage ratio of Total Debt to EBITDA as set forth in the ¥140 billion Facility agreement. At December 31, 2003, the interest rate was 2.83%. The Shareholder Subordinated Loans, which were subordinated to the ¥140 billion Facility, consisted of eight-year subordinated loans and eight-year Tranche B Subordinated Loans. The ¥140 billion Facility had requirements to make mandatory prepayments under specific circumstances as defined in the agreements. Such prepayments are designated as restricted cash on the consolidated balance sheets.
In May 2003, LMI and SC converted ¥32 billion of Shareholder Subordinated Loans for 750,250 shares of common stock of the company. At December 31, 2003, the interest rate was 2.08%.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
In December 2003, a consolidated subsidiary of the Company became party to the ¥140 billion Facility. Immediately prior to this transaction, the consolidated subsidiary had outstanding ¥3,686,090 thousand to third-party creditors. In connection with this transaction, a third-party debt holder forgave ¥400,000 thousand of debt owed to it. As a result, the Company recorded a gain of ¥400,000 thousand in other non-operating income in the accompanying consolidated statement of operations for the year ended December 31, 2003. Additionally, the third-party debt holder was issued ¥500,000 thousand of preferred stock of the consolidated subsidiary in exchange for ¥500,000 thousand of debt owed to it (see Note 10). The remaining ¥2,686,090 thousand of third-party debt was repaid from proceeds of the ¥140 billion Facility.
In March 2004, the Company entered into additional shareholder subordinated loans of ¥2,431,000 thousand each with SC and LMI. The aggregate ¥4,862,000 thousand of loan proceeds were used for the purchase of the remaining shares of @NetHome (see Note 2). These additional shareholder subordinated loans had identical terms to the Shareholder Subordinated Loans discussed above.
In August 2004, LMI, SC and Microsoft made a capital contribution to the Company in the aggregate amount of ¥30,000 million. The proceeds of this contribution were used to repay an aggregate of ¥30,000 million of Shareholder Subordinated Loans owed respectively in the same amounts as contributed by LMI, SC and Microsoft (see Note 1).
2004 Refinancing
On December 15, 2004, for the purpose of the refinancing the ¥140 billion Facility, the Company entered into a ¥175 billion senior syndicated facility (“¥175 billion Facility”) which consists of a ¥130 billion term loan facility (“Term Loan Facility”), a ¥20 billion revolving facility (“Revolving Facility”) and a ¥25 billion guarantee facility (“Guarantee Facility”). Concurrently the Company entered into a ¥50 billion subordinated syndicated loan facility (“Mezzanine Facility”). Consistent with the ¥140 billion Facility, the ¥175 billion Facility will be utilized for the financing of Jupiter, sixteen of its consolidated managed affiliates, one managed affiliate under the equity method accounting and one managed affiliate, which the Company has no equity investment (“Jupiter Combined Group”). On December 21, 2004, the Company made full drawdowns from each of the ¥130 billion Term Loan Facility and the ¥50 billion Mezzanine Facility. The proceeds from the December 2004 drawdown were used to repay all outstanding loans under the ¥140 billion Facility and all outstanding Shareholder Subordinated Loans.
The ¥130 billion Term Loan Facility consists of a five year ¥90 billion Tranche A Term Loan Facility (“Tranche A Facility”) and a seven year ¥40 billion Tranche B Term Loan Facility (“Tranche B Facility”). Final maturity dates of the Tranche A Facility and Tranche B Facility are December 31, 2009 and December 31, 2011, respectively. Loan repayment of the Tranche A Facility and the Tranche B Facility commence on September 30, 2005 and March 31, 2009, respectively, each based on a defined rate reduction each quarter thereafter until maturity.
The ¥20 billion Revolving Facility will be available for drawdown until one month prior to its final maturity of December 31, 2009. A commitment fee of 0.50% per annum is payable on the unused available Revolving Facility during its availability period.
The ¥25 billion Guarantee Facility provides for seven years of bank guarantees on loans from the Development Bank of Japan owed by affiliates of the Jupiter Combined Group. The Guarantee Facility commitment reduces gradually according to the amount and schedule as defined in the ¥175 billion Facility agreement until final maturity at December 31, 2011. As of December 31, 2004 the guarantee commitment is ¥25 billion. Such guarantee commitment will be reduced to ¥23.1 billion by December 2005; ¥21.6 billion by December 2006; ¥20.0 billion by December 2007; ¥18.6 billion by December 2008; ¥17.2 billion by December 2009; ¥15.8 billion by December 2010; and to ¥13.2 billion by December 2011. A commitment fee of 0.50% per annum is payable on the unused available Guarantee Facility during its availability period.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
Interest on the Tranche A Facility, Tranche B Facility and the Revolving Facility is based on TIBOR, as defined in the agreement, plus the applicable margin. Each facility’s applicable margin is reducing based upon a leverage ratio of Senior Debt to EBITDA as such terms are defined in the ¥175 billion Facility agreement. When the leverage ratio is greater than or equal to 4.0:1, the margin on the Tranche A Facility and the Revolving Facility is 1.50% per annum and the margin of the Tranche B Facility ranges from 1.80% to 2.00% per annum; when less than 4.0:1 but greater than or equal to 2.5:1 the margin on the Tranche A Facility and the Revolving Facility is 1.38% per annum and the margin of the Tranche B Facility ranges from 1.69% to 1.88% per annum; when less than 2.5:1 but greater than or equal to 1.5:1 the margin on the Tranche A Facility and the Revolving Facility is 1.25% per annum and the margin of the Tranche B Facility ranges from 1.58% to 1.75% per annum; and when less than 1.5:1 the margin on the Tranche A Facility and the Revolving Facility is 1.00% per annum and the margin of the Tranche B Facility ranges from 1.35% to 1.50% per annum. In regards to the fees due on the Guarantee Facility, when the leverage ratio is greater than 4.00:1, the interest rate is 3.00% per annum; when less than 4.00:1 but greater than or equal to 3.75:1 the interest rate is 2.00%; when less than 3.75:1 but greater than or equal to 3.50:1 the interest rate is 1.50%; when less than 3.50:1 but greater than or equal to 3.00:1 the interest rate is 1.00%; when less than 3.00:1 but greater than or equal to 2.00:1 the interest rate is 0.75%; and when less than 2.00:1, the interest rate is 0.50% per annum. As of December 31, 2004 the interest rates for the outstanding Tranche A Facility, Tranche B Facility, and Guarantee Facility, were 1.6%, 1.9%, and 1.0% respectively.
The ¥175 billion Facility has requirements to make mandatory prepayments in the amount equal to (1) 50% of the Group Free Cash Flow, as defined in the agreement, until the later of (a) March 31, 2007 and (b) the first quarter for which the ratio of Senior Debt to EBITDA, as defined in the agreement, is less than 2.50:1.00; (2) 50% of third party contributions received when the ratio of Senior Debt to EBITDA is greater than 4.00:1.00; (3) proceeds from the sale of assets exceeding ¥500 million that are not reinvested within six months; (4) insurance proceeds exceeding ¥500 million that are not used to repair or replace the damaged assets within twelve months; and (5) proceeds of any take-out securities as defined in the ¥175 billion Facility agreement. The ¥175 billion Facility requires the Jupiter Combined Group to comply with various financial covenants, such as Maximum Senior Debt to EBITDA Ratio, Maximum Senior Debt to Combined Total Capital Ratio, Minimum Debt Service Coverage Ratio and Minimum Interest Coverage Ratio as such terms are defined in the ¥175 billion Facility agreement. In addition, the ¥175 billion Facility contains certain limitations or prohibitions on additional indebtedness. Additionally, the ¥175 billion Facility requires the Company to maintain interest hedging agreements on at least 50% of the outstanding amounts under the Tranche A Facility. Due to the ¥175 billion Facility closing on December 15, 2004, the Company was not required to calculate financial covenants for the fiscal year 2004.
The Mezzanine Facility contains a bullet repayment upon final maturity at June 30, 2012. However, in the event of an IPO by the Company, there is a mandatory prepayment of the Mezzanine Facility of 100% from the proceeds of such IPO. Interest on the Mezzanine Facility is based on TIBOR, as defined in the agreement, plus an increasing margin. The initial margin is 3.25% per annum and increases 0.25% each successive three month period from closing up to a maximum margin of 9.00% per annum. The Mezzanine Facility has identical financial covenants as the ¥175 billion Facility.
As of December 31, 2004 the Company had ¥20 billion revolving loans available for immediate borrowing under the ¥175 billion Facility.
Development Bank of Japan Loans
The loans represent institutional loans from the Development Bank of Japan, which have been made available to telecommunication companies operating in specific local areas designated as “Teletopia” by the MIC to facilitate development of local telecommunication network. Requirements to qualify for such financing include use of optical fiber cables, equity participation by local/municipal government and guarantee by third parties,

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
among other things. These loans are obtained by the Company’s subsidiaries and were primarily guaranteed, directly or indirectly, by SC, LMI and Microsoft. In connection with the 2004 refinancing described above, the guarantees by SC, LMI and Microsoft have been cancelled and replaced with guarantees pursuant to the Guarantee Facility.
Securities on Long-term Debt
At December 31, 2004, subsidiaries’ shares owned by the Company, trademark and franchise rights held by the Company and substantially all equipment held by the Company’s subsidiaries were pledged to secure the loans from the Development Bank of Japan and the Company’s bank facilities. The aggregate annual maturities of long-term debt outstanding at December 31, 2004 are as follows (Yen in thousands):
         
Year ending December 31,    
     
2005
  ¥ 5,385,980  
2006
    11,648,720  
2007
    20,461,660  
2008
    31,474,610  
2009
    42,981,060  
Thereafter
    87,522,435  
       
    ¥ 199,474,465  
       
7. Leases
The Company and its subsidiaries are obligated under various capital leases, primarily for home terminals, and other noncancelable operating leases, which expire at various dates during the next seven years. See Note 5 for further discussion of capital leases from subsidiaries and affiliates of SC.
At December 31, 2003 and 2004, the amount of equipment and related accumulated depreciation recorded under capital leases were as follows (Yen in thousands):
                 
    2003   2004
         
Distribution system and equipment
  ¥ 45,170,512     ¥ 48,061,224  
Support equipment and buildings
    6,656,913       6,594,499  
Less: accumulated depreciation
    (22,111,664 )     (24,129,460 )
Other assets, at cost, net of depreciation
    292,511       209,669  
             
    ¥ 30,008,272     ¥ 30,735,932  
             
Depreciation of assets under capital leases is included in depreciation and amortization in the accompanying consolidated statements of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
Future minimum lease payments under capital leases and noncancelable operating leases as of December 31, 2004 are as follows (Yen in thousands):
                   
    Capital   Operating
Year ending December 31,   Leases   Leases
         
 
2005
  ¥ 10,479,258     ¥ 901,131  
 
2006
    8,298,826       750,754  
 
2007
    5,997,212       626,332  
 
2008
    4,102,122       399,496  
 
2009
    2,810,622       383,100  
 
More than five years
    2,686,635       703,288  
             
Total minimum lease payments
    34,374,675     ¥ 3,764,101  
             
Less: amount representing interest (rates ranging from 1.10% to 5.99%)
    (2,570,124 )        
             
Present value of net minimum payments
    31,804,551          
Less: current portion
    (9,529,241 )        
             
Noncurrent portion
  ¥ 22,275,310          
             
The Company and its subsidiaries occupy certain offices under cancelable lease arrangements. Rental expenses for such leases for the years ended December 31, 2002, 2003 and 2004, totaled ¥4,115,628 thousand, ¥4,134,249 thousand and ¥3,970,228 thousand, respectively, and were included in selling, general and administrative expenses in the accompanying consolidated statements of operations. Also, the Company and its subsidiaries occupy certain transmission facilities and use poles and other equipment under cancelable lease arrangements. Rental expenses for such leases for the years ended December 31, 2002, 2003 and 2004, totaled ¥7,323,538 thousand, ¥8,542,845 thousand and ¥8,943,602 thousand, respectively, and are included in operating costs and programming costs in the accompanying consolidated statements of operations.
8. Income Taxes
The Company and its subsidiaries are subject to Japanese national corporate tax of 30%, an inhabitant tax of 6% and a deductible enterprise tax of 10%, which in aggregate result in a statutory tax rate of 42%. On March 24, 2003, the Japanese Diet approved the Amendments to Local Tax Law, reducing the enterprise tax from 10.08% to 7.2%. The amendments to the tax rates will be effective for fiscal years beginning on or after April 1, 2004. Consequently, the statutory income tax rate will be lowered to approximately 40% for deferred tax assets and liabilities expected to be settled or realized on or after January 1, 2005 for the Company.
All pretax income/loss and related tax expense/benefit are derived solely from Japanese operations. Income tax expense for the years ended December 31, 2002, 2003 and 2004 is as follows (Yen in thousand):
                           
    2002   2003   2004
             
Current
  ¥ 256,763     ¥ 209,805     ¥ 1,812,786  
Deferred
                45,591  
                   
 
Income tax expense
  ¥ 256,763     ¥ 209,805     ¥ 1,858,377  
                   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
The effective rates of income tax (benefit) expense relating to losses (income) incurred differs from the rate that would result from applying the normal statutory tax rates for the years ended December 31, 2002, 2003 and 2004 is as follows:
                           
    2002   2003   2004
             
Normal effective statutory tax rate
    (42.0)%       42.0%       42.0%  
 
Adjustment to deferred tax assets and liabilities for enacted changes in tax laws and rates
                0.1  
 
Increase/(decrease) in valuation allowance
    42.0       (41.2 )     (27.4 )
 
Other
    3.5       3.0        
                   
Effective tax rate
    3.5%       3.8%       14.7%  
                   
The effects of temporary differences and carryforwards that give rise to deferred tax assets and liabilities at December 31, 2003 and 2004 are as follows (Yen in thousands):
                   
    2003   2004
         
Deferred tax assets:
               
 
Operating loss carryforwards
  ¥ 29,921,448     ¥ 21,649,833  
 
Deferred revenue
    14,165,581       14,455,010  
 
Lease obligation
    12,452,252       12,721,820  
 
Retirement and other allowances
    1,390,741       1,459,068  
 
Investment in affiliates
    794,896       567,766  
 
Accrued expenses and other
    2,485,228       3,978,505  
             
 
Total gross deferred tax assets
    61,210,146       54,832,002  
 
Less: valuation allowance
    (45,846,086 )     (35,240,909 )
             
 
Deferred tax assets
    15,364,060       19,591,093  
             
Deferred tax liabilities:
               
 
Property and equipment
    12,680,631       13,796,923  
 
Tax deductible goodwill
    633,155        
 
Other
    2,050,274       2,416,766  
             
 
Total gross deferred tax liabilities
    15,364,060       16,213,689  
             
 
Net deferred tax assets
  ¥     ¥ 3,377,404  
             
The net changes in the total valuation allowance for the years ended December 31, 2002, 2003 and 2004 were decreases of ¥8,985,905 thousand, ¥6,543,162 thousand and ¥10,605,177 thousand, respectively.
Current deferred tax assets in the amount of ¥2,068,822 thousand are included in prepaid expenses and non-current deferred tax assets in the amount of ¥1,308,582 thousand are included in other in non-current assets in the accompanied consolidated balance sheet at December 31, 2004.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management expects to realize its deferred tax assets net of existing valuation allowance. The Company had ¥343,918 thousand of tax deductible goodwill as of December 31, 2004.
The amount of unrecognized tax benefits at December 31, 2003 and 2004 acquired in connection with business combinations were ¥12,000 million and ¥7,267 million (net of ¥3,423 million recognized during 2004),

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
respectively. If the deferred tax assets are realized or the valuation allowance is reversed, the tax benefit realized is first applied to i) reduce to zero any goodwill related to acquisition, ii) second to reduce to zero other non-current intangible assets related to the acquisition and iii) third to reduce income tax expense. See Note 4.
At December 31, 2004, the Company and its subsidiaries had net operating loss carryforwards for income tax purposes of ¥54,124,581 thousand which were available to offset future taxable income. Net operating loss carryforwards, if not utilized, will expire in each of the next five years as follows (Yen in thousands):
         
Year ending December 31,    
     
2005
  ¥ 17,501,242  
2006
    20,094,037  
2007
     
2008
    55,494  
2009
    10,751,591  
2010-2011
    5,722,217  
       
    ¥ 54,124,581  
       
9. Severance and Retirement Plans
Under unfunded severance and retirement plans, substantially all full-time employees terminating their employment after the three year vesting period are entitled, under most circumstances, to lump-sum severance payments determined by reference to their rate of pay at the time of termination, years of service and certain other factors. No assumptions are made for future compensation levels as the plans have flat-benefit formulas. As a result, the accumulated benefit obligation and projected benefit obligation are the same. December 31, 2004 was used as the measurement date.
Net periodic cost of the Company and its subsidiaries’ plans accounted for in accordance with SFAS No. 87 for the years ended December 31, 2002, 2003 and 2004, included the following components (Yen in thousands):
                         
    2002   2003   2004
             
Service cost — benefits earned during the year
  ¥ 205,094     ¥ 257,230     ¥ 265,608  
Interest cost on projected benefit obligation
    35,074       40,159       40,120  
Recognized actuarial loss
    232,507       158,371       463,216  
                   
Net periodic cost
  ¥ 472,675     ¥ 455,760     ¥ 768,944  
                   
The reconciliation of beginning and ending balances of the benefit obligations of the Company and its subsidiaries’ plans accounted for in accordance with SFAS No. 87 are as follows (Yen in thousands):
                 
    2003   2004
         
Change in benefit obligation:
               
Benefit obligation, beginning of year
  ¥ 1,606,371     ¥ 2,006,011  
Service cost
    257,230       265,608  
Interest cost
    40,159       40,120  
Acquisitions (Note 2)
          30,630  
Actuarial loss
    158,371       432,586  
Benefits paid
    (56,120 )     (93,288 )
             
Benefit obligation, end of year
  ¥ 2,006,011     ¥ 2,681,667  
             

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
The weighted-average discount rate used in the determination of projected benefit obligation and net pension cost of the Company and its subsidiaries’ plans as of and for the year ended December 31, 2002, 2003, and 2004 is as follows:
                         
    2002   2003   2004
Projected benefit obligation            
Discount rate
    2.5%       2.0%       2.0%  
Net pension cost
                       
Discount rate
    3.0%       2.0%       2.0%  
The estimated future benefit payments are (Yen in thousands):
         
Estimated Future Benefit Payments    
     
2005
  ¥ 105,753  
2006
    116,145  
2007
    172,494  
2008
    138,000  
2009
    167,641  
2010 to 2014
    996,298  
       
    ¥ 1,696,331  
       
In addition, employees of the Company and certain of its subsidiaries participate in a multi-employer defined benefit plan. The Company contributions to this plan amounted to ¥324,521 thousand, ¥342,521 thousand and ¥292,546 thousand for the years ended December 31, 2002, 2003 and 2004, respectively, and are included in provision for retirement allowance in selling, general and administrative expenses in the accompanying consolidated statements of operations.
10. Redeemable Preferred Stock
On December 29, 2003, in connection with being included as a party to the ¥140 billion Facility, a consolidated subsidiary of the Company issued ¥500,000 thousand of preferred stock to a third-party in exchange for debt owed to that third party. All or a part of the preferred stock can be redeemed after 2010, up to a half of the preceding year’s net income, at the holder’s demand. The holder of the preferred stock has a priority to receive dividends, however, the amount of such dividends will be decided by the subsidiary’s board of directors and such dividend will not exceed ¥1,000 per preferred stock for any fiscal year and will not accumulate.
11. Shareholders’ Equity
Dividends
Under the Japanese Commercial Code (the “Code”), the amount available for dividends is based on retained earnings as recorded on the books of the Company maintained in conformity with financial accounting standards of Japan. Certain adjustments not recorded on the Company’s books are reflected in the consolidated financial statements for reasons described in Note 1. At December 31, 2004, the accumulated deficit recorded on the Company’s books of account was ¥16,024,828 thousand. Therefore, no dividends may be paid at the present time.
The Code provides that an amount equivalent to at least 10% of cash dividends paid and other cash outlays resulting from appropriation of retained earnings be appropriated to a legal reserve until such reserve and the additional paid-in capital equal 25% of the issued capital. The Code also provides that neither additional paid-in capital nor the legal reserve are to be used for cash dividends, but may be either (i) used to reduce a capital deficit, by resolution of the shareholders; (ii) capitalized, by resolution of the Board of Directors; or (iii) used

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
for purposes other than those provided in (i) and (ii), such as refund made to shareholders or acquisition of treasury stocks, but only up to an amount equal to the additional paid-in capital and the legal reserve less 25% of the issued capital, by resolution of the shareholders. The Code provides that at least one-half of the issue price of new shares be included in capital.
Stock-Based Compensation Plans
The Company maintains subscription-rights option plans and stock purchase warrant plans for certain directors, corporate auditors and employees of the Company’s consolidated managed franchises and to directors, corporate auditors and employees of the Company’s unconsolidated managed franchises and other non-employees (collectively the “Jupiter Option Plans”). The Company’s board of directors and shareholders approved the grant of the Company’s ordinary shares at an initial exercise price of ¥92,000 per share. The exercise price is subject to adjustment upon an effective IPO to the lower of ¥92,000 per share or the IPO offering price.
Under Jupiter Option Plans, the number of ordinary shares issuable will be adjusted for stock splits, reverse stock splits and certain other recapitalizations and the subscription rights will not be exercisable until the Company’s ordinary shares are registered with the Japan Securities Dealers Association or listed on a stock exchange. Non-management employees will, unless the grant agreement provides otherwise, vest in two years from date of grant. Management employees will, unless the grant agreement provides otherwise, vest in four equal installments from date of grant. Options under the Jupiter Option Plans generally expire 10 years from date of grant, currently ranging from August 23, 2010 to August 23, 2012.
The Company has accounted for awards granted to the Company’s and its consolidated managed franchises’ directors, corporate auditors and employees under APB No. 25 and FIN No. 44. Based on the Company’s estimated fair value per ordinary share, there was no intrinsic value at the date of grant under the Jupiter Option Plans. As the exercise price at the date of grant is uncertain, the Jupiter Option Plans are considered variable awards. Under APB No. 25 and FIN 44, variable awards will have stock compensation recognized each period to the extent the market value of the ordinary shares granted exceeds the exercise price. The Company will be subject to variable accounting for grants to employees under the Jupiter Option Plans until all options granted are exercised, forfeited, or expired. At December 31, 2002, 2003 and 2004, the market value of the Company’s ordinary shares did not exceed the exercise price and no compensation expense was recognized.
The Company has accounted for awards granted to directors, corporate auditors and employees of the Company’s unconsolidated managed franchises and to other non-employees, in accordance with SFAS No. 123 and EITF 00-12. As a result of cancellations, options outstanding to directors, corporate auditors and employees of the Company’s unconsolidated managed franchises and to other non-employees were 23,338 ordinary shares, 21,916 ordinary shares and 11,476 ordinary shares at December 31, 2002, 2003 and 2004, respectively. The Company recorded compensation expense related to the directors, corporate auditors and employees of the Company’s unconsolidated managed franchises and other non-employees of ¥64,058 thousand, ¥117,359 thousand and ¥93,484 thousand for the years ended December 31, 2002, 2003 and 2004, respectively, which has been included in selling, general and administrative expense for the Company’s non-employees and in equity in earnings of affiliates for employees of affiliated companies in the accompanying consolidated statements of operations.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
The following table summarizes activity under the Jupiter Option Plans:
                         
    2002   2003   2004
             
Outstanding at beginning of the year
    132,712       159,004       191,764  
Granted
    30,576       41,958       29,730  
Canceled
    (4,284 )     (9,198 )     (8,418 )
                   
Outstanding at end of the year
    159,004       191,764       213,076  
                   
Weighted average exercise price
  ¥ 92,000     ¥ 92,000     ¥ 92,000  
                   
Weighted average remaining contractual life
    8.0 years       7.4 years       6.6 years  
                   
Options exercisable, end of period
                 
                   
Weighted average fair value of options granted
  ¥ 14,604     ¥ 18,340     ¥ 24,545  
                   
12. Fair Value of Financial Instruments
For financial instruments other than long-term loans, lease obligations and interest rate swap agreements, the carrying amount approximates fair value because of the short maturity of these instruments. Based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities, the fair value of long-term debt and capital lease obligations at December 31, 2003 and 2004 are as follows (Yen in thousands):
                                 
    2003   2004
         
    Carrying       Carrying    
    Amount   Fair Value   Amount   Fair Value
                 
Long-term debt
  ¥ 224,270,195     ¥ 220,114,532       ¥199,474,465       ¥199,127,222  
Lease obligation
    31,130,629       32,328,048       31,804,551       30,125,734  
Interest rate swap agreements
    694,745       694,745       8,204       8,204  
13. Supplemental Disclosures to Consolidated Statements of Cash Flows
                             
    2002   2003   2004
             
    (Yen in thousands)
Cash paid during the year for:
                       
 
Interest
  ¥ 4,696,332     ¥ 4,408,426     ¥ 8,588,285  
                   
 
Income tax
  ¥     ¥ 378,116     ¥ 323,144  
                   
Cash acquisitions of new subsidiaries:
                       
 
Fair value of assets acquired
  ¥ 20,135,417     ¥     ¥ 1,688,442  
 
Liabilities assumed
    21,991,647             1,245,532  
                   
   
Cash paid, net of cash acquired
  ¥ (1,856,230 )   ¥     ¥ 442,910  
                   
Property acquired under capital leases during the year
  ¥ 10,990,909     ¥ 6,057,250     ¥ 12,561,285  
                   
Conversion of long-term debt into equity
  ¥     ¥ 32,260,750     ¥  
                   
14. Commitments
In connection with the September 1, 2000 acquisition of Titus Communications Corporation (“Titus”), Microsoft and the Company entered into a gain recognition agreement with respect to the Titus shares and assets acquired. The Company agreed not to sell during any 18-month period, without Microsoft consent, any shares of Titus, or sell any of Titus’ assets, valued at $35 million or more, in a transaction that would result in taxable income to Microsoft. Microsoft will retain this consent right until the earlier of June 30, 2006 or the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES — (Continued)
date Microsoft owns less than 5% of the Company’s ordinary shares and Microsoft has sold, in taxable transactions, 80% of the Company’s ordinary shares issued to it in connection with the Titus acquisition.
The Company has guaranteed payment of certain bank loans for its equity method affiliate investee, CATV Kobe, and its cost method investee Bay Communications Inc. The guarantees are based on an agreed-upon proportionate share of the bank loans among certain of the entities’ shareholders, considering each of their respective equity interest. The term of the guarantee ranges from 5 to 12 years and the aggregate guaranteed amounts were ¥796,233 thousand, ¥722,531 thousand and ¥179,072 thousand as of December 31, 2002, 2003 and 2004, respectively. Management believes that the likelihood the Company would be required to perform or otherwise incur any significant losses associated with any of these guarantees is remote.
15. Subsequent Events
On February 9, 2005, the Company entered into a share purchase agreement to purchase from Microsoft, LMI, and SC all of their interest in J-COM Chofu, as well as all of the equity interest owned by Microsoft in Tu-Ka Cellular Tokyo, Inc. and Tu-Ka Cellular Tokai, Inc. (“Tu-Ka”) on or about February 25, 2005. The Company will pay approximately $24 million (approximately ¥2,500 million) to Microsoft, approximately ¥972 million to LMI and approximately ¥940 million to SC for their respective Chofu or Tu-Ka shares. Consideration for J-COM Chofu shares will be in cash at closing, and the Tu-Ka shares will be transferred in exchange for a non-interest-bearing promissory note to Microsoft that is payable 5 business days after a successful IPO in Japan by the Company.

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Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Jupiter Programming Co. Ltd.:
We have audited the accompanying consolidated balance sheets of Jupiter Programming Co. Ltd. and subsidiaries as of December 31, 2003 and 2004, and the related consolidated statements of operations, shareholders’ equity and comprehensive income, and cash flows for each of the years in the two-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jupiter Programming Co., Ltd. and subsidiaries as of December 31, 2003 and 2004, and the results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles.
KPMG AZSA & Co.
Tokyo, Japan
March 4, 2005

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2004
                       
    2003   2004
         
    (Yen in thousands)
ASSETS
Current assets:
               
 
Cash and cash equivalents:
               
   
Related party
  ¥ 2,350,000     ¥ 3,100,000  
   
Other
    2,554,768       2,252,611  
 
Accounts receivable (less allowance for doubtful accounts of ¥10,618 thousand in 2003 and ¥7,723 thousand in 2004):
               
     
Related party
    307,160       380,826  
     
Other
    3,036,190       4,298,811  
 
Retail inventories
    2,235,952       2,999,404  
 
Program rights and language versioning, net (Note 3)
    646,758       599,480  
 
Deferred income taxes (Note 13)
    1,165,550       1,334,560  
 
Prepaid and other current assets
    378,606       401,840  
             
Total current assets
    12,674,984       15,367,532  
Investments (Note 4)
    3,359,563       6,929,961  
Property and equipment, net (Note 5)
    2,012,286       5,327,068  
Software development costs, net (Note 6)
    1,450,388       1,902,244  
Program rights and language versioning, excluding current portion, net (Note 3)
    140,372       86,289  
Goodwill (Note 8)
    188,945       470,131  
Other intangible assets, net (Note 7)
    59,393       251,959  
Deferred income taxes (Note 13)
    236,975       357,606  
Other assets, net
    506,321       680,365  
             
Total assets
  ¥ 20,629,227     ¥ 31,373,155  
             

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS — (Continued)
                     
    2003   2004
         
    (Yen in thousands)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
               
 
Short-term debt (Note 12)
  ¥ 46,000     ¥  
 
Obligations under capital leases, current installments (related party) (Note 11)
    329,764       290,031  
 
Accounts payable:
               
   
Related party
    485,416       557,851  
   
Other
    3,722,456       4,848,307  
 
Accrued liabilities
               
   
Related party
    232,172       276,938  
   
Other
    1,228,563       1,515,453  
 
Income taxes payable
    1,516,200       2,191,203  
 
Advances from affiliate
          938,000  
 
Other current liabilities
    517,910       512,501  
             
Total current liabilities
    8,078,481       11,130,284  
Long-term debt (Note 12):
               
   
Related party
    2,016,000       1,000,000  
   
Other
    4,000,000       4,000,000  
Obligations under capital leases, excluding current installments (related party) (Note 11)
    174,946       823,170  
Accrued pension and severance cost (Note 14)
    216,611       284,796  
Deferred income taxes (Note 13)
          81,380  
             
Total liabilities
    14,486,038       17,319,630  
             
Minority interests
    1,539,900       3,055,893  
             
Shareholders’ equity (Note 15):
               
 
Common stock, no par value; 2003 — authorized 450,000 shares; issued and outstanding 336,680 shares
               
   
2004 — authorized 460,000 shares; issued and outstanding 360,680 shares
    16,834,000       11,434,000  
 
Additional paid-in capital
          6,788,054  
 
Accumulated deficit
    (12,230,711 )     (7,207,717 )
 
Accumulated other comprehensive loss
          (16,705 )
             
Total shareholders’ equity
    4,603,289       10,997,632  
             
Total liabilities and shareholders’ equity
  ¥ 20,629,227     ¥ 31,373,155  
             
See accompanying notes to consolidated financial statements.

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2002, 2003 and 2004
                             
    2002   2003   2004
             
    (unaudited)        
    (Yen in thousands)
Revenues:
                       
 
Retail sales, net
  ¥ 27,432,871     ¥ 38,699,329     ¥ 50,010,854  
 
Television programming revenue:
                       
   
Related party
    1,457,731       1,655,215       1,762,782  
   
Other
    4,247,036       5,802,030       6,664,584  
 
Services and other revenue:
                       
   
Related party
    524,849       755,244       866,157  
   
Other
    634,336       906,453       1,176,418  
                   
Total revenues
    34,296,823       47,818,271       60,480,795  
                   
Operating costs and expenses:
                       
 
Cost of retail sales:
                       
   
Related party
    1,251,413       1,597,880       2,212,430  
   
Other
    15,141,176       21,658,902       28,038,763  
 
Cost of programming and distribution:
                       
   
Related party
    851,475       2,487,545       2,742,401  
   
Other
    5,417,193       6,271,783       7,482,238  
 
Selling, general and administrative expenses:
                       
   
Related party
    895,979       943,439       1,318,449  
   
Other
    6,728,610       8,532,952       10,084,322  
 
Depreciation and amortization
    1,107,040       1,210,163       1,380,432  
                   
Total operating expenses
    31,392,886       42,702,664       53,259,035  
                   
Operating income
    2,903,937       5,115,607       7,221,760  
Other income (expense):
                       
 
Interest expense:
                       
   
Related party
    (77,899 )     (60,073 )     (45,258 )
   
Other
    (74,482 )     (66,204 )     (77,245 )
 
Foreign exchange (loss) gain
    (309,017 )     (141,368 )     126,572  
 
Equity in (losses) income of equity method affiliates (Note 4)
    (163,758 )     (64,472 )     22,888  
 
Other (expense) income, net
    (214,087 )     9,763       (9,241 )
                   
Total other (expense) income
    (839,243 )     (322,354 )     17,716  
                   
Income before income taxes and minority interests
    2,064,694       4,793,253       7,239,476  
Income tax expense (Note 13)
    (703,947 )     (1,519,225 )     (2,951,446 )
Minority interests in earnings, net of tax
    (343,027 )     (608,738 )     (1,077,972 )
                   
Net income
  ¥ 1,017,720     ¥ 2,665,290     ¥ 3,210,058  
                   
See accompanying notes to consolidated financial statements.

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
Years ended December 31, 2002, 2003 and 2004
                               
    2002   2003   2004
             
    (unaudited)        
    (Yen in thousands)
Common stock (Note 15):
                       
 
Balance at beginning of year
  ¥ 16,834,000     ¥ 16,834,000     ¥ 16,834,000  
 
Transfer from common stock
                (8,400,000 )
 
Issuance of common stock
                3,000,000  
                   
 
Balance at end of year
    16,834,000       16,834,000       11,434,000  
                   
Additional paid-in capital (Note 15):
                       
 
Balance at beginning of year
                 
 
Transfer from common stock
                6,587,064  
 
Issuance of common stock
                3,000,000  
 
Carryover basis adjustment related to LJS acquisition (Note 2)
                (2,799,010 )
                   
 
Balance at end of year
                6,788,054  
                   
Accumulated deficit:
                       
 
Balance at beginning of year
    (15,913,721 )     (14,896,001 )     (12,230,711 )
 
Transfer from common stock
                1,812,936  
 
Net income
    1,017,720       2,665,290       3,210,058  
                   
 
Balance at end of year
    (14,896,001 )     (12,230,711 )     (7,207,717 )
                   
Accumulated other comprehensive income:
                       
 
Balance at beginning of year
                 
   
Unrecognized losses on derivative instruments (Note 9):
                       
     
Unrealized holding losses arising during the year, net of tax benefit, ¥11,460 thousand in 2004
                (16,705 )
                   
 
Balance at end of year
                (16,705 )
                   
Treasury stock at cost:
                       
 
Balance at beginning of year
                 
 
Redemption of common stock, to be held as treasury stock (Note 15)
                (6,000,000 )
 
Issuance of treasury stock related to LJS acquisition (Note 2)
                6,000,000  
                   
 
Balance at end of year
                 
                   
Total shareholders’ equity
  ¥ 1,937,999     ¥ 4,603,289     ¥ 10,997,632  
                   
Comprehensive income:
                       
 
Net income for the year
  ¥ 1,017,720     ¥ 2,665,290     ¥ 3,210,058  
 
Other comprehensive loss for the year, net of tax benefit, ¥11,460 thousand in 2004
                (16,705 )
                   
 
Total comprehensive income
  ¥ 1,017,720     ¥ 2,665,290     ¥ 3,193,353  
                   
See accompanying notes to consolidated financial statements.

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2003 and 2004
                               
    2002   2003   2004
             
    (unaudited)        
    (Yen in thousands)
Cash flows from operating activities:
                       
 
Net income
  ¥ 1,017,720     ¥ 2,665,290     ¥ 3,210,058  
 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
   
Depreciation and amortization
    1,107,040       1,210,163       1,380,432  
   
Amortization of program rights and language versioning
    1,298,054       1,570,670       1,732,435  
   
Provision for doubtful accounts
    1,501       1,975       (3,519 )
   
Equity in losses (income) of equity method affiliates
    163,758       64,472       (22,888 )
   
Write-down of cost method investment
    215,650              
   
Deferred income taxes
    (536,017 )     (553,039 )     (278,181 )
   
Minority interest in earnings
    343,027       608,738       1,077,972  
   
Changes in assets and liabilities, net of effects of acquisitions:
                       
     
Purchase of program rights and language versioning
    (1,433,219 )     (1,608,392 )     (1,631,074 )
     
Increase in accounts receivable
    (515,809 )     (740,650 )     (1,307,561 )
     
(Increase) decrease in retail inventories, net
    (777,383 )     252,870       (763,453 )
     
Increase (decrease) in accounts payable
    1,242,235       777,510       883,283  
     
Increase in accrued liabilities
    169,642       425,674       263,015  
     
Increase in income taxes payable
    939,964       369,587       674,288  
     
Other, net
    457,341       210,947       (22,218 )
                   
Net cash provided by operating activities
    3,693,504       5,255,815       5,192,589  
Cash flows from investing activities:
                       
 
Capital expenditures
    (1,378,218 )     (1,299,228 )     (3,886,668 )
 
Acquisition of subsidiary, net of cash acquired
    (188,844 )           (391,887 )
 
Investments in affiliates
    (626,050 )     (1,259,945 )     (748,500 )
 
Other, net
    (113,998 )     4,500        
                   
Net cash used in investing activities
    (2,307,110 )     (2,554,673 )     (5,027,055 )
Cash flows from financing activities:
                       
 
Proceeds (repayments) on short-term debt
          46,000       (46,000 )
 
Proceeds from advances from affiliate
                938,000  
 
Proceeds from issuance of long-term debt
    60,000       4,040,000        
 
Principal payments on long-term debt
          (4,000,000 )     (176,000 )
 
Principal payments on obligations under capital leases
    (527,935 )     (460,262 )     (429,014 )
 
Proceeds from issuance of common stock
                6,000,000  
 
Payments to acquire treasury stock
                (6,000,000 )
                   
Net cash used in financing activities
    (467,935 )     (374,262 )     286,986  
Net effect of exchange rate changes on cash and cash equivalents
    (25,895 )     (23,095 )     (4,677 )
                   
Net increase in cash and cash equivalents
    892,564       2,303,785       447,843  
Cash and cash equivalents at beginning of year
    1,708,419       2,600,983       4,904,768  
                   
Cash and cash equivalents at end of year
  ¥ 2,600,983     ¥ 4,904,768     ¥ 5,352,611  
                   
Supplemental information:
                       
 
Cash paid during the year for:
                       
   
Income taxes
  ¥ 299,999     ¥ 1,702,678     ¥ 2,551,301  
   
Interest
    152,381       126,277       90,711  
 
Acquisition of BBF (Note 2)
                       
   
Fair value of assets acquired (including cash acquired of ¥158,113 thousand)
                705,657  
   
Fair value of liabilities assumed
                (87,657 )
   
Accrued estimated additional purchase consideration
                (68,000 )
 
Non-cash activities:
                       
   
Assets acquired under capital leases
    5,457       142,644       1,037,505  
   
Acquisition of LJS through issuance of treasury stock (Note 2)
                3,200,990  
   
Elimination of long-term loan from LJS
                840,000  
See accompanying notes to consolidated financial statements.

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Description of Business and Summary of Significant Accounting Policies and Practices
          (a)  Description of Business
Jupiter Programming Co. Ltd. (the “Company”) and its subsidiaries (hereafter collectively referred to as “JPC”) invest in, develop, manage and distribute television programming to cable and satellite systems in Japan. Jupiter Shop Channel Co., Ltd (“Shop Channel”), through which JPC markets and sells a wide variety of consumer products and accessories, is JPC’s largest channel in terms of revenue, comprising approximately 80%, 81%, and 83%, of total revenues for the years ended December 31, 2002, 2003 and 2004, respectively. JPC’s business activities are conducted in Japan and serve the Japanese market.
The Company is owned 50% by Liberty Media International, Inc. (“LMI”) through its wholly owned subsidiaries Liberty Programming Japan, Inc. (43%) and Liberty Programming Japan II LLC (7%), and 50% by Sumitomo Corporation. The Company was incorporated in 1996 in Japan under the name Kabushiki Kaisha Jupiter Programming, Jupiter Programming Co. Ltd. in English.
          (b)  Basis of Consolidated Financial Statements
The consolidated statements of operations, shareholders’ equity and comprehensive income and cash flows for the year ended December 31, 2002, as well as the related footnote disclosures for that year, are unaudited. These consolidated financial statements for 2002 have been prepared on a consistent basis with the 2003 and 2004 consolidated financial statements and reflect all adjustments that in the opinion of management are necessary to present the results of operations and cash flows for 2002 in accordance with the accounting principles generally accepted in the United States of America.
The Company and its subsidiaries maintain their books of account in accordance with accounting principles generally accepted in Japan. The consolidated financial statements presented herein have been prepared in a manner and reflect certain adjustments that are necessary to conform them to accounting principles generally accepted in the United States of America. The major areas requiring such adjustment are accounting for derivative instruments and hedging activities, accounting for assets held under finance lease arrangements, accounting for goodwill and other intangible assets, employers’ accounting for pensions, accounting for compensated absence, accounting for deferred taxes, accounting for cooperative marketing arrangements and certain customer discounts, and accounting for the non-cash contribution of Liberty J Sports, Inc., from LMI.
          (c)  Principles of Consolidation
The consolidated financial statements include the financial statements of the Company and all of its majority owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
JPC accounts for investments in variable interest entities in accordance with the provisions of the Revised Interpretation of the FASB Interpretation (“FIN”) No. 46 “Consolidation of Variable Interest Entities”, issued in December 2003. The Revised Interpretation of FIN No. 46 provides guidance on how to identify a variable interest entity (“VIE”), and determines when the assets, liabilities, non-controlling interests, and results of operations of a VIE must be included in a company’s consolidated financial statements. A company that holds variable interests in an entity is required to consolidate the entity if the company’s interest in the VIE is such that the company will absorb a majority of the VIE’s expected losses and/or receive a majority of the entity’s expected residual returns, if any. VIEs created after December 31, 2003 must be accounted for under FIN No. 46R. For nonpublic companies, FIN No. 46R must be applied to all VIEs created before January 1, 2004 that are subject to this Interpretation by the beginning of the first annual period beginning after December 15, 2004. There has been no material effect to JPC’s consolidated financial statements from potential VIEs entered into after December 31, 2003 and there was no impact from the adoption of the deferred provisions effective January 1, 2005.

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
          (d)  Cash Equivalents
Cash equivalents consist of highly liquid debt instruments with an initial maturity of three months or less from the date of purchase.
          (e)  Allowance for doubtful accounts
Allowance for doubtful accounts is computed based on historical bad debt experience and includes estimated uncollectible amounts based on an analysis of certain individual accounts, including claims in bankruptcy.
          (f)  Retail Inventories
Retail Inventories, consisting primarily of products held for sale on Shop Channel, are stated at the lower of cost or market value. Cost is determined using the first-in, first-out method.
          (g)  Program Rights and Language Versioning
Rights to programming acquired for broadcast on the programming channels and language versioning are stated at the lower of cost and net realizable value. Program right licenses generally state a fixed time period within which a program can be aired, and generally limit the number of times a program can be aired. The licensor retains ownership of the program upon expiration of the license. Programming rights and language versioning costs are amortized over the license period for the program rights based on the nature of the contract or program. Where airing runs are limited, amortization is generally based on runs usage, where usage is unlimited, a straight line basis is used as an estimate of actual usage for amortization purposes. Certain sports programs are amortized fully upon first airing. Such amortization is included in programming and distribution expense in the accompanying consolidated statements of operations.
The portion of unamortized program rights and language versioning costs expected to be amortized within one year is classified as a current asset in the accompanying consolidated balance sheets.
          (h)  Investments
For those investments in affiliates in which JPC’s voting interest is 20% to 50% and JPC has the ability to exercise significant influence over the affiliates’ operations and financial policies, the equity method of accounting is used. Under this method, the investment is originally recorded at cost and is adjusted to recognize JPC’s share of the net earnings or losses of its affiliates. JPC recognizes its share of losses of an equity method affiliate until its investment and net advances, if any, are reduced to zero and only provides for additional losses in the event that it has guaranteed obligations of the equity method affiliate or is otherwise committed to provide further financial support.
The difference between the carrying value of JPC’s investment in the affiliate and the underlying equity in the net assets of the affiliate is recorded as equity method intangible assets where appropriate and amortized over a relevant period of time, or as residual goodwill. Equity method goodwill is not amortized but continues to be reviewed for impairment in accordance with APB No. 18, which requires that an other than temporary decline in value of an investment be recognized as an impairment loss.
Investments in other securities carried at cost represent non-marketable equity securities in which JPC’s ownership is less than 20% and JPC does not have the ability to exercise significant influence over the entities’ operation and financial policies.
JPC evaluates its investments in affiliates and non-marketable equity securities for impairment due to declines in value considered to be other than temporary. In performing its evaluations, JPC utilizes various sources of information, as available, including cash flow projections, independent valuations and, as applicable, stock

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
price analysis. In the event of a determination that a decline in value is other than temporary, a charge to income is recorded for the loss, and a new cost basis in the investment is established.
          (i)  Derivative Financial Instruments
Under Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended, entities are required to carry all derivative instruments in the consolidated balance sheets at fair value. The accounting for changes in the fair value (that is, gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, on the reason for holding the instrument. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies. If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (loss) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss are reported in earnings immediately. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in income in the period of change.
JPC uses foreign exchange forward contracts to manage currency exposure, resulting from changes in foreign currency exchange rates, on purchase commitments for contracted programming rights and other contract costs and for forecasted inventory purchases in U.S. dollars. JPC enters into these contracts to hedge its U.S. dollar denominated net monetary exposures. Hedges relating to purchase commitments for contracted programming rights and other contract costs may qualify for hedge accounting under the hedging criteria specified by SFAS No. 133. However prior to January 1, 2004, JPC elected not to designate any qualifying transactions as hedges. For certain qualifying transactions entered into since January 1, 2004, JPC has designated the transactions as cash flow hedges and the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive loss. For JPC’s foreign exchange forward contracts that do not qualify for hedge accounting under the hedging criteria specified by SFAS No. 133, changes in the fair value of derivatives are recorded in the consolidated statement of operations in the period of the change.
JPC does not, as a matter of policy, enter into derivative transactions for the purpose of speculation.
          (j)  Property and Equipment
Property and equipment are stated at cost.
Depreciation and amortization is generally computed using the straight line method over the estimated useful lives of the respective assets as follows:
         
Furniture and fixtures
    2-20 years  
Leasehold and building improvements
    3-18 years  
Equipment and vehicles
    2-15 years  
Buildings
    37-50  years  
Equipment under capital leases is initially stated at the present value of minimum lease payments. Equipment under capital leases is amortized using the straight line method over the shorter of the lease term and the estimated useful lives of the respective assets, which generally range from three to nine years.

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
          (k)  Software Development Costs
JPC capitalizes certain costs incurred to purchase or develop software for internal use. Costs incurred to develop software for internal use are expensed as incurred during the preliminary project stage, including costs associated with making strategic decisions and determining performance and system requirements regarding the project, and vendor demonstration costs. Labor costs incurred subsequent to the preliminary project stage through implementation are capitalized. JPC also expenses costs incurred for internal use software projects in the post implementation stage such as costs for training and maintenance. The capitalized cost of software is amortized straight-line over the estimated useful life, which is generally two to five years.
          (l)  Goodwill and Other Intangible Assets
Goodwill represents the excess of costs over fair value of net assets of businesses acquired. In June 2001, the FASB issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires the use of the purchase method of accounting for business combinations and establishes certain criteria for the recognition of intangible assets separately from goodwill. Under SFAS No. 142 goodwill is no longer amortized, but instead is tested for impairment at least annually. Intangible assets with definite useful lives are amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” Any recognized intangible assets determined to have an indefinite useful life are not amortized, but instead are tested for impairment until their life is determined to be no longer indefinite.
JPC performs its annual impairment test for goodwill and indefinite-life intangible assets at the end of each year. JPC completed its annual impairment tests at December 31, 2002, 2003 and 2004, respectively, with no indication of impairment identified.
          (m)  Long-Lived Assets and Long-Lived Assets to Be Disposed Of
JPC accounts for long-lived assets in accordance with the provisions of SFAS No. 144. SFAS No. 144 requires that long-lived assets and certain identifiable intangibles with definite useful lives be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Fair value is determined by independent third party appraisals, projected discounted cash flows, or other valuation techniques as appropriate.
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” The standard requires that obligations associated with the retirement of tangible long-lived assets be recorded as liabilities when those obligations are incurred, with the amount of the liability initially measured at fair value. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June  15, 2002. JPC adopted SFAS No. 143 on January 1, 2003 and the adoption did not have a material effect on its results of operations, financial position or cash flows.
          (n)  Accrued Pension and Severance Costs
The Company and certain of its subsidiaries provide a Retirement Allowance Plan (“RAP”) for eligible employees. The RAP is an unfunded retirement allowance program in which benefits are based on years of service which in turn determine a multiple of final monthly compensation. JPC accounts for the RAP in accordance with the provisions of SFAS No. 87, “Employers’ Accounting for Pensions”.

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In addition, JPC employees participate in an Employees’ Pension Fund (“EPF”) Plan. The EPF Plan is a multi-employer plan consisting of approximately 120 participating companies, mainly affiliates of Sumitomo Corporation. The plan is composed of substitutional portions based on the pay-related part of the old age pension benefits prescribed by the Welfare Pension Insurance Law in Japan, and corporate portions based on contributory defined benefit pension arrangements established at the discretion of the Company and its subsidiaries. Benefits under the EPF Plan are based on years of service and the employee’s compensation during the five years before retirement.
The assets of the EPF Plan are co-mingled and no assets are separately identifiable for any one participating company. JPC accounts for the EPF Plan in accordance with the provisions of SFAS No. 87, governing multi-employer plans. Under these provisions, JPC recognizes a net pension expense for the required contribution for each period and recognizes a liability for any contributions due but unpaid at the end of each period. Any shortfalls in plan funding are charged to participating companies on a ‘share-of-contribution’ basis through ’special contributions’ spread over a period of years determined by the EPF Plan as being appropriate.
          (o)  Revenue Recognition
Retail sales. Revenue from sales of products by Shop Channel is recognized when the products are delivered to customers, which is when title and risk of loss transfers. Shop Channel’s retail sales policy allows merchandise to be returned at the customers’ discretion, generally up to 30 days after the date of sale. Retail sales revenue is reported net of discounts, and of estimated returns, which are based upon historical experience.
Television Programming Revenue. Television programming revenue includes subscription and advertising revenue.
Subscription revenue is recognized in the periods in which programming services are provided to cable and satellite subscribers. JPC’s channels distribute programming to individual satellite platform subscribers through an agreement with the platform operator which provides subscriber management services to channels in return for a fee based on subscription revenues. Individual subscribers pay a monthly fee for programming channels under the terms of rolling one-month subscription contracts. Cable service providers generally pay a per-subscriber fee for the right to distribute JPC’s programming on their systems under the terms of generally annual distribution contracts. Subscription revenue is recognized net of satellite platform commissions and certain cooperative marketing and advertising funds paid to cable system operators. Satellite platform commissions for the years ended December 31, 2002, 2003 and 2004 were ¥843,335 thousand, ¥1,580,945 thousand and ¥1,639,055 thousand, respectively. Cooperative marketing and advertising funds paid to cable system operators for the years ended December 31, 2002, 2003 and 2004 were ¥80,289 thousand, ¥174,432 thousand and ¥225,572 thousand, respectively.
The Company generates advertising revenue on all of its programming channels except Shop Channel. Advertising revenue is recognized, net of agency commissions, when advertisements are broadcast on JPC’s programming channels.
Services and Other Revenue. Services and other revenue mainly comprises cable and advertising sales fees and commissions, and technical broadcast facility and production services provided by the Company and certain subsidiaries, and is recognized in the periods in which such services are provided to customers.
          (p)  Cost of Retail Sales
Cost of retail sales consists of the cost of products marketed to customers by Shop Channel, including write-downs for inventory obsolescence, shipping and handling costs and warehouse costs. Product costs are recognized as cost of retail sales in the accompanying consolidated statements of operations when the products are delivered to customers and the corresponding revenue is recognized.

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
          (q)  Cost of Programming and Distribution
Cost of programming and distribution consists of costs incurred to acquire or produce programs airing on the channels distributed to cable and satellite subscribers. Distribution costs include the costs of delivering the programming channels via satellite, including the costs incurred for uplink services and use of satellite transponders, and payments made to cable and satellite platforms for carriage of Shop Channel.
          (r)  Advertising Expense
Advertising expense is recognized as incurred and is included in selling, general and administrative expenses or, if appropriate, as a reduction of subscription revenue. Cooperative marketing costs are recognized as an expense to the extent that an identifiable benefit is received and the fair value of the benefit can be reasonably measured, otherwise as a reduction of subscription revenue. Advertising expense included in selling, general and administrative expenses for the years ended December 31, 2002, 2003 and 2004 was ¥1,062,757 thousand, ¥1,003,836 thousand and ¥1,333,596 thousand, respectively.
          (s)  Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
          (t)  Foreign Currency Transactions
Assets and liabilities denominated in foreign currencies are translated at the applicable current rates on the balance sheet dates. All revenue and expenses denominated in foreign currencies are converted at the rates of exchange prevailing when such transactions occur. The resulting exchange gains or losses are reflected in other income (expense) in the accompanying consolidated statements of operations.
          (u)  Use of Estimates
Management of JPC has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period, to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Significant items subject to such estimates and assumptions include valuation allowances for accounts receivable, retail inventories, investments, deferred tax assets, retail sales returns, and obligations related to employees’ retirement plans. Actual results could differ from estimates.
          (v)  New Accounting Standards
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs-an amendment of ARB No. 43.” This Statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that “... under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges... .” This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during annual periods beginning after June 15, 2005. JPC does not expect the adoption of this statement will have a material effect on its consolidated financial statements.
          (w)  Reclassification
Certain prior year amounts have been reclassified for comparability with the current year presentation.
(2) Acquisitions
On May 1, 2002, JPC acquired 100% of the outstanding common stock of Misawa Satellite Broadcasting Ltd. (“MSB”), a television programming company. The aggregate purchase price was ¥188,844 thousand and was paid in cash. The acquisition was accounted for as a purchase. On January 1, 2003, JPC merged the business operations of MSB with its wholly-owned subsidiary, Jupiter Satellite Broadcasting Co., Ltd. MSB operated Home Channel and as a result of the acquisition, JPC is expected to increase direct-to-home revenue from the packages in which Home Channel was carried. The results of operations of MSB are included in the accompanying consolidated statements of operations from May  1, 2002 onward. Goodwill from the acquisition of MSB is not deductible for tax purposes.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition of MSB (Yen in thousands):
         
Current assets
  ¥ 139,787  
Goodwill
    183,655  
       
Total assets acquired
    323,442  
Current liabilities assumed
    (134,598 )
       
Net assets acquired
  ¥ 188,844  
       
In addition to the goodwill recognized from the MSB transaction, ¥7,827 thousand of other goodwill was recorded in 2002.
In April 2004, JPC acquired all of the issued and outstanding common stock of Liberty J Sports, Inc. (“LJS”) from LMI, in exchange for 24,000 shares of JPC’s common stock held in treasury having a fair value, as determined by independent appraisal, of ¥250,000 per share. The aggregate purchase price amounted to ¥6,000,000 thousand. Immediately prior to the acquisition, LJS held 33.3% of the issued and outstanding shares of voting common stock of Jupiter Sports, Inc., with JPC holding the remaining 66.7%. Jupiter Sports Inc. is a holding company with its only principal asset, an investment, representing approximately 42.8% of the issued and outstanding voting common stock, in JSports Broadcasting Corporation (“JSB”). JSB is a sports channel broadcasting company currently operating three channels of various sports related contents. Jupiter Sports Inc. accounts for its investment in JSB using the equity method of accounting as it is able to exercise significant influence over the operations of JSB. As a result of the acquisition of LJS, JPC has increased its indirect ownership in JSB from 28.5% to 42.8%. Upon consummation of the acquisition, LJS was converted to a limited liability company with the Certificate of Conversion filed with the Secretary of State of Delaware, and renamed J Sports LLC.
The acquisition was consummated in concert with a series of capital transactions as described in Note 15 to the consolidated financial statements.
The Company has accounted for the acquisition to the extent of the ¥3,000,000 thousand cash paid to LMI in an earlier redemption of shares of common stock (see Note 15) in a manner similar to a partial step acquisition, reflecting the culmination of an earnings process on the part of LMI. Accordingly, the excess of

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
¥3,000,000 thousand over 50% of the fair value of the assets acquired and liabilities assumed with respect to the underlying investment in JSB has been recorded as a component of JPC’s investment in JSB and accordingly has been classified as equity method goodwill. Management has determined that the fair value of the assets acquired and liabilities assumed approximated their respective carrying values at the date of acquisition, and that there were no material intangible assets applicable to the underlying investment in JSB. The balance of the underlying investment acquired in JSB has been accounted for at historical cost using carryover basis with the difference of ¥3,000,000 thousand over such historical cost amount being reflected as a deduction from additional paid in capital. Goodwill from the acquisition is not deductible for tax purposes.
The following table summarizes the allocation of the acquisition consideration (Yen in thousands):
           
Purchase accounting:
       
 
50% of acquisition consideration
  ¥ 3,000,000  
 
Fair value of 50% of underlying net assets acquired
    200,990  
       
 
Equity method goodwill
  ¥ 2,799,010  
       
Carryover basis:
       
 
50% of acquisition consideration
  ¥ 3,000,000  
 
Historical cost of 50% of underlying net assets acquired
    200,990  
       
 
Carryover basis adjustment to additional paid in capital
  ¥ 2,799,010  
       
On December 28, 2004, JPC acquired 100% of the outstanding shares of BB Factory Corporation Ltd. (“BBF”), a television programming company. The aggregate purchase price is estimated to be ¥618,000 thousand, of which ¥550,000 thousand was paid in cash on December 28, 2004. The estimated additional purchase consideration of ¥68,000 has been accrued at December 31, 2004. The amount was determined with reference to the net asset value of BBF at January 31, 2005, pending final approval by both parties to the transaction. The additional purchase amount for BBF shall be settled in cash no later than March 31, 2005. The acquisition was accounted for as a purchase. JPC intends to sell access rights to the BBF broadcasting infrastructure to a new joint venture in which the JPC will hold a 50% interest. The new joint venture will be named Reality TV Japan, and was incorporated on January 26, 2005. BBF operated Channel BB and as a result of the acquisition, JPC expects to decrease funding requirements for Reality TV Japan due to its access to direct-to-home revenue from the packages in which Channel BB was carried. JPC has recognized intangible assets in the amount of ¥200,000 thousand representing estimated financial benefits from taking over Channel BB’s position in those packaging alliances, which it will amortize over a ten year period from 2005. The results of operations of BBF will be included in JPC’s consolidated statements of operations from January 1, 2005. Goodwill from the acquisition of BBF is not deductible for tax purposes.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition of BBF (Yen in thousands).
         
Current assets
  ¥ 224,471  
Intangible assets
    200,000  
Goodwill
    281,186  
       
Total assets acquired
    705,657  
Current liabilities assumed
    (6,277 )
Deferred tax liabilities
    (81,380 )
       
Net assets acquired
  ¥ 618,000  
       

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(3) Program Rights and Language Versioning
Program rights and language versioning as of December 31, 2003 and 2004 were composed of the following (Yen in thousands):
                 
    2003   2004
         
Program rights
  ¥ 1,616,603     ¥ 1,308,623  
Language versioning
    206,884       116,910  
             
      1,823,487       1,425,533  
Less accumulated amortization 557,638
    (1,036,357 )     (739,764 )
             
      787,130       685,769  
Less current portion
    (646,758 )     (599,480 )
             
    ¥ 140,372     ¥ 86,289  
             
Amortization expense related to program rights and language versioning for the years ended December 31, 2002, 2003 and 2004 was ¥1,298,054 thousand, ¥1,570,670 thousand and ¥1,732,435 thousand, respectively, which is included in cost of programming and distribution in the consolidated statements of operations in respective years.
(4) Investments
Investments, including advances, as of December 31, 2003 and 2004 were composed of the following (Yen in thousands):
                                   
    2003   2004
         
    percentage   carrying   percentage   carrying
    ownership   amount   ownership   amount
                 
Investments accounted for under the equity method:
                               
 
Discovery Japan, Inc. 
    50.0 %   ¥ 281,692       50.0 %   ¥ 580,455  
 
Animal Planet Japan, Co. Ltd. 
    33.3 %     342,423       33.3 %     223,510  
 
InteracTV Co., Ltd. 
    42.5 %     38,805       42.5 %     38,586  
 
JSports Broadcasting Corporation
    28.5 %     1,110,431       42.8 %     4,045,414  
 
AXN Japan, Inc. 
    35.0 %     825,112       35.0 %     879,630  
 
Jupiter VOD Co., Inc. 
                50.0 %     401,266  
                         
Total equity method investments
            2,598,463               6,168,861  
Investments accounted for at cost:
                               
 
NikkeiCNBC Japan, Inc. 
    9.8 %     100,000       9.8 %     100,000  
 
Kids Station, Inc. 
    15.0 %     304,500       15.0 %     304,500  
 
AT-X, Inc. 
    12.3 %     266,000       12.3 %     266,000  
 
Nihon Eiga Satellite Broadcasting Corporation
    10.0 %     66,600       10.0 %     66,600  
 
Satellite Service Co. Ltd. 
    12.0 %     24,000       12.0 %     24,000  
                         
Total cost method investments
            761,100               761,100  
                         
            ¥ 3,359,563             ¥ 6,929,961  
                         

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following investments represent participation in programming businesses:
  Discovery Japan, Inc., a general documentary channel;
  Animal Planet Japan, Co. Ltd., an animal-specific documentary channel;
  JSports Broadcasting Corporation, a sports channel business currently operating three channels;
  AXN Japan, Inc., an action and adventure channel;
  NikkeiCNBC Japan, Inc., a news service channel;
  Kids Station, Inc., a children’s entertainment channel;
  AT-X, Inc., an animation genre channel;
  Nihon Eiga Satellite Broadcasting Corporation, a Japanese period drama and movie channels business
    currently operating two channels; and
  Jupiter VOD Co., Inc. a multi-genre video on demand programming service
The following investments represent participation in broadcast license-holding companies through which channels are consigned to subscribers to the “CS110 degree East’ Direct-to-home satellite service:
  InteracTV Co., Ltd., holds licenses for Movie Plus, Lala, Golf Network and Shop channels, among
    others;
  Satellite Service Co. Ltd., holds licenses for Discovery and Animal Planet channels, among others.
The following reflects JPC’s share of earnings (losses) of investments accounted for under the equity method for the years ended December 31, 2002, 2003 and 2004 (Yen in thousands):
                         
    2002   2003   2004
             
    (unaudited)        
Discovery Japan, Inc. 
  ¥ (92,949 )   ¥ 143,445     ¥ 298,763  
Animal Planet Japan, Co. Ltd. 
    (260,929 )     (311,673 )     (283,913 )
InteracTV Co., Ltd. 
    (1,142 )     (1,272 )     (219 )
JSports Broadcasting Corporation
    191,262       143,227       135,973  
AXN Japan, Inc. 
          (38,199 )     (43,982 )
Jupiter VOD Co., Inc. 
                (83,734 )
                   
    ¥ (163,758 )   ¥ (64,472 )   ¥ 22,888  
                   
In August 2003, the Company invested ¥863,311 thousand to acquire a 35% interest in AXN Japan, Inc. (“AXN”). During 2004 JPC provided cash loans in the amount of ¥98,500 thousand to AXN. AXN is an action and adventure entertainment channel that complements JPC’s channel businesses.
In December 2004, the Company invested ¥485,000 thousand and acquired a 50% voting interest in Jupiter VOD Co., Ltd. (“JVOD”). JVOD is a video on demand service that will begin providing on-demand video services primarily to digitized cable systems capable of receiving its service from January 2005.
The carrying amount of investments in affiliates as of December 31, 2003, included ¥751,940 thousand of excess cost of the investments over the Company’s equity in the net assets of AXN. The carrying amount of investments in affiliates as of December 31, 2004, included ¥751,940 thousand and ¥2,799,010 thousand of excess cost of the investments over the Company’s equity in the net assets of AXN and JSB, respectively. The amount of that excess cost represents “equity method goodwill.”
JPC holds 33.3% of the ordinary shares of Animal Planet Japan, Co. Ltd, and records its share of the earnings and losses in accordance with that ordinary shareholding ratio. The Company has funding obligations in accordance with its ordinary shareholding ratio up to a maximum of ¥1,295,250 thousand. During the years ended December 31, 2003 and 2004, the Company invested ¥370,000 thousand and ¥165,000 thousand, respectively, and had made an aggregate investment of ¥1,295,000 thousand as of December 31, 2004, in

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Animal Planet Japan, Co. Ltd. JPC’s funding obligations for this investment have been substantially fulfilled. JPC and Animal Planet Japan, Co. Ltd.’s other shareholders are currently preparing a revised business plan and funding agreement for this investment.
The aggregate cost of JPC’s cost method investments totaled ¥761,100 thousand at December 31, 2004. JPC estimated that the fair value of each of those investments exceeded the cost of the investment, and therefore concluded that no impairment had occurred.
Financial information for the companies in which the Company has an investment accounted for under the equity method is presented as combined as the companies are similar in nature and operate in the same business area. Condensed combined financial information is as follows (Yen in thousands):
                   
    2003   2004
         
Combined financial position at December 31,
               
 
Current assets
  ¥ 6,747,882     ¥ 8,533,233  
 
Other assets
    1,780,915       634,175  
             
 
Total assets
  ¥ 8,528,797     ¥ 9,167,408  
             
 
Current liabilities
  ¥ 2,983,359     ¥ 3,056,756  
 
Other liabilities
    2,543,293       1,413,948  
 
Shareholders’ equity
    3,002,145       4,696,704  
             
 
Total liabilities and shareholders’ equity
  ¥ 8,528,797     ¥ 9,167,408  
             
                           
    2002   2003   2004
             
    (unaudited)        
Combined operations for the year ended December 31,
                       
 
Revenues
  ¥ 16,034,608     ¥ 15,256,112     ¥ 21,682,192  
 
Operating expenses
    15,720,997       15,270,229       21,998,685  
                   
 
Operating income (loss)
    313,611       (14,117 )     (316,493 )
 
Other income, net, including income taxes
    364,935       319,099       783,921  
                   
 
Net income
  ¥ 678,546     ¥ 304,982     ¥ 467,428  
                   

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(5) Property and Equipment
Property and equipment as of December 31, 2003 and 2004 were comprised of the following (Yen in thousands):
                 
    2003   2004
         
Furniture and fixtures
  ¥ 143,364     ¥ 187,233  
Leasehold and building improvements
    671,028       1,362,537  
Equipment and vehicles
    2,698,152       4,295,113  
Buildings
          851,485  
Land
    437,147       437,147  
Construction in progress
    253,678       183,254  
             
      4,203,369       7,316,769  
Less accumulated depreciation and amortization
    (2,191,083 )     (1,989,701 )
             
    ¥ 2,012,286     ¥ 5,327,068  
             
Property and equipment include assets held under capitalized lease arrangements (Note 11). Depreciation and amortization expense related to property and equipment for the years ended December 31, 2002, 2003 and 2004 was ¥699,332 thousand, ¥734,930 thousand and ¥772,907 thousand, respectively.
(6) Software Development Costs
Capitalized software development costs for internal use as of December 31, 2003 and 2004 are as follows (Yen in thousands):
                 
    2003   2004
         
Software development costs
  ¥ 2,722,942     ¥ 3,773,137  
Less accumulated amortization
    (1,272,554 )     (1,870,893 )
             
    ¥ 1,450,388     ¥ 1,902,244  
             
Significant software development additions during 2003 and 2004 included development of Shop Channel core system and e-commerce infrastructure, and further development of a sales receivables management system, all of which are for internal use.
Aggregate amortization expense for the years ended December 31, 2002, 2003 and 2004 was ¥355,727 thousand, ¥451,327 thousand and ¥584,340 thousand, respectively.
(7) Intangibles
Intangible assets acquired during the year ended December 31, 2004 totaled ¥214,936 thousand. The weighted average amortization period is ten years. (Note 2)

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The details of intangible assets other than software and goodwill at December 31, 2003 and 2004 were as follows (Yen in thousands):
                   
    2003   2004
         
Intangible assets subject to amortization, net of accumulated amortization of ¥6,420 thousand in 2003 and ¥28,417 thousand in 2004:
               
 
Channel packaging arrangements
  ¥     ¥ 200,000  
 
Other
    54,525       46,886  
             
      54,525       246,886  
Other intangible assets not subject to amortization:
    4,868       5,073  
             
Total other intangible assets
  ¥ 59,393     ¥ 251,959  
             
Channel packaging arrangements represent estimated value to be derived from existing channel position in packaging alliances on the direct-to-home satellite distribution platform, and are being amortized over their estimated useful life of ten years. The aggregate amortization expense of other intangible assets subject to amortization for the years ended December 31, 2002, 2003 and 2004 was ¥36,177 thousand, ¥1,802 thousand and ¥22,257 thousand, respectively. The future estimated amortization expenses for each of five years relating to amounts currently recorded in the consolidated balance sheet are as follows (Yen in thousands):
         
Year ending December 31,
       
2005
  ¥  45,892  
2006
    26,146  
2007
    22,466  
2008
    22,466  
2009
    22,466  
(8) Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2002, 2003 and 2004 were as follows (Yen in thousands):
                         
    2002   2003   2004
             
    (unaudited)        
Balance at beginning of year
  ¥     ¥ 191,482     ¥ 188,945  
Acquisitions
    191,482             281,186  
Adjustment
          (2,537 )      
                   
Balance at end of year
  ¥ 191,482     ¥ 188,945     ¥ 470,131  
                   
A breakdown of the goodwill recorded during 2002 and 2004 is provided in note 2 and is summarized as follows:
         
2002
  Misawa Satellite Broadcasting Co   ¥191,482 thousand
2004
  BB Factory   ¥281,186 thousand
(9) Derivative Instruments and Hedging Activities
JPC uses foreign exchange forward contracts that extend 3 to 52 months to manage currency exposure, resulting from changes in foreign currency exchange rates, on purchase commitments for contracted programming rights and other contract costs and for forecasted inventory purchases in U.S. dollars. JPC enters into these contracts to hedge its U.S. dollar denominated monetary exposures.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
JPC does not enter into derivative financial transactions for trading or speculative purposes.
JPC is exposed to credit-related losses in the event of non-performance by the counterparties to derivative financial instruments, but they do not expect the counterparties to fail to meet their obligations because of the high credit rating of the counterparties.
For certain qualifying transactions entered into from January 1, 2004, JPC designates the transactions as cash flow hedges and the effective portion of the gain or loss on the derivative instrument is reported as a component of other accumulated comprehensive loss. The amount of hedge ineffectiveness recognized currently in foreign exchange gain was not material for the year ended December 31, 2004. These amounts are reclassified into earnings through loss (gain) on forward exchange contracts when the hedged items impact earnings. Accumulated losses, net of taxes, of ¥16,705 thousand are included in accumulated other comprehensive loss at December 31, 2004, and will be reclassified into earnings within twelve months. No cash flow hedges were discontinued during the year ended December 31, 2004 as a result of forecasted transactions that are no longer probable to occur.
JPC has entered into foreign exchange forward contracts designated but not qualified as hedging instruments under SFAS No. 133 as a means of hedging certain foreign currency exposures. JPC records these contracts on the balance sheet at fair value. The changes in fair value of such instruments are recognized currently in earnings and are included in foreign exchange (loss) gain.
At December 31, 2003, the fair value of forward exchange contracts not designated as hedging instruments recognized in the balance sheet was a liability of ¥241,507 thousand. At December 31, 2004, the fair value of forward exchange contracts recognized in the balance sheet was a liability of ¥174,959 thousand and an asset of ¥18,813 thousand.
(10) Fair Value of Financial Instruments
The carrying amounts for financial instruments in JPC’s consolidated financial statements at December 31, 2003 and 2004 approximate to their estimated fair values. Fair value estimates are made at a specific point in time based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash and cash equivalents, accounts receivable, accounts payable, income taxes payable, accrued liabilities, and other current liabilities (non-derivatives): The carrying amounts approximate fair value because of the short duration of these instruments.
Foreign exchange forward contracts: The carrying amount is reflective of fair value. The fair value of currency forward contracts is estimated based on quotes obtained from financial institutions. As at December 31, 2003, fair value of foreign exchange forward contracts of ¥241,507 thousand was included in the consolidated balance sheet under other current liabilities. As at December 31, 2004, fair value of foreign exchange forward contracts of ¥18,813 thousand was included in the consolidated balance sheet under other current assets, and ¥174,959 thousand was included under other current liabilities.
Long-term debt, including current maturities and short-term debt: The fair value of JPC’s long-term debt is estimated by discounting the future cash flows of each instrument by a proxy for rates expected to be incurred on similar borrowings at current rates. Borrowings bear interest based on certain financial ratios that determine a margin over Euroyen TIBOR, and are therefore variable. JPC believes the carrying amount approximates fair value based on the variable rates and currently available terms and conditions for similar debt.

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Capital lease obligations, including current installments: The carrying amount is reflective of fair value. The fair value of JPC’s capital lease obligations is estimated by discounting the future cash flows of each instrument at rates currently offered to JPC by leasing companies.
(11) Leases
JPC is obligated under various capital leases for certain equipment and other assets that expire at various dates, generally during the next five years. At December 31, 2003 and 2004, the gross amount of equipment and the related accumulated amortization recorded under capital leases were as follows (Yen in thousands):
                 
    2003   2004
         
Equipment and vehicles
  ¥ 1,794,097     ¥ 1,839,215  
Others
    99,667       126,368  
Less accumulated amortization
    (1,417,805 )     (865,908 )
             
    ¥ 475,959     ¥ 1,099,675  
             
Amortization of assets held under capital leases is included with depreciation and amortization expense. Leased equipment is included in property and equipment (note 5).
Future minimum capital lease payments as of December 31, 2004 were as follows (Yen in thousands):
           
Year ending December 31,
       
 
2005
  ¥ 313,917  
 
2006
    247,663  
 
2007
    224,818  
 
2008
    190,961  
 
2009
    170,756  
 
Thereafter
    24,479  
       
Total minimum lease payments
    1,172,594  
Less amount representing interest (at rates ranging from 1.25% to 2.6%)
    (59,393 )
       
Present value of future minimum capital lease payments
    1,113,201  
Less current installments
    (290,031 )
       
    ¥ 823,170  
       
JPC also has several operating leases, primarily for office space, that expire over the next 10 years and a 30-year lease for land that expires in 29 years. Rent expense for the years ended December 31, 2002, 2003 and 2004 was ¥238,621 thousand, ¥275,264 thousand and ¥332,530 thousand, respectively.
The Company leases two principle office premises. JPC headquarters has a three-year lease agreement from August 2004, with a rolling two-year right of renewal that provides for annual rental costs of ¥245,118 thousand. Shop Channel has a 10-year agreement expiring in October 2013 with an annual rental cost of ¥185,905 thousand. These and other leases for office space are mainly cancelable upon six months notice. Accordingly, the schedule below detailing future minimum lease payments under non-cancelable operating leases includes the lease costs for the Company’s premises for only a six-month period.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Future minimum lease payments for the noncancelable portion of operating leases as of December 31, 2004 were as follows (Yen in thousands):
           
Year ending December 31,
       
 
2005
  ¥ 293,418  
 
2006
    4,980  
 
2007
    4,980  
 
2008
    4,980  
 
2009
    4,980  
 
Thereafter
    111,635  
       
Total minimum lease payments
  ¥ 424,973  
       
(12) Debt
Short-term debt at December 31, 2003 and 2004 consisted of the following (Yen in thousands):
                 
    2003   2004
         
Promissory note
  ¥ 46,000     ¥  
             
Short-term debt in 2003 represented a promissory note in the amount of ¥46,000 thousand due to Sony Pictures Entertainment (Japan) Inc. which was repaid by the due date of March 31, 2004.
Long-term debt at December 31, 2003 and 2004 consisted of the following (Yen in thousands):
                 
    2003   2004
         
Borrowings from banks
  ¥ 4,000,000     ¥ 4,000,000  
Loans from shareholders
    1,000,000       1,000,000  
Loans from subsidiary minority shareholders
    1,016,000        
             
Total long-term debt
    6,016,000       5,000,000  
Less: current maturities
           
             
Long-term debt
  ¥ 6,016,000     ¥ 5,000,000  
             
At December 31, 2004, the Company had a ¥10,000,000 thousand credit facility (the “Facility”) available for immediate and full borrowing with a group of banks. The Facility, which is guaranteed by certain of the Company’s subsidiaries, comprises an ¥8,000,000 thousand five-year term loan and a ¥2,000,000 thousand 364-day revolving facility. Outstanding borrowings under the five-year term loan at December 31, 2003 and 2004 were ¥4,000,000 thousand. There were no borrowings outstanding under the 364-day revolving facility as of December 31, 2003 and 2004. The Company pays a commitment fee of 0.20% on undrawn borrowings of the Facility. Interest on outstanding borrowings is based on certain financial ratios and can range from Euroyen TIBOR + 0.75% to TIBOR + 2.00% for the five-year term loan and from TIBOR + 0.70% to TIBOR + 1.00% for the 364-day revolving facility. The interest rates charged at December 31, 2003 and 2004 for the five-year term loan and for the 364-day revolving facility were 0.83% and 0.835% and 0.78% and 0.785%, respectively.
The term loan portion of the Facility is available for immediate and full borrowing to be drawn upon until December 25, 2005. Repayment by installments begins on March 31, 2006, on a quarterly basis, equal to 10% of the outstanding balance at the end of the availability period, until fully repaid on June 25, 2008. The 364-day revolving facility was renewed on June 22, 2004 and is available for immediate and full borrowing until June 22, 2005, and repayment in full is due on that date.

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Facility contains certain financial and other restrictive covenants. The financial covenants consist of: (i) EBITDA, as defined by the Facility agreement and reported on a Commercial Code of Japan basis, shall be equal to or exceed; for year 2004, ¥3,000,000 thousand; for year 2005, ¥3,500,000 thousand; for year 2006, ¥4,000,000 thousand; for year 2007, ¥5,000,000 thousand; and (ii) ‘Actual Amount of Investment’, as defined by the Facility agreement, shall not exceed ‘Maximum Amount of Investment’ as defined, provided that, in respect of a year, an amount equal to the excess of Maximum over Actual amount of investment shall be added to the Maximum Amount of Investment of the next following year. Maximum amounts of investment are defined relative to prior year EBITDA and other specified amounts.
Restrictive covenants contained in the Facility agreement include certain restrictions on: (i) creation of contractual security interests over the Company’s assets; (ii) sale of assets that would result in material adverse effect, or would comprise over 10% of total assets; (iii) corporate reorganization that would result in material adverse effect; (iv) sale of shares in principal subsidiaries; (v) distribution of dividends, repurchase of own shares, and repayment of subordinated loans; (vi) amendment of subordinated loan agreements; (vii) transactions with related parties other than in normal course of business, (viii) changes in fundamental nature of business; (ix) incursion of interest-bearing debt not contemplated in the Facility agreement; (x) transfer, creation of security interests on, or otherwise disposal of the Company’s shares; (xi) changes in control of the Company management by parent companies; (xii) purchase of shares in companies in unrelated business areas; and (xiii) changes in scope of the business of a particular subsidiary. JPC was in compliance with these covenants at December 31, 2004.
JPC has outstanding term borrowings of ¥500,000 thousand from each of LMI and Sumitomo Corporation. The borrowings are subordinated to the Facility described above. The borrowings bear interest at the higher of the rate applicable to the term loan portion of the Facility, and Japan Long Term Prime rate (1.85% and 1.55% at December 31, 2003 and 2004, respectively), and are due in full on July 26, 2008.
JPC had the following debt of certain subsidiaries due to minority shareholders in those subsidiaries:
As of December 31, 2003 JPC had outstanding borrowings of ¥836,000 thousand by Jupiter Sports Inc. due to Liberty J Sports, Inc., an indirect wholly owned subsidiary of LMI. The borrowings bore interest at the higher of the rate applicable to the term loan portion of the Facility and Japan Long Term Prime rate (1.85% at December 31, 2003), and was due in full on December 31, 2007. In April 2004, JPC acquired all of the issued and outstanding shares of Liberty J Sports, Inc. from LMI. Upon acquiring control, the outstanding borrowings were eliminated in consolidation of Liberty J Sports, Inc., which was subsequently renamed J Sports LLC. Note 2 provides further details of this acquisition.
As of December 31, 2003 JPC had outstanding borrowings of ¥180,000 thousand by Jupiter Shop Channel Co., Ltd. due to Home Shopping Network Inc. The borrowings bore interest at the Japan Short Term Prime rate (1.375% at December 31, 2003). The borrowings were due in full on December 31, 2005 and were repaid early in full in December 2004. No gain or loss was recognized on this repayment transaction.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The aggregate maturities of long-term debt for each of the five years subsequent to December 31, 2004 were as follows (Yen in thousands):
           
    2004
     
Year ending December 31,
       
 
2005
  ¥  
 
2006
    1,600,000  
 
2007
    1,600,000  
 
2008
    1,800,000  
 
2009
     
       
Total debt
  ¥ 5,000,000  
       
(13) Income Taxes
The components of the provision for income taxes for the years ended December 31, 2002, 2003 and 2004 recognized in the consolidated statements of operations were as follows (Yen in thousands):
                         
    2002   2003   2004
             
    (unaudited)        
Current taxes
  ¥ 1,239,964     ¥ 2,072,264     ¥ 3,229,627  
Deferred taxes
    (536,017 )     (553,039 )     (278,181 )
                   
Income tax expense
  ¥ 703,947     ¥ 1,519,225     ¥ 2,951,446  
                   
All pre-tax income and income tax expense is related to operations in Japan. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2003 and 2004 were presented below (Yen in thousands).
                   
    2003   2004
         
Deferred tax assets:
               
 
Retail inventories
  ¥ 617,970     ¥ 811,289  
 
Property and equipment
    195,223       297,238  
 
Accrued liabilities
    372,529       330,995  
 
Enterprise tax payable
    142,709       195,588  
 
Unrealized foreign exchange
    101,371       62,581  
 
Equity method investments
    711,645       944,389  
 
Operating loss carryforwards
    1,892,339       895,097  
 
Others
    270,394       320,361  
             
      4,304,180       3,857,538  
 
Less valuation allowance
    (2,901,655 )     (2,165,372 )
             
Total deferred tax assets
    1,402,525       1,692,166  
Deferred tax liabilities:
               
 
Intangibles
          (81,380 )
             
Net deferred tax assets
  ¥ 1,402,525     ¥ 1,610,786  
             
The net changes in the total valuation allowance for the years ended December 31, 2002, 2003 and 2004 were decreases of ¥1,003,452 thousand, ¥1,970,667 thousand, and ¥736,283 thousand, respectively.

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible or in which the operating losses are available for use. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefit of these deductible differences, net of the existing valuation allowance. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of the future taxable income during the carryforward period are reduced.
At December 31, 2004, JPC and its subsidiaries had total net operating loss carryforwards for income tax purposes of approximately ¥2,199,795 thousand, which are available to offset future taxable income, if any. JPC’s subsidiaries are subject to taxation on a stand-alone basis and net operating loss carryforwards may not be utilized against other group company profits. Aggregated net operating loss carryforwards, if not utilized, expire as follows (Yen in thousands):
           
Year ending December 31,
       
 
2005
  ¥ 1,116,701  
 
2006
    143,308  
 
2007
     
 
2008
     
 
2009
    351,540  
 
2010
    229,485  
 
2011
    358,761  
       
    ¥ 2,199,795  
       
The Company and its subsidiaries were subject to Japanese National Corporate tax of 30%, an Inhabitant tax of 6% and a deductible Enterprise tax of 10%, which in aggregate result in a statutory tax rate of 42.1%. On March 24, 2003, the Japanese Diet approved the Amendments to Local Tax Law, reducing the standard enterprise tax rate from 10.08% to 7.2%. The amendments to the tax rates became effective for fiscal years beginning on or after April 1, 2004. Consequently, the statutory income tax rate was lowered to approximately 40.7% for deferred tax assets and liabilities expected to be settled or realized on or after January 1, 2005. As a result of the decrease in the statutory tax rate, when compared with the amounts based on the tax rate applied before this revision, the net deferred tax assets decreased by approximately ¥47,119 thousand at December 31, 2004. A reconciliation of the Japanese statutory income tax rate and the effective income tax rate as a

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
percentage of income before income taxes for the years ended December 31, 2002, 2003 and 2004 is as follows:
                         
    2002   2003   2004
             
    (unaudited)        
Statutory tax rate
    42.1 %     42.1 %     42.1 %
Non-deductible expenses
    2.8       1.9       1.4  
Change in valuation allowance
    (27.1 )     (9.9 )     (1.2 )
Income tax credits
                (0.8 )
Reduction of tax net operating loss due to intercompany transfer of assets
    19.6              
Additional tax deduction due to intercompany transfer of assets
    (3.9 )     (1.7 )     (1.1 )
Effect of tax rate change
                0.7  
Others
    0.6       (0.7 )     (0.3 )
                   
Effective income tax rate
    34.1 %     31.7 %     40.8 %
                   
(14) Accrued Pension and Severance Cost
Net periodic cost of the Company and its subsidiaries’ unfunded RAP accounted for in accordance with SFAS No. 87 for the years ended December 31, 2002, 2003 and 2004, included the following components (Yen in thousands):
                         
    2002   2003   2004
             
    (unaudited)        
Service cost — benefits earned during the year
  ¥ 43,652     ¥ 44,743     ¥ 49,768  
Interest cost on projected benefit obligation
    2,625       3,951       4,332  
Recognized actuarial loss
    10,341       15,972       24,317  
                   
Net periodic cost
  ¥ 56,618     ¥ 64,666     ¥ 78,417  
                   
The reconciliation of beginning and ending balances of the benefit obligations of the Company and its subsidiaries’ plans accounted for in accordance with SFAS No. 87 are as follows (Yen in thousands):
                   
    2003   2004
         
Change in projected benefit obligations:
               
 
Benefit obligations, beginning of year
  ¥ 158,031     ¥ 216,611  
 
Service cost
    44,743       49,768  
 
Interest cost
    3,951       4,332  
 
Actuarial loss
    15,973       24,317  
 
Benefits paid
    (6,087 )     (10,232 )
             
Projected benefit obligations, end of year
  ¥ 216,611     ¥ 284,796  
             
Accumulated benefit obligations, end of year
  ¥ 164,662     ¥ 210,159  
             
Actuarial gains and losses are recognized fully in the year in which they occur. The weighted-average discount rate used in determining net periodic cost of the Company and its subsidiaries’ plans was 2.50%, 2.00% and 2.00% for the years ended December 31, 2002, 2003 and 2004, respectively. The weighted-average discount rate used in determining benefit obligations as of December 31, 2003 and 2004 was 2.00%. Assumed salary

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
increases ranged from 1% to 4.1% depending on employees’ age for the years ended December 31, 2002, 2003 and 2004.
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid (Yen in thousands):
           
Year ending December 31,
       
 
2005
  ¥ 16,206  
 
2006
    25,570  
 
2007
    25,291  
 
2008
    29,482  
 
2009
    34,715  
 
Years 2010-2014
    174,596  
JPC uses a measurement date of December 31 for all of its unfunded Retirement Allowance Plans.
In addition, employees of the Company and certain of its subsidiaries participate in a multi-employer defined benefit EPF plan. The Company contributions to this plan amounted to ¥56,976 thousand, ¥60,322 thousand, and ¥44,510 thousand for the years ended December 31, 2002, 2003 and 2004, respectively, and are included in selling, general and administrative expenses in the accompanying consolidated statements of operations.
(15) Shareholders’ Equity
The Commercial Code of Japan, provides that an amount equal to at least 10% of cash dividends and other cash appropriations paid be appropriated as a legal reserve until the aggregated amount of additional paid-in capital and the legal reserve equals 25% of the issued capital.
The Company paid no cash dividends for the years ended December 31, 2002, 2003 and 2004. The amount available for dividends under the Commercial Code of Japan is based on the unappropriated retained earnings recorded in the Company’s books of account and amounted to nil at December 31, 2004.
On January 30, 2004, the total number of JPC’s ordinary shares authorized to be issued was increased from 450,000 to 460,000 shares.
On March 5, 2004, JPC transferred ¥8,400,000 thousand of common stock to additional paid-in capital (¥6,587,064 thousand) and accumulated deficit (¥1,812,936 thousand). The transfer was approved by the Company’s stockholders in accordance with the Commercial Code of Japan, which allows a company to make a purchase of its own shares, as contemplated in the further transaction noted below, only from specified additional paid-in capital or retained earnings reserves. JPC purchased its own shares using the resulting additional paid-in capital, and elected at the same time to eliminate its accumulated deficit and generate positive retained earnings on a single entity basis. On a consolidated basis, JPC continued to show an accumulated deficit immediately after that transfer. Such transfer did not impact JPC’s total equity, cash position or liquidity. Had the Company been subject to corporate law generally applicable to United States companies for similar transactions, the accumulated deficit at December 31, 2004 would be ¥1,812,936 thousand more than the amount included in the accompanying consolidated financial statements.
During March and April 2004 the following capital transactions occurred and were based on an independent third party valuation of the common stock of JPC:
        1) Issuance of 24,000 newly issued shares of common stock to Sumitomo Corporation at a rate of ¥250,000 per common share (¥6,000,000 thousand), ¥3,000,000 thousand of which was allocated to common stock with the remaining ¥3,000,000 thousand allocated to additional paid-in capital;

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
        2) Redemption of 12,000 shares of common stock from Sumitomo Corporation at a rate of ¥250,000 per common share (¥3,000,000 thousand) to be held as treasury stock;
 
        3) Redemption of 12,000 shares of common stock from Liberty Programming Japan at a rate of ¥250,000 per common share (¥3,000,000 thousand) to be held as treasury stock;
 
        4) Issuance of 24,000 shares of common stock held in treasury shares to Liberty Programming Japan II Inc. in return for 1,000 shares of common stock in Liberty J Sports Inc. Liberty J Sports Inc. was then converted to a limited liability company with the Certificate of Conversion filed with the Delaware Secretary of State, and was subsequently renamed J Sports LLC. J Sports LLC is a wholly owned subsidiary of JPC.
(16) Related Party Transactions
JPC engages in a variety of transactions in the normal course of business. Significant related party balances, income and expenditures have been separately identified in the consolidated balance sheets and statements of operations. A list of related parties and a description of main types of transactions with each party follows:
Sumitomo Corporation, shareholder, and its subsidiaries: television programming advertising revenues, cost of retail sales, costs of programming and distribution, selling, general and administrative expenses for staff secondment fees, cash deposits, property and equipment capital leases, subordinated loans and interest thereon;
LMI, shareholder, and its subsidiaries: selling, general and administrative expenses for staff secondment fees and recharge of project development costs, subordinated loans and interest thereon;
Discovery Japan, Inc., and Animal Planet Japan, Co. Ltd, affiliate companies: services and other revenues from cable and advertising sales activities and broadcasting, marketing and office support services; costs of programming, distribution relating to direct-to-home subscription revenue and receipt of cash advances;
JSports Broadcasting Corporation, affiliate company: services and other revenues from cable and advertising sales activities and recovery of staff costs for seconded staff;
InteracTV Co., Ltd, affiliate company: pass through of direct-to-home television programming subscription revenues to JPC, costs of programming and distribution payments for transponder services;
Minority interests in Jupiter Golf Network, Co. Ltd, four companies holding total of 10.6%: television programming advertising revenues;
Home Shopping Network Inc.: minority shareholder loans and interest thereon;
Jupiter Telecommunications Co., Ltd, an affiliated company of LMI and Sumitomo Corporation at December 31, 2004, and an indirect consolidated subsidiary of LMI effective January 1, 2005: television programming cable subscription revenues, costs of programming and distribution for carriage of Shop Channel by cable systems.
(17) Concentration of credit risk
As of December 31, 2003 and 2004, SkyPerfecTV, an unrelated party, and Jupiter Telecommunications Co., Ltd (“JCom”), a related party, agent for sales of programming delivered via satellite and most significant cable system operator, respectively, represented concentrations of credit risk for the Company. For the years ended December 31, 2002, 2003 and 2004, subscription revenues of ¥1,688,119 thousand, ¥2,888,163 thousand and ¥3,095,526 thousand, respectively, received through SkyPerfect TV, accounted for approximately 35%, 45% and 44%, respectively, of subscription revenues, and 5%, 6% and 5%, respectively, of total revenues. As of

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JUPITER PROGRAMMING CO. LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
December 31, 2002, 2003 and 2004, SkyPerfect TV accounted for approximately 7%, 5% and 6%, respectively, of accounts receivable.
For the years ended December 31, 2002, 2003 and 2004, subscription revenues of ¥1,207,749 thousand, ¥1,361,897 thousand and ¥1,464,167 thousand, respectively, received through JCom, accounted for approximately 25%, 21% and 21%, respectively, of subscription revenues, and 4%, 3% and 2%, respectively, of total revenues. As of December 31, 2002, 2003 and 2004, JCom accounted for approximately 7%, 6% and 3%, respectively, of accounts receivable.
(18) Commitments, Other Than Leases
At December 31, 2004, JPC has commitments to purchase various program rights as follows (Yen in thousands):
           
Year ending December 31,
       
 
2005
  ¥ 1,131,527  
 
2006
    822,490  
 
2007
    37,864  
 
2008
    14,205  
       
Total program rights purchase commitments
  ¥ 2,006,086  
       
At December 31, 2004, JPC has commitments for transponder and uplink services as follows (Yen in thousands):
           
Year ending December 31,
       
 
2005
  ¥ 1,217,059  
 
2006
    1,265,173  
 
2007
    642,872  
 
2008
    523,984  
 
2009
    403,459  
 
Thereafter
    140,142  
       
Total transponder and uplink services commitments
  ¥ 4,192,689  
       
JPC contracts, through subsidiaries and affiliate licensed broadcasting companies, to utilize capacity on three satellites from two transponder service providers. JPC channels contract for a portion of the capacity available on a transponder according to the bandwidth needs of individual channels. Transponder service contracts are generally ten years in duration. Service fees are based on fixed rates or a fixed portion plus a variable portion based on platform subscriber numbers. Termination is possible on a channel-by-channel basis. One transponder service provider charges termination penalty fees, the other does not charge a fee until the last channel from one licensed broadcaster terminates. Due to the unclear nature of the responsibility for termination fees, commitments are disclosed for the full minimum commitment amounts under the service contracts.
JPC has capital equipment purchase commitments amounting to ¥2,024,206 thousand at December 31, 2004 that must be expended by December 31, 2005.

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INDEPENDENT AUDITORS’ REPORT
The Board of Directors and Stockholders
Torneos y Competencias S.A.:
We have audited the accompanying consolidated balance sheets of Torneos y Competencias S.A. and its subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of operations and comprehensive income (loss), of changes in stockholders’ equity and of cash flows for each of the years in the three-year period ended December 31, 2004. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Torneos y Competencias S.A. and its subsidiaries as of December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As disclosed in Note 1 to the consolidated financial statements, the Company is in default with respect to two bank loans and certain loans are past due. In addition, at December 31, 2004, the Company has a net working capital deficiency. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans with regards to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Finsterbusch Pickenhayn Sibille(*)
Buenos Aires, Argentina
March 11, 2005
(*) Finsterbusch Pickenhayn Sibille is the Argentine member firm of KPMG International, a Swiss cooperative.

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TORNEOS Y COMPETENCIAS S.A.
CONSOLIDATED BALANCE SHEETS
                     
    December 31,
     
    2004   2003
         
    (In thousands of
    Argentine pesos)
ASSETS
Current Assets
               
Cash
  A$ 2,641     A$ 2,224  
Accounts receivable, net
    19,007       15,116  
Related party receivables (Note 6)
    15,426       9,087  
Programming rights, net
    3,210       7,268  
Advances to soccer clubs
    1,180       2,216  
Tax receivables
    2,805       5,877  
Building held for sale (Notes 6.d and 11.a)
    2,940        
Prepaid expenses and other current assets
    3,466       2,375  
             
   
Total current assets
    50,675       44,163  
             
Related party receivables (Note 6)
    2,885       774  
Programming rights, net
    19,050       9,291  
Advances to soccer clubs
    2,421       4,660  
Deferred income taxes (Note 9)
    1,360       2,054  
Investments in affiliates accounted for under the equity method (Note 4)
    21,132       19,185  
Property and equipment, net (Note 5)
    15,690       15,914  
Other assets
    1,214       1,165  
Assets associated with discontinued operations (Note 6.d)
          5,909  
             
TOTAL ASSETS
  A$ 114,427     A$ 103,115  
             
 
LIABILITIES
Current Liabilities
               
Accounts payable and accrued liabilities
  A$ 28,532     A$ 11,743  
Related party liabilities (Note 6)
    6,216       15,880  
Debt (Note 7)
               
 
Related party debt
    8,419       8,306  
 
Third party debt
    8,333       9,024  
Taxes payable
    6,588       5,331  
Deferred income
    6,906       16,133  
Other liabilities
    4,816       4,203  
             
   
Total current liabilities
    69,810       70,620  
             
Investments in affiliates accounted for under the equity method (Note 4)
          3,715  
Other liabilities
    2,076       3,476  
Liabilities associated with discontinued operations (Note 6.d)
    3,700       3,208  
             
TOTAL LIABILITIES
  A$ 75,586     A$ 81,019  
             
Commitments and contingencies (Note 10)
               
 
Minority interest in subsidiaries
    (31 )     8  
 
Stockholders’ equity:
               
 
Common stock, A$1 par value. 50,160,000 shares authorized, issued and outstanding
    50,160       50,160  
 
Additional paid-in capital
          107,812  
 
Accumulated other comprehensive losses, net of taxes
    (6,768 )     (6,717 )
 
Legal reserve
          1,597  
 
Accumulated deficit
    (4,520 )     (130,764 )
             
   
Total stockholders’ equity
  A$ 38,872     A$ 22,088  
             
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  A$ 114,427     A$ 103,115  
             
See accompanying notes to consolidated financial statements.

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TORNEOS Y COMPETENCIAS S.A.
CONSOLIDATED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
                             
    Year ended December 31,
     
    2004   2003   2002
             
    (In thousands of Argentine pesos, except number of
    shares and per share amounts)
Revenue
                       
   
Related party (Note 6)
  A$ 74,941     A$ 76,977     A$ 69,974  
   
Third party
    28,126       18,553       10,729  
Operating costs and expenses
                       
 
Operating (other than depreciation)
                       
   
Related party (Note 6)
    (814 )     (1,676 )     (1,253 )
   
Third party
    (58,948 )     (44,970 )     (36,490 )
 
Selling, general and administrative
                       
   
Related party (Note 6)
    (70 )     (143 )     (400 )
   
Third party
    (25,565 )     (23,360 )     (20,003 )
Provision for doubtful accounts and other receivables
    (3,798 )     (709 )     (7,293 )
Depreciation
    (1,404 )     (1,424 )     (1,719 )
Impairment of goodwill (Note 2)
                (95,663 )
                   
Operating income (loss)
    12,468       23,248       (82,118 )
Share of earnings (losses) from equity affiliates (Note 4)
    12,901       9,427       (10,589 )
Interest expense
    (7,215 )     (10,042 )     (18,321 )
Foreign currency transaction gains (losses)
    4,167       5,365       (9,236 )
Other income (expenses), net
    (709 )     459       (2,082 )
                   
Income (loss) from continuing operations before income tax and minority interest
    21,612       28,457       (122,346 )
Income tax expense (Note 9)
    (5,027 )     (7,886 )     (1,698 )
Minority interest in losses (earnings) of subsidiaries
    11       (16 )     116  
                   
Income (loss) from continuing operations
    16,596       20,555       (123,928 )
Discontinued operations, net of tax (including gain on disposal of A$239 during 2004 and impairment of goodwill of A$6,074 during 2002) (Note 6.d)
    239       (604 )     (9,658 )
                   
Net income (loss)
  A$ 16,835     A$ 19,951     A$ (133,586 )
                   
Other comprehensive (loss) income, net of tax
                       
Foreign currency translation adjustment
    (51 )     1,136       (6,222 )
                   
Comprehensive income (loss)
  A$ 16,784     A$ 21,087     A$ (139,808 )
                   
Income (loss) per share from continuing operations
    0.33       0.41       (2.47 )
Income (loss) per share from discontinued operations
    0.01       (0.01 )     (0.19 )
                   
Net income (loss) per share
    0.34       0.40       (2.66 )
                   
Weighted average number of common shares outstanding
    50,160,000       50,160,000       50,160,000  
                   
See accompanying notes to consolidated financial statements.

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TORNEOS Y COMPETENCIAS S.A.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
                                                 
            Accumulated            
            other            
        Additional   comprehensive           Total
    Common   paid-in   losses,   Legal   Accumulated   stockholders’
    stock   capital   net of taxes   reserve   deficit   equity
                         
    (In thousands of Argentine pesos)
Balance as of January 1, 2002
  A$ 50,160     A$ 107,812     A$ (1,631 )   A$ 1,597     A$ (17,129 )   A$ 140,809  
Foreign currency translation adjustment
                (6,222 )                 (6,222 )
Net loss
                            (133,586 )     (133,586 )
                                     
Balance as of December 31, 2002
    50,160       107,812       (7,853 )     1,597       (150,715 )     1,001  
Foreign currency translation adjustment
                1,136                   1,136  
Net income
                            19,951       19,951  
                                     
Balance as of December 31, 2003
    50,160       107,812       (6,717 )     1,597       (130,764 )     22,088  
Foreign currency translation adjustment
                (51 )                 (51 )
Absorption of accumulated deficit as required under Argentine law (Note 8)
          (107,812 )           (1,597 )     109,409        
Net income
                            16,835       16,835  
                                     
Balance as of December 31, 2004
  A$ 50,160     A$     A$ (6,768 )   A$     A$ (4,520 )   A$ 38,872  
                                     
See accompanying notes to consolidated financial statements.

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TORNEOS Y COMPETENCIAS S.A.
CONSOLIDATED STATEMENTS OF CASH FLOWS
                               
    Year ended December 31,
     
    2004   2003   2002
             
    (In thousands of Argentine pesos)
Cash flows from operating activities:
                       
Income (loss) from continuing operations
  A$ 16,596     A$ 20,555     A$ (123,928 )
Adjustments to reconcile income (loss) from continuing operations to net cash provided by (used in) operating activities:
                       
 
Provision for doubtful accounts and other receivables
    3,798       709       7,293  
 
Depreciation
    1,404       1,424       1,719  
 
Share of (earnings) losses from equity affiliates
    (12,901 )     (9,427 )     10,589  
 
Impairment of goodwill
                95,663  
 
Minority interest in losses (earnings) of subsidiaries
    (11 )     16       (116 )
 
Deferred tax expense
    694       4,170       1,698  
 
Changes in operating assets and liabilities, net of the effect of dispositions:
                       
   
Receivables, programming rights and others
    (17,098 )     13,847       3,775  
   
Payable and other current liabilities
    2,194       (24,639 )     30,019  
                   
   
Net cash provided by (used in) operating activities
    (5,324 )     6,655       26,712  
                   
Cash flows from investing activities:
                       
 
Capital expenditures
    (1,430 )     (1,162 )      
 
Cash distribution from equity affiliates
    7,500             2,718  
 
Proceeds from the sale of property and equipment
    250             732  
                   
   
Net cash provided by (used in) investing activities
    6,320       (1,162 )     3,450  
                   
Cash flows from financing activities:
                       
 
Debt proceeds
    4,338       1,213       10,537  
 
Repayment of debt
    (4,917 )     (5,063 )     (43,649 )
                   
   
Net cash used in financing activities
    (579 )     (3,850 )     (33,112 )
                   
   
Net cash provided by (used in) discontinued operations
          (26 )     172  
                   
   
Net increase (decrease) in cash
    417       1,617       (2,778 )
     
Cash at beginning of year
    2,224       607       3,385  
                   
     
Cash at end of year
  A$ 2,641     A$ 2,224     A$ 607  
                   
See accompanying notes to consolidated financial statements.

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TORNEOS Y COMPETENCIAS S.A.
December 31, 2004, 2003 and 2002
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands of Argentine pesos, except as otherwise mentioned)
1. Description of business, liquidity and basis of presentation
     Description of business
Torneos y Competencias S.A. (“TyC” or the “Company”) is an independent producer of Argentine sports and entertainment programming that, through various affiliates, operates a sports programming cable channel; commercializes rights to televise sporting events via cable, satellite and broadcast television; and manages two sports magazines and several thematic soccer bars. TyC’s emphasis is on soccer, and it has an exclusive agreement (except for certain cable broadcast rights held by an affiliate) with the Asociación de Fútbol Argentino, or “AFA”, to produce and distribute programs related to matches between clubs in the Argentine professional soccer leagues. This agreement expires in 2010 unless extended to 2014 at TyC’s request. TyC produces or co-produces, with its three television studios and the production facilities of its production partners, a number of soccer-based programs, such as Fútbol de Primera, El clásico del Domingo and Fútbol de Verano.
TyC has interests in two magazines: El Grafico, which covers Argentine and international sports, with special emphasis on soccer; and Golf Digest, the Argentine and Chilean editions of the American golf magazine.
TyC also has the rights to broadcast friendly summer season tournaments in different Argentine cities through 2007.
The Company’s principal shareholders are:
         
    Ownership
Shareholders   percentage
     
ACH Acquisitions Co.
    20%  
Telefónica de Contenidos S.A. Unipersonal
    20%  
A y N Argentina LLC
    20%  
Liberty Argentina, Inc, a subsidiary of Liberty Media International, Inc (“LMI”)
    40%  
TyC’s 50% — owned affiliate, Televisión Satelital Codificada S.A., or “TSC” holds the commercial rights in Argentina, with certain exceptions, to televise selected official soccer matches of AFA’s Premier Ligue. TSC sells the rights to televise specific matches to cable operators, to an over-the-air broadcast television channel in and around Buenos Aires and, in certain cases, exclusively to the TyC Sports Channel.
Another 50% — owned affiliate of TyC, TELE-RED Imagen S.A., or “TRISA” owns the TyC Sports Channel, the first dedicated sports cable channel in Argentina, which packages soccer programming co produced by Torneos and other sporting events to which TRISA holds commercial rights. TRISA also holds commercial rights to produce and distribute certain motor car racing, basketball and boxing events.
T&T Sports Marketing Inc. (“T&T”), a 50% — owned affiliate of the Company, has entered into agreements with the “Confederación Sudamericana de Fútbol (“Conmebol”) for the acquisition of the “Copa Libertadores” and “Copa Sudamericana” broadcasting rights up to 2010. See Notes 4 and 6.
     Liquidity
The Company is in default with respect to two bank loans. In addition, the Company’s loans from LMI are past due. Principal and interest under these bank and LMI loans of A$13,346 and A$4,088, respectively, have been classified as current liabilities at December 31, 2004. See Note 7. In addition, at December 31, 2004, current liabilities exceed current assets by A$19,135. The Company plans to renegotiate these loans to extend the repayment terms. Although the Company expects that it will be able to successfully renegotiate the bank loans that are in default and the past due loans from LMI, no assurance can be given that the Company will be

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TORNEOS Y COMPETENCIAS S.A.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
successful. In the event that the Company’s efforts in this regard are not successful, the Company’s ability to continue as a going concern could be adversely affected in that the Company may not have sufficient funds available to meet its current liabilities as they become due and payable, particularly if payment is demanded under the aforementioned bank or LMI loans.
     Basis of presentation
The accompanying consolidated financial statements include the accounts of TyC and all voting interest entities where TyC exercises a controlling interest through the ownership of a direct or indirect majority voting interest and variable interest entities for which TyC is the primary beneficiary. All significant interc