<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 8, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
KABUSHIKI KAISHA JYUPITATEREKOMU
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
JUPITER TELECOMMUNICATIONS CO., LTD.
(TRANSLATION OF REGISTRANT'S NAME INTO ENGLISH)
------------------------
<TABLE>
<S> <C> <C>
JAPAN 4841 NOT APPLICABLE
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
HIGASHI-IKEBUKURO CENTER BUILDING 8F
41-24, HIGASHI-IKEBUKURO 4-CHOME
TOSHIMA-KU, TOKYO 170-0013, JAPAN
+81-3-5953-5001
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CT CORPORATION SYSTEM
111 EIGHTH AVENUE
NEW YORK, NEW YORK 10011
212-894-8940
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
BRIAN G. CARTWRIGHT, ESQ. CHRISTOPHER H. LUNDING, ESQ.
LATHAM & WATKINS CLEARY, GOTTLIEB, STEEN & HAMILTON
633 WEST FIFTH STREET, SUITE 4000 SHIN KASUMIGASEKI BUILDING 20TH FLOOR
LOS ANGELES, CALIFORNIA 90071-2007 3-2, KASUMIGASEKI 3-CHOME
213-485-1234 CHIYODA-KU, TOKYO 100-0013, JAPAN
+81-3-3595-3911
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement is declared effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(2) ORDINARY SHARE(3)(4) PRICE(3) REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------------------
Ordinary shares, no par value,
including ordinary shares
represented by American
depositary shares(1)........ 1,000,640 $750 $750,480,000 $198,127
------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) American depositary shares evidenced by American depositary receipts
issuable upon deposit of the ordinary shares registered hereby are being
registered pursuant to a separate registration statement on Form F-6. Each
American depositary share will represent one-fiftieth of an ordinary share.
(2) Consists of 566,400 ordinary shares being offered in Japan, 377,600 ordinary
shares, directly or in the form of American depositary shares, being offered
in the United States and internationally outside Japan and 56,640 ordinary
shares, directly or in the form of American depositary shares, that the
overseas underwriters have the option to purchase to cover over-allotments,
if any, in the United States and internationally outside Japan.
(3) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(a), as promulgated under the Securities Act of
1933, as amended.
(4) Represents the U.S. dollar equivalent of the proposed maximum offering price
per ordinary share of Y81,000 based on The Bank of Tokyo-Mitsubishi, Ltd.
Telegraphic Transfer Selling exchange rate quotation on November 6, 2000 of
Y108.20 per U.S. dollar.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
We and the selling shareholders identified in this prospectus are making a
global offering of our ordinary shares, which may be in the form of American
Depositary Shares. The global offering will consist of an overseas offering in
the U.S. and internationally outside Japan and a Japanese offering. The attached
prospectus relates to the overseas offering in the U.S. and internationally
outside Japan.
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER
TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS
NOT PERMITTED.
Subject to Completion. Dated November 7, 2000.
944,000 ORDINARY SHARES
DIRECTLY OR IN THE FORM OF AMERICAN DEPOSITARY SHARES
[J-COM LOGO]
JUPITER TELECOMMUNICATIONS CO., LTD.
Y PER ORDINARY SHARE
US$ PER ADS
------------------
Of the 944,000 ordinary shares being offered, 377,600 ordinary shares,
directly or in the form of American Depositary Shares, or ADSs, are being
offered by us in the U.S. and internationally outside Japan, 409,400 ordinary
shares are being offered by us in Japan and 157,000 ordinary shares are being
offered by the selling shareholders in Japan. Each ADS represents the right to
receive one-fiftieth of an ordinary share. We will not receive any proceeds from
the sale of ordinary shares by the selling shareholders.
This is our initial public offering. We currently expect the initial public
offering price to be between Y70,000 and Y81,000 per ordinary share and US$13.00
and US$15.00 per ADS. We have applied to list our ADSs for quotation on the
Nasdaq National Market under the symbol "JUPI." We have also applied for the
listing and admission for trading of our ordinary shares on the Mothers Market
of the Tokyo Stock Exchange.
INVESTING IN OUR ORDINARY SHARES AND ADSS INVOLVES A HIGH DEGREE OF RISK.
PLEASE SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF THOSE RISKS.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------
<TABLE>
<CAPTION>
PER
ORDINARY SHARE PER ADS TOTAL
-------------- ---------- ----------
<S> <C> <C> <C>
Initial public offering price Y US$ US$
Underwriting discount Y US$ US$
Proceeds to Jupiter (before expenses) Y US$ US$
Proceeds to selling shareholders (before expenses) Y US$ US$
</TABLE>
We have granted the overseas underwriters an eight-day option to purchase
from us up to an aggregate of 56,640 additional ordinary shares, directly or in
the form of ADSs, at the initial public offering price less the underwriting
discount to cover over-allotments, if any, in the U.S. and internationally
outside Japan.
The underwriters expect to deliver the ordinary shares and the ADSs to
purchasers on or about , 2000.
------------------
NIKKOSALOMONSMITHBARNEY GOLDMAN, SACHS & CO.
------------------
MERRILL LYNCH & CO. DAIWA SECURITIES AMERICA INC.
CAZENOVE INC. NOMURA SECURITIES INTERNATIONAL, INC.
Prospectus dated , 2000.
<PAGE> 4
(MAP OF JAPAN MARKED TO INDICATE LOCATION OF OUR CABLE FRANCHISES. J-COM LOGO
IS ALSO DISPLAYED.)
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.......................................... 1
RISK FACTORS................................................ 11
FORWARD-LOOKING STATEMENTS.................................. 27
ENFORCEMENT OF CIVIL LIABILITIES............................ 27
CAPITALIZATION.............................................. 28
DILUTION.................................................... 29
USE OF PROCEEDS............................................. 30
DIVIDEND POLICY............................................. 30
EXCHANGE RATES.............................................. 31
SELECTED HISTORICAL FINANCIAL AND OTHER DATA................ 32
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS................................................ 38
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 43
BUSINESS.................................................... 71
MANAGEMENT.................................................. 105
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS........ 110
PRINCIPAL AND SELLING SHAREHOLDERS.......................... 115
DESCRIPTION OF CAPITAL STOCK................................ 118
DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS................. 125
JAPANESE FOREIGN EXCHANGE AND OTHER REGULATIONS............. 134
TAX CONSIDERATIONS.......................................... 136
THE MOTHERS MARKET.......................................... 139
SHARES ELIGIBLE FOR FUTURE SALE............................. 140
UNDERWRITING................................................ 142
LEGAL MATTERS............................................... 146
EXPERTS..................................................... 146
WHERE YOU CAN FIND MORE INFORMATION......................... 146
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
</TABLE>
UNTIL AND INCLUDING , 2000, ALL DEALERS THAT BUY, SELL OR TRADE
THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THE GLOBAL OFFERING, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALER'S OBLIGATION
TO DELIVER A PROSPECTUS WHEN ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
i
<PAGE> 6
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FOUND IN GREATER DETAIL
ELSEWHERE IN THIS PROSPECTUS. YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER
WITH THE MORE DETAILED INFORMATION REGARDING OUR COMPANY, OUR ORDINARY SHARES OR
ADSS BEING SOLD IN THIS GLOBAL OFFERING AND OUR FINANCIAL STATEMENTS AND THE
RELATED NOTES APPEARING ELSEWHERE IN THIS PROSPECTUS BEFORE DECIDING TO PURCHASE
OUR ORDINARY SHARES OR ADSS.
THE COMPANY
We, together with our managed franchises, are a leading broadband provider
of integrated entertainment, information and communication services in Japan. We
offer our services through our 20 managed franchises, primarily under the
"J-COM" brand. We were founded in January 1995 as a joint venture between
Sumitomo Corporation and Liberty Media International, Inc., formerly known as
Tele-Communications International, Inc. We offer our customers cable television
services in all of our managed franchises. In addition, we offer high-speed
Internet access services in parts of 19 of our managed franchises, and we offer
telephony services in selected areas. During 2001, we expect to begin the launch
of our digital and interactive television services in selected managed
franchises. We deliver these services over our broadband networks, which we are
expanding throughout the franchise areas that we serve.
We are currently the largest provider of cable television services in Japan
based on the number of customers we serve. On September 1, 2000, we acquired
Titus Communications Corporation, a major broadband provider of cable
television, telephony and high-speed Internet access services in Japan. Titus
primarily served customers in areas geographically contiguous with some of our
managed franchises. As of September 30, 2000:
- our managed franchise areas covered 6.3 million homes;
- we passed 4.6 million homes with our broadband networks; and
- we served 739,300 cable television customers, 58,900 telephony customers
and 98,800 high-speed Internet access customers.
Our consolidated group, which consists of Jupiter and 13 of our managed
franchises, had Y19,012 million in total revenue in 1999 and Y23,038 million in
total revenue in the first nine months of 2000. Our consolidated group also had
a net loss of Y12,240 million in 1999 and a net loss of Y12,917 million in the
first nine months of 2000. In addition, our consolidated group had negative cash
flows from our operating activities and investing activities of Y19,409 million
in 1999 and Y17,725 million in the first nine months of 2000. Our managed
franchises expect to continue to invest heavily in the construction and upgrade
of the infrastructure of our broadband networks and in the expansion of our
existing broadband services. As a result, we expect that our consolidated group
will continue to generate negative cash flows from our operating and investment
activities for the foreseeable future.
Following the global offering, our principal shareholders, Sumitomo,
Liberty Media and Microsoft Holdings V, Inc., a subsidiary of Microsoft
Corporation, will collectively own approximately 77.6% of our ordinary shares,
assuming the overseas underwriters have not exercised their over-allotment
option. Historically, we have relied upon our founding shareholders, Sumitomo
and Liberty Media, for our technical and management employees and the executive
management of our franchises. We also have relied on our shareholders as a
source of financing. As of September 30, 2000, of our consolidated group's and
unconsolidated managed franchises' total debt of Y136,621 million, Y71,553
million was owed to Sumitomo and its affiliates, an additional Y17,180 million
was guaranteed by Sumitomo and Y35,300 million was guaranteed by Microsoft.
Following completion of the global offering, we may not be able to continue to
rely upon our principal shareholders as a source of financing.
1
<PAGE> 7
OUR OPERATIONAL STRUCTURE
Our Franchises
We operate our broadband networks through 20 individually operated cable
franchises, most of which are located in some of the most populated urban
regions of Japan. We are the largest shareholder in each of these franchises.
Nineteen of these franchises are organized in three large regional clusters
which we designate as the Kanto cluster, which includes our managed franchises
in Tokyo, the Kansai cluster, which includes our managed franchises in Osaka and
Kobe, and the Kyushu cluster, which includes our managed franchises in Fukuoka
and Kitakyushu. In addition, we have one managed franchise in Sapporo.
As an operator of multiple cable systems, we provide each managed franchise
with experienced personnel, including their president, operating and
administrative services, sales and marketing training, programming and equipment
procurement assistance and other management services. Further, our managed
franchises construct their networks based on our standard architecture and
either currently use or are in the process of adopting our unified customer
management system to support sales, customer service, billing and collections.
In addition to our managed franchises, we own non-controlling equity interests
in five companies that own locally operated and managed cable franchises.
Our High-Speed Internet Service Joint Ventures
We own a 35.7% interest in @Home Japan Co., Limited, a joint venture with
Sumitomo and At Home Corporation, a U.S.-based provider of Internet access, Web
portals and content. In June 2000, we began the commercial launch of @Home Japan
high-speed Internet access under the J-COM@NetHome brand. As of September 30,
2000, ten of our managed franchises offered the J-COM@NetHome service. We plan
to roll out this service to our other managed franchises by the end of 2001. In
addition, we own a 26% interest in Kansai Multimedia Services, a provider of
high-speed Internet access for cable system operators in the Kansai region of
Japan as well as Internet access and infrastructure services for several of our
managed franchises in the Kansai region.
OUR BUSINESS STRATEGY
We are committed to maintaining and building upon our position as the
largest centrally managed multiple system operator in Japan by pursuing the
following business strategies:
- offer high-value bundled entertainment, information and communications
services;
- develop our network infrastructure to ensure customer satisfaction;
- capitalize on regional clustering of franchises;
- achieve efficiencies as a multiple system operator; and
- aggressively market our services and brand.
ADDITIONAL INFORMATION
We were incorporated in Japan on January 18, 1995. Our principal executive
offices are located at Higashi-Ikebukuro Center Building 8F, 41-24,
Higashi-Ikebukuro 4-chome, Toshima-ku, Tokyo 170-0013, Japan. Our telephone
number is +81-3-5953-5001. Our English language Internet Web site is
www.jcom.co.jp. This reference to our Web site is not an active hyperlink nor is
the information on our Web site incorporated by reference into this prospectus.
------------------------------------------------------
Unless we indicate otherwise, the information contained in this prospectus
assumes the overseas underwriters do not exercise their over-allotment option to
purchase up to an aggregate of 56,640 additional ordinary shares, including
ordinary shares represented by ADSs, in the overseas offering.
2
<PAGE> 8
GLOBAL OFFERING
SHARES OFFERED BY THE
COMPANY.................. 787,000 ordinary shares, including ordinary shares
represented by ADSs.
SHARES OFFERED BY THE
SELLING SHAREHOLDERS....... 157,000 ordinary shares.
GLOBAL OFFERING............ The global offering consists of the overseas
offering in the U.S. and internationally outside
Japan and the Japanese offering, each of which is
described below. Following the global offering, a
total of 4,721,285 ordinary shares, including
ordinary shares represented by ADSs, will be
outstanding.
OVERSEAS OFFERING.......... An offering in the U.S. and internationally outside
Japan by us of 377,600 ordinary shares, directly or
in the form of ADSs.
JAPANESE OFFERING.......... A public offering in Japan by us and the selling
shareholders of 566,400 ordinary shares. The
Japanese offering will be underwritten and will
occur at the same time as the overseas offering.
OVER-ALLOTMENT OPTION...... We have granted the overseas underwriters an
eight-day option to purchase from us up to an
aggregate of 56,640 additional ordinary shares,
including ordinary shares represented by ADSs, at
the initial public offering price less the
underwriting discount to cover over-allotments, if
any, in the overseas offering. The overseas
underwriters may exercise the option during a
period commencing on , 2000, which is three
days after the date of this prospectus, and
terminating on , 2000, which is seven days
after the option commencement date. Unless we
indicate otherwise, all information in this
prospectus assumes the overseas underwriters do not
exercise their over-allotment option. If the
overseas underwriters exercise their over-allotment
option in full, 4,777,925 ordinary shares will be
outstanding following the global offering,
including ordinary shares represented by ADSs.
EXPECTED OFFERING PRICE.... Y70,000 to Y81,000 per ordinary share and US$13.00
to US$15.00 per ADS. These price ranges are
approximate, and the top and bottom amounts of
these ranges are not precisely the same when
converted from dollars into yen or yen into dollars
and adjusted for the ratio of ordinary shares to
ADSs. When we and the underwriters agree on the
initial public offering prices for the ordinary
shares and the ADSs, we will first agree on the
initial public offering price for the ordinary
shares in yen, and then determine the initial
public offering price for the ADSs in dollars,
based on the then current exchange rate and
adjusted for the ratio of ordinary shares to ADSs.
DEPOSITARY................. The Bank of New York.
3
<PAGE> 9
USE OF PROCEEDS FROM THE
GLOBAL OFFERING............ We intend to use the estimated net proceeds of the
global offering of Y54,874 million (US$499
million), using an assumed offering price of
Y75,500 per ordinary share and US$14.00 per ADS, to
fund the operations and capital expenditures of our
managed franchises, to make certain strategic
investments and for general corporate purposes at
Jupiter, including possible investments in and
acquisitions of additional franchises, and
investments in existing franchises. We anticipate
that our managed franchises will use the majority
of the cash contributed by us for capital
improvements related to the upgrade and expansion
of our broadband networks, to expand our broadband
services and to develop new services. See "Use of
Proceeds" for a further discussion of how we intend
to use the net proceeds of the global offering.
AMERICAN DEPOSITARY
SHARES..................... Each ADS represents one-fiftieth of an ordinary
share. The ADSs are evidenced by American
Depositary Receipts, or ADRs. Please see
"Description of American Depositary Receipts" for a
summary of the material features of the ADSs and
ADRs.
LISTING.................... We have applied to list the ADSs for quotation on
the Nasdaq National Market under the symbol "JUPI."
You will need to have ordinary shares in the form
of ADSs for trading on that market. We have also
applied for the listing and admission for trading
of the ordinary shares on the Mothers Market of the
Tokyo Stock Exchange.
TIMING OF GLOBAL
OFFERING................... Although the initial price of the ordinary shares
and ADSs sold in the global offering was determined
as of the date of this prospectus, the ADSs will
not commence trading on the Nasdaq National Market
until three business days after the date of this
prospectus and the ordinary shares will not
commence trading on the Mothers Market until four
business days after the date of this prospectus.
The following is a tentative calendar of various
events related to the global offering which assumes
we will price the global offering on December 4,
2000 (Tokyo time). All dates are as of the calendar
day in Tokyo, Japan, unless otherwise indicated.
<TABLE>
<S> <C>
Pricing of global offering (after the
Tokyo Stock Exchange closes)........ December 4, 2000
Japanese subscription period
commences........................... December 5, 2000
Japanese subscription period closes.... December 6, 2000
Trading of ADSs commences on the Nasdaq
National Market (New York time)..... December 7, 2000
Trading of ordinary shares commences on
the Mothers Market.................. December 8, 2000
Over-allotment option exercise period
closes (New York time).............. December 14, 2000
</TABLE>
4
<PAGE> 10
SUMMARY HISTORICAL FINANCIAL AND OTHER DATA
The following summary historical financial and other data should be read in
conjunction with the consolidated financial statements of our consolidated group
and the related notes, "Selected Historical Financial and Other Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. The financial information and
other data for each of the years ended December 31, 1997, 1998 and 1999 have
been derived from the audited consolidated financial statements of our
consolidated group, and the financial information and other data for each of the
nine-month periods ended September 30, 1999 and 2000 have been derived from the
unaudited condensed consolidated financial statements of our consolidated group.
The consolidated financial statements of our consolidated group are reported in
Japanese yen, with U.S. dollar translation, and are presented in accordance with
U.S. generally accepted accounting principles, or U.S. GAAP, for all periods
presented.
When we refer to "yen" and "Y" in this prospectus, we are referring to
Japanese yen, the legal currency of Japan. When we refer to "U.S. dollars,"
"dollars," "$" and "US$" in this prospectus, we are referring to United States
dollars, the legal currency of the United States. For your convenience, we have
included in this prospectus translations of yen amounts into U.S. dollar amounts
using, unless otherwise indicated, The Bank of Tokyo-Mitsubishi, Ltd.
Telegraphic Transfer Selling exchange rate quotation as of October 31, 2000 of
Y110.05 per US$1.00. These translations should not be construed as a
representation that those yen or U.S. dollar amounts have been, could have been,
or could in the future be, converted into U.S. dollars or yen, as the case may
be, at any particular rate, the rate stated above or at all.
5
<PAGE> 11
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- ------------------------------------------
1997 1998 1999 1999 1999 2000 2000
----------- ----------- ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT ORDINARY SHARE, ADS, PER ORDINARY SHARE AND PER ADS DATA)
(AUDITED) (UNAUDITED)
------------------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Total revenue........ Y 5,631,429 Y11,096,117 Y 19,012,267 $ 172,761 Y 12,952,611 Y 23,038,394 $ 209,344
Construction-related
expenses,
programming costs,
other operating
costs and selling,
general and
administrative
expenses........... 11,139,532 16,484,443 22,625,651 205,595 15,498,481 24,628,044 223,789
Depreciation and
amortization....... 1,580,603 3,054,889 5,507,458 50,045 3,687,081 8,675,856 78,836
----------- ----------- ------------ ------------ ------------ ------------ ------------
Operating loss....... (7,088,706) (8,443,215) (9,120,842) (82,879) (6,232,951) (10,265,506) (93,281)
Interest and other
expense, net....... (483,036) (633,998) (1,124,647) (10,219) (689,075) (1,383,621) (12,573)
Equity in losses of
affiliates......... (959,098) (1,319,344) (2,644,459) (24,030) (1,936,361) (2,497,094) (22,690)
Minority interests in
subsidiaries....... 647,645 456,069 649,470 5,902 343,036 438,065 3,981
Income tax benefit... -- -- -- -- -- 332,220 3,019
----------- ----------- ------------ ------------ ------------ ------------ ------------
Loss before
extraordinary
gain............... Y(7,883,195) Y(9,940,488) Y(12,240,478) $ (111,226) Y (8,515,351) Y(13,375,936) $ (121,544)
=========== =========== ============ ============ ============ ============ ============
Loss before
extraordinary gain
per ordinary share,
basic and
diluted............ Y (5,653) Y (5,097) Y (5,610) $ (50.97) Y (4,035) Y (4,803) $ (43.64)
=========== =========== ============ ============ ============ ============ ============
Ordinary shares used
in computing loss
before
extraordinary gain
per ordinary share,
basic and
diluted............ 1,394,580 1,950,330 2,182,011 2,182,011 2,110,572 2,784,894 2,784,894
=========== =========== ============ ============ ============ ============ ============
Loss before
extraordinary gain
per ADS, basic and
diluted(1)......... Y (113) Y (102) Y (112) $ (1.02) Y (81) Y (96) $ (0.87)
=========== =========== ============ ============ ============ ============ ============
ADSs used in
computing loss
before
extraordinary gain
per ADS, basic and
diluted(1)......... 69,729,000 97,516,500 109,100,550 109,100,550 105,528,600 139,244,700 139,244,700
=========== =========== ============ ============ ============ ============ ============
</TABLE>
---------------
(1) Loss before extraordinary gain per ADS and ADSs used in computing loss
before extraordinary gain per ADS assume all outstanding ordinary shares
were issued in the form of ADSs for each of the periods presented.
6
<PAGE> 12
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------------------------------------ ----------------------------------------
1997 1998 1999 1999 1999 2000 2000
------------ ------------ ------------ --------- ------------ ------------ ----------
(IN THOUSANDS)
(AUDITED) (UNAUDITED)
------------------------------------------------------ ----------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, receivables and
other assets,
net................ Y 6,985,885 Y 5,833,136 Y 8,262,800 $ 75,082 Y 9,206,366 Y 19,197,643 $ 174,445
Investments in
affiliates......... 4,741,816 7,560,853 6,216,396 56,487 6,681,980 4,631,572 42,086
Property and
equipment, net..... 25,898,851 33,997,270 58,124,991 528,169 49,672,795 110,595,883 1,004,960
Goodwill, net........ 3,827,252 4,363,183 15,236,398 138,450 15,030,918 111,122,100 1,009,742
------------ ------------ ------------ --------- ------------ ------------ ----------
Total assets....... Y 41,453,804 Y 51,754,442 Y 87,840,585 $ 798,188 Y 80,592,059 Y245,547,198 $2,231,233
============ ============ ============ ========= ============ ============ ==========
Short-term loans,
long-term debt and
capital lease
obligations........ Y 20,318,377 Y 33,228,438 Y 63,496,611 $ 576,980 Y 54,472,563 Y127,756,298 $1,160,893
Other liabilities.... 6,429,528 7,654,788 19,518,524 177,361 17,343,750 30,527,969 277,401
Minority interest.... 633,571 783,908 778,620 7,075 1,003,789 416,290 3,783
Shareholders'
equity............. 14,072,328 10,087,308 4,046,830 36,772 7,771,957 86,846,641 789,156
------------ ------------ ------------ --------- ------------ ------------ ----------
Total liabilities
and shareholders'
equity........... Y 41,453,804 Y 51,754,442 Y 87,840,585 $ 798,188 Y 80,592,059 Y245,547,198 $2,231,233
============ ============ ============ ========= ============ ============ ==========
OTHER FINANCIAL DATA:
EBITDA(1)............ Y (5,508,103) Y (5,388,326) Y (3,613,384) $ (32,834) Y (2,545,870) Y (1,589,650) $ (14,445)
Cash flows (used in)/
provided by:
Operating
activities....... Y (5,275,652) Y (5,761,506) Y (953,892) $ (8,668) Y (1,130,097) Y (4,632,284) $ (42,093)
Investing
activities....... Y(11,516,050) Y(13,581,576) Y(18,455,114) $(167,698) Y(13,746,519) Y(13,092,348) $ (118,967)
Financing
activities....... Y 16,365,088 Y 16,859,639 Y 19,541,304 $ 177,568 Y 15,470,139 Y 20,569,359 $ 186,909
Capital expenditures:
Capital leases..... Y 655,177 Y 2,413,701 Y 5,296,685 $ 48,130 Y 2,078,440 Y 7,691,969 $ 69,895
Other capital
expenditures..... 8,980,220 8,567,612 11,275,418 102,457 10,379,944 11,312,280 102,792
------------ ------------ ------------ --------- ------------ ------------ ----------
Total............ Y 9,635,397 Y 10,981,313 Y 16,572,103 $ 150,587 Y 12,458,384 Y 19,004,249 $ 172,687
============ ============ ============ ========= ============ ============ ==========
</TABLE>
---------------
(1) EBITDA represents operating loss before depreciation and amortization.
EBITDA is frequently used by securities analysts and is presented here to
provide additional information about our operations. EBITDA is not a
measurement presented in accordance with U.S. GAAP. We may compute EBITDA
differently than it is computed by other companies, including those in our
industry. EBITDA should not be considered in isolation or as a substitute
for net income, cash flow provided by operating activities or other income
or cash flow data prepared in accordance with U.S. GAAP or as a measure of a
company's profitability or liquidity.
7
<PAGE> 13
SELECTED OPERATING DATA
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
----------------------------------- ----------------------
1997 1998 1999 1999 2000
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED FRANCHISES:
Franchise homes(1)(2).................... -- -- -- -- 4,614,000
Cable Television
Homes passed(2).......................... 743,100 1,091,700 1,921,800 1,795,100 3,313,600
Customers................................ 77,700 131,600 304,800 255,400 510,200
Customer penetration(3).................. 10.5% 12.1% 15.9% 14.2% 15.4%
Telephony
Homes passed(2).......................... 45,600 137,000 247,800 197,800 1,232,100
Customers................................ 2,300 6,000 14,300 9,600 58,900
Customer penetration(3).................. 5.0% 4.4% 5.8% 4.9% 4.8%
Internet(4)
Homes passed(2).......................... -- -- 814,000 691,400 2,443,500
Customers................................ -- -- 10,500 5,000 84,600
Customer penetration(3).................. -- -- 1.3% 0.7% 3.5%
MANAGED FRANCHISES (INCLUDES CONSOLIDATED
AND UNCONSOLIDATED MANAGED FRANCHISES):
Franchise homes(1)(2).................... -- -- -- -- 6,307,400
Cable Television
Homes passed(2).......................... 1,057,400 1,868,100 2,510,200 2,391,000 4,602,500
Customers................................ 121,700 253,900 403,500 357,500 739,300
Customer penetration(3).................. 11.5% 13.6% 16.1% 15.0% 16.1%
Monthly churn(5)......................... 1.3% 1.7% 2.0% 2.1% 1.8%
Telephony
Homes passed(2).......................... 45,600 137,000 247,800 197,800 1,232,100
Customers................................ 2,300 6,000 14,300 9,600 58,900
Customer penetration(3).................. 5.0% 4.4% 5.8% 4.9% 4.8%
Monthly churn(5)......................... 1.3% 1.3% 1.2% 1.4% 1.5%
Internet(4)
Homes passed(2).......................... -- -- 986,600 798,100 3,139,600
Customers................................ -- -- 12,300 5,800 98,800
Customer penetration(3).................. -- -- 1.2% 0.7% 3.1%
Monthly churn(5)......................... -- -- 0.4% 0.3% 0.5%
ALL INVESTMENTS IN MANAGED FRANCHISES AND
NON-MANAGED INVESTMENTS (OUR
PROPORTIONATE OWNERSHIP)(6):
Franchise homes(1)(2).................... -- -- -- -- 4,790,100
Homes passed(2).......................... 787,200 1,352,700 2,082,900 1,962,800 3,433,800
Customers................................ 93,100 173,000 331,500 279,400 659,700
</TABLE>
(footnotes on next page)
8
<PAGE> 14
(1) Franchise homes represents the total number of single residences and
multiple-dwelling units within the franchise area and is based on recent
available census data.
(2) Our franchise homes data reflects recent available census data. Our homes
passed figures are estimated based on recent available census data, updated
for additional information related to the specific franchise area. In many
of our franchises, the population is increasing and single-dwelling units
are gradually being replaced with multiple-dwelling units, resulting in an
increasing number of franchise homes and homes passed. We believe that in
most of our franchises, and on an aggregate basis, this has resulted in
homes passed being higher than our reported figures. As we periodically
update our system data to account for the increasing number of homes in our
franchises, we expect to revise our reported figures in the future.
(3) Customer penetration is calculated by dividing customers by homes passed.
(4) High-speed Internet access was initiated in 1999.
(5) Monthly churn is calculated by dividing the number of disconnected customers
in our managed franchises by the average number of customers in our managed
franchises for each of the fiscal years and nine-month periods presented, as
applicable, and dividing by the number of months in the period.
(6) Our proportionate ownership of franchise homes, homes passed and customers
represent the totals for each of these categories reduced by amounts
attributable to other equity owners of our managed franchises and non-
managed investments.
9
<PAGE> 15
SUMMARY UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION AND
OTHER DATA
The following summary unaudited pro forma condensed combined financial
information and other data has been prepared from and should be read in
conjunction with the consolidated financial statements of our consolidated group
and the related notes, consolidated financial statements of Titus and the
related notes, "Selected Historical Financial and Other Data," "Unaudited Pro
Forma Condensed Combined Financial Statements" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus. The pro forma condensed combined financial information and
other data gives pro forma effect to the acquisition of Titus as if the
acquisition had occurred on January 1, 1999 for income statement purposes. The
pro forma as adjusted financial data set forth below adjusts the pro forma data
to give effect to our sale of 787,000 ordinary shares in the global offering,
including ordinary shares represented by ADSs, as if it had occurred on January
1, 1999.
The pro forma information is presented for illustrative purposes only and
does not purport to represent what the actual results of operations would have
been if the acquisition of Titus and the global offering had occurred on January
1, 1999. The future operating results of our consolidated group may differ
materially from the pro forma amounts reflected in the following statements due
to various factors, including changes of operating results between the date of
the pro forma information and the factors discussed under the caption entitled
"Risk Factors" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA PRO FORMA AS ADJUSTED
YEAR ENDED NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
-------------------------- -------------------------- --------------------------
(IN THOUSANDS, EXCEPT ORDINARY SHARE, ADS, PER ORDINARY SHARE AND PER ADS DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenue............... Y 24,824,591 $ 225,576 Y 29,120,268 $ 264,609 Y 29,120,268 $ 264,609
Construction-related
expenses, programming
costs, other operating
costs and selling, general
and administrative
expenses.................. 32,093,599 291,627 35,448,195 322,110 35,448,195 322,110
Depreciation and
amortization.............. 13,576,510 123,367 14,697,524 133,553 14,697,524 133,553
------------ ----------- ------------ ----------- ------------ -----------
Operating loss.............. (20,845,518) (189,418) (21,025,451) (191,054) (21,025,451) (191,054)
Interest and other expense,
net....................... (881,117) (8,007) (1,359,439) (12,353) (1,359,439) (12,353)
Equity in losses of
affiliates................ (2,644,459) (24,030) (2,497,094) (22,690) (2,497,094) (22,690)
Income tax benefit.......... -- -- 332,220 3,019 332,220 3,019
------------ ----------- ------------ ----------- ------------ -----------
Loss before extraordinary
gain...................... Y(24,371,094) $ (221,455) Y(24,549,764) $ (223,078) Y(24,549,764) $ (223,078)
============ =========== ============ =========== ============ ===========
Pro forma loss before
extraordinary gain per
ordinary share, basic and
diluted................... Y (7,248) $ (65.86) Y (6,403) $ (58.18) Y (5,313) $ (48.27)
============ =========== ============ =========== ============ ===========
Ordinary shares used in
computing pro forma loss
before extraordinary gain
per ordinary share, basic
and diluted............... 3,362,297 3,362,297 3,834,037 3,834,037 4,621,037 4,621,037
============ =========== ============ =========== ============ ===========
Pro forma loss before
extraordinary gain per
ADS, basic and
diluted(1)................ Y (145) $ (1.32) Y (128) $ (1.16) Y (106) $ (0.97)
============ =========== ============ =========== ============ ===========
ADSs used in computing pro
forma loss before
extraordinary gain per
ADS, basic and
diluted(1)................ 168,114,850 168,114,850 191,701,850 191,701,850 231,051,850 231,051,850
============ =========== ============ =========== ============ ===========
</TABLE>
---------------
(1) Pro forma loss before extraordinary gain per ADS and ADSs used in computing
pro forma loss before extraordinary gain per ADS assume all outstanding
ordinary shares were issued in the form of ADSs for each of the periods
presented.
10
<PAGE> 16
RISK FACTORS
An investment in our ordinary shares or ADSs involves a high degree of
risk. You should consider carefully the following information about these risks,
together with all the other information contained in this prospectus, including
our consolidated financial statements and related notes, prior to making a
decision about investing in our ordinary shares or ADSs. The occurrence of any
of the following risks might cause the trading price of our ordinary shares and
ADSs to decline. This might cause you to lose all or part of your investment.
RISKS RELATING TO OUR BUSINESS
OUR CONSOLIDATED GROUP HAS A HISTORY OF NEGATIVE CASH FLOWS AND NET LOSSES AND
EXPECTS TO GENERATE NEGATIVE CASH FLOWS AND TO INCUR SUBSTANTIAL NET LOSSES FOR
THE FORESEEABLE FUTURE, WHICH MAY PREVENT US FROM EXPANDING OUR BROADBAND
NETWORK AND THREATEN OUR ABILITY TO CONTINUE OUR OPERATIONS.
Our consolidated group expects to use significant amounts of cash for the
foreseeable future, primarily as a result of the following investment
activities:
- the construction and upgrade of the infrastructure of our broadband
networks and the installation and connection of new customers;
- the expansion of our existing broadband services, including telephony and
high-speed Internet access, and the introduction of digital and
interactive television;
- the increase of our equity ownership in our existing consolidated and
unconsolidated franchises; and
- the acquisition of additional franchises.
Since our inception, our consolidated group has never reported a profit for
any fiscal year and continues to incur substantial costs to operate and expand
its business. As of September 30, 2000, our consolidated group had an
accumulated deficit of Y48.8 billion. Our consolidated group also expects to
incur net losses for the foreseeable future as a result of the following costs
and expenses:
- increases in direct and indirect selling, marketing and promotional costs
associated with marketing new and expanded offerings of telephony,
high-speed Internet access and digital and interactive television to new
and existing customers; and
- increases in operating expenses to improve our operational and financial
systems, including costs related to increases in personnel.
If our consolidated group continues to use significant amounts of cash and
to generate negative cash flows and incur net losses, we may be unable to expand
our broadband networks, finance our operations and service our debt.
WE DEPEND ON THE PAYMENT OF MANAGEMENT FEES AND OTHER DISTRIBUTIONS FROM OUR
MANAGED FRANCHISES. IF WE DO NOT RECEIVE THESE PAYMENTS AND DISTRIBUTIONS, WE
MAY BE UNABLE TO FINANCE OUR OPERATIONS AND THOSE OF OUR MANAGED FRANCHISES AND
TO SERVICE OUR CONSOLIDATED GROUP'S OUTSTANDING DEBT.
We conduct a substantial portion of our operations and provide all of our
broadband services through our 13 consolidated and seven unconsolidated managed
franchises. Consequently, we depend upon payments and distributions from these
20 managed franchises in the form of management and other fees, reimbursed costs
and expenses and dividends. The ability of our managed franchises to make
payments or distributions to us depends on their cash flows, earnings, debt
service requirements, business and tax considerations and legal restrictions.
While each of our managed franchises is obligated by contract to make payments
to us for the services we provide to them, we cannot require them to do so, nor
can we
11
<PAGE> 17
require them to pay us a dividend in respect of our ownership interest in them.
If our managed franchises are unable to make distributions and payments to us,
we may be unable to finance our operations and those of our managed franchises
and to service our consolidated group's outstanding debt.
OUR SUBSTANTIAL INDEBTEDNESS MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
THREATEN OUR ABILITY TO CONTINUE OUR OPERATIONS.
As of September 30, 2000, our consolidated group and unconsolidated managed
franchises had total indebtedness of Y136,621 million, of which Y111,066 million
is due on or before September 30, 2001 and Y90,445 million is due on or before
March 31, 2001, including Y57,518 million owed to Sumisho Finance Management
under a credit line which matures on March 31, 2001, unless renewed. Our
consolidated group's and unconsolidated managed franchises' substantial
indebtedness could have significant negative consequences including the
following:
- increasing our vulnerability to general adverse economic and industry
conditions;
- requiring the dedication of a substantial portion of expected cash flow
from operations to the payment of principal of, and interest on, our
indebtedness, and reducing the availability of cash flow to fund working
capital, to expand and upgrade our broadband networks, to complete
investments in, and acquisitions of, additional franchises or for other
general corporate purposes;
- limiting our flexibility in planning for, or reacting to, changes in our
business and the industries in which our managed franchises operate,
including limiting our ability to borrow additional funds; and
- placing us at a competitive disadvantage as compared with less leveraged
competitors.
OUR CASH FLOWS ARE NOT SUFFICIENT TO COVER OUR OPERATING COSTS AND EXPENSES AND
IF WE ARE UNABLE TO OBTAIN ADDITIONAL CAPITAL ON COMMERCIALLY REASONABLE TERMS,
WE MAY BE UNABLE TO SERVICE OUR OUTSTANDING INDEBTEDNESS AND IMPLEMENT OUR
BUSINESS PLAN AND OUR ABILITY TO CONTINUE OUR OPERATIONS MAY BE THREATENED.
Since the commencement of our business, we have financed our operations and
capital expenditures primarily from:
- capital contributions from our founding shareholders, Sumitomo and
Liberty Media;
- debt financing from an affiliate of Sumitomo; and
- debt financing obtained from third parties guaranteed by Sumitomo and
Microsoft.
Following completion of the global offering, our cash flows will not be
sufficient to service our outstanding indebtedness. As of September 30, 2000, of
our consolidated group's and unconsolidated managed franchises' total debt of
Y136,621 million, Y71,553 million was owed to Sumitomo and its affiliates, an
additional Y17,180 million was guaranteed by Sumitomo and Y35,300 million was
guaranteed by Microsoft. If our principal shareholders do not continue to
finance our capital requirements, either through equity or debt financing or
financial guarantees, which they are not obligated to provide, we will be
required to obtain substantial financing from third-party sources, including
commercial bank borrowings or private or public sales of equity or debt
securities by us or our managed franchises. If we obtain funds through the
incurrence of additional debt, our debt service obligations would increase, we
may become subject to new financial and restrictive covenants, which may
adversely affect our ability to implement our business plan, our ability to
invest in and acquire new franchises, our ability to expand our broadband
networks and services and our ability to finance operating losses and our assets
may become subject to security interests in favor of our lenders. If we obtain
funds through the issuance of equity securities, the ownership interests
represented by the ordinary shares, including ordinary shares represented by
ADSs, will be diluted.
12
<PAGE> 18
As of September 30, 2000, the total indebtedness of our consolidated group
and that of our unconsolidated managed franchises had a weighted average
interest rate of 1.144%. Interest rates for third-party commercial loans
currently available in Japan are substantially higher than our historical
weighted average interest rate. We currently plan to refinance our existing
indebtedness with third-party commercial loans that we expect will bear an
annual rate of interest equal to the Tokyo Interbank Offered Rate, or TIBOR,
plus between 250 and 350 basis points. As of October 31, 2000, the two-month
TIBOR was 0.54143%. Accordingly, we expect that our annual debt service
obligations will substantially increase. In addition, upon completion of the
global offering, we will be party to an agreement with three of our
shareholders, Sumitomo, Liberty Media and Microsoft, under which we will pay to
them a fee, on a quarterly basis, in an amount up to 1.0% annually of the
average daily amount of our outstanding indebtedness guaranteed by the
guaranteeing shareholders. Our consolidated group has not previously paid a fee
in connection with the guarantee of its indebtedness. Accordingly, this fee will
increase our consolidated group's debt service obligations on our guaranteed
indebtedness.
We may not be able to obtain third-party financing for all or a portion of
our existing or any additional indebtedness. If we are unable to obtain
alternative sources of financing, we may be unable to service our indebtedness
or to refinance or repay our indebtedness at maturity, which may prevent us from
implementing our business plan and may threaten our ability to continue
operations.
OUR RECENT GROWTH AND CONTINUED ACQUISITIONS OF, AND INVESTMENTS IN, OUR MANAGED
FRANCHISES MAY MAKE IT DIFFICULT FOR YOU TO EVALUATE THE HISTORICAL OPERATING
PERFORMANCE AND PROSPECTS OF OUR CONSOLIDATED GROUP.
We commenced operations in 1995 and have grown rapidly, primarily as a
result of acquisitions of, and investments in, our managed franchises. However,
because this growth is primarily the result of acquisitions of, and investments
in, franchises, our consolidated group's historical operating performance is not
indicative of our consolidated group's future growth or performance, or of the
future operating results that we may achieve with the operations that will be
under our control, and you should not expect this rate of growth to continue.
Our consolidated group's financial statements report the consolidated financial
condition and results of operations of the franchises in which we own a majority
equity interest. When we obtain a majority equity interest in other franchises,
including those in which we already have an investment but not a majority equity
interest, U.S. GAAP requires that our financial statements reflect the
consolidated financial condition and results of operations of these additional
franchises, even if the actual increase in our ownership percentage is
relatively small. Consequently, it may be difficult for you to evaluate from
period to period our comparative consolidated financial condition and results of
operations and the prospects of our consolidated group.
OUR CONSOLIDATED GROUP'S OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, AND ANY
FAILURE TO MEET FINANCIAL EXPECTATIONS MAY DISAPPOINT SECURITIES ANALYSTS OR
INVESTORS AND MAY RESULT IN A DECLINE IN THE MARKET PRICE OF OUR ORDINARY SHARES
AND ADSS.
Our consolidated group's operating results have varied in the past and may
continue to fluctuate significantly in the future. Some of the factors that
could cause our operating results to fluctuate include, among others, the
following:
- the rate at which new customers subscribe to our services, which rate has
historically increased during the fourth quarter of each year;
- our customer disconnect rate, which rate has historically increased
during the first quarter of each year;
- the success of our marketing strategy, including our ability to
successfully employ sales initiatives other than door-to-door marketing
to attract new customers; and
13
<PAGE> 19
- fluctuations in our consolidated group's operating expenses, including
those related to increases in personnel.
We anticipate that fluctuations in our operating results caused by these
and other factors will continue and may affect our ability to effectively
operate our business. We are in a relatively early stage of developing our
business and, as such, the rate at which we acquire new customers may continue
to be uneven from period to period. Furthermore, because a significant portion
of our consolidated group's expenses are either fixed or require significant
upfront variable costs, variations in the timing of the recognition of revenue
may cause significant variations in our consolidated group's operating results
from quarter to quarter. We expect these variations to continue as we change the
mix of services we offer through the introduction of new services and the
expansion of our existing telephony and high-speed Internet access services.
Fluctuations in our consolidated group's operating results may result in a
decrease in the market price of our ordinary shares and ADSs.
AS OUR CUSTOMER BASE GROWS, OUR CONSOLIDATED GROUP'S LOSSES MAY INCREASE
SIGNIFICANTLY, WHICH MAY ADVERSELY AFFECT THE TRADING PRICE OF OUR ORDINARY
SHARES AND ADSS.
Our goal is to rapidly expand our customer base. As part of this growth
strategy, we now incur and expect to continue to incur large upfront expenses,
primarily attributable to marketing costs incurred in connection with the
addition of each new customer. We intend to recover these expenses over time
through monthly subscription fees. Since customer acquisition costs are expensed
as incurred and we earn revenue from customers through the payment of monthly
subscription fees, it takes some time to earn customer-related revenue in an
amount equal to our upfront customer acquisition expenses. If the number of new
customers in any given period of time increases significantly as compared to the
size of our existing customer base on which we rely for the generation of
monthly subscription fees, our consolidated group may incur large losses for
these periods. In addition, our revenues may be affected if a large number of
customers disconnect our services, commonly referred to as customer churn, prior
to our recoupment of the upfront acquisition expenses related to the acquisition
of these customers. It is possible that losses of this type may lead to a
decrease in the trading price of our ordinary shares and ADSs.
THE INTEGRATION OF TITUS INTO OUR EXISTING BUSINESS MAY REQUIRE EXCESSIVE
ATTENTION FROM SENIOR MANAGEMENT AND DISRUPT OUR ONGOING OPERATIONS AND THE
EXPANSION OF OUR BROADBAND NETWORK.
As a result of our acquisition of Titus on September 1, 2000, we are
currently in the process of integrating and managing an additional 157,200 cable
television, telephony and high-speed Internet access customers, representing
approximately 18% of the total customers served by our managed franchises as of
September 30, 2000. The integration of Titus' franchises and customers involves,
among others, the following management challenges:
- integrating Titus' franchises, networks and operations, including
different technologies, financial and accounting systems, sales and
marketing procedures and other corporate administrative functions;
- retaining Titus' customers due to changes in services and pricing;
- retaining Titus' key technical and management employees, some of whom
have been seconded by Titus' former shareholders; and
- upgrading the broadband network of Titus' TITUS SCAT (Sapporo) franchise,
which we have renamed J-COM Sapporo.
We cannot assure you that we will successfully manage the integration of
Titus with our operations or complete the planned upgrades to the J-COM Sapporo
broadband network. In addition, we will face many of these same management
challenges in connection with the integration of other franchises we may acquire
in the future. Difficulties in achieving any of the above integration steps with
respect to either our acquisition of Titus or any other acquisitions of new
franchises could place excessive demands upon our
14
<PAGE> 20
senior management and distract their attention from the management of our
ongoing operations, including the expansion of our broadband networks.
IF WE DO NOT ACQUIRE AND SUCCESSFULLY INTEGRATE COMPLEMENTARY FRANCHISES, WE MAY
BE UNABLE TO ACHIEVE THE OPERATING EFFICIENCIES NECESSARY FOR US TO BECOME
PROFITABLE.
An important element of our business strategy is to acquire and integrate
complementary franchises that we believe will enhance our operations and
profitability and which will allow us to:
- capitalize on regional clustering of our franchises;
- build upon our position as the largest centrally managed multiple system
operator in Japan while providing us opportunities to expand our network
infrastructure;
- generate cost savings resulting from management efficiencies and
economies of scale; and
- expand our customer base.
We believe that many existing cable television operators in Japan may be
unable to make the capital investment necessary to offer digital services
throughout their existing cable franchises and may seek strategic alliances with
larger existing operators. We perceive competition among Japanese
telecommunications providers to acquire existing Japanese franchises as intense
and expect this competition to increase in the future. For example, four of our
competitors have recently announced that they would form a venture to integrate
their cable systems operations starting in April 2001. Increased competition in
Japan may result in fewer acquisition opportunities available to our
consolidated group and may make it more expensive to acquire or invest in
additional cable franchises in the future, which, in each case, could adversely
affect the growth prospects of our consolidated group, and its ability to
increase profitability through achieving additional economies of scale.
Furthermore, because non-Japanese investors currently own more than 50% of
our ordinary shares, our acquisition of any shares in any franchise will
generally be subject to a prior notification requirement and a 30-day waiting
period under Japanese foreign exchange regulations. While we have not
experienced any order of modification or suspension of any of our past
acquisitions under Japanese foreign exchange regulations, the Japanese
government reserves the power to extend the waiting period and order amendment
of the terms of, or suspension of, any proposed acquisition. Any delay or
interruption initiated by the Japanese government may materially adversely
affect our ability to acquire new franchises or increase our interest in
existing franchises.
OUR MINORITY SHAREHOLDERS IN OUR EXISTING FRANCHISES MAY PREVENT US FROM
ACQUIRING AND SUCCESSFULLY INTEGRATING THE OPERATIONS OF NEW FRANCHISES, OR
INCREASING OUR OWNERSHIP INTEREST IN OUR EXISTING FRANCHISES, WHICH MAY PREVENT
US FROM ACHIEVING THE OPERATING EFFICIENCIES NECESSARY FOR US TO BECOME
PROFITABLE.
Under the Japanese Commercial Code, minority shareholders of our existing
franchises that we wish to merge or consolidate with one or more of our other
existing franchises, or with a newly acquired franchise, may object to the
merger or consolidation and require us to purchase their shares at fair market
value. We cannot assure you that we would be able to obtain the capital
sufficient to purchase the shares of the minority holders exercising these
rights or predict whether minority shareholders of our franchises would exercise
this right.
The Japanese Commercial Code generally also requires the affirmative vote
of holders of at least two-thirds of our ordinary shares present or represented
at a meeting of shareholders in order for us to acquire all of the business of
another company or the acquisition of another company through a stock for stock
exchange. As a result, holders of more than one-third of our ordinary shares
would be able to prevent our acquisition of additional franchises.
15
<PAGE> 21
If minority shareholders of our company or our franchises exercise these
rights, our ability to merge or consolidate two or more of our existing or newly
acquired franchises could be delayed, and our goal to realize profitability
through operating efficiencies generated by economies of scale may not be
achieved.
IF WE ARE UNABLE TO MAINTAIN MANAGEMENT AGREEMENTS WITH OUR UNCONSOLIDATED
MANAGED FRANCHISES OR EXPAND THE NUMBER OF FRANCHISES UNDER OUR MANAGEMENT, WE
MAY NOT BE ABLE TO ACHIEVE THE OPERATING EFFICIENCIES NECESSARY FOR US TO BECOME
PROFITABLE.
Our future growth depends, in part, on our ability to maintain our
management agreements with our seven unconsolidated managed franchises in which
we currently do not hold a majority equity interest. We have entered into a
management agreement with each of these unconsolidated franchises. These
management agreements are for one-year terms with an automatic renewal for
successive one-year terms, absent notice to the contrary. The agreements may be
terminated by these franchises upon 30 days notice prior to the automatic
renewal date. Although we hope to increase our equity interest in one or more of
these unconsolidated managed franchises to gain greater assurance of our
long-term management of these franchises, we cannot assure you that we will be
able to acquire a majority interest in these franchises, or obtain the required
capital to do so on commercially reasonable terms. If we are unable to acquire a
majority interest in these franchises, we may not continue to manage these
franchises in the future, which may cause operating revenue to decline and
prevent us from achieving profitability through economies of scale.
IF OUR BROADBAND SERVICES DO NOT ACHIEVE MARKET ACCEPTANCE IN JAPAN, WE MAY NOT
BE ABLE TO ATTRACT AND RETAIN NEW CUSTOMERS FOR THESE SERVICES, WHICH MAY
SIGNIFICANTLY LIMIT OUR POTENTIAL FOR FUTURE GROWTH.
The Japanese market for broadband services is new and continuing to
develop. Accordingly, the revenue and income potential of these services in our
targeted markets is not proven. Our future profitability and growth depend on
the commercial acceptance and increased use of broadband services in Japan,
including ours. Customer acceptance of broadband services depends in part on:
- the quality of available programming;
- the ability of providers to increase the transmission capacity while
maintaining superior performance; and
- the ability of providers to address concerns related to security,
reliability, cost, ease of access and quality of service.
The lack of quality programming for digital and interactive television may be an
even greater problem than for cable television because it is a new form of
entertainment in Japan. If market acceptance of broadband services in Japan is
limited, or if we are unable to attract and retain customers for these services,
our potential for future growth would be significantly limited.
THE FUTURE GROWTH OF OUR HIGH-SPEED INTERNET ACCESS DEPENDS ON INCREASING USE IN
JAPAN OF THE INTERNET AND HIGH-SPEED INTERNET ACCESS, THE EXPANSION OF
ELECTRONIC COMMERCE AND THE DEVELOPMENT OF OTHER BANDWIDTH INTENSIVE
APPLICATIONS. IF USE OF THESE SERVICES DOES NOT CONTINUE TO INCREASE, THE
POTENTIAL GROWTH OF OUR HIGH-SPEED INTERNET ACCESS SERVICE WOULD BE
SIGNIFICANTLY REDUCED.
Rapid growth in the use of the Internet in Japan is a recent phenomenon.
Even with the recent advancement of Internet technology, including high-speed
Internet access, users primarily access the Internet through dial-up modems or
other Internet-related technology without subscribing to high-speed Internet
access. If use of the Internet in Japan, including high-speed Internet access,
electronic commerce and other bandwidth intensive applications, does not
continue to increase or increases more slowly than we expect, or if the
technological infrastructure underlying the Internet does not effectively
support future
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increases in Internet use, the potential growth of our high-speed Internet
access service may not be realized.
OUR ABILITY TO INCREASE THE NUMBER OF OUR CUSTOMERS WITHIN OUR FRANCHISE AREAS
DEPENDS, IN PART, UPON OUR ACCESS TO MULTIPLE-DWELLING UNITS WHICH ARE OWNED BY
THIRD PARTIES. IF WE ARE UNABLE TO NEGOTIATE ACCESS TO MULTIPLE-DWELLING UNITS,
OUR POTENTIAL FOR CUSTOMER GROWTH WITHIN OUR MANAGED FRANCHISE AREAS MAY BE
SIGNIFICANTLY LIMITED.
A significant percentage of our current and potential customers live in
multiple-dwelling units. We typically negotiate access to an individual
multiple-dwelling unit with its owner and enter into an agreement giving us the
right to connect each of the multiple-dwelling unit households to our cable
network. We then market our services directly to these multiple-dwelling unit
households. If we are unable to maintain access to our current customers and
obtain future access to potential customers living in these multiple-dwelling
unit households, as a result of changes in regulations, changes in technology,
such as the construction of wireless communications systems in new condominiums,
or changes in our relations with multiple-dwelling unit owners, we would not be
able to retain our current customers or attract new customers who live in
multiple-dwelling units, which would result in a decrease in our revenues and
operating cash flows.
IF WE ARE UNABLE TO MAINTAIN A SUFFICIENTLY LARGE AND QUALIFIED SALES FORCE, WE
MAY NOT BE ABLE TO ATTRACT AND RETAIN CUSTOMERS, WHICH WOULD CAUSE OUR
CONSOLIDATED GROUP'S REVENUE TO DECREASE.
Our sales force is critical to our success in attracting new customers and
marketing new services to existing customers. We primarily use door-to-door
marketing to obtain new customers and market new services to existing customers.
We currently depend on third-party personnel companies to provide us with the
majority of the members of our sales force. Competition for qualified sales
personnel in Japan is intense. Any qualified personnel that we hire will need to
be properly trained prior to marketing our services. If we do not maintain a
sufficiently large and qualified sales force in the future, we may not be able
to increase market awareness or sales of our services and we may not be able to
successfully obtain new customers or sell new services to our existing
customers, which would result in decreased revenues and operating cash flows and
would significantly reduce our potential for revenue growth.
IF WE ARE UNABLE TO KEEP PACE WITH THE EXPECTED RAPID TECHNOLOGICAL DEVELOPMENTS
OR OUR CUSTOMERS' DEMANDS FOR IMPROVED BROADBAND SERVICES, WE MAY NOT BE ABLE TO
RETAIN AND ATTRACT CUSTOMERS, WHICH WOULD CAUSE OUR CONSOLIDATED GROUP'S REVENUE
TO DECREASE.
The market for broadband services is characterized by rapidly evolving
technological advances, industry standards and user requirements and frequent
new product and service introductions and enhancements. The rapid evolution of
broadband services will require us to continually and timely improve the
features, performance and reliability of our broadband networks and customer
services in a timely manner, especially in response to competitive offerings.
For example, Japan's Science and Technology Agency recently announced plans to
spend Y50 billion for the development of advanced communications satellites that
will have the capacity to offer Internet access of up to 20,000 times faster
than otherwise available over telephone lines. Rapid technological change or our
customer's demands for improved services may adversely affect our plans to
upgrade and expand our broadband networks by rendering our product and service
offerings less attractive or even obsolete and may require us to incur
unanticipated costs. For example, the transition of television programming from
an analog to a digital format may occur at a rate that does not allow us to
fully recover the expenses associated with our leased analog set-top boxes.
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The following factors could prevent us from completing any expansion or
upgrade of our broadband networks, including the digitalization of our cable
television systems, on a timely basis:
- we may have difficulty in obtaining required licenses, whether as the
result of changes in regulation or a loss of cooperation from third
parties involved in the license application process, which may in turn
lead to delays in construction;
- we may not be able to obtain sufficient capital for continued expansion
and upgrade on commercially reasonable terms or at all;
- we may not be able to obtain the equipment necessary to complete our
construction, planned upgrades or installation of new services, due to
equipment shortages or interruptions in supplier relationships, such as
converter boxes for digital television;
- we may experience delays in the development of hardware and/or software
for digital and interactive television;
- we may have difficulty in hiring contractors and other personnel to
perform the upgrades in a timely manner; and
- our construction costs may increase significantly as a result of cost
overruns or delays in construction.
Any one or a combination of these events may delay or prevent the expansion
of our broadband networks, the continued roll-out of our telephony and
high-speed Internet access services, our introduction of digital and interactive
television or any future technological enhancement to our offered services. If
we are not able to satisfy customer demand for upgraded services or upgrade our
systems to provide enhanced services in a timely manner, or if our technologies
become obsolete or are or become unpopular, we may not be able to retain our
existing customers or attract new customers. As a result, our consolidated
group's revenues may decrease.
WE OPERATE IN AN INCREASINGLY COMPETITIVE MARKET AND MAY NOT BE ABLE TO
EFFECTIVELY COMPETE WITH OTHER PROVIDERS OF BROADBAND NETWORK SERVICES AND
COMPETING TECHNOLOGIES THAT OFFER ALTERNATIVE SOURCES FOR CUSTOMER
ENTERTAINMENT, COMMUNICATION AND INFORMATION.
The market for cable television, telephony and high-speed Internet access
in Japan is highly competitive, rapidly evolving and highly fragmented. We
expect the level and intensity of competition to increase in the future from
both existing competitors and new market entrants as a result of the
deregulation of the industries, the influx of new market entrants and strategic
alliances and cooperative relationships among industry participants. The
deregulation of the Japanese cable television industry over the past six years
has provided for the elimination of foreign ownership limitations on cable
television providers, allowed cable television providers to offer a wider array
of services, including cable telephony and high-speed Internet access, and
allowed providers to service greater geographic areas. We anticipate that the
Japanese government will continue to deregulate the industries in which we
compete. Increased competition may result in a loss of existing customers,
reduce the rate of customer acquisition and lead to price reductions, in each
case resulting in decreases in cash flows, operating margins and profitability.
Many of our current and potential competitors for broadband services have
substantially greater financial, technical, marketing and other resources,
larger customer bases, longer operating histories, greater name recognition, a
larger installed customer base and more established relationships in the
entertainment, communication and information industries than we do. Competition
with our cable television services comes primarily from terrestrial television
and direct-to-home satellite television providers, such as Sky Perfect
Communications, Inc., that may have the ability to offer a greater number of
popular and desirable channels than we offer. Our primary competition in the
telephony market, Nippon Telegraph and Telephone Corporation, more commonly
known as NTT, was the sole provider of fixed
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telephony services in Japan until 1985. As of March 31, 1999, NTT served
approximately 99.5% of the country's fixed-line telephony customers. As a
result, we are at a clear disadvantage in competing with respect to our
telephony services. Competition with our high-speed Internet access services
comes from various providers and alternative technologies such as mobile
communications carriers and asymmetric digital subscriber line providers, each
of which has been successfully introduced to the Japanese market, and Internet
providers using fiber optic cable to the home, including NTT, which we
anticipate will be introduced to the Japanese market in the near future. Our
competitors have offered, and in the future may continue to offer, services
similar to ours at lower prices or with incentives that we may not be able to
match. Competitors may also compete in our franchises by "overbuilding" in our
franchise areas as has occurred in portions of our J-COM Sotetsu franchise. This
may intensify competition for cable television customers in our franchise areas.
Price-based competition may also substantially undercut our marketing strength,
one of the key competitive advantages that we believe we currently possess.
The Ministry of Posts and Telecommunications has been exploring ways to
promote the construction of a nation-wide fiber-optic network and to enhance
competition in the telecommunications industry. The Ministry of Posts and
Telecommunications reportedly has had preliminary discussions regarding
proposals that, if adopted, would:
- simplify the process for obtaining approval for the delivery of cable
television and satellite broadcast services over fiber-optic networks
owned by telecommunications firms without the need for an additional
license;
- promote the creation of a nation-wide fiber-optic network that may enable
telecommunications providers, including us and our competitors, to expand
existing, or introduce new, services or service areas; and
- allow companies, including us and our competitors, to use the networks of
NTT group firms, power utilities and other companies.
If adopted, one or more of these proposals could intensify competition in the
areas in which we offer our services.
NTT HAS HISTORICALLY BEEN ALLOWED TO, AND MAY CONTINUE TO, SET RETAIL RATES
BELOW THE WHOLESALE INTERCONNECT RATES CHARGED TO US FOR INTERCONNECTION AND TO
USE HISTORICAL RATHER THAN CURRENT COSTS AS THE BASIS FOR SETTING WHOLESALE
INTERCONNECT RATES, WHICH MAY PREVENT US FROM OFFERING OUR TELEPHONY SERVICES AT
COMPETITIVE RATES.
Under Japanese law, NTT, which has the only nationwide telephony network in
Japan, must provide access to its telephony network to new common carriers, such
as us, at regulated rates. However, to date, the Japanese government has allowed
NTT to calculate such rates based on the historical cost of the build-out of its
network, rather than based on the Long-Run Incremental Cost Methodology used in
the United Kingdom, which calculates interconnection rate based on the much
lower costs assumed to be incurred for the construction of the current network
with currently available equipment and technology, as opposed to calculating
interconnection rates based on the actual historical costs incurred to construct
the network. As a result, the wholesale rates NTT charges us for interconnection
are significantly higher than they would be if calculated using the Long-Run
Incremental Cost Methodology. Although Japan and the United States issued a
joint status report pursuant to which the Japanese government agreed to reduce
interconnection rates charged by NTT, there can be no assurance that lower
interconnection rates will be adopted by NTT or that the Long-Run Incremental
Cost Methodology will be implemented in Japan.
In addition, the government allows NTT to set some of its own retail rates
below the wholesale interconnection rates it charges to other carriers. NTT has
significantly greater financial resources than we do, and there is no assurance
that its pricing strategy will not be allowed to continue or that NTT will not
reduce retail rates further in an attempt to retain customers or gain market
share. If NTT were to set its
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rates below the wholesale interconnection rates it charges us, our ability to
acquire new or to retain existing telephony customers would be seriously harmed.
OUR TELEPHONY SERVICES DEPEND UPON SERVICES PROVIDED BY OUR COMPETITORS,
INCLUDING NTT, AND ANY DISRUPTION IN THEIR SERVICE WILL SIMILARLY DISRUPT OUR
TELEPHONY SERVICES TO OUR CUSTOMERS.
We depend upon NTT and other third-party carriers to enable our customers
to initiate and receive calls outside of our network. As a result, we face risks
inherent with dependence upon any third-party provider, including delays and
interruptions in service. In addition, because NTT has the only nationwide fixed
telephony network in Japan, there is in many cases no readily available
alternative interconnection provider. Any delay or interruption by NTT with
respect to these services would similarly delay or interrupt the telephony
services we offer to our customers. If these delays and interruptions are
frequent, we may not be able to retain and attract customers for our telephony
services.
IF WE DO NOT RETAIN OUR CURRENT KEY PERSONNEL, INCLUDING PERSONNEL SECONDED FROM
OUR FOUNDING SHAREHOLDERS, THE DAY TO DAY MANAGEMENT OF OUR EXISTING OPERATIONS
AND THE EXPANSION OF OUR BROADBAND NETWORKS MAY BE DISRUPTED.
Our future success depends on the continued service of our key personnel.
Since we began operations, the majority of our technical, accounting and
management employees and the executive officers of our managed franchises have
been seconded from our founding shareholders, Sumitomo and Liberty Media
International. We have benefited from the technical, accounting and management
expertise and experience of management employees, experienced in the cable
television industry, who are seconded to us by our principal shareholders. As of
September 30, 2000, 41 of our technical, accounting and management employees
were seconded from our principal shareholders. Due to the technical nature of
our services and the dynamic market in which we compete, our performance depends
on attracting and retaining employees with appropriate experience. If we are
unable to retain these employees, call upon our principal shareholders as a
source of technical, accounting and management employees following the global
offering or attract new employees with appropriate experience as we grow larger,
the day to day management of our existing operations and the expansion of our
broadband networks may be disrupted.
OUR OPERATIONS ARE VULNERABLE TO NATURAL DISASTERS, SECURITY RISKS AND OTHER
EVENTS THAT MAY INTERRUPT OUR SERVICES AND RESULT IN LOST REVENUE.
Our operations depend on our ability to avoid damages to our networks and
facilities from fires, earthquakes, floods, power losses, telecommunications
failures, network software flaws, unauthorized access, computer viruses,
transmission cable cuts and similar events. The occurrence of any of these
events may interrupt our services. In particular, the incidence of earthquakes
is greater in Japan than in most of the other significant cable markets in the
world. Our services may also be interrupted due to damages or other disruptions
in the networks or facilities of our service providers. These services include
satellite delivered programming and telephony services, as well as
Internet-based services and content provided by @Home Japan Co., Limited. We may
also experience interruptions in our services as a result of the accidental or
intentional actions of third persons. Although our buildings and headend
facilities are insured for these types of events, other than against
earthquakes, we cannot recover any of the lost revenue we may incur during
resulting interruptions in our operations because we do not carry business
interruption insurance. While we have attempted to build redundancy into our
broadband networks and hosting facilities, the failure of our technological
infrastructure or the technological infrastructure of our service providers,
whether from operational disruption, natural disaster or otherwise, may result
in an interruption in our operations and a loss of revenue.
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WE DEPEND UPON THIRD PARTIES FOR OUR CABLE TELEVISION PROGRAMMING AND
INTERNET-BASED CONTENT.
We obtain our cable television programming and Internet-based content, and
expect to obtain content for digital and interactive television services, from
third parties. Most of our arrangements for television programming content are
not exclusive and result from short-term carriage agreements with individual
providers for terms ranging from one to three years. Our third-party providers
of television programming include our competitors whose programming we provide
or want to provide to our customers on a retransmission basis, such as NHK and,
in the future, BS (broadcast satellite) digital television providers. Because
our programming agreements are typically short-term, we must maintain our
relationships with our content providers, including our competitors, so that we
may continue to provide television programming to our customers. If these
relationships terminate or our content providers are not able to adequately
perform their obligations, and we are not able to obtain programming from
alternate sources, our ability to retain existing customers and our ability to
attract new customers may be impaired resulting in a decrease in our
consolidated group's revenue.
IF WE ARE UNABLE TO OBTAIN THE TELECOMMUNICATIONS EQUIPMENT NECESSARY FOR THE
OFFERING OF OUR BROADBAND SERVICES, WE MAY SUFFER DELAYS AND INTERRUPTIONS IN
OUR ABILITY TO OFFER NEW SERVICES AND EXPAND OUR EXISTING SERVICES.
We rely on a small number of equipment vendors to supply us with the
equipment necessary to allow us to offer, upgrade and expand our broadband
services. The telecommunications industry has experienced, and may experience in
the future, shortages in the supply of the equipment necessary for the delivery
of broadband services. We have experienced, and may continue to experience,
delays in equipment deliveries and quality problems which have caused, and in
the future could cause, delays in, or cancellations of, launches of new service
offerings and the expansion of our service offerings. In addition, industry
capacity has, from time to time, become constrained such that some vendors which
supply the necessary equipment for our services have been unable to fulfill
demand. For example, we are currently relying upon two third-party vendors for
the development and manufacture of the digital set top converter boxes which
will be necessary for the delivery of our digital television services. If our
vendors experience production delays, which we believe may be a likely
possibility, the launch of our digital television services may be delayed. Our
vendors are under no obligation to produce our digital set top converter boxes
and have complete discretion with respect to the timing and number of digital
set top converter boxes released in the market. Equipment shortages or
interruptions in supplier relationships may delay or prevent us from obtaining
the equipment necessary to complete our construction, planned upgrades or
installation of new and existing services.
WE DEPEND UPON THIRD PARTIES FOR CONTINUED ACCESS TO UTILITY POLES AND TO LEASED
FIBER NECESSARY FOR THE OPERATION OF OUR BROADBAND NETWORKS.
The operation of our networks depends upon our continued access to utility
poles which have been installed by utility companies, including NTT, on roads
under permits granted by government agencies and other road administrators. The
operation of portions of our broadband networks in some areas also depends upon
our continued access to fiber leased from utility companies that forms a portion
of our local distribution networks, interconnects some of our headends, and
connects some of our headends to the telecommunications facilities of third
parties that we depend upon to provide our services. The expansion of our
networks in existing and new franchise areas will depend upon our ability to
lease additional fiber from utility companies or other providers for these
purposes. If we are unable to renew our agreements with third parties for the
use of utility poles or fiber, or if the utility companies are unable to
maintain the permits granted to them by government agencies and other road
administrators, or the leased fiber in good condition, our services to our
customers may be disrupted and we may be required to incur substantial costs to
replace these components of our networks.
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RISKS RELATING TO OUR ECONOMIC AND REGULATORY ENVIRONMENT
WE ARE SUBJECT TO SIGNIFICANT GOVERNMENTAL REGULATION. OUR FAILURE TO COMPLY
WITH GOVERNMENTAL REGULATIONS MAY INTERRUPT DELIVERY OF OUR BROADBAND SERVICES
OR RESULT IN THE LOSS OF ONE OR MORE OF OUR LICENSES.
Cable television system operators and telephony and Internet service
providers are subject to extensive regulation in Japan. Our cable television,
telephony and high-speed Internet access operations are subject to licenses from
the Ministry of Posts and Telecommunications. In particular, the geographic
boundaries of our franchise areas, the number of homes expected to be passed,
and the time frame in which we must pass these homes are set forth in the
licenses for cable television system operators. In the event that we fail to
comply with applicable laws or regulations or the terms of licenses, we may lose
certain operating licenses and we may be required to suspend or terminate our
operations, which would prevent us from serving our customers through our
broadband networks. We may also face difficulties in obtaining new licenses from
the Ministry of Posts and Telecommunications in the future. Expansions and
upgrades of our broadband networks also are subject to licenses from the
Ministry of Posts and Telecommunications, and any delay or failure to obtain
these required licenses would impair our ability to offer our services and
expand our business.
Recent proposed changes in the laws, regulations and Ministry of Posts and
Telecommunications policies may:
- result in an increase in competition in our industries;
- increase our costs of conducting business in compliance with government
regulations;
- limit the range of services that we may offer to customers; or
- limit the prices that we may charge to customers for our services.
While we are not currently subject to any Japanese regulations on foreign
ownership of our ordinary shares, there can be no assurance that in the future
the Japanese government will not adopt restrictions on, or impose waiting
periods with respect to, foreign ownership.
A council organized to study the Internet in Japan recently cited more than
730 regulations and 120 laws that act as legal impediments to the growth of
electronic commerce in Japan. Although the Japanese government has announced
plans to revise Japanese law so as to facilitate the development of electronic
commerce next year, such efforts may be unsuccessful or may not be adopted as
quickly as anticipated. In addition, uncertainty and new regulations, including
regulations that have the effect of restricting Internet usage, may increase our
costs of doing business and prevent us from delivering our broadboard services
in a manner that may reduce the profitability otherwise associated with these
services.
THE JAPANESE ECONOMY REMAINS IN A PROLONGED RECESSION WHICH MAY LIMIT THE AMOUNT
THAT CONSUMERS WILL SPEND FOR OUR BROADBAND SERVICES, AND REDUCE THE POTENTIAL
FOR CUSTOMER GROWTH WITHIN OUR EXISTING FRANCHISES.
The Japanese economy experienced a prolonged recession during the early to
mid-1990s. Since 1997, the recession has grown increasingly serious. This
renewed decline has been attributed to a number of factors including:
- sluggish consumer spending;
- decreases in corporate capital expenditures;
- strains in the Japanese financial system caused by the failure of several
major financial institutions;
- economic difficulties in other Asian and other emerging economies; and
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- an uncertain domestic economic outlook in general.
Although consumer spending has remained relatively constant during the
recession, there is no assurance that the economy will recover in the future or
that continued economic weakness will not lead to a reduction in consumer
spending or demand for our services, any of which would result in a decrease in
our consolidated group's revenue.
RISKS RELATING TO THE OFFERING
THE INITIAL OFFERING PRICE OF OUR ADSS WILL BE DETERMINED THREE DAYS BEFORE THEY
MAY BE TRADED AND THE INITIAL OFFERING PRICE OF OUR ORDINARY SHARES WILL BE
DETERMINED FOUR DAYS BEFORE THEY MAY BE TRADED, AND YOU MAY LOSE A PORTION OF
YOUR INVESTMENT IF THE MARKET VALUE OF OUR SECURITIES DECREASES FOLLOWING THE
DETERMINATION OF THESE INITIAL OFFERING PRICES AND PRIOR TO THE DAY TRADING
BEGINS.
The initial price to the public of the ordinary shares and ADSs sold in the
global offering will be determined on the date of this prospectus. However, ADSs
will not commence trading on the Nasdaq National Market until three business
days after the pricing date. As a result, you may not be able to sell or
otherwise deal in the ADSs for this three-day period. The ordinary shares will
not commence trading on the Mothers Market until four business days after the
date of this prospectus. As a result, you may not be able to sell or otherwise
trade any ordinary shares for this four-day period. It is possible that
securities dealers or others could create markets for the ordinary shares or the
ADSs during this period outside the Mothers Market or the Nasdaq National
Market. Accordingly, the trading prices of our ordinary shares and ADSs on
markets created by securities dealers or others could fall before trading in the
ordinary shares and ADSs offered in the global offering begin on the Mothers
Market and the Nasdaq National Market and you may lose a portion of your
investment to the extent of the decrease in trading prices of our securities.
THE PRICE OF OUR ORDINARY SHARES AND ADSS MAY BE VOLATILE, WHICH MAY RESULT IN
SUBSTANTIAL LOSSES FOR INVESTORS PURCHASING OUR ORDINARY SHARES AND ADSS IN THE
GLOBAL OFFERING.
Upon completion of the global offering, our ordinary shares will be traded
in Japan on the Market of the High-Growth and Emerging Stocks of the Tokyo Stock
Exchange, commonly referred to as the Mothers Market, and our ADSs will be
traded in the United States on the Nasdaq National Market. Prior to the global
offering, you could not buy or sell our ordinary shares publicly, either
directly or in the form of ADSs. Unlike securities that have an active trading
history, the lack of a prior public market in our securities makes it impossible
for us to predict the extent to which investor interest will lead to the
development of an active and liquid trading market. The initial public offering
price of our ordinary shares and ADSs, which will be negotiated with
representatives of the Japanese and overseas underwriters based on several
factors, may vary from the market price of these securities after the global
offering. Furthermore, stock prices for telecommunications companies similar to
ours have been highly volatile, both in Japan and in the United States, and
valuations have often been unrelated to the operating performance of the
companies. The lack of an active and liquid trading market may contribute to
significant fluctuations in the market price of our ordinary shares and ADSs in
response to factors, some of which are beyond our control, and will make it more
difficult to predict the effect these factors may have on the market price of
our ordinary shares and the ADSs. As a result, it may be difficult for you to
sell our ordinary shares or ADSs at a price that is attractive to you, if at
all.
In addition, the market price for our ordinary shares may be affected by
uncertainties with respect to the Mothers Market. The Mothers Market is a newly
formed section of the Tokyo Stock Exchange that opened for business in November
1999. The Mothers Market was established to provide a market for emerging
companies with high-growth potential to more easily access the public markets,
to foster new industries and to provide for a wider choice of investment
instruments. The Mothers Market places a
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greater emphasis on investor self-responsibility by not requiring a financial
and operating history and by shortening the time period otherwise required for
listing on the Tokyo Stock Exchange. To date, only a limited number of companies
have listed their shares on the Mothers Market and the future of this market is
uncertain. If the Mothers Market does not prove to be able to provide a liquid
trading market for our ordinary shares, it may be difficult for you to sell our
ordinary shares or ADSs at a price that is attractive to you, if at all. Any
impact on the market price of our ordinary shares in Japan caused by
uncertainties regarding the Mothers Market may adversely impact the market price
of our ADSs on the Nasdaq National Market.
In the past, securities class action litigation has been brought in the
U.S. against companies following periods of volatility in the market price of
their securities. We may in the future be the target of similar litigation.
Securities litigation, regardless of the outcome, may result in substantial
costs and divert management's attention and resources.
DIFFERENCES IN TRADING RULES ON THE MOTHERS MARKET AND ON THE NASDAQ NATIONAL
MARKET MAY RESULT IN A DISCREPANCY BETWEEN THE TRADING PRICE OF OUR ORDINARY
SHARES AND ADSS. AS A RESULT, YOU MAY NOT BE ABLE TO SELL OUR ORDINARY SHARES OR
ADSS AT A PRICE THAT IS ATTRACTIVE TO YOU.
The intra-day market price movement of our ordinary shares on the Mothers
Market will be subject to a restrictive floor and ceiling. The daily quoted
market price per share of ordinary shares on the Mothers Market is restricted
within a range based upon the closing sales price on the immediately preceding
trading day. This range varies from Y30, for a previous day's closing price per
ordinary share of less than Y100, to Y10 million, for a previous day's closing
price per ordinary share of not less than Y50 million. In contrast, trading of
the ADSs on the Nasdaq National Market will not be subject to any floor or
ceiling. As a result, there may be a discrepancy between the pricing of the
ordinary shares on the Mothers Market and the ADSs on the Nasdaq National Market
and holders of ordinary shares may wish to convert their ordinary shares into
ADSs. Because there is no assurance that holders of ordinary shares will be able
to convert their ordinary shares into ADSs immediately, the holders of ordinary
shares are subject to the risk that the market price of the ordinary shares
could increase or fall before they are able to convert into ADSs and trade on
the Nasdaq National Market and holders of ADSs are subject to the risk that the
market price of the ADSs could increase or fall before they are able to convert
into ordinary shares and trade on the Mothers Market.
FOLLOWING THE GLOBAL OFFERING, OUR PRINCIPAL SHAREHOLDERS WILL CONTINUE TO
CONTROL MATTERS ON WHICH ALL SHAREHOLDERS MAY VOTE, CAUSING US TO TAKE ACTION
THAT MAY NOT BE IN THE INTERESTS OF ALL SHAREHOLDERS.
Following the global offering, our principal shareholders, Sumitomo,
Liberty Media and Microsoft Holdings V, Inc., a subsidiary of Microsoft
Corporation, collectively will own approximately 77.6% of our ordinary shares
and will have the ability to control our management and affairs and actions
taken with respect to fundamental corporate transactions, the election and
removal of our directors, the approval of mergers involving us, stock-for-stock
exchanges and the sale of all or an important part of our business. Our
principal shareholders currently invest and may continue to invest in businesses
that provide services that may compete with the services we offer. Consequently,
these principal shareholders may take actions that do not reflect the interests
of all shareholders. This control might have the effect of delaying or
preventing a change of control of our company that other shareholders may
believe is desirable. This control also may depress the trading prices of our
publicly held ordinary shares and ADSs.
AGREEMENTS TO WHICH WE AND OUR SHAREHOLDERS ARE A PARTY AND JAPANESE LAW MAY
MAKE IT MORE DIFFICULT FOR A THIRD PARTY TO ACQUIRE CONTROL OF OUR ORDINARY
SHARES, WHICH MAY LIMIT THE OPPORTUNITY TO SELL YOUR ORDINARY SHARES OR ADSS IN
A CHANGE OF CONTROL TRANSACTION.
In connection with our acquisition of Titus, Jupiter entered into an
agreement with Microsoft restricting Jupiter's ability to sell shares of Titus
or the assets of Titus without Microsoft's consent until
24
<PAGE> 30
the earlier of June 30, 2006 or the date that Microsoft owns less than 5% of our
ordinary shares and Microsoft has sold, in taxable transactions, 80% of our
ordinary shares that were issued to it in the Titus acquisition. This consent
right may prevent us from taking action that may otherwise be in our best
interest and the best interest of our shareholders.
Upon completion of the global offering, Sumitomo, Liberty Media and
Microsoft will be party to a shareholders agreement under which each will have a
right of first offer with respect to any sales of our ordinary shares held by
them, subject to specified limited exceptions. In addition, Liberty Media
Corporation and Liberty Media International, which are affiliates of Liberty
Jupiter, Inc. and Liberty Japan, Inc., are parties to an agreement with
UnitedGlobalCom, Inc. and United Pan-Europe Communications, N.V. which grants
UnitedGlobalCom, subject to certain permitted exceptions, a right of first offer
with respect to the Liberty entities' interest in us. Furthermore, the Japanese
Commercial Code, unlike the corporate law of many U.S. jurisdictions, generally
requires a super-majority vote of holders of at least two-thirds of our ordinary
shares present or represented at a meeting of shareholders with respect to the
merger, stock-for-stock exchange or sale of all or an important part of our
business. These agreements and the super-majority provisions of the Japanese
Commercial Code could each have the effect of:
- delaying or preventing a change of control in our company, even if a
change of control were in our shareholders' interest;
- deterring tender offers for our ordinary shares that may be in the
interest of some shareholders; or
- limiting the opportunity for our shareholders to receive a premium for
their ordinary shares that might otherwise exist if an investor attempted
to effect a change of control of our company.
IT MAY BE MORE DIFFICULT FOR HOLDERS OF OUR SECURITIES TO PROTECT THEIR
INTERESTS WITH RESPECT TO ACTIONS BY A MAJORITY OF OUR SHAREHOLDERS THAN FOR
HOLDERS OF SECURITIES OF COMPANIES INCORPORATED UNDER THE STATE CORPORATE LAW
APPLICABLE TO COMPANIES IN THE U.S.
The rights of our shareholders and the responsibilities of members of our
board of directors under Japanese law are different from those applicable to a
corporation incorporated in the U.S. For example, Japanese law generally does
not recognize the concept that shareholders holding a controlling interest in
our ordinary shares have fiduciary obligations to minority shareholders and as a
result, a majority of our shareholders may cause us to enter into transactions
on terms which may not be beneficial to our minority shareholders. Our
shareholders may have more difficulty protecting their interests in connection
with actions by management, members of our board of directors or our controlling
shareholders than they would as shareholders of a corporation incorporated in
the U.S.
AS AN ADR HOLDER, YOU WILL HAVE FEWER RIGHTS THAN A REGISTERED SHAREHOLDER, AND
YOU MUST ACT THROUGH THE DEPOSITARY TO EXERCISE THOSE RIGHTS.
The rights of our shareholders under Japanese law to take actions,
including voting their shares, receiving dividends and distributions, bringing
derivative actions, examining our accounting books and records and exercising
appraisal rights are available only to holders of record on our register of
shareholders or our register of beneficial shareholders. Because the depositary
or its nominee, through its custodian agent, is the registered holder of the
ordinary shares underlying the ADSs, only the depositary or its nominee can
exercise those rights in connection with the deposited ordinary shares. The
depositary will make efforts to vote the ordinary shares underlying the ADSs as
instructed by you and will pay to you the dividends and distributions collected
from us. However, as an ADR holder, you will not be able to bring a derivative
action, examine our accounting books and records or exercise appraisal rights
unless the depositary agrees to do so on your behalf.
25
<PAGE> 31
AS AN ADR HOLDER, YOU WILL BE SUBJECT TO RESTRICTIONS ON THE WITHDRAWAL OF
ORDINARY SHARES FROM THE DEPOSITARY.
Under our ADS program each ADS will initially represent the right to
receive one-fiftieth of one ordinary share. In order to withdraw any ordinary
shares, a holder of ADRs will have to surrender for cancellation ADRs evidencing
50 ADSs or any integral multiple thereof. Each ADR will bear a legend to that
effect. As a result, holders of ADRs will be unable to withdraw fractions of an
ordinary share or receive any cash settlement in lieu of withdrawal of fractions
of an ordinary share.
THE TANGIBLE BOOK VALUE OF OUR ORDINARY SHARES IS SUBSTANTIALLY LOWER THAN THE
ASSUMED OFFERING PRICE OF OUR SECURITIES, RESULTING IN IMMEDIATE AND SUBSTANTIAL
DILUTION TO PURCHASERS IN THE GLOBAL OFFERING.
The assumed initial public offering price for our ordinary shares,
including ordinary shares represented by ADSs, is substantially higher than the
net tangible book value per share of our ordinary shares immediately prior to
the global offering. If you purchase ordinary shares, including ordinary shares
represented by ADSs, in the global offering, you will in effect pay a price for
our ordinary shares that substantially exceeds the per share value of our total
assets after deducting our total liabilities. This will result in an immediate
and substantial dilution in net tangible book value per ordinary share,
including ordinary shares represented by ADSs, purchased in the global offering
and existing shareholders will experience a material increase in the net
tangible book value per security. After giving effect to the sale of the
ordinary shares in the global offering, including ordinary shares represented by
ADSs, and after deducting underwriting discounts and other estimated expenses of
the global offering, but excluding any other changes in tangible book value
after September 30, 2000, our estimated net tangible book value per ordinary
share would immediately increase by Y12,651 ($115) per ordinary share to our
existing shareholders and immediately decrease by Y69,019 ($627) per ordinary
share to purchasers of our ordinary shares, including ordinary shares
represented by ADSs, at the assumed initial public offering price. As a result,
you will:
- pay a purchase price per share for our ordinary shares, including
ordinary shares represented by ADSs, that substantially exceeds the value
of our assets after subtracting liabilities on a per share basis; and
- collectively contribute 30.5% of our total paid-in capital but will own
only 16.7% of our total equity outstanding.
THE PRICE OF OUR ORDINARY SHARES AND ADSS MAY BE AFFECTED BY ADDITIONAL ORDINARY
SHARES BECOMING AVAILABLE FOR SALE IN THE FUTURE.
Sales of a substantial amount of our ordinary shares, either directly or in
the form of ADSs, in the public market after the global offering, or the
perception that substantial sales may occur, may adversely affect the prevailing
market price of our ordinary shares or ADSs. This may also impair our ability to
raise additional capital through the sale of additional equity securities.
Immediately after the completion of the global offering, we will have
4,721,285 ordinary shares, including ordinary shares represented by ADSs,
outstanding, or 4,777,925 ordinary shares, including ordinary shares represented
by ADSs, if the overseas underwriters exercise their over-allotment option in
full. Of these securities, the securities sold in this global offering will be
immediately transferable without restriction in the public market, except for
securities purchased by any of our affiliates. The remaining 3,777,285 ordinary
shares, plus any ordinary shares sold in the global offering that are purchased
by any of our affiliates, will be "restricted securities," which will be subject
to the limitations of Rule 144 under the Securities Act and which will, in the
case of some of our shareholders, have registration rights.
26
<PAGE> 32
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that relate to future
events or our future financial performance. These statements are found in the
sections entitled "Prospectus Summary," "Risk Factors," "Management's Discussion
and Analysis of Financial Condition and Results of Operations," "Business" and
elsewhere in this prospectus. In some cases, you can identify forward-looking
statements by terminology such as "anticipate," "believe," "continue," "could,"
"estimate," "expect," "forecast," "intend," "may," "plan," "potential,"
"predict," "project," "should" or "will" or the negative of such terms or other
comparable terminology. These statements involve known and unknown risks,
uncertainties, and other factors that may cause our or our industry's actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. These
risks, uncertainties and other factors include, among other things, those listed
under "Risk Factors" as well as those included elsewhere in this prospectus.
These forward-looking statements include, but are not limited to,
statements relating to:
- our anticipated capital expenditures for the planned upgrades and
expansions of our network and the ability to fund these expenditures;
- our ability to fund our future operations through borrowing or otherwise;
- our ability to refinance our existing indebtedness;
- our expectations about growth in demand for our services;
- our ability to successfully integrate the operations of Titus;
- our plans to achieve growth by offering new services and through
acquisitions and consolidations;
- our ability to adjust to technological change;
- our ability to effectively compete in a highly competitive environment;
and
- our beliefs about the effects of Japanese government regulations on our
business.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee our future results, levels of
activity, performance or achievements.
ENFORCEMENT OF CIVIL LIABILITIES
We are a limited liability, joint-stock corporation incorporated under the
laws of Japan. A majority of our directors, executive officers and corporate
auditors reside in Japan. All or substantially all of our assets and the assets
of these individuals who live in Japan also are located in Japan and elsewhere
outside the United States. It may not be possible, therefore, for investors to
effect service of process within the United States upon us or these individuals
or to enforce against us or these individuals judgments obtained in United
States courts predicated upon the civil liability provisions of the federal
securities laws of the United States. Our Japanese counsel, Nishimura &
Partners, has advised us that original actions or actions for enforcement of
judgments of United States courts for liabilities predicated solely upon the
federal securities laws of the United States may not be enforceable in Japan.
27
<PAGE> 33
CAPITALIZATION
The following table sets forth, as of September 30, 2000, the
capitalization of our consolidated group in accordance with U.S. GAAP on an
actual and as adjusted basis. The as adjusted data set forth below adjusts the
actual data to give effect to our issuance of 787,000 ordinary shares in the
global offering, including ordinary shares represented by ADSs, and the
application of the estimated net proceeds from the sale of ordinary shares by us
in the global offering using an assumed initial public offering price of Y75,500
per ordinary share and $14.00 per ADS. This information should be read in
conjunction with the consolidated financial statements of our consolidated group
and the related notes, "Unaudited Pro Forma Condensed Combined Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this prospectus. The following
table assumes no exercise of the overseas underwriters' over-allotment option
and, for your convenience, reflects U.S. dollar translations using the exchange
rate in effect on October 31, 2000:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
-----------------------------------------------------
ACTUAL AS ADJUSTED
------------------------- -------------------------
(IN THOUSANDS, EXCEPT ORDINARY SHARE DATA)
<S> <C> <C> <C> <C>
Cash and cash equivalents............................. Y 4,361,529 $ 39,632 Y 59,235,474 $ 538,260
============ ========== ============ ==========
Short-term borrowings, including current portion of
long-term debt...................................... Y 92,895,967 $ 844,125 Y 92,895,967 $ 844,125
Long-term debt........................................ 16,615,920 150,985 16,615,920 150,985
Shareholders' equity:
Ordinary shares, no par value, 15,000,000 shares
authorized(1); 3,934,286 shares issued and
outstanding, actual; 4,721,285 shares issued and
outstanding, as adjusted......................... 47,002,623 427,102 76,711,873 697,064
Additional paid-in capital.......................... 88,614,344 805,219 113,779,039 1,033,885
Accumulated deficit................................. (48,770,326) (443,165) (48,770,326) (443,165)
------------ ---------- ------------ ----------
Total shareholders' equity....................... 86,846,641 789,156 141,720,586 1,287,784
------------ ---------- ------------ ----------
Total capitalization........................... Y196,358,528 $1,784,266 Y251,232,473 $2,282,894
============ ========== ============ ==========
</TABLE>
---------------
(1) On September 29, 2000, our shareholders approved an increase in the number
of authorized shares to 15,000,000, effective October 1, 2000.
28
<PAGE> 34
DILUTION
Our consolidated group's net tangible book value as of September 30, 2000
was Y(6,170) per ordinary share. Net tangible book value per ordinary share is
determined by dividing our consolidated group's net tangible book value, or our
consolidated group's total tangible assets less total liabilities, as of
September 30, 2000 by the number of our outstanding ordinary shares immediately
before the global offering. As of the same date, our consolidated group's net
tangible value per ADS was $(1.12). We have calculated net tangible book value
per ADS by multiplying the net tangible book value per ordinary share by one-
fiftieth, which is the number of ordinary shares represented by each ADS.
Our consolidated group's net tangible book value per ordinary share as of
September 30, 2000, after giving effect to the global offering, was Y6,481, or
$1.18 per ADS. This computation gives effect to the issuance by us of 787,000
ordinary shares in the global offering, including ordinary shares represented by
ADSs, using an assumed initial public offering price of Y75,500 per ordinary
share and $14.00 per ADS, net of underwriting discounts and estimated offering
expenses. This represents an immediate increase in net tangible book value of
Y12,651 per ordinary share or $2.30 per ADS to our existing shareholders and an
immediate dilution in net tangible book value of Y69,019 per ordinary share and
$12.82 per ADS to new public investors. The following table illustrates this per
ordinary share and per ADS dilution:
<TABLE>
<CAPTION>
PER ORDINARY
SHARE PER ADS
------------ -------
<S> <C> <C> <C> <C>
Assumed initial public offering price per ordinary
share and per ADS................................. Y75,500 $14.00
Net tangible book value per ordinary share and per
ADS as of September 30, 2000...................... (6,170) (1.12)
Increase in net tangible book value per ordinary
share and per ADS attributable to new public
investors......................................... 12,651 2.30
------ -----
Net tangible book value per ordinary share and per
ADS after the global offering..................... 6,481 1.18
------- ------
Dilution in net tangible book value per ordinary
share and per ADS to new public investors......... Y69,019 $12.82
======= ======
</TABLE>
The following table presents, as of the date of this prospectus, the total
number of ordinary shares purchased from us, the total consideration paid to us,
before deducting estimated underwriting discounts and estimated global offering
expenses paid by us, and the average price paid per ordinary share by our
existing shareholders and by our new public investors in the global offering.
For purposes of this table, we have assumed that all new public investors
purchase ordinary shares rather than ADSs.
<TABLE>
<CAPTION>
AVERAGE PRICE
ORDINARY SHARES PER ORDINARY
PURCHASED TOTAL CONSIDERATION SHARE
-------------------- ------------------------- -------------
NUMBER PERCENT IN MILLIONS PERCENT YEN
--------- ------- -------------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders............... 3,934,286 83.3% Y135,617 69.5% Y 34,471
New public investors................ 787,000 16.7 59,419 30.5 Y 75,500
--------- ----- -------- -----
Total............................. 4,721,286 100.0% Y195,036 100.0% Y 41,310
========= ===== ======== =====
</TABLE>
The preceding table does not give effect to the sale of ordinary shares by the
selling shareholders and the repurchase by us of 0.67 of an ordinary share held
by one of our selling shareholders. Sales by the selling shareholders in the
Japanese offering will reduce the number of ordinary shares held by existing
shareholders to 3,777,285, or 80.0% of the ordinary shares outstanding, and will
increase the number of ordinary shares held by new investors to 944,000, or
20.0% of the ordinary shares outstanding.
The preceding discussion and the accompanying tables exclude:
- up to 56,640 ordinary shares that we may issue in connection with the
exercise by the overseas underwriters of their option to cover
over-allotments, if any, in the overseas offering; and
- 144,798 ordinary shares issuable upon exercise of subscription rights for
ordinary shares that are currently issued and outstanding at an exercise
price of Y92,000 per ordinary share.
29
<PAGE> 35
USE OF PROCEEDS
The estimated net proceeds we will receive from the sale of 787,000
ordinary shares by us in the global offering, after deducting estimated
underwriting discounts and estimated global offering expenses payable by us, are
estimated to be approximately Y54,874 million ($499 million), or Y58,894 million
($535 million) if the overseas underwriters' over-allotment option is exercised
in full, using an assumed offering price of Y75,500 per ordinary share and
$14.00 per ADS. We will not receive any proceeds from the sale of 157,000
ordinary shares by the selling shareholders.
We presently intend to use the net offering proceeds as follows:
- Y30.0 billion ($273 million) for the expansion and upgrade of our
broadband networks by our managed franchises;
- Y20.0 billion ($182 million) for investments in new and existing
franchises, including approximately Y2,751 million ($25 million) to
purchase all of the shares of each of CHOFU Television Corporation, Tu-Ka
Cellular Tokyo Inc. and Tu-Ka Cellular Tokai Inc. which are currently
held by an affiliate of Microsoft;
- Y1.0 billion ($9 million) for the expansion and upgrade of the broadband
networks by our non-managed investments; and
- Y3.9 billion ($35 million) for working capital.
However, other than the acquisitions referenced above, we have no
commitments to use the net proceeds from the global offering for any specific
purpose, investment or acquisition and our board of directors generally has the
discretion and authority to use the net proceeds we receive from the global
offering for other corporate purposes without obtaining shareholders approval.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our ordinary shares
since our inception and we do not currently anticipate paying any cash dividends
in the foreseeable future.
30
<PAGE> 36
EXCHANGE RATES
Fluctuations in exchange rates between the Japanese yen, the U.S. dollar
and other currencies will affect the U.S. dollar or other currency equivalents
of the yen price of our ordinary shares on the Mothers Market and the U.S.
dollar price of our ADSs on the Nasdaq National Market.
These fluctuations will also affect the U.S. dollar or other currency
proceeds from the conversions of cash dividends paid in yen on our ordinary
shares represented by ADSs and the U.S. dollar or other currency amounts
received upon the conversion of any yen proceeds from the sale of our ordinary
shares represented by ADSs. When we refer to "yen" and "Y" in this prospectus,
we are referring to Japanese yen, the legal currency of Japan. When we refer to
"U.S. dollars," "dollars," "$" and "US$" in this prospectus, we are referring to
United States dollars, the legal currency of the United States. For your
convenience, we have included in this prospectus translations of Japanese yen
amounts into U.S. dollar amounts using, unless otherwise indicated, the
Telegraphic Transfer Selling exchange rate quotation of The Bank of
Tokyo-Mitsubishi, Ltd. On October 31, 2000, the Telegraphic Transfer Selling
exchange rate quotation for U.S. dollars was Y110.05 per $1.00. The translations
in this prospectus should not be construed as a representation that those yen or
U.S. dollar amounts have been, could have been or could in the future be,
converted into U.S. dollars or yen, as the case may be, at any particular rate,
the rate stated above or at all.
The following table shows the high, low and average year-end Telegraphic
Transfer Selling exchange rate quotations of The Bank of Tokyo-Mitsubishi, Ltd.,
in yen per U.S. dollar, for the periods and as of the dates indicated:
<TABLE>
<CAPTION>
HIGH LOW AVERAGE
------- ------- -------
(YEN PER U.S. DOLLAR)
<S> <C> <C> <C>
Year ended December 31, 1995.......................... Y105.50 Y 81.20 Y 95.10
Year ended December 31, 1996.......................... 117.10 105.40 109.84
Year ended December 31, 1997.......................... 132.10 113.15 122.07
Year ended December 31, 1998.......................... 147.40 115.80 131.89
Year ended December 31, 1999.......................... 125.40 103.00 114.96
January 1, 2000 through September 30, 2000............ 112.70 102.55 108.16
</TABLE>
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
(YEN PER U.S. DOLLAR)
<S> <C> <C>
May 2000................................................. Y110.65 Y107.40
June 2000................................................ 109.90 105.70
July 2000................................................ 110.65 107.00
August 2000.............................................. 110.50 107.40
September 2000........................................... 109.00 106.35
October 2000............................................. 110.25 108.70
</TABLE>
31
<PAGE> 37
SELECTED HISTORICAL FINANCIAL AND OTHER DATA
The following selected historical financial and other data should be read
in conjunction with the consolidated financial statements of our consolidated
group and the related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. The financial information and other data for the fiscal year ended
March 31, 1996, the nine months ended December 31, 1996 and the years ended
December 31, 1997, 1998 and 1999 have been derived from the audited consolidated
financial statements of our consolidated group, and the financial information
and other data for each of the nine-month periods ended September 30, 1999 and
2000 have been derived from the unaudited condensed consolidated financial
statements of our consolidated group. The financial statements of our
consolidated group are reported in Japanese yen, with U.S. dollar translation,
and are presented in accordance with U.S. GAAP for all periods presented.
Historical results are not necessarily indicative of the results to be expected
in the future. U.S. dollar translations are presented using the exchange rate in
effect on October 31, 2000.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR NINE MONTHS YEAR ENDED ENDED
ENDED ENDED DECEMBER 31, SEPTEMBER 30,
MARCH 31, DECEMBER 31, ---------------------------------------- ---------------------------
1996 1996 1997 1998 1999 1999 2000
----------- ------------ ----------- ----------- ------------ ------------ ------------
(IN THOUSANDS, EXCEPT ORDINARY SHARE, ADS, PER ORDINARY SHARE AND PER ADS DATA)
(AUDITED) (UNAUDITED)
--------------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Total revenue............... Y 2,032,208 Y 2,279,327 Y 5,631,429 Y11,096,117 Y 19,012,267 Y 12,952,611 Y 23,038,394
Construction-related
expenses, programming
costs, other operating
costs and selling, general
and administrative
expenses.................. 3,511,910 4,736,937 11,139,532 16,484,443 22,625,651 15,498,481 24,628,044
Depreciation and
amortization.............. 440,985 579,030 1,580,603 3,054,889 5,507,458 3,687,081 8,675,856
----------- ----------- ----------- ----------- ------------ ------------ ------------
Operating loss.............. (1,920,687) (3,036,640) (7,088,706) (8,443,215) (9,120,842) (6,232,951) (10,265,506)
Interest and other expense,
net....................... (78,598) (139,427) (483,036) (633,998) (1,124,647) (689,075) (1,383,621)
Equity in losses of
affiliates................ (526,097) (624,624) (959,098) (1,319,344) (2,644,459) (1,936,361) (2,497,094)
Minority interests in
subsidiaries.............. 373,572 318,627 647,645 456,069 649,470 343,036 438,065
Income tax benefit.......... -- -- -- -- -- -- 332,220
----------- ----------- ----------- ----------- ------------ ------------ ------------
Loss before extraordinary
gain...................... Y(2,151,810) Y(3,482,064) Y(7,883,195) Y(9,940,488) Y(12,240,478) Y (8,515,351) Y(13,375,936)
=========== =========== =========== =========== ============ ============ ============
Loss before extraordinary
gain per ordinary share,
basic and diluted......... Y (7,410) Y (4,577) Y (5,653) Y (5,097) Y (5,610) Y (4,035) Y (4,803)
=========== =========== =========== =========== ============ ============ ============
Ordinary shares used in
computing loss before
extraordinary gain per
ordinary share, basic and
diluted................... 290,403 760,833 1,394,580 1,950,330 2,182,011 2,110,572 2,784,894
=========== =========== =========== =========== ============ ============ ============
Loss before extraordinary
gain per ADS, basic and
diluted(1)................ Y (148) Y (92) Y (113) Y (102) Y (112) Y (81) Y (96)
=========== =========== =========== =========== ============ ============ ============
ADSs used in computing loss
before extraordinary gain
per ADS, basic and
diluted(1)................ 14,520,150 38,041,650 69,729,000 97,516,500 109,100,550 105,528,600 139,244,700
=========== =========== =========== =========== ============ ============ ============
</TABLE>
---------------
(1) Loss before extraordinary gain per ADS and ADSs used in computing loss
before extraordinary gain per ADS assume all outstanding ordinary shares
were issued in the form of ADSs for each of the periods presented.
32
<PAGE> 38
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31, AS OF SEPTEMBER 30,
MARCH 31, ----------------------------------------------------- --------------------------
1996 1996 1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- ----------- ----------- ------------
(IN THOUSANDS)
(AUDITED) (UNAUDITED)
------------------------------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, receivables and
other assets, net...... Y 4,829,225 Y 6,567,971 Y 6,985,885 Y 5,833,136 Y 8,262,800 Y 9,206,366 Y 19,197,643
Investments in
affiliates............. 862,903 4,815,690 4,741,816 7,560,853 6,216,396 6,681,980 4,631,572
Property and equipment,
net.................... 6,096,364 9,445,248 25,898,851 33,997,270 58,124,991 49,672,795 110,595,883
Goodwill, net............ 762,977 922,774 3,827,252 4,363,183 15,236,398 15,030,918 111,122,100
----------- ----------- ----------- ----------- ----------- ----------- ------------
Total assets............. Y12,551,469 Y21,751,683 Y41,453,804 Y51,754,442 Y87,840,585 Y80,592,059 Y245,547,198
=========== =========== =========== =========== =========== =========== ============
Short-term loans,
long-term debt and
capital lease
obligations............ Y 3,363,553 Y 5,119,801 Y20,318,377 Y33,228,438 Y63,496,611 Y54,472,563 Y127,756,298
Other liabilities........ 2,517,264 3,329,595 6,429,528 7,654,788 19,518,524 17,343,750 30,527,969
Minority interest........ 527,597 610,679 633,571 783,908 778,620 1,003,789 416,290
Shareholders' equity..... 6,143,055 12,691,608 14,072,328 10,087,308 4,046,830 7,771,957 86,846,641
----------- ----------- ----------- ----------- ----------- ----------- ------------
Total liabilities and
shareholders' equity... Y12,551,469 Y21,751,683 Y41,453,804 Y51,754,442 Y87,840,585 Y80,592,059 Y245,547,198
=========== =========== =========== =========== =========== =========== ============
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS ENDED
YEAR ENDED ENDED YEAR ENDED DECEMBER 31, SEPTEMBER 30,
MARCH 31, DECEMBER 31, ------------------------------------------ ---------------------------
1996 1996 1997 1998 1999 1999 2000
----------- ------------ ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
(AUDITED) (UNAUDITED)
----------------------------------------------------------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(1)............ Y(1,479,702) Y(2,457,610) Y (5,508,103) Y (5,388,326) Y (3,613,384) Y (2,545,870) Y (1,589,650)
Cash flows (used in)/
provided by:
Operating
activities....... Y(2,300,019) Y(2,200,573) Y (5,275,652) Y (5,761,506) Y (953,892) Y (1,130,097) Y (4,632,284)
Investing
activities....... Y(2,125,266) Y(7,961,099) Y(11,516,050) Y(13,581,576) Y(18,455,114) Y(13,746,519) Y(13,092,348)
Financing
activities....... Y 6,418,719 Y11,331,030 Y 16,365,088 Y 16,859,639 Y 19,541,304 Y 15,470,139 Y 20,569,359
Capital expenditures:
Capital leases..... Y 287,190 Y 799,468 Y 655,177 Y 2,413,701 Y 5,296,685 Y 2,078,440 Y 7,691,969
Other capital
expenditures..... 1,737,092 2,725,283 8,980,220 8,567,612 11,275,418 10,379,944 11,312,280
----------- ----------- ------------ ------------ ------------ ------------ ------------
Total............ Y 2,024,282 Y 3,524,751 Y 9,635,397 Y 10,981,313 Y 16,572,103 Y 12,458,384 Y 19,004,249
=========== =========== ============ ============ ============ ============ ============
</TABLE>
---------------
(1) EBITDA represents operating loss before depreciation and amortization.
EBITDA is frequently used by securities analysts and is presented here to
provide additional information about our operations. EBITDA is not a
measurement presented in accordance with U.S. GAAP. We may compute EBITDA
differently than it is computed by other companies, including those in our
industry. EBITDA should not be considered in isolation or as a substitute
for net income, cash flow provided by operating activities or other income
or cash flow data prepared in accordance with U.S. GAAP or as a measure of a
company's profitability or liquidity.
33
<PAGE> 39
TRANSLATED SELECTED FINANCIAL INFORMATION:
The following table presents the selected historical financial information
of our consolidated group for the periods and as of the dates presented,
expressed in U.S. dollars, translated using the exchange rate in effect on
October 31, 2000:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000
------------------- --------------------
(IN THOUSANDS, EXCEPT ORDINARY SHARE, ADS,
PER ORDINARY SHARE AND PER ADS DATA)
(AUDITED) (UNAUDITED)
------------------- --------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue........................................... $ 172,761 $ 209,344
Construction-related expenses, programming costs, other
operating costs and selling, general and
administrative
expenses.............................................. 205,595 $ 223,789
Depreciation and amortization........................... 50,045 78,836
------------ ------------
Operating loss.......................................... (82,879) (93,281)
Interest and other expense, net......................... (10,219) (12,573)
Equity in losses of affiliates.......................... (24,030) (22,690)
Minority interests in subsidiaries...................... 5,902 3,981
Income tax benefit...................................... -- 3,019
------------ ------------
Loss before extraordinary gain.......................... $ (111,226) $ (121,544)
============ ============
Loss before extraordinary gain per ordinary share, basic
and diluted........................................... $ (50.98) $ (43.64)
============ ============
Ordinary shares used in computing loss before
extraordinary gain per ordinary share, basic and
diluted............................................... 2,182,011 2,784,894
============ ============
Loss before extraordinary gain per ADS, basic and
diluted(1)............................................ $ (1.02) $ (0.87)
============ ============
ADSs used in computing loss before extraordinary gain
per ADS, basic and diluted(1)......................... 109,100,550 139,244,700
============ ============
</TABLE>
---------------
(1) Loss before extraordinary gain per ADS and ADSs used in computing loss
before extraordinary gain per ADS assume all outstanding ordinary shares
were issued in the form of ADSs for each of the periods presented.
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(IN THOUSANDS)
(AUDITED) (UNAUDITED)
----------------- ------------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, receivables and other assets, net................. $ 75,082 $ 174,445
Investments in affiliates............................... 56,487 42,086
Property and equipment, net............................. 528,169 1,004,960
Goodwill, net........................................... 138,450 1,009,742
-------- ----------
Total assets.......................................... $798,188 $2,231,233
======== ==========
Short-term loans, long-term debt and capital lease
obligation............................................ $576,980 $1,160,893
Other liabilities....................................... 177,361 277,401
Minority interest....................................... 7,075 3,783
Shareholders' equity.................................... 36,772 789,156
-------- ----------
Total liabilities and shareholders' equity............ $798,188 $2,231,233
======== ==========
</TABLE>
34
<PAGE> 40
SELECTED OPERATING DATA
The following table presents selected operating data for our managed
franchises and other cable operations in which we invest for each of the periods
presented:
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31, AS OF SEPTEMBER 30,
MARCH 31, ------------------------------------------- ---------------------
1996 1996 1997 1998 1999 1999 2000
--------- ------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED FRANCHISES:
Franchise homes(1)(2)... -- -- -- -- -- -- 4,614,000
Cable Television
Homes passed(2)......... 160,500 255,700 743,100 1,091,700 1,921,800 1,795,100 3,313,600
Customers............... 9,500 18,500 77,700 131,600 304,800 255,400 510,200
Customer
penetration(3)....... 5.9% 7.2% 10.5% 12.1% 15.9% 14.2% 15.4%
Telephony(4)
Homes passed(2)......... -- -- 45,600 137,000 247,800 197,800 1,232,100
Customers............... -- -- 2,300 6,000 14,300 9,600 58,900
Customer
penetration(3)....... -- -- 5.0% 4.4% 5.8% 4.9% 4.8%
Internet(5)
Homes passed(2)......... -- -- -- -- 814,000 691,400 2,443,500
Customers............... -- -- -- -- 10,500 5,000 84,600
Customer
penetration(3)....... -- -- -- -- 1.3% 0.7% 3.5%
MANAGED FRANCHISES
(INCLUDES CONSOLIDATED
AND UNCONSOLIDATED
MANAGED FRANCHISES):
Franchise homes(1)(2)... -- -- -- -- -- -- 6,307,400
Cable Television
Homes passed(2)......... 493,200 809,900 1,057,400 1,868,100 2,510,200 2,391,000 4,602,500
Customers............... 37,900 77,100 121,700 253,900 403,500 357,500 739,300
Customer
penetration(3)....... 7.7% 9.5% 11.5% 13.6% 16.1% 15.0% 16.1%
Monthly churn(6)(7)..... -- -- 1.3% 1.7% 2.0% 2.1% 1.8%
Telephony(4)
Homes passed(2)......... -- -- 45,600 137,000 247,800 197,800 1,232,100
Customers............... -- -- 2,300 6,000 14,300 9,600 58,900
Customer
penetration(3)....... -- -- 5.0% 4.4% 5.8% 4.9% 4.8%
Monthly churn(6)(7)..... -- -- 1.3% 1.3% 1.2% 1.4% 1.5%
Internet(5)
Homes passed(2)......... -- -- -- -- 986,600 798,100 3,139,600
Customers............... -- -- -- -- 12,300 5,800 98,800
Customer
penetration(3)....... -- -- -- -- 1.2% 0.7% 3.1%
Monthly churn(6)(7)..... -- -- -- -- 0.4% 0.3% 0.5%
ALL INVESTMENTS IN MANAGED
FRANCHISES AND NON-
MANAGED INVESTMENTS (OUR
PROPORTIONATE
OWNERSHIP)(8):
Franchise homes(1)(2)... -- -- -- -- -- -- 4,790,100
Homes passed(2)......... 223,300 522,900 787,200 1,352,700 2,082,900 1,962,800 3,443,800
Customers............... 17,400 52,400 93,100 173,000 331,500 279,400 659,700
</TABLE>
(footnotes on next page)
35
<PAGE> 41
(1) Franchise homes represents the total number of single residences and
multiple-dwelling units within the franchise area and is based on recent
available census data.
(2) Our franchise homes data reflects recent available census data. Our homes
passed figures are estimated based on recent available census data, updated
for additional information related to the specific franchise area. In many
of our franchises, the population is increasing and single-dwelling units
are gradually being replaced with multiple-dwelling units, resulting in an
increasing number of franchise homes and homes passed. We believe that in
most of our franchises, and on an aggregate basis, this has resulted in
homes passed being higher than our reported figures. As we periodically
update our system data to account for the increasing number of homes in our
franchises, we expect to revise our reported figures in the future.
(3) Customer penetration is calculated by dividing customers by homes passed.
(4) Telephony service was initiated in 1997.
(5) High-speed Internet access was initiated in 1999.
(6) Monthly churn is calculated by dividing the number of disconnected customers
in our managed franchises by the average number of customers in our managed
franchises for each of the fiscal years and nine-month periods presented, as
applicable, and dividing by the number of months in the period.
(7) Monthly churn is unavailable for the fiscal year ended March 31, 1996 and
for the nine months ended December 31, 1996.
(8) Our proportionate ownership of franchise homes, homes passed and customers
represent the totals for each of these categories reduced by amounts
attributable to other equity owners of our managed franchises and
non-managed investments.
JAPANESE GAAP SELECTED FINANCIAL DATA
Our consolidated group maintains its books of account in conformity with
generally accepted accounting principles in Japan, or Japanese GAAP. The
following selected financial data with respect to the years ended December 31,
1998 and 1999 have been derived from the audited consolidated financial
statements which were prepared in accordance with Japanese GAAP and were
included in our filing with the Tokyo Stock Exchange in connection with the
Japanese offering. These financial statements have been audited by Asahi & Co.,
a member firm of Andersen Worldwide SC, independent certified public
accountants. The consolidated financial statements of our consolidated group
presented elsewhere in this prospectus differ from those issued for domestic
purposes in Japan as they have been prepared in conformity with U.S. GAAP and
reflect certain adjustments not recorded in the books of account prepared in
conformity with Japanese GAAP. The principal adjustments necessary to conform to
U.S. GAAP include, among others, adjustments that relate to scope of
consolidation, accounting for leases, recognition of certain revenues, severance
and retirement benefits, capitalization of interest costs, depreciation and
amortization and accruals for certain expenses. The consolidated financial
statements prepared in accordance with Japanese GAAP include, in addition to our
consolidated franchises, those unconsolidated managed franchises in which we own
a 40% or greater voting interest and over which we have significant management
control. These unconsolidated managed franchises are accounted for using the
equity method of accounting under U.S. GAAP.
36
<PAGE> 42
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1998 1999
----------- ------------
(IN THOUSANDS, EXCEPT PER
ORDINARY SHARE AND
PER ADS DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................................... Y13,794,084 Y 30,741,492
Net loss.................................................... Y(9,758,392) Y(11,134,796)
Net loss per ordinary share................................. Y (5,003) Y (5,103)
Net loss per ADS(1)......................................... Y (100) Y (102)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------
1998 1999
----------- ------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Total assets................................................ Y43,012,022 Y 98,637,597
</TABLE>
---------------
(1) Net loss per ADS assumes all outstanding ordinary shares were issued in the
form of ADSs for each of the periods presented.
37
<PAGE> 43
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements
give pro forma effect to the completion of our acquisition of Titus as if the
acquisition had occurred on January 1, 1999 for the presentation of the
condensed combined statements of operations for the year ended December 31, 1999
and for the nine months ended September 30, 2000. Because Titus' fiscal year end
of March 31 differs from our fiscal year end of December 31, Titus' results have
been conformed to reflect actual results for the nine months ended September 30,
2000 and for the year ended December 31, 1999. As such, there have been no
periods of Titus excluded from, or included more than once for the purposes of,
these unaudited pro forma condensed combined financial statements.
The acquisition of Titus was structured as a stock-for-stock exchange
whereby each ordinary share of Titus was exchanged for 0.9675464 of our ordinary
shares and each convertible preference share of Titus was converted into
1,814.1495 of our ordinary shares. The total number of shares issued by us in
connection with the acquisition of Titus was 1,180,285.74. We are operating and
presently intend to continue operating Titus as a wholly-owned subsidiary. The
total estimated purchase price for Titus is Y89,617,940 thousand, which is
comprised of Y89,111,573 thousand, which is the product of 1,180,285.74 ordinary
shares issued multiplied by the estimated initial public offering price per
share of Y75,500, plus Y506,367 thousand of net identifiable liabilities assumed
from Titus. We have used the purchase method of accounting to account for this
acquisition. Accordingly, the purchase price has been allocated to the tangible
and intangible net assets of Titus using an independent third-party appraisal.
The pro forma income statement adjustments give effect to the Titus
acquisition and are based on an independent third party appraisal of the net
assets acquired. The net assets acquired include Titus' broadband networks and
intangible assets, including goodwill.
The pro forma as adjusted financial data adjusts the pro forma data to give
effect to our issuance of 787,000 ordinary shares in the global offering,
including ordinary shares represented by ADSs, as if it had occurred on January
1, 1999.
The pro forma information has been prepared from, and should be read in
conjunction with, the consolidated financial statements of our consolidated
group and related notes, and the consolidated financial statements of Titus and
related notes, included elsewhere in this prospectus. The pro forma information
is reported in Japanese yen, with U.S. dollar translations using the exchange
rate in effect on October 31, 2000, and is presented in accordance with U.S.
GAAP. The pro forma information is presented for illustrative purposes only and
does not purport to represent what actual results of operations would have been
if the acquisition of Titus and the global offering had occurred on January 1,
1999. The future operating results of our consolidated group may differ
materially from the pro forma amounts reflected in the following statements due
to a variety of factors, including changes in operating results between the date
of the pro forma information and the factors discussed under the caption
entitled "Risk Factors" included elsewhere in this prospectus.
38
<PAGE> 44
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 2000
-------------------------------------------------------------------------------------------
CONSOLIDATED
GROUP TITUS PRO FORMA PRO FORMA
HISTORICAL HISTORICAL(1) ADJUSTMENTS PRO FORMA AS ADJUSTED(A)
------------ ------------- -------------- ------------ --------------------------
(IN THOUSANDS, EXCEPT ORDINARY SHARE, ADS, PER ORDINARY SHARE AND PER ADS DATA)
(UNAUDITED)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONDENSED STATEMENTS OF
OPERATIONS:
Total revenue................ Y 23,038,394 Y 6,081,874 Y -- Y 29,120,268 Y 29,120,268 $ 264,609
Construction-related
expenses, programming
costs, other operating
costs and selling, general
and administrative
expenses(b)(c)............. 24,628,044 10,820,151 -- 35,448,195 35,448,195 322,110
Depreciation and
amortization............... 8,675,856 3,596,083 3,193,754(d)
(665,580)(e)
(102,589)(f) 14,697,524 14,697,524 133,553
------------ ----------- ----------- ------------ ------------ -----------
Operating loss............... (10,265,506) (8,334,360) (2,425,585) (21,025,451) (21,025,451) (191,054)
Interest and other expense,
net........................ (945,556) (413,883) -- (1,359,439) (1,359,439) (12,353)
Equity in losses of
affiliates................. (2,497,094) -- -- (2,497,094) (2,497,094) (22,690)
Income tax benefit........... 332,220 -- --(g) 332,220 332,220 3,019
------------ ----------- ----------- ------------ ------------ -----------
Loss before extraordinary
gain....................... Y(13,375,936) Y(8,748,243) Y(2,425,585) Y(24,549,764) Y(24,549,764) $ (223,078)
============ =========== =========== ============ ============ ===========
Pro forma loss before
extraordinary gain per
ordinary share............. Y (4,803) Y (6,403) Y (5,313) $ (48.27)
============ ============ ============ ===========
Weighted average number of
ordinary shares used in
computing pro forma loss
before extraordinary gain
per ordinary share(h)...... 2,784,894 3,834,037 4,621,037 4,621,037
============ ============ ============ ===========
Pro forma loss before
extraordinary gain per
ADS(2)..................... Y (96) Y (128) Y (106) $ (0.97)
============ ============ ============ ===========
Weighted average number of
ADSs used in computing pro
forma loss before
extraordinary gain per
ADS(2)..................... 139,244,700 191,701,850 231,051,850 231,051,850
============ ============ ============ ===========
</TABLE>
---------------
(1) Because Titus' fiscal year end differs from ours, Titus' results presented
above have been conformed to reflect actual results for the period from
January 1, 2000 through August 31, 2000.
(2) Pro forma loss before extraordinary loss per ADS and weighted average number
of ADSs used in computing pro forma loss before extraordinary gain per ADS
assumes all outstanding ordinary shares were issued in the form of ADSs for
the period presented.
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
39
<PAGE> 45
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------------------------------------------
CONSOLIDATED
GROUP TITUS PRO FORMA PRO FORMA
HISTORICAL HISTORICAL(1) ADJUSTMENTS PRO FORMA AS ADJUSTED(A)
------------ ------------- ----------- ------------ -----------------------------
(IN THOUSANDS, EXCEPT ORDINARY SHARE, ADS, PER ORDINARY SHARE AND PER ADS DATA)
(AUDITED) (UNAUDITED)
------------ -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONDENSED STATEMENTS OF
OPERATIONS:
Total revenue............ Y 19,012,267 Y 5,812,324 Y -- Y 24,824,591 Y 24,824,591 $ 225,576
Construction-related
expenses, programming
costs, other operating
costs and selling,
general and
administrative
expenses(c)............ 22,625,651 9,467,948 -- 32,093,599 32,093,599 291,627
Depreciation and
amortization........... 5,507,458 4,430,675 4,790,631(d)
(998,370)(e)
(153,884)(f) 13,576,510 13,576,510 123,367
------------ ----------- ----------- ------------ ------------ ------------
Operating loss........... (9,120,842) (8,086,299) (3,638,377) (20,845,518) (20,845,518) (189,418)
Interest and other
expense, net........... (475,177) (405,940) -- (881,117) (881,117) (8,007)
Equity in losses of
affiliates............. (2,644,459) -- -- (2,644,459) (2,644,459) (24,030)
------------ ----------- ----------- ------------ ------------ ------------
Loss before extraordinary
gain................... Y(12,240,478) Y(8,492,239) Y(3,638,377)(g) Y(24,371,094) Y(24,371,094) $ (221,455)
============ =========== =========== ============ ============ ============
Pro forma loss before
extraordinary gain per
ordinary share......... Y (5,610) Y (7,248) Y (5,873) $ (53.37)
============ ============ ============ ============
Weighted average number
of ordinary shares used
in computing pro forma
loss before
extraordinary gain per
ordinary share(h)...... 2,182,011 3,362,297 4,149,297 4,149,297
============ ============ ============ ============
Pro forma loss before
extraordinary gain per
ADS (2)................ Y (112) Y (145) Y (117) $ (1.07)
============ ============ ============ ============
Weighted average number
of ADSs used in
computing pro forma
loss before
extraordinary gain per
ADS(2)................. 109,100,550 168,114,850 207,464,850 207,464,850
============ ============ ============ ============
</TABLE>
---------------
(1) Because Titus' fiscal year end differs from ours, Titus' results presented
above have been conformed to reflect actual results for the year ended
December 31, 1999.
(2) Pro forma loss before extraordinary gain per ADS and weighted average number
of ADSs used in computing pro forma loss before extraordinary gain per ADS
assumes all outstanding ordinary shares were issued in the form of ADSs for
the period presented.
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
40
<PAGE> 46
Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
(a) The only adjustment to the pro forma amounts is to give effect to the sale
of 787,000 ordinary shares in the global offering, as if it had occurred on
January 1, 1999, by adjusting the weighted average number of ordinary
shares and ADSs outstanding and the related per ordinary share amounts.
(b) Included in selling, general and administrative expenses of Titus is
Y1,489,008 thousand of compensation expense related to a fully-vested stock
award granted to an executive officer on June 26, 2000 plus two months of
compensation expense related to a second award granted on July 4, 2000 (See
note (c) below).
(c) On August 23, 2000, our board of directors and shareholders approved a new
subscription-rights option plan and the grant of subscription rights
exercisable for an aggregate of up to 55,718 ordinary shares, before giving
effect to the constructive 3-for-1 stock split effected on September 30,
2000, at an exercise price of Y276,000 per share to Jupiter's directors,
corporate auditors and employees, to the directors, corporate auditors and
employees of our managed franchises and to directors, corporate auditors
and employees of our unconsolidated managed franchises and other
non-employees. The number of ordinary shares issuable will be adjusted for
stock splits, reverse stock splits and certain other recapitalizations.
Subscription rights for 48,266 ordinary shares were granted on September
11, 2000. The aggregate number of ordinary shares and exercise price, as
adjusted for the constructive 3-for-1 stock split effected on September 30,
2000, are 144,798 and Y92,000, respectively.
The subscription rights for non-management employees will, unless the grant
agreement provides otherwise, vest on the second anniversary of the date of
grant, and the subscription rights for management employees will, unless
the grant agreement provides otherwise, vest in four equal installments
beginning on the first anniversary of the date of grant. The subscription
rights will expire on August 23, 2010.
We have accounted for the subscription rights granted to Jupiter's
directors, corporate auditors and employees and to the directors, corporate
auditors and employees of our managed franchises under APB No. 25,
"Accounting for Stock Issued to Employees" and FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB No. 25." Based on using the estimated initial public
offering price of Y75,500 per ordinary share, there was no intrinsic value
to the subscription rights at the date of grant as each grant is fixed as
to the number of shares and the exercise price at the time of grant exceeds
the assumed initial public offering price of Y75,500 per ordinary share.
Accordingly, it is expected that no deferred compensation or charges to
operations will be recorded for the subscription rights granted to
Jupiter's directors, corporate auditors and employees and the directors,
corporate auditors and employees of our managed franchises.
Subscription rights granted to directors, corporate auditors and employees
of our unconsolidated managed franchises and to other non-employees will be
accounted for in accordance with SFAS No. 123, "Accounting for Stock-Based
Compensation," over the vesting periods described above. As of the date of
grant, the estimated fair market value of these subscription rights, based
on the estimated offering price of Y75,500 per ordinary share, was
approximately Y422,597 thousand. We recorded compensation expense related
to the directors, corporate auditors and employees of our unconsolidated
managed franchises and other non-employees of Y18,273 thousand which has
been included in selling, general and administrative expenses in the case
of non-employees and in equity in losses of affiliates for employees of
affiliated companies in the accompanying condensed consolidated statement
of operations for the period ended September 30, 2000.
Prior to our acquisition of Titus, Microsoft Holdings V, Inc., the majority
shareholder of Titus and now a principal shareholder of ours, entered into
a restricted stock agreement with an executive officer of Titus, currently
one of our executive officers. The total number of Titus' restricted
ordinary shares granted in the agreement were converted into 17,704 of our
ordinary shares. The restricted ordinary shares transferred under the
restricted stock agreement will vest, subject to his continued employment
by us as an executive officer or director, in four equal semiannual
installments, the first of which will occur on January 4, 2001. In
accordance with APB No. 25, we will recognize compensation expense of
Y1,184,300 thousand over the remaining vesting period beginning September
1, 2000. We have recorded compensation expense of Y78,131 thousand in this
regard for the nine months ended September 30, 2000.
(footnotes continued on next page)
41
<PAGE> 47
Beginning September 1, 2000, we estimate that future charges to operations
from all of the above awards will be approximately as follows:
<TABLE>
<S> <C>
September 2000 to August 2001............................... Y1,156,856 thousand
September 2001 to August 2002............................... 370,176 thousand
September 2002 to August 2003............................... 55,905 thousand
September 2003 to August 2004............................... 23,960 thousand
</TABLE>
(d) Represents the amortization of the Titus acquisition goodwill resulting
from the allocation of the excess consideration, including the fair value
of the net liabilities acquired. Goodwill will be amortized on a
straight-line basis over a period of 20 years. The allocation of the Titus
acquisition purchase price has been determined by an independent
third-party appraisal.
(e) Represents the impact on depreciation expense of the write-down to fair
value of Titus' property and equipment. The useful life of Titus' property
and equipment is estimated to be seven and one-half years. The fair value
of Titus' property and equipment has been determined by an independent
third-party appraisal.
(f) Represents the elimination of Titus' amortization of its historical
goodwill.
(g) No income tax benefit associated with the pro forma adjustment has been
recognized in the accompanying condensed statements of operations due to
the uncertainty of the realization of the tax benefit.
(h) The weighted average number of ordinary shares used to calculate pro forma
per share data is calculated based on the weighted average number of
ordinary shares of historical Jupiter outstanding and the assumption that
the 1,180,285.74 ordinary shares issued in connection with the acquisition
of Titus were issued as of January 1, 1999.
42
<PAGE> 48
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion of our consolidated group's
financial condition and results of operations together with its consolidated
financial statements and the accompanying notes included in this prospectus.
OVERVIEW
Jupiter Telecommunications Co., Ltd. was founded in January 1995 as a joint
venture between Sumitomo Corporation and Liberty Media International, Inc.,
formerly known as Tele-Communications International, Inc., to acquire, manage
and operate cable television franchises in Japan. Since 1995 we have grown to
become a leading broadband provider of integrated entertainment, information and
communication services in Japan. Through our managed franchises we have
historically offered our customers cable television and more recently have
expanded our service offerings to include telephony and high-speed Internet
access in selected managed franchises. Our services are delivered over the
broadband networks which we are expanding throughout the franchise regions that
we serve.
EFFECT OF VARIOUS ACCOUNTING METHODS ON OUR CONSOLIDATED GROUP'S RESULTS OF
OPERATIONS
The various interests that Jupiter acquires in its consolidated franchises
and the other cable franchises in which Jupiter invests are accounted for under
one of three methods of accounting: the consolidation method, the equity method
and the cost method. The applicable accounting method is determined on a
case-by-case basis and is based upon Jupiter's ownership percentage of the
outstanding voting securities of each franchise. The accounting method used to
account for Jupiter's ownership interests in any franchise could change from
quarter to quarter as a result of acquisitions or dispositions of franchise
ownership interests or third-party investments in a franchise.
Consolidation Method
Franchises which Jupiter effectively controls are accounted for under the
consolidation method of accounting. Effective control is determined based on an
ownership interest of greater than 50% of the franchises' outstanding voting
securities. Under this method, a franchise's results of operations and financial
position are reflected within the consolidated statements of operations and
consolidated balance sheets of our consolidated group. All significant
intercompany accounts and transactions are eliminated, including management
fees, construction fees, programming fees and other fees Jupiter charges to its
consolidated franchises. Participation of other franchise shareholders in the
net assets and earnings or losses of a consolidated franchise is presented as
"minority interest" on the consolidated balance sheets and consolidated
statements of operations of our consolidated group. Minority interest adjusts
the consolidated results of operations to reflect only the consolidated group's
share of the earnings or losses of consolidated franchises.
Equity Method
Franchises whose results Jupiter does not consolidate, but over which
Jupiter exercises significant influence, are accounted for under the equity
method of accounting. Whether or not Jupiter exercises significant influence
with respect to a franchise generally is determined based on an ownership
interest which is between 20% and 50% of the franchise's outstanding voting
securities. Under the equity method of accounting, Jupiter's share of the
earnings or losses of a franchise, which is generally limited to the carrying
value of Jupiter's ownership interest in the franchise, is presented as "Equity
in earnings or losses of affiliates" in the consolidated statements of
operations.
Cost Method
Jupiter's ownership interest in franchises not accounted for under either
the consolidation or equity methods of accounting are accounted for under the
cost method of accounting. Under the cost method, Jupiter's ownership interest
is included in the consolidated balance sheets at Jupiter's original acquisition
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<PAGE> 49
cost, and charges are recognized in the consolidated statements of operations
only if events or circumstances indicate that other than a temporary impairment
of the carrying value has occurred.
Accounting Practices
REVENUE. Our consolidated group generates a majority of its revenue through
monthly subscription fees charged to customers for basic, premium and other
cable television services provided by our consolidated franchises. Our
consolidated group also recognizes revenue from the management fees and
construction fees charged to our unconsolidated franchises, including amounts
for labor and construction and installation materials that Jupiter obtains for
the managed franchises and for third parties. The amount we charge the managed
franchises for our management services is based upon the number of customers
within the managed franchise. We launched telephony service in selected managed
franchise areas in 1997 and high-speed Internet access in selected managed
franchise areas in 1999. To date, our consolidated group did not generate
significant revenue from these services, but expects revenue from these services
to increase in the future.
In addition, our consolidated group recognizes other revenue from
installation and reconnection fees charged to customers to commence or reinstate
service in our consolidated franchises and for programming fees and other
services charged to our unconsolidated franchises. Our consolidated group has
generated increased revenue in each of the past five fiscal years, primarily
through acquisitions and internal growth through increases in the customer base
in our consolidated franchises as a result of innovative, controlled and focused
sales and marketing efforts. However, no assurance can be given that our
consolidated group can achieve the same customer growth in future periods.
OPERATING COSTS AND EXPENSES. Operating costs and expenses consist of
construction-related expenses, operating costs, programming distribution costs,
selling, general and administrative expenses and depreciation and amortization
expenses. Operating costs primarily include programming costs, costs
attributable to construction activity that Jupiter bills to its franchises,
cable service related expenses and expenses related to customer billings.
Jupiter obtains most of its programming on a per channel basis generally from
suppliers through carriage agreements under which Jupiter pays carriage fees to
the program suppliers based on the number of franchise customers subscribing to
the particular channel. In many cases, our per customer charges decrease as the
number of our customers subscribing for the particular channel increases. Our
consolidated group benefits from volume discounts that Jupiter negotiates with
most program channels based on the total number of customers in all its
franchises. Selling, general and administrative expenses primarily include
marketing labor costs, advertising and promotion costs, customer support,
accounting and administrative personnel and professional fees. Our consolidated
group does not capitalize any portion of its advertising and promotion expenses.
Depreciation and amortization expenses relate to the depreciation of tangible
assets and the amortization of goodwill and other assets.
STOCK COMPENSATION EXPENSE. We granted subscription rights to Jupiter's
directors, corporate auditors and employees, to the directors, corporate
auditors and employees of our managed franchises and to directors, corporate
auditors and employees of our unconsolidated managed franchises and other non-
employees on September 11, 2000. In accordance with APB No. 25, "Accounting for
Stock Issued to Employees," and FASB Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation -- an Interpretation of APB
No. 25," it is expected that there will be no expense incurred as a result of
the subscription rights granted to Jupiter's directors, corporate auditors and
employees and to the directors, corporate auditors and employees of our
consolidated managed franchises as each grant is fixed as to the number of
ordinary shares and the exercise price at the time of grant exceeds the assumed
initial public offering price of Y75,500 per ordinary share. In accordance with
SFAS No. 123, "Accounting for Stock-Based Compensation," compensation expense
will be charged in future periods to operations for the subscription rights
granted to the directors, corporate auditors and employees of our unconsolidated
managed franchises and to other non-employees based on the difference between
the computed fair market value at each reporting date and the grant price of
Y92,000 per ordinary share. The vesting period for these subscription rights is
from one to four years and will be recorded in an accelerated manner consistent
with Financial Accounting Standards Board Interpretation No. 28.
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<PAGE> 50
Prior to our acquisition of Titus, Microsoft Holdings V, Inc., the majority
shareholder of Titus and now a principal shareholder of ours, entered into a
restricted stock agreement with an executive officer of Titus, currently one of
our executive officers. The total number of Titus' restricted shares granted in
the agreement were converted into 17,704.17 of our ordinary shares. The
restricted shares transferred under the restricted stock agreement will vest,
subject to his continued employment by us as an executive officer or director,
in four equal semiannual installments, the first of which will occur on January
4, 2001. Should the executive officer fulfill his obligations under the
agreement, we will recognize future compensation expense of Y1,184,300 thousand
($10,761 thousand) over the vesting period.
We estimate that future charges to operations from all of the above awards
will be approximately as follows:
<TABLE>
<S> <C>
September 2000 through August 2001.......................... Y1,156,856 thousand
September 2001 through August 2002.......................... 370,176 thousand
September 2002 through August 2003.......................... 55,905 thousand
September 2003 through August 2004.......................... 23,960 thousand
</TABLE>
OPERATING RESULTS. Our consolidated group has a history of net losses and
negative cash flows from operations and presently expects to continue to report
net losses and operate with negative cash flows from operations for the
foreseeable future. The principal reasons for the prior net losses include
increases in direct costs, such as programming costs as the number of customers
of our consolidated franchises increases, expenses related to construction
activity as our broadband networks are expanded, sales and marketing and general
administrative expenses attributable to increases in market penetration and an
expanded customer base, depreciation and amortization resulting from increased
levels of capital investment and increases in interest expense attributable to
increased borrowings to partially fund network expansion. Our consolidated group
anticipates these factors will continue to result in net losses as new services
are introduced and new customers are acquired.
In addition, our consolidated group incurs negative cash flows as a result
of additional uses of working capital, including those attributable to capital
expenditures related to construction and upgrading of our broadband networks and
the installation of new customers, the acquisition of equity in additional
franchises and additional investments to increase Jupiter's equity interest in
existing franchises. Although our consolidated group generates monthly fees from
customers, it incurs one-time marketing expenses with the addition of each new
customer. These expenses are recouped over time from the monthly subscription
fees charged to customers. However, as the number of new customers in a given
period of time increases, our consolidated group may incur large operating
expenses and capital expenditures for such periods. In addition, as the size of
our business expands, personnel expense and other overhead costs and expenses
will increase. We cannot predict what impact, if any, continued losses will have
on our consolidated group's ability to finance operations in the future.
DISCUSSION OF BUSINESS SEGMENTS. We manage each of our consolidated and
unconsolidated managed franchises as separate operating units. Monthly
information is prepared and reviewed by our senior management to assist in
improving the operational performance of our consolidated and unconsolidated
managed franchises and, as a result, under SFAS 131, "Disclosures about Segments
of an Enterprise and Related Information," each consolidated and unconsolidated
managed franchise is considered to be a separate business segment.
While each of our consolidated and unconsolidated managed franchises is
different in terms of its size, location and length of time in operation, the
economic and operational factors which influence their overall profitability are
generally consistent. Each of our consolidated and unconsolidated managed
franchises operates its business in accordance with a management agreement. In
addition, each of our consolidated and unconsolidated managed franchises
markets, or plans to market, its services under the J-COM brand.
The nature of services provided to our customers by our consolidated and
unconsolidated managed franchises, the pricing of these services and the way in
which these services are sold are generally consistent. Many of the variable
operating costs, such as programming expenses, billing costs and
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<PAGE> 51
management fees, are negotiated directly by Jupiter and charged to each
consolidated and unconsolidated managed franchise on a consistent basis. Because
the variable marketing costs of acquiring each new customer are significant and
intended to be recovered over time, the rate at which new customers are added,
as compared to the number of existing customers who generate monthly
subscription fees, can significantly impact the profitability of our
consolidated and unconsolidated managed franchises. In addition to these
variable costs, there are fixed overhead costs within each consolidated and
unconsolidated managed franchise, such as building rent and utilities, which do
not directly vary based on customer volumes. When our consolidated and
unconsolidated managed franchises first launch service, these fixed overhead
costs can result in significant operating losses, which should decrease over
time as customers are added and revenues increase. In addition, there are costs,
such as those associated with network pole rental, service power, maintenance
and repair, which depend to a large extent on the age and size of the respective
franchise's existing broadband network. Other than variances in the size and age
of the broadband networks, the size of existing customer bases, the average rate
of new customer acquisitions and fixed overhead costs, we do not believe that
there are any significant differentiating factors which affect the results of
our consolidated and unconsolidated managed franchises.
The operating income or loss presented in monthly management accounts
prepared by Jupiter and its consolidated and unconsolidated managed franchises
do not conform to U.S. GAAP. Significant differences include:
- treatment of revenues related to compensation-in-aid-of-construction and
maintenance, which are generally excluded from revenue in the management
accounts, but which are generally recognized over 20 years under U.S.
GAAP;
- depreciation and amortization expenses are not included in the results;
- certain period-end accruals are simplified for reporting purposes;
- payments made under capital leases are reflected in operating costs
rather than as interest and related depreciation expense;
- management accounts are prepared and reviewed for our consolidated and
unconsolidated managed franchises, which were budgeted for the year,
regardless of the ownership ratio, and no distinction is made between
those consolidated and unconsolidated managed franchises which are
consolidated under U.S. GAAP and those which are treated as affiliates;
and
- intercompany transactions, such as construction and other costs charged
by Jupiter to its consolidated and unconsolidated managed franchises are
not eliminated.
INDUSTRY TRENDS AND OTHER FACTORS INFLUENCING FUTURE RESULTS OF OPERATIONS
Our consolidated group's results from operations, and the results from
operations of our non-consolidated managed franchises which we account for under
the equity method of accounting, may be impacted in the next few years by:
- industry-wide increases in capital expenditures which we expect to occur
as cable television providers attempt to meet the Japanese government's
announced goal for nation-wide digital television services; and
- industry consolidation expected to result from the acquisition of cable
television providers that are unable to make the capital investment
necessary to offer digital services.
If these trends are realized, significant demands will be placed on our
cash flow to meet the competing demands of financing network upgrades and
expansion and potential acquisitions. To the extent that we raise additional
capital through indebtedness, we would incur additional interest expense which
would decrease our net cash flow and net income. Network expansion and upgrade
will also likely result in increased overhead and maintenance costs that would
also decrease our net cash flow and net income. While we believe that such
expenditures will in time result in off-setting increases in revenue, we cannot
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<PAGE> 52
assure you that these increases, if any, will be realized. Each of these
industry trends similarly would affect the results of operations of our
affiliates as they also operate in this industry as cable television providers.
In addition, our consolidated group's results of operations for the next
twelve months will be influenced by a number of factors, some of which are
subject to substantial uncertainty.
REVENUE. Our consolidated group's future revenue depends upon, among other
things:
- our ability to increase the number of our customers;
- the rate at which customers accept our telephony and high-speed Internet
access services;
- the rate at which we increase our investment in our existing managed
franchises; and
- whether we acquire new franchises.
We cannot predict whether we will be able to retain our existing customers
or successfully attract new customers to subscribe for our services. We also
cannot predict whether new or existing customers will subscribe for our
telephony and high-speed Internet access services. Our ability to increase our
investment in our existing managed franchises depends upon our ability to
purchase shares from existing shareholders when such shares become available for
sale, if at all. Our ability to acquire new franchises is limited to the
availability of such franchises and our ability to acquire the franchises on
reasonable terms.
OPERATING COSTS AND EXPENSES. Our consolidated group's future operating
costs and expenses depend upon, among other things:
- whether cable television programming costs will increase;
- the costs and expenses related to increased sales efforts and cable
installations for new customers; and
- the impact of Japanese national, regional and municipal income taxes and
the utilization of net operating loss carryforwards which will expire
between 2000 and 2004. See the discussion of income taxes included in
Note 9 to the consolidated financial statements of our consolidated group
contained elsewhere in this prospectus.
We cannot predict whether cable television programming costs will increase
in future periods. However, because our programming costs are generally based on
our number of customers, our programming costs will increase as the number of
our customers increases. We expect sales and marketing expenses to increase as
we implement our strategy to increase customer penetration in our franchise
areas. In addition, cable installation and administrative costs associated with
new customers typically exceed the revenue recognized from new customers during
the initial year of service. Accordingly, to the extent we successfully attract
new customers, the resulting increase in these expenses will decrease operating
income.
In connection with the upgrade of our broadband networks, we adjusted the
remaining useful lives of electronic equipment in our distribution system that
will be replaced during the system upgrades. The effect of this change has
resulted in increases in depreciation expense for the nine months ended
September 30, 2000, and will result in additional increases in depreciation
expense for the years ended December 31, 2000 and December 31, 2001.
Our operating costs and expenses also are impacted by telephony
interconnection fees, although these fees represent less than 2% of our
operating costs and expenses. If the Long Running Incremental Cost method is
adopted, we expect our telephony interconnection rates to decrease compared to
the rates currently in effect. As a first step, in July 2000, Japan and the
United States jointly announced an agreement under which the Japanese government
would adopt regulations effectively requiring NTT to reduce its regional access
rates by 50% and its local access rates by 20% over a two-year period.
OTHER INCOME. Our consolidated group's other income is comprised largely of
installation fees charged for cable installation and reconnections and
programming fees charged to our unconsolidated subsidiaries. Because each of
these is a product of the growth in the number of our customers, we cannot
predict
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<PAGE> 53
whether our consolidated group's other income in future periods will be
comparable to our historical operating results.
NET INCOME. Our net income is impacted by the earnings or losses of
franchises which we account for under the equity method of accounting. Although
we provide management services to these franchises, we do not exercise control
over all of their business decisions. Accordingly, we cannot predict whether the
net earnings or losses that we report for these entities will be comparable from
period to period.
UNCONSOLIDATED MANAGED FRANCHISES. We manage our unconsolidated managed
franchises and report our portion of their net results from operations under the
equity method of accounting. In our capacity as manager of these franchises, we
believe that their results of operations will be impacted by similar factors and
in the same manner as the results of operations of our consolidated group
discussed above. However, because we do not exercise management control over the
entire operations of these entities, we are unable to anticipate the impact of
nonoperating activities and events on the franchises.
TITUS ACQUISITION. As a result of our acquisition of Titus, we expect our
consolidated group's operating expenses, as is the case with any other
acquisition, to increase as we integrate Titus' operating and administrative
functions into ours. We also expect to make capital expenditures to upgrade and
expand the acquired operations, which will add to the negative cash flow that we
already expect to generate.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September
30, 1999
OVERVIEW. Our consolidated group's results of operations for the nine
months ended September 30, 2000 include the results of operations of the
Tsuchiura franchise, which was treated using the consolidation method of
accounting during the period, but which was treated using the equity method of
accounting for the nine months ended September 30, 1999. The change to the
consolidation method of accounting resulted from Jupiter's increase in its
equity investment in the Tsuchiura franchise in December 1999. Our consolidated
group's results of operations also include our share of the results of
operations of the Ashiya franchise, which is now part of the Kobe Ashiya
franchise, in which Jupiter made its initial equity investment in July 1999 and
which was treated using the equity method of accounting for the nine months
ended September 30, 2000.
Our consolidated group's results of operations for the nine months ended
September 30, 2000 also include the consolidated results of the J-COM Titus
franchise, the J-COM Sapporo franchise and the J-COM Sotetsu franchise from the
date of their acquisition on September 1, 2000.
Our consolidated group's results of operations for the nine months ended
September 30, 2000 also include the results of the Fuchu franchise, which is now
part of the J-COM Tokyo franchise, the CV21 (Fukuoka) franchise and the Osaka
franchise, each of which was treated under the consolidation method of
accounting during the period, but which was treated using the equity method of
accounting during part of the nine months ended September 30, 1999. The change
to the consolidation method of accounting resulted from Jupiter's increased
equity investment in the Fuchu and CV21 (Fukuoka) franchises in March 1999 and
the Osaka franchise in September 1999.
As of September 30, 2000, there were a total of approximately 510,200 cable
television customers, 58,900 telephony customers and 84,600 high-speed Internet
access customers in our consolidated franchises, compared to approximately
255,400 cable television customers, 9,600 telephony customers and 5,000
high-speed Internet access customers as of September 30, 1999. This represents
an aggregate increase of approximately 383,700 customers, or 142%. Of this
amount, approximately 20,400 customers, or 5%, are attributable to the
consolidation of the Tsuchiura franchise, which was not included in our
consolidated group for the nine months ended September 30, 1999. A further
157,100 customers, or 41%, are attributable to the consolidation of the J-COM
Titus, J-COM Sapporo and J-COM Sotetsu franchises, which were not included in
our consolidated group for the nine months ended September 30, 1999. The
remaining portion of the increase, 206,200 customers, or 54%, is attributable to
an increase in the number of the cable television, telephony and high-speed
Internet access customers in the other consolidated
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<PAGE> 54
franchises. The increase of approximately 254,800 cable television customers
represents an increase of 100% over the amount as of September 30, 1999. Of this
increase, approximately 19,700 cable television customers, or 8%, were
attributable to the consolidation of the Tsuchiura franchise, which was not
included in our consolidated group for the nine months ended September 30, 1999.
A further 93,700 cable television customers, or 37%, are attributable to the
consolidation of the J-COM Titus, J-COM Sapporo and J-COM Sotetsu franchises,
which were not included in our consolidated group for the nine months ended
September 30, 1999. The remaining portion of the increase in the number of cable
television customers, 141,400 customers, or 55%, was attributable to customer
growth in our other consolidated franchises.
As of September 30, 2000, there were a total of approximately 229,100 cable
television customers and 14,200 high-speed Internet access customers in our
unconsolidated managed franchises, compared to approximately 102,100 cable
television customers and 800 high-speed Internet access customers as of
September 30, 1999. There were no telephony customers in our unconsolidated
managed franchises as of either date. This represents an aggregate increase of
approximately 140,400 customers, or 136%.
For the nine months ended September 30, 2000, our consolidated group had
approximately 240,400 new customer installations of cable television, telephony
and high-speed Internet access, compared to approximately 100,800 installations
for the nine months ended September 30, 1999, an increase of approximately
139,600, or 138%. Of this increase, approximately 6,500 installations were
attributable to the Tsuchiura franchise which was not included in our
consolidated group for the nine months ended September 30, 1999, and
approximately 9,200 were attributable to the J-COM Titus, J-COM Sapporo and
J-COM Sotetsu franchises, which were included in our consolidated group from the
date of their acquisition on September 1, 2000.
The following table sets forth the percentages of revenue that individual
items in our consolidated group's statements of operations constitute for the
periods presented:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------------------------------------------
1999 2000
------------------------------------ ------------------------------------
AS A % OF AS A % OF
(MILLIONS) (THOUSANDS) REVENUE (MILLIONS) (THOUSANDS) REVENUE
---------- ----------- --------- ---------- ----------- ---------
(UNAUDITED)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Subscription fees................ Y 7,984 $ 72,551 61.6% Y 16,695 $ 151,703 72.5%
Construction-related sales....... 1,846 16,777 14.3 1,325 12,041 5.7
Programming fees................. 679 6,166 5.2 1,187 10,784 5.2
Other............................ 2,444 22,203 18.9 3,832 34,816 16.6
------- -------- ----- -------- --------- -----
12,953 117,697 100.0 23,039 209,344 100.0
------- -------- ----- -------- --------- -----
Operating costs and expenses:
Construction-related expenses.... 1,682 15,281 13.0 1,181 10,729 5.1
Programming costs................ 2,346 21,319 18.1 5,059 45,965 22.0
Other operating costs............ 3,630 32,984 28.0 4,991 45,356 21.7
Selling, general and
administrative................ 7,841 71,247 60.5 13,397 121,739 58.1
Depreciation and amortization.... 3,687 33,503 28.5 8,676 78,836 37.7
------- -------- ----- -------- --------- -----
19,186 174,334 148.1 33,304 302,625 144.6
------- -------- ----- -------- --------- -----
Operating loss..................... (6,233) (56,637) (48.1) (10,265) (93,281) (44.6)
Other income (expense):
Interest expense, net............ (492) (4,475) (3.8) (915) (8,313) (4.0)
Equity in losses of affiliates... (1,936) (17,595) (14.9) (2,497) (22,690) (10.8)
Other income (expense), net...... 146 1,330 1.1 (31) (279) (0.1)
------- -------- ----- -------- --------- -----
(2,282) (20,740) (17.6) (3,443) (31,282) (14.9)
------- -------- ----- -------- --------- -----
Loss before income taxes and
extraordinary gain............... (8,515) (77,377) (65.7) (13,708) (124,563) (59.5)
Income tax benefit................. -- 332 3,019 1.4
------- -------- -------- ---------
Loss before extraordinary gain..... (8,515) (77,377) (65.7) (13,376) (121,544) (58.1)
Extraordinary gain................. -- -- -- 459 4,169 2.0
------- -------- -------- ---------
Net loss........................... Y(8,515) $(77,377) (65.7) Y(12,917) $(117,375) (56.1)
======= ======== ======== =========
</TABLE>
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REVENUE. Total revenue increased by Y10,086 million, or 78%, from Y12,953
million for the nine months ended September 30, 1999 to Y23,039 million for the
nine months ended September 30, 2000.
Subscription fees increased by Y8,711 million, or 109%, from Y7,984 million
for the nine months ended September 30, 1999 to Y16,695 million for the nine
months ended September 30, 2000. This increase was primarily a result of cable
television, telephony and high-speed Internet customer growth in our
consolidated franchises, including amounts attributable to the addition to our
consolidated group of the Tsuchiura franchise and of the J-COM Titus, J-COM
Sapporo and J-COM Sotetsu franchises from September 1, 2000, the date of their
acquisition. The average monthly subscription rates in effect for our
consolidated franchises for the nine months ended September 30, 2000 were
largely unchanged compared to the average rates in effect for the nine months
ended September 30, 1999.
Construction revenue decreased by Y521 million, or 28%, from Y1,846 million
for the nine months ended September 30, 1999 to Y1,325 million for the nine
months ended September 30, 2000. This decrease was primarily the result of
revenue attributable to construction and installation activity at the Tsuchiura
franchise which was included for the nine months ended September 30, 1999 but
eliminated in consolidation for the nine months ended September 30, 2000.
Programming fees increased by Y508 million, or 75%, from Y679 million for
the nine months ended September 30, 1999 to Y1,187 million for the nine months
ended September 30, 2000. This increase was primarily attributable to an
increase in the number of cable television customers in our unconsolidated
managed franchises during the year. Additionally, programming fees for the nine
months ended September 30, 1999 included amounts attributable to the Tsuchiura
franchise which were eliminated in consolidation for the nine months ended
September 30, 2000.
Other revenue increased by Y1,388 million, or 57%, from Y2,444 million for
the nine months ended September 30, 1999 to Y3,832 million for the nine months
ended September 30, 2000. This increase was primarily attributable to a Y406
million, or 52%, increase in installation charges from Y777 million for the nine
months ended September 30, 1999 to Y1,183 million for the nine months ended
September 30, 2000. This increase related to an approximately 138% increase in
the volume of cable television, telephony and high-speed Internet access
installations in our consolidated group from 100,800 for the nine months ended
September 30, 1999 to 240,400 for the nine months ended September 30, 2000. The
decrease in the average revenue per installation, from approximately Y7,700 for
the nine months ended September 30, 1999 to approximately Y4,900 for the nine
months ended September 30, 2000, was the result of the increased proportion of
telephony and high-speed Internet access installations during the period, the
charges for which are deferred and recognized over the expected duration of the
subscription period. The increase was also attributable to a Y284 million, or
51%, increase in revenue from third parties, from Y554 million for the nine
months ended September 30, 1999 to Y838 million for the nine months ended
September 30, 2000 in connection with the extension of our broadband networks to
customers that are obstructed from terrestrial broadcast signals. The increase
was also attributable to a Y195 million, or 165%, increase in management fees
charged to our unconsolidated managed affiliate franchises, from Y118 million
for the nine months ended September 30, 1999 to Y313 million for the nine months
ended September 30, 2000 as a result of the increased number of subscribers
within our unconsolidated managed affiliated franchises.
CONSTRUCTION-RELATED EXPENSES. Construction-related expenses decreased by
Y501 million, or 30%, from Y1,682 million for the nine months ended September
30, 1999 to Y1,181 million for the nine months ended September 30, 2000. This
decrease corresponds to the decrease in construction-related sales between the
two periods.
PROGRAMMING COSTS. Programming costs increased by Y2,713 million, or 116%,
from Y2,346 million for the nine months ended September 30, 1999 to Y5,059
million for the nine months ended September 30, 2000. This increase was
primarily a result of cable television customer growth in our consolidated
franchises throughout the year, including the increase attributable to the
addition to our consolidated group of the Tsuchiura franchise and the addition
to our consolidated group of the J-COM Titus, J-COM
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<PAGE> 56
Sapporo and J-COM Sotetsu franchises from September 1, 2000, the date of their
acquisition, together with additional programming costs associated with
improvements to our basic channel line-up.
OTHER OPERATING COSTS. Other operating costs increased by Y1,361 million,
or 37%, from Y3,630 million for the nine months ended September 30, 1999 to
Y4,991 million for the nine months ended September 30, 2000. This increase was
primarily attributable to increases in the number of technical support,
maintenance and service personnel needed to support the increase in the number
of customers, increases in utility expenses related to the expansion of the
broadband networks and the increase attributable to the addition to our
consolidated group of the Tsuchiura franchise and the addition to our
consolidated group of the J-COM Titus, J-COM Sapporo and J-COM Sotetsu
franchises from September 1, 2000, the date of their acquisition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by Y5,556 million, or 71%, from Y7,841 million
for the nine months ended September 30, 1999 to Y13,397 million for the nine
months ended September 30, 2000. The increase was primarily attributable to
increased marketing costs and salaries, together with other general overhead
expenses, attributable to the increased size of our consolidated group's
employed and contract sales force and the increase in administrative staffing
levels needed to manage the number of customers added during the period. The
increase was also attributable, in part, to the selling, general and
administrative expenses of the Tsuchiura franchise resulting from its
consolidation with our consolidated group and the addition to our consolidated
group of the J-COM Titus, J-COM Sapporo and J-COM Sotetsu franchises from
September 1, 2000, the date of their acquisition.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased by Y4,989 million, or 135%, from Y3,687 million for the nine
months ended September 30, 1999 to Y8,676 million for the nine months ended
September 30, 2000. This increase was partially attributable to part-period
depreciation and amortization of the fixed and intangible assets acquired during
the nine months ended September 30, 2000, and full-period depreciation and
amortization of fixed and intangible assets acquired in 1999. The increase was
also attributable to the addition of the fixed and intangible assets and the
related depreciation and amortization of the Tsuchiura franchise, resulting from
its consolidation with our consolidated group and amortization of goodwill which
resulted from our acquisition of Titus on September 1, 2000 and a change in the
remaining useful lives of electronic components of our distribution system that
will be replaced in connection with the upgrade of our broadband networks.
INTEREST EXPENSE. Interest expense increased by Y423 million, or 86%, from
Y492 million for the nine months ended September 30, 1999 to Y915 million for
the nine months ended September 30, 2000. This increase was primarily a result
of increases in the level of short- and long-term borrowings and capital leases.
EQUITY IN LOSSES OF AFFILIATES. Equity in losses of affiliates increased by
Y561 million, or 29%, from Y1,936 million for the nine months ended September
30, 1999 to Y2,497 million for the nine months ended September 30, 2000,
reflecting our consolidated group's portion of the losses of our unconsolidated
franchises for the period. This increase was primarily attributable to our 35.7%
investment in @Home Japan Co., Limited, in which our share of losses increased
by Y882 million for the nine months ended September 30, 2000, and our 40.1%
investment in the Media Saitama franchise, in which our share of losses
increased by Y221 million for the nine months ended September 30, 2000. We made
our initial equity investment in @Home Japan Co. in September 1999. These
increases in losses were offset by decreases in losses in the Tsuchiura and
Osaka franchises, in which aggregate losses decreased by Y374 million, resulting
from their consolidation with our consolidated group. The remaining Y168 million
decrease in our share of affiliate losses was primarily attributable to better
operating results of the other affiliates due to additional revenue as a result
of increased customers, offset by increased costs associated with the
acquisition of new customers.
OTHER INCOME/EXPENSE. Other expense (net) increased by Y177 million from
Y146 million for other income (net) for the nine months ended September 30, 1999
to Y31 million for other expense (net) for the nine months ended September 30,
2000.
51
<PAGE> 57
LOSS BEFORE INCOME TAXES AND EXTRAORDINARY GAIN. Loss before income taxes
and extraordinary gain increased by Y5,193 million, or 61%, from Y8,515 million
for the nine months ended September 30, 1999 to Y13,708 million for the nine
months ended September 30, 2000 for the reasons set forth above.
INCOME TAX BENEFIT. The income tax benefit of Y332 million shown for the
nine months ended September 30, 2000 is the tax benefit arising from the
purchase of debt of a subsidiary at a discount. In September 2000, we purchased
debt of a subsidiary in the amount of Y1,130 million at a 70% discount from the
holder who was bankrupt and in the process of liquidation. As a result of this
transaction, we realized a gain of Y791 million, which has been recorded net of
a tax benefit of Y332 million, resulting in a Y459 million extraordinary gain.
LOSS BEFORE EXTRAORDINARY GAIN. Loss before extraordinary gain increased by
Y4,861 million, or 57%, from Y8,515 million for the nine months ended September
30, 1999 to Y13,376 million for the nine months ended September 30, 2000 for the
reasons set forth above.
EXTRAORDINARY GAIN. The extraordinary gain of Y459 million shown for the
nine months ended September 30, 2000 is the net of tax benefit arising from the
purchase of debt of a subsidiary at a discount. In September 2000, we purchased
debt of a subsidiary in the amount of Y1,130 million at a 70% discount from the
holder who was bankrupt and in the process of liquidation. As a result of this
transaction, we realized a total gain of Y791 million, which has been recorded
net of a tax benefit of Y332 million resulting in a Y459 million extraordinary
gain.
NET LOSS. Net loss increased by Y4,402 million, or 52%, from Y8,515 million
for the nine months ended September 30, 1999 to Y12,917 million for the nine
months ended September 30, 2000 for the reasons set forth above.
52
<PAGE> 58
DISCUSSION OF BUSINESS SEGMENTS. The following table sets forth the
revenue and operating income (loss) for the most significant of our operating
segments for the nine months ended September 30, 1999 and 2000. Due to the
differences in the basis of preparation of management reports and U.S. GAAP
financial statements, the information included in the following table and
discussed below should not be viewed as an alternative to U.S. GAAP measures of
financial results.
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------
INCREASE
1999 2000 (DECREASE)
------- ------- ----------
(MILLIONS)
<S> <C> <C> <C>
Revenue:
Jupiter........................................... Y11,565 Y27,217 Y15,652
J-COM Tokyo....................................... 4,300 7,310 3,010
J-COM Kansai...................................... 862 3,197 2,335
Osaka(1).......................................... -- 1,970 1,970
Urawa............................................. 1,239 1,848 609
Yokosuka(1)....................................... -- 1,691 1,691
Kobe Ashiya(1).................................... -- 1,386 1,386
CV21 (Fukuoka).................................... 901 1,132 231
J-COM Kitakyushu.................................. 667 1,069 402
All other system operators(2)..................... 2,526 7,149 4,623
------- ------- -------
Y22,060 Y53,969 Y31,909
======= ======= =======
Operating Income (Loss):
Jupiter........................................... Y (538) Y 409 Y 947
J-COM Tokyo....................................... (281) (867) (586)
J-COM Kansai...................................... (1,309) (1,263) 46
Osaka(1).......................................... -- (142) (142)
Urawa............................................. 185 303 118
Yokosuka(1)....................................... -- 428 428
Kobe Ashiya(1).................................... -- (270) (270)
CV21 (Fukuoka).................................... (97) (129) (32)
J-COM Kitakyushu.................................. (122) (206) (84)
All other system operators(2)..................... (967) (2,020) (1,053)
------- ------- -------
Y(3,129) Y(3,757) Y (628)
======= ======= =======
</TABLE>
---------------
(1) The financial results of the Osaka, Yokosuka and Kobe Ashiya franchises were
not included in our managed group reports for the period ended September 30,
1999 and therefore no segment data for these franchises is shown for the
period.
(2) All other system operators for each of the periods presented include all
consolidated and unconsolidated managed franchises that Jupiter manages for
the entire applicable period, other than the J-COM Tokyo, J-COM Kansai,
Osaka, Urawa, Yokosuka, Kobe Ashiya, CV21 (Fukuoka) and J-COM Kitakyushu
franchises. Franchises that become managed during the period may not be
reflected in the management report until the beginning of the following
period.
Jupiter's total revenue increased by Y15,652 million, or 135%, from Y11,565
million for the nine months ended September 30, 1999 to Y27,217 million for the
nine months ended September 30, 2000. This increase was primarily attributable
to increased sales of construction materials as a result of additional
installation and construction activity, particularly associated with the
continued build-out of the Hokusetsu, J-COM Kansai and Fukuoka franchises, and
the activity to upgrade networks in some of our franchises to 750 megahertz
hybrid fiber optic-coaxial standard. This increase was also a result of the
increase in the number of customers in our managed franchises, including those
attributable to the Sakai, Kobe Ashiya, Media Saitama, J-COM Titus, J-COM
Sapporo and J-COM Sotetsu franchises, which Jupiter began
53
<PAGE> 59
managing during the nine months ended September 30, 2000, and to the related
increase in management fees, seconded employees' salaries, programming costs and
billing expenses recharged to those managed franchises. Jupiter's operating
income of Y409 million for the nine months ended September 30, 2000 compared to
an operating loss of Y538 million for the nine months ended September 30, 1999
as a result of the contribution of the additional revenue outlined above.
Operating costs primarily increased as a result of the third-party costs
associated with the acquisition of Titus and the global offering, including
those fees charged by our accountants, lawyers and bankers. Most of these costs
have been capitalized in our consolidated financial statements in accordance
with U.S. GAAP. Other operating costs were generally consistent between the nine
months ended September 30, 1999 and 2000.
Total revenue for the J-COM Tokyo franchise increased by Y3,010 million, or
70%, from Y4,300 million for the nine months ended September 30, 1999 to Y7,310
million for the nine months ended September 30, 2000. This increase was
primarily attributable to increases in the number of its cable television
customers and new customer installations. In addition, telephony and high-speed
Internet revenues, which were excluded from the segment reports during the nine
months ended September 30, 1999, are included in the segment reports for the
nine months ended September 30, 2000 in the amounts of Y1,106 million
attributable to telephony services and Y555 million attributable to high-speed
Internet services. Operating losses increased by Y586 million, or 209%, from
Y281 million for the nine months ended September 30, 1999 to Y867 million for
the nine months ended September 30, 2000 primarily as a result of the
contribution of the additional revenue, offset by an increase in management fees
and other customer related costs, and by a significant increase in marketing
costs associated with the increased rate of acquisition of new customers.
Total revenue for the J-COM Kansai franchise increased by Y2,335 million,
or 271%, from Y862 million for the nine months ended September 30, 1999 to
Y3,197 million for the nine months ended September 30, 2000. This increase was
primarily attributable to increases in the number of its cable television and
high-speed Internet customers and new customer installations. Operating losses
decreased by Y46 million, or 4%, from Y1,309 million for the nine months ended
September 30, 1999 to Y1,263 million for the nine months ended September 30,
2000 as a result of the contribution of additional revenue offset by an increase
in management fees and other customer related costs and by an increase in
marketing costs associated with the acquisition of new customers.
Total revenue for the Urawa franchise increased by Y609 million, or 49%,
from Y1,239 million for the nine months ended September 30, 1999 to Y1,848
million for the nine months ended September 30, 2000. This increase was
primarily attributable to increases in the number of its cable television
customers and new customer installations. Operating income increased by Y118
million, or 64%, from Y185 million for the nine months ended September 30, 1999
to Y303 million for the nine months ended September 30, 2000, primarily as a
result of the contribution of additional revenue offset by an increase in the
cost of management fees and other customer related costs and by an increase in
marketing costs associated with the acquisition of new customers.
Total revenue for the CV21 (Fukuoka) franchise increased by Y231 million,
or 26% from Y901 million for the nine months ended September 30, 1999 to Y1,132
million for the nine months ended September 30, 2000. This increase was
primarily attributable to increases in the number of its cable television
customers and new customer installations in the CV21 (Fukuoka) franchise.
Operating losses increased by Y32 million, or 33%, from Y97 million for the nine
months ended September 30, 1999 to Y129 million for the nine months ended
September 30, 2000 primarily as a result of the contribution of additional
revenue offset by an increase in management fees and other customer related
costs and by an increase in marketing costs associated with the acquisition of
new customers.
Total revenue for the J-COM Kitakyushu franchise increased by Y402 million,
or 60%, from Y667 million for the nine months ended September 30, 1999 to Y1,069
million for the nine months ended September 30, 2000. This increase was
primarily attributable to increases in the number of its cable television
customers and new customer installations, including increases in the number of
cable television customers and new customer installations in the Yahata
franchise, which is now part of the J-COM
54
<PAGE> 60
Kitakyushu franchise. Operating losses increased by Y84 million, or 69%, from
Y122 million for the nine months ended September 30, 1999 to Y206 million for
the nine months ended September 30, 2000 primarily as a result of the
contribution of additional revenue offset by an increase in management fees and
other customer related costs and by an increase in marketing costs associated
with the acquisition of new customers.
Revenues and operating losses are shown for the nine months ended September
30, 2000 for the Osaka, Yokosuka and Kobe Ashiya franchises. These franchises
were not budgeted within our group of managed franchises for the year ended
December 31, 1999 and as a result their results were not included within our
managed franchises and are not available. Because of this, no segment
information is presented for these franchises for the nine months ended
September 30, 1999.
Total revenue for all other system operators included in our management
reports increased by Y4,623 million, or 183%, from Y2,526 million for the nine
months ended September 30, 1999 to Y7,149 million for the nine months ended
September 30, 2000. This increase was primarily attributable to overall
increases in the number of cable television customers served by these system
operators and to the inclusion of our Sakai and Media Saitama franchises,
neither of which were included in our management report for the nine months
ended September 30, 1999. Operating losses for all other system operators
included in the management reports increased by Y1,053 million, or 109%, from
Y967 million for the nine months ended September 30, 1999 to Y2,020 million for
the nine months ended September 30, 2000 primarily as a result of the
contribution of additional revenue offset by an increase in management fees and
customer related costs and by the significant one-time costs associated with the
acquisition of new customers. The increase in operating losses is also
attributable to the inclusion of the Sakai and Media Saitama franchises, neither
of which were included in our management reports for the nine months ended
September 30, 1999.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
OVERVIEW. Our consolidated group's results of operations for the year ended
December 31, 1999 include the results of operations of the Fuchu, CV21
(Fukuoka), Osaka and Tsuchiura franchises, which were treated under the
consolidation method of accounting during the period, but which were treated
using the equity method of accounting for the year ended December 31, 1998. The
change to the consolidation method of accounting resulted from Jupiter's
increased equity investment in the Fuchu and CV21 (Fukuoka) franchises in March
1999, the Osaka franchise in September 1999 and the Tsuchiura franchise in
December 1999.
In addition, during the year ended December 31, 1999, Jupiter made initial
equity investments in each of the Ashiya, which is now part of the Kobe Ashiya
franchise, Media Saitama, Kobe West, Amagaski, which is now part of the Hanshin
franchise, and Fujisawa franchises. Our consolidated group's results of
operations reflect our share of the results of operations for each of these
franchises from the date of Jupiter's initial investment using the equity method
of accounting. Jupiter made its initial investment in the Ashiya franchise,
which is now part of the Kobe Ashiya franchise, in July 1999, the Media Saitama
franchise in March 1999, the Kobe West franchise in March 1999, the Amagaski
franchise, which is now part of the Hanshin franchise, in March 1999 and the
Fujisawa franchise in January 1999.
During the year ended December 31, 1998, Jupiter made its initial
investment in the Sakai franchise. Our consolidated group's results of
operations reflect the results of operations for the Sakai franchise from the
date of Jupiter's initial investment. Jupiter made the initial investment in the
Sakai franchise in August 1998 and the franchise was accounted for using the
equity method of accounting. Jupiter also increased its investment in the Kobe
East franchise, which is now part of the Kobe Ashiya franchise, in September
1998, subsequent to which it was accounted for using the equity method of
accounting.
As of December 31, 1999, there were a total of approximately 304,800 cable
television customers and 14,300 telephony customers in the consolidated
franchises, compared to approximately 131,600 cable television customers and
6,000 telephony customers as of December 31, 1998. This represents an aggregate
increase of approximately 181,500 customers, or 132%. Of this amount,
approximately 95,100 customers,
55
<PAGE> 61
or 52%, are attributable to the consolidation of the Fuchu, CV21 (Fukuoka),
Osaka and Tsuchiura franchises which were not included in our consolidated group
for the year ended December 31, 1998. The remaining portion of the increase,
86,400 customers, or 48%, is attributable to an increase in the number of the
cable television and telephony customers in the other consolidated franchises.
The increase of approximately 173,200 cable television customers represents an
increase of 132% over the amount at December 31, 1998. Of this increase,
approximately 93,000 cable television customers, or 54%, were attributable to
the consolidation of the Fuchu, CV21 (Fukuoka), Osaka and Tsuchiura franchises,
which were not included in our consolidated group for the year ended December
31, 1998. The remaining portion of the increase, 80,200 customers, or 46%, was
attributable to customer growth in the other consolidated franchises. In
addition, high-speed Internet access was introduced during 1999 and our
consolidated franchises had approximately 10,500 high-speed Internet access
customers as of December 31, 1999.
For the year ended December 31, 1999, our consolidated franchises had
approximately 156,100 new customer installations of cable television, telephony
and high-speed Internet access services, compared to approximately 77,400
installations for the year ended December 31, 1998, an increase of approximately
78,700, or 102%. Of this increase, approximately 18,300 installations, or 23%,
were attributable to the Fuchu, CV21 (Fukuoka), Osaka and Tsuchiura franchises
which were not included in our consolidated group for the year ended December
31, 1998.
The following table sets forth the percentages of revenue that individual
items in our consolidated group's statements of operations constitute for the
periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1998 1999
------------------------------------ ------------------------------------
AS A % OF AS A % OF
(MILLIONS) (THOUSANDS) REVENUE (MILLIONS) (THOUSANDS) REVENUE
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Subscription fees........... Y 5,632 $ 51,173 50.8% Y 11,852 $ 107,695 62.3%
Construction-related
sales.................... 2,762 25,097 24.9 2,896 26,320 15.2
Programming fees............ 1,045 9,503 9.4 931 8,458 4.9
Other....................... 1,657 15,055 14.9 3,333 30,288 17.6
------- -------- ----- -------- --------- -----
11,096 100,828 100.0 19,012 172,761 100.0
------- -------- ----- -------- --------- -----
Operating costs and expenses:
Construction-related
expenses................. 2,611 23,722 23.5 2,626 23,865 13.8
Programming costs........... 1,791 16,275 16.1 2,722 24,738 14.3
Other operating costs....... 3,285 29,854 29.6 5,916 53,753 31.1
Selling, general and
administrative........... 8,797 79,940 79.3 11,361 103,239 59.8
Depreciation and
amortization............. 3,055 27,759 27.6 5,508 50,045 29.0
------- -------- -------- ---------
19,539 177,550 176.1 28,133 255,640 148.0
------- -------- -------- ---------
Operating loss................ (8,443) (76,722) (76.1) (9,121) (82,879) (48.0)
Other income (expense):
Interest expense, net....... (407) (3,694) (3.7) (723) (6,573) (3.8)
Equity in losses of
affiliates............... (1,319) (11,989) (11.9) (2,644) (24,030) (13.9)
Other income, net........... 229 2,078 2.1 248 2,256 1.3
------- -------- -------- ---------
(1,497) (13,605) (13.5) (3,119) (28,347) (16.4)
------- -------- -------- ---------
Loss before income taxes...... (9,940) (90,327) (89.6) (12,240) (111,226) (64.4)
Income taxes.................. -- -- -- -- -- --
------- -------- -------- ---------
Net loss...................... Y(9,940) $(90,327) (89.6) Y(12,240) $(111,226) (64.4)
======= ======== ======== =========
</TABLE>
REVENUE. Total revenue increased by Y7,916 million, or 71%, from Y11,096
million for the year ended December 31, 1998 to Y19,012 million for the year
ended December 31, 1999.
Subscription fees increased by Y6,220 million, or 110%, from Y5,632 million
for the year ended December 31, 1998 to Y11,852 million for the year ended
December 31, 1999. This increase was primarily the result of customer growth in
our consolidated franchises, including amounts attributable to the addition to
our consolidated group of the Fuchu, CV21 (Fukuoka), Osaka and Tsuchiura
franchises. The average
56
<PAGE> 62
monthly subscription rates in effect for our consolidated franchises for the
year ended December 31, 1999 were largely unchanged compared to the average
rates in effect for the year ended December 31, 1998.
Construction revenue increased by Y134 million, or 5%, from Y2,762 million
for the year ended December 31, 1998 to Y2,896 million for the year ended
December 31, 1999. This increase was attributable to an increase in the
construction and installation activity at our unconsolidated managed franchises
in connection with the build-out of our broadband networks and an increase in
the number of new customer installations by our unconsolidated managed
franchises. Construction revenue for the year ended December 31, 1998 included
amounts attributable to construction and installation activity at the Fuchu,
CV21 (Fukuoka), Osaka and Tsuchiura franchises which amounts were eliminated in
consolidation for the year ended December 31, 1999.
Programming fees decreased by Y114 million, or 11%, from Y1,045 million for
the year ended December 31, 1998 to Y931 million for the year ended December 31,
1999. Programming fees for the year ended December 31, 1998 included amounts
charged to our Fuchu, CV21 (Fukuoka), Osaka and Tsuchiura franchises which were
eliminated in consolidation for the year ended December 31, 1999.
Other revenue increased by Y1,676 million, or 101%, from Y1,657 million for
the year ended December 31, 1998 to Y3,333 million for the year ended December
31, 1999. This increase is primarily attributable to a Y726 million, or 189%,
increase in installation charges from Y384 million in 1998 to Y1,110 million in
1999 in our consolidated franchises related to an approximately 102% increase in
the volume of cable television, telephony and high-speed Internet access
installations in our consolidated group from 77,400 in 1998 to 156,100 in 1999,
and to a 42% increase in the average revenue per installation from approximately
Y5,000 in 1998 to approximately Y7,100 in 1999. The increase in installation
volumes includes those attributable to the Fuchu, CV21 (Fukuoka), Osaka and
Tsuchiura franchises resulting from their consolidation with our consolidated
group. The increase in average revenue per installation is attributable to
generally higher installation prices charged in our franchises, changes to the
mix of installation between single dwelling units and multiple-dwelling units
and between cable television, telephony and high-speed Internet access. The
increase is also attributable to a Y502 million, or 187%, increase in revenue
from third parties, from Y268 million in 1998 to Y770 million in 1999, in
connection with the extension of our broadband networks to customers that are
obstructed from terrestrial broadcast signals.
CONSTRUCTION-RELATED EXPENSES. Construction-related expenses increased by
Y15 million from Y2,611 million for the year ended December 31, 1998 to Y2,626
million for the year ended December 31, 1999. This increase corresponds to the
increase in construction-related sales during 1999.
PROGRAMMING COSTS. Programming costs increased by Y931 million, or 52%,
from Y1,791 million for the year ended December 31, 1998 to Y2,722 million for
the year ended December 31, 1999. This increase was primarily the result of
cable television customer growth in our consolidated franchises throughout the
year, including the increase attributable to the addition to our consolidated
group of the Fuchu, CV21 (Fukuoka), Osaka and Tsuchiura franchises.
OTHER OPERATING COSTS. Other operating costs increased by Y2,631 million,
or 80%, from Y3,285 million for the year ended December 31, 1998, to Y5,916
million for the year ended December 31, 1999. This increase was primarily
attributable to increases in the number of technical support, maintenance and
service personnel to support the increase in the number of customers, increases
in utility expenses related to the expansion of the broadband networks and the
operating costs of the Fuchu, CV21 (Fukuoka), Osaka and Tsuchiura franchises
resulting from their consolidation with our consolidated group.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by Y2,564 million, or 29%, from Y8,797 million
for the year ended December 31, 1998 to Y11,361 million for the year ended
December 31, 1999. The increase was primarily attributable to increased
marketing costs and salaries, together with other general overhead expenses,
attributable to the increased size of our employed and contract sales force and
the increase in administrative staffing levels needed to manage the number of
customers added during the year. The increase was also partially attributable to
the selling,
57
<PAGE> 63
general and administrative expenses of the Fuchu, CV21 (Fukuoka), Osaka and
Tsuchiura franchises resulting from their consolidation with our consolidated
group.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased by Y2,453 million, or 80%, from Y3,055 million for the year
ended December 31, 1998 to Y5,508 million for the year ended December 31, 1999.
This increase was partially attributable to part-period depreciation and
amortization of fixed and intangible assets acquired in 1999, and full-period
depreciation and amortization of fixed and intangible assets acquired in 1998.
The increase was also attributable to the addition of the fixed and intangible
assets and related depreciation and amortization of the Fuchu, CV21 (Fukuoka),
Osaka and Tsuchiura franchises resulting from their consolidation with our
consolidated group.
INTEREST EXPENSE. Interest expense increased by Y316 million, or 78%, from
Y407 million for the year ended December 31, 1998 to Y723 million for the year
ended December 31, 1999. This increase was primarily a result of increases in
the level of short- and long-term borrowings and capital leases.
EQUITY IN LOSSES OF AFFILIATES. Equity in losses of affiliates increased by
Y1,325 million, or 100%, from Y1,319 million for the year ended December 31,
1998 to Y2,644 million for the year ended December 31, 1999, reflecting our
consolidated group's portion of the losses of our unconsolidated managed
franchises for the period. Of this increase, Y544 million is related to
additional losses recognized in 1999 in the Kobe East franchise, now part of the
Kobe Ashiya franchise, in which we made our initial equity investment in
September 1998. An additional Y303 million of this increase is attributable to
ownership increases in the Sakai franchise, from 40.0% for the year ended
December 31, 1998 to 46.5% for the year ended December 31, 1999, and the
Shimonoseki franchise, from 45.0% for the year ended December 31, 1998 to 50.0%
for the year ended December 31, 1999. Our investments in the Media Saitama
franchise and in @Home Japan, in which we made our initial equity investments
during 1999, accounted for an aggregate of Y252 million of this increase. The
remaining Y226 million increase in our share of affiliate losses was primarily
attributable to increases in costs associated with the acquisition of new
customers and the expansion of our broadband networks, including labor, network
maintenance and utility expenses, in our unconsolidated managed franchises.
OTHER INCOME/EXPENSE. Other income (net) increased by Y19 million, or 8%,
from Y229 million for the year ended December 31, 1998 to Y248 million for the
year ended December 31, 1999.
NET LOSS. Net loss increased by Y2,300 million, or 23%, from Y9,940 million
for the year ended December 31, 1998 to Y12,240 million for the year ended
December 31, 1999 for the reasons set forth above.
DISCUSSION OF BUSINESS SEGMENTS. The following table sets forth the
revenue and operating income (loss) for the most significant of our operating
segments for the years ended December 31, 1998 and 1999. Due to the differences
in the basis of preparation of management reports and U.S. GAAP financial
statements, the information included in the following table and discussed below
should not be viewed as an alternative to U.S. GAAP measures of financial
results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
INCREASE
1998 1999 (DECREASE)
------- ---------- ----------
(MILLIONS)
<S> <C> <C> <C>
Revenue:
Jupiter.......................................... Y14,243 Y18,236 Y3,993
J-COM Tokyo...................................... 4,716 5,951 1,235
Urawa............................................ 1,449 1,702 253
J-COM Kansai..................................... 355 1,413 1,058
CV21 (Fukuoka)................................... 1,109 1,232 123
J-COM Kitakyushu................................. 624 893 269
All other system operators(1).................... 2,138 3,794 1,656
------- ------- ------
Y24,634 Y33,221 Y8,587
======= ======= ======
(footnotes on next page)
</TABLE>
58
<PAGE> 64
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
INCREASE
1998 1999 (DECREASE)
------- ---------- ----------
(MILLIONS)
<S> <C> <C> <C>
Operating Income (Loss):
Jupiter.......................................... Y(2,353) Y (567) Y1,786
J-COM Tokyo...................................... (509) (679) (170)
Urawa............................................ 299 213 (86)
J-COM Kansai..................................... (1,048) (1,814) (766)
CV21 (Fukuoka)................................... (104) (131) (27)
J-COM Kitakyushu................................. (116) (119) (3)
All other system operators(1).................... (1,285) (1,458) (173)
------- ------- ------
Y(5,116) Y(4,555) Y 561
======= ======= ======
</TABLE>
---------------
(1) All other system operators for each of the periods presented include all
consolidated and unconsolidated managed franchises that Jupiter manages for
the entire applicable period, other than the J-COM Tokyo, Urawa, J-COM
Kansai, CV21 (Fukuoka) and J-COM Kitakyushu franchises. Franchises that
become managed during the period may not be reflected in the management
report until the beginning of the following period.
Jupiter's total revenue increased by Y3,993 million, or 28%, from Y14,243
million for the year ended December 31, 1998 to Y18,236 million for the year
ended December 31, 1999. This increase was primarily attributable to the
increase in the number of customers in our managed franchises, including those
attributable to the Osaka franchise, which Jupiter began managing during the
year ended December 31, 1999. This increase is also a result of the related
increase in management fees, seconded employees' salaries, programming costs and
billing expenses recharged to those managed franchises. In addition, sales of
construction materials increased as a result of additional installation and
construction activity, particularly associated with the continued build-out of
the J-COM Kansai and Fukuoka franchises. Jupiter's operating losses decreased by
Y1,786 million, or 76%, from Y(2,353) million for the year ended December 31,
1998 to Y(567) million for the year ended December 31, 1999 as a result of the
contribution of the additional revenue outlined above. Other operating costs
were generally consistent between the years ended December 31, 1998 and 1999.
Total revenue for the J-COM Tokyo franchise increased by Y1,235 million, or
26%, from Y4,716 million for the year ended December 31, 1998 to Y5,951 million
for the year ended December 31, 1999. This increase was primarily attributable
to increases in the number of its cable television customers and new customer
installations. Operating losses increased by Y170 million, or 33%, from Y(509)
million for the year ended December 31, 1998 to Y(679) million for the year
ended December 31, 1999 primarily as a result of the contribution of additional
revenue offset by an increase in management fees and other customer related
costs and by an increase in marketing costs associated with the acquisition of
new customers.
Total revenue for the Urawa franchise increased by Y253 million, or 17%,
from Y1,449 million for the year ended December 31, 1998 to Y1,702 million for
the year ended December 31, 1999. This increase was primarily attributable to
increases in the number of its cable television customers and new customer
installations. Operating income decreased by Y86 million, or 29%, from Y299
million for the year ended December 31, 1998 to Y213 million for the year ended
December 31, 1999 primarily as a result of the contribution of additional
revenue offset by an increase in the cost of management fees and other customer
related costs and by an increase in marketing costs associated with the
acquisition of new customers.
Total revenue for the J-COM Kansai franchise increased by Y1,058 million,
or 298%, from Y355 million for the year ended December 31, 1998 to Y1,413
million for the year ended December 31, 1999. This increase was primarily
attributable to increases in the number of its cable television customers and
new customer installations. Operating losses increased by Y766 million, or 73%,
from Y(1,048) million for
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the year ended December 31, 1998 to Y(1,814) million for the year ended December
31, 1999 as a result of the contribution of additional revenue offset by an
increase in management fees and other customer related costs and by an increase
in marketing costs associated with the acquisition of new customers.
Total revenue for the CV21 (Fukuoka) franchise increased by Y123 million,
or 11%, from Y1,109 million for the year ended December 31, 1998 to Y1,232
million for the year ended December 31, 1999. This increase was primarily
attributable to increases in the number of its cable television customers and
new customer installations in the CV21 (Fukuoka) franchise, which was treated
using the equity method of accounting for the year ended December 31, 1998 but
which was treated using the consolidation method of accounting for the year
ended December 31, 1999. Operating losses increased by Y27 million, or 26%, from
Y(104) million for the year ended December 31, 1998 to Y(131) million for the
year ended December 31, 1999 primarily as a result of the contribution of
additional revenue offset by an increase in management fees and other customer
related costs and by an increase in marketing costs associated with the
acquisition of new customers.
Total revenue for the J-COM Kitakyushu franchise increased by Y269 million,
or 43%, from Y624 million for the year ended December 31, 1998 to Y893 million
for the year ended December 31, 1999. This increase was primarily attributable
to increases in the number of its cable television customers and new customer
installations, including increases in the number of cable television customers
and new customer installations in the Yahata franchise, which is now part of the
J-COM Kitakyushu franchise. Operating losses increased by Y3 million, or 3%,
from Y(116) million for the year ended December 31, 1998 to Y(119) million for
the year ended December 31, 1999 primarily as a result of the contribution of
additional revenue offset by an increase in management fees and other customer
related costs and by an increase in marketing costs associated with the
acquisition of new customers.
Total revenue for all other system operators included in our management
reports increased by Y1,656 million, or 77%, from Y2,138 million for the year
ended December 31, 1998 to Y3,794 million for the year ended December 31, 1999.
This increase was primarily attributable to overall increases in the number of
cable television customers in these system operators and to the inclusion in our
management reports of a full year's results of the Hokusetsu and Shimonoseki
franchises, each of which commenced operations in August 1998. Operating losses
for all other system operators included in our management reports increased by
Y173 million, or 13%, from Y(1,285) million for the year ended December 31, 1998
to Y(1,458) million for the year ended December 31, 1999 primarily as a result
of the contribution of additional revenue offset by an increase in management
fees and customer related costs and by the significant one-time costs associated
with the acquisition of new customers.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
OVERVIEW. Our consolidated group's results of operations for the year ended
December 31, 1998 include the results of operations of the CSQ, Nerima, and
Chigasaki franchises, which were treated under the consolidation method of
accounting during 1998, but which were treated using the equity method of
accounting for portions of the year ended December 31, 1997. The change to the
consolidation method of accounting resulted from Jupiter's increased equity
investment in the CSQ franchise in April 1997, the Chigasaki franchise in June
1997 and the Nerima franchise in November 1997.
In addition, during the year ended December 31, 1998, Jupiter made its
initial investment in the Sakai franchise. Our consolidated group's results of
operations reflect our share of the results of operations for the Sakai
franchise from the date of Jupiter's initial investment. Jupiter made the
initial investment in the Sakai franchise in August 1998 and the franchise was
accounted for using the equity method of accounting. Jupiter also increased its
investment in the Kobe East franchise, which is now part of the Kobe Ashiya
franchise, in September 1998, subsequent to which it was accounted for using the
equity method of accounting.
During the year ended December 31, 1997, Jupiter made its initial
investments in the Samukawa franchise, which is now part of the Shonan
franchise, and the Kobe East franchise, which is now part of the Kobe Ashiya
franchise. The Samukawa franchise, which is now part of the Shonan franchise,
was
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<PAGE> 66
accounted for using the equity method of accounting since Jupiter's initial
investment in June 1997. The Kobe East franchise, which is now part of the Kobe
Ashiya franchise, was accounted for using the cost method of accounting during
1997 and part of 1998, until we increased our equity investment in this
franchise in September 1998 and began using the equity method of accounting.
As of December 31, 1998, there were a total of approximately 131,600 cable
television customers and 6,000 telephony customers in our consolidated
franchises, compared to approximately 77,700 cable television customers and
2,300 telephony customers as of December 31, 1997. This represents an aggregate
increase of approximately 57,600 customers, or 72%. The majority of the increase
in the number of cable television customers was attributable to customer growth
in our consolidated franchises.
For the year ended December 31, 1998, our consolidated group had
approximately 77,400 new customer installations of cable television and
telephony services, compared to approximately 26,400 installations for the year
ended December 31, 1997, an increase of approximately 51,000, or 193%.
The following table sets forth the percentages of revenue that individual
items in our consolidated group's statements of operations constitute for the
periods presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1998
------------------------ ------------------------
AS A % AS A %
(MILLIONS) OF REVENUE (MILLIONS) OF REVENUE
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue:
Subscription fees......................... Y 1,913 34.0% Y 5,632 50.8%
Construction-related sales................ 1,365 24.2 2,762 24.9
Programming fees.......................... 943 16.7 1,045 9.4
Other..................................... 1,410 25.1 1,657 14.9
------- ------ ------- -----
5,631 100.0 11,096 100.0
------- ------ ------- -----
Operating costs and expenses:
Construction-related expenses............. 1,219 21.6 2,611 23.5
Programming costs......................... 613 10.9 1,791 16.1
Other operating costs..................... 2,094 37.2 3,285 29.6
Selling, general and administrative....... 7,214 128.1 8,797 79.3
Depreciation and amortization............. 1,580 28.1 3,055 27.6
------- -------
12,720 225.9 19,539 176.1
------- -------
Operating loss.............................. (7,089) (125.9) (8,443) (76.1)
Other income (expense):
Interest expense, net..................... (159) (2.8) (407) (3.7)
Equity in losses of affiliates............ (959) (17.0) (1,319) (11.9)
Other income, net......................... 324 5.7 229 2.1
------- -------
(794) (14.1) (1,497) (13.5)
------- -------
Loss before income taxes.................... (7,883) (140.0) (9,940) (89.6)
Income taxes................................ -- -- -- --
------- -------
Net loss.................................... Y(7,883) (140.0) Y(9,940) (89.6)
======= =======
</TABLE>
REVENUE. Total revenue increased by Y5,465 million, or 97%, from Y5,631
million for the year ended December 31, 1997 to Y11,096 million for the year
ended December 31, 1998.
Subscription fees increased by Y3,719 million, or 194%, from Y1,913 million
for the year ended December 31, 1997 to Y5,632 million for the year ended
December 31, 1998. This increase was primarily a result of customer growth in
our consolidated franchises and a full year of revenue from franchises acquired
during 1997. The average monthly subscription rates in effect for our
consolidated franchises for the year ended December 31, 1998 were largely
unchanged compared to the average rate in effect for the year ended December 31,
1997.
Construction revenue increased by Y1,397 million, or 102%, from Y1,365
million for the year ended December 31, 1997 to Y2,762 million for the year
ended December 31, 1998. This increase was primarily a
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<PAGE> 67
result of an increase in the construction and installation activity at our
unconsolidated managed franchises in connection with the build-out of our
broadband networks and the installation of new customers.
Programming fees increased Y102 million, or 11%, from Y943 million for the
year ended December 31, 1997 to Y1,045 million for the year ended December 31,
1998. This increase was primarily attributable to an increase in the number of
cable television customers in our unconsolidated managed franchises during the
year.
Other revenue increased by Y247 million, or 18%, from Y1,410 million for
the year ended December 31, 1997 to Y1,657 million for the year ended December
31, 1998. This increase is primarily attributable to an increase in installation
revenue resulting from an increase in the number of customer installations at
our consolidated franchises.
CONSTRUCTION-RELATED EXPENSES. Construction-related expenses increased
Y1,392 million, or 114%, from Y1,219 million for the year ended December 31,
1997 to Y2,611 million for the year ended December 31, 1998. This increase
corresponds to the growth in construction-related sales during 1998.
PROGRAMMING COSTS. Programming costs increased by Y1,178 million, or 192%,
from Y613 million for the year ended December 31, 1997 to Y1,791 million for the
year ended December 31, 1998. This increase was primarily a result of cable
television customer growth in our consolidated franchises throughout the year
including a full year's results attributable to the addition to our consolidated
group of the Nerima, Chigasaki and CSQ franchises during 1997.
OTHER OPERATING COSTS. Other operating costs increased by Y1,191 million,
or 57%, from Y2,094 million for the year ended December 31, 1997 to Y3,285
million for the year ended December 31, 1998. This increase was primarily
attributable to increases in the number of technical support, maintenance and
service personnel to support the increase in the number of customers, increases
in utility expenses related to the expansion of the broadband networks and the
full year's operating costs of the Nerima, Chigasaki and CSQ franchises
resulting from their consolidation with our consolidated group during 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased by Y1,583 million, or 22%, from Y7,214 million
for the year ended December 31, 1997 to Y8,797 million for the year ended
December 31, 1998. The increase was primarily attributable to increased
marketing costs and salaries, together with other general overhead expenses,
attributable to the increased size of our employed and contract sales force and
the increase in administrative staffing levels needed to manage the number of
customers added during the year. The increase was also partially attributable to
a full year of selling, general and administrative expenses of the Nerima,
Chigasaki and CSQ franchises resulting from their consolidation with our
consolidated group during 1997.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses increased by Y1,475 million, or 93%, from Y1,580 million for the year
ended December 31, 1997 to Y3,055 million for the year ended December 31, 1998.
This increase was partially attributable to part-period depreciation and
amortization of the fixed and intangible assets acquired in 1998, and
full-period depreciation and amortization of fixed and intangible assets
acquired in 1997. The increase was also attributable to the addition of the
fixed and intangible assets and related depreciation and amortization of the
Nerima, Chigasaki and CSQ franchises resulting from their consolidation with our
consolidated group during 1997.
INTEREST EXPENSE. Interest expense increased by Y248 million, or 156%, from
Y159 million for the year ended December 31, 1997 to Y407 million for the year
ended December 31, 1998. This increase was primarily a result of increases in
the level of short- and long-term borrowings and capitalized leases.
EQUITY IN LOSSES OF AFFILIATES. Equity in losses of affiliates increased by
Y360 million, or 38%, from Y959 million for the year ended December 31, 1997 to
Y1,319 million for the year ended December 31, 1998, reflecting our consolidated
group's portion of the losses of our unconsolidated managed franchises for the
period. Of this increase, approximately Y436 million is related to our
investments in the Kobe East franchise, in which we had a 42.6% equity interest,
the Sakai franchise, in which we had a 40.0% equity interest, the Osaka
franchise, in which we had a 33.6% equity interest, and Kansai Multimedia, in
which
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<PAGE> 68
we had a 20.0% equity interest. The increase in losses attributable to new
investments was offset by our investment in the Nerima franchise, which
contributed Y191 million in losses for the year ended December 31, 1997 but
which became part of our consolidated group in 1998. The remaining net increase
of Y245 million in our share of losses of affiliates was primarily attributable
to increases in costs associated with the acquisition of new customers and with
the expansion of our broadband networks, including labor, technical maintenance
and utility expenses, in our unconsolidated managed franchises.
OTHER INCOME/EXPENSE. Other income (net) decreased by Y95 million, or 29%,
from Y324 million for the year ended December 31, 1997 to Y229 million for the
year ended December 31, 1998.
NET LOSS. Net loss increased by Y2,057 million, or 26%, from Y7,883 million
for the year ended December 31, 1997 to Y9,940 million for the year ended
December 31, 1998 for the reasons set forth above.
DISCUSSION OF BUSINESS SEGMENTS. The following table sets forth the
revenue and operating income (loss) for the most significant of our operating
segments for the years ended December 31, 1997 and 1998. Due to the differences
in the basis of preparation of management reports and U.S. GAAP financial
statements, the information included in the following table and discussed below
should not be viewed as an alternative to U.S. GAAP measures of financial
results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
INCREASE
1997 1998 (DECREASE)
------- ------- ----------
(MILLIONS)
<S> <C> <C> <C>
Revenue:
Jupiter........................................... Y10,455 Y14,243 Y3,788
J-COM Tokyo....................................... 3,569 4,716 1,147
Urawa............................................. 970 1,449 479
J-COM Kansai...................................... 157 355 198
CV21 (Fukuoka).................................... 857 1,109 252
J-COM Kitakyushu.................................. 494 624 130
All other system operators(1)..................... 936 2,138 1,202
------- ------- ------
Y17,438 Y24,634 Y7,196
======= ======= ======
Operating Income (Loss):
Jupiter........................................... Y(3,109) Y(2,353) Y 756
J-COM Tokyo....................................... (969) (509) 460
Urawa............................................. 190 299 109
J-COM Kansai...................................... (192) (1,048) (856)
CV21 (Fukuoka).................................... (137) (104) 33
J-COM Kitakyushu.................................. (82) (116) (34)
All other system operators(1)..................... (982) (1,285) (303)
------- ------- ------
Y(5,281) Y(5,116) Y 165
======= ======= ======
</TABLE>
---------------
(1) All other system operators for each of the periods presented include all
consolidated and unconsolidated managed franchises that Jupiter manages for
the entire applicable period, other than the J-COM Tokyo, Urawa, J-COM
Kansai, CV21 (Fukuoka) and J-COM Kitakyushu franchises. Franchises that
become managed during the period may not be reflected in the management
report until the beginning of the following period.
Jupiter's total revenue increased by Y3,788 million, or 36%, from Y10,455
million for the year ended December 31, 1997 to Y14,243 million for the year
ended December 31, 1998. This increase was primarily attributable to the
increase in the number of customers in our managed franchises, including those
attributable to the Urawa and Yokosuka franchises, in which Jupiter made its
initial equity investments during the year ended December 31, 1998. This
increase is also a result of the related increase in
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<PAGE> 69
management fees, seconded employees' salaries, programming costs and billing
expenses recharged to those managed franchises. In addition, sales of
construction materials increased as a result of additional installation and
construction activity, primarily associated with the continued build-out of the
J-COM Kansai and Fukuoka franchises. Jupiter's operating loss decreased by Y756
million, or 24%, from Y(3,109) million for the year ended December 31, 1997 to
Y(2,353) million for the year ended December 31, 1998 as a result of the
contribution of the additional revenue outlined above. Other operating costs
were generally consistent between the years ended December 31, 1997 and 1998.
Total revenue for the J-COM Tokyo franchise increased by Y1,147 million, or
32%, from Y3,569 million for the year ended December 31, 1997 to Y4,716 million
for the year ended December 31 1998. This increase was primarily attributable to
increases in the number of its cable television customers and new customer
installations. Operating losses decreased by Y460 million, or 47%, from Y(969)
million for the year ended December 31, 1997 to Y(509) million for the year
ended December 31, 1998 primarily as a result of the contribution of additional
revenue offset by an increase in management fees and other customer related
costs and by an increase in marketing costs in connection with the acquisition
of new customers.
Total revenue for the Urawa franchise increased by Y479 million, or 49%,
from Y970 million for the year ended December 31, 1997 to Y1,449 million for the
year ended December 31, 1998. This increase was primarily attributable to a 19%
increase in the number of its cable television customers for the year ended
December 31, 1998 together with increases in revenues per customer, which
resulted from a price increase for basic service in the latter part of the year
ended December 31, 1997. Operating income increased by Y109 million, or 57%,
from Y190 million for the year ended December 31, 1997 to Y299 million for the
year ended December 31, 1998 primarily as a result of the contribution of
additional revenue offset by the cost of management fees, which were not
incurred prior to the year ended December 31, 1998, and by an increase in
marketing costs associated with the acquisition of new customers.
Total revenue for the J-COM Kansai franchise increased by Y198 million, or
126%, from Y157 million for the year ended December 31, 1997 to Y355 million for
the year ended December 31, 1998. This increase was primarily attributable to
increases in the number of its cable television customers and new customer
installations. This increase was also a result of the introduction of cable
television service in parts of the J-COM Kansai franchise during the year ended
December 31, 1998. Operating losses increased by Y856 million, or 446%, from
Y(192) million for the year ended December 31, 1997 to Y(1,048) million for the
year ended December 31, 1998 as a result of the contribution of additional
revenue offset by an increase in management fees and other customer related
costs, an increase in marketing costs associated with the acquisition of new
customers and an increase in fixed overhead costs related to the launch of cable
television service in parts of the J-COM Kansai franchise.
Total revenue for the CV21 (Fukuoka) franchise, which was treated using the
equity method of accounting for the years ended December 31, 1997 and 1998,
increased by Y252 million, or 29%, from Y857 million for the year ended December
31, 1997 to Y1,109 million for the year ended December 31, 1998. This increase
was primarily attributable to increases in the number of its cable television
customers and new customer installations. Operating losses decreased by Y33
million, or 24%, from Y(137) million for the year ended December 31, 1997 to
Y(104) million for the year ended December 31, 1998 primarily as a result of the
contribution of additional revenue offset by an increase in management fees and
other customer related costs and by an increase in marketing costs associated
with the acquisition of new customers.
Total revenue for the J-COM Kitakyushu franchise increased by Y130 million,
or 26%, from Y494 million for the year ended December 31, 1997 to Y624 million
for the year ended December 31, 1998. This increase was primarily attributable
to increases in the number of its cable television customers and new customer
installations. Operating losses increased by Y34 million, or 41%, from Y82
million for the year ended December 31, 1997 to Y116 million for the year ended
December 31, 1998 primarily as a result of the contribution of additional
revenue offset by an increase in management fees and other customer related
costs and an increase in marketing costs associated with the acquisition of new
customers.
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<PAGE> 70
Total revenue for all other system operators included in our management
reports increased by Y1,202 million, or 128%, from Y936 million for the year
ended December 31, 1997 to Y2,138 million for the year ended December 31, 1998.
This increase was primarily attributable to the overall increase in the number
of cable television customers in these system operators and to the inclusion in
our management reports of a full year's results of the Fukuoka franchise, which
commenced operations in August 1997, and of the Hokusetsu and Shimonoseki
franchises, each of which commenced operations in August 1998. Operating losses
for all other system operators included in our management reports increased by
Y303 million, or 31%, from Y982 million for the year ended December 31, 1997 to
Y1,285 million for the year ended December 31, 1998 primarily as a result of the
contribution of additional revenue offset by the fixed overhead costs of these
system operators and by the significant one-time costs associated with the
acquisition of new customers.
LIQUIDITY AND CAPITAL RESOURCES
Historical Sources and Uses of Cash
JUPITER TELECOMMUNICATIONS CO., LTD. AND CONSOLIDATED FRANCHISES. Since
Jupiter's formation, our consolidated group's cash requirements have been funded
by capital contributions from Sumitomo and Liberty Media International, our
founding shareholders, and from loans from banks and commercial lenders,
including Sumisho Finance Management, a wholly-owned subsidiary of Sumitomo. In
addition, our consolidated group leases the majority of its cable television
home terminals and high-speed cable modems under capital leases from AJCC, a
subsidiary of Sumitomo. Cash used by our consolidated group in operating
activities was Y4,632 million for the nine months ended September 30, 2000, Y954
million for the year ended December 31, 1999, Y5,762 million for the year ended
December 31, 1998 and Y5,276 million for the year ended December 31, 1997. Our
consolidated group received capital contributions from our shareholders of
Y6,003 million for the nine months ended September 30, 2000, Y6,200 million for
the year ended December 31, 1999, Y6,000 million for the year ended December 31,
1998 and Y9,200 million for the year ended December 31, 1997. Prior to May 2000,
of these amounts, an aggregate of 60% was contributed by Sumitomo and the
remainder was contributed by Liberty Media International. In addition to capital
contributions, Sumisho Finance Management, a wholly-owned subsidiary of
Sumitomo, has provided to our consolidated group a credit line during these
periods. The largest amount of indebtedness owed by our consolidated group to
Sumisho Finance outstanding at any time was Y57,518 million during the nine
months ended September 30, 2000, Y41,858 million during the year ended December
31, 1999, Y21,965 million during the year ended December 31, 1998 and Y10,726
million during the year ended December 31, 1997. See the discussion of
transactions with our shareholders and our other affiliates under the caption
"Certain Relationships and Related Party Transactions" contained elsewhere in
this prospectus.
Our business requires significant cash to fund capital expenditures,
acquisitions, continued investment in our franchises, debt service costs and
ongoing operations. Our consolidated group makes capital expenditures primarily
to upgrade, rebuild and expand our broadband networks, to perform system
maintenance, to expand our broadband services to integrate franchises that we
have acquired and invested in and to develop new services. Upgrading our
broadband networks will enable us to offer new services, including digital and
interactive television, HDTV broadcast signals, additional channels and program
package tiers, expanded pay-per-view options, and expanded high-speed Internet
access. In addition, we have followed a strategy of expansion through selective
acquisitions of and investments in cable system operators.
For the nine months ended September 30, 2000, our consolidated group
invested Y13,092 million in capital expenditures and investments, including
Y11,312 million primarily by our consolidated franchises in connection with the
upgrade and expansion of our broadband networks and installation of new
customers in our consolidated franchises. The remaining Y1,780 million
represents investments by Jupiter in connection with the acquisition of and
investments in cable television franchises, investment in @Home Japan, the
purchase of shares in our unconsolidated franchises and the purchase of shares
from minority shareholders of our consolidated franchises.
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<PAGE> 71
For the year ended December 31, 1999, our consolidated group made capital
expenditures and investments of Y18,455 million, including Y11,275 million
primarily by our consolidated franchises in connection with the upgrade and
expansion of our broadband networks and installation of new customers, including
the introduction of high-speed Internet access. The remaining Y7,180 million
represents investments by Jupiter in connection with the acquisition of and
investments in cable television franchises, the purchase of shares in our
unconsolidated franchises and the purchase of shares from minority shareholders
of our consolidated franchises.
For the year ended December 31, 1998, our consolidated group made capital
expenditures and investments of Y13,582 million, including Y8,568 million
primarily by our consolidated franchises in connection with the expansion of our
broadband networks and new customer installations. The remaining Y5,014 million
represents investments by Jupiter in connection with the acquisition of and
investments in cable television franchises, the purchase of shares in our
unconsolidated franchises and the purchase of shares from minority shareholders
of our consolidated franchises.
For the year ended December 31, 1997, our consolidated group made capital
expenditures and investments of Y11,516 million, including Y8,980 million
primarily by our consolidated franchises in connection with the expansion of our
broadband networks and installation of new customers, including the introduction
of our telephony services. The remaining Y2,536 million investments by Jupiter
in connection with the acquisition of and investments in cable television
franchises, the purchase of shares in our unconsolidated franchises and the
purchase of shares from minority shareholders of our consolidated franchises.
Capital Expenditures and Financial Resources
OUR CONSOLIDATED FRANCHISES. For the period from January 1, 2001 to
December 31, 2002, our consolidated franchises currently plan to incur capital
expenditures of Y83.4 billion ($758 million). These currently planned capital
expenditures include Y12.3 billion ($112 million) for the costs of expanding our
broadband networks within our existing managed franchise areas, Y8.6 billion
($78 million) for upgrading substantially all of our existing 450 megahertz
networks to a two-way 750 megahertz hybrid fiber optic-coaxial standard, Y17.9
billion ($163 million) for telephony equipment purchases and Y40.4 billion ($367
million) for installing new customers. These currently planned capital
expenditures exclude Y8.2 billion ($75 million) for analog set top converter
boxes and high-speed cable modems which we currently obtain under capital leases
from AJCC K.K., a subsidiary of Sumitomo. These currently planned capital
expenditures also exclude Y14.6 billion ($133 million) for digital set top
converter boxes, which we expect to obtain under capital leases in the future.
OUR UNCONSOLIDATED MANAGED FRANCHISES. For the period from January 1, 2001
to December 31, 2002, our unconsolidated managed franchises currently plan to
incur capital expenditures of Y27.1 billion ($246 million). These currently
planned capital expenditures include Y550 million ($5 million) for network
expansion, Y3.8 billion ($35 million) for upgrading substantially all of our
existing 450 megahertz networks to a two-way 750 megahertz hybrid fiber
optic-coaxial standard, Y13.5 billion ($123 million) for installing new
customers and Y8.7 billion ($79 million) for telephony equipment purchases.
These currently planned capital expenditures exclude Y2.4 billion ($22 million)
for analog set top converter boxes and high-speed cable modems which we
currently obtain under capital leases from AJCC K.K., a subsidiary of Sumitomo.
These currently planned capital expenditures also exclude Y5.5 billion ($50
million) for digital set top converter boxes, which we expect to obtain under
capital leases in the future.
JUPITER'S INVESTMENTS IN CONSOLIDATED AND UNCONSOLIDATED FRANCHISES. For
the period from January 1, 2001 to December 31, 2002, Jupiter's current strategy
is to invest an aggregate of Y16.7 billion ($152 million) in our consolidated
and unconsolidated managed franchises and non-managed investments through the
purchase of shares held by other equity holders of those franchises and/or
through the purchase of shares issued by those franchises. However, Jupiter has
not entered into any agreement for the purchase of any shares.
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<PAGE> 72
BUSINESS SEGMENTS. Of the Y110.5 billion ($1,004 million) of capital
expenditures currently expected to be incurred by our consolidated and
unconsolidated managed franchises for the period from January 1, 2001 to
December 31, 2002, approximately Y11.7 billion ($106 million) is currently
expected to be incurred by the J-COM Tokyo franchise, Y2.5 billion ($23 million)
is currently expected to be incurred by the Urawa franchise, Y16.8 billion ($153
million) is currently expected to be incurred by the J-COM Kansai franchise,
Y6.5 billion ($59 million) is currently expected to be incurred by the Osaka
franchise, Y4.1 billion ($37 million) is currently expected to be incurred by
the Yokosuka franchise, Y4.9 billion ($45 million) is currently expected to be
incurred by the Kobe Ashiya franchise, Y2.5 billion ($23 million) is currently
expected to be incurred by the CV21 (Fukuoka) franchise, Y5.2 billion ($47
million) is currently expected to be incurred by the J-COM Kitakyushu franchise
and Y56.3 billion ($512 million) is currently expected to be incurred by all of
our other consolidated and unconsolidated managed franchises.
SOURCES OF WORKING AND INVESTMENT CAPITAL. Our consolidated group currently
plans to fund future working capital requirements and finance capital
improvements and network expansion, acquisitions of and investments in cable
television franchises and capital contributions to our franchises, from a
combination of sources, including the Y54,874 million ($499 million) estimated
net proceeds of the global offering, cash from operating activities, proceeds
from private and public issuances of debt and equity securities and borrowings
under commercial loan facilities and lines of credit, including from Sumitomo
and its affiliates. However, our consolidated group has not received any
commitment for any sources of potential debt or equity financing. We are
currently in discussions with a group of international banks with respect to a
credit facility in an amount of up to Y150 billion ($1,363 million). Any
agreement with the banks will be subject to, among other things, the
satisfactory completion of due diligence by the banks, the finalization of the
syndication structure and terms of the credit facility and final documentation.
Although we plan to refinance our indebtedness in the first half of calendar
year 2001, we cannot predict when we will be able to refinance our existing
indebtedness, if at all. Consequently, our consolidated managed franchises
cannot predict how much of their currently planned Y83.4 billion ($758 million)
of capital expenditures through 2002 will be financed from any particular
source, nor can our consolidated group currently predict whether our maturing
indebtedness will be repaid or refinanced. As of September 30, 2000, the total
indebtedness of our consolidated group and that of our unconsolidated managed
franchises had a weighted average interest rate of 1.144%. Interest rates for
third-party commercial loans currently available in Japan are substantially
higher than our historical weighted average interest rate. We currently plan to
refinance our existing indebtedness with third-party commercial loans that we
expect will bear an annual rate of interest equal to TIBOR plus between 250 and
350 basis points. As of October 31, 2000, the two-month TIBOR was 0.54143%.
Accordingly, we expect that our annual debt service obligations will
substantially increase.
Until we are able to enter into a debt facility with commercial lenders, we
currently expect to obtain loans, and guarantees of loans, from our existing
shareholders and/or their affiliates although they are under no obligation to do
so. Upon completion of the global offering, we will be party to an agreement
with three of our existing shareholders, Sumitomo, Liberty Media and Microsoft,
under which we will pay to them a fee, on a quarterly basis, in an amount of up
to 1.0% annually of the average daily amount of our outstanding indebtedness
guaranteed by the guaranteeing shareholders. This fee will increase our
consolidated group's debt service obligations on our guaranteed indebtedness.
Our consolidated group has not previously paid a fee in connection with the
guarantee of its indebtedness.
Our unconsolidated managed franchises currently plan to fund future working
capital requirements and finance capital improvements and network expansion
primarily from debt financing and, as necessary, from capital contributions from
existing shareholders in the franchises, including Jupiter. However, none of our
unconsolidated managed franchises has received commitments from any sources of
potential debt or equity financing. Consequently, our unconsolidated managed
franchises cannot predict how much of their currently planned Y27.1 billion
($246 million) of capital expenditures through 2002 will be financed from any
particular source. In addition, our unconsolidated managed franchises do not
have the corporate power to require capital contributions from shareholders, and
we are not aware that any of them are planning to request voluntary capital
contributions, pro rata or otherwise.
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INDEBTEDNESS. As of September 30, 2000, our consolidated group's total
indebtedness, excluding capital leases, was Y109.5 billion ($995 million). The
following table summarizes the indebtedness, excluding capital leases, of
Jupiter and each of our consolidated franchises, unconsolidated managed
franchises and non-managed investments, all as of September 30, 2000:
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000
------------------------------------------
PERCENTAGE
TOTAL OWNERSHIP ATTRIBUTABLE
DEBT INTEREST DEBT(1)
------------ ---------- ------------
(IN THOUSANDS, EXCEPT PERCENTAGE AMOUNTS)
<S> <C> <C> <C>
OUR CONSOLIDATED GROUP
Jupiter............................. Y 9,520,000 100.0% Y 9,520,000
J-COM Titus......................... 35,300,000 100.0 35,300,000
J-COM Tokyo......................... 25,608,300 78.5 20,102,520
J-COM Kansai(2)..................... 8,188,500 98.8 8,090,240
Osaka............................... 2,270,350 58.9 1,337,240
J-COM Sapporo(3).................... 3,641,000 74.8 2,723,470
J-COM Kitakyushu(4)................. 6,207,500 81.4 5,052,900
Hokusetsu........................... 1,465,000 55.0 805,750
CV21 (Fukuoka)(5)................... 7,108,400 68.8 4,890,580
J-COM Sotetsu....................... 0 99.4 0
Gunma............................... 1,982,000 100.0 1,982,000
Tsuchiura........................... 1,443,150 61.3 884,650
Shonan.............................. 3,558,400 69.5 2,473,090
Kisarazu............................ 3,219,300 77.9 2,507,830
------------ -----------
Total............................. Y109,511,900 Y95,670,270
============ ===========
OUR UNCONSOLIDATED MANAGED
FRANCHISES
Fukuoka............................. Y 5,349,700 45.0% Y 2,407,360
Sakai(2)............................ 3,038,300 46.5 1,412,810
Kobe Ashiya......................... 1,627,600 42.3 688,470
Media Saitama....................... 5,240,500 40.1 2,101,440
Yokosuka............................ 5,381,400 47.0 2,529,260
Urawa............................... 4,616,650 49.7 2,294,480
Shimonoseki(6)(7)................... 1,855,000 50.0 927,500
------------ -----------
Total............................. Y 27,109,150 Y12,361,320
============ ===========
OUR NON-MANAGED INVESTMENTS
Kobe West........................... Y 2,247,700 20.0% Y 449,540
Hanshin............................. Y 3,662,600 7.8 Y 285,680
Fujisawa............................ Y 3,585,100 20.0 Y 717,020
</TABLE>
-------------------------
(1) Attributable Debt is the product of Total Debt and Percentage Ownership
Interest, and does not represent the amount of debt that Jupiter or any of
its franchises is obligated to repay.
(2) Our J-COM Kansai and Sakai franchises have entered into an agreement to
merge. We expect the merger to be completed in January 2001.
(3) The facilities and premises of our J-COM Sapporo franchise are encumbered by
a security interest held by the Development Bank of Japan.
(4) Our J-COM Kitakyushu franchise has granted the Development Bank of Japan the
right to request the assignment of a portion of its network and transmission
equipment to the Development Bank to secure the loans made to us by the
Development Bank of Japan.
(footnotes continued on next page)
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<PAGE> 74
(5) The facilities of our CV21 (Fukuoka) franchise are encumbered by a security
interest held by the Development Bank of Japan.
(6) Our Shimonoseki franchise has granted the Development Bank of Japan a
security interest in certain parcels of land and a building. In addition,
our Shimonoseki franchise has assigned a portion of its network and
transmission equipment to the Development Bank of Japan to secure the loans
made to us by the Development Bank of Japan.
(7) The other shareholders of our Shimonoseki franchise have an option to
purchase from us shares representing up to 5% of the outstanding shares of
the franchise, which if fully exercised would decrease our ownership
interest in the franchise to 45%.
The outstanding indebtedness of our consolidated franchises as of September
30, 2000 presented above had a weighted average interest rate of 1.192% and an
average maturity of 26 months. The outstanding indebtedness of our
unconsolidated managed franchises as of September 30, 2000 presented above had a
weighted average interest rate of 0.950% and an average maturity of 52 months.
As of September 30, 2000, our consolidated group and unconsolidated managed
franchises had total indebtedness of Y136,621 million, of which Y111,066 million
is due on or before September 30, 2001, and Y90,445 million is due on or before
March 31, 2001, including the Y57,518 million owed to Sumisho Finance Management
under a credit line which matures on March 31, 2001, unless renewed.
At September 30, 2000, Jupiter had additional available borrowing capacity
of Y0.5 billion ($5 million), our consolidated franchises had additional
available borrowing capacity of Y12.8 billion ($116 million) and our
unconsolidated managed franchises had additional available borrowing capacity of
Y4.7 billion ($42.7 million). These additional borrowing capacities are
primarily short-term credit facilities with Sumisho Finance Management.
The amount of our consolidated group's outstanding indebtedness may
adversely impair our ability to refinance portions of the currently outstanding
indebtedness and obtain additional financing in the future. The credit
facilities that we may enter into may contain various financial and operating
covenants, including the grant of security interests, that could adversely
impact our ability to operate our business, including restrictions on the
ability of our consolidated franchises to distribute cash to us.
We believe that, after giving effect to the global offering and based upon
our current level of operations, our cash flow and the cash flow of our managed
franchises provided from operating activities, together with the availability
under our credit facilities, including those of our managed franchises, will be
sufficient to enable Jupiter and each of its managed franchises to meet
operating costs and expenses for the next 12 months. However, we cannot assure
you that these amounts will be sufficient to accomplish our planned network
upgrade and expansion. If the amount of our cash flow is not sufficient to
provide for our currently planned network upgrade and expansion, then the
further upgrade and expansion of our broadband networks may be delayed or
reduced.
Our consolidated group does not anticipate that it will generate sufficient
cash flow from operating activities to repay the entire principal amount of our
consolidated group's outstanding indebtedness at maturity, including amounts due
within the next 12 months. As a result, our consolidated group may be required
to consider a number of measures, including refinancing all or a portion of its
indebtedness, seeking modifications to the terms of its indebtedness, seeking
additional debt financing which may be subject to obtaining necessary lender
consents, seeking additional equity financing or a combination of two or more of
the foregoing. Our consolidated group currently plans to refinance all of its
indebtedness due within the next 12 months through one or more various sources,
including private and public issuances of debt and equity securities and
borrowings under commercial loan facilities and lines of credit with current or
new lenders, including from Sumitomo and its affiliates. However, none of these
sources of capital is assured and the failure of our consolidated group to
refinance its indebtedness would have a material adverse effect on its business,
financial condition and results of operations. In addition, our ability to offer
new services and compete effectively, and our growth, financial condition and
results of operations could be materially adversely affected.
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INTEREST RATE RISK
The table below provides information about the financial instruments at
fair value of our consolidated group as of December 31, 1999 that are sensitive
to changes in interest rates, including debt obligations and capital lease
obligations. The table presents principal cash flows and related weighted
average interest rates by expected maturity dates.
<TABLE>
<CAPTION>
SCHEDULED MATURITY DATE
WEIGHTED ---------------------------------------------------------------------------
AVERAGE
INTEREST
RATE TOTAL 2000 2001 2002 2003 2004 THEREAFTER
-------- ------------ ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENTAGE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long-term debt....... 1.35% Y 11,969,635 Y 892,597 Y 964,691 Y 964,855 Y 976,960 Y 939,095 Y7,231,437
Capital lease
obligations........ 2.20% 7,306,274 1,821,116 1,627,609 1,394,450 1,112,611 767,145 583,343
------------ ---------- ---------- ---------- ---------- ---------- ----------
Total in Japanese
yen................ Y 19,275,909 Y2,713,713 Y2,592,300 Y2,359,305 Y2,089,571 Y1,706,240 Y7,814,780
============ ========== ========== ========== ========== ========== ==========
Total in U.S.
dollars............ $ 175,155 $ 24,659 $ 23,556 $ 21,438 $ 18,987 $ 15,504 $ 71,011
============ ========== ========== ========== ========== ========== ==========
</TABLE>
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." In June 2000,
SFAS No. 138, "Accounting for Certain Derivative Instruments and Hedging
Activities -- an Amendment of SFAS No. 133," was issued to amend the accounting
and reporting requirements of SFAS No. 133 for certain derivative instruments
and hedging activities. SFAS No. 133, as amended by SFAS No. 138, is effective
for the fiscal years beginning after June 15, 2000, and requires recognition of
all derivatives in the balance sheet and measurement of those instruments at
fair value. Changes in the fair value of derivatives will be required to be
recorded in the current earnings or other comprehensive income, depending on
hedge designation and type of the related hedge transaction. Hedge
ineffectiveness will be recognized in earnings. Our consolidated group will
adopt SFAS No. 133 in the year ending December 31, 2001. The effect on our
consolidated group's financial statements of adopting SFAS No. 133 is not
expected to be significant. There has been no derivative instrument employed by
our consolidated group through September 30, 2000.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB 101), and amended it in March
2000. We have adopted the provisions of SAB 101 with no significant impact on
our financial position or results of operations.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation -- an Interpretation of APB Opinion No. 25" (FIN 44). FIN 44
clarifies, among other issues, the application of APB Opinion No. 25 in the
following areas: the definition of an employee for purposes of applying APB
Opinion No. 25, the criteria for determining whether a plan qualifies as a
noncompensatory plan, the accounting consequence of various modifications to the
terms of previously fixed stock options or awards and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. We do not
expect the application of FIN 44 to have a material impact on our financial
position or results of operations.
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BUSINESS
OUR COMPANY
We, together with our managed franchises, are a leading broadband provider
of integrated entertainment, information and communication services in Japan. We
offer our services through our 20 managed franchises, primarily under the
"J-COM" brand. We were founded in January 1995 as a joint venture between
Sumitomo Corporation and Liberty Media International, Inc., formerly known as
Tele-Communications International, Inc., to acquire, manage and operate cable
television franchises in Japan. Through our managed franchises, we have
historically offered our customers cable television services. More recently, we
have expanded our service offerings to include telephony services and high-speed
Internet access services. We currently offer high-speed Internet access services
in parts of 19 of our managed franchises, and we offer telephony services in
selected areas. During 2001, we expect to begin our launch of digital and
interactive television services in selected managed franchises. We deliver these
services over our broadband networks, which we are expanding throughout the
franchise regions that we serve.
On September 1, 2000, we acquired Titus Communications Corporation, a major
broadband provider of cable television, telephony and high-speed Internet access
in Japan. Titus primarily served customers in areas geographically contiguous
with some of our managed franchises. As of September 30, 2000, our managed
franchise areas covered 6.3 million homes, of which 4.6 million were passed by
our broadband networks. As of September 30, 2000, we served 739,300 cable
television, 58,900 telephony and 98,800 high-speed Internet access customers,
making us the largest centrally managed multiple system operator in Japan. Our
cable television services represent the principal portion of the total revenues
of our consolidated group. Our telephony and high-speed Internet services are
still in the early stages of development. Our telephony service represented less
than 6%, and our high-speed Internet services represented less than 8%, of the
total revenue of our consolidated group for the nine months ended September 30,
2000.
Our management team has extensive experience in the development and
management of multi-media broadband and telecommunications services. Members of
our management team have been responsible for the development of various cable
television and telephony systems, including Sumitomo's cable television
operations contributed to us at the time we were formed and Telewest
Communications plc's integrated cable television and telephony operations in the
United Kingdom. Members of our management team also have prior experience at
other leading broadband companies, including AT&T Broadband, formerly known as
Tele-Communications, Inc., AT&T Japan, Jones Intercable, Cable & Wireless, U.S.
West and MediaOne.
Our three principal shareholders, Sumitomo, Liberty Media and Microsoft
Holdings V, Inc., have been instrumental in developing our business, attracting
and providing a premier management team and facilitating the acquisition of our
managed franchises. We believe the combined technological expertise, business
relationships and industry knowledge of these strategic shareholders will enable
us to provide multiple broadband services more rapidly and effectively, to enter
into strategic relationships and to adapt to changes in our industry.
OUR OPERATIONAL STRUCTURE
Our Managed Franchises
We are the largest shareholder in 20 individually operated cable
franchises, all of which have entered into management agreements with us and pay
us management fees on a per-customer basis. Seventeen of these managed
franchises offer broadband services under the J-COM brand. We expect that our
J-COM Titus and J-COM Sotetsu franchises will begin marketing their broadband
services under the J-COM brand in December 2000. We further expect that our
Yokosuka franchise will begin offering its broadband services under the J-COM
CATY brand in January 2001. Of our 20 managed franchises, we own a majority
equity interest in 13 and an equity interest of over 40% in each of the other
seven. As of September 30, 2000, we had 6.3 million homes within our managed
franchise areas, of which we passed
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4.6 million with our broadband networks, and we served 739,300 cable television,
58,900 telephony and 98,800 high-speed Internet access customers.
Nineteen of our managed franchises, most of which are located in some of
the most populated urban regions in Japan, are organized in three large regional
clusters: the Kanto cluster, which includes our managed franchises in Tokyo; the
Kansai cluster, which includes our managed franchises in Osaka and Kobe; and the
Kyushu cluster, which includes our managed franchises in Fukuoka and Kitakyushu.
In addition, we also have one managed franchise in Sapporo.
[MAP OF JAPAN SHOWING JUPITER'S FRANCHISE CLUSTERS AND LISTING MANAGED
FRANCHISES GROUPED BY CLUSTER AND JUPITER'S CURRENT OWNERSHIP INTEREST
IN EACH MANAGED FRANCHISE.]
As a multiple system operator, we provide each managed franchise with
experienced personnel, including the president of each managed franchise,
operating and administrative services, sales and marketing training, programming
and equipment procurement assistance and other management services. We require
our managed franchises to construct their networks based on our standard
architecture, and we provide design and construction expertise for the network
build-out. To facilitate our ability to manage our managed franchises and the
ability of our managed franchises to manage their operations, each of our
managed franchises either uses or is in the process of adopting our unified
customer management system to support sales, customer service, billing and
collection for cable television, telephony and high-speed Internet access. In
return for these management services, our managed franchises pay us a monthly
management fee. In addition, all of our managed franchises pay us an agreed upon
margin on services and equipment purchased through our central office. The
licenses required to offer our services are held at the franchise level.
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Our Investments in Other Cable Franchises
In addition to our managed franchises, we own non-controlling equity
interests of between 7% and 20% in three cable franchises that are operated and
managed by third-party franchise operators. We refer to these cable franchises
as our non-managed investments. As of September 30, 2000, our non-managed
investments had 983,900 homes within their franchise areas, of which 666,300
homes were passed by their broadband networks, and they served 89,000 cable
television and 13,000 high-speed Internet access customers. In addition, we own
an interest of less than 3% in each of Kansai Cablenet Co., Ltd., which we
acquired in October 2000 in exchange for our investment in our Suita franchise,
and one other company which owns and operates cable franchises.
Our Joint Venture with At Home Corporation
We own a 35.7% interest in @Home Japan Co., Limited, a joint venture with
Sumitomo and At Home Corporation, a U.S.-based provider of Internet access, Web
portals and content in the U.S. and internationally. In June 2000, we began the
commercial launch of @Home Japan high-speed Internet access under the
J-COM@NetHome brand. As of September 30, 2000, ten of our managed franchises
offered the J-COM@NetHome service. This service provides high-speed Internet
access and a Web portal, offering rich broadband content delivered over @Home
Japan's private network. We presently plan to roll-out the @Home Japan service
to the remainder of our managed franchises by the end of 2001. Our present
strategy is to migrate our existing high-speed Internet access customers to the
@Home Japan service as we implement it in each of our managed franchises.
Our Investment in Kansai Multimedia
We own a 26% interest in Kansai Multimedia Services, a high-speed Internet
access provider. Our primary partner in Kansai Multimedia is Kansai Electric
Power Company, an electric utility company. Kansai Multimedia provides turnkey
high-speed Internet access for cable system operators in the Kansai region of
Japan, as well as Internet access and infrastructure services for several of our
managed franchises. We provide our managed franchises in the Kansai region with
@Home Japan's broadband content over the Kansai Multimedia network.
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OPERATING DATA
The following tables set forth as of September 30, 2000 selected operating
data for our managed franchises and non-managed investments:
Cable Television
<TABLE>
<CAPTION>
OWNERSHIP FRANCHISE HOMES CUSTOMER
FRANCHISES INTEREST HOMES(1)(2) PASSED(2) CUSTOMERS PENETRATION(3)
---------- --------- ----------- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
MANAGED -- CONSOLIDATED
J-COM Titus.................... 100.0% 1,098,800 792,700 63,900 8.1%
J-COM Tokyo.................... 78.5 838,000 681,700 147,300 21.6
J-COM Kansai(4)................ 98.8 725,900 504,700 73,300 14.5
Osaka.......................... 58.9 344,300 289,600 44,300 15.3
J-COM Sapporo.................. 74.8 389,900 282,600 26,400 9.3
J-COM Kitakyushu............... 81.4 322,000 168,300 29,000 17.2
Hokusetsu...................... 55.0 182,900 139,200 24,700 17.7
CV21 (Fukuoka)................. 68.8 164,300 149,000 31,300 21.0
J-COM Sotetsu.................. 99.4 129,500 44,200 3,400 7.7
Gunma.......................... 100.0 116,400 50,500 4,900 9.7
Tsuchiura...................... 61.3 117,700 63,900 19,700 30.8
Shonan......................... 69.5 97,800 84,100 23,100 27.5
Kisarazu....................... 77.9 86,500 63,100 18,900 30.0
--------- --------- -------
Subtotal.................... 4,614,000 3,313,600 510,200 15.4%
--------- --------- -------
MANAGED -- UNCONSOLIDATED
Fukuoka........................ 45.0% 349,700 230,700 35,800 15.5%
Sakai(4)....................... 46.5 301,100 195,200 32,900 16.9
Kobe Ashiya.................... 42.3 262,900 229,600 36,000 15.7
Media Saitama.................. 40.1 257,800 231,400 26,000 11.2
Yokosuka....................... 47.0 196,900 175,800 46,100 26.2
Urawa.......................... 49.7 219,500 161,000 42,900 26.6
Shimonoseki(5)................. 50.0(5) 105,500 65,200 9,400 14.4
--------- --------- -------
Subtotal.................... 1,693,400 1,288,900 229,100 17.8%
--------- --------- -------
Total -- Managed
Franchises............. 6,307,400 4,602,500 739,300 16.1%
========= ========= =======
NON-MANAGED INVESTMENTS(6)
Hanshin........................ 7.8% 563,800 363,500 43,800 12.0%
Kobe West...................... 20.0 271,000 159,000 20,300 12.8
Fujisawa....................... 20.0 149,100 143,800 24,900 17.3
</TABLE>
Telephony
<TABLE>
<CAPTION>
OWNERSHIP FRANCHISE HOMES CUSTOMER
FRANCHISES INTEREST HOMES(1)(2) PASSED(2) CUSTOMERS PENETRATION(3)
---------- --------- ----------- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
MANAGED -- CONSOLIDATED
J-COM Titus.................... 100.0% 1,098,800 706,000 23,600 3.3%
J-COM Tokyo.................... 78.5 838,000 481,900 33,900 7.0
J-COM Sotetsu.................. 99.4 129,500 44,200 1,400 3.2
--------- --------- -------
Total -- All Franchises... 2,066,300 1,232,100 58,900 4.8%
========= ========= =======
</TABLE>
(footnotes on next page)
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<PAGE> 80
High-Speed Internet Access
<TABLE>
<CAPTION>
OWNERSHIP FRANCHISE HOMES CUSTOMER
FRANCHISES INTEREST HOMES(1)(2) PASSED(2) CUSTOMERS PENETRATION(3)
---------- --------- ----------- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
MANAGED -- CONSOLIDATED
J-COM Titus.................... 100.0% 1,098,800 775,800 36,200 4.7%
J-COM Tokyo.................... 78.5 838,000 423,900 15,100 3.6
J-COM Kansai(4)................ 98.8 725,900 477,700 16,600 3.5
Osaka.......................... 58.9 344,300 289,600 5,400 1.9
J-COM Kitakyushu............... 81.4 322,000 97,600 400 0.4
Hokusetsu...................... 55.0 182,900 139,200 5,700 4.1
J-COM Sotetsu.................. 99.4 129,500 44,200 2,200 5.0
Gunma.......................... 100.0 116,400 50,500 300 0.6
Tsuchiura...................... 61.3 117,700 30,800 600 1.9
Shonan......................... 69.5 97,800 84,100 1,400 1.7
Kisarazu....................... 77.9 86,500 30,100 700 2.3
--------- --------- -------
Subtotal.................... 4,059,800 2,443,500 84,600 3.5%
--------- --------- -------
MANAGED -- UNCONSOLIDATED
Sakai(4)....................... 46.5% 301,100 11,000 700 6.4%
Kobe Ashiya.................... 42.3 262,900 200,200 3,600 1.8
Media Saitama.................. 40.1 257,800 231,400 2,900 1.3
Yokosuka....................... 47.0 196,900 27,400 400 1.5
Urawa.......................... 49.7 219,500 161,000 6,100 3.8
Shimonoseki(5)................. 50.0 105,500 65,100 500 0.8
--------- --------- -------
Subtotal.................... 1,343,700 696,100 14,200 2.0%
--------- --------- -------
Total -- Managed
Franchises............. 5,403,500 3,139,600 98,800 3.1%
========= ========= =======
NON-MANAGED INVESTMENTS(6)
Hanshin........................ 7.8% 563,800 363,500 9,400 2.6%
Kobe West...................... 20.0 271,000 159,000 3,600 2.3
</TABLE>
---------------
(1) Franchise homes represents the total number of single residences and
multiple-dwelling units within the franchise area and is based on recent
available census data.
(2) Our franchise homes data reflects recent available census data. Our homes
passed figures are estimated based on recent available census data, updated
for additional information related to the specific franchise area. In many
of our franchises the population is increasing and single-dwelling units are
gradually being replaced with multiple-dwelling units, resulting in an
increasing number of franchise homes and homes passed. We believe that in
most of our franchises, and on an aggregate basis, this has resulted in
homes passed being higher than our reported figures. As we periodically
update our system data to account for the increasing number of homes in our
franchises, we expect to revise our reported figures in the future.
(3) Customer penetration is calculated by dividing customers by homes passed.
(4) Our J-COM Kansai and Sakai franchises have entered into an agreement to
merge. We expect the merger to be completed in January 2001.
(5) The other shareholders of our Shimonoseki franchise have an option to
purchase from us shares representing up to 5% of the outstanding shares of
the franchise, which if fully exercised, would decrease our ownership
interest in the franchise to 45%.
(6) In addition, we own an interest of less than 3% in each of Kansai Cablenet
Co., Ltd., which we acquired in October 2000 in exchange for our investment
in our Suita franchise, and one other company which owns and operates cable
franchises.
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<PAGE> 81
OUR BUSINESS STRATEGY
We are committed to maintaining and building upon our position as the
largest centrally managed multiple system operator in Japan by pursuing the
following business strategies:
Offer High-Value Bundled Entertainment, Information and Communications
Services
We focus on offering compelling services at an attractive price. We are
committed to offering services which we believe consumers find exciting,
relevant and valuable. In cable television, our goal is to be the best source of
home entertainment by providing a wide selection of popular programming and
content for our customers, and following the launch of digital television, an
exciting interactive experience. In telephony, our goal is to provide
competitively priced, high-quality digital services with value-added features.
In Internet access, we aim to be the best in terms of speed and accessibility to
media-rich portals and Web-sites at a fixed monthly fee. Through our integrated
services, we seek to be the one-stop shop for the entertainment, information and
communication needs of our customers. Our goal is to deliver our current and
future services through a single entry point into the home and through a single
sales, billing, service and operations infrastructure. We believe the integrated
delivery of these services will result in a better customer experience and will
enable us to fully utilize our network infrastructure by generating multiple
revenue streams. We intend to continue to add new services to address changing
customer needs and demands as technology and customer preferences evolve.
Develop Our Network Infrastructure to Ensure Customer Satisfaction
We believe network reliability is a key element in establishing customer
confidence and satisfaction. Our network must ensure delivery of our multiple
services with strong signal clarity, high-speed transmission, two-way
communication and continuous access. To achieve these objectives, we are
expanding our advanced broadband networks, which are designed to provide
multiple two-way, high-speed service offerings, including high definition
television, more commonly referred to as HDTV, services, as they become
available. Since we were established in 1995, substantially all of our newly
constructed networks have been built to a standard architecture of two-way fiber
optic and coaxial cable with spectrum capacity of 750 megahertz. We expect that
by the end of 2000 we will have either built or upgraded approximately 80% of
the homes passed by our networks to a two-way 750 megahertz fiber optic and
coaxial cable standard. We intend to continue to expand and upgrade our
transmission facilities and equipment to achieve lower cost and faster speed and
to support higher demand for our services.
Capitalize on Regional Clustering of Franchises
Nineteen of our managed franchises are organized in three regional
clusters: the Kanto cluster, which includes Tokyo; the Kansai cluster, which
includes Osaka and Kobe; and the Kyushu cluster, which includes Fukuoka and
Kitakyushu. Our regional clustering strategy enables us to reduce network
buildout costs, more rapidly launch new services, and, in certain instances, may
enable us to consolidate headends. For example, we can deploy a single telephony
switch or high-speed Internet server to reach a larger region and more potential
customers than we would be able to reach with a more dispersed base of franchise
homes. Clustering allows us to achieve significant operating efficiencies by
reducing ongoing network maintenance costs and by serving a greater number of
customers with a common operational, sales, technical support and customer
service infrastructure. Clustering also facilitates mergers of our clustered
franchises which allows us to serve a greater number of customers under common
management. We believe that we will achieve further benefits as we continue to
integrate our cable networks and operations infrastructure. In addition, we may
look for opportunities to partner with or to acquire other operators in
geographically proximate markets, further leveraging our existing cable network
infrastructure.
Achieve Efficiencies as a Multiple System Operator
Our centrally managed multiple system operator structure and our
significant scale of operations enable us to achieve numerous management,
operating and purchasing synergies. In addition, franchise-wide marketing under
the J-COM brand enables us to cost-effectively advertise and market our
services. Our growing customer base improves our purchasing power, enabling us
to contract for programming and
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<PAGE> 82
equipment on more favorable terms. Consolidation of management, sales and
technical training, as well as billing, accounting and customer management,
allows us to achieve significant cost savings. We believe our experience in
operating multiple franchises enhances knowledge-transfer and sharing of best
practices. We have leveraged the expertise of our principal shareholders across
all of our managed franchises. We believe we have the opportunity and the
resources to realize additional efficiencies both in our existing managed
franchises and through the acquisition of additional franchises.
Aggressively Market Our Services and Brand
Our marketing and sales efforts have been fundamental in driving the growth
of our customer base. Therefore, we intend to continue to commit significant
resources to these activities in the future. Our marketing objectives include
raising consumer awareness of the choice and convenience of our services. Our
marketing strategy is to promote the J-COM brand, to actively sell our services
to new and existing customers and to competitively price our services to offer
customers greater value. We plan to continue to market our services through a
number of initiatives, which currently include door-to-door marketing by local
sales representatives, telemarketing, direct mail, advertising and working with
the landlords of multiple-dwelling units to make our services available to their
tenants. With the acquisition of Titus, we believe we have strengthened our
ability to add customers through inbound calling.
THE JAPANESE MARKET ENVIRONMENT FOR BROADBAND SERVICES
We believe that a number of regulatory, competitive, demographic and
economic factors make Japan an attractive market for our operations.
Regulatory and Competitive Environment
- The national and local governments consider cable television to be an
important means of disseminating information to the public and have
implemented policies to encourage the development of the industry.
-- The national and local governments have provided financial support to
cable television operators to construct their networks.
-- The national government has deregulated the cable television industry
in recent years, removing all restrictions on foreign and non-local
ownership and permitting the formation of multiple system operators.
- A Ministry of Posts and Telecommunications administrative guideline
recommends the owners of buildings that obstruct terrestrial broadcast
television signals to provide for the retransmission of these broadcast
signals to households that would otherwise be unable to receive them. In
many cases, cable operators provide these services in exchange for
compensation from building owners.
- The Ministry of Posts and Telecommunications has announced a timetable
for the introduction of HDTV in Japan, which is expected to improve the
television viewing experience and create an opportunity for television
providers that are able to deliver HDTV signals rapidly and cost
effectively.
- The national government has introduced, and has begun to implement, plans
to reduce telephony interconnection fees charged by NTT to connect with
its network and has announced plans to introduce number portability when
changing service providers during 2001 to promote competition in the
telephony industry.
- There are numerous suppliers of cable television programming in Japan,
including sports and movie programming, and no individual supplier
controls the market.
Demographic and Economic Factors
- Japan has a high population and household density, which enables cable
system operators to construct their networks cost effectively.
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<PAGE> 83
- The standard of construction of cable television networks in Japan is
generally aerial, which reduces the capital necessary for network
construction.
- Despite economic weakness in the 1990s, Japan remains a high-income
society with an average monthly income per working household of Y574,676
($5,222) and average monthly consumption per working household of
Y346,177 ($3,146) in 1999 according to the Statistics Bureau of Japan.
- In recent years, Japanese banks and other Japanese lenders have offered
low interest rates on debt financing, benefiting the economy in general
and cable system operators.
- Dial-up Internet users have historically been required to pay time-based
fees and connection fees to some Internet service providers for Internet
access as well as time-based fees charged by NTT and other carriers for
local calls, increasing the cost of using the Internet. We believe this
has contributed to Japan's relatively low Internet penetration rate of
19.1% of total households as of December 31, 1999 according to the
Ministry of Posts and Telecommunications.
OUR REGIONAL CLUSTERS
Kanto Cluster
As of September 30, 2000, the managed franchises which comprise our Kanto
cluster had an aggregate of 3,158,900 franchise homes and served 396,200 cable
television, 58,900 telephony and 65,900 high-speed Internet access customers.
Our Kanto cluster is located in the center of Japan and consists of parts of the
Tokyo metropolitan area and the Ibaraki, Gunma, Saitama, Chiba and Kanagawa
prefectures.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
INITIAL
INVESTMENT
FRANCHISE LEGAL NAME BRAND USED SERVICE AREA DATE
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J-COM Titus Titus Communications J-COM(1) Tokyo (Kodaira, Tanashi, September 2000
Corporation Higashi-kurume, Hoya,
Itabashi, Higashi-
murayama, Kiyose)
Chiba (Kashiwa, Abiko,
Kamagaya, Shonan)
Kanagawa (Sagamihara)
Gunma (Maebashi, Isezaki)
----------------------------------------------------------------------------------------------------
J-COM Tokyo J-COM Tokyo Co., Ltd. J-COM Tokyo (Suginami, Nerima, March 1995
Koganei, Kokubunji,
Fuchu)
Saitama (Wako, Niiza)
----------------------------------------------------------------------------------------------------
Media Saitama Media Saitama Co., Ltd. J-COM Saitama (Omiya, Ageo, Ina) March 1999
----------------------------------------------------------------------------------------------------
Yokosuka CATV Yokosuka Co., Ltd. J-COM CATY(2) Kanagawa (Yokosuka, Zushi, September 1996
Miura, Hayama)
----------------------------------------------------------------------------------------------------
Urawa Urawa Cable Television J-COM Saitama (Urawa, Yono) December 1996
Network Co., Ltd.
----------------------------------------------------------------------------------------------------
J-COM Sotetsu TITUS Sotetsu J-COM(1) Kanagawa (Yamato, Seya) September 2000
Corporation
----------------------------------------------------------------------------------------------------
Gunma Jupiter Gunma Co., Ltd. J-COM Gunma (Takasaki, Fujioka) February 1996
----------------------------------------------------------------------------------------------------
Tsuchiura Tsuchiura Cable J-COM Ibaraki (Tsuchiura, October 1996
Television Co., Ltd. Ushiku, Ami)
----------------------------------------------------------------------------------------------------
Shonan J-COM Shonan Co., Ltd. J-COM Kanagawa (Chigasaki, March 1995
Samukawa)
----------------------------------------------------------------------------------------------------
Kisarazu Kisarazu Cable J-COM Chiba (Kisarazu, Kimitsu, December 1995
Television Co., Ltd. Sodegaura, Futtsu)
----------------------------------------------------------------------------------------------------
</TABLE>
---------------
(1) We expect that our J-COM Titus and J-COM Sotetsu franchises will begin
marketing their services under the J-COM brand in December 2000.
(2) We expect that our Yokosuka franchise will begin marketing its services
under the J-COM CATY brand in January 2001.
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<PAGE> 84
Kansai Cluster
As of September 30, 2000, the managed franchises which comprise our Kansai
cluster had an aggregate of 1,817,100 franchise homes and served 211,200 cable
television and 32,000 high-speed Internet access customers. Our Kansai cluster
is located in southwestern Japan and consists of parts of the Osaka, Hyogo and
Wakayama prefectures, including parts of the cities of Osaka and Kobe.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
INITIAL
INVESTMENT
FRANCHISE LEGAL NAME BRAND USED SERVICE AREA DATE
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J-COM Kansai(1) J-COM Kansai J-COM Osaka (Yao, Kashiwabara, Fujiidera, January 1996
Co., Ltd. Matsubara, Habikino, Kaizuka,
Izumisano, Sennan, Hannan,
Kumadori, Tajiri, Misaki)
Hyogo (Takarazuka, Kawanishi,
Inagawa)
Wakayama (Wakayama, Kainan, Iwade,
Kishikawa)
--------------------------------------------------------------------------------------------------------
Osaka Osaka Cable TV J-COM Osaka (Abeno, Sumiyoshi, Higashi- May 1996
Corporation sumiyoshi, Hirano, Ikuno, Tennoji)
--------------------------------------------------------------------------------------------------------
Sakai(1) Sakai Cable TV J-COM Osaka (Sakai) August 1998
Corporation
--------------------------------------------------------------------------------------------------------
Kobe Ashiya Cablenet Kobe J-COM Hyogo (Kobe (Higashi-nada, Nada, December 1997
Ashiya Co., Chuo, Hyogo), Ashiya)
Ltd.
--------------------------------------------------------------------------------------------------------
Hokusetsu Hokusetsu J-COM Osaka (Minoo, Ibaraki, Settsu) June 1996
Cable Net
Co., Ltd.
--------------------------------------------------------------------------------------------------------
</TABLE>
---------------
(1) Our J-COM Kansai and Sakai franchises have entered into an agreement to
merge. We expect the merger to be completed in January 2001.
Kyushu Cluster
As of September 30, 2000, the managed franchises which comprise our Kyushu
cluster had an aggregate of 941,500 franchise homes and served 105,500 cable
television and 900 high-speed Internet access customers. Our Kyushu cluster is
located in southern Japan and consists of parts of the Fukuoka and Yamaguchi
prefectures, including parts of the cities of Fukuoka and Kitakyushu.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
INITIAL
INVESTMENT
FRANCHISE LEGAL NAME BRAND USED SERVICE AREA DATE
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fukuoka Fukuoka Cable J-COM Fukuoka (Higashi, Sawara, Hakata, March 1996
Network Co., Nishi)
Ltd.
--------------------------------------------------------------------------------------------------------
J-COM Kitakyushu J-COM J-COM Kitakyushu (Kokura-kita, Kokura- April 1996
Kitakyushu minami, Moji, Yahata-nishi)
Co., Ltd.
--------------------------------------------------------------------------------------------------------
CV21 (Fukuoka) Cablevision 21 J-COM Fukuoka (Minami, Jonan) April 1996
Inc.
--------------------------------------------------------------------------------------------------------
Shimonoseki Cable Net J-COM Yamaguchi (Shimonoseki) December 1996
Shimonoseki
Co., Ltd.
--------------------------------------------------------------------------------------------------------
</TABLE>
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<PAGE> 85
J-COM Sapporo Franchise
We also have a managed franchise in Sapporo, Hokkaido. As of September 30,
2000, J-COM Sapporo had an aggregate of 389,900 franchise homes and served
26,400 cable television customers.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
INITIAL
INVESTMENT
FRANCHISE LEGAL NAME BRAND USED SERVICE AREA DATE
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
J-COM Sapporo J-COM Sapporo, J-COM Sapporo (Chuo, Nishi, Minami, September 2000
Co., Ltd. Toyohira, Shiroishi, Atsubetsu)
--------------------------------------------------------------------------------------------------------
</TABLE>
INDUSTRY OVERVIEW
Cable Television Sector
Prior to 1993, the government regulated local cable television development
and local ownership and control of the country's cable systems. As a result,
until government deregulation in 1993, the industry consisted of a large number
of small franchises with individual distribution systems and program offerings.
Local governments often partnered with local businesses to invest in the
creation of Japan's early cable television networks. Local governments continue
to be shareholders in most of our franchises. The participation of local
governments as shareholders has been and continues to be beneficial as it
enhances a cable television operator's ability to provide relevant local
community channels to customers, develop key relationships within local
communities, pay reduced road use fees and property taxes and receive financing
and subsidies for network construction. Some of our managed franchises received
in the aggregate Y1,100 million ($10 million) in subsidies from the national and
local governments in early 2000 under a special application grant to promote
economic growth through infrastructure development and, as of September 30,
2000, our managed franchises had outstanding borrowings of over Y17,200 million
($156 million) in interest-free loans from the Development Bank of Japan.
Following deregulation of the cable television industry in 1993, the
government has eased a number of restrictions, including restrictions on foreign
and non-local ownership, mergers and engaging in other lines of business.
However, the cable television industry in Japan remains highly fragmented. As of
March 31, 2000, according to the Ministry of Posts and Telecommunications, Japan
had 686 cable franchises, including the franchises managed by us. In 1999, the
government announced its desire that 100% of Japanese television transmission be
digital by 2010, and its intention to provide monetary support to ease the
financial burden on cable television operators to upgrade their systems. We
believe that industry fragmentation and the government's emphasis on digital
television transmission will provide opportunities for us to partner with or
acquire smaller operators who need financial and operational support.
We expect the introduction of digital HDTV to significantly alter the
television industry in Japan, and to affect cable television providers,
terrestrial broadcasters and direct-to-home satellite television providers. In
October 1998, the Ministry of Posts and Telecommunications announced its desire
that terrestrial broadcasters begin digital HDTV broadcasting in the Tokyo,
Nagoya and Osaka areas in 2003, and in the rest of the country in 2006. Industry
experts believe that beginning in December 2000, Japan Broadcasting Corporation,
more commonly referred to as NHK, and Japan's six commercial television
broadcasters will start broadcasting digital HDTV signals via satellite. To
receive digital HDTV broadcasts, viewers will be required to use digital
television sets or HDTV signal adapters. Although broadcasters are expected to
initially offer analog simulcast of their digital channels, analog satellite
broadcasts are expected to be phased out by 2007 and terrestrial broadcasts are
expected to be phased out by 2010.
Telephony Sector
Until 1985, NTT had a state-granted monopoly on all local and long-distance
telephony business in Japan. In 1985, in an effort to reduce NTT's monopoly, the
government began permitting new common carriers to compete with NTT. Major
operators other than NTT in local call markets include Tokyo Telecommunications
Network and Kyushu Telecommunications Network. Major operators in the long-
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<PAGE> 86
distance and international call market include NTT, Japan Telecom Co., Ltd. and
DDI Corporation. On October 1, 2000, KDD Corporation and IDO Corporation merged
into DDI Corporation, which now offers its services under the "KDDI" brand.
The wireless telephony market consists of both analog and digital cellular
services and Personal Handiphone Systems. A Personal Handiphone System, or PHS,
is a digital wireless telephone system that operates on a microcell network,
offering shorter-range services and less mobility than cellular services. Major
operators in the cellular services market include NTT DoCoMo, Inc., KDDI's "au
group," formerly IDO Corporation and DDI Cellular group, and J-Phone group.
Major operators in the PHS market include NTT DoCoMo, DDI Pocket and ASTEL
group. According to the Ministry of Posts and Telecommunications, for the
12-month period ended March 31, 1999, common carriers other than NTT carried
15.7% of all domestic fixed-line calls, including 48.8% of domestic
long-distance calls and 6.3% of local calls. During the same period, common
carriers other than NTT also carried 47.1% of wireless calls, including 42.0% of
cellular calls and 83.5% of PHS calls. Until 1985, KDD Corporation, a
predecessor to DDI Corporation, had a state granted monopoly on international
calls. In 1985, the government began permitting competition with KDD Corporation
in the international call market. In October 1999, NTT entered the international
call market. For the 12-month period ended March 31, 1999, KDD Corporation
carried 59.6% of international calls and common carriers other than KDD
Corporation carried the remaining 40.4%.
In 1994, the government adopted regulations allowing cable television
operators to offer telephony services. In July 1999, in order to further
accelerate competition, the government mandated NTT's reorganization into a
holding company with newly established NTT East and NTT West providing local
access and NTT Communications providing long-distance and international access.
In addition to the reorganization of NTT, the Japanese telecommunication
industry has experienced a number of major changes in recent years including
investment by foreign telecommunications operators, such as AT&T, British
Telecom and Cable & Wireless, and general industry consolidation, such as the
recent merger of DDI Corporation, KDD Corporation and IDO Corporation.
NTT is the principal provider of fixed telephony in Japan that owns and
operates a nationwide system. Other common carriers, including us, must connect
to NTT's system for calls extending beyond their respective networks. To support
"any-to-any" calling, we have 53 interconnection agreements with 55 telephony
operators. We expect interconnection charges to decrease if the Long Running
Incremental Cost method is implemented. The Long Running Incremental Cost method
calculates interconnection charges based on costs assumed to be incurred for the
construction of the current network with presently available equipment and
technology, as opposed to calculating interconnection charges based on the
actual historical costs incurred to construct the network. As a first step, in
July 2000, Japan and the United States jointly announced an agreement under
which the Japanese government would adopt regulations effectively requiring NTT
to reduce its regional access rates by 50% and its local access rates by 20%
over a two-year period.
Internet Sector
Use of the Internet in Japan has lagged behind use in the U.S., but is
extensive and growing. According to Access Media International, Japan had an
estimated 18.5 million Internet users as of December 1999. Only the U.S., with
an estimated 80 million users, had a larger number of Internet users in 1999.
Access Media International estimates that the number of Internet users in Japan
will reach 30 million by 2002.
Broadband Internet access delivered over high-capacity hybrid fiber
optic-coaxial networks has the advantage of being able to provide high
transmission speed and always-on connectivity. Broadband Internet access
customers are able to enjoy increasingly sophisticated entertainment and
commercial service offerings on the Internet, including digital quality video
and audio. These service offerings can be transmitted over high-capacity hybrid
fiber optic-coaxial networks at speeds of up to 100 times faster than are
achievable with a conventional 56.6 kilobits per second dial-up modem.
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<PAGE> 87
According to a Ministry of Posts and Telecommunications survey, as of April
1, 2000, there were 145 cable television operators holding a Type I carrier
license to provide Internet access, 136 of which had provided services to
216,000 broadband Internet access customers.
OUR SERVICES
We provide a suite of related and complementary entertainment, information
and communication services to our customers. As of September 30, 2000, we
provided traditional cable television services in all of our managed franchises,
serving 739,300 customers, we provided telephony services in three of our
managed franchises serving 58,900 customers, and we provided high-speed Internet
access in parts of 17 of our managed franchises serving 98,800 customers. We
currently offer high-speed Internet access in parts of 19 of our managed
franchises. We intend to launch our digital and interactive television services
in most of our managed franchises during 2001. We expect to be able to provide
our telephony service in all of our managed franchises by the end of 2003.
Traditional Cable Television Services
We provide a wide selection of cable television programming to our
customers for a monthly fee. We offer customers a package of basic cable
services, including news, sports, movies and other popular programs, and a
choice of various premium services. We believe our relationship with Jupiter
Programming Co., Ltd., an affiliate of ours, enables us to provide quality
programming cost-effectively. All of our cable television customers receive a
basic cable channel package. In addition, as of September 30, 2000, our
customers subscribed to a total of 318,000 premium channels for a premium
channel per customer ratio of 43%. We tailor our basic channel line-up and our
additional premium channel offerings for each franchise according to
demographics, programming preferences, competition and price sensitivity.
- BASIC SERVICE. Our basic cable channel package consists of approximately
43 channels of local broadcast television, local community programming,
including governmental and satellite delivered programming, including
those provided by Jupiter Programming Co., Ltd. A typical channel line-up
includes popular channels in the Japanese market such as CSN, a top
Japanese movie channel; the SHOP Channel, a shopping network; 1, 2 and 3,
three popular sports channels; The Discovery Channel; and the Golf
Network. As of September 30, 2000, the fees for our basic cable channel
package in 17 of our managed franchises ranged from Y3,000 ($27) to
Y3,600 ($33), depending on the franchise. We expect that the three former
Titus franchises will offer our basic cable channel package by the end of
December 2000. We expect to implement our current pricing packages for
all new customers in these franchises by the end of December 2000 and to
adopt our current pricing packages for existing customers in these
franchises by the end of April 2001.
- PREMIUM CHANNELS. Our premium channels provide premium movies, sports,
horseracing and other special event entertainment programming which we
source through multiple suppliers. We offer subscriptions to these
channels either individually or in packages. One of our most popular
premium offerings is the basic cable plus WOWOW package, to which
approximately 27% of our customers subscribed as of September 30, 2000.
In addition, the basic cable plus WOWOW package includes a film, event
and special programming channel. We currently charge Y4,800 ($44) per
month for the basic cable plus WOWOW package in 17 of our managed
franchises, representing a savings to our customers of up to Y800 ($7)
per month off the stand-alone WOWOW retail price. We expect that the
three former Titus franchises will offer our basic cable plus WOWOW
package by the end of December 2000. We expect to implement our current
pricing packages for all new customers in these franchises by the end of
December 2000 and to adopt our current pricing packages for existing
customers in these franchises by the end of April 2001.
We charge a varying installation fee for the first cable outlet within the
home. Installation fees for second cable outlets also vary, but are generally
priced lower than the first outlet to encourage customers to take an additional
outlet at the time of the initial sign-up.
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Our basic and premium channel fees cover one cable outlet within the
customer's home. We offer our customers additional cable outlets for which we
charge discounted rates for basic channel services. As of September 30, 2000,
127,600 of our cable customers, or 17%, subscribed to additional cable outlets.
We believe our ability to offer additional outlets is a competitive advantage
over satellite television providers, which are currently unable to offer
additional outlets to their customers without requiring the customer to install
an additional satellite receiver for each outlet.
In addition to our basic service and premium channel service, we offer our
customers the NHK 1 and NHK 2 broadcast channels as part of our basic cable
service. We also offer our customers two popular pay channels, BS1 and BS2,
which are produced by NHK. To receive BS1 and BS2 other than by subscribing
through us, a household would have to purchase and install a satellite receiver.
All households that receive the NHK broadcast channels, including our
customers who elect to receive the NHK pay channels through our cable service,
are required to pay a monthly fee to NHK. NHK offers our customers who also
subscribe to NHK's two pay channels through us the option either to pay the fees
directly to NHK, or remit discounted fees to us. For our customers electing to
pay the discounted NHK fees, we collect the fees as part of our regular customer
billings and forward the fees to NHK. NHK pays us a small per customer
collection fee for our customers electing to pay in this manner. We do not pay
NHK any programming fees for these channels.
A Ministry of Posts and Telecommunications administrative guideline
recommends the owners of buildings which obstruct terrestrial broadcast
television signals to provide for the retransmission of these broadcast signals
to households which would otherwise be unable to receive them. In many cases, we
provide these services in exchange for compensation from the building owner for
the construction and maintenance of the network. As of September 30, 2000, under
these regulations, we received compensation from building owners for
constructing portions of our networks passing approximately 400,000 homes that
were not customers of our services. We refer to these homes as compensation
homes. Once constructed, the network can be used to transmit our cable
television programming to residents under our standard pricing structure.
As of September 30, 2000, we provided retransmission of terrestrial
broadcast television signals to residents other than customers of our cable
television services in 1.5 million of our homes passed including our
approximately 400,000 compensation homes. We also provided our J-COM promotional
channel and our J-COM-branded community channel to most of these homes. We do
not pay programming fees to broadcasters for and do not charge customers to
receive these signals. We believe that these broadcast transmission services do
not result in significant increases in our operating costs and enable us to
promote our other services to households that receive these retransmission
services. In addition, because these homes are already connected to our network,
any capital expenditures that are incurred when these households become
customers are substantially lower.
Telephony
We currently offer telephony services primarily to residential customers in
parts of our J-COM Titus, J-COM Tokyo and J-COM Sotetsu franchise areas, and we
expect to be able to provide our telephony services in all of our managed
franchises by the end of 2003. We provide both local and domestic long-distance
telephony services, providing consumers an alternative to NTT and other local
carriers. Our network provides us with our own local telephony infrastructure,
giving us a number of competitive advantages over other local carriers that do
not own their own networks. Generally, local carriers that do not own a local
network must either lease local access capacity from NTT or another local
carrier, or require their customers to directly purchase or lease local loop
access from NTT or another available carrier. In addition, because these local
carriers do not own a local network, they are required to pay interconnection
fees for calls which originate or terminate outside of their systems. To be
profitable, these local carriers must charge their customers rates higher than
these interconnection fees because call charges are their principal source of
revenue.
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We believe that owning our own local network infrastructure gives us the
following competitive advantages over other local carriers that do not own a
local network:
- our customers do not need to purchase or lease access to the local loop
from another carrier, which creates the opportunity for us to displace
the existing service provider and allows the customer to rely on us as
their exclusive carrier for all local and domestic long distance
telephony services;
- we increase customer satisfaction by providing customers the convenience
of a single comprehensive telephone bill for all local and domestic long
distance telephony services;
- we increase customer satisfaction by serving as their single quality
assurance provider for local and domestic long distance telephony
services;
- we have lower costs because we do not pay interconnection fees for the
origination or termination of calls between customers within our local
network; and
- we have sources of telephony revenue other than per call charges,
including line rental fees, fees for enhanced services such as call
waiting and second line service and termination fees for calls to our
customers originating from outside of our network.
These competitive advantages allow us to generate greater per customer
revenue and offer more services, at a lower per customer cost, than other local
carriers that do not own a local network, all while increasing customer
convenience and satisfaction. To date, we have not received a substantial
portion of our total revenues from the sale of our telephony services.
With respect to international calls, the customers of all local telephony
carriers in Japan, including those subsidiaries of NTT that provide local
telephony services to NTT customers, must connect with an international
long-distance provider to complete the call. As a result, all carriers must pay
a connection fee to the international long-distance provider.
We believe our telephony services are attractive to consumers both in terms
of price and quality in comparison to comparable services offered by NTT and
other existing carriers. As of September 30, 2000, our call charges in our J-COM
Tokyo franchise were 15% to 43% lower than those of NTT and our telephony line
rental charges were 24% lower than those charged by NTT in the area in which we
currently offer telephony service. Our value-added services, such as call
waiting and second line service, were priced at a discount relative to NTT
ranging from 30% to 70%. Customers who purchase one or more of these value-added
features receive tone dialing as a free add-on. As of September 30, 2000, our
tone dialing service was taken by more than 70% of our telephony customers. We
expect that the telephony pricing packages offered by our J-COM Titus and J-COM
Sotetsu franchises will be conformed to that of our J-COM Tokyo franchise by the
end of 2000. In addition, we do not charge our customers an initial line rights
fee when they purchase our telephony service. In contrast, NTT charges its
customers a non-refundable local line rights fee of Y72,000 ($654) at the time
that a customer establishes service, in addition to installation and connections
fees and the monthly fixed service fee, premium service fee and call charges
discussed above. We also offer greater price reductions to our customers who
purchase telephony services bundled with our cable television or high-speed
Internet access services.
Through our local network, we are able to offer a full range of
competitively priced telephony services, attracting customers, such as singles
and young families, that find our services a greater value than telephony
service that requires line access fees and/or lease charges, monthly fixed
service fees, premium service fees and call charges demanded by other carriers.
We believe that price is one of the most important factors influencing Japanese
customers to switch from NTT or another local carrier to our service. As a
result of our competitive pricing and the perceived value of our services, we
believe we attract customers who purchase our telephony service as a replacement
service to NTT or their other existing carrier, as well as to customers who use
our telephony service as a second line for modem and facsimile use.
We believe that the voice quality of our telephony product, which is
digitally transmitted to the voice port at the side of the customer's house, is
equal to or superior to that of our competitors. Attractive
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pricing, high-voice quality and active promotion of our value-added services are
key aspects of our telephony strategy. Number portability, which will allow
NTT's or other carriers' customers switching from NTT or other existing carriers
to our services to retain their original phone number, is expected to be
mandated by the Japanese government for introduction beginning in 2001. We
believe number portability will further boost our ability to effectively market
our telephony service.
We have configured our network's overall capacity and scope so that we can
offer telephony services to businesses as well as to residential customers,
including multiple line services with enhanced features, local and wide-area
networks and intranet services. Business services ultimately may include
interactive video and other communication and information services. We believe
that providing communications services to the business telephony market requires
a specialized operational infrastructure in areas such as sales and billing. On
a limited scale, we currently offer telephony services to small businesses, in
addition to our residential service offerings. Although we believe that
businesses may become a significant part of our customer base in the future, we
have not yet begun to develop the operational infrastructure required to provide
these services in all of our managed franchises.
High-Speed Internet Access
We commenced offering "always-on" high-speed Internet access for a fixed
monthly charge in the first quarter of 1999. As of September 30, 2000, we
provided high-speed Internet access to 98,800 customers in parts of 17 of our
managed franchises. Currently, we offer high-speed Internet access in parts of
19 of our managed franchises.
We believe that broadband cable Internet connections are currently the
superior means of Internet access for residential customers. Specifically, we
believe that our J-COM@NetHome high-speed Internet access offers numerous
advantages over conventional dial-up Internet access, including:
- current transmission speeds of up to 768 kilobits per second downstream,
for receiving data, and 128 kilobits per second upstream, for sending
data, with the capability to offer transmission speeds of up to
approximately 100 times faster than are achievable with a conventional
56.6 kilobits per second dial-up modem;
- rich broadband Internet content which is tailored to the high-speed
platform we provide;
- "always-on" access, so that customers do not have to go through the
dial-up process and do not experience busy signals; and
- a fixed monthly charge, in contrast to the time-based fees and per
connection fees charged by some Internet service providers for Internet
access and the time-based fees charged by NTT and other carriers for
local calls.
Through our @Home Japan joint venture with Sumitomo and At Home
Corporation, in June 2000 we commercially launched the @Home Japan high-speed
Internet access in selected managed franchises. We offer this service under the
J-COM@NetHome brand. This service is designed to provide high-speed Internet
access and a Web portal offering rich broadband content. This service will be
delivered over our networks and over @Home Japan's private high-capacity
network, which we believe will minimize the bottlenecks frequently encountered
on the public Internet backbone. As of September 30, 2000, ten of our managed
franchises offered the J-COM@NetHome service. We expect to roll-out the @Home
Japan service to the remainder of our managed franchises by the end of 2001. Our
current strategy is to migrate our existing high-speed Internet access customers
to the @Home Japan service as it is implemented in each of our managed
franchises.
We offer our high-speed Internet access service for between Y6,000 ($55) to
Y6,500 ($59) per month, including modem rental. If our high-speed Internet
access service is bundled with our cable television or telephony services, we
expect to discount our price by up to approximately 13% based on the bundle of
services. We are initially charging installation fees generally ranging between
Y10,000 ($91) and Y30,000 ($273), which we believe will enable us to manage the
high expected demand for this service. To date, we
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have not received a substantial portion of our total revenues from the sale of
our high-speed Internet access services.
Digital and Interactive Television
We expect to begin the roll-out of our digital and interactive television
services including HDTV in most of our managed franchises during 2001.
Initially, we plan to offer customers retransmission of digital and interactive
broadcast channels which are scheduled to be offered by BS digital, a satellite
television service. We expect to offer the BS digital platform at a price
comparable to what satellite television providers are expected to charge. We
expect to launch additional digital and interactive services as they are
developed and become available to digital cable television and satellite
television providers in Japan. Once these enhanced digital services become
available, we expect our customers may receive a mix of additional television
programming, an electronic program guide and digital music stations. We expect
these services to include:
- additional HDTV broadcasts;
- additional basic channels;
- additional premium channels;
- near video-on-demand for recently released feature films; and
- pay-per-view programming for live events and adult entertainment
programs.
In addition, as part of our customized platform we plan to launch various
interactive television services. These new services, which we intend to offer in
order to enable our customers to interact more fully over the television than
they would with the limited interactivity to be initially provided by BS and CS
digital, are planned to include:
- a "walled garden," offering local information and entertainment services,
e-commerce and interactive games;
- television e-mail access, which would allow customers to use the same
email address that they use with our high-speed Internet access;
- video-on-demand, offering access to an extensive library of films and
specialized programming, and providing VCR functionality such as pause,
rewind and fast forward; and
- television Internet, which would allow customers unlimited access to a
television formatted Internet access at speeds of up to two times that of
conventional dial-up modems.
We expect that our planned interactive television services will allow
customers to get limited computer-like functionality over the television by
using a conventional television remote control or a keyboard. However, whereas
the computer is a "lean in" or active experience, interactive television is a
"lean back" and more relaxed entertainment and e-commerce experience. We believe
that the interactive television experience will play an important role in
cross-selling and migrating some of our customers to the more active Internet
experience of our high-speed Internet access, as well as positioning us to
provide future Internet content designed for television viewing.
Providing digital and interactive television services to customers will
require our networks to carry a greater number of channels and to support
two-way communications. We intend to increase channel capacity through digital
compression technology without the need for additional bandwidth. We plan on
providing two-way communications by installing headend equipment capable of
delivering and receiving digitally encoded communications with a digital set top
converter box in the customer's home. We believe that this digital platform will
also enable us to deliver HDTV signals to our customers, as these signals become
available.
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As technology develops, we believe multi-media services will increasingly
converge, resulting in hybrid offerings which will not be individually
distinguished as video-only, voice-only or data-only service. We believe this
convergence will take place with respect to content, delivery networks, and
appliances used by individuals to access these services. Our plan to provide
digital and interactive television services is an initial example of this
convergence. Additionally, we strive to keep pace with the rapid rate of
technological development to ensure that we continue to deliver the most
exciting services and content to our customers in the future.
OUR MANAGEMENT SERVICES
We provide management services to 20 of our franchises, all of which have
entered into management agreements with us. In addition, we currently manage 17
of these franchises under the J-COM brand using our uniform business strategy
and plan to manage our J-COM Titus and J-COM Sotetsu franchises under the J-COM
brand using our uniform business strategy beginning in December 2000. We expect
that our Yokosuka franchise will begin offering our broadband services under the
J-COM CATY brand in January 2001. We provide each of these 20 franchises with:
- operating and administrative services, including assistance and guidance
in the preparation of their business plans and budgets;
- programming selection and procurement;
- a sales and marketing program, including comprehensive training and
support;
- a unified customer management system that supports customer service,
operations, sales, billing and collections for cable television,
telephony and high-speed Internet access;
- technical expertise, including assistance in network design, construction
and maintenance;
- assistance and specifications for procurement of network equipment and
construction materials; and
- a standardized financial accounting and reporting system.
In addition, the president of each of these managed franchises is seconded
from us. Generally, our executive officers meet monthly with the presidents and
other senior officers of each of our managed franchises to review financial,
operational and marketing issues.
Our management agreements are for an initial term of one year, with
automatic renewal for successive one-year periods unless either party provides
termination notice at least 30 days prior to the scheduled end of the term.
In return for our management services, our managed franchises pay us
monthly management fees on a per-customer basis. In addition, all of our managed
franchises pay us an agreed upon margin on services and equipment purchased
through our central office and an agreed upon margin on license fees for use of
our centralized billing system. We believe that our managed franchises during
the 12-month period ended March 31, 2000 were able to achieve performance above
the industry average, growing their customer bases on average by 56.0%, as
compared to a 19.6% increase industry-wide throughout Japan during the same
period, according to the Ministry of Posts and Telecommunications.
In the future, we may provide management services to other cable
franchises, including the non-managed franchises in which we currently hold
equity interests. We believe our services will provide these franchises the
opportunity to lower their cost of operations, gain access to our programming
content, market under the J-COM brand and benefit from the other services
generally available to our managed franchises. We believe we will benefit from
this strategy by increasing our management fee revenue, expanding recognition of
the J-COM brand and achieving additional economies of scale, including
increasing our accessibility to a greater array of programming content at lower
per-customer costs.
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CABLE TELEVISION PROGRAMMING
We believe that the breadth and quality of our programming is essential to
the growth and retention of our cable television customer base. We devote
considerable resources to obtaining access to a wide array of basic and premium
programming that we believe will appeal to our target market and broad customer
base. We rely on extensive market research, customer demographic analyses and
local programming preferences to determine channel offerings in each of our
markets.
Our basic and premium programming lineup consists of approximately 50
channels comprised of what we believe to be among the most popular channels
currently available across a broad range of genres. In addition to offering
national and local programming, our programming genres include, among others,
movie, sports, news, music, culture, shopping and network television. We
ascertain the popularity of a particular channel through internal and external
market research including surveys of our existing customers. We expect that the
digital converters, which we will begin offering during 2001, will enable us to
provide digital HDTV signals to our customers, as these signals become
available, providing us with an advantage over competitors who are unable to
offer these services.
In general, we obtain most of our programming on a per-channel basis from
suppliers under distribution agreements. These agreements generally require us
to pay a carriage fee to the program suppliers based on the number of our
customers subscribing to the particular channel. In many cases, our per-customer
charges decrease as the number of our customers subscribing to a channel
increases. Our managed franchises also benefit from the volume discounts we
negotiate with most content providers based upon the total number of system-wide
customers. These cost savings provide us flexibility to expand our service
offerings while maintaining our operating margins. For example, we added the
JSkySports channels to our basic package at no additional charge to our
customers. The JSkySports channels would cost our customers an additional Y2,000
($18) per month as of September 30, 2000 if purchased from Sky Perfect directly.
Our distribution agreements range from terms of one to ten years, providing
us with flexibility while also giving us the opportunity to secure longer term
access to popular and high quality programs. In February 2000, we entered into a
ten-year carriage agreement with Jupiter Programming Co., Ltd. for the right to
rebroadcast CSN, Golf Network, Shop Channel, JSkySports 1, 2 and 3 and The
Discovery Channel, each of which we consider to be integral to our channel
line-up. This agreement is automatically renewable for successive three year
terms unless cancelled by either party. In addition, we are working closely with
Jupiter Programming Co., Ltd. on the development of new digital and interactive
television content. Please see the discussion under the caption "Certain
Relationships and Related Party Transactions" contained elsewhere in the
prospectus for further discussion of the terms of our carriage agreement with
Jupiter Programming Co., Ltd.
MARKETING AND SALES
We believe our marketing and sales activities are critical to maximizing
market penetration, increasing revenue per customer and achieving high levels of
customer retention. We therefore commit considerable resources to developing and
implementing these activities. In formulating our marketing and sales strategy,
we are able to draw upon our management's and founding shareholders' prior
experience in operating other leading cable television companies around the
world.
As a multiple system operator, we determine the marketing strategy and
policy for our managed franchises. We set the advertising and marketing budgets,
develop marketing plans and provide training for sales personnel at our managed
franchises. We also develop advertising campaigns through a single advertising
agency and utilize the campaigns throughout our managed franchises. Our managed
franchises are responsible for implementing these sales and marketing programs,
with ongoing support at the multiple system operator level. We also publish a
J-COM program guide that we use to promote our services and provide program
listings to existing and potential customers. Due to our significant scale of
operations, we are able to produce a high-quality program guide for each of our
managed franchises and achieve discounts on printing costs. We believe this
multiple system operator strategy enables us to more
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effectively leverage our expertise and achieve economies of scale, providing us
with a competitive advantage relative to other cable operators in Japan.
Marketing
Our marketing efforts focus on promoting our services and positioning J-COM
as an integrated, competitively priced one-stop provider of entertainment,
information and communication services. Specifically, we highlight the following
aspects of our services:
- CABLE TELEVISION. Depth, diversity and quality of programming content.
Our goal is to be a popular source of programming, appealing to a broad
customer base.
- TELEPHONY. Superior voice quality, availability of a wide range of
value-added features, all offered at attractive pricing compared to NTT.
- INTERNET ACCESS. High-speed, "always-on" local connections, high-capacity
backbone and easy access to content.
- BUNDLED SERVICE PACKAGES. Price discounts and convenience.
In general, our marketing initiatives focus on the quality and scope of our
services rather than on price. However, we will use our low-cost operating
structure to compete on a price basis if and when necessary. For example, in
telephony, we intend to continue to price our telephony services below that of
NTT as a means of increasing telephony customer penetration. Moreover, we use
price as a means of cross-selling, by currently offering a price discount of up
to approximately 13% depending on the bundle of services purchased by our
customers in 17 of our managed franchises. We expect to offer this discount in
the J-COM Titus, J-COM Sotetsu and J-COM Sapporo franchises by the end of
December 2000. We are able to offer such discounts based on our cost advantages
from our integrated network delivery system, multiple service offerings and
efficiencies from being a multiple system operator. We believe discounts through
the bundling of services enhance customer loyalty and reduce customer disconnect
rates.
Sales and Promotion
We invest significant resources into promoting and selling both the J-COM
brand and the broadband services that we offer. Promoting the J-COM brand across
our managed franchises is important in building our brand equity, attracting new
customers, cross-selling and building relations with other franchise operators.
We promote our services through numerous means, including sponsorships, our
J-COM community channel, our J-COM program guide publication and advertising in
newspapers and on billboards, television and the Internet.
As part of our efforts to develop the J-COM brand, we have developed the
slogan "Cable TV to Supermedia" to refer to our roll-out of broadband services
in addition to cable television. We believe based on our marketing research that
this slogan will continue to be an effective way to develop our brand identity
with Japanese consumers. We utilize this slogan in selected marketing materials
and on our website.
Our sales efforts focus on attracting both new customers and cross-selling
new services to existing customers. These include direct sales, telemarketing
and three in-bound regional calling centers to respond to prospective customers.
We conduct market research to assist our sales campaigns and support our sales
activities through media advertising and direct mail.
Our direct sales activities primarily involve door-to-door marketing by
local sales representatives. Our objective is for sales representatives to call
on every eligible home within their calling region at least once every nine to
12 months. We have a large direct sales force of approximately 1,400, primarily
hired on a contract basis. They are compensated with both a base salary and
commissions based on success. All sales representatives must attend a week of
product and sales skills training before making any calls, followed by ongoing
training in areas such as advanced sales skills, specialty marketing and new
services.
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We believe our local sales forces and ongoing direct sales activities
enable us to develop stronger relationships with our existing customers and
potential customers. These relationships will continue to be important as we
begin to offer advanced telecommunications services in all of our managed
franchises. We believe that our local sales forces provide us with a significant
competitive advantage relative to other cable, satellite television, local
telephony and Internet service providers who have not developed direct marketing
infrastructures and local customer relationships.
For multiple-dwelling units, we have a dedicated team whose objective is to
secure agreements with building owners to gain access to building tenants. We
estimate that this team secured agreements with approximately 65% of the
multiple-dwelling units in our managed franchises. Through these agreements, we
are able to use our local sales forces to actively market our services to
multiple-dwelling unit residents in our managed franchises. Whenever possible,
we seek to enter into these agreements prior to the launch of our services in
our managed franchise areas. Under these agreements, we provide retransmission
of local, off-air terrestrial signals and the J-COM promotional channel free of
charge to all residents in the multiple-dwelling unit. Additionally, these
agreements provide us with access to the wiring inside the multiple-dwelling
unit, enabling us to begin the work necessary to upgrade the wiring to the
standard required to effectively deliver all of our services. Our objective is
to convert these tenants into paying customers. We believe that our agreements
with multiple-dwelling unit owners and our relationships with multiple-dwelling
unit residents in our managed franchises provide us with additional advantages
over our competitors.
OUR RELATIONSHIPS WITH LOCAL GOVERNMENTS AND COMMUNITIES
We believe that maintaining strong relationships with the local governments
and communities in regions that we serve will be important to our long term
success. Local governments currently hold ownership interests in many of our
franchises, and over time we have developed strong relationships with them. We
also provide community programming services, which focus on community
activities. We believe that improving our local government and community
relationships will facilitate our future efforts to develop our networks,
provide new telecommunications services, build the J-COM brand and expand our
business into new regions.
BROADBAND NETWORK ARCHITECTURE
Our broadband networks enable us to offer multiple services over a single
network infrastructure, including cable television, telephony, high-speed
Internet access and, beginning in 2001, we expect our networks will enable us to
offer digital and interactive television, including HDTV.
Our network infrastructure consists of our local networks, regional
networks and an inter-regional network.
Local Networks
At the local network or franchise level, our broadband networks consist of
three principal components: the headend facility, the distribution network and
the customer equipment.
The headend facilities in all of our franchises consist of reception and
distribution equipment for video signals. The reception equipment at our headend
facilities receives television programming from satellites, traditional
terrestrial television broadcasters and other sources. The distribution
equipment at the headend facility is then used to combine the television
programming from these various sources and transmit our programming to our
customers through our distribution network. Our distribution network is composed
of a combination of fiber optic cable and coaxial cable, as well as electronic
devices that manage and amplify the signal as it travels through the
distribution network. The distribution network transmits signals between the
headend facility and the customer locations. During 2001, we expect to add
equipment at many of our headend facilities to support the launch of our digital
and interactive television services.
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In franchises where we already have introduced high-speed Internet access,
our headend facilities also contain computer servers that receive cable modem
signals from customers on our local networks and connect these signals to our
outside Internet service providers. In franchises where we plan to launch our
@Home Japan high-speed Internet service, we expect to install @Home Japan
regional data centers and cache servers. Regional data centers and cache servers
are used to provide high-speed broadband Internet access, monitor network
performance, and store and transmit data, Internet content and web pages. We use
regional data centers and cache servers to store popular, frequently accessed
broadband content and data closer to the locations of our customers. This
enables our customers to access this content from within the local network,
reducing the distance the content must travel to reach the customer and
resulting in higher delivery speeds.
In the franchises where we have already introduced telephony service, our
headend facilities also contain equipment which routes calls from the local
network to our telephony switch. A switch is a device that selects the circuits
to be used for transmission of voice signals or other information over
telecommunications networks. Our telephony switch connects customer calls within
our networks and interconnects with NTT's switch center for calls that are
initiated or terminated outside of our networks. Currently, we have one
installed telephony switch in our J-COM Tokyo franchise and three installed
telephony switches in our J-COM Titus franchise, and we intend to install
additional telephony switches in each of our regional clusters. We intend to
serve multiple franchises from each telephony switch by installing equipment at
other headend facilities that are connected to the headend facility containing
the telephony switch by fiber optic cable, linking them to the switch.
We purchase equipment that we believe is scalable. This means that we
believe our headend facility equipment will enable us to accommodate a
significant increase in demand for our services with minimal additional capital
investment for equipment. This will enable us to leverage our capital investment
over a greater number of potential customers, rapidly launch our services in our
local networks and to maintain our networks and equipment cost effectively.
We are constructing our local distribution networks to a standard
architecture composed of a combination of fiber optic and coaxial cable with
spectrum capacity of 750 megahertz which is capable of two-way interactive
communications with our customers. This standard architecture enables high-speed
broadband signal transmission and two-way, interactive communications with our
customers. We also plan to upgrade our systems that we have acquired to this
standard architecture. We believe our two-way 750 megahertz fiber optic and
coaxial cable standard architecture is among the most advanced in use among
cable television operators worldwide. We believe this standard architecture
provides us with sufficient capacity to offer all of our services and preserves
additional spectrum capacity to accommodate increases in video, voice and data
transmission and to provide future services. By building our networks to this
standard architecture since our inception in 1995, we believe we have optimized
our network design for two-way, broadband services and minimized our
construction costs.
At points in our networks where the fiber optic cable and coaxial cable
portions connect, a transition device called a node is required to convert the
transmission signal from a light wave that is transmitted on the fiber optic
cable to a radio wave that is transmitted on the coaxial cable. For two-way
interactive communications from our customers to our headend facilities, the
node converts the signal from a radio wave to a light wave. In most of our
networks, we have deployed fiber optic cable from the headend facilities to
individual nodes serving 600 to 2,400 homes, depending upon the housing density
and the number of customers in that area. We deploy coaxial cable from the node
to the customer's home or building. If the number of our customers increases to
a point where the current node size and the capacity allocated for two-way
interactive services are insufficient to carry the entire signal transmission,
we can allocate additional capacity or upgrade the technology at the nodes to
serve the additional customers and to prevent service delays or disruptions. The
residential density in the franchise areas that we serve and the high quality of
our local networks enable us to serve more homes from an individual node than
operators of older, less advanced networks with lower home density, resulting in
more efficient utilization of our network infrastructure.
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The technology we use to provide our telephony services consists of fiber
optic and coaxial cable to transmit the telephony signal, and does not require a
separate copper wire overlay network. We believe this technology will enable us
to more rapidly and cost effectively offer telephony services to additional
franchise areas. In franchises where we intend to offer telephony services, our
networks are designed to provide high service quality and to prevent significant
service disruptions. Our standard network architecture for these franchises
includes a two-hour backup power supply at the node with a power failure alarm,
a four-hour backup power supply at the headend facility with a power failure
alarm and a generator to provide uninterruptible power at the telephony switch
location.
The equipment our customers use to receive our signals and access our
services consists primarily of cable television analog set-top converter boxes,
high-speed cable modems and telephony access line units. Cable television analog
set-top converter boxes convert our broadband cable television signals into
signals that can be received by the customer's television. High-speed cable
modems enable customers to connect their computers to our local distribution
network so that they can access the Internet. Telephony access line units
connect telephony signals between the internal copper telephony wiring at the
customer's residence and our local distribution network, so that the customer
can place calls through our telephony switch. We currently use analog set-top
converter boxes from numerous suppliers, including Pioneer Corporation, General
Instrument, Scientific Atlanta, NEC Corporation and Matsushita Electric
Industrial Co., Ltd. We use telephony access line units from Nortel and
high-speed cable modems from Terayon. We intend to expand our supplier base for
telephony access line units and cable modems as we increase the penetration of
our telephony and high-speed Internet access services. With the introduction of
digital television, we will need to provide our customers with digital set-top
converter boxes. We expect to commence our rollout of digital set-top converter
boxes during 2001.
The diagram below illustrates how the principal components of our local
networks connect with each other:
[GRAPHIC APPEARS HERE]
[DESCRIPTION OF GRAPHIC: Illustration contains three primary boxes aligned
side-by-side. The first primary box is on the far left and is labeled 'Headend.'
The first primary box contains a smaller box labeled "Central or Connected
Headend (Owned)." The following bullets are set forth below the "Central or
Connected Headend (Owned)" box:
"- Telephony Switch and/or other telephony equipment"
"- Video reception & distribution equipment"
"- High-speed Internet equipment"
"- Regional data center or cache server (planned)"
"- Digital and interactive television equipment (planned)"
Four ovals are stacked to the left of the first box. The top two ovals,
which are labeled "Terrestrial Broadcast Programming" and "Satellite Delivered
Programming," respectively, have one-way arrows connecting them to the "Central
or Connected Headend (Owned)" box. The bottom two ovals, which are labeled
"Internet Service Providers" and "NTT Switch Center," respectively, have two-way
arrows connecting them to the "Central or Connected Headend (Owned)" box. The
second primary box, labeled "Distribution Network," is in the center and
contains within it three stacked ovals each labeled "Node." There are two-way
arrows labeled "Fiber (Owned or Leased)" connecting the "Central or Connected
Headend (Owned)" box and each "Node" oval. The third primary box, labeled
"Customer Equipment," is on the far right and contains three stacked boxes each
labeled "Customer." There are two-way arrows labeled "Coaxial (Owned)"
connecting the center "Node" oval contained in the second primary box to each of
the "Customer" boxes. The following bullets are set forth below the stacked
"Customer" boxes:
"- Set top converter box"
"- Access line unit"
"- Cable modem."]
Regional Networks
We use fiber optic cable to interconnect some headend facilities within our
Kanto Cluster. We intend to interconnect the headend facilities within our other
regional clusters in the future. Interconnecting headend facilities with fiber
optic cable enables us to utilize the video, telephony and Internet equipment at
one central headend facility to provide services through other connected headend
facilities, without requiring us to install the same equipment at the other
connected headend facilities.
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We also expect to be able to use fiber optic cable to interconnect our
regional networks with the local networks of other operators that are in
geographically proximate markets. This would enable us to provide advanced
services to other cable system operators, further leveraging our central headend
equipment and creating opportunities for additional revenue.
The diagram below illustrates how the principal components of our regional
network connect with each other:
[GRAPHIC APPEARS HERE]
[DESCRIPTION OF GRAPHIC: Illustration contains a large box labeled
"Regional Network." To the left of the box are four ovals, three of which are
stacked to the far left and are labeled "International/Long Distance Carriers,"
"Local Telephone Providers" and "Mobile Telephone Operators," respectively, and
are each connected by a two-way arrow to the fourth oval labeled "NTT Switch
Center." Contained within the "Regional Network" box is a box labeled "Central
Headend (Owned)." The "Central Headed (Owned)" box is connected on the left side
to the "NTT Switch Center" by a two-way arrow labeled "Fiber" and on the right
side to each of the top and bottom boxes contained in a vertical row consisting
of three stacked boxes, each labeled "Connected Headend," by two-way arrows each
labeled "Fiber." The top and bottom boxes of the three stacked boxes labeled
"Connected Headend" are connected to the middle box by a two-way arrow labeled
"Fiber." The following bullets are set forth below the three stack boxes:
"- Video reception and distribution equipment"
"- High-speed Internet equipment"
"- Telephony equipment"
In the bottom left of the "Regional Network" box is the text "(Fiber may be
owned or leased)."]
Inter-Regional Network
Our inter-regional network currently consists of a wide-area network
provided over leased and owned telecommunications infrastructure. We use this
network primarily for our internal management information systems and e-mail
functions.
We intend to expand our inter-regional network by using a combination of
leased and owned fiber optic cable to interconnect our regional networks. We
believe we will then be able to connect telephony traffic between our regions
entirely on our own network, giving us the opportunity to improve our margins on
telephony services by reducing our dependence on third parties to connect
telephony traffic. We believe this will also enable us to better control the
quality of services delivered to our customers. We plan to develop our
inter-regional network after we begin generating sufficient inter-regional
telephony and Internet traffic, reducing the risk associated with this capital
investment. In the interim, we plan to connect this inter-regional traffic using
NTT's and other carriers' networks. We intend to utilize our existing inter-
regional network to establish a central network operations center in Tokyo,
which we believe will enable us to monitor network status in all of our regions
and rapidly respond to network problems and disruptions.
Our @Home Japan joint venture is currently developing a proprietary
high-capacity broadband network to access most major urban areas of Japan. This
proprietary network includes leased fiber optic cable capacity that is used to
transmit broadband Internet content and data. We intend to coordinate the
development of our inter-regional network with the development of the @Home
Japan network, to leverage our combined purchasing power to secure favorable
terms for fiber optic cable capacity.
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COMPETITION
The market for cable television, telephony and high-speed Internet access
in Japan is highly competitive and we compete with a wide range of companies
using a variety of technologies. Many of our competitors have substantially
greater financial, technical and marketing resources, larger customer bases,
longer operating histories, greater name recognition and more established
relationships in the industry than us.
Video Services
Our principal competition in our cable television business comes from
alternative distributors of television signals, particularly direct-to-home
satellite television providers, terrestrial television and other forms of
entertainment.
CABLE SYSTEM OPERATORS. We do not believe that other cable system operators
offer significant competition to us in our service areas. In substantially all
of the areas served by our networks, we are the only cable system operator that
has constructed a network and provides services. However, Japanese cable
television franchise licenses are non-exclusive, and other cable television
providers could "overbuild" our franchises by procuring a license covering one
of our existing franchise areas and then building competing networks in areas
where we have already constructed networks or constructing networks in areas of
our franchises where we have not yet completed construction, as has occurred in
portions of the areas served by our J-COM Sotetsu franchise. Nevertheless, we
believe the substantial capital expenditures required to construct a competing
network are a significant barrier to entry.
We may face increasing competition from other cable system operators in
acquiring new franchises. In October 2000, Fujitsu Ltd., Marubeni Corp., Tokyo
Electric Power Co., Inc. and Secom Co., Ltd. announced that they would form a
joint venture to integrate their cable systems operations starting in April
2001. On June 30, 2000, Sony Corporation announced its intention to develop a
broadband network with Tokyu Cable Television Co., Ltd. to provide games and
movie content over Tokyu Cable's network. Pacific Century CyberWorks Limited, a
leading Hong Kong based media company, has announced an alliance with cable
system operator Tomen Mediacom Inc. Although we do not believe these companies
and alliances offer significant competition in our current service areas, they
may affect our ability to expand into new franchise areas.
SATELLITE TELEVISION PROVIDERS. Direct-to-home satellite television is a
popular pay television service in Japan. Direct-to-home satellite television
providers include CS (communications satellite) digital television and BS
(broadcast satellite) analog television providers. Sky Perfect is currently the
only CS digital television provider in Japan. As of August 31, 2000, Sky Perfect
served approximately 2.3 million customers and it offered 174 television
channels. In September 2000, DIRECTV Japan Inc. ceased its operations and
offered its pay customers the option to be migrated over to Sky Perfect.
Recently, Japan Satellite Broadcasting, Inc., more commonly referred to as
WOWOW, and Nippon Television Network Corp. announced their intention to launch
CS digital television services during 2001 and have entered into an alliance
with Mitsubishi Corp., NTT DoCoMo Inc. and NTT Communications Corp.
We believe that CS digital television providers currently represent the
most significant source of competition to cable television providers, because of
the greater number of television channels they offer. However, we believe that
we are currently better positioned than CS digital television providers to
provide HDTV signals to our customers as these services become available. Our
advanced broadband networks are designed with the capability to deliver HDTV
signals. We expect to rollout digital converters which are currently being
developed for our use and are expected to be capable of receiving HDTV signals.
We believe that CS digital television providers will, on the other hand, need to
allocate additional satellite transmission capacity to carry HDTV signals and
that current digital receivers are not capable of receiving HDTV signals and
will need to be replaced.
We also compete with the two BS analog television providers, NHK, which
offers two channels, and WOWOW, which offers one channel. As of July 31, 2000,
NHK served approximately 10.0 million
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customers and, as of August 31, 2000, WOWOW served approximately 2.5 million
customers. We do not perceive BS analog television providers to be a significant
source of competition because we currently offer the same channels at a discount
to what subscribers would pay if they subscribed for these channels directly
from NHK or WOWOW.
Another form of satellite television service, BS digital, is expected to be
launched in December 2000. BS digital will include HDTV and interactive
services, and is expected to consist of six broadcast channels, which include
Fuji, TBS, TV Tokyo, TV Asahi, Nippon Television Network Corp. and NHK, two pay
channels, which include WOWOW and Star Channel, and nine data broadcasters. In
addition, new BS and CS digital satellites capable of transmitting HDTV signals
are expected to launch in late 2000 or early 2001. The location and orientation
of these satellites will allow consumers to receive both BS and CS programming
with a single dish and set-top box. We have initiated discussions with the BS
and CS digital broadcast channels in an effort to secure retransmission rights
to their digital and interactive programming once it becomes available to reduce
the likelihood of our customers switching to satellite television. However, we
expect that digital satellite television services will continue to represent
competition for us in the future.
We believe that we have several competitive advantages relative to
direct-to-home satellite television providers, including:
- Our basic programming package offers what we believe is among the most
popular Japanese language and other programming in each of the
entertainment genres offered by Sky Perfect, all at a more affordable
price of Y3,600 ($33) or less per month compared to approximately Y6,900
($63) or more per month charged by our competitors to receive basic
programming which includes these same channels.
- We offer lower setup costs as compared to Sky Perfect, for which
customers must install and maintain a satellite dish and receiver.
Generally, the customer must also purchase the satellite dish and
receiver.
- We offer rebroadcast of national and local terrestrial channels, and
origination of local community-based programming to our customers and
additional households pursuant to arrangements with building owners and
national and local governments.
- We have the ability to support an "always on" return path for interactive
services using our two-way broadband networks, compared to the slower
dial-up telephone return path expected to be utilized by BS and CS
digital providers.
- We have the ability to integrate interactive and digital broadcast
services with other broadband access services, such as those available
via home terminals and high-speed modems, which is currently unique to
cable systems.
- We operate our franchises as local businesses which enables us to develop
an understanding of local consumer needs.
- We offer telephony and high-speed Internet access and, beginning in 2001,
we expect to offer other interactive and digital television services,
including HDTV, in combination with broadcast television services.
TERRESTRIAL TELEVISION BROADCASTERS. Terrestrial television viewing in
Japan has long been a popular form of entertainment. The seven broadcast
channels currently available in Japan are the predominant source of terrestrial
television programming. However, we market our programming to customers who
desire a greater variety of programming than otherwise available through
terrestrial television.
OTHER COMPETITION. We also compete with home entertainment media, such as
home video rentals, films, live theater and concerts.
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Telephony Services
NTT, our principal competitor in the fixed-line telephony market, has an
established market presence, a fully-built network and resources substantially
greater than ours. Until 1985, NTT was the sole provider of fixed-line telephony
services in Japan and faced little or no competition. As a result, despite
government deregulation, as of March 31, 1999, approximately 99.5% of the
fixed-line telephony customers in Japan were NTT customers. NTT has a
fully-built national telephony network and has extensive experience in marketing
and operating telecommunications services in Japan. In addition to NTT, we also
compete in the Kanto area with Tokyo Telecommunications Network, which served
approximately 2.6 million customers as of March 31, 2000, in the Kyushu area
with Kyushu Telecommunications Network, which entered the local telephony market
on April 1, 1999, and with other new common carriers in all our markets. NTT's
aggressive marketing campaigns and price cutting to retain and attract customers
have intensified competition in this market.
We believe that price is one of the most important factors influencing
Japanese consumers to switch from NTT or another local carrier to our telephony
service. We seek to provide savings on the cost of line rental, optional
services, call charges and installation charges. For example, NTT currently
charges its customers a non-refundable local line rights fee of Y72,000 ($654)
at the time that a customer establishes service, in addition to installation and
connection fees and a monthly fixed service fee, premium service fee and call
charges. Other local carriers that do not own a local network must pay NTT or
another local carrier to lease local access capacity. Alternatively, these local
carriers may require the customer to incur line rights fees to acquire access to
the local loop directly from NTT in our service areas. These other local
carriers must also pay interconnection charges to NTT or another local carrier
to complete calls placed using their service.
We also compete for customers with cellular network operators, such as NTT
DoCoMo, KDDI's "au group," formerly IDO Corporation and DDI Cellular group, and
J-Phone group, and PHS network operators, such as NTT DoCoMo, DDI Pocket and
ASTEL group. According to figures published by the Ministry of Posts and
Telecommunications, approximately 67.8% of households in Japan had at least one
mobile phone in 1999 compared to approximately 62.3% in 1998. Furthermore,
intense competition in the wireless market has led to rapid, substantial and
sustained decreases in the prices for equipment, access fees and usage charges.
Wireless phone ownership and usage in Japan is expected to increase further as
new technology is introduced to improve access to the Internet via wireless
phones and prices continue to decrease.
Although wireless services may compete in certain respects with our
telephony services, we view wireless services as being complementary in other
respects. We believe wireless services increase overall usage and demand for our
value-added services. For example, we offer our customers the ability to use our
call forwarding services and other features in conjunction with their wireless
phones to integrate their communications services.
DDI Corporation and Japan Telecom Co., Ltd., long-distance new common
carriers, also compete with us in the long-distance telephony market. Our
telephony customers can choose service from any of these new common carriers
instead of our services. However, we do not believe that these new common
carriers represent significant competition because we offer competitive pricing
for our services and our customers would be burdened by the requirement to dial
additional numbers for each call if they want to use the services of these new
common carriers.
Internet Access
The Internet access market is highly competitive and rapidly evolving.
Although we expect the overall size of the market to expand, we also expect
competition among high-speed Internet access providers to intensify. New
technologies are expected to be deployed which will enable access to the
Internet at significantly faster speeds than are currently available.
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Our principal competitors in the Internet access market include:
TELECOMMUNICATIONS CARRIERS. We compete for business directly with
telecommunications carriers who have Type I carrier licenses. Most of the major
telecommunications carriers in Japan, including NTT, Japan Telecom Co., Ltd. and
DDI Corporation, which markets its services under the "KDDI" brand, offer
Internet access over dial-up modems. In addition, traditional telecommunications
operators are beginning to offer high-speed Internet access services through the
use of fiber optic cable. NTT West Corp. and NTT East Corp. have already
substantially completed their fiber optic networks in several metropolitan
areas. In Tokyo and Osaka, NTT plans to start testing a high-speed "always on"
Internet access service using fiber optic cable with a maximum data speed of ten
megabits per second in December 2000.
INTERNET SERVICE PROVIDERS. We compete with Internet service providers that
provide conventional dial-up Internet access. The Internet access market is
extremely competitive and highly fragmented. We do not believe that significant
barriers to entry exist, and we expect competition in this market to intensify.
Our competitors in this sector include companies and services, such as Fujitsu
Limited (@nifty/InfoWeb), NEC Corporation (BIGLOBE), NTT (OCN), Sony Corporation
(SoNet), MasterNet, ODN and DION. We believe that our ability to bundle our
high-speed Internet access together with our cable television and telephony
services and our ability to provide these services over our own advanced
broadband network differentiates us from these Internet service providers.
CABLE SYSTEM OPERATORS. We do not believe that other cable system operators
offer significant competition to us in our service areas. In substantially all
of the areas served by our networks, we are the only cable system operator that
has constructed a network and provides high-speed Internet access. However,
Japanese cable franchise licenses are non-exclusive, and other cable system
operators could "overbuild" our franchises by building competing networks in
areas where we have already constructed networks or by constructing networks in
areas of our franchises where we have not yet completed construction, as has
occurred in portions of the areas served by our J-COM Titus and J-COM Sotetsu
franchises. Nevertheless, we believe the substantial capital expenditures
required to construct a competing network are a significant barrier to entry.
Many of the other major cable companies in Japan recently began offering
dial-up and one-way cable modem services, and a few have begun offering two-way
high-speed Internet access. Internet access via a two-way high-speed cable modem
is in an early stage of development in Japan, and currently is available only in
select cable systems, including some of ours, with two-way capabilities. This
trend may be accelerated if Fujitsu, Ltd. and Internet service provider Nifty
Corp. are successful in their recently announced venture aimed at marketing a
high-speed Internet access service to cable television providers.
In addition to us, Tokyo Cable Network Inc. and other cable television
operators market, or have announced plans to market, their high-speed Internet
access bundled with their cable television and, in some cases, telephony
services. Advanced Internet Integration Planning Co., a joint venture formed by
Tokyu Corp., Sony Corporation and Toyota Motor Corporation, has recently
announced that it is testing high-speed Internet access services and digital
programming to be provided to cable television operators beginning next year. As
another example, Pacific Century Cyberworks Limited has gained the right to use
Tomen Mediacom's cable television infrastructure to deliver broadband and
electronic commerce services to subscribers through Tomen Mediacom's cable
television operators in the Tokyo area.
OTHER COMPETITORS. In the future, we may face Internet-related competition
from global alliances, such as SpeedNet Inc., a recently announced joint venture
between Softbank, Microsoft and Tokyo Electric Power Co. and AT&T/BT global
services, distributed by Japan Telecom in which AT&T and British Telecom
recently purchased a 30% equity interest.
NTT recently announced that its two regional carriers will allow their
fiber optic networks to be leased by competitors. In addition, fiber optic cable
is expected to become available for lease in 2001 from other sources, including
utility, transportation and other telecommunications companies, in part
subsidized by government funding and construction efforts. Furthermore, the
Ministry of Posts and Telecommunications has targeted 2005 for completion of a
nation-wide fiber optic cable network capable
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of providing high-speed Internet access to homes throughout Japan. We anticipate
that as fiber optic cable becomes more prevalent in Japan, additional operators
will begin offering high-speed Internet access through the use of fiber optic
cable. Several companies have already announced plans to provide Internet access
services using leased fiber optic cable. For example, ten cable companies in the
Kanto region have set up a joint venture which plans to offer Internet access
using fiber optic cable laid by the Ministry of Construction, which will reduce
their start-up costs.
Internet access can also be provided via satellite. Currently, only a few
operators offer Internet access using satellites, with their services being
mainly limited to business users. However, Japan's Science and Technology Agency
recently announced plans to spend Y50 billion for the development of advanced
communications satellites that will have the capacity to offer Internet access
up to 20,000 times faster than otherwise available over telephone lines. With
the increased efficiency in satellite transponder usage, there have been efforts
to start up services targeting residential users and we anticipate competition
from satellite providers in the future.
We also compete with Internet access offered by mobile communications
carriers, such as NTT DoCoMo. NTT DoCoMo is planning to introduce next
generation mobile communication service "IMT-2000" in May 2001 that provides 384
kilobits per second data transmission services. As of August 2000, the Ministry
of Posts and Telecommunications had licensed 16 operators, of which ten have
commenced service, to provide high-speed local Internet access using a "wireless
local loop" infrastructure. Increased data transmission speeds and improved
liquid crystal display monitors for mobile communications terminals have enabled
mobile communications carriers to offer "wireless Internet" services to their
mobile customers. The Ministry of Posts and Telecommunications released
preliminary data indicating that there were approximately 17.29 million users
accessing the Internet through wireless phones as of August 31, 2000.
Since December 1999, several companies, including NTT's subsidiaries and
Tokyo Metallic Communications, have commenced Internet access services using
asymmetric digital subscriber line technology, which is significantly faster
than conventional dial-up Internet access, in certain areas in Japan. Additional
entrants such as the "DSL Basic Access Committee," formed in 1999 by a
consortium of more than ten different Japanese companies, including Mitsui & Co.
and DDI Corporation, also are expected to provide this service in the future.
Another form of competition may come from real estate developers that form
joint ventures with Internet providers to offer high-speed Internet access
services to promote condominium sales. The services provided by these joint
ventures may displace our services and serve as a basis for owners of multiple-
dwelling units denying us access to their buildings.
A continuing trend towards business combinations and alliances in the
Internet access sector, as well as government funded projects, may also create
significant new competitors to us. For example, the Ministry of Posts and
Telecommunications has announced plans to begin offering interest-free loans to
support the development of phone and wireless-based Internet services in fiscal
2001. We cannot predict whether competition from such developing and future
technologies or from such future competitors will have a material impact on our
operations.
GOVERNMENT REGULATION
The Ministry of Posts and Telecommunications is the regulatory agency
responsible for overseeing Japan's telecommunications and broadcasting
activities. The Ministry of Posts and Telecommunications is responsible for
planning, formulating and promoting basic general policies governing licenses
and other regulatory matters. The Ministry of Posts and Telecommunications also
enforces the laws governing the telecommunications industry.
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Regulation of the Cable Television Industry in Japan
BACKGROUND. With the development of the cable television industry in Japan
over the last 40 years, the Ministry of Posts and Telecommunications has enacted
a variety of promotional measures to support the growth of cable television. In
addition, technological advancements resulting in greater capacity and
interactive capabilities have enabled cable television providers to support not
only television services, but also other forms of telecommunication. As a
result, the cable television industry in Japan has evolved from a retransmission
business to a multi-channel television business, which includes the distribution
of satellite delivered programming. The deregulation of the cable television
industry from 1994 through 1996, including the easing of restrictions on foreign
investment, spurred growth in Japan's cable television industry. The three major
actions undertaken by the Ministry of Posts and Telecommunications between 1994
and 1996 to stimulate the cable television industry were:
- increasing maximum equity ownership interest that can be owned by foreign
entities from 20.0% to 33.3%, from which it was further increased to 100%
in June 1999. Please see the description under the caption "-- Foreign
Ownership;"
- allowing greater participation by cable television providers in offering
additional telecommunications services, including cable telephony; and
- allowing cable television providers to service regions outside of their
headquartered areas.
LEGISLATION. The two key laws governing cable television broadcasting
services in Japan are:
- the Cable Television Broadcasting Law; and
- the Wire Telecommunications Law.
The Cable Television Broadcasting Law was enacted in 1972 to regulate the
installation and operation of cable television facilities and the provision of
cable television services.
The Wire Telecommunications Law is the fundamental law in Japan pertaining
to wire telecommunications and it regulates all wire telecommunications
equipment, including cable television facilities.
LICENSES. Under the Cable Television Broadcasting Law, any business that
wishes to install cable television facilities with more than 500 drop terminals
to provide cable television services must obtain a license from the Ministry of
Posts and Telecommunications. Under the Wire Telecommunications Law, if these
facilities have 500 drop terminals or less, only prior notification to the
Ministry of Posts and Telecommunications is required in lieu of a license.
Under the Cable Television Broadcasting Law, if a license is required, the
license application must provide an installation plan, including details of the
facilities to be constructed and the frequencies to be used, financial
estimates, and other relevant information. Generally, the license holder must
obtain prior permission from the Ministry of Posts and Telecommunications in
order to change any of the items included in the original license application.
Licenses will be granted if the following conditions are satisfied:
- the installation plan is reasonable and practicable;
- the facilities to be constructed satisfy technical standards prescribed
by the Ministry of Posts and Telecommunications;
- the financial and technical competence of the applicant is deemed
sufficient; and
- the establishment of the facilities in the proposed area is necessary and
appropriate in light of social, environmental and cultural conditions.
The Cable Television Broadcasting Law also provides that any business that
wishes to provide cable television services must file prior notification with
the Ministry of Posts and Telecommunications before
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commencing service. This notification must provide and identify the service
areas, the facilities to be used and the frequencies to be used, an outline of
the proposed cable television broadcasting services and other relevant
information, regardless of whether these facilities are leased or owned.
Generally, the cable television provider must notify the Ministry of Posts and
Telecommunications of any changes to these items.
A cable television provider must comply with the following guidelines:
- if the cable television provider intends to edit programming, program
standards must be established and made public, a broadcast consultation
organization must be established, and standards set forth in the
Broadcasting Law, which relate to programming, must be followed;
- the license holder must make its facilities available to third parties
wishing to use them for cable television broadcasting services, subject
to availability of broadcast capacity;
- cable television broadcasting services must be provided to those parties
requesting them in the absence of reasonable grounds for refusal;
- a retransmission consent must be obtained where the retransmission of
television broadcasts occurs in any area outside a zone designated by the
Ministry of Posts and Telecommunications as an area in which consents
need not be obtained, even though the Ministry of Posts and
Telecommunications has not yet designated any area of this type within
Japan; and
- under the Roads Law, permission to occupy or use public roads for the
installation and use of cable must be obtained from the relevant
government agencies and other road administrators.
TARIFFS. Before commencing operations, a cable television provider must
notify the Ministry of Posts and Telecommunications of all charges and tariffs
it will charge for providing cable television services. In addition, a cable
television provider must give prior notification to the Ministry of Posts and
Telecommunications of all amendments to the provider's existing tariffs/charges
scheme. Approval by the Ministry of Posts and Telecommunications of these
amendments is not required.
FOREIGN OWNERSHIP. In June 1999, certain foreign ownership restrictions
provided for in the Cable Television Broadcasting Law were abolished. Since that
time, licenses to install cable television broadcasting facilities may be
granted to a Japanese entity in which non-Japanese nationals hold all of the
voting rights. In addition, non-Japanese nationals may now be nominated as
representative directors of cable television providers.
TRANSFER OF FACILITIES, SALE OF BUSINESS AND MERGER. Under the Cable
Television Broadcasting Law, if a license holder transfers all of its cable
television facilities to another entity with the approval of the Ministry of
Posts and Telecommunications, the transferee succeeds to the transferor's
license. Additionally, upon consummation of a merger of a license holder that is
approved by the Ministry of Posts and Telecommunications, the surviving entity
succeeds to the license of the dissolved party.
If a cable television provider that has filed prior notification with the
Ministry of Posts and Telecommunications in connection with its commencement of
service sells all of its cable television business to another entity, or merges
with another entity, the purchaser or the surviving entity, as the case may be,
need not give prior notice to the Ministry of Posts and Telecommunications of
its commencement of service. However, the purchaser or the surviving entity, as
the case may be, must immediately notify the Ministry of Posts and
Telecommunications of the sale of the business or merger upon its completion.
REVOCATION OF LICENSES. The Ministry of Posts and Telecommunications may
revoke a facility license in the following circumstances:
- if the original license or amendment thereof is obtained by illegal
means;
- if a license holder breaches the terms of its license, fails to comply
with technical standard set forth in the relevant ordinance under the
Cable Television Broadcasting Law, or fails to meet other requirements of
the Cable Television Broadcasting Law; or
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- if a license holder fails to implement a Ministry of Posts and
Telecommunications improvement order relating to its cable television
facilities or its operation of cable television services.
Regulation of the Telecommunications Industry in Japan
As providers of telephony and high-speed Internet access, our franchises
also are subject to regulation by the Ministry of Posts and Telecommunications
under the Telecommunications Business Law. The Telecommunications Business Law
regulates two types of telecommunications companies. Type I carriers are allowed
to carry data over telecommunications circuit facilities which they installed or
on which they hold long-term leases meeting certain criteria. Type I carriers
include NTT, DDI Corporation and other common carriers, as well as wireless
operators. Type II carriers, including telecommunications circuit resale
carriers and Internet service providers, can only carry data over facilities
installed by others. Under the Telecommunications Business Law, Type I carriers
are allowed to offer the same kinds and categories of services as Type II
carriers. Because our franchises carry data over telecommunications circuit
facilities they installed in connection with their telephony and high-speed
Internet access, our franchises are Type I carriers.
As Type I carriers, the following regulations under the Telecommunications
Business Law apply to our franchises in connection with their provision of
telephony and high-speed Internet access.
MINISTRY OF POSTS AND TELECOMMUNICATIONS LICENSE. A Type I carrier is
required to obtain a license from the Ministry of Posts and Telecommunications
before providing telephony or Internet access. The license application must set
forth categories and descriptions of services, service areas and
telecommunications facilities. Additionally, a Type I carrier generally must
obtain prior permission from the Ministry of Posts and Telecommunications in
order to change any of these items set forth in the original application. A Type
I carrier must also obtain approval from the Ministry of Posts and
Telecommunications before it enters into an agreement entrusting any part of its
telecommunications service to any other telecommunications carrier. A license
may be revoked by the Ministry of Posts and Telecommunications, among others, if
a Type I carrier has failed to commence its telecommunications business within
the time period designated by the Ministry of Posts and Telecommunications or if
a Type I carrier has harmed the public interest by otherwise violating the
Telecommunications Business Law.
For purposes of a Type I carrier license, Internet access and telephony
services are deemed to be separate categories of service. Thus, when a franchise
plans to commence either telephony or Internet access, that franchise must first
apply for and obtain a Type I license to carry the service for which the
application relates. After a franchise receives a Type I license permitting it
to provide either telephony or Internet access, the franchise must reapply for
an extension of the original license prior to offering additional services not
covered by the original license.
To date, our managed franchises that offer telephony or high-speed Internet
access have generally been able to obtain the necessary license and approvals
without undue delay or hardship, and have never had a license revoked.
OBLIGATION TO PROVIDE SERVICES. Type I carriers must not, without good
reason, refuse to provide telecommunications services within their service
areas.
TERMS AND CONDITIONS FOR THE PROVISION OF SERVICES. Type I carriers must
establish standard terms and conditions for providing telecommunications
services. These terms and conditions, and any amendments to them, are subject to
approval by the Ministry of Posts and Telecommunications. Except for non-tariff
based services, for which approval by the Ministry of Posts and
Telecommunications is separately required, Type I carriers are prohibited from
providing any telecommunications services other than in accordance with terms
and conditions approved by the Ministry of Posts and Telecommunications.
TARIFF REGULATION. Type I carriers must establish tariffs for the
telecommunications services that they offer. Although such tariffs may be
established and changed without approval by the Ministry of Posts and
Telecommunications, prior notification to the Ministry of Posts and
Telecommunications is required.
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Additionally, the Ministry of Posts and Telecommunications may order a change to
the tariffs if it determines that the tariffs are not calculated according to a
clear and properly stipulated method, include any provision that unfairly
discriminates against any person or creates unfair competition or are otherwise
strongly adverse to the public interest.
INTERCONNECTION REGULATION. Interconnection tariffs, terms and conditions
are subject to special regulation by the Ministry of Posts and
Telecommunications. For example, NTT East and NTT West, which are designated by
the Ministry of Posts and Telecommunications as dominant Type I carriers, must
establish uniform interconnection tariffs, terms and conditions which are
subject to approval by the Ministry of Posts and Telecommunications.
Telecommunications carriers who are not designated as dominant Type I
carriers may set interconnection tariffs, terms and conditions by independent
negotiation and agreement subject to approval by the Ministry of Posts and
Telecommunications.
SALE OF BUSINESS AND MERGER. A sale of the business of a going-concern or a
merger is subject to prior approval by the Ministry of Posts and
Telecommunications where the transferor or dissolved party is a Type I carrier.
The transferee or the surviving entity, as the case may be, succeeds to the Type
I carrier license from the transferor or the dissolved party.
TECHNICAL STANDARD FOR TYPE I CARRIER. In order to ensure the quality and
security of the telecommunications infrastructure of a Type I carrier, Type I
carriers are required to maintain their telecommunications facilities in
accordance with the technical standards established by the Ministry of Posts and
Telecommunications. If the Ministry of Posts and Telecommunications determines
that the telecommunications facilities of a Type I carrier fail to meet its
technical standards, it may order the carrier to improve or repair its
facilities.
Currently, other than the Telecommunications Business Law, only a small
body of laws and regulations specifically applies to Internet access and other
Internet related activities in Japan. Due to the increasing popularity and use
of the Internet, however, it is possible that Internet related laws and
regulations may be adopted in Japan and in other jurisdictions. Governmental
agencies in Japan and elsewhere are currently considering the adoption of
Internet related laws and regulations. These laws and regulations could cover
issues such as user privacy, freedom of expression, pricing, characteristics and
quality of products and services, taxation, advertising, intellectual property
rights, information security and the convergence of traditional
telecommunications services with Internet communications.
PROPERTIES
Our corporate headquarters are located at Higashi-Ikebukuro Center Building
8F, 41-24, Higashi-Ikebukuro 4-chome, Toshima-ku, Tokyo, where we lease
approximately 22,000 square feet. Our lease expires on December 31, 2000 and is
automatically renewable for two-year terms thereafter. In addition, we own or
lease real property for signal reception sites and business offices in many of
the communities served by our franchises and for our principal executive
offices. Our headend locations are generally located on leased parcels of land,
with lease terms that are automatically renewable.
Our principal physical assets which we either own or lease consist of cable
television, telephony and Internet plant and equipment, including signal
receiving, encoding and decoding devices; headend facilities; telephony
switches; cable modem termination systems; host digital terminal; headends;
digital terminals; regional fiber networks; distribution systems; and customer
drop equipment, including set-top boxes, access line units and broadband modems
for each of our managed franchises. Our cable plant and related equipment are
generally attached to utility poles under pole rental agreements with local
public utilities and telephone companies, and in certain locations are buried in
underground ducts or trenches. The amount of our cable plant and equipment
buried underground is less than one percent of our total cable plant and
equipment. The physical components of our network require maintenance and
periodic upgrading to keep pace with technological advances.
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EMPLOYEES
As of September 30, 2000, Jupiter employed approximately 500 people,
including 41 employees seconded from our principal shareholders, but excluding
part-time and temporary personnel and consultants. Of these 500 employees, we
seconded approximately 335 to our managed franchises. Of the total,
approximately 140 were employed in network engineering, approximately 270 were
employed in customer support, sales, marketing and related activities,
approximately 20 were employed in information technology and product
development, and approximately 70 were employed in general and administration.
In comparison, we employed approximately 430 people as of December 31, 1999,
approximately 390 people as of December 31, 1998 and approximately 350 people as
of December 31, 1997.
As of September 30, 2000, our managed franchises employed, approximately
1,850 people, excluding part-time and temporary personnel and consultants but
including approximately 335 employees seconded from us. Of the approximately
1,940 people carrying out the sales and marketing of our services for our
managed franchises, approximately 580 are directly employed by our managed
franchises on a full-time basis, while the remaining 1,360 are hired on a
contract basis from personnel agencies. In comparison, our managed franchises
employed approximately 920 people as of December 31, 1999, approximately 810
people as of December 31, 1998 and approximately 560 people as of December 31,
1997.
None of our employees, and, with the exception of approximately 15
employees in the CV21 (Fukuoka) franchise, none of the employees of our managed
franchises, is subject to any collective-bargaining arrangements. We consider
our relations with all our employees, as well as the relations of our managed
franchises with their direct employees, to be good.
Our principal shareholders pay the compensation to our employees that are
seconded from them, however, we reimburse our shareholders for any compensation
they pay to these employees. While we expect to continue this arrangement with
our principal shareholders, there can be no assurance that we will be able to
continue to call upon our principal shareholders as a source of employees
following the global offering. Likewise, our managed franchises reimburse us for
any compensation we pay to their employees seconded from us.
INSURANCE
We have insurance to cover risks incurred in the ordinary course of
business, including general liability, property coverage and workers'
compensation insurance in amounts typical of similar operators in the cable
industry and with reputable insurance providers. As is typical in the cable
industry, we generally do not insure our external coaxial fiber cable plant.
However, we generally do insure our cable plant within buildings for such
hazards as fire, explosion, theft, floods, mischief and accidents other than
earthquakes.
PROPRIETARY RIGHTS
We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect proprietary
rights to our services. We have no patented technology that would preclude or
inhibit competitors from entering our market. The steps we have taken to protect
our intellectual property may not prove sufficient to prevent misappropriation
of our technology or to deter independent third-party development of similar
technologies. To the extent that we rely on technologies we license from third
parties, such licenses may not be available to us in the future on commercially
reasonable terms, if at all.
We are the owners of the following trademarks, each of which has been
registered in Japan: "Jupiter," both in Japanese and English; "J-COM," in
English; the J-COM logo mark; and the J-COM character mark.
To date, we have received no notice that our services infringe on the
proprietary rights of third parties, but third parties could claim that our
current or future services infringe on their rights. We expect that participants
in our markets will be increasingly subject to infringement claims as the number
of services and competitors in our markets grows. We may, however, become
involved in such actions in the
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future. Any of these claims, whether meritorious or not, could be
time-consuming, result in costly litigation, cause service installation delays
or require us to enter into royalty or licensing agreements. Royalty or
licensing agreements might not be available on terms acceptable to us or at all.
As a result, any of these claims may have a material adverse effect on our
business.
THEFT PROTECTION
Our multi-channel package is scrambled, and we believe the incidence of
theft of service in our markets is negligible.
LEGAL PROCEEDINGS
We are not a party to any litigation or other legal proceedings which, if
determined adversely against us, would have a material adverse effect on our
consolidated group's financial condition and results of operations.
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MANAGEMENT
DIRECTORS, SENIOR MANAGEMENT AND CORPORATE AUDITORS
The following table sets forth the name, age and position of each of our
directors, executive officers and corporate auditors:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Tsunetoshi Ishibashi 59 Representative Director, Chairman
Lee A. Daniels 43 Representative Director, President
Vernon A. Chamberlin 54 Representative Director, Executive Vice
President
Susumu Shoji 58 Managing Director, Finance and Accounting
Yasufumi Hirayama 56 Managing Director, Planning and Administration
Tsuguhito Aoki 53 Director
Miranda T. C. Curtis 44 Director
Susumu Furukawa 46 Director
Graham Hollis 48 Director
Atsushi Nishijo 58 Director
Yasushige Nishimura 65 Director
Yuji Tamura 57 Director
Henry P. Vigil 42 Director
Darryl V. Dorrington 56 Corporate Auditor
Yasuo Kimura 67 Corporate Auditor
Masaki Okubo 60 Corporate Auditor
Suzanne M. Provan 35 Corporate Auditor
</TABLE>
Tsunetoshi Ishibashi. Mr. Ishibashi has served as our Representative
Director, Chairman since September 2000. From March 1998 to August 2000, Mr.
Ishibashi served as our Representative Director, President and Chief Executive
Officer. Mr. Ishibashi served as our Executive Vice President from December 1997
to March 1998 and has served as one of our directors since January 1995. Since
May 1995, he served as Deputy General Manager, Media Business Division of
Sumitomo. From April 1990 to May 1995, he served as the General Manager, CATV
Business Department of Sumitomo.
Lee A. Daniels. Mr. Daniels has served as our Representative Director,
President since September 2000. Prior to joining us, Mr. Daniels served as the
President and Chief Executive Officer of Titus from April 1998 to August 2000.
From November 1994 to April 1998, he served as the President and Chief Executive
Officer of AT&T Japan Ltd. and AT&T CSG. Prior to that time, he held various
positions at AT&T Corp., including Product Line Director and Sales and Marketing
Director in Global Consumer Services and was an International Sales Manager in
Business Communications Services.
Vernon A. Chamberlin. Mr. Chamberlin has served as our Representative
Director, Executive Vice President since September 2000. From August 1998 to
September 2000, Mr. Chamberlin served as our Director, Executive Vice President
and Chief Operating Officer. Mr. Chamberlin is responsible for our marketing,
engineering and operating divisions as well as the operating performance of our
managed franchises. Mr. Chamberlin joined our company in April 1996 as a Senior
Vice President with responsibility to develop and launch integrated cable
television, telephony and high-speed Internet access services. Prior to joining
us, Mr. Chamberlin worked for U.S. West International/MediaOne in the United
Kingdom as Director of Operations from March 1990 to April 1996, where he was
responsible for overseeing the development and start-up of integrated cable
television and telephony businesses involving several joint ventures, including
Telewest Communications plc.
Susumu Shoji. Mr. Shoji has served as our Managing Director since September
1997 and has been in charge of Finance and Accounting since October 2000. Mr.
Shoji served as our Chief Financial Officer from June 1996 to September 2000.
From June 1996 to September 1997, Mr. Shoji also served as one of our directors.
From July 1994 to June 1996, he was General Manager, Accounting Department of
the Machinery & Electric Group of Sumitomo.
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Yasufumi Hirayama. Mr. Hirayama has served as our Managing Director since
September 1997 and has served as one of our directors since June 1996. Mr.
Hirayama has been in charge of Planning and Administration since October 2000
and in charge of Operations from March 1998 to September 2000. From January 1996
to March 1998, Mr. Hirayma served as our General Manager, President Office in
charge of administration. From July 1994 to January 1996, he served as the
Deputy General Manager, Overseas Planning & Coordination Department of Sumitomo.
Tsuguhito Aoki. Mr. Aoki has served as one of our directors since January
1995. Since December 1998, Mr. Aoki has been the General Manager of CATV &
Satellite Business Department, formerly known as CATV Business Department, of
Sumitomo. From June 1996 to December 1998, he served as Deputy General Manager
of CATV Business Department. From January 1995 to June 1996, Mr. Aoki served as
our Chief Financial Officer.
Miranda T. C. Curtis. Ms. Curtis has served as one of our directors since
January 1995. Since February 1999, Ms. Curtis has been the President of Liberty
Media International. In that capacity, she oversees all of Liberty Media
International's international broadband, distribution, telephony and content
operations. From September 1996 to February 1999, she served as Executive Vice
President of Liberty Media International. She joined Liberty Media International
in 1994 at its formation and served in the international division of AT&T
Broadband, formerly Tele-Communications, Inc., from 1992 to 1994. Ms. Curtis
also serves on the board of directors of Telewest Communications plc, Jupiter
Programming Co., Ltd., Multithematiques SA and Princes Holdings, Ltd.
Susumu Furukawa. Mr. Furukawa has served as one of our directors since
September 2000. Since April 2000, Mr. Furukawa has been the Vice President of
Consumer Strategy of Microsoft Corporation. From November 1991 to April 2000, he
served as the Chairman and Chief Executive Officer of Microsoft Japan. From May
1986 to November 1991, he served as the General Manager and President of
Microsoft Japan.
Graham Hollis. Mr. Hollis has served as one of our directors since
September 2000. From March 1999 to August 2000, Mr. Hollis served as one of our
corporate auditors. Mr. Hollis has been an Executive Vice President of Liberty
Media International since September 1996 and Chief Financial Officer of Liberty
Media International since May 1995. From July 1994 to May 1995, he was the
Director of Finance at Liberty Media International. Mr. Hollis also serves on
the board of directors of Telewest Communications plc, The Wireless Group plc,
Jupiter Programming Co., Ltd., Multithematiques SA and Princes Holdings, Ltd.
Atsushi Nishijo. Mr. Nishijo has served as one of our directors since
October 1995. Mr. Nishijo has served as a Representative Director and General
Manager of the Media, Electronics and Information Business Group of Sumitomo
since April 2000. From April 1997 to April 2000, he served as a Representative
Director and General Manager of the Media Business Division of Sumitomo. From
June 1995 to March 1997, he served as a Director of the Media Business Division
of Sumitomo. From June 1993 to June 1995, he served as Executive Vice President
of Sumitomo Corporation of America, a subsidiary of Sumitomo.
Yasushige Nishimura. Mr. Nishimura has served as one of our directors since
September 2000. Mr. Nishimura has been the Chairman of Jupiter Satellite
Broadcasting Co., Ltd. since May 1998 and Chairman of Japan Satellite
Broadcasting Association since June 1998. From March 1996 to March 2000, he
served as Chairman of Jupiter Programming Co., Ltd., a joint venture between a
wholly-owned subsidiary of Liberty Media International and Sumitomo. From
January 1995 to March 1998, he was our President and Chief Executive Officer.
From April 1990 to October 1995, he was Deputy General Manager, Media Business
Division of Sumitomo. In addition, he has been a consultant to Liberty Media
since November 1998 and a senior advisor to Jupiter Programming Co., Ltd. since
April 2000.
Yuji Tamura. Mr. Tamura has served as one of our directors since September
2000. Mr. Tamura has been a Managing Director and General Manager of the Media
Business Division of Sumitomo since April 2000, the General Manager of Machinery
& Electric Systems of Sumitomo since April 1998 and a
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director of Sumitomo since June 1996. From June 1995 to April 1998, he served as
the President of Sumitomo Corporation Thailand, Ltd., an affiliate of Sumitomo.
Prior to that time, he worked for Sumitomo.
Henry P. Vigil. Mr. Vigil has served as one of our directors since
September 2000. Since January 1999, Mr. Vigil has been the Vice President,
Consumer Strategy and Partnerships of Microsoft Corporation. From January 1997
to January 1999, he served as the Senior Director of Strategy Planning and
Business Development for the Digital Television Group of Microsoft Corporation.
From September 1995 to January 1997, he served as General Manager of the
Internet Commerce Business Unit and General Manager of the Interactive
Television Business Unit of Microsoft Corporation. In addition, from 1990 to
1995, he served as Director of Marketing for Desktop Applications of Microsoft
Corporation. Mr. Vigil also serves on the board of directors of Telewest
Communications plc and UnitedGlobalCom, Inc.
Darryl V. Dorrington. Mr. Dorrington has served as one of our corporate
auditors since September 2000. From March 1998 to August 2000, Mr. Dorrington
served as one of our directors. Mr. Dorrington has been General Manager (Japan)
of Liberty Media International since 1998. From January 1996 to March 1998, he
served as Chief Operating Officer of Jupiter Programming Co., Ltd. From 1991 to
1996, he served as Deputy Chief Executive of Television New Zealand Ltd. and was
responsible for establishing and managing subsidiary companies and building the
business structure of Television New Zealand Ltd.
Yasuo Kimura. Mr. Kimura has served as one of our corporate auditors since
June 1995. From January 1995 to June 1995, Mr. Kimura served as one of our
directors. From June 1995 to June 1998, he served as a Representative Director
and an Executive Vice President of Sumitomo. Since June 1998, he has been a
special advisor to Sumitomo.
Masaki Okubo. Mr. Okubo has served as one of our corporate auditors since
January 1995. From February 1991 to January 1995, Mr. Okubo was General Manager,
Information System Department of Sumitomo.
Suzanne M. Provan. Ms. Provan has served as one of our corporate auditors
since September 2000. Since July 1998, Ms. Provan has served as Director of
Accounting of Liberty Media International. From May 1997 to July 1998, she
served as Vice President and Controller of Liberty Media International. From
July 1995 to May 1997, she served as Controller of Liberty Media International.
Prior to joining Liberty Media International, Ms. Provan held various positions
within the financial group of AT&T Broadband, formerly Tele-Communications, Inc.
BOARD OF DIRECTORS
Our board of directors has the ultimate responsibility for the
administration of our affairs. Our board of directors can resolve any affairs in
connection with the conduct of our business other than affairs that law or our
articles of incorporation require shareholder approval. The board of directors
elects one or more representative directors from among its members who have the
authority individually to represent us. Though the board of directors can
delegate a part of its authority to our representative directors, certain
matters provided for by law or our rules of board of directors, including the
incurrence of substantial indebtedness, must be resolved by our board of
directors. Our articles of incorporation do not contain any provisions limiting
the borrowing power of our board of directors. The quorum of our board of
directors is a majority of its members and a resolution can be adopted by a
majority vote. Any directors who have a special interest in a resolution are not
counted for purposes of a quorum and cannot exercise their voting rights in
connection with that resolution. Our articles of incorporation provide for not
less than three directors. Directors are elected at a general meeting of
shareholders, and the normal term of office of directors is two years, although
a director may serve any number of consecutive terms. Our articles of
incorporation do not mandate staggered terms for our directors. Our articles of
incorporation do not contain any provisions regarding retirement or
non-retirement of directors based upon their age or regarding the number of
shares required for qualification as a director. From among its members, the
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board of directors may elect the chairman and the president and one or more
vice-chairmen, executive vice presidents, senior managing directors and managing
directors.
Upon completion of the global offering, Sumitomo, Liberty Media and
Microsoft will enter into a shareholders agreement. The agreement will provide
that our principal shareholders will undertake to maintain 13 directors on our
board of directors, with Sumitomo and Liberty Media each having the right to
nominate three non-full-time directors and Microsoft having the right to
nominate two non-full-time directors. In addition, the shareholders party to the
agreement have the right to remove directors they appoint to our board of
directors. These shareholders will agree further that each will have the right
to nominate one member to any committee of our board of directors. The board
nomination rights will be subject to maintaining minimum ownership holdings of
our outstanding ordinary shares. The shareholders agreement will terminate when
Sumitomo, Liberty Media, Microsoft, their controlled associates and any of their
transferees who are transferred an aggregate of 15% or more of the voting power
of our outstanding ordinary shares, collectively own less than 33% of the voting
control of our outstanding ordinary shares.
CORPORATE AUDITORS AND INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
In accordance with the requirements of the Japanese Commercial Code, our
articles of incorporation provide for not less than three corporate auditors.
Corporate auditors, of whom at least one must be from outside our company, are
elected at a general meeting of shareholders and the normal term of office for a
corporate auditor is three years, although they may serve any number of
consecutive terms. Corporate auditors form the board of corporate auditors.
Corporate auditors are under a statutory duty to oversee the administration of
our affairs by our directors, to examine our financial statements and business
reports to be submitted by our board of directors to the general meetings of our
shareholders and to report their opinions to our shareholders. They are entitled
to attend meetings of the board of directors and to express their opinions, but
they are not entitled to vote. Our board of corporate auditors also determines
matters relating to the duties of the corporate auditors, such as audit policy
and methods for the investigation of our affairs.
In addition to corporate auditors, we have appointed independent certified
public accountants, who have the statutory duties to examine the financial
statements to be submitted by our board of directors to the general meetings of
our shareholders and to report to our board of corporate auditors and our board
of directors. Beginning with the fiscal year ended March 31, 1995, Asahi & Co.,
a member firm of Andersen Worldwide SC, independent certified public
accountants, became Jupiter's independent certified public accountants in Japan.
EXECUTIVE OFFICER AND DIRECTOR COMPENSATION
The aggregate amount of compensation we paid during the fiscal year ended
December 31, 1999 to our directors and executive officers as a group, which
includes four individuals, including amounts attributable to benefits and
prerequisites, but excluding amounts paid in connection with expatriate
allowances and foreign tax equalization, was Y101,443,000 ($921,790).
On September 29, 2000, our shareholders approved an aggregate cash and
non-cash compensation allowance of up to Y800 million ($7 million) for our
directors and up to Y100 million ($0.9 million) for our corporate auditors.
Currently, we do not pay cash compensation either to our non-full-time directors
or our non-full-time corporate auditors for their services as members of our
board of directors or board of corporate auditors, however, we will reimburse
our directors and corporate auditors for expenses incurred in connection with
attending board meetings.
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On September 11, 2000, we granted subscription rights for the purchase of
an aggregate of 48,408 ordinary shares to our directors and an aggregate of
2,040 ordinary shares to our corporate auditors, each at an exercise price of
Y92,000 per ordinary share, as follows:
<TABLE>
<CAPTION>
ORDINARY SHARES UNDERLYING
NAME SUBSCRIPTION-RIGHTS GRANT
---- --------------------------
<S> <C>
Tsunetoshi Ishibashi.............................. 11,880
Lee A. Daniels.................................... 11,880
Vernon A. Chamberlin.............................. 11,880
Susumu Shoji...................................... 2,784
Yasufumi Hirayama................................. 2,784
Tsuguhito Aoki.................................... 900
Miranda T. C. Curtis.............................. 900
Susumu Furukawa................................... 900
Graham Hollis..................................... 900
Atsushi Nishijo................................... 900
Yasushige Nishimura............................... 900
Yuji Tamura....................................... 900
Henry P. Vigil.................................... 900
Darryl V. Dorrington.............................. 480
Yasuo Kimura...................................... 480
Masaki Okubo...................................... 600
Suzanne M. Provan................................. 480
------
Total........................................ 50,448
======
</TABLE>
SUBSCRIPTION-RIGHTS OPTION PLAN
Under our articles of incorporation we can, with authorization by a
resolution of our shareholders, grant subscription rights from time to time to
directors, employees or both groups in compliance with the procedures provided
in the Japanese Commercial Code. In addition, we can, from time to time, issue
bonds with share subscription warrants, and grant detached share subscription
warrants to our directors, employees or both groups. See "Description of Capital
Stock -- Stock Option."
Under our subscription-rights option plan, we can, with the approval of our
shareholders, grant subscription-rights options from time to time in compliance
with the procedures required under Japanese law. On September 11, 2000, we
granted subscription rights exercisable for an aggregate of 144,798 ordinary
shares at an exercise price of Y92,000 per ordinary share to Jupiter's
directors, corporate auditors and employees, to the directors, corporate
auditors and employees of our managed franchises and to other non-employees. The
subscription rights for non-management employees will vest two years following
the grant of the options. The subscription rights for management employees will
vest in four equal annual installments beginning one year from the date of
grant. The subscription rights will be exercisable until August 23, 2010. The
subscription rights will not be exercisable until our ordinary shares are
registered with the Japan Securities Dealers Association or listed on a stock
exchange. The number of ordinary shares issuable upon exercise of the
subscription rights and the exercise price of these ordinary shares will be
adjusted for stock splits, reverse stock splits and recapitalizations. Upon a
merger or a stock for stock exchange, we may make reasonable adjustments to the
number of ordinary shares issuable upon exercise of the subscription rights, the
exercise period and other terms, restrict exercise of the subscription rights or
cancel the subscription rights.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following discussion describes material transactions and agreements
since January 1, 1997 through the date of this prospectus between our
consolidated group and our directors, executive officers, corporate auditors and
shareholders that own more than 10% of our capital stock and, in each case, the
companies with whom they are affiliated. The discussion also describes
transactions between our consolidated group and companies in which it owns a 10%
or greater equity interest. We believe that each of the transactions described
below is, or at the time it was entered into was, on terms no less favorable
than those we could have obtained with independent third parties.
TRANSACTIONS WITH OUR DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE AUDITORS
Since January 1, 1997, we have not entered into any material transactions
with any of our directors, executive officers or corporate auditors.
TRANSACTIONS WITH OUR SHAREHOLDERS
Since January 1, 1997, we entered into the following transactions with
Sumitomo, Liberty Media Corporation and Microsoft, our principal shareholders,
or entities with whom they are affiliated.
Sumitomo, Liberty Media Corporation and Microsoft
CAPITAL CONTRIBUTIONS. Our principal shareholders from time to time have
made capital contributions to us in exchange for our ordinary shares as follows:
<TABLE>
<CAPTION>
NUMBER OF ORDINARY SHARES ISSUED
----------------------------------------
SHAREHOLDER 1997 1998 1999 2000
----------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Sumitomo............................ 110,400 72,000 74,000 65,400
Liberty Japan, Inc. ................ 73,600 48,000 49,600 48,000
Liberty Jupiter, Inc. .............. -- -- -- 6,600
</TABLE>
In each case, the price per ordinary share paid to us by our principal
shareholders was Y50,000.
SHARE ISSUANCES TO ADJUST CAPITALIZATION STRUCTURE. On September 30, 2000,
for purposes of adjusting our capitalization structure in anticipation of the
global offering, we issued an aggregate of 2,622,857.16 ordinary shares to our
shareholders on a pro rata basis at a price of Y1 per ordinary share, including
issuances to our principal shareholders as follows:
<TABLE>
<CAPTION>
NUMBER OF ORDINARY
SHAREHOLDER SHARES ISSUED
----------- ------------------
<S> <C>
Sumitomo................................................ 918,000.00
Liberty Japan, Inc. .................................... 734,400.00
Liberty Jupiter, Inc. .................................. 183,600.00
Microsoft Holdings V, Inc. ............................. 605,864.04
</TABLE>
We have accounted for the share issuances described in the table above as a
constructive 3-for-1 stock split of our ordinary shares.
PROGRAM DISTRIBUTION AGREEMENTS. We purchase programming under program
distribution agreements with cable channels which Jupiter Programming Co., Ltd.,
a Japanese company in which each of Sumitomo and a wholly-owned subsidiary of
Liberty Media International own a 50% equity interest, owns an interest in or
exercises control over. The terms of these program distribution agreements range
from one to three years. Amounts paid to cable channels under these agreements
totaled Y451 million for the nine-month period ended September 30, 2000, Y542
million for the year ended December 31, 1999, Y260 million for the year ended
December 31, 1998 and Y138 million for the year ended December 31, 1997.
CARRIAGE AGREEMENT WITH JUPITER PROGRAMMING CO., LTD. In February 2000, we
entered into a carriage agreement with Jupiter Programming Co., Ltd. The
carriage agreement generally provides that we
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will carry, and Jupiter Programming Co., Ltd. will provide, certain cable
channels that Jupiter Programming Co., Ltd. owns an interest in or exercises
control over. The programming fees, which are paid directly to these cable
channels under our program distribution agreements, shall be on terms no less
favorable than those offered by these cable channels to other cable operators,
and no less favorable than those paid by us to other programming suppliers for
comparable programming. The initial term of the agreement is for ten years and
will automatically renew for three year periods thereafter unless cancelled by
either party on three months notice.
REGISTRATION OF SHARES. Upon completion of the global offering, our
principal shareholders, Sumitomo, Liberty Media and Microsoft, will be parties
to a registration rights agreement, entitling them to certain rights with
respect to the registration of their ordinary shares in the United States under
the Securities Act. Under the agreement, if we propose to register any of our
ordinary shares under the Securities Act, our principal shareholders will be
entitled to include their ordinary shares in the registration. The rights will
be subject to customary conditions and limitations, including the right of the
underwriters in an underwritten offering to limit the number of ordinary shares
included in the registered offering and our right to postpone the registration
for up to 90 days under certain circumstances. In addition, our principal
shareholders holding more than 5% of the voting power of our ordinary shares
will also be entitled to require us to file a registration statement under the
Securities Act to register at least $25 million of their ordinary shares for
resale, subject to customary conditions and limitations. Our principal
shareholders each will be entitled to four such registrations. Subject to the
limitations contained in the agreement, we will be responsible for paying all
registration expenses in connection with the registration statement. The holders
selling ordinary shares will be responsible for paying customary selling
expenses, including the fees of their counsel.
AGREEMENT TO EXTEND GUARANTEES. Upon completion of the global offering, we
will be party to an agreement with Sumitomo, Liberty Media and Microsoft under
which we will pay to them a fee, on a quarterly basis, in an amount up to 1.0%
annually of the average daily amount of our outstanding indebtedness guaranteed
by the guaranteeing shareholders. This fee will increase our consolidated
group's debt service obligations on our guaranteed indebtedness. To date, our
consolidated group has not paid any fees in connection with the guarantee of its
indebtedness.
Sumitomo
STRATEGIC PARTNERSHIP WITH SUMITOMO AND AT HOME CORPORATION. In August
1999, we entered into a joint venture with Sumitomo and At Home Corporation, a
U.S. based Internet service and content provider and indirect affiliate of ours,
to form @Home Japan Co., Limited, a corporation organized under the laws of
Japan. Under the terms of the joint venture, @Home Japan will be the exclusive
provider of high-speed broadband Internet access to our managed franchises with
a view to expanding the service into other unaffiliated cable franchises
throughout Japan. In exchange for its 21.4% interest in @Home Japan, Sumitomo
contributed to @Home Japan certain assets of its high-speed Internet access
business in Japan. In exchange for its 42.9% interest in @Home Japan, At Home
Corporation granted @Home Japan an exclusive license to use the @Home trademark
and other specified intellectual property in Japan in connection with the @Home
Japan service. At Home Corporation also agreed to contribute ongoing technical
support and expertise in high-speed, broadband cable Internet access. In
exchange for our 35.7% interest, we granted @Home Japan the exclusive right to
provide high-speed, broadband cable Internet access over our network to
customers in our managed franchises. Under the terms of the joint venture, we
will make monthly payments to @Home Japan based upon an agreed upon percentage
of subscription revenue received by us from our customers for the @Home Japan
services after deducting cable modem leasing costs. In addition, @Home Japan
will pay us an agreed upon percentage of any service fees, income received from
third-party content providers, transaction fees and advertising and promotional
revenue received by @Home Japan. Payments made to @Home Japan under these
arrangements aggregated Y73 million for the nine months ended September 30,
2000. To date, no payments have been made to us.
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PRODUCTS AND SERVICES. We purchase from Sumitomo and its affiliates
products and other services in connection with our business, including, without
limitation, leasing services, real estate services, insurance, computer
management services, personnel services, subscriber management and billing
services, Internet devices, consulting services and programming. Payments made
to Sumitomo and its affiliates for these products and services aggregated Y9,973
million for the nine months ended September 30, 2000, Y6,120 million for the
year ended December 31, 1999, Y3,055 million for the year ended December 31,
1998 and Y2,645 million for the year ended December 31, 1997. These payments
include amounts paid under our program distribution agreements discussed above
to cable channels which are affiliates of Sumitomo.
CREDIT LINE. On January 12, 2000, Sumisho Finance Management, a
wholly-owned subsidiary of Sumitomo, extended to our managed franchises a credit
line through March 31, 2001. Under the credit line, our consolidated group is
permitted to borrow up to Y70,760 million ($643 million). Sumisho Finance has
provided to our consolidated group a credit line in each of the past three
years. The largest amount of indebtedness owed to Sumisho Finance outstanding at
any time was Y57,518 million during the nine months ended September 30, 2000,
Y41,858 million during the year ended December 31, 1999, Y21,965 million during
the year ended December 31, 1998 and Y10,726 million during the year ended
December 31, 1997. The credit line provides us with the option to borrow at an
interest rate based on either the Japanese Short-Term Prime Lending Rate or the
Tokyo Interbank Offered Rate plus a variable rate, which variable rate taken
together with the Tokyo Interbank Offered Rate has ranged between 1.0% and 2.2%
during the past three years. As of September 30, 2000, our consolidated group's
total debt owed to Sumisho Finance was Y57,518 million. For a discussion of the
other material terms of the credit line, see the discussion under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources" elsewhere in this prospectus.
OTHER AGREEMENTS. As of September 30, 2000, 35 of our employees were
seconded to us by Sumitomo. We pay Sumitomo a fee for these seconded employees.
Fees paid to Sumitomo for the seconded employees aggregated Y728 million for the
nine months ended September 30, 2000, Y980 million for the year ended December
31, 1999, Y742 million for the year ended December 31, 1998 and Y663 million for
the year ended December 31, 1997.
STOCK PURCHASES. We have from time to time acquired from Sumitomo equity
interests in some of our existing franchises. Amounts paid to Sumitomo for these
equity interests totaled Y3,515 million for the year ended December 31, 1999,
Y3,725 million for the year ended December 31, 1998 and Y711 million for the
year ended December 31, 1997. For the nine months ended September 30, 2000, we
have not acquired any additional equity interests in our existing franchises
from Sumitomo.
Liberty Media
AGREEMENTS AND TRANSACTIONS. As of September 30, 2000, six of our employees
were seconded to us from Liberty Media International. We reimburse Liberty Media
International, a subsidiary for Liberty Media Corporation, for the salary and
related expenses of these seconded employees. Payments made to Liberty Media
International for the seconded employees aggregated Y325 million for the nine
months ended September 30, 2000, Y457 million for the year ended December 31,
1999, Y771 million for the year ended December 31, 1998 and Y769 million for the
year ended December 31, 1997.
Microsoft
In connection with our acquisition of Titus, we entered into an agreement
with Microsoft Holdings V, Inc., a subsidiary of Microsoft, to purchase from
Microsoft Holdings for an aggregate purchase price of US$25 million (Y2,751
million) all of its shares of CHOFU Television Corporation, Tu-Ka Cellular Tokyo
Inc. and Tu-Ka Cellular Tokai Inc. The closing of the purchase of the shares of
CHOFU, Tu-Ka Cellular Tokyo and Tu-Ka Cellular Tokai owned by Microsoft Holdings
is presently expected to occur after the consummation of the global offering.
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In connection with our acquisition of Titus, we also entered into a gain
recognition agreement with Microsoft in which we have agreed not to sell during
any 18-month period, without Microsoft's 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 date that Microsoft owns less than 5%
of our ordinary shares and Microsoft has sold, in taxable transactions, 80% of
our ordinary shares that was issued to it in the Titus acquisition.
TRANSACTIONS WITH OUR UNCONSOLIDATED AFFILIATES
MANAGEMENT AGREEMENTS. We have entered into management agreements with each
of the Fukuoka, Sakai, Kobe Ashiya, Media Saitama, Urawa, Yokosuka and
Shimonoseki franchises, each of which is an unconsolidated affiliate in which we
hold an ownership interest. The management agreements are for one year terms,
with automatic renewal for successive one-year periods unless either party
provides termination notice at least 30 days prior to the scheduled end of the
term. Under the agreements, we provide operating and administrative services,
programming selection and procurement, sales and marketing programs, customer
management support, technical expertise and accounting and reporting systems. In
exchange for these management services, we are paid a monthly management fee on
a per-customer basis. Management fees paid to us for these management services
aggregated Y313 million for the nine months ended September 30, 2000, Y212
million for the year ended December 31, 1999, Y186 million for the year ended
December 31, 1998 and Y171 million for the year ended December 31, 1997.
SUPPLY AND CONSTRUCTION AGREEMENTS. We are party to supply and construction
agreements with the six unconsolidated affiliates which have entered into
management agreements with us. The terms of the supply and construction
agreements are linked in duration with the management agreements. Under the
agreements, we purchase equipment and provide project management services in
connection with the construction of the broadband networks owned and operated by
these unconsolidated franchises. We receive a service fee for these services
equal to approximately 10% of the cost of the equipment purchased by us and a
project management fee equal to approximately 10% of the labor costs of the
construction required to build the broadband networks. Fees paid to us for these
services aggregated Y1,162 million for the nine months ended September 30, 2000,
Y2,879 million for the year ended December 31, 1999, Y2,465 million for the year
ended December 31, 1998 and Y1,441 million for the year ended December 31, 1997.
PROGRAM DISTRIBUTION AGREEMENTS. We are party to program distribution
agreements with each of the unconsolidated affiliates which have entered into
management agreements with us. The terms of these programming distribution
agreements range from one to ten years. Fees paid to us for programming under
these agreements aggregated Y1,073 million for the nine months ended September
30, 2000, Y849 million for the year ended December 31, 1999, Y1,011 million for
the year ended December 31, 1998 and Y919 million for the year ended December
31, 1997.
OTHER AGREEMENTS. As of September 30, 2000, 69 of our employees were
seconded by us to nine of our unconsolidated affiliates: Urawa, Media Saitama,
Yokosuka, Fukuoka, Sakai, Kobe Ashiya, Shimonoseki, Fujisawa and Kansai
Multimedia. These unconsolidated affiliates reimburse us for all salary and
other related expenses for their seconded employees, paying us Y400 million for
the nine months ended September 30, 2000, Y411 million for the year ended
December 31, 1999, Y360 million for the year ended December 31, 1998 and Y400
million for the year ended December 31, 1997.
On October 18, 2000, our J-COM Kansai franchise, a member of our
consolidated group, and our Sakai franchise, one of our unconsolidated
affiliates, entered into an agreement to merge. We expect the merger to be
completed in January 2001.
INVESTMENTS IN OUR UNCONSOLIDATED AFFILIATES. We have from time to time
made equity investments in our unconsolidated affiliates. We invested an
aggregate of Y1,369 million for the nine months ended September 30, 2000 in
Kansai Multimedia and @Home Japan Co., Limited, Y632 million for the year ended
December 31, 1999 in Shimonoseki and @Home Japan, Y200 million for the year
ended
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December 31, 1998 in Kansai Multimedia and Y427 million for the year ended
December 31, 1997 in Yokosuka.
OTHER TRANSACTIONS
On September 11, 2000, we granted subscription rights for the purchase of
an aggregate of 11,640 ordinary shares to the directors, corporate auditors and
employees of our affiliates, each at an exercise price of Y92,000 per ordinary
share. These subscription rights will vest two years following the grant of the
subscription rights.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our ordinary shares as of October 31, 2000, based on an
aggregate of 3,934,285.74 ordinary shares outstanding as of that date, and as
adjusted to reflect the sale of the ordinary shares in the global offering, by:
- each person or group of affiliated persons who is known by us to
beneficially own our ordinary shares;
- each of our directors and corporate auditors;
- all of our directors and corporate auditors as a group; and
- each selling shareholder.
Each of our principal shareholders has the same voting rights as the
holders of our ordinary shares. As of October 31, 2000, we had four record
holders of our ordinary shares in Japan and, as of that date, approximately 42%
of our ordinary shares were held in Japan.
Unless otherwise indicated, the address of each person named in the table
below is c/o Jupiter Telecommunications Co., Ltd., Higashi-Ikebukuro Center
Building 8F, 41-24, Higashi-Ikebukuro 4-chome, Toshima-ku, Tokyo 170-0013,
Japan.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
BEFORE THE GLOBAL AFTER THE GLOBAL
OFFERING ORDINARY SHARES TO OFFERING
------------------------- BE SOLD IN THE -------------------------
BENEFICIAL OWNER ORDINARY SHARES PERCENT GLOBAL OFFERING ORDINARY SHARES PERCENT
---------------- --------------- ------- ------------------ --------------- -------
<S> <C> <C> <C> <C> <C>
Sumitomo Corporation(1)...... 1,377,000.00 35.0% -- 1,377,000.00 29.2%
Liberty Media
Corporation(2)............. 1,377,000.00 35.0 -- 1,377,000.00 29.2
Microsoft Corporation(3)..... 908,796.06 23.1 -- 908,796.06 19.2
Itochu Corporation(4)........ 118,040.67 3.0 38,960 79,080.67 1.7
Toshiba Corporation(5)....... 118,040.67 3.0 118,040 -- --
Tsunetoshi Ishibashi......... -- -- -- -- --
Lee Daniels(6)............... 35,408.34 * -- 35,408.34 *
Vernon A. Chamberlin......... -- -- -- -- --
Susumu Shoji................. -- -- -- -- --
Yasufumi Hirayama............ -- -- -- -- --
Tsuguhito Aoki............... -- -- -- -- --
Miranda T. C. Curtis(7)...... -- -- -- -- --
Susumu Furukawa.............. -- -- -- -- --
Graham Hollis................ -- -- -- -- --
Atsushi Nishijo.............. -- -- -- -- --
Yasushige Nishimura.......... -- -- -- -- --
Yuji Tamura.................. -- -- -- -- --
Henry P. Vigil............... -- -- -- -- --
Darryl V. Dorrington......... -- -- -- -- --
Yasuo Kimura................. -- -- -- -- --
Masaki Okubo................. -- -- -- -- --
Suzanne M. Provan............ -- -- -- -- --
All directors and corporate
auditors as a group (17
persons)................ 35,408.34 * -- 35,408.34 *
</TABLE>
---------------
* Less than 1% of total.
(1) The address for Sumitomo is 2-2, Hitotsubashi 1-chome, Chiyoda-ku, Tokyo
100-8601, Japan.
(2) The address for Liberty Media Corporation is 9197 South Peoria Street,
Englewood, Colorado 80112. Liberty Media Corporation owns its shares through
its subsidiaries, Liberty Japan, Inc., which owns
(footnotes continued on next page)
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1,101,600 shares, and Liberty Jupiter, Inc., which owns 275,400 shares.
Liberty Media Corporation is a wholly-owned subsidiary of AT&T Broadband,
LLC (formerly known as Tele-Communications, Inc.), which in turn is a
wholly-owned subsidiary of AT&T Corporation. Liberty Media Corporation is
part of AT&T's Liberty Media Group.
Liberty Media Corporation became an indirect wholly-owned subsidiary of AT&T
as a result of the merger of Italy Merger Corp., a wholly-owned subsidiary
of AT&T, with and into Tele-Communications, Inc. In the merger:
- Tele-Communications, Inc. became a wholly-owned subsidiary of AT&T;
- the businesses and assets of the Liberty Media Group and TCI Ventures
Group of Tele-Communications, Inc. were combined; and
- the holders of Tele-Communications, Inc.'s Liberty Media Group common
stock and TCI Ventures Group common stock received in exchange for their
shares two new classes of common stock of AT&T intended to reflect the
results of AT&T's Liberty Media Group. Following the merger, AT&T's
Liberty Media Group consists of the assets and businesses of
Tele-Communications, Inc.'s Liberty Media Group and its TCI Ventures
Group prior to the merger, except for those assets which were
transferred to Tele-Communications, Inc.'s TCI Group in connection with
the merger.
The board of directors and management of Liberty Media Corporation manage
the business and affairs of Liberty Media Corporation, including, but not
limited to, making determinations regarding the disposition and voting of
our ordinary shares owned by Liberty Jupiter, Inc. and Liberty Japan, Inc.
Although Liberty Media Corporation is a wholly-owned subsidiary of AT&T, a
majority of Liberty Media Corporation's board of directors consists of
individuals designated by Tele-Communications, Inc., a subsidiary of AT&T,
prior to its merger. If these individuals or their designated successors
cease to constitute a majority of Liberty Media Corporation's board of
directors, Liberty Media Corporation will transfer all of its assets and
businesses to a new entity. Although this new entity would be owned
substantially by AT&T, it would be managed, including with respect to the
voting and disposition of our ordinary shares, by the management of Liberty
Media Corporation prior to the transfer of assets.
As a result, Liberty Media Corporation, acting through its board of
directors and management, will have the power to determine how our ordinary
shares owned by Liberty Jupiter, Inc. and Liberty Japan, Inc. will be voted
and, subject to the limitations of the Delaware General Corporation Law,
will have the power to dispose of our ordinary shares and, therefore, we
consider Liberty Media Corporation as the beneficial owner of our ordinary
shares owned by Liberty Jupiter and Liberty Japan.
(3) Microsoft Corporation owns its shares through its subsidiary, Microsoft
Holdings V, Inc. The address for Microsoft Corporation is One Microsoft Way,
Redmond, Washington 98052-6399.
(4) The address for Itochu is 5-1, Kita-Aoyama, 2-chome, Minato-ku, Tokyo
107-8077, Japan.
(5) The address for Toshiba is 1-1, Shibaura, 1-chome, Minato-ku, Tokyo
105-8001, Japan. Upon completion of the global offering, we intend to
repurchase the remaining 0.67 of an ordinary share held by Toshiba not sold
in the global offering.
(6) Under an agreement between Mr. Daniels and Microsoft Holdings V, Inc., 50%
of Mr. Daniels' ordinary shares will vest, subject to his continued
employment by us as an executive officer or director, in four equal
semiannual installments, the first of which will occur on January 4, 2001.
(7) Excludes 275,400 of our ordinary shares held by Liberty Jupiter. Ms. Curtis
is a director of Liberty Jupiter and in that capacity is a beneficial owner
of our ordinary shares held by Liberty Jupiter.
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RECENT CHANGES IN OUR PRINCIPAL SHAREHOLDERS
On May 2, 2000, Liberty Media Corporation, through its subsidiary, Liberty
Jupiter, Inc., acquired 255,600 ordinary shares from Sumitomo, representing 10%
of our then outstanding ordinary shares. The sale by Sumitomo to Liberty Jupiter
decreased Sumitomo's beneficial ownership in us to 50%.
On September 1, 2000, in connection with our acquisition of Titus,
Microsoft acquired 908,796.06 of our ordinary shares, Itochu acquired 118,040.67
of our ordinary shares, Toshiba acquired 118,040.67 of our ordinary shares and
Lee A. Daniels acquired 35,408.34 of our ordinary shares, representing an
aggregate of 30% of our ordinary shares.
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DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock is a summary of the material
information concerning our ordinary shares. For additional information, you
should read our articles of incorporation and share handling rules which are
included as exhibits to the registration statement of which this prospectus is a
part. Additional information, some of which is not summarized below, is also
contained in the Japanese Commercial Code and certain other laws of Japan.
GENERAL
Our ordinary shares are not currently listed or quoted on any stock
exchange or traded on any over-the-counter market, including in Japan and the
United States.
Our authorized share capital is 15,000,000 ordinary shares, either with
Y50,000 par value or with no par value per share, of which 3,934,285.74 ordinary
shares without par value have been issued. There are no redemption or sinking
fund provisions applicable to our ordinary shares. Under the Japanese Commercial
Code, the transfer of ordinary shares is made by delivery of share certificates.
However, in order to assert shareholders' rights against us, the transferee must
have his name and address registered on our register of shareholders.
Shareholders are required to file their names, addresses and seal impressions
with The Sumitomo Trust and Banking Company, Limited, which is the transfer
agent for our ordinary shares. Foreign shareholders may file a specimen
signature in lieu of a seal impression. Non-resident shareholders are required
to appoint a standing proxy in Japan or file a mailing address in Japan.
Japanese securities firms and commercial banks customarily offer the service of
standing proxy and provide related services upon payment of their standard fee.
We have been advised by the depositary for the ordinary shares underlying the
ADSs that the depositary expects to appoint a Japanese-based custodian as
standing proxy in Japan for the benefit of the depositary.
At the time our ordinary shares are listed on the Tokyo Stock Exchange, the
central clearing system of share certificates under the Law Concerning Central
Clearing of Share Certificates and Other Securities in Japan will apply to our
ordinary shares. Upon application of this system to our ordinary shares, holders
of our ordinary shares may deposit certificates for our ordinary shares with the
Japan Securities Depository Center, the sole depositary under the system,
through "participants" in the system. These "participants" normally will be
securities firms. The ordinary shares deposited with the Japan Securities
Depository Center will be registered in the name of the Japan Securities
Depository Center in our register of shareholders. The beneficial owners of
these "deposited shares" will be recorded in the register of beneficial
shareholders we will prepare based upon information furnished by the
participants and the Japan Securities Depository Center. This register of
beneficial shareholders will be updated as of record dates and on those dates
shareholders entitled to rights pertaining to the ordinary shares are
determined. For the purpose of transferring the deposited ordinary shares,
delivery of share certificates will not be required. In general, beneficial
shareholders of deposited ordinary shares registered in the register of
beneficial shareholders will be entitled with respect to those ordinary shares
to the same rights and benefits as the holders of ordinary shares registered in
the register of shareholders. The registered beneficial shareholders may
exercise the rights attached to the ordinary shares such as voting rights and
will receive dividends, if any, and notices to shareholders directly from us.
The ordinary shares held by a person as a registered shareholder and those held
by the same person as a registered beneficial shareholder are aggregated for
such purposes. New ordinary shares issued with respect to deposited ordinary
shares, including those issued upon a stock split, automatically become
deposited ordinary shares. The beneficial shareholders will be required to file
with the transfer agent for our ordinary shares the same information as would be
required from the registered shareholders principally through the relevant
participants. Beneficial shareholders may at any time withdraw their ordinary
shares from deposit and receive share certificates.
DIVIDENDS
Following approval by resolution of an ordinary general meeting of
shareholders, year-end dividends may be distributed in cash on a pro rata basis
to shareholders or pledgees of record as of December 31 of
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each year in proportion to the number of ordinary shares held by each
shareholder or pledgee. Additionally, our board of directors may, at its
discretion, declare interim dividend payments in cash to shareholders or
pledgees of record as of June 30 of each year. Our articles of incorporation
provide that we are relieved of our obligation to pay any dividends that go
unclaimed for three years after the date they first become payable.
The Japanese Commercial Code provides that, until our legal reserve is at
least one-quarter of our stated capital, we must set aside in our legal reserve
an amount equal to at least one-tenth of any amount paid out by us as an
appropriation of retained earnings, including any payment by way of year-end
dividends and bonuses to directors and corporate auditors, or equal to one-tenth
of any interim dividend. The Japanese Commercial Code permits us to distribute
profits by way of year-end dividends out of the excess of our net assets, on an
unconsolidated basis, over the aggregate of:
- our stated capital;
- our additional paid-in capital;
- our accumulated legal reserve;
- the legal reserve to be set aside in respect of the dividends concerned
and any other proposed payment by way of appropriation of retained
earnings;
- the excess, if any, of unamortized expenses incurred in preparation for
commencement of business and in connection with research and development
over the aggregate of the amounts referred to in the three preceding
bullets immediately above; and
- beginning in fiscal 2001, if certain of our assets are stated at market
value pursuant to the Japanese Commercial Code, the aggregate amount of
the difference between their market value and acquisition cost.
If we have on our balance sheet a number of ordinary shares acquired for the
purpose of transferring these ordinary shares to our directors and/or employees
but these ordinary shares are yet to be transferred, their book value shall be
deducted from the amount available for payment of year-end dividends.
In the case of interim dividends, net assets are calculated by reference to
our balance sheet as of the preceding December 31, but adjusted to reflect any
subsequent payment by way of appropriation of retained earnings, transfer to the
legal reserve in respect of such appropriation, and any subsequent transfer of
retained earnings to stated capital. If our shareholders pass a resolution
enabling us to purchase ordinary shares for the purpose of transferring them to
our directors and/or employees or for the purpose of canceling them with
retained earnings, then the total amount of the purchase price authorized by
such resolution shall, so long as the resolution has not expired, and whether or
not any purchase has been made, also be deducted from the amount available for
the payment of interim dividends. Interim dividends may not be paid where there
is a risk that at the end of the financial year net assets might be less than
the aggregate of the amounts referred to in the first five bullets set forth in
the above paragraph and, beginning in fiscal 2001, the sixth bullet set forth in
the above paragraph and the deduction referred to in the final sentence of the
immediately preceding paragraph.
In Japan, the "ex-dividend" date and the record date for any dividends come
before the date the issuer decides the amount of the dividends to be paid.
For information as to Japanese taxes on dividends, please refer to the
section "Tax Considerations -- Japanese Taxation."
CAPITAL STOCK AND RESERVES
When we issue new ordinary shares, the entire amount of the issue price of
the new ordinary shares is required to be accounted for as stated capital,
although we may account for an amount not exceeding one-half of the issue price
as additional paid-in capital, so long as the remainder is not less than the
total par value of the new ordinary shares with par value being issued. We may
at any time transfer the whole or
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any part of our additional paid-in capital and legal reserve to stated capital
by resolution of our board of directors. We may also transfer the whole or any
part of retained earnings which are distributable as year-end dividends to
stated capital by resolution at an ordinary general meeting of shareholders.
STOCK SPLITS
We may at any time split our ordinary shares in issue into a greater number
of ordinary shares by resolution of our board of directors if our net assets on
our balance sheet as of the preceding December 31 divided by the number of our
ordinary shares in issue after the stock split is at least Y50,000. If par value
shares are outstanding at the time of the stock split, the total par value of
the par value shares outstanding after the stock split must not exceed our
stated capital.
Generally, unless a stock split involves a change in the par value of the
ordinary shares, shareholders will not be required to surrender share
certificates for exchange, but certificates representing the additional ordinary
shares resulting from the stock split will be issued to shareholders. If
exchange of share certificates is not required, we must give public notice of
the stock split and a record date therefor, not less than two weeks prior to the
record date. In addition, promptly after the stock split takes effect, we must
give notice to each shareholder of the number of ordinary shares to be issued to
such shareholder by virtue of the stock split. If exchange of share certificates
is required, we must give public notice and in addition, notice to each
shareholder that, within a period of not less than one month specified in the
notice, share certificates must be submitted to us for exchange.
For information as to the treatment under Japanese tax law of a stock
split, please refer to the section "Tax Considerations - Japanese Taxation."
FRACTIONAL SHARES
In the event that we make a stock split or consolidate our outstanding
ordinary shares into a smaller number of ordinary shares or issue new ordinary
shares, for example, upon conversion of convertible bonds or upon exercise of
stock purchase warrants and fractional ordinary shares have resulted from the
transaction, a holder of fractional ordinary shares constituting one-hundredth
of one ordinary share or any integral multiple thereof will be, unless the
holder chooses to receive cash for the fraction, registered in a register of
fractional ordinary shares. Fractional ordinary shares will not carry voting
rights but, under our articles of incorporation, they will entitle the holders
to receive dividends. Under our articles of incorporation no certificate will be
issued representing fractional ordinary shares and therefore fractional ordinary
shares are normally not transferable. The registered holders of fractional
ordinary shares may at any time require us to purchase the fractional ordinary
shares at the current market price as determined pursuant to the Japanese
Commercial Code.
GENERAL MEETING OF SHAREHOLDERS
The ordinary general meeting of our shareholders is held in Tokyo within
three months of January 1 of each year. In addition, we may hold an
extraordinary general meeting of our shareholders whenever necessary. We must
give notice of a general meeting of our shareholders stating the place, the time
and the purpose and a summary of the matters to be acted upon at least two weeks
prior to the date set for the meeting. We must send this notice to each
shareholder having voting rights or, in the case of a non-resident shareholder,
to the holder's mailing address or proxy in Japan. The record date for an
ordinary general meeting of shareholders is December 31.
Any shareholder holding at least 300 ordinary shares or 1% of the total
number of our outstanding ordinary shares for six months or longer may propose a
matter to be considered at a general meeting of our shareholders. A proposal is
made by submitting a written request to a representative director of ours at
least six weeks prior to the date of the meeting.
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VOTING RIGHTS
A shareholder of record is entitled to one vote per ordinary share, except
that a corporate shareholder more than one-quarter of whose issued ordinary
shares are directly or indirectly owned by us does not have voting rights.
Except as otherwise provided by law or by our articles of incorporation, a
resolution can be adopted at a general meeting of our shareholders by a majority
of the ordinary shares having voting rights present or represented at the
meeting. Shareholders may also exercise their voting rights through proxies,
provided that the proxy is granted to one of our shareholders having voting
rights. The Japanese Commercial Code and our articles of incorporation provide
that the quorum for the election of directors and corporate auditors is
one-third of the total number of issued ordinary shares having voting rights.
Our articles of incorporation provide that ordinary shares may not be voted
cumulatively for the election of directors. Shareholders of a company having
1,000 or more shareholders may exercise voting rights by sending the voting
rights exercise form indicating consent or dissent to the items on the agenda.
The Japanese Commercial Code provides that a special resolution of general
meeting of shareholders is required in order to amend the articles of
incorporation and in certain other instances, including:
- any reduction of the stated capital;
- any removal of a director or a corporate auditor;
- dissolution, merger or consolidation of our company;
- our acquisition of another company or establishment of a parent company
by way of a stock for stock exchange;
- sale of the whole or an important part of the business;
- purchase of the whole of the business of any other company; or
- any offering of new ordinary shares at a "specially favorable" price, or
any offering of convertible bonds with "specially favorable" conversion
conditions or of bonds with warrants to subscribe for new ordinary shares
with "specially favorable" conditions, to persons other than
shareholders.
A special resolution requires the approval of the holders of at least
two-thirds of the ordinary shares present or represented at the meeting where
quorum is present. A quorum exists when a majority of the total number of
outstanding ordinary shares having voting rights is present or represented.
LIQUIDATION RIGHTS
If we are liquidated, the assets remaining after payment of all taxes,
liquidation expenses and debts will be distributed among our shareholders in
proportion to the number of ordinary shares they hold.
ISSUE OF ADDITIONAL SHARES AND PRE-EMPTIVE RIGHTS
Holders of our ordinary shares have no pre-emptive rights. Authorized but
unissued ordinary shares may be issued at the times and on the terms as our
board of directors determines, as long as the limitations as to the offering of
new ordinary shares at a "specially favorable" price mentioned above are
observed. The new ordinary shares to be sold in the global offering will not be
deemed to be issued at a "specially favorable" price. Our board of directors
may, however, determine that shareholders be given subscription rights to new
ordinary shares. Any subscription rights must be given on uniform terms to all
shareholders as of a record date. Public notice of that record date must be
given at least two weeks in advance. Each shareholder must also be given at
least two weeks prior notice of the date on which the rights expire. The issue
price of new ordinary shares with a par value may not be less than the par value
and must be paid in full. We may, however, make a rights issue to shareholders
at a subscription price per share which is less than the par value thereof if:
- the difference between the subscription price and the par value does not
exceed the sum of the amount accounted for as stated capital in excess of
par value in connection with previous issues and
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the amount of additional paid-in capital, legal reserve and retained
earnings transferred to stated capital, divided by the number of the new
ordinary shares;
- the sum of our net assets in our balance sheet as of the preceding
December 31 and the total subscription price, divided by the number of
the ordinary shares in issue thereafter, is at least Y50,000; and
- the subscription rights to the new ordinary shares are made transferable.
Subject to certain requirements under the Japanese Commercial Code, we may
issue convertible bonds and bonds with warrants to subscribe for our new
ordinary shares by resolution of our board of directors. Holders of convertible
bonds may convert the bonds into ordinary shares within the applicable
conversion period by submitting a conversion request. The warrants may be
detached from the relevant bonds and transferred by delivery of warrant
certificates if provided for in the bonds. Holders of warrants may exercise
their rights to subscribe for new ordinary shares within the applicable
subscription period by submitting notice of exercise and paying the required
amount of subscription money.
DILUTION
It is possible that, in the future, market conditions and other factors
might make rights issues to shareholders desirable at a subscription price
substantially below their then current market price. In this case, shareholders
who do not exercise and are unable otherwise to realize the full value of their
subscription rights will suffer dilution of their equity interest in us.
REPORTS TO SHAREHOLDERS
We furnish our shareholders notices of general meetings of our
shareholders, annual and semi-annual business reports, including financial
statements, and notice of resolutions adopted at the general meetings of our
shareholders, all of which are in Japanese.
Upon completion of the global offering, we will be subject to the
information requirements of the Exchange Act of 1934 applicable to foreign
private issuers and, in accordance with those requirements, we will be required
to file reports and other information in English with the SEC. For information
on how to obtain these reports and other information, please refer to the "Where
You Can Find More Information" section of this prospectus.
RECORD DATE
The record date for year-end dividends and the determination of
shareholders entitled to vote at the ordinary general meeting of our
shareholders is December 31. The record date for interim dividends is June 30.
In addition, we may set a record date for determining the shareholders entitled
to other rights and for other purposes by giving at least two weeks prior public
notice.
REPURCHASE OF OUR OWN SHARES
Neither we nor any of our subsidiaries can acquire our ordinary shares
except by means of a reduction of capital in the manner provided in, and except
as otherwise permitted by, the Japanese Commercial Code as summarized below.
The Japanese Commercial Code permits us to acquire our ordinary shares,
pursuant to a resolution at an ordinary general meeting of our shareholders,
only for the purpose of transferring the ordinary shares to our directors and/or
employees or for the purpose of canceling the ordinary shares.
We can only acquire our ordinary shares for the purpose of transferring
them to our directors and/or employees if:
- the number of ordinary shares to be acquired does not exceed 10% of our
total issued ordinary shares; and
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- the aggregate amount of the purchase price does not exceed the amount of
the retained earnings available for our year-end dividend payment less
the sum of any amount paid or to be paid by way of appropriation of
retained earnings and any amount of any transfer from retained earnings
to stated capital.
We can only acquire our ordinary shares for purposes of canceling them if:
- the aggregate amount of the purchase price does not exceed the amount of
the retained earnings available for our year-end dividend payment less
the sum of any amount paid or to be paid by way of appropriation of
retained earnings and any amount of any transfer from retained earnings
to stated capital; and
- there is no concern that there would not be retained earnings available
for our year-end dividend payment at the close of the current fiscal
year.
If our ordinary shares are listed on an exchange or traded in the
over-the-counter market, acquisition must be made through the market or by way
of tender offer by the close of the following ordinary general meeting.
The Law for Special Exceptions to the Commercial Code concerning Procedures
of Cancellation of Shares authorizes a company whose shares are listed on an
exchange or the over-the-counter market to acquire and cancel its shares by a
resolution of the board of directors if the company's articles of incorporation
provide that shares may be purchased for the purpose of cancellation by a
resolution of the board of directors. Under this law, in general, acquisition by
a company of its shares using retained earnings is subject to, among other
things, the following restrictions: the number of shares to be acquired must not
exceed 10% of the total shares issued and the aggregate amount of the purchase
price for all shares to be purchased by the company during the period from the
time of the resolution of the board of directors to the time of conclusion of
the immediately following ordinary general meeting of shareholders must not
exceed half of the amount available for its interim dividend payment less the
amount of interim dividend actually distributed or to be distributed. At
present, our articles of incorporation do not provide for the purchase of
ordinary shares for the purpose of cancellation by a resolution of our board of
directors.
STOCK OPTIONS
The Japanese Commercial Code permits two types of stock option plans:
options using shares repurchased by a company, otherwise referred to as
treasury-stock options, and options using newly issued shares, otherwise
referred to as subscription-right options. A company may only adopt one type of
plan at any given time.
In order to adopt treasury-stock options, we would need to obtain a
resolution at an ordinary general meeting of our shareholders authorizing the
options and setting out the identity of directors and/or employees to be granted
the options, as well as the class and number of treasury stocks to be resold on
exercise, exercise price, exercise period and other terms of the options. The
number of ordinary shares to be purchased by the directors and/or employees upon
exercise of the options may not exceed one-tenth of the total number of our
issued ordinary shares. The exercise period may not exceed ten years.
In order for a company to adopt a subscription-right option plan, the
company must be authorized to do so by its articles of incorporation. Our
articles of incorporation provide that we may adopt a subscription-right option
plan. In addition, a special resolution of our shareholders at a shareholders'
meeting is required to grant subscription-right options. The special resolution
must authorize the identity of directors and/or employees to be granted the
options, and the class and number of shares to be newly issued on exercise,
exercise price, exercise period and other terms of the options. The number of
ordinary shares issuable upon exercise of the subscription-right options may not
exceed one-tenth of the number of ordinary shares in issue of the company. The
exercise period may not exceed ten years.
In addition to treasury-stock options and subscription-right options, we
may also issue bonds with warrants to subscribe for our newly issued ordinary
shares, detach the warrants from the bonds, repurchase
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the warrants and transfer the warrants to our directors and/or employees. This
would have a similar effect as to granting stock options directly to our
directors and/or employees.
TRANSFER AGENT
The transfer agent for our ordinary shares, as set forth in our share
handling rules, is The Sumitomo Trust and Banking Company, Limited. The Sumitomo
Trust and Banking Company is not affiliated with us or our shareholders.
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DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS
AMERICAN DEPOSITARY RECEIPTS
The Bank of New York will be the Depositary for our ADS program and will
issue the ADRs. Each ADR is a certificate evidencing a specified number of ADSs.
Each ADS will represent ownership interests in one-fiftieth of an ordinary share
or the right to receive ordinary shares. The ordinary shares will be deposited
by us with the Tokyo main office of The Sumitomo Bank, Limited, its custodian,
at 3-2, Marunouchi 1-chome, Chiyoda-ku, Tokyo 100-0005, Japan. Each ADS will
also represent securities, cash or other property deposited with The Bank of New
York but not distributed to ADS holders. The Bank of New York's Corporate Trust
office is located at 101 Barclay Street, New York, New York 10286 and its
principal executive office is located at One Wall Street, New York, NY 10286.
You may hold ADSs either directly, by having an ADR registered in your
name, or indirectly through your broker or other financial institution. If you
hold ADSs directly, you are an ADR holder. This description assumes you hold
your ADSs directly. If you hold your ADSs indirectly, you must rely on the
procedures of your broker or other financial institution to assert the rights of
ADR holders described in this section. You should consult with your broker or
financial institution to find out what those procedures are.
As an ADR holder, you will not be treated as one of our shareholders and
you will not have shareholder rights which are governed by Japanese law. The
Bank of New York will be the registered owner of the ordinary shares underlying
your ADRs, and you must rely on it to exercise the rights attributable to a
shareholder. You will have only the rights of an ADR holder. The rights and
obligations of The Bank of New York and us are set out in a deposit agreement
among us, The Bank of New York and you, as an ADR holder. In general, the
deposit agreement and the ADRs are governed by the laws of the State of New
York.
The material terms of the deposit agreement are described below. For more
complete information, you should read the entire deposit agreement and the ADR,
each of which has been filed as an exhibit to the registration statement for
which this prospectus is a part.
SHARE DIVIDENDS AND OTHER DISTRIBUTIONS
Receipt of Dividends and Other Distributions
The Bank of New York has agreed to pay to you the cash dividends or any
other distributions it or any of the custodians receives on ordinary shares or
other deposited securities after deducting its fees and expenses. You will
receive these distributions in proportion to the number of ordinary shares
represented by your ADRs as of a record date to be fixed by The Bank of New York
after having consulted with us.
CASH. The Bank of New York will convert any cash dividend or other cash
distribution we pay on the ordinary shares into U.S. dollars, if it can do so on
a reasonable basis and can transfer the U.S. dollars to the United States. If
that is not possible, or if any approval from the Japanese government is needed
and cannot be obtained, the agreement allows The Bank of New York to distribute
the Japanese yen only to those ADR holders to whom it is possible to do so. The
Bank of New York will hold the Japanese yen it cannot convert for the account of
the ADR holders who have not been paid. It will not invest the Japanese yen and
it will not be liable for any interest.
Before making a distribution, we will deduct any withholding taxes that
must be paid under Japanese law and The Bank of New York will deduct any
withholding taxes that must be paid under U.S. law. It will distribute only
whole U.S. dollars and cents and will round fractional cents to the nearest
whole cent. If the exchange rates fluctuate during a time when The Bank of New
York cannot convert the Japanese yen currency, you may lose some or all of the
value of the distribution, in U.S. dollar terms.
ORDINARY SHARES. The Bank of New York may distribute new ADSs representing
any ordinary shares we may distribute as a dividend or free distribution if we
furnish it promptly with reasonable assurances
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that it would not require registration under the Securities Act to do so. The
Bank of New York will only distribute whole ADSs. It will sell ordinary shares
which would require it to use a fractional ADS and distribute the net proceeds
in the same way as it does with cash. If The Bank of New York does not
distribute additional ADRs, each outstanding ADS will also represent the new
ordinary shares.
RIGHTS TO RECEIVE ADDITIONAL SECURITIES. If we offer holders of our
ordinary shares any rights to subscribe for additional ordinary shares or any
other securities, The Bank of New York may make these rights available to you if
lawful and feasible. We must first instruct The Bank of New York to do so and
furnish it with satisfactory assurances that it would not require registration
under the Securities Act to do so. If The Bank of New York determines in its
discretion, after consultation with us, that it is not lawful and feasible to
make rights available to all or some of the ADR holders, and The Bank of New
York decides it is practical to sell the rights, The Bank of New York will sell
the rights and distribute the proceeds to the ADR holders otherwise entitled to
the rights, net of fees, in the same way as it does with cash. The Bank of New
York may allow rights that are not distributed or sold to lapse. In that case,
you will receive no value for them. In circumstances in which warrants or other
instruments for rights would not otherwise be distributed, if you request the
distribution of the warrants or other instruments for rights in order to
exercise the rights allocable to your ADSs, The Bank of New York will distribute
the warrants or other instruments to you if we allow the rights to be exercised
and you execute documents we consider necessary under applicable law.
If The Bank of New York makes rights available to you, it will exercise the
rights and purchase the ordinary shares on your behalf if you instruct it to do
so. The Bank of New York will then deposit the ordinary shares and issue
additional ADRs to you. It will only exercise rights if you pay it the exercise
price and any other charges the rights require you to pay. In lieu of delivering
ADRs representing a fractional ADS, The Bank of New York will sell the ordinary
shares represented by the aggregate of all fractional ADSs and distribute the
net proceeds.
The securities laws of the United States may restrict the sale, deposit,
cancellation and transfer of the ADSs issued after the exercise of rights. For
example, you may not be able to trade the ADSs freely in the United States. In
this case, there is a possibility that The Bank of New York may need to issue
the ADSs under a separate restricted deposit agreement that would contain the
same provisions as the current deposit agreement except for the changes needed
to put the appropriate restrictions in place.
DISTRIBUTIONS OTHER THAN CASH, ORDINARY SHARES OR RIGHTS. The Bank of New
York will send to you anything else we distribute on deposited securities by any
means it thinks is legal, fair and practical. If in the opinion of The Bank of
New York, the distribution cannot be made proportionately or is not otherwise
feasible, The Bank of New York may, after consultation with us, adopt any method
it deems fair and practical for effecting the distribution, including the public
or private sale of the property received and distributing the net proceeds.
The Bank of New York is not responsible if it decides that it is unlawful
or impractical to make a distribution available to any ADR holders. We have no
obligation to register ordinary shares, ADSs, rights or other securities under
the Securities Act. We also have no obligation to take any other action to
permit the distribution of ADRs, ordinary shares, rights or anything else to ADR
holders. This means that you may not receive the distributions we make on our
ordinary shares or any value for them if it is illegal or impractical for us to
make them available to you.
DEPOSIT AND WITHDRAWAL
Issuance of ADRs
The Bank of New York will issue ADSs if you or your broker deposit ordinary
shares or evidence of rights to receive ordinary shares with the custodian. Upon
payment of its fees and expenses and of any taxes or charges including stamp
taxes or stock transfer taxes or fees, The Bank of New York will register the
appropriate number of ADRs in the names you request and will deliver the ADRs at
its corporate trust
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office to the persons you request. However, no fractional ordinary shares will
be accepted for deposit unless deposited by us pursuant to the terms of the
deposit agreement.
Surrender of ADRs
You may surrender your ADRs at The Bank of New York's corporate trust
office for the purpose of withdrawing the ordinary shares evidenced by the ADRs.
Upon payment of its fees and expenses and of any taxes or governmental charges,
including stamp taxes or stock transfer taxes or fees, The Bank of New York will
deliver to you at the Tokyo office of the custodian the whole number of
underlying ordinary shares and any other deposited securities, property or cash
underlying the ADRs. Otherwise, upon your request, The Bank of New York will
deliver, at your risk and expense, the deposited securities at its corporate
trust office. The Bank of New York will not accept for surrender any number of
ADSs which would require the delivery of a fractional ordinary share, in which
case The Bank of New York will deliver an ADR representing the balance of ADSs
not representing a whole ordinary share.
PRE-RELEASE OF ADRS
In certain circumstances, subject to the provisions of the deposit
agreement, The Bank of New York may issue ADRs before deposit of the underlying
ordinary shares. This is called a pre-release of the ADRs. The Bank of New York
may also deliver ordinary shares upon the receipt and cancellation of pre-
released ADRs, even if the ADRs are canceled before the pre-release transaction
has been completed. A pre-release is completed as soon as the underlying
ordinary shares are delivered to The Bank of New York. The Bank of New York may
receive ADRs instead of ordinary shares to complete a pre-release. The Bank of
New York may pre-release ADRs only under the following conditions:
- before or at the time of the pre-release, the person to whom the
pre-release is being made must represent to, and agree with, The Bank of
New York in writing that it or its customer:
-- owns the ordinary shares or ADRs to be remitted;
-- assigns all beneficial rights, title and interest in such ordinary
shares or ADRs to The Bank of New York for the benefit of the ADR
holders; and
-- will not take any action with respect to the ordinary shares or ADRs
that is inconsistent with the transfer of beneficial ownership;
- the pre-release must be fully collateralized with cash, U.S. government
securities or other collateral that The Bank of New York considers
appropriate;
- The Bank of New York must be able to close out the pre-release on not
more than five business days notice; and
- The Bank of New York may require additional indemnities and credit
regulations as it deems appropriate.
In addition, the number of ADRs that may be outstanding at any time as a result
of pre-release will not normally exceed 30%, although The Bank of New York
reserves the right to change or disregard the limit from time to time if it
thinks it is reasonably appropriate to do so.
We are not liable to any ADR holder with respect to any representations,
actions or omissions by The Bank of New York for actions taken with respect to
the pre-release of ADRs.
VOTING RIGHTS
You may instruct The Bank of New York to vote the ordinary shares
underlying your ADRs unless we specifically ask The Bank of New York not to
solicit your voting instructions. Otherwise, you won't be able to exercise your
right to vote unless you cancel your ADRs and withdraw the ordinary shares.
However, you may not know about the meeting far enough in advance to withdraw
the ordinary shares. The deposit agreement provides that The Bank of New York
will solicit your voting instructions unless we request in writing that it do
otherwise. The Company presently intends to solicit your voting instructions on
all matters submitted to a vote of shareholders, but we are not obligated to do
so.
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Upon receipt of a notice of a meeting of holders of our ordinary shares,
The Bank of New York, unless we request otherwise, will notify you of the
upcoming vote and arrange to deliver our voting materials to you. The materials
will describe the matters to be voted on, and explain how you may instruct The
Bank of New York to vote the ordinary shares or other deposited securities
underlying your ADSs as you direct. For instructions to be valid, The Bank of
New York must receive them on or before a date established by The Bank of New
York for such purpose. The Bank of New York will try, as far as practical,
subject to Japanese law and the provisions of our articles of incorporation, to
vote or to have its agents vote the ordinary shares or other deposited
securities as you instruct. If no instructions are received by The Bank of New
York, it will deem that you have instructed them to give a discretionary proxy
to a person designated by us to vote the deposited securities, unless we inform
The Bank of New York that substantial opposition exists or the matter materially
and adversely affects your rights. To the extent Japanese law prohibits the
voting of fractional ordinary shares, The Bank of New York will aggregate voting
instructions it receives that are the same and vote the number of whole ordinary
shares represented by the ADSs for which the voting instructions relate,
rounding down to the nearest whole ordinary share. After aggregating the voting
instructions, The Bank of New York will not vote any remaining ADSs that
represent less than a whole ordinary share.
Neither The Bank of New York nor we can assure you that you will receive
the voting materials in time to ensure that you can instruct The Bank of New
York to vote your ordinary shares. In addition, The Bank of New York and its
agents are not responsible for failing to carry out voting instructions or for
the manner of carrying out voting instructions. This means that you may not be
able to exercise your right to vote and there may be nothing you can do if your
ordinary shares are not voted as you requested.
The Bank of New York agrees to appoint the custodian as a standing proxy in
Japan.
FEES AND EXPENSES
<TABLE>
<S> <C>
--------------------------------------------------------------------------------------------
ADR holders must pay: For:
--------------------------------------------------------------------------------------------
Up to $5.00 per 100 ADSs or portion thereof. Each issuance of an ADR, including as a
result of a distribution of ordinary shares
or rights or other property.
Each cancellation of an ADR, including if the
agreement terminates.
Each distribution of property other than
cash, ordinary shares or rights.
--------------------------------------------------------------------------------------------
Up to $0.02 per ADS or portion thereof. Any cash distribution.
--------------------------------------------------------------------------------------------
Up to $1.50 per certificate. Transfer, combination or split-up of ADRs.
--------------------------------------------------------------------------------------------
Registration fees. Transfer and registration of ordinary shares
on the share register upon deposit or
withdrawal of ordinary shares.
--------------------------------------------------------------------------------------------
Expenses of The Bank of New York. Conversion of Japanese yen to U.S. dollars.
Cable, telex and facsimile transmission
expenses.
--------------------------------------------------------------------------------------------
Taxes and other governmental charges The As necessary.
Bank of New York or the custodian have to
pay on any ADR or share underlying an ADR,
for example, stock transfer taxes, stamp
duty or withholding taxes.
--------------------------------------------------------------------------------------------
Any charges payable by The Bank of New York, As incurred.
including the custodian, or its agents in
connection with servicing the deposited
securities.
--------------------------------------------------------------------------------------------
</TABLE>
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PAYMENT OF TAXES
The Bank of New York may deduct the amount of any outstanding taxes or
governmental charges from any payments owed to you. In the event that The Bank
of New York determines that any distribution in ordinary shares or other
property is subject to any tax or other government charge which The Bank of New
York is obligated to withhold, then The Bank of New York may, by public or
private sale, dispose of all or a portion of the ordinary shares or other
property to pay any taxes or charges owed. You will remain liable if the net
proceeds of the sale are not enough to pay the taxes. If The Bank of New York
sells any ordinary shares or other property represented by the ADSs, it will, if
appropriate, reduce the total number of ADSs held by you prior to the sale by
that number of ADSs representing the ordinary shares or other property sold and
pay to you any proceeds, or send to you any property, remaining after it has
paid the taxes.
CHANGES AFFECTING DEPOSITED SECURITIES
If we:
- change the nominal or par value of our ordinary shares;
- split-up, consolidate or reclassify any of the deposited securities,
including the ordinary shares;
- recapitalize, reorganize, merge or consolidate; or
- sell our assets;
then any securities received by The Bank of New York or the custodian in
exchange for or in conversion of the ordinary shares will be treated as
deposited securities underlying the ADSs. If we ask The Bank of New York, it
will or, in its discretion, it may request a surrender of the ADRs in exchange
for new ADRs identifying the new deposited securities, or in the case of a
dividend of ordinary shares, issue additional ADRs.
RESIGNATION AND REMOVAL OF DEPOSITARY
The Bank of New York may resign as depositary at any time, effective upon
our appointment of a successor depositary. The Bank of New York may be removed
by us upon 90 days written notice, effective upon the later of the 90th day
after delivery of notice to The Bank of New York or the appointment of a
successor depositary. We have agreed not to appoint any other depositary for the
issuance of ADRs so long as The Bank of New York is acting as depositary.
AMENDMENT AND TERMINATION
Amendment of the Deposit Agreement
We may agree with The Bank of New York to amend the deposit agreement and
the ADRs for any reason without your consent. If the amendment imposes or
increases fees or charges, except for taxes and other governmental charges,
registration fees, cable, telex or facsimile transmission costs, delivery costs
or other similar expenses, or prejudices an important right of ADR holders, the
amendment will only become effective as to outstanding ADRs 30 days after The
Bank of New York notifies you of the amendment. At the time an amendment becomes
effective, you are considered, by continuing to hold your ADR, to have agreed to
the amendment and to be bound by the amendment to the deposit agreement or ADR,
as the case may be. Unless necessary to comply with applicable law, in no event
will any amendment impair your right to surrender your ADRs and receive the
underlying ordinary shares.
Termination of the Deposit Agreement
The Bank of New York will terminate the deposit agreement if we direct it
to do so. The Bank of New York may also terminate the agreement if The Bank of
New York has provided us and the ADR holders with notice that it would like to
resign and we have not appointed a new depositary bank within 90 days. In each
case, The Bank of New York must provide at least 90 days notice before
termination of
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the agreement. After termination, to the extent that you have not already
surrendered your ADRs as otherwise provided for under the deposit agreement, The
Bank of New York and its agents will only be required to:
- provide you with 90 days advance notice that the deposit agreement will
terminate; and
- collect and deliver dividends and other distributions pertaining to the
deposited securities, sell rights as provided for in the deposit
agreement and deliver ordinary shares and other deposited securities upon
cancellation of the ADRs, after deducting any fees, expenses or taxes.
One year after termination, The Bank of New York may, if practical, sell
any remaining deposited securities by public or private sale. After that, The
Bank of New York will hold the proceeds of the sale, as well as any other cash
it is holding under the agreement, for the pro rata benefit of the ADR holders
that have not surrendered their ADRs. It will not invest the money and will have
no liability for interest. The Bank of New York's only obligations will be to
account for the proceeds of the sale and other cash. Upon termination of the
deposit agreement, all of our obligations will be discharged except with respect
to indemnification and to remit amounts payable to The Bank of New York.
LIMITATIONS ON OBLIGATIONS AND LIABILITY TO ADR HOLDERS
The deposit agreement expressly limits our obligations and liability and
the obligations and liability of The Bank of New York. We and The Bank of New
York:
- are only obligated to perform the actions specifically set forth in the
agreement without negligence or bad faith;
- are not liable for any action or nonaction by either in reliance on
advice of or information from counsel, accountants, any person presenting
shares for deposit, you and any other person believed in good faith to be
competent to give such advice or information;
- are not liable if either is prevented or delayed by law or circumstances
beyond their control from performing their obligations under the
agreement;
- are not liable if either exercises discretion permitted under the
agreement or takes action as required by the agreement;
- generally have no obligation to become involved in an action, suit or
other proceeding related to the ADRs or the ordinary shares on your
behalf or on behalf of any other party; and
- may rely upon any documents we believe in good faith to be genuine and to
have been signed or presented by the proper party.
In addition to each of the above, The Bank of New York is:
- not liable for any acts or omissions made by a successor depository,
provided that The Bank of New York did not perform its obligations
negligently or in bad faith; and
- not liable for any failure to carry out any instructions to vote the
ordinary shares, or for the manner in which any vote is cast or the
effect of any vote, provided that The Bank of New acted in good faith.
The deposit agreement provides that we and The Bank of New York will
indemnify each other under certain circumstances.
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REQUIREMENTS FOR DEPOSITARY ACTIONS
Before The Bank of New York will issue or register transfer of an ADR, make
a distribution on an ADR or permit withdrawal of ordinary shares, The Bank of
New York may require:
- payment of the fee of the depository and payment of stock transfer or
other taxes or other governmental charges and transfer or registration
fees charged by third parties for the transfer of any ordinary shares or
other deposited securities;
- production of satisfactory proof of the identity and genuineness of any
signature or other information it deems necessary; and
- compliance with regulations it may establish, from time to time,
consistent with the deposit agreement, including presentation of transfer
documents.
The Bank of New York may refuse to deliver, transfer or register transfers
of ADRs generally when the transfer books of The Bank of New York or us are
closed, or at any time if The Bank of New York or we think it advisable to do
so.
In the event your ADR is mutilated, destroyed, lost or stolen, The Bank of
New York will execute and deliver to you a new ADR to replace the mutilated,
destroyed, lost or stolen ADR provided that you file with The Bank of New York a
request for the issuance of a new ADR and an indemnity bond along with
satisfying any other reasonable requirements imposed by The Bank of New York.
Right to Receive Ordinary Shares Underlying ADRs
You have the right to cancel your ADRs and withdraw the underlying ordinary
shares at any time except:
- when temporary delays are caused by closing of the transfer books of The
Bank of New York or us, or the deposit of ordinary shares in connection
with the voting of ordinary shares at a shareholders' meeting, or the
payment of a dividend on the ordinary shares;
- when you or other ADR holders seeking to withdraw ordinary shares owe
money to pay fees, taxes and similar charges; or
- when it is necessary to prohibit withdrawals in order to comply with any
laws or governmental regulations that apply to ADRs or to the withdrawal
of ordinary shares or other deposited securities.
This right of withdrawal may not be limited by any other provision of the
deposit agreement.
The ratio of ADS to ordinary share is 50-to-1. As such, The Bank of New
York will not accept for surrender any number of ADSs which would require the
delivery of fractional ordinary shares. You will need to have 50 ADSs, or any
integral multiple thereof, in order to withdraw any ordinary shares.
AVAILABILITY OF INFORMATION
Upon completion of the global offering, we will be subject to the
information requirements of the Securities Exchange Act of 1934, as amended, as
applicable to foreign private issuers. As a result, we will be required to file
reports, including annual reports on Form 20-F, reports on Form 6-K and other
information with the SEC.
The Bank of New York will make available for inspection by ADR holders at
its corporate trust office any reports and communications, including any proxy
solicitation materials, sent by us which are:
- received by The Bank of New York as the holder of the ordinary shares;
and
- made generally available to the holders of our ordinary shares.
The Bank of New York will also, upon written request, send you, at our expense,
copies of any notices, reports and communications which are made generally
available by us to holders of our ordinary shares. These notices, reports and
communications, including any proxy soliciting material, furnished to The Bank
of New York by us will be available in English to the extent these materials are
required to be translated
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into English pursuant to any regulation of the SEC or are made generally
available to holders of our ordinary shares.
The Bank of New York shall maintain books for the registration and transfer
of the ADRs. These books will be open for inspection by you and other ADR
holders, however, the inspection of the books may not be for purposes other than
communicating with other ADR holders for matters relating to our business, the
deposit agreement or the ADRs.
DISCLOSURE OF INTERESTS
We may, from time to time, request that you provide information as to the
capacity in which you own or owned ADRs and regarding the identity of any other
persons then or previously interested in your ADRs and the nature of that
interest.
The deposit agreement provides that you agree to provide any information
requested by us or The Bank of New York. The Bank of New York has agreed to
comply with reasonable written instructions received from us requesting that The
Bank of New York forward any of our requests to you and to forward to us any
responses to any requests received by The Bank of New York.
In addition, the deposit agreement provides that you must promptly notify
us and submit additional information to us upon becoming a beneficial owner,
either directly or indirectly, of 10% or more of our ordinary shares, including
ordinary shares represented by ADSs, and to promptly notify us of any change in
this information. Your failure to provide this notice may result in the
withholding of your ability to instruct The Bank of New York to vote the
ordinary shares underlying your ADSs.
LISTING OF ADSs
We have applied to have the ADSs approved for quotation on the Nasdaq
National Market under the symbol "JUPI." In connection with our application to
approve the ADSs for quotation on the Nasdaq National Market, we have requested
exemptions from compliance with specific provisions of the Nasdaq Marketplace
Rules otherwise applicable to Nasdaq issuers, including an exemption from the
provisions requiring us to:
- distribute to our shareholders copies of our annual report prior to our
annual meeting of shareholders, in lieu of which we intend to issue an
English translation of our audited Japanese GAAP financial statements
prior to our annual shareholders meetings and provide our audited U.S.
GAAP financial statements within the time frame permitted by U.S.
securities laws as applicable to foreign private issuers;
- establish an audit committee of our board of directors, adopt a formal
written audit committee charter and maintain a minimum number of
independent directors of our board of directors, in lieu of which we have
established and will maintain our board of corporate auditors and adopted
our rules of the board of corporate auditors as prescribed by Japanese
law and our organizational documents;
- maintain a minimum quorum for shareholders meetings of not less than
one-third of our outstanding ordinary shares;
- solicit proxies and provide proxy statements for shareholder meetings, in
lieu of which we will distribute voting instruction forms and convocation
notices to our shareholders;
- submit related party transactions to review by an audit committee or a
comparable body of our board of directors, in lieu of which our board of
directors will review related party transactions and disclose these
transactions in our annual reports filed with the Japanese Minister of
Finance as provided under Japanese law;
- obtain shareholder approval for the issuance of equity securities under
specified conditions or in specified transactions, in lieu of which we
will provide notice to our shareholders with respect to
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any new issuance of our ordinary shares through statutory public notice
in an official gazette in advance of the issue date as required by
Japanese law so that objecting shareholders have an opportunity to voice
concern;
- refrain from issuing a class of security or taking corporate action that
has the effect of nullifying, restricting or disparately reducing the per
share voting rights of our ordinary shares to the extent the provisions
in the deposit agreement may have the effect of nullifying, restricting
or disparately reducing the per share voting rights of the holders of our
ADRs; and
- require peer review of our independent auditors to the extent that any
audits of us have been or may be conducted by our auditors prior to
receipt of peer review.
If granted, any one or more of these exemptions would allow us to take action
that may not be in the best interests of all holders of our ordinary shares,
including ordinary shares represented by ADSs, without notifying these holders.
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JAPANESE FOREIGN EXCHANGE AND OTHER REGULATIONS
JAPANESE FOREIGN EXCHANGE REGULATIONS
The Foreign Exchange and Foreign Trade Law of Japan, frequently referred to
as the Foreign Exchange Law, and the cabinet orders and ministerial ordinances
under the Foreign Exchange Law govern the issuance of shares by companies and
the acquisition and holding of shares by "exchange non-residents" and "foreign
investors" under the Foreign Exchange Law.
Exchange non-residents are:
- individuals who do not reside in Japan; and
- corporations whose principal offices are located outside Japan.
Generally, branches and other offices located within Japan of non-resident
corporations are regarded as exchange residents of Japan and branches and other
offices of Japanese corporations located outside Japan are regarded as exchange
non-residents of Japan.
Foreign investors are:
- individuals who are exchange non-residents;
- corporations which are organized under the laws of foreign countries or
whose principal offices are located outside Japan; and
- corporations in which 50% or more of its shares are held by individuals
who are exchange non-residents and/or corporations which are organized
under the laws of foreign countries or whose principal offices are
located outside Japan or a majority of the officers, or officers having
the power of representation, are individuals who are exchange
non-residents.
Due to the amendments to the Foreign Exchange Law effective on April 1,
1998, all aspects of foreign exchange and foreign trade transactions that were
previously subject to licensing or other prior notifications or approvals, with
minor exceptions, were changed to require only post-transaction reporting.
However, the Minister of Finance of Japan will have the power to impose
licensing requirements for transactions in limited circumstances.
POTENTIAL CONSEQUENCES RESULTING FROM AN ACQUISITION OF LISTED SHARES
After our ordinary shares are listed on the Mothers Market of the Tokyo
Stock Exchange, if a foreign investor acquires our ordinary shares and if the
foreign investor's direct and indirect total holdings are 10% or more of our
issued ordinary shares after the acquisition, the foreign investor must file a
report of the acquisition with the Minister of Finance, Minister of Posts and
Telecommunications and any other competent minister within 15 days from and
including the date of the acquisition. However, in certain limited circumstances
where the foreign investor is in any country other than those designated by the
regulations, a prior notification of an acquisition must be filed with the
Minister of Finance, Minister of Posts and Telecommunications and any other
competent minister, who may then modify or prohibit the proposed acquisition.
POTENTIAL CONSEQUENCES RESULTING FROM DIVIDENDS, PROCEEDS OF SALES AND STOCK
SPLITS
Under the current Foreign Exchange Law, dividends paid on, and the proceeds
of sales in Japan of, our ordinary shares held by exchange non-residents may, in
general, be converted into foreign currency and repatriated abroad. The
acquisition of our ordinary shares by exchange non-residents as a result of a
stock split is not subject to any of the foregoing requirements.
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REPORTING OF SUBSTANTIAL SHAREHOLDINGS
Under the Securities and Exchange Law of Japan, if any person becomes,
after our ordinary shares are listed on the Mothers Market of the Tokyo Stock
Exchange, beneficially and solely or jointly a holder of more than 5% of our
total issued ordinary shares, that shareholder must file with Japan's Financial
Services Agency a report of its shareholding within five business days of
becoming a 5% holder of our ordinary shares. If there is any subsequent change
of 1% or more in the holdings of a holder of more than 5% of our total issued
ordinary shares, then that shareholder must file a similar report. For this
purpose, our total issued ordinary shares and the number of ordinary shares of
the shareholders include ordinary shares issuable on conversion of convertible
securities and on exercise of share subscription warrants. The shareholder also
must file a copy of the report with us and the Tokyo Stock Exchange.
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TAX CONSIDERATIONS
JAPANESE TAXATION
The following is a discussion of the principal Japanese tax consequences to
an owner of our ordinary shares or ADSs who is a non-resident of Japan or a
non-Japanese corporation without a permanent establishment in Japan to which the
relevant income is attributable. The statements regarding Japanese tax laws set
forth below are based on the laws in force and as interpreted by the Japanese
taxation authorities as of the date of this prospectus. These statements are
subject to changes in the applicable Japanese laws or double taxation
conventions occurring after that date. This summary is not exhaustive of all
possible tax considerations which may apply to a particular investor. Potential
investors should satisfy themselves, by consulting their own tax advisers, as
to:
- the overall tax consequences of the acquisition, ownership and
disposition of our ordinary shares or ADSs, including specifically the
tax consequences under Japanese law;
- the laws of the jurisdiction of residence; and
- any tax treaty between Japan and their country of residence or of which
they are nationals or citizens.
Generally, a non-resident of Japan or a non-Japanese corporation is subject
to Japanese withholding tax on dividends paid by Japanese corporations. Stock
splits, subject to the following, are not subject to Japanese income tax.
However, a transfer of retained earnings or legal reserve to stated capital is
treated as a dividend payment to shareholders for Japanese tax purposes and is,
in general, subject to Japanese income tax. This is true whether or not the
transfer is made in connection with a stock split or otherwise. In general, a
transfer of additional paid-in capital to stated capital is not treated as a
dividend. No transfer of retained earnings or legal reserve to stated capital
would be necessary in connection with a stock split if the total par value of
our ordinary shares in issue after the stock split does not exceed the stated
capital.
Unless an applicable tax treaty, convention or agreement reduces the
maximum rate of withholding tax, the rate of Japanese withholding tax applicable
to dividends paid by Japanese corporations to a non-resident or non-Japanese
corporation is 20%. Japan has entered into income tax treaties, conventions or
agreements with a number of countries reducing the above-mentioned withholding
tax rate to 15% for portfolio investors. These countries include, among others,
Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy,
Luxembourg, The Netherlands, New Zealand, Norway, Singapore, Spain, Sweden,
Switzerland, the United Kingdom and the United States. The withholding tax rate
is further reduced if investors and our company have some capital relationship
as provided for in an applicable tax treaty, convention or agreement.
The Convention Between the United States and Japan for the Avoidance of
Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on
Income establishes the maximum rate of Japanese withholding tax which may be
imposed on dividends paid to a United States resident or corporation not having
a "permanent establishment" in Japan. A "permanent establishment" in Japan is
generally a fixed place of business for industrial or commercial activity in
Japan. Under the Treaty, the maximum withholding rate for most U.S. shareholders
is limited to 15% of the gross amount actually distributed. However, the maximum
rate is 10% of the gross amount actually distributed, if the recipient is a
corporation and
- during the part of the paying corporation's taxable year, which precedes
the date of payment of the dividend and during the whole of its prior
taxable year, if any, at least 10% of the voting ordinary shares of the
paying corporation were owned by the recipient corporation; and
- not more than 25% of the gross income of the paying corporation for such
prior taxable year, if any, consists of interest or dividends as defined
in the treaty.
For purpose of this treaty and Japanese tax law, U.S. holders of ADRs will be
treated as the owners of the ordinary shares underlying the ADSs evidenced by
the ADRs.
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Non-resident holders who are entitled to a reduced rate of Japanese
withholding tax on payment of dividends by us must submit the required form in
advance through us to the relevant tax authority before payment of dividends.
The required form is the Application Form for Income Tax Convention regarding
the Relief from Japanese Income Tax on Dividends. A standing proxy for
non-resident holders may provide the application service. With respect to ADSs,
the reduced rate is applicable if The Bank of New York, as depositary, or its
agent, submits two Application Form for Income Tax Convention. One form must be
submitted before the payment of dividends, and the other form must be submitted
within eight months after our fiscal year-end. In this regard, at our request,
the depositary, or its agent, will forward to us the information or documents
regarding holders of ADSs that is available from the depositary's records. The
depositary will not automatically request additional information or
documentation from, nor forward any applicable paperwork to, holders of our
ADSs.
A non-resident holder of our ordinary shares or ADSs who does not submit an
application in advance will be entitled to claim from the relevant Japanese tax
authority a refund of withholding taxes withheld in excess of the rate of an
applicable tax treaty.
Gains derived from the sale outside Japan of our ordinary shares or ADSs by
a non-resident of Japan or a non-Japanese corporation are generally not subject
to Japanese income taxes. In addition, gains derived from the sale of our
ordinary shares or ADSs within Japan by a non-resident of Japan or a non-
Japanese corporation not having a permanent establishment in Japan are generally
not subject to Japanese income taxes.
An individual who has acquired our ordinary shares or ADSs as a
distributee, legatee or donee may have to pay Japanese inheritance and gift
taxes at progressive rates regardless of whether that individual has any
presence in, or any other connection with, Japan.
We have paid or will pay any stamp, registration or similar tax imposed by
Japan in connection with the issue of our ordinary shares in connection with
this global offering.
UNITED STATES FEDERAL TAXATION
The following is a summary of the material U.S. federal income and estate
tax consequences that may be relevant to a U.S. holder with respect to the
acquisition, ownership and disposition of our ordinary shares or ADSs. For
purposes of this summary, a "U.S. holder" includes the following:
- citizens or residents of the United States for United States federal
income tax purposes;
- corporations created or organized under the laws of the United States or
of any political subdivision thereof;
- persons otherwise subject to United States federal income taxation on
their worldwide income regardless of its source;
- estates the income of which is subject to United States federal income
taxation regardless of source;
- any trust the administration of which is subject to the primary
supervision of a United States court and which has one or more United
States persons who have the authority to control all substantial
decisions of the trust, or, if the trust was in existence on August 20,
1996, has elected to continue to be treated as a United States person; or
- any other person that is subject to United States federal income tax on a
net income basis in respect of an investment in our ordinary shares or
ADSs.
This summary deals only with ordinary shares and ADSs held as capital
assets, within the meaning of section 1221 of the Internal Revenue Code of 1986,
as amended (the Code), and does not address the tax consequences applicable to
holders that may be subject to special tax rules, including, without limitation,
financial institutions, insurance companies, regulated investment companies,
tax-exempt organizations, dealers in securities or currencies, persons holding
ordinary shares or ADSs as a hedge against currency risks or as a position in a
"straddle" or "conversion transaction" or other integrated investment
transaction for tax purposes, persons whose "functional currency" is not the
U.S. dollar, or holders of 10% or more, by voting power or value, of our
ordinary shares. It also does not deal with holders other than original
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purchasers, except where otherwise specifically noted. This summary is based
upon the Code, existing temporary and proposed Treasury Regulations, Internal
Revenue Service rulings and judicial decisions as now in effect and as currently
interpreted and does not take into account possible changes in the tax laws or
interpretations, any of which may be applied retroactively and could affect the
tax consequences described in this prospectus. Furthermore, this summary is
based in part on the assumption that each obligation in the deposit agreement
and any related agreement will be performed in accordance with its terms.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT A TAX ADVISOR WITH RESPECT TO THE
U.S. FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF ACQUIRING, OWNING OR
DISPOSING OF OUR ORDINARY SHARES OR ADSS.
Ownership of ADSs
For U.S. federal income tax purposes, U.S. holders of ADSs will be treated
as the owners of the ordinary shares represented by the ADSs.
Dividends
The gross amount of any distributions of cash or property with respect to
our ordinary shares, excluding distributions of ordinary shares, if any,
distributed pro rata to all shareholders of our company, including holders of
ADSs, but including amounts withheld in respect of Japanese withholding taxes,
will be included in income by a U.S. holder as foreign source dividend income at
the time of receipt, which in the case of a U.S. holder of ADSs generally will
be the date of receipt by the depositary, to the extent such distributions are
made from the current and accumulated earnings and profits of our company. Such
dividends will not be eligible for the dividends received deduction generally
allowed to corporate U.S. holders. To the extent, if any, that the amount of any
distribution by us exceeds our current and accumulated earnings and profits as
determined under U.S. federal income tax principles, it will be treated first as
a tax-free return of the U.S. holder's tax basis in our ordinary shares or ADSs
and thereafter as capital gain.
Subject to certain limitations, Japanese tax withheld from dividends at the
15% treaty rate will be eligible for credit against a U.S. holder's federal
income taxes or, at the election of the holder, may be deducted in computing
taxable income. Under the Code, the limitation on foreign taxes eligible for
credit is calculated separately with respect to specific classes of income. For
this purpose, dividends paid by us will generally be "passive" income or, in the
case of certain holders, "financial services" income. Foreign tax credits will
not be allowed for withholding taxes imposed in respect of certain short-term or
hedged positions or in respect of certain arrangements in which a U.S. holder's
expected economic profit, after foreign taxes, is insubstantial.
A transfer of retained earnings or legal reserve to stated capital is
treated as a dividend payment subject to withholding tax for Japanese tax
purposes. Such a transfer generally is not a taxable event for U.S. federal
income tax purposes. Consequently, under applicable Treasury regulations, any
Japanese withholding tax imposed in such case may be treated as imposed on
"general limitation" income. A U.S. holder may not be able to derive effective
U.S. foreign tax credit benefits in respect of those Japanese taxes if the
holder does not have sufficient foreign-source general limitation income.
If dividends are paid in Japanese yen, the amount of the dividend
distribution includible in the income of a U.S. holder will be the U.S. dollar
value of the payments made in Japanese yen, determined at a spot exchange rate
between Japanese yen and U.S. dollars on the date the dividend is includible in
the income of the U.S. holder, regardless of whether the payment is in fact
converted into U.S. dollars. Generally, gain or loss, if any, resulting from
currency exchange fluctuations during the period from the date the dividend is
paid to the date such payment is converted into U.S. dollars will be treated as
ordinary income or loss. A U.S. holder may be required to recognize foreign
currency gain or loss on the receipt of a refund in respect of Japanese
withholding tax to the extent the U.S. dollar value of the refund differs from
the U.S. dollar equivalent of that amount on the date of receipt of the
underlying dividend.
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Sale or Exchange of Ordinary Shares or ADSs
A U.S. holder generally will recognize gain or loss on the sale or exchange
of our ordinary shares or ADSs equal to the difference between the amount
realized on such sale or exchange and the U.S. holder's tax basis in the
ordinary shares or ADSs, as the case may be. Any gain or loss will be a capital
gain or loss, and will be long-term capital gain or loss if the ordinary shares
or ADSs, as the case may be, were held for more than one year. A gain or loss,
if any, recognized by a U.S. holder generally will be treated as U.S. source
income or loss for U.S. foreign tax credit purposes.
Estate Taxes
An individual shareholder who is a citizen or resident of the United States
for U.S. federal estate tax purposes will have the value of the ordinary shares
or ADSs owned by such holder included in his or her gross estate for U.S.
federal estate tax purposes. An individual holder who actually pays Japanese
estate tax with respect to the ordinary shares or ADSs will, however, be
entitled to credit the amount of such tax against his or her U.S. federal estate
tax liability, subject to certain conditions and limitations.
Backup Withholding Tax and Information Reporting Requirements
In general, information reporting requirements will apply to payments of
dividends in respect of the ordinary shares or ADSs or the proceeds received on
the sale, exchange or redemption of the ordinary shares or ADSs by a paying
agent within the United States or through certain U.S. related financial
intermediaries to a non-corporate or other non-exempt U.S. holder, and a 31%
backup withholding tax may apply to these amounts if the U.S. holder fails to
provide an accurate taxpayer identification number to the paying agent. Amounts
withheld as backup withholding will be creditable against the U.S. holder's
United States federal income tax liability.
The above summary is not intended to constitute a complete analysis of all
tax consequences relating to ownership of our ordinary shares or ADSs. You
should consult your tax advisor concerning the tax consequences of your
particular situation.
THE MOTHERS MARKET
The Tokyo Stock Exchange is the largest stock exchange in Japan. The Tokyo
Stock Exchange had been divided into the First Section and the Second Section
until it launched a new section called the Market of the High-Growth and
Emerging Stocks, commonly referred to as the Mothers Market, in November 1999.
The Mothers Market was established to provide a market for emerging companies
with high-growth potential to more easily access the public markets, to foster
new industries and to provide for a wider choice of investment instruments
through the use of the Tokyo Stock Exchange's market facilities.
The Mothers Market differs from the First Section and Second Section of the
Tokyo Stock Exchange in the following ways:
- A history of financial results and a minimum number of years since
incorporation are not required as listing criteria. A company that has
adequate operational plans is acceptable.
- The listing procedure is carried out within a short period of time,
lasting approximately one month from application to listing.
- Examination of listings emphasizes disclosure of a company's main
business and risk factors. A company's profitability and continuity are
not subjects of examination.
- Quarterly financial reports, analyst meetings, which must occur at least
twice a year for the first three years after listing, and other investor
relations activities are required in addition to regular timely
disclosures to promote transparency in the new market.
- The Mothers Market puts greater emphasis on investors'
self-responsibility and gives investors opportunities to invest in
companies from an earlier stage.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the global offering, there has not been any public market for our
ordinary shares or ADSs, and no prediction can be made as to the effect, if any,
that market sales of ordinary shares or ADSs or the availability of ADSs for
sale in the future will have on the prevailing market price of our ordinary
shares or ADSs. Nonetheless, sales of substantial amounts of our ordinary
shares, including ordinary shares represented by ADSs, in the public market, or
the perception that such sales may occur, could adversely affect the market
price of our ordinary shares or ADSs and could impair our future ability to
raise capital through the sale of our equity securities.
Upon the closing of the global offering, we will have an aggregate of
4,721,285 ordinary shares outstanding, including ordinary shares represented by
ADSs, assuming the underwriters do not exercise their over-allotment option. The
944,000 ordinary shares sold in the global offering, including ordinary shares
represented by ADSs, will be freely tradable in the United States, except that
any ordinary shares sold in the global offering and held by "affiliates" as
defined under Rule 144 under the Securities Act may only be sold in compliance
with the limitations described below. The remaining 3,777,285 ordinary shares
may be sold in the United States only if registered or if they qualify for an
exemption from registration under the Securities Act, including Rule 144 or
Regulation S. The ordinary shares outstanding after the global offering may be
deposited with the depositary and, subject to the terms of the deposit
agreement, ADSs representing these ordinary shares will be issued.
In general, under Rule 144 as currently in effect, a person, or persons
whose ordinary shares are required to be aggregated, including an affiliate, who
has beneficially owned shares for at least one year is entitled to sell, within
any three-month period commencing 90 days after the date of this prospectus, a
number of ordinary shares that does not exceed the greater of 1.0% of the then
outstanding ordinary shares, including ordinary shares represented by ADSs, or
the average weekly trading volume in the ordinary shares, including ordinary
shares represented by ADSs, during the four calendar weeks preceding the date on
which notice of such sale is filed, subject to certain restrictions. Immediately
after the completion of the global offering, 1.0% of the outstanding ordinary
shares, including ordinary shares represented by ADSs, will be equal to
approximately 47,213 ordinary shares. In addition, a person who is not deemed to
have been an affiliate of ours at any time during the 90 days preceding a sale
and who has beneficially owned the ordinary shares proposed to be sold for at
least two years would be entitled to sell ordinary shares, subject to certain
conditions, under Rule 144(k) without regard to the requirements described
above.
Regulation S under the Securities Act provides that ordinary shares owned
by any person may be sold without registration, provided the sale is
accomplished in an offshore transaction and no directed selling efforts are made
in the United States, subject to certain other conditions. These terms are
defined in Regulation S. In general, Regulation S provides that the ordinary
shares, including ordinary shares held by Sumitomo, Liberty Jupiter, Liberty
Japan, Microsoft Holdings V, Inc. and Itochu, may be sold on the Mother's Market
of the Tokyo Stock Exchange or in some other manner outside the United States
without requiring registration of the sales in the United States. Ordinary
shares, including ordinary shares represented by ADSs, issued pursuant to
Regulation S and held by non-affiliates may immediately be resold in the United
States. In addition, Sumitomo, Liberty Jupiter, Liberty Japan and Microsoft may
be deemed affiliates of ours. Therefore, sales by them in the United States of
the ordinary shares owned by them following the global offering may continue to
be subject to the volume limitations of Rule 144.
Upon completion of the global offering, our existing shareholders will be
parties to a registration rights agreement, entitling them to certain rights
with respect to the registration of their ordinary shares in the United States
under the Securities Act. Under the agreement, if we propose to register any of
our ordinary shares under the Securities Act, our existing shareholders will be
entitled to include their ordinary shares in the registration. The rights are
subject to customary conditions and limitations, including the right of the
underwriters in an underwritten offering to limit the number of ordinary shares
included in the registered offering and our right to postpone the registration
for up to 90 days under certain circumstances. In addition, our existing
shareholders holding more than 5% of the voting power of our ordinary shares
will
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also be entitled to require us to file a registration statement under the
Securities Act to register at least $25 million of their ordinary shares for
resale, subject to customary conditions and limitations. Our existing
shareholders each will be entitled to four such registrations. Subject to the
limitations contained in the agreement, we will be responsible for paying all
registration expenses in connection with the registration statement. The holders
selling ordinary shares will be responsible for paying customary selling
expenses, including the fees of their counsel.
In addition, upon completion of the global offering, Sumitomo, Liberty
Media and Microsoft will be party to a shareholders agreement under which each
will have a right of first offer with respect to any sales of ordinary shares
held by them, subject to specified limited exceptions.
Prior to the global offering, our ordinary shares have not been listed or
quoted on any stock exchange or traded on any over-the-counter market, including
in Japan and the United States. We have applied for the listing and admission
for trading of our ordinary shares on the Mothers Market of the Tokyo Stock
Exchange and to have our ADSs approved for quotation on the Nasdaq National
Market. We cannot guarantee, however, that a regular trading market will develop
in our ordinary shares or ADSs or that the market price of our ordinary shares
and ADSs will not decline below their respective initial public offering prices.
Sales of substantial amounts of our ordinary shares or ADSs in the public
market, including ordinary shares issued upon the exercise of outstanding
subscription rights following the global offering, or the perceptions that such
sales might occur, could cause the market price of our ordinary shares or ADSs
to fall substantially.
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<PAGE> 147
UNDERWRITING
The global offering consists of (i) an offering by us of an aggregate of
377,600 ordinary shares, including ordinary shares represented by ADSs, in the
United States and internationally outside Japan, and (ii) an offering by us and
the selling shareholders of an aggregate of 566,400 ordinary shares in Japan.
Nikko Salomon Smith Barney Limited and Goldman, Sachs & Co. are the joint global
coordinators and joint global bookrunners of the global offering.
Subject to the terms and conditions in the overseas underwriting agreement
dated , 2000, each overseas underwriter named below has severally
agreed to purchase, and we have agreed to sell to them, the number of ordinary
shares, including ordinary shares represented by ADSs, set forth opposite the
name of such overseas underwriter:
<TABLE>
<CAPTION>
NUMBER OF
NAME ORDINARY SHARES
---- ---------------
<S> <C>
Salomon Smith Barney Inc. ..................................
Goldman, Sachs & Co. .......................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Daiwa Securities America Inc. ..............................
Cazenove Inc. ..............................................
Nomura Securities International, Inc. ......................
-------
Total..................................................... 377,600
=======
</TABLE>
The overseas underwriting agreement provides that the overseas underwriters
may elect to have ADSs delivered instead of all or a portion of the ordinary
shares. The overseas underwriting agreement also provides that the obligations
of the overseas underwriters to purchase the ordinary shares, including ordinary
shares represented by ADSs, included in the global offering are subject to
confirmation of certain legal matters by counsel and certain other conditions.
The overseas underwriters are obligated to purchase all the ordinary shares,
including ordinary shares represented by ADSs, in the overseas offering, but
excluding those covered by the over-allotment option described below, if they
purchase any of them.
When we and the underwriters agree on the initial public offering prices
for the ordinary shares and the ADSs, we will first agree on the initial public
offering price for the ordinary shares in yen, and then determine the initial
public offering price for the ADSs in dollars, based on the then current
exchange rate and adjusted for the ratio of ordinary shares to ADSs.
The overseas underwriters, for whom Salomon Smith Barney Inc. and Goldman,
Sachs & Co. are acting as overseas representatives, propose to offer some of the
ordinary shares, including ordinary shares represented by ADSs, directly to the
public at the initial public offering price set forth on the cover page of this
prospectus and some of the ordinary shares, including ordinary shares
represented by ADSs, to certain dealers at the initial public offering price
less a concession not exceeding Y per ordinary share or $ per
ADS. The overseas underwriters may allow, and these dealers may reallow, a
concession not exceeding Y per ordinary share or $ per ADS on sales
to other dealers. After the ordinary shares, including ordinary shares
represented by ADSs, are released for sale to the public, the offering price and
other selling terms may be changed by the joint global coordinators.
We have granted to the overseas underwriters an eight-day option,
exercisable during a period commencing on , 2000, which is three
days after the date of this prospectus, and terminating
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<PAGE> 148
on , 2000, which is seven days after the option commencement date,
to purchase up to 56,640 additional ordinary shares, including ordinary shares
represented by ADSs, at the initial public offering price less the underwriting
discount to cover over-allotments, if any, in the overseas offering. To the
extent such option is exercised, each overseas underwriter will be obligated,
subject to certain conditions, to purchase a number of additional ordinary
shares, including ordinary shares represented by ADSs, approximately
proportionate to such overseas underwriter's initial purchase commitment.
The following table shows the underwriting discounts to be paid to the
overseas underwriters by us in connection with the overseas offering. These
amounts are shown assuming both no exercise and full exercise of the overseas
underwriters' option to purchase additional ordinary shares, including ordinary
shares represented by ADSs.
<TABLE>
<CAPTION>
PAID BY JUPITER
-----------------------------------------
NO EXERCISE FULL EXERCISE
------------------- -------------------
<S> <C> <C> <C> <C>
Total Underwriting Discounts.................. Y $ Y $
Per ADS.......................................
Per Ordinary Share............................
</TABLE>
We and the selling shareholders have also entered into Japanese
underwriting agreements with certain Japanese underwriters, for whom Nikko
Salomon Smith Barney Limited and Goldman Sachs (Japan) Ltd. are acting as the
Japanese representatives. The Japanese underwriting agreements provide for the
concurrent offer and sale of 566,400 ordinary shares in Japan. The initial
public offering price for ordinary shares, including ordinary shares represented
by ADSs, offered by this prospectus and the initial public offering price for
ordinary shares offered in the Japanese offering, as well as the underwriting
discounts we and each of the selling shareholders must pay on each ordinary
share, including ordinary shares represented by ADSs, will be the same. The
closing of the overseas offering is conditioned upon the closing of the Japanese
offering and the closing of the Japanese offering is conditioned upon the
closing of the overseas offering.
The overseas underwriters and the Japanese underwriters have entered into
an agreement in which they agree to restrictions on where and to whom they and
any dealer purchasing from them may offer ordinary shares or ADSs. The same
agreement also provides that sales may be made by the Japanese underwriters to
the overseas underwriters of any number of ordinary shares or ADSs as may be
mutually agreed. The number of ordinary shares or ADSs actually allocated to
each offering may differ from the amount offered due to reallocation among the
overseas offering and the Japanese offering. The price of any ADSs so sold shall
be the initial public offering price listed on the cover page of this
prospectus, in U.S. dollars, less an amount not greater than the per ADS amount
of the concession to dealers set forth above. The per share price of any
ordinary shares so sold shall be the initial public offering price listed on the
cover page of this prospectus, in Japanese yen, less an amount not greater than
the per ordinary share amount of the concession to dealers described above.
We, Sumitomo, Liberty Jupiter, Liberty Japan, Microsoft, Itochu and each of
our executive officers and directors have agreed that, for a period of 180 days
from the date of this prospectus, we and they will not, without the prior
written consent of the joint global coordinators, offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, or announce the offering
of, any ordinary shares or ADSs or any securities convertible into or
exchangeable for ordinary shares or ADSs, other than ordinary shares disposed of
as bona fide gifts approved by the joint global coordinators, subscription
rights to purchase ordinary shares pursuant to an employee benefit plan,
ordinary shares subject to priority allocation in the global offering and,
subject to certain conditions, in the case of Liberty Jupiter and Liberty Japan,
transfers of ordinary shares to their respective affiliates and UnitedGlobalCom,
Inc. All of our currently outstanding 3,934,286 ordinary shares, other than the
157,000 ordinary shares offered by the selling shareholders, will be subject to
this agreement. The joint global coordinators in their sole discretion may
release any of the ordinary shares or ADSs subject to the lock-up at any time
without notice.
Prior to this global offering, there has been no public market for the
ordinary shares or the ADSs. Consequently, the initial public offering price for
the ordinary shares and the ADSs was determined by
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<PAGE> 149
negotiations among us and the joint global coordinators. Among the factors
considered in determining the initial public offering price were our record of
operations, our current financial condition, our future prospects, our markets,
the economic conditions in, and future prospects for, the industry in which we
compete, our management and current prevailing general conditions in the equity
securities markets, including current market valuations of publicly traded
companies considered comparable to us. There can be no assurance, however, that
the prices at which the ordinary shares or the ADSs will sell in the public
market after the global offering will not be lower than the price at which they
are sold by the overseas underwriters or that an active trading market in the
ordinary shares or the ADSs will develop and continue after the global offering.
We have applied to have the ADSs approved for quotation on the Nasdaq
National Market under the symbol "JUPI." We have also applied for listing and
admission for trading of the ordinary shares on the Mothers Market of the Tokyo
Stock Exchange.
This offering document may be used in connection with ordinary shares,
including ordinary shares represented by ADSs, initially offered outside the
United States insofar as such ordinary shares, including ordinary shares
represented by ADSs, are resold from time to time in the United States in
transactions that require registration under the Securities Act.
In order to facilitate the offering of the ordinary shares and ADSs, the
overseas underwriters and certain of their affiliates may engage in transactions
outside Japan that stabilize, maintain or otherwise affect the price of the
ordinary shares and ADSs. Specifically, the overseas underwriters may over-allot
in connection with the overseas offering, creating a short position in the ADSs
for their own account. In addition, to cover over-allotments or to stabilize the
price of the ADSs, the overseas underwriters may bid for, and purchase, ADSs in
the open market. Finally, the overseas underwriting syndicate may reclaim
selling concessions allowed to an overseas underwriter or dealer for
distributing the ADSs in the overseas offering, if the syndicate repurchases
previously distributed ADSs in transactions to cover syndicate short positions,
in stabilizing transactions or otherwise. The overseas underwriters have
reserved the right to reclaim selling concessions in order to encourage overseas
underwriters and dealers to distribute the ordinary shares, including ordinary
shares represented by ADSs, for investment, rather than short-term profit
taking. Increasing the proportion of the global offering held for investment may
reduce the supply of ordinary shares, including ordinary shares represented by
ADSs, available for short-term trading. Any of these activities may stabilize or
maintain the market price of the ordinary shares or ADSs above independent
market levels. The overseas underwriters are not required to engage in these
activities, and may end any of these activities at any time.
The overseas underwriters do not expect sales to discretionary accounts to
exceed five percent of the total number of the ordinary shares, including
ordinary shares represented by ADSs, offered.
We estimate that our total expenses relating to the global offering will be
approximately $8,900,000. We and the selling shareholders also have agreed to
reimburse the overseas underwriters and the Japanese underwriters for certain
expenses incurred in connection with the global offering.
The overseas underwriting agreement requires the overseas underwriters to
pay for the ordinary shares, including ordinary shares represented by ADSs, in
yen. However, investors will pay for the ADSs in U.S. dollars. An affiliate of
Goldman, Sachs & Co. will convert U.S. dollars that the overseas underwriters
receive into yen based on the exchange rate on the date of pricing. This rate
will include a customary commission.
Some of the overseas underwriters and their affiliates and the Japanese
underwriters and their affiliates have in the past provided, and may in the
future provide, investment banking and underwriting services to us and our
affiliates for which they have received customary compensation. Some of the
overseas underwriters and their affiliates and the Japanese underwriters and
their affiliates may, from time to time, engage in transactions with and perform
services for us in the ordinary course of their business.
We and the selling shareholders have agreed to indemnify the overseas
underwriters against liabilities, including liabilities for misstatements and
omissions under the Securities Act, and to contribute to
144
<PAGE> 150
payments the overseas underwriters may be required to make in respect of these
liabilities. The overseas underwriters have agreed to indemnify us and the
selling shareholders against liabilities, including liabilities for misstatement
and omissions under the Securities Act of 1933, but only with reference to
information relating to the overseas underwriters furnished to us in writing.
Each overseas underwriter has agreed that it will observe all applicable
laws and regulations in any jurisdictions outside the United States in which it
may offer, sell, resell or deliver ordinary shares, including the ordinary
shares represented by ADSs. In addition, since the overseas underwriters may
elect to offer, sell, resell or deliver ordinary shares, including the ordinary
shares represented by ADSs, in the countries specifically mentioned in the
paragraphs below, in accordance with applicable laws and regulations, each
overseas underwriter has represented and agreed that:
- it has not offered or sold, and, during the six months after the closing
date of the overseas offering, it will not offer to sell any ordinary
shares, including ordinary shares represented by ADSs, to any persons in
the United Kingdom, except to persons whose ordinary activities involve
them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their businesses or otherwise in
circumstances which have not resulted and will not result in an offer to
the public in the United Kingdom within the meaning of the Public Offers
of Securities Regulations 1995; it has complied with, and will comply
with, all applicable provisions of the Financial Services Act 1986 with
respect to anything done by it in relation to the ordinary shares,
including ordinary shares represented by ADSs, from or otherwise
involving the United Kingdom; and it has only issued or passed on and
will only issue or pass on in the United Kingdom any document received by
it in connection with the global offering to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements)(Exemption) Order 1996, as amended, or is a person to whom
the document may otherwise lawfully be issued or passed on;
- it has not offered or sold and will not offer or sell in the overseas
offering in the Hong Kong Special Administrative Region of the People's
Republic of China (Hong Kong), by means of any document, any ordinary
shares, including ordinary shares represented by ADSs, other than to
persons whose ordinary business it is to buy or sell shares or
debentures, whether as principal or agent, or in circumstances which do
not constitute an offer to the public within the meaning of the Companies
Ordinance (Cap. 32) of Hong Kong and it has not issued and will not issue
in the overseas offering, and does not and will not have in its
possession for the purposes of issue in the overseas offering, any
invitation, document or advertisement relating to the ordinary shares,
including ordinary shares represented by ADSs, in Hong Kong, except if
permitted to do so under the securities laws of Hong Kong, other than
with respect to ordinary shares, including ordinary shares represented by
ADSs, which are intended to be disposed of to persons outside Hong Kong
or only to persons whose business involves the acquisition, disposal or
holding of securities, whether as principal or agent;
- it has not and will not offer, sell, transfer or deliver the ordinary
shares, including ordinary shares represented by ADSs, in or from the
Netherlands as part of their initial distribution or at any time
thereafter, directly or indirectly, other than to banks, pension funds,
insurance companies, securities firms, investment institutions, central
governments, large international and supranational institutions and other
comparable entities, including treasuries and finance companies of large
enterprises, which trade or invest in securities in the conduct of a
profession or trade. Individuals or legal entities who or which do not
trade or invest in securities in the conduct of their profession or trade
may not participate in the global offering and this communication may not
be considered an offer or the prospect of an offer to sell shares;
- this prospectus has not been registered as a prospectus with the
Registrar of Companies in Singapore and, accordingly, our ordinary
shares, including ordinary shares represented by ADSs, have not been
offered or sold and will not be offered or sold, nor will this prospectus
or any other offering document or material relating to our ordinary
shares, including ordinary shares represented
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<PAGE> 151
by ADSs, be circulated or distributed, directly or indirectly, to (i)
persons in Singapore other than under circumstances in which such offer
or sale does not constitute an offer or sale of our ordinary shares,
including ordinary shares represented by ADSs, to the public in
Singapore, or (ii) the public or any member of the public in Singapore
other than pursuant to, and in accordance with the conditions of, an
exemption invoked under Division 5A of Part IV of the Companies Act,
Chapter 50, of Singapore and to persons to whom our ordinary shares,
including ordinary shares represented by ADSs, may be offered or sold
under such exemption; and
- the ordinary shares, including ordinary shares represented by ADSs, which
it purchases in the overseas offering, will be purchased by it as
principal and that, in connection with the initial offering, and
distribution of the ordinary shares, including ordinary shares
represented by ADSs, sold in the overseas offering, it has not offered or
sold, and will not offer or sell, any ordinary shares, including ordinary
shares represented by ADSs, sold in the overseas offering directly or
indirectly, in Japan or to, or for the benefit of, any resident of Japan.
The ordinary shares, including ordinary shares represented by ADSs, sold
in the overseas offering have not been and will not be registered under
the Securities and Exchange Law of Japan.
SETTLEMENT CYCLE
It is expected that the delivery of the ordinary shares, directly or in the
form of ADSs, will be made on or about the date specified in the last paragraph
of the cover page of this prospectus, which is the fourth business day in New
York following the date of pricing of the ordinary shares and ADSs. Pursuant to
Rule 15c6-1 under the Securities Exchange Act of 1934, trades in the secondary
market generally are required to settle in three business days, unless the
parties to any trade expressly agree otherwise. Accordingly, purchasers who wish
to trade the ordinary shares, directly or in the form of ADSs, on the date of
pricing, which will be three business days prior to the commencement of trading
on the Nasdaq National Market, will be required, by virtue of the fact that
these securities will settle on the fourth business day in New York following
the date of pricing, to specify an alternate settlement cycle at the time of any
such trade to prevent a failed settlement, and should also consult their own
advisors.
LEGAL MATTERS
Certain matters in connection with the overseas offering will be passed
upon for Jupiter by Latham & Watkins, Los Angeles, U.S. counsel for Jupiter. The
validity of our ordinary shares, including ordinary shares represented by ADSs,
offered by this prospectus and certain other matters will be passed upon by
Nishimura & Partners, Japanese counsel for Jupiter, and by Tomotsune Kimura &
Mitomi, Japanese counsel for the underwriters. Certain matters in connection
with the overseas offering will be passed upon on behalf of the underwriters by
Cleary, Gottlieb, Steen & Hamilton, U.S. counsel for the underwriters.
EXPERTS
The financial statements included in this prospectus and elsewhere in this
registration statement to the extent and for the periods indicated in their
reports have been audited by Arthur Andersen, independent public accountants,
and are included herein in reliance upon the authority of said firm as experts
in giving said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form F-1, which
includes amendments, exhibits, schedules and supplements with respect to the
ordinary shares, including ordinary shares represented by ADSs, offered by this
prospectus. Although this prospectus, which is a part of the registration
statement, contains all material information included in the registration
statement, part of the registration statement has been omitted from this
prospectus as permitted by the SEC. Accordingly, this prospectus does not
contain all the information set forth in the registration statement and the
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<PAGE> 152
accompanying exhibits. A related registration statement on Form F-6 has also
been filed with the SEC to register the ADSs. For further information with
respect to our company and the ADSs offered by this prospectus, please refer to
these registration statements. Statements contained in this prospectus as to the
contents of any contract, agreement or other document may not contain all of the
information that you may find important. For a more comprehensive understanding
of these matters you should read the contract, agreement or other document, a
copy of which is filed as an exhibit to the registration statement.
Upon completion of our global offering, we will be subject to the
information requirements of the Securities Exchange Act of 1934, as amended, as
applicable to foreign private issuers. As a result, we will be required to file
reports, including annual reports on Form 20-F, reports on Form 6-K and other
information with the SEC. We also intend to submit to the SEC quarterly reports
on Form 6-K which will include unaudited quarterly financial information, for
the first three quarters of each fiscal year, in addition to our annual report
on Form 20-F which will include audited annual financial information. We intend
to file these reports within the same time periods that apply to the filing by
domestic issuers of quarterly reports on Form 10-Q and annual reports on Form
10-K. The SEC's rules generally require that domestic issuers file a quarterly
report on Form 10-Q within 45 days after the end of the first three fiscal
quarters and file an annual report on Form 10-K within 90 days after the end of
each fiscal year. These reports and other information filed or to be filed by us
can be inspected and copied at the public reference facilities maintained by the
SEC at:
<TABLE>
<S> <C>
- Judiciary Plaza - Northwestern Atrium Center
450 Fifth Street, N.W. 500 West Madison Street
Room 1024 Suite 1400
Washington, D.C. 20549 Chicago, Illinois 60661-2511
- Seven World Trade Center
13th Floor
New York, New York 10048
</TABLE>
Copies of these materials can also be obtained from the Public Reference Section
of the SEC, 450 Fifth Street, N.W., Washington D.C. 20549, at prescribed rates.
The SEC maintains a Website at www.sec.gov that contains reports, proxy and
information statements, and other information regarding registrants that make
electronic filings with the SEC using its EDGAR system. As a foreign private
issuer, we are not required to use the EDGAR system, but currently intend to do
so in order to make our reports available electronically.
As a foreign private issuer, we will be exempt from the rules under the
Exchange Act prescribing the furnishing and content of proxy statements, and our
executive officers, directors and principal shareholders will be exempt from the
reporting and short-swing profit recovery provisions contained in Section 16 of
the Exchange Act.
We will furnish the depositary referred to under "Description of American
Depositary Receipts" with annual reports, which will include annual audited
consolidated financial statements prepared in accordance with U.S. GAAP, and
quarterly reports, which will include unaudited quarterly consolidated financial
information prepared in accordance with U.S. GAAP. The depositary will make
available for inspection by ADR holders at its corporate trust office any
reports and communications, including any proxy solicitation materials, sent by
us which are received by the depositary as a holder of our ordinary shares and
made generally available to holders of our ordinary shares. The depositary will
also, upon written request, send ADR holders, at our expense, copies of any
notices, reports and communications which are made generally available by us to
holders of our ordinary shares. These notices, reports and communications,
including any proxy soliciting material, furnished to the depositary by us will
be available in English to the extent these materials are required to be
translated into English pursuant to any regulation of the SEC or are made
generally available to holders of our ordinary shares. Please see "Description
of American Depositary Receipts" for further details on the responsibilities of
the depositary.
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<PAGE> 153
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
JUPITER TELECOMMUNICATIONS CO., LTD. AND SUBSIDIARIES
Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of December 31,
1999 and September 30, 2000 (unaudited)................... F-2
Condensed Consolidated Statements of Operations for the
Nine-Month Periods ended September 30, 1999 and 2000
(unaudited)............................................... F-3
Condensed Consolidated Statement of Shareholders' Equity for
the Nine-Month Period ended September 30, 2000
(unaudited)............................................... F-5
Condensed Consolidated Statements of Cash Flows for the
Nine-Month Periods ended September 30, 1999 and 2000
(unaudited)............................................... F-6
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... F-7
Report of Independent Public Accountants.................... F-18
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-19
Consolidated Statements of Operations for the Years ended
December 31, 1997, 1998 and 1999.......................... F-20
Consolidated Statements of Shareholders' Equity for the
Years ended December 31, 1997, 1998 and 1999.............. F-21
Consolidated Statements of Cash Flows for the Years ended
December 31, 1997, 1998 and 1999.......................... F-22
Notes to Consolidated Financial Statements.................. F-23
TITUS COMMUNICATIONS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2000
and June 30, 2000 (unaudited)............................. F-42
Condensed Consolidated Statements of Operations for the
Three-Month Periods ended June 30, 1999 and 2000
(unaudited)............................................... F-43
Condensed Consolidated Statement of Shareholders' Equity for
the Three-Month Period ended June 30, 2000 (unaudited).... F-44
Condensed Consolidated Statements of Cash Flows for the
Three-Month Periods ended June 30, 1999 and 2000
(unaudited)............................................... F-45
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................... F-46
Report of Independent Public Accountants.................... F-50
Consolidated Balance Sheets as of March 31, 1999 and 2000... F-51
Consolidated Statements of Operations for the Years ended
March 31, 1998, 1999 and 2000............................. F-53
Consolidated Statements of Shareholders' Equity for the
Years ended March 31, 1998, 1999 and 2000................. F-54
Consolidated Statements of Cash Flows for the Years ended
March 31, 1998, 1999 and 2000............................. F-55
Notes to Consolidated Financial Statements.................. F-56
</TABLE>
F-1
<PAGE> 154
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND SEPTEMBER 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1999 2000 2000
------------ ------------- -------------
(THOUSANDS OF YEN) (THOUSANDS OF
U.S. DOLLARS)
<S> <C> <C> <C>
Cash, receivables and other assets, net........... Y 8,262,800 Y 19,197,643 $ 174,445
Investments in affiliates, net (Notes 3 and 4).... 6,216,396 4,631,572 42,086
Property and equipment, at cost, net (Notes 2 and
4).............................................. 58,124,991 110,595,883 1,004,960
Goodwill, net (Note 2)............................ 15,236,398 111,122,100 1,009,742
------------ ------------ ----------
Y 87,840,585 Y245,547,198 $2,231,233
============ ============ ==========
Short-term loans, long-term debt and capital lease
obligations (Note 6)............................ Y 63,496,611 Y127,756,298 $1,160,893
Other liabilities................................. 19,518,524 30,527,969 277,401
Minority interest................................. 778,620 416,290 3,783
Commitments and contingencies (Notes 6 and 10)
Shareholders' equity (Notes 2 and 7):
Common stock no par value....................... 39,900,000 47,002,623 427,102
Authorized 15,000,000 shares at December 31,
1999 and September 30, 2000; issued and
outstanding 2,394,000 shares at December
31, 1999 and 3,934,285.74 shares at
September 30, 2000
Additional paid-in capital...................... -- 88,614,344 805,219
Accumulated deficit............................. (35,853,170) (48,770,326) (443,165)
------------ ------------ ----------
Total shareholders' equity................... 4,046,830 86,846,641 789,156
------------ ------------ ----------
Y 87,840,585 Y245,547,198 $2,231,233
============ ============ ==========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated balance sheets.
F-2
<PAGE> 155
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
NINE MONTHS ENDED SEPTEMBER 30, ENDED
------------------------------- SEPTEMBER 30,
1999 2000 2000
-------------- -------------- -------------
(THOUSANDS OF YEN) (THOUSANDS OF
U.S. DOLLARS)
<S> <C> <C> <C>
Revenue (Note 4):
Subscription fees................................. Y 7,984,251 Y 16,694,950 $ 151,703
Construction-related sales principally from
related parties................................ 1,846,345 1,325,146 12,041
Programming fees principally from related
parties........................................ 678,529 1,186,802 10,784
Other............................................. 2,443,486 3,831,496 34,816
------------ ------------ ---------
12,952,611 23,038,394 209,344
------------ ------------ ---------
Operating costs and expenses (Note 4):
Construction-related expenses..................... 1,681,693 1,180,776 10,729
Programming costs:
Related parties................................ 526,782 945,972 8,596
Other.......................................... 1,819,341 4,112,447 37,369
Other operating costs............................. 3,629,867 4,991,487 45,356
Selling, general and administrative............... 7,840,798 13,397,362 121,739
Depreciation and amortization..................... 3,687,081 8,675,856 78,836
------------ ------------ ---------
(19,185,562) (33,303,900) (302,625)
------------ ------------ ---------
Operating loss............................... (6,232,951) (10,265,506) (93,281)
Other expense (Note 4):
Interest expense, net:
Related parties................................ (284,614) (713,546) (6,484)
Other.......................................... (207,807) (201,286) (1,829)
Other expenses, net............................... (196,654) (468,789) (4,260)
------------ ------------ ---------
Loss before income taxes and other items..... (6,922,026) (11,649,127) (105,854)
Equity in losses of affiliates...................... (1,936,361) (2,497,094) (22,690)
Minority interest in net losses of consolidated
subsidiaries...................................... 343,036 438,065 3,981
------------ ------------ ---------
Loss before income taxes and extraordinary
gain...................................... (8,515,351) (13,708,156) (124,563)
Income tax benefit (Note 8)......................... -- 332,220 3,019
------------ ------------ ---------
Loss before extraordinary gain............... (8,515,351) (13,375,936) (121,544)
Extraordinary gain on extinguishment of subsidiary
debt, net of tax expense (Note 8)................. -- 458,780 4,169
------------ ------------ ---------
Net loss.................................. Y (8,515,351) Y(12,917,156) $(117,375)
============ ============ =========
</TABLE>
F-3
<PAGE> 156
<TABLE>
<CAPTION>
NINE MONTHS
NINE MONTHS ENDED SEPTEMBER 30, ENDED
-------------------------------- SEPTEMBER 30,
1999 2000 2000
-------------- -------------- -----------------
(IN YEN, EXCEPT SHARE AMOUNTS) (IN U.S. DOLLARS,
EXCEPT SHARE
AMOUNT)
<S> <C> <C> <C>
Per share data (Note 7):
Loss per share before extraordinary gain.... Y (4,035) Y (4,803) $ (43.64)
Extraordinary gain per share................ -- 165 1.50
------------ ------------ ---------
Net loss per share.......................... Y (4,035) Y (4,638) $ (42.14)
============ ============ =========
Weighted average number of common shares
outstanding (number of shares) (Note 7)..... 2,110,572 2,784,894 2,784,894
------------ ------------ ---------
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
F-4
<PAGE> 157
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
TOTAL TOTAL
ADDITIONAL ACCUMULATED SHAREHOLDERS' SHAREHOLDERS'
COMMON STOCK PAID-IN CAPITAL DEFICIT EQUITY EQUITY
------------ --------------- ------------ ------------- -------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1999...................... Y39,900,000 Y -- Y(35,853,170) Y 4,046,830 $ 36,772
Common stock issued to fund
operations in the ordinary
course; 360,000 shares at
Y16,666.67 per share
(after giving effect to a
3-for-1 stock
split -- Note 7).......... 6,000,000 -- -- 6,000,000 54,521
Acquisition of Titus
Communications Corporation
(Note 2).................. 1,100,000 88,517,940 -- 89,617,940 814,338
Stock Compensation (Note
7)........................ -- 96,404 -- 96,404 876
Common stock issued to
effect a constructive
3-for-1 stock split;
2,622,857.16 shares at Y1
per share (Note 7)........ 2,623 -- -- 2,623 24
Net loss.................... -- -- (12,917,156) (12,917,156) (117,375)
----------- ----------- ------------ ------------ -------------
Balance at September 30,
2000...................... Y47,002,623 Y88,614,344 Y(48,770,326) Y 86,846,641 $ 789,156
=========== =========== ============ ============ =============
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
F-5
<PAGE> 158
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
NINE MONTHS ENDED SEPTEMBER 30, ENDED
-------------------------------- SEPTEMBER 30,
1999 2000 2000
-------------- -------------- -------------
(THOUSANDS OF YEN) (THOUSANDS OF
U.S. DOLLARS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................ Y (8,515,351) Y(12,917,156) $(117,375)
Adjustments to reconcile net loss to net cash
used in operating activities:
Extraordinary gain........................... -- (458,780) (4,169)
Income tax benefit........................... -- (332,220) (3,019)
Depreciation and amortization................ 3,687,081 8,675,856 78,836
Equity in losses of affiliates............... 1,936,361 2,497,094 22,690
Minority interest in net losses of
consolidated subsidiaries.................. (343,036) (438,065) (3,981)
Stock compensation expense................... -- 85,191 774
Change in operating assets and liabilities,
net........................................ 2,104,848 (1,744,204) (15,849)
------------ ------------ ---------
Net cash used in operating activities... (1,130,097) (4,632,284) (42,093)
------------ ------------ ---------
Cash flows from investing activities:
Capital expenditure............................. (10,379,944) (11,312,280) (102,792)
Other investments............................... (3,366,575) (1,780,068) (16,175)
------------ ------------ ---------
Net cash used in investing activities... (13,746,519) (13,092,348) (118,967)
------------ ------------ ---------
Cash flows from financing activities:
Proceeds from issuance of common stock.......... 6,200,000 6,002,623 54,544
Debt proceeds................................... 9,270,139 14,566,736 132,365
------------ ------------ ---------
Net cash provided by financing
activities............................ 15,470,139 20,569,359 186,909
------------ ------------ ---------
Net increase in cash and cash equivalents......... 593,523 2,844,727 25,849
Cash and cash equivalents at beginning of
period.......................................... 1,384,504 1,516,802 13,783
------------ ------------ ---------
Cash and cash equivalents at end of period........ Y 1,978,027 Y 4,361,529 $ 39,632
============ ============ =========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
F-6
<PAGE> 159
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF FINANCIAL STATEMENTS
BUSINESS AND ORGANIZATION
Jupiter Telecommunications Co., Ltd. (the "Company") was formed in January
1995 for the purpose of owning and operating cable telecommunication systems and
programming businesses in Asia with the principal focus on Japan. The Company
was established with shares 60%-owned by Sumitomo Corporation ("SC") and
40%-owned by Liberty Japan, Inc. (formerly known as TCI Japan, Inc.), a
wholly-owned subsidiary of Liberty Media International, Inc. ("LMI") (formerly
known as Tele-Communications International, Inc.).
The shareholders' agreement, which was amended in February 1998 and
terminated on August 31, 2000, required unanimous approval of both shareholders
for key business decisions of the Company. Additionally, the shareholders'
agreement contained Liberty Japan's option to buy, from SC, a 10% share of the
Company so that the shareholders would equally own the Company, which was
exercised in May 2000.
On September 1, 2000, the Company issued 1,180,285.74 ordinary shares to
Microsoft Holding V, Inc. ("Microsoft"), Itochu Corporation and Toshiba
Corporation in exchange for the shares they held in Titus Communications
Corporation (see Note 2). As a result of this transaction, the shareholders'
ownership interests were as follows:
<TABLE>
<S> <C>
SC.......................................................... 35%
LMI......................................................... 35%
Microsoft................................................... 24%
Toshiba..................................................... 3%
Itochu...................................................... 3%
</TABLE>
The Company and its subsidiaries own and operate cable telecommunication
systems throughout Japan and provide cable television services and telephone and
Internet connection services. Currently, cable television services account for
most of the Company and its subsidiaries' business as telephony and Internet
services are still in their early stage. Telephony revenue represented less than
3% and 6% of the consolidated total revenue for the nine months ended September
30, 1999 and 2000, respectively, and Internet revenue represented less than 1%
and 8% of the consolidated total revenue for the nine months ended September 30,
1999 and 2000, respectively.
The telecommunication industry in Japan is highly regulated by the Ministry
of Posts and Telecommunications ("MPT"). In general, franchise rights granted by
the MPT to the Company's subsidiaries for operation of cable telecommunication
systems in their respective locality are not exclusive. The Company generates
revenues from sale of construction materials and supplies for cable systems,
programming and management services from its franchisees. Amounts of such
revenues from franchisees that are unconsolidated affiliates are disclosed in
Note 4.
As set forth in the accompanying condensed consolidated statements of cash
flows, the Company and its subsidiaries have relied on capital contributions and
financing from shareholders for their liquidity requirements. The Company and
its subsidiaries anticipate that they will continue to be dependent on financing
from shareholders and/or external sources in order to meet their future
liquidity requirements. If these efforts are not successful, future operations
of the Company and its subsidiaries will be adversely affected.
F-7
<PAGE> 160
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
BASIS OF FINANCIAL STATEMENTS
The Company and its subsidiaries maintain their books of account in
conformity with financial accounting standards of Japan. The condensed
consolidated financial statements presented herein have been prepared in a
manner and reflect certain adjustments which are necessary to conform them with
accounting principles generally accepted in the United States of America. The
major adjustments include those related to scope of consolidation, accounting
for leases, recognition of certain revenues, postretirement benefits,
depreciation and amortization and accruals for certain expenses.
The accompanying condensed consolidated financial statements reflect all
adjustments which are, in the opinion of the management, necessary to a fair
presentation of the results of operations and financial situation for the
periods presented.
The Company and its subsidiaries maintain their accounts in Japanese yen,
the currency of the country in which they are incorporated and principally
operate. The U.S. dollar amounts included herein represent a translation using
the approximate exchange rate quotation of The Bank of Tokyo-Mitsubishi, Ltd.
for selling spot U.S. dollars by telegraphic transfer against yen as of October
31, 2000 of Y110.05 to $1 solely for the convenience of readers outside Japan.
The translation should not be construed as a representation that the yen amounts
have been, could have been, or could in the future be converted into U.S.
dollars at the above or any other rate.
2. ACQUISITIONS
On June 27, 2000, the shareholders of the Company entered into a definitive
agreement with the shareholders of Titus Communications Corporation ("Titus")
for the purpose of combining the two companies. The closing took place on
September 1, 2000. Each common share of Titus was exchanged for 0.32251548 of an
ordinary share of the Company (or 0.9675464 of an ordinary share of the Company
adjusted for the constructive 3-for-1 stock split effected on September 30,
2000) and each convertible preference share of Titus was exchanged for
604.716525 ordinary shares of the Company (or 1,814.1495 of an ordinary share of
the Company adjusted for the constructive 3-for-1 stock split effected on
September 30, 2000). The total number of shares issued by the Company in
connection with the acquisition of Titus was 1,180,285.74 after giving effect to
the constructive 3-for-1 stock split effected on September 30, 2000.
The total estimated purchase price for Titus is Y89,617,940 thousand, which
is comprised of Y89,111,573 thousand (the product of 1,180,285.74 ordinary
shares issued multiplied by the estimated initial public offering price per
share of Y75,500), plus Y506,367 thousand of net identifiable liabilities
assumed from Titus. The Company used the purchase method of accounting to
account for this acquisition. Accordingly, the purchase price has been allocated
to the tangible and intangible net assets of Titus using an independent,
third-party appraisal. The Titus acquisition goodwill will be amortized on a
straight-line basis over a period of 20 years. The Titus assets, liabilities and
operations have been included in the accompanying condensed combined financial
statements since the September 1, 2000 acquisition date. The Company is
presently operating, and intends to continue to operate, Titus as a wholly-owned
subsidiary of the Company.
F-8
<PAGE> 161
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The following table reflects the September 1, 2000 pro forma balance sheet
of Titus, as adjusted to give effect to purchase accounting adjustments (in
thousands of yen):
<TABLE>
<S> <C>
Cash, receivables and other assets.......................... Y 5,137,638
Property and equipment...................................... 39,059,740
Goodwill.................................................... 96,825,362
Debt and capital lease obligations.......................... (42,791,982)
Other liabilities........................................... (8,612,818)
------------
Y 89,617,940
============
</TABLE>
The following unaudited condensed results of operations for the nine months
ended September 30, 1999 and 2000 were prepared assuming the Titus acquisition
occurred on January 1, 1999. These pro forma amounts are not necessarily
indicative of operating results that would have occurred if the Titus merger had
occurred on January 1, 1999.
<TABLE>
<CAPTION>
NINE MONTHS
NINE MONTHS ENDED SEPTEMBER 30, ENDED
-------------------------------- SEPTEMBER 30,
1999 2000 2000
-------------- -------------- --------------
(THOUSANDS OF YEN, (THOUSANDS OF
EXCEPT PER SHARE AMOUNTS) U.S. DOLLARS,
EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue.................................. Y 17,006,671 Y 29,120,268 $ 264,609
Net loss before extraordinary gain....... (17,442,564) (24,549,764) (223,078)
Net loss................................. (17,442,564) (24,090,984) (218,909)
Net loss per share before extraordinary
gain................................... (5,300) (6,403) (58.18)
Net loss per share....................... (5,300) (6,283) (57.10)
</TABLE>
F-9
<PAGE> 162
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. INVESTMENTS IN AFFILIATES
The Company's affiliates are engaged in the telecommunication business in
Japan. Condensed financial information of the Company's unconsolidated
affiliates for each of the nine months ended September 30, 1999 and 2000 are as
follows:
<TABLE>
<CAPTION>
NINE MONTHS
NINE MONTHS ENDED SEPTEMBER 30, 2000 ENDED
------------------------------------- SEPTEMBER 30,
1999 2000 2000
--------------- --------------- -------------
(THOUSANDS OF
(THOUSANDS OF YEN) U.S. DOLLARS)
<S> <C> <C> <C>
Combined Operations:
Total revenue........................ Y11,020,542 Y13,944,068 $126,707
Operating, selling, general and
administrative expenses........... 11,153,943 13,992,435 127,146
Depreciation and amortization........ 2,984,870 3,497,507 31,781
----------- ----------- --------
Operating loss.................. (3,118,271) (3,545,874) (32,220)
Interest expense, net................ (204,724) (379,412) (3,448)
Other expense, net................... (249,458) (208,021) (1,890)
----------- ----------- --------
Net loss........................ Y(3,572,453) Y(4,133,307) $(37,558)
=========== =========== ========
</TABLE>
4. RELATED PARTY TRANSACTIONS
The Company purchases cable system materials and supplies from third party
suppliers and resells them to its subsidiaries and affiliates.
Construction-related sales in the accompanying condensed consolidated statements
of operations represent revenues from unconsolidated affiliates for such sales.
The Company provides programming services to its subsidiaries and
affiliates. Programming fees in the accompanying condensed consolidated
statements of operations represent revenues from unconsolidated affiliates for
such services provided and the related products sold.
The Company provides management services to its subsidiaries and
affiliates. Fees for such services related to unconsolidated affiliates amounted
to Y117,649 thousand and Y312,873 thousand ($2,843 thousand) for the nine months
ended September 30, 1999 and 2000, respectively, and are included in Revenue -
Other in the accompanying condensed consolidated statements of operations.
The Company purchases certain cable television programs from Jupiter
Programming Co., Ltd., an affiliated company jointly owned by SC and a wholly
owned subsidiary of LMI. Such purchases amounted to Y390,382 thousand and
Y450,516 thousand ($4,094 thousand) for the nine months ended September 30, 1999
and 2000, respectively, and were included in programming costs -- related
parties in the accompanying condensed consolidated statements of operations.
The Company purchases certain high-speed Internet services from @Home
Japan, an affiliated company. Such purchases amounted to Y72,565 thousand ($659
thousand) for the nine months ended September 30, 2000. There were no such
purchases made during the nine months ended September 30, 1999.
F-10
<PAGE> 163
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The Company purchased stock of the affiliated companies from SC in the
amounts of Y3,514,537 thousand during the year ended December 31, 1999. The
Company did not purchase any stock of affiliated companies from SC during the
nine months ended September 30, 2000.
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. The
Company and its subsidiaries' purchases of such goods from AJCC, primarily as
capital leases, amounted to Y2,182,350 thousand and Y4,655,200 thousand ($42,301
thousand) for the nine months ended September 30, 1999 and 2000, respectively.
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
essentially on their payroll costs. The service fees paid to SC amounted to
Y721,811 thousand and Y728,318 thousand ($6,618 thousand) for the nine months
ended September 30, 1999 and 2000, respectively. The service fees paid to LMI
amounted to Y355,066 thousand and Y325,011 thousand ($2,953 thousand) for the
nine months ended September 30, 1999 and 2000, respectively. These amounts were
included in selling, general and administrative expenses in the accompanying
condensed consolidated statements of operations.
Sumisho Finance Management ("SFM") is a wholly-owned subsidiary of SC and
its primary business is to provide financing to subsidiaries and affiliated
companies of SC. The Company and its subsidiaries have short-term borrowings
from SFM.
5. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
NINE MONTHS ENDED SEPTEMBER 30, ENDED
------------------------------- SEPTEMBER 30,
1999 2000 2000
------------- ------------ -------------
(THOUSANDS OF
(THOUSANDS OF YEN) U.S. DOLLARS)
<S> <C> <C> <C>
Cash paid during the year for:
Interest....................................... Y 487,720 Y 922,104 $ 8,379
=========== ========== ========
Income tax..................................... -- -- --
=========== ========== ========
Cash paid for acquisition of new subsidiaries:
Fair value of assets acquired.................. Y20,460,116 -- --
Liabilities assumed............................ 17,488,269 -- --
----------- ---------- --------
Cash paid, net of cash acquired............. Y 2,971,847 -- --
=========== ========== ========
Property acquired under capital leases during the
year........................................... Y 2,078,440 Y7,691,969 $ 69,895
=========== ========== ========
</TABLE>
See also the fair value of assets acquired and liabilities assumed in the
Titus acquisition in Note 2.
6. SHORT-TERM LOANS, LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
Short-term loans, long-term debt and capital lease obligations at September
30, 2000 included Y38,941,000 thousand ($353,848 thousand) of short-term loans
and long-term debt of Titus and its subsidiaries assumed in connection with the
acquisition described in Note 2.
Short-term bank loans of Titus and its subsidiaries of Y32,500,000 thousand
($295,320 thousand) represented loans from commercial banks with fixed maturity,
all guaranteed by Microsoft. The average
F-11
<PAGE> 164
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
interest rate on these short-term loans was 1.128% at September 30, 2000.
Long-term debt of Titus and its subsidiaries of Y6,441,000 thousand ($58,528
thousand) consisted of secured interest-free loans from Development Bank of
Japan, due fiscal 2003 through 2012, unsecured interest-free loan from Higashi
Nihon Ferry Co., Ltd., the largest minority shareholder of a subsidiary, due
fiscal 2003 through 2012, and bank loans guaranteed by Microsoft, due through
fiscal 2002. The average interest rate on these long-term loans was .0748% at
September 30, 2000.
7. SHAREHOLDERS' EQUITY
CHANGE OF PAR VALUE
On June 6, 2000, the Company's board of directors approved a change in the
par value of all outstanding shares from Y50,000 to no par value.
STOCK OPTION PLAN
On August 23, 2000, the Company's board of directors and shareholders
approved a new subscription-rights option plan and the grant of subscription
rights exercisable for an aggregate of up to 55,718 ordinary shares (before
giving effect to the constructive 3-for-1 stock split effected on September 30,
2000) at an exercise price of Y276,000 per share to Jupiter's directors,
corporate auditors and employees, to the directors, corporate auditors and
employees of the Company's managed franchises and to directors, corporate
auditors and employees of the Company's unconsolidated managed franchises and
other non-employees. The number of ordinary shares issuable will be adjusted for
stock splits, reverse stock splits and certain other recapitalizations.
Subscription rights for 48,266 ordinary shares were granted on September 11,
2000. The aggregate number of ordinary shares and exercise price, as adjusted
for the constructive 3-for-1 stock split effected on September 30, 2000, are
144,798 and Y92,000, respectively.
The subscription rights for non-management employees will, unless the grant
agreement provides otherwise, vest on the second anniversary of the grant, and
the subscription rights for management employees will, unless the grant
agreement provides otherwise, vest in four equal installments beginning on the
first anniversary of the grant. The subscription rights will expire on August
23, 2010.
The Company has accounted for the subscription rights granted to Jupiter's
directors, corporate auditors and employees and to the directors, corporate
auditors and employees of the Company's managed franchises under APB No. 25,
"Accounting for Stock Issued to Employees," and FASB Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB No. 25." Based on using the Company's estimated initial
public offering price per ordinary share, there was no intrinsic value to the
subscription rights at the date of grant as each grant is fixed as to the number
of shares and the exercise price at the time of grant exceeds the assumed
initial offering price of Y75,500 per ordinary share. Accordingly, it is
expected that no deferred compensation or charges to operations for the
subscription rights granted to Jupiter's directors, corporate auditors and
employees and the directors, corporate auditors and employees of the Company's
managed franchises will be recorded.
Subscription rights granted to directors, corporate auditors and employees
of the Company's unconsolidated managed franchises and to other non-employees
has been accounted for in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation," and are amortized over the vesting periods described
above. As of the date of grant, the estimated fair market value of these
subscription rights, based on the estimated offering price of Y75,500 per share,
was approximately Y422,597 thousand ($3,840 thousand). 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
Y18,273
F-12
<PAGE> 165
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
thousand ($166 thousand) which has been included in selling, general and
administrative expense for the Company's non-employees and in equity in losses
of affiliates for employees of affiliated companies in the accompanying
condensed consolidated statement of operations for the period ended September
30, 2000.
STOCK AWARD
On June 26, 2000, Microsoft Holdings V, Inc., the majority shareholder of
Titus and now a principal shareholder of Jupiter, entered into a restricted
stock agreement with an executive officer of Titus, currently one of the
Company's executive officers. The total number of Titus' restricted ordinary
shares granted in the agreement were converted into 17,704 of the Company's
ordinary shares, as adjusted for the constructive 3-for-1 stock split effective
September 30, 2000, discussed below. The restricted shares transferred under the
restricted stock agreement will vest, subject to his continued employment by us
as an executive officer or director, in four equal semiannual installments, the
first of which will occur on January 4, 2001. Should the executive officer
fulfill his obligations under the agreement, we will recognize compensation
expense of Y1,184,300 thousand ($10,761 thousand) over the remaining vesting
period beginning September 1, 2000 in accordance with APB No. 25, "Accounting
for Stock Issued to Employees," based on the current estimated offering price
per share of Y75,500. The Company recorded compensation expense related to the
stock award to the executive officer of Y78,131 thousand ($710 thousand) which
has been included in selling, general and administrative expense in the
accompanying condensed consolidated statement of operations for the nine months
ended September 30, 2000.
CONSTRUCTIVE STOCK SPLIT
On September 12, 2000, the Company's Board of Directors approved a plan to
issue two additional ordinary shares to the existing shareholders for each share
owned as of September 28, 2000, for a price of Y1 per share. The plan became
effective on September 30, 2000. Such share issuance has been accounted for as a
constructive 3-for-1 stock split under U.S. GAAP. Accordingly, the historical
number of shares outstanding, the number of shares issued, the weighted average
number of ordinary shares outstanding and per share data in the accompanying
condensed consolidated financial statements have been adjusted giving effect to
such constructive 3-for-1 stock split. Also, the number of the Company's
authorized shares was increased to 15,000,000 effective October 1, 2000, which
was presented, instead of the historical number of authorized shares in the
accompanying condensed consolidated financial statements to correspond with such
adjustment in the number of shares.
LOSS PER SHARE
Net loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding, giving effect to the constructive
stock split described above. Stock options outstanding as of September 30, 2000
are not included in the diluted loss per share as the impact would be
anti-dilutive.
8. EXTINGUISHMENT OF SUBSIDIARY DEBT
In September 2000, the Company purchased debt of a subsidiary in the amount
of Y1,130,000 thousand ($10,268 thousand) at a 70% discount from the holder who
was bankrupt and in the process of liquidation. As a result of this transaction,
the Company realized a gain of Y791,000 thousand ($7,188 thousand) and recorded
this as an extraordinary gain net of income tax expense of Y332,220
F-13
<PAGE> 166
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
thousand ($3,019 thousand) in the accompanying condensed consolidated statement
of operations for the nine months ended September 30, 2000.
9. SEGMENT INFORMATION
Under SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," operating segments are defined as components of an
enterprise about which separate financial information is available that is
regularly evaluated by the chief operating decision makers in deciding how to
allocate resources and in assessing performance. In addition to itself, the
Company has determined that each individual consolidated subsidiary and
unconsolidated affiliate system operator ("SO") is an operating segment because
each SO represents a separate legal entity and serves a separate geographic
area.
The following table summarizes revenue, operating income/loss and total
assets by SO which are the primary measures used by the Company's chief
operating decision makers to measure the Company's operating results and to
measure segment profitability and performance. This information is derived from
the Company's management reports and should not be viewed as an alternative to
the U.S. generally accepted accounting principles ("U.S. GAAP") measures of
financial results.
The management reports are not maintained in U.S. GAAP. Major adjustments
required to reconcile the segment reports to U.S. GAAP include: (1) revenues and
operating losses of consolidated subsidiaries not included in the management
reports, (2) revenues and operating losses of equity method affiliates included
in the management reports, (3) Internet and telephony revenues and operating
losses not included in the management reports for certain historic periods, (4)
compensation revenue from construction and maintenance not included within the
management reports, (5) intercompany eliminations principally for Jupiter
Corporate sales to consolidated SOs, Jupiter Corporate's investment in
consolidated subsidiaries and receivables from consolidated subsidiaries, (6)
depreciation and amortization not included in the management reports, (7)
goodwill and excess costs of equity investments not recorded in management
reports, (8) capital lease adjustments not made to management reports, and (9)
other miscellaneous adjustments necessary to reconcile management accounts to
U.S. GAAP, none of which are considered individually significant. In the
following table, revenue for SOs (J-COM Tokyo, J-COM Kansai, Osaka, Urawa,
Yokosuka, Kobe Ashiya, CV21 (Fukuoka), J-COM Kitakyushu and all other SOs),
primarily represents subscription revenues from external sources, while revenue
from Jupiter Corporate primarily represents subscription revenues from
consolidated subsidiaries and equity method affiliates for construction-related
sales, programming and management fees. All revenues on Jupiter Corporate
derived from consolidated subsidiaries are eliminated in consolidation.
The financial results of the SOs added to our segment reporting in the nine
months ended September 30, 2000, which were the Osaka, Yokosuka and Kobe Ashiya
franchises, were not included in our management reports for the nine months
ended September 30, 1999. Given that the necessary information is unavailable
and the cost to develop it would be excessive, no comparable segment data for
these SOs is shown for the prior period.
F-14
<PAGE> 167
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
NINE MONTHS ENDED SEPTEMBER 30, ENDED
------------------------------- SEPTEMBER 30,
1999 2000 2000
------------- -------------- -------------
(THOUSANDS OF
(THOUSANDS OF YEN) U.S. DOLLARS)
<S> <C> <C> <C>
Total revenue:
Jupiter Corporate............................... Y11,564,859 Y 27,216,666 $ 247,312
SOs:
J-COM Tokyo.................................. 4,299,989 7,310,405 66,428
J-COM Kansai................................. 861,625 3,197,371 29,054
Osaka........................................ -- 1,970,159 17,902
Urawa........................................ 1,239,219 1,848,460 16,797
Yokosuka..................................... -- 1,690,481 15,361
Kobe Ashiya.................................. -- 1,386,409 12,598
CV21(Fukuoka)................................ 900,541 1,132,091 10,287
J-COM Kitakyushu............................. 666,963 1,068,484 9,709
All Other SOs................................ 2,526,544 7,148,992 64,961
----------- ------------ ------------
Total segment revenue........................ 22,059,740 53,969,518 490,409
Adjustments to reconcile segment revenue to U.S.
GAAP revenue:
Revenue of managed equity method affiliates
included in management report.............. (2,382,413) (8,233,498) (74,816)
Revenue of consolidated subsidiaries not
included in management report.............. 62,005 974,411 8,854
Internet and telephony revenue not included
in management report in 1999............... 486,234 --
Compensation revenue not included in
management report.......................... 501,514 838,286 7,617
Intercompany eliminations principally for
corporate sales to consolidated SOs........ (8,362,004) (23,945,518) (217,588)
Other........................................ 587,535 (564,805) (5,132)
----------- ------------ ------------
Consolidated U.S. GAAP Revenue......... Y12,952,611 Y 23,038,394 $ 209,344
=========== ============ ============
</TABLE>
F-15
<PAGE> 168
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
NINE MONTHS ENDED SEPTEMBER 30, ENDED
------------------------------- SEPTEMBER 30,
1999 2000 2000
------------- -------------- -------------
(THOUSANDS OF
(THOUSANDS OF YEN) U.S. DOLLARS)
<S> <C> <C> <C>
Operating Income (Loss):
Jupiter Corporate................................ Y (538,304) Y 409,077 $ 3,717
SOs:
J-COM Tokyo................................... (280,393) (866,536) (7,874)
J-COM Kansai.................................. (1,309,315) (1,263,146) (11,478)
Osaka......................................... -- (141,577) (1,286)
Urawa......................................... 185,041 302,912 2,752
Yokosuka...................................... -- 427,530 3,885
Kobe Ashiya................................... -- (270,011) (2,454)
CV21 (Fukuoka)................................ (96,844) (129,341) (1,175)
J-COM Kitakyushu.............................. (122,330) (205,464) (1,867)
All Other SOs................................. (966,867) (2,020,071) (18,356)
----------- ------------ -----------
Total segment operating loss.................. (3,129,012) (3,756,627) (34,136)
Adjustments to reconcile segment operating loss
to U.S. GAAP operating loss:
Depreciation and amortization not included in
management report........................... (3,687,081) (8,675,856) (78,836)
Operating losses of managed equity method
affiliates included in management report.... 297,830 987,374 8,972
Operating losses of consolidated subsidiaries
not included in management report........... (82,851) (778,527) (7,074)
Internet and telephony operating losses not
included in management report in 1999....... (325,396) -- --
Compensation revenue not included in
management report........................... 501,514 838,286 7,617
Reduction in operating expense for capitalized
leases treated as operating expense in
management report........................... 855,630 2,080,472 18,905
Intercompany eliminations principally related
to corporate sales to consolidated SOs...... (260,451) (906,033) (8,233)
Other......................................... (403,134) (54,595) (496)
----------- ------------ -----------
Consolidated U.S. GAAP operating loss.... Y(6,232,951) Y(10,265,506) $ (93,281)
=========== ============ ===========
</TABLE>
F-16
<PAGE> 169
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1999 2000 2000
------------ ------------- -------------
(THOUSANDS OF
(THOUSANDS OF YEN) U.S. DOLLARS)
<S> <C> <C> <C>
Total Assets:
Jupiter Corporate............................... Y 37,893,931 Y 57,362,083 $ 521,237
SOs:
J-COM Tokyo.................................. 21,419,149 29,893,422 271,635
J-COM Kansai................................. 9,906,477 14,394,933 130,804
Osaka........................................ -- 7,042,248 63,991
Urawa........................................ 3,652,574 4,391,961 39,909
Yokosuka..................................... -- 5,964,153 54,195
Kobe Ashiya.................................. -- 6,773,170 61,546
CV21 (Fukuoka)............................... 4,959,853 4,944,463 44,929
J-COM Kitakyushu............................. 3,816,726 5,473,086 49,733
All Other SOs................................ 18,731,267 35,236,705 320,188
------------ ------------ ----------
Total segment assets......................... 100,379,977 171,476,224 1,558,167
Adjustments to reconcile segment total assets to
U.S. GAAP total assets:
Assets of managed equity method affiliates
included in management report.............. (12,839,953) (38,002,370) (345,319)
Assets of consolidated subsidiaries not
included in management report.............. 7,260,550 53,754,446 488,455
Capital leases and other fixed assets not
included in management report.............. 8,968,274 15,097,372 137,186
Goodwill and excess cost of equity
investments not reflected in management
report..................................... 12,028,065 89,885,896 816,773
Intercompany eliminations principally for
Jupiter Corporate's investment and
receivables with consolidated
subsidiaries............................... (28,156,598) (47,657,506) (433,053)
Other........................................ 200,270 993,136 9,024
------------ ------------ ----------
Consolidated U.S. GAAP Total Assets..... Y 87,840,585 Y245,547,198 $2,231,233
============ ============ ==========
</TABLE>
10. COMMITMENTS
In 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. In connection with this
upgrade, the Company has placed firm orders to purchase related materials and
equipment amounting to approximately Y6,822,765 thousand ($61,997 thousand) as
of September 30, 2000.
F-17
<PAGE> 170
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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, 1998 and 1999, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. 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 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, 1998 and 1999,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America.
Our audit also comprehended the translation of Japanese yen amounts into
U.S. dollar amounts and, in our opinion, such translation has been made on the
basis set forth in Note 1.
ARTHUR ANDERSEN
Tokyo, Japan
March 31, 2000 (except for Notes 1(c), 1(m) and 17 as to which the date is
October 31, 2000)
F-18
<PAGE> 171
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF
---------------------------- U.S. DOLLARS
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents (Note 1)........................ Y 1,384,504 Y 1,516,802 $ 13,783
Accounts receivable, less allowance for doubtful accounts
of Y23,272 thousand in 1998 and Y32,126 thousand ($290
thousand) in 1999 (Note 13)............................. 1,542,155 3,277,414 29,781
Prepaid expenses.......................................... 420,308 640,821 5,823
------------ ------------ ---------
Total current assets.................................. 3,346,967 5,435,037 49,387
Investments:
Investments in affiliates (Notes 1, 3 and 5).............. 7,560,853 6,216,396 56,487
Investments in other securities, at cost (Note 1)......... 377,697 377,697 3,432
------------ ------------ ---------
7,938,550 6,594,093 59,919
Property and equipment, at cost (Notes 1, 5 and 8):
Land...................................................... 156,224 160,380 1,457
Distribution system and equipment......................... 38,603,732 65,912,537 598,933
Support equipment and buildings........................... 2,574,240 3,747,339 34,051
------------ ------------ ---------
41,334,196 69,820,256 634,441
Less accumulated depreciation............................. (7,336,926) (11,695,265) (106,272)
------------ ------------ ---------
33,997,270 58,124,991 528,169
Other assets:
Goodwill, net (Notes 1, 2 and 3).......................... 4,363,183 15,236,398 138,450
Other (Note 4)............................................ 2,108,472 2,450,066 22,263
------------ ------------ ---------
6,471,655 17,686,464 160,713
------------ ------------ ---------
Y 51,754,442 Y 87,840,585 $ 798,188
============ ============ =========
Current liabilities:
Short-term loans (Notes 5 and 6):
Related party........................................... Y 21,835,000 Y 41,394,000 $ 376,138
Other................................................... 2,362,000 1,918,000 17,428
Long-term debt -- current portion (Notes 7 and 12)........ 695,575 887,061 8,061
Capital lease obligations to related parties -- current
portion (Notes 5, 8 and 12)............................. 761,244 1,686,558 15,325
Accounts payable.......................................... 2,004,570 3,865,212 35,122
Accrued expenses and other liabilities.................... 1,253,000 2,170,693 19,725
------------ ------------ ---------
Total current liabilities............................. 28,911,389 51,921,524 471,799
Long-term debt, less current portion (Notes 7 and 12)....... 5,219,226 12,011,906 109,150
Capital lease obligations to related parties, less current
portion (Notes 5, 8 and 12)............................... 2,355,393 5,599,086 50,878
Deferred revenue (Note 1)................................... 4,250,464 13,181,287 119,776
Severance and retirement allowance (Notes 1 and 10)......... 146,754 301,332 2,738
------------ ------------ ---------
Total liabilities..................................... 40,883,226 83,015,135 754,341
------------ ------------ ---------
Minority interest........................................... 783,908 778,620 7,075
------------ ------------ ---------
Commitments and contingencies (Note 16)
Shareholders' equity (Notes 11 and 17):
Common stock no par value................................. 33,700,000 39,900,000 362,562
Authorized 15,000,000 shares at December 31, 1998 and
1999; issued and outstanding 2,022,000 shares at
December 31, 1998 and 2,394,000 shares at December 31,
1999
Accumulated deficit....................................... (23,612,692) (35,853,170) (325,790)
------------ ------------ ---------
Total shareholders' equity............................ 10,087,308 4,046,830 36,772
------------ ------------ ---------
Y 51,754,442 Y 87,840,585 $ 798,188
============ ============ =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-19
<PAGE> 172
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF
---------------------------------------- U.S. DOLLARS
1997 1998 1999 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue (Notes 1 and 5):
Subscription fees........................ Y 1,913,614 Y 5,631,649 Y 11,851,850 $ 107,695
Construction-related sales principally
from related parties.................. 1,364,819 2,761,914 2,896,487 26,320
Programming fees principally from related
parties............................... 942,849 1,045,792 930,775 8,458
Other.................................... 1,410,147 1,656,762 3,333,155 30,288
----------- ----------- ------------ ---------
5,631,429 11,096,117 19,012,267 172,761
----------- ----------- ------------ ---------
Operating costs and expenses:
Construction-related expenses............ 1,219,057 2,610,563 2,626,331 23,865
Programming costs:
Related parties....................... 138,412 260,328 542,197 4,927
Other................................. 474,286 1,530,711 2,180,185 19,811
Other operating costs (Note 1)........... 2,093,953 3,285,413 5,915,502 53,753
Selling, general and administrative...... 7,213,824 8,797,428 11,361,436 103,239
Depreciation and amortization............ 1,580,603 3,054,889 5,507,458 50,045
----------- ----------- ------------ ---------
12,720,135 19,539,332 28,133,109 255,640
----------- ----------- ------------ ---------
Operating loss........................ (7,088,706) (8,443,215) (9,120,842) (82,879)
Other income (expense) (Note 5):
Interest expense, net:
Related parties....................... (70,070) (205,920) (374,648) (3,404)
Other................................. (88,817) (200,663) (348,784) (3,169)
Other expenses, net...................... (324,149) (227,415) (401,215) (3,646)
----------- ----------- ------------ ---------
Loss before income taxes and other
items................................. (7,571,742) (9,077,213) (10,245,489) (93,098)
Equity in losses of affiliates........... (959,098) (1,319,344) (2,644,459) (24,030)
Minority interest in net losses of
consolidated subsidiaries............. 647,645 456,069 649,470 5,902
----------- ----------- ------------ ---------
Loss before income taxes.............. (7,883,195) (9,940,488) (12,240,478) (111,226)
Income taxes (Notes 1 and 9)............... -- -- -- --
----------- ----------- ------------ ---------
Net loss................................... Y(7,883,195) Y(9,940,488) Y(12,240,478) $(111,226)
=========== =========== ============ =========
</TABLE>
<TABLE>
<CAPTION>
IN
IN YEN U.S. DOLLARS
---------------------------------------- ------------
1997 1998 1999 1999
----------- ----------- ------------ ------------
(IN YEN, EXCEPT SHARE AMOUNTS) (IN U.S.
DOLLARS,
EXCEPT SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Per ordinary share data (Notes 1 and 17):
Net loss per share....................... Y (5,653) Y (5,097) Y (5,610) $ (50.97)
=========== =========== ============ =========
Average number of common shares outstanding
(number of shares) (Note 17)............. 1,394,580 1,950,330 2,182,011 2,182,011
----------- ----------- ------------ ---------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-20
<PAGE> 173
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF
------------------------------------------ U.S. DOLLARS
1997 1998 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Common stock:
Balance, beginning of year............. Y 18,500,000 Y 27,700,000 Y 33,700,000 $ 306,224
Common stock issued; 552,000 shares in
1997, 360,000 shares in 1998 and
372,000 shares in 1999.............. 9,200,000 6,000,000 6,200,000 56,338
------------ ------------ ------------ ---------
Balance, end of year................... Y 27,700,000 Y 33,700,000 Y 39,900,000 $ 362,562
============ ============ ============ =========
Accumulated deficit:
Balance, beginning of year............. Y (5,789,009) Y(13,672,204) Y(23,612,692) $(214,564)
Net loss............................... (7,883,195) (9,940,488) (12,240,478) (111,226)
------------ ------------ ------------ ---------
Balance, end of year................... Y(13,672,204) Y(23,612,692) Y(35,853,170) $(325,790)
============ ============ ============ =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-21
<PAGE> 174
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF
-------------------------------------------- U.S. DOLLARS
1997 1998 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.............................................. Y (7,883,195) Y (9,940,488) Y(12,240,478) $(111,226)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization....................... 1,580,603 3,054,889 5,507,458 50,045
Equity in losses of affiliates...................... 959,098 1,319,344 2,644,459 24,030
Minority interest in net losses of consolidated
subsidiaries...................................... (647,645) (456,069) (649,470) (5,902)
Provision for bad debt.............................. 17,564 (1,862) 5,680 52
Provision for retirement allowance.................. 51,613 45,389 99,358 903
Loss on disposal/sale of fixed assets............... -- 30,369 261,668 2,377
Change in operating assets and liabilities:
Increase in accounts receivable................... (406,158) (68,575) (1,301,595) (11,827)
(Increase)/decrease in prepaid expenses........... (146,944) 76,277 (34,780) (316)
(Increase)/decrease in other assets............... (84,749) (955,556) 155,764 1,415
Increase/(decrease) in accounts payable........... (213,525) (81,158) 1,018,833 9,258
Increase in accrued expenses and other
liabilities..................................... 652,691 376,627 614,876 5,587
Increase in deferred revenue...................... 844,995 839,307 2,964,335 26,936
------------ ------------ ------------ ---------
Net cash used in operating activities........... (5,275,652) (5,761,506) (953,892) (8,668)
------------ ------------ ------------ ---------
Cash flows from investing activities:
Capital expenditure................................... (8,980,220) (8,567,612) (11,275,418) (102,457)
Acquisition of new subsidiaries, net of cash
acquired............................................ (1,550,876) (323,508) (2,362,653) (21,469)
Purchase of affiliates' shares........................ (752,050) (4,183,859) (4,320,592) (39,261)
Purchase of subsidiaries' shares from minority
shareholders........................................ (1,000) (169,900) (496,451) (4,511)
Purchase of other investments......................... (231,904) (376,697) -- --
Sale of subsidiaries' shares.......................... -- 40,000 -- --
------------ ------------ ------------ ---------
Net cash used in investing activities........... (11,516,050) (13,581,576) (18,455,114) (167,698)
------------ ------------ ------------ ---------
Cash flows from financing activities:
Proceeds from issuance of common stock................ 9,200,000 6,000,000 6,200,000 56,338
Proceeds from minority shareholders................... 100,000 600,000 -- --
Net increase in short-term loans from related party
and others.......................................... 6,786,000 10,449,000 15,889,950 144,389
Proceeds from long-term debt.......................... 1,140,000 615,000 123,950 1,126
Proceeds from sale of fixed assets.................... -- 107,397 11,355 103
Principal payments of long-term debt.................. (533,926) (270,859) (1,412,584) (12,836)
Principal payments under capital lease obligation to
related parties..................................... (326,986) (640,899) (1,271,367) (11,552)
------------ ------------ ------------ ---------
Net cash provided by financing activities....... 16,365,088 16,859,639 19,541,304 177,568
------------ ------------ ------------ ---------
Net increase (decrease) in cash and cash equivalents.... (426,614) (2,483,443) 132,298 1,202
Cash and cash equivalents at beginning of year.......... 4,294,561 3,867,947 1,384,504 12,581
------------ ------------ ------------ ---------
Cash and cash equivalents at end of year................ Y 3,867,947 Y 1,384,504 Y 1,516,802 $ 13,783
============ ============ ============ =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-22
<PAGE> 175
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, BASIS OF FINANCIAL STATEMENTS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND ORGANIZATION
Jupiter Telecommunications Co., Ltd. (the "Company") was formed in January
1995 for the purpose of owning and operating cable telecommunication systems and
programming businesses in Asia with the principal focus on Japan. The Company
was established with shares 60%-owned by Sumitomo Corporation ("SC") and
40%-owned by Liberty Japan, Inc. (formerly known as TCI Japan, Inc.), a
wholly-owned subsidiary of Liberty Media International, Inc. (LMI) (formerly
known as Tele-Communications International, Inc.).
A shareholders' agreement, which was amended in February 1998, requires
unanimous approval of both shareholders for key business decisions of the
Company. Additionally, the shareholders' agreement contains Liberty Japan's
option to buy, from SC, a 10% share of the Company so that the shareholders
would equally own the Company. This option was exercised in May 2000.
The Company and its subsidiaries own and operate cable telecommunication
systems throughout Japan and provide cable television services and telephony and
Internet connection services. Currently, cable television services account for
most of the Company and its subsidiaries' business as telephone and Internet
services are still in their early stage, representing less than 5% of the
consolidated total revenue in 1999.
The telecommunication industry in Japan is highly regulated by the Ministry
of Posts and Telecommunications (MPT). In general, franchise rights granted by
the MPT to its subsidiaries for operation of cable telecommunication systems in
their respective locality are not exclusive. The Company generates revenues from
sale of construction materials and supplies for cable systems, programming and
management services from its franchisees. Amounts of such revenues from
franchisees that are unconsolidated affiliates are disclosed in Note 5.
As set forth in the accompanying consolidated statements of cash flows, the
Company and its subsidiaries have relied on capital contributions and financing
from shareholders for their liquidity requirements. The Company and its
subsidiaries anticipate that they will continue to be dependent on financing
from shareholders and/or external sources in order to meet their future
liquidity requirements. If these efforts are not successful, future operations
of the Company and its subsidiaries will be adversely affected. See also Notes
5, 6 and 7.
BASIS OF FINANCIAL STATEMENTS
The Company and its subsidiaries maintain their 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 them with accounting
principles generally accepted in the United States of America. The major
adjustments include those related to scope of consolidation, accounting for
leases, recognition of certain revenues, postretirement benefits, depreciation
and amortization and accruals for certain expenses.
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 all cable
system operators, at December 31, 1997, 1998 and 1999. All significant
intercompany balances and transactions have been eliminated. For the
consolidated
F-23
<PAGE> 176
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
subsidiaries with negative equity position, the Company has recognized the
entire amount of cumulative losses of such subsidiaries regardless of its
ownership percentage.
(b) Investments
For those investments in affiliates in which the Company's voting interest
is 20% to 50%, the equity method of accounting is used. Under this method, the
investment originally recorded at cost is adjusted to recognize the Company's
share of the net earnings or losses of the affiliates, including amortization of
the excess of the Company's cost over its percentage interest in the net assets
of each affiliate. All significant intercompany profits from these affiliates
have been eliminated according to the requirements of the equity method of
accounting.
Investments in other securities carried at cost represent non-marketable
equity securities in which the Company's ownership is less than 20%.
(c) Translation into U.S. Dollars
The Company and its subsidiaries maintain their accounts in Japanese yen,
the currency of the country in which they are incorporated and principally
operates. The U.S. dollar amounts included herein represent a translation using
the approximate exchange rate quotation of The Bank of Tokyo-Mitsubishi, Ltd.
for selling spot U.S. dollars by telegraphic transfer against yen as of October
31, 2000 of Y110.05 to $1 solely for the convenience of readers outside Japan.
The translation should not be construed as a representation that the yen amounts
have been, could have been, or could in the future be converted into U.S.
dollars at the above or any other rate.
(d) 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 liabilities to prepare these consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America. Actual results could differ from those estimates.
(e) Revenue Recognition
The Company and its subsidiaries recognize cable television and programming
revenues as 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 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.
The Company and its subsidiaries provide poor reception rebroadcasting
services to non-cable television viewers suffering from poor reception of
television waves caused by obstacles. The Company and its subsidiaries enter
into agreements with the parties that have built the 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.
F-24
<PAGE> 177
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
See Note 5 for a description of Revenue -- Construction-related sales and
Revenue -- Programming fees in the accompanying consolidated statements of
operations which are primarily from affiliates.
(f) 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 Statement of Financial Accounting Standard (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.
Other operating costs in our consolidated statements of operations include,
among other things, cable service related expenses, billing costs, technical and
maintenance personnel and utility expenses related to the broadband network.
(g) Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments with
an initial maturity of three months or less.
(h) 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 system and equipment and from 10 to 29 years for support
equipment and buildings. Equipment under capital leases is stated at the present
value of minimum lease payments. Equipment under capital lease is amortized on a
straight-line basis over the shorter of the lease term or estimated useful life
of the asset, which ranged from 3 to 12 years.
Ordinary maintenance and repairs are charged to income as incurred. Major
replacements and improvements are capitalized. When properties are retired or
otherwise disposed of, the property and related accumulated depreciation
accounts are relieved of the applicable amounts and any differences are included
in other income or expenses.
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 has
identified certain electronic components of their distribution system that will
be replaced in connection with the upgrade and, accordingly, has adjusted the
remaining useful lives of such electronics in accordance with the upgrade
schedule. The effect of such changes in the remaining useful lives is estimated
to result in additional depreciation expense of approximately Y3,754,000
thousand and Y391,000 thousand for the years ended December 31, 2000 and 2001,
respectively. Additionally, after giving effect to the accelerated depreciation,
our net loss per share for the year ended December 31, 1999 would have been
Y(7,509) or $(68.23). See Note 16.
(i) Goodwill
Goodwill represents the difference between the cost of acquired cable
television companies and amounts allocated to the estimated fair value of their
net assets, which is being amortized over 20 years.
F-25
<PAGE> 178
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(j) Income Taxes
Income taxes are provided based on income for financial reporting purposes.
Deferred income taxes are recognized by the asset and liability method for the
estimated future tax consequences attributable to temporary differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.
(k) 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." The subsidiaries have
local severance payment plans under which accrued severance liabilities are
stated on the vested benefits obligation basis, which is the amount required to
be paid if all eligible employees voluntarily terminated their employment as of
the balance sheet date. Accrued severance liabilities for these subsidiaries
were Y1,148 thousand and Y35,352 thousand ($321 thousand) at December 31, 1998
and 1999, respectively, and were included in severance and retirement allowance
in the accompanying consolidated balance sheets.
(l) Long-Lived Assets
The Company and its subsidiaries' long-lived assets, including 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 a comparison of the carrying amount of
an asset to future net cash flows (undiscounted and without interest charges)
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 exceed 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.
(m) Loss Per Share
Net loss per common share is computed by dividing net loss by the weighted
average number of common shares outstanding, giving effect to the share issuance
on September 30, 2000 which is more fully described in Note 17.
(n) Business Line Information
The Company and its subsidiaries are principally engaged in cable
television services with their headquarters and all facilities located in Japan.
(o) Advertising Expense
Advertising expense is charged to income as incurred and is included in
selling, general and administrative expenses in the accompanying consolidated
statements of operations.
(p) New Accounting Standards
In June 1998, Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
will be effective for the fiscal years beginning after June 15, 2000 and
requires recognition of all derivatives in the balance sheet and measurement of
those instruments at fair value. Changes in the fair value of derivatives are
recorded in the current earnings or other comprehensive income, depending on
hedge designation and type of the related hedge transaction. The hedge
ineffectiveness will all be recognized in earnings. The Company and its
F-26
<PAGE> 179
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
subsidiaries will adopt SFAS No. 133 during the fiscal year in which the
statement becomes effective. The effect on the Company's and its subsidiaries'
consolidated financial statements of adopting SFAS No. 133 is not expected to be
significant. There has been no derivative instrument employed by the Company and
its subsidiaries through December 31, 1999.
2. ACQUISITIONS
The Company has acquired varying interests in cable television companies
during the periods presented. The Company has used the purchase method of
accounting for all such acquisitions and, accordingly, has allocated the
purchase price based on the estimated fair value of net assets of the acquired
companies. Such companies have been included in the accompanying consolidated
financial statements since the dates of acquisition.
In April 1997, the Company increased its ownership of CSQ from 37.0% to
58.3% for cash consideration of Y1,212,770 thousand ($11,020 thousand). Since
the Company's initial investment in CSQ in April 1996, the cumulative amount of
consideration paid in excess of the estimated fair value of the net assets
acquired of Y1,595,807 thousand ($14,501 thousand) has been recorded as goodwill
in the accompanying consolidated balance sheets.
In June 1997, the Company acquired a 66.9% interest in Samukawa for cash
consideration of Y323,700 thousand ($2,941 thousand). The amount of
consideration paid in excess of the estimated fair value of the net assets
acquired of Y1,129,299 thousand ($10,262 thousand) has been recorded as goodwill
in the accompanying consolidated balance sheets.
In June 1997, the Company increased its ownership of Chigasaki from 15.9%
to 66.9% for cash consideration of Y606,060 thousand ($5,507 thousand). Since
the Company's initial investment in Chigasaki in March 1995, the cumulative
amount of consideration paid in excess of the estimated fair value of the net
assets acquired of Y407,023 thousand ($3,699 thousand) has been recorded as
goodwill in the accompanying consolidated balance sheets.
In November 1997, the Company increased its ownership of Nerima from 26.5%
to 64.3% for cash consideration of Y1,735,700 thousand ($15,772 thousand). Since
the Company's initial investment in Nerima in March 1995, the cumulative amount
of consideration paid in excess of the estimated fair value of the net assets
acquired of Y205,361 thousand ($1,866 thousand) has been recorded as goodwill in
the accompanying consolidated balance sheets.
In October 1998, the Company acquired a 51% interest in KCT for cash
consideration of Y510,000 thousand ($4,634 thousand). The amount of
consideration paid in excess of the estimated fair value of the net assets
acquired of Y557,870 thousand ($5,069 thousand) has been recorded as goodwill in
the accompanying consolidated balance sheets.
In March 1999, the Company increased its ownership of Fuchu from 39.9% to
69.9% for cash consideration of Y915,000 thousand ($8,314 thousand). Since the
Company's initial investment in Fuchu in March 1995, the cumulative amount of
consideration paid in excess of the estimated fair value of the net assets
acquired of Y1,046,869 thousand ($9,513 thousand) has been recorded as goodwill
in the accompanying consolidated balance sheets.
Also in March 1999, the Company increased its ownership of CV21 (Fukuoka)
from 49.5% to 53.8% for cash consideration of Y1,701,750 thousand ($15,463
thousand). Since the Company's initial investment in CV21 (Fukuoka) in April
1996, the cumulative amount of consideration paid in excess of the estimated
fair value of the net assets acquired of Y5,410,801 thousand ($49,167 thousand)
has been recorded as goodwill in the accompanying consolidated balance sheets.
F-27
<PAGE> 180
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In September 1999, the Company increased its ownership of Osaka from 48.6%
to 58.8% for cash consideration of Y3,140,639 thousand ($28,538 thousand). Since
the Company's initial investment in Osaka in May 1996, the cumulative amount of
consideration paid in excess of the estimated fair value of the net assets
acquired of Y3,063,504 thousand ($27,837 thousand) has been recorded as goodwill
in the accompanying consolidated balance sheets.
In December 1999, the Company increased its ownership of Tsuchiura from
42.0% to 61.3% for cash consideration of Y763,925 thousand ($6,942 thousand).
Since the Company's initial investment in Tsuchiura in October 1996, the
cumulative amount of consideration paid in excess of the estimated fair value of
the net assets acquired of Y727,510 thousand ($6,611 thousand) has been recorded
as goodwill in the accompanying consolidated balance sheets.
The following unaudited pro forma condensed combined results of operations
for the Company are prepared assuming that the foregoing acquisitions were
completed as of the beginning of the periods presented. This pro forma condensed
combined financial information does not purport to represent what the Company's
results of operations would actually have been if such transactions had in fact
occurred on such date. The pro forma adjustments are based upon currently
available information and upon certain assumptions that management believes are
reasonable.
<TABLE>
<CAPTION>
(UNAUDITED)
-----------------------------------------------------------
THOUSANDS OF YEN THOUSANDS OF
------------------------------------------- U.S. DOLLARS
1997 1998 1999 1999
----------- ------------ ------------ ------------
(EXCEPT PER SHARE AMOUNTS)
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue............................. Y11,648,487 Y 15,350,453 Y 21,810,413 $ 198,186
Net loss............................ (8,241,125) (10,159,618) (12,247,735) (111,292)
Net loss per share.................. (5,909) (5,209) (5,613) (51.00)
</TABLE>
3. INVESTMENTS IN AFFILIATES
The Company's affiliates are engaged in the telecommunication business in
Japan. At December 31, 1999, the Company held investments in Shimonoseki
(50.0%), Urawa (49.7%), CATV Yokosuka (47.0%), Sakai (46.5%), Fukuoka (45.0%),
Kobe East (42.7%), Ashiya (42.3%), Media Saitama (40.1%), @Home Japan (35.7%)
and 20.0% of each of Kansai Multimedia, Fujisawa, Amagasaki and Kobe West. At
December 31, 1998, the Company held investments in CV21 (Fukuoka) (49.49%),
Urawa (49.7%), CATV Yokosuka (47.1%), Shimonoseki (45.0%), FCN (45.0%), Kobe
East (42.6%), Tsuchiura (42.0%), Sakai (40.0%), Fuchu (39.9%), Osaka (33.6%) and
Kansai Multimedia (20.0%).
The carrying value of investments in affiliates as of December 31, 1998 and
1999, includes Y9,627,986 thousand and Y7,320,324 thousand ($66,518 thousand),
respectively, of unamortized balance of the excess cost of investments over the
Company's equity in the net assets of the affiliates which is being amortized on
a straight-line basis over 20 years. All significant intercompany profits from
these affiliates have been eliminated according to the equity method of
accounting.
F-28
<PAGE> 181
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Condensed financial information of the Company's unconsolidated affiliates
at December 31, 1998 and 1999 and for each of the three years ended December 31,
1999 are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF
-------------------------- U.S. DOLLARS
1998 1999 1999
----------- ----------- ------------
<S> <C> <C> <C>
Combined Financial Position:
Property and equipment, net....................... Y33,192,558 Y43,741,827 $397,472
Other assets, net................................. 5,960,678 7,644,830 69,467
----------- ----------- --------
Total assets................................... Y39,153,236 Y51,386,657 $466,939
=========== =========== ========
Debt.............................................. Y24,358,651 Y31,386,791 $285,205
Other liabilities................................. 18,126,886 23,500,443 213,543
Shareholders' deficit............................. (3,332,301) (3,500,577) (31,809)
----------- ----------- --------
Total liabilities and deficit.................. Y39,153,236 Y51,386,657 $466,939
=========== =========== ========
</TABLE>
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF
------------------------------------------ U.S. DOLLARS
1997 1998 1999 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Combined Operations:
Total revenue...................... Y 3,072,671 Y 8,939,940 Y 12,914,151 $ 117,348
Operating, selling, general and
administrative expenses......... (3,088,601) (8,624,021) (13,347,348) (121,284)
Depreciation and amortization...... (798,293) (1,992,060) (3,645,547) (33,126)
----------- ----------- ------------ ---------
Operating loss.................. (814,223) (1,676,141) (4,078,744) (37,062)
Interest expense, net.............. (185,851) (329,780) (375,518) (3,412)
Other, net......................... 544,720 15,707 (2,590) (24)
----------- ----------- ------------ ---------
Net loss........................ Y (455,354) Y(1,990,214) Y (4,456,852) $ (40,498)
=========== =========== ============ =========
</TABLE>
4. OTHER ASSETS
Other assets, excluding goodwill, at December 31, 1998 and 1999, consisted
of the following:
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF
------------------------ U.S. DOLLARS
1998 1999 1999
---------- ---------- ------------
<S> <C> <C> <C>
Lease and other deposits...................... Y1,260,320 Y1,360,046 $12,359
Long-term loans receivable.................... 510,270 660,096 5,998
Capitalized computer software................. 198,345 249,391 2,266
Other......................................... 139,537 180,533 1,640
---------- ---------- -------
Total other assets.......................... Y2,108,472 Y2,450,066 $22,263
========== ========== =======
</TABLE>
5. RELATED PARTY TRANSACTIONS
The Company purchases cable system materials and supplies from third party
suppliers and resells them to its subsidiaries and affiliates.
Construction-related sales in the accompanying consolidated statements of
operations represent revenues from unconsolidated affiliates for such sales.
The Company provides programming services to its subsidiaries and
affiliates. Programming fees in the accompanying consolidated statements of
operations represent revenues from unconsolidated affiliates for such services
provided and the related products sold.
F-29
<PAGE> 182
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company provides management services to its subsidiaries and managed
affiliates. Fees for such services related to managed affiliates amounted to
Y171,059 thousand, Y193,755 thousand and Y216,235 thousand ($1,965 thousand) for
the years ended December 31, 1997, 1998 and 1999, respectively, and are included
in Revenue -- Other in the accompanying consolidated statements of operations.
The Company purchases certain cable television programs from Jupiter
Programming Co., Ltd., an affiliated company jointly owned by SC and a
wholly-owned subsidiary of LMI. Such purchases amounted to Y138,412 thousand,
Y260,328 thousand and Y542,197 thousand ($4,927 thousand) for the years ended
December 31, 1997, 1998 and 1999, respectively, and are shown as programming
costs -- related parties in the accompanying consolidated statements of
operations.
The Company purchased stock of the affiliated companies from SC in the
amounts of Y710,964 thousand, Y3,724,556 thousand and Y3,514,537 thousand
($31,936 thousand), in the years ended December 31, 1997, 1998 and 1999,
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. The
Company and its subsidiaries' purchases of such goods from AJCC, primarily as
capital leases, amounted to Y520,996 thousand, Y1,218,238 thousand and
Y3,474,681 thousand ($31,574 thousand), for the years ended December 31, 1997,
1998 and 1999, respectively.
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
essentially on their payroll costs. The service fees paid to SC amounted to
Y663,390 thousand, Y741,965 thousand and Y980,321 thousand ($8,908 thousand) for
the years ended December 31, 1997, 1998 and 1999, respectively. The service fees
paid to LMI amounted to Y768,693 thousand, Y771,197 thousand and Y456,866
thousand ($4,151 thousand) for the years ended December 31, 1997, 1998 and 1999,
respectively. These amounts are included in selling, general and administrative
expenses in the accompanying consolidated statements of operations.
Sumisho Finance Management ("SFM") is a wholly-owned subsidiary of SC and
its primary business is to provide financing to subsidiaries and affiliated
companies of SC. The Company and its subsidiaries have short-term borrowings
from SFM as described in Note 6.
6. SHORT-TERM LOANS
A summary of short-term loans at December 31, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF
-------------------------- U.S. DOLLARS
1998 1999 1999
----------- ----------- ------------
<S> <C> <C> <C>
Short-term borrowings from SFM.............. Y21,835,000 Y41,394,000 $376,138
Short-term borrowings from Banks............ 2,362,000 1,918,000 17,428
----------- ----------- --------
Y24,197,000 Y43,312,000 $393,566
=========== =========== ========
</TABLE>
Short-term borrowings from SFM represent the subsidiaries' borrowings on
the lines of credit provided by SFM to the Company and its subsidiaries and
affiliates. The interest rates on the borrowings from SFM were ranging from
1.40% to 1.50% and from 1.06% to 1.80% at December 31, 1998 and 1999,
respectively. At December 31, 1999, unused and available lines of credit from
SFM totaled approximately Y25,941,000 thousand (235,720 thousand).
F-30
<PAGE> 183
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Short-term borrowings from Banks represent the subsidiaries' borrowings
from commercial banks. The interest rates on the borrowings from Banks were
ranging from 1.18% to 1.88% and from 1.13% to 1.28% at December 31, 1998 and
1999, respectively.
7. LONG-TERM DEBT
A summary of long-term debt, the entire amount of which is at the
subsidiaries, as of December 31, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF
------------------------- U.S. DOLLARS
1998 1999 1999
---------- ----------- ------------
<S> <C> <C> <C>
0% unsecured loans from Development Bank of Japan,
due fiscal 2000 - 2014............................. Y 588,150 Y 2,161,350 $ 19,640
Unsecured loans from Development Bank of Japan, due
fiscal 2000 - 2014, interest from 2.2% to 6.8%..... 1,808,200 2,185,200 19,857
0% secured loans from Development Bank of Japan, due
fiscal 2000 - 2014................................. 2,758,300 2,868,000 26,061
Unsecured loans from commercial banks, due fiscal
2000 - 2002, interest from 1.0% to 3.8%............ 760,151 319,417 2,903
Secured loans from Development Bank of Japan, due
fiscal 2000 - 2004, interest at 5.3%............... -- 324,000 2,944
Secured loans from commercial banks, due fiscal
2001 - 2016, interest from 0.75% to 1.25%.......... -- 5,041,000 45,806
Less: current portion................................ (695,575) (887,061) (8,061)
---------- ----------- --------
Long-term debt, less current portion................. Y5,219,226 Y12,011,906 $109,150
========== =========== ========
</TABLE>
The 0% unsecured 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 MPT 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,
among other things. These loans were guaranteed by certain shareholders of each
subsidiary until August 1996. Since September 1996, these loans have been
guaranteed primarily by SC.
Property and equipment with a book value at December 31, 1999 of Y6,517,369
thousand ($59,222 thousand) were mortgaged to secure the long-term loans.
The aggregate annual maturities of long-term debt outstanding at December
31, 1999 are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
---------------- ------------
<S> <C> <C>
Year ending December 31,
2000.......................................... Y 887,061 $ 8,061
2001.......................................... 970,070 8,815
2002.......................................... 979,916 8,904
2003.......................................... 1,003,310 9,117
2004.......................................... 974,240 8,853
Thereafter.................................... 8,084,370 73,461
----------- --------
Y12,898,967 $117,211
=========== ========
</TABLE>
F-31
<PAGE> 184
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. LEASES
The Company and its subsidiaries are obligated under various capital
leases, primarily for home terminals, and other non-cancelable operating leases,
which expire at various dates during the next seven years.
At December 31, 1998 and 1999, the gross amount of equipment and related
accumulated depreciation recorded under capital leases were as follows:
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF
-------------------------- U.S. DOLLARS
1998 1999 1999
----------- ----------- ------------
<S> <C> <C> <C>
Distribution system and equipment........... Y 3,359,448 Y 8,543,306 $ 77,631
Support equipment and buildings............. 1,183,236 1,837,956 16,701
Less: accumulated depreciation.............. (1,512,023) (3,392,316) (30,825)
Other assets, at cost, net of
depreciation.............................. 5,258 96,914 881
----------- ----------- --------
Y 3,035,919 Y 7,085,860 $ 64,388
=========== =========== ========
</TABLE>
Depreciation of assets under capital leases is included in depreciation and
amortization in the accompanying consolidated statements of operations.
Future minimum lease payments under capital leases and non-cancelable
operating leases as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
------------------------ ---------------------
CAPITAL OPERATING CAPITAL OPERATING
LEASES LEASES LEASES LEASES
----------- --------- -------- ---------
<S> <C> <C> <C> <C>
Year ending December 31,
----------------------------------------------
2000........................................ Y 1,861,181 Y 72,478 $ 16,912 $ 659
2001........................................ 1,700,012 55,601 15,447 505
2002........................................ 1,488,523 33,431 13,526 304
2003........................................ 1,213,800 14,734 11,030 134
2004........................................ 855,326 5,342 7,772 48
More than five years........................ 668,739 -- 6,077 --
----------- -------- -------- ------
Total minimum lease payments.................. 7,787,581 Y181,586 70,764 $1,650
======== ======
Less: amount representing interest (rates
ranging from 2.2% to 5.7%).................. (501,937) (4,561)
----------- --------
Present value of net minimum payments......... 7,285,644 66,203
Less: current portion......................... (1,686,558) (15,325)
----------- --------
Noncurrent portion............................ Y 5,599,086 $ 50,878
=========== ========
</TABLE>
The Company and its subsidiaries occupy certain offices under cancelable
lease arrangements. Rental expenses for such leases for the years ended December
31, 1997, 1998 and 1999, totaled Y780,989 thousand, Y954,990 thousand and
Y941,733 thousand ($8,557 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 transmittal
facilities and use poles and other equipment under cancelable lease
arrangements. Rental expenses for such leases for the years ended December 31,
1997, 1998 and 1999, totaled Y210,089 thousand, Y693,661 thousand and Y1,429,615
F-32
<PAGE> 185
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
thousand ($12,991 thousand), respectively, and are included in operating
expenses in the accompanying consolidated statements of operations.
9. INCOME TAXES
The Company and its subsidiaries are subject to Japanese national, regional
and municipal taxes based on income. The aggregate normal tax rate was
approximately 51% for the years ended December 31, 1997 and 1998, and
approximately 48% for the year ended December 31, 1999. However, as a result of
the amendments to Japanese tax regulations that were enacted into law effective
April 1, 1999, the normal tax rate was reduced from approximately 48% to 42%
effective from January 1, 2000. Deferred income taxes were principally
calculated at the rate of 42%.
The effects of temporary differences that give rise to deferred tax assets
and liabilities at December 31, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF
---------------------------- U.S. DOLLARS
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Operating loss carryforwards.................... Y 10,957,940 Y 11,752,342 $ 106,791
Deferred revenue................................ 1,367,691 7,217,928 65,588
Investment in affiliates........................ 963,234 1,026,708 9,329
Depreciation.................................... 185,377 995,357 9,045
Lease obligation................................ 1,505,336 3,059,970 27,805
Other........................................... 186,504 443,044 4,026
------------ ------------ ---------
Total gross deferred tax assets................. 15,166,082 24,495,349 222,584
Less: valuation allowance....................... (12,793,814) (20,897,817) (189,894)
------------ ------------ ---------
Deferred tax assets............................. 2,372,268 3,597,532 32,690
------------ ------------ ---------
Deferred tax liabilities:
Depreciation and amortization................... 1,483,122 2,985,131 27,125
Other........................................... 889,146 612,401 5,565
------------ ------------ ---------
Total gross deferred tax liabilities............ 2,372,268 3,597,532 32,690
------------ ------------ ---------
Net deferred tax assets......................... Y -- Y -- $ --
============ ============ =========
</TABLE>
Because of the uncertainty in realization of the future tax benefits, the
net deferred tax assets at December 31, 1998 and 1999 are fully offset by a
valuation allowance.
At December 31, 1999, the Company and its subsidiaries had net operating
loss carryforwards for income tax purposes of Y27,981,766 thousand ($254,264
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:
<TABLE>
<CAPTION>
THOUSANDS OF
YEAR ENDING DECEMBER 31, THOUSANDS OF YEN U.S. DOLLARS
------------------------ ---------------- ------------
<S> <C> <C>
2000............................................. Y 2,414,035 $ 21,936
2001............................................. 4,788,283 43,510
2002............................................. 6,568,603 59,687
2003............................................. 6,509,880 59,154
2004............................................. 7,700,965 69,977
----------- --------
Y27,981,766 $254,264
=========== ========
</TABLE>
F-33
<PAGE> 186
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As the income tax regulations in Japan do not permit filing of a
consolidated tax return by a parent company, certain portions of the Company's
and its subsidiaries' loss carryforwards may not be realizable.
10. SEVERANCE AND RETIREMENT PLANS
Under the 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.
Net periodic cost of the Company and its subsidiaries' plans accounted for
in accordance with SFAS No. 87 for the years ended December 31, 1997, 1998 and
1999, included the following components:
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF
----------------------------- U.S. DOLLARS
1997 1998 1999 1999
------- ------- ------- ------------
<S> <C> <C> <C> <C>
Service cost -- benefits earned during the
year........................................... Y43,409 Y63,862 Y80,223 $729
Interest cost on projected benefit obligation.... 1,041 2,624 5,096 46
------- ------- ------- ----
Net periodic cost................................ Y44,450 Y66,486 Y85,319 $775
======= ======= ======= ====
</TABLE>
The reconciliations 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:
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF
-------------------- U.S. DOLLARS
1998 1999 1999
-------- -------- ------------
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation, beginning of year.......... Y 74,962 Y145,606 $1,323
Service cost................................... 63,862 80,223 729
Interest cost.................................. 2,624 5,096 46
Actuarial loss................................. 7,615 56,811 516
Benefits paid.................................. (3,457) (21,756) (198)
-------- -------- ------
Benefit obligation, end of year.................. Y145,606 Y265,980 $2,416
======== ======== ======
</TABLE>
The weighted-average discount rate used in determining costs of the Company
and its subsidiaries' plans was 3.5% for the years ended December 31, 1997, 1998
and 1999.
11. SHAREHOLDERS' EQUITY
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, 1999, the deficit recorded on the Company's books of account was Y9,707,983
thousand ($88,214 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 equals 25% of the
issued capital. The Code also provides that both additional paid-in capital and
the legal reserve are not available for cash dividends, but may be used to
reduce a capital deficit by resolution of the shareholders or may be capitalized
by resolution of the Board of Directors. The Code
F-34
<PAGE> 187
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
provides that at least one-half of the issue price of new shares, with a minimum
of the par value thereof, be included in common stock.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
For financial instruments other than long-term loans and lease obligations,
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, 1998 and 1999
are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF
-------------------------- U.S. DOLLARS
1998 1999 1999
----------- ----------- ------------
<S> <C> <C> <C>
Long-term debt.............................. Y5,709,809 Y11,969,635 $108,765
Lease obligation............................ Y3,182,037 Y 7,306,274 $ 66,390
</TABLE>
13. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company and its
subsidiaries to concentrations of credit risk consist principally of accounts
receivable. The Company management believes that the risk associated with
accounts receivable is mitigated by the large number of customers comprising its
customer base.
14. SUPPLEMENTAL DISCLOSURES TO CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THOUSANDS OF YEN THOUSANDS OF
---------------------------------------- U.S. DOLLARS
1997 1998 1999 1999
----------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Cash paid during the year for:
Interest............................. Y 108,354 Y 406,933 Y 657,966 $ 5,979
=========== ========== =========== ========
Income tax........................... Y -- Y -- Y -- $ --
=========== ========== =========== ========
Acquisition of new subsidiaries:
Fair value of assets acquired........ Y11,045,194 Y1,710,778 Y22,710,811 $206,368
Liabilities assumed.................. 9,494,318 1,387,270 20,348,158 184,899
----------- ---------- ----------- --------
Cash paid, net of cash acquired... Y 1,550,876 Y 323,508 Y 2,362,653 $ 21,469
=========== ========== =========== ========
Property acquired under capital leases
during the year...................... Y 655,177 Y2,413,701 Y 5,296,685 $ 48,130
=========== ========== =========== ========
</TABLE>
F-35
<PAGE> 188
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SEGMENT INFORMATION
Under SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information," operating segments are defined as components of an
enterprise about which separate financial information is available that is
regularly evaluated by the chief operating decision makers in deciding how to
allocate resources and in assessing performance. In addition to itself, the
Company has determined that each individual consolidated subsidiary and
unconsolidated affiliate system operator ("SO") is an operating segment because
each SO represents a separate legal entity and serves a separate geographic
area.
The following table summarizes revenue, operating income/loss and total
assets by SO which are the primary measures used by the Company's chief
operating decision makers to measure the Company's operating results and to
measure segment profitability and performance. This information is derived from
the Company's management reports and should not be viewed as an alternative to
the US generally accepted accounting principles ("U.S. GAAP") measures of
financial results.
The management reports are not maintained in U.S. GAAP. Major adjustments
required to reconcile the management reports to U.S. GAAP include: (1) revenues
and operating losses of consolidated subsidiaries not included in the management
reports, (2) revenues and operating losses of managed equity method affiliates
included in the management reports, (3) Internet and telephony revenues and
operating losses not included in the management reports for certain historic
periods, (4) compensation revenue from construction and maintenance not included
within the management reports, (5) intercompany eliminations principally for
Jupiter Corporate sales to consolidated SOs, Jupiter Corporate's investment in
consolidated subsidiaries and receivables from consolidated subsidiaries, (6)
depreciation and amortization not included in the management reports, (7)
goodwill and excess costs of equity investments not recorded in management
reports, (8) capital lease adjustments not made to management reports, and (9)
other miscellaneous adjustments necessary to reconcile management accounts to
U.S. GAAP, none of which are considered individually significant. In the
following table, revenue for SOs (J-COM Tokyo, Urawa, J-COM Kansai, CV21
(Fukuoka), J-COM Kitakyushu and all other SOs), primarily represents
subscription revenues from external sources, while revenue from Jupiter
corporate primarily represents intercompany revenues from consolidated
subsidiaries and equity method affiliates for construction-related sales,
programming and management fees. All revenues of Jupiter corporate derived from
consolidated subsidiaries are eliminated in consolidation. Certain SOs in 1997
and 1998 are combined to conform to 1999 SO classification that has resulted
from merger activities of SOs during the periods presented.
F-36
<PAGE> 189
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
---------------------------------------- ------------
1997 1998 1999 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Total revenue:
Jupiter Corporate........................ Y10,455,198 Y14,242,716 Y 18,236,331 $ 165,710
SOs:
J-COM Tokyo........................... 3,568,679 4,715,978 5,951,295 54,078
Urawa................................. 970,399 1,449,305 1,702,277 15,468
J-COM Kansai.......................... 157,041 354,745 1,412,781 12,838
CV21 (Fukuoka)........................ 856,531 1,108,873 1,231,502 11,190
J-COM Kitakyushu...................... 493,862 623,779 893,368 8,118
All Other SOs......................... 936,204 2,138,339 3,793,503 34,471
----------- ----------- ------------ ---------
Total segment revenue............... 17,437,914 24,633,735 33,221,057 301,873
Adjustments to reconcile segment revenue to
U.S. GAAP revenue:
Revenue of managed equity method
affiliates included in management
report................................ (4,479,371) (4,441,676) (3,368,077) (30,605)
Revenue of consolidated subsidiaries not
included in management report......... -- -- 257,127 2,336
Internet and Telephony revenue not
included in management report......... -- 271,032 1,042,022 9,469
Compensation revenue not included in
management reports.................... 38,407 268,352 770,259 6,999
Intercompany eliminations principally for
corporate sales to consolidated SOs... (7,146,590) (9,374,443) (13,324,820) (121,080)
Other.................................... (218,931) (260,883) 414,699 3,769
----------- ----------- ------------ ---------
Consolidated U.S. GAAP revenue...... Y 5,631,429 Y11,096,117 Y 19,012,267 $ 172,761
=========== =========== ============ =========
</TABLE>
F-37
<PAGE> 190
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
--------------------------------------- ------------
1997 1998 1999 1999
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Operating Income (Loss):
Jupiter Corporate......................... Y(3,109,234) Y(2,352,723) Y (566,425) $ (5,147)
SOs:
J-COM Tokyo............................ (968,896) (509,291) (679,223) (6,172)
Urawa.................................. 190,167 298,772 212,707 1,933
J-COM Kansai........................... (192,147) (1,047,609) (1,813,796) (16,482)
CV21 (Fukuoka)......................... (136,798) (104,328) (130,791) (1,188)
J-COM Kitakyushu....................... (81,679) (115,801) (118,909) (1,080)
All Other SOs.......................... (982,728) (1,285,003) (1,458,172) (13,250)
----------- ----------- ----------- --------
Total segment operating loss......... (5,281,315) (5,115,983) (4,554,609) (41,386)
Adjustments to reconcile segment operating
loss to U.S. GAAP operating loss:
Depreciation and amortization not included
in management report................... (1,580,603) (3,054,889) (5,507,458) (50,045)
Operating losses of managed equity method
affiliates included in management
report................................. 112,322 222,776 484,773 4,405
Operating losses of consolidated
subsidiaries not included in management
report................................. -- -- (95,973) (872)
Internet and Telephony operating losses
not included in management report...... -- (656,713) (833,078) (7,570)
Compensation revenue not included in
management report...................... 38,407 268,352 770,259 6,999
Intercompany eliminations principally
related to corporate sales to
consolidated SOs....................... (446,643) (410,451) (409,780) (3,724)
Other..................................... 69,126 303,693 1,025,024 9,314
----------- ----------- ----------- --------
Consolidated U.S. GAAP Operating
Loss................................. Y(7,088,706) Y(8,443,215) Y(9,120,842) $(82,879)
=========== =========== =========== ========
</TABLE>
F-38
<PAGE> 191
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
------------------------------------------ ------------
1997 1998 1999 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total Assets:
Jupiter Corporate..................... Y 23,699,992 Y 26,594,151 Y 37,893,931 $ 344,334
SOs:
J-COM Tokyo........................ 15,251,692 17,680,901 21,419,149 194,631
Urawa.............................. 2,939,268 2,948,094 3,652,574 33,190
J-COM Kansai....................... 3,324,914 6,050,249 9,906,477 90,018
CV21(Fukuoka)...................... 5,812,856 5,445,345 4,959,853 45,069
J-COM Kitakyushu................... 2,583,650 3,009,718 3,816,726 34,682
All Other SOs...................... 10,113,322 14,205,413 18,731,267 170,207
------------ ------------ ------------ ---------
Total segment assets............... 63,725,694 75,933,871 100,379,977 912,131
Adjustments to reconcile segment total
assets to U.S. GAAP total assets:
Assets of managed equity method
affiliates included in management
report................................ (14,681,545) (20,144,255) (12,839,953) (116,674)
Assets of consolidated subsidiaries not
included in management report......... -- -- 7,260,550 65,975
Capital leases and other fixed assets... 3,109,186 4,244,860 8,968,274 81,493
Goodwill and excess cost of equity
investments........................... 2,963,254 3,689,817 12,028,065 109,296
Intercompany elimination principally for
Jupiter Corporate's investment and
receivables with consolidated
subsidiaries.......................... (14,444,287) (12,606,374) (28,156,598) (255,853)
Other................................... 781,502 636,523 200,270 1,820
------------ ------------ ------------ ---------
Consolidated U.S. GAAP Total
Assets........................... Y 41,453,804 Y 51,754,442 Y 87,840,585 $ 798,188
============ ============ ============ =========
</TABLE>
16. COMMITMENTS
In 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. In connection with this
upgrade, the Company has placed firm orders to purchase related materials and
equipment amounting to approximately Y4,237,000 thousand ($38,501 thousand) to
date.
17. SUBSEQUENT EVENTS
CHANGE OF PAR VALUE
On June 6, 2000, the Company's board of directors approved a change in the
par value of all outstanding shares from Y50,000 to no par value.
ACQUISITION OF TITUS
On June 27, 2000, the shareholders of the Company entered into a definitive
agreement with the shareholders of Titus Communications Corporation for the
purpose of combining the two companies. The closing took place on September 1,
2000. Each common share of Titus was exchanged for 0.32251548 of an ordinary
share of the Company (or 0.9675464 of an ordinary share of the Company adjusted
for the constructive 3-for-1 stock split effected on September 30, 2000) and
each convertible preference share of
F-39
<PAGE> 192
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Titus was exchanged for 604.716525 ordinary shares of the Company (or 1,814.1495
ordinary shares of the Company adjusted for the constructive 3-for-1 stock split
effected on September 30, 2000). The Company is presently operating, and intends
to continue to operate, Titus as a wholly-owned subsidiary of the Company.
STOCK OPTION PLAN
On August 23, 2000, the Company's board of directors and shareholders
approved a new subscription-rights option plan and the grant of subscription
rights exercisable for an aggregate of up to 55,718 ordinary shares (before
giving effect to the constructive 3-for-1 stock split effected on September 30,
2000) at an exercise price of Y276,000 per share to Jupiter's directors,
corporate auditors and employees, to the directors, corporate auditors and
employees of the Company's managed franchises and to directors, corporate
auditors and employees of the Company's unconsolidated managed franchises and
other non-employees. The number of ordinary shares issuable will be adjusted for
stock splits, reverse stock splits and certain other recapitalizations.
Subscription rights for 48,266 ordinary shares were granted on September 11,
2000. The aggregate number of ordinary shares and exercise price, as adjusted
for the constructive 3-for-1 stock split effected on September 30, 2000, are
144,798 and Y92,000, respectively.
The subscription rights for non-management employees will, unless the grant
agreement provides otherwise, vest on the second anniversary of the grant, and
the subscription rights for management employees will, unless the grant
agreement provides otherwise, vest in four equal installments beginning on the
first anniversary of the grant. The subscription rights will expire on August
23, 2010.
The Company will account for the subscription rights granted to the
Company's directors, corporate auditors and employees and to the directors,
corporate auditors and employees of the Company's managed franchises under APB
No. 25, "Accounting for Stock Issued to Employees," and FASB Interpretation No.
44, "Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB No. 25." Based on using the Company's estimated initial
public offering price per ordinary share, there was no intrinsic value to the
subscription rights at the date of grant as each grant is fixed as to the number
of shares and the exercise price at the time of grant exceeds the assumed
initial offering price of Y75,500 per ordinary share. Accordingly, it is
expected that no deferred compensation or charges to operations for the
subscription rights granted to the Company's directors, corporate auditors and
employees and the directors, corporate auditors and employees of the Company's
managed franchises will be recorded.
Subscription rights granted to directors, corporate auditors and employees
of the Company's unconsolidated managed franchises and to other non-employees
will be accounted for in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation," over the vesting periods described above. As of the
date of grant, the estimated fair market value of these subscription rights,
based on the estimated offering price of Y75,500 per share, was approximately
Y422,597 thousand ($3,840 thousand).
STOCK AWARD
On June 26, 2000, Microsoft Holdings V, Inc., a majority shareholder of
Titus and now a principal shareholder of the Company, entered into a restricted
stock agreement with an executive officer of Titus, currently one of the
Company's executive officers. The total number of Titus' restricted ordinary
shares granted in the agreement were converted into 17,704.17 of the Company's
ordinary shares, as adjusted for the constructive stock split effective
September 30, 2000, discussed below. The restricted shares transferred under the
restricted stock agreement will vest, subject to his continued employment by us
as an executive officer or director, in four equal semiannual installments, the
first of which will occur on January 4, 2001. Should the executive officer
fulfill his obligations under the agreement, we will recognize compensation
F-40
<PAGE> 193
JUPITER TELECOMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
expense of Y1,184,300 thousand ($10,761 thousand) over the remaining vesting
period beginning September 1, 2000 in accordance with APB No. 25.
CONSTRUCTIVE STOCK SPLIT
On September 12, 2000, the Company's Board of Directors approved a plan to
issue two additional ordinary shares to the existing shareholders for each share
owned as of September 28, 2000, for a price of Y1 per share. The plan became
effective on September 30, 2000. Such share issuance has been accounted for as a
constructive 3-for-1 stock split under U.S. GAAP. Accordingly, the historical
number of shares outstanding, the number of shares issued, the weighted average
number of ordinary shares outstanding and per share data in the accompanying
consolidated financial statements have been adjusted giving effect to such
constructive 3-for-1 stock split. Also, on September 29, 2000, the Company's
shareholders approved an increase in the number of the Company's authorized
shares to 15,000,000, effective October 1, 2000, which was presented, instead of
the historical number of authorized shares of 1,000,000 at December 31, 1998 and
1999, in the accompanying consolidated financial statements to correspond with
such adjustments in the number of shares.
F-41
<PAGE> 194
TITUS COMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND JUNE 30, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30, JUNE 30,
2000 2000 2000
------------ ------------ -------------
(THOUSANDS OF
(THOUSANDS OF YEN) U.S. DOLLARS)
<S> <C> <C> <C>
Cash, receivables and other assets, net........... Y 5,074,349 Y 5,574,639 $ 50,656
Property and equipment, at cost, net.............. 41,010,840 42,333,079 384,671
Goodwill, net..................................... 1,758,684 1,722,045 15,648
------------ ------------ ---------
Y 47,843,873 Y 49,629,763 $ 450,975
============ ============ =========
Short-term loans, long-term debt and capital lease
obligations..................................... Y 36,592,349 Y 40,044,775 $ 363,878
Other liabilities................................. 7,341,187 6,404,810 58,199
Shareholders' equity:
Common stock
Authorized 1,940,756 shares of no par value
at March 31 and June 30, 2000..............
Issued and outstanding 610,500 shares of no
par value at March 31 and June 30, 2000.... 25,757,740 25,757,740 234,055
Convertible preferred stock of Y50,000 par value
Authorized 1,244 shares at March 31 and June
30, 2000...................................
Issued and outstanding 257 shares at March
31, 2000, 325 shares at June 30, 2000...... 3,212,500 4,062,500 36,915
Additional paid-in capital...................... 3,179,247 5,358,927 48,696
Accumulated deficit............................. (28,239,150) (31,998,989) (290,768)
------------ ------------ ---------
Total shareholders' equity................... 3,910,337 3,180,178 28,898
------------ ------------ ---------
Y 47,843,873 Y 49,629,763 $ 450,975
============ ============ =========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these condensed consolidated balance sheets.
F-42
<PAGE> 195
TITUS COMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 2000
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------- THREE MONTHS ENDED
1999 2000 JUNE 30, 2000
----------- ----------- ------------------
(THOUSANDS OF
(THOUSANDS OF YEN) U.S. DOLLARS)
<S> <C> <C> <C>
Revenue:
Cable TV.................................................. Y 1,081,387 Y 1,398,333 $ 12,706
Internet.................................................. 80,497 585,637 5,322
Telephony................................................. 141,468 329,425 2,993
----------- ----------- --------
1,303,352 2,313,395 21,021
----------- ----------- --------
Operating costs and expenses:
Operating................................................. 629,648 898,426 8,164
Selling, general and administrative (Note 3).............. 1,530,194 3,698,261 33,605
Depreciation and amortization............................. 1,074,195 1,364,157 12,396
----------- ----------- --------
3,234,037 5,960,844 54,165
----------- ----------- --------
Operating loss......................................... (1,930,685) (3,647,449) (33,144)
Other income (expense):
Interest expense, net..................................... (124,321) (124,095) (1,128)
Other income, net......................................... (20,656) 11,705 107
----------- ----------- --------
Loss before income taxes and other items.................. (2,075,662) 3,759,839 (34,165)
Minority interest in net losses of consolidated
subsidiaries........................................... 735 -- --
----------- ----------- --------
Loss before income taxes............................... (2,074,927) (3,759,839) (34,165)
Income taxes.............................................. -- -- --
----------- ----------- --------
Net loss.................................................. Y(2,074,927) Y(3,759,839) $(34,165)
=========== =========== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
------------------------- THREE MONTHS ENDED
1999 2000 JUNE 30, 2000
----------- ----------- ------------------
(IN U.S. DOLLARS,
(IN YEN, EXCEPT ORDINARY EXCEPT ORDINARY
SHARE AMOUNTS) SHARE AMOUNTS)
<S> <C> <C> <C>
Per share data:
Net loss per ordinary share, basic and diluted............ Y (3,399) Y (6,159) $ (55.97)
-------- -------- --------
Weighted average number of common shares outstanding,
basic and diluted...................................... 610,500 610,500 610,500
-------- -------- --------
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
F-43
<PAGE> 196
TITUS COMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
THOUSANDS OF THOUSANDS OF
YEN U.S. DOLLARS
------------ -------------
<S> <C> <C>
Common stock:
Balance at April 1, 2000.................................. Y 25,757,740 $ 234,055
------------ ---------
Balance at June 30, 2000.................................. Y 25,757,740 $ 234,055
============ =========
Convertible preferred stock:
Balance at April 1, 2000.................................. Y 3,212,500 $ 29,191
Convertible preferred stock issued 68 shares in 2000 at
stated value........................................... 850,000 7,724
------------ ---------
Balance at June 30, 2000.................................. Y 4,062,500 $ 36,915
============ =========
Additional paid-in capital:
Balance at April 1, 2000.................................. Y 3,179,247 $ 28,889
Net proceeds of convertible preferred stock in excess of
stated capital......................................... 850,000 7,724
Amortization-issued new shares............................ (6,984) (63)
Capital contribution (Note 3)............................. 1,336,664 12,146
------------ ---------
Balance at June 30, 2000.................................. Y 5,358,927 $ 48,696
============ =========
Accumulated deficit:
Balance at April 1, 2000.................................. Y(28,239,150) $(256,603)
Net loss.................................................. (3,759,839) (34,165)
------------ ---------
Balance at June 30, 2000.................................. Y(31,998,989) $(290,768)
============ =========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
F-44
<PAGE> 197
TITUS COMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 1999 AND 2000
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, THREE MONTHS
---------------------------- ENDED JUNE 30,
1999 2000 2000
------------ ------------ --------------
(THOUSANDS OF YEN) (THOUSANDS OF
U.S. DOLLARS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... Y(2,074,927) Y(3,759,839) $(34,165)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................. 1,074,195 1,364,157 12,396
Loss on disposal/sale of fixed assets......... 9,523 2,053 19
Provision for bad debt........................ -- 6,040 55
Provision for retirement allowance............ 9,502 33,574 305
Minority interest in net losses of
consolidated subsidiaries................... (735) -- --
Stock compensation expense (Note 3)........... -- 1,336,664 12,146
Change in operating assets and liabilities,
net......................................... (2,177,509) (905,943) (8,232)
Other, net.................................... 76,712 59,353 539
----------- ----------- --------
Net cash used in operating activities....... (3,083,239) (1,863,941) (16,937)
----------- ----------- --------
Cash flows from investing activities:
Capital expenditure.............................. (550,862) (1,845,905) (16,773)
Other investments................................ (19,968) (66,606) (605)
----------- ----------- --------
Net cash used in investing activities....... (570,830) (1,912,511) (17,378)
----------- ----------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock........... 375,000 1,693,017 15,384
Net increase (decrease) in short-term bank
loans......................................... 6,800,000 6,500,000 59,064
Principal payments of long-term debt............. (3,500,000) (3,500,000) (31,804)
Principal payments under capital lease
obligations................................... (195,789) (305,116) (2,773)
----------- ----------- --------
Net cash provided by financing activities... 3,479,211 4,387,901 39,871
----------- ----------- --------
Net increase (decrease) in cash and cash
equivalents...................................... (174,858) 611,449 5,556
Cash and cash equivalents at beginning of period... 693,520 1,412,296 12,833
----------- ----------- --------
Cash and cash equivalents at end of period......... Y 518,662 Y 2,023,745 $ 18,389
=========== =========== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the three months for:
Interest......................................... Y 102,220 Y 141,960 $ 1,290
=========== =========== ========
Income tax....................................... Y -- Y -- $ --
=========== =========== ========
Non-cash investing and financing activities:
Property acquired under capital leases during the
three months.................................. Y 283,264 Y 757,542 $ 6,884
=========== =========== ========
Capital contribution (Note 3)...................... Y -- Y 1,336,664 $ 12,146
=========== =========== ========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
F-45
<PAGE> 198
TITUS COMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF FINANCIAL STATEMENTS
BUSINESS AND ORGANIZATION
TITUS Communications Corporation ("Titus") was established on December 19,
1994 for the purpose of constructing, owning and operating cable
telecommunication systems in Japan. Titus' ownership at June 30, 2000 was as
follows:
<TABLE>
<CAPTION>
SHAREHOLDERS OWNERSHIP AT JUNE 30, 2000
------------ --------------------------
<S> <C>
Microsoft Holdings V, Inc. ("Microsoft")............... 57.054%
Itochu Corporation ("Itochu").......................... 19.973
Toshiba Corporation ("Toshiba")........................ 19.973
Lee A. Daniels (See Note 3)............................ 3.000
-------
100.000%
=======
</TABLE>
On June 27, 2000, Titus entered into a definitive stock-for-stock exchange
agreement with Jupiter Telecommunications Co., Ltd. for the purpose of
exchanging the stock of Titus for stock in Jupiter with the effect that Titus
became a wholly-owned subsidiary of Jupiter on September 1, 2000. Each common
share of Titus was exchanged for .32251548 of an ordinary share of Jupiter and
each convertible preferred share of Titus was exchanged for 604.716525 ordinary
shares of Jupiter.
Titus and its subsidiaries own and operate cable telecommunication systems
throughout Japan and provide cable television services, telephony and Internet
connection services. Currently, cable television services account for
approximately 60% of Titus and its subsidiaries' business, while telephony and
Internet services account for the remaining 40%.
The telecommunication industry in Japan is highly regulated by Type 1
License granted by the Ministry of Posts and Telecommunications ("MPT"). In
general, franchise rights granted by the MPT to Titus and its subsidiaries for
operation of cable telecommunication systems in their respective locality are
not exclusive.
As set forth in the accompanying condensed consolidated statements of cash
flows, Titus and its subsidiaries have relied on capital contributions and
financing from shareholders for their liquidity requirements. Negative working
capital as of March 31 and June 30, 2000 was Y24,766,766 thousand and
Y27,868,366 thousand ($253,234 thousand), respectively. Titus and its
subsidiaries anticipate that they will continue to be dependent on financing
from shareholders and/or external sources in order to meet their future
liquidity requirements. If these efforts are not successful, future operations
of Titus and its subsidiaries will be adversely affected.
BASIS OF FINANCIAL STATEMENTS
Titus and its subsidiaries maintain their books of account in conformity
with financial accounting standards of Japan. The condensed consolidated
financial statements presented herein have been prepared in a manner and reflect
certain adjustments which are necessary to conform them with accounting
principles generally accepted in the United States of America. The major
adjustments include those related to accounting for leases, recognition of
certain revenues, postretirement benefits, depreciation and amortization and
accruals for certain expenses.
The accompanying condensed consolidated financial statements reflect all
adjustments which are, in the opinion of the management, necessary to a fair
presentation of the results of operations and financial situation for the
periods presented.
F-46
<PAGE> 199
TITUS COMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Titus and its subsidiaries maintain their accounts in Japanese yen, the
currency of the country in which they are incorporated and principally operate.
The U.S. dollar amounts included herein represent a translation using the
approximate exchange rate quotation of The Bank of Tokyo-Mitsubishi, Ltd. for
selling spot U.S. dollars by telegraphic transfer against yen as of October 31,
2000 of Y110.05 to $1 representation that the yen amounts have been, could have
been, or could in the future be converted into U.S. dollars at the above or any
other rate.
2. CONVERTIBLE PREFERRED STOCK
The holder of a preferred share has one voting right and may convert it
into 1,875 fully paid shares of common stock of Titus with no par value by a
resolution of the Board of Directors. Furthermore, preferred shareholders are
entitled to receive the full aggregate issue price in the return of capital on
liquidation of Titus, before any payment to the holders of any other class of
stock in Titus is made, but are not entitled to any further participation in the
assets or profits such as interest, coupon, dividend or any other type of income
of Titus.
At May 23, 2000, Titus issued 68 shares of convertible preferred stock at
the price of Y25,000 thousand per share, totaling Y1,700,000 thousand ($15,448
thousand), which was fully subscribed by Microsoft in order to obtain operating
funds.
At May 31, 2000, Microsoft acquired all shares of preferred stock of Titus
held by MediaOne.
3. STOCK GRANT
On June 26, 2000, Microsoft, the majority shareholder, and an executive
officer entered into two stock transfer agreements in which Microsoft agreed to
transfer a portion of its shares to the executive officer. Under these
agreements, Microsoft granted a fully-vested stock award of 18,298 shares on
June 26, 2000, and granted another stock award of 18,298 shares on July 4, 2000,
which will vest, subject to certain conditions, in four equal semiannual
installments, the first of which will occur on January 4, 2001. As a result,
Titus recorded compensation expense in the amount of Y1,336,664 thousand
($12,146 thousand) in selling, general and administration expense and capital
contribution from the majority shareholder for the fully-vested stock award
granted on June 26, 2000, and will recognize future compensation expense for the
latter stock award over the vesting period beginning July 2000.
4. RELATED PARTY TRANSACTIONS
Summarized below are significant transactions with related parties for the
three months ended June 30, 1999 and 2000, and the related transactions balances
as of March 31 and June 30, 2000.
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 1999
----------------------------------------------------------------------------
PURCHASE OF
PURCHASE OF PURCHASE OF CABLE
DISTRIBUTION OTHER PROPERTY FRANCHISE TELEVISION INTEREST RENT
TRANSACTIONS: EQUIPMENT AND EQUIPMENT COSTS PROGRAMS EXPENSE EXPENSE
------------- ------------ -------------- --------- ----------- -------- -------
(THOUSANDS OF YEN)
<S> <C> <C> <C> <C> <C> <C>
Itochu and its related
companies....................... Y 57,780 Y7,572 Y -- Y7,071 Y3,117 Y --
Toshiba and its related
companies....................... 137,364 410 -- -- 5,294 --
Higashi Nihon Ferry Co.,
Ltd.("HNF")..................... -- -- -- -- -- 16,978
</TABLE>
F-47
<PAGE> 200
TITUS COMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 2000
----------------------------------------------------------------------------
PURCHASE OF
PURCHASE OF PURCHASE OF CABLE
DISTRIBUTION OTHER PROPERTY FRANCHISE TELEVISION INTEREST RENT
TRANSACTIONS: EQUIPMENT AND EQUIPMENT COSTS PROGRAMS EXPENSE EXPENSE
------------- ------------ -------------- --------- ----------- -------- -------
(THOUSANDS OF YEN)
<S> <C> <C> <C> <C> <C> <C>
Itochu and its related
companies....................... Y 349,790 Y13,794 Y -- Y10,165 Y3,960 Y --
Toshiba and its related
companies....................... 33,250 -- -- -- 4,185 --
HNF............................... -- -- -- -- -- 17,306
</TABLE>
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED JUNE 30, 2000
----------------------------------------------------------------------------
PURCHASE OF
PURCHASE OF PURCHASE OF CABLE
DISTRIBUTION OTHER PROPERTY FRANCHISE TELEVISION INTEREST RENT
TRANSACTIONS: EQUIPMENT AND EQUIPMENT COSTS PROGRAMS EXPENSE EXPENSE
------------- ------------ -------------- --------- ----------- -------- -------
(THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Itochu and its related
companies...................... $3,178 $125 $-- $92 $36 $ --
Toshiba and its related
companies...................... 302 -- -- -- 38 --
HNF.............................. -- -- -- -- -- 157
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
----------------------------------------------------
LEASE PAYABLES LEASE
BALANCES: DEPOSITS TRADE OTHER OBLIGATIONS LOANS
--------- -------- -------- ------ ----------- -------
(THOUSANDS OF YEN)
<S> <C> <C> <C> <C> <C>
Itochu and its related companies............. Y -- Y171,154 Y6,515 Y 917,907 Y --
Toshiba and its related companies............ -- 19,795 199 711,327 --
HNF.......................................... 228,358 -- -- -- 69,200
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
----------------------------------------------------
LEASE PAYABLES LEASE
BALANCES: DEPOSITS TRADE OTHER OBLIGATIONS LOANS
--------- -------- -------- ------ ----------- -------
(THOUSANDS OF YEN)
<S> <C> <C> <C> <C> <C>
Itochu and its related companies............. Y -- Y 40,551 Y7,602 Y 988,641 Y --
Toshiba and its related companies............ -- 15,774 1,185 664,669 --
HNF.......................................... 228,358 -- -- -- 69,200
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000
----------------------------------------------------
LEASE PAYABLES LEASE
BALANCES: DEPOSITS TRADE OTHER OBLIGATIONS LOANS
--------- -------- -------- ------ ----------- -------
(THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C>
Itochu and its related companies............. $ -- $ 368 $ 69 $ 8,984 $ --
Toshiba and its related companies............ -- 143 11 6,040 --
HNF.......................................... 2,075 -- -- -- 629
</TABLE>
Titus' officers and management level employees are seconded from MediaOne,
Itochu and Toshiba to Titus, whose services are charged as payroll costs. The
payroll paid to officers and employees seconded from MediaOne amounted to
Y115,434 thousand and Y172,028 thousand ($1,563 thousand) for the three months
ended June 30, 1999 and 2000, respectively. The payroll paid to officers and
employees seconded from Itochu amounted to Y10,658 thousand and Y10,356 thousand
($94 thousand) for the three months ended June 30, 1999 and 2000, respectively.
The payroll paid to officers and employees seconded from Toshiba amounted to
Y3,325 thousand and Y3,484 thousand ($32 thousand) for the three months ended
June 30, 1999 and 2000, respectively.
F-48
<PAGE> 201
TITUS COMMUNICATIONS CO., LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
5. COMMITMENTS
Commitments outstanding at June 30, 2000 for the purchase of computer
software approximated Y1 billion ($9 million). Titus and its subsidiaries occupy
certain land, offices and other facilities and use certain electric poles and
equipment under cancelable lease arrangements. Rental expense for the three
months ended June 30, 1999 and 2000 totaled Y377,554 thousand and Y410,258
thousand ($3,728 thousand), respectively.
F-49
<PAGE> 202
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of
TITUS Communications Corporation and Subsidiaries:
We have audited the accompanying consolidated balance sheets of TITUS
Communications Corporation (a Japanese corporation) and subsidiaries as of March
31, 1999 and 2000, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended March 31, 2000. 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 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 TITUS
Communications Corporation and subsidiaries as of March 31, 1999 and 2000, and
the related results of their operations and their cash flows for each of the
three years in the period ended March 31, 2000 in conformity with accounting
principles generally accepted in the United States of America.
Our audit also comprehended the translation of Japanese yen amounts into
U.S. dollar amounts and, in our opinion, such translation has been made on the
basis set forth in Note 1.
ARTHUR ANDERSEN
Tokyo, Japan
May 12, 2000 (except for Notes 1(b), 7 and 12 as to which the date is October
31, 2000)
F-50
<PAGE> 203
TITUS COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 2000
<TABLE>
<CAPTION>
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
---------------------------- ------------
1999 2000 2000
------------ ------------ ------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents (Note 1).............. Y 693,520 Y 1,412,296 $ 12,833
Accounts receivable, less allowance for doubtful
accounts of Y40,780 thousand in 1999 and
Y66,106 thousand ($597 thousand) in 2000
(Note 10).................................... 637,389 1,075,850 9,776
Refundable consumption taxes.................... 183,170 220,791 2,006
Prepaid expenses and other...................... 132,945 220,555 2,004
------------ ------------ --------
Total current assets.................... 1,647,024 2,929,492 26,619
Property and equipment, at cost (Notes 1, 3 and
9):
Distribution system and equipment............... 36,302,172 45,752,926 415,747
Buildings and leasehold improvements............ 2,701,664 2,766,385 25,137
Equipment vehicles.............................. 380,355 423,750 3,851
Capitalized computer software................... 588,207 798,635 7,257
Less accumulated depreciation................... (5,247,001) (9,615,320) (87,372)
------------ ------------ --------
34,725,397 40,126,376 364,620
Land............................................ 159,069 490,082 4,453
Construction in progress........................ -- 394,382 3,584
------------ ------------ --------
34,884,466 41,010,840 372,657
Other assets:
Goodwill (Note 1)............................... 1,905,241 1,758,684 15,981
Lease deposits.................................. 1,250,853 1,193,362 10,844
Long-term prepaid expenses (Note 1)............. 817,036 737,960 6,706
Deferred assets and other....................... 197,377 213,535 1,940
------------ ------------ --------
4,170,507 3,903,541 35,471
------------ ------------ --------
Y 40,701,997 Y 47,843,873 $434,747
============ ============ ========
</TABLE>
F-51
<PAGE> 204
TITUS COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND 2000
<TABLE>
<CAPTION>
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
---------------------------- ------------
1999 2000 2000
------------ ------------ ------------
<S> <C> <C> <C>
Current liabilities:
Short-term bank loans (Note 2).................. Y -- Y 16,800,000 $ 152,658
Long-term debt -- current portion (Notes 2, 8
and 9)....................................... 10,300,000 6,600,000 59,973
Capital lease obligations -- current portion
(Notes 3, 8 and 9)........................... 755,181 1,128,279 10,253
Accounts payable................................ 3,029,739 2,114,433 19,213
Accrued expenses and other...................... 1,190,260 1,053,546 9,573
------------ ------------ ---------
Total current liabilities............... 15,275,180 27,696,258 251,670
Long-term debt, less current portion (Notes 2, 8
and 9).......................................... 14,641,000 8,041,000 73,067
Capital lease obligations, less current portion
(Notes 3, 8 and 9).............................. 2,964,406 4,023,070 36,557
Deferred revenue (Note 1)......................... 2,772,309 3,885,360 35,305
Severance and retirement allowance (Notes 1 and
5).............................................. 186,998 287,848 2,616
------------ ------------ ---------
Total liabilities....................... 35,839,893 43,933,536 399,215
------------ ------------ ---------
Minority interest................................. 1,728 -- --
------------ ------------ ---------
Commitments and contingencies (Notes 3 and 11)
Shareholders' equity (Notes 6 and 7):
Common stock
Authorized 667,480 shares of Y50,000 par
value at March 31, 1999, 1,940,756 shares
of non par value at March 31, 2000
Issued and outstanding 478,000 shares of
Y50,000 par value at March 31, 1999,
610,500 shares of non par value at March
31, 2000................................... 23,726,056 25,757,740 234,055
Convertible preferred stock of Y50,000 par value
Authorized 1,244 shares, issued and
outstanding 257 shares at March 31, 2000
(Note 7)................................... -- 3,212,500 29,191
Additional paid-in capital...................... -- 3,179,247 28,889
Accumulated deficit............................. (18,865,680) (28,239,150) (256,603)
------------ ------------ ---------
Total shareholders' equity.............. 4,860,376 3,910,337 35,532
------------ ------------ ---------
Y 40,701,997 Y 47,843,873 $ 434,747
============ ============ =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
F-52
<PAGE> 205
TITUS COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
<TABLE>
<CAPTION>
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
--------------------------------------- -----------------
1998 1999 2000 2000
----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C>
Revenue (Note 1):
Cable TV................................ Y 2,208,393 Y 3,716,517 Y 4,779,290 $ 43,428
Internet................................ -- 77,492 992,876 9,022
Telephony............................... 30,761 288,538 785,999 7,142
----------- ----------- ----------- --------
2,239,154 4,082,547 6,558,165 59,592
Operating costs and expenses (Note 9):
Operating............................... 1,108,064 1,941,775 2,755,317 25,037
Selling, general and administrative..... 5,766,652 6,822,811 8,039,548 73,054
Depreciation and amortization........... 2,033,676 3,368,420 4,639,936 42,162
----------- ----------- ----------- --------
8,908,392 12,133,006 15,434,801 140,253
----------- ----------- ----------- --------
Operating loss....................... (6,669,238) (8,050,459) (8,876,636) (80,661)
Other income (expense) (Note 9):
Interest expense, net................... (285,713) (414,390) (493,542) (4,485)
Other, net.............................. 14,777 74,307 (5,020) (45)
----------- ----------- ----------- --------
Loss before income taxes and other
items................................ (6,940,174) (8,390,542) (9,375,198) (85,191)
Minority interest in net losses of
consolidated subsidiaries............ 268,791 160,558 1,728 16
----------- ----------- ----------- --------
Loss before income taxes............. (6,671,383) (8,229,984) (9,373,470) (85,175)
Income taxes (Note 4)..................... -- -- -- --
----------- ----------- ----------- --------
Net loss.................................. Y(6,671,383) Y(8,229,984) Y(9,373,470) $(85,175)
=========== =========== =========== ========
</TABLE>
<TABLE>
<CAPTION>
IN YEN IN U.S. DOLLARS
--------------------------------------- -----------------
1998 1999 2000 2000
----------- ----------- ----------- -----------------
(IN YEN, EXCEPT SHARE AMOUNTS) (IN U.S. DOLLARS,
EXCEPT SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Per share data:
Net loss per share; basic and diluted... Y (34,978) Y (20,318) Y (17,060) $(155.02)
Weighted average number of common shares
outstanding, basic and diluted.......... 190,733 405,058 549,432 549,432
----------- ----------- ----------- --------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-53
<PAGE> 206
TITUS COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
<TABLE>
<CAPTION>
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
------------------------------------------ ------------
1998 1999 2000 2000
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Common stock:
Balance, beginning of year............. Y 6,537,501 Y 16,778,371 Y 23,726,057 $ 215,593
Common stock issued: 156,040 shares in
1998, 140,000 shares in 1999 and
132,500 shares in 2000.............. 7,727,238 6,947,686 2,031,683 18,462
Conversion of convertible bonds to
common stock of 51,210 shares in
1998................................ 2,513,632 -- -- --
------------ ------------ ------------ ---------
Balance, end of year................... Y 16,778,371 Y 23,726,057 Y 25,757,740 $ 234,055
============ ============ ============ =========
Convertible preferred stock:
Balance, beginning of year............. Y -- Y -- Y -- --
Convertible preferred stock issued 257
shares in 2000...................... -- -- 3,212,500 29,191
------------ ------------ ------------ ---------
Balance, end of year................... Y -- Y -- Y 3,212,500 $ 29,191
============ ============ ============ =========
Additional paid-in capital:
Balance, beginning of year............. Y -- Y -- Y -- $ --
Net proceeds of convertible preferred
stock in excess of stated capital... -- -- 3,179,247 28,889
------------ ------------ ------------ ---------
Balance, end of year................... Y -- Y -- Y 3,179,247 $ 28,889
============ ============ ============ =========
Accumulated deficit:
Balance, beginning of year............. Y (3,964,313) Y(10,635,696) Y(18,865,680) $(171,428)
Net loss............................... (6,671,383) (8,229,984) (9,373,470) (85,175)
------------ ------------ ------------ ---------
Balance, end of year................... Y(10,635,696) Y(18,865,680) Y(28,239,150) $(256,603)
============ ============ ============ =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-54
<PAGE> 207
TITUS COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 31, 1998, 1999 AND 2000
<TABLE>
<CAPTION>
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
----------------------------------------- ------------
1998 1999 2000 2000
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................... Y (6,671,383) Y(8,229,984) Y (9,373,470) $ (85,175)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 2,033,676 3,368,420 4,639,936 42,162
Loss on disposal/sale of fixed assets............ 36,412 15,825 48,148 438
Provision for bad debt........................... 13,555 27,225 35,817 325
Provision for retirement allowance............... 61,001 95,370 100,850 916
Minority interest in net losses of consolidated
subsidiaries................................... (268,791) (160,558) (1,728) (16)
Change in operating assets and liabilities:
Increase in accounts receivable................ (37,595) (342,256) (474,278) (4,309)
(Increase)/decrease in refundable consumption
tax......................................... (64,689) 54,239 (37,621) (342)
(Increase)/decrease in prepaid expenses and
other....................................... (372,108) 308,282 (87,611) (796)
(Increase)/decrease in long-term prepaid
expenses.................................... (116,387) 58,090 64,293 584
Increase/(decrease) in accounts payable........ (177,821) 1,397,014 (915,306) (8,317)
Increase/(decrease) in accrued expenses and
other....................................... 327,069 382,689 (136,714) (1,242)
Increase in deferred revenue................... 873,263 1,056,728 1,113,050 10,114
------------ ----------- ------------ ---------
Net cash used in operating activities.......... (4,363,798) (1,968,916) (5,024,634) (45,658)
------------ ----------- ------------ ---------
Cash flows from investing activities:
Purchase of property and equipment................. (11,093,298) (8,139,563) (8,298,229) (75,404)
Decrease (increase) in lease deposits, net......... (613,898) (461) 57,491 522
Other, net......................................... (74,299) (14,714) (17,328) (157)
------------ ----------- ------------ ---------
Net cash used in investing activities.......... (11,781,495) (8,154,738) (8,258,066) (75,039)
------------ ----------- ------------ ---------
Cash flows from financing activities:
Proceeds from issuance of common stock............. 7,727,238 6,947,685 2,031,683 18,462
Proceeds from issuance of preferred stock.......... -- -- 6,391,747 58,080
Proceeds from issuance of convertible bonds........ 1,028,000 -- -- --
Net increase (decrease) in short-term bank loans... 1,600,000 (1,600,000) 16,800,000 152,658
Proceeds from long-term debt....................... 6,600,000 4,400,000 -- --
Principal payments of long-term debt............... -- -- (10,300,000) (93,594)
Principal payments under capital lease
obligation....................................... (228,275) (477,617) (921,954) (8,378)
------------ ----------- ------------ ---------
Net cash provided by financing activities...... 16,726,963 9,270,068 14,001,476 127,228
------------ ----------- ------------ ---------
Net increase (decrease) in cash and cash
equivalents........................................ 581,670 (853,586) 718,776 6,531
Cash and cash equivalents at beginning of year....... 965,436 1,547,106 693,520 6,302
------------ ----------- ------------ ---------
Cash and cash equivalents at end of year............. Y 1,547,106 Y 693,520 Y 1,412,296 $ 12,833
============ =========== ============ =========
</TABLE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
------------------------------------ ------------
1998 1999 2000 2000
---------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Cash paid during the year for:
Interest.............................................. Y 251,508 Y 399,663 Y 475,839 $ 4,324
========== ========== ========== =======
Income tax............................................ Y -- Y -- Y -- $ --
========== ========== ========== =======
Non-cash investing and financing activities:
Property acquired under capital leases during the
year................................................ Y 815,050 Y2,785,583 Y2,336,084 $21,227
========== ========== ========== =======
Conversion of convertible bonds to common stock....... Y2,560,500 Y -- Y -- $ --
========== ========== ========== =======
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-55
<PAGE> 208
TITUS COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, BASIS OF FINANCIAL STATEMENTS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
BUSINESS AND ORGANIZATION
TITUS Communications Corporation ("Titus") was established on December 19,
1994 for the purpose of constructing, owning and operating cable
telecommunication systems in Japan. Titus' ownership at March 31, 2000 was as
follows:
<TABLE>
<CAPTION>
COMMON STOCK OWNERSHIP
SHAREHOLDERS AT MARCH 31, 2000
------------ ----------------------
<S> <C>
MediaOne International Holdings, Inc.
("MediaOne", a U.S. corporation)............. 60.0%
Itochu Corporation ("Itochu").................. 20.0
Toshiba Corporation ("Toshiba")................ 20.0
-----
100.0%
=====
</TABLE>
Subsequent to March 31, 2000, all shares of common and preferred (see Note
7) stock of Titus held by MediaOne were acquired by Microsoft Holdings V, Inc.
("Microsoft").
Titus and its subsidiaries own and operate cable telecommunication systems
throughout Japan and provide cable television services, telephony and Internet
connection services. Currently, cable television services account for
approximately 73% of Titus and its subsidiaries' business, while telephony and
Internet services account for the remaining 27%.
The telecommunication industry in Japan is highly regulated by Type I
License granted by the Ministry of Posts and Telecommunications ("MPT"). In
general, franchise rights granted by the MPT to Titus and its subsidiaries for
operation of cable telecommunication systems in their respective locality are
not exclusive.
As set forth in the accompanying consolidated statements of cash flows,
Titus and its subsidiaries have relied on capital contributions and financing
from shareholders for their liquidity requirements. Negative working capital as
of March 31, 1999 and 2000 were Y13,628,156 thousand and Y24,766,766 thousand
($225,050 thousand), respectively. Titus and its subsidiaries anticipate that
they will continue to be dependent on financing from shareholders and/or
external sources in order to meet their future liquidity requirements. If these
efforts are not successful, future operations of Titus and its subsidiaries will
be adversely affected. See also Note 3.
BASIS OF FINANCIAL STATEMENTS
Titus and its subsidiaries maintain their 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 them with accounting principles
generally accepted in the United States of America. The major adjustments
include those related to accounting for leases, recognition of certain revenues,
postretirement benefits, depreciation and amortization and accruals for certain
expenses.
F-56
<PAGE> 209
TITUS COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Consolidation Policy
The accompanying consolidated financial statements include the accounts of
Titus and its subsidiaries as follows:
- TITUS Sotetsu Corporation (Formed in January 1996)
- TITUS SCAT Corporation ("SCAT") (Acquired from third party in March 1997)
All significant intercompany balances and transactions have been
eliminated. For the consolidated subsidiaries with negative equity position,
Titus has recognized the entire amount of cumulative losses of such subsidiaries
regardless of its ownership percentage.
Titus has accounted for as goodwill the cost in excess of fair value of the
net assets acquired of SCAT accounted for as a purchase acquisition in March
1997. Goodwill is amortized over a 15-year period on a straight-line basis.
(b) Translation into U.S. Dollars
Titus and its subsidiaries maintain their accounts in Japanese yen, the
currency of the country in which it is incorporated and principally operates.
The U.S. dollar amounts included herein represent a translation using the
approximate exchange rate quotation of The Bank of Tokyo - Mitsubishi, Ltd. for
selling spot U.S. dollars by telegraphic transfer against yen as of October 31,
2000 of Y110.05 to $1 solely for convenience of readers outside Japan. The
translation should not be construed as a representation that the yen amounts
have been, could have been, or could in the future be converted into U.S.
dollars at the above or any other rate.
(c) Use of Estimates
Management of Titus has made a number of estimates and assumptions relating
to the reporting of assets and liabilities and the disclosure of contingent
liabilities to prepare these consolidated financial statements in conformity
with generally accepted accounting principles in the United States of America.
Actual results could differ from those estimates.
(d) Revenue Recognition
Titus and its subsidiaries recognize revenues from cable television,
telephony and Internet services as 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 direct selling costs. In accordance with Statement of Financial
Accounting Standard (SFAS) No. 51, "Financial Reporting by Cable Television
Companies," any remaining amount is deferred and recognized over the estimated
average period that the subscribers are expected to remain connected to the
system.
The Company and its subsidiaries provide poor reception rebroadcasting
services to non-cable television viewers suffering from poor reception of
television waves caused by obstacles. The Company and its subsidiaries enter
into agreements with the parties that have built the 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
F-57
<PAGE> 210
TITUS COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
agreement periods which are generally 15-30 years. Such revenues are included in
cable TV revenue in the accompanying consolidated statements of operations.
(e) Cable Television System Costs, Expenses and Revenues
Titus 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. SFAS No. 51 requires that programming and other
system costs that were incurred during prematurity period in anticipation of
servicing a fully operating system and that would not vary significantly
regardless of the number of subscribers for future operations be deferred. SFAS
No. 51 also requires costs of successful franchise applications to be
capitalized. Costs incurred during the prematurity period and franchise costs
capitalized are included in deferred assets and are being amortized over 10 and
5 years, respectively. Currently, there is no significant system that falls in a
prematurity period as defined by SFAS No. 51.
(f) Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid debt instruments with
an initial maturity of three months or less. Cash and cash equivalents are
carried at cost, which approximates market value.
(g) 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. Equipment under capital leases is
stated at the present value of minimum lease payments. Depreciation is computed
on a straight-line method using estimated useful lives ranging from 6 to 15
years for distribution system and equipment and from 3 to 20 years for others.
Equipment under capital lease is amortized on a straight-line basis over the
shorter of the lease term or estimated useful life of the asset.
Ordinary maintenance and repairs are charged to income as incurred. Major
replacements and improvements are capitalized. When properties are retired or
otherwise disposed of, the property and related accumulated depreciation
accounts are relieved of the applicable amounts and any differences are included
in other income or expenses.
(h) Long-term Prepaid Expenses
Long-term prepaid expenses primarily represent prepaid rent fees of office
and system operators' buildings and unrefundable lease deposits. Prepaid rent
has been charged to expense when incurred and unrefundable lease deposits have
been amortized over contract periods ranging from 5 to 45 years.
(i) Income Taxes
Income taxes are provided based on income for financial reporting purposes.
Deferred income taxes are recognized under the asset and liability method for
the estimated future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
(j) Severance and Retirement Plan
Titus 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." These subsidiaries have local
severance payment plans under which accrued severance liabilities are stated
F-58
<PAGE> 211
TITUS COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
on the vested benefits obligation basis, which is the amount required to be paid
if all eligible employees voluntarily terminated their employment as of the
balance sheet date. Accrued severance liabilities for these subsidiaries were
Y27,529 thousand and Y35,050 thousand ($318 thousand) at March 31, 1999 and
2000, respectively, and were included in severance and retirement allowance in
the accompanying consolidated balance sheets.
(k) Long-Lived Assets
Titus and its subsidiaries' long-lived assets including 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 a comparison of the carrying amount of
an asset to future net cash flows (undiscounted and without interest charges)
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 exceed 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.
(l) Loss Per Share
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding during each period. Diluted net loss
per share reflects the potential dilution and is computed on the basis that all
convertible debentures or contracts to issue common stock were converted at the
beginning of year or at time of issuance, if later. Diluted net loss per share
produced the same result as basic net loss per share due to the anti-dilutive
effect.
(m) Advertising Expense
Advertising expense is charged to income as incurred and is included in
selling, general and administrative expenses in the accompanying consolidated
statements of operations.
2. SHORT-TERM BANK LOANS AND LONG-TERM DEBT
Short-term bank loans of Y16,800,000 thousand ($152,658 thousand) at March
31, 2000 represented loans from commercial banks with fixed maturity. Interest
rates of such loans were ranging from 0.61% to 1.28% at March 31, 2000. The
weighted-average interest rate and balance for the year ended March 31, 2000
were 1.19% and Y8,223,333 thousand ($74,724 thousand), respectively. All
short-term bank loans are guaranteed by the principal shareholder.
A summary of long-term debt at March 31, 1999 and 2000 is as follows:
<TABLE>
<CAPTION>
THOUSANDS OF THOUSANDS OF
YEN U.S. DOLLARS
--------------------------- ------------
1999 2000 2000
------------ ----------- ------------
<S> <C> <C> <C>
Secured interest-free loans from
Development Bank of Japan, due fiscal
2003 through 2012........................ Y 3,571,800 Y 3,571,800 $ 32,456
Unsecured interest-free loan from Higashi
Nihon Ferry Co., Ltd. due fiscal 2003
through 2012............................. 69,200 69,200 629
Bank loans guaranteed by a shareholder,
interest from 1.42% to 2.08%, due through
fiscal 2002.............................. 21,300,000 11,000,000 99,955
------------ ----------- --------
Total................................. Y 24,941,000 Y14,641,000 $133,040
Maturing within one year................... (10,300,000) (6,600,000) (59,973)
------------ ----------- --------
Y 14,641,000 Y 8,041,000 $ 73,067
============ =========== ========
</TABLE>
F-59
<PAGE> 212
TITUS COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Secured interest-free loan represents institutional loans from Development
Bank of Japan borrowed by SCAT, which have been made available to
telecommunication companies operating in specific local areas designated by MPT
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 secured by mortgage, among other
things. Property and equipment of SCAT with the net book value of Y3,527,655
thousand and Y3,356,550 thousand ($30,500 thousand) are pledged as collateral
for such interest-free loans from Development Bank of Japan as of March 31, 1999
and 2000, respectively.
Unsecured interest-free loan has been provided to SCAT from Higashi Nihon
Ferry Co., Ltd. ("HNF"), its former parent company. Since the acquisition of the
majority of shares of SCAT by Titus in March 1997, HNF has been the second
largest shareholder of SCAT.
The aggregate annual maturities of long-term loans outstanding at March 31,
2000 are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF
YEAR ENDING MARCH 31, THOUSANDS OF YEN U.S. DOLLARS
--------------------- ---------------- ------------
<S> <C> <C>
2001......................................... Y 6,600,000 $ 59,973
2002......................................... 4,400,000 39,983
2003......................................... 364,100 3,308
2004......................................... 364,100 3,308
2005......................................... 364,100 3,308
Thereafter................................... 2,548,700 23,160
----------- --------
Total........................................ Y14,641,000 $133,040
=========== ========
</TABLE>
3. LEASES
Titus and its subsidiaries are obligated under various non-cancelable
capital leases, primarily for home terminals, equipment vehicles, and telephone
equipment, which expire at various dates during the next six years.
At March 31, 1999 and 2000, the gross amount of equipment and related
accumulated depreciation recorded under capital leases were as follows:
<TABLE>
<CAPTION>
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
------------------------ ------------
1999 2000 2000
---------- ----------- ------------
<S> <C> <C> <C>
Distribution system and equipment................ Y4,133,192 Y 6,383,084 $ 58,002
Equipment vehicles............................... 375,634 419,533 3,812
---------- ----------- --------
Sub-total...................................... 4,508,826 6,802,617 61,814
Less: accumulated depreciation................... (814,298) (1,707,344) (15,514)
---------- ----------- --------
Total.......................................... Y3,694,528 Y 5,095,273 $ 46,300
========== =========== ========
</TABLE>
F-60
<PAGE> 213
TITUS COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under capital leases as of March 31, 2000 are
as follows:
<TABLE>
<CAPTION>
THOUSANDS OF
YEAR ENDING MARCH 31, THOUSANDS OF YEN U.S. DOLLARS
--------------------- ---------------- ------------
<S> <C> <C>
2001......................................... Y 1,226,944 $ 11,149
2002......................................... 1,199,788 10,902
2003......................................... 1,116,130 10,142
2004......................................... 963,606 8,756
2005......................................... 699,767 6,359
Thereafter................................... 218,512 1,986
Total minimum lease payments................. 5,424,747 49,294
Less: amount representing interest (rates ranging
from 0.50% to 6.04%)............................ (273,398) (2,484)
----------- --------
Present value of the net minimum payments......... 5,151,349 46,810
Less: current portion............................. (1,128,279) (10,253)
----------- --------
Y 4,023,070 $ 36,557
=========== ========
</TABLE>
4. INCOME TAXES
Titus and its subsidiaries are subject to Japanese national, regional and
municipal taxes based on income. Due to government enacted tax rate reductions,
the aggregate normal tax rate for the years ended March 31, 1998, 1999 and 2000
were approximately 51%, 48% and 42%, respectively. Deferred income taxes were
principally calculated at the rate of 42%.
The effects of temporary differences that give rise to deferred tax assets
and liabilities at March 31, 1999 and 2000 are as follows:
<TABLE>
<CAPTION>
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
------------------------------- ------------
1999 2000 2000
-------------- -------------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Operating loss carryforwards................. Y 7,425,433 Y 11,611,127 $ 105,508
Deferred revenue............................. 1,163,907 1,631,851 14,828
Depreciation and amortization................ 62,076 -- --
Accrual for compensation..................... 241,167 447,379 4,065
Other........................................ 29,138 95,381 867
----------- ------------ ---------
Total gross deferred tax assets........... 8,921,721 13,785,738 125,268
Less: valuation allowance.................... (8,883,602) (13,563,074) (123,245)
----------- ------------ ---------
Deferred tax assets.......................... 38,119 222,664 2,023
----------- ------------ ---------
Deferred tax liabilities:
Depreciation and amortization................ -- (189,023) (1,718)
Capitalization of programming costs and other
system costs, net......................... (38,119) (33,641) (305)
----------- ------------ ---------
Total gross deferred tax liabilities...... (38,119) (222,664) 2,023
----------- ------------ ---------
Net deferred tax assets...................... Y -- Y -- $ --
=========== ============ =========
</TABLE>
Due to the uncertainty in realization of the future tax benefits, the net
deferred tax asset at March 31, 1999 and 2000 is fully offset by a valuation
allowance as of March 31, 1999 and 2000.
F-61
<PAGE> 214
TITUS COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of March 31, 2000, Titus and its subsidiaries had net operating loss
carryforwards for income tax purposes of approximately Y27,645,541 thousand
($251,209 thousand) which were available to offset future taxable income. These
carryforwards will expire as follows:
<TABLE>
<CAPTION>
THOUSANDS OF
YEAR ENDING MARCH 31, THOUSANDS OF YEN U.S. DOLLARS
--------------------- ---------------- ------------
<S> <C> <C>
2001......................................... Y 600,945 $ 5,461
2002......................................... 2,032,487 18,469
2003......................................... 6,819,071 61,963
2004......................................... 7,977,384 72,489
2005......................................... 10,215,654 92,827
----------- --------
Total........................................ Y27,645,541 251,209
=========== ========
</TABLE>
5. SEVERANCE AND RETIREMENT PLANS
Under the 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.
Net periodic cost of Titus' plan accounted for in accordance with SFAS No.
87 for the years ended March 31, 1998, 1999 and 2000, included the following
components:
<TABLE>
<CAPTION>
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
----------------------------- ------------
1998 1999 2000 2000
------- -------- -------- ------------
<S> <C> <C> <C> <C>
Service cost -- benefits earned during the
year....................................... Y64,672 Y 98,738 Y102,200 $929
Interest cost on projected benefit
obligation................................. 706 2,840 5,253 48
Net amortization and deferral................ -- 228 -- --
------- -------- -------- ----
Net periodic cost.......................... Y65,378 Y101,806 Y107,453 $977
======= ======== ======== ====
</TABLE>
Amount of actuarial loss in excess of ten percent of benefit obligation has
been amortized over the average remaining service period of 23 years.
The reconciliations of beginning and ending balances of the benefit
obligations of Titus' plan accounted for in accordance with SFAS No. 87 are as
follows:
<TABLE>
<CAPTION>
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
------------------- ------------
1999 2000 2000
-------- -------- ------------
<S> <C> <C> <C>
Change in benefit obligation:
Benefit obligation, beginning of year.............. Y 94,676 Y175,084 $ 1591
Service cost....................................... 98,738 102,200 929
Interest cost...................................... 2,840 5,253 48
Actuarial loss..................................... 1,200 45,751 415
Benefits paid...................................... (22,370) (14,123) (128)
-------- -------- ------
Benefit obligation, end of year.................... Y175,084 Y314,165 $2,855
======== ======== ======
</TABLE>
The weighted-average discount rate and the rate of compensation increase
used in determining costs of Titus' plan was 3.0% and 2.0%, respectively, for
the years ended March 31, 1998, 1999 and 2000.
F-62
<PAGE> 215
TITUS COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY
Under the Japanese Commercial Code (the "Code"), the amount available for
dividends is based on retained earnings as recorded on the books of Titus
maintained in conformity with financial accounting standards of Japan. Certain
adjustments not recorded on Titus' books are reflected in the consolidated
financial statements for reasons described in Note 1. At March 31, 2000, the
deficit recorded on Titus' books of account was Y16,291,686 thousand ($148,039
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 equals 25% of the
issued capital. The Code also provides that both additional paid-in capital and
the legal reserve are not available for cash dividends, but may be used to
reduce a capital deficit by resolution of the shareholders or may be capitalized
by resolution of the Board of Directors.
The Code provides that at least one-half of the issue price of new shares
regardless of type of shares, with a minimum of the par value thereof, be
included in common stock.
On March 11, 1998, Y2,560,500 thousand of convertible bonds held by
principal shareholders were converted into 51,210 shares of Y50,000 par value
common stock.
On June 30, 1999, 485,500 outstanding shares of Y50,000 par value common
stock were converted into 485,500 shares of non par value common stock.
7. CONVERTIBLE PREFERRED STOCK
During the year ended March 31, 2000, Titus issued 257 shares of
convertible preferred stock at the price of Y25,000 thousand per share, totaling
Y6,425,000 thousand, which was fully subscribed by MediaOne in order to obtain
additional operating funds. The holder of a preferred share has one voting right
and may convert it into 1,875 fully paid shares of common stock of Titus with no
par value by a resolution of the Board of Directors. Furthermore, preferred
shareholders are entitled to receive the full aggregate issue price in the
return of capital on liquidation of Titus, before any payment to the holders of
any other class of stock in Titus is made, but are not entitled to any further
participation in the assets or profits such as interest, coupon, dividend or any
other type of income of Titus. These shares of convertible preferred stock will
be converted in connection with the stock-for-stock exchange scheduled to close
on September 1, 2000. See Note 12.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
For financial instruments other than long term loans and lease obligations,
the carrying amount approximates fair value because of the short maturity of
these instruments. Based on the borrowing rates currently available to Titus for
bank loans with similar terms and average maturities, the fair value of long-
term debt and capital lease obligations at March 31, 1999 and 2000 are as
follows:
<TABLE>
<CAPTION>
THOUSANDS OF
THOUSANDS OF YEN U.S. DOLLARS
-------------------------- ------------
1999 2000 2000
----------- ----------- ------------
<S> <C> <C> <C>
Long-term debt.............................. Y25,287,197 Y14,694,055 $133,522
Lease obligation............................ Y 3,911,275 Y 5,398,336 $ 49,053
</TABLE>
F-63
<PAGE> 216
TITUS COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS
Summarized below are significant transactions with related parties for the
years ended March 31, 1998, 1999 and 2000, and the related transaction balances
as of March 31, 1999 and 2000.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1998
----------------------------------------------------------------------------
PURCHASE OF PURCHASE OF PURCHASE OF
DISTRIBUTION OTHER PROPERTY FRANCHISE CABLE TV INTEREST RENT
TRANSACTIONS: EQUIPMENT AND EQUIPMENT COSTS PROGRAMS EXPENSE EXPENSE
------------- ------------ -------------- --------- ----------- -------- -------
(THOUSANDS OF YEN)
<S> <C> <C> <C> <C> <C> <C>
Itochu and its related
companies...................... Y 368,516 Y212,614 Y -- Y 9,041 Y 6,154 Y --
Toshiba and its related
companies...................... 1,582,975 21,225 33,375 -- 6,589 --
HNF.............................. -- -- -- -- -- 45,996
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 1999
----------------------------------------------------------------------------
PURCHASE OF PURCHASE OF PURCHASE OF
DISTRIBUTION OTHER PROPERTY FRANCHISE CABLE TV INTEREST RENT
TRANSACTIONS: EQUIPMENT AND EQUIPMENT COSTS PROGRAMS EXPENSE EXPENSE
------------- ------------ -------------- --------- ----------- -------- -------
(THOUSANDS OF YEN)
<S> <C> <C> <C> <C> <C> <C>
Itochu and its related
companies...................... Y 285,405 Y 13,494 Y -- Y46,940 Y11,057 Y --
Toshiba and its related
companies...................... 2,429,259 77,394 25,333 -- 8,748 --
HNF.............................. -- -- -- -- -- 74,085
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 2000
----------------------------------------------------------------------------
PURCHASE OF PURCHASE OF PURCHASE OF
DISTRIBUTION OTHER PROPERTY FRANCHISE CABLE TV INTEREST RENT
TRANSACTIONS: EQUIPMENT AND EQUIPMENT COSTS PROGRAMS EXPENSE EXPENSE
------------- ------------ -------------- --------- ----------- -------- -------
(THOUSANDS OF YEN)
<S> <C> <C> <C> <C> <C> <C>
Itochu and its related
companies...................... Y1,137,135 Y 38,918 Y -- Y33,113 Y13,109 Y --
Toshiba and its related
companies...................... 547,308 4,695 -- -- 19,512 --
HNF.............................. -- -- -- -- -- 71,954
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED MARCH 31, 2000
----------------------------------------------------------------------------
PURCHASE OF PURCHASE OF PURCHASE OF
DISTRIBUTION OTHER PROPERTY FRANCHISE CABLE TV INTEREST RENT
TRANSACTIONS: EQUIPMENT AND EQUIPMENT COSTS PROGRAMS EXPENSE EXPENSE
------------- ------------ -------------- --------- ----------- -------- -------
(THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C>
Itochu and its related
companies...................... $ 10,333 $ 354 $ -- $ 301 $ 119 $ --
Toshiba and its related
companies...................... 4,973 43 -- -- 177 --
HNF.............................. -- -- -- -- -- 654
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------------------------------------
LEASE PAYABLES LEASE
BALANCES: DEPOSITS TRADE OTHER OBLIGATIONS LOANS
--------- -------- ------ -------- ----------- -------
(THOUSANDS OF YEN)
<S> <C> <C> <C> <C> <C>
Itochu and its related companies............... Y -- Y4,628 Y216,689 Y707,749 Y --
Toshiba and its related companies.............. -- -- 946 908,873 --
HNF............................................ 228,358 -- -- -- 69,200
</TABLE>
F-64
<PAGE> 217
TITUS COMMUNICATIONS CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
------------------------------------------------------
LEASE PAYABLES LEASE
BALANCES: DEPOSITS TRADE OTHER OBLIGATIONS LOANS
--------- -------- -------- -------- ----------- -------
(THOUSANDS OF YEN)
<S> <C> <C> <C> <C> <C>
Itochu and its related companies............. Y -- Y171,154 Y 6,515 Y917,907 Y --
Toshiba and its related companies............ -- 19,795 199 711,327 --
MediaOne and its related companies........... -- -- 86,544 -- --
HNF.......................................... 228,358 -- -- -- 69,200
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
------------------------------------------------------
LEASE PAYABLES LEASE
BALANCES: DEPOSITS TRADE OTHER OBLIGATIONS LOANS
--------- -------- -------- -------- ----------- -------
(THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C>
Itochu and its related companies............. $ -- $ 1,555 $ 59 $ 8,341 $ --
Toshiba and its related companies............ -- 180 2 6,464 --
MediaOne and its related companies........... -- -- 786 -- --
HNF.......................................... 2,075 -- -- -- 629
</TABLE>
Titus' officers and management level employees are seconded from MediaOne,
Itochu and Toshiba to Titus, whose services are charged as payroll costs. The
payroll paid to officers and employees seconded from MediaOne amounted to
Y324,122 thousand, Y178,023 thousand and Y551,831 thousand ($5,014 thousand) for
the years ended March 31, 1998, 1999 and 2000, respectively. The payroll paid to
officers and employees seconded from Itochu amounted to Y74,148 thousand,
Y53,380 thousand and Y60,401 thousand ($549 thousand) for the years ended March
31, 1998, 1999 and 2000, respectively. The payroll paid to officers and
employees seconded from Toshiba amounted to Y50,695 thousand, Y24,323 thousand
and Y13,806 thousand ($125 thousand) for the years ended March 31, 1998, 1999
and 2000, respectively.
10. CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject Titus and its subsidiaries
to concentrations of credit risk consist principally of accounts receivable.
Titus management believes that the risk associated with accounts receivable is
mitigated by the large number of customers comprising its customer base.
11. COMMITMENTS
Commitments outstanding at March 31, 2000 for the purchase of computer
software approximated Y1 billion ($9 million). Titus and its subsidiaries occupy
certain land, offices and other facilities and use certain electric poles and
equipment under cancelable lease arrangements. Rental expense for the year ended
March 31, 1999 and 2000 totaled Y1,129,562 thousand and Y1,207,939 thousand
($10,976 thousand), respectively.
12. SUBSEQUENT EVENT
In June 2000, Titus entered into a definitive stock for stock exchange
agreement with Jupiter Telecommunications Co., Ltd. ("Jupiter") for the purpose
of exchanging the stock of Titus for stock in Jupiter with the effect that Titus
would become a wholly-owned subsidiary of Jupiter. The closing took place on
September 1, 2000. Each share of Titus common stock was converted into
0.32251548 of an ordinary share of Jupiter. Each convertible preference share of
Titus was converted into 604.716525 ordinary shares of Jupiter.
F-65
<PAGE> 218
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
944,000 ORDINARY SHARES
DIRECTLY OR IN THE FORM OF AMERICAN DEPOSITARY SHARES
JUPITER TELECOMMUNICATIONS CO., LTD.
[J-COM LOGO]
------------
PROSPECTUS
, 2000
------------
NIKKOSALOMONSMITHBARNEY
GOLDMAN, SACHS & CO.
------------------------
MERRILL LYNCH & CO.
DAIWA SECURITIES AMERICA, INC.
CAZENOVE INC.
NOMURA SECURITIES INTERNATIONAL, INC.
--------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER IS NOT
PERMITTED. THE INFORMATION INCLUDED WITHIN THIS PROSPECTUS IS ONLY ACCURATE AS
OF THE DATE ON THE FRONT OF THIS PROSPECTUS.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 219
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses to be paid by us, other than
the underwriting discounts payable by us in connection with the sale of the
ordinary shares being registered for sale in the global offering. All amounts
shown are estimates except for the SEC registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT TO BE PAID
-----------------
<S> <C>
SEC registration fee........................................ $ 198,127
NASD filing fee............................................. 30,500
Nasdaq National Market listing fee.......................... 121,700
Blue Sky qualification fees and expenses.................... 15,000
Printing and engraving expenses............................. 3,072,000
Legal fees and expenses..................................... 2,445,000
Accounting fees and expenses................................ 1,000,000
Director and officer liability insurance.................... 25,000
Transfer agent and registrar fees........................... 25,000
Miscellaneous expenses...................................... 1,967,673
----------
Total..................................................... $8,900,000
==========
</TABLE>
ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Articles 254 and 280 of the Japanese Commercial Code make the provisions of
Articles 643 to 656 of the Civil Code of Japan applicable to the relationship
between the registrant and its directors and corporate auditors, respectively.
These Articles, among other things, provide in effect that:
(1) Any director or corporate auditor of a company may demand
advance payment of expenses which are considered necessary for
the management of the affairs of such company entrusted to him;
(2) If a director or a corporate auditor of a company has defrayed
any expenses which are considered necessary for the management
of the affairs of such company entrusted to him, he may demand
reimbursement therefor from the company;
(3) If a director or a corporate auditor has assumed an obligation
necessary for the management of the affairs entrusted to him, he
may require the company to perform it in his place or, if it is
not due, to furnish adequate security; and
(4) If a director or a corporate auditor, without any fault on his
part, sustains damage through the management of the affairs
entrusted to him, he may demand compensation therefor from the
company.
Under Article 279-2 of the Japanese Commercial Code, a company may not
refuse a demand from a corporate auditor referred to in subparagraphs (1)
through (3) above unless the company establishes that the relevant expense or
obligation was or is not necessary for the performance of the corporate
auditor's duties.
The directors and corporate auditors of the Registrant maintain liability
insurance to cover themselves against, among others, claims asserted against or
liabilities incurred by them in connection with their performance of duties in
their respective capacities as such. The premium for the insurance is paid by
the Registrant, except for the premium for the special coverage portion of the
insurance relating to (i) liability determined in a final judgment of a court of
competent jurisdiction, or determined in a settlement, to be owed by a director
or corporate auditor to the registrant and (ii) any expenses incurred by such
director or
II-1
<PAGE> 220
corporate auditor in connection with the defense against, or the settlement of,
the claim which results in determination of such liability.
ITEM 7. RECENT SALES OF UNREGISTERED SECURITIES.
Pursuant to a series of private financings, we sold at a price of Y50,000
per ordinary share:
- an aggregate of 120,000 ordinary shares to Sumitomo Corporation and
Liberty Japan, Inc., formerly known as TCI Japan, Inc., on May 14, 1997;
- an aggregate of 64,000 ordinary shares to Sumitomo and Liberty Japan on
September 17, 1997;
- an aggregate of 40,000 ordinary shares to Sumitomo and Liberty Japan on
January 21, 1998;
- an aggregate of 80,000 ordinary shares to Sumitomo and Liberty Japan on
April 10, 1998;
- an aggregate of 124,000 ordinary shares to Sumitomo and Liberty Japan on
July 28, 1999;
- an aggregate of 54,000 ordinary shares to Sumitomo and Liberty Japan on
February 26, 2000; and
- an aggregate of 66,000 ordinary shares to Sumitomo, Liberty Japan and
Liberty Jupiter on May 10, 2000.
On September 1, 2000, in connection with our acquisition of Titus
Communications Corporation, we issued an aggregate of 393,428.58 ordinary shares
to Microsoft Holdings V, Inc., Itochu Corporation, Toshiba Corporation and Lee
A. Daniels.
On September 11, 2000, we granted subscription rights exercisable for an
aggregate of 48,266 ordinary shares at an exercise price of Y276,000 per
ordinary share to Jupiter's directors, corporate auditors and employees, to the
directors, corporate auditors and employees of our managed franchises and to
other non-employees. The issuance of these subscription-rights were deemed to be
exempt from registration under the Securities Act in reliance on Section 4(2),
Regulation S and Rule 701 of the Securities Act.
On September 30, 2000, for purposes of adjusting our capitalization
structure in anticipation of the global offering, we issued an aggregate of
2,622,857.16 ordinary shares at Y1 per ordinary share, which we have accounted
for as a constructive 3-for-1 stock split. The securities issuances set forth
above do not reflect this constructive 3-for-1 stock split.
There were no underwriters employed in connection with any of these
transactions. Unless otherwise indicated, the issuance of these securities were
deemed to be exempt from registration under the Securities Act in reliance on
Section 4(2) of the Securities Act.
II-2
<PAGE> 221
ITEM 8. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Overseas Underwriting Agreement among the Registrant
and the Overseas Underwriters named in Schedule I thereto
1.2++ Form of Japanese Underwriting Agreement among the Registrant
and the Japanese Underwriters*
1.3++ Form of Japanese Underwriting Agreement among the
Registrant, Toshiba Corporation, Itochu Corporation and the
Japanese Underwriters*
1.4 Form of Letter Agreement among the Registrant, Toshiba
Corporation, Itochu Corporation and the Overseas
Underwriters
2.1 Stock-for-Stock Exchange Agreement, dated June 27, 2000,
between the Registrant and Titus Communications Corporation*
2.2 Share Exchange Relationship Agreement, dated June 27, 2000,
among Microsoft Holdings V, Inc., Microsoft Corporation,
Itochu Corporation, Toshiba Corporation, Sumitomo
Corporation, Liberty Jupiter, Inc., Liberty Japan, Inc. and
Liberty Media Corporation
3.1 Articles of Incorporation*
3.2 Share Handling Rules, as amended, of the Registrant*
3.3 Rules of the Board of Directors of the Registrant*
3.4 Rules of the Board of Corporate Auditors of the Registrant*
4.1 Specimen certificate of the Registrant representing the
ordinary shares*
4.2 Form of Deposit Agreement among the Registrant, The Bank of
New York, as depositary, and all owners and holders from
time to time of American Depositary Receipts, including the
form of American Depositary Receipt
4.3 Form of Registration Rights Agreement
4.4 Form of Shareholders Agreement among Sumitomo Corporation,
Liberty Media Corporation, Liberty Jupiter, Inc., Liberty
Japan, Inc., Microsoft Corporation and Microsoft Holdings V,
Inc.
5.1 Form of opinion of Nishimura & Partners, Japanese counsel to
the Registrant
10.1 Long Term Carriage Agreement, dated February 21, 2000,
between the Registrant and Jupiter Programming Company, Ltd.
10.2 Lease Agreement, dated June 16, 2000, for the property
located at Higashi-Ikebukuro Center Building 8F, 41-24,
Higashi-Ikebukuro 4-chome, Toshima-ku, Tokyo 170-0013,
Japan*
10.3 Form of Agreement on Grant of Subscription Rights of New
Shares (for Managers)*
10.4 Form of Agreement on Grant of Subscription Rights of New
Shares (for Non-Managers)*
10.5 Form of Debt Indemnity Agreement among the Registrant,
Microsoft Corporation, Sumitomo Corporation and Liberty
Media Corporation
21.1 Subsidiaries of Registrant
23.1 Consent of Arthur Andersen, independent public accountants
23.2++ Consent of Nishimura & Partners, Japanese counsel to the
Registrant (included in Exhibit 5.1)
24.1 Power of Attorney (included on page II-4)
</TABLE>
---------------
* Indicates an English translation of a Japanese language document.
++ To be filed by amendment.
II-3
<PAGE> 222
(b) Financial Statement Schedules
Schedules not listed above have been omitted because the information
required to be set forth therein is either not applicable, not material or is
shown in the financial statements or notes thereto.
ITEM 9. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the registrant for liabilities arising under
the Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions referenced in
Item 6 of this registration statement or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is against policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities, other than the
payment by the registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any action,
suit or proceeding, is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at the time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 223
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form F-1 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Tokyo, Japan, on November 8, 2000, at 09:30 (November 7, 2000,
Washington, D.C.).
JUPITER TELECOMMUNICATIONS CO., LTD.
By /s/ TSUNETOSHI ISHIBASHI
------------------------------------
Tsunetoshi Ishibashi
Representative Director, Chairman
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Tsunetoshi Ishibashi and Vernon A.
Chamberlin, and each of them acting individually, as his true and lawful
attorneys-in-fact and agents, each with full power of substitution, for him in
any and all capacities, to sign any and all amendments to this registration
statement, including post-effective amendments or any abbreviated registration
statement and any amendments thereto filed pursuant to Rule 462(b) increasing
the number of securities for which registration is sought, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, with full power of each to act alone, full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully for all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or his or their substitute or substitutes, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ TSUNETOSHI ISHIBASHI Representative Director, Chairman November 8, 2000
------------------------------------------ (Principal Executive Officer)
Tsunetoshi Ishibashi
/s/ LEE A. DANIELS Representative Director, President November 8, 2000
------------------------------------------
Lee A. Daniels
/s/ VERNON A. CHAMBERLIN Representative Director, November 8, 2000
------------------------------------------ Executive Vice President
Vernon A. Chamberlin
/s/ SUSUMU SHOJI Managing Director, Finance and November 8, 2000
------------------------------------------ Accounting (Principal Financial and
Susumu Shoji Accounting Officer)
/s/ YASUFUMI HIRAYAMA Managing Director November 8, 2000
------------------------------------------
Yasufumi Hirayama
/s/ TSUGUHITO AOKI Director November 8, 2000
------------------------------------------
Tsuguhito Aoki
/s/ MIRANDA T. C. CURTIS Director November 8, 2000
------------------------------------------
Miranda T. C. Curtis
</TABLE>
II-5
<PAGE> 224
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ SUSUMU FURUKAWA Director November 8, 2000
------------------------------------------
Susumu Furukawa
/s/ GRAHAM HOLLIS Director November 8, 2000
------------------------------------------
Graham Hollis
/s/ ATSUSHI NISHIJO Director November 8, 2000
------------------------------------------
Atsushi Nishijo
/s/ YASUSHIGE NISHIMURA Director November 8, 2000
------------------------------------------
Yasushige Nishimura
/s/ YUJI TAMURA Director November 8, 2000
------------------------------------------
Yuji Tamura
/s/ HENRY P. VIGIL Director November 8, 2000
------------------------------------------
Henry P. Vigil
</TABLE>
II-6
<PAGE> 225
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF THE REGISTRANT
Pursuant to the requirement of the Securities Act of 1933, the undersigned,
the duly authorized representative in the United States of Jupiter
Telecommunications Co., Ltd., has signed this registration statement in the City
of Englewood, State of Colorado, on November 7, 2000.
/s/ GRAHAM HOLLIS
--------------------------------------
Graham Hollis
Authorized Representative in the
United States
II-7
<PAGE> 226
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Overseas Underwriting Agreement among the Registrant
and the Overseas Underwriters named in Schedule I thereto
1.2++ Form of Japanese Underwriting Agreement among the Registrant
and the Japanese Underwriters*
1.3++ Form of Japanese Underwriting Agreement among the
Registrant, Toshiba Corporation, Itochu Corporation and the
Japanese Underwriters*
1.4 Form of Letter Agreement among the Registrant, Toshiba
Corporation, Itochu Corporation and the Overseas
Underwriters
2.1 Stock-for-Stock Exchange Agreement, dated June 27, 2000,
between the Registrant and Titus Communications Corporation*
2.2 Share Exchange Relationship Agreement, dated June 27, 2000,
among Microsoft Holdings V, Inc., Microsoft Corporation,
Itochu Corporation, Toshiba Corporation, Sumitomo
Corporation, Liberty Jupiter, Inc., Liberty Japan, Inc. and
Liberty Media Corporation
3.1 Articles of Incorporation*
3.2 Share Handling Rules, as amended, of the Registrant*
3.3 Rules of the Board of Directors of the Registrant*
3.4 Rules of the Board of Corporate Auditors of the Registrant*
4.1 Specimen certificate of the Registrant representing the
ordinary shares*
4.2 Form of Deposit Agreement among the Registrant, The Bank of
New York, as depositary, and all owners and holders from
time to time of American Depositary Receipts, including the
form of American Depositary Receipt
4.3 Form of Registration Rights Agreement
4.4 Form of Shareholders Agreement among Sumitomo Corporation,
Liberty Media Corporation, Liberty Jupiter, Inc., Liberty
Japan, Inc., Microsoft Corporation and Microsoft Holdings V,
Inc.
5.1 Form of opinion of Nishimura & Partners, Japanese counsel to
the Registrant
10.1 Long Term Carriage Agreement, dated February 21, 2000,
between the Registrant and Jupiter Programming Co., Ltd.
10.2 Lease Agreement, dated June 16, 2000, for the property
located at Higashi-Ikebukuro Center Building 8F, 41-24,
Higashi-Ikebukuro 4-chome, Toshima-ku, Tokyo 170-0013,
Japan*
10.3 Form of Agreement on Grant of Subscription Rights of New
Shares (for Managers)*
10.4 Form of Agreement on Grant of Subscription Rights of New
Shares (for Non-Managers)*
10.5 Form of Debt Indemnity Agreement among the Registrant,
Microsoft Corporation, Sumitomo Corporation and Liberty
Media Corporation
21.1 Subsidiaries of Registrant
23.1 Consent of Arthur Andersen, independent public accountants
23.2++ Consent of Nishimura & Partners, Japanese counsel to the
Registrant (included in Exhibit 5.1)
24.1 Power of Attorney (included on page II-4)
</TABLE>
---------------
* Indicates an English translation of a Japanese language document.
++ To be filed by amendment.
