<PAGE>
As filed with the Securities and Exchange Commission on December 13, 1999
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
----------------
United Pan-Europe Communications N.V.
(Exact name of registrant as specified in its charter)
The Netherlands 4841
(State or other jurisdiction of (Primary Standard Industrial
incorporation or organization) Classification Code Number)
98-0191997
(I.R.S. Employer Identification
No.)
Fred. Roeskestraat 123
P.O. Box 74763
1076 EE Amsterdam, The Netherlands
+31 20 778 9840
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
Michael T. Fries, Chairman
c/o UnitedGlobalCom, Inc.
4643 South Ulster Street, Suite 1300
Denver, Colorado 80237
(303) 770-4001
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
Nick Nimmo, Esq.
Holme Roberts & Owen LLP
1700 Lincoln Street, Suite 4100
Denver, Colorado 80203
(303) 861-7000
----------------
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
----------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, 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(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. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Amount Offering maximum maximum
Title of each class of to be price aggregate amount of
securities to be registered registered per unit(1) offering price(1) registration fee(2)
- --------------------------- ----------------- ----------- ----------------- -------------------
<S> <C> <C> <C> <C>
10 7/8% Senior Notes due
2007................... $ 200,000,000 100% $ 200,000,000
10 7/8% Senior Notes due
2007................... (Euro)100,000,000 100% (Euro)100,000,000
11 1/4% Senior Notes due
2009................... $ 252,000,000 99.262% $ 250,140,240
11 1/4% Senior Notes due
2009................... (Euro)101,000,000 99.262% (Euro)100,254,620
13 3/8% Senior Discount
Notes due 2009......... $ 478,000,000 52.306% $ 250,022,680
13 3/8% Senior Discount
Notes due 2009......... (Euro)191,000,000 52.306% (Euro)99,904,460 $269,770
</TABLE>
- --------------------
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 of the Securities Act of 1933, as amended.
(2) Calculated pursuant to Rule 457(f)(2) based on the $1,021,855,535 book
value on December 10, 1999 of the notes to be received by the Registrant in
the exchange described herein.
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 of 1933, as amended, or until this registration statement
shall become effective on such date as the Commission, acting pursuant to said
section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this preliminary 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 is not +
+soliciting an offer to buy these securities in any state where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
DATED DECEMBER 13, 1999
PRELIMINARY PROSPECTUS
[LOGO OF UPC]
Offer to Exchange
$200,000,000 of 10 7/8% Senior Notes due 2007
(Euro)100,000,000 of 7/8% Senior Notes due 2007
$252,000,000 of 11 1/4% Senior Notes due 2009
(Euro)101,000,000 of 11 1/4% Senior Notes due 2009
$478,000,000 of 13 3/8% Senior Discount Note due 2009
(Euro)191,000,000 of 13 3/8% Senior Discount Notes due 2009
of
United Pan-Europe Communications N.V.
for substantially identical Series B Notes
registered under the Securities Act
- --------------------------------------------------------------------------------
Terms of the Exchange Offer
. The exchange offer expires at 12:00 p.m. New York City time (5:00 p.m.,
London time) on January , 2000, unless we extend the expiration date.
. We will exchange all old notes that you validly tender and do not validly
withdraw.
. You may withdraw tenders of old notes any time prior to the expiration of
the exchange offer.
. The exchange offer is not subject to any condition, other than that it not
violate applicable law or any applicable interpretation of the staff of the
Securities and Exchange Commission.
. We will not receive any proceeds from the exchange offer.
. Your exchange of old notes for new notes will not be a taxable exchange for
U.S. federal income tax purposes.
. The terms of the new notes and the old notes are substantially identical,
except for transfer restrictions, registration rights and liquidated damages
that apply to the old notes.
. There is no existing market for the new notes, and we do not intend to apply
for their listing on any securities exchange other than the Luxembourg Stock
Exchange.
See the "Description of the Notes" section on page 168 for more information
about the notes to be issued in this exchange offer.
This investment involves risks. See the section entitled "Risk Factors" that
begins on page 17 for a discussion of the risks that you should consider prior
to tendering your old notes for exchange.
-----------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is
a criminal offense.
-----------
The date of this prospectus is December , 1999
<PAGE>
[MAP]
/1/Since our initial public offering in February 1999.
<TABLE>
<CAPTION>
[LOGO OF UNITED PAN- [LOGO OF PRIORITY [LOGO OF CHELLO
EUROPE COMMUNICATIONS] TELECOM] BROADBAND]
<S> <C> <C>
. Established, highly . Offering residential and . Providing high speed
penetrated cable networks business services at Internet/data services
discounted pricing
. 10.8 million aggregate . 168,100 aggregate . 79,025 aggregate Internet
franchise homes telephone lines (72,750 subscribers
cable telephone lines)
. 8.8 million aggregate homes . European market . E-commerce/advertising,
passed deregulation content aggregation and
integration
. 5.8 million aggregate . Number portability . Flat fee, "always on"
subscribers service
</TABLE>
One stop shopping for all personal and business communication needs.
<PAGE>
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of UPC have
not changed since the date hereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary...................................................... 1
Risk Factors............................................................ 17
Disclosure Regarding Foreward Looking Statements........................ 28
The Exchange Offer...................................................... 29
Use of Proceeds......................................................... 35
Exchange Rate Data...................................................... 36
Capitalization.......................................................... 37
Unaudited Pro Forma Condensed Consolidated Financial Data............... 39
Selected Consolidated Financial Data.................................... 49
Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 51
Business................................................................ 78
Regulation.............................................................. 130
Management.............................................................. 151
Security Ownership of Certain Beneficial Owners and Management ......... 162
Certain Transactions and Relationships ................................. 163
Description of the Notes................................................ 168
Description of Other Debt............................................... 212
Certain Tax Consequences................................................ 219
Legal Matters........................................................... 226
Experts................................................................. 226
Enforcement of Civil Liabilities........................................ 227
Available Information................................................... 227
General Information..................................................... 228
Index To Financial Statements........................................... F-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in our notes. You should read the entire prospectus carefully,
especially the risks of investing in our notes discussed under "Risk Factors."
Unless otherwise stated, the information presented in this prospectus has
not been adjusted for the acquisitions described below under "New Acquisitions
since our Initial Public Offering" that have not yet been completed or were
completed after September 30, 1999. The acquisitions of Kabel Haarlem, Monor
and Golden Channels have not yet been completed and are subject to certain
closing conditions, including regulatory approvals. There can be no assurance
that all such approvals will be obtained or conditions satisfied and,
accordingly, these acquisitions may not be completed.
Some of the financial and operating figures appearing in this prospectus are
qualified by the terms "aggregate," "proportionate" and "consolidated." When we
refer to information as "aggregate," we mean that the information is given in
respect of all systems in which we hold any equity interest that we either
consolidate or account for using the equity method for financial accounting
purposes in accordance with the applicable generally accepted accounting
principles as though we wholly owned them. When we refer to information as
"proportionate," we mean that we have multiplied the figures attributable to
each operating system in which we own any equity interest by our percentage of
the equity of that system we own. When we refer to information as
"consolidated," we mean that the figures that we present are the sum of those
for all systems we consolidate in accordance with applicable generally accepted
accounting principles. All references in the prospectus to "guilders" and "NLG"
are to Dutch guilders and all references to "dollars" and "$" are to United
States dollars. We have calculated all conversions in this prospectus between
dollars and Dutch guilders on the basis of September 30, 1999 exchange rates
except (1) for conversion of purchase prices of closed acquisitions and our
October 1999 equity and debt offerings for which we have used the actual
exchange rate on the date of closing and (2) as otherwise indicated.
General Information About Us and Our Business
Overview
We own and operate broadband communications networks in 12 countries in
Europe and in Israel. We provide communications services in many European
countries through our three business lines: cable television, telephone and
Internet/data services. Our subscriber base is one of the largest of any group
of broadband communications networks operated across Europe.
Our Western European systems are located in Austria, Belgium, France, The
Netherlands, Norway and Sweden. These systems are located in the capital cities
of Vienna, Brussels, Amsterdam, Oslo and Stockholm, as well as suburban Paris.
Our Central and Eastern European systems are located in the Czech Republic,
Hungary, Poland, Romania and the Slovak Republic. These operations are located
in the capital cities of Prague, Budapest, Warsaw, Bucharest and Bratislava. We
also have operations in distinct regions in the Czech Republic, Romania, and
the Slovak Republic and, in the case of Poland, in eight regional clusters
centered around eight of the ten major cities. We also have systems in Israel
and Malta located in and around the cities of Tel Aviv and Valletta.
We intend to continue to increase our presence in the European market
through acquisitions as the European telecommunications market consolidates,
and to implement our branded package of video, voice and Internet/data product
offerings in systems we acquire. In February 1999, we completed our initial
public offering and, as of December 10, 1999, our equity market capitalization
was approximately NLG 34.7 billion ($16.0 billion).
Our existing operating companies consist primarily of highly penetrated,
mature, broadband systems that generate stable cash flow. As of September 30,
1999, our average aggregate cable television subscriber penetration
1
<PAGE>
rate was 65.7%. Our average monthly cable television subscriber churn during
1998 was less than 1% for our basic video services. Some of our key operating
statistics as of September 30, 1999 are as follows:
. On an aggregate basis, our systems had about 10.0 million homes in their
service areas. Of these, approximately 8.2 million homes were passed by
the cable in our network and thus were capable of receiving our video
services. About 5.3 million of these homes, or approximately 65.4% of the
homes passed, subscribed to our basic video services.
. Adjusted for the completion of all of our new acquisitions, on an
aggregate basis, our systems would have had 10.8 million homes in their
license areas, 8.8 million of which were passed by our networks. About
5.8 million of these homes, or approximately 65.7% of the homes passed,
would have subscribed to our basic video services.
. On a proportionate basis, 4.9 million subscribers, or 65.4% of the homes
passed, subscribe to our basic video services. Adjusted for completion of
all of our new acquisitions, on a proportionate basis, our systems would
have had 5.3 million subscribers to our basic video services, or 65.7% of
the homes passed.
We have undertaken a significant upgrade of our cable television
infrastructure, beginning in 1994 with our Western European systems. When we
upgrade, we replace parts of the coaxial cable with fiber optic lines and
upgrade the remaining coaxial cable to increase transmission speed and enable
signals to be sent both to and from the subscriber's home. This upgrading
enables us to provide digital video, telephone and Internet/data services. As
of September 30, 1999, the upgraded parts of our existing networks in Austria,
Belgium, France, Norway and The Netherlands passed about 60.6% of the 4.1
million homes passed by those networks and we anticipate that, by the end of
1999, upgraded systems will pass 61.1% of homes in those service areas. We have
also begun to upgrade our Central and Eastern European systems. As of September
30, 1999, on an aggregate basis, our existing systems had approximately 72,750
cable telephone lines and approximately 79,025 high speed Internet access
subscribers.
Our large existing customer base, combined with our upgraded network,
provides us with an opportunity to add to our cash flow by selling additional
services, such as enhanced video, telephone and Internet/data services, to our
existing cable subscribers. Once the network upgrade is complete, these
additional services can be added at a relatively low incremental cost. During
the nine months ended September 30, 1999, we increased the number of cable
telephone and Internet access subscribers by approximately 46,000 and 54,700,
respectively, which represent 118.9% and 224.8% increases from December 31,
1998, respectively.
In addition to the intrinsic growth of our existing systems, we have
expanded our coverage by selectively acquiring cable television and
telecommunications systems and by increasing our ownership percentage in some
systems. Since our initial public offering in February 1999, we acquired or
agreed to acquire 12 systems in Europe that pass a total of 5.4 million homes
with a total of 3.6 million subscribers, plus an additional 181,550 direct-to-
home ("DTH") subscribers in Poland, as of September 30, 1999. For example, we
recently acquired @Entertainment, Inc., which owns and operates cable
television and DTH systems in Poland, and the remaining 50% interest in A2000,
our Amsterdam system. Our strategy also has included disposing of some minority
ownership interests where we could not acquire control. Our continuing program
of acquisitions and consolidation allows us to upgrade and improve our current
services, to achieve substantial economies of scale and to implement our
branded package of video, voice and Internet/data product offerings.
2
<PAGE>
New Business Lines
We believe the European telecommunications market offers significant growth
opportunities. Most European Union member countries and Norway had opened their
telephone industries to competition by January 1, 1998. This liberalization
means that new providers like our company can offer telephone and other
telecommunications services in addition to core broadband, cable-based video
services. As a result of these regulatory changes and technological advances, a
single cable connection to the home or business can deliver video, telephone
and Internet/data services. We can now offer all three services as an
integrated package in those Western European markets where we have upgraded our
network. We believe that our upgraded networks, combined with our ability to
leverage our existing subscriber base, give us a considerable advantage over
existing fixed line operators and over other new market entrants.
We offer local telephone services under the brand name Priority Telecom in
our Austrian, Dutch, French and Norwegian systems. A2000 has offered cable
telephone services since July 1997. By September 30, 1999, A2000 served
approximately 36,100 lines (including business lines) covering approximately
30,075 cable telephone subscribers. We launched cable telephone services in
Vienna in February 1999, in suburban Paris in March 1999, in Oslo in April
1999, and in The Netherlands in Arnhem in May 1999 and in Apeldoorn and
Eindhoven in June 1999.
Under our chello broadband brand name, we have introduced a portal service
giving high speed access to the Internet through cable modems. Cable modem
technology can provide Internet access at speeds significantly faster than
traditional modems that use telephone lines. Through our chello broadband
portal, we see significant opportunities to increase revenues through the
offering of content, e-commerce and advertising.
We believe that we can further increase the attractiveness of our video
service offerings by providing additional programming content on our video and
Internet services. We intend to enhance the quality of our content through
development of our own existing programming businesses and through acquisition
of interests in other programming businesses. We already are pursuing this
strategy through UPC tv, which launched two channels in April 1999 and plans to
launch three more by the end of 1999 (see "Business--UPC Video Services: Video
Distribution and Programming--Continue to Develop Programming Business"). In
February 1999, we acquired from our majority shareholder, UnitedGlobalCom, Inc.
("United"), a 33.5% interest in Iberian Programming Services, Inc. ("IPS"), a
group of programming entities focusing on the Spanish- and Portuguese-speaking
markets. We increased our interest in IPS to 50% in May 1999. In addition,
through our acquisition of @Entertainment, we acquired a programming business
in Poland. We also recently purchased a strategic interest in another
programming business, SBS Broadcasting S.A. ("SBS"), which is chartered in
Luxembourg and primarily operates in Sweden and in eight other countries in
Europe.
3
<PAGE>
New Acquisitions Since our Initial Public Offering
We have made or agreed to make the following acquisitions since our initial
public offering in February 1999. Terel, our minority owned Israeli system, has
agreed to purchase a 35% economic interest in Golden Channels, an Israeli
system with approximately 322,925 subscribers as of December 30, 1998. The
acquisitions of Kabel Haarlem, Monor and Golden Channels are subject to a
number of significant closing conditions, including regulatory approvals, that
may not be satisfied. These acquisitions may not, therefore, close. See "Risk
Factors--Our acquisitions strategy involves significant risks" and "Business--
Operating Companies."
<TABLE>
<CAPTION>
Video
Subscribers Actual
Ownership at September 30, (Scheduled(*))
Company Interest Location 1999 Closing Date
------- --------- ------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
Operating Systems:
UTH................... 49%(/1/) The Netherlands 868,100 February 1999
GelreVision........... 100% The Netherlands 132,400 June 1999
A2000................. 50%(/2/) The Netherlands 515,250 September 1999
Kabel Haarlem......... 100% The Netherlands 66,000 First Quarter 2000*
RCF................... 95.7% France 74,000 June 1999
Time Warner Cable
France............... 100% France 79,750 August 1999
Videopole............. 100% France 143,150 August 1999
Stjarn................ 100% Sweden 241,350 July 1999
@Entertainment........ 100% Poland 983,925 August 1999
+181,550
DTH
subscribers
SKT (now UPC
Slovensko)........... 100% Slovak Republic 160,750 June 1999
Kabel Plus............ 94.6% Czech Republic 435,000 October 1999
Slovak Republic
Monor................. 47.5%(/3/) Hungary 32,000 December 1999*
Programming Companies:
IPS................... 50% Spanish- and n/a February/May 1999
Portuguese-speaking
markets
SBS................... 13.3% Scandinavia and n/a July/August 1999
Eastern Europe
</TABLE>
- -------------------
(1) We acquired the 49% of UTH that we did not already own.
(2) We acquired the 50% of A2000 that we did not already own.
(3) We have agreed to acquire an additional 47.5% of Monor.
Joint Venture with Microsoft and Liberty Media
In September 1999, we agreed to form a joint venture with Microsoft and
Liberty Media Corporation. We will contribute the 5.6 million Class A shares of
United that we own and the other parties will contribute 9.8 million Class B
shares of United. We will have a 50% interest in the new joint venture and
Liberty and Microsoft will share the other 50% and a $287.0 million redeemable
preferred interest in the joint venture to balance out the parties' ownership
interests. We, together with Liberty and Microsoft, will evaluate content and
distribution opportunities in Europe. Liberty holds interests in a broad range
of video programming, communications, technology and Internet businesses in the
United States, Europe, South America and Asia. In addition to expanding our
programming and distribution opportunities, the joint venture will further
strengthen our technological services relationship with Microsoft.
4
<PAGE>
The joint venture will hold approximately 14.5% of United's common stock on
a fully diluted basis. The joint venture and its members will be bound by
voting and standstill agreements with United and certain of its controlling
shareholders.
Historical Growth
Most of our operating systems have provided video services for a long time.
These systems have grown significantly over the past few years, both in terms
of the number of subscribers and revenues. We have grown by developing our
existing systems and strategically acquiring cable television systems. The
operating information in the tables below demonstrates this growth.
The first table shows aggregate operating data for all of the systems in
which we have an interest. The second table presents proportionate operating
data for our operating companies. The fifth column in each table shows the data
as of September 30, 1999, as adjusted for our new acquisitions.
<TABLE>
<CAPTION>
As Adjusted
for New
Historical Acquisitions
------------------------------------------- -------------
As of December 31, As of As of
----------------------------- September 30, September 30,
1996 1997 1998 1999 1999
--------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Aggregate Operating Data
Homes in our service
areas.................... 4,007,760 4,134,656 5,645,738 10,035,646 10,785,646
Homes passed by cable in
our networks............. 3,254,865 3,553,756 4,664,345 8,174,339 8,796,399
Homes passed by two-way
cable.................... -- 966,510 1,932,922 2,910,857 2,911,657
Basic video subscribers... 2,061,197 2,311,708 3,414,820 5,345,701 5,780,701(1)
Telephone subscribers..... -- 3,255 38,686 84,691 85,491
Internet/data subscrib-
ers...................... -- 2,037 24,338 79,039 79,039
<CAPTION>
As Adjusted
for New
Historical Acquisitions
------------------------------------------- -------------
As of December 31, As of As of
----------------------------- September 30, September 30,
1996 1997 1998 1999 1999
--------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Proportionate Operating Data
Homes in our service
areas.................... 2,650,156 2,870,982 4,037,037 9,303,990 10,013,490
Homes passed by cable in
our networks............. 2,088,108 2,351,539 3,193,000 7,530,696 8,119,108
Homes passed by two-way
cable.................... -- 539,546 1,187,634 2,672,331 2,673,088
Basic video subscribers... 1,321,004 1,514,606 2,200,251 4,926,658 5,338,168
Telephone subscribers..... -- 1,628 15,111 79,380 80,137
Internet/data subscrib-
ers...................... -- 1,735 15,956 77,547 77,457
</TABLE>
- --------------------
(1)Excludes 181,550 DTH subscribers in Poland.
5
<PAGE>
Summary Operating and Financial Data
In the tables below, the "UPC Ownership Interest" column shows the
percentage we own of the operating systems or programming companies in which we
have an interest. The remaining columns show aggregate operating data and
historical financial information for these systems or programming companies.
The information for our systems in France, the Czech Republic, Romania and the
Slovak Republic has been adjusted to take account of ownership percentages of
multiple systems. The adjusted financial information for the nine months ended
September 30, 1999 has been translated at the relevant exchange rate as of
September 30, 1999.
<TABLE>
<CAPTION>
Adjusted Financial
Information For the
Nine Months
Aggregate Operating Data Ended
as of September 30, 1999 September 30, 1999
------------------------------------------------------ -------------------
Homes
UPC in our Two-Way Basic Basic
Ownership Service Homes Homes Video Video Adjusted
Interest Area Passed Passed Subscribers Penetration Revenue EBITDA(2)
----------- ---------- --------- --------- ----------- ----------- --------- ---------
(unaudited)
(Dutch guilders,
Western European Systems in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Austria................. 95.0% 1,081,710 908,030 734,440 461,589 50.8% 155,329 58,327
Belgium................. 100.0% 133,090 133,090 131,816 123,952 93.1% 27,331 4,289
France.................. 95.7-99.6% 1,265,827 900,020 238,309 331,029 36.8% 86,720 (7,914)
The Netherlands......... 100.0% 1,710,192 1,652,887 1,311,887 1,515,802 91.7% 331,609 86,596
Norway.................. 100.0% 529,000 466,742 44,492 324,469 69.5% 76,133 15,509
Sweden.................. 100.0% 770,000 421,624 72,679 241,359 57.2% 49,955 8,939
---------- --------- --------- --------- --------- --------
Subtotal............... 5,489,819 4,482,393 2,533,623 2,998,200 66.9% 727,077 165,746
Other Systems
Israel.................. 46.6% 610,500 599,443 377,234 415,754 69.4% 259,233 115,649
Malta................... 50.0% 175,000 167,744 -- 75,000 44.7% 24,501 10,044
---------- --------- --------- --------- --------- --------
Subtotal............... 785,500 767,187 377,234 490,754 64.0% 283,734 125,693
Central and Eastern
European Systems
Poland(1)............... 100% 1,950,000 1,705,569 -- 983,947 57.7% 126,263 (187,147)
Hungary:
UPC Magyarorszag....... 79.3% 901,500 624,898 -- 498,325 79.7% 53,474 18,175
Monor.................. 47.5% 85,000 70,061 -- 32,011 45.7% 30,940 20,022
Czech Republic.......... 94.6%-100.0% 989,484 782,558 800 491,638 62.8% 46,024 7,169
Romania................. 51.0%-100.0% 240,000 143,274 -- 94,234 65.8% 3,931 1,625
Slovak Republic......... 95.0%-100.0% 344,343 220,399 -- 191,592 86.9% 10,384 4,200
---------- --------- --------- --------- --------- --------
Subtotal............... 4,510,327 3,546,759 800 2,291,747 64.6% 271,016 (135,956)
Total on an aggregate
basis................. 10,785,646 8,796,339 2,911,657 5,780,701 65.7% 1,281,827 155,483
========== ========= ========= ========= ========= ========
Total on a
proportionate basis... 10,013,490 8,119,108 2,673,088 5,338,168 65.7% 1,091,880 70,708
========== ========= ========= ========= ========= ========
</TABLE>
- -------------------
(1) Excluding 181,550 DTH subscribers.
(2) Excludes costs sustained at the parent level. See "Unaudited Pro Forma
Condensed Consolidated Financial Data."
<TABLE>
<CAPTION>
Adjusted
Adjusted for the Nine
as of Months Ended
September 30, 1999 September 30, 1999
------------------ -------------------
UPC
Ownership Adjusted
Interest Revenue EBITDA
------------------ --------- ---------
(unaudited)
(Dutch guilders,
Programming in thousands)
<S> <C> <C> <C>
Tara (United Kingdom)................... 80.0% 1,358 (7,100)
IPS (Spain and Portugal)................ 50.0% 43,521 19,209
SBS..................................... 13.3% 572,472 13,811
--------- --------
Total on a proportionate basis.......... 98,986 5,762
========= ========
</TABLE>
6
<PAGE>
We have presented "Adjusted EBITDA" statistics in the table above and
elsewhere in this prospectus. The term "Adjusted EBITDA" represents earnings
before:
. net interest expense,
. income tax expense,
. depreciation,
. amortization,
. stock-based compensation charges,
. minority interest,
. share in results of affiliated companies (net),
. currency exchange gains (losses), and
. other non-operating income (expense) items.
Industry analysts generally consider Adjusted EBITDA to be a helpful way to
measure the performance of cable television operations and communications
companies like us. We believe Adjusted EBITDA helps investors to assess the
cash flow from our operations from period to period and thus to value our
business. Adjusted EBITDA should not, however, be considered a replacement for
net income, cash flows or for any other measure of performance or liquidity
under generally accepted accounting principles, or as an indicator of a
company's operating performance. We are not free to use the cash represented by
our Adjusted EBITDA as we please. Several of our consolidated operating
companies are restricted by the terms of their debt arrangements. Each company
has its own operating expenses and capital expenditure requirements, which can
limit our use of cash. Our presentation of Adjusted EBITDA may not be
comparable to statistics with a similar name reported by other companies. Not
all companies and analysts calculate Adjusted EBITDA in the same manner.
Strategic Relationships
United currently owns approximately 55.1% of our outstanding ordinary shares
A. Because we are a strategic holding of United, United is likely to continue
to control us for the foreseeable future. United is a leading provider of
video, voice and Internet/data services in Europe (through us), the
Asia/Pacific region and Latin America. At September 30, 1999, on an aggregate
basis, United's systems passed 13.0 million homes and served 6.6 million basic
video subscribers. Measured by the percentage it holds of its operating
systems, United's systems passed 8.4 million homes and served 3.9 million
subscribers. United's Class A common shares are traded on the Nasdaq National
Market System under the symbol "UCOMA." As of December 10, 1999, United had an
equity market capitalization of approximately $6.5 billion (NLG 13.4 billion).
In our initial public offering, Microsoft Corporation purchased
approximately 10.2 million, or 7.8%, of our ordinary shares A. In January 1999,
we signed a letter of intent with Microsoft to establish a technical services
relationship and agreed to set up a series of joint projects to deliver
Internet, non-traditional telephone and other interactive video and general
services to digital cable set-top devices, personal computers and other devices
within and beyond our service areas. We and Microsoft would also be preferred
suppliers to one another, with Microsoft having the first opportunity to
license technologies to us. As part of this technology relationship, we have
agreed to grant Microsoft warrants to purchase up to 3.8 million of our
ordinary shares A. Microsoft also has the right to acquire 10% of chello
broadband N.V. See "Certain Transactions and Relationships--Relationship with
Microsoft."
Our Address and Telephone Number
Our office address is Fred. Roeskestraat 123, 1076 EE Amsterdam, The
Netherlands. Our telephone number is +31 20 778 9840.
7
<PAGE>
The Exchange Offer
On October 29, 1999, we issued $200,000,000 of 10 7/8% Senior Notes due
2007, (Euro)100,000,000 of 10 7/8% Senior Notes due 2007, $252,000,000 of 11
1/4% Senior Notes due 2009, (Euro)101,000,000 of 11 1/4% Senior Notes due 2009,
$478,000,000 of 13 3/8% Senior Discount Notes due 2009 and (Euro)191,000,000 of
13 3/8% Senior Discount Notes due 2009 to the following initial purchasers:
. Morgan Stanley & Co. International Limited
. Donaldson, Lufkin & Jenrette International
. Goldman Sachs International
. Merrill Lynch International
. TD Securities (USA) Inc.
These initial purchasers then sold the old notes in an offering exempt from
the registration requirements of the Securities Act.
Simultaneously with the private placement, we entered into a registration
rights agreement with the initial purchasers of the old notes. Under the
registration rights agreement, we must deliver this prospectus to you.
You may exchange your old notes for new notes, which have substantially
identical terms, except that the new notes will be freely transferable by the
holders except as otherwise provided in this prospectus. The exchange offer
satisfies your rights under the registration rights agreement. After the
exchange offer is over, you will not be entitled to any exchange or
registration rights with respect to your old notes, except under limited
circumstances.
The exchange offer.......... We are offering to exchange:
. $200,000,000 total principal amount of
Series B 10 7/8% Senior Notes due 2007,
which have been registered under the
Securities Act, for your outstanding 10
7/8% senior dollar notes; and
. (Euro)100,000,000 total principal amount
of 10 7/8% Series B Senior Notes due
2007, which have been registered under
the Securities Act, for your outstanding
10 7/8% senior euro notes.
. $252,000,000 total principal amount of
Series B 11 1/4% Senior Notes due 2009,
which have been registered under the
Securities Act, for your outstanding 11
1/4% senior dollar notes; and
. (Euro)101,000,000 total principal amount
of 11 1/4% Series B Senior Notes due
2009, which have been registered under
the Securities Act, for your outstanding
11 1/4% senior euro notes.
. $478,000,000 total principal amount at
maturity of 13 3/8% Series B Senior
Discount Notes due 2009, which have been
registered under the Securities Act, for
your outstanding 13 3/8% senior discount
notes.
8
<PAGE>
. (Euro) 191,000,000 total principal amount
at maturity of 13 3/8% Series B Senior
Discount Notes due 2009, which have been
registered under the Securities Act, for
your outstanding 13 3/8% senior discount
notes.
To exchange your old notes, you must properly
tender them, and we must accept them. We will
exchange all old notes that you validly tender
and do not validly withdraw.
Resales..................... We believe that you can offer for resale, resell
and otherwise transfer the new notes without
complying with the registration and prospectus
delivery requirements of the Securities Act if:
. you acquire the new notes in the ordinary
course of your business;
. you are not participating, do not intend
to participate, and have no arrangement
or understanding with any person to
participate, in the distribution of the
new notes; and
. you are not an "affiliate" of ours, as
defined in Rule 405 of the Securities
Act.
By executing the letter of transmittal, or by
agreeing to the terms of the letter of
transmittal, you represent to us that you
satisfy each of these conditions. If you do not
satisfy any of these conditions and you transfer
any exchange note without delivering a proper
prospectus or without qualifying for a
registration exemption, you may incur liability
under the Securities Act. We do not assume or
indemnify you against this liability.
If a broker-dealer acquires new notes for its
own account in exchange for old notes, and it
acquired the old notes through market-making or
other trading activities, the broker-dealer must
acknowledge that it will deliver a proper
prospectus when any new notes are transferred. A
broker-dealer may use this prospectus for an
offer to resell, a resale or other retransfer of
the new notes.
Expiration date; Withdrawal The exchange offer expires at, and you may
rights ..................... withdraw your tender of old notes at any time
before, 12:00 p.m., New York City time (5:00
p.m., London time), on January , 2000, unless
we extend the expiration date.
Procedures for tendering We issued the old notes as global securities.
old notes .................. When we issued the old dollar denominated notes,
we deposited them with Citibank, N.A., as
custodian. Citibank, N.A. issued a
certificateless depositary interest in the
dollar denominated notes, which represents a
100% interest in the dollar denominated notes,
to DTC. Beneficial interests in the dollar
denominated notes, which direct or indirect
participants in DTC hold through the
certificateless depositary interest, are shown
on records that DTC maintains in book-entry
form.
When we issued the old euro denominated notes,
we deposited them with Morgan Guaranty Trust
Company of New York as operator of
9
<PAGE>
the Euroclear System and Cedelbank, as common
depositary. Security entitlements with respect
to the euro denominated notes are shown on
records in book-entry form that Euroclear,
Cedelbank or your securities intermediary
maintain.
To tender outstanding notes in the exchange
offer the registered holder (Euroclear,
Cedelbank or DTC) must transfer your outstanding
notes in accordance with DTC's, Euroclear's or
Cedelbank's standard procedures for such
transfer. In lieu of delivering a letter of
transmittal to the exchange agent, a computer-
generated message, in which the holder of the
outstanding notes acknowledges and agrees to be
bound by the terms of the letter of transmittal,
must be transmitted by DTC, Euroclear or
Cedelbank on behalf of a holder and received by
the exchange agent before 12:00 p.m., New York
City time (5:00 p.m., London time), on the
expiration date.
Special procedures for
beneficial owners.......... If:
. you beneficially own old notes,
. these notes are registered in the name of
a broker, dealer, commercial bank, trust
company or other nominee, and
. you wish to tender your old notes in the
exchange offer,
please contact the registered holder as soon as
possible and instruct it to tender on your
behalf and comply with our instructions set
forth elsewhere in this prospectus.
Appraisal or dissenters'
rights ..................... You do not have any appraisal or dissenters'
rights in the exchange offer. If you do not
tender your old notes or we reject your tender,
you will not be entitled to any further
registration rights under the registration
rights agreement, except under limited
circumstances. However, your notes will remain
outstanding and entitled to the benefits of the
indentures.
U.S. federal income tax
considerations.............. Your exchange of old notes for new notes is not
a taxable exchange for United States federal
income tax purposes. You will not recognize any
taxable gain or loss or any interest income as a
result of the exchange.
Exchange agent.............. Citibank, N.A. is serving as the exchange agent
for both the dollar denominated notes and the
euro denominated notes in the exchange offer.
The address, telephone number and facsimile
number of the exchange agent are listed in "The
Exchange Offer-Exchange agent" and in the letter
of transmittal.
In order to comply with Netherlands securities laws, the new notes may not
be offered, transferred or sold as part of their initial distribution, other
than to individuals or legal entities, situated in or outside The Netherlands,
who or which trade or invest in securities in the conduct of their profession
or business (which includes banks, brokers, dealers, insurance companies,
pension funds, other institutional investors and other parties (including
treasury departments of commercial enterprise and finance companies or groups),
which regularly trade or invest in securities).
10
<PAGE>
The New Notes
The new notes to be issued to you in the exchange offer will evidence the
same obligations of UPC as the notes you currently hold. The indentures that
currently govern your existing notes are the same indentures that will govern
the new notes. The terms of the new notes will be the same as the old notes,
except that there will be no legends on the new notes restricting their
transfer and the new notes will be registered under the Securities Act instead
of having registration rights. You should read "Description of the Notes"
beginning on page 168 for a detailed description of the terms and conditions of
the new notes.
Notes Offered............... $200,000,000 in aggregate principal amount of
dollar denominated 10 7/8% senior notes due
2007;
(Euro) 100,000,000 in aggregate principal amount
of euro denominated 10 7/8% senior notes due
2007; and
$252,000,000 in aggregate principal amount of
dollar denominated 11 1/4% senior notes due
2009;
(Euro) 101,000,000 in aggregate principal amount
of euro denominated 11 1/4% senior notes due
2009;
$478,000,000 in aggregate principal amount at
maturity of dollar denominated 13 3/8% senior
discount notes due 2009;
(Euro) 191,000,000 in aggregate principal amount
at maturity of euro denominated 13 3/8% senior
discount notes due 2009.
Maturity.................... August 1, 2007 for the 10 7/8% senior notes;
August 1, 2009 for the 11 1/4% senior notes and
the 13 3/8% senior discount notes.
Accretion................... The senior discount notes will accrete at a rate
of 13 3/8% per year, compounded semi-annually,
to an aggregate principal amount of $478,000,000
at November 1, 2004.
Interest.................... Annual rate of 10 7/8% for the senior notes due
2007 and 11 1/4% for the senior notes due 2009.
Interest on the notes will be payable semi-
annually in cash in arrears on May 1 and
November 1 of each year, beginning May 1, 2000.
The senior discount notes will accrue interest
at the rate of 13 3/8% per year, beginning
November 1, 2004. Interest on the senior
discount notes will be payable semi-annually in
cash in arrears on May 1 and November 1 of each
year, commencing May 1, 2005.
Registration Covenant;
Exchange Offer.............
We agreed to register the new notes under the
Securities Act by filing the registration
statement of which this prospectus forms a part.
We agreed to:
.cause the registration statement to become
effective on or before April 27, 2000;
and
. consummate the exchange offer within 45
days after the effective date of the
registration statement.
11
<PAGE>
In addition, we have agreed, in certain
circumstances, to file a "shelf registration
statement" that would allow some or all of the
notes to be offered to the public.
If we fail to meet any or all the targets listed
above (a "registration default"), the annual
interest rates on the notes will increase by
0.50% during the first 90-day period during
which the registration default continues, and
will increase by an additional 0.25% for each
subsequent 90-day period during which the
registration default continues, up to a maximum
increase of 1.50% over the interest rates that
would otherwise apply to the notes. As soon as
we cure a registration default, the interest
rates on the notes will revert to their original
levels.
Upon consummation of the exchange offer, holders
of notes will no longer have any rights under
the registration rights agreement, except to the
extent that we have continuing obligations to
file a shelf registration statement.
Additional Amounts.......... Unless required by law, all our payments with
respect to the notes will be made without
withholding or deduction for any present or
future taxes or governmental charges of whatever
nature imposed or levied by any tax authority
within The Netherlands or any other jurisdiction
in which we are organized or engaged in a trade
or business. Subject to certain exceptions, if
we are required by law to withhold or deduct
taxes in respect of payments on the notes, we
will pay additional amounts so that the net
amounts receivable by the holders, after any
withholding or deduction in respect of such tax
or liability, will equal the respective amounts
which would have been receivable in respect of
the notes in the absence of such payments,
withholding or deduction. See "Description of
the Notes--Additional Amounts."
Optional Redemption......... On or after November 1, 2004, we may redeem some
or all of the senior notes due 2009 and senior
discount notes at any time at the redemption
prices described in the section "Optional
Redemption" under the heading "Description of
the Notes." The senior notes due 2007 may not be
redeemed prior to maturity, except as set forth
below.
In addition, we may redeem up to 35% of the
aggregate original principal amount of each
series of the notes prior to November 1, 2002,
with the net cash proceeds from certain sales of
our equity at the price listed in the section
"Description of the Notes--Optional Redemption,"
provided at least 65% of the principal amount
(principal amount at maturity with respect to
the senior discount notes) of the respective
series of notes originally issued under the
indentures (as defined) on the issue date
remains outstanding thereafter.
Optional Tax Redemption..... We may redeem the notes, in whole but not in
part, at the principal amount thereof or, in the
case of the senior discount notes, the accreted
value thereof, plus accrued and unpaid interest
and liquidated
12
<PAGE>
damages, if any, thereon to the date of
redemption in certain circumstances in which we
would be required to pay additional amounts. See
"Description of the Notes--Redemption for
Changes in Withholding Taxes."
Mandatory Offer to If we undertake certain sales of assets or
Repurchase.................. experience specific kinds of changes in control,
we must offer to repurchase the notes.
Ranking..................... The notes are senior, general, unsecured
obligations of United Pan-Europe Communications,
N.V. They rank equally with all of our current
and future senior, unsecured indebtedness. The
notes are effectively junior to our senior
secured indebtedness to the extent of the
collateral securing such indebtedness and to all
of the existing and future indebtedness,
including trade payables, of our subsidiaries.
At September 30, 1999, on a pro forma basis,
assuming consummation of the new acquisitions,
the notes would have effectively ranked junior
in right of payment to approximately NLG 3.7
billion ($1.8 billion) of our and our
subsidiaries' indebtedness.
Original Issue Discount..... We issued the senior discount notes with
original issue discount for U.S. federal income
tax purposes. Thus, although cash interest will
not be payable on the senior discount notes
prior to May 1, 2005, U.S. holders will be
required to include amounts in gross income for
U.S. federal income tax purposes prior to
receiving the cash payments to which that income
is attributable. See "Certain Tax Consequences--
Certain United States Federal Income Tax
Consequences--Senior Discount Notes--Original
Issue Discount."
Certain Covenants........... The indenture contains certain covenants that
place certain limitations on our ability, and
the ability of our subsidiaries, to:
. borrow money,
. issue capital stock,
. pay dividends on stock or repurchase
stock,
. make investments,
. create certain liens,
. engage in certain transactions with
affiliates, and
. sell certain assets or merge with or into
other companies.
These covenants are subject to a number of
important exceptions and qualifications, which
are described under the heading "Description of
the Notes--Certain Covenants."
Listing..................... We have applied to list the old notes on the
Luxembourg Stock Exchange and we will apply to
list the new notes on the Luxembourg Stock
Exchange.
Trustee, Registrar,
Principal Paying and
Transfer Agent............. Citibank, N.A.
13
<PAGE>
Luxembourg Paying Agent..... Banque Internationale a Luxembourg.
Use of Proceeds............. We will not receive any proceeds from the
exchange offer. We used the net proceeds from
the sale of the notes to fund a portion of our
new acquisitions, and for working capital and
other general corporate purposes. See "Use of
Proceeds."
Risk Factors................ You should carefully consider all of the
information set forth in this prospectus and, in
particular, the specific factors set forth under
the "Risk Factors" section before deciding to
tender your old notes in the exchange offer.
14
<PAGE>
Summary Historical Consolidated Financial Data of the Company
The financial data in the tables below for the years ended December 31,
1996, 1997 and 1998 and as of December 31, 1998 is derived from our audited
consolidated financial statements contained elsewhere in this prospectus. The
financial information for the nine months ended September 30, 1998 and 1999 and
as of September 30, 1999 comes from our unaudited financial statements
contained elsewhere in this prospectus. As a result of United's acquisition in
December 1997 of the 50% of us owned by Philips Electronics N.V. and the
associated push-down of United's basis on December 11, 1997, financial
information as of and subsequent to December 31, 1997 is presented on a "post-
acquisition" basis. For more information about these accounting changes, see
note 1 to the audited consolidated financial statements at the back of this
prospectus.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------- --------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- ----------
(unaudited)
(Dutch guilders, in thousands, except per
share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Service and other revenue
Cable television......... 240,746 320,440 377,817 287,256 513,783
Telephone................ -- -- 531 436 44,827
Internet/data............ -- 764 9,465 5,274 30,086
Programming/DTH and
other................... 4,433 16,051 21,157 13,249 19,862
-------- -------- -------- -------- ----------
Total service and other
revenue.................. 245,179 337,255 408,970 306,215 608,558
Operating expense......... (82,439) (118,508) (138,459) (101,258) (316,481)
Selling, general &
administrative expense... (81,176) (119,067) (481,703) (136,608) (440,533)
Depreciation and
amortization............. (79,832) (132,888) (187,646) (137,842) (340,501
-------- -------- -------- -------- ----------
Net operating income
(loss)................... 1,732 (33,208) (398,838) (69,493) (488,957)
-------- -------- -------- -------- ----------
Net loss before income
taxes and other items.... (55,186) (157,385) (499,336) (131,400) (629,217)
-------- -------- -------- -------- ----------
Net loss.................. (88,615) (181,042) (563,221) (179,706) (676,738)
======== ======== ======== ======== ==========
Basic diluted loss per
ordinary share........... (0.96) (1.98) (6.80) (2.17) (5.61)
======== ======== ======== ======== ==========
Weighted-average number of
ordinary shares
outstanding.............. 92,063 91,533 82,869 82,864 120,587
Other Data:
Adjusted EBITDA:
Cable television......... 99,405 132,565 168,805 130,109 216,316
Telephony................ -- -- (11,568) (7,510) (49,037)
Internet/data............ -- 385 (24,859) (12,997) (101,313)
Programming/DTH and
other................... (17,841) (28,452) (20,943) (8,760) (104,937)
-------- -------- -------- -------- ----------
Total Adjusted EBITDA..... 81,564 104,498 111,435 100,842 (38,971)
======== ======== ======== ======== ==========
Capital expenditure....... 106,647 145,630 281,678 170,170 650,628
Cash flows from operating
activities............... 42,530 132,433 73,000 51,358 (89,536)
Cash flows from investing
activities............... (6,394) (402,340) (613,347) (381,253) (4,732,355)
Cash flows from financing
activities............... (116,756) 326,482 471,913 275,910 4,931,252
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998 As of September 30, 1999
----------------------- ------------------------
(unaudited)
(Dutch guilders, in thousands)
<S> <C> <C>
Balance Sheet Data:
Property, plant and
equipment................... 602,997 3,512,313
Intangible assets............ 680,032 5,446,246
Total assets................. 2,067,779 10,690,268
Short-term and long-term
debt........................ 1,526,602 6,789,825
Total liabilities............ 2,116,019 7,811,173
Total shareholders' equity
(deficit)................... (74,174) 2,846,093
</TABLE>
15
<PAGE>
In the above table, we have calculated Adjusted EBITDA as follows:
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
------------------------ -------------------
1996 1997 1998 1998 1999
------ ------- -------- -------- ---------
(unaudited)
(Dutch guilders, in thousands)
<S> <C> <C> <C> <C> <C>
Net operating income/(loss).... 1,732 (33,208) (398,838) (69,493) (488,957)
Add Back:
Depreciation and amortization.. 79,832 132,888 187,646 137,842 340,501
Compensation expense related to
stock options................. -- 4,818 322,627 32,493 109,485
------ ------- -------- -------- ---------
Adjusted EBITDA................ 81,564 104,498 111,435 100,842 (38,971)
====== ======= ======== ======== =========
</TABLE>
Summary Unaudited Pro Forma Condensed Consolidated Financial Data of the
Company
The three tables that follow show our unaudited condensed consolidated
financial data, pro forma for (1) the acquisitions of UTH, @Entertainment,
A2000, Stjarn, SBS, and Kabel Plus, (2) the offering of our ordinary shares A
completed in October 1999 and (3) the offering of our senior notes completed in
October 1999. The information in the Balance Sheet Data table is given as of
September 30, 1999. The information in these tables comes from pro forma
financial statements contained later in this prospectus. See "Risk Factors--Our
high level of debt and limitations on our capacity to borrow and invest could
slow down growth in subscribers and revenue and prevent us from fulfilling our
obligations under the notes."
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1998 September 30, 1999
----------------- ------------------
(unaudited)
(Dutch guilders, in thousands)
<S> <C> <C>
Statement of Operations Data:
Service and other revenue
Cable television........................ 833,986 740,398
Telephone............................... 46,227 68,597
Internet/data........................... 15,098 39,372
DTH, Programming and other.............. 57,728 56,187
---------- ----------
Total service and other revenue......... 953,039 904,354
Operating expenses....................... (397,026) (531,305)
Selling, general and administrative
expense................................. (796,490) (627,934)
Depreciation and amortization............ (636,425) (591,501)
Net operating income/(loss) ............. (876,902) (846,186)
Net loss before income taxes and other
items................................... (1,355,494) (1,318,679)
Net loss................................. (1,394,545) (1,340,411)
Other Data:
Adjusted EBITDA.......................... 82,152 (143,275)
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1999
------------------------
(unaudited)
(Dutch guilders, in
Balance Sheet Data: thousands)
<S> <C>
Property, plant and equipment.......................... 3,687,461
Goodwill and other intangibles......................... 5,633,104
Total assets........................................... 14,773,380
Short-term and long-term debt.......................... 8,954,726
Total liabilities...................................... 9,986,788
Total shareholders' equity............................. 4,746,348
</TABLE>
16
<PAGE>
RISK FACTORS
You should carefully consider the risks described below in addition to all
other information provided to you in this prospectus before deciding whether to
participate in this exchange offer. The multi-channel television, telephone and
Internet/data service industries are changing rapidly. Therefore, the forward-
looking statements and statements of expectations, plans and intent in this
prospectus are subject to a greater degree of risk than similar statements
regarding certain other industries. The risk factors described below,
other than those which discuss the consequences of failing to exchange your old
notes in the exchange offer, are generally applicable to both the old notes and
the notes issued in the exchange offer.
You may have difficulty selling any notes that you do not exchange.
If you do not exchange your old notes for the notes offered in this
exchange offer, you will continue to be subject to the restrictions on the
transfer of your notes. Those transfer restrictions are described in the
indenture governing the notes and in the legend contained on the old notes, and
arose because we originally issued the old notes under exemptions from, and in
transactions not subject to, the registration requirements of the Securities
Act.
In general, you may offer or sell your old notes only if they are
registered under the Securities Act and applicable state securities laws, or if
they are offered and sold under an exemption from those requirements. We do not
intend to register the old notes under the Securities Act.
If a large number of old notes are exchanged for notes issued in the
exchange offer, it may be more difficult for you to sell your unexchanged
notes. In addition, if you do not exchange your old notes in the exchange
offer, you will no longer be entitled to have those notes registered under the
Securities Act.
See "The Exchange Offer--Consequences of Failure to Exchange Old notes" for
a discussion of the possible consequences of failing to exchange your notes.
The notes are effectively junior in right of payment to obligations of our
subsidiaries
The notes are effectively subordinated to all our subsidiaries' existing
and future preferred stock, indebtedness and other liabilities. This is because
our right to receive the assets of any of our subsidiaries upon their
liquidation or reorganization will be subordinated, by operation of law, to the
claims of our subsidiaries' creditors. These creditors include trade creditors.
However, even if we are recognized as a creditor of any of our subsidiaries,
our claims would be subordinated to any indebtedness of that subsidiary that is
senior in right of payment to our claim. Our assets consist almost exclusively
of our direct and indirect ownership interests in our subsidiaries and
affiliated companies that operate our respective businesses. Our ability to pay
interest on the notes and to repay the principal of the notes depends on
earnings and cash flows or sales of the shares or assets of our subsidiaries
and affiliate companies and payment of funds by our subsidiaries or affiliated
companies to us in the form of loans, dividends and otherwise. Some of our
subsidiaries and other affiliates are parties to credit or other borrowing
agreements that severely restrict or prohibit them from paying dividends and
management fees. The future operating performance of our subsidiaries and
affiliated companies is also subject to general economic, financial,
competitive, legislative, regulatory, business and other factors beyond our
control. See "Description of Other Debt."
The indentures restrict our and our subsidiaries' ability to incur
additional indebtedness. The indentures do not, however, otherwise specifically
prohibit us from incurring indebtedness that provides for cash payments of
interest or principal prior to maturity of the notes. See "Description of the
Notes."
The covenants in the indentures governing the notes restrict our and our
subsidiaries' activities. In some situations, we can designate some of our
subsidiaries as unrestricted subsidiaries. Unrestricted subsidiaries generally
are not subject to the restrictions of the indentures. The indentures also
limit our ability to make future investments in persons other than our
subsidiaries. Thus our ability to capitalize unrestricted subsidiaries is
limited even though we may depend materially on them for cash flow. See
"Description of the Notes."
17
<PAGE>
Our high level of debt and limitations on our capacity to borrow and invest
could slow down growth in subscribers and revenue and prevent us from
fulfilling our obligations under the notes
We are highly leveraged. Our high level of debt and limitations on our
capacity to borrow and invest reduce our financial flexibility. This could
reduce the amount of money available to develop our businesses and result in
slower growth in subscribers and revenues than we plan. On a pro forma basis,
including our October 1999 offering of senior notes and the completion of our
acquisition of Kabel Plus, as of September 30, 1999, we would have owed NLG9.0
billion in consolidated debt. Although there can be no assurance that we will
be successful in doing so, we may need in the future to seek significant
additional financing which could result in our incurring significant additional
indebtedness. See "--We may not be able to raise sufficient capital to fund our
acquisitions strategy" and "Capitalization." Many of our unconsolidated
subsidiaries and affiliates also have long- and short-term debt.
The terms of many of our debt facilities limit our borrowing capacity. They
also limit our ability to invest in some of our subsidiaries and limit certain
transactions between subsidiaries.
As a subsidiary of United, we are restricted by the terms of United's debt
instruments. We have agreed with United not to take any action that would
result in a breach of these terms. This limits our ability to incur more debt
and issue certain preferred stock. Our freedom to invest in entities that we do
not control is also limited. Even if we do not cause a breach of the terms of
United's debt securities, a breach that is caused by United or one of its other
subsidiaries could still restrict us from incurring more debt or taking other
actions.
For more detailed information about our level of debt and restrictions on
our ability to borrow, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
There is no established market for the notes.
Although we have applied to list the old notes on the Luxembourg Stock
Exchange, the new notes constitute a new issue of securities for which there is
no established trading market. The initial purchasers have advised us that they
intend to make a market in the new notes, but they are not obligated to do so
and may discontinue market-making activities any time. Accordingly, we cannot
give any assurance as to (1) the likelihood that an active market for the notes
will develop, (2) the liquidity of any such market, (3) the ability of holders
to sell their notes or (4) the prices that holders may obtain for their notes
upon any sale. Future trading prices for the notes will depend on many factors,
including our operating results, the market for similar securities and interest
rates. Historically, the market for non-investment grade debt has been subject
to disruptions that have caused substantial volatility in the prices of
securities similar to the notes. We cannot guarantee that the market for the
notes will not be subject to similar disruptions and any such disruptions could
have an adverse effect on the value or marketability of the notes.
There may be Discount Consequences from the original issuance.
The senior discount notes were issued at a significant discount from their
aggregate principal amount at maturity. Consequently, U.S. holders of the
senior discount notes generally will be required to include amounts in gross
income for U.S. federal income tax purposes in advance of receipt of any cash
payment on the senior discount notes to which the income is attributable. See
"Certain Tax Consequences--Certain United States Federal Income Tax
Consequences" for a more detailed discussion of the federal income tax
consequences to the U.S. holders of the senior discount notes of the purchase,
ownership and disposition of the senior discount notes.
You may be subject to backup withholding on your new notes.
Backup withholding at a 31% rate will generally apply to payments with
respect to the new notes to non-U.S. holders if the non-U.S. holder fails to
furnish required information certification to UPC or its paying agent and fails
to otherwise establish an exemption. Any amounts withheld will be allowed as a
refund or a credit against your federal income tax liability, if any, if you
follow the procedures of the Internal Revenue Service for obtaining refunds or
credits. You should read the section entitled "Certain Tax Consequences--
Information reporting and backup withholding" for information on how you can
avoid backup withholding requirements.
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We expect to continue to make net losses for the next five to ten years
We have experienced net losses every year since we started business in July
1995. Through September 30, 1999, we had recognized cumulative losses of
approximately NLG1,403.8 million, excluding the NLG154.7 million in losses
allocated to a former shareholder, Philips, through December 11, 1997. New
lines of business, in particular, generally have negative cash flow. We expect
negative cash flow from the new business ventures to increase as these
operations expand. We expect to incur net losses for at least the next five to
ten years. Continuing net losses will increase our capital needs.
Our acquisitions strategy involves significant risks
A key element of our growth strategy is to continue to acquire systems, and
to increase the percentage we own in some systems in order to expand our
coverage and implement our branded package of video, voice and Internet/data
offerings. We are often and currently are engaged in discussions or
negotiations regarding the acquisition of businesses and systems, some
potentially significant in relation to our size. Our pending new acquisitions,
as well as future acquisitions, will be accompanied by risks such as:
. Difficulty of identifying appropriate acquisitions. Our growth may suffer
if we are not able to identify and acquire cable/telephone systems that
are either near our existing networks or are large enough to serve as the
basis for expanded operations.
. Difficulties in completing acquisitions. We may not be able to satisfy
conditions that sellers of networks may demand in order to close
acquisitions. In addition, there may be significant legal and contractual
issues in connection with acquisitions, such as change of control
provisions in licenses and agreements, that could delay or prevent
completion. Regulatory bodies may impose adverse conditions on the
completion of our acquisitions. At the time of closing any new
acquisition, we may waive conditions to closing, either because we
believe that the condition will be satisfied in the future or because we
believe an unsatisfactory resolution would not materially adversely
affect us and our subsidiaries as a whole. There is a risk that our
beliefs in some of these instances will prove to be incorrect.
. Entry into new markets. If we consummate acquisitions in markets in which
we have not previously operated, we will have no prior experience in
dealing with local regulators or with local market conditions.
We may not be able to raise sufficient capital to fund our acquisitions
strategy
We will need to raise more capital in the future to fund our acquisitions
strategy. We may raise further capital by selling assets, issuing debt or
equity or borrowing funds. We are not sure whether we will be able to raise
capital through any of these or other methods. If we cannot raise capital, we
may not be able to grow by acquiring systems as we intend. In addition, our
acquisitions strategy exposes us to the risk of unanticipated expenditures. For
example, although we normally negotiate customary warranty protection when
acquiring new systems, we may be liable for undisclosed liabilities, or we may
have to incur greater capital expenditures than we intended, in relation to a
particular acquisition.
We cannot be certain that we will be successful in integrating acquired
businesses with our existing businesses
Our success depends, in part, upon the successful integration of our new
acquisitions and any future acquisitions we make. Although we believe that the
consummation of our new acquisitions will result in significant benefits and
synergies, the integration of these businesses will also present significant
challenges, including:
. realizing economies of scale in interconnection, programming and network
operations, and eliminating duplicate overheads; and
. integrating networks, financial systems and operational systems.
We cannot assure you, with respect to either our new acquisitions or future
acquisitions, that we:
. will realize any anticipated benefits; or
. will successfully integrate any acquired business with our existing
operations.
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Failure to raise necessary capital could restrict the development of our
network and the introduction of new services
The video, telephone and Internet/data business is capital intensive
because it requires extensive telecommunications infrastructure, equipment and
labor. We may not have access to sufficient capital to remain competitive. Lack
of capital could harm our business. If we are unable to raise significant
capital in the future, we may not be able to execute our business plan,
including building a digital distribution platform.
Many of our operating companies are expanding and upgrading their networks
to offer new services. Technological change may make further upgrades necessary
if our operating companies are to compete effectively in their markets. Our
financial resources, even with the proceeds from this offering, may not be
enough for our capital needs. Also, we expect that equipment vendors will
finance a good part of the cost of the equipment for our new services. This
vendor financing is not yet in place. We may not be able to secure vendor
financing on satisfactory terms or at all. Failure to upgrade our operating
systems or make other planned capital expenditures could harm our operations
and competitive position. During the period 2000-2010, we currently must repay
or refinance, over NLG6.8 billion of indebtedness existing as of September 30,
1999 and NLG2.1 billion in principal amount of our senior notes offered in
October 1999. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources--Sources of
Capital."
Our recent acquisition of @Entertainment exposes us to a number of risks
As a result of our acquisition of @Entertainment, we became subject to a
number of risks, including:
. Possible termination of conduit agreements. As of June 30, 1999, about
76.8% of @Entertainment's cable plant was constructed using pre-existing
conduits of the Polish national telephone company ("TPSA"). A substantial
portion of @Entertainment's contracts with TPSA permit termination by
TPSA without penalty at any time either immediately upon the occurrence
of certain conditions or upon provision of three to six months' notice
without cause. If TPSA terminated @Entertainment's access to these
conduits, @Entertainment might not be able to replace or locate a
substitute for the conduits. In addition, @Entertainment would incur
significant costs if it were forced to build its own conduits. As of June
30, 1999, TPSA was legally entitled to terminate conduit agreements
covering approximately 4% of @Entertainment's subscribers as a result of
@Entertainment's failure to comply with certain terms of its conduit
agreements with TPSA. Any termination for cause by TPSA of these
contracts could result in the loss of @Entertainment's permits, the
termination of its agreements with Polish cooperative authorities and
programmers and an inability to service customers in affected areas. In
addition, some conduit agreements with TPSA provide that cables can be
installed in the conduits only for the use of cable television. If
@Entertainment uses the cables for a purpose other than cable television,
such as data transmission, telephone, or Internet access, such use could
be considered a violation of the terms of certain conduit agreements,
unless this use is expressly authorized by TPSA. There is no guarantee
that TPSA would give its approval to permit other uses of the conduits.
. Compliance with foreign ownership and change of control rules. Under the
Polish Communications Act of 1990 (the "Polish Telecommunications Act"),
permits for cable television operators may be issued only to residents in
Poland or companies in which foreign persons do not hold more than 49% of
the share capital and voting rights, and in which the majority of members
of the governing bodies are Polish citizens residing in Poland.
@Entertainment believes that the current ownership structure of PTK
Operator Sp. z o.o., its licensee company, is in material compliance with
Polish foreign ownership rules. However, certain aspects of this
structure have not been tested for compliance with Polish foreign
ownership rules in Polish administrative or court proceedings, and there
can be no assurance that such structure will not be challenged by Polish
telecommunications regulatory authorities. If such ownership structure
was found to be in breach of Polish foreign ownership rules, this could
result in the cancellation of @Entertainment's permits and the imposition
of monetary penalties. In addition, under the Polish Telecommunications
Act, @Entertainment's permits could be revoked or limited in scope upon a
direct or indirect change of control of PTK Operator
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Sp.z o.o. The Polish Telecommunications Act does not define what
constitutes a direct or indirect change of control. There is a risk that
our acquisition of @Entertainment constituted an indirect change of
control of PTK Operator Sp.z o.o.
. Operating without necessary permits. @Entertainment is currently
operating in certain areas without the permits necessary for the
construction and operation of a cable television network issued by the
Polish State Agency for Radio Communications (the "PAR"). Failure to
obtain these permits could lead to governmental orders requiring
@Entertainment to stop operating in those areas, the imposition of
monetary penalties, and forfeiture of our cable networks. In addition,
failure to be in compliance with all regulatory laws and licensing
requirements could result in @Entertainment being in breach under a
number of its operating agreements. In order to obtain new permits from
the PAR, @Entertainment must show, among other things, that it is in
compliance with Polish foreign ownership restrictions. @Entertainment's
operation without requisite permits could impair its ability to obtain
new permits in the future, renew current licenses and conduct its
business. There can be no assurance that PAR will issue any or all of
these permits.
. Arbitration with Canal+. @Entertainment is engaged in arbitration with
Telewizyna Korporacja Partycypacyjna ("TKP"), the company that broadcasts
Canal+ Polska, in relation to a letter of intent to form a joint venture
for the purpose of creating a joint DTH platform. The arbitration arises
from the failure of the parties to reach definitive agreements
contemplated by the letter of intent by the date required. As a result of
this, @Entertainment terminated the letter of intent. TKP and its
shareholders have informed @Entertainment that they believe
@Entertainment did not have the right to terminate the letter of intent
and that they believe that the failure to reach the definitive agreements
resulted from a breach of the letter of intent by @Entertainment. If this
arbitration is determined in a manner adverse to @Entertainment,
@Entertainment may be liable for damages up to $10.0 million, plus
interest and costs.
. Polish Regulation of the DTH Market. The Polish Radio and Television Act
of 1992 (the "Television Act") does not include regulations directly
applicable to the broadcasting of programs broadcast which are from
abroad and received in Poland. Specifically, there are no Polish
regulations in force concerning satellite broadcasting of a program
dedicated to a Polish audience where the uplink for the broadcasting of
such a program is made by a foreign broadcaster from outside Poland.
@Entertainment believes that the Television Act does not apply to such
broadcasting from outside Poland and that such activity is not subject to
Polish broadcasting requirements. The Polish National Radio and
Television Council, which, among other things, regulates the broadcasting
operations of broadcasters, has not officially adopted an interpretation
of this issue and there have been no court rulings on this issue. If
@Entertainment's interpretation were successfully challenged, its DTH
broadcasts from outside Poland would be required to comply with the
requirements of the Television Act. The Television Act would require a
broadcasting license and would impose foreign ownership restrictions. We
cannot assure you that @Entertainment would be able to comply with these
requirements. In addition, Poland has not currently sought to regulate
foreign DTH broadcasters that uplink outside of Poland. There can be no
assurances, however, that Poland will not seek to regulate this aspect of
the DTH industry.
. Minority shareholder litigation. In July 1999, certain minority
shareholders of a third-tier @Entertainment subsidiary filed a lawsuit
naming nine defendants, including @Entertainment and some of its
subsidiaries. The plaintiffs collectively own approximately 1.7% of the
third-tier subsidiary. The plaintiffs, relying upon a shareholders'
agreement, allege various breaches of duty by the defendants. The lawsuit
seeks damages in the amount of 1.7% of the amount paid by us for
@Entertainment. Minority shareholders who own approximately 6.0% of the
third-tier subsidiary have made similar claims but have not filed suit.
Based on the damages claimed in the suit that has been filed, the total
potential liability against us is approximately 7.7% of the amount we
paid for @Entertainment. We cannot assure that we or @Entertainment will
successfully be able to defend against these claims.
. DTH business risks. @Entertainment's DTH business depends on its ability
to broadcast using satellites. Satellites are subject to significant
risks that may prevent or impair proper commercial operations, including
satellite defects, destruction and damage. If one or more of its
transponders fails to operate, @Entertainment
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would not be able to pre-empt any other transponder customer.
@Entertainment does not insure against possible interruption of access to
transponders. Philips Business Electronics B.V. has had difficulties
delivering DTH reception systems on schedule. Significant continued delays
could harm the development and operation of @Entertainment's DTH service,
could be interrupted or delayed. The encryption technology used with
@Entertainment's DTH system to prevent signal theft or "piracy," may not
remain effective. If the encryption technology is compromised in a manner
which is not promptly corrected, @Entertainment's business may suffer.
Stjarn relies upon agreements with Stokab
Our recently acquired system, Stjarn, leases fiber optic cables to link its
main headend to over 40 fiber nodes under agreements with Stokab, a city-
controlled entity with exclusive rights to lay ducts for cables for
communications or broadcast services in the downtown area of the City of
Stockholm. The main part of the leased ducting and fiber optic cables is
governed by an agreement entered into by Stjarn and Stokab in 1993 which
expires in 2019. Stjarn's operations are critically dependent upon these
agreements with Stokab. If Stjarn were unable to lease fiber optic cables from
Stokab, this would have a material adverse effect on Stjarn's operations.
Adverse regulation of our video services could limit our revenues and growth
plans and expose us to various penalties
In most of our markets, regulation of video services takes the form of
price controls and programming content restrictions. Also, in The Netherlands
and Austria, local municipalities have contractual rights that restrict our
flexibility to increase prices, change programming and introduce new services.
In addition, laws in Belgium may require us to obtain special authorization for
distributing programming from non-European Union sources (which we are
currently distributing without such authorization), and to distribute certain
digital multiplexed programming (which we are not distributing). In Israel, our
subscription fees and program offerings are restricted by franchise agreements
and are subject to review by governmental agencies, including the Restrictive
Trade Practices Tribunal. We are subject to pending claims in Israel alleging
that we have engaged in certain unlawful acts, including violation of our cable
television franchise agreements. In Poland, there are restrictions with respect
to rights to install and operate cable television and DTH broadcasting networks
by entities in which foreign ownership exceeds certain limits and in which the
majority of governing bodies are not Polish citizens residing in Poland.
@Entertainment may not be deemed to be in full compliance with these or other
restrictions or regulations. These varying restrictions could limit our plans
to increase our revenues and expose us to various potential penalties,
including monetary fines, discontinuation of certain programming and impairment
of our cable and DTH authorizations. Secondly currently pending legislative
works in Poland may have a negative impact on our business in Poland. They may
jeopardise the exclusivity of rights to broadcast certain sport events held by
our subsidiaries and increase the costs of acquisition of rights to
programming. See "Regulation." Regulation could also cause us to incur
substantial capital and operating costs as well as limit the number of channels
we carry, such as in connection with the distribution of high-definition or
advanced television services.
Regulation may increase the cost of introducing our new telephone and
Internet/data services, subject them to competitive pressures and slow their
growth
Regulation could slow the introduction of our new services and increase
their costs. The regulatory regimes in our European markets present some risks.
Our operating companies need to obtain and retain licenses and other regulatory
approvals for our existing and new services. They may not succeed. In order to
offer our new services, our operating companies need to connect their networks
to those of the incumbent telecommunications operators. The regulatory regimes
in our Western European markets have been designed to help companies like us to
obtain fairly priced interconnect arrangements. As we found in Austria,
however, the regulatory process can be time-consuming. This may impede our
ability to obtain favorable interconnection arrangements on schedule. Problems
such as these would delay the introduction or impede the profitability of the
new services. Regulators may also impose universal service contribution
requirements on our services which would raise our costs.
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The Internet access business has, to date, not been materially restricted
by regulation in our markets. The legal and regulatory environment of Internet
access and electronic commerce is uncertain, however, and may change. New laws
and regulations may be adopted for Internet service offerings. Existing laws
may be applied to the new forms of electronic commerce. Uncertainty and new
regulation could increase our costs. It could also slow the growth of
electronic commerce on the Internet significantly. This could delay growth in
demand for our Internet/data services and limit the growth of our revenues. New
and existing laws may cover issues such as:
. sales and other taxes,
. user privacy,
. pricing controls,
. characteristics and quality of products and services,
. consumer protection,
. cross-border commerce,
. libel and defamation,
. copyright and trademark infringement,
. pornography and indecency, and
. other claims based on the nature and content of Internet materials.
Low demand, competition, unplanned costs and difficulties with interconnection
could hinder the profitability of our telephone services
Our telephone services may not become profitable for a number of reasons.
Customer demand could be low, or we may encounter competition and pricing
pressure from incumbent and other telecommunications operators. Our network
upgrade may cost more than planned. Furthermore, our operating systems need to
interconnect their networks with those of the incumbent telecommunications
operators in order to provide telephone services. Not all of our systems have
interconnection agreements in place, and interconnection agreements have
limited duration and may be subject to regulatory and judicial review. We are
negotiating interconnection agreements for our planned telephone markets that
do not yet have them. This may involve time-consuming negotiations and
regulatory proceedings. While incumbent telecommunications operators in the
European Union are required by law to provide interconnection, incumbent
telecommunications operators may not agree to interconnect on a time scale or
on terms that will permit us to offer profitable telephone services. After
interconnection agreements are concluded, we remain reliant upon the good faith
and cooperation of the other parties to these agreements for reliable
interconnection. We are currently involved in a dispute with the Austrian
telecommunications operator in the Austrian courts over our interconnection
arrangement there.
The complexities of the operating systems we need to develop for our new
services could increase their costs and slow their introduction
We only recently began to offer local telephone and advanced Internet/data
services. We may not have planned for or be able to overcome all of the
problems in introducing these new services. Our new services may not meet our
financial expectations. This would impede our planned revenue growth and harm
our financial condition.
The new services involve many operating complexities. We will need to
develop and enhance new services, products and systems, as well as marketing
plans to sell the new services. For example, we intend to introduce a
comprehensive new billing system to support our new telephone and Internet/data
businesses. Until then, however, we plan to employ enhanced versions of our
existing customer care and billing systems for these services. Problems with
the existing or new systems could delay the introduction of the new services,
increase their costs, or slow successful marketing. These complexities and
others may cause the new services not to meet our financial expectations. This
could impede our planned revenue growth and harm our financial condition.
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The success of our new telephone and Internet/data services depends on whether
we continue to achieve technological advances
Technology in the cable television and telecommunications industry is
changing very rapidly. These changes influence the demand for our products and
services. We need to be able to anticipate these changes and to develop
successful new and enhanced products quickly enough for the changing market.
This will determine whether we can continue to increase our revenues and the
number of our subscribers and be competitive.
We have introduced new services, including:
.additional video channels and tiers,
.pay-per-view services with frequent starting times, which are known as
"impulse" pay-per-view,
.high speed data and Internet access services, and
.cable telephone services.
The technologies used to provide these services are in operation in some of
our systems as well as systems of other providers. However, we cannot be sure
that demand for our services will develop or be maintained in light of other
new technological advances. There could be delays in introducing our new
services, such as access to the Internet through cable modems and telephone
services. Further, our new services may not operate as intended.
Lack of necessary equipment could delay or impair the expansion of our new
services
If we cannot obtain the equipment needed for our existing and planned
services, our operating results and financial condition may be harmed. For
example, a customer will need a digital set-top box to access the Internet or
receive our other enhanced services through a television set. These boxes are
being developed by several suppliers. If there are not enough affordable set-
top boxes for subscribers, however, we may have to delay our expansion plans.
Inability to obtain the necessary programming could reduce demand for our
services
Our success depends on obtaining or developing affordable and popular
programming for our subscribers. We may not be able to obtain or develop enough
competitive programming to meet our needs. This would reduce demand for our
video services, limiting their revenues. We rely on other programming suppliers
for most of our programming. In some markets, such as in Poland, there is only
a limited amount of local language programming available. In those markets, we
must repackage other programming in the local language. We plan to commit
substantial resources to obtaining and developing new programming. We expect to
seek partners for this. We may not, however, find appropriate partners, obtain
necessary broadcasting licenses or successfully implement our programming
plans. Our programming may be less popular than our competitors' programming.
We are contractually restricted from packaging some of our channels together in
some of our markets.
European use of the Internet, electronic commerce and other bandwidth intensive
applications may not increase as we expect
Our business plan assumes that Western European use of the Internet,
electronic commerce and other bandwidth intensive applications will increase
substantially in the next few years, in a manner similar to the increased use
in the United States in the past few years. Our business plan assumes a less
rapid increase in Eastern Europe. If the use of applications requiring
intensive bandwidth does not increase in Europe as anticipated, chello
broadband and other services involving managed bandwidth could be materially
lower than we currently anticipate. Reduced demand for our services may have a
negative effect on our pricing and our financial condition.
Increased competition in video services could reduce our revenues
The cable television industry in many of our markets is competitive and
changing rapidly. Competition could result in the loss of our customers and a
decrease in our revenues.
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We expect that competition will increase with new entrants who use multi-
channel television technologies different from the technologies our cable
systems use. These technologies may include:
. services that receive satellite signals at the subscriber's home,
. private cable systems used by housing associations and multiple unit
dwellings, and
. "wireless" cable transmitted by low frequency radio.
We may also face competition from other communications and entertainment
media companies. These could include incumbent telecommunications operators and
providers of services over the Internet. In some franchise areas, our rights to
provide video services are not exclusive. We currently compete with other cable
operators and in the future may have to compete with additional cable
operators. In Israel, the government-required liquidation of a video
programming provider in which we held an interest, which may increase our
programming costs. Further, we may be required to provide previously exclusive
programming to competing providers of DTH satellite services.
The competitiveness of the telephone services industry will make it difficult
for our new telephone service to enter the market
We will face competition from incumbent telecommunications operators,
wireless telephone carriers and other new entrants to the European telephone
market. Some of these competitors have more experience in providing telephone
services than we have. Some of our competitors can also devote more capital to
these services than we can.
Developing a profitable telephone service will depend, among other things,
on whether we can:
. attract customers,
. maintain competitive prices,
. limit loss of customers, and
. provide high quality customer care and billing services without
incurring significant additional costs.
As part of our strategy to offer integrated telecommunications services, we
plan to offer local and long distance telephone services. The long distance
telephone business is extremely competitive. Prices for long distance calls
have decreased significantly in recent years and we expect them to continue to
drop. Increased competition may also push prices down for local telephone
services. Regulators may make incumbent telecommunications operators lower
their rates or increase their pricing flexibility. Because these are our
principal competitors, this could force us to lower our rates to remain
competitive.
Growing competition in Internet/data services will make it harder for our
Internet/data service to succeed
The Internet/data services business in Europe is increasingly competitive.
This will make it harder for our new Internet/data service to gain a share of
the market. At the moment, we compete with companies that provide Internet/data
service using traditional, low speed telephone lines, including many incumbent
telecommunications operators. We expect chello broadband to face growing
competition from Internet service providers that, like it, use higher-speed,
higher-capacity cable modems. These could include @Home and Roadrunner, as they
move to the European market. We currently compete with other telecommunications
service providers, including incumbent telecommunications operators, that use
other broadband technologies, such as fiber, microwave, satellite and digital
subscriber lines, and we expect such competition to increase in the future.
The loss of key personnel could weaken our technological and operational
expertise, delay the introduction of our new business lines and lower the
quality of service
We may not be able to attract and retain key employees. This could hinder
the introduction of our new services as planned. There is intense competition
for qualified personnel in our industry. Our success and growth strategy
depends upon being able to attract and retain key management, technological and
operating personnel. Without these, we might make less successful strategic
decisions. We would also be less prepared for technological and marketing
problems, which could reduce our ability to serve subscribers and lower the
quality of our services. As a result, our financial condition could worsen.
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Foreign currency exchange rate fluctuations may cause financial losses
Changes in foreign currency exchange rates can reduce the value of our
assets and revenues and increase our liabilities and costs. In general, neither
we nor our operating companies try to reduce our exposure to these exchange
rate risks by using hedging transactions. We may therefore suffer losses solely
as a result of exchange rate currencies. In each country, our operating
companies attempt to match costs, revenues, borrowings and repayments in their
local currencies. Nonetheless, they have had to pay for a lot of equipment in
currencies other than their own. They may continue to be required to do so. On
an aggregate basis, as of September 30, 1999, pro forma for our October 1999
senior note offering, including the effect of the cross-currency swaps entered
into in July and October 1999, about 33.5% of our consolidated debt was
denominated in currencies outside of the European Monetary Union. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
At the UPC level, the value of our investment in an operating company
outside the euro "zone" is affected by the exchange rate between the euro and
the local currency of the operating company.
Computer systems may malfunction and interrupt our operating systems and our
services if they do not achieve Year 2000 readiness
Our cable television, programming, telephone and Internet/data operations
are heavily dependent upon computer systems and other technological devices
with imbedded chips. Such computer systems and other technological devices may
not be capable of accurately recognizing dates beginning on January 1, 2000.
This problem could cause miscalculations, resulting in our cable television,
telephone and Internet/data systems or programming services malfunctioning or
failing to operate. These problems are generally expected to be more
significant outside the United States, particularly in Eastern Europe.
In response to possible Year 2000 problems, the Board of Directors of
United established a task force to assess the impact that potential Year 2000
problems may have on company-wide operations, including us and our operating
companies, and to implement necessary changes to address such problems. The
task force, which includes our staff, external consultants and staff from
United, and subcommittees at the operating company levels, has developed a
program to minimize Year 2000 problems.
We intend to include our new acquisitions in our Year 2000 program. We are
currently determining whether any of these systems have their own programs in
place for Year 2000 compliance and at what level their systems are within our
Year 2000 program. We can give no assurance that any or all of our new
acquisitions will fit within our Year 2000 program. For example, upon further
review of the operations of recently-acquired @Entertainment, we have
determined that billing and subscriber management system software for
approximately half of its cable television subscribers is not Year 2000
compliant. @Entertainment is upgrading this software, but may not have its
systems fully compliant by the end of 1999. If we cannot successfully integrate
our new acquisitions into our Year 2000 program, our business could be harmed.
Some of our critical operations depend on other companies and we believe
that our largest Year 2000 risk is our dependence upon third-party products.
Two significant areas in which our systems depend upon third-party products are
programming and telephone interconnections. We do not have the ability to
control third parties in their assessment and remediation procedures for
potential Year 2000 problems. Should these parties not be prepared for Year
2000, their systems may fail and we would not be able to provide our services
to our customers. Notwithstanding these limitations, the task force monitors
the websites for all vendors used by us, to the extent applicable, for
information on such vendors' Year 2000 programs. To the extent applicable, the
task force uses such information to verify Year 2000 compliance and to
implement remediation procedures. We also have requested information from
various third parties on the state of their Year 2000 compliance programs in an
effort to prevent any possible interruptions or failures. To date, responses by
programming vendors to such communications have been limited. The responses
received state only that the party is working on Year 2000 issues and does not
have a definitive position at this time. As a result, we are unable to assess
the risk posed by our dependence upon such third
26
<PAGE>
parties' systems. Vendors for critical equipment components, such as the
headend controllers, have been more responsive, and we believe substantially
all of our equipment will be Year 2000 compliant. We cannot, however, give any
assurances concerning compliance of equipment because such belief is based on
information provided by vendors, which cannot be independently verified, and
because of the uncertainties inherent in Year 2000 remediation. We have already
considered certain limited contingency plans, including preparing back-up
programming and stand-by power generators. These may not be sufficient,
however, to prevent interruptions on our systems. If we or other companies on
whom we depend fail to implement Year 2000 procedures on time, our business,
operating results and financial condition could be significantly harmed.
The task force is also including our minority investments in its program.
No assurance can be given, however, that these entities will implement the
recommendations of the task force or otherwise be Year 2000 compliant.
The task force is not able to determine the full cost of its Year 2000
program and its related impact on our financial condition. In the course of our
business, we have made substantial capital investments over the past few years
in improving our systems, primarily for reasons other than Year 2000. Because
the systems' upgrades also result in Year 2000 compliance, replacement and
remediation costs have been low. Based on the task force review to date, we
currently estimate that these costs will not exceed NLG9.0 million. No
assurance can be made, however, as to the total cost for our Year 2000 program
until all of the data has been gathered. In addition, we cannot predict the
financial impact we will experience if Year 2000 problems are caused by third
parties upon which our systems are dependent or experienced by entities in
which we hold investments. The failure of any one of these parties to implement
Year 2000 procedures could have a material adverse impact on our operations and
financial condition.
The indentures restrict our and our subsidiaries' ability to incur
additional indebtedness. The indentures do not, however, otherwise specifically
prohibit us from incurring indebtedness that provides for cash payments of
interest or principal prior to maturity of the notes. See "Description of the
Notes."
The covenants in the indentures governing the notes restrict our and our
subsidiaries' activities. In some situations, we can designate some of our
subsidiaries as unrestricted subsidiaries. Unrestricted subsidiaries generally
are not subject to the restrictions of the indentures. The indentures also
limit our ability to make future investments in persons other than our
subsidiaries. Thus our ability to capitalize unrestricted subsidiaries is
limited even though we may depend materially on them for cash flow. See
"Description of the Notes."
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
We caution you that, in addition to the historical financial information
included herein, this prospectus includes certain "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 (the
"Litigation Reform Act") that are based on management's beliefs, as well as on
assumptions made by and information currently available to management. All
statements other than statements of historical fact included in this
prospectus, including, without limitation, budgeted, future, and certain other
statements under "Prospectus Summary," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "@Entertainment Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" and located other places in our prospectus regarding our financial
position and business strategy, may constitute forward-looking statements. In
addition, forward-looking statements generally can be identified by the use of
forward-looking terminology such as "may," "will," "expect," "intend,"
"estimate," "anticipate," "believe," "plan," "seek," or "continue" or the
negative thereof or variations thereon or similar terminology. Such forward-
looking statements involve known and unknown risks, including, but not limited
to, national and international economic and market conditions, competitive
activities or other business conditions, and customer reception of our existing
and future services. Although we believe that our expectations with respect to
the forward-looking statements are based upon reasonable assumptions within the
bounds of our knowledge of our business and operations as of the date hereof,
there can be no assurance that our actual results, performance or achievements
will not differ materially from any future results, performance or achievements
expressed or implied from such forward-looking statements. You should be aware
that the multi-channel television, telephone and Internet/data service
27
<PAGE>
industries are changing rapidly, and, therefore, the forward-looking statements
and statements of expectations, plans and intent in this prospectus are subject
to a greater degree of risk than similar statements regarding certain other
industries. Important factors that could cause actual results to differ
materially from our expectations ("Cautionary Statements") are disclosed in
this prospectus, including without limitation in conjunction with the forward-
looking statements included in this prospectus and under "Risk Factors." All
subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by these
Cautionary Statements.
28
<PAGE>
THE EXCHANGE OFFER
Purpose of the exchange offer
On October 29, 1999, we privately placed $200,000,000 in aggregate
principal amount of dollar denominated 10 7/8% senior notes due 2007,
(Euro)100,000,000 in aggregate principal amount of euro denominated 10 7/8%
senior notes due 2007, $252,000,000 in aggregate principal amount of dollar
denominated 11 1/4% senior notes due 2009, (Euro)101,000,000 in aggregate
principal amount of euro denominated 11 1/4% senior notes due 2009,
$478,000,000 in aggregate principal amount at maturity of dollar denominated 13
3/8% senior discount notes due 2009 and (Euro)191,000,000 in aggregate
principal amount at maturity of euro denominated 13 3/8% senior discount notes
due 2009. Simultaneously with the sale of the old notes, we entered into a
registration rights agreement with the initial purchasers of the old notes.
Under the registration rights agreement, we agreed to file a registration
statement regarding the exchange of the old notes for notes with terms
identical in all material respects. We also agreed to use our reasonable best
efforts to cause that registration statement to become effective with the SEC.
We issued the old notes as global securities. When we issued the old dollar
denominated notes, we deposited them with Citibank, N.A., as custodian.
Citibank, N.A. issued a certificateless depositary interest in the dollar
denominated notes, which represents a 100% interest in the dollar denominated
notes, to DTC. Beneficial interests in the dollar denominated notes, which
direct or indirect participants in DTC hold through the certificateless
depositary interest, are shown on records that DTC maintains in book-entry
form.
When we issued the old euro denominated notes, we deposited them with
Morgan Guaranty Trust Company of New York as operator of the Euroclear System
and Cedelbank, as common depositary. Security entitlements with respect to the
euro denominated notes are shown on records in book-entry form that Euroclear,
Cedelbank or your securities intermediary maintain.
We are conducting the exchange offer to satisfy our contractual obligations
under the registration rights agreement. The form and terms of the new notes
are the same as the form and terms of the old notes, except that the new notes
will be registered under the Securities Act. As a result, the new notes will
not bear legends restricting their transfer and will not contain the
registration rights and liquidated damage provisions contained in the old
notes. The old notes provide that, if a registration statement relating to the
exchange offer has not been filed by January 27, 2000, declared effective by
April 27, 2000 and consummated within 45 days after the effective date of the
registration statement, we will pay liquidated damages on the old notes. Upon
the completion of the exchange offer, you will not be entitled to any
liquidated damages on your old notes or any further registration rights under
the registration rights agreement, except under limited circumstances. The
exchange offer is not extended to holders of old notes in any jurisdiction
where the exchange offer does not comply with the securities or blue sky laws
of that jurisdiction. A copy of the registration rights agreement is filed as
an exhibit to the registration statement of which this prospectus is a part.
In this section entitled "The Exchange Offer," the term "holder" means any
person whose old notes are held of record by DTC, Euroclear or Cedelbank and
who wants to deliver these old notes by book-entry transfer.
Terms of the exchange offer
The expiration date of the exchange offer is 12:00 p.m., New York City time
(5:00 p.m., London time), on January , 2000 unless we extend the exchange
offer.
The exchange offer is not conditioned upon holders tendering a minimum
principal amount of old notes.
You do not have any appraisal or dissenters' rights in the exchange offer.
If you do not tender old notes or you tender old notes that we do not accept,
your old notes will remain outstanding. Any old notes will be entitled to the
benefits of the indenture under which they were, and the new notes will be,
issued. The old notes will not, however, be entitled to any further
registration rights under the registration rights agreement, except under
limited circumstances. See "Risk Factors--You may have difficulty selling any
notes that you do not exchange" for more information regarding notes
outstanding after the exchange offer.
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<PAGE>
After the expiration date, we will return to you any tendered old notes
that we did not accept for exchange.
You will not have to pay brokerage commissions or fees or transfer taxes
for exchanging your notes if you follow the instructions in the letter of
transmittal. We will pay the charges and expenses, other than those taxes
described below, in the exchange offer. See "--Fees and expenses" below for
further information regarding fees and expenses.
Neither UPC nor UPC's board of directors recommends that you tender or not
tender old notes in the exchange offer. In addition, UPC has not authorized
anyone to make any recommendation. You must decide whether to tender in the
exchange offer and, if so, the aggregate amount of old notes to tender.
We have the right, in accordance with applicable law, at any time:
. to delay the acceptance of the old notes;
. to terminate the exchange offer if we determine that any of the
conditions to the exchange offer have not occurred or have not been
satisfied;
. to extend the expiration date of the exchange offer and keep all old
notes tendered other than those notes properly withdrawn; and
. to waive any condition or amend the terms of the exchange offer.
If we materially change the exchange offer, or if we waive a material
condition of the exchange offer, we will promptly distribute a prospectus
supplement to you disclosing the change or waiver. We also will extend the
exchange offer if required by Rule 14e-1 under the Securities Exchange Act of
1934.
If we exercise any of the rights listed above, we will promptly give
written notice of the action to the exchange agent, as described below under
"--Exchange agent", and we will issue a release to appropriate news agencies.
In the case of an extension, an announcement will be made no later than 9:00
a.m., New York City time in the case of dollar denominated notes, or 9:00
a.m., London time in the case of euro denominated notes, on the next business
day after the previously scheduled expiration date.
Acceptance of old notes for exchange, and issuance of new notes
UPC will issue to the exchange agent new notes for old notes tendered and
accepted and not withdrawn promptly after the expiration date. The exchange
agent might not deliver the new notes to all tendering holders at the same
time. The timing of delivery depends upon when the exchange agent receives and
processes the required documents.
UPC will be deemed to have exchanged old notes validly tendered and not
withdrawn when it gives written notice to the exchange agent of their
acceptance. The exchange agent is an agent for UPC for receiving tenders of
old notes, letters of transmittal and related documents. If UPC for any
reason:
. delays the acceptance or exchange of any old notes, or
. extends the exchange offer, or
. is unable to accept or exchange notes,
then the exchange agent may, on behalf of UPC and subject to Rule 14e-1(c)
under the Exchange Act, retain tendered notes. Old notes that the exchange
agent retains may not be withdrawn, except according to the withdrawal
procedures outlined below in "--Withdrawal rights."
In tendering old notes, you must warrant in the letter of transmittal or in
an agent's message, which is described below, that:
. you have full power and authority to tender, exchange, sell, assign
and transfer old notes,
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<PAGE>
. UPC will acquire good, marketable and unencumbered title to the
tendered old notes, free and clear of all liens, restrictions,
charges and other encumbrances, and
. the old notes tendered for exchange are not subject to any adverse
claims or proxies.
You also must warrant and agree that you will, upon request, execute and
deliver any additional documents that UPC or the exchange agent requests to
complete the exchange, sale, assignment, and transfer of the old notes.
Procedures for Tendering Old Notes
To tender outstanding notes in the exchange offer, the registered holder of
the notes must transfer such outstanding notes into the exchange agent's
account in accordance with DTC's ATOP procedures or Euroclear's or Cedalbank's
standard transfer procedures.
In lieu of delivering a letter of transmittal to the exchange agent, a
computer-generated message, in which the holder of the outstanding euro notes
acknowledges and agrees to be bound by the terms of the letter of transmittal,
must be transmitted by DTC, Euroclear or Cedelbank, as the case may be, on
behalf of a holder and received by the exchange agent prior to 12:00 p.m., New
York City time (5:00 p.m., London time), on the expiration date.
The tender by a holder of outstanding notes will constitute an agreement
between such holder and us in accordance with the terms and subject to the
conditions set forth herein and in the letter of transmittal.
No letter of transmittal should be sent to us.
Only a registered holder of outstanding notes may tender outstanding notes
in the exchange offer.
Any beneficial holder whose outstanding notes are registered in the name of
his broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on his behalf.
Determination of Validity
All the questions as to the validity, form, eligibility, time of receipt,
acceptance and withdrawal of the tendered outstanding notes will be determined
by us in our sole discretion, which determinations will be final and binding.
We reserve the absolute right to reject any and all outstanding notes not
validly tendered or any outstanding notes our acceptance of which would, in the
opinion of our counsel, be unlawful. We also reserve the absolute right to
waive any irregularities or conditions of tender as to particular outstanding
notes. Our interpretation of the terms and conditions of the exchange offer,
including the instructions in the letter of transmittal, will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of outstanding notes must be cured within such time as
we shall determine. Neither us, the exchange agent nor any other person shall
be under any duty to give notification of defects or irregularities with
respect to tenders of outstanding notes nor shall any of them incur any
liability for failure to give such notification. Tenders of outstanding notes
will not be deemed to have been made until such irregularities have been cured
or waived. Any outstanding notes received by the exchange agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned without cost by the exchange agent to the
tendering holder of such outstanding notes unless otherwise provided in the
letter of transmittal, as soon as practicable following the expiration date.
In addition, we reserve the right in our sole discretion to
(a) purchase or make offers or any outstanding notes that remain
outstanding subsequent to the expiration date, or to terminate the exchange
offer and
(b) to the extent permitted by applicable law, purchase outstanding
notes in the open market, in privately negotiated transactions or
otherwise.
The terms of any such purchases or offers may differ from the terms of the
exchange offer.
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<PAGE>
By tendering, each holder of outstanding notes will represent to us that,
among other things, the exchange notes acquired pursuant to the exchange offer
are being obtained in the ordinary course of business of the person receiving
such exchange notes, whether or not such person is the holder, that neither the
holder nor any other person has an arrangement or understanding with any person
to participate in the distribution of the exchange notes and that neither the
holder nor any such other person is an "affiliate" of ours within the meaning
of Rule 405 under the Securities Act.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of outstanding notes may be
withdrawn at any time prior to 12:00 p.m., New York City time (5:00 p.m.,
London time),on the expiration date unless previously accepted for exchange.
To withdraw a tender of outstanding notes in the exchange offer, a notice
of withdrawal must be transmitted by DTC, Euroclear or DTC, Cedelbank, as the
case may be, and received by the exchange agent, in accordance with the
standard operating procedures of DTC, Euroclear or Cedelbank, as the case may
be, on behalf of a holder, prior to 12:00 p.m., New York City time (5:00 p.m.,
London time), on the expiration date and prior to acceptance for exchange
thereof by us. Any such notice of withdrawal must
(1) specify the name of the person having deposited the outstanding
notes to be withdrawn,
(2) identify the outstanding notes to be withdrawn, including the
principal amount of such outstanding notes, and
(3) be signed by the depositor in the same manner as the original
signature on the letter of transmittal by which such outstanding notes were
tendered, or be accompanied by documents of transfers sufficient to permit
the trustee with respect to the outstanding notes to register the transfer
of such outstanding notes into the name of the depositor withdrawing the
tender.
All questions as to the validity, form and eligibility, including time of
receipt, for such withdrawal notices will be determined by us, whose
determination shall be final and binding on all parties. Any outstanding notes
so withdrawn will be deemed not to have been validly tendered for purposes of
the exchange offer and no exchange notes will be issued with respect thereto
unless the outstanding notes so withdrawn are validly tendered. Any outstanding
notes which have been tendered but which are not accepted for exchange will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the
exchange offer. Properly withdrawn outstanding notes may be tendered by
following one of the procedures for tendering described above at any time prior
to the expiration date.
Exchange Agent
Citibank, N.A., the trustee under the indentures, has been appointed as
exchange agent for the exchange of the outstanding notes. Questions and
requests for assistance relating to the exchange of the outstanding notes and
requests for additional copies of this prospectus or of the letter of
transmittal should be directed to the exchange agent addressed at Citibank
Global Agency and Trust Services, telephone (44-171) 508-3839.
Resales of new notes
Based on the staff of the SEC's letters to other parties, we believe that
holders of new notes, other than broker-dealers, can offer the new notes for
resale, resell and otherwise transfer the new notes without delivering a
prospectus to prospective purchasers. However, you must acquire the new notes
in the ordinary course of business and have no intention of engaging in a
distribution of the new notes, as a "distribution" is defined by the Securities
Act. We are exchanging the old notes for new notes in reliance upon the staff
of the SEC's position, set forth in interpretive letters to third parties in
other similar transactions. We will not seek our own interpretive letter. As a
result, we cannot assure you that the staff will take the same position on this
exchange offer as it did in interpretive letters to other parties.
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<PAGE>
If you are an "affiliate" of UPC or you intend to distribute new notes, or
if you are a broker-dealer who purchased old notes from UPC to resell pursuant
to Rule 144A or any other available exemption under the Securities Act, you:
. cannot rely on the staff's interpretations in the above mentioned
interpretive letters;
. cannot tender old notes in the exchange offer; and
. must comply with the registration and prospectus delivery
requirements of the Securities Act to transfer the old notes, unless
the sale is exempt.
In addition, if you are a broker-dealer who acquired old notes for your own
account as a result of market-making or other trading activities and you
exchange the old notes for new notes, you must deliver a prospectus with any
resales of the new notes.
If you want to exchange your old notes for new notes, you will be required
to affirm that you:
. are not an "affiliate" of UPC;
. are acquiring the new notes in the ordinary course of your business;
. have no arrangement or understanding with any person to participate
in a distribution of the new notes, within the meaning of the
Securities Act; and
. are not a broker-dealer, are not engaged in, and do not intend to
engage in, a distribution of the new notes, within the meaning of the
Securities Act.
In addition, we may require you to provide information regarding the number
of "beneficial owners" of the old notes within the meaning of Rule 13d-3 under
the Exchange Act. Each broker-dealer that receives new notes for its own
account must acknowledge that it acquired the old notes for its own account as
the result of market-making activities or other trading activities. Each
broker-dealer must further agree that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of new notes.
By making this acknowledgment and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" under the Securities
Act. Based on the staff's position in interpretive letters issued to third
parties, we believe that broker-dealers who acquired old notes for their own
accounts as a result of market-making activities or other trading activities
may fulfill their prospectus delivery requirements with respect to the new
notes with a prospectus meeting the requirements of the Securities Act.
Accordingly, a broker-dealer may use this prospectus to satisfy such
requirements. We have agreed that a broker-dealer may use this prospectus for a
period ending six months after the expiration date of the exchange offer. You
should read the section entitled "Plan of Distribution" for further information
about the use of this prospectus by broker-dealers. A broker-dealer intending
to use this prospectus in the resale of new notes must notify us, on or prior
to the expiration date, that it is a participating broker-dealer. This notice
may be given in the letter of transmittal or may be delivered to the exchange
agent. Any participating broker-dealer who is an "affiliate" of UPC may not
rely on the staff's interpretive letters and must comply with the registration
and prospectus delivery requirements of the Securities Act when reselling new
notes.
Each participating broker-dealer exchanging old notes for new notes agrees
that, upon receipt of notice from UPC:
. that any statement contained or incorporated by reference in this
prospectus makes the prospectus untrue in any material respect, or
. that this prospectus omits to state a material fact necessary to make
the statements contained or incorporated by reference in this prospectus,
in light of the circumstances under which they were made, not misleading,
or
. on the occurrence of other events specified in the registration
rights agreement,
the participating broker-dealer will suspend the sale of new notes.
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<PAGE>
Each participating broker-dealer agrees not to resell the new notes until:
. UPC has amended or supplemented this prospectus to correct the
misstatement or omission and UPC furnishes copies of the amended or
supplemented prospectus to the participating broker-dealer, or
. UPC gives notice that the sale of the new notes may be resumed.
If UPC gives notice suspending the sale of new notes, it shall extend the
six month period during which this prospectus may be used by a participating
broker-dealer by the number of days between the date UPC gives notice of
suspension and the date participating broker-dealers receive copies of the
amended or supplemented prospectus or the date UPC gives notice resuming the
sale of new notes.
FEES AND EXPENSES
We will pay the exchange agent's fees for their services and out-of-pocket
expenses. We will also pay brokerage houses and other custodians, nominees and
fiduciaries their reasonable out-of- pocket expenses for sending copies of this
prospectus and related documents to holders of old notes, and for handling or
tendering for their customers.
We will pay the transfer taxes for the exchange of the old notes in the
exchange offer. If, however, new notes are delivered to or issued in the name
of a person other than the registered holder, or if a transfer tax is imposed
for any reason other than for the exchange of old notes in the exchange offer,
then the tendering holder will pay the transfer taxes. If a tendering holder
does not submit satisfactory evidence of payment of taxes or exemption from
taxes with the letter of transmittal, the taxes will be billed directly to the
tendering holder.
We will not make any payment to brokers, dealers or other nominees
soliciting acceptances in the exchange offer.
ACCOUNTING TREATMENT
The new notes will be recorded at the same carrying value as the old notes.
Accordingly, UPC will not recognize any gain or loss on the exchange for
accounting purposes. We intend to amortize the expenses of the exchange offer
and issuance of the old notes over the respective terms of the dollar notes and
euro notes.
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USE OF PROCEEDS
We will not receive any proceeds from the exchange offer. The net proceeds
from the sale of the old notes to the initial purchasers was approximately NLG
2,081.8 million ($1,007.8 million), less fees and expenses. We used the net
proceeds to fund a portion of the new acquisitions, and for working capital and
other general corporate purposes.
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EXCHANGE RATE DATA
We report all of our historical financial results in Dutch guilders. For
your convenience, we have converted some amounts in non-Dutch currencies to
Dutch guilders. These foreign currency translations for amounts prior to
December 31, 1998 use the same exchange rates used for the 1998 financial
statements. For amounts after December 31, 1998, we have used September 30,
1999 exchange rates, except (1) for conversion of purchase prices of closed
acquisitions and our October 1999 equity and note offerings, for which we have
used the actual exchange rate on the date of closing, and (2) as otherwise
indicated. These translated amounts may not currently equal such Dutch guilder
amounts nor may they necessarily be converted into Dutch guilders at the
translation exchange rates used.
In the future, we expect to report our financial results in euros. The
fixed exchange rate is 0.45378 euros per NLG1.00. The average exchange rate for
September 1999 was 0.9526 euros per $1.00.
The following table sets forth, for the periods indicated, information
concerning the exchange rate at the end of the period, the average of the
exchange rates at 12:00 p.m. Eastern Standard Time on the last day of each
month during the applicable period and the high and low exchange rates for
Dutch guilders expressed in guilders per $1.00. Exchange rates have been
rounded to the nearest 1/100th of one dollar. The source of the information in
this table is derived from U.S. Federal Reserve Statistical Release H.10(512).
<TABLE>
<CAPTION>
As of or for the Year As of or for the
Exchange Rates: Dutch Guilders per Ended December 31, Nine Months
$1.00 ----------------------- Ended
1996 1997 1998 September 30, 1999
------- ------- ------- ------------------
<S> <C> <C> <C> <C>
Exchange rate at end of period..... 1.73 2.03 1.88 2.07
Average exchange rate during
period............................ 1.69 1.97 1.99 2.05
Highest exchange rate during
period............................ 1.76 2.12 2.09 2.17
Lowest exchange rate during
period............................ 1.61 1.73 1.81 1.86
</TABLE>
The following table presents the spot rates used to translate the balance
sheets and the average rates used to translate the income statements of our
operating systems into Dutch guilders presented in this prospectus. The amounts
below represent the number of Dutch guilders per unit of each functional
currency, unless otherwise indicated.
<TABLE>
<CAPTION>
Average Rate Average Rate Average Rate Average Rate
Twelve Twelve Twelve Nine
Months Months Months Balance Months
Ended Balance Ended Balance Ended Sheet Rate at Ended
Exchange Rates: Dutch Dec. 31, Sheet Rate at Dec. 31, Sheet Rate at Dec. 31, September September 30,
Guilders per Other 1996 Dec. 31, 1997 1997 Dec. 31, 1998 1998 30, 1999 1999
Currency ------------ ------------- ------------ ------------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Austrian Schilling...... 0.1593 0.1602 0.1599 0.1602 0.1602 0.16015 0.16015
Belgian Franc........... 0.0544 0.0546 0.0545 0.0546 0.0546 0.054629 0.054629
Czech Koruna............ 0.0626 0.0585 0.0622 0.0627 0.0617 0.0616 0.05946
French Franc............ 0.3295 0.3369 0.3243 0.3362 0.3363 0.33595 0.33595
German Mark............. -- -- -- 1.1268 1.1273 1.1267 1.1267
Hungarian Forint (per
100 units)............. -- 0.99 1.05 0.88 0.93 0.85 0.873
Irish Pound............. -- 2.89 2.96 2.80 2.82 2.7981 2.7981
New Israeli Shekel...... -- 0.5720 0.5522 0.4546 0.5293 0.483 0.49621
Maltese Lira............ -- 5.11 4.99 5.02 5.09 5.18 5.15
Norwegian Kroner........ 0.2645 0.2745 0.2755 0.2479 0.2637 0.2668 0.26324
Polish Zloty............ 0.6254 0.5738 0.5989 0.5398 0.5687 0.5039 0.52603
Romania Leu (per 100
units)................. -- 0.0250 0.0277 0.0179 0.0227 0.0125 0.01417
Slovak Koruna........... -- 0.0579 0.0579 0.0512 0.0566 0.04509 0.04963
Swedish Kronor.......... 0.2512 0.2553 0.2551 0.2325 0.2503 0.2527 0.2482
U.S. Dollar............. 1.69 2.02 1.95 1.89 1.99 2.07 2.047
</TABLE>
36
<PAGE>
CAPITALIZATION
The following table sets forth, on a consolidated basis, our non-restricted
cash and cash equivalents, short-term and long-term debt and equity
capitalization as of September 30, 1999, to reflect (1) our offering of
15,000,000 ordinary shares A, (2) our offering of senior notes in October 1999
and the related swap agreement, (3) the use of the net proceeds from our
offering of 15,000,000 ordinary shares A at a price of NLG131.67 per share, (4)
the use of proceeds from the October 1999 senior note offering and (5) our
acquisition of Kabel Plus.
The table should be read in conjunction with our audited and unaudited
consolidated financial statements, the notes and supplements thereto, and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our "Unaudited Pro Forma Condensed Consolidated Financial
Data," all of which are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1999
---------------------------------
Actual Adjusted
--------------- ----------------
(Dutch guilders, in thousands)
<S> <C> <C>
Non-restricted cash and cash equivalents..... 139,150 3,798,613
=============== ===============
Short-term debt:
United loan................................ 13,809 --
Stjarn facilities ......................... 84,566 84,566
Stjarn seller's note....................... 207,000 207,000
Other...................................... 65,007 114,585
Current portion of long-term............... 12,430 12,430
--------------- ---------------
382,812 418,581
=============== ===============
Long-term debt:
UPC October 1999 senior notes and discount
notes..................................... -- 2,129,132
UPC July 1999 senior notes and discount
notes..................................... 3,171,375 3,171,375
UPC senior credit facility................. 618,298 618,298
PCI senior notes and discount notes........ 271,812 271,812
@ Entertainment senior notes and discount
notes..................................... 626,321 626,321
New TeleKabel facility..................... 562,571 562,571
CNBH facility.............................. 252,221 252,221
A2000 facilities........................... 458,000 458,000
Mediareseaux facility...................... 85,859 85,859
RCF facility............................... 69,624 69,624
RVC facility............................... 100,785 100,785
Videopole facility......................... 7,820 7,820
Bank and other loans....................... 182,327 182,327
--------------- ---------------
Total long-term debt....................... 6,407,013 8,536,145
--------------- ---------------
Minority interest in subsidiaries............ 33,002 40,244
--------------- ---------------
Shareholders' equity:
Priority stock............................. -- --
Ordinary shares A.......................... 573,853 639,964
Additional paid in capital................. 3,518,033 5,352,177
Deferred compensation...................... (61,488) (61,488)
Accumulated deficit........................ (1,403,788) (1,403,788)
Other cumulative comprehensive income...... 219,483 219,483
--------------- ---------------
Total shareholders' equity............... 2,846,093 4,746,348
=============== ===============
Total capitalization..................... 9,286,108 13,322,737
=============== ===============
</TABLE>
37
<PAGE>
The @Entertainment and @Entertainment/PCI senior notes include put
provisions that were triggered as a result of our acquisition of
@Entertainment. The offers for the repurchase of the @Entertainment Notes and
the PCI Notes, which were made pursuant to the terms of the indentures covering
each of the @Entertainment Notes and the PCI Notes, expired at 12:01 PM, New
York City time, on November 2, 1999. Pursuant to its repurchase offer,
@Entertainment has purchased $49.1 million aggregate principal amount at
maturity of @Entertainment Notes for an aggregate price of $26.5 million and
PCI has purchased $113.2 million aggregate principal amount of PCI Notes for an
aggregate price of $114.4 million. The Kabel Plus facility includes a change of
control provision and our acquisition of Kabel Plus may result in an obligation
to repay this facility.
38
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated financial data are
presented to reflect the pro forma effect of certain of the new acquisitions.
The unaudited pro forma condensed consolidated balance sheet and statements of
operations and notes thereto do not purport to represent what our results of
operations would actually have been if such transactions had in fact occurred
on such dates. The pro forma adjustments are based upon currently available
information and upon certain assumptions that we believe are reasonable. The
unaudited pro forma condensed consolidated financial data and accompanying
notes should be read in conjunction with our audited consolidated financial
statements and the notes thereto, our unaudited interim consolidated financial
statements and notes thereto, certain financial statements of certain of our
new acquisitions and other financial information, including "Management's
Discussion and Analysis of Financial Condition and Results of Operations," all
of which are included elsewhere in this prospectus.
In August 1998, we and NUON created United TeleKabel Holding ("UTH") by
contributing each of our interests in Dutch cable television systems to UTH. We
contributed our 100% interest in CNBH and our 50% interest in A2000. NUON
contributed its 100% interest in N.V. TeleKabel Beheer. Effective August 1998,
we deconsolidated our assets contributed to UTH and accounted for our
investment in UTH under the equity method. In February 1999, we acquired NUON's
49% interest in UTH for NLG518.1 million. The NUON acquisition completed the
purchase of a 100.0% interest in N.V. Telekabel Beheer. We began consolidating
UTH effective February 1, 1999.
In July 1999, we closed the purchase of approximately 4.8% of SBS for cash
of $24.3 million (NLG50.1 million). In August 1999, we acquired an additional
8.5% of SBS for $75.9 million (NLG154.8 million), increasing our ownership to
13.3%. Our investment in SBS was accounted for under the equity method of
accounting.
In July 1999, we acquired StjarnTVnatet AB ("Stjarn") for a purchase price
of $397.0 million (NLG817.8 million). $100.0 million (NLG206.0 million) of the
purchase price was paid in the form of a one year note with interest at 8% per
year and the balance of the purchase price was paid in cash. Upon maturity of
the note, we will have the option to pay the note in either cash or our shares.
We have assumed in the unaudited statement of operations pro formas that the
note is outstanding from January 1, 1998 to December 31, 1998 and that the note
will then convert to equity upon maturity. The Stjarn acquisition was
structured as a purchase of shares of Stjarn's parent holding company, NBS
Nordic Broadband Services AB ("NBS Nordic"). The Stjarn acquisition was
accounted for under the purchase accounting method. We began consolidating
Stjarn effective upon the closing of the acquisition, including its cash and
its debt, which were SEK27.6 million (NLG7.0 million) and SEK581.9 million
(NLG147.1 million), respectively, as of September 30, 1999.
NBS Nordic acquired its wholly-owned subsidiary Stjarn (formerly Singapore
Telecom International Svenska AB) on May 6, 1998. As NBS Nordic had no
substantial operations of its own prior to the acquisition of Stjarn, Stjarn is
deemed to be the predecessor to NBS Nordic. We refer to the acquisition of NBS
Nordic as the acquisition of its operating entity Stjarn throughout this
document.
In August 1999, we acquired 100% of @Entertainment for $807.0 million
(NLG1,654.4 million). The @Entertainment acquisition was accounted for under
the purchase accounting method. We began consolidating @Entertainment upon the
closing of the acquisition, including its cash and its debt, which were $23.8
million (NLG49.3 million) and $457.6 million (NLG947.3 million), respectively,
as of September 30, 1999.
In September 1999, we acquired the remaining 50% of A2000 that we did not
already own for $229.0 million (NLG471.7 million), including the assumption of
receivables from A2000 of approximately NLG27.0 million. The A2000 acquisition
was accounted for under the purchase accounting method. Upon closing of the
A2000 acquisition, we began consolidating A2000, including its debt. As of
September 30, 1999, A2000 had debt of NLG505.9 million, excluding loans from
us.
In October 1999, we acquired MediaOne's 94.6% interest in Kabel Plus for
$150.0 million (NLG312.7 million). The Kabel Plus acquisition will be accounted
for under the purchase accounting method. Upon closing of
39
<PAGE>
the Kabel Plus acquisition, we consolidated Kabel Plus, including its debt. As
of September 30, 1999, Kabel Plus had debt of CZK804.8 million (NLG49.8
million).
In October 1999, we closed the offering of 15,000,000 of our ordinary
shares A. The price was set at (Euro)59.75 (NLG131.67) per share, for gross
proceeds of approximately (Euro)896.2 million (NLG1,975.0 million) and net
proceeds of approximately (Euro)862.3 million (NLG1,900.3 million). Proceeds
from the offering were used for the acquisition of Kabel Plus and the repayment
of the loan to United.
In October 1999, we closed a $1,030.7 million (NLG2,129.1 million)
equivalent bond offering, consisting of the bonds for which we are offering
these bonds in exchange. The offering consists of six tranches: $252.0 million
and (Euro)101.0 million of ten year senior notes due 2009 with a 11 1/4%
coupon; $200.0 million and (Euro)100.0 million of eight year senior notes due
2007 with a coupon of 10 7/8%; and $478.0 million and (Euro)191.0 million
aggregate principal amount of ten year 13 3/8% senior discount notes due 2009.
The senior discount notes were sold at 52.306% of the face amount yielding
gross proceeds of $252.0 million and (Euro)100.0 million and will accrue but
not pay interest until 2004. Concurrent with the closing of the offering, we
entered into cross-currency swaps, swapping the $252.0 million 11 1/4% coupon
and $200.0 million 10 7/8% coupon into fixed and variable rate Euro notes with
a notional amount totaling (Euro)349.9 million. Net proceeds from the offering
totaled approximately $1,007.8 million (NLG2,081.8 million).
40
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The following unaudited pro forma condensed consolidated balance sheet as
of September 30, 1999 gives effect to (1) the acquisition of Kabel Plus, (2)
the offering of 15,000,000 of our ordinary shares A in October 1999, and (3)
the offering of our senior notes and senior discount notes in October 1999, as
if each had occurred on September 30, 1999.
<TABLE>
<CAPTION>
As of September 30, 1999
-----------------------------------------------------------------
Pro Forma Adjustments
-------------------------------------------
October 1999 October 1999
UPC Kabel Plus Equity Senior Notes UPC
Historical Acquisition(a) Offering Offering(h) Pro Forma
---------- -------------- ------------ ------------- ----------
(Dutch guilders, in thousands)
<S> <C> <C> <C> <C> <C>
Assets:
Current assets
Cash and cash equivalents........... 139,150 3,870 1,573,771(e) 2,081,822 3,798,613
Restricted cash..................... 37,775 1,135 -- -- 38,910
Subscriber receivables, net......... 92,362 5,630 -- -- 97,992
Costs to be reimbursed, net......... 19,085 -- -- -- 19,085
Other current assets................ 366,849 6,135 -- -- 372,984
---------- ------- --------- --------- ----------
Total current assets............... 655,221 16,770 1,573,771 2,081,822 4,327,584
Marketable equity securities of
parent.............................. 412,858 -- -- -- 412,858
Investments in and advances to
affiliates, net..................... 500,158 1,433 -- -- 501,591
Property, plant & equipment, net..... 3,512,313 175,148 -- -- 3,687,461
Goodwill and other intangibles, net.. 5,446,246 186,858(b) -- -- 5,633,104
Deferred financing costs, net........ 140,544 -- -- 47,310 187,854
Non-current restricted cash and other
assets.............................. 22,928 -- -- -- 22,928
---------- ------- --------- --------- ----------
Total assets....................... 10,690,268 380,209 1,573,771 2,129,132 14,773,380
========== ======= ========= ========= ==========
Liabilities and shareholders' equity:
Current liabilities
Accounts payable, accrued
liabilities and other current
liabilities........................ 858,343 10,714 -- -- 869,057
Short-term debt..................... 356,573 49,578 -- -- 406,151
Note payable to shareholder......... 13,809 -- (13,809)(f) -- --
Current portion of long-term debt... 12,430 -- -- -- 12,430
---------- ------- --------- --------- ----------
Total current liabilities........... 1,241,155 60,292 (13,809) -- 1,287,638
Long-term debt....................... 6,407,013 -- -- 2,129,132 8,536,145
Deferred taxes and other long-term
liabilities......................... 163,005 -- -- -- 163,005
---------- ------- --------- --------- ----------
Total liabilities................... 7,811,173 60,292 (13,809) 2,129,132 9,986,788
Minority interest in subsidiaries.... 33,002 7,242(c) -- -- 40,244
---------- ------- --------- --------- ----------
Total shareholders' equity.......... 2,846,093 312,675(d) 1,587,580(g) -- 4,746,348
---------- ------- --------- --------- ----------
Total liabilities and shareholders'
equity............................. 10,690,268 380,209 1,573,771 2,129,132 14,773,380
========== ======= ========= ========= ==========
</TABLE>
- --------------------
(a)Represents the historical amounts included in Kabel Plus's balance sheet at
September 30, 1999, except as indicated in (b), (c) and (d), converted from
Czech korunas to Dutch guilders at the September 30, 1999 spot exchange
rate.
(b)Represents the pro forma increase in goodwill and other intangibles as a
result of the Kabel Plus acquisition:
<TABLE>
<S> <C> <C>
Consolidation of historical Kabel Plus goodwill and other
intangibles............................................... NLG 1,058
Additional pro forma goodwill and other
intangibles due to the Kabel Plus acquisition:
Historical shareholders' equity.............. NLG(126,875)
Purchase price............................... NLG 312,675
-----------
NLG185,800
----------
NLG186,858
==========
</TABLE>
(c)Represents the allocation of historical net assets to minority interest in
Kabel Plus.
41
<PAGE>
(d)Represents the pro forma increase in shareholders' equity as a result of
proceeds from our October 1999 equity offering used for the acquisition of
Kabel Plus.
(e)Represents the pro forma increase in cash from our October 1999 equity
offering, net of issuance costs and proceeds used for the repayment of our
loan from United and the acquisition of Kabel Plus.
(f)Represents the pro forma repayment of our loan from United with proceeds
from our October 1999 equity offering.
(g)Represents the pro forma increase in shareholders' equity from our October
1999 equity offering, net of offering costs and proceeds used for the
acquisition of Kabel Plus.
(h)Represents the pro forma increase in cash, deferred finance costs and long-
term debt from our October 1999 senior notes and senior discount notes
offering.
42
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma condensed consolidated statement of
operations for the nine months ended September 30, 1999 gives effect to (1) the
UTH transaction and the NUON acquisition (together the "NUON Transaction"), (2)
the acquisitions of @Entertainment, A2000, Kabel Plus, Stjarn and 13.3% of SBS,
and (3) the various debt and equity offerings used to fund the acquisitions as
if each had occurred as of January 1, 1998.
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999
-------------------------------------------------------------------------------------------------------------
Pro Forma Adjustments
-----------------------------------------------------------------------------------------------
@
UPC NUON Entertainment A2000 Kabel Plus Stjarn SBS
Historical Transaction (a) Acquisition (d) Acquisition (g) Acquisition (k) Acquisition (n) Acquisition
------------ --------------- --------------- --------------- --------------- --------------- -----------
(unaudited)
(Dutch guilders, in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Service and
other revenue.. 608,558 19,844 95,711 103,013 38,555 38,873 --
Operating
expense........ (316,481) (6,616) (144,316) (37,143) (10,775) (15,974) --
Selling, general
&
administrative
expense........ (440,533) (6,013) (104,058) (45,478) (19,828) (12,024) --
Depreciation and
amortization... (340,501) (9,913)(b) (100,215)(e) (79,802)(h) (20,217)(l) (40,853)(o) --
------------ ------- -------- -------- ------- ------- -------
Net operating
(loss) income.. (488,957) (2,698) (252,878) (59,410) (12,265) (29,978) --
Interest in
come........... 22,819 -- 5,756 834 -- 369 --
Interest
expense........ (187,750) (4,790) (156,837)(f) (49,704)(i) (6,557) (42,614)(p) --
Gain on sale of
assets......... 14,625 -- -- -- -- -- --
Foreign exchange
gain (loss) and
other expense 10,046 -- (4,461) (1,043) 1,493 -- --
------------ ------- -------- -------- ------- ------- -------
Net loss before
income taxes
and other items (629,217) (7,488) (408,420) (109,323) (17,329) (72,223) --
Shares in
results of
affiliated
companies,
net............ (55,857) 385 (c) (2,047) 36,206(j) -- -- (10,460)(q)
Minority
interests in
subsidiaries... 1,300 22 -- -- 936(m) -- --
Income tax
benefit
(expense)...... 7,036 242 (61) -- -- 566 --
------------ ------- -------- -------- ------- ------- -------
Net loss........ (676,738) (6,839) (410,528) (73,117) (16,393) (71,657) (10,460)
============ ======= ======== ======== ======= ======= =======
Basic and
diluted net
loss per
ordinary share
A.............. (5.61)
============
Weighted-average
number of
ordinary shares
A outstanding.. (120,586,863)
============
<CAPTION>
July
1999
Senior
Notes UPC
Offering Pro Forma
------------ ----------------
<S> <C> <C>
Statement of
Operations Data:
Service and
other revenue.. -- 904,554
Operating
expense........ -- (531,305)
Selling, general
&
administrative
expense........ -- (627,934)
Depreciation and
amortization... -- (591,501)
------------ ----------------
Net operating
(loss) income.. -- (846,186)
Interest in
come........... -- 29,778
Interest
expense........ (7,391)(r) (455,643)
Gain on sale of
assets......... -- 14,625
Foreign exchange
gain (loss) and
other expense (67,288)(s) (61,253)
------------ ----------------
Net loss before
income taxes
and other items (74,679) (1,318,679)
Shares in
results of
affiliated
companies,
net............ -- (31,773)
Minority
interests in
subsidiaries... -- 2,258
Income tax
benefit
(expense)...... -- 7,783
------------ ----------------
Net loss........ (74,679) (1,340,411)
============ ================
Basic and
diluted net
loss per
ordinary share
A.............. (10.52)
================
Weighted-average
number of
ordinary shares
A outstanding.. (127,405,107)(t)
================
</TABLE>
<TABLE>
<S> <C>
Consolidation of historical amortization and depreciation of UTH
for the month ended January 31, 1999........................... NLG(8,246)
Amortization of the step-up in basis recorded under purchase
accounting, using a 15 year life, for the month ended January
31, 1999....................................................... NLG(1,667)
---------
NLG(9,913)
=========
</TABLE>
<TABLE>
<S> <C>
Consolidation of historical share in results of affiliates of
UTH for the month ended January 31, 1999...................... NLG(5,022)
Elimination of the historical share in results recorded by UPC
for its 51% investment in UTH for the month ended
January 31, 1999 ............................................. NLG 5,407
---------
NLG 385
=========
</TABLE>
- -------------------
(a) Represents the consolidation of the historical results of operations for
UTH for the month ended January 31, 1999, except as indicated in (b) and
(c).
(b) Represents additional depreciation and amortization expense as a result of
the NUON Transaction:
(c) Represents additional share in results of affiliates as a result of the
NUON Transaction:
(d) Represents the consolidation of the historical results of operations for
@Entertainment for the seven months ended July 31, 1999, except as
indicated in (e) and (f), converted from U.S. dollars to Dutch guilders
using the July 31, 1999 seven month average exchange rate.
43
<PAGE>
(e)Represents additional depreciation and amortization expense as a result of
the @Entertainment acquisition:
<TABLE>
<S> <C>
Consolidation of historical amortization and depreciation
of @Entertainment for the seven months ended July 31,
1999..................................................... NLG (48,787)
Amortization of the step-up in basis recorded under
purchase accounting, using a 15 year life, for the seven
months ended July 31, 1999............................... NLG (51,428)
-------------
NLG (100,215)
=============
(f)Represents additional interest expense as a result of the @Entertainment
acquisition:
Consolidation of historical interest expense of
@Entertainment for the seven months ended July 31, 1999.. NLG (58,760)
Additional interest expense as a result of the July 1999
senior notes incurred for the @Entertainment acquisition
for the seven months ended July 31, 1999, at an initial
annual blended weighted average interest rate of 9.9%.... NLG (98,077)
-------------
NLG (156,837)
=============
(g)Represents the consolidation of the historical results of operations for
A2000 for the eight months ended August 31, 1999, except as indicated in
(h), (i) and (j).
(h)Represents additional depreciation and amortization expense as a result of
the A2000 acquisition:
Consolidation of historical amortization and depreciation
of A2000 for the eight months ended August 31, 1999...... NLG (46,866)
Reclassification of UTH's amortization of its excess basis
in A2000 for the eight months ended August 31, 1999...... NLG (11,927)
Amortization of the step-up in basis recorded under
purchase accounting, using a 15 year life, for the eight
months ended August 31, 1999............................. NLG (21,009)
-------------
NLG (79,802)
=============
(i)Represents additional interest expense as a result of the A2000 acquisition:
Consolidation of historical interest expense of A2000 for
the eight months ended August 31, 1999................... NLG (21,874)
Additional interest expense as a result of the July 1999
senior notes incurred for the A2000 acquisition for the
seven months ended July 31, 1999, at an initial annual
blended weighted average interest rate of 9.9%........... NLG (27,830)
-------------
NLG (49,704)
=============
(j)Represents the elimination of the historical equity pick-up recorded by UTH
for its investment in A2000:
Elimination of UTH's share in results of A2000 for the
eight months ended August 31, 1999....................... NLG 24,279
Reclassification of UTH's amortization of its excess basis
in A2000 for the eight months ended August 31, 1999 to
amortization expense..................................... NLG 11,927
-------------
NLG 36,206
=============
</TABLE>
(k)Represents the consolidation of the historical results of operations for
Kabel Plus for the nine months ended September 30, 1999, except as
indicated in (l) and (m), converted from Czech korunas to Dutch guilders,
using the September 30, 1999 nine month average exchange rate.
(l) Represents additional depreciation and amortization expense as a result of
the Kabel Plus acquisition:
<TABLE>
<S> <C>
Consolidation of historical amortization and depreciation of
Kabel Plus for the nine months ended September 30, 1999....... NLG(14,896)
Amortization of the step-up in basis recorded under purchase
accounting, using a 15 year life, for the nine months ended
September 30, 1999............................................ NLG (5,321)
----------
NLG(20,217)
==========
</TABLE>
44
<PAGE>
(m) Represents minority interest in the net loss of Kabel Plus for the nine
months ended September 30, 1999.
(n) Represents the consolidation of the historical results of operations for
NBS Nordic for the seven months ended July 31, 1999, except as indicated in
(o) and (p), converted from Swedish kronor, using the July 31, 1999 seven
month average exchange rate.
(o) Represents additional depreciation and amortization expense as a result of
the Stjarn acquisition.
<TABLE>
<S> <C>
Consolidation of historical amortization and depreciation of
NBS Nordic for the seven months ended July 31, 1999.......... NLG (11,783)
Amortization of the step-up in basis recorded under purchase
accounting, using a 15 year life, for the seven months ended
July 31, 1999................................................ NLG (29,070)
-----------
NLG (40,853)
===========
</TABLE>
(p) Represents additional interest expense as a result of the Stjarn
acquisition:
<TABLE>
<S> <C>
Consolidation of historical interest expense of NBS Nordic for
the seven months ended July 31, 1999.......................... NLG (6,520)
Additional interest expense as a result of the July 1999 senior
notes incurred for the Stjarn acquisition for the seven months
ended July 31, 1999, at an initial annual blended weighted
average interest rate of 9.9%................................. NLG(36,094)
----------
NLG(42,614)
==========
(q) Represents share of results in SBS as a result of the acquisition of a
13.3% interest:
UPC's proportionate interest in historical results of SBS for
the seven months ended July 31, 1999.......................... NLG (2,455)
Additional amortization resulting from excess basis in the
investment of SBS for the seven months ended July 31, 1999,
using a 15 year life.......................................... NLG (8,005)
----------
NLG(10,460)
==========
</TABLE>
(r) Represents amortization of deferred finance costs related to the July 1999
senior notes offering for the seven months ended July 31, 1999, plus
additional interest expense related to the proceeds used for the July 1999
senior notes offering pro rata for the portion of the offering proceeds
used for the acquisitions of @Entertainment, A2000 and Stjarn, at an
initial annual blended weighted average interest rate of 9.9%.
(s) Represents the pro forma exchange rate loss on our July 1999 U.S. dollar-
denominated senior discount notes for the seven months ended July 31, 1999
pro rata for the portion of the offering proceeds used for the acquisitions
of @Entertainment, A2000 and Stjarn.
(t) For pro forma purposes, the purchase price for UTH and SBS, which totaled
NLG720.5 million, assuming the acquisitions had occurred on January 1,
1998, are assumed to have been funded from proceeds of our initial public
offering in February 1999. In addition, we are assuming the Stjarn seller's
note is converted to our equity upon maturity on January 1, 1999, assuming
the acquisition had occurred on January 1, 1998. Consequently, the pro
forma weighted average number of shares outstanding for the nine months
ended September 30, 1999 assumes the issuance of 14,980,013 ordinary shares
A at the initial public offering price of NLG63.91 per share, discounted
for underwriting commissions of 5%.
For pro forma purposes, the purchase price for Kabel Plus, which totaled
NLG303.0 million, assuming the acquisition had occurred on January 1, 1998,
is assumed to have been funded from proceeds of our October 1999 equity
offering. Consequently, the pro forma weighted average number of shares
outstanding for the nine months ended September 30, 1999 assumes the
issuance of 2,384,461 ordinary shares A at the October 1999 equity offering
price of NLG131.67 per share, discounted for underwriting commissions of
3.5%.
45
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
The following unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 1998 gives effect to (1) the NUON
Transaction, (2) the acquisitions of @Entertainment, A2000, Stjarn and Kabel
Plus and 13.3% of SBS, and (3) the various debt and equity offerings used to
fund the acquisitions, as if each had occurred as of January 1, 1998.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
---------------------------------------------------------------------------------------------------------
Pro Forma Adjustments
---------------------------------------------------------------------------------------------
UPC NUON @Entertainment A2000 Kabel Plus Stjarn SBS
Historical Transaction(a) Acquisition(d) Acquisition(g) Acquisition(k) Acquisition(n) Acquisition
---------- -------------- --------------- -------------- -------------- -------------- -----------
(audited) (unaudited)
(Dutch guilders, in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Service and
other revenue.. 408,970 186,041 123,161 124,167 47,540 63,160 --
Operating
expense........ (138,459) (62,314) (123,191) (31,914) (15,000) (26,148) --
Selling, general
&
administrative
expense........ (481,703) (58,195) (148,318) (61,773) (28,908) (17,593) --
Depreciation and
amortization... (187,646) (87,539)(b) (140,534)(e) (122,653)(h) (29,546)(l) (68,507)(o) --
---------- ------- -------- -------- ------- -------- --------
Net operating
(loss) income.. (398,838) (22,007) (288,882) (92,173) (25,914) (49,088) --
Interest
income......... 7,397 -- 6,680 674 -- 1,801 --
Interest
expense........ (104,355) (37,926) (205,664)(f) (70,975)(i) (29,949) (88,483)(p) --
Provision for
loss on
investment..... (6,230) -- -- -- -- -- --
Foreign exchange
gain (loss) and
other expense.. 2,690 -- (259) 1,100 (6,047) 13,000(q)
---------- ------- -------- -------- ------- -------- --------
Net loss before
income taxes
and other
items.......... (499,336) (59,933) (488,125) (161,374) (61,910) (122,770) --
Shares in
results of
affiliated
companies,
net............ (63,823) 5,216(c) (12,563) 50,333(j) 123 -- (22,653)(r)
Minority
interests
in subsidiaries.. 1,153 235 -- -- 3,336(m) -- --
Income tax
benefit
(expense)...... (1,215) 1,212 (418) 13 -- -- --
---------- ------- -------- -------- ------- -------- --------
Net loss........ (563,221) (53,270) (501,106) (111,028) (58,451) (122,770) (22,653)
========== ======= ======== ======== ======= ======== ========
Basic and
diluted net
loss per
ordinary share
A ............. (6.80)
==========
Weighted-average
number of
ordinary shares
A outstanding.. 82,869,342
==========
<CAPTION>
July 1999
Senior
Notes UPC
Offering Pro Forma
------------ -------------
<S> <C> <C>
Statement of
Operations Data:
Service and
other revenue.. -- 953,039
Operating
expense........ -- (397,026)
Selling, general
&
administrative
expense........ -- (796,490)
Depreciation and
amortization... -- (636,425)
------------ -------------
Net operating
(loss) income.. -- (876,902)
Interest
income......... -- 16,552
Interest
expense........ (12,433)(s) (549,785)
Provision for
loss on
investment..... -- (6,230)
Foreign exchange
gain (loss) and
other expense.. 50,387(t) 60,871
------------ -------------
Net loss before
income taxes
and other
items.......... 37,954 (1,355,494)
Shares in
results of
affiliated
companies,
net............ -- (43,367)
Minority
interests
in subsidiaries.. -- 4,724
Income tax
benefit
(expense)...... -- (408)
------------ -------------
Net loss........ 37,954 (1,394,545)
============ =============
Basic and
diluted net
loss per
ordinary share
A ............. (14.36)
=============
Weighted-average
number of
ordinary shares
A outstanding.. 97,121,066(u)
=============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------
N.V.
TeleKabel
Beheer UTH Pro Forma NUON
Historical Historical Adjustments Transaction
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Consolidated Statement of
Operations:
Revenue................... 86,919 99,122 -- 186,041
Operating expense......... (29,142) (33,172) -- (62,314)
Selling, general and
administrative expense... (22,099) (36,096) -- (58,195)
Depreciation and
amortization............. (32,128) (35,408) (20,003) (87,539)(b)
------- ------- ------- -------
Net operating loss........ 3,550 (5,554) (20,003) (22,007)
Interest income........... -- -- -- --
Interest expense.......... (21,227) (16,699) -- (37,926)
Provision for loss on
investment related
costs.................... -- -- -- --
Foreign exchange gain
(loss) and other
expenses................. -- -- -- --
------- ------- ------- -------
Net loss before income
taxes and other items.... (17,677) (22,253) (20,003) (59,933)
Share in results of
affiliated companies,
net...................... 6,237 (23,739) 22,718 5,216(c)
Minority interests in
subsidiaries............. -- 235 -- 235
Income tax benefit
(expense)................ -- 1,212 -- 1,212
------- ------- ------- -------
Net loss.................. (11,440) (44,545) 2,715 (53,270)
======= ======= ======= =======
</TABLE>
- -------------------
(a) Represents the consolidation of the historical results of operations of
N.V. TeleKabel Beheer for the seven months ended July 1998 and the
historical results of UTH from inception (August 1998) through December 31,
1998, except as indicated in (b) and (c).
46
<PAGE>
(b)Represents additional depreciation and amortization expense as a result of
the NUON Transaction:
<TABLE>
<S> <C>
Consolidation of historical amortization and depreciation of
N.V. TeleKabel Beheer for the seven months ended July 31,
1998......................................................... NLG(32,128)
Consolidation of historical amortization and depreciation of
UTH for the five months ended December 31, 1998.............. NLG(35,408)
Amortization of the step-up in basis recorded under purchase
accounting, using a 15 year life, for the year ended December
31, 1998..................................................... NLG(20,003)
----------
NLG(87,539)
==========
</TABLE>
(c)Represents additional share in results of affiliates as a result of the NUON
Transaction:
<TABLE>
<S> <C>
Consolidation of historical share in results of affiliates of
N.V. TeleKabel Beheer for the seven months ended July 31,
1998......................................................... NLG 6,237
Consolidation of historical share in results of affiliates of
UTH for the five months ended December 31, 1998.............. NLG(23,739)
Elimination of the historical share in results recorded by UPC
for its 51% investment in UTH for the five months ended
December 31, 1998............................................ NLG 22,718
----------
NLG 5,216
==========
</TABLE>
(d)Represents the consolidation of the historical results of operations for
@Entertainment for the year ended December 31, 1998, except as indicated in
(e) and (f), converted from U.S. dollars to Dutch guilders using the
December 31, 1998 twelve month average exchange rate.
(e)Represents additional depreciation and amortization expense as a result of
the @Entertainment acquisition:
<TABLE>
<S> <C>
Consolidation of historical amortization and depreciation of
@Entertainment for the year ended December 31, 1998.......... NLG (52,371)
Amortization of the step-up in basis recorded under purchase
accounting, using a 15 year life, for the year ended December
31, 1998..................................................... NLG (88,163)
-----------
NLG(140,534)
===========
</TABLE>
(f)Represents additional interest expense as a result of the @Entertainment
acquisition:
<TABLE>
<S> <C>
Consolidation of historical interest expense of
@Entertainment for the year ended December 31, 1998......... NLG (43,716)
Additional interest expense as a result of the July 1999
senior notes incurred for the @Entertainment acquisition for
the year ended December 31, 1998, at an initial annual
blended weighted average interest rate of 9.9%.............. NLG (161,948)
------------
NLG (205,664)
============
</TABLE>
(g)Represents the consolidation of the historical results of operations for
A2000 for the year ended December 31, 1998, except as indicated in (h), (i)
and (j).
(h)Represents additional depreciation and amortization expense as a result of
the A2000 acquisition:
<TABLE>
<S> <C>
Consolidation of historical amortization and depreciation of
A2000 for the year ended December 31, 1998................... NLG (73,254)
Reclassification of UPC's amortization of its excess basis in
A2000 for the seven months ended July 31, 1998............... NLG (10,434)
Reclassification of UTH's amortization of its excess basis for
the five months ended December 31, 1998...................... NLG (7,451)
Amortization of the step-up in basis recorded under purchase
accounting, using a 15 year life, for the year ended December
31, 1998..................................................... NLG (31,514)
-----------
NLG(122,653)
===========
</TABLE>
47
<PAGE>
(i)Represents additional interest expense as a result of the A2000 acquisition:
<TABLE>
<S> <C>
Consolidation of historical interest expense of A2000 for the
year ended December 31, 1998.................................. NLG(25,021)
Additional interest expense as a result of the July 1999 senior
notes incurred for the A2000 acquisition for the year ended
December 31, 1998, at an initial annual blended weighted
average interest rate of 9.9%................................. NLG(45,954)
----------
NLG(70,975)
==========
</TABLE>
(j)Represents the elimination of the historical equity pick-up recorded by UPC
and UTH for their investment in A2000:
<TABLE>
<S> <C>
Elimination of UPC's share in results of A2000 for the seven
months ended July 31, 1998..................................... NLG16,198
Elimination of UTH's share in results of A2000 for the five
months ended December 31, 1998................................. NLG16,250
Reclassification of amortization of UPC's excess basis in A2000
for the seven months ended July 31, 1998....................... NLG10,434
Reclassification of amortization of UTH's excess basis in A2000
for the five months ended December 31, 1998.................... NLG 7,451
---------
NLG50,333
=========
</TABLE>
(k)Represents the consolidation of the historical results of operations for
Kabel Plus for the year ended December 31, 1998, except as indicated in (l)
and (m), converted from Czech korunas to U.S. dollars, using the December
31, 1998 twelve month average exchange rate.
(l)Represents additional depreciation and amortization expense as a result of
the Kabel Plus acquisition:
<TABLE>
<S> <C>
Consolidation of historical amortization and depreciation of
Kabel Plus for the year ended December 31, 1998............. NLG(20,423)
Amortization of the step-up in basis recorded under purchase
accounting, using a 15 year life, for the year ended
December 31, 1998........................................... NLG (9,123)
----------
NLG(29,546)
==========
</TABLE>
(m) Represents the minority interest in Kabel Plus for the year ended December
31, 1998.
(n) Represents the consolidation of the pro forma results of operations for NBS
Nordic for the twelve months ended December 31, 1998, except as indicated
in (o), (p) and (q) converted from Swedish Kronor, using the December 31,
1998 twelve month average exchange rate. These pro forma results of
operations include Stjarn, as if NBS Nordic acquired Stjarn on January 1,
1998.
(o) Represents additional depreciation and amortization expense as a result of
the Stjarn acquisition:
<TABLE>
<S> <C>
Consolidation of pro forma amortization and depreciation of NBS
Nordic for the twelve months ended December 31, 1998.......... NLG(18,673)
Amortization of the step-up in basis recorded under purchase
accounting, using a
15 year life, for the year ended December 31, 1998............ NLG(49,834)
----------
NLG(68,507)
==========
</TABLE>
(p) Represents additional interest expense as a result of the Stjarn
acquisition:
<TABLE>
<S> <C>
Consolidation of pro forma interest expense of NBS Nordic for
the twelve months ended December 31, 1998................... NLG (12,723)
Additional interest expense as a result of the Stjarn
seller's note for the year ended December 31, 1998 at an
annual interest rate of 8%.................................. NLG(16,160)
Additional interest expense as a result of the July 1999
senior notes incurred for the Stjarn acquisition for the
year ended December 31, 1998, at an initial annual blended
weighted average interest rate of 9.9%...................... NLG (59,600)
-----------
NLG (88,483)
===========
</TABLE>
48
<PAGE>
(q) Represents the pro forma exchange rate gain on the U.S. dollar-denominated
Stjarn seller's note for the year ended December 31, 1998.
(r) Represents share of results in SBS as a result of the acquisition of a
13.3% interest:
<TABLE>
<S> <C>
UPC's proportionate interest in historical results of SBS for
the year ended December 31, 1998.............................. NLG (8,929)
Additional amortization resulting from excess basis in the
investment of SBS for the year ended December 31, 1998........ NLG(13,724)
----------
NLG(22,653)
==========
</TABLE>
(s) Represents amortization of deferred finance costs related to the July 1999
senior notes offering for the year ended December 31, 1998, plus additional
interest expense related to the proceeds used for the July 1999 senior
notes offering costs pro rata for the portion of the offering proceeds used
for the acquisitions of @Entertainment, A2000 and Stjarn, at an initial
annual blended weighted average interest rate of 9.9%.
(t) Represents the pro forma exchange rate gain on our July 1999 U.S. dollar-
denominated senior discount notes for the year ended December 31, 1998 pro
rata for the portion of the offering proceeds used for the acquisitions of
@Entertainment, A2000 and Stjarn.
(u) For pro forma purposes, the purchase price for UTH and SBS, which totalled
NLG720.5 million, assuming the acquisitions had occurred on January 1,
1998, are assumed to have been funded from proceeds of our initial public
offering in February 1999. Consequently, the pro forma weighted average
number of shares for the year ended December 31, 1998 assumes the issuance
of 11,867,083 ordinary shares A at the initial public offering price of
NLG63.91 per share, discounted for underwriting commissions of 5%.
For pro forma purposes, the purchase price for Kabel Plus, which totalled
NLG303.0 million, assuming the acquisition had occurred on January 1, 1998,
is assumed to have been funded from proceeds of our October 1999 equity
offering. Consequently, the pro forma weighted average number of shares
outstanding for the year ended December 31, 1998 assumes the issuance of
2,384,461 ordinary shares A at the October 1999 equity offering price of
NLG131.67 per share, discounted for underwriting commissions of 3.5%.
49
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the years ended
December 31, 1996, 1997 and 1998 have been derived from our audited
consolidated financial statements included in this prospectus as restated to
include Monor Communications Group, Inc. ("Monor"), Tara Television Limited
("Tara") and Iberian Programming Services, Inc. ("IPS") for all periods in
which their operations were part of United's consolidated results. The selected
consolidated financial data for the year ended December 31, 1994 has been
derived from the audited financial statements of the European cable television
operations of Philips Electronics N.V. contributed to us upon our formation as
a joint venture. The following selected consolidated financial data for the six
months ended December 31, 1995 have been derived from our audited consolidated
financial statements not included in this prospectus as restated to include
Monor, Tara and IPS. The following selected consolidated financial data for the
six months ended June 30, 1995, and the nine months ended September 30, 1998
and 1999 have been derived from unaudited financial statements that, in our
opinion, reflect all adjustments, consisting of normal recurring adjustments,
necessary to present fairly the financial data for such periods and as of such
date. Due to the relative value of the assets contributed by United and
Philips, the cable television properties contributed by Philips are deemed to
be our predecessor. On December 11, 1997, United acquired the 50% of us that it
did not already own from Philips. As a result of this acquisition and the
associated push-down of United's basis on December 11, 1997, the financial
information for the year ended December 31, 1998, and the nine months ended
September 30, 1998 and September 30, 1999 is presented on a "post-acquisition"
basis. The data set forth below for us is qualified by reference to, and should
be read in conjunction with, our audited consolidated financial statements and
notes thereto and also with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Predecessor Interest UPC
------------------------ --------------------------------------------------------------
Six Months Six Months Nine Months
Year Ended Ended Ended Year Ended December 31, Ended September 30,
December 31, June 30, December 31, --------------------------- --------------------
1994 1995 1995 1996 1997 1998 1998 1999
------------ ----------- ------------ ------- -------- -------- --------- ---------
(unaudited) (unaudited)
(Dutch guilders, in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Service and other
revenue............... 183,600 91,100 100,179 245,179 337,255 408,970 306,215 608,558
Operating expense...... (44,100) (23,000) (32,806) (82,439) (118,508) (138,459) (101,258) (316,481)
Selling, general &
administrative
expense............... (44,500) (23,600) (33,617) (81,176) (119,067) (481,703) (136,608) (440,533)
Depreciation and
amortization.......... (42,200) (21,100) (33,974) (79,832) (132,888) (187,646) (137,842) (340,501)
------- ------- ------- ------- -------- -------- --------- ---------
Net operating income
(loss)................ 52,800 23,400 (218) 1,732 (33,208) (398,838) (69,493) (488,957)
Interest income........ -- -- 6,403 2,757 6,512 7,397 4,621 22,819
Interest expense....... -- -- (19,873) (38,475) (70,738) (104,355) (73,137) (187,750)
Provision for loss on
investment related
costs................. -- -- -- -- (18,888) (6,230) -- --
Gain on sale of
assets................ -- -- -- -- -- -- -- 14,625
Foreign exchange gain
(loss) and other
income (expense),
net................... -- -- (3,376) (21,200) (41,063) 2,690 6,609 10,046
------- ------- ------- ------- -------- -------- --------- ---------
Net income (loss)
before income taxes
and other items....... 52,800 23,400 (17,064) (55,186) (157,385) (499,336) (131,400) (629,217)
Share in results of
affiliated companies,
net................... (2,800) (2,300) (31,756) (30,712) (25,458) (63,823) (46,789) (55,857)
Minority interests in
subsidiaries.......... (200) -- (191) (2,208) 152 1,153 (1,930) 1,300
Income tax benefit
(expense)............. -- -- 155 (509) 1,649 (1,215) 413 7,036
------- ------- ------- ------- -------- -------- --------- ---------
Net income (loss)...... 49,800 21,100 (48,856) (88,615) (181,042) (563,221) (179,706) (676,738)
======= ======= ======= ======= ======== ======== ========= =========
Adjusted EBITDA........ 95,000 44,500 33,756 81,564 104,498 111,435 100,842 (38,971)
======= ======= ======= ======= ======== ======== ========= =========
Basic and diluted loss
per ordinary share A.. n/a n/a (0.53) (0.96) (1.98) (6.80) (2.17) (5.61)
======= ======= ======== ======== ========= =========
Weighted-average number
of ordinary shares A
outstanding........... n/a n/a 92,063 92,063 91,533 82,869 82,864 120,587
======= ======= ======== ======== ========= =========
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Predecessor Interest UPC
------------------------ -------------------------------------------------------------
December 31,
December 31, June 30, December 31, ----------------------------- September 30,
1994 1995 1995 1996 1997 1998 1999
------------ ----------- ------------ --------- --------- --------- -------------
(unaudited) (unaudited)
(Dutch guilders, in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Selected Balance Sheet
Data
Non-restricted cash and
cash equivalents...... 700 400 123,895 43,649 100,144 29,571 139,150
Other current assets... 14,700 10,000 172,687 83,265 85,421 136,046 516,071
Investments in
affiliated companies.. 5,900 5,200 270,664 260,468 413,649 493,051 500,158
Property, plant and
equipment............. 197,800 192,000 277,785 415,989 484,982 602,997 3,512,313
Intangible assets...... 2,300 2,200 209,274 270,407 690,046 680,032 5,446,246
Total assets........... 222,000 220,400 1,055,094 1,076,552 1,915,704 2,067,779 10,690,268
Short-term debt........ 3,400 -- 443,401 449,892 257,515 351,853 382,812
Other current
liabilities........... 41,100 132,300 92,574 120,649 185,442 244,514 858,343
Long-term debt......... -- -- 236,140 275,802 966,100 1,174,749 6,407,013
Total liabilities...... 165,100 132,300 777,506 858,059 1,467,184 2,116,019 7,811,173
Total shareholders'
equity (deficit)...... 56,900 86,700 276,188 213,938 439,805 (74,174) 2,846,093
</TABLE>
In the above table, we have calculated Adjusted EBITDA as follows:
<TABLE>
<CAPTION>
Predecessor Interest UPC
------------------------ --------------------------------------------------------
Nine Months
Six Months Six Months Ended
Year Ended Ended Ended Year Ended December 31, September 30,
December 31, June 30, December 31, ------------------------ -----------------
1994 1995 1995 1996 1997 1998 1998 1999
------------ ----------- ------------ ------ ------- -------- ------- --------
(unaudited) (unaudited)
(Dutch guilders, in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net operating
income/(loss).......... 52,800 23,400 (218) 1,732 (33,208) (398,838) (69,493) (488,957)
Add Back:
Depreciation and
amortization........... 42,200 21,100 33,974 79,832 132,888 187,646 137,842 340,501
Stock-based
compensation........... -- -- -- -- 4,818 322,627 32,493 109,485
------ ------ ------ ------ ------- -------- ------- --------
Adjusted EBITDA......... 95,000 44,500 33,756 81,564 104,498 111,435 100,842 (38,971)
====== ====== ====== ====== ======= ======== ======= ========
</TABLE>
51
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations covers the years ended December 31, 1996, 1997 and 1998, and the
nine months ended September 30, 1998 and 1999, as restated to include Monor,
Tara and IPS for all periods in which their operations were part of United's
consolidated results, and should be read together with our consolidated
financial statements and related notes included elsewhere herein. These
consolidated financial statements provide additional information regarding our
financial activities and condition.
Introduction
We commenced our present business in July 1995. We provide communications
services in many European countries through our business lines: cable
television, telephone, Internet/data services and DTH and programming. We own
and operate broadband communications networks in 12 countries in Europe and in
Israel and provide Internet/data and telephony in 6 and 6 European countries,
respectively. Our subscribers base is one of the largest of any group of
broadband communications networks operated across Europe. We intend to continue
to increase our presence in the European market through acquisitions as the
European telecommunications market consolidates, and to implement our branded
package of video, voice and Internet/data product offerings in systems we
acquire. We and Microsoft signed a letter of intent in 1999 to establish a
relationship to work jointly on Internet, telephone and video projects.
History of UPC and Recent Developments
Since formation, we have developed largely through acquisitions. The most
recent acquisitions have resulted in significant growth in consolidated
revenues and expenditures.
September In September 1996, we increased our ownership in Norkabel
1996Norkabel and (Norway) from 8.3% to 100%, Kabelkom (Hungary) from 3.9%
Kabelkom to effectively 50% and the Swedish system from 2.1% to
Acquisitions 25.9%. We subsequently sold our interest in the Swedish
system. Norkabel was consolidated effective upon its
acquisition. Kabelkom was accounted for using the equity
method.
January 1997Janco In January 1997, we acquired 70.2% of Janco, a cable
Acquisition system in Oslo, Norway, from Helsinki Media. In November
1997, we merged Norkabel into Janco, to form Janco
Multicom, of which we held 87.3%. In November 1998, we
acquired the remaining 12.7% of Janco Multicom for
approximately NLG37.2 million.
December 1997UPC On December 11, 1997, we and United acquired the 50% of
Acquisition our ordinary shares A held by Philips for NLG450.0
million. As part of this acquisition, we purchased 3.17
million shares of Class A Common Stock of United held by
Philips for NLG66.8 million and we and United purchased
all of our convertible notes back from Philips for
NLG339.8 million. The acquisition of UPC was financed
with proceeds from our senior revolving credit facility
and our bridge bank facility and cash from United.
1996-1998 We sold our unconsolidated interests in our systems in
Miscellaneous France called Citecable in 1996, Germany in 1997 and
SystemSales Spain in 1998 and our consolidated interest in Portugal
in 1998.
January 1998 CNBH Effective January 1, 1998, we acquired the Combivisie
Formation and cable television systems in the region surrounding our
Combivisie KTE system in The Netherlands for a purchase price of
Acquisition NLG180.8 million. Effective January 1, 1998, we combined
the Combivisie and KTE systems to form CNBH and
consolidated the results of CNBH through July 31, 1998
(see "UTH Formation").
52
<PAGE>
June 1998Eastern
Europe On June 29, 1998, we acquired from Time Warner
Transactions Entertainment Company L.P. 50% of Kabelkom, the Hungarian
cable television system holding company, increasing our
ownership to 100%. The purchase price was approximately
$27.5 million, $9.5 million of which was payable in cash
and $18.0 million by delivery of a non-interest bearing
note. We gave Time Warner the option, exercisable until
March 26, 1999, to purchase 50% of the Hungarian
programming businesses formerly held by Kabelkom,
including HBO Hungary, and 100% of TV Max, a Czech and
Slovak Republic programming business, for approximately
$18.25 million. Effective June 30, 1998, we combined our
interests in Kabelkom with Kabeltel, a group of Hungarian
cable television systems located in Budapest and other
large Hungarian cities, forming Telekabel Hungary. We own
79.25% of Telekabel Hungary, Hungary's largest cable
television operator, and started consolidating its
results as of such date. In March 1999, Time Warner
exercised its option to purchase our Hungarian
programming business and TV Max.
August 1998 UTH In August 1998, UPC and NUON combined all of their Dutch
Formation broadband cable television and telecommunications
businesses to form UTH. We contributed 100% of CNBH and
50% of A2000 for our 51% interest in UTH. NUON
contributed 100% of TeleKabel Beheer. UPC and NUON agreed
on the relative values of their respective assets and
NUON made a small balancing payment of approximately
NLG2.0 million for its 49% interest. As a result of the
creation of UTH, effective August 1, 1998, we did not
consolidate the results of CNBH and accounted for UTH
using the equity method of accounting. As described
below, however, we purchased the other 49% of UTH in
February 1999 and began consolidating UTH effective
February 1, 1999.
November 1998 We held our interest in the Israeli, Maltese and Irish
Increase in operating systems through a partnership with a subsidiary
Israeli and of Tele-Communications International, Inc. In November
Maltese Systems 1998, we acquired Tele-Communications International
Ownership Inc.'s indirect 23.3% and 25.0% interests in the Israeli
and Maltese systems for approximately $88.5 million, net
of closing adjustments, doubling our respective interests
in these systems to 46.6% and 50%. We financed these
acquisitions through a loan of $90.0 million (NLG184.5
million) from our primary partners in the Israeli
operating system.
November 1998 Sale As part of the Israeli and Maltese transaction described
of Irish System above, in November 1998, we purchased from Riordan
Communications Ltd. an indirect 5% interest in an Irish
multi-channel television system and 5% of Tara, a company
providing Irish programming to the U.K. markets. The
purchase price was settled using 384,531 shares of United
that we indirectly held. In November 1998, we sold the
newly-acquired 5% interest in the Irish multi-channel
television system, together with our previously-held 20%
interest in this system, to Tele-Communications
International, Inc. The purchase price for this
transaction was $20.5 million, offsetting part of the
purchase price payable for the Israeli and Maltese
systems.
December 1998 In December 1998, United sold to us, in exchange for
Purchase of Monor 6,330,340 of our ordinary shares A, United's:
and Tara from
United
. 44.75% economic interest in Monor, a company that
operates a traditional telephone system in the Monor
region of Hungary.
. 75% interest in Tara, our programming company that
provides Irish programming in the UK with revenues of
approximately NLG1.3 million for the year ended December
31, 1998.
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Because this was an exchange between companies under
common control, we have restated our financial statements
for all periods in which the operations of these
companies were part of United's consolidated financial
statements.
1999 Acquisitions
Since our initial public offering in February 1999, we have made or agreed
to make a significant number of acquisitions, which we refer to in this
prospectus collectively as our "new acquisitions." The new acquisitions are all
consistent with one of the key elements of our growth strategy, which is to
continue to acquire systems and to increase the percentage we own in some
systems in order to expand our coverage and implement our branded package of
video, voice and Internet/data product offerings in areas adjacent to our
existing systems or in new areas if the acquisition is sufficiently large. By
this strategy, we seek to upgrade and improve our current services and to
achieve substantial economies of scale. We are often and currently are engaged
in discussions or negotiations regarding the acquisition of businesses and
systems, some potentially significant in relation to our size.
The following are the acquisitions we have made or agreed to make since our
initial public offering in February 1999. The acquisitions of Kabel Haarlem and
Monor and Tevel's acquisition of 35% of Golden Channels have not yet closed and
are subject to a number of closing conditions, including regulatory approvals,
that may not be satisfied. These acquisitions may not, therefore, close. See
"Business--Operating Companies."
February 1999/May In February 1999, United sold to us, in exchange for
1999 Purchase of 4,955,264 of our ordinary shares, United's approximately
IPS From United 33.5% interest in Ibercom, Inc. ("IPS"), a group of
programming entities focusing on the Spanish- and
Portuguese-speaking markets.
Because this was an exchange between companies under
common control, we have restated our financial statements
for all periods in which the operations of IPS were part
of United's consolidated financial statements.
In May 1999, we acquired a further 16.5% interest in IPS
from an unaffiliated party for approximately $7.6 million
(NLG15.6 million), increasing our ownership to 50%.
February 1999 On February 17, 1999, we acquired NUON's 49% ownership
Purchase of UTH interest in UTH for NLG518.1 million. In addition, we
Minority Interest purchased from NUON a NLG33.3 million subordinated loan,
including interest, dated December 23, 1998 owed by UTH
to NUON. We paid for the entire purchase price and loan
totaling NLG551.4 million in cash on closing. Effective
February 17, 1999, we own 100% of UTH and began
consolidating UTH as of February 1, 1999.
June 1999 In June 1999, we acquired 100% of the GelreVision multi-
Acquisition of channel television systems in The Netherlands. The
GelreVision acquisition increased our homes passed by 146,000 and our
subscriber base by 132,000, based on September 30, 1999
data. We paid NLG233.9 million for GelreVision. These
systems are contiguous to our A2000 and TeleKable Beheer
operations.
June 1999 In June 1999, we completed the acquisition of SKT spol s
Acquisition of SKT r.o., which operates a cable television system in
spol s r.o Bratislava, the capital of the Slovak Republic. The
purchase price was $43.25 million (NLG90.7 million). This
system passed approximately 173,000 homes and had
approximately 161,000 subscribers as of September 30,
1999.
June 1999
Acquisition of
Reseaux Cables de
France In June 1999, we acquired 95.7% of Reseaux Cables de
France ("RCF"), the fifth largest cable television
operation in France, which operates cable television
systems throughout France, for FFR172.0 million (NLG57.8
million). These systems passed
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approximately 202,000 homes and had an aggregate of
approximately 74,000 subscribers as of September 30,
1999. At closing we began consolidating RCF, including
its debt, which was NLG83.0 million.
July 1999 In July 1999, we acquired Stjarn. Stjarn operates cable
Acquisition of television systems serving the greater Stockholm area and
Stjarn leases its fiber optic network, which has access to
770,000 homes and 8,000 businesses. Stjarn systems passed
approximately 422,000 homes and had approximately 241,000
subscribers as of September 30, 1999. The purchase price
was $397.0 million (NLG817.8 million), $100.0 million
(NLG206.0 million) of which was paid in the form of a one
year note with interest at 8% per year. The balance of
the purchase price was paid in cash. Upon maturity of the
note, we will have the option to pay the note in either
cash or our shares. At closing we began consolidating
Stjarn, including its debt, which was NLG172.7 million.
July/August 1999 In July 1999, we closed the purchase of approximately
Acquisition of an 4.8% of SBS, which owns and operates television and radio
Interest in SBS broadcasting stations across nine countries in Europe,
for cash of approximately $24.3 million (NLG50.1
million). In August 1999, we acquired an additional 8.5%
interest for $75.9 million (NLG154.8 million), increasing
our interest to 13.3%. This investment will align us with
one of the leading European broadcasting companies with
which we intend to jointly develop and purchase new
programming services.
August 1999 In August 1999, we acquired 100% of Videopole, the fourth
Acquisition of largest cable television operation in France. The
Videopole Videopole systems passed approximately 362,000 homes and
had approximately 143,000 subscribers as of September 30,
1999. The purchase price of $135.1 million (NLG279.4
million), was paid with cash of $69.9 million (NLG144.6
million) and 955,376 of our ordinary shares A, which are
registered on the Amsterdam Stock Exchange only. The
share price was based on a 20-day average stock price
through August 2, 1999. At closing we began consolidating
Videopole, including its debt, which was NLG41.8 million.
August 1999 In August 1999, we acquired 100% of @Entertainment, which
Acquisition of provides cable television. DTH satellite television
@Entertainment services and related programming services in Poland.
These systems had approximately 1,706,000 homes passed,
984,000 cable subscribers and 182,000 DTH subscribers as
of September 30, 1999. The purchase price was $807.0
million (NLG1,662.5 million). At closing we began
consolidating @Entertainment, including its debt, which
was NLG924.0 million.
September 1999 In September 1999, we acquired the 50% interest in A2000
Acquisition of that we did not already own for $229.0 million (NLG471.7
A2000 million), including our assumption of receivables from
A2000 of approximately NLG27.0 million. At closing we
began consolidating A2000, including its debt, which was
NLG523.5 million. A2000 operates systems serving
Amsterdam and its surrounding communities of Landsmeer,
Purmerend, Zaanstad, Ouder-Amstel and Hilversum. A2000
systems passed approximately 582,000 homes and had
approximately 515,000 cable subscribers, 30,000 cable
telephone subscribers and 19,000 high-speed internet
subscribers as of September 30, 1999.
August 1999 In August 1999, we won a bid to purchase Kabel Haarlem
Agreement to B.V., the municipality-owned cable television network in
Acquire Kabel Haarlem, for approximately NLG134.0 million. Kabel
Haarlem B.V. Haarlem's systems are located near Amsterdam. As of
September 30, 1999, this system passed approximately
70,000 homes and had approximately 66,000 basic cable
television subscribers. This acquisition is expected to
close during the first quarter of 2000.
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<PAGE>
September 1999 In September 1999, we agreed to acquire an additional
Agreement to 47.5% share of Monor which will increase our ownership
Acquire 47.5% in from 47.5% to approximately 95.1% for approximately $45.0
Monor million (NLG93.2 million). As of September 30, 1999,
Monor's systems passed approximately 66,000 homes with
nearly 32,000 basic cable subscribers and had 73,000
traditional telephony lines in the Monor region, an area
which borders Budapest in Hungary.
October 1999 In October 1999, we completed the acquisition of a 94.6%
Acquisition of interest in Kabel Plus and took control of the Kabel Plus
Kabel Plus cable television systems, which operate in the Czech and
Slovak Republics. The purchase price was $150.0 million
(NLG312.7). As of September 30, 1999, Kabel Plus passed
approximately 622,000 homes and had approximately 435,000
basic cable television subscribers . At closing we began
consolidating Kabel Plus, including its debt, which was
NLG48.4 million.
Agreement by Tevel In November 1999, Tevel, our 46.6% - owned operating
to Acquire 35% in company, agreed to purchase a 35% economic interest in
Golden Channels Golden Channels for $183.5 million (NLG379.8 million).
Golden Channels is a competitor of Tevel in the Israel
market. Its systems, including Idan, passed approximately
461,347 homes and had approximately 322,945 basic
subscribers at December 31, 1998. Close of the
acquisition is subject to regulatory approval.
Acquisition Integration
The integration of our 1999 acquisitions is the responsibility of our
regional managing directors, working in close conjunction with our corporate
headquarters and our business units. This process is initiated strategically
prior to the acquisition. Upon obtaining control, we begin the process of
integrating and aligning policies and procedures, reviewing management and
personnel for redundancy and establishing our strategy. We direct these changes
through the budget and reforecast process. In certain circumstances,
implementation of our policies, procedures and strategy will have an impact on
financial statement disclosure and reported operations. For example, at
@Entertainment we have noted that their non-pay disconnect policy is more
lenient than ours and may, pending further assessment, result in the
disconnection of over 50,000 subscribers reported as of June 30, 1999. Of this
amount, we have already disconnected 7,500 subscribers. Additionally, our
strategy with regard to @Entertainment's DTH and programming business may lead
to segregation of this business and closer alignment with our distribution and
programming business units. Further, our policy with regards to customer
premise equipment (set-top boxes) is generally to maintain ownership.
Therefore, we have initiated a policy to discontinue the sale of
@Entertainment's DTH set-top boxes to subscribers and, instead, we will provide
them to new subscribers for a monthly rental fee.
Overview of Our Activities
Services
Our operating systems generally offer a range of video service subscription
packages including a basic tier, which typically includes 26 to 32 channels,
and an expanded basic tier, which typically includes 6 to 13 additional
channels. In some systems, we also offer mini-tiers, premium programming, which
typically includes 2 channels, and pay-per-view programming, which includes 5
to 10 channels.
To date, our primary source of revenue has been cable television video
services. For the year ended December 31, 1997, the year ended December 31,
1998 and the nine months ended September 30, 1999, video services accounted for
approximately 95.0%, 92.4% and 84.4%, respectively, of our consolidated
revenues. For the same periods, our Internet/data service accounted for about
0.2%, 2.3% and 4.9%, respectively, and our telephone services accounted for 0%,
0.1% and 7.4%, respectively, of our consolidated revenues.
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Historically, video service revenue has increased as a result of:
. subscriber growth from both well-established and developing systems,
primarily in our Austrian and Central and Eastern European systems;
. increases in revenue per subscriber from basic rate increases and the
introduction of expanded basic tiers and pay-per-view services; and
. acquisition of systems, primarily in The Netherlands, Norway and
Hungary.
For a discussion of our revenue recognition policies, see note 2 of the
Notes to our Consolidated Financial Statements.
We believe that an increasing percentage of our future revenues will come
from telephone and Internet/data services. Within a decade, video services
could account for half of our total revenue, as our revenue from other
services increases. These are forward-looking statements and will not be
fulfilled unless our new services grow significantly. Capital constraints,
technological limitations, competition, lack of programming, loss of
personnel, adverse regulation and many other factors could prevent our new
services from growing as we expect.
Pricing
We usually charge a one-time installation fee when we connect subscribers,
a monthly subscription fee that depends on whether a basic or expanded basic
tier service is provided and which includes use of the set-top box, and
incremental amounts for those subscribers purchasing pay-per-view and premium
programming, which are generally offered only to expanded basic tier
subscribers. @Entertainment, the Polish system that we recently acquired,
currently operates by selling a set-top box to each subscriber. In order to
prevent this practice acting as a barrier to entry for subscribers, effective
April 1, 1999, the boxes have been sold at a price substantially reduced by
promotional incentives. This policy will have a significant negative impact on
@Entertainment's Adjusted EBITDA. Prior to April 1, 1999, @Entertainment
retained ownership of the installed set-top boxes. We have initiated a policy
to conform this aspect of @Entertainment's operations to our general policy of
retaining ownership of the installed set-top boxes and providing them to
subscribers for a monthly rental fee.
In our Western European markets, price controls by various local and
national governmental agencies apply to the basic tier services. Expanded
basic tier, pay-per-view and premium programming are subject to EU and
national competition laws generally but are not subject to sector-specific
price controls.
Costs of Operations
Video services operating costs include the direct costs of programming,
franchise fees and operating expenses necessary to provide the service to the
subscriber. Direct costs of programming are primarily variable, based on the
number of subscribers. The cost per subscriber is established by negotiation
between us and the program supplier or rates negotiated by cable associations.
Franchise fees, where applicable, are typically based upon a percentage of
revenue and typically range from a low of 3% to 5% in Belgium to approximately
13.5% in Austria. Other direct operating expenses include operating personnel,
service vehicles, maintenance and plant electricity.
Selling, general and administrative expenses include personnel-related
costs such as stock-based compensation expenses, marketing, sales and
commissions, legal and accounting, office facilities and other overhead costs.
Stock-based compensation expense results from our stock option and phantom
stock option plans, which, prior to our initial public offering in February
1999, required variable plan accounting. Increases in the fair market value of
our shares result in compensation charges that are expensed for vested
options. Decreases in fair market value would result in compensation credits.
A compensation charge is generally a non-cash expense unless the option holder
puts the vested option to us for cash. Following our initial public offering,
we settle the options in shares upon exercise; therefore options issued
pursuant to the stock option plan no longer require variable plan accounting.
Our phantom stock option plans, however, continue to require variable plan
accounting.
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Results of Operations
The following table sets forth summary information derived from our
Consolidated Statements of Operations for the years ended December 31, 1996,
1997 and 1998, and the nine months ended September 30, 1998 and 1999
(unaudited). As a result of United's acquisition of our company and the
associated push-down of United's basis on December 11, 1997, this information
is presented on a "post-acquisition" basis. The operating results from which
these percentages have been derived were restated to include Monor, Tara and
IPS for all periods for which their operations were part of United's
consolidated results.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
----------------------------- -------------------
1996 1997 1998 1998 1999
------- -------- -------- -------- --------
(unaudited)
(Dutch guilders, in thousands)
<S> <C> <C> <C> <C> <C>
Service and other
revenue................ 245,179 337,255 408,970 306,215 608,558
Operating expense....... (82,439) (118,508) (138,459) (101,258) (316,481)
Selling, general and
administrative
expense................ (81,176) (119,067) (481,703) (136,608) (440,533)
Depreciation and
amortization........... (79,832) (132,888) (187,646) (137,842) (340,501)
------- -------- -------- -------- --------
Net operating income
(loss)................. 1,732 (33,208) (398,838) (69,493) (488,957)
Interest income......... 2,757 6,512 7,397 4,621 22,819
Interest expense........ (14,263) (41,995) (92,308) (65,989) (185,466)
Interest expense,
related party.......... (24,212) (28,743) (12,047) (7,148) (2,284)
Provision for loss on
investment related
costs.................. -- (18,888) (6,230) -- --
Gain on sale of assets.. -- -- -- -- 14,625
Foreign exchange gain
(loss) and other income
(expense), net......... (21,200) (41,063) 2,690 6,609 10,046
------- -------- -------- -------- --------
Net loss before income
taxes and other items.. (55,186) (157,385) (499,336) (131,400) (629,217)
Share in results of
affiliated companies,
net.................... (30,712) (25,458) (63,823) (46,789) (55,857)
Minority interests in
subsidiaries........... (2,208) 152 1,153 (1,930) 1,300
Income tax benefit
(expense).............. (509) 1,649 (1,215) 413 7,036
------- -------- -------- -------- --------
Net loss................ (88,615) (181,042) (563,221) (179,706) (676,738)
======= ======== ======== ======== ========
Other information:
Adjusted EBITDA......... 81,564 104,498 111,435 100,842 (38,971)
======= ======== ======== ======== ========
As a Percentage of
Revenue:
Operating expense....... 33.6% 35.1% 33.9% 33.07% 52.01%
Selling, general and
administrative
expense................ 33.1% 35.3% 117.8% 44.61% 72.39%
Depreciation and
amortization........... 32.6% 39.4% 45.9% 45.01% 55.95%
Net operating (loss)
income................. 0.7% (9.8%) (97.5%) (22.69%) (80.35%)
Net loss................ (36.1%) (53.7%) (137.7%) (58.69%) (111.20%)
Adjusted EBITDA......... 33.3% 31.0% 27.2% 32.93% (6.40%)
</TABLE>
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Revenue
During the nine months ended September 30, 1999, our revenue increased
NLG302.4 million to NLG608.6 million from NLG306.2 million for the nine months
ended September 30, 1998, a 98.8% increase. Of this increase, approximately
NLG226.5 million resulted from increased cable television revenue, NLG44.4
million resulted from increased telephony revenue, NLG24.8 million resulted
from increased Internet/data revenue and NLG8.8 million resulted from increased
DTH and programming revenue. Revenue from other services decreased NLG2.1
million. The increase in cable television revenue primarily results from
acquisitions completed during 1999, which are included in our consolidated
results of operations from their respective dates of acquisition. Total cable
television revenue for the nine months ended September 30, 1999, includes cable
television revenue attributed to entities acquired during 1999 of NLG208.9
million of which UTH represents 73.7%. We also began consolidation of Telekabel
Hungary upon its formation in July 1998, resulting in cable television revenue
of NLG53.3 million for the nine months ended September 30, 1999, compared to
NLG13.8 million for the nine months ended September 30, 1998. The remaining
growth in cable television revenue is due to increased subscribers. The
increase in telephony revenue is primarily a result of the consolidation of
UTH, as well as increased telephony revenue from the launch of telephony
services in Austria, France and Norway in the first half of 1999. The increase
in Internet/data services revenue is primarily due to increased revenue from
Austria and Belgium due to subscriber growth, and the launch of Internet/data
services in France, The Netherlands and Norway in the first half of 1999. A
substantial portion of the increase in DTH and programming revenue is due to
the acquisition of @Entertainment, which had DTH and programming revenue of
NLG8.4 million for the two months ended September 30, 1999.
During the year ended December 31, 1998, our revenue increased NLG71.7
million to NLG409.0 million from NLG337.3 million for the year ended December
31, 1997, a 21.3% increase. Of this increase approximately NLG57.4 million
resulted from increased cable television revenue, NLG8.7 million resulted from
increased Internet/data revenue and the remainder, NLG5.6 million, resulted
from Tara and other services. The increase in cable television revenue resulted
primarily from the acquisition of Combivisie in January 1998 which was
consolidated through July 31, 1998 and the consolidation of Telekabel Hungary
effective July 1, 1998. Of the NLG57.4 million approximately 21.6% was
attributable to Combivisie and 48.2% was attributable to Telekabel Hungary. The
balance of the increase in cable television revenue came from subscriber growth
and in increased revenue per subscriber in Austria, and increased revenue from
subscriber growth in the systems we are developing in France and Eastern
Europe.
During the year ended December 31, 1997, our revenue increased NLG92.1
million to NLG337.3 million from NLG245.2 million for the year ended December
31, 1996, a 37.6% increase. A substantial portion of this increase was
attributable to the acquisition of Norkabel in October 1996 and the acquisition
of Janco in January 1997, which together amounted to NLG77.0 million. The
remaining increase in revenue was attributable to subscriber growth in the
Austrian systems, increases in subscription fees in some systems and revenues
from developing systems in France, Romania and the Slovak Republic, which were
not included in the 1996 operating results.
Operating Expense
During the nine months ended September 30, 1999, our operating expense
increased NLG215.2 million to NLG316.5 million from NLG101.3 million, an
increase of 212.4%. Of this increase, approximately NLG84.6 million resulted
from increased cable television operating expense, NLG44.0 million resulted
from increased telephony operating expense, NLG66.5 million resulted from
increased Internet/data operating expense, NLG29.9 million resulted from
increased DTH and programming operating expense and NLG5.0 million resulted
from increased operating expense for other services. The increase in cable
television operating expense primarily results from acquisitions completed
during 1999, which are included in our consolidated results of operations from
their respective dates of acquisition. Total cable television operating expense
for the nine months ended September 30, 1999, includes cable television
operating expense attributed to entities acquired during 1999 of NLG72.6
million, of which UTH represents 62.6%. We also began consolidation of
Telekabel Hungary upon its formation in July 1998, resulting in cable
television operating expense of NLG19.4 million for the nine months ended
September 30, 1999, compared to NLG4.9 million for the nine months ended
September 30, 1998. The balance of the increase in cable
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television operating expense relates to subscriber growth. The increase in
telephony operating expense is primarily a result of the consolidation of UTH,
as well as increased telephony operating expense from the launch of telephony
services in Austria, France and Norway in the first half of 1999. The increase
in Internet/data services operating expense is primarily due to increased
operating expense in Austria and Belgium due to subscriber growth, and the
launch of Internet/data services in France, The Netherlands and Norway in the
first half of 1999 and the operating expense for chello, our branded internet
portal business. The increase in DTH and programming operating expense is
mostly due to the acquisition of @Entertainment, which had DTH and programming
operating expense of NLG29.7 million for the two months ended September 30,
1999.
During the year ended December 31, 1998, our operating expense increased
NLG20.0 million to NLG138.5 million from NLG118.5 million for the year ended
December 31, 1997, a 16.9% increase. Approximately NLG9.9 million of this
increase was attributable to the results of Telekabel Hungary, which were
consolidated effective July 1, 1998. In addition, approximately NLG2.0 million
was attributable to the acquisition of Combivisie. The remaining increase
comprised direct costs related to subscriber growth and increased operating
costs related to the introduction of our Internet/data services. As a
percentage of revenues, operating expense declined from 35.1% for the
comparable period in 1997 to 33.9%. This was due primarily to the lower
operating costs in the Combivisie system and a reduction of operating costs in
Tara. We expect operating expense as a percentage of revenue to increase as new
video, telephone and Internet/data services are introduced.
During the year ended December 31, 1997, our operating expense increased
NLG36.1 million to NLG118.5 million from NLG82.4 million the previous year, a
43.8% increase. Most of this increase was attributable to the acquisition of
Norkabel in October 1996 and of Janco in January 1997, which together amounted
to NLG27.5 million, the consolidation of Tara amounting to NLG6.6 million, as
well as the inclusion of operating expenses related to developing systems in
France, Romania and the Slovak Republic that were not included in the 1996
operating results. In addition, operating expenses during 1997 included
expenses related to the introduction of expanded basic tier programming in
Austria, Belgium and The Netherlands and Internet/data services in Austria and
Belgium.
Selling, General and Administrative Expense
During the nine months ended September 30, 1999, our selling, general and
administrative expense increased NLG303.9 million to NLG440.5 million from
NLG136.6 million, an increase of 222.5%. A substantial portion of this
increase, and the increase as a percentage of revenue, results from a stock-
based compensation charge of NLG109.5 million attributable to our stock-option
plans for the nine months ended September 30, 1999, compared to NLG32.5 million
for the nine months ended September 30, 1998. Of the remaining increase in
selling, general and administrative expense, NLG55.8 million is an increase in
cable television selling, general and administrative expense. NLG41.9 million
is an increase in telephony selling, general and administrative expense,
NLG54.2 million is an increase in Internet/data selling, general and
administrative expense (excluding stock-based compensation expense of NLG2.2
million for the chello option plan) NLG26.2 million is an increase in corporate
and other selling, general and administrative expense (excluding increased
stock-based compensation expense of NLG74.7 million for the corporate option
plan). The increase in cable television selling, general and administrative
expense primarily results from acquisitions completed during 1999 which are
included in our consolidated results of operations from their respective dates
of acquisition. Total cable television selling, general and administrative
expense for the nine months ended September 30, 1999, includes cable television
selling, general and administrative expense attributed to entities acquired
during 1999 of NLG 54.6 million, of which UTH represents 65.4%. We also began
consolidation of Telekabel Hungary upon its formation in July 1998, resulting
in cable television selling, general and administrative expense of NLG15.7
million for the nine months ended September 30, 1999, compared to NLG3.4
million for the nine months ended September 30, 1998. The balance of the
increase in cable television selling, general and administrative expense
relates to subscriber growth. The increase in telephony selling, general and
administrative expense is primarily a result of the consolidation of UTH,
increased telephony selling, general and administrative expense from the launch
of telephony services in Austria, France and Norway in the first half of 1999
and continued development expense. The increase in Internet/data services
selling, general and administrative expense is primarily
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due to increased selling, general and administrative expense in Austria and
Belgium due to subscriber growth, the launch of Internet/data services in
France, The Netherlands and Norway in the first half of 1999 and continued
development branding of chello, our internet portal business. The increase in
DTH and programing selling, general and administrative expense is primarily due
to the acquisition of @Entertainment, which had DTH and programming selling,
general and administrative expense of NLG14.5 million for the two months ended
September 30, 1999. The increase in corporate selling, general and
administrative expense include the Pan European branding of the UPC identity,
start up and development expense related to our digital set top box launch in
2000 and corporate staffing for communications, investor relations and
corporate development.
During the year ended December 31, 1998, our selling, general and
administrative expense increased NLG362.6 million to NLG481.7 million from
NLG119.1 million for the year ended December 31, 1997, a 304.5% increase. A
substantial portion of this increase and the increase as a percentage of net
revenue resulted from a stock-based compensation charge of NLG322.6 million
attributable to our stock option plans for the year ended December 31, 1998. In
addition, we incurred NLG15.9 million in general and administrative expenses
attributable to the formation and start up of chello broadband. A portion of
this increase was also attributable to the acquisition of Combivisie and the
acquisition of Telekabel Hungary, with the remaining increase comprising
additional selling, general and administrative expenses related to the
development of new businesses, including further development of Internet/data
services and preparation for the launch of telephone services in The
Netherlands, Norway and France. We expect selling, general and administrative
expense, excluding stock-based compensation expense, as a percentage of revenue
to continue to increase as new video, telephone and Internet/data services are
introduced. In the future, stock-based compensation expense will be recognized
only for our phantom stock option plans which continues to require variable
plan accounting. Therefore, we expect this expense as a percentage of selling,
general and administrative expense to decrease.
During the year ended December 31, 1997, our selling, general and
administrative expense increased NLG37.9 million to NLG119.1 million from
NLG81.2 million for the prior year, a 46.7% increase. A substantial portion of
this increase was attributable to the acquisition of Norkabel in October 1996
and of Janco in January 1997, which together amounted to an increase in
selling, general and administrative expense of NLG19.1 million, as well as the
inclusion of expenses related to the consolidation of Tara and developing
systems in France, Romania and the Slovak Republic that were not included in
1996. Selling, general and administrative expense during the year ended
December 31, 1997, also included expenses related to the introduction of
expanded basic tier programming in Austria, Belgium and The Netherlands and
Internet/data services in Austria and Belgium, as well as a stock-based
compensation charge of NLG4.8 million.
Our allowance for doubtful accounts as a percentage of trade receivables
for the years ended December 31, 1996, 1997 and 1998 was 37.9%, 40.6% and
41.6%, respectively. This high allowance as a percentage of trade receivables
results primarily from our billing process, whereby subscribers receive and
generally pay their invoice before the service period begins. Therefore, most
of our outstanding receivables generally represent overdue accounts requiring
consideration for an allowance. Our receivable balance is generally less than
one-half of a month of our revenue.
Depreciation and Amortization
During the nine months ended September 30, 1999, our depreciation and
amortization expense increased NLG202.7 million to NLG340.5 million from
NLG137.8 million for the nine months ended September 30, 1998, a 147.1%
increase. The increase primarily results from acquisitions completed during
1999, which are included in our consolidated results of operations for the nine
months ended September 30, 1999, and the consolidation of Telekabel Hungary
effective July 1, 1998. The remaining increase comprised additional
depreciation related to additional capital expenditures to upgrade the network
in our Western European systems and new-build for developing systems.
During the year ended December 31, 1998, our depreciation and amortization
expense increased NLG54.8 million to NLG187.7 million from NLG132.9 million for
the year ended December 31, 1997, a 41.2% increase.
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NLG26.3 million of this increase and much of the increase as a percentage of
our net revenue was attributable to the application of push-down accounting,
including goodwill created in connection with the acquisition of UPC. The
remaining increase comprised additional depreciation related to the acquisition
of Combivisie and acquisition of Telekabel Hungary, additional capital
expenditures to upgrade the network in our Western European systems and new-
build for developing systems.
During the year ended December 31, 1997, our depreciation and amortization
expense increased NLG53.1 million to NLG132.9 million from NLG79.8 million in
1996, a 66.5% increase. The majority of the increase was directly attributable
to the acquisition of Norkabel in October 1996 and of Janco in January 1997,
which together amounted to NLG45.4 million. The remaining increase comprised
additional depreciation from capital expenditures to upgrade the network in our
primary systems and new-build for developing systems.
On January 25, 1999 we entered into a letter of intent with Microsoft
providing for the establishment of a technical services relationship. In
connection with this letter of intent, we have agreed to grant Microsoft
warrants to purchase up to 3,800,000 ordinary shares A or ADSs representing
such shares at Microsoft's option, at an exercise price of $28.00 per ordinary
share A or ADS. Half of these warrants are expected to be formally issued in
the fourth quarter of 1999. These warrants will be exercisable after one year
from issuance for a period of three years. The other half of the warrants will
be issued upon the signing of the first definitive agreement. This half of the
warrants will vest and become exercisable based on performance criteria to be
established in the definitive agreements, although they also will not be
exercisable until at least one year after the date of the closing of our
initial public offering. The first half of the warrants are for the right to
negotiate to license technology from Microsoft under definitive agreements to
be negotiated in the future. Concurrent with our initial public offering, we
recorded as contract acquisition rights approximately NLG64.4 million
associated with the first half of the warrants. Such costs will be amortized on
a straight-line basis over the expected contract life, which is yet to be
determined. The accounting for the cost associated with the second half of the
warrants will depend upon the ultimate nature of the performance criteria
giving rise to the earn-out of these warrants. These warrants will be recorded
as such at fair value when it is probable the performance criteria will be met,
in accordance with EITF Issue No. 96-18.
Operating Income (Loss); Adjusted EBITDA
During the nine months ended September 30 1999, operating loss increased
NLG419.5 million to NLG489.0 million from NLG69.5 million for the nine months
ended September 30, 1998 a 603.6% increase. Approximately 18.4% of this
increase resulted from the stock-based compensation charge of NLG109.5 million
related to our stock option plans for the nine months ended September 30, 1999.
A substantial portion of the remaining increase in net operating loss is due to
the acquisitions completed during 1999, which are included in our consolidated
results of operations for the nine months ended September 30, 1999, and the
focus on the continued development of our telephony and Internet/data services.
Adjusted EBITDA for the nine months ended September 30, 1999 decreased NLG139.8
million to a negative NLG139.0 million, a 138.7% decrease. Substantially all of
this decrease in Adjusted EBITDA can be attributed to the increased negative
EBITDA related to development of our telephone, Internet/data and programming
services and negative EBITDA from @Entertainment.
During the year ended December 31, 1998, operating loss increased NLG365.6
million to NLG398.8 million from NLG33.2 million, a 1,101.2% increase.
Approximately 88.2% of this increase resulted from the stock-based compensation
charge of NLG322.6 million related to our stock option plans. A substantial
portion of the remaining increase resulted from new depreciation and
amortization expense from the acquisition of UPC, the acquisition of Combivisie
and the acquisition of Telekabel Hungary. Adjusted EBITDA increased NLG6.9
million to NLG111.4 million from NLG104.5 million, a 6.6% increase. As a
percentage of revenue, Adjusted EBITDA decreased to 27.2% from 31.0%, a 12.3%
decrease. The decrease in Adjusted EBITDA was primarily attributable to NLG15.9
million in costs attributable to the formation and start up of chello broadband
in addition to additional expenses related to the further development of
Internet/data services and the preparation for launch of telephone services.
During the year ended December 31, 1997, operating loss increased to
NLG33.2 million from operating income of NLG1.7 million for the year ended
December 31, 1996. This increase was primarily related to depreciation and
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amortization expense and the consolidation of Tara. Adjusted EBITDA increased
NLG22.9 million to NLG104.5 million from NLG81.6 million, a 28.1% increase.
During the year ended December 31, 1997, Adjusted EBITDA as a percentage of
revenue dropped from 33.3% in 1996 to 31.0%, a decrease of about 6.9%. This
decrease was primarily related to negative Adjusted EBITDA from developing
systems in France and the Slovak Republic and the consolidation of Tara.
We believe the introduction of telephone services and Internet/data
services will have a significant negative impact on operating income (loss) and
Adjusted EBITDA during 1999. Thereafter, this negative impact is expected to
decline. We intend for our new businesses to be Adjusted EBITDA positive after
two to three years following introduction of service, but there can be no
assurance that this will occur. The financial effect of the development of our
video programming businesses and the construction of our digital distribution
platform will depend upon our ability to find joint venture partners for these
new investments. If we are unable to find joint venture partners for these new
investments, we will be required to consolidate all of the losses of these new
investments. During the nine months ended September 30, 1999, such losses were
consolidated.
Interest Income
During the nine months ended September 30, 1999, interest income increased
NLG18.2 million to NLG22.8 million from NLG4.6 million during the same period
in 1998, a 395.7% increase. This increase resulted from the interest income on
the proceeds of our initial public offering in February 1999, and the proceeds
of our Senior Notes and Senior Discount Notes, which were issued in July 1999.
Interest Expense
During the nine months ended September 30, 1999, interest expense increased
NLG114.7 million to NLG187.8 million from NLG73.1 million during the same
period in 1998, a 156.9% increase. This increase was due primarily to our
Senior Notes and Senior Discount Notes which were issued in July 1999, and debt
consolidated as a result of acquisitions in 1999, mainly @Entertainment and
UTH. Furthermore interest expenses increased due to the interest cost related
to the DIC Loan.
During the year ended December 31, 1998, interest expense increased NLG33.7
million to NLG104.4 million from NLG70.7 million during the same period in
1997, a 47.7% increase. This increase was due primarily to increases in
indebtedness related to the UPC Acquisition in December 1997, the acquisition
of Combivisie in January 1998 and the acquisition of Telekabel Hungary in June
1998. See "--Liquidity and Capital Resources."
During the year ended December 31, 1997, interest expense increased NLG32.2
million to NLG70.7 million from NLG38.5 million during the same period in 1996,
an 83.6% increase. This increase was due primarily to additional indebtedness
incurred for the acquisition of Norkabel in October 1996 and, to a lesser
extent, indebtedness incurred to fund developing systems, corporate overhead
and the acquisition of UPC. See "--Liquidity and Capital Resources."
Provision for Loss on Investment Related Costs
The provision for loss on investment-related costs totaled NLG18.9 million,
NLG6.2 million and NLG0 million for the years ended December 31, 1997 and 1998,
and the nine months ended September 30, 1999, respectively. During 1998, Tara
wrote-off its deferred development costs. During 1997, we made a strategic
decision to sell our interest in our Portuguese system due to competitive
pressures beyond our control. After receiving several offers for the sale of
our Portuguese system substantially less than the carrying value of our
investment, we recorded a permanent impairment on the investment. The system
was subsequently sold in January 1998.
Foreign Exchange Gain (Loss) and Other Expense
Foreign exchange gain (loss) and other income (expense), net, reflected a
gain of NLG10.0 million for the nine months ended September 30, 1999 as
compared to a gain of NLG6.6 million for the same period in 1998. The
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foreign exchange gain during the nine months ended September 30, 1999 was due
primarily to an increase in the value of the Dutch guilder in relation to the
US Dollar a compared to December 31, 1998.
Foreign exchange gain (loss) and other expense reflected a gain of NLG2.7
million for year ended December 31, 1998 as compared to a loss of NLG41.1
million for the same period in 1997. The foreign exchange gain during 1998 was
due primarily to a more stable Dutch guilder in relation to the U.S. dollar
during 1998 as compared to 1997.
Foreign exchange loss and other expense increased NLG19.9 million to a loss
of NLG41.1 million for the year ended December 31, 1997 from a loss of NLG21.2
million for the previous year. This increase in foreign exchange loss was due
primarily to the weakening of the Dutch guilder in relation to the U.S. dollar
and its related impact on our U.S. dollar-denominated indebtedness, primarily
pay-in-kind convertible notes owed to Philips.
Share in Results of Affiliated Companies, Net
The table below sets forth our share in results of affiliated companies for
the applicable periods. It shows the consolidation, following our July 1, 1998
acquisition, of our Hungarian cable television holding company, although our
Hungarian programming business continues to be accounted for using the equity
method.
<TABLE>
<CAPTION>
For the Nine Months
Year Ended December 31 Ended September 30,
------------------------- --------------------
1996 1997 1998 1998 1999
------- ------- ------- --------- ---------
(unaudited)
(Dutch guilders, in thousands)
<S> <C> <C> <C> <C> <C>
A2000........................ (19,965) (25,458) (26,631) (26,631) (34,427)
UTH.......................... -- -- (22,780) (8,325) (5,407)
Hungary (Kabelkom,
programming and cable
television)................. (262) 4,431 (7,970) (6,974) (219)
UII Partnership (Israel,
Ireland and Malta).......... 1,896 10,589 (666) 3,414 --
Tevel(1)..................... -- -- -- -- (10,036)
Melita(1).................... -- -- -- -- (2,013)
Monor........................ (4,475) (9,633) (4,381) (4,069) 2,065
Xtra Music................... -- -- -- -- (3,427)
SBS.......................... -- -- -- -- (7,784)
IPS.......................... (8,426) (5,188) (337) (553) 2,600
Other(2)..................... 520 (199) (1,058) (3,651) 2,791
------- ------- ------- --------- ---------
Total........................ (30,712) (25,458) (63,823) (46,789) (55,857)
======= ======= ======= ========= =========
</TABLE>
- --------------------
(1) Historically, we held our interests in Israel, Ireland and Malta in UII, a
general partnership. In November 1998, we acquired our partner's interest
in Tevel and Melita and sold our interest in PHL.
(2) "Other" shows in 1996 our share in results from Spain, France and Germany,
in 1997, 1998 and 1999, our share in results from TV Max and a Czech and
Slovak Republic programming business.
For the nine months ended September 30, 1999, our share in net losses of
affiliated companies increased to NLG55.9 million from NLG46.8 million for the
nine months ended September 30, 1998, a 19.4% increase. The increase was
primarily due to increased losses from A2000, Tevel, Melita and Xtra Music for
the nine months ended September 30, 1999. We also recognized losses on our
13.3% investment in SBS, which we acquired in July/August of 1999. These losses
were partially offset by the sale of our Hungarian programming and cable
television investment in the first quarter of 1999, as well as gains from
Monor, IPS and other for the nine months ended September 30, 1999.
For the year ended December 31, 1998, our share in net losses of affiliated
companies increased to NLG63.8 million from NLG25.5 million for the year ended
December 31, 1997, a 150.2% increase. A substantial portion of the increase in
share in net losses was attributable to additional amortization of goodwill of
A2000, Kabelkom, our
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Hungarian cable television holding company, and the partnership through which
we held our interests in the Israeli, Irish and Maltese operating companies, in
each case related to the new basis of accounting established in the step
acquisition of us by United. A2000 also had increased losses as it began to
introduce telephone services during this period. The share in net losses of
Kabelkom for the year ended December 31, 1998, as compared to the net income
over the comparable period in 1997, was related to the introduction of a new
programming channel, increased programming fees, a loss of HBO subscribers due
to the introduction of two additional commercial channels by competitors, and
additional overhead costs. Effective July 1, 1998, we consolidated results from
our Hungarian cable television businesses and no longer accounted for them in
share of results of affiliated companies. The loss in the UII Partnership
resulted from additional amortization as discussed above, in addition to losses
incurred by Tevel during the last quarter of the year of which our share
increased from 23.3% to 46.6%. These losses resulted from goodwill amortization
and financing expense related to Tevel's acquisition of Gvanim Cable Television
Ltd.
For the year ended December 31, 1997, our share in net losses of affiliated
companies decreased to NLG25.5 million from NLG30.7 million for the previous
year, a 16.9% decrease, primarily as a result of improved earnings from the
partnership holding the Israeli, Irish and Maltese systems, offset by increased
losses from Monor.
Statements of Cash Flows
We had cash and cash equivalents of NLG139.2 million as of September 30,
1999, an increase of NLG109.6 million from NLG29.6 million as of December 31,
1998. We had cash and cash equivalents of NLG29.6 million as of December 31,
1998, a decrease of NLG70.5 million from NLG100.1 million as of December 31,
1997. Cash and cash equivalents as of December 31, 1997 represented an increase
of NLG56.5 million from NLG43.6 million as of December 31, 1996.
<TABLE>
<CAPTION>
For the Nine Months
Year Ended December 31, Ended September 30,
---------------------------- --------------------
1996 1997 1998 1998 1999
-------- -------- -------- -------- ----------
(unaudited)
(Dutch guilders, in thousands)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities............... 42,530 132,433 73,000 51,358 (89,536)
Cash flows from investing
activities............... (6,394) (402,340) (613,347) (381,253) (4,732,355)
Cash flows from financing
activities............... (116,756) 326,482 471,913 275,910 4,931,252
Effect of exchange rates
on cash.................. 366 (72) (2,139) (1,703) 218
Net increase (decrease) in
cash and cash
equivalents.............. (80,254) 56,503 (70,573) (55,688) 109,579
Cash and cash equivalents
at beginning of period... 123,895 43,641 100,144 100,144 29,571
-------- -------- -------- -------- ----------
Cash and cash equivalents
at end of period......... 43,641 100,144 29,571 44,456 139,150
======== ======== ======== ======== ==========
</TABLE>
Cash Flows from Operating Activities
During the nine months ended September 30, 1999, net cash flow from
operating activities decreased NLG140.9 million to NLG89.5 negative million
from NLG51.4 million for the comparable period in 1998, a 274.1% decrease. This
decrease was primarily related to increased cash needs for working capital,
start-up costs for Internet/data and telephony and the consolidation of UTH as
of February 1, 1999.
During the year ended December 31, 1998, net cash flow from operating
activities decreased NLG59.4 million to NLG73.0 million from NLG132.4 million
for the comparable period in 1997, a 44.9% decrease. This decrease was
primarily related to increased cash needs for working capital.
Net cash flow from operating activities totaled NLG132.4 million for the
year ended December 31, 1997, as compared to NLG42.5 million for the year ended
December 31, 1996, an increase of NLG89.9 million. This increase was primarily
related to cash generated from working capital including increased current
liabilities and a reduction of accounts receivable.
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Cash Flows from Investing Activities
We used approximately NLG4,732.4 million of cash in investing activities
during the nine months ended September 30, 1999, compared to NLG381.3 million
for the nine months ended September 30, 1998. During the nine months ended
September 30, 1999, cash was used principally for the acquisitions of:
. UTH, which represented NLG491.5 million, net of cash acquired;
. GelreVision, which represented NLG233.6 million, net of cash acquired;
. Stjarn, which represented NLG604.0 million, net of cash acquired; and
. @Entertainment, which represented NLG1,526.2 million, net of cash
acquired;
. A2000, which represented NLG470.6 million, net of cash acquired; and
. Other acquisitions, which represented NLG485.1 million, net of cash
acquired.
Capital expenditures for property, plant and equipment, including other
tangible assets such as system upgrade and new-build activities, represented
NLG650.6 million. During the nine months ended September 30, 1999, we had a net
increase in restricted cash of NLG7.5 million from the release of NLG30.3
million of restricted cash upon pay-off of the bridge bank facility and the
escrow of NLG37.8 million related to the acquisition of Time Warner Cable
France. During this period we made a net investment in affiliates of NLG265.4
million, including our acquisition of an interest in SBS for NLG208.9 with
direct costs incurred and received proceeds from the sale of our Hungarian
programming assets of NLG36.7 million. We also made an investment in bonds of
NLG34.5 million.
For the nine months ended September 30, 1998, our primary use of cash for
investing activities was the acquisition of Combivisie for NLG180.8 million,
net of cash acquired, and NLG29.5 million for other acquisitions, net of cash
acquired. We also used cash for capital expenditures of NLG170.2 million and
investments in affiliates of NLG13.8 million, which was partially offset by a
decrease in restricted cash of NLG13.0 million.
We used approximately NLG613.3 million of cash in investing activities
during the year ended December 31, 1998, compared to NLG402.3 million for the
year ended December 31, 1997. During the year ended December 31, 1998, cash was
used principally for new acquisitions including the acquisitions of Combivisie
and Kabelkom, which together represented NLG200.2 million, including goodwill
related to the acquisitions, and for capital expenditures for property, plant
and equipment, including other tangible assets such as system upgrade and new-
build activities, which represented NLG281.7 million. Also during 1998, we
acquired an additional 23.3% and 25% interest in Tevel and Melita,
respectively, for approximately NLG170.1 million, acquired the remaining
minority interest in Janco and sold our investment in PHL. Both the acquisition
of the minority interest in Janco, through the release of escrowed funds, and
the sale of PHL provided funds to us which offset our other investing
activities. During the year ended December 31, 1997, cash was used for new
acquisitions, primarily Janco for NLG85.1 million, an additional cash-funded
letter of credit of NLG47.0 million to acquire the remaining interest in Janco
Multicom, and capital expenditures including upgrade and new-build activities
totaling NLG145.6 million.
We used approximately NLG402.3 million of cash in investing activities
during the year ended December 31, 1997, compared to NLG6.4 million for the
year ended December 31, 1996. During the year ended December 31, 1997, cash was
used principally for (1) the acquisition of Janco and other acquisitions, which
represented NLG127.9 million including goodwill related to the acquisitions,
(2) a cash-funded letter of credit to purchase the remaining interest in Janco
Multicom, which represented NLG47.0 million, (3) the continuation of our
upgrade and new-build construction program, which represented NLG145.6 million
of capital expenditures and also including goodwill and other intangible
assets, and (4) the purchase of United stock, which represented NLG66.8
million. In contrast, during the year ended December 31, 1996 cash was used
principally for purchases of property, plant and equipment, goodwill and other
intangible assets, which represented NLG106.6 million, for the continuation of
our upgrade and new-build construction and for acquisitions, which represented
NLG46.5 million and was primarily as a result of our acquisition of our
partner's interest in the partnership that held the Norwegian, Swedish and
Hungarian cable
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television systems. These investing activities were offset by repayments from
A2000 and its subsidiaries of NLG146.7 million after these companies obtained
long-term financing.
Cash Flows from Financing Activities
We had NLG4,931.3 million of cash flows from financing activities during
the nine months ended September 30, 1999. Principal sources of cash include net
proceeds from our initial public offering in February 1999 of NLG2,659.7
million and gross proceeds from the offering in July 1999 of the UPC Notes due
2009 of NLG3,150.1 million. Additional sources of cash were from long-term and
short-term borrowings of NLG1,347.5 million and NLG28.8 million, respectively.
Long-term borrowings include borrowings under the UPC Senior Revolving Credit
Facility of NLG110.0 million, borrowings under the New Telekabel Facility of
NLG539.9 million, borrowings under the Mediareseaux Facility of NLG54.3
million, borrowings under the UPC Senior Credit Facility of NLG618.3 million
and other borrowings of NLG25.0 million. Concurrent with the initial public
offering, DIC exercised its option to acquire our shares for proceeds of
NLG89.6 million, which we used to pay NLG87.8 million of the DIC Loan. We used
proceeds from the initial public offering to pay NLG620.0 million of the UPC
Senior Revolving Credit Facility, NLG110.0 million of the UPC Bridge Bank
Facility and NLG157.4 million of the United Loan. As part of the acquisition of
UTH in February 1999, we also paid a loan to NUON of NLG33.0 million. In March
1999, UTH paid off its existing credit facility of NLG620.0 million with
proceeds from the New Telekabel Facility and funding from UPC. In July 1999, we
paid off the UPC Senior Revolving Credit Facility of NLG458.0 million with
proceeds from the UPC Senior Credit Facility. We paid down other long-term and
short-term loans of NLG103.1 million, including NLG41.7 million for the
Telekabel Hungary Facility. We used proceeds from the sale of our programming
assets in Hungary to pay the Time Warner Note totaling NLG36.4 million. During
the nine months ended September 30, 1999, we incurred deferred financing costs
of NLG118.8 million.
During the nine months ended September 30, 1998 our primary source of cash
was gross proceeds from long-term debt, which represented NLG338.0 million,
including additional borrowings from the UPC Senior Revolving Credit Facility
and CNBH's major facility, as well as borrowings from United of NLG161.9
million. We repaid short-term debt of approximately NLG215.4 million, including
NLG131.1 million of the UPC Bridge Bank Facility and NLG65.0 million under a
KTE bank facility. We incurred deferred financing costs of NLG8.0 million.
We had NLG471.9 million of cash flows from financing activities during the
year ended December 31, 1998, as compared to NLG326.5 million for the year
ended December 31, 1997. Principal sources of cash during that period included
gross proceeds from long-term debt, which represented NLG529.6 million,
including additional borrowings from our senior revolving credit facility and
CNBH's major facility, a loan from our primary partners in the Israeli
operating system of $90.0 million (NLG170.1 million) and borrowings from
United, which represented NLG176.1 million. We repaid long-term and short-term
borrowings of approximately NLG252.6 million during the same period, including
NLG131.1 million of our bridge bank facility and NLG65.0 million under a KTE
bank facility.
Cash flows from financing activities during the year ended December 31,
1997 were NLG326.5 million, as compared to negative cash flow from financing
activities of NLG116.8 million for the year ended December 31, 1996. Principal
sources of cash from financing activities during that period included gross
proceeds of NLG1,402.1 million from short-term and long-term debt including
NLG883.9 million under our senior revolving credit facility, NLG252.5 million
under our bridge bank facility, bank loans and other obligations of NLG65.0
million in The Netherlands and other obligations primarily related to the
acquisition of Janco and the refinancing of Norkabel, which represented
NLG200.7 million. During the same period, we repaid approximately NLG587.9
million of short-term borrowings, including Dutch credit facilities of NLG384.7
million, short-term debt assumed in the acquisition of Norkabel of NLG138.4
million, other short-term credit arrangements of NLG22.1 million and other
long-term debt of NLG24.8 million. In December 1997, we also repaid NLG170.4
million of the pay-in-kind convertible notes and purchased NLG292.6 million of
ordinary shares A from Philips as part of the acquisition of UPC.
Cash flows from financing activities during the year ended December 31,
1996 were negative NLG116.8 million. Financing activities during the year ended
December 31, 1996 included raising gross proceeds of NLG326.1 million from
short-term and long-term loans and repayment of long- and short-term facilities
of NLG440.4 million.
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Liquidity and Capital Resources
Historically, we have financed our operations and acquisitions primarily
from:
. cash contributed by United upon our formation;
. debt financed at the UPC corporate level and project debt financed at
the operating company level;
. equity raised in our initial public offering;
. debt raised in our July 1999 offering of senior notes; and
. operating cash flow.
We have both well-established and developing systems. In general, we have
used the cash contributed by United upon formation and debt financed at the UPC
corporate level to fund acquisitions, developing systems and corporate
overhead. We have financed our well-established systems and, when possible, our
developing systems, with project debt and operating cash flow. Well-established
systems generally have stable positive cash flows that are used to fund new
product offerings, including telephony and Internet/data. Developing systems
are at various stages of construction and development and generally depend on
us for some of the funding for their operating needs until project financing
can be secured.
Debt Facilities
We and our consolidated and unconsolidated affiliates had significant debt
outstanding as of September 30, 1999. See "Description of other debt".
Sources of Capital
We had approximately NLG139.2 million of unrestricted cash and cash
equivalents on hand as of September 30, 1999. In addition, we had additional
borrowing capacity at the corporate and project debt level including CNBH,
Mediareseaux and the new Telekabel facilities.
During February 1999, we successfully completed an initial public offering
selling 44.6 million shares on the Stock Market of Amsterdam Exchanges and
Nasdaq National Market System and raising gross and net proceeds from the
offering of approximately NLG2,852.9 million and NLG2,659.7 million,
respectively. Concurrent with the offering DIC exercised one of its two option
agreements acquiring approximately 1.6 million shares for NLG89.6 million.
Proceeds from the sale of the shares to DIC were used to repay $45.0 million of
the DIC Loan and related interest. Proceeds from the offering were used to
reduce the senior revolving credit facility (NLG635.8 million, including
accrued interest of NLG15.8 million), repay in its entirety the bridge bank
facility (NLG110.0 million, net of the interest reserve account), acquire
NUON's 49% interest in UTH (NLG518.1 million) and assume from NUON a NLG33.0
million subordinated loan and accrued interest related to the loan. Subsequent
to the offering, we also repaid $80.0 million (NLG157.4 million) of the note
payable to United and an additional NLG191.0 million of the senior revolving
credit facility and completed the acquisitions of GelreVision (NLG243.0
million), SKT Bratislava (NLG88.7 million) and RCF (NLG57.8 million).
On July 27, 1999, we closed an offering of our 10 7/8% senior notes due
2009 and our 12% senior discount notes due 2009. The offering generated gross
proceeds of approximately $1.5 billion. Proceeds from the bond offering were
primarily used to fund acquisitions. Also, in July 1999 we entered into a
(Euro)1.0 billion credit facility (the "UPC Senior Credit Facility"). Proceeds
from the UPC Senior Credit Facility were used to refinance our existing UPC
Senior Revolving Credit Facility. The remaining available proceeds are expected
to be used to repay certain intercompany debts, pay interest on funds
downstreamed from the proceeds of the bond offering, general corporate
purposes, capital expenditures, pay amounts due under the UPC Senior Credit
Facility and other permitted distributions.
On October 27, 1999, we closed the offering of 15,000,000 of its ordinary
shares A. The price was set at (Euro)59.75 per share, for gross proceeds of
approximately (Euro)896.2 million.
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<PAGE>
On October 29, 1999, we closed a $1.03 billion equivalent bond offering.
The offering consists of six tranches: $252.0 million and (Euro)101.0 million
of ten year Senior Notes due 2009 with a 11 1/4% coupon; $200.0 million and
(Euro)100.0 million of eight year Senior Notes due 2007 with a coupon of 10
7/8%; and $478.0 million and (Euro)191.0 million aggregate principal amount of
ten year 13 3/8% Senior Discount Notes due 2009. The Senior Discount Notes were
sold at 52.306% of the face amount yielding gross proceeds of $250.0 million
and (Euro)100.0 million and will accrete but not pay interest until 2004.
While the proceeds from our recent debt and equity offerings are adequate
to meet our existing business requirements, we may need to raise additional
capital in the future to the extent we pursue new acquisition or development
opportunities or if cash flow from operations is insufficient to satisfy our
liquidity requirements.
The consummation of our tender offer of @Entertainment, resulted in a
change of control, and as a result, @Entertainment was obligated to offer to
repurchase any notes that the note holders put to it at 101% of their principal
amount, plus accrued and unpaid interest. The offers for the repurchase expired
at 12:01 PM, New York City time, on November 2, 1999. Pursuant to its
repurchase offer, @Entertainment has purchased $49.1 million aggregate
principal amount at maturity of @Entertainment Notes for an aggregate price of
$26.5 million and PCI has purchased $113.2 million aggregate principal amount
of PCI Notes for an aggregate price of $114.4 million. Funds used to repurchase
these notes were provided to @Entertainment from UPC's recent debt offering.
69
<PAGE>
Consolidated Capital Expenditures
The table below sets forth our consolidated capital expenditures for the
last three fiscal years and the nine months ended September 30, 1998 and 1999.
The historical information below does not reflect capital expenditures by A2000
(through September 1, 1999), UTH (through February 1, 1999), Tevel or other
unconsolidated systems. CNBH has been deconsolidated as of August 1, 1998; its
capital expenditures are included for the nine months ended September 30, 1998
and for the year ended December 31, 1998. Capital expenditures for acquisitions
which are consolidated in our financial statements are included in the table
below from their date of consolidation.
<TABLE>
<CAPTION>
Historical
------------------------------------------------------
For the Nine
Year Ended Year Ended Year Ended Months Ended
December 31, December 31, December 31, September 30,
1996 1997 1998 1998 1999
------------ ------------ ------------ ------- -------
(Dutch guilders, in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cable network
Upgrade................ 61,345 48,484 87,654 66,744 168,897
New build.............. 12,581 55,042 75,293 38,096 141,607
------- ------- ------- ------- -------
Total cable network.... 73,926 103,526 162,947 104,840 310,504
Master telecom center:
Video services......... 8,713 4,734 4,065 3,343 13,087
Cable telephone
(Priority Telecom).... -- -- 17,278 4,444 58,219
Internet/data
services.............. 349 4,480 629 357 5,839
------- ------- ------- ------- -------
Total master telecom
center................ 9,062 9,214 21,972 8,144 77,145
Customer premise
equipment (CPE):
Video services......... 4,179 5,833 14,268 9,614 8,525
Cable telephone
(Priority Telecom).... -- -- 1,677 4 37,298
Internet/data
services.............. 430 3,890 12,855 8,283 32,990
------- ------- ------- ------- -------
Total CPE.............. 4,609 9,723 28,800 17,901 78,813
Support systems and
equipment (SSE)........ 8,098 9,221 15,608 11,521 19,145
Land, buildings,
leasehold and Other.... 4,347 5,629 18,795 11,742 28,637
------- ------- ------- ------- -------
Total SSE and Other.... 12,445 14,850 34,403 23,263 47,782
New businesses:
chello broadband....... -- -- 4,589 1,340 33,945
Digital distribution
platform.............. -- -- -- -- 14,461
DTH.................... -- -- -- -- 7,692
------- ------- ------- ------- -------
Total new businesses... -- -- 4,589 1,340 56,098
Other................... 6,605 8,317 28,967 14,682 80,286
------- ------- ------- ------- -------
Total capital
expenditures.......... 106,647 145,630 281,678 170,170 650,628
======= ======= ======= ======= =======
</TABLE>
We plan to fund future capital expenditures with cash on hand and with
financing on the project-level and from vendors.
Cable Network
Since 1995, we have been aggressively upgrading our existing cable
television system infrastructure and constructing our new-build infrastructure
with two-way high capacity technology to support digital video, telephone and
Internet/data services. Capital expenditures for the upgrade and new-build
construction can be reduced at our discretion, although such reductions require
lead-time in order to complete work-in-progress and can result in higher total
costs of construction.
We expect that the upgrade of the cable network and related equipment will
cause us to write off some of our existing cable network and equipment. We do
not expect the write-off to be significant, except in certain limited
circumstances where it will be necessary to rebuild the network. While there
are some exceptions, most of the existing cable plant and related equipment has
been in service for over ten years and the remaining book value is very low.
While we believe the upgrade will extend the life of our existing plant, we do
not anticipate extending the useful life of our existing coaxial cable and
equipment for financial reporting purposes.
70
<PAGE>
During the year ended December 31, 1998 and the nine months ended September
30, 1999, we spent approximately NLG162.9 million and NLG310.5 million in cable
network capital expenditures, respectively.
Master Telecom Center
The master telecom center includes the headend and all central network
equipment needed for services provided through the operating system. For cable
television, this includes satellite antennas, encryption devices and original
transmission facilities. For telephone service, this includes the central
office switch and synchronous digital hierarchy and other telephone-related
equipment. For Internet/data service, this includes servers and equipment for
connection to the Internet. During the year ended December 31, 1998 and the
nine months ended September 30, 1999, we spent approximately NLG22.0 million
and NLG77.1 million for master telecom center equipment, respectively.
Customer Premise Equipment
Customer premise equipment includes television set-top converters for video
services, cable telephone equipment for telephone and cable modems and network
interface cards for Internet/data services. Customer premise equipment is a
variable capital expenditure, except for inventory on hand, and generally will
not be incurred unless we need the equipment for a subscriber. We recently
entered into agreements with Philips and General Instruments for the
development and purchase of an integrated digital set-top box for video and
Internet/data services, as well as for Internet-based telephone. A2000 has
agreed with the City of Amsterdam to deploy during the year 2000, a significant
number of digital set-top boxes to our existing customers who elect to take our
expanded tier service. During the year ended December 31, 1998 and the nine
months ended September 30, 1999, we spent approximately NLG28.8 million and
NLG78.8 million on customer premise equipment, respectively.
Support Systems and Equipment
Support systems and equipment includes ancillary systems such as
operational and business support systems, including network management,
customer care, inventory and billing. During the year ended December 31, 1998
and the nine months ended September 30, 1999, we spent NLG34.4 million and
NLG47.8 million in total support systems and equipment.
New Businesses
In addition to the network infrastructure and related equipment and capital
resources described above, development of our newer businesses, chello
broadband and our digital distribution platform and DTH, require capital
expenditures for the construction and development of our pan-European
distribution and programming facilities, including our origination facility,
network operating center, near video on demand server complex and related
support systems and equipment. For the year ended December 31, 1998 and the
nine months ended September 30, 1999, we incurred capital expenditures of
approximately NLG4.6 million and NLG33.9 million for chello broadband,
respectively. For the year ended December 31, 1998 and the nine months ended
September 30, 1999, we incurred capital expenditures of NLG0 million and
NLG14.5 million for the digital distribution platform, respectively. For the
year ended December 31, 1998 and the nine months ended September 30, 1999, we
have incurred NLG0 million and NLG7.7 million, for DTH, respectively.
New Business Lines--Revenue, Operating and Selling, General and Administrative
Expenses
During late 1997, we introduced Internet/data service as a product offering
in our consolidated systems. During 1998, we began the development of several
other new businesses including chello broadband, Priority Telecom and UPCtv.
During 1998, the Internet/data service business and telephony business were
developed at both local country operating companies and at the corporate pan-
European level. The information below provides an overview of the revenues,
operating expenses and selling, general and administrative expenses for 1997
and 1998 and the nine months ended September 30, 1998 and 1999 related to these
new services in relation to our cable television business.
71
<PAGE>
Historically, we did not fully allocate overhead and general and administrative
expenses to these new businesses. Full allocation began in 1999.
Corporate overhead selling, general and administrative expense includes a
stock-based compensation charge of NLG32.5 million for the nine months ended
September 30, 1998, compared to a charge of NLG107.2 million for the nine
months ended September 30, 1999, and a charge of NLG4.8 million for the year
ended December 31, 1997, compared to NLG320.5 million for the year ended
December 31, 1998. chello broadband selling, general and administrative expense
includes no stock-based compensation charge for the nine months ended September
30, 1998, compared to a charge of NLG2.2 million for the nine months ended
September 30, 1999, and no charge for the year ended December 31, 1997,
compared to a charge of NLG2.1 million for the year ended December 31, 1998.
Operating expenses do not include depreciation and amortization, which for the
nine months ended September 30, 1998 and 1999 totaled NLG101.3 million and
NLG316.5 million respectively, and for the years ended December 31, 1997 and
1998 totaled NLG132.9 million and NLG187.6 million, respectively.
Our consolidated operating expense and selling, general and administrative
expense has increased as a percentage of our consolidated revenue when
comparing the nine months ended September 30, 1999 with the comparable period
in 1998. This increase is primarily due to the costs incurred in 1999 in our
new businesses--Internet/data services, telephony and DTH and programming.
Operating and selling, general and administrative expenses as a percent of
revenue have remained constant for our cable television business. Cable
television operating expense as a percentage of cable television revenues was
34.6% for the nine months ended September 30, 1999, compared to 32.4% for the
same period in 1998. Internet/data operating expense as a percentage of
Internet/data revenue was 190.1% for the nine months ended September 30, 1999.
Telephony operating expense as a percentage of telephony revenue was 100.6% for
the nine months ended September 30, 1999. DTH and programming operating expense
as a percentage of DTH and programming revenue was 203.6% for the nine months
ended September 30, 1999.
Cable television selling, general and administrative expense as a
percentage of cable television revenues was 23.3% for the nine months ended
September 30, 1999, compared to 22.3% for the same period in 1998.
Internet/data selling, general and administrative expense as a percentage of
Internet/data revenue was 184.6% for the nine months ended September 30, 1999.
Telephony selling, general and administrative expense as a percentage of
telephony revenue was 108.8% for the nine months ended September 30, 1999. DTH
and programming selling, general and administrative expenses as a percentage of
DTH and programming revenue was 178.6% for the nine months ended September 30,
1999.
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1997 December 31, 1998
--------------------------- ---------------------------
Operating SG&A Operating SG&A
Revenue Expenses Expenses Revenue Expenses Expenses
------- --------- -------- ------- --------- --------
(Dutch guilders, in thousands)
<S> <C> <C> <C> <C> <C> <C>
Cable television........ 320,440 (111,543) (111,800) 377,817 (122,786) (86,226)
Telephone
Operating companies... -- -- -- 531 (1,369) (10,730)
Priority Telecom...... -- -- -- -- -- --
Internet/data
Operating companies... 764 (378) -- 9,465 (7,654) (28,813)
chello broadband...... -- -- -- -- -- (2,144)
Corporate overhead, DTH
and programming and
other.................. 16,051 (6,587) (7,267) 21,157 (6,650) (353,790)
------- -------- -------- ------- -------- --------
Total............... 337,255 (118,508) (119,067) 408,970 (138,459) (481,703)
======= ======== ======== ======= ======== ========
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended For the Nine Months Ended
September 30, 1998 September 30, 1999
--------------------------- ----------------------------
Operating SG&A Operating SG&A
Revenue Expenses Expenses Revenue Expenses Expenses
------- --------- -------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Cable television........ 287,256 (93,125) (64,022) 513,783 (177,689) (119,778)
Telephone
Operating companies... 436 (1,069) (4,284) 44,827 (44,391) (46,335)
Priority Telecom...... -- -- (2,593) -- (700) (2,438)
Internet/data
Operating companies... 5,274 (5,135) (6,799) 30,086 (29,084) (25,301)
chello broadband...... -- -- (6,337) 7,625 (42,594) (44,290)
Corporate overhead and
other.................. 13,249 (1,929) (52,573) 10,101 (2,304) (172,079)
DTH and programming..... 16,972 (34,555) (30,312)
Intercompany............ -- -- -- (14,836) 14,836 --
------- -------- -------- ------- -------- --------
Total............... 306,215 (101,258) (136,608) 608,558 (316,481) (440,533)
======= ======== ======== ======= ======== ========
</TABLE>
Certain Dutch Property Tax Issues
One of our Dutch systems was recently assessed for a transfer tax on the
purchase of immovable property in the amount of NLG1.8 million for the purchase
of a cable network. We have always regarded our cable networks as movable
property and not subject to such transfer tax. We are appealing this tax
assessment. Should we be unsuccessful, our Dutch systems may be assessed for
taxes on similar transactions. We cannot predict the extent to which the taxes
could be assessed retroactively or the amount of tax that our systems may be
assessed for, although it may be substantial, being 6% of the value
attributable to our systems at the date of transfer. Because we own 100% of UPC
Nederland, any tax liabilities assessed against our Dutch systems will be
consolidated with our results. We believe that, if our appeal is unsuccessful,
most cable television companies and other utilities in The Netherlands would
become subject to similar tax liabilities. If this happens, we expect these
entities would lobby the Dutch tax authorities with us against such tax
assessments. We cannot assure you that such lobbying would be successful. In
October 1999, the Dutch tax authorities issued an assessment on the 1995 tax
return of one of our subsidiaries. The assessment, on a taxable amount of
approximately NLG80.1 million, resulted in a tax payable of approximately
NLG28.0 million. The Dutch tax authorities indicated that this assessment was
issued to reserve the rights of the Dutch tax authorities pending expiration of
time under the statute of limitations. The assessment does not express an
opinion of the Dutch tax authorities on the taxes due and is still subject to
discussion. We intend to file an appeal against the assessment and,
furthermore, to defend our tax filing position, if necessary.
Inflation and Foreign Currency Exchange Rate Losses
To date, we have not been impacted materially by inflation.
The value of our monetary assets and liabilities is affected by
fluctuations in foreign currency exchange rates as accounts payable for certain
equipment purchases and certain operating expenses, such as programming
expenses, are denominated in currencies other than the functional currency of
the entity making such payments. We and some of our operating companies have
notes payable and notes receivable that are denominated in, and loans payable
that are linked to, a currency other than their own functional currency,
exposing us to foreign currency exchange risks on these monetary assets and
liabilities. In general, we and our operating companies do not execute hedge
transactions to reduce our exposure to foreign currency exchange rate risks.
Accordingly, we may experience economic loss and a negative impact on earnings
and equity with respect to our holdings solely as a result of foreign currency
exchange rate fluctuations.
The functional currency for our operations generally is the applicable
local currency for each operating company. We have consolidated operations in
countries outside of the European Monetary Union including Norway Sweden,
Poland, Ireland, Hungary, Romania, Slovak Republic and operations which report
in US dollars. Assets and
73
<PAGE>
liabilities of foreign subsidiaries are translated at the exchange rates in
effect at year-end, and the statements of operations are translated at the
average exchange rates during the period. Exchange rate fluctuations on
translating foreign currency financial statements into Dutch guilders result in
unrealized gains or losses referred to as translation adjustments. Cumulative
translation adjustments are recorded as a separate component of shareholders'
equity. Transactions denominated in currencies other than the local currency
are recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transaction gains and losses
which are reflected in income as unrealized, based on period-end translations,
or realized upon settlement of the transactions.
Cash flows from our operations in foreign countries are translated based on
their reporting currencies. As a result, amounts related to assets and
liabilities reported on the consolidated statements of cash flows will not
agree to changes in the corresponding balances on the consolidated balance
sheets. The effects of exchange rate changes on cash balances held in foreign
currencies are reported as a separate line below cash flows from financing
activities.
New Accounting Principles
The American Institute of Certified Public Accountants recently issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities,"
which is required to be adopted by affected companies for fiscal years
beginning after December 15, 1998. This statement defines start-up and
organization costs, which must be expensed as incurred. In addition, all
deferred start-up and organization costs existing as of January 1, 1999 must be
written-off and accounted for as a cumulative effect of an accounting change.
As of December 31, 1998, our deferred start-up and organization costs were
insignificant. We adopted this statement effective January 1, 1999, with no
material effect on our financial statements.
The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which requires that companies
recognize all derivatives as either assets or liabilities in the balance sheet
at fair value. Under this statement, accounting for changes in fair value of a
derivative depends on its intended use and designation. In June 1999, the FASB
approved Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133" ("SFAS 137"). SFAS 137 amends the effective date of
SFAS 133. SFAS 133 will now be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000. We currently are assessing the effect of
this new standard.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting For the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. SOP 98-1 identifies the characteristics of internal-use
software and provides examples to assist in determining when computer software
is for internal use. SOP 98-1 is effective for financial statements for fiscal
years beginning after December 15, 1998, for projects in progress and
prospectively, with earlier application encouraged. We adopted this statement
effective January 1, 1999, with no material effect on our financial statements.
European Economic and Monetary Union
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the euro. The participating countries adopted the euro as their
common legal currency on that day. The euro trades on currency exchanges and is
available for non-cash transactions during the transition period between
January 1, 1999 and January 1, 2002. During this transition period, the
existing currencies are scheduled to remain legal tender in the participating
countries as denominations of the euro and public and private parties may pay
for goods and services using either the euro or the participating countries'
existing currencies.
During the transition period, all operating companies' billing systems will
include amounts in euro as well as the respective country's existing currency.
All of our accounting and management reporting systems currently are multi-
currency.
74
<PAGE>
We intend to use the euro as our reporting currency by the end of 2000. We
do not expect the introduction of the euro to affect materially our cable
television and other operations. We have not yet taken steps to confirm that
the financial institutions and other third parties with whom we have financial
relationships are prepared for the use of the euro. Thus far, we have not
experienced any material problem with third parties as a result of the
introduction of the euro. We believe the introduction of the euro will not
require us to amend any of our financial instruments or loan facilities, other
than amendments that will be made automatically by operation of law. These will
include automatic replacement of the currencies of participating countries with
the euro. They will also include automatic replacement of interest rates of
participating countries with European interest rates. We believe the
introduction of the euro has reduced our exposure to risk from foreign currency
and interest rate fluctuations.
Quantitative and Qualitative Disclosure About Market Risk
Investment Portfolio
As of September 30, 1999, we had cash and cash equivalents of approximately
NLG139.2 million. We have invested this cash in highly liquid instruments which
meet high credit quality standards with original maturities at the date of
purchase of less than three months. These investments will be subject to
interest rate risk and foreign exchange fluctuations (with respect to amounts
invested in currencies outside the European Monetary Union), however, we do not
expect any material losses with respect to its investment portfolio.
75
<PAGE>
Impact of Foreign Currency Rate Changes
The table below provides information about our and our consolidated
subsidiaries' foreign currency exchange risk for cash and debt which is
denominated in foreign currencies outside of the European Monetary Union as of
September 30, 1999, including cash flows based on the expected repayment date
and related weighted-average interest rates for debt. The information is
presented in NLG equivalents, which is our reporting currency. The instruments'
actual cash flows are denominated in U.S. dollars and Polish zloty. See "--
Liquidity and Capital Resources--Debt Facilities."
<TABLE>
<CAPTION>
Amount Outstanding
As of September 30, 1999
---------------------------
Book Value Fair Value
(in thousands)
<S> <C> <C>
Dollar Denominated Investments
Cash Account...................................... 42,998 42,998
Polish Zloty Denominated Investments
Cash Account...................................... 8,671 8,671
</TABLE>
<TABLE>
<CAPTION>
Amount Outstanding
as of September Expected Repayment
30, 1999 as of December 31,
--------------------- --------------------------------
Book Value Fair Value 1999 2000 2001 2002 2003
<S> <C> <C> <C> <C> <C> <C> <C>
Dollar Denominated
Facilities
DIC Loan
8.0% per annum + 6.0%
of principal at
maturity............... 93,150 93,150 -- 93,150 -- -- --
United Loan
10.75% per annum 13,809 13,809 13,809 -- -- -- --
Stjarn Seller's Note
8.0% per annum......... 207,000 207,000 -- 207,000 -- -- --
UPC USD Senior Discount
Notes, 2009
12.5% per annum........ 847,085 844,405 -- -- -- -- --
PCI Notes
9.875% per annum....... 271,812 242,190 236,808 -- -- -- 35,004
@Entertainment
1998 Senior Discount
Notes
14.5% per annum........ 283,912 318,200 34,702 -- -- -- --
@Entertainment
1999 Senior Discount
Notes
14.5% per annum........ 318,919 340,209 20,059 -- -- -- --
@Entertainment
1999 Series C Senior
Discount Notes
7.0% per annum on the
principal amount at
maturity............... 23,490 23,490 -- -- -- -- --
</TABLE>
Historically, we and our operating companies have not executed hedge
transactions to reduce our exposure to foreign currency exchange rate risk.
Accordingly, we may experience economic loss and a negative impact on earnings
and equity with respect to our holdings solely as a result of foreign currency
exchange rate fluctuations. In connection with our offering of senior discount
notes in July 1999, we entered into a cross-currency swap agreement.
76
<PAGE>
Interest Rate Sensitivity
The table below provides information about our financial instruments that
are sensitive to changes in interest rates as of September 30, 1999, including
cash flows based on the expected repayment dates and the related weight-average
interest rates. The information is presented in NLG equivalents, which is our
reporting currency.
<TABLE>
<CAPTION>
Amount Outstanding
as of September Expected Repayment as of December
30, 1999 31,
--------------------- -----------------------------------
Book Value Fair Value 1999 2000 2001 2002 2003
---------- ---------- ------- ------ ------ ------ ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Variable Rate Facilities
UPC Euro Senior Notes
2009
EURIBOR + 4.15% and
8.54%, average rate in
1999 of 7.5% and
8.54%.................. 1,663,177 1,627,810 -- -- -- -- --
UPC Senior Credit
Facility
EURIBOR/LIBOR +0.75% to
2.0%, average rate in
1999 of 6.0% .......... 618,298 618,298 -- -- -- -- --
New Telekabel Facility
EURIBOR +0.75% to 2.0%,
average rate in 1999 of
4.90%.................. 562,571 562,571 -- -- -- 26,995 53,991
CNBH Facility
AIBOR + 0.7% to 0.75%,
or fixed rate advance
+0.7% to 0.75%, average
rate in 1999 of 3.90%.. 252,221 252,221 -- -- 7,020 16,398 30,454
Mediareseaux Facility
LIBOR +0.75% to 2.0%,
average rate in 1999 of
5.10%.................. 86,195 86,195 -- -- -- -- 6,949
RCF Facility
PIBOR +1.5%, average
rate in 1999 of 4.70%.. 81,382 81,382 11,600 11,600 11,600 11,600 11,600
RVC Facility
LIBOR +1.0%, average
rate in 1999 of 4.0%... 100,785 100,785 -- -- 10,000 10,000 18,300
A2000 Facility(1)
AIBOR +0.7% to 0.75% or
fixed rate advance
+0.7% to 0.75%, average
rate in 1999 of 4.85%.. 458,000 458,000 458,000 -- -- -- --
</TABLE>
- --------------------
(1) A2000 is currently negotiating a credit facility to replace the existing
facilities.
77
<PAGE>
<TABLE>
<CAPTION>
Amount Outstanding
as of September Expected Repayment as of
30, 1999 December 31,
--------------------- --------------------------------
Book Value Fair Value 1999 2000 2001 2002 2003
---------- ---------- ------- ------- ---- ---- ------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate Facilities
DIC Loan
8.0% per annum +6.0% of
principal at maturity.. 93,150 93,150 -- 93,150 -- -- --
United Loan
10.75% per annum....... 13,809 13,809 13,809 -- -- -- --
Videopole Facility
6.60% per annum........ 8,156 8,156 -- -- -- -- --
UPC Euro Senior Notes,
2009
10.875% per annum...... 661,113 664,419 -- -- -- -- --
UPC USD Senior Discount
Notes, 2009
12.5% per annum........ 847,085 844,405 -- -- -- -- --
PCI Notes
9.875% per annum....... 271,812 242,190 236,808 -- -- -- 35,004
@Entertainment 1998
Senior Discount Notes
14.5% per annum........ 283,912 318,200 34,702 -- -- -- --
@Entertainment 1999
Senior Discount Notes
14.5% per annum........ 318,919 340,209 20,059 -- -- -- --
@Entertainment 1999
Series C Senior
Discount Notes
s s 7.0% per annum on
the principal amount at
maturity............... 23,490 23,490 -- -- -- -- --
Stjarn Seller's Note
8.0% per annum......... 207,000 207,000 -- 207,000 -- -- --
</TABLE>
Equity Prices
As of September 30, 1999, we are exposed to equity price fluctuations
related to our investment in United stock, which is classified as an investment
available for sale. Changes in the price of the stock are reflected as
unrealized gains (losses) in our statement of shareholders' equity (deficit),
until such time as the stock is sold and any unrealized gain (loss) will be
reflected in the statement of operations.
<TABLE>
<CAPTION>
Fair Value as of
Number of Shares September 30, 1999
---------------- ------------------
(Dutch guilders, in thousands
except share amounts)
<S> <C> <C>
Investment in United Stock.................. 2,784,620 412,858
</TABLE>
As of September 30, 1999, we are also exposed to equity price fluctuations
related to our debt which is convertible into our ordinary shares A. The table
below provides information about our convertible debt, including expected cash
flows and related weight-average interest rates.
<TABLE>
<CAPTION>
Expected
Amount Repayment
Outstanding as of as of December
September 30, 1999 31,
--------------------- --------------
Book Value Fair Value 1999 2000
---------- ---------- ------ -------
(Dutch guilders, in thousands)
Convertible Debt
- ----------------
<S> <C> <C> <C> <C>
DIC Loan
8.0% per annum + 6.0% of principal at
maturity................................. 93,150 93,150 -- 93,150
United Loan
10.75% per annum......................... 13,809 13,809 13,809 --
Stjarn Seller's Note
8% per annum............................. 207,000 207,000 -- 207,000
</TABLE>
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Cross-Currency Swaps
Concurrent with the closing of the July 1999 note offering, we entered into
a cross-currency swap, swapping the $800.0 million, 10 7/8% fixed rate senior
notes into fixed and variable rate Euro notes with a notional amount totalling
(Euro)754.7 million. One half of the Euro notes ((Euro)377.35 million) have a
fixed interest rate of 8.54% through August 1, 2004, thereafter switching to a
variable interest rate of EURIBOR +4.15%. The remaining (Euro)377.35 million
have a variable interest rate of EURIBOR +4.15% through August 1, 2009. The
cross-currency swaps provide the bank with the right to terminate the swap at
fair value commencing August 1, 2004 with the payment of a call premium equal
to the call premium which would be paid by us to the holders of the $800.0
million of senior notes if the notes are called on or after August 1, 2004.
In October 1999, we closed an offering of notes consisting of six tranches:
$252.0 million and (Euro)101.0 million of ten year senior notes due 2009 with a
11 1/4% coupon; $200.0 million and (Euro)100.0 million of eight year Senior
Notes due 2007 with a coupon of 10 7/8%; and $478.0 million and (Euro)191.0
million aggregate principal amount of ten year 13 3/8% Senior Discount Notes
due 2009. The Senior Discount Notes were sold at 52.306% of the face amount
yielding gross proceeds of $250.0 million and (Euro)100.0 million and will
accrete but not pay interest until 2004. We have entered into cross-currency
swaps, swapping the $252.0 million, 11 1/4% coupon into fixed and variable rate
Euro notes with a notional amount totalling (Euro)240.2 million, and swapping
the $200.0 million, 10 7/8% coupon into fixed and variable rate Euro notes with
a notional amount totalling (Euro)109.7 million.
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BUSINESS
We own and operate broadband communications networks in 12 countries in
Europe and in Israel. We provide communications services in many European
countries through our three business lines: cable television, telephone and
Internet/data services. Our subscriber base is the largest of any group of
broadband communications networks operated across Europe.
Our Growth Strategy
We believe our leading position in providing video services across Europe
will help us to expand and integrate our three lines of business. Our goal is
to enhance our position as a leading pan-European distributor of video
programming services and to become a leading pan-European provider of telephone
services and Internet/data services, offering a one-stop shopping solution for
personal and business communication needs.
The key elements of our strategy to achieve this goal are to:
. continue to increase our average cable revenue per subscriber by
developing our expanded basic tier service, pay-per-view, video on demand
and audio-only program offerings;
. continue to upgrade our systems and take advantage of our upgraded
broadband infrastructure and high cable penetration to offer telephone
and Internet/data services to residential and business customers;
. continue to position Priority Telecom as our high quality, pan-European,
full-service branded telephone product with competitive pricing and
superior service;
. capitalize on our ability to provide high speed Internet access through
our chello broadband portal, aggregate and integrate content into the
portal and develop e-commerce and advertising lines of business;
. continue to develop our programming business and partnerships in order to
secure high quality programming content for our systems and for sale to
other television operators;
. utilize digital distribution technology to deliver and integrate our
video, Internet/data and programming businesses; and
. continue to acquire systems and increase the percentage we own in some
systems in order to expand our coverage and implement our branded,
packaged video, voice and data product offerings.
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Implementation of New Services
The following table shows, in respect of our existing systems, the status
of the implementation of the new services that we are adding in addition to our
existing basic video services.
<TABLE>
<CAPTION>
Services Launched or Currently Planned For Launch
---------------------------------------------------------------------
Video Internet/Data Telephone
--------------------------------- ------------------------ ----------
chello
Expanded Premium Impulse Pay- Internet/Data broadband Cable
Basic Tier Channels Per-View Services Portal Telephone
---------- --------- ------------ ------------- ---------- ----------
Western Europe:
<S> <C> <C> <C> <C> <C> <C>
Austria............... May 1997 -- May 1997 Sept. 1997 June 1999 Feb. 1999
Belgium............... Oct. 1996 1989 Planned Sept. 1997 March 1999 Planned
France................ Oct. 1996 Oct. 1996 May 1998 March 1999 June 1999 March 1999
The Netherlands
A2000................ Oct. 1996 1989 Apr. 1997 Oct. 1997 Planned July 1997
UTH(1)............... Dec. 1996 1988 June 1998 Nov. 1997 June 1999 May 1999
Malta................. 1994 1994 Planned Planned Planned --
Norway................ 1989 1990 Planned Mar. 1998 March 1999 Apr. 1999
Central and Eastern Europe:
Czech Republic........ 1994 1994 -- -- Planned --
Hungary............... 1991 1991 -- Planned Planned --
Poland................ -- 1995 -- Planned Planned --
Romania............... Apr. 1998 Feb. 1998 -- -- -- --
Slovak Republic....... 1995 Apr. 1997 -- Planned -- --
Israel................ 1990 -- 1994 -- Planned --
</TABLE>
- --------------------
(1)Some of these services were launched by KTE or Combivisie prior to the
formation of UTH.
As we introduce new services, we will promote Priority Telecom and chello
broadband as independent brands, within both UPC systems and non-affiliated
cable systems. In addition, a key element of our strategy is to market the
products in our three lines of business as an integrated, branded package of
services, establishing UPC as a unified brand. We plan to increasingly market
our expanded array of products as a value package offering, which we believe
will be attractive to subscribers.
UPC Video Services: Video Distribution and Programming
Video Distribution Overview
We own and operate established cable television systems and are expanding
and upgrading those systems. As of September 30, 1999, our operating systems
had approximately 5.3 million aggregate subscribers to their basic tier video
services. Video distribution services accounted for approximately 92.4% of our
consolidated revenue in 1998. Adjusted for the new acquisitions, we had 5.8
million aggregate subscribers to our basic tier video service at September 30,
1999, excluding 181,550 DTH subscribers. We offer our subscribers some of the
most advanced analog video services available today and a large choice of FM
radio programs and plan to increase our offerings through an integrated digital
set-top box. In addition, because many of our operations are two-way capable,
we have been able to add more services. In many systems, for example, we have
introduced impulse pay-per-view services, which enable subscribers to our
expanded basic tier to select and purchase programming services, such as movies
and special events, directly by remote control.
Growth Strategy
We are focusing on a multi-part growth strategy, the key elements of which
are to:
. continue to increase our average revenue per subscriber by developing our
expanded basic tier service, pay-per-view, video on demand and audio-only
program offerings; and
. continue to develop our programming business in order to secure high
quality programming content for our systems and for sale to other
television operators.
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Continue to Increase Video Service Revenue Per Subscriber
We plan to continue increasing our average revenue per subscriber by
expanding our video services program offerings in the expanded basic tier
service, pay-per-view and digital audio areas. We plan to continue improving
our expanded basic tier offerings by adding new channels and, where possible,
migrating popular commercial channels into the expanded basic tier service.
Generally, basic tier pricing is regulated while the expanded basic tier is not
price-regulated. In addition, we plan to offer subscribers additional choice by
offering thematic groupings of tiered video services in a variety of genres and
by increasing the number and time availability of pay-per-view offerings. For
example, we currently offer six to nine pay-per-view offerings but anticipate
that, once our digital distribution platform is operational, we will offer over
75 channels of near video on demand pay-per-view programming. Near video on
demand is an advanced television service that provides premium programming,
movies and events on numerous channels each with a staggered starting time at
frequent intervals. Because of the frequent starting times, subscribers have a
greater number of purchase opportunities relatively "on demand."
We have increased our average revenue per subscriber by offering enhanced
video services in the form of impulse pay-per-view services in some of our
markets for several years. In Israel, Tevel's 250,000 subscribers with two-way
capabilities buy an aggregate of more than 100,000 pay-per-view programs per
month, for an average monthly buy rate of 0.4 per subscriber. In our Austrian
and the A2000 systems, during 1998, the average impulse pay-per-view monthly
buy rate was over 1.7 and 1.0 per expanded basic tier subscriber, respectively.
The chart below sets forth for the nine months ended September 30, 1999,
the average monthly revenue per subscriber for certain of our systems, as well
as in the United Kingdom and the United States, countries of comparable per
capita income where these types of enhanced services have been offered for
longer periods. Although we do not expect that we will achieve the average
monthly revenue per subscriber in our systems that is realized in the United
Kingdom and the United States, these figures illustrate the potential to
increase our average monthly revenue per subscriber through the introduction of
enhanced service offerings. Information for the United Kingdom and United
States comes from Kagan World Media, Ltd.
[GRAPH]
The higher average revenue per subscriber in our Israeli and Maltese
systems is attributable to offering enhanced video services. Depending on the
system, this was done through introducing new channels, including
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country-specific program channels, introducing stand-alone pay-per-view and
through migrating channels from rate-regulated basic tiers to unregulated
tiers.
Our management team has substantial experience in the European cable
television industry and has demonstrated the potential to increase revenue per
basic cable television subscriber by offering additional services that appeal
to our subscribers. We believe that we have the opportunity to apply these
principles to our recently acquired systems and our new acquisitions, which
currently have much lower revenues per subscriber, while adding major
innovations in pan-European programming and distribution to increase further
our average revenue per subscriber in all systems.
Continue to Develop Programming Business
We have been involved in several country-specific programming ventures
including ventures dedicated to creating channels for Spain, Czech Republic,
Hungary, Israel and Malta. Together, these programming ventures have developed
channels in key genres including sports, children, documentary and movies,
which are subtitled or dubbed in the local language. We believe that our
programming ventures add value to our cable television networks by providing
compelling content to our subscribers. In connection with our acquisition of
Time Warner's interest in the Hungary cable television systems, Time Warner
has purchased our interests in the Czech and Hungarian programming services.
We own 80% of Tara, having recently acquired United's 75% interest in Tara.
Tara provides Irish general entertainment programming to the U.K. markets. The
remaining 20% of Tara is owned by RTE Commercial Enterprises Ltd., an
affiliate of the Irish national broadcasting company. In addition, we recently
acquired United's 33.5% interest in IPS. In May 1999, we acquired a further
16.5% interest in IPS from an unaffiliated party, bringing our total
percentage ownership of IPS to 50%. IPS produces a movie channel, a
documentary channel, a children's channel and a music channel independently,
and a history channel in joint venture with AGE Network for the Spanish and
Portuguese markets. The other partner of IPS is a subsidiary of The Walt
Disney Corporation. As of September 30, 1999, Tara and IPS sold their channels
to non-UPC cable operators serving an aggregate of approximately 2.3 million
subscribers.
In August 1999, we acquired @Entertainment, Inc., which, in addition to
having the largest number of cable subscribers in Poland, also operates a
Polish language programming business. In August 1999, we completed the
acquisition of 13.3% of SBS. SBS owns and operates television and radio
broadcasting stations in Scandinavia and other European markets. SBS both
produces and purchases programming for its stations with an emphasis on the
importance of producing programs locally in each market.
We believe that we have a strong competitive opportunity to become a
provider of new channels due to our ready access to our customer base and our
ability to affordably adapt our channels for distribution to multiple European
markets and languages. We plan to:
. operate six new 24-hour channels by the end of 1999 and two new channels
shortly thereafter;
. acquire rights to up to 30 channels created by third parties over the
next few years; and
. acquire rights to and distribute up to 75 near video on demand channels
over the next few years.
The initial six channels planned for 1999 are:
. Club: a women's interest channel created by licensing content from E!,
Carlton Food Network, and others, which launched on UPC's cable systems
in the Netherlands in October 1999;
. UPC Sport One: a general sports channel;
. Extreme Sports: an extreme sports channel created by licensing content
from X-Dream;
. Reality TV: a channel using on real life video programming and factual
documentary programming.
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. Avanti: a technology and air/space channel; and
. Film I: a movie channel showing high-quality library film product, which
was launched in May 1999.
UPCtv has launched two television channels, EX-Extreme Sports and UPC Film
I, to date. These channels were first offered on the A2000 network in May 1999
and are due to be offered on the UTH network in September 1999. In the case of
all new channels, our role includes acquisition, scheduling and content
aggregation, channel design and transmitting the channels to satellites for
distribution. In addition to developing our eight pan-European channels, we are
negotiating for additional channels and near video on demand pay-per-view
programming on a pan-European basis. In the future, we plan to distribute our
UPCtv channels to entities that are not affiliated with us and in countries
where we do not currently operate.
We are constructing a satellite-based pan-European digital distribution
platform that will enable digital distribution of our new channels and other
television signals to our upgraded networks. When this digital distribution
platform is constructed, we will convert our impulse pay-per-view services into
a near video on demand service that would be able to provide up to 75 channels
of programming. We are negotiating to acquire rights to broadcast first-run hit
movies, adult programming and special events over this planned digital
distribution platform. Upon obtaining appropriate rights, the near video on
demand service would likely include between 12 and 16 new movie titles per
month that would be broadcast as frequently as every 15 minutes, thus enabling
subscribers to choose a movie at a convenient start time. Although near video
on demand channels cannot be offered simultaneously on a pan-European basis due
to licensing restrictions, we intend to use remote content servers located in
the cable operator's headend to store the library for playout at the
appropriate time.
Full digitalization of our television signals, to be made possible by our
network upgrade to full two-way capability, will provide our Western European
systems with substantially more channel capacity. This increased channel
capacity will enable subscribers to customize their subscriptions for our
products and services to suit their lifestyles and personal interests. When the
planned digital distribution platform is completed, we also intend to provide
our subscribers with customizable programming guides that would enable them to
program favorite channels and also allow parents to restrict their children's
viewing habits. The construction of the planned digital distribution platform
will involve significant capital investment and the use of new technologies. We
cannot assure you that we will be able to complete the construction of the
digital distribution platform on the planned schedule. See "Risk Factors--
Failure to raise necessary capital could restrict the development of our
network and the introduction of new services."
UPC Telephone Services: Priority Telecom
Overview
We believe that our existing customer base and upgraded network give us a
unique opportunity to provide telephone services in Europe. We offer local
telephone services, under the brand name Priority Telecom, in our Austrian,
Dutch, French and Norwegian systems. We also provide national and international
long distance voice telephone services. Our operating companies are licensed to
provide telephone services in Austria, France, Hungary, The Netherlands and
Norway. We believe that our fiber and broadband, coaxial cable and cable-based
subscriber relationships provide ready access to potential residential
telephone subscribers. We believe our networks and facilities also provide the
opportunity for cost-effective access to potential business telephone
customers.
A2000 began offering cable telephone services in July 1997 on a trial basis
in Purmerend, a town outside Amsterdam, and since then has begun to offer these
services to its customers in Hilversum, Zaanstad and part of Amsterdam. We
launched Priority Telecom's cable telephone service on a trial basis in Vienna
in November 1998 and in Oslo in March 1999. Full launches then took place in
February 1999 and April 1999, respectively. UTH launched Priority Telecom cable
telephone service in parts of its network in May 1999. Priority Telecom's cable
telephone service was launched on Mediareseaux's network in March 1999.
We have negotiated interconnection agreements with a number of
telecommunications operators and continue to evaluate and enter into agreements
with other new telecommunication service providers in order to achieve more
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cost effective rates for national and international long distance services. In
addition, we are in the process of connecting the switches in our operating
companies over the pan-European AORTA backbone, allowing us to keep a greater
proportion of calls on our network, thereby reducing the amount of
interconnection fees we must pay to other telecommunications operators.
Market Opportunity
We believe there are significant growth opportunities in the European
telecommunications market as a result of the January 1, 1998 liberalization of
the telephone industry in most EU member countries and Norway. This
liberalization allows new providers to offer telephone and other
telecommunications services in markets that have historically been dominated by
incumbent national operators. The current local telephone rates charged to
subscribers are high in comparison to those in the United States. The following
table illustrates this disparity. The source for this information is the
Organization for Economic Cooperation and Development. The monthly revenue
comes from their average monthly basket of local residential charges assuming
peak time usage on a discount plan.
<TABLE>
<CAPTION>
Total 1997 Revenue Monthly basket of
Incumbent of National local PSTN
Telecommunications Telecommunications Residential Charges
Operator Operators per line (May 1998)
------------------ ------------------ -------------------
(U.S. dollars)
(in millions)
<S> <C> <C> <C>
Austria.............. PTA 3,734 $78.75
Belgium.............. Belgacom 4,244 75.63
France............... France Telecom 28,636 58.99
The Netherlands...... KPN 7,931 49.22
Norway............... Telenor 3,608 41.07
United States........ Various 256,801 19.92
</TABLE>
With approximately 4,430 kilometers of telephone-capable fiber optic cable
already deployed in our Western European systems, we believe that Priority
Telecom has an advantage over other new entrants in the telephone services
market. Currently, Priority Telecom has broadband, coaxial cable access to
approximately 1.8 million homes and, through us, long-standing cable
television-based relationships with approximately 2.8 million residential
subscribers in its planned telephone markets. We believe that our international
telephone backbone capacity needs, especially when combined with our branded
Internet/data services business, chello broadband, will create international
traffic volumes that will provide significant economies of scale, thereby
allowing the long-term lease of fiber capacity and the resale of excess
capacity to business and carrier customers.
Priority Telecom's strategy includes pursuing selective investment
opportunities in wireless telephone services. This strategy is designed to
develop cross-marketing and bundling of fixed and mobile products and allow UPC
to provide backbone transmission services to mobile operators. Priority Telecom
recently entered into a co-operation relationship with Connect Austria, an
Austrian mobile telephone operator. UPC Austria currently supplies backbone
bandwidth to Connect Austria and, following the recently announced "Take Two"
co-operation, offers customers a combination of fixed and mobile telephone
services with one telephone number, one monthly line rental and free
installation. In addition, Priority Telecom announced a second co-operation
with Cesky Mobil, a consortium led by TIW which was recently awarded a CSM
licence in the Czech Republic. Cesky Mobil have agreed to lease backbone
capacity from our Czech operating companies and to cross-market and bundle
mobile services with our other product offerings. In addition, Priority Telecom
may consider bidding for broadband wireless frequencies where these frequencies
provide a cost-effective outreach technology.
Competition
Priority Telecom will face competition in its markets from incumbent
telecommunications operators and other competitive operators that have
substantially more experience in providing, and significantly greater resources
devoted to, telephone services. In addition, we will depend on interconnection
arrangements provided by incumbent telecommunications operators. We believe,
however, that our strategy for Priority Telecom will allow us to compete
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effectively with incumbent telecommunications operators and any other local
loop providers who subsequently enter the market. See "Risk Factors--The
competitiveness of the telephone services industry will make it difficult for
our new telephone service to enter the market."
Priority Telecom Growth Strategy
Because of the relatively high European local tariff rates, we believe
potential customers will be receptive to our telephone services, which we
intend to price at a discount compared to services offered by incumbent
telecommunications operators. In addition to competing on the basis of price,
we offer a full complement of services to telephone subscribers including
custom local access services, "CLASS," including caller ID, call waiting, call
forwarding, call blocking, distinctive ringing and three-way calling. We also
are able to provide voice mail and second lines. We now offer these telephone
services in our Austrian, Dutch, Norwegian and French systems. The introduction
of number portability in some of our markets, including The Netherlands, Norway
and France, provides an even greater opportunity as potential customers will be
able to subscribe to our service without having to change their existing
telephone numbers.
Our strategy for Priority Telecom is to achieve high-growth from early
market entry with the goal of establishing a strong market position prior to
market entry by other potential local loop competitors. The key elements of our
telephone penetration strategy are:
. pricing at a discount to the incumbent telecommunications operators;
. waiving or substantially discounting installation fees;
. integrating telephone with our video and Internet/data services; and
. providing an equal or superior quality of service than that of other
providers.
We also plan to use short-term promotions, special calling plans and non-
cash incentives to support the marketing of our telephone services. We intend
to concentrate on building brand awareness for Priority Telecom as a pan-
European telecommunications brand, which may be co-branded with our existing
local video services brands. We also plan to integrate Priority Telecom's
residential and small office/home office telephone products with our video
services and chello broadband's Internet access services, thus enabling us to
offer pricing packages designed to encourage multiple product purchases and
minimize churn.
Priority Telecom will pursue this pricing, branding and integration
strategy in the following three market segments:
1. Residential and Small Office/Home Office Served by Cable Phone. In
most cases, Priority Telecom is the only operator other than the incumbent
in its respective operating areas that has direct, facilities-based access
to many potential residential and small office/home office customers.
2. Medium-sized Businesses Served by Cable Phone. Priority Telecom's
network is able to reach many medium-sized businesses that may not be
reached economically with direct fiber connections.
3. Large Businesses and Other Licensed Operators Served Directly by
Fiber or Point-to-Point Microwave. Priority Telecom exploits its early
entry advantage from its existing local fiber rings to provide high
quality, cost competitive telephone service to businesses as an alternative
to the incumbent telecommunications operators.
We believe the residential and small office/home office market sectors
represent a significant business opportunity for Priority Telecom. Simple
marketing offers are being used to encourage rapid take-up by overcoming
consumer inertia and increasing brand awareness of our products. The approach
includes, for example, innovative offers and periodic deep discounts. Large and
medium-sized business customers are marketed through a key account management
direct sales force targeting specific industry sectors such as other licensed
operators, Internet service providers, banks and financial services, and retail
and professional services.
We utilize cable telephone equipment with various line capabilities. For
the residential and small office/home office market, a one-, two- or four-line
unit is utilized. Four-, eight- and twelve-line cable telephone equipment units
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are used to provide service to segments of the medium-sized business market.
Large businesses generally will be connected to the network with direct fiber
connections using self-healing fiber optic ring synchronous digital hierarchy
technology. This technology automatically detects disruptions in the fiber and
reroutes calls within 1/20 of a second, thereby providing reliable service to
these customers.
Priority Telecom's strategy includes pursuing selective investment
opportunities in wireless telephone services. This strategy is designed to
develop cross-marketing and bundling of fixed and mobile products and allow UPC
to provide backbone transmission services to mobile operators. Priority Telecom
entered into a co-operation relationship with Connect Austria, an Austrian
mobile telephone operator. Connect Austria, though the recently announced "Take
Two" co-operation, offers customers a combination of fixed and mobile telephone
services with one telephone number, one monthly line rental and free
installation. In addition, Priority Telecom announced a second co-operation
with Cesky Mobil, a consortium led by TIW which was recently awarded a GSM
license in the Czech Republic. Cesky Mobil has agreed to lease backbone
capacity from our Czech operating companies and to cross-market and bundle
mobile services with our other product offerings. In addition, Priority Telecom
may consider bidding for broadband wireless frequencies where these frequencies
provide a cost-effective outreach technology.
The A2000 Experience
A2000 has successfully launched cable telephone services in parts of its
systems. A2000 originally marketed its cable telephone service under the brand
name Nedpoint, however, following our acquisition of the 50% of A2000 that we
did not own, A2000's service was rebranded Priority Telecom. As of September
30, 1999, A2000 had approximately 36,100 lines serving 30,075 cable telephone
subscribers. As of the same date, A2000 achieved a penetration rate of
approximately 14% of the homes marketed in Purmerend, its first market where
the service was launched in July 1997. The installation rate for A2000 averaged
about 310 installations per week during the nine months ended September 30,
1999. Current churn rates are approximately 7% on an annualized basis.
Following the common European pricing model, A2000's tariffs are usage-
based rather than a flat fee and every call is metered. In September 1999,
A2000's average monthly revenue per telephone subscriber was approximately
NLG75. This compares with approximately NLG71 for KPN subscribers during 1998,
although this amount may decrease as a result of KPN rate cuts. See
"Regulation--The Netherlands."
Cost of Implementation
Traditional telephone service is carried over twisted copper pair in the
local loop. Cable telephone technology allows telephone traffic to be carried
over our upgraded network without requiring the installation of twisted copper
pair. Therefore, instead of the expensive addition of a second cable into every
home and small business, cable telephone technology only requires the addition
of equipment at the master telecom center, the distribution hub and in the
customer's home to transform voice communication into signals capable of
transmission over the fiber and coaxial cable. The equipment required in the
home is housed in a small, secure, self-contained unit that is usually mounted
on the wall inside the home. This box is capable of passing through cable
television, Internet cable modem and radio signals and providing standard
telephone services. It also includes an emergency back-up battery.
Once the network has been upgraded to two-way capability, the cost of
implementation for telephone services will include a typical estimated
equipment cost of $72 (NLG142) per line for the voice switch, $36 (NLG71) per
line for the host digital terminal and, giving two lines of capacity, $404
(NLG796) for the equipment required in the home. Nortel has supplied our DMS
100E telephone switches. We have cable telephone equipment supply agreements
with Tellabs and Nortel. We are also in the process of undertaking a
substantial upgrade of our customer care and billing system for each operating
system providing telephone services. See "Risk Factors--The complexities of the
operating systems we need to develop for our new services could increase their
costs and slow their introduction" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
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Interconnection Agreements
Each of our operating companies that offers telephone services has entered
into an interconnection agreement with the incumbent national
telecommunications service provider. In addition, certain of these operating
companies have also entered into interconnection agreements with other
telecommunications service providers, providing alternative routes and
additional flexibility. Even though we have secured interconnection
arrangements, we may still experience difficulty operating under them. In our
A2000 system, for example, capacity constraints at the interconnection have
lowered the quality of A2000's telephone service, resulting in a higher rate of
customer loss than A2000 has experienced before. In Austria, while Telekabel
Wien secured its interconnection arrangement with the support of the Austrian
telecommunications regulator, the Austrian incumbent telecommunications
operator is challenging the arrangement in the Austrian courts. See
"Regulation--Austria."
Roll-Out and Implementation Schedule
We began to offer cable telephone services in July 1997, with the launch of
our A2000 service under the brand name Nedpoint, now rebranded Priority
Telecom. Priority Telecom launched its service on a trial basis in Vienna
during November 1998 and in February 1999 launched its business and residential
service in a service area of approximately 100,000 homes. The number of homes
in this service area increased to 462,000 homes by the end of the second
quarter of 1999. Our Priority Telecom service was officially launched in
Mediareseaux's service area in France in March 1999, UPC Norge's service areas
in Norway in April 1999 and in a part of UTH's service area in The Netherlands
in May 1999.
Because strong back office systems are important to support and integrate
successfully Priority Telecom and our other services, we have dedicated
significant resources to the development of our support plan. The plan includes
a convergent customer care and billing system that will allow residential
customers to receive a single bill for all of the services we intend to offer.
See "Risk Factors--The complexities of the operating systems we need to develop
for our new services could increase their costs and slow their introduction."
Pan-European Backbone
We are developing a pan-European backbone and telecommunications resale
business. This backbone is designed to link our major cable and telephone
networks through a combination of leased capacity arrangements to allow us to
capture more traffic between our operating areas. In October 1998, we entered
into a contract with Hermes Europe Railtel for the purchase of high speed fiber
optic-based transmission capacity. This network is currently expected to be in
place for international telephone traffic by the first half of 2000.
Traditional Telephone System
In addition to our cable telephone operations, our Monor system has offered
traditional telephone services since December 1994 and as of September 30,
1999, had approximately 72,875 traditional telephone lines.
Regulation
Regulation significantly affects our telephone business, including its
profitability and the timing of its introduction. See "Risk Factors" and
"Regulation."
UPC Internet/Data Services: High Speed Access and chello broadband
Overview
At year-end 1997, International Data Corporation estimated that there were
approximately 69 million World Wide Web users, of which approximately 24% were
in Western Europe. By 2002, International Data Corporation estimates that the
number of World Wide Web users will increase to approximately 320 million, with
approximately 26% of these in Western Europe.
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We believe there are significant growth opportunities in the European
Internet market, as evidenced by the projected rapid growth in World Wide Web
users in our Western European markets. The following information comes from
International Data Corporation.
<TABLE>
<CAPTION>
Number of World Wide Web Users
-------------------------------
1997 2001
--------------- ---------------
<S> <C> <C>
Austria......................................... 279,000 1,280,000
Belgium......................................... 370,000 1,390,000
France.......................................... 1,140,000 4,030,000
The Netherlands................................. 1,070,000 4,540,000
Norway.......................................... 481,000 1,330,000
</TABLE>
We also believe that the slow speed of current residential "dial-up'
Internet access and the metered toll charges in Europe are significant
deterrents to Internet users. Cable modems allow Internet access at speeds
significantly faster than dial-up access. Although a number of different
technologies designed to provide much faster access than dial-up modems have
been proposed and are being tested, we believe that cable modem access
technology is superior to all other current technologies because:
. cable modem technology is based on the widely-used Transport Control
Protocol/Internet Protocol (TCP/IP), which is used on local area
networks (LANs) and the Internet;
. a global standard has been created and accepted; and
. customers are served by a shared infrastructure, which allows for lower-
cost service offerings.
We have launched residential and business cable-modem based high speed
Internet access services, branded as chello broadband, in Austria, Belgium,
France, The Netherlands and Norway earlier this year. We believe that the
always switched on, flat fee chello broadband service will benefit from the
rapid growth of the Internet and will enable us to gain more customers in the
business and residential Internet market by capitalizing on our existing
network capabilities, continuing network upgrade and broad customer base in
certain markets with high personal computer penetration. In marketing chello
broadband, we emphasize the always switched on feature, the speed, flat fee
price advantages and compelling multi-media portal and content of our cable
modem-based Internet service. An integral part of our strategy is to market
chello broadband's services for sale to other cable television systems.
Through the chello portal, we see significant opportunities to increase
revenues through content, e-commerce and advertising.
chello broadband acts as a European Internet access gateway and a portal
delivering specially created content. chello broadband provides high speed
broadband access over its AORTA-branded, pan-European backbone. AORTA was
launched in December 1998 and is designed to link our major cable networks
through a combination of leased capacity arrangements to allow us to capture
more traffic between our operating areas. chello broadband stores the most
popular Internet sites locally, thus making them available at the high speeds
made possible by our network. The existence of the AORTA pan-European backbone
enables chello broadband to aggregate the volume of data stored for
availability at high speeds to its customers. Although chello broadband prices
its service at a subscription level that is above that of dial-up services,
cable modem users do not incur any telephone usage charges and thus, depending
on usage, the overall monthly cost to the subscriber may actually be lower
than the cost of an analog modem connection over the telephone network.
We launched chello broadband on the upgraded portions of our network in
Austria, Belgium, France, The Netherlands (with the exception of A2000) and
Norway during the first quarter of 1999. As of September 30, 1999, we had more
than 74,675 residential and 2,850 business chello broadband subscribers.
With approximately 5,233 kilometers of high-capacity two-way active fiber
plant deployed throughout our Western European systems as of June 30, 1999, we
believe that chello broadband has a competitive advantage over traditional
Internet service providers that rely on dial-up access. chello broadband also
has broadband, coaxial cable access to approximately 1.7 million homes, and is
able to leverage our long-standing cable television-based
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relationships with approximately 2.8 million residential subscribers in chello
broadband's Internet markets. As an Internet portal, chello broadband
associates with other cable television operators to provide Internet/data
service to their subscribers.
chello broadband will also enable our cable television operators to offer
customers an "Internet TV" service. Internet TV service consists of a set-top
box that allows customers to use their existing television to access the chello
broadband network and the Internet.
Competition
The Internet services business in Europe is highly competitive. We believe,
however, that our strategy for chello broadband, which encompasses competitive
pricing and superior service combined with high speed access and compelling
content, will mitigate the effects of competition from other Internet service
providers in its markets. We currently compete with traditional dial-up
Internet service providers and other providers (including many incumbent
telecommunications service providers) and expect that chello broadband will
face competition from other broadband service providers, such as @Home and
Roadrunner as they move to the European market. In the future, and in some
areas currently, we expect competition from providers using other broadband
technologies, including fiber, microwave, satellite and digital subscriber
lines.
chello broadband Growth Strategy
We have created chello broadband as part of a pan-European strategy
designed to capture value by developing economies of scale and market share by
leveraging our existing cable television and telephone subscriber base. To
accomplish this goal, chello broadband provides over the AORTA-branded pan-
European backbone, local cable television operators with high speed broadband
access, server farms, proprietary high-bandwidth content, and centralized
customer service and billing. These server farms can store the most popular
content locally for quick retrieval by subscribers.
We market chello broadband to the residential, small office/home office and
medium-sized business segments. We are targeting chello broadband's service to
small office/home office and medium-sized business customers who may view the
services as a lower cost alternative to leased lines. Cable modem service is
initially being targeted primarily to high-end Internet users frustrated with
the speed of access, quality of service and high telephone bills associated
with their existing dial-up service. We believe that local partners, in
addition to our operating systems, will be crucial for chello broadband's
success. chello broadband has entered into partnerships with non-UPC local
cable operators in order to share responsibilities in creating the service and
revenues generated by the service.
We may offer equity securities of chello broadband to investors to fund
further development, including to the public or to chello broadband's partners.
We may also offer chello broadband's equity securities to third-party cable
operators to encourage such cable operators to become chello broadband
affiliates, as we plan to do with Microsoft. See "Certain Transactions and
Relationships--Relationship with Microsoft." In these partnering arrangements,
we expect that chello broadband will provide connection to the AORTA-branded
pan-European backbone network, purchase and maintain the regional server farms,
provide general customer service and billing and aggregate and develop
proprietary broadband content. The local cable operators would generally
install the customer premise cable modems and termination modems and offer
first level telephone-based technical support. The precise division of
responsibility will be negotiated on a case-by-case basis.
chello broadband Content Strategy
chello broadband is developing an Internet portal business by partnering
with providers of local, regional, national and international content. We
believe that high bandwidth and compelling content are necessary from the
outset to provide users with a rewarding broadband experience that is superior
to our competitors' offerings. chello broadband intends to develop as part of
its portfolio interactive content for set top boxes designed to provide cable
affiliates with Internet-enabled content such as electronic programming guides,
electronic banking, home shopping
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and on-line gaming. chello broadband also intends to leverage its "first-screen
advantage" to drive traffic into its Internet portal.
Cost of Implementation
Cable modem technology allows access to the Internet over our existing
upgraded network. All that is required to transform data communication into
signals capable of transmission over fiber and coaxial cable is the addition of
incremental electronic equipment, including servers, routers and switches at
the master telecom center. The equipment in the home is a small, self-contained
cable modem that is placed nearby the customer's personal computer and
connected to the cable system. We also plan to offer our customers an Internet
TV service. The Internet TV service will consist of a set-top box that allows
customers to use their existing television as a platform for accessing chello
broadband's network.
Once the network has been upgraded to two-way capability, the cost of
implementation for Internet/data services will include the estimated
incremental master telecom center and distribution hub equipment costs of
approximately NLG400 per subscriber and approximately NLG450 per cable modem
for the required equipment in the home in mid-1999. We are currently
negotiating with cable modem suppliers, however, and expect that prices for
cable modems will decrease to approximately NLG400 by 2000. We have entered
into supply agreements to obtain cable modems primarily from Bay
Networks/Nortel and Terayon. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
and "Risk Factors--Failure to raise necessary capital could restrict the
development of our network and the introduction of new services."
Roll-Out and Implementation Schedule
The launch of chello broadband in certain of our upgraded Western European
markets occurred during the first half of 1999. We plan to launch chello
broadband in additional markets in the future. The back office support plan
described under "--UPC Telephone Services: Priority Telecom--Roll-Out and
Implementation Schedule" is similar to the back office support plan that chello
broadband intends to implement.
Development of the Pan-European Backbone
The AORTA pan-European backbone will facilitate a direct U.S. Internet link
in the future. In October 1998, we entered into a contract with Hermes Europe
Railtel for the purchase of high speed fiber optic-based transmission capacity.
This network is now in place for international Internet traffic. In April 1999,
chello broadband signed an agreement with Flag Atlantic-1 for a 1.28 terabits
transatlantic link.
Regulation
Our Internet access business currently is subject to limited regulation.
However, the legal and regulatory environment applicable to the Internet is in
a fluid state. Adverse regulatory developments could negatively affect our
Internet business. See "Regulation."
Operating Companies
We have operations in 12 countries in Europe and in Israel. While they all
offer a basic video tier, their other services vary. We are also currently
upgrading the network in some countries but not in others. We therefore
describe each of our operating companies and their operations below. We believe
understanding them individually will help you to understand our business as a
whole and our consolidated financial information in this prospectus.
We also provide selected financial and operating data for each operating
company. For all our operating companies, we have calculated average monthly
service revenues per subscriber using service revenues excluding installation
revenues. For the operating companies that do not use Dutch guilders as their
operating currency, we have converted the amounts to Dutch guilders using the
average exchange rate or fixed exchange rate for the period presented.
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Western Europe and Israel
Austria: Telekabel Group
The following selected financial data have been derived from the
financial statements of Telekabel Group. These financial statements have
been prepared in accordance with Dutch GAAP with the Austrian schilling as
the functional currency. The following selected financial data for the nine
months ended September 30, 1999 includes a translation using the fixed
exchange rate of 0.16015 Dutch guilders per Austrian schilling.
<TABLE>
<CAPTION>
Translation
to Guilders
--------------
Nine Months Nine Months
Ended Ended
Year Ended December 31, September 30, September 30,
------------------------------ ------------- --------------
1996 1997 1998 1999 1999
-------- --------- --------- ------------- --------------
(unaudited)
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues................ (AS) 985,338 1,018,095 1,105,535 969,897 (NLG) 155,329
Net operating income
(loss)................. (AS) 103,139 105,866 9,504 (9,716) (NLG) (1,556)
Adjusted EBITDA......... (AS) 512,356 507,022 505,567 364,202 (NLG) 58,327
Adjusted EBITDA margin.. 52.0% 49.8% 45.7% 37.6% 37.6%
Total capital
expenditures........... (AS) 388,813 374,717 514,859 663,197 (NLG) 106,211
Cash flows from
operating activities... (AS) 387,679 494,891 458,125 430,727 (NLG) 68,981
Cash flows from
investing activities... (AS) (416,432) (519,511) (388,311) (700,462) (NLG) (112,179)
Cash flows from
financing activities... (AS) 30,001 124,137 (180,504) 336,647 (NLG) 53,914
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of
------------------------- September 30,
1996 1997 1998 1999
------- ------- ------- -------------
<S> <C> <C> <C> <C> <C>
Other Data:
Homes passed................. 872,016 890,305 900,350 908,030
Basic video subscribers...... 428,453 435,859 454,957 461,589
Basic video penetration...... 49.1% 49.0% 50.5% 50.8%
Avg. mo. service rev. per
video subscriber............ (NLG) 27.54 27.79 28.82 29.76
Two-way homes passed......... -- 339,900 516,700 734,440
Internet subscribers:
Residential.............. -- 1,177 9,054 28,034
Business................. -- 21 603 1,151
Telephone subscribers:
Residential.............. -- -- -- 15,377
Business................. -- -- -- 366
</TABLE>
Overview/Growth Strategy. We own 95% of the Telekabel Group, which
provides communications services to the Austrian cities of Vienna, Klagenfurt,
Graz, Baden and Wiener Neustadt and is the largest video distribution system in
Austria with over 40% of the market. Telekabel Group's largest subsidiary,
Telekabel Wien, which serves Vienna and represents approximately 87% of
Telekabel Group's total subscribers, owns and operates one of the larger
clusters of cable systems in the world in terms of subscriber numbers served
from a single headend.
We are capitalizing on Telekabel Group's strong market position and
positive perception by its customers by aggressively expanding Telekabel
Group's service offerings as its network is upgraded to full two-way
capability.
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The upgraded network enabled Telekabel Group to launch an expanded basic tier,
impulse pay-per-view services and Internet/data services in 1997. Telekabel
Group was the first Austrian cable television company to offer tiered and pay-
per-view services when it launched such services in Vienna. The pay-per-view
buy rate has since grown to more than two movies per expanded basic subscriber
per month, although Telekabel Group expects this average to decrease because
high-demand customers subscribed early to the expanded basic tier and later
subscribers will likely have a lower demand for pay-per-view services.
Telekabel Group is considering restructuring its basic and expanded tiers to
increase further its average revenue per subscriber, although the extent and
timing of any such restructuring would depend upon market studies and the
approval of the board of management of the respective subsidiary, which
includes a representative appointed by the respective municipality. See
"Regulation--Austria."
Telekabel Group launched an Internet access service in September 1997 and
had approximately 29,175 Internet access subscribers as of September 30, 1999.
The chello broadband service was introduced in June 1999. Telekabel Group is
currently averaging monthly additions of 2,600 customers for its Internet
service following its market launch. In addition, Telekabel Group launched
Priority Telecom's cable telephone service in Vienna on a commercial basis in
early 1999. Following intervention of regulatory authorities on behalf of
Telekabel Group, Telekabel Group entered into an interconnection arrangement
with PTA, the incumbent telecommunications service operator, in November 1998.
See "Regulation--Austria--Telephone and Internet/Data Services."
Network. Telekabel Group owns the complete cable television infrastructure
for each of its systems from the headend to the house. In 1996, Telekabel Wien
started plant construction on the rebuild and upgrade of its existing cable
network in Vienna. The upgrade, which incorporates high capacity 860 MHz
technology, was approximately 81% complete and passed approximately 734,425
homes and businesses as of September 30, 1999.
Programming. Telekabel Group offers basic subscribers 32 channels of cable
programming, including substantially all of the broadcast channels from Austria
and Germany, as well as CNN, Super Channel, MTV, an informational channel, Tips
and Hits, Telekino Heute and Vienna cable text. Telekabel Group launched an
expanded basic tier in May 1997 by providing subscribers whose homes are passed
by the upgraded network an advanced analog decoder box, the cost of which is
provided for in the monthly rate. The expanded basic tier currently provides
seven channels of additional programming: ONYX, VH-1 Germany, BET, Muzzik, BBC
World, BBC Prime and an adult channel. In conjunction with the launch of this
tier, Telekabel Group launched an impulse pay-per-view service with up to nine
channels of programming.
Results of Operations. For the year ended December 31, 1998, Telekabel
Group had total revenues of approximately NLG177.2 million, representing
approximately 43.3% of our consolidated revenues for the same period, and
Adjusted EBITDA of approximately NLG81.0 million. For the year ended December
31, 1997, Telekabel Group had total revenues of approximately NLG162.8 million,
which represented approximately 48.3% of our consolidated revenues for the
year, and Adjusted EBITDA of approximately NLG80.5 million. Telekabel Group's
Adjusted EBITDA margin declined slightly from 49.8% for the year ended December
31, 1997 to 45.7% for the year ended December 31, 1998. This decline was due
primarily to the increased operating costs and selling, general and
administrative costs associated with the start up of Telekabel Group's cable
telephone and Internet/data services. These costs were approximately NLG12.0
million for 1998. The Adjusted EBITDA margin for Telekabel Group's video
services business on a stand-alone basis was approximately 53% for the year
ended December 31, 1998. A large component of Telekabel Group's operating
expenses are franchise and other fees paid to the respective municipalities,
which were approximately NLG22.5 million and approximately NLG22.1 million,
respectively, for 1997 and 1998.
Budgeted Capital Expenditures and Capital Resources. Telekabel Group has
budgeted approximately NLG208.0 million for capital expenditures in 1999,
primarily to continue to upgrade its network to full two-way capacity, purchase
customer premise equipment for its new services, install a telephone switch and
implement a subscriber management system. Telekabel Group expects to fund these
expenditures through available cash flow and support from us.
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Competition. Telekabel Group's cable systems compete with a DTH satellite
service that is available throughout Austria. Currently, DTH satellite service
penetration of the Austrian market is approximately 35% and is concentrated
primarily in the rural areas of the country. There is less competition from DTH
satellite service in Vienna where we estimate that the penetration is
approximately 8%. Competition in the Internet/data business in Austria is
intensifying. PTA, the national incumbent telecommunications service provider,
is promoting its high speed lines and a number of other companies recently have
entered, or are expected to enter, the market. In its telephone service in
Vienna, Telekabel Group competes with PTA and other new telephony providers.
New facilities-based telephony and Internet/data service providers that compete
with the Telekabel Group in its operating areas include United Telkom Austria,
Tele.ring and Citykom. In addition, there are three wireless telephone
providers in Telekabel Group's operating areas.
Regulatory Issues. The regulatory environment in which the Telekabel Group
operates significantly affects the operations of its business, including the
profitability and the timing of introduction of our new business lines. See
"Regulation--European Union" and "--Austria."
Corporate Ownership. Telekabel Group consists of five Austrian
corporations, each of which owns a cable television operating system. We own
95% of, and manage, each Telekabel Group company. Each of the respective cities
in which the operating systems are located owns, directly or indirectly, the
remaining 5% interest in each company.
Telekabel Wien's 5% shareholder Kabel-TV-Wien Gesellschaft m.b.H ("KTV") is
owned by the City of Vienna. KTV has the right to appoint a member to Telekabel
Wien's supervisory board. If four to six members have been appointed by
shareholder resolution, KTV has the right to appoint two members. KTV also has
the right to appoint one member of Telekabel Wien's board of management. We
have appointed six members of the supervisory board and two members of the
board of management. KTV has appointed two members of the supervisory board and
one member of the board of management. The remaining four members of the
supervisory board are employee representatives. Under the agreements among
Telekabel Wien and KTV, decisions regarding the subscriber rates and
programming content of Telekabel Wien's basic subscription package require the
unanimous approval of Telekabel Wien's board of management. Although we believe
the cooperation between KTV's managing director and the other managing
directors has been successful in the past, there can be no assurance that the
board of management will unanimously approve decisions regarding the subscriber
rates and programming content of Telekabel Wien's basic subscription package.
Should the Board not reach a unanimous decision in respect of these matters,
then pursuant to our syndicate agreement with KTV and Philips, a shareholders
meeting can be called. We, as a 95% shareholder, can call that meeting and
decide on the agenda. Under Austrian law, a majority shareholder such as us may
generally take a decision at the shareholders meeting rather than through the
Board of Management. However, we as the majority shareholder have never taken
this action and do not anticipate doing so in the future.
In connection with the UPC acquisition in December 1997, KTV and Philips
agreed that Philips will continue to guarantee the capital level to be
maintained by Telekabel Wien. Philips has also agreed to guarantee the
continued fulfillment of the agreements that were originally concluded between
KTV and Philips and that were assigned by Philips to us. We have agreed to
indemnify Philips for any liability under Philips' guarantee.
Philips, KTV and ourselves have agreed that the agreements concluded
between KTV and Philips will run until December 31, 2022 with an option to
extend them.
Due to its position as a guarantor, Philips has the right to appoint one
member to our Supervisory Board. This Supervisory Director has a veto right
that is limited to fundamental decisions and exceptional business matters, such
as the sale or disposition of our interests in Telekabel Wien, if certain
threshold values are met. See "Certain Transactions and Relationships--
Relationship with Philips."
The articles of association of the companies in the Telekabel Group
restrict their shareholders from divesting their interests for periods ranging
from the end of 2009 to 2022. In addition, a sale of shares requires notice of
two years and is subject to a right of first refusal of the other shareholders.
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The City of Vienna's approval is required for any change of control over
us, which approval cannot be unreasonably withheld if the buyer is a reputable
telecommunications and/or cable television operator. In the absence of such
approval, the City of Vienna can require United to own Telekabel Wien
separately from us. See "Certain Transactions and Relationships."
We may provide Priority Telecom's services to Telekabel Group's subscribers
through a subsidiary wholly-owned by us, even though the services will continue
to be marketed by Telekabel Group.
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Belgium: UPC Belgium
The following selected financial data have been derived from the
financial statements of UPC Belgium (formerly Radio Public N.V./S.A.). These
financial statements have been prepared in accordance with Dutch GAAP with
the Belgian franc as the functional currency. The following selected
financial data for the nine months ended September 30, 1999 includes a
translation using the fixed exchange rate of 0.054629 Dutch guilders per
Belgian franc.
<TABLE>
<CAPTION>
Translation to
Guilders
--------------
Nine Months Nine Months
Year Ended December 31, Ended Ended
---------------------------- September 30, September 30,
1996 1997 1998 1999 1999
-------- -------- -------- ------------- --------------
(unaudited)
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues................ (BEF) 693,990 710,521 673,170 500,302 (NLG)27,331
Net operating income
(loss)................. (BEF) (78,805) (70,861) (161,365) (180,325) (NLG)(9,851)
Adjusted EBITDA......... (BEF) 268,232 267,815 242,734 78,511 (NLG) 4,289
Adjusted EBITDA margin.. 38.7% 37.7% 36.1% 15.7% 15.7%
Total capital
expenditures........... (BEF) 56,018 213,728 361,622 207,143 (NLG)11,316
Cash flows from
operating activities... (BEF) (37,483) (112,423) 548,975 153,215 (NLG) 8,370
Cash flows from
investing activities... (BEF) (187,667) (485,745) (557,961) (156,657) (NLG)(8,558)
Cash flows from
financing activities... (BEF) 259,336 (405,133) (1,025) (549) (NLG) (30)
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------------- As of September 30,
1996 1997 1998 1999
------- ------- ------- -------------------
<S> <C> <C> <C> <C> <C>
Other Data:
Homes passed............ 133,000 133,000 133,000 133,090
Basic video subscrib-
ers.................... 127,815 127,529 127,398 123,952
Basic video penetra-
tion................... 96.1% 95.9% 95.8% 93.1%
Avg. mo. service rev.
per video subscriber... (NLG) 19.20 19.58 19.67 18.74
Two-way homes passed.... -- 27,600 91,735 131,816
Internet subscribers:
Residential........... -- 214 1,869 4,359
Business.............. -- 42 284 548
</TABLE>
Overview/Growth Strategy. UPC Belgium, our 100% owned subsidiary, provides
cable television and communications services in selected areas of Brussels and
nearby Leuven. We estimate that there are currently approximately 133,075 homes
under license in UPC Belgium's franchise areas. UPC Belgium, which currently
has 93% penetration in its franchise areas, plans to grow through the
introduction of new services that currently are not subject to the price
regulations applicable to basic cable services.
UPC Belgium's management believes there is a strong demand for enhanced
services in its market. UPC Belgium introduced an expanded basic tier service
in October 1996 and an Internet access service in September 1997. As of
September 30, 1999, UPC Belgium had approximately 5,450 expanded basic
subscribers and 3,825 residential, 500 student and 525 business Internet access
subscribers. UPC Belgium introduced the chello broadband service in the first
quarter of 1999. As UPC Belgium upgrades additional portions of its network to
full two-way capability, it plans to introduce impulse pay-per-view, which was
implemented in Leuven in November 1999. UPC Belgium intends to provide cable
telephone services beginning in mid-2000.
Network. UPC Belgium owns the complete cable television infrastructure for
each of its systems from the headend to the home, with the exception of
Etterbeek. The Etterbeek system, which has 15,375 subscribers, is
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municipality-owned and we have an agreement with the municipality to operate
the network until at least 2016. In late 1996, UPC Belgium began upgrading its
network through fiber optic overlay of its trunk lines and replacement of all
amplifiers. Employing high capacity 860 MHz technology, UPC Belgium's upgraded
networks passed approximately 131,800 homes, or 99% of its total network as of
September 30, 1999. We expect to substantially complete this upgrade by the end
of 1999.
Programming. UPC Belgium offers in Brussels a basic tier consisting of 32
channels, 17 expanded basic programs in six tiers, 20 FM radio channels and 16
premium digital radio channels. Its system in Leuven offers a basic tier
consisting of 37 channels, an expanded basic tier with five channels, 20 FM
radio channels and 16 premium digital radio channels. UPC Belgium also
distributes three premium channels, two in Brussels and one in Leuven, which
are provided by Canal+.
Results of Operations. For the year ended December 31, 1998, UPC Belgium
had total revenues of approximately NLG36.8 million, representing approximately
9.0% of our consolidated revenues for the same period, and Adjusted EBITDA of
approximately NLG13.3 million. For the year ended December 31, 1997, UPC
Belgium had total revenues of approximately NLG38.7 million, which represented
approximately 11.5% of our consolidated revenues for the year, and Adjusted
EBITDA of approximately NLG14.6 million. UPC Belgium's Adjusted EBITDA margin
declined from 37.7% for the year ended December 31, 1997 to 36.1% for the year
ended December 31, 1998. This decline was due primarily to the increased start
up costs associated with UPC Belgium's Internet/data services. These costs were
approximately NLG3.6 million for the year ended December 31, 1998. The Adjusted
EBITDA margin for UPC Belgium's video services business on a stand-alone basis
was approximately 46.1% for the year ended December 31, 1998. In early 1998,
UPC Belgium ceased providing engineering services for some of our affiliates
and third parties. This resulted in a slight decrease in revenue in 1998;
however, Adjusted EBITDA was not affected by this change.
Budgeted Capital Expenditures and Capital Resources. UPC Belgium has
budgeted approximately NLG25.7 million for capital expenditures in 1999,
primarily to continue its network upgrade to full two-way capacity, purchase
customer premise equipment for its new services and implement a subscriber
management system. UPC Belgium expects to fund these expenditures through
available cash flow.
Competition. UPC Belgium has approximately 95% penetration of its cable
television services in its service areas. UPC Belgium faces competition from
one other cable television provider, Iverlek, which was granted a license for
the provision of cable television services in Leuven and is constructing a
cable network there. As of September 30, 1999, UPC Belgium had approximately
25,550 subscribers in Leuven. To date, UPC Belgium has experienced only limited
competition from DTH satellite service providers. In its Internet access
business, UPC Belgium competes with traditional dial-up Internet service
providers as well as various higher-speed access services offered by the
incumbent telephone operator, Belgacom, and other operators of public
telecommunications networks. In addition, we believe that Telenet offers a
broadband access and content service using Iverlek's new cable network in
Leuven.
Regulatory Issues. The regulatory environment in which our Belgian
subsidiary operates significantly affects the operations of its business,
including the profitability and the timing of introduction of our new business
lines. See "Regulation--European Union" and "--Belgium."
Corporate Ownership. We own 100% of UPC Belgium.
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France: UPC France
The following selected financial data have been derived from the
financial statements of Mediareseaux, CiteReseau, Rhone Vision Cable,
Videopole and RCF. The financial statements of Mediareseaux have been
prepared in accordance with Dutch GAAP. The financial statements of
CiteReseau, Rhone Vision Cable, Videopole and RCF have been prepared in
accordance with French GAAP with the French franc as the functional currency.
The following selected financial data for the nine months ended September 30,
1999 includes a translation using the fixed exchange rate of 0.33595 Dutch
guilders per French franc.
<TABLE>
<CAPTION>
Translation to
Year Ended Guilders
December 31, ------------------
----------------- Nine Months Ended Nine Months Ended
1997 1998 September 30, 1999 September 30, 1999
------- -------- ------------------ ------------------
Mediareseaux (unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues............... (FFR) 7,789 23,961 35,931 (NLG) 12,071
Net operating income
(loss)................ (FFR) (18,295) (28,605) (55,505) (NLG) (18,647)
Adjusted EBITDA........ (FFR) (13,790) (15,097) (29,966) (NLG) (10,067)
Adjusted EBITDA
margin................ N/A N/A N/A N/A
Total capital
expenditures.......... (FFR) 70,333 155,795 180,390 (NLG) 60,602
Cash flows from
operating activities.. (FFR) (12,862) 10,042 (8,147) (NLG) (2,737)
Cash flows from
investing activities.. (FFR) (71,073) (156,069) (1,263,250) (NLG) (424,389)
Cash flows from
financing activities.. (FFR) 78,927 149,405 1,730,302 (NLG) 581,295
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of
-------------------- September 30,
1997 1998 1999
Other Data: --------- --------- -------------
<S> <C> <C> <C> <C>
Homes passed...................... 28,267 74,623 85,439
Basic video subscribers........... 6,758 29,107 34,079
Basic video penetration........... 23.9% 39.0% 39.9%
Avg. mo. service rev. per video
subscriber....................... (NLG) 18.92 24.86 29.11
Two-way homes passed.............. 28,267 74,623 85,439
Internet subscribers:
Residential...................... -- -- 1,478
Business......................... -- -- 15
Telephone subscribers:
Residential...................... -- -- 8,024
Business......................... -- -- 163
</TABLE>
<TABLE>
<CAPTION>
Translation to
Year Ended Guilders
December 31, ------------------
------------------ Nine Months Ended Nine Months Ended
1997 1998 September 30, 1999 September 30, 1999
-------- -------- ------------------ ------------------
Time Warner Cable
France(1) (unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues............... (FFR) 21,662 44,930 54,608 (NLG) 18,345
Net operating income
(loss)................ (FFR) (41,787) (57,234) (46,631) (NLG) (15,666)
Adjusted EBITDA........ (FFR) (22,347) (17,725) (4,424) (NLG) (1,486)
Adjusted EBITDA
margin................ N/A N/A N/A N/A
Total capital
expenditures.......... (FFR) 173,065 348,671 242,661 (NLG) 81,522
Cash flows from
operating activities.. (FFR) (42,373) (28,376) (13,939) (NLG) (4,683)
Cash flows from
investing activities.. (FFR) (184,097) (355,141) (72,434) (NLG) (24,334)
Cash flows from
financing activities.. (FFR) 191,592 420,864 206,646 (NLG) 69,422
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of
-------------------- September 30,
1997 1998 1999
Other Data: --------- --------- -------------
<S> <C> <C> <C> <C>
Homes passed..................... 100,031 182,408 249,751
Basic video subscribers.......... 37,309 59,042 79,773
Basic video penetration.......... 37.3% 32.4% 31.9%
Avg. mo. service rev. per video
subscriber...................... (NLG) 23.15 22.59 27.09
Two-way homes passed............. 12,600 39,887 112,705
</TABLE>
--------
(1) Represents the combined aggregate results of Time Warner Cable France's
two operating systems, CiteReseau and Rhone Vision Cable.
98
<PAGE>
<TABLE>
<CAPTION>
Translation to
Guilders
--------------
Year Ended Nine Months Nine Months
December 31, Ended Ended
------------------ September September
1997 1998 30, 1999 30, 1999
-------- -------- ----------- --------------
Videopole (unaudited)
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues............... (FFR) 107,543 123,341 97,184 (NLG) 32,649
Net operating income
(loss)................ (FFR) (95,909) (99,179) (64,399) (NLG)(21,635)
Adjusted EBITDA........ (FFR) (29,934) (14,359) (1,285) (NLG) (432)
Adjusted EBITDA
margin................ N/A N/A N/A N/A
Total capital
expenditures.......... (FFR) 136,295 111,386 33,774 (NLG) 11,346
Cash flows from
operating activities.. (FFR) (79,023) (83,893) 29,381 (NLG) 9,871
Cash flows from
investing activities.. (FFR) (149,657) (119,840) (34,032) (NLG)(11,433)
Cash flows from
financing activities.. (FFR) 210,135 200,766 12,895 (NLG) 4,332
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-------------------- As of September 30,
1997 1998 1999
Other Data: --------- --------- -------------------
<S> <C> <C> <C> <C>
Homes passed.............. 314,586 353,234 362,340
Basic video subscribers... 109,949 133,928 143,160
Basic video penetration... 35.0% 37.9% 39.5%
Avg. mo. service rev. per
video subscriber......... (NLG) 20.38 22.76 25.20
Two-way homes passed...... 29,644 39,660 39,734
</TABLE>
<TABLE>
<CAPTION>
Translation to
Guilders
------------------
Year Ended Nine Months
December 31, Ended
---------------- September Nine Months Ended
1997 1998 30, 1999 September 30, 1999
------- ------- ----------- ------------------
Reseaux Cables de France (unaudited)
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues............... (FFR) 83,305 90,316 70,412 (NLG) 23,655
Net operating income
(loss)................ (FFR) (21,148) (19,315) (11,296) (NLG) (3,795)
Adjusted EBITDA........ (FFR) 9,610 13,521 12,118 (NLG) 4,071
Adjusted EBITDA
margin................ 11.5% 15.0% 17.2% 17.2%
Total capital
expenditures.......... (FFR) 23,206 18,094 6,524 (NLG) 2,192
Cash flows from
operating activities.. (FFR) (7,873) (7,027) (96) (NLG) (32)
Cash flows from
investing activities.. (FFR) (23,046) (18,679) (7,286) (NLG) (2,448)
Cash flows from
financing activities.. (FFR) 69,628 585 (9,849) (NLG) (3,309)
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-------------------- As of September 30,
1997 1998 1999
Other Data: --------- --------- -------------------
<S> <C> <C> <C> <C>
Homes passed.............. 200,000 200,000 202,490
Basic video subscribers... 70,606 73,720 74,017
Basic video penetration... 35.3% 36.9% 36.6%
Avg. mo. service rev. per
video subscriber......... (NLG) 31.92 32.74 35.38
Two-way homes passed...... -- -- 431
</TABLE>
Overview/Growth Strategy. We have a 99.6% ownership interest and a 95%
economic interest (after exercise of warrants described below) in Mediareseaux
Marne S.A. ("Mediareseaux"), which currently holds cable television franchises
for 190,000 homes in the Marne-la-Vallee area east of Paris. Mediareseaux began
construction of its network in September 1996, and as of September 30, 1999,
Mediareseaux's system passed approximately 85,425 homes and had approximately
34,075 basic subscribers, giving it a penetration rate of 39.9%. To increase
its average monthly revenue per subscriber, Mediareseaux began offering pay-
per-view services in May 1998, and to date, the pay-per-view buy rate is
approximately 0.5 movies per expanded basic tier subscriber per month. For the
nine months ended September 30, 1999, Mediareseaux's average monthly service
revenue per video subscriber has averaged over NLG35.38.
99
<PAGE>
In June 1998, Mediareseaux obtained a 15 year telephone and network
operator license for an area that includes 1.5 million homes in the eastern
suburbs of Paris (three Departments) and in September 1998, Mediareseaux began
installing a telephone switch. Mediareseaux began offering telephone services
in March 1999 within its cable television franchise area. Mediareseaux also
offers chello broadband's Internet access services via its cable systems, and
is carrying out a trial offering of broadband fixed wireless local loop service
in two towns in the eastern suburbs of Paris under a temporary license for
1999. To expand its operations, Mediareseaux is pursuing potential acquisition
opportunities and plans to develop these franchises as one clustered system
offering integrated video, voice and Internet/data services.
In August 1999, we acquired 100% of Time Warner Cable France. The Time
Warner Cable France operating subsidiaries' systems are located in suburban
Paris and Lyon and in Limoges. As of September 30, 1999, these systems passed
approximately 249,750 homes and had approximately 79,750 subscribers.
In August 1999, we acquired 100% of Videopole, which through its operating
subsidiaries operates 83 cable systems serving approximately 123 towns and
cities throughout France including suburban Paris. The number of homes passed
and subscribers were approximately 362,325 and approximately 143,150,
respectively, as of September 30, 1999. At present, these systems offer analog
cable television services and, in some of Videopole's systems, digital cable
television services. Videopole began offering Internet/data services at the end
of 1997. Following our acquisition of Videopole, we plan to upgrade these
systems to offer enhanced video services within three years. We would begin
this upgrade with the systems in and around Paris, which we plan to upgrade and
link into the Mediareseaux systems in order to provide full video, voice and
Internet/data services by the second quarter of 2000.
In June 1999, we acquired 95.7% of RCF. RCF's cable systems serve nine
regions throughout France. RCF's systems passed approximately 202,475 homes and
had approximately 74,000 subscribers as of September 30, 1999. At present,
these systems offer only cable television services. We plan to upgrade the RCF
systems to offer enhanced video, telephone and Internet/data services. The RCF
system architecture is older than that of Time Warner Cable France or Videopole
and will, therefore, be more expensive to upgrade. We plan, however, to
complete the upgrade and launch full service in our three lines of business on
the RCF systems by the end of 2001.
Network. Mediareseaux owns the complete cable television infrastructure for
each of its cable systems from the headend to the home. The hybrid fiber
coaxial network's initial architecture was a 750 MHz UHF-VHF frequency band
network with a 5-65 MHz return path. The systems' post-1998 construction
incorporates 860 MHz hybrid fiber coaxial capacity with a 5-65 MHz return
providing full two-way capability. As of September 30, 1999, Mediareseaux's
network passed approximately 45% of the 190,000 homes then in its franchise
areas. Since December 1998, we have increased the number of our franchises and
we expect the network to pass all 190,000 homes in our current franchise areas
by the end of 2000.
The systems held by Time Warner Cable France's operating subsidiaries are
constructed to 860 MHz hybrid fiber coaxial capacity, as are 90% of Videopole's
systems. The remaining 10% of Videopole's systems are constructed to 550 MHz
capacity. Approximately 60% of RCF's systems are constructed to 450 MHz
capacity, and the remaining 40% are constructed to 600 MHz capacity.
Programming. Mediareseaux currently offers the following programming
packages:
. a basic eight-channel tier containing off-air, local and promotional
programs;
. four extended basic tiers, called News & Current Events, Youth &
Discovery, International Channels and Sports & Leisure, with five to ten
channels each;
. three premium tiers containing three children's channels, three sports
channels and four movie channels; and
. ten impulse pay-per-view channels.
Time Warner Cable France's programming offerings currently include a basic
tier comprised of between 21 and 22 channels, an extended basic tier comprised
of three groups of three to six channels each and a premium tier
100
<PAGE>
comprised of three channels. One of Time Warner Cable France's operating
systems also offers a digital package of five expanded basic tiers and two
premium packages.
Videopole's basic service programming offerings vary by system and include
between 14 and 28 channels. RCF currently offers (i) a mini basic tier of 14
channels, (ii) a basic tier of 25 channels and (iii) a digital package with
four premium tiers.
Results of Operations. As of December 31, 1998, Mediareseaux had total
revenues of approximately NLG8.1 million for the year then ended, representing
approximately 2% of our consolidated revenues for the same date, and Adjusted
EBITDA of approximately negative NLG5.1 million. For the year ended December
31, 1997, Mediareseaux had total revenues of approximately NLG2.5 million,
which represented approximately 0.7% of our consolidated revenues for the year,
and Adjusted EBITDA of approximately negative NLG4.5 million.
As of December 31, 1998, Time Warner Cable France had total revenues of
approximately NLG15.1 million for the year then ended and Adjusted EBITDA of
approximately negative NLG6.0 million. For the year ended December 31, 1997,
Time Warner Cable France had total revenues of approximately NLG7.3 million and
Adjusted EBITDA of approximately negative NLG7.5 million.
As of December 31, 1998, Videopole had total revenues of approximately
NLG41.4 million for the year then ended and Adjusted EBITDA of approximately
negative NLG4.8 million. For the year ended December 31, 1997, Videopole had
total revenues of approximately NLG34.9 million and Adjusted EBITDA of
approximately negative NLG9.7 million.
As of December 31, 1998, RCF had total revenues of approximately NLG30.3
million for the year then ended and Adjusted EBITDA of approximately NLG4.5
million. For the year ended December 31, 1997, RCF had total revenues of
approximately NLG28.1 million and Adjusted EBITDA of approximately NLG3.2
million.
Budgeted Capital Expenditures and Capital Resources. Mediareseaux has
budgeted approximately NLG64.0 million for capital expenditures in 1999,
primarily to complete construction of the network in its franchise areas,
purchase customer premise equipment for its new services, install a telephone
switch and implement a subscriber management system. Mediareseaux expects to
fund these expenditures through drawings under its debt facility and equity
contributions from us to match the debt to equity ratio of the facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Debt Facilities."
Time Warner Cable France has budgeted approximately NLG114.4 million and
NLG131.3 million for capital expenditures in 1999 and 2000, respectively,
primarily to continue construction of the network in suburban Lyon and to
launch cable telephone and Internet services. Time Warner Cable France expects
to fund these expenditures through drawings under RVC's debt facility and
operating cash flow. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--Debt
Facilities."
Videopole has budgeted approximately NLG34.3 million and NLG63.4 million
for capital expenditures in 1999 and 2000, respectively, primarily to introduce
new services such as telephone and Internet. Videopole expects to fund these
expenditures through drawings under its facility, through debt at the UPC level
and operating cash flow.
RCF has budgeted approximately NLG2.4 million and NLG48.7 million for
capital expenditures in 1999 and 2000, respectively, primarily to introduce new
services such as telephone and Internet. RCF expects to fund these expenditures
through debt at the UPC level and operating cash flow.
Competition. Our French operating companies compete with other video
service providers in their license areas including DTH satellite service
providers such as Canal Satellite and TPS. In the provision of their cable
telephone services, our French operating companies face competition mainly from
France Telecom, the French incumbent telecommunications operator, and Cegetel.
Mediareseaux faces competition from France Telecom's
101
<PAGE>
Wanadoo service and other high speed data services including AOL France, Club
Internet and other providers in the provision of Internet services.
Regulatory Issues. The regulatory environment in which our French companies
operate significantly affect the operations of their businesses, including the
profitability and the timing of introduction of our new business lines. See
"Regulation--France."
Corporate Ownership. We own 99.6% of Mediareseaux, our French operating
system. The other owner of Mediareseaux is an entity controlled by Patrick
Drahi, its founder and current chairman, which holds warrants giving it the
right to purchase, for a nominal amount, new shares corresponding to 4.6% of
Mediareseaux's share capital. Accordingly, we will have only a 95% economic
interest in Mediareseaux should the above entity exercise the warrants.
Pursuant to an agreement dated June 16, 1998, we and the entity controlled by
Patrick Drahi have granted to each other options to purchase and sell, at a
price based on fair market value, the shares of Mediareseaux that the entity
may hold in the future.
In June 1999, we acquired 95.7% of RCF. The remaining 4.3% is held by SLF,
a Belgian company.
In August 1999, we acquired 100% of Videopole and 100% of Time Warner Cable
France. Simultaneous with the acquisition of Time Warner Cable France, we
acquired an additional 47.62% of one of its operating systems, Rhone Vision
Cable, in which Time Warner Cable France had a 49.88% interest. We paid
approximately FRF 89.3 million (NLG30.0 million) for this additional interest
and increased our ownership interest in Rhone Vision Cable to 97.5%.
102
<PAGE>
The Netherlands: UPC Nederland
The following selected financial data have been derived from the
financial statements of Kabeltelevisie Eindhoven N.V., which we refer to as
"KTE," Stichting Combivisie Regio, which we refer to as "Combivisie," N.V.
TeleKabel Beheer and GelreVision, all of which are now wholly owned by UTH,
and from the financial statements of A2000 Holding N.V. We combined the
assets of KTE and Combivisie in January 1998 to form CNBH. In August 1998, we
contributed CNBH and 50% of A2000 and NUON contributed N.V. TeleKabel Beheer
to form UTH. In June 1999, we acquired 100% of GelreVision and began
consolidating its results beginning on June 1, 1999. In September 1999, we
purchased the 50% of A2000 that we did not own from Media One, bringing our
ownership of A2000 to 100%. Because UTH began operations in August 1998, the
financial information presented below for the year ended December 31, 1998
includes results of CNBH and N.V. TeleKabel Beheer for the first seven months
of 1998 and includes results from UTH from formation to December 31, 1998.
The financial information below has been prepared in accordance with Dutch
GAAP with the Dutch guilder as the functional currency.
<TABLE>
<CAPTION>
KTE Combivisie N.V. TeleKabel Beheer
-------------------- -------------------- ----------------------
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
-------------------- -------------------- ----------------------
1996 1997 1996 1997 1996 1997
--------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Data: (in thousands, except percentages)
Revenues............... (NLG) 17,932 20,669 27,143 29,001 113,917 137,167
Net operating income
(loss)................ (NLG) 1,650 2,156 11,958 12,864 22,846 27,395
Adjusted EBITDA........ (NLG) 11,298 12,719 19,816 21,032 45,041 58,813
Adjusted EBITDA
margin................ 63.0% 61.5% 73.0% 72.5% 39.5% 42.9%
Total capital
expenditures.......... (NLG) 5,591 8,192 9,250 19,121 36,000 71,875
Cash flows from
operating activities.. (NLG) 6,939 4,207 16,204 14,456 (8,534) 38,374
Cash flows from
investing activities.. (NLG) (5,592) (8,441) (9,251) (19,726) (230,592) (266,954)
Cash flows from
financing activities.. (NLG) (2,602) 3,505 (7,715) (101) 238,148 246,045
<CAPTION>
As of December 31, As of December 31, As of December 31,
------------------ -------------------- ----------------------
1996 1997 1996 1997 1996 1997
--------- --------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Other Data:
Homes passed........... 89,116 95,442 139,062 143,376 511,300 642,000
Basic video
subscribers........... 84,660 90,671 133,775 139,249 475,000 595,000
Basic video
penetration........... 95.0% 95.0% 96.2% 97.1% 92.9% 92.7%
Avg. mo. service rev.
per video subscriber.. (NLG) 17.69 18.03 16.21 17.19 15.69 16.20
Two-way homes passed... -- 90,000 -- 35,000 -- 50,000
</TABLE>
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, June 30,
1998 1999(2)
UTH ------------------ -------------------
(unaudited)
Selected Financial Data: (in thousands, except percentages)
<S> <C> <C> <C>
Revenues....................... (NLG) 219,314 216,195
Net operating income (loss).... (NLG) 764 (56,742)
Adjusted EBITDA................ (NLG) 86,249 60,005
Adjusted EBITDA margin......... 39.3% 27.8%
Total capital expenditures..... (NLG) 214,606 180,458
Cash flows from operating
activities.................... (NLG) 70,750 76,510
Cash flows from investing
activities.................... (NLG) (255,440) (501,041)
Cash flows from financing
activities.................... (NLG) 178,714 422,806
<CAPTION>
As of December 31, As of September 30,
1998 1999
------------------ -------------------
<S> <C> <C> <C>
Other Data:
Homes passed................... 914,737 1,652,887
Basic video subscribers........ 867,800 1,515,802
Basic video penetration........ 94.9% 91.7%
Avg. mo. service rev. per video
subscriber.................... (NLG) 17.96 15.25
Two-way homes passed........... 484,133 1,311,887
Internet subscribers
Residential.................... 2,685 37,911
Business....................... -- 1,156
Telephone subscribers: (1)
Residential.................... 20,500 50,982
Business....................... -- 8,451
</TABLE>
--------
(1) UTH's 80% subsidiary Uniport offers a carrier select telephone service to
22,455 subscribers as of September 30, 1999. The subscriber number as of
December 30, 1998 belongs totally to Uniport.
(2) In the statement of operations and cash flow data of UTH the operations
of GelreVision and A2000 are included from their date of consolidation
(June 1, 1999 and September 1, 1999 respectively). UTH includes
statistics for GelreVision and A2000 as of September 30, 1999.
103
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months
--------------------------- Ended
1996 1997 1998 Septemer 30, 1999
A2000 ------- -------- -------- -------------------
(unaudited)
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues............... (NLG) 89,893 100,677 124,167 116,914
Net operating income
(loss)................ (NLG) (1,942) (17,671) (42,774) (29,214)
Adjusted EBITDA........ (NLG) 40,546 33,250 30,565 24,269
Adjusted EBITDA
margin................ 45.1% 33.0% 24.6% 20.8%
Total capital
expenditures.......... (NLG) 44,740 118,498 110,524 90,851
Cash flows from
operating activities.. (NLG) 35,215 33,304 7,408 27,638
Cash flows from
investing activities.. (NLG) (83,754) (119,824) (110,640) (91,845)
Cash flows from
financing activities.. (NLG) 72,547 60,000 96,733 64,319
<CAPTION>
As of December 31,
---------------------------
As of September 30,
1996 1997 1998 1999
------- -------- -------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Other Data:
Homes passed........... 555,459 565,740 572,936 581,500
Basic video
subscribers........... 523,940 518,160 529,067 515,273
Basic video
penetration........... 94.3% 91.6% 92.3% 88.6%
Avg. mo. service rev.
per video subscriber.. (NLG) 12.96 13.29 14.76 15.81
Two-way homes passed... -- 125,180 386,109 417,616
Internet subscribers:
Residential............ -- 450 8,128 17,564
Business............... -- -- 253 965
Telephone subscribers:
Residential............ -- 3,252 18,111 30,054
Business............... -- 3 3 21
<CAPTION>
Nine Months
Year Ended December 31, Ended
--------------------------- September 30,
1996 1997 1998 1999
GelreVision ------- -------- -------- -------------------
(unaudited)
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues............... (NLG) 21,871 23,173 26,574 23,230
Net operating income
(loss)................ (NLG) 5,785 6,793 (470) (284)
Adjusted EBITDA........ (NLG) 14,276 14,959 11,911 11,360
Adjusted EBITDA
margin................ 65.3% 64.6% 44.8% 48.9%
Total capital
expenditures.......... (NLG) 6,872 18,828 35,970 18,155
Cash flows from
operating activities.. (NLG) 14,731 6,806 8,505 8,687
Cash flows from
investing activities.. (NLG) (6,994) (19,146) (45,457) (18,244)
Cash flows from
financing activities.. (NLG) (7,216) 11,435 36,637 9,556
<CAPTION>
As of December 31,
--------------------------- As of September 30,
1996 1997 1998 1999
------- -------- -------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Other Data:
Homes passed........... 116,000 131,000 144,000 145,741
Basic video
subscribers........... 107,000 120,000 131,000 132,419
Basic video
penetration........... 92.2% 91.6% 91.0% 90.9%
Avg. mo. service rev.
per video subscriber
...................... (NLG) 16.65 16.90 17.15 17.30
Two-way homes passed... -- 25,000 88,000 113,302
Internet subscribers... -- -- 1,000 4,338
Telephone subscribers.. -- -- -- 8
</TABLE>
Overview/Growth Strategy. Our existing Dutch operations were held through
UTH, a wholly-owned subsidiary. UTH held four principal operating companies:
(1) CNBH, which holds the combined KTE and Combivisie systems, (2) TeleKabel
Beheer, (3) 50% of A2000 (100% as of September 1999) and, as of June 1999, (4)
GelreVision. In September 1999, all of our Dutch subsidiaries were consolidated
into newly-formed UPC Nederland N.V. For the sake of clarity, we have continued
to discuss the Dutch operating companies individually. Financial and operating
information for UTH's consolidated companies, which are CNBH (KTE and
Combivisie), TeleKabel Beheer, GelreVision and A2000 , are presented separately
in this section because of the separate history of each entity.
104
<PAGE>
GelreVision's results are also presented separately. UTH began consolidating
GelreVision's results on June 1, 1999 and A2000's results as of September 1,
1999.
A minority ownership interest in KTE was contributed by Philips upon our
formation. Shortly after formation, we acquired 50% of A2000, the system with
operations in Amsterdam and its surrounding areas, and the remaining 96.2% of
the KTE system. Effective January 1, 1998, we acquired the Combivisie cable
system, which we subsequently combined with KTE to form CNBH.
In August 1998, we formed UTH with NUON. We contributed 100% of CNBH and
our 50% interest in A2000 and NUON contributed 100% of TeleKabel Beheer. In
February 1999, we acquired NUON's interest in UTH. In September 1999, we
acquired the remaining 50% of A2000 from MediaOne that we did not already own.
UTH is in the process of integrating all of the operations of CNBH and
TeleKabel Beheer.
UTH owns and operates systems in the regions of Brabant, Flevoland,
Friesland and Gelderland. Because of the large number of current subscribers
located in four large clusters in The Netherlands, UTH has constructed a fiber
backbone to interconnect its region-wide networks. Both KTE and Combivisie
introduced an expanded basic tier in December 1996. CNBH launched impulse pay-
per-view services in June 1998. An expanded basic tier was launched in UTH's
other service areas in late 1999.
UTH launched chello broadband's Internet/data services in the CNBH systems
in early 1999. The media launch of chello broadband services in the remainder
of UTH's service areas took place on June 4, 1999. TeleKabel Beheer introduced
an Internet access service in November 1997 in parts of its networks and
launched chello broadband's service on April 1, 1999. All existing Internet
customers will be migrated to the chello broadband service. UTH launched
Priority Telecom cable telephone service in parts of its network as of May 1,
1999. UTH also delivers a business telephone service, including leased line
management, on-site services and telephone equipment, sales and maintenance to
its former shareholder, NUON, and several other companies.
In August 1998, CNBH acquired from Nutsbedrijf Regio Eindhoven a 16,700
subscriber cable television system in the Eindhoven region. This acquisition
enabled us to increase our cluster of operations in and around the Eindhoven
area.
In September 1998, UTH acquired 80% of Uniport, a carrier select telephone
service with approximately 22,450 subscribers as of September 30, 1999.
A2000 currently has basic penetration rates of approximately 89% in its two
systems serving Amsterdam and its surrounding communities of Landsmeer,
Purmerend, Zaanstad, Ouder-Amstel, and Hilversum. As a result of this high
penetration and the rate regulation of the basic tier in A2000's franchise
areas, A2000 has focused its efforts on increasing its average revenue per
subscriber through the introduction of new video, telephone and Internet/data
services.
A2000 launched a nine-channel expanded basic tier in October 1996, impulse
pay-per-view services in April 1997, cable telephone service in July 1997 and
an Internet/data access service in October 1997. A2000 launched its Nedpoint-
branded cable telephone service in August 1998. See "--UPC Telephone Services:
Priority Telecom--The A2000 Experience." As of September 30, 1999, A2000 had
approximately 16,300 subscribers to its expanded basic tier, approximately
30,075 cable telephone subscribers and approximately 17,550 residential and 950
business subscribers to its Internet/data access service. Approximately 15% of
subscribers who subscribe for its Internet/data services also subscribe to an
integrated package including one or both of its telephone and expanded basic
tier services. Approximately 30% of the subscribers who subscribe to its
telephone services also subscribe to one or both of the other services. See "--
UPC Telephone Services: Priority Telecom."
In June 1999, UTH purchased 100% of the GelreVision system, which had
approximately 132,400 basic cable television subscribers and approximately
4,325 Internet/data subscribers as of September 30, 1999. GelreVision plans to
move its existing Internet/data subscribers to the chello broadband service at
the end of 1999. GelreVision
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intends to provide cable telephone services beginning in 2000. GelreVision
operates cable television systems contiguous with our TeleKabel Beheer
operations.
Network. Each of UTH's systems owns or has the right to use the complete
cable television infrastructure from the headend to the home. In 1997,
Combivisie and TeleKabel Beheer began upgrading their networks with high
capacity 860 MHz technology. The upgrade is expected to be 100% completed by
the end of 2000. As of September 30, 1999, approximately 79% of UTH's homes
were passed by the upgraded network.
A2000 owns or has the right to use its infrastructure from the headend to
the home and is in the process of upgrading its cable television
infrastructure. As of September 30, 1999, approximately 417,600 homes, or 72%
of A2000's systems, were passed by the high capacity 860 MHz upgraded network
with total rebuild expected to be completed by early 2000.
The GelreVision network uses 860 MHz technology and is being upgraded to
two-way capability. The upgrade is scheduled to be completed by the end of
2000. As of September 30, 1999, approximately 113,300 homes, or 78% of homes
passed, were passed by the upgraded network.
Programming. UTH currently offers its subscribers an average of 28 channels
of basic programming along with a music channel and 33 FM radio channels. UTH
also distributes two premium channels provided by Canal+. In addition, UTH
offers an impulse pay-per-view service, consisting of four movie channels and
one adult channel. UTH's basic service includes Dutch broadcasting channels, as
well as a variety of German, French and English channels. Price increases for
UTH's basic tier service require approval of the relevant municipality. The
eight channels in UTH's expanded basic tier include the following types of
programming: sports, travel, news, science fiction, music and general
entertainment. UTH is discussing with some of its higher value programming
suppliers the migration of their channels from the basic tier to the expanded
basic tier.
Historically, A2000 offered 26 channels of cable programming and 39 FM
radio channels to its basic tier subscribers. A2000's expanded basic tier
carried 13 channels. Recent developments will significantly increase A2000's
ability to offer additional programming as well as alter its tiering structure.
Increases in the price of the basic tier service were restricted by
agreements between A2000 and Amsterdam and the other municipalities in its
franchise areas. Because these prices were kept at a low level, A2000's basic
tier revenues were limited. A2000, therefore, charged programming suppliers
carriage fees for the transmission of their channels in A2000's basic tier. See
"Regulation--The Netherlands--Video Services." Some of A2000's programming
suppliers were unwilling to pay such carriage fees and Discovery, Eurosport,
CNN and MTV withdrew their channels from A2000's basic tier offerings.
In April 1999, A2000 and the municipality of Amsterdam reached an agreement
on a large scale introduction of digital set-top boxes and a reduction of the
rate regulated basic cable television package to 15 public channels. The
agreement means that A2000 will no longer charge carriage fees to commercial
broadcasters for inclusion of their channels in the basic cable television
package and allows A2000 to migrate a number of popular commercial channels to
its expanded basic tier. During the period preceding the introduction of and
migration of channels to its digital platform, A2000 and the municipality of
Amsterdam have agreed on an interim solution for the basic tier service, namely
increasing A2000's current 26 channel basic package to 32 channels with an
increase in the monthly subscription fee. Once the digital set-top boxes are
introduced, the price for the rate regulated 15 public channel basic service
will be reduced and the price for the expanded basic tier will increase over
time until it becomes unregulated in 2001. The agreement will initially affect
approximately 390,000 customers in the greater Amsterdam area. Negotiations
with the remaining municipalities are in process. The agreement with the
municipality of Amsterdam requires A2000 to provide our integrated digital set-
top box to customers requesting the expanded basic tier. Our set-top boxes will
enable these customers to receive our chello broadband Internet service over a
computer or a television. In addition, we will be able to offer subscribers IP
telephone services through our set-top boxes in the future.
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Introduction of the digital set-top boxes is expected to occur in the first
quarter of 2000. Subsequent to reaching the agreement with the municipality,
CNN and MTV were reintroduced into the A2000 basic tier programming package.
A2000 also distributes two premium channels provided by Canal+. A2000
offers programming in many languages, including Dutch, English, German,
Italian, French and Turkish.
A2000 plans to continue to introduce new channels on its tiered services
when such programming is available. A2000's impulse pay-per-view service offers
movies from all major studios on four movie channels. This service also
includes an adult channel and one "barker" channel that provides previews of
upcoming pay-per-view events.
GelreVision currently offers 29 channels of basic cable programming and 35
FM radio channels. GelreVision is in the process of synchronizing its network
with those of UTH, which will enable it to offer an expanded range of
programming. GelreVision intends to introduce an expanded basic tier in early
2000. See "Risk Factors--Inability to obtain the necessary programming could
reduce demand for our services."
Results of Operations. For the year ended December 31, 1998, UTH had total
revenues of approximately NLG219.3 million, representing approximately 36.9% of
our consolidated revenues for the same period if we consolidated the results of
UTH, and Adjusted EBITDA of approximately NLG86.2 million. For the year ended
December 31, 1997, KTE had total revenues of approximately NLG20.7 million,
which represented approximately 6.1% of our consolidated revenues for the year,
and Adjusted EBITDA of approximately NLG12.7 million. During the same period,
Combivisie had revenues and Adjusted EBITDA of NLG29.0 million and NLG21.0
million, respectively, and TeleKabel Beheer had revenues and Adjusted EBITDA of
NLG137.2 million and NLG58.8 million, respectively.
For the year ended December 31, 1998, A2000 had total revenues of
approximately NLG124.2 million. For the same period, A2000 had Adjusted EBITDA
of approximately NLG30.6 million. For the year ended December 31, 1997, A2000
had total revenues of approximately NLG100.7 million and Adjusted EBITDA of
approximately NLG33.3 million. A2000's Adjusted EBITDA margin declined from
33.0% for the year ended December 31, 1997 to 24.6% for the year ended December
31, 1998. This decline was due primarily to the increased start up and
operating costs associated with A2000's Internet/data and cable telephone
services. The costs associated with these services were approximately NLG15.4
million for the year ended December 31, 1998. The Adjusted EBITDA margin for
A2000's video services business on a stand-alone basis was approximately 42.6%
for the year ended December 31, 1998.
GelreVision had total revenues of approximately NLG26.6 million and
Adjusted EBITDA of approximately NLG11.9 million for the year ended December
31, 1998.
Budgeted Capital Expenditures and Capital Resources. UTH has budgeted
approximately NLG235.0 million for capital expenditures in 1999, excluding
A2000, primarily to continue its network upgrade to full two-way capacity,
purchase customer premise equipment for its new services, install telephone
switches and implement a subscriber management system. UTH expects to fund
these expenditures through available cash flow, drawings from CNBH's facility
and proceeds from TeleKabel Beheer's term facility.
A2000 has budgeted approximately NLG168.4 million and NLG412.8 million for
capital expenditures in 1999 and 2000, respectively, primarily to continue its
network upgrade to full two-way capacity, purchase customer premise equipment,
including digital set-top boxes as required by an agreement reached with the
city of Amsterdam discussed above under "--Programming," and implement a
subscriber management system. A2000 expects to fund these expenditures through
available cash flow and support from us.
Following the acquisition of GelreVision, UTH has budgeted an additional
NLG35.0 million and NLG27.0 million for capital expenditures in 1999 and 2000,
respectively. We did not assume any material debt in connection with our
acquisition of GelreVision.
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Competition. UTH is the only cable system in its franchise areas and has
maintained approximately 95% penetration. For UTH, competition from television
signals received by antenna, DTH satellite services and local private cable
systems have been limited. A2000 currently has a penetration rate of about 92%
in its service area, with its primary competition being DTH satellite service
providers. To date, however, A2000's programming rights and low basic cable
fees, along with restrictive regulations and high installation costs on the
installation of dishes, have limited DTH satellite services as a meaningful
competitor. KPN, the incumbent telecommunications operator, has been conducting
a trial of providing video services over its telephone lines.
In their Internet access business, our Dutch subsidiaries compete with
dial-up Internet service providers, including KPN's World Access/Planet
Internet, NLNet, Euronet and World Online, as well as emerging free access
providers. In regard to high speed Internet access, our Dutch subsidiaries are
currently the only providers in their operating areas. However, KPN is
currently testing a high speed Internet access service and other providers of
broadband services are likely to provide competition in the near future.
In the cable telephone business, UTH and A2000 currently compete with KPN,
Telfort, Colt, Worldcom, and other new telephony providers. Our Dutch
subsidiaries compete with these other telephony providers on the basis of
price, quality of service and ability to integrate certain services.
Regulatory Issues. The regulatory environment in which our Dutch
subsidiaries operate significantly affects the operations of their business,
including the profitability and the timing of introduction of our new business
lines. See "Regulation--European Union" and "--The Netherlands." As discussed
above under "--Programming," price increases of our Dutch subsidiaries for
basic tier video services are restricted by agreements with local
municipalities. See "Regulation--The Netherlands."
Corporate Ownership. We own 100% of UTH and 100% of GelreVision. In
September 1999, we purchased from MediaOne the 50% of A2000 that we did not
own, bringing our ownership of A2000 to 100%.
Recent Developments
In August 1999, we won a bid to purchase Kabel Haarlem B.V., the
municipality-owned cable television network in Haarlem, for approximately
NLG134.0 million. Kabel Haarlem's system is located near Amsterdam. As of
September 30, 1999, this system passed approximately 70,000 homes and had
approximately 66,000 basic cable television subscribers. This acquisition is
expected to close during the first quarter of 2000 and has not been reflected
in any of the statistical or pro forma financial or other information contained
in this prospectus.
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Norway: United Pan-Europe Communications Norge AS
The following selected financial data have been derived from the
financial statements of UPC Norge (formerly Janco Multicom). These financial
statements have been prepared in accordance with Dutch GAAP with the
Norwegian kroner as the functional currency. The following selected financial
data for the nine months ended September 30, 1999 includes a translation
using the average exchange rate of 0.26324 Dutch guilders per Norwegian
kroner.
<TABLE>
<CAPTION>
Year Ended Translation
December 31, to Guilders
------------------ -------------------
Nine Months Nine Months
Ended September 30, Ended September 30,
1997 1998 1999 1999
-------- -------- ------------------- -------------------
(unaudited)
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues................ (NKr) 332,192 351,466 289,215 (NLG) 76,133
Net operating income
(loss)................. (NKr) (101,216) (122,467) (149,012) (NLG) (39,226)
Adjusted EBITDA......... (NKr) 134,660 125,338 58,916 (NLG) 15,509
Adjusted EBITDA margin.. 40.5% 35.7% 20.4% 20.4%
Total capital
expenditures........... (NKr) 74,863 194,156 256,378 (NLG) 67,489
Cash flows from
operating activities... (NKr) 43,859 35,472 (43,124) (NLG) (11,352)
Cash flows from
investing activities... (NKr) (75,608) (194,042) (362,247) (NLG) (95,358)
Cash flows from
financing activities... (NKr) 111,445 82,342 433,893 (NLG) 114,218
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-------------------- As of September 30,
1997 1998 1999
--------- --------- -------------------
<S> <C> <C> <C> <C>
Other Data:
Homes passed................ 457,551 463,235 466,742
Basic video subscribers..... 319,654 323,387 324,469
Basic video penetration..... 69.9% 69.8% 69.5%
Average mo. service rev. per
video subscriber........... (NLG) 20.13 21.07 22.95
Two way homes passed........ 5,171 15,803 44,492
Internet subscribers:
Residential................ 153 768 1,634
Business................... -- -- 4
Telephone subscribers:
Residential................ -- -- 1,327
Business................... -- -- 1
</TABLE>
Overview/Growth Strategy. In an effort to increase our position in the
Norwegian cable television market, we acquired from Helsinki Media in January
1997, 70.2% of Janco, a cable system providing cable television services in the
Oslo area. In November 1997, we merged Norkabel, a cable system providing
services in southern Norway, into Janco forming Janco Multicom. We acquired the
remaining 12.7% interest in Janco Multicom in November 1998. In September 1999,
Janco Multicom was renamed United Pan-Europe Communications Norge AS ("UPC
Norge").
As a result of the merger, UPC Norge is Norway's largest cable television
operator with approximately 42% of the total Norwegian cable television market
as of September 30, 1999. UPC Norge owns and operates 16 cable television
systems in Norway. Its main network is located in Oslo and its systems are
located primarily in the southeast and along the southwestern coast.
Our goals for our Norwegian operating systems are to continue to increase
their homes passed and penetration rate, to improve its average revenue per
subscriber generally by providing additional programming and services and
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to increase average revenue per subscriber in the former Janco systems in
particular at least up to the levels in the former Norkabel systems. We believe
that this is the result of Norkabel's implementation of expanded basic tiers
and its aggressive migration of channels from the basic tier to the expanded
basic tier. Although the former Janco systems also launched an expanded basic
tier, the basic tier continued to carry the most popular channels. Revenue
enhancing techniques, including migration of channels to expanded basic tiers,
are currently being implemented in the former Janco systems.
UPC Norge launched an Internet access service in March 1998 and introduced
chello broadband service in June 1999. We have migrated all of UPC Norge's
existing Internet access subscribers to chello broadband. We also introduced
Priority Telecom's cable telephone service in April 1999 in the upgraded
portions of our Norwegian system's network. See "--UPC Internet/Data Services:
High Speed Access and chello broadband," and "--UPC Telephone Services:
Priority Telecom."
Network. UPC Norge owns the complete cable television infrastructure for
each of its systems from the headend to the home, except for cable and plant
located on housing association property, which is legally owned by the housing
association. UPC Norge is currently upgrading its network to full high capacity
860 MHz two-way capability, with the exception of 75,000 homes in western rural
areas. Its networks vary in capacity from 300 MHz to 550 MHz. This varying
architecture requires us to replace more of the network than in our other
primary markets, thereby increasing the costs associated with this upgrade. The
upgrade, which began in April 1998, is scheduled to be completed over the next
three to four years.
Programming. Our Norwegian system currently offers subscribers 43 channels
of programming in four tiers:
. a basic tier including "must carry" channels, a limited number of
broadcast channels required by the government to be carried;
. expanded basic tiers;
. a "mini-tier" of certain selected channels; and
. premium services.
Because English is widely understood in Norway, our Norwegian system is able
to use English-language programming to supplement the limited, but increasing,
supply of available Scandinavian-language programming.
Results of Operations. For the year ended December 31, 1998, UPC Norge had
total revenues of approximately NLG92.7 million, representing approximately
22.7% of our consolidated revenues for the same period, and Adjusted EBITDA of
approximately NLG33.0 million. For the year ended December 31, 1997, UPC Norge
had total revenues of approximately NLG91.5 million, which represented
approximately 27.1% of UPC's consolidated revenues for the year, and Adjusted
EBITDA of approximately NLG36.9 million. UPC Norge's Adjusted EBITDA margin
declined from 40.5% for the year ended December 31, 1997 to 35.7% for the year
ended December 31, 1998. This decline was due primarily to the increased start
up costs associated with UPC Norge's Internet/data services launched in early
1998 and telephone service launched in the first quarter of 1999. The Adjusted
EBITDA margin for UPC Norge's video services business on a stand-alone basis
was approximately 39.7% for the year ended December 31, 1998.
Budgeted Capital Expenditures and Capital Resources. UPC Norge has budgeted
approximately NLG112.2 million and NLG124.3 million for capital expenditures in
1999 and 2000, respectively, primarily to continue its network upgrade to full
two-way capacity, purchase customer premise equipment for its new services,
install a telephone switch and implement a subscriber management system. UPC
Norge expects to fund these expenditures through available cash flow and
support from us.
Competition. UPC Norge experiences limited competition for multi-channel
video services from DTH satellite service providers and, in a few areas, other
cable television systems. In its Internet access business, UPC Norge expects to
compete with Telenor, the Norwegian incumbent telecommunications operator that
launched on a limited
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test basis; Tele2, a subsidiary of NetCom Systems, which operates a dial-up
Internet access service and has recently launched a high speed wireless
Internet access service; and other new providers. UPC Norge competes in the
telephone business primarily with Telenor, as well as with other new providers
and indirect access telephone service providers.
Regulatory Issues. The regulatory environment in which our Norwegian system
operates significantly affects the operations of its business, including the
profitability and the timing of introduction of our new business lines. See
"Regulation--European Union" and "--Norway."
Corporate Ownership. We own 100% of UPC Norge.
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Sweden: StjarnTVnatetAB
The following selected financial data have been derived from the
unaudited pro forma consolidated financial statements of NBS Nordic Broadband
Services AB ("NBS") for the twelve months ended December 31, 1996, 1997 and
1998, and the unaudited consolidated historical financial statements of NBS
for the nine months ended September 30, 1999. These financial statements have
been prepared in accordance with Swedish GAAP and with the Swedish kronor as
the functional currency. NBS acquired StjarnTVnatet AB ("Stjarn") in May
1998. Prior to the acquisition of Stjarn, NBS had no operations of its own.
The unaudited pro forma selected financial data for the years ended December
31, 1996, 1997 and 1998 set forth the financial information as if the
acquisition of Stjarn had taken place prior to the beginning of these
periods. The acquisition has been accounted for as a purchase and the
unaudited pro forma financial information for NBS reflects the financing
required to effect the acquisition and the creation of goodwill as a result
of the acquisition. The following selected financial data for the nine months
ended September 30, 1999 includes a translation using the average exchange
rate of NLG0.2482 per Swedish kronor.
<TABLE>
<CAPTION>
Translation
to Guilders
-------------
Nine Months
Ended Nine Months
Year Ended December 31, September Ended
------------------------------- 30, September 30,
1996 1997 1998 1999 1999
------------- ------- ------- ----------- -------------
(unaudited)
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues................ (SEK) 241,972 247,429 252,359 201,271 (NLG) 49,955
Net operating income
(loss)................. (SEK) 31,844 35,601 (10,555) (14,674) (NLG) (3,642)
Adjusted EBITDA......... (SEK) 87,721 92,280 50,589 36,015 (NLG) 8,939
Adjusted EBITDA margin.. 36.3% 37.3% 20.0% 17.9% 17.9%
Total capital
expenditures........... (SEK) -- -- 61,492 108,168 (NLG) 26,847
Cash flows from
operating activities... (SEK) -- -- 39,111 21,999 (NLG) 5,460
Cash flows from
investing activities... (SEK) -- -- (61,492) (115,026) (NLG) (28,549)
Cash flows from
financing activities... (SEK) -- -- 13,148 (43,901) (NLG) (10,896)
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------- As of September 30,
1996 1997 1998 1999
----------- ------- ------- -------------------
<S> <C> <C> <C> <C>
Other Data:
Homes passed................ -- -- -- 421,624
Basic video subscribers..... 220,494 226,892 230,305 241,359
Basic video penetration..... -- -- -- 57.2%
Avg. mo. service rev. per
video subscriber........... (NLG) 20.93 18.80 21.31 21.97
Two-way homes passed........ -- 300 300 72,679
Internet subscribers:
Residential............... -- -- -- 2,311
Business.................. -- -- -- --
</TABLE>
Overview/Growth Strategy. As of September 30, 1999, Stjarn provided analog
television services across its broadband network to approximately 241,350
paying subscribers out of a total of approximately 421,600 homes passed in the
greater Stockholm area of Sweden. Stjarn has access to areas including a total
of approximately 770,000 homes. For the year ended December 31, 1998, Stjarn
had cable television-related revenues of approximately SEK252.5 million
(NLG63.2 million) and EBITDA of approximately SEK50.6 million (NLG12.7
million).
Stjarn launched Internet services in one area in the City of Stockholm in
April 1999. As of September 30, 1999, high speed Internet services had been
offered to approximately 72,675 connected homes, of which 2,300 homes had at
that date subscribed.
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In February 1999, Stjarn gained approximately 7,700 subscribers through the
acquisition of Stockholm Kabel TV, a cable network provider in Stockholm.
Network. Stjarn's main headend is equipped with a total of 11 satellite
dishes to receive incoming analog television signals. As of September 30, 1999,
Stjarn's network connected approximately 241,350 homes in Greater Stockholm,
extending to a radius of approximately 40 kilometers from the headend.
Approximately 99% of Stjarn's 241,350 connected homes are served by one
connection point or headend.
Stjarn is currently upgrading its cable access network from 450 MHz to 550
MHz capacity with the potential to upgrade to 860 MHz bandwidth in the future.
The upgrade to 550 MHz is expected to be substantially completed by the end of
1999, enabling the launch of Internet and digital television services across
its network. Stjarn's upgraded network will have sufficient capacity to support
Internet services for up to 120,000 subscribers, 150 digital television
channels and 30 analog television channels.
Stjarn leases the fiber optic cables it uses to link to its main headend
under agreements with Stokab, a city-controlled entity with exclusive rights to
lay ducts for cables for communications or broadcast services in the City of
Stockholm. The main part of the leased ducting and fiber optic cables is
covered by an agreement which expires in January 2019. Additional fibers are
leased under several short-term agreements, most of which have three year terms
but some of which have ten year terms. In total, the Stokab network has access
to approximately 770,000 homes and 30,000 businesses. The network owned by
Stjarn extends from the fiber node to the house. Stjarn's systems are
critically dependent on these arrangements with Stokab.
Stjarn generally does not own internal wiring. However, under distribution
agreements with public housing associations, it has been granted exclusive
rights to use the existing cable networks and is responsible for maintenance,
service and repair. The three largest of these agreements cover approximately
110,000 connected homes. These agreements are valid through 2018.
Programming. Stjarn offers four tiers of programming to 53% of homes passed
by its network: a basic tier consisting of 11 channels; an extended basic tier
consisting of six channels; an international tier consisting of nine channels;
and two premium channels, Canal + and TV1000.
Results of Operations. For the year ended December 31, 1998, Stjarn had
total revenues of SEK252.4 million (NLG63.2 million) and EBITDA of
approximately SEK50.6 million (NLG12.7 million). For the year ended December
31, 1997, Stjarn had total revenues of SEK247.4 million (NLG63.1 million) and
EBITDA of approximately SEK92.3 million (NLG23.6 million). Stjarn's EBITDA
decreased SEK41.7 million (NLG9.7 million) for the year ended December 31, 1998
as compared to the year ended December 31, 1997, a 45% decrease. This decrease
in EBITDA was primarily related to an increase in operating expenses of SEK42.9
million (NLG10.5 million) from SEK54.4 million (NLG13.9 million) in 1997 to
SEK97.3 million (NLG24.4 million) in 1998. Approximately SEK 17.5 million
(NLG4.4 million) of this operating expense increase related to management
bonuses and other costs related to the acquisition of Stjarn by NBS. The
remaining increase included additional marketing expenses of SEK7.1 million
(NLG1.74 million) and other costs related to preparing for the broadband
services, office moving expenses, consulting fees and Year 2000 compliance.
Unlike our other systems where we own the system and do not pay lease fees, the
lease fees paid by Stjarn for fiber and ducting are included in Stjarn's
operating expense and, accordingly, negatively impact EBITDA.
Budgeted Capital Expenditures and Capital Resources. Stjarn has budgeted
approximately SEK216.8 million (NLG53.1 million) for capital expenditure for
1999. Of this amount, SEK102.8 million (NLG25.2 million) has been budgeted for
the network upgrade. SEK43.5 million (NLG10.7 million) has been budgeted for
Internet services related investments. Stjarn expects to fund these investments
through available cash flow and borrowings.
Competition. Stjarn faces competition from existing cable operators, from
providers of DTH services and from digital terrestrial broadcasters. There are
currently four major cable television operators in Sweden: Telia,
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Kabelvision, Sweden On Line and Stjarn. In contrast to Stjarn, many of its
competitors have shorter customer contracts. These contracts only cover the
provision of a television signal.
At present, Stjarn and Telia are the only cable television operators who
have the technological capability to offer interactive digital cable television
services in Sweden. Stjarn may also face competition from providers of digital
terrestrial television. In order to receive digital terrestrial television,
customers will need a set-top box to decode the digital signals received.
Stjarn has chosen to wait for the introduction of a new set-top box that is
currently expected to be available within a year.
Internet access services have been available to residential customers in
Sweden since the middle of 1994. Industry sources indicate that at the end of
1998, there were approximately 1.4 million subscribers to Internet services in
Sweden. At present, there are three major Internet service providers, Telia,
which has approximately 40% of the total number of subscribers, Tele2, which
has approximately 28% of the total number of subscribers, and TeleNordia, which
has approximately 14% of the total number of subscribers. The average monthly
fee for an Internet user is between SEK300 (NLG73.4) and SEK350 (NLG85.7).
Regulatory Issues. Any change in the regulatory environment in which Stjarn
operates could affect the operations of its business, including the
profitability and the timing of introduction of our new business lines. See
"Regulation--European Union" and "--Sweden."
Corporate Ownership. In July 1999, we acquired 100% of Stjarn.
114
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Israel: Tevel Israel International Communications Ltd.
The following selected financial data have been derived from the
financial statements of Tevel Israel International Communications Ltd. In
April 1998, Tevel acquired the approximately 144,000-subscriber Gvanim cable
television systems in two areas adjacent to Tevel's existing operations. The
financial data as of December 31, 1998 includes nine months of Gvanim's
operating results. These financial statements have been prepared in
accordance with Israeli GAAP with the New Israeli shekel as the functional
currency adjusted for changes in the general purchasing power of the New
Israeli shekel using the consumer price index. The following selected
financial data for the nine months ended September 30, 1999 includes a
translation using the average exchange rate for the period of 0.49621 Dutch
guilders per New Israeli shekel.
<TABLE>
<CAPTION>
Translation
to Guilders
-------------
Nine Months
Nine Months Ended
Year Ended December 31, Ended September
---------------------------- September 30, 30,
1996 1997 1998 1999 1999
------- ------- ---------- -------------- -------------
(unaudited)
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues................ (NIS) 355,676 387,976 573,258 522,426 (NLG) 259,233
Net operating income
(loss)................. (NIS) 86,834 101,501 125,585 75,494 (NLG) 37,461
Adjusted EBITDA......... (NIS) 192,716 213,024 317,056 233,065 (NLG) 115,649
Adjusted EBITDA margin.. 54.2% 54.9% 55.3% 44.6% 44.6%
Total capital
expenditures........... (NIS) 52,108 61,330 119,359 101,570 (NLG) 50,400
Cash flows from
operating activities... (NIS) 139,757 141,390 164,891 154,765 (NLG) 76,796
Cash flows from
investing activities... (NIS) (55,693) (63,647) (1,098,691) (116,390) (NLG) (57,754)
Cash flows from
financing activities... (NIS) (83,668) (77,749) 973,354 (36,982) (NLG) (18,351)
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------------- As of September 30,
1996 1997 1998 1999
------- ------- ------- -------------------
<S> <C> <C> <C> <C> <C>
Other Data:
Homes passed............ 334,426 350,392 575,976 599,443
Basic video
subscribers............ 231,712 241,874 402,355 415,754
Basic video
penetration............ 69.3% 69.0% 69.9% 69.4%
Avg. mo. service rev.
per video subscriber... (NLG) 59.57 61.30 62.82 67.32
Two-way homes passed.... 334,426 350,392 363,819 377,234
</TABLE>
Overview/Growth Strategy. Tevel has exclusive cable television broadcasting
franchises for the entire Tel Aviv metropolitan area, the region of Ashdod-
Ashkelon, which is 30 miles south of Tel Aviv, and the Jezreel Valley, which is
80 miles northeast of Tel Aviv. We currently own 46.6% of Tevel. In April 1998,
Tevel acquired 100% of Gvanim Cable Television Ltd. and has since fully
integrated Gvanim's operations with its own. The Gvanim acquisition increased
Tevel's total subscribers as of September 30, 1999 to approximately 415,750 in
franchise areas representing over 610,500 homes, or approximately 40% of the
total homes in Israel.
Tevel's growth strategy is to increase its subscriber base by completing
build out within existing franchise areas, particularly in the Gvanim franchise
areas, increase penetration rates by offering a wider variety of programming
and increase sales of enhanced services, such as impulse pay-per-view in the
Gvanim franchise areas. Should liberalization occur, Tevel may consider
launching its own telephone and Internet/data services. See "Regulation--
Israel."
In addition to its cable operations, Tevel owns 50% of Globkol-Globescom
Elitec Communications Systems Ltd. ("Globkol"), a telecommunications equipment
company that designs, installs and maintains switching systems for businesses.
As of September 30, 1999, Globkol served approximately 1,200 sites with a total
of approximately 84,300 outlets. Tevel also owns 33% of Netvision, one of
Israel's leading Internet service providers.
115
<PAGE>
Network. Tevel owns the complete cable television infrastructure for each
of its cable systems from the headend to the home. The systems' construction
incorporates 550 MHz capability, representing approximately 50 channels, with a
25 MHz return path providing approximately 377,225 homes passed with two-way
capability for impulse pay-per-view services only. Tevel plans to upgrade all
of its systems to 750 MHz hybrid fiber coaxial technology capable of providing
cable telephone and Internet/data services. Currently, Gvanim's network is a
one-way system with a substantial overlay of fiber optic backbone, but it is
being upgraded to full two-way capability with the installation of 860 MHz
hybrid fiber coaxial technology. Tevel expects that the upgrade of all of its
systems will be substantially complete by mid-2000.
Programming. Tevel offers basic subscribers approximately 40 channels of
programming, including a wide range of entertainment, news, sports, performing
arts and educational channels. Five pay-per-view channels are also available in
all of Tevel's areas. Currently, over 30% of Tevel's subscribers purchase at
least one pay-per-view offering per month. Tevel has applied to extend its
license to provide pay-per-view services in all of its franchise areas. Tevel
has also applied for a license to provide pay-per-view services in Gvanim's
franchise areas. The Israeli Communications Ministry has indicated that it
intends to change a number of terms of Tevel's pay-per-view license, and has
offered Gvanim a pay-per-view license on terms incorporating these changes.
Tevel is opposed to these term changes and is negotiating with the
Communications Ministry over the terms of the extension of its pay-per-view
license and Gvanim's pay-per-view license. Tevel's current pay-per-view license
has been extended until January 2000.
Tevel, Gvanim and the other Israeli cable television operators own a
programming company, ICP Israel Cable Programming Company Limited. See
"Regulation--Israel." ICP purchases programming rights for subsequent sale to
cable television operators in Israel and produces two cable-exclusive channels:
a general entertainment channel and a movie channel. Programming for a
children's channel, a sports channel and a channel showing nature, science and
art documentaries are produced by third parties. ICP is considered a
"restrictive arrangement" under Israeli Restrictive Trade Practices law and is
regulated by an arrangement that was to expire in June 1999. The arrangement
has been extended temporarily until December 31, 1999. See "Regulation--
Israel."
Results of Operations. For the year ended December 31, 1998, Tevel had
total revenues of approximately NLG284.2 million and Adjusted EBITDA of
approximately NLG157.2 million. These amounts include nine months of revenue
from the Gvanim systems acquired in April 1998. For the year ended December 31,
1997, Tevel had total revenues of approximately NLG192.3 million and Adjusted
EBITDA of approximately NLG105.6 million.
Budgeted Capital Expenditures and Capital Resources. Tevel has budgeted
approximately $45.0 million for capital expenditures in 1999, primarily to
continue to upgrade its network. Tevel expects to fund these expenditures
through available cash flow. To finance the Gvanim acquisition, Tevel borrowed
NIS928.3 million (NLG447.6 million) under a nine-year term loan. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources--Debt Facilities."
Competition. Because Tevel and Gvanim have exclusive cable television
licenses, to date they have experienced no competition from other multi-channel
television providers. The Israeli government recently passed legislation,
however, to grant licenses to DTH satellite service operators. To date, such a
license has been granted to a group headed by Bezeq, the Israeli incumbent
telecommunications service provider. An additional license application has been
filed by another group. These operators are expected to begin providing DTH
satellite services by early 2000. ICP or the cable operators may be required to
sell to DTH satellite service operators its channels, which are currently
offered exclusively to cable television operators. See "Regulation--Israel."
Regulatory Issues. The regulatory environment in which Tevel operates
significantly affects the operations of its business, including the
profitability and the timing of introduction of our new business lines. See
"Regulation--Israel."
Corporate Ownership. We indirectly own 46.6% of Tevel. An Israeli
corporation owned by DIC Communication and Technology Ltd. and PEC Israel
Economic Corporation, which we call the "Discount Group," owns 48.4% of Tevel
and a private Israeli investor holds the remaining 5% of Tevel.
116
<PAGE>
Tevel is managed by a board of directors. We have the right to designate
one of Tevel's five directors for each 17% of Tevel that we own. Currently, two
Tevel directors are our appointees. Each of Tevel's shareholders has agreed to
grant a right of first refusal to the other shareholders in the event of a
transfer of any Tevel shares. If the other shareholders do not exercise this
right, they are permitted to participate in the sale and may require the
selling shareholder to include in the transferred shares such number of shares
equal to each shareholder's pro rata amount.
In addition, any shareholder of Tevel that holds more than a 30% interest
may offer its shares to the other shareholders at a price based upon the
appraised fair market value of Tevel. If the other shareholders do not accept
the offer, the offering shareholder may require that all of the shares of Tevel
be sold to a third party at the appraised value. Any such sales would be
conditioned on receipt of appropriate regulatory and other consents. If a third
party has not agreed to purchase the Tevel shares at the appraised value within
six months of the date the appraisal is delivered to Tevel and the
shareholders, the right to exercise the forced buyout option lapses and any
shareholder that thereafter desires to exercise the forced buyout option must
first offer to sell its shares to the other shareholder at fair market value
based on a new appraisal. No shareholder may exercise this forced buyout option
more than once in any 12-month period. Neither party has exercised the forced
buyout option. We and the Discount Group have agreed not to exercise this
forced buyout option while our loan from DIC is outstanding. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources--Debt Facilities."
Tevel's shareholders, other than the private Israeli investor, have agreed
not to compete with Tevel in respect of certain cable telecommunications
services and complementary businesses in Israel unless the Tevel board of
directors decides that Tevel will not participate in such systems or
businesses.
Tevel has entered into two consulting agreements, one with affiliates of
the Discount Group and one with us. Pursuant to these agreements, Tevel is
required to pay to each of us and the Discount Group up to 2.5% of Tevel's
annual gross revenues, excluding customer premise equipment deposits. Tevel is
entitled to terminate the consulting agreement with either us or the Discount
Group if such holder's share ownership in Tevel falls below 20%. The validity
of the consulting agreements has been challenged by Tevel's minority
shareholder, claiming that the consulting fee is not proportionate to the
services rendered. Accordingly, the minority shareholder has claimed that these
agreements constitute an oppression of the minority under Israeli law and has
demanded cancellation of the consulting agreements. We, Tevel and the Discount
Group have rejected these claims. The minority owner filed a claim in the
District Court of Tel Aviv on June 1, 1999 and on September 8, 1999, Tevel
served its statement of defense.
Recent developments
In November 1999, Tevel agreed to purchase a 35% economic interest in
Golden Channels for $183.5 million (NLG 379.8 million). Golden Channels is a
competitor of Tevel in the Israel market. Its systems, including Idan, passed
approximately 461,325 homes and had approximately 322,925 basic subscribers at
December 31, 1998. The closing of this acquisition is subject to regulatory
approval and has not been reflected in any of the statistical or pro forma
financial or other information contained in this prospectus.
117
<PAGE>
Central and Eastern Europe
Czech Republic
The following selected financial data has been derived from the financial
statements of the respective companies. The financial statements for KabelNet
have been prepared in accordance with Dutch GAAP with the Czech koruna as the
functional currency. The financial statements of Kabel Plus, which we have
recently agreed to acquire, have been prepared in accordance with U.S. GAAP
with the Czech koruna as the functional currency. The following selected
financial data have been converted to Dutch guilders using the average
exchange rate for the relevant period which corresponds in each case to the
average exchange rate used in the respective companies' financial statements
for the periods indicated.
<TABLE>
<CAPTION>
KabelNet Kabel Plus
------------------------------- -------------------------------
Year Ended Nine Months Year Ended Nine Months
December 31, Ended December 31, Ended
---------------- September 30, ---------------- September 30,
1997 1998 1999 1997 1998 1999
------- ------- ------------- ------- ------- -------------
(unaudited) (unaudited)
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues............... (NLG) 7,492 8,909 125,614 39,915 47,540 38,555
Net operating income
(loss)................ (NLG) (13,116) (10,668) (63,572) (25,145) (16,788) (7,004)
Adjusted EBITDA........ (NLG) (6,730) (1,887) (12,159) (8,781) 3,633 7,892
Adjusted EBITDA
margin................ N/A N/A N/A N/A 7.6% 20.5%
Total capital
expenditures.......... (NLG) 4,217 1,041 42,146 32,752 9,026 (6,714)
Cash flows from
operating activities.. (NLG) (13,608) (5,469) (10,427) (16,396) (14,490) 2,036
Cash flows from
investing activities.. (NLG) (2,293) (1,384) (31,382) (33,260) (9,026) (5,706)
Cash flows from
financing activities.. (NLG) 14,563 7,307 43,559 45,018 13,690 1,784
<CAPTION>
As of As of
December 31, As of December 31, As of
---------------- September 30, ---------------- September 30,
1997 1998 1999 1997 1998 1999
------- ------- ------------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Other Data:
Homes passed........... 145,650 151,716 160,558 609,017 613,000 622,000
Basic video
subscribers........... 51,571 54,153 56,638 385,272 368,000 435,000
Basic video
penetration........... 35.4% 35.7% 35.3% 63.3% 60.0% 69.9%
Avg. mo. service rev.
per video subscriber.. (NLG) 12.30 13.34 13.89 4.47 7.03 8.56
Two way homes passed... -- -- -- -- 800 800
Telephone Subscribers:
Residential(1)........ -- -- -- -- 800 800
Business.............. -- -- -- -- -- --
</TABLE>
--------
(1) Excludes 3,200 experimental antenna-based telephone subscribers.
Overview/Growth Strategy. We own 100% of KabelNet, our Czech Republic
subsidiary that provides cable and "wireless" cable television services in the
cities of Prague and Brno, the Czech Republic's second largest city. At
September 30, 1999, the wireless cable system served approximately 66,700
subscribers in both cities and the cable system served approximately 11,075
subscribers in Prague. KabelNet's penetration rate was 35.3% as of
September 30, 1999. There are no current plans to launch telephone or
Internet/data services in KabelNet's systems.
In June 1999, we agreed to acquire 94.6% of Kabel Plus, the leading
provider of cable television services in the Czech Republic. At September 30,
1999, Kabel Plus's cable system served about 435,000 subscribers in the Czech
Republic. We intend to increase Kabel Plus' revenue per subscriber by
increasing sales of premium cable packages.
Network. KabelNet's systems currently offer programming over an MMDS
network and a hybrid fiber coaxial cable network. KabelNet owns the complete
cable system infrastructure for each of its systems from the headend to the
home. KabelNet has no plans to introduce two-way services to its network at
this time.
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<PAGE>
Kabel Plus currently provides programming over traditional cable television
coaxial networks to the majority of its customers. It also provides
programming over MMDS networks in two communities in the Czech Republic and
two in the Slovak Republic. Kabel Plus owns the infrastucture of its networks.
Programming. KabelNet offers subscribers three tiers of programming
comprising approximately 16 channels:
. five "must carry" channels;
. a 15-channel basic tier, which includes the "must carry" channels; and
. one premium channel, HBO Czech.
Approximately 11 channels, including HBO Czech, are available in both the
Czech and Slovak languages. Currently, approximately 12.5% of KabelNet's cable
subscribers take the 15-channel basic tier.
The Kabel Plus systems have various programming line-ups depending on the
size and location of the network and availability of off-air channels. Kabel
Plus provides three levels of service with the following number of channels:
. seven to ten "must carry" channels;
. 15 to 20 channel satellite service; and
. one premium service, HBO Czech.
Result of Operations. For the year ended December 31, 1998, KabelNet had
total revenues of approximately NLG8.9 million and Adjusted EBITDA of
approximately negative NLG1.9 million. For the year ended December 31, 1997,
KabelNet had total revenues of approximately NLG7.5 million and Adjusted
EBITDA of approximately negative NLG6.7 million.
For the year ended December 31, 1998, Kabel Plus had total revenues of
NLG47.5 million and Adjusted EBITDA of NLG3.6 million. For the year ended
December 31, 1997, Kabel Plus had total revenues of approximately NLG39.9
million and Adjusted EBITDA of approximately negative NLG8.8 million.
Budgeted Capital Expenditures and Capital Resources. KabelNet has budgeted
approximately NLG2.5 million for capital expenditures in 1999, primarily to
expand MMDS distribution. KabelNet expects to fund these expenditures through
available cash flow and funding from us. KabelNet has no bank debt. An
additional NLG3.9 million and NLG29.9 million has been budgeted for Kabel Plus
for 1999 and 2000, respectively.
Competition. KabelNet faces competition in its service area. Currently,
parts of its service areas have been overbuilt by Kabel Plus and Dattel Kabel
in Prague and Kabel Plus in Brno. In June 1999, we agreed to acquire 94.6% of
Kabel Plus as described above. Overbuilding is when a cable network is
installed where a multi-channel video services provider already exists.
Regulation. The regulatory environment in which our Czech subsidiaries
operate significantly affects the operations of their businesses, including
the profitability and the timing of introduction of our new business lines.
See "Regulation--Czech Republic."
Corporate Ownership. We own 100% of KabelNet. In June 1999, we agreed to
acquire 94.6% of Kabel Plus.
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<PAGE>
Hungary: UPC Magyarorszag
The following selected financial data have been derived from the
financial statements of the respective companies. Because Telekabel Hungary
began operations in July 1998, the financial information presented below for
the year ended December 31, 1998 includes results of Kabelkom and Kabeltel
for the first six months of 1998 and includes results from Telekabel Hungary
from formation to December 31, 1998. The financial statements for Kabeltel,
Kabelkom and Telekabel Hungary have been prepared in accordance with
Hungarian GAAP, U.S. GAAP and Dutch GAAP, respectively, with the Hungarian
forint as the functional currency. The following selected financial data have
been converted to Dutch guilders using the average exchange rate for the
relevant period which corresponds in each case to the average exchange rate
used in the respective companies' financial statements for the periods
indicated.
<TABLE>
<CAPTION>
Kabelkom Kabeltel
------------------ -------------------
Year Ended Year Ended December
December 31, 1997 31, 1997
----------------- -------------------
(in thousands, except percentages)
<S> <C> <C> <C>
Selected Financial Data:
Revenues..................... (NLG) 32,717 9,555
Net operating income (loss).. (NLG) 11,660 (283)
Adjusted EBITDA.............. (NLG) 14,857 778
Adjusted EBITDA margin....... 45.4% 8.1%
Total capital expenditures... (NLG) 11,213 6,759
Cash flows from operating
activities.................. (NLG) 10,973 (6,298)
Cash flows from investing
activities.................. (NLG) (11,213) (6,759)
Cash flows from financing
activities.................. (NLG) (854) 14,409
<CAPTION>
As of December 31, As of December 31,
1997 1997
------------------ -------------------
<S> <C> <C> <C>
Other Data:
Homes passed................. 290,690 113,875
Basic video subscribers...... 266,775 102,405
Basic video penetration...... 91.8% 89.9%
Average monthly service
revenue per video
subscriber.................. (NLG) 10.73 7.43
<CAPTION>
Telekabel Hungary
--------------------------------------
Year Ended Nine Months Ended
December 31, 1998 September 30, 1999
------------------ -------------------
(unaudited)
(in thousands, except percentages)
<S> <C> <C> <C>
Selected Financial Data:
Revenues..................... (NLG) 52,697 53,474
Net operating income (loss).. (NLG) 8,692 6,431
Adjusted EBITDA.............. (NLG) 19,569 18,175
Adjusted EBITDA margin....... 37.1% 34.0%
Total capital expenditures... (NLG) 25,070 49,375
Cash flows from operating
activities.................. (NLG) 9,088 (2,949)
Cash flows from investing
activities.................. (NLG) (31,182) (56,403)
Cash flows from financing
activities.................. (NLG) 26,579 58,978
<CAPTION>
As of December 31, As of September 30,
1998 1999
------------------ -------------------
<S> <C> <C> <C>
Other Data:
Homes passed................. 510,622 624,898
Basic video subscribers...... 442,567 498,325
Basic video penetration...... 86.7% 79.7%
Average monthly service
revenue per video
subscriber.................. (NLG) 10.80 12.49
</TABLE>
Overview/Growth Strategy. In June 1998, we increased our interest in
Kabelkom, Hungary's largest operator of cable television systems, from 50% to
100%. Shortly thereafter, Kabelkom combined operations with Kabeltel, Hungary's
second largest operator of cable television systems, creating Telekabel
Hungary, in which we retain a 79.25% interest. Telekabel Hungary operates
through its subsidiary, UPC Magyarorszag. As of September 30, 1999, Telekabel
Hungary had approximately 498,325 subscribers. We are launching Internet/data
services in certain areas of Telekabel Hungary's systems in 1999.
120
<PAGE>
When Kabelkom was formed in 1991, its systems had average monthly revenue
per subscriber of less than NLG2.0. Through the addition of local language
programming and other enhanced video services, these systems had average
monthly revenue per subscriber of more than NLG10.80 for the year ended
December 31, 1998.
Network. Telekabel Hungary owns the complete cable television
infrastructure for each of its systems from the headend to the home. We are
upgrading these networks. In Budapest, the network will be upgraded to 750 MHz
hybrid fiber coaxial technology with 65 MHz return path. As of September 30,
1999, approximately 162,500 customers were already served by the rebuilt
network.
Programming. Our Hungarian system offers subscribers four tiers of
programming comprising approximately 35 channels:
. ""lifeline'' package, the broadcast channels required by the government
to be carried;
. basic tier, which includes a limited number of satellite channels and
the broadcast channels required by the government to be carried;
. an expanded basic tier; and
. a premium service, HBO-Hungary.
Approximately 25 channels, including HBO-Hungary, are available in Hungarian.
In our Hungarian systems, 78.0% of all subscribers passed by our upgraded
network subscribe to the expanded basic tier.
Results of Operations. As of December 31, 1998, combined revenues and
Adjusted EBITDA for the year then ended were approximately NLG52.7 million and
NLG19.6 million, respectively. For the year ended December 31, 1997, Kabelkom
had total revenues of approximately NLG32.7 million and Adjusted EBITDA of
approximately NLG14.9 million. For the year ended December 31, 1997, Kabeltel
had total revenues of approximately NLG9.6 million and Adjusted EBITDA of
approximately NLG0.8 million. The relative increase in combined revenue is the
result of acquisitions in January 1998 (20,000 subscribers), May 1998 (18,000
subscribers) and the rebuild of approximately 60,000 homes. This rebuild
permits us to offer enhanced services in the former Kabeltel systems,
generating an average additional monthly revenue of approximately NLG3.0 per
subscriber.
Budgeted Capital Expenditures and Capital Resources. Telekabel Hungary has
budgeted approximately NLG57.1 million for capital expenditures in 1999,
primarily to continue the network upgrade, line extensions and acquisitions.
Telekabel Hungary expects to fund these expenditures through available cash
flow and support from us. See "UPC Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Competition. Our Hungarian system currently averages over 83% penetration
in its service area and faces limited competition in its multi-channel video
services from DTH satellite services and, in some areas, other cable
television systems and a microwave services provider. In our Internet/data
services, we compete against MATAV, the incumbent telecommunications operator,
and other new providers of such services.
Regulatory Issues. The regulatory environment in which Telekabel Hungary
operates significantly affects the operation of its business, including the
profitability and timing of introduction of our new business there. See
"Regulation--Hungary."
Corporate Ownership. We and The First Hungary Fund Ltd., an investment
fund, indirectly own 79.25% and 20.75%, respectively, of the ordinary share
capital of Telekabel Hungary. Telekabel Hungary owns 100% interests in 10
Kabelkom systems contributed by us and 100% in four Kabeltel systems
contributed by The First Hungary Fund. See "UPC Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources--Debt Facilities."
One of our wholly-owned subsidiaries is solely responsible for the day-to-
day management of Telekabel Hungary, under the supervision of Telekabel
Hungary's supervisory board. The supervisory board has four members, three of
which are appointed by us and one by The First Hungary Fund. The parties have
agreed that the supervisory
121
<PAGE>
director appointed by The First Hungary Fund may block the required supervisory
board approval of any element of the business plans and budgets of Telekabel
Hungary and its subsidiaries that the supervisory director reasonably
determines would decrease the shareholders' value of Telekabel Hungary to the
detriment of The First Hungary Fund, while we would obtain an increase in value
other than through Telekabel Hungary or its subsidiaries. Certain major
decisions concerning Telekabel Hungary and its subsidiaries, such as the
merger, demerger, liquidation and sale of all or substantially all of the
assets of those entities, the amendment of their articles of association, and
the issuance of certain preference shares, require approval of The First
Hungary Fund's representative so long as The First Hungary Fund owns at least
10% of Telekabel Hungary's share capital.
Moreover, we and The First Hungary Fund can dispose of our shares in
Telekabel Hungary after December 31, 1999, either to the other at fair market
value, to a third party or through a registration of such shares under the
Securities Act or on a European exchange. The selling shareholder must first
offer its shares to the other and, if the non-selling shareholder declines to
purchase such shares, the shares may be sold to a third party on terms no less
favorable than the terms offered to the non-selling shareholder for a six-month
period after the non-selling shareholder declines to purchase the shares.
Hungary: Monor
Monor, one of our Hungarian operating companies, has offered traditional
telephone services since December 1994. As of September 30, 1999, we owned a
47.54% economic interest in Monor.
Monor has the exclusive, local-loop telephone concession for the region of
Monor, Hungary. Monor has 85,000 homes in its franchise area, with
approximately 84,900 traditional fixed-line telephone homes passed and
approximately 70,050 cable television homes passed. It served approximately
72,875 traditional telephone access lines under an exclusive franchise
extending until 2002, and approximately 32,000 cable television subscribers as
of September 30, 1999. Revenues for the year ended December 31, 1998 were
approximately NLG35.6 million. For the nine months ended September 30, 1999,
Monor had total revenues of approximately NLG30.9 million and EBITDA of
approximately NLG20.2 million. Monor had approximately NLG75.5 million of
outstanding bank debt as of September 30, 1999.
Corporate Ownership. We and our partner, PenneCom B.V., each own about a
47.54% economic interest and about a 37.5% voting interest in Monor. The
remaining economic and voting interests are owned by several Hungarians.
Recent Developments in Hungary
We have agreed to purchase PenneCom's 47.54% economic interest in Monor.
The purchase price is approximately $45.0 million. This acquisition is expected
to close in December 1999, subject to receipt of necessary government and
third-party approvals.
We recently expanded our footprint in Budapest with the acquisition of
Ujpest, a cable system adjacent to our existing systems. This acquisition, for
which we paid $10.0 million (NLG20.5 million), adds approximately 28,000
subscribers to our Hungarian systems, passing some 34,000 homes. This
transaction closed in August 1999 and has not been reflected in any of the
statistical or pro forma financial or other information contained in this
prospectus.
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Poland: @Entertainment, Inc.
In August 1999 we acquired 100% of the outstanding shares of
@Entertainment. The following selected financial data have been derived from
the financial statements of @Entertainment, Inc. These financial statements
have been prepared in accordance with U.S. GAAP with the U.S. dollar as the
reporting currency. The following selected financial data for the nine months
ended September 30, 1999 includes a translation using the average exchange
rate during the period of 2.07 Dutch guilders per U.S. dollar.
<TABLE>
<CAPTION>
Translation
Year Ended December 31, to Guilders
--------------------------- -------------------
Nine Months Nine Months
Ended September 30, Ended September 30,
1996 1997 1998 1999 1999
-------- ------- -------- ------------------- -------------------
(unaudited)
(in thousands, except percentages)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues................ (USD) 24,923 38,138 61,859 61,682 (NLG) 126,263
Net operating income
(loss)................. (USD) (1,347) (42,670) (100,813) (136,294) (NLG) (278,994)
Adjusted EBITDA......... (USD) 8,441 (8,274) (74,509) (91,425) (NLG) (187,147)
Adjusted EBITDA margin.. 33.9% N/A N/A N/A N/A
Total capital
expenditures........... (USD) 26,581 39,643 114,992 27,750 (NLG) 56,804
Cash flows from
operating activities... (USD) 6,112 (18,773) (70,668) (111,988) (NLG) (229,239)
Cash flows from
investing activities... (USD) (74,861) (64,842) (147,210) (36,745) (NLG) (75,217)
Cash flows from
financing activities... (USD) 134,889 120,823 125,242 159,487 (NLG) 326,470
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of
------------------------------- September 30,
1996 1997 1998 1999
--------- --------- --------- --------------
<S> <C> <C> <C> <C> <C>
Other Data:
Homes passed by cable... 1,088,540 1,408,099 1,591,981 1,705,569
Total video
subscribers............ 539,342 768,901 935,340(1) 983,947(2)
Total video
penetration............ 49.5% 54.6% 58.8% 57.7%
Average monthly basic
service revenue per
basic video
subscriber............. (NLG) 7.37 9.73 11.32 14.17
</TABLE>
--------
(1) Does not include 95,378 DTH subscribers.
(2) Includes 30,032 and 240,652 subscribers to the intermediate and broadcast
packages, respectively. Does not include 181,557 DTH subscribers.
Overview/Growth Strategy. @Entertainment operates the largest cable
television system in Poland with approximately 1,705,550 homes passed and
approximately 983,925 cable and 181,550 DTH total subscribers as of September
30, 1999. @Entertainment's cable subscribers are located in regional clusters
encompassing eight of the ten largest cities in Poland, including those cities
which @Entertainment believes provide the most favorable demographics for cable
television in the country.
@Entertainment expanded its distribution capacity with the launch of its
DTH broadcasting service for Poland, targeted at homes outside of its cable
network coverage area. DTH subscribers receive Wizja TV (described below under
"Programming"). @Entertainment's multi-channel Polish-language DTH service, the
first such service available in Poland, is broadcast from its transmission
facilities in Maidstone, UK. As of September 30, 1999, @Entertainment had sold
to Philips' authorized retailers approximately 200,000 DTH packages. As of
September 30, 1999 Philips had sold and installed 186,000 of these packages to
consumers.
Network. @Entertainment's fiber-optic cable television networks serve
approximately 67% of its subscribers. All of @Entertainment's cable networks
have bandwidths of at least 550 MHz, with one network as high as 1 GHz. New
portions of the networks that are currently being constructed are being
designed to have minimum bandwidths of 860 MHz and @Entertainment intends to
upgrade any portions of its cable networks that have bandwidths below 550 MHz
(generally acquired from other entities) to at least 860 MHz by the first
quarter of 2000. @Entertainment's
123
<PAGE>
cable television networks have been constructed with the flexibility and
capacity to be cost-effectively reconfigured to offer an array of interactive
and integrated entertainment, telecommunications and information services.
@Entertainment's equipment used for its cable television business includes
106 headends for cable networks and approximately 5,511 kilometers of cable and
fiber plant as of June 30, 1999. @Entertainment has been able to avoid
constructing its own underground conduits in certain areas by entering into a
series of agreements with TPSA (the Polish national telephone company) which
permit @Entertainment to use TPSA's infrastructure for an indefinite period or
for fixed periods up to 20 years. As of June 30, 1999, approximately 76.8% of
@Entertainment's cable television plant has been constructed using pre-existing
conduits from TPSA. A substantial portion of @Entertainment's contracts with
TPSA for the use of such conduits permits termination by TPSA without penalty
at any time either immediately upon the occurrence of certain conditions or
upon provision of three to six months notice without cause. Generally speaking,
TPSA may terminate a conduit agreement immediately (and without penalty) if:
(1) @Entertainment does not have a valid permit from the Polish State Agency of
Radio Communications authorizing the construction and operation of a cable
television network in a specified geographic area covering the subscribers to
which the conduit delivers a signal; (2) @Entertainment's cable network
serviced by the conduit does not meet the technical specifications required by
the Polish Communications Act of 1990; (3) @Entertainment does not have a
contract with the Polish cooperative authority allowing for the installation of
the cable network; or (4) @Entertainment does not pay the rent required under
the conduit agreement. In addition, as of June 30, 1999, TPSA was legally
entitled to terminate conduit agreements covering approximately 4% of
@Entertainment's subscribers as a result of @Entertainment's failure to comply
with certain terms of its conduit agreements with TPSA. Any termination by TPSA
of such contracts could result in @Entertainment losing its permits, the
termination of agreements with co-op authorities and programmers, and an
inability to service customers with respect to the areas where its networks
utilize the conduits that were the subject of such TPSA contracts.
In addition, some conduit agreements with TPSA provide that cables can be
installed in the conduits only for the use of cable television. If
@Entertainment uses the cables for a purpose other than cable television, such
as data transmission, telephone, or Internet access, such use could be
considered a violation of the terms of certain conduit agreements, unless this
use is expressly authorized by TPSA. There is no guarantee that TPSA would give
its approval to permit other uses of the conduits.
@Entertainment's DTH service is encoded, processed, compressed, encrypted,
multiplexed (i.e., combined with other channels), modulated (i.e., applied to
the designated carrier frequency for transmission to satellite) and transmitted
from its Maidstone, U.K. facility to geosynchronous satellites ("uplinked")
that receive, convert and amplify the digital signals and retransmit them to
earth in a manner that allows individual subscribers to receive and be billed
for the particular programming services to which they subscribe.
@Entertainment has a 5-year contract with British Telecommunications plc
("BT") for the provision and maintenance of uplink equipment at Maidstone.
Other than the BT uplink equipment, @Entertainment owns all the required
broadcasting equipment at the facility it leases in Maidstone. @Entertainment's
programming is currently transmitted to the transponders leased by
@Entertainment on Astra satellites 1E and 1F. @Entertainment's DTH signal is
beamed by these satellites back to earth where it may be received in Poland by
@Entertainment's DTH subscribers with the appropriate satellite reception
equipment and by @Entertainment's cable headends for distribution to cable
subscribers.
Programming. @Entertainment currently offers between 30 and 70 channels to
its cable television basic tier subscribers. The basic tier generally includes
all Polish terrestrial broadcast channels, most major European satellite
programming legally available in Poland, regional and local programming and, on
most of its cable networks, Wizja TV, including @Entertainment's proprietary
Polish language channel, Atomic TV. @Entertainment's cable television basic
tier offerings vary by location.
@Entertainment also offers cable subscribers an intermediate tier, which
includes approximately 17 to 24 channels, and a broadcast package, which
includes 6 to 12 broadcast channels. The intermediate tier costs approximately
one-half of the amount charged for the basic tier and is designed to compete
with small cable operators on the basis of price. The broadcast package costs
substantially less than the intermediate tier and includes the all Polish
terrestrial broadcast channels which often have poor quality when broadcast
over the air.
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<PAGE>
@Entertainment's DTH subscribers currently receive @Entertainment's Wizja
TV programming, which consists of approximately 24 channels.
@Entertainment, both directly and through joint ventures, produces
television programming for distribution. @Entertainment has developed a multi-
channel, primarily Polish-language programming platform under the brand name
Wizja TV. Wizja TV's current channel line-up includes five channels, Atomic TV,
Wizja 1, Wizja Pogoda, Twoja Wizja and Wizja Sport, which are owned and
operated by @Entertainment, and 20 channels that are produced by third parties,
11 of which are broadcast under exclusive agreements for pay television in
Poland.
@Entertainment currently distributes Atomic TV and intends to distribute
the Wizja TV programming package to third party cable operators in Poland on a
per-subscriber fee basis. @Entertainment exchanged letters with two major cable
associations in Poland, representing an aggregate of approximately 2.6 million
subscribers (including @Entertainment's cable subscribers), with the objective
of making the Wizja TV programming package available for distribution within
the cable networks of other providers that are members of the associations.
Budgeted Capital Expenditures and Capital Resources. We have budgeted
approximately NLG321.1 million for capital expenditures in 1999, primarily to
upgrade @Entertainment's network and make its systems ready for telephone and
Internet services. We expect to provide advances to @Entertainment to fund
these expenditures. Following our acquisition of @Entertainment, we began
consolidating @Entertainment's debt.
Competition. @Entertainment operations compete with cable, DTH and other
providers of multi-channel pay television operators in Poland. These include
numerous operators of small cable networks, which are active throughout Poland,
and which pose a competitive threat to @Entertainment because they often incur
lower capital expenditures and operating costs and therefore have the ability
to charge lower fees to subscribers than does @Entertainment. In addition,
certain of @Entertainment's competitors or their affiliates have greater
experience in the cable television industry and have greater resources
(including financial resources and access to international programming sources)
than @Entertainment. The largest competitors of @Entertainment in Poland
include Bresnan Communications, which was recently acquired by the Polish
conglomerate Elektrim S.A., and Multimedia Polska, S.A. In addition,
@Entertainment understands that a number of cable operators in Poland have
formed, or are in the process of forming, a consortium for the joint creation
and production of Polish-language programming.
Regulation. The regulatory environment in which @Entertainment operates
significantly affects the operations of its business, including the
profitability and the timing of introduction of our new business lines. See
"Regulation--Poland."
Corporate Ownership. In August 1999, we acquired 100% of @Entertainment. In
July 1999, we and @Entertainment were sued by minority shareholders of an
@Entertainment subsidiary claiming damages in the amount of a percentage of the
amount paid by us for @Entertainment's common stock. See "Risk Factors--Our
recent acquisition of @Entertainment exposes us to a number of risks."
125
<PAGE>
Romania
The following selected financial data have been derived from the
financial statements of the respective companies described below. The
financial statements for our operating companies in Romania have been
prepared in accordance with Dutch GAAP with the functional currency of the
Romanian leu. The following selected financial data has been converted to
Dutch guilders using the average exchange rate for the relevant period which
corresponds in each case to the average exchange rate used in the respective
companies' financial statements for the periods indicated. Because Eurosat
was acquired in May 1998, only seven months of its results have been included
in the 1998 financial results for the Romanian systems.
<TABLE>
<CAPTION>
Year Ended December Nine Months
31, Ended
-------------------- September 30,
1997 1998 1999
--------- --------- -------------------
(unaudited)
(in thousands, except percentages)
<S> <C> <C> <C> <C>
Selected Financial Data:
Revenues(1)................. (NLG) 2,192 4,161 3,931
Net operating income
(loss)..................... (NLG) 1,049 1,454 1,336
Adjusted EBITDA............. (NLG) 1,359 1,905 1,625
Adjusted EBITDA margin...... 62.0% 45.8% 41.3%
Total capital expenditures.. (NLG) 857 1,153 605
Cash flows from operating
activities................. (NLG) 1,232 423 6,895
Cash flows investing
activities................. (NLG) (1,012) (1,289) (9,021)
Cash flows from financing
activities................. (NLG) (192) 1,076 2,283
<CAPTION>
As of December 31,
-------------------- As of September 30,
1997 1998 1999
--------- --------- -------------------
<S> <C> <C> <C> <C>
Other Data:
Homes passed................ 69,620 98,174 143,274
Basic video subscribers..... 40,188 61,999 94,234
Basic video penetration..... 57.7% 63.2% 65.8%
Average monthly service
revenue per video
subscriber................. (NLG) 4.40 6.60 6.42
</TABLE>
Overview/Growth Strategy. We are currently involved in the development of
three cable companies in Romania:
. our 100%-owned Control Cable Ventures, with operations in Ploiesti and
Slobozia;
. our 100%-owned Multicanal Holdings, located in Bucharest, Romania's
capital; and
. our 51%-owned Eurosat in Bacau.
Since 1993, when we first entered the Romanian market, we have widened our
customer base through acquisition and marketing activities in conjunction with
build out. As of September 30, 1999, our combined Romanian operations passed
approximately 143,250 homes and served approximately 94,225 subscribers,
representing a penetration rate of 65.8%. There are no current plans to launch
telephone or Internet/data services in the Romanian systems.
Network. In 1994, we initiated an intensive upgrade of our Romanian systems
to rebuild the network from 300 MHz to 550 MHz. In Bacau, it will be 750 MHz.
The rebuild in Ploiesti, which has 24,000 subscribers, is complete. The rebuild
in Slobozia and Bacau, which together have 30,000 subscribers, is expected to
be completed by 2000. We currently have no plans to introduce two-way services
in our Romanian systems.
Programming. Our Romanian systems offer subscribers three different tiers
of programming providing a total of approximately 28-34 channels:
. basic tier;
. an expanded basic tier; and
. a premium tier, HBO Romania.
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<PAGE>
HBO Romania was launched in Ploiesti and Bucharest in February and April
1998, respectively. HBO Romania was also launched in Slobozia in November 1998
and in Bacau in February 1999. We also launched an expanded basic tier in
Ploiesti in April 1998. Approximately 12 channels, including HBO Romania, are
available in Romanian.
Results of Operations. For the year ended December 31, 1998, the combined
Romanian systems had total revenues of approximately NLG4.2 million and
Adjusted EBITDA of approximately NLG1.9 million. For the year ended December
31, 1997, our combined Romanian operations had total revenues of approximately
NLG2.2 million and Adjusted EBITDA of approximately NLG1.4 million.
Budgeted Capital Expenditures and Capital Resources. The combined Romanian
systems have budgeted approximately NLG1.5 million for capital expenditures in
1999, primarily to finish upgrading the networks. Our Romanian networks are
self-funding and have no third-party debt.
Competition. Because there are no exclusive franchises awarded in Romania,
we face competition in all four franchise areas in which we operate. While
there is little overbuild within the cities, the homes are divided among a
variety of competitors in each city. Including our systems, there are three
operators in Ploiesti, four operators in Bacau, two operators in Slobozia and
eight major operators in Bucharest.
Regulation. Exclusive franchises are not awarded in Romania. We have
received non-exclusive licenses to operate cable television systems in all of
our service areas. These renewable licenses are valid for another six years.
The cable television industry is regulated by the Romanian audiovisual law,
which went into effect in June 1996, and is administered by the National
Audiovisual Council.
Corporate Ownership. We have interests in five Romanian cable companies. We
own 100% interests in Multicanal Holdings, SRL, located in Bucharest, and
Control Cable Ventures, SRL, with operations in Ploiesti and Slobozia. In July
1999, we also purchased 100% of Diplomatic International with 38,000
subscribers and Selectronic, SRL with 15,700 subscribers. We also own a 51%
interest in Eurosat, with operations in Bacau. The other shareholders of
Eurosat are local investors.
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<PAGE>
Slovak Republic
The following selected financial data has been derived from the financial
statements of the respective companies. The financial statements for UPC
Slovensko s r.o. (formerly SKT spol s r.o.) have been prepared in accordance
with Slovak GAAP with the functional currency of Slovak koruna. The financial
statements for the other Slovak Republic companies have been prepared in
accordance with Dutch GAAP with the functional currency of Slovak koruna. The
following selected financial data has been converted to Dutch guilders using
the average exchange rate for the relevant period which corresponds in each
case to the average exchange rate used in the respective companies' financial
statements for the periods indicated.
<TABLE>
<CAPTION>
UPC Slovensko s r.o. Other Slovak Republic
------------------------------- ------------------------------
Year Ended Nine Months Year Ended Nine Months
December 31, Ended December 31, Ended
---------------- September 30, --------------- September 30,
1997 1998 1999 1997 1998 1999
------- ------- ------------- ------ ------- -------------
(unaudited) (unaudited)
(in thousands, (in thousands,
except percentages) except percentages)
Selected Financial Data:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ (NLG) 10,566 10,863 8,464 1,547 1,652 1,920
Net operating income
(loss)................. (NLG) (3,257) (2,733) (2,449) (1,826) (3,068) (1,308)
Adjusted EBITDA......... (NLG) 5,633 6,958 4,279 (1,011) (1,736) (79)
Adjusted EBITDA margin.. 53.3% 64.1% 50.6% n/a n/a N/A
Total capital
expenditures........... (NLG) 18,454 2,833 4,215 2,799 6,804 3,295
Cash flows from
operating activities... (NLG) 23,263 (24,457) 3,538 (2,594) (709) (662)
Cash flows from
investing activities... (NLG) (18,483) (2,857) (4,634) (3,863) (10,689) (5,502)
Cash flows from
financing activities... (NLG) (4,872) 27,326 3,374 6,396 11,567 3,708
<CAPTION>
As of As of As of As of
December 31, September 30, December 31, September 30,
---------------- ------------- --------------- -------------
1997 1998 1999 1997 1998 1999
------- ------- ------------- ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Other Data:
Homes passed............ 160,716 165,622 173,389 22,193 37,641 47,010
Basic video
subscribers............ 154,653 156,819 160,765 18,476 21,044 30,827
Basic video
penetration............ 96.2% 94.7% 92.7% 83.3% 55.9% 65.6%
Average Mo. service rev.
per video subscriber... (NLG) 4.99 5.38 5.56 6.77 7.20 8.01
</TABLE>
Overview/Growth Strategy. We entered the Slovak market in 1995 and
currently have over 344,325 homes in our franchise areas. With respect to our
existing operations excluding UPC Slovensko, we are developing, together with a
local partner, projects in the cities of Trnava, Zvolen, Nove Zamky and Levice.
We own 95% of our projects in Trnava and 100% of our projects in Zvolen, Nove
Zamky and Levice. Construction of the network in Trnava has been completed. Our
networks in the cities of Zvolen, Nove Zamky and Levice are all currently under
construction, which is expected to be substantially completed by the end of
1999.
In June, we completed the acquisition of UPC Slovensko, which operates a
cable system in Bratislava, the capital of the Slovak Republic, and several
other cities in the Slovak Republic. The purchase price was $43.25 million
(NLG90.7 million). This acquisition made us the largest cable operator in the
Slovak Republic. Pro forma for the UPC Slovensko acquisition, our operations
passed approximately 220,375 homes as of September 30, 1999. We intend to
launch Internet/data services in its Slovak service areas by mid-2000 and
telephone services in all systems by early 2003.
Network. The Slovak systems own the hybrid fiber coaxial cable network from
the headend to the home. As part of the UPC Slovensko acquisition, we acquired
an 860 MHz cable system. We plan to introduce internet services in Bratislava
in 2000 and in other Slovak cities by 2003.
Programming. The Slovak systems offer subscribers three tiers of
programming with a total of approximately 34 channels. Approximately 11
channels are available in both the Slovak and Czech languages. Currently, 88.2%
of the subscribers subscribe to the expanded basic tier.
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<PAGE>
Result of Operations. For the year ended December 31, 1998, our systems
other than UPC Slovensko had combined total revenues of approximately NLG1.7
million and Adjusted EBITDA of approximately negative NLG1.7 million. For the
year ended December 31, 1997, these systems had total revenues of approximately
NLG1.5 million and Adjusted EBITDA of approximately negative NLG1.0 million.
For the year ended December 31, 1998, UPC Slovensko had total revenues of
approximately NLG10.9 million and Adjusted EBITDA of approximately NLG7.0
million. For the year ended December 31, 1997, UPC Slovensko had total revenues
of approximately NLG10.6 million and Adjusted EBITDA of approximately NLG5.6
million.
Budgeted Capital Expenditures and Capital Resources. The Slovak systems
have budgeted approximately NLG2.0 million for capital expenditures in 1999,
primarily to complete construction of the network. The Slovak systems expect to
fund these expenditures through available cash flow and support from us. The
Slovak systems have no third-party debt.
Competition. The Slovak systems have limited competition from a MMDS system
in Bratislava. In Banska Bystrica and Zvolen, our systems have one competitor.
In all other cities, our systems face no material competition.
Regulation. The regulatory environment in which our Slovak subsidiaries
operate significantly affects the operation of their business, including
profitability and the timing of introduction of our new business lines. See
"Regulation--Slovak Republic."
Corporate Ownership. We own 100% of UPC Slovensko and between 95.0% and
100% of our other Slovak operations.
Other Systems
Malta: Melita
Overview/Growth Strategy. Melita operates an exclusive franchise network in
Malta. Currently, we and Melita Cable Holdings each own 50% of Melita. As of
September 30, 1999, Melita passed approximately 167,725 homes and had 75,000
basic video subscribers representing a 44.7% penetration rate in its service
area. Melita's growth strategy is to continue to market aggressively its
service to homes in its franchise areas, as well as to provide more programming
to increase its appeal to subscribers.
Network. Melita owns the complete cable television infrastructure from the
headend to the home. The upgrade to high capacity 860 MHz two-way capability,
which has been initiated this year and is expected to be completed by 2000,
will enable Melita to provide Internet access and other enhanced services.
Pending litigation and recent legislation may, however, affect our ability to
offer Internet/data services in Malta. See "Regulation--Malta."
Programming. Melita currently provides 52 channels of programming, grouped
in three tiers:
. reception, which includes local and foreign off-air channels that are
received with an antenna and retransmitted over the cable network;
. basic, which includes reception service plus fourteen additional
satellite services that are received with a satellite dish and
retransmitted over the cable network; and
. TV Plus (reception and basic services plus nine additional satellite
services).
Because English is spoken in Malta by over 90% of the population, Melita is
able to take advantage of the abundant supply of English language programming
available for licensing. In 1996, Melita created a "live" sports channel
showing English Premier League Football and in 1997, introduced a second "live"
sports channel featuring Italian soccer, as well as four other new channels. In
August 1998, Melita combined the features into a full-time sports channel,
which includes other sports events and local productions.
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<PAGE>
Results of Operations. For the year ended December 31, 1998, Melita had
revenues of approximately NLG30.0 million and Adjusted EBITDA of approximately
NLG11.1 million. For the same period, Melita had average monthly service
revenue per video subscriber of approximately NLG37.0. For the year ended
December 31, 1997, Melita had total revenues of approximately NLG23.0 million
and Adjusted EBITDA of approximately NLG9.7 million.
Budgeted Capital Expenditure and Capital Resources. Melita has budgeted
approximately NLG24.4 million for capital expenditures in 1999, primarily to
upgrade its network to full two-way capacity, purchase customer premises
equipment, implement a subscriber management system and purchase its own
premises. The network upgrade and the introduction of new services is expected
to be funded through available cash flow and bank financing. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations--
Liquidity and Capital Resources--Debt Facilities."
Competition. With the exception of a small number of home satellite
receivers and a few private hotel cable installations, competition in Malta is
limited primarily to approximately 15 Italian broadcast channels.
Regulatory Issues. The regulatory environment in which our Maltese
subsidiary operates significantly affects the operation of its business,
including our ability to introduce additional services such as Internet/data
services. See "Regulation--Malta."
Corporate Ownership. We currently own 50% of Melita. Melita Cable Holdings
owns the remaining 50%.
Strategic Programming Investments
In July 1999, we acquired an initial 4.8% of SBS, which owns and operates
television and radio broadcasting stations in Scandinavia and other European
markets. SBS offers television programming services in Sweden, Denmark,
Norway, Flemish Belgium, The Netherlands and Hungary. In August 1999, we
acquired an additional 8.5% interest, increasing our total interest in SBS to
13.3%.
SBS owns and operates television and radio broadcasting stations in
Scandinavia and other European markets. SBS currently owns and operates
television stations which broadcast into Norway, Sweden, Denmark, Flemish
Belgium and the Netherlands, and together with two European partners, operates
the first national private television network in Hungary. Additionally, SBS
owns a minority interest in a national television network in Italy, operates a
television station in Slovenia under the terms of a management and funding
agreement and owns 50% of a Swiss company which in March 1999 was awarded a
national terrestrial broadcasting license to broadcast in Switzerland. SBS
also owns and operates radio stations, which broadcast in Denmark, Sweden and
Finland.
SBS called for redemption all $155.0 million of its 7 1/4% convertible
subordinated debentures due 2005. Holders of the debentures were required to
redeem their debentures for cash or convert them into SBS common shares not
later than July 30, 1999. We have acquired the debentures tendered for
redemption and immediately converted them into 847,680 SBS shares. We
purchased newly-issued common shares from SBS to bring our interest in SBS to
13.3%.
Other Business Information
Employees
As of September 30, 1999, we, together with our consolidated subsidiaries,
had approximately 4,800 employees. We believe that our relations with our
employees are generally good.
As of December 31, 1995, 1996, 1997 and 1998 we, together with our
consolidated subsidiaries, had approximately 407, 704, 815 and 1,500
employees, respectively.
Certain of our operating subsidiaries, including our Austrian, Dutch and
Norwegian systems, are parties to collective bargaining agreements with some
of their respective employees.
130
<PAGE>
Legal Proceedings
We and our operating companies are not parties to any material legal
proceedings. From time to time, we and our operating companies may become
involved in litigation relating to claims arising out of its operations in the
normal course of business.
Properties
We lease our corporate offices in Amsterdam and London. Our operating
companies and subsidiaries generally lease their offices as well. We own small
parcels of property in various countries that we use for our network equipment.
In other countries, we have been able to obtain easements for this equipment.
131
<PAGE>
REGULATION
The provision of video, telephone, Internet/data and broadcasting services
in the countries in which we and our new acquisitions operate is regulated. The
scope of regulation varies from country to country, although in some
significant respects regulation in our Western European markets is harmonized
under the regulatory structure of the European Union ("EU"). Set forth below is
a summary of the regulatory environment in the EU and the countries in which we
operate, or expect to operate, following completion of the new acquisitions.
European Union
Austria, The Netherlands, Belgium, France, Sweden, Denmark, Finland, the
United Kingdom and Italy are all member states of the EU. As such, these
countries are required to enact national legislation which implements
directives issued by the EU Commission and other EU bodies. In recent years,
the EU has led the liberalization of the telecommunications and video services
sectors, which includes the use of cable networks to provide public voice
telephone and other telecommunications services, in EU member states. Although
not an EU member state, Norway is a member of the European Economic Area and
has generally implemented or is implementing the same principles on the same
timetable as EU member states. Poland, which is in the process of negotiations
of its membership into the EU, started adjusting its regulatory system to EU
requirements and currently is in the process of revising its broadcast and
copyright regulations. As a result, most of the markets in which we operate or
have pending acquisitions have been significantly affected by regulation
initiated at the EU level. As it develops, such EU regulation will continue to
have a significant effect on these markets, including future developments
relating to the convergence of telecommunications, media and information
technology.
The EU Commission has started to review the consequences of this
convergence for the regulatory environment. This review will take place during
1999 and may result in changes of the current regulatory framework, but the
scope of such changes cannot be predicted at this time.
Telephone and Internet/Data Services
Liberalization of Telecommunications Services and Infrastructure. A central
aim of the liberalization process has been to reduce the monopoly power of the
incumbent telecommunications operators in order to introduce competition in the
European telecommunications market. Liberalization measures have been adopted
under the EU Treaty's competition rules and harmonization measures have been
put in place through the adoption of Open Network Provision directives (the so-
called "ONP framework"). ONP includes the principle that public
telecommunications networks have to be made accessible on the basis of
objective, transparent, public and non-discriminatory conditions. The ONP
framework applies to providers of public telecommunications networks or
services having significant market power in the relevant market. At the moment
the ONP principles do not apply to video networks or services. Any future
application of ONP principles to video networks or services could have a
material effect on our business throughout the EU. Following the EU
Commission's Services Directive (90/388/EC), dated June 28, 1990, as amended,
the exclusive rights of incumbent operators to provide telecommunications
services were gradually removed so that competing operators and service
providers would be entitled to offer all telecommunications services other than
public voice telephone. The incumbent telecommunications operators invariably
owned the national networks, however, and the lack of an alternative
infrastructure to provide such liberalized services operated as a major barrier
to entry into the market by competitors. In an effort to overcome this barrier,
the EU introduced the "Cable Television Networks Directive" (95/51/EC amending
directive 90/388/EC), dated October 18, 1995, which required member states to
remove existing restrictions on the use of cable television networks to provide
telecommunications services other than public voice telephone services. As a
result, cable television operators became able to use their networks to provide
telecommunications services except for public voice telephony. In 1996, the EU
Commission issued the "Full Competition Directive" (96/19/EC amending directive
90/388/EC), which required the European Community Member States to remove all
remaining exclusive rights over public voice telephone and public
telecommunications networks of incumbent public voice telephone operators by
January 1, 1998. Certain Member States (Luxembourg, Spain, Greece, Portugal and
Ireland) requested and obtained
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temporary relief from the Full Competition Directive. Spain, Portugal and
recently Ireland have decided to accelerate the liberalization process. The
establishment and provision of telecommunications networks were also
liberalized under this directive. As a result of this directive, our Western
European operating companies may establish and provide telecommunications
networks and/or services, including public voice telephone and Internet/data
services, through their cable networks, subject to obtaining the necessary
licenses and authorizations.
Under the Cable Television Networks Directive, telecommunications operators
that have exclusive rights to provide cable television network infrastructure
in a given area and achieve an annual turnover in the relevant
telecommunications market of more than (Euro)50 million must account separately
for their telecommunications services and any cable television services. In The
Netherlands and Belgium, this requirement applies to all telecommunications
operators providing both cable television and other telecommunications services
under national law irrespective of the above-mentioned requirements. Should any
of our operating companies in the EU with exclusive rights to cable television
infrastructure achieve the requisite turnover, they would become subject to
these requirements.
In June 1999, the EU Commission adopted a directive amending the Services
Directive (90/388/EC) requiring member states to enact legislation directing
certain telecommunications operators to separate their cable television and
telecommunications operations into distinct legal entities. This directive is
intended to aid the development of the cable television sector and to encourage
competition and innovation in local telecommunications and high speed Internet
access. The directive includes competition safeguards to deter anticompetitive
cross-subsidies or discrimination by incumbent telecommunications operators as
they enter into cable television or broadband services.
Interconnection. Because new telecommunications operators need to
interconnect their networks with the fixed public telephone network, the EC
Council of Ministers and the European Parliament adopted the "Directive on
Interconnection in Telecommunications" (97/33/EC amended by Directive
98/61/EC), which sets forth the general framework for interconnection,
including general obligations for telecommunications operators to interconnect
with their networks. The directive requires member states to impose obligations
on public telecommunications network operators to negotiate interconnection
agreements on a non-discriminatory basis. Public telecommunications network
operators with significant market power (which, although it may vary, is
presumed when an operator has 25% or more of the relevant market) are subject
to additional obligations. They must offer interconnection without
discriminating between operators that offer similar services, and their
interconnection charges must follow the principles of transparency and be based
on the actual cost of providing the interconnection. The directive also
contains provisions on collocation of facilities, number portability with
certain exceptions, supplementary charges to contribute to the costs of
universal service obligations and other interconnection standards. As a result,
if the principles in the directive are fully applied, our operating companies
in the EU and Norway should be able to interconnect with the public fixed
network and other major telecommunications networks on reasonable terms in
order to provide their services. There can be no assurance, however, that we
will be able to obtain from incumbent telecommunications operators
interconnection on terms and conditions or at prices satisfactory to us without
protracted negotiations or involvement in time-consuming regulatory
proceedings.
Licensing. EU telecommunications policy has also aimed to harmonize the
licensing requirements for the provision of public telecommunications services.
As a result of the "Licensing Directive" (97/13/EC), which became effective on
December 31, 1997, member states are required to adopt national legislation so
that providers of telecommunications services generally require either no
authorization or a general authorization which is conditional upon "essential
requirements," such as the security and integrity of the network's operation.
Licensing conditions and procedures must be objective, transparent and non-
discriminatory. Member states may issue individual licenses in certain
situations. For example, the provision of public voice telephone services and
the establishment or provision of public telecommunication networks may be
subject to individual licenses. In addition, telecommunications operators with
significant market power may be required by member states to hold individual
licenses carrying more burdensome conditions than the authorizations held by
other providers. Significant market power is typically 25% of the relevant
market. License fees can only include administrative costs except in the case
of scarce resources where additional fees are allowed.
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Regulation of the Internet. Although Internet-specific regulations have not
been issued, EU policy may develop harmonized principles of "responsibility of
content" to apply to Internet access providers analogous to those applicable to
publishing companies. We do not expect such regulations to materially adversely
affect our Internet business plans.
Video Services
Video Services through Telecommunications Networks. Most of our operating
companies are the only cable television operators in their franchise areas. As
with the telecommunications sector, the cost of building a network to provide
video services is a considerable disincentive to potential new entrants in the
video services market. Our operating companies may face competition in the long
term in their franchise areas from new entrants providing video services
through the infrastructure of incumbent telecommunications operators and
potential new entrants. In The Netherlands, for example, where there are no
restrictions on the use of telecommunications infrastructure for the provision
of cable television services, the incumbent telecommunications operator is
testing whether it will be able to provide video services through its fixed
networks.
Conditional Access. In order to enable further competition in pay
television services and accelerated development of advanced television
services, the EU Council and Parliament passed the "Advanced Television
Standards Directive" (95/47/EC), dated October 24, 1995, which requires member
states to regulate the offering of conditional access systems, such as program
decoders used for the expanded basic tier services offered by many of our
operating companies. Providers of such conditional access systems are required
to make them available on a fair, reasonable and non-discriminatory basis to
other video service providers, such as broadcasters.
Broadcasting. The "Television Without Frontiers Directive" (97/36/EC),
dated June 30, 1997, is intended to introduce freedom of broadcasting in the
EU. Generally, broadcasts emanating from and intended for reception within a
country have to respect the laws of that country. Under the directive, other EC
member states are required to allow broadcast signals of broadcasters in other
member states to be freely transmitted within their territory so long as the
broadcaster complies with the law of the originating member state. The
directive also establishes quotas for the transmission of European-produced
programming and programs made by European producers who are independent of
broadcasters. Television advertising and sponsorship in member states will have
to comply with certain minimum rules and standards, although member states may
set more detailed and stricter rules for certain matters.
Apart from the Directive, the other primary source of European regulation
affecting television broadcasting is the 1989 European Convention on
Transfrontier Television (the "Convention"). The Convention is effective in
those countries that have ratified it. Both the United Kingdom and Poland have
ratified the Convention. The Convention currently provides that the country in
which a broadcaster uplinks its programming to the satellite has jurisdiction
over that broadcaster.
A change to the Convention (the "Amendment") was agreed by parties to the
Convention and will be effective no later than October 1, 2000. The Amendment
will bring the Convention into conformity with the Directive's establishment
test, providing that a broadcaster should be regulated primarily by the
authorities in the Convention country in which the broadcaster is established.
Additionally, the Amendment would provide that when a broadcaster's channel is
wholly- or principally-directed at a country, other than where it is
established, for the purpose of evading the laws of that country in the areas
covered by the Convention, the broadcaster would become subject to the laws of
the country of reception. The Amendment allows parties to the Convention to
designate that certain important events (e.g. major sporting events) cannot be
broadcast exclusively by a single television station so as to deprive a large
proportion of the public of that Convention country from seeing the event live
or on a deferred coverage basis on free-to-air television.
We plan to enter into joint venture agreements with programming providers
in order to launch eight new channels, which we intend to broadcast to our
operating companies and other cable television operators for distribution
through their networks. We understand that the Television Without Frontiers
Directive will apply to the broadcasting of these joint-venture channels to
such operating companies so that one broadcasting license within an
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EC member state will permit us to broadcast such channels to cable operators
throughout the EU. Where the joint-venture partner is already a licensed
broadcaster within the EU, we believe the joint venture activities may fall
within the scope of our partner's broadcast license, and that the joint venture
could operate under the terms and conditions of that license. We also plan to
apply for a broadcasting license in an EU country to accommodate joint ventures
with those partners that do not have a broadcast license in a member state of
the EU or channels created without a partner. We are currently in discussions
with the regulatory authorities in The Netherlands and plan to obtain a
broadcasting license in The Netherlands.
Another major EU Commission Directive for broadcasting, "Directive on
Satellite Transmission and Cable Retransmission" (93/83/EC), dated September
27, 1993, requires member states to permit a satellite broadcaster to obtain
the necessary copyright license for its programs in just one country
(generally, the country in which the broadcaster is established), rather than
obtaining copyright licenses in each country in which the broadcast is
received.
In addition to national laws which implement the EU directives on
broadcasting described in "Regulation--European Union," various other types of
national broadcasting regulations apply to SBS. Over-the-air, terrestrial
television and radio broadcasters operate pursuant to licenses granted by
national or local regulatory authorities allowing use of certain radio
frequencies in a specified geographic area, generally for a limited duration
which can be renewed. Broadcasters operate subject to various regulatory
conditions such as limitations on advertising, program content and ownership.
Austria
Relationship with Municipalities
Each of the five municipalities in which the Telekabel Group offers
services holds, directly or indirectly, 5% of the local operating company and
each municipality has the right to appoint a director to the board of
management. Each member of the Telekabel Group has entered into an agreement
with its municipality. Under the agreement between Telekabel Wien and the City
of Vienna, decisions regarding the subscriber rates and programming content of
Telekabel Wien's basic subscription package require the unanimous approval of
Telekabel Wien's board of management, of which the city appoints one member.
While the board of management in the past has always unanimously approved these
decisions there can be no assurance that the municipality's director will
continue to approve these decisions in the future and not hinder the
implementation of our strategies for our video, telephone or Internet/data
services. If the managing directors cannot reach agreement, the parties have
agreed to call a shareholders meeting to decide the matter. Under Austrian law,
a majority shareholder such as us may generally take a decision at a
shareholders meeting rather than through the board of management. However, we
as the majority shareholder have never taken this action and do not anticipate
doing so in the future. The agreements between the other Telekabel Group
members and their municipalities require each member to consult with its
municipality prior to making similar business decisions.
Video Services
Regulatory Framework. The Cable and Satellite Broadcast Radio Law governs
the provision of video services in Austria. The Regional Radio and Cable
Broadcast Authorities regulate the operation of cable television networks.
Notifications. The Telekabel Group does not require a license to provide
video services. It need only notify the Regional Radio and Cable Broadcast
Authority of the services it intends to provide. The right to provide such
services is not exclusive, and new entrants could operate without entering into
agreements with municipalities.
Programming. Under the Cable and Satellite Broadcast Radio Law, the
Telekabel Group is required to carry two "must carry" public Austrian channels
in its basic tier. In July 1997, previous prohibitions on cable network
operators transmitting programming produced by them were lifted. Pursuant to
the terms of the agreement with the City of Vienna, however, Telekabel Wien is
prohibited from producing programming.
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Price Regulation. In addition to the approval of subscriber rates for the
basic tier services by the City of Vienna described above, pricing of the basic
tier is subject to price control by the Austrian Wage and Price Commission.
Approval from the Wage and Price Commission generally must be sought only when
the desired price increase is greater than 50% of the increase in the consumer
price index, and cost justification must be shown for such approval.
Historically, all of the Telekabel Group's price increase applications have
been approved. Pricing of services other than the basic tier is not regulated.
Telephone and Internet/Data Services
Regulatory Framework. The Telecommunications Act, which came into force
August 1, 1997, liberalized the telecommunications sector in Austria as of
January 1, 1998, in compliance with EU directives. As a result, cable
television networks may be used to provide telecommunications services as
described above under "--European Union--Telephone and Internet/Data Services."
Licenses. A telecommunications operator or service provider must obtain a
license issued by the Austrian telecommunications regulatory agency, the
Telekom Control Commission, to provide public voice telephone services and for
the public offer of leased lines. Telekabel Wien has received a license to
provide public voice telephone services in the entire Republic of Austria and a
license for the public offer of leased lines through its cable network. The
licenses are granted for an unlimited period of time.
Interconnection. Austria's Telecommunications Act generally implements the
terms of the EU Directive on Interconnection in Telecommunications. In November
1998, Telekabel Wien entered into an interconnection agreement with PTA, the
incumbent operator. Difficulty and delay in negotiations and agreement led
Telekabel Wien to seek the intervention of the Austrian telecommunications
regulator, which determined the principal terms of the agreement. PTA brought
an action in the Austrian courts against some of the major carriers to revise
the terms of the interconnection arrangement. The Supreme Constitutional Court
ruled in March 1999 that the PTA's constitutionally guaranteed rights were not
infringed. However, the court left open the issue of whether the decree issued
by the telecommunications regulator was otherwise lawfully issued. The case is
now pending before the Austrian Supreme Administrative Court.
Price Regulation. Although there are no voice telephone pricing regulations
currently applicable to Telekabel Wien, the Telekom Control Commission must be
notified of the tariff structure and any subsequent rate increases. In
addition, if Telekabel Wien were held to have significant market power (as
defined in Austria's Telecommunications Act) with respect to the services
offered, certain matters including tariffs would become subject to the approval
of the Telekom Control Commission.
Internet/Data Services. Internet/data services are regulated as
telecommunications services under Austria's Telecommunications Act. Under the
Telecommunications Act, the Telekabel Group does not require licenses to
provide Internet/data services, and such services are not subject to price
regulations. It need only notify the Telekom Control Commission of the services
it intends to provide.
Belgium
Video Services
Authorizations. In Belgium, a cable operator needs to obtain a governmental
authorization from the appropriate Community to operate a cable television
system. The Belgium Communities, namely the French Community, the Flemish
Community and the German-speaking Community, have exclusive jurisdiction to
regulate cable television, including programming content, in their respective
language areas. The Flemish and French Communities, as well as the Federal
government, have overlapping jurisdiction in the bilingual area of Brussels
where UPC Belgium operates. During 1996, 1997 and 1998, all of UPC Belgium's
non-exclusive authorizations were renewed for nine years. Special
authorizations are also required for the distribution of non-EU programs, both
in Flanders and in Brussels, and we have requested a special authorization in
Brussels. While this request has been
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pending, we have been distributing such programming, which could (but we
believe is unlikely to) expose us to various penalties, including monetary
fines, discontinuance of such programming and impairment of our cable
authorizations.
Programming. In all the regions of Belgium, cable television operators are
required to transmit particular local, national and other channels as part of
their basic tier. There are usually between 11 and 13 of these "must-carry"
channels. We are engaged in litigation with Canal+ over whether we are required
to carry its digital multiplexed programming. If we are not successful, we may
be required to pay monetary penalties and be ordered to carry such programming.
The Court of Appeals in Brussels issued an order (interim decision) for us to
distribute Canal+ digital tier on our network with a fine of BEF100,000 for
each day of delay. The court decided among other things that Canal+ should be
considered a "must carry" channel. As a result, UPC Belgium currently
distributes Canal+ programs; however, various actions relating to the court's
decision are pending before the Court and competition authorities.
Price Regulation. Price increases require the approval of the Ministry of
Economic Affairs and must be justified by an increase in the cost of providing
the service. Cost-justified increases are generally approved as long as the
increase is below the level of inflation. Historically, all of UPC Belgium's
requested price increases have been approved. We have filed a complaint pending
before the Belgian competition authority alleging that the competing cable
systems in Leuven is charging prices below its cost in violation of the laws
against unfair competition.
Franchise Fees. In Etterbeek, UPC Belgium will pay the municipality an
annual amount for use of the municipality-owned cable system. Since 1995, cable
regulations have come into force that grant cable operators a right of way for
the use of public and private property to install and exploit cable networks.
Prior to the 1995 regulations, UPC Belgium was a party to concession agreements
with the municipalities in its franchise areas, which obliged it to pay certain
franchise fees. UPC Belgium has not paid franchise fees since 1995 when the
cable regulations went into effect. Only one small municipality continues to
request payment of the old franchise fees, which amount to 5% of the operating
system's annual gross revenues, but no litigation has been filed on this issue.
UPC Belgium does not believe that it is obliged to pay these fees because it
believes that regulations adopted in 1987 and the 1995 regulations have
superseded the concession agreements.
Telephone and Internet/Data Services
Regulatory Framework. The provision of cable telephone is governed by the
law of March 21, 1991, as amended by the law of 1997, together with
regulations. These provisions allow telecommunications services to be provided
through cable television networks as described above under "--European Union--
Telephone and Internet/Data Services." In line with the liberalization process
in the EU, the Belgian Parliament adopted in December 1997 a law amending the
law of 1991 and abolishing the remaining monopoly rights of Belgacom, the
incumbent telecommunications operator. As a result, other telecommunications
operators may begin to offer public voice telephone services in Belgium. The
other main telecommunication companies which have begun to offer public voice
telephone services in Belgium are Telenet BT, Unisource and Mobistar.
Licenses. In January 1999, UPC Belgium received a permanent license to
build and operate a public telecommunications network. UPC Belgium plans to
submit an application for a license to offer voice telephone services and
expects to receive a license in 2000. Subsequently, UPC Belgium plans to enter
into an interconnection agreement with Belgacom. UPC Belgium's telephone
services will not be subject to rate regulation, but UPC Belgium may be
required to contribute to a universal service fund under regulations which are
being developed.
Internet/Data Services. The provision of Internet/data services in Belgium
is also governed by the law of March 21, 1991, as amended, pursuant to which
UPC Belgium must make certain notifications to the Institut Belge des Postes et
Telecommunications regarding the services it intends to provide. UPC Belgium
has made these notifications. UPC Belgium's permanent license to build and
operate a telecommunications network authorizes it to offer Internet/data
services on its own infrastructure. These services are not subject to rates
regulation.
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France
Video Services
Regulatory Framework. Cable television operators must obtain licenses
granted by the Conseil Superieur de l'Audiovisuel and must also enter into
agreements with local authorities covering public service delegation and/or
public domain occupancy.
Authorizations. Mediareseaux obtained in September 1997 licenses from the
Conseil Superieur de l' Audiovisuel to operate cable networks for audio-visual
services in the territory of Syndicat Mixte de Videocommunication de l'Est
parisien and the territory of the city of Rosny-sous-Bois, valid until 2026 and
2022, respectively. Mediareseaux's, Videopole's, RCF's and Time Warner Cable
France's agreements with the local authorities govern, among other things, its
channel line-up and cable subscription rates. The agreements also give the
respective territories the option to purchase Mediareseaux's network at the
expiration of the agreements for a price equal to its usage value as estimated
under the terms and conditions of the agreements.
Between 1989 and 1992, RCF's subsidiaries obtained licenses from the
Conseil Superieur de l'Audiovisuel to operate cable networks distributing radio
and television broadcasting services in the cities of Lorient, La-Roche-sur-
Yon, Valenciennes, Bruay-sur-Escaut, Antibes-Juan les Pins, Mandelieu, Cholet,
Nevers, Chateauroux, Saint Maur, Deols, Poinconnet, in the territory of
Perigueux and in the territory of the associated cities of Coteau. These
authorizations are valid for a 20 year period.
Between 1995 and 1996, Time Warner Cable France's subsidiaries obtained
licenses from the Conseil Superieur de l'Audiovisuel to operate cable networks
for audio-visual services in the suburbs of Paris and Lyon and in the city of
Limoges. These authorizations are granted for a 30 year period for operating
cable networks in the suburbs of Lyon and in the city of Limoges (i.e. until
2025) and for a 20 year period for operating cable networks in the suburbs of
Paris (i.e. until 2016).
Various licenses from the Conseil Superieur de l'Audiovisuel are also held
by subsidiaries of Videopole to allow them to operate cable networks for audio-
visual services in various regions within France.
Programming. Cable television operators are required to transmit particular
channels as part of their basic tier service. Various other national laws also
restrict the content of programming distributed by cable television operators.
Price Regulation. Certain of the agreements of Mediareseaux, subsidiaries
of Time Warner Cable France, Videopole and RCF with local authorities require
the local authorities' approval for changes in the rates for basic tier
service.
Franchise Fees. Mediareseaux pays local authorities franchise fees of 1% of
their basic revenue. Certain of the agreements of Videopole, RCF or Time Warner
Cable France through its subsidiaries require the payment of a franchise fee,
the amount of which is based on a percentage of their basic revenue.
Telephone and Internet/Data Services
Regulatory Framework. The Minister of Telecommunications grants licenses
for the establishment and operation of a public telecommunications network and
for the provision of voice telephony services. France Telecom is obligated to
interconnect with other providers of telecommunications services at cost-
oriented rates and on nondiscriminatory terms. Local number portability is
available, which benefits new entrants. New telecommunications providers are
required to make universal service payments to France Telecom.
Licenses. Mediareseaux holds licenses granted by the Minister of
Telecommunications on June 17, 1998 for a public telecommunications network and
voice telephony services in three French departments in the Paris region. The
licenses were granted for a period of 15 years, are non-transferable and can
only be revoked for a material breach of telecommunications regulations. A
license extension to establish and operate a telecommunication network and to
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offer voice telephony services was requested by Mediareseaux in order to obtain
a nationwide license. The application was lodged with the French regulation
authority (Autorite de Regulation des Telecommunications) in July 1999. We
anticipate the authorization being granted within approximately four months of
the Autorite de Regulation des Telecommunications sending confirmation of
receipt.
Mediareseaux was granted temporary licenses in December 1998 and April 1999
to conduct experimental business in the field of wireless local loop in the
Champs sur Marne area.
Time Warner Cable France, Videopole and RCF do not hold any
telecommunications license in France at the present date.
Interconnection. Mediareseaux has entered into interconnection agreements
with France Telecom and two other new telecommunications providers.
Pricing Regulation. Mediareseaux's telecommunications services are not
subject to price regulation.
Internet/Data Services. Internet/data services do not require a license and
are not subject to price regulation.
The Netherlands
Video Services
Regulatory Framework. The liberalization of the Dutch telecommunications and
cable television sector has generally proceeded at a quicker pace than required
by the EU directives. The new Telecommunications Act took effect, with the
exception of a few provisions, on December 15, 1998 and further liberalized
these sectors. The Dutch Telecommunications Act governs, among other things,
the installation and operation of public telecommunications networks, which
include cable television networks, and the provision of telecommunications
services, including the provision of telephone and Internet/data services. The
provision of video services through the cable television network, and more
specifically content, is regulated primarily by the Dutch Media Act, as
amended, and the Media Decree. Agreements with municipalities and the
competition laws also impose restrictions on cable television operators.
Under the new Dutch Telecommunications Act, the Dutch Independent Post and
Telecommunications Authority ("OPTA") is charged with regulation and dispute
settlement in relation to the provision of telecommunications networks and
services. Under the media laws, video service providers are subject to certain
content requirements, which are overseen by the Commissariaat voor de Media.
Registration. The new Dutch Telecommunications Act does not require a
license for the installation, maintenance or operation of a cable network.
Network operators need only register with OPTA. The registration of a network
does not give an operator any exclusive right. Any registered person may
install, maintain and operate a new network alongside an existing one. The new
Dutch Telecommunications Act gives cable network operators and providers of
other public telecommunications networks, under certain conditions and
restrictions, rights of way to install and maintain cable, which are identical
to those previously exclusively enjoyed by KPN, the incumbent
telecommunications operator in The Netherlands.
Programming. Pursuant to the Dutch Telecommunications Act and the Media Act,
cable television network providers must transmit to all its subscribers at
least 15 programs for television and at least 25 programs for radio, including
approximately seven television and nine radio "must carry" channels. OPTA may
grant a total or partial exemption from these obligations if the provider does
not have significant market power in its area of coverage.
Our Dutch operating companies often purchased their cable television
networks from the local municipalities. Pursuant to the terms of the agreements
with the municipalities, the Dutch operating companies were obligated to
continue to provide basic tier services of between 20 and 30 television
channels, including the 15 required under the media laws.
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In April 1999, A2000 and the municipality of Amsterdam reached an agreement
on a large scale introduction of digital decoders and a reduction of the basic
cable television package to 15 public channels. The agreement means that A2000
will no longer charge carriage fees to commercial broadcasters for inclusion in
the basic cable television package and allows A2000 to migrate a number of
popular commercial channels to its expanded basic tier. During the period
preceding the migration to its digital platform, A2000 and the municipality of
Amsterdam have agreed on an interim solution for the basic tier service
increasing its current 26 channels to 32 channels with an increase in the
monthly subscription fee. Once the digital decoders are introduced the price
for the rate regulated 15 public channel basic fee will be reduced and the
price for the expanded basic tier will increase over time until it becomes
unregulated in 2001. The agreement will initially affect approximately 390,000
customers in the greater Amsterdam area. Negotiations with the remaining
municipalities are in process.
The carriage fees previously charged by A2000 to commercial broadcasters
are the subject of pending litigation. We do not believe this litigation will
have a materially adverse effect on us.
Cable television operators are allowed to transmit their own programs
within The Netherlands upon obtaining a broadcast license from the
Commissariaat voor de Media. The licensee must comply with the advertising and
sponsorship rules set forth in the media laws, which are consistent with the EU
Television without Frontiers Directive.
In July 1999, OPTA issued an interim decision in a dispute between Canal+
and A2000. OPTA has ordered A2000 to offer digital transmission of Canal+'s two
premium television channels commencing on September 15, 1999. OPTA has
predicted that this might reduce the transmission fee that Canal+ pays to us
from approximately NLG4.0 million to approximately NLG2.0 million, as A2000
would only need to use one rather than two 8 MHz channels for the transmission
of Canal+'s two programs. OPTA's decision, however, requires Canal+ to bear the
costs associated with adapting A2000's network to allow digital transmission.
OPTA has ordered A2000 to provide information to OPTA regarding its costs with
respect to setting its rate for carriage of Canal+'s channels. In August, the
court at Rotterdam ruled in administrative summary proceedings that OPTA was
entitled to order A2000 to offer Canal+ digital transmission of Canal+'s two
television channels, but that OPTA will first have to give a ruling on the rate
for digital carriage of Canal+'s channels and the amount of costs Canal+ will
have to bear associated with testing and adapting A2000's network to allow
digital transmission. It is expected that OPTA will give such ruling in the
near future.
On 17 August 1999, OPTA and the Dutch Competition Authority issued joint
guidelines for the settlement of network access disputes between cable network
operators and providers of cable programming. Pursuant to these guidelines,
cable network operators are obliged to charge cost orientated transmission fees
to program providers (fees should reflect the underlying transmission costs but
may include a limited return on assets) and are obligated to provide non-
discriminatory access to the cable network. This implies that third party
program providers must be granted access to the cable network under the same
conditions that cable network operator or its subsidiaries have access to the
network. These guidelines only apply to the provision of cable television
services.
Price Regulation. The Media Act authorizes the competent Minister to set
maximum price levels for basic tier services. This authority has not, however,
been exercised in the Netherlands.
The new agreement between A2000 and the municipality of Amsterdam described
above, provides for interim expansion of the basic tier, from 26 channels to 32
channels, with an increase in the monthly subscription fee. Once the digital
decoders are introduced, the price for the rate regulated 15 public channel
basic tier will be reduced and the price for the expanded basic tier will
increase over time until it becomes unregulated in 2001. Negotiations with the
remaining municipalities have started.
Telephone and Internet/Data Services
Regulatory Framework. Until recently, the fixed telecommunications
infrastructure was a statutory monopoly of KPN. As described above, the Dutch
telecommunications sector has been liberalized in advance of and in
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accordance with European Union telecommunications policy and cable television
networks may now be used for the provision of all telecommunications services.
Number portability was introduced in The Netherlands in 1999.
Interconnection. The Dutch Telecommunications Act generally implements EU
telecommunications policy on interconnection. A2000 and UTH have entered into a
total of three interconnection agreements with KPN, WorldCom and Enertel
networks.
Price Regulation. While Priority Telecom's telephone service is not
currently subject to price regulation, the prices of its competitor, KPN, are.
OPTA indicated that KPN should during 1999 reduce its end-user tariffs and also
reduce its interconnection prices in accordance with principles of cost
orientation as set forth by OPTA. On September 27, 1999, OPTA introduced its
new price cap mechanism, deciding that KPN was to reduce a basket of its
nominal end user rates (not including international rates) by 5.3% per year for
the next three years. KPN may adjust its resulting rates for inflation, which
must lead to a net decrease of at least 3.3% in the first year. The fact that
KPN's end-user tariffs for all of its basic telephone services (with the
exception of international calls but including ISDN) must be cost orientated
may have a negative effect on Priority Telecom's ability to compete.
Internet/Data Services. Under the Dutch Telecommunications Act,
Internet/data services are regulated as telecommunications services. As such,
our Dutch operating systems need to register with OPTA as providers of public
telecommunications services and/or networks and our prices for these services
are not regulated.
Norway
As a member state of the European Economic Area, Norway implements EU
directives in the telecommunications sector.
Video Services
Regulatory Framework. The provision of video services in Norway is
regulated by the Telecommunications Act of June 23, 1995 and The Broadcast Act
of December 4, 1992.
Registration. Under Norway's Telecommunications Act, the installation and
operation of the cable infrastructure and equipment must be authorized by and
registered with the Norwegian Post and Telecommunications Authority on the
basis of certain necessary technical qualifications. Cable television system
registrations are non-exclusive.
In Norway, the simultaneous and unchanged transmission of television
signals over a cable television network is not subject to any licensing or
registration requirements.
Programming. Cable television providers have "must-carry" obligations
obliging them to include three national channels and typically one local
television channel in their basic tier services. Distribution of any
programming that is not a simultaneous and unchanged retransmission requires a
programming license issued by the Ministry of Cultural Affairs. Because pay-
per-view programming and some other services are not strictly simultaneous
retransmission, UPC Norge obtained in 1998 a three-year programming license.
The license covers distribution of encrypted pay television channels, mostly
transmitted by satellite, and programming and distribution of commercials. At
the expiration of this license, we expect to renew the license or to have
authorization to engage in such activities without a license.
Price Regulation. The provision of the basic tier service is subject to
price control. A cable operator is only allowed to increase the basic tier
package subscription fee in line with the Official Consumer Price Index, with
no cost justification required. We have implemented such price increases in
January of each year. There are no specific pricing restrictions on expanded
basic (non-basic) tier services.
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Telephone and Internet/Data Services
Regulatory Framework. Since January 1, 1998, alternative networks in Norway
have been permitted to offer voice telephone services in accordance with the
terms of the applicable EU directives.
Registration. For telephone operators and service providers without
significant market power, as is currently the case with UPC Norge, no license
is required to offer voice telephone services. Such providers need only
register with the Norwegian Post and Telecommunications Authority.
Interconnection. Norway's telecommunications legislation generally
implements EU policy on interconnection. Cable network companies have the right
to interconnect with the public telecommunications network and the national
incumbent operator, Telenor, has the duty to provide any telecommunications
company with interconnection to its network on a non-discriminatory basis.
Interconnection rates charged by Telenor must be on a cost-basis. UPC Norge has
entered into an interconnection agreement with Telenor. Mediation proceedings
before the Norwegian Post and Telecommunications Authority between UPC Norge
and Telenor concluded in July 1999. The mediation related to certain changes
UPC Norge wished to make to its current interconnection agreement with Telenor.
As a result of the mediation an amendment protocol was added to the
interconnection agreement. According to this amendment protocol, UPC Norge and
Telenor have agreed that the current interconnection agreement will remain in
force until a new interconnection agreement has been negotiated. Negotiation of
the new interconnection agreement commenced in September 1999.
Pricing. Providers of public telephone without significant market power,
including UPC Norge, are not subject to any specific pricing regulations. In
addition, they are not obligated to make universal service contributions.
Internet/Data Services. Cable television networks do not require a license
or notification to provide Internet/data services. Broadband capacity may be
used freely by cable companies for commercial purposes, as long as the network
itself and necessary equipment comply with general technical requirements set
by the PTA. These services are not subject to telecommunications regulation
with respect to pricing and non-discrimination.
Sweden
Video Services
Regulatory Framework. Apart from certain limited rules governing program
content, the Swedish cable television industry is fully deregulated.
Authorizations. No license is required to operate cable television services
in Sweden.
Programming. Cable television operators are presently required to transmit
four "must carry" channels, which include all three terrestrial television
channels in Sweden: the two public service channels provided by State owned
Sveriges Television (SVT1 and SVT2) and the commercial channel (TV4)
transmitted by the publicly-held television company TV4. In addition, one local
television channel in each municipality should be included among the "must
carry" channels, provided that such channel has been authorized for the
municipality in question by the Radio and TV Authority. If digital television
services are offered, one additional "must carry" channel must be carried. If
Stjarn starts digital cable TV distribution, one additional "must carry"
channel must be distributed.
Price Regulation. There is no regulation of tariffs in Sweden.
Telephone and Internet/Data Services
Regulatory Framework. The provision of telephone services is governed by
the Swedish Telecommunications Act of 1993. The provision of Internet services
is not governed by any general Swedish legislation.
Authorization. Within a public telecommunications network, telephone
services to a fixed termination point may only be provided following
notification to the National Post and Telecom Agency. In addition, a license by
the
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National Post and Telecom Agency is required in order to be entitled to provide
such services within a public telecommunications network if the activity is of
an extent which is considerable with regard to the area covered, the number of
users or other comparable circumstances. Stjarn has a license, which covers
fixed telephone services. To the extent intended services to be launched by
Stjarn require additional licenses it is believed that such can be obtained
without difficulty. In addition, there are regulations governing the operation
of an established telephony network and providing for the provision of such
matters as connection to the emergency services and interconnection rights
between different operators.
Internet/Data Services. Under the Swedish Telecommunications Act, the
provision of network capacity for services offered by third party Internet
operators could require notification to the National Post and Telecom Agency.
Further, if such activity is conducted to a considerable extent, a license from
the National Post and Telecom Agency is required. The Internet/data services
currently provided by Stjarn do not include the provision of network capacity
and therefore are not subject to a license requirement.
Israel
Video Services
Regulatory Framework. As part of the liberalization policy adopted by the
Israeli Communications Ministry, the telecommunications and cable television
market in Israel is expected to undergo significant reforms beginning in early
2000. We expect that these reforms will include opening the multi-channel
television business to competition by granting licenses to direct to home
satellite operators and opening the local telephone and Internet/data
transmission markets to competition by granting licenses to independent
operators, thereby allowing competition with Bezeq, the Israeli incumbent
telecommunications operator. Upon expiration of the existing cable television
licenses, franchise exclusivity will be eliminated and other operators will be
permitted to apply for cable television licenses to compete in the cable
television market.
The 1987 Bezeq law, which allowed the introduction of cable television,
gave the new cable companies exclusive rights to download and rebroadcast
satellite programming until 2003. The cable television operators therefore
challenged the legal basis of the Communications Ministry policy of introducing
direct to home satellite service before that date. In November 1998, the
Israeli High Court of Justice decided that direct to home satellite service
could be introduced before 2003. The cable television operators are seeking
compensation for the loss of exclusivity prior to 2003. This could come in the
form of some additional right or rights with respect to the content or services
they provide. This issue is currently pending before the Communications
Ministry and may be ruled on by the High Court of Justice.
Franchise Agreements. Tevel holds exclusive cable television franchise
agreements that were granted for a period of 12 years and expire in 2002. These
franchises include a four-year renewal option at the discretion of the
Communications Ministry. Gvanim, which was recently acquired by Tevel, holds
exclusive franchises which expire in 2002 and 2005. As with the Tevel
franchises, the Communications Ministry is authorized to extend both of these
franchises for an additional four years. Tevel and Gvanim pay the government
royalties of 5% of their gross revenues. Upon the opening of the
telecommunications market to competition, we expect exclusive cable television
franchises to be replaced with long-term renewable, non-exclusive licenses that
will permit cable operators to continue providing cable television services and
to begin to offer additional telecommunications services such as voice
telephone and Internet/data services.
Programming. Pursuant to its franchise agreements, Tevel must provide
within its basic tier five tape-delivered channels subtitled in Hebrew: a movie
channel, a general entertainment channel, a children's channel, a nature and
science channel, and a sports channel. The movie channel and the general
entertainment channel are produced by ICP Israel Cable Programming Company
Limited, a programming company owned by Tevel, Gvanim and the other Israeli
cable television companies. The other three channels are produced for ICP by
independent parties. The ownership by the Israeli cable television operators of
ICP is considered a "restrictive arrangement" under Israeli Restrictive Trade
Practices law and is regulated by an arrangement approved by the Restrictive
Trade
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Practices Tribunal in June 1996. Under this arrangement, ICP is obligated to
spend 15% of its programming expenses on programming from local producers.
The current ICP arrangement was to expire in June 1999. With the expiration
of the ICP arrangement the Restrictive Trade Practices Commissioner and the
Ministry of Communications began to consider various alternatives to divest the
cable television operation interests in ICP, including the sale of ICP's
programming interest to third parties or distribution of such interest in ICP
among its shareholders. The Restrictive Trade Practices Commissioner and the
Ministry of Communications are considering requiring cable network operators,
among other things, to supply the previously cable-exclusive content they
produce to the DTH satellite service providers once they are operational. The
three cable operators (which are the shareholders of ICP) applied on August 26,
1999 to the Restrictive Trade Practices Tribunal to approve the allocation of
channels among the cable operators as part of the liquidation of ICP - the
movie channel to be allocated to Tevel, the family channel to be allocated to
Golden Channels, and the sports channel to be allocated to Matav. As part of
the application of the cable operators, the ICP arrangement has been extended
temporarily by the Restrictive Trade Practices Tribunal until December 31,
1999. This extension was granted in order to allow the Ministry of
Communications, together with the cable operators, to reach a comprehensive
arrangement with respect to the liquidation of ICP and the allocation of
interests in the field of content. After December 31, 1999 the Restrictive
Trade Practices Tribunal will address the application of the cable operators,
also taking into consideration any arrangement reached with the Ministry of
Communications.
In view of the requested allocation of the channels, Tevel has entered into
long term agreements with two major studios for the purchase of content for the
movie channel. To secure its obligation pursuant to one of these agreements,
Tevel has extended a $5 million bank guarantee.
DBS, the first DTH satellite service to enter the market, filed a plea in
the Israeli Supreme Court on July 19, 1999 against the Restrictive Trade
Practices Commissioner (the "Commissioner") and the cable operators. In this
plea, DBS claims that the continuation of cooperation among the cable operators
with respect to the purchase of content following the original expiration date
of the ICP arrangement is a restrictive arrangement forbidden by law and
therefore (i) the Commissioner should determine that the arrangement pursuant
to which the cable operators are acting jointly to purchase content is a
restrictive arrangement; (ii) the Commissioner should order the cable operators
to avoid acting according to the restrictive arrangement; and (iii) the
Commissioner should order the cable operators to stop their cooperation
regarding the purchase of content relating to the period following the
expiration of the ICP arrangement including with respect to the three long term
agreements mentioned above.
The Restrictive Trade Practices Tribunal in its decision of September 1,
1999 to extend the ICP arrangement until October 31, 1999 stated that the
extension does not apply to the purchase of content, including any negotiations
or any other activity relating to the purchase of content, except for the
purchase of content which is intended to be broadcasted by December 31, 1999.
Moreover, the temporary extension of the arrangement does not permit purchase
of content from any of the major studios even if the content is intended to be
broadcast prior to December 31, 1999.
Pursuant to the 1987 Bezeq Law, cable operators must obtain authorization
to add or remove channels from their service from the Ministry of
Communications. Further restrictions prohibit cable television operators from
carrying advertisements on their tape-delivered channels. Tevel currently is
required to provide three "must-carry" off-air channels. Its current
arrangement currently prohibits "tiering" of video services. Since its
establishment, Tevel has offered its subscribers the "super-basic package,"
which is currently comprised of 45 channels of programming. The DTH satellite
service providers will be entitled to provide "tiering" of their video
services. The Communications Ministry made a preliminary determination
approving "tiering" of cable television services upon the earlier of DTH
satellite service providers achieving 250,000 subscribers (approximately
100,000 subscribers from the Tevel franchise areas) or a period of 18-27 months
from the first day of commercial broadcast of DTH service. Tevel and other
cable providers have appealed to the High Court of Justice the determination
setting forth the above-described tiering timetable. On June 26, 1999, the High
Court of Justice rejected the appeal. In preparation for the commencement of
the direct-to-home satellite services mentioned above, Tevel expects an
increase in its marketing expenses and in the programming purchase expenses as
well as a possible adverse effect on its earnings whether as a
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result of customers leaving or as a result of a reduction in the customers
monthly fees. At this stage it is premature to predict the above mentioned
effects on Tevel's future results.
A class action lawsuit was filed against Tevel in April 1998 alleging that
Tevel unlawfully dropped certain programming. An additional class action
lawsuit was filed against Tevel in August 1999 alleging that Tevel unlawfully
dropped certain programming and failed to provide an alternative channel in its
place. We do not believe that this litigation will have a material adverse
effect on us.
Pricing. Cable television service subscription fees are subject to
regulation through the franchise agreements and through the arrangement
approved by the Restrictive Trade Practices tribunal. Currently, this
arrangement is more restrictive than the franchise agreements and permits basic
tier subscription fees to be increased by a maximum of 1.9% per year above the
cost of living index. Two class action lawsuits were filed against Tevel in
April 1998, the first alleging that Tevel engaged in unlawful pricing practices
and the second challenging Tevel's collection of converter deposits. We do not
believe that this litigation will have a material adverse effect on us.
Telephone and Internet/Data Services
As part of the proposed liberalization of the telecommunications market,
Tevel and Gvanim expect to be permitted to provide Internet/data and voice
telephone services in their franchise areas, and to interconnect with Bezeq on
non-discriminatory terms with cost-based rates. There may be limits on a cable
television system's ownership, operation or marketing with a provider of
telecommunications services.
Czech Republic
Video Services
Regulatory Framework. The operation of cable television systems in the
Czech Republic is regulated by Act No. 110/1964 Coll. on Telecommunications, as
amended (the "Telecom Act"), Act No. 468/1991 Coll. on Radio and Television
Broadcasting Operation, as amended (the "Broadcasting Act") and Act No.
130/1992 Coll. on the Council of the Czech Republic for Radio and Television
Broadcasting, as amended (the "Council Act"). These Acts are administered by
the Ministry of Transportation and Communications of the Czech Republic (the
"Ministry of Communications"), the Czech Telecommunication Office of the
Ministry of Transportation and the Council of the Czech Republic for Radio and
Television Broadcasting (the "Council") established under the Council Act.
The Ministry of Communications is preparing a new telecommunications act
which may be adopted by the Parliament in the near future. The new act may
contain significant changes which could have a material impact on cable
operators.
Licenses. Cable television operators in the Czech Republic must obtain
permits to establish and operate cable television networks. The permits set
forth the terms and conditions for construction and operation of cable
television systems, including the technical parameters of the cable network,
the technical specifications of the telecommunications equipment and the terms
of validity of the permits. In addition, cable television operators must either
obtain a license to broadcast television programming over the network (a
"Licensed Operator") or register to distribute television programming over the
network (a "Registered Operator"), depending on the services provided and
distribution technologies used. Broadcasting licenses are valid for a maximum
of twelve years, non-exclusive and discretionary. An applicant for a license
must describe its ownership structure in the application. If any of the
applicant's shareholders is a foreign entity, the Council will take into
consideration in deciding whether to grant the license (i) the contribution of
the applicant to the development of original local production, (ii) the share
of ownership participation of Czech persons or entities, and (iii) the
representation of Czech persons or entities in the management bodies of the
applicant.
Licenses are not transferrable. In addition, a Licensed Operator must seek
Council approval for any changes in its information on file with the Council
including any changes in ownership. An internal regulation often applied by
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the Council typically results in rejection of applications for approval of
changes in ownership structure involving more than a 51% interest in the
Licensed Operator.
Unlike licenses, registrations are granted for an indefinite period and are
non-discretionary. Further, there is no formal restriction as to the exact
participation of foreign shareholders in a Registered Operator.
Certain of our licenses, permits and governmental approvals in the Czech
Republic may be invalid or subject to challenge. In addition, Kabel Plus is
involved in certain on-going litigation. We do not believe that such
challenges, invalidities or litigation will have a material adverse effect on
our operations.
Price Regulation. There is no rate regulation of cable services in the
Czech Republic. However, the Ministry of Finance and the Office for Economical
Competition may influence subscription fees through consumer protection and
anti-monopoly laws.
Telephone and Internet/Data Services
In the Czech Republic, SPT TELECOM currently has exclusive rights for the
provision of international and long-distance services, including local
telephone services outside of delineated local networks. These exclusive rights
are scheduled to terminate on January 1, 2001.
The Czech Republic has not enacted any Internet-specific regulations to
date.
Hungary
Cable operators in Hungary are not granted exclusive franchises; however,
all cable operators must be properly registered with the appropriate government
agency and must meet certain technical licensing requirements. Cable operators
are required to carry certain "must carry" channels in their basic tier and may
not charge a separate fee for them. Moreover, although there is no rate
regulation in Hungary, rates are subject to fair disclosure and anti-
competition reviews by the government and could be challenged if considered to
be an abuse of a dominant market position. There are several proceedings
regarding our rates pending at the Economic Competition Office that could
result in monetary fines. Further, a single cable operator may not provide
service to homes exceeding in the aggregate one-sixth of the Hungarian
population. Hungarian regulatory authorities are currently investigating
whether Telekabel Hungary is in compliance with this rule. We expect the
investigation to be concluded by the end of 1999 or early 2000.
MATAV and other local telephony providers, including Monor, have a monopoly
in local voice telephony services in their respective service areas until 2002,
but there are no restrictions on entry into Internet/data services or rate
regulation of such new providers other than certain technical licensing
requirements. Recent legislation restricts MATAV and other local telephony
providers, including Monor, from acquiring additional cable assets.
Poland
General
The operation of cable and digital satellite DTH television systems in
Poland is regulated under the Polish Communications Act of 1990 (the
"Communications Act") and the Polish Radio and Television Act of 1992 (the
"Television Act"). These are regulated by:
. The Polish Minister of Communications;
. The Polish State Agency of Radio Communications ("PAR"); and
. The Polish National Radio and Television Council (the "Council").
Cable television operators in Poland are required to obtain permits from
PAR to install and operate cable television systems and must register certain
programming that they transmit over their networks with the Council.
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Neither the Minister of Communications nor PAR currently has the authority
to regulate the rates charged by operators of cable television and DTH
services. However, excessive rates could be challenged by the Polish Anti-
Monopoly Office should they be deemed to constitute monopolistic or other anti-
competitive practices. Cable television and DTH operators in Poland are also
subject to the Law on Copyright and Neighboring Rights of 1994 (the "Copyright
Act") which provides intellectual property rights protection to authors and
producers of programming. Under the terms of the Television Act, broadcasters
in Poland are regulated by, and must obtain a broadcasting license from, the
Council.
With one exception, all of the Wizja proprietary channels and all channels
on the Wizja platform are currently licensed in the United Kingdom by the
Independent Television Commission as satellite television services. As such,
they are then retransmitted under the European Convention on Transfrontier
Broadcasting to Poland and then distributed via cable and DTH in Poland. As its
regulatory regime develops, Poland may seek to regulate the reception of DTH
signals. Poland's regulatory environment is undergoing constant change. We do
not know how such change will impact our business.
Communications Act
Permits. The Communications Act and the required permits issued by PAR set
forth the terms and conditions for providing cable television services. If a
cable operator breaches the terms of its permits or the provisions of the
Communications Act, or if such operator fails to acquire permits covering areas
serviced by its networks, PAR or the Polish penal court can impose penalties on
such operator, including:
. fines or imprisonment;
. the revocation of all permits covering the cable networks where such
breach occurred; and
. the forfeiture of the cable operator's cable networks.
In addition, the Communications Act provides that PAR may not grant a new
permit to, or renew an expiring permit held by, any applicant that has had, or
that is controlled by an entity that has had, a permit revoked within the
previous five years.
@Entertainment will be required to obtain additional permits from the
Minister of Communications to offer other telecommunications services such as
internet access or broadband transmission services.
Foreign Ownership Restrictions. The Communications Act provides that
permits may only be issued to and held by Polish citizens, or companies in
which foreign persons hold no more than 49% of the share capital, ownership
interests and voting rights. In addition, a majority of the management and
supervisory board of any cable television operator holding permits must be
comprised of Polish citizens residing in Poland. These restrictions do not
apply to any permits issued prior to July 7, 1995. If the Polish regulatory
authorities were to conclude that @Entertainment's ownership or distribution
structure is not in compliance with Poland's regulatory restrictions on foreign
ownership, @Entertainment could be forced to incur significant costs in order
to bring its ownership structure and distribution system into compliance with
the applicable regulations and @Entertainment may be forced to dispose of its
ownership interests in various entities. These restrictions may also materially
adversely affect our ability to acquire programming. See "Risk Factors--Our
recent acquisition of @Entertainment exposes us to a number of risks."
Television Act
The Polish National Radio and Television Council. The Council, an
independent agency of the Polish government, has regulatory authority over both
the programming that cable television operators transmit over their networks
and the broadcasting operations of broadcasters.
Registration of Programming. Under the Television Act, cable television
operators must register each channel and the programming which will be aired on
that channel with the Chairman of the Council prior to transmission.
@Entertainment's subsidiaries have registered most of the programming that they
transmit on their cable networks,
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except programming transmitted on networks for which they do not have permits.
The Chairman of the Council may revoke the registration of any of
@Entertainment's programming, or may not register all additional programming
that @Entertainment desires to transmit over @Entertainment's networks, for
violations of applicable law. In addition, the Council may take action
regarding unregistered programming that @Entertainment's subsidiaries transmit
over cable networks for which @Entertainment's subsidiaries do not yet have PAR
permits. This pertains to areas for which permit applications cannot be made
until all permit requirements are satisfied (including obtaining agreements
with the cooperative authorities, upgrading of the acquired networks to meet
technical standards where necessary and satisfying foreign ownership
limitations). Such actions could include the levying of monetary fines against
@Entertainment's subsidiaries, and the seizure of equipment involved in
transmitting such unregistered programming as well as criminal sanctions
against @Entertainment's subsidiaries' management. These actions could have a
material adverse effect on @Entertainment's business, financial condition and
results of operations.
Restrictions on Foreign Ownership of Polish Broadcasters. The Television
Act provides that programming may be broadcast in Poland only by Polish
entities in which foreign persons hold no more than 33% of the share capital,
ownership interest and voting rights. In addition, the Television Act provides
that the majority of the management and supervisory boards of any company
holding a broadcasting license must be comprised of Polish citizens residing in
Poland. Companies that engage in broadcasting in Poland are required to obtain
a broadcasting license from the Chairman of the Council under the Television
Act. The Council may revoke a broadcasting license for, among other things:
. violations of the Television Act;
. violations of the terms of the broadcasting license; or
. violations of restrictions on foreign ownership of broadcasters.
Requirements Concerning Programs Broadcast From Outside of Poland. The
Television Act does not include regulations directly applicable to the
broadcasting of programs being broadcast from abroad and received in Poland.
Specifically, there are no regulations in force concerning satellite
broadcasting of a program directed to a Polish audience if the transmission to
the satellite for the broadcasting of such program is made by a foreign
broadcaster from outside of Poland. We believe that the Television Act does not
apply to such broadcasting and that such activity is not subject to Polish
broadcasting requirements. A subsidiary of Canal+ has filed suit against HBO
Polska Sp. z o.o. and certain Polish cable operators (including our
subsidiaries) alleging violations of the Television Act in connection with
HBO's broadcasting activity from outside of Poland.
@Entertainment has established and intends to establish entities to engage
in the development and production of Polish-language thematic television
programming outside of Poland. While all of the content and programs which it
distributes across its cable networks and its DTH system are distributed via
satellite systems which are located outside of Poland, much of the programming
is produced or assembled entirely in Poland. @Entertainment believes that the
ownership structure of its entities as well as its operating strategy are not
subject to Poland's regulatory restrictions on foreign ownership, licensing
requirements, restrictions and regulations on broadcasting of programming.
If the Polish regulatory authorities determine otherwise, @Entertainment
would be required to:
. secure additional licenses from the Chairman of the Council and
permits from PAR;
. modify the nature and content of its programming;
. pay fines or other penalties for lack of compliance with these
regulations; and
. comply with Polish regulations governing ownership structure and
the production and transmission of programming across cable
networks and across a DTH system.
Copyright Protection
Television operators, including cable and DTH operators, in Poland are
subject to the provisions of the Polish Copyright Act, which governs the
enforcement of intellectual property rights. In general, the holder of a Polish
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copyright for a program transmitted over the cable networks of a cable
television operator or the system of a DTH operator has a right to receive
compensation from such operator or to prevent transmission of the program.
The rights of Polish copyright holders, or certain foreign authors of
programming protected under the Copyright Act, are generally enforced by
organizations for collective copyright administration and protection such as
Zwiazek Autorow i Kompozytorow Scenicznych ("ZAIKS") and Zwiazek Artystow Scen
Polskich ("ZASP"), and can also be enforced by the holders themselves. Most of
@Entertainment's cable subsidiaries operate under a contract with ZASP and all
of @Entertainment's cable subsidiaries operate under a contract with ZAIKS. A
violation of the Copyright Act by a cable television operator also constitutes
a violation of the Communications Act and of the operator's permits. See "--
Television Act" for a discussion of the penalties and consequences associated
with violations of the Television Act and "--Communications Act" for a
discussion of the penalties and consequences associated with violations of a
television operator's permits.
@Entertainment currently makes copyright payments to foreign programmers
requiring these types of payments, such as CNN, Eurosport and the Cartoon
Network.
@Entertainment is currently negotiating with several copyright collecting
societies in both the United Kingdom and Poland in relation to obtaining
appropriate copyright licenses for the Wizja owned channels.
Anti-Monopoly Act
Exclusive Programming Agreements. Many of the programming agreements that
@Entertainment has entered into for its cable networks and its DTH service
contain exclusivity clauses which restrict or prohibit the provider of such
programming from providing such programming to other cable or DTH operators in
Poland. Although such exclusivity clauses are not specifically prohibited under
the Anti-Monopoly Act, such agreements may be found unlawful, and therefore
unenforceable, if they restrict or hinder competition or otherwise involve the
abuse of a dominant position. A decision by the Anti-Monopoly Office to deem
one or more of these programming agreements as void due to the fact that it
contains an illegal exclusivity clause could have a material adverse effect on
@Entertainment's business and financial results in that such a decision would
potentially reduce the commercial value of these contracts and could reduce the
consumer appeal of the programming offered on its cable networks and its DTH
system.
Market Dominance. Companies that obtain control of 40% or more of the
relevant market and do not encounter significant competition are usually deemed
to have market dominance, and therefore face greater scrutiny from the Anti-
Monopoly Office. From time to time, @Entertainment receives inquiries from and
is subject to review by various divisions of the Anti-Monopoly Office.
Recent Anti-Monopoly Office Findings with Respect to @Entertainment and its
Subsidiaries. The Anti-Monopoly Office has issued four decisions against
subsidiaries of @Entertainment in various local markets deciding the relevant
subsidiary had achieved a dominant position and abused that dominant position
in the respective market in which it operates. These decisions have been based
on one or more of the following actions:
.a lease operating arrangement of one of our Polish operating subsidiaries;
. moving certain satellite channels to a new frequency without termination
of agreements with subscribers whose television sets are not equipped to
receive the new frequency;
.increasing rates without providing subscribers a detailed basis for the
price increases;
.changing the programming line-up without sufficient notice to subscribers;
.offering extended basic tier services in certain forms; and
.certain rate increases and penalty charges.
One of these decisions has been overturned by the Anti-Monopoly court and the
other three are currently being appealed.
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Romania
Exclusive franchises are not awarded in Romania. We have received non-
exclusive licenses to operate cable television systems in all of our service
areas. These renewable licenses are valid for another six years. The cable
television industry is regulated by the Romanian audiovisual law, which came
into force in June 1996, and is administered by the National Audiovisual
Council.
Slovak Republic
Video Services
Regulatory Framework. The operation of cable television systems in the
Slovak Republic is regulated by Act No. 110/1964 Coll. on telecommunications,
as amended (the "Telecom Act") and Act No. 468/1991 Coll. on operation of radio
and television broadcasting, as amended (the "Broadcasting Act"). These acts
are administered by the Ministry of Transportation, Posts and
Telecommunications (the "Ministry of Telecommunications"), the
Telecommunication Office of the Slovak Republic (the "Slovak Telecom Office"),
Regional Telecommunications Offices and the Council of the Slovak Republic for
Radio and Television Broadcasting (the "Council").
The Ministry of Telecommunications is preparing a new telecommunications
act which may be adopted by the Slovak Parliament in the near future. The new
act may contain significant changes which could have a material impact on cable
operators.
Licenses. Cable television operators in the Slovak Republic must obtain
permits from the Slovak Telecom Office or the relevant Regional Telecom Office
to establish, build and operate cable television networks. The permits set
forth the terms and conditions for construction and operation of cable
television systems, including the technical parameters of the cable network,
the areas covered by the permit (one or more permits may be required to cover a
network territory) and the term of the permit. In addition to the permits,
cable television operators must obtain licenses from the Council to broadcast
television programming over their networks. Broadcasting licenses are issued
for a maximum of twelve years, are non-exclusive and discretionary. Although
the Broadcasting Act only specifies licenses for broadcasting, the Council has
developed the practice of issuing licenses for the distribution of television
programming over a cable network in addition to issuing licenses to television
programme producers who broadcast their programming. Additionally, even though
not required, cable operators typically also have their own agreements with
each city and/or large cooperative housing associations in which the network is
located.
If a company with foreign ownership applies for a broadcasting license, the
Council considers the contribution of the company to the development of
original domestic production as well as the degree of participation of Slovak
persons in the company and its management. Although no formal restrictions as
to exact participation exist, the Council is reluctant to issues licenses to
companies that have foreign ownership of more than 50%.
A license holder has an obligation to notify the Council of any changes in
information that has been filed with the Council in order to obtain and
preserve the license. No prior approval of these changes is required; however,
it is not clear from the Broadcasting Act what authority the Council has to
take any action if it does not approve of the change.
Certain claims have been filed against UPC Slovensko for, among other
things, the removal of a part of UPC Slovensko's cable television network. In
addition, some irregularities and deficiencies exist with respect to UPC
Slovensko's government approvals and licenses. We do not believe that such
claims, irregularities and deficiencies will have a material adverse effect on
our business.
Price Regulation. The Ministry of Finance has recently issued a regulation
which covers cable television and related services. Under the regulation,
prices must reflect economically justified costs and an appropriate profit. Any
annual increases in rates must correspond to a verifiable increase in
economically justified costs, however, under no circumstances may rates be
increased in excess of the annual inflation rate. Cable operators are also
subject to consumer protection laws and anti-monopoly laws.
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<PAGE>
Telephone and Internet/Data Services
In the Slovak Republic, Slovak Telecommunications currently has exclusive
rights for the provision of fixed-line local, long-distance and international
telephone services. These exclusive rights are scheduled to terminate on
December 31, 2002.
The Slovak Republic has not enacted any Internet-specific regulations to
date.
Malta
In 1991, Melita was awarded an exclusive 15-year renewable license to
deliver cable television services for Malta. Rates for the basic tiers are
subject to regulation and requests for rate increases made to the government
must be accompanied by a cost analysis of the increases in cost. Premium
services, "pay-per-view" and other additional services are not subject to rate
regulation.
Melita currently does not offer Internet/data services over its own network
but intends to offer such services by the end of 1999. The Maltese incumbent
telecommunications provider, Maltacom, recently initiated a legal action
challenging Melita's right to offer Internet/data services. Maltacom is
claiming that the offering of such services by Melita (i) infringes Maltacom's
exclusive license to provide Internet/data services and (ii) exceeds the scope
of the license granted to Melita in 1991. Melita has filed a reply contesting
these claims.
Proposed regulations published in October 1999 liberalizing Malta's
telecommunications may also affect Melita's ability to act as an Internet
services provider by requiring that any Internet service activities be provided
through a separate legal entity. The regulation appears to prohibit Melita from
acting as an Internet services provider and, further, may require Melita and
Maltacom to allow other Internet/data service providers to access to their
respective networks subject to the payment of certain tariffs.
Broadcasting
In addition to national laws which implement the EU directives on
broadcasting described in "Regulation--European Union," various other types of
national broadcasting regulations apply to SBS and @Entertainment's Wizja TV.
Over-the-air, terrestrial television and radio broadcasters operate pursuant to
licenses granted by national or local regulatory authorities allowing use of
certain radio frequencies in a specified geographic area, generally for a
limited duration which can be renewed. Broadcasters operate subject to various
regulatory conditions, such as limitations on advertising, program content and
ownership.
United Kingdom
The United Kingdom's Broadcasting Act 1990, as amended by the Broadcasting
Act 1996 (the "Broadcasting Act"), comprises the legislative framework for the
regulation of both analogue and digital television and commercial radio. The
Independent Television Commission ("ITC") regulates almost all television
services provided from the United Kingdom.
The ITC currently licenses most of @Entertainment's channels, including all
DTH channels, as satellite television services. @Entertainment's licenses place
several conditions on @Entertainment's provision of services. These conditions
include compliance with the ITC's "codes of practices." The ITC "codes of
practices" sets forth rules regarding, among other things, program content,
program sponsorship and advertising. The Broadcasting Act contains detailed
restrictions on the ownership of licenses and disqualifies certain bodies, such
as non-EU nationals, from holding certain types of licenses. There are no such
ownership restrictions applicable to satellite television services. The
Broadcasting Act also contains restrictions are intended to prevent the
accumulation of interests in certain licensed broadcasting services, and limits
cross-media ownership. If a licensee breaches a license condition, the ITC may
direct the licensee to broadcast a correction and/or apology or not to repeat a
particular program, impose a fine on the licensee, revoke the license or impose
other sanctions.
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<PAGE>
Other Matters
EU directives and national consumer protection and competition laws in our
Western European markets impose limitations on the pricing and marketing of
integrated packages of services, such as video, telephone and Internet/data
services. These limitations are common in developed market economies and are
designed to protect consumers and ensure a fair competitive market. While we
may offer our services in integrated packages in our Western European markets,
we are generally not permitted to make subscription to one service, such as
cable television, conditional upon subscription to another service, such as
telephone, that a subscriber might not otherwise take. In addition, we must not
abuse or enhance a dominant market position through unfair anti-competitive
behavior. For example, cross-subsidization between our business lines that
would have this effect would be prohibited. We have to be careful, therefore,
in accounting for discounts in services provided in integrated packages. We
believe we can implement our strategy of offering integrated packages of
services without infringing any of these consumer protection and anti-
competition laws. We do not, therefore, expect any of these limitations to
significantly affect our operating strategy.
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<PAGE>
MANAGEMENT
United currently owns approximately 54.9% of our outstanding ordinary
shares A and all of our outstanding priority shares. Because we are a strategic
holding of United, United is likely to continue to control us for the
foreseeable future. All five members of our Supervisory Board are also
directors, officers or employees of United.
Supervisory Board
Our general affairs and business, as well as our management board, are
supervised by a Supervisory Board, the members of which are proposed by United
as the holder of our priority shares and appointed by the general meeting of
shareholders. Mr. Gene Schneider, United's Chairman and Chief Executive Officer
and the former Chairman of the Supervisory Board, resigned from the Supervisory
Board in February 1999. Pursuant to the rules and procedures of the Supervisory
Board, he became a non-voting advisor to the Supervisory Board and has the
right to attend and participate in the meetings of the Supervisory Board.
The Supervisory Directors are appointed at the general meeting of
shareholders from a list proposed by United as the holder of our priority
shares or through direct appointment by Philips, pursuant to its right to
appoint one director as set forth in our articles of association. The Discount
Group has a contractual right to nominate one director and United has agreed to
vote in favor of the Discount Group's nominee subject to certain conditions.
The Discount Group, our partner in our Israeli system, has not to date
exercised its contractual right to nominate a Supervisory Director. The
Discount Group's nomination may be set aside by two-thirds of the votes cast at
the general meeting of shareholders representing more than one-half of the
issued nominal capital.
The Supervisory Directors and Advisor are:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Michael T. Fries.......................... 36 Chairman of the Supervisory Board
John P. Cole, Jr.......................... 69 Supervisory Director
Richard De Lange.......................... 54 Supervisory Director
Ellen P. Spangler......................... 50 Supervisory Director
Tina M. Wildes............................ 39 Supervisory Director
Gene W. Schneider......................... 73 Advisor
</TABLE>
Michael T. Fries has been a member of the Supervisory Board since September
1998 and the Chairman since February 1999. He is the Executive Chairman of
Austar United Communications Limited ("Austar United"), United's subsidiary
that recently completed an initial public offering in Australia. Since
September 1998, he is also President of United and President of United Latin
America, Inc., a wholly-owned subsidiary of United. Mr. Fries also serves as
President and Chief Executive Officer of United Asia/Pacific Communications,
Inc., a majority-owned subsidiary of United, positions he has held since June
1995 and December 1996, respectively. Prior to becoming President of United
Asia/Pacific Communications, Inc., and since March 1990, Mr. Fries served as
United's Senior Vice President, Development, in which capacity he was
responsible for managing United's acquisitions and new business development
activities, including United's expansion into the Asia/Pacific, Latin American
and European markets.
John P. Cole Jr. became a member of the Supervisory Board in February 1999
and has been a director of United since March 1998. Mr. Cole has practiced law
in Washington, D.C. since 1956 and has been counsel over the years in many
landmark proceedings before the U.S. Federal Communications Commission,
reflecting the development of the cable television industry. In 1966, he
founded the law firm of Cole, Raywid & Braverman, a 30-lawyer firm specializing
in all aspects of communications and media law. Mr. Cole is also a director of
Century Communications Corporation.
Richard De Lange has been a member of the Supervisory Board since April
1996. Since October 1998, Mr. De Lange has been Chairman of the Philips
organization in The Netherlands (Philips Nederland B.V. and Nederlandse
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<PAGE>
Philips Bedrijven B.V.). He also serves as President and Chief Executive
Officer of Philips Media B.V., which position he assumed in February 1996. From
April 1995 until October 1998, Mr. De Lange was Chairman and Managing Director
of Philips Electronics UK Ltd. Previously, Mr. De Lange served since 1970 in
various capacities with subsidiaries of Philips, including as President of
Philips Lighting Europe from December 1990 until April 1995.
Ellen P. Spangler became a member of the Supervisory Board in February
1999. Ms. Spangler is the Senior Vice President of Business and Legal Affairs
and Secretary of United, positions she has held since December 1996. Prior to
assuming her current positions, from February 1991 she served as a Vice
President of United where her responsibilities included business and legal
affairs, programming and assisting on development projects.
Tina M. Wildes became a member of the Supervisory Board in February 1999.
Ms. Wildes is the Senior Vice President of Operations and Development Oversight
of United, a position she has held since May 1998. From October 1997 until May
1998, Ms. Wildes served as Senior Vice President of Programming for United.
From 1993 to 1997, she was Regional Vice President of United Latin America,
Inc. From 1988 to 1994, Ms. Wildes served as either a director or vice
president for development, programming and operations for several of United's
European operating companies, including operations in Sweden, Norway, Malta,
Israel, Spain and Portugal.
Gene W. Schneider served as a member of the Supervisory Board from July
1995 until February 1999, when he became an advisor to the Supervisory Board.
Mr. Schneider is also the Chairman of the Board of Directors of United, a
position he has held since its inception in May 1989. In addition to serving as
United's Chairman, Mr. Schneider has served as United's Chief Executive Officer
since October 1995, and served as United's President from October 1997 until he
relinquished the title in September 1998. Mr. Schneider served as Chairman of
United Artists, then the third largest multiple system operator in the United
States, from May 1989 until its merger with Tele-Communications, Inc. in
November 1991. He was a founder of United Cable in the early 1950s and, as its
Chairman and Chief Executive Officer, helped build United Cable into the
eighth-largest multiple system operator in the United States prior to its
merger with United Artists in 1989. As Chairman of United Cable, he was
involved in United Cable's investment in numerous programming companies such as
Discovery and Turner Broadcasting, and served as a director on the board of
Turner Broadcasting and Chairman of C-SPAN. Mr. Schneider is also Chairman of
the Board of Advance Display Technologies, Inc. and a director of Austar
United. Mr. Schneider has been active in cable television affairs and has
served on the board of the National Cable Television Association (the "NCTA")
and on numerous committees and special projects thereof since NCTA's inception
in the early 1950s. Mr. Schneider is one of the original inductees into NCTA's
Cable Television Pioneers.
The Supervisory Board has an Audit Committee and a Compensation Committee.
Both committees are comprised of Mr. Fries, Ms. Spangler and Ms. Wildes.
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<PAGE>
Family Relationships
Tina M. Wildes, a member of the Supervisory Board, and Mark L. Schneider,
the Chairman of our Board of Management and our Chief Executive Officer, are
sister and brother. Gene W. Schneider is their father. No other family
relationships exist between any other members of our Supervisory Board or Board
of Management.
Board of Management and Other Key Employees
The members of the Board of Management are:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Mark L. Schneider.................... 44 Chairman of Board of Management and
Chief Executive Officer
John F. Riordan...................... 57 President, Vice Chairman, chello
broadband
Charles H. R. Bracken................ 33 Board of Management Member and Chief
Financial Officer
Anton H. E. v. Voskuijlen............ 42 Senior Vice President, Managing
Director, Legal, HR and Regulatory
Policy
Nimrod J. Kovacs..................... 49 Board of Management Member, Managing
Director, Eastern Europe and Executive
Chairman, UPC Central Europe
</TABLE>
Other key employees include:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Scott Bachman....................... 44 Managing Director, Technology and
Purchasing
Andrew Barron....................... 34 Managing Director, Media
Jeroen Bergman...................... 33 Managing Director, Video and Marketing
Steven D. Butler.................... 40 Managing Director, UPC Capital Markets
and Treasurer
Sudhir Ispahani..................... 39 Managing Director, Operations and
Technology, chello broadband
Roger Lynch......................... 37 President and Chief Executive Officer,
chello broadband
Shane O'Neill....................... 38 Managing Director, Strategy,
Acquisitions and Corporate Development
Simon Oakes......................... 40 Managing Director, Programming
Iain Osborne........................ 42 Managing Director, Marketing, Sales and
Portal, chello broadband
Ray D. Samuelson.................... 46 Managing Director, Finance and
Accounting
Anton M. Tuijten.................... 37 General Counsel
</TABLE>
Mark L. Schneider has been our Chief Executive Officer and Chairman of our
Board of Management since April 1997. Since December 1996, he has served as
Executive Vice President of United and President and Chief Executive Officer of
United Europe/Middle East Communications, Inc. and from May 1996 to December
1996, Mr. Schneider was Chief of Strategic Planning and Operational Oversight
of United. He served as President of United from July 1992 until March 1995 and
was Senior Vice President of United from May 1989 until July 1992. Mr.
Schneider also worked as a consultant for United from March 1995 to May 1996.
Mr. Schneider has been a member of the board of directors of United since 1993.
John F. Riordan was appointed as our President in June 1999, and has been a
member of our Board of Management since September 1998. Also in September 1998,
Mr. Riordan was appointed Vice Chairman of chello broadband, our Internet
portal and ISP, overseeing implementation of our Internet/data services and
digital distribution platform. In June 1999, Mr. Riordan became a director of
Austar United. From April 1997 until March 1998, he was a member of our
Supervisory Board. Mr. Riordan has also served as a director of United since
March 1998. From 1992 until November 1998, Mr. Riordan served as Chief
Executive Officer of Princes Holdings Limited, the Irish multi-channel
television operating company of which we owned 20% until its sale in November
1998.
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<PAGE>
Charles H. R. Bracken was appointed Chief Financial Officer in November
1999. Prior to November 1999 Mr. Bracken served as Managing Director of
Strategy, Acquisitions and Corporate Development from March 1999. Mr. Bracken
became a member of the Board of Management in July 1999. From 1994, he held a
number of positions at Goldman Sachs International in London, most recently as
Executive Director, Communications, Media and Technology. While at Goldman
Sachs, he was responsible for providing merger and corporate finance advice to
a number of communications companies, including us.
Anton H.E. v. Voskuijlen has been on our Board of Management since April
1997 and has been Senior Vice President since May 1999. He also served as our
General Counsel from July 1996 until May 1999. Prior to joining us in 1996, he
served as Vice President, Business Affairs and Legal Counsel of Philips Media
in New York, New York.
Nimrod J. Kovacs was appointed Executive Chairman, Central Europe in August
1999. He was appointed our Managing Director of Eastern Europe in March 1998
and a member of our Board of Management in September 1998. He has served in
various positions with United, including President of United Programming, Inc.,
since December 1996, President, Eastern Europe Electronic Distribution & Global
Programming Group from January to December 1996 and Senior Vice President,
Central/Eastern Europe from March 1991 until December 1995.
Scott Bachman has served as our Managing Director of Technology and
Purchasing since February 1998. From March 1996 until February 1998, Mr.
Bachman was our Vice President of Engineering and the Chief Technology Officer.
From April 1991 to March 1996, Mr. Bachman was Vice President of Operations &
Technology Projects for Cable Television Laboratories, Inc.
Andrew Barron was appointed as Managing Director of Media in November 1999,
a new position created to oversee the development of our digital media
strategy. Prior to joining us, Mr. Barron was Executive Vice President of New
Media & Business Development at Walt Disney International Europe, with
responsibility for overseeing Walt Disney's Internet business in Europe and all
European businesses and business development initiatives for the company. Mr.
Barron joined Walt Disney in 1995 and negotiated a number of distribution
agreements for the Disney Channel as well as equity investments for Walt Disney
in the Central European region. Prior to joining Walt Disney, Mr. Barron worked
for McKinsey & Co. as a management consultant specialising in international
telecoms strategy and mergers and acquisitions activity.
Jeroen Bergman was appointed Managing Director of Video and Marketing in
July 1999. Prior to his appointment, Mr. Bergman was the Commercial Director at
Casema, a subsidiary of France Telecom, and the second largest cable television
operator in The Netherlands after us, a position he had held since 1996. From
1993 to 1996, Mr. Bergman worked for Optus Vision, and its shareholder Optus
Communications, a long distance and mobile communications operator in
Australia, primarily owned by Cable & Wireless.
Steven D. Butler was appointed Managing Director of UPC Capital Markets and
Treasurer in February 1998. Mr. Butler is responsible for all corporate and
project/debt equity financing activities, as well as banking and investor
relations. From July 1995 until February 1998, Mr. Butler served as out Vice
President and Treasurer. Prior to July 1995, Mr. Butler served as Director of
Finance at United from May 1991.
Sudhir Ispahani has been Managing Director of Operations and Technology for
chello broadband since March 1999 with primary responsibility for developing
and implementing chello's technology architecture. Mr. Ispahani joined chello
broadband as Corporate Technology Officer in July 1998 and has been a member of
chello broadband's Management Board since November 1998. From 1988 until he
joined chello broadband in July 1998, Mr. Ispahani worked as Director of
Service Direct for MCI.
Roger Lynch was appointed President and Chief Executive Officer of chello
broadband in November 1999. Prior to November 1999, Mr. Lynch served as
President and Chief Financial Officer of chello broadband from July 1999. Prior
to joining us, Mr. Lynch spent five years at Morgan Stanley Dean Witter where
he was responsible for the bank's Internet corporate finance activity in
Europe. In addition, Mr. Lynch was Morgan Stanley's Internet sector specialist
and had advised us and chello broadband during the year preceding his
appointment with us.
156
<PAGE>
Shane O'Neill joined us as Managing Director, Strategy, Acquisitions and
Corporate Development in November 1999. Prior to joining us, Mr. O'Neill spent
seven years at Goldman Sachs in the New York, Sydney and London offices. Most
recently, Mr. O'Neill was an Executive Director in the Advisory Group for
Goldman Sachs in London where he worked on a number of mergers & acquisitions
and corporate finance transactions for companies in the communications
industry, including UPC. Prior to joining Goldman Sachs, Mr. O'Neill spent four
years at Macquarie Bank in Sydney as well as three years at KPMG in Dublin
where he qualified as a chartered accountant.
Simon Oakes was appointed our Managing Director of Programming in March
1998, responsible for our programming operations and development activities.
From 1994 until joining us, Mr. Oakes independently developed and produced
feature films including Single Girls' Diary (Granada Films), The Maiden of
Buttermere (Tribeca and United Artists) and Cave (Working Title and Polygram).
From 1989 until 1994, Mr. Oakes served as Co-chairman of Crossbow Films, a film
production company.
Iain Osborne has been Managing Director of Marketing, Sales and Portal for
chello broadband since March 1999 and has been a member of the Board of
Management since January 1999. Mr. Osborne joined the company in July 1998 from
Yahoo! Inc. where he was Marketing and Communications Director, Europe.
Ray D. Samuelson was appointed our Managing Director of Finance and
Accounting in February 1998, responsible for all our accounting, reporting,
budgeting, management information systems and administrative activities. From
our formation in July 1995 until February 1998, Mr. Samuelson served as Vice
President of Finance & Accounting. From 1992 to 1995, he was Vice President of
Finance and Administration of the Cable Operations Division at United. Prior to
Mr. Samuelson's appointment with United, he was seconded as a US WEST employee
from 1990 to 1992 as the Chief Financial Officer of United's and US WEST's
Norwegian, Swedish and Hungarian cable television partnership.
Anton M. Tuijten joined our company in September 1998 as Vice President of
Legal Services and was appointed our General Counsel in May 1999. Mr. Tuijten
is also General Counsel for and a member of the Management Board of chello
broadband. From 1992 until joining us, Mr. Tuijten was General Counsel and
Company Secretary of Unisource, an international telecommunications company.
157
<PAGE>
Executive Compensation
The following table sets forth the 1997 and 1998 compensation for our chief
executive officer, the four other highest compensated executive officers at
fiscal year end 1998 and one other executive officer who was not an executive
officer at fiscal year end 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation(1)
-------------------------------
Name and Principal Other Annual All Other
Position Year Salary Bonus Compensation(2) Compensation(3)
- ------------------ ---- ------- ------- --------------- ---------------
(Dutch guilders)
<S> <C> <C> <C> <C> <C>
Mark L. Schneider(4) ..... 1997 584,940 -- -- 109,510
Chief Executive Officer 1998 738,010 -- -- 222,842
J. Timothy Bryan(5) ...... 1998 597,300 210,260 1,657 9,577
Former President and
Chief Financial Officer
Gene Musselman(6)......... 1997 131,251 -- -- 6,318
Chief Operating Officer, 1998 499,663 149,325 7,403 142,442
Telekabel Wien
Margaret M. Houlihan(7)... 1997 335,790 -- -- 61,636
Former Managing Director, 1998 449,637 -- 46,310 176,205
Video Services
Nimrod Kovacs(8).......... 1998 547,525 -- 1,657 9,557
Managing Director,
Eastern Europe
Michael Simmons(9)........ 1998 448,509 -- -- 76,208
Former Managing Director,
Portugal
</TABLE>
- --------------------
(1) Compensation amounts (except for automobile allowance payments and school
fees, if applicable, which were paid in Dutch guilders) for the persons
identified above were converted from U.S. dollars to Dutch guilders using
the average exchange rate for the respective years.
(2) Consisted of automobile lease, operating and maintenance payments, and
health and life insurance payments for some of the executive officers
listed above.
(3) Our executive officers who are United States citizens were employed by
United and seconded to us during 1997 and 1998. United compensates all
United States citizens working for us outside the United States for certain
expenses and adjustments related to non-U.S. assignments and we reimburse
United for such expenses. These expenses and adjustments include home leave
payments for trips back to the employee's home country, housing allowance
and school tuition fees for the employee's children. See "--Agreements with
Executive Officers." Certain compensation identified in this column also
consisted of matching employer contributions under United's employee 401(k)
plan or our pension plan, as applicable.
(4) Mr. Schneider was appointed as our Chief Executive Officer in April 1997
but continued to serve as a consultant for United until September 1998. The
salary amount shown consisted of the total salary paid to Mr. Schneider for
his duties to us and United. Other compensation consisted of amounts
related to Mr. Schneider's non-U.S. assignment.
(5) Mr. Bryan was our President and Chief Financial Officer from September 1998
to June 1999, prior to which time he was the Chief Financial Officer of
United. At the annual general shareholders meeting on July 23, 1999, Mr.
Bryan was released from his duties as a member of the Board of Management.
The salary amount shown consisted of the total salary paid to Mr. Bryan for
his duties to us and United. Mr. Bryan received a performance-based bonus
for 1998. Other annual compensation consisted of health and life insurance
payments and other compensation consisted of matching employer
contributions under United's employee 401(k) plan and personal use of an
airplane.
(6) Mr. Musselman received a performance-based bonus for 1998. Other annual
compensation consisted of health and life insurance payments. Other
compensation consisted of amounts related to Mr. Musselman's non-U.S.
assignment and matching employer contributions under United's employee
401(k) plan.
(7) Ms. Houlihan is no longer our employee. Other annual compensation consisted
of an automobile allowance and health and life insurance payments and other
compensation consisted of amounts related to Ms. Houlihan's non-U.S.
assignment and matching employer contributions under United's employee
401(k) plan.
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<PAGE>
(8) Mr. Kovacs was appointed as our Managing Director of Eastern Europe in
March 1998. The salary amount shown consisted of the total salary paid to
Mr. Kovacs for his duties to us and United. Other annual compensation
consisted of health and life insurance payments and other compensation
consisted of matching employer contributions under United's employee 401(k)
plan.
(9) We sold our interest in our Portuguese system in February 1998. Mr. Simmons
is no longer our employee. Other annual compensation consisted of health
and life insurance payments and other compensation related to Mr. Simmons'
non-U.S. assignment and matching employer contributions under United's
employee 401(k) plan.
The following table sets forth information concerning options that were
granted by us to the executive officers listed in the Summary Compensation
Table above during the fiscal year ended December 31, 1998.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Individual Grants
--------------------------
Potential Realizable
Value at Assumed
Number of Percentage of Annual Rates of Stock
Securities Total Options Price Appreciation
Underlying Granted to Exercise for Option Term(1)
Options Employees in Price Expiration ---------------------
Granted Fiscal Year (NLG/Share) Date 5% (NLG) 10% (NLG)
---------- ------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mark L. Schneider....... 975,000(2) 41.6%(3) NLG12.00 12/06/03 75,747,750 91,221,000
J. Timothy Bryan........ 90,000(4) 4.4%(5) NLG12.00 09/21/99(6) 679,206 1,721,242
397,500(7) 19.3%(5) NLG13.57 09/21/99(6) 3,392,036 8,596,766
</TABLE>
- --------------------
(1) The potential realizable value is based on assumed annual rates of stock
price appreciation from our initial public offering, at NLG63.91, to the
end of the option term.
(2) Vests in 48 equal monthly installments from April 1, 1997.
(3) Represents percentage of total options granted to employees under the
Equity Stock Option Plan in last fiscal year.
(4) Shares are subject to phantom options, which UPC may, at its option, pay in
cash or in UPC shares on exercise, which options vest in 48 equal monthly
installments from April 1, 1997. Mr. Bryan is no longer our employee.
(5) Represents percentage of total options granted to employees under the
Phantom Stock Option Plan in last fiscal year.
(6) The original expiration date of these options was April 1, 2007 for 90,000
of the options and September 24, 2008 for 397,500 of the options. However,
the vested options expired on September 21, 1999, the date that is 90 days
from the last date of Mr. Bryan's employment with us. The unvested options
were cancelled upon termination of Mr. Bryan's employment with us.
(7) Shares are subject to phantom options, which UPC may, at its option, pay in
cash or in UPC shares on exercise, which options vest in 48 equal monthly
installments from October 1, 1998. Mr. Bryan is no longer our employee.
159
<PAGE>
The following table sets forth information with respect to the executive
officers listed in the Summary Compensation Table above holding unexercised
options as of December 31, 1998. The value of unexercised in-the-money options
represents the difference between the price of the ordinary shares A in our
initial public offering, being NLG63.91, and the exercise price of the options,
being NLG12.00 for Mr. Schneider's options and NLG12.00 and NLG13.57 for Mr.
Bryan's options. See "--Stock Option Plans" and "Security Ownership of Certain
Beneficial Owners and Management."
Aggregated Fiscal Year-end Option Values
<TABLE>
<CAPTION>
Number of Securities
Number of Underlying Unexercised
Ordinary Options at Fiscal Year- Value of Unexercise
Shares A End In-the-Money Options(1)
Acquired on Values ------------------------- ---------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- --------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark L. Schneider....... -- -- 406,250 568,750 NLG21,088,438 NLG29,523,812
J. Timothy Bryan........ 12,500(2) US$59,000 62,344 425,156 NLG 3,095,410 NLG21,109,198
</TABLE>
- --------------------
(1) UPC sold shares in its initial public offering at NLG63.91 per share on
February 11, 1999. Such share price is the basis for the values determined
in the above table for UPC.
(2) Represents the number of shares underlying the phantom options, which were
exercised with respect to an affiliate of UPC. The value was determined by
the United Board of Directors. Mr. Bryan is no longer our employee.
Agreements with Executive Officers
We do not have employment agreements with any of the executive officers
listed in the Summary Compensation Table above. Mr. Simmons and Ms. Houlihan
had employment agreements with United that have been terminated. Mr. Schneider
has a consulting agreement with United and Mr. Musselman and Mr. Kovacs have
employment agreements with United. We and United are parties to a Secondment
Agreement, pursuant to which Mr. Schneider, together with all our other U.S.
citizen employees, are seconded to us. See "Certain Transactions and
Relationships--Relationship with United and Related Transactions." Pursuant to
the Secondment Agreement, we reimburse United for all expenses incurred by
United in connection with the seconded employees.
Mr. Schneider's consulting agreement with United is for a term of five
years and expires May 31, 2000. Mr. Schneider receives a fee of NLG759,000 per
year. If Mr. Schneider's employment is terminated without cause or if he dies
prior to the end of the term of the agreement, he or his personal
representative shall receive all payments due under the agreement through its
term.
United, UPC and Mr. Bryan entered into an employment agreement in October
1998. Mr. Bryan ceased to be employed by United in June 1999 and the parties
are currently in dispute over the terms of the agreement.
Stock Option Plans
Equity Stock Option Plan. Under our Equity Stock Option Plan, the
Supervisory Board may grant incentive stock options to our employees. There are
approximately 4.4 million total options outstanding under our stock option
plan. The Board of Management may from time to time increase the number of
shares available for granting under our stock option plan. Options under our
stock option plan must be granted at fair market value (as determined by the
Supervisory Board) at the time of the grant. The ordinary shares A available
under our stock option plan are held by Stichting Administratiekantoor UPC, a
stock option foundation, which administers our stock option plan. Each option
represents the right to acquire from the foundation a depositary receipt
representing the economic value of one share. United appoints the board members
of the foundation and thus controls the voting of the foundation's ordinary
shares A. Proceeds from the exercise of these options remain in the foundation.
Upon liquidation of the foundation, any remaining assets revert to United.
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All options are exercisable upon grant and for the next five years. In
order to introduce the element of "vesting" of the options, our stock option
plan provides that even though the options are exercisable immediately, the
shares to be issued or options granted in 1996 are deemed to "vest" 1/36th each
month for a three-year period from the date of the option grant. The date of
the option grant is generally the employee's employment commencement date. For
options granted in 1998 and thereafter, the vesting period has been increased
to four years and the options vest 1/48th each month. No options were granted
in 1997. If the employee's employment terminates other than in the case of
death, disability or the like, all unvested options previously exercised must
be resold to the foundation at the original purchase price and all vested
options must be exercised within 30 days of the termination date. The
Supervisory Board may alter these vesting schedules in its discretion.
Our stock option plan contains limited anti-dilution protection in the case
of stock splits, stock dividends and the like. Our stock option plan also
provides that, in the case of a change of control, the acquiring company has
the right to require us to acquire all of the options outstanding at the per
share value determined in the transaction giving rise to the change of control.
In 1996, we loaned the following officers the amounts indicated to enable
such officers either to exercise stock options to acquire our shares, to pay
the tax on such exercise or both: Scott Bachman (exercise and tax,
NLG1,635,835); Steve Butler (exercise and tax, NLG1,226,877); Ray Samuelson
(exercise and tax, NLG2,453,750); Michael Simmons (exercise and tax,
NLG787,000); David D'Ottavio (exercise and tax, NLG6,543,340); and Anton H.E.
van Voskuijlen (tax only, NLG106,245). In 1996, the total of all loans made to
officers was NLG12,753,047. In 1998, we loaned Mr. van Voskuijlen NLG40,500
(tax only) in relation to an additional grant. These loans bear no interest.
The tax payable over the imputed interest is added to the loan. All loans made
in 1996 are due 18 months after the date of our initial public offering. Mr.
van Voskuijlen's loans are due upon exercise of his options.
Through December 31, 1998, options to acquire a total of 6,333,000 ordinary
shares A have been granted under the Plan. Of these, options representing
375,000 ordinary shares A have been exercised and resold to the foundation and,
therefore, are available for future option grants. Options representing 82,500
ordinary shares A have been canceled. The exercise prices for the options range
from NLG10.49 to NLG13.57.
In March 1998, we granted Mark Schneider options for 975,000 ordinary
shares A at an exercise price of NLG12.00, the price at which shares were
acquired by United and us from Phillips in connection with the purchase in
December 1997.
Phantom Stock Option Plan. Under our phantom stock option plan, the
Supervisory Board has granted certain employees the right to receive an amount
in cash or stock, at the Supervisory Board's option, equal to the difference
between the fair market value of the ordinary shares A and the stated grant
price for a specified number of phantom options. Through December 31, 1998,
options representing 2,057,500 phantom shares remained outstanding. The grant
prices for the phantom options range from NLG12.00 to NLG13.57. The phantom
options have a four-year vesting period and vest 1/48th each month. The phantom
options may be exercised during the period specified in the option certificate,
but in no event later than ten years following the date of the grant. 744,100
of the outstanding phantom options were fully vested on December 31, 1998. Our
phantom stock option plan contains limited anti-dilution protection in the case
of stock splits, stock dividends and the like. Our phantom stock option plan
also provides that, in some cases upon a change of control, all phantom options
outstanding become fully exercisable. Upon exercise of the phantom options, we
may elect to issue such number of ordinary shares A as is equal to the value of
the cash difference in lieu of paying the cash.
Our phantom stock option plan also provides that upon the offering, an
employee holding phantom options may convert these into options for ordinary
shares A under our stock option plan. If the employee elects not to do so, upon
exercise of the phantom options we may elect to issue such number of ordinary
shares A equal to the value of the cash difference in lieu of paying cash to
such employee.
chello broadband Equity Option Plan. Under chello broadband's equity option
plan, the Supervisory Board may grant incentive stock options to chello
broadband employees. Options under chello broadband's equity option plan must
be granted at fair market value (as determined by the Supervisory Board) at the
time of grant.
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All options are exercisable upon grant and for the next five years. In
order to introduce the element of "vesting" of the options, the chello
broadband equity option plan provides that even though the options are
exercisable immediately, the shares to be issued or options granted are deemed
to vest 1/48th each month for a four-year period from the date of grant. If the
employee's employment terminates other than in the case of death, disability or
the like, all unvested options previously exercised must be resold to chello
broadband at the original purchase price, or all vested options must be
exercised, within 30 days of termination date. The Supervisory Board may alter
these vesting schedules in its discretion.
The chello broadband equity option plan contains limited anti-dilution
protection in the case of stock splits, stock dividends and the like. The
chello broadband equity option plan also provides that, in the case of change
in control, the acquiring company has the right to require chello broadband to
acquire all of the options outstanding at the per share value determined in the
transaction giving rise to the change in control.
In 1999, we granted Mark Schneider options for 250,000 chello broadband
shares. Also during 1999, we granted John Riordan options for 300,000 chello
broadband shares. Both of these grants were at an exercise price of NLG20.00.
In 1999, we loaned Mark Schneider NLG5.0 million to enable him to either
exercise chello stock options, to pay the tax on such exercise, or both. In
1999, we also loaned Mr. Riordan NLG187,200 to enable him to pay tax on the
exercise of chello broadband stock options. These loans bear no interest. The
tax payable over the imputed interest is added to the loans. The loans are due
upon sale of the shares or five years from the date of grant, whichever
comes first.
chello broadband Phantom Stock Option Plan. Under chello broadband's
phantom stock option plan, the Supervisory Board has granted to certain chello
broadband employees the right to receive an amount in cash or our stock, at the
Supervisory Board's option, equal to the difference between the fair market
value of a share of chello broadband and the stated grant price for a specified
number of phantom options. Through December 31, 1998, options representing
570,000 chello broadband shares remained outstanding. The grant prices for
these chello broadband phantom options is NLG10.00. The chello broadband
phantom options have a four year vesting period and vest 1/48th each month. The
chello broadband phantom options may be exercised during the period specified
in the option certificate, but in no event later than ten years following the
date of grant. 70,625 of the outstanding phantom options were fully vested on
December 31, 1998. The chello broadband phantom stock option plan contains
limited anti-dilution protection in the case of stock splits, stock dividends,
and the like. The chello broadband phantom stock option plan also provides
that, in certain cases of change in control, all phantom options outstanding
become fully exercisable.
The chello broadband phantom stock option plan also provides that upon an
initial public offering of chello broadband shares, an employee holding chello
broadband phantom options may convert these into options for chello shares
under chello broadband's equity stock option plan. If the employee elects not
to do so, upon exercise of the chello broadband phantom options we may elect to
issue such number of chello broadband shares equal to the value of the cash
difference in lieu of paying the cash.
Limitation of Liability and Indemnification Matters
Pursuant to Dutch law, each member of the Supervisory Board and Board of
Management is responsible to us for the proper performance of his or her
assigned duties. Our articles of association provide that the adoption by the
general meeting of shareholders of the annual accounts shall discharge the
Supervisory Board and Board of Management from liability in respect of the
exercise of their duties during the financial year concerned unless an explicit
reservation is made by the general meeting of shareholders. This discharge of
liability may also be limited by mandatory provisions of Dutch law, such as in
the case of bankruptcy, and furthermore extends only to actions or omissions
not disclosed in or apparent from the adopted annual accounts. In the event of
such actions or omissions, the members of the Supervisory Board or Board of
Management will be jointly and severally liable to third parties for any loss
sustained by such third parties as a result of such actions or omissions,
unless the Supervisory Board or
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<PAGE>
Board of Management member proves that he or she is not responsible for the
actions or omissions. Generally, under Dutch law, directors will not be held
personally liable for decisions based on reasonable business judgment.
Our articles of association provide that we must indemnify any person who:
. is or was a member of the Supervisory Board or the Board of Management;
. suffers any loss as a result of their position as a member of such
boards; and
. acted in good faith in carrying out their duties.
This indemnification will generally not apply if the person seeking
indemnification is found to have acted with gross negligence or wilful
misconduct in the performance of their duty to us, unless the court in which
the action is brought determines that indemnification is otherwise appropriate.
Our articles of association furthermore provide that a majority of the members
of the Supervisory Board (not being parties to the action) must approve any
indemnification, unless the entire Supervisory Board is named in the lawsuit,
in which case the indemnification may be approved by independent legal counsel
in a written opinion or by the general meeting of shareholders. The Supervisory
Board may extend the indemnification provisions of our articles of association
to any of our officers, employees or agents.
Compensation of Supervisory Board Members
All of the members of the Supervisory Board, other than Mr. De Lange, are
directors or employees of United. None of these members receive additional
compensation for serving on the Supervisory Board.
Compensation of Board of Management Members
The aggregate 1998 salary compensation for the entire Board of Management
is approximately NLG3.1 million. In addition, we provide our executive officers
with automobile allowances and other benefits. Expatriates also receive housing
allowances, foreign tax equalization payments and other compensation relating
to their foreign assignments.
Compensation Committee Interlocks and Insider Participation
We and United have concluded a secondment arrangement, pursuant to which
certain U.S. citizens employed by United are seconded to us. See "Certain
Transactions and Relationships--Relationship with United and Related
Transactions." Prior to our initial public offering in February 1999,
compensation for all members of our management who are employees of United was
set by the compensation committee of United and compensation for all of our
other employees was determined by the Supervisory Board. In February 1999, our
Supervisory Board established a compensation committee following the completion
of the initial public offering. The compensation committee is composed of Mr.
Fries, Ms. Spangler and Ms. Wildes, each of whom is a member of the Supervisory
Board. The members of our management who are employees of United, however, will
continue to have their compensation set by United's compensation committee.
None of the members of our compensation committee, the United compensation
committee or our Supervisory Board has served as a director or member of a
compensation committee of another company that had any executive officer that
was also one of our Supervisory Directors or a member of the compensation
committee of United.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of all classes of securities as of December 1, 1999, by
(1) each shareholder who is known by us to own beneficially more than 5% of the
outstanding ordinary shares at such date; (2) each of our Supervisory Directors
and our advisor to the Supervisory Board; (3) each of our executive officers;
and (4) all of our Supervisory Directors, advisors and executive officers as a
group. Because Messrs. G. Schneider, Cole, M. Schneider and Riordan are
directors of United, they may be deemed to beneficially own our shares held by
United. They disclaim any beneficial ownership of these shares and this table
does not include those shares.
<TABLE>
<CAPTION>
Number of Percentage of
Ordinary Ordinary
Beneficial Owner Shares A Shares A
- ---------------- ---------- -------------
<S> <C> <C>
UnitedGlobalCom, Inc.(1)(2)........................... 79,715,876 54.9%
Microsoft Corporation(3).............................. 10,157,750 7.0
Gene W. Schneider(4).................................. 31,000 *
Michael T. Fries(5)................................... 3,051 *
John P. Cole, Jr. .................................... 1,525 *
Richard De Lange...................................... -- --
Ellen P. Spangler..................................... 305 *
Tina Wildes........................................... 3,051 *
Mark L. Schneider(6).................................. 680,000 *
John F. Riordan(7).................................... 351,220 *
Charles H.R. Bracken(8)............................... 41,667 *
Nimrod J. Kovacs(9)................................... 37,831 *
Anton H.E. v. Voskuijlen(10).......................... 260,938 *
All directors, director nominees and executive offi-
cers as a
group (11 persons)................................... 1,372,757 *
</TABLE>
- --------------------
* Less than 1%.
(1) The figures for the percent of shares are based on 145,201,499 ordinary
shares A outstanding on December 1, 1999 (after elimination of shares held
by subsidiaries).
(2) Includes 2,628,407 ordinary shares A held by the stock option foundation,
the board members of which are appointed by United. The address of
UnitedGlobalCom, Inc. is 4643 South Ulster Street, Suite 1300, Denver,
Colorado 80237, U.S.A.
(3) The address of Microsoft Corporation is One Microsoft Way, Redmond,
Washington 98052, U.S.A.
(4) Includes 10,000 ordinary shares A held by the Gene W. Schneider Family
Trust of which Mr. Schneider is a co-trustee. Also includes 1,000 ordinary
shares A owned by his spouse.
(5) Represents 3,051 ordinary shares A owned by Mr. Fries' spouse.
(6) Mr. M. Schneider holds currently exercisable options for 975,000 ordinary
shares A of which options for 325,000 ordinary shares A are subject to our
repurchase right, which expires April 1, 2001. Includes 10,000 ordinary
shares A held by the Gene W. Schneider Family Trust of which Mr. M.
Schneider is a co-trustee.
(7) Mr. Riordan holds currently exercisable options for 525,000 ordinary shares
A of which options for 175,000 ordinary shares A are subject to our
repurchase right, which right expires April 1, 2001. Also includes 1,220
ordinary shares A owned by Mr. Riordan's spouse.
(8) Mr. Bracken holds currently exercisable options for 250,000 ordinary shares
A of which options for 208,333 ordinary shares A are subject to our
repurchase right, which expires March 15, 2003.
(9) Includes 5,000 ordinary shares A held by Kovacs Communications, Inc.
(10) Represents currently exercisable options for 290,000 ordinary shares A of
which options for 39,062 ordinary shares A are subject to our repurchase
right, which right expires January 1, 2002.
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CERTAIN TRANSACTIONS AND RELATIONSHIPS
Relationship with Philips
We began operations as a joint venture between United and Philips in July
1995. Both shareholders contributed various assets to us.
In December 1997, we and United acquired all of Philips' interest in us. As
part of this transaction, we purchased from Philips:
. 3.17 million shares of United Class A Common Stock for NLG66.8 million,
the then-current market value of such shares;
. a portion of the pay-in-kind convertible notes at their fully accreted
value for NLG170.4 million; and
. 24.378 million ordinary shares A for NLG292.6 million.
We also converted the remaining pay-in-kind convertible notes purchased by
United into 15.18 million ordinary shares A.
One of the Supervisory Board members, Mr. De Lange, continues to be a
member of the Supervisory Board pursuant to amendments to our articles of
association in connection with the acquisition of UPC. Under our articles of
association, Philips may appoint and remove one of our Supervisory Directors,
so long as Philips has any liability in respect of the agreements relating to
the Telekabel Wien system, which is expected to terminate by 2006. We have
agreed to indemnify Philips against such liability. We and United have agreed
to use our reasonable best efforts to obtain the release by the City of Vienna
of Philips from such liability. Philips' representative on the Supervisory
Board must approve (1) the disposition of assets aggregating more than 30% of
the consolidated assets or generating more than 30% of the consolidated
revenues of the Telekabel Group, or (2) our merger or consolidation into any
other entity that is not wholly-owned by United.
Loans to Executive Officers
In 1998, we loaned him NLG40,500 to enable him to pay the tax on the stock
options received years. In 1999, we loaned Mr. M. Schneider NLG5.0 million to
enable him to exercise stock options in our chello broadband subsidiary granted
to him during this year. In 1999, we also loaned Mr. Riordan NLG187,200 to
enable him to pay tax on the exercise of stock options in our chello broadband
subsidiary granted to him during the year. These recourse loans bear no
interest. The loans are due upon exercise of the respective options. We made
similar loans to other employees for the purpose of exercising and/or paying
tax on options. See "Management--Stock Option Plans."
In October 1999, we agreed to guarantee for a period of 60 days the bridge
loan Mr. M. Schneider obtained in connection with the purchase of his home. Our
guarantee of this (Euro)7.6 million bridge loan will be secured by
Mr. M. Schneider's vested stock options and a right to a first mortgage on his
home. If Mr. M. Schneider defaults on this loan and the guarantee is enforced,
we have a power of attorney which allows us to exercise the relevant number of
stock options and sell the shares in satisfaction of Mr. M. Schneider's
obligation. Upon an event of default, we can also execute a first mortgage.
Eastern European Transaction
We have agreed to sell 3% of our interest in our Eastern European
operations (other than @Entertainment) to Nimrod Kovacs for a purchase price
based on our investment in these interests at historical cost plus 12% interest
thereon from the time of investment through the date of closing. This is
approximately NLG7,995,000, assuming completion of expected financing in
Eastern Europe. Mr. Kovacs is a member of our Board of Management, and our
Executive Chairman, UPC Central Europe.
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The Discount Group's Option
In November 1998, a subsidiary of Discount Investment Corporation loaned us
$90.0 million (the "DIC Loan") to acquire additional interests in our Israeli
operation. In connection with the DIC Loan, we granted an option to the
Discount Group, our partner in our Israeli system and an affiliate of Discount
Investment Corporation, to acquire ordinary shares A at a price per share equal
to the price in the initial public offering, discounted by a factor of 10%. The
Discount Group exercised its option and we issued 1,558,654 ordinary shares A
to it at the same time as the closing of our initial public offering. The
aggregate purchase price for the shares was equal to the sum of $45 million,
plus interest thereon at the rate of 8% per annum from November 9, 1998 through
the closing of the exercise of the option. The Discount Group currently owns
about 1.2% of our outstanding ordinary shares A.
In connection with the exercise of the option, we agreed to enter into a
registration rights agreement with the Discount Group and a shareholders'
agreement with the Discount Group and United.
Under the shareholders' agreement, United agreed to vote in favor of one
supervisory board member nominated by the Discount Group for as long as the
Discount Group and its affiliates retain at least the number of ordinary shares
A originally acquired upon the exercise of the option. In addition, the
Discount Group has the right to participate on equal terms in connection with
sales of ordinary shares A by United, including the right to sell the Discount
Group's entire interest in us in connection with a sale by United of a
controlling interest in us. The Discount Group also has the right to negotiate
with United prior to certain sales of ordinary shares A by United. United has a
right of first refusal with respect to a sale of ordinary shares A by the
Discount Group and the right to require that the Discount Group agrees to a
merger or sale of all of our shares if proposed by United. In addition, there
are certain limited restrictions on the entities or persons to whom the
Discount Group may transfer its ordinary shares A.
Upon the exercise of its option, the Discount Group received an additional
option to acquire ordinary shares A from us at a price per share equal to the
greater of (1) the price in our initial public offering or (2) the average sale
price of our ordinary shares A on the Stock Market of Amsterdam Exchanges for
the 30-day period immediately preceding the exercise date. The aggregate
purchase price for the ordinary shares A purchased pursuant to the additional
option would be equal to the sum of $45.0 million, plus interest thereon at the
rate of 8% per annum from November 9, 1998 through the closing of the
additional option. The transfer rights and restrictions set forth in the
registration rights agreement and the shareholders' agreement discussed above
will be applicable with respect to the ordinary shares A acquired by the
Discount Group upon the exercise of the additional option. The additional
option will terminate if it is not exercised on or before September 30, 2000.
Relationship With United and Related Transactions
United is a leading provider of video, voice and data services outside the
United States. Together with its strategic and financial partners, United has
ownership interests in multi-channel television systems in operation or under
construction in over 20 countries. United's operations are organized in three
geographic regions: (1) Europe, consisting of United's interest in us; (2)
Asia/Pacific, including investments in operating systems and development
projects in Australia, New Zealand, the Philippines, Tahiti and China; and (3)
Latin America, including multi-channel television systems in Brazil, Chile,
Mexico and Peru.
Control by United. Immediately prior to our initial public offering, United
held effectively all of the voting control over us and held all of our issued
and outstanding ordinary shares A other than approximately 7.7% of such shares
that were registered in the name of the stock option foundation to support our
stock option plan. The foundation currently has the right to shares totaling
2.0% of our issued and outstanding ordinary shares A. United appoints the board
members of the foundation and thus controls the voting of these shares. See
"Management--Stock Option Plans." United currently owns approximately 61.2% of
our outstanding ordinary shares A and all of our outstanding priority shares.
Assuming the completion of the offering of our ordinary shares A, United will
own 55.5% of our ordinary shares A. Because we are a strategic holding of
United, United will continue to control us for the foreseeable future. Five
members of our six-member Supervisory Board are directors, officers or
employees of United.
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Transactions with United. As part of the acquisition of UPC, we acquired
approximately 3.17 million shares of United's Class A common stock. We
subsequently sold 384,531 of these shares in exchange for certain interests in
the Irish system and Tara. We currently hold approximately 2.8 million shares
of United's Class A common stock, which currently represents approximately 7%
of United's outstanding common stock. We plan to contribute these shares to a
new joint venture to which Liberty Media and Microsoft will contribute
approximately 4.9 million shares of United's Class B common stock. The joint
venture will hold approximately 14.5% of United's common stock, on a fully
diluted basis. The joint venture and its members will be bound by voting and
standstill agreements with United and certain of its controlling shareholders.
United has sold to us, in exchange for 6,330,340 of our ordinary shares A,
United's 37.5% voting and 44.75% economic interest in the telephone system
operating in the Monor region of Hungary and its interest in the Tara
programming joint venture. United has also sold to us its interest in the IPS
programming joint venture in exchange for 4,955,264 ordinary shares A.
Agreements with United. Subject to certain limitations, beginning one year
after the date of our initial public offering, United may require us to file a
registration statement under the Securities Act of 1933 with respect to all or
a portion of United's ordinary shares A or ADSs, and we are required to use our
best efforts to effect such registration, subject to certain conditions and
limitations. We are not obligated to effect more than three of these demand
registrations using forms other than Form S-3 or F-3, as the case may be.
United may demand registration of such securities an unlimited number of times
on Form S-3 or F-3, as the case may be, except that we are not required to
register United's ordinary shares A on Form S-3 more than once in any six-month
period. United also has the right to have its ordinary shares A included in any
registration statement we propose to file under the Act except that, among
other conditions, the underwriters of any such offering may limit the number of
shares included in such registration. We have also granted United rights
comparable to those described above with respect to the listing or
qualification of the ordinary shares A held by United on the Stock Market of
Amsterdam Exchanges or on any other exchange and in any other jurisdiction
where we previously have taken action to permit the public sale of our
securities.
United incurs certain overhead and other expenses at the corporate level on
behalf of us and its other operating companies. These expenses include costs
not readily allocable among the operating companies, such as accounting,
financial reporting, investor relations, human resources, information
technology, equipment procurement and testing expenses, corporate offices lease
payments and costs associated with corporate finance activities. United also
incurs direct costs for its operating companies such as travel expenses and
salaries for United employees performing services on behalf of its respective
operating companies. We and United are parties to a management services
agreement, with an initial term through 2009, pursuant to which United will
continue to perform these services for us. Under the management services
agreement, we will pay United a fixed amount each month as its portion of such
unallocated expenses. This fixed amount is initially $300,000 per month. After
the first year of the management services agreement, the fixed amount may be
adjusted from time to time by United to allocate these corporate level expenses
among United's operating companies, including us, taking into account the
relative size of the operating companies and their estimated use of United
resources. In addition, we will continue to reimburse United for costs incurred
by United that are directly attributable to us.
We and United are also parties to a secondment agreement that specifies the
basis upon which United may second certain of its employees to us. United's
secondment of employees to us helps us attract and retain U.S. citizens and
other employees who want U.S. benefit plans, without creating a separate U.S.
employment subsidiary. We generally are responsible for all costs incurred by
United with respect to any seconded employee's employment and severance. United
may terminate a seconded employee's employment if the employee's conduct
constitutes willful misconduct that is materially injurious to United. During
the year ended December 31, 1998, we incurred approximately NLG10.7 million for
costs associated with the seconded employees, which costs were reimbursable to
United.
We have agreed with United that so long as United holds 50% or more of our
outstanding ordinary shares A, (1) United will not pursue any video services,
telephone or Internet access or content business opportunities
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specifically directed to the European or Israeli markets, unless it has first
presented such business opportunity to us and we have elected not to pursue
such business opportunity, and (2) we will not pursue any video services,
telephone or Internet access or content business opportunities in Saudi Arabia
or in other markets outside of Europe or the Middle East, unless we have first
presented such business opportunity to United and United has elected not to
pursue such business opportunity. Either party may pursue any business in the
United States and its territories and possessions without regard to activities
of the other.
We and United have agreed that we will provide audited financial statements
to United in such form and with respect to such periods as are necessary or
appropriate to permit United to comply with its reporting obligations as a
publicly-traded company and that we will not change our accounting principles
without United's prior consent. We have consented to the public disclosure by
United of all matters deemed necessary or appropriate by United, in its sole
discretion, to satisfy the disclosure obligations of United or any of its
affiliates thereof under the United States federal securities laws or to avoid
potential liability under such laws. We have also agreed to indemnify United
against all liabilities United may incur in connection with United's
indemnification obligations under the underwriting agreement.
United Indentures. We, as a subsidiary of United, are restricted by the
covenants in United's indentures dated February 5, 1998 and April 29, 1999. The
United indentures contain covenants that, among other things, limit the ability
of United and its subsidiaries, including us, to:
. incur indebtedness and issue certain preferred stock in amounts exceeding
that permitted based upon financial ratios and other tests;
. repurchase equity interests from third parties other than United;
. make investments in non-controlled entities;
. enter into agreements restricting our ability to make distributions,
loans or other payments to equity holders;
. create certain liens;
. sell assets or issue equity for consideration other than cash or fail to
invest the cash proceeds of such sales within 360 days of the sale
periods; and
. enter into transactions with affiliates of United.
We will continue to be controlled by United and restricted by the terms of
its debt securities. We have agreed with United that, for as long as we are
subject to the provisions of United's indentures, as amended or supplemented,
or any other indenture or agreement to which United is a party governing
indebtedness of United that replaces or refinances any indebtedness governed by
United's indentures, as amended or supplemented, we will not take any action
that will result in a breach of United's indentures.
United's senior secured discount notes were issued pursuant to an
indenture, dated as of February 5, 1998, and its senior discount notes were
issued pursuant to an indenture, dated as of April 29, 1999. The foregoing
description of certain covenants of these indentures is a summary only, does
not purport to be complete and is qualified in its entirety by reference to all
of the provisions of the indentures.
Relationship With Microsoft
We have signed a letter of intent with Microsoft to establish a technical
services relationship and, as part of this, we have agreed to set up a series
of joint projects to deliver Internet, non-traditional telephone
and other interactive video and general services to digital cable set-top
devices, personal computers and other devices within and beyond our current
service areas. The particular terms of each joint project will be negotiated by
us and Microsoft. As part of this relationship, we plan to establish a
technology board to review technology issues and develop technology
specifications and directions. This board will be chaired by Scott Bachman, our
Managing Director of Technology, and would include representatives from
Microsoft and us. In addition, we and Microsoft will
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be preferred suppliers to one another, with Microsoft having the first
opportunity to license technologies to us. We will be given the opportunity to
present and offer our products to Microsoft offices in Europe. We and Microsoft
will also cooperate to advocate mutually-agreed standards and regulations to
the bodies in our service territories who set technical standards. We will also
have the right to license Microsoft software for the delivery of Internet
content services over our networks.
As part of this technology relationship, we have agreed that, on the
earlier of three months from the date of the letter of intent and the signing
of the first definitive agreement with Microsoft, we will grant Microsoft
warrants to purchase up to 3,800,000 ADSs representing ordinary shares A, which
would currently represent approximately 3.0% of our outstanding share capital.
Microsoft will have the option under these warrants to purchase ordinary shares
A instead of ADSs. These warrants can be exercised at a price of $28.00 per
ordinary share A or ADS. These warrants will not be exercisable until at least
February 16, 2000 and will expire February 16, 2003. In addition, half of the
warrants will not vest until certain performance standards are met. We have
agreed to grant Microsoft certain registration rights to be negotiated with
respect to the ADSs or shares to be issued upon exercise of these warrants. In
addition, we will grant Microsoft a preemptive right to purchase up to an
aggregate of 10% of chello broadband n.v. in any public or private equity
offering at the initial offering price and the right of first negotiation in
any private equity offering, other than to our or other cable operators in
exchange for carriage of chello broadband n.v.
Microsoft has agreed not to dispose of the ordinary shares A purchased in
our initial public offering for six months following such offering and it will
not acquire more than 15% of our total share capital without the prior written
approval of our Supervisory Board. If we enter into a definitive agreement, as
expected, Microsoft will extend its six-month lock-up period to one year.
In September 1999, we agreed to form a joint venture with Microsoft and
Liberty Media Corporation. We will contribute the 2.8 million Class A shares of
United that we own and the other parties will contribute 4.9 million Class B
shares of United. We will have a 50% interest in the new joint venture and
Liberty and Microsoft will share the other 50% and a $287.0 million redeemable
preferred interest in the joint venture to balance out the parties' ownership
interest. The joint venture intends to borrow the amount necessary to redeem
this preferred interest. This joint venture will further strengthen our
technical services relationship with Microsoft.
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DESCRIPTION OF THE NOTES
The Senior Dollar Notes due 2007 and the Senior Euro Notes due 2007
(together the "Senior Notes due 2007") were issued pursuant to an indenture
(the "Senior Notes due 2007 Indenture") dated as of October 29, 1999 (the
"Issue Date"), by and among United Pan-Europe Communications N.V. and Citibank
N.A., as trustee (the "Senior Notes due 2007 Trustee"); the Senior Dollar Notes
due 2009 and the Senior Euro Notes due 2009 (together the "Senior Notes due
2009" and together with the Senior Notes due 2007, the "Senior Notes") were
issued pursuant to an indenture (the "Senior Notes due 2009 Indenture" and
together with the Senior Notes due 2007 Indenture, the "Senior Notes
Indentures") dated as of October 29, 1999, by and among United Pan-Europe
Communications N.V. and Citibank N.A., as trustee (the "Senior Notes due 2009
Trustee" and together with the Senior Notes due 2007 Trustee, the "Senior Notes
Trustee"); and the Senior Discount Notes were issued pursuant to an indenture
(the "Discount Notes Indenture" and together with the Senior Notes Indentures,
the "Indentures") dated as of October 29, 1999, by and among United Pan-Europe
Communications N.V. and Citibank N.A., as trustee (the "Discount Notes Trustee"
and together with the Senior Notes Trustee, the "Trustees"). Although, for
convenience, the Senior Notes due 2007, the Senior Notes due 2009 and the
Senior Discount Notes are referred to as the "Notes," the Senior Notes due
2007, the Senior Notes due 2009 and the Senior Discount Notes were issued each
as a separate series and do not together have any class voting or other rights.
The following summaries of certain provisions of the Indentures are
summaries only, do not purport to be complete and are qualified in their
entirety by reference to all of the provisions of the Indentures.
You can find the definitions of certain capitalized terms in this section
under the subheading "- Certain Definitions." For purposes of this section,
references to "Company," "we," "our," or "us" includes only United Pan-Europe
Communications N.V. and not its Subsidiaries.
The terms of the Notes include those stated in the Indentures and those
made part of the Indentures by reference to the Trust Indenture Act of 1939, as
amended (the "TIA"). The Notes are subject to all such terms, and Holders of
Notes are referred to the Indentures and the Trust Indenture Act for a
statement thereof. A copy of forms of the Indentures are available from the
Company upon request.
The following description is a summary of the material provisions of the
Indentures. It does not restate the Indentures in their entirety. We urge you
to read the Indentures because they, and not this description, define your
rights as a Holder of the Notes.
The terms of the notes to be issued in the exchange offer are identical in
all material respects to the terms of the old notes, except for the transfer
restrictions relating to the old notes. Any old notes that remain outstanding
after the exchange offer, together with the notes issued under the same
Indenture in the exchange offer, will be treated as a single class of
securities under each indenture for voting purposes. When we refer to the term
"Note" or "Notes", we are referring to both the old notes and the notes to be
issued in the exchange offer .
Brief Description of the Notes
The Notes
The Notes are:
.our unsecured, general obligations;
. ranked equally in right of payment with all of our existing and future
unsubordinated and unsecured Indebtedness; and
. ranked senior in right of payment to all of our existing and future
Subordinated Indebtedness;
Our operations are conducted through our subsidiaries and, therefore, we
depend on the cash flow of our subsidiaries to meet our obligations, including
our obligations under the Notes. The Notes are effectively subordinated in
right of payment to all Indebtedness and other liabilities and commitments
(including trade payables and lease obligations) and preferred stock of our
subsidiaries. Any right we have to receive assets of any of our subsidiaries
upon the subsidiary's liquidation or reorganization (and the consequent right
of the Holders of the Notes to participate in those assets) will be effectively
subordinated to the claims of that subsidiary's creditors and preferred
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interest holders, except to the extent that we are recognized as a creditor of
the subsidiary, in which case our claims would still be subordinate in right
of payment to any security in the assets of the subsidiary and any
indebtedness of the subsidiary senior to that held by us. The term
"Subsidiaries" as used in this Description of the Notes does not include
Unrestricted Subsidiaries. On a pro forma basis, assuming the completion of
the October 1999 note offering and the completion of all the new acquisitions,
as of September 30, 1999, we would have owed NLG9.0 billion in consolidated
debt. See "Capitalization" and "Unaudited Pro Forma Condensed Consolidated
Financial Data."
Principal, Maturity and Interest
The Senior Notes
The Senior Euro Notes due 2009, the Senior Dollar Notes due 2009, the
Senior Euro Notes due 2007, and the Senior Dollar Notes due 2007 are limited
in aggregate principal amount to (Euro)101,000,000, $252,000,000,
(Euro)100,000,000, and $200,000,000, respectively, and will mature on November
1, 2009, November 1, 2009, November 1, 2007 and November 1, 2007,
respectively. Interest on the Senior Notes due 2009 and the Senior Notes due
2007 will accrue at a rate of 11.25% and 10.875% per annum, respectively, and
will be payable semi-annually in arrears, on each May 1 and November 1 (each,
an "Interest Payment Date"), commencing May 1, 2000, to the record holders
thereof on each preceding April 15 and October 15 (each, a "Record Date").
Interest on the Senior Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from October 29,
1999. Interest will be computed on the basis of a 360-day year comprised of
twelve 30-day months. Interest on overdue principal and (to the extent
permitted by law) on overdue installments of interest will accrue at a rate
equal to the rate borne by the Senior Notes.
A reference to payment of principal in respect of the Senior Notes includes
a payment of premium, if any. For additional information concerning payments
on the Senior Notes. See "--Payment on the Notes."
We have appointed Citibank N.A. to serve as registrar and principal paying
agent for the Senior Notes.
We have applied to list the Senior Notes on the Luxembourg Stock Exchange.
As long as the Senior Notes are listed on the Luxembourg Stock Exchange and as
long as the rules of this exchange require, we will also maintain a paying
agent and a transfer agent in Luxembourg.
The Senior Notes are issued without coupons and in fully registered form
only, in minimum denominations of $1,000 or (Euro)1,000, as the case may be,
and in integral multiples of $1,000 or (Euro)1,000. No service charge will be
made for any registration of transfer or exchange of the Senior Notes, but we
may require payment to cover any transfer tax or similar governmental charge.
The Senior Discount Notes
The Senior Dollar Discount Notes are limited in aggregate principal amount
at maturity to $478,000,000, and the Senior Discount Euro Notes are limited in
aggregate principal amount at maturity to (Euro)191,000,000, and will mature
on November 1, 2009 . The Accreted Value of the Senior Dollar Discount Notes
will accrete at a rate of 13.375% per annum and the Accreted Value of the
Senior Euro Discount Notes will accrete at a rate of 13.375% per annum, until
they reach their principal amount at maturity on November 1, 2004. Interest on
the Senior Discount Notes will be payable in cash semi-annually in arrears, on
each May 1 and November 1 (each, an "Interest Payment Date"), commencing May
1, 2005, to the record holders thereof on each preceding April 15 and October
15 (each, a "Record Date"). Interest will be computed on the basis of a 360-
day year comprised of twelve 30-day months. Interest on overdue principal and
(to the extent permitted by law) on overdue installments of interest will
accrue at a rate equal to the rate borne by the Senior Discount Notes.
A reference to payment of principal or Accreted Value in respect of the
Senior Discount Notes includes a payment of premium, if any. For additional
information concerning payments on the Senior Discount Notes, see "--Payment
on the Notes."
We have appointed Citibank N.A. to serve as registrar and principal paying
agent for the Senior Discount Notes.
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We have applied to list the Senior Discount Notes on the Luxembourg Stock
Exchange. As long as the Senior Discount Notes are listed on the Luxembourg
Stock Exchange and as long as the rules of this exchange require, we will also
maintain a paying agent and a transfer agent in Luxembourg.
The Senior Discount Notes are issued without coupons and in fully
registered form only, in minimum denominations of $1,000 and (Euro)1,000
principal amount at maturity, respectively, and in integral multiples of $1,000
and (Euro)1,000 principal amount at maturity, respectively. No service charge
will be made for any registration of transfer or exchange of the Senior
Discount Notes, but we may require payment to cover any transfer tax or similar
governmental charge.
Additional Amounts
All payments made by us under or with respect to the Notes will be made
free and clear of and without withholding or deduction for or on account of any
present or future Taxes imposed or levied by or on behalf of any Taxing
Authority within The Netherlands, or within any other jurisdiction in which the
Company is organized or engaged in business, unless we are required to withhold
or deduct Taxes by law or by the interpretation or administration thereof. If
we are required to withhold or deduct any amount for or on account of Taxes
(other than any estate, inheritance, gift, sales, excise, transfer, wealth, or
personal property tax, or similar non-income tax based assessment or
governmental charge) imposed by a Taxing Authority within (i) The Netherlands,
(ii) any jurisdiction in which the Company is organized or engaged in business,
or (iii) any other jurisdiction if payments on the Notes are made by the
Company or any Affiliate or agent of the Company from within such jurisdiction,
from any payment made under or with respect to the Notes, we will pay such
additional amounts ("Additional Amounts") as may be necessary so that the net
amount received by each Holder of Notes (including Additional Amounts) after
such withholding or deduction (including any withholding or deduction in
respect of such Additional Amounts) will not be less than the amount the Holder
would have received if such Taxes had not been withheld or deducted; provided
that no Additional Amounts will be payable with respect to a payment made to a
Holder with respect to any Tax or portion thereof which would not have been
imposed, payable or due:
(1) but for the existence of any present or former connection between the
Holder (or the beneficial owner of, or person ultimately entitled to
obtain an interest in, such Notes) and The Netherlands or other
jurisdiction in which the Company is organized or engaged in business
other than the holding of the Notes;
(2) but for the failure of the Holder to use its reasonable best efforts to
comply upon written notice by us delivered 60 days prior to any payment
date with a request by us to satisfy any certification, identification
or other reporting requirements which shall include any applicable
forms or instructions whether imposed by statute, treaty, regulation or
administrative practice concerning the nationality or residence of the
Holder or the connection of the Holder with The Netherlands or other
jurisdiction in which we are organized or engaged in business; provided
that the Holder's failure to comply with the 60 day requirement
described above shall not relieve us of our obligation to pay
Additional Amounts if the Holder's application for any requested
certification, identification or other reporting requirement remains
outstanding or is otherwise pending and the Holder continues to use its
reasonable best efforts to obtain such information; provided, further,
that we shall pay any Additional Amounts not paid on any payment date
as a result of the operation of this clause upon the satisfaction of
the relevant certification, identification or other reporting
requirements within 30 days after such payment date; provided, further,
that we shall not, as a result of such satisfaction occurring after the
payment date, have already irrevocably paid to the relevant taxing
authority the withheld or deducted amount in respect of which such
Additional Amounts would have been payable;
(3) but for the failure of the Holder (or the beneficial individual owner
of, or individual ultimately entitled to obtain an interest in, such
Notes) who is an individual citizen or resident of a member state of
the European Union to comply with a written notice by us delivered 60
days prior to any payment date with a request by us to provide any
certification, identification or other reporting requirement, whether
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imposed by statute, treaty, regulation or administrative practice, if
such action would otherwise eliminate the requirement for the
withholding or deduction of Taxes; or
(4) if the beneficial owner of, or person ultimately entitled to obtain an
interest in, such Notes had been the Holder of the Notes and would not
be entitled to the payment of Additional Amounts (excluding the impact
of the book-entry procedures described under "--Book-Entry
Procedures").
In addition, Additional Amounts will not be payable with respect to any Tax
which is payable and so paid otherwise than by withholding or deduction from
payments of, or in respect of principal of, or any interest or Liquidated
Damages on, the Notes. We will remit the full amount of any withholdings or
deductions for or on account of Taxes to the relevant Taxing Authority in
accordance with applicable law. We will make reasonable efforts to obtain
certified copies of tax receipts evidencing the payment of any Taxes so
deducted or withheld from each Taxing Authority imposing such Taxes. We will
furnish to the Holders, within 60 days after the date the payment of any Taxes
so deducted or withheld are due pursuant to applicable law, either certified
copies of tax receipts evidencing such payment by us or, if such receipts are
not obtainable, other evidence of such payments by us.
At least 30 days prior to each date on which any payment under or with
respect to the Notes is due and payable, if we will be obligated to pay
Additional Amounts with respect to such payment, we will deliver to the
respective Trustee an Officers' Certificate stating (i) the fact that such
Additional Amounts will be payable, (ii) the amounts so payable and (iii) such
other information necessary to enable the respective Trustee to pay such
Additional Amounts to the Holders of Notes on the Interest Payment Date.
Whenever in the Indentures or in this "Description of the Notes" there is
mentioned, in any context, the payment of amounts based upon the principal
amount or Accreted Value of the Notes or of Accreted Value, principal, premium,
if any, interest or Liquidated Damages, if any, or of any other amount payable
under or with respect to any of the Notes, such mention shall be deemed to
include mention of the payment of Additional Amounts to the extent that, in
such context, Additional Amounts are, were or would be payable in respect
thereof.
Optional Redemption
The Senior Notes due 2009
We will not have the right to redeem any Senior Notes due 2009 prior to
November 1, 2004 (other than out of the Net Cash Proceeds of an Equity Offering
of common stock, as described further below).
At any time on or after November 1, 2004, we may redeem the Senior Notes due
2009 for cash at our option, in whole or in part, upon not less than 30 days
nor more than 60 days notice to each Holder of Senior Notes due 2009, at the
following redemption prices (expressed as percentages of principal amount
thereof) if redeemed during the 12-month period commencing November 1 of the
years indicated below, in each case together with accrued and unpaid interest
and Liquidated Damages, if any, thereon to the date of redemption of the Senior
Notes due 2009 ("Redemption Date"):
<TABLE>
<CAPTION>
Senior
Notes
Year due 2009
- ---- --------
<S> <C>
2004................................................................... 105.625%
2005................................................................... 103.750%
2006................................................................... 101.875%
2007 and thereafter.................................................... 100.000%
</TABLE>
Prior to November 1, 2002, upon an Equity Offering of common stock for cash
of the Company, up to 35% of the aggregate original principal amount of each of
the Senior Dollar Notes due 2009 and the Senior Euro Notes due 2009 (determined
separately) issued pursuant to the Senior Notes Indenture may be redeemed at
our option within 90 days after the date of the closing of such Equity
Offering, on not less than 30 days, but not more than 60 days, notice
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to each Holder of the Senior Notes due 2009 to be redeemed, with cash in an
amount not in excess of the Net Cash Proceeds of such Equity Offering, at a
redemption price equal to 111.250% of the principal amount, in the case of the
Senior Dollar Notes due 2009 and 111.250% of the principal amount in the case
of the Senior Euro Notes due 2009, in each case together with accrued and
unpaid interest and Liquidated Damages, if any, thereon to the Redemption Date;
provided, however, that immediately following such redemption not less than 65%
of the aggregate original principal amount of the Senior Dollar Notes due 2009
and the Senior Euro Notes due 2009 (determined separately) originally issued
pursuant to the Senior Notes Indenture remain outstanding and provided,
further, that such redemption shall occur within 90 days after the date of the
closing of such Equity Offering.
If the Redemption Date hereunder is on or after an interest record date
("Record Date") on which the Holders of record have a right to receive the
corresponding interest due and Liquidated Damages, if any, and on or before the
associated Interest Payment Date, any accrued and unpaid interest and
Liquidated Damages, if any, due on such Interest Payment Date will be paid to
the Person in whose name a Senior Note due 2009 is registered at the close of
business on such Record Date, and such Interest and Liquidated Damages, if any,
will not be payable to Holders whose Senior Notes due 2009 are redeemed
pursuant to such redemption.
The Senior Notes due 2007
We will not have the right to redeem any Senior Notes due 2007 prior to
their maturity on November 1, 2007 (other than out of the Net Cash Proceeds of
an Equity Offering of common stock, as described in the next following
paragraph).
Prior to November 1, 2002, upon an Equity Offering of common stock for cash
of the Company, up to 35% of the aggregate original principal amount of each of
the Senior Dollar Notes due 2007 and the Senior Euro Notes due 2007 (determined
separately) issued pursuant to the Senior Notes Indenture may be redeemed at
our option within 90 days after the date of the closing of such Equity
Offering, on not less than 30 days, but not more than 60 days, notice to each
Holder of the Senior Notes due 2007 to be redeemed, with cash in an amount not
in excess of the Net Cash Proceeds of such Equity Offering, at a redemption
price equal to 110.875% of the principal amount, in the case of the Senior
Dollar Notes due 2007 and 110.875% of the principal amount in the case of the
Senior Euro Notes due 2007, in each case together with accrued and unpaid
interest and Liquidated Damages, if any, thereon to the Redemption Date;
provided, however, that immediately following such redemption not less than 65%
of the aggregate original principal amount of the Senior Dollar Notes due 2007
and the Senior Euro Notes due 2007 (determined separately) originally issued
pursuant to the Senior Notes Indenture remain outstanding and provided,
further, that such redemption shall occur within 90 days after the date of the
closing of such Equity Offering.
If the Redemption Date hereunder is on or after an interest record date
("Record Date") on which the Holders of record have a right to receive the
corresponding interest due and Liquidated Damages, if any, and on or before the
associated Interest Payment Date, any accrued and unpaid interest and
Liquidated Damages, if any, due on such Interest Payment Date will be paid to
the Person in whose name a Senior Note due 2007 is registered at the close of
business on such Record Date, and such Interest and Liquidated Damages, if any,
will not be payable to Holders whose Senior Notes due 2007 are redeemed
pursuant to such redemption.
The Senior Discount Notes
We will not have the right to redeem any Senior Discount Notes prior to
November 1, 2004 (other than out of the Net Cash Proceeds of an Equity Offering
of common stock, as described further below).
At any time on or after November 1, 2004, we may redeem the Senior Discount
Notes for cash at our option, in whole or in part, upon not less than 30 days
nor more than 60 days notice to each Holder of Senior Discount Notes, at the
following redemption prices (expressed as percentages of Accreted Value
thereof) if redeemed during the
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12-month period commencing November 1 of the years indicated below, in each
case together with accrued and unpaid interest and Liquidated Damages, if any,
thereon to the Redemption Date:
<TABLE>
<CAPTION>
Senior
Year Discount Notes
- ---- --------------
<S> <C>
2004............................................................. 106.688%
2005............................................................. 104.458%
2006............................................................. 102.229%
2007 and thereafter.............................................. 100.000%
</TABLE>
Prior to November 1, 2002, upon an Equity Offering of common stock for cash
of the Company, up to 35% of the aggregate original principal amount at
maturity of each of the Senior Dollar Discount Notes and the Senior Euro
Discount Notes issued pursuant to the Discount Notes Indenture may be redeemed
at our option within 90 days after the date of the closing of such Equity
Offering, on not less than 30 days, but not more than 60 days, notice to each
such Holder of the Senior Discount Notes to be redeemed, with cash in an amount
not in excess of the Net Cash Proceeds of such Equity Offering, at a redemption
price equal to 113.375% of the Accreted Value thereof, together with accrued
and unpaid interest and Liquidated Damages, if any, thereon to the Redemption
Date; provided, however, that immediately following such redemption not less
than 65% of the aggregate original principal amount at maturity of each
respective series of the Senior Discount Notes originally issued pursuant to
the Discount Notes Indenture remains outstanding.
If the Redemption Date hereunder is on or after an interest record date
("Record Date") on which the Holders of record have a right to receive the
corresponding interest due and Liquidated Damages, if any, and on or before the
associated Interest Payment Date, any accrued and unpaid interest and
Liquidated Damages, if any, due on such Interest Payment Date will be paid to
the Person in whose name a Senior Discount Note is registered at the close of
business on such Record Date, and such Interest and Liquidated Damages, if any,
will not be payable to Holders whose Senior Discount Notes are redeemed
pursuant to such redemption.
Redemption for Changes in Withholding Taxes
The Notes will be subject to redemption in whole, but not in part, at our
option at 100% of the principal amount or, in the case of the Senior Discount
Notes, the Accreted Value thereof, together with accrued and unpaid interest
and Liquidated Damages, if any, thereon to the Redemption Date, if a Tax Event
has occurred and is continuing. Prior to the publication of any notice of
redemption as a result of a Tax Event, we shall be required to deliver to the
respective Trustee (i) an Officer's Certificate stating that such amendment or
change has occurred (irrespective of whether such amendment or change is then
effective), describing the facts leading thereto and stating that we cannot
avoid the requirement to pay Additional Amounts by taking reasonable measures
available to us and (ii) an opinion of counsel reasonably acceptable to the
respective Trustee to the effect that we are or will become obligated to pay
Additional Amounts as a result of such change or amendment.
Mandatory Redemption
The Notes will not have the benefit of any sinking fund and we will not be
required to make any mandatory redemption payments with respect to the Notes.
Selection and Notice
In the case of a partial redemption, the respective Trustee shall select
the Notes or portions thereof for redemption on a pro rata basis, by lot or in
such other manner it deems appropriate and fair. The Notes may be redeemed in
part in multiples of $1,000 or (Euro)1,000, as applicable, only.
Notice of any redemption will be sent, by first class mail, at least 30
days and not more than 60 days prior to the date fixed for redemption to the
Holder of each Note to be redeemed to such Holder's last address as then shown
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upon the registry books of the registrar for the Company. Any notice which
relates to a Note to be redeemed in part only must state the portion of the
principal amount (principal amount at maturity, in the case of the Senior
Discount Notes) equal to the unredeemed portion thereof and must state that on
and after the date of redemption, upon surrender of such Note, a new Note or
Notes in a principal amount equal to the unredeemed portion thereof will be
issued. On and after the date of redemption, interest will cease to accrue
(and, if applicable, the Accreted Value of the Senior Discount Notes will cease
to increase) on the Notes or portions thereof called for redemption, unless we
default in the payment thereof.
If the Notes are then listed on the Luxembourg Stock Exchange the Company
will publish a redemption notice in a daily newspaper with general circulation
in Luxembourg (which, for as long as the Notes are traded on the Luxembourg
Stock Exchange, is expected to be the Luxemburger Wort).
Certain Covenants
Repurchase of Notes at the Option of the Holder Upon a Change of Control
The Indentures provide that if a Change of Control has occurred, each
Holder of Notes will have the right, at such Holder's option, pursuant to an
offer (subject only to conditions required by applicable law, if any) by us
(the "Change of Control Offer"), to require us to repurchase all or any part of
such Holder's Notes (provided that the principal amount of such Notes must be
$1,000 (or (Euro)1,000, as applicable) or an integral multiple thereof) on a
date (the "Change of Control Purchase Date") that is no later than 35 Business
Days after the occurrence of such Change of Control, at a cash price equal to,
in the case of the Senior Notes, 101% of the principal amount thereof, and in
the case of the Senior Discount Notes, 101% of the Accreted Value thereof (in
each case, the "Change of Control Purchase Price"), together with accrued and
unpaid interest and Liquidated Damages, if any, to the Change of Control
Purchase Date.
The Change of Control Offer shall be made within 10 Business Days following
a Change of Control and shall remain open for 20 Business Days following its
commencement (the "Change of Control Offer Period"). Upon expiration of the
Change of Control Offer Period, we shall promptly purchase all Notes properly
tendered in response to the Change of Control Offer.
As used herein, a "Change of Control" means any merger or consolidation of
the Company with or into any Person or any sale, transfer or other conveyance,
whether direct or indirect, of all or substantially all of our assets, on a
consolidated basis, in one transaction or a series of related transactions, if,
immediately after giving effect to such transaction(s), either (A) any "person"
or "group" (other than the Parent or any of the Principals) is or becomes the
"beneficial owner," directly or indirectly, of more than 35% of the total
voting power of all classes of our securities in the aggregate normally
entitled to vote in the election of directors, managers, or trustees, as
applicable, of the transferee(s) or surviving entity or entities and such
"person" or "group" beneficially owns (after giving effect to such transaction)
a greater percentage of the total voting power than is at that time
beneficially owned by Parent and the Principals (in the aggregate) and none of
the Parent nor any of the Principals has the right or ability by voting power,
contract or otherwise to elect or nominate for elections a majority of our
Supervisory Board, or (B) the Continuing Directors cease for any reason to
constitute a majority of the Supervisory Board of the Company then in office or
(C) we adopt a plan of liquidation (other than a plan of liquidation as a
consequence of which (1) the Parent and the Principals (in the aggregate)
beneficially own at least the same percentage of voting power after the
consummation of such plan as before or otherwise retain the right or ability,
by voting power, to control the Person that acquires the proceeds of such
liquidation and (2) the Person that acquires the substantial majority of the
proceeds of such liquidation shall have assumed by supplemental indenture the
Company's obligations pursuant to the Indentures).
As used in this covenant, "person" or "group" has the meaning given by
Sections 13(d) and 14(d) of the Exchange Act, whether or not applicable.
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On or before the Change of Control Purchase Date, we will:
(1) accept for payment Notes or portions thereof properly tendered pursuant
to the Change of Control Offer,
(2) deposit with the Paying Agent for us cash sufficient to pay the Change
of Control Purchase Price (together with accrued and unpaid interest
and Liquidated Damages, if any,) of all Notes so tendered, and
(3) deliver to the respective Trustee the Notes so accepted together with
an Officers' Certificate listing the Notes or portions thereof being
purchased by us.
The Paying Agent promptly will pay the Holders of Notes so accepted an
amount equal to the Change of Control Purchase Price (together with accrued and
unpaid interest and Liquidated Damages, if any,) and the respective Trustee
promptly will authenticate and deliver to such Holders a new Note equal in
principal amount to any unpurchased portion of the Note surrendered. We will
publicly announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Purchase Date.
The Change of Control purchase feature of the Notes may make more difficult
or discourage a takeover of the Company, and, thus, the removal of incumbent
management.
The phrase "all or substantially all" of our assets will likely be
interpreted under applicable law and will be dependent upon particular facts
and circumstances. As a result, there may be a degree of uncertainty in
ascertaining whether a sale or transfer of "all or substantially all" of our
assets has occurred. In addition, no assurance can be given that we will be
able to acquire Notes tendered upon the occurrence of a Change of Control.
Any Change of Control Offer will be made in compliance with all applicable
laws, rules and regulations, including, if applicable, Regulation 14E under the
Exchange Act and the rules thereunder and all other applicable Federal and
state securities laws. To the extent that the provisions of any securities laws
or regulations conflict with the provisions of this covenant, compliance by us
with such laws and regulations shall not in and of itself cause a breach of
their obligations under such covenant.
If the Change of Control Purchase Date hereunder is on or after an interest
payment Record Date and on or before the associated Interest Payment Date, any
accrued and unpaid interest (and Liquidated Damages, if any) due on such
Interest Payment Date will be paid to the Person in whose name a Note is
registered at the close of business on such Record Date, and such interest (and
Liquidated Damages, if applicable) will not be payable to Holders who tender
the Notes pursuant to the Change of Control Offer.
The Company will not be required to make an offer to purchase in connection
with any series of Notes on a Change of Control Purchase Date, if, before the
Change of Control occurs, it has exercised its right to redeem all of the Notes
of such series, as described, above under "Optional Redemption" or "Redemption
for Changes in Withholding Taxes."
Limitation on Incurrence of Additional Indebtedness and Disqualified
Capital Stock
The Indentures provide that, except as set forth in this covenant, we will
not, and will not permit any of our Subsidiaries to, directly or indirectly,
issue, assume, guaranty, incur, become directly or indirectly liable with
respect to (including as a result of an Acquisition), or otherwise become
responsible for, contingently or otherwise (individually and collectively, to
"incur" or, as appropriate, an "incurrence"), any Indebtedness (including
Disqualified Capital Stock and Acquired Indebtedness), other than Permitted
Indebtedness.
Notwithstanding the foregoing if:
(1) no Default or Event of Default shall have occurred and be continuing at
the time of, or would occur after giving effect on a pro forma basis
to, such incurrence of Indebtedness; and
(2) on the date of such incurrence (the "Incurrence Date"), either (i) the
Leverage Ratio of the Company for the Reference Period immediately
preceding the Incurrence Date, after giving effect on a pro forma basis
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to such incurrence of such Indebtedness and, to the extent set forth in
the definition of Leverage Ratio, the use of proceeds thereof, would not
exceed 7.0 to 1.0 (the "Debt Incurrence Ratio"), (ii) the Consolidated
Coverage Ratio of the Company for the Reference Period immediately
preceding the Incurrence Date, after giving effect on a pro forma basis
to such incurrence of such Indebtedness and, to the extent set forth in
the definition of Consolidated Coverage Ratio, the use of proceeds
thereof, would not be less than 1.75 to 1.0, or (iii) after giving
effect on a pro forma basis to such incurrence of Indebtedness, and, to
the extent used to retire other Indebtedness, the use of proceeds
therefrom, the amount of Indebtedness outstanding of the Company would
not exceed 225% of the Consolidated Invested Equity Capital of the
Company.
then we may incur such Indebtedness (including Disqualified Capital Stock and
Acquired Indebtedness).
In addition, the foregoing limitations of the first paragraph of this
covenant will not prohibit:
(a) if no Event of Default shall have occurred and be continuing, the
incurrence by us or our Subsidiaries of Indebtedness in an aggregate
amount incurred and outstanding at any time pursuant to this paragraph
(a) (plus any refinancing indebtedness incurred to retire, defease,
refinance, replace or refund such Indebtedness) of up to $400 million
(or the equivalent thereof, at the time of incurrence, in the
applicable foreign currencies);
(b) the incurrence by us and our Subsidiaries of Indebtedness pursuant to
the Credit Agreement in an aggregate amount incurred and outstanding at
any time pursuant to this paragraph (b) (plus any refinancing
indebtedness incurred to retire, defease, refinance, replace or refund
such Indebtedness) of up to (Euro)1 billion, minus the amount of any
such Indebtedness (1) retired with the Net Cash Proceeds from any Asset
Sale applied to reduce permanently the outstanding amounts or the
commitments with respect to such Indebtedness pursuant to the covenant
"Limitation on Sale of Assets and Subsidiary Stock" or (2) assumed by a
transferee in an Asset Sale;
(c) the incurrence by any Subsidiary of Indebtedness if on the Incurrence
Date either (1) the Leverage Ratio of such Subsidiary of the Company
for the Reference Period immediately preceding the Incurrence Date,
after giving effect on a pro forma basis to such incurrence of such
Indebtedness and to the extent set forth in the definition of Leverage
Ratio, the use of proceeds thereof, would be no more than 7.0 to 1.0,
or (2) the Consolidated Coverage Ratio of such Subsidiary for the
Reference Period immediately preceding the Incurrence Date, after
giving effect on a pro forma basis to such incurrence of such
Indebtedness and, to the extent set forth in the definition of
Consolidated Coverage Ratio, the use of proceeds thereof, would be no
less than 1.75 to 1.00, or (3) after giving effect on a pro forma basis
to such incurrence of such Indebtedness, and, to the extent used to
retire other Indebtedness, the use of proceeds therefrom, the amount of
Indebtedness outstanding of such Subsidiary would not exceed 225% of
the Consolidated Invested Equity Capital of such Subsidiary, provided
in the case of each of clauses (c)(1), (2) and (3), the net proceeds
therefrom are used in a Related Business of the Company or any
affiliated company of the Company, and provided, further, that for the
purposes of this clause (c) a Subsidiary may be a co-obligor or
guarantor on such Indebtedness of another Subsidiary of the Company (A)
if such co-obligor or guarantor Subsidiary owns (either directly or
indirectly through one or more Subsidiaries of the Company) all or a
portion of the Equity Interests of the Subsidiary of the Company that
incurred such Indebtedness, (B) if all or a portion of the Equity
Interests of such co-obligor or guarantor Subsidiary is owned (either
directly or indirectly through one or more Subsidiaries of the Company)
by the Subsidiary that incurred such Indebtedness or (C) if such co-
obligor or guarantor Subsidiary owns (either directly or indirectly
through one or more Subsidiaries of the Company) all or a portion of
the business that will use the proceeds of such Indebtedness; and,
(d) if no Event of Default shall have occurred and be continuing, the
incurrence by Subsidiaries of the Company of Indebtedness pursuant to
the Existing Agreements up to, but not in excess of the maximum
applicable amounts of Indebtedness available for borrowing pursuant to
the terms of each such Existing Agreement as in effect on the date of
the Indenture; provided that in determining the maximum
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applicable amounts available, it shall be assumed that the Company
satisfies any applicable conditions to borrowing.
Indebtedness (including Disqualified Capital Stock) of any Person which is
outstanding at the time such Person becomes a Subsidiary of the Company
(including upon designation of any subsidiary or other Person as a Subsidiary)
or is merged with or into or consolidated with the Company or a Subsidiary of
the Company shall be deemed to have been incurred at the time such Person
becomes such a Subsidiary of the Company or is merged with or into or
consolidated with the Company or a Subsidiary of the Company, as applicable.
Upon each incurrence, we may designate pursuant to which provision of this
covenant such Indebtedness is being incurred and such Indebtedness shall not
be deemed to have been incurred or outstanding under any other provision of
this covenant, except as stated otherwise in the foregoing provisions.
Notwithstanding anything contained herein to the contrary, we will not, and
will not permit any of our Subsidiaries to, incur any Indebtedness that is
contractually subordinate to any other Indebtedness of the Company unless such
Indebtedness is at least as subordinate to the Notes.
Our ability to borrow and take other actions is significantly restricted by
the debt instruments and other obligations of our Parent. Our ability to incur
Indebtedness and take other actions we believe may be necessary or appropriate
in the due course of our business will, therefore, not be wholly within our
control (as limited by the Indentures and our other restrictive agreements).
Investors in the Notes are cautioned to be familiar with the further material
restrictions contained in our Parent's indentures, under which we are
currently deemed to be a restricted subsidiary.
Limitation on Restricted Payments
The Indentures provide that we will not, and will not permit any of our
Subsidiaries to, directly or indirectly, make any Restricted Payment if, after
giving effect to such Restricted Payment on a pro forma basis:
(1) a Default or an Event of Default shall have occurred and be continuing,
(2) the Company is not permitted to incur at least $1.00 (or its foreign
currency equivalent) of additional Indebtedness pursuant to the Debt
Incurrence Ratio in the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock," or
(3) the aggregate amount of all Restricted Payments made by the Company and
its Subsidiaries, including after giving effect to such proposed
Restricted Payment, on and after July 30, 1999, would exceed, without
duplication (and except to the extent otherwise credited pursuant to
clause (g) of the definition of "Permitted Investment"), the sum of:
(a)(i) the amount of the cumulative Consolidated EBITDA of the Company,
if positive, less 150% of the cumulative Consolidated Fixed Charges of
the Company, for the period (taken as one accounting period),
commencing on the first day of the first full fiscal quarter commencing
after July 30, 1999, to and including the last day of the fiscal
quarter ended immediately prior to the date of each such calculation
for which consolidated financial statements of the Company are
available, provided that such sum shall not be deemed to result in an
amount less than zero for purposes of any calculation pursuant to this
clause (3)(a)(i); or (ii) if such cumulative Consolidated EBITDA of the
Company is zero or less, then the amount of such cumulative
Consolidated EBITDA for such period; plus
(b) the aggregate Net Cash Proceeds received by the Company from the
sale of its Qualified Capital Stock (other than (i) to a Subsidiary of
the Company and (ii) to the extent applied in connection with a
Qualified Exchange), after July 30, 1999, plus
(c) to the extent that any Investment (other than a Permitted
Investment) that was made after July 30, 1999 is sold for cash or Cash
Equivalents or otherwise liquidated or repaid for cash or Cash
Equivalents, the amount of cash or Cash Equivalents received by the
Company, but only to the extent of the lesser of
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(A) the cash or Cash Equivalents transferred as a return of capital
with respect to such Investment and (B) the initial amount of such
Investment (in either case, less the cost of disposition, if any); plus
(d) in the event an Unrestricted Subsidiary is designated as a
Subsidiary, an amount equal to fair market value, at such time, of the
Investment of the Company and its Subsidiaries made after July 30,
1999, provided, however, that such amount shall not exceed the amount
of Investments previously made in such Subsidiary that were counted as
Restricted Payments pursuant to this covenant.
The foregoing clauses (2) and (3) of the immediately preceding paragraph,
however, will not prohibit:
(u) any dividend, distribution or payment of dividends on Disqualified
Capital Stock permitted by the covenant "Limitation on Incurrence of
Additional Indebtedness and Disqualified Capital Stock"; and
(v) any repurchase by the Company of any shares of any class or options
to acquire such shares from any current, future or former directors,
officers or employees of the Company or any of its Subsidiaries or
Affiliates, provided that the aggregate amount of all the repurchases
made under this clause shall not exceed $10 million in any twelve-month
period (with unused amounts in any calendar year being carried over to
succeeding calendar years subject to a maximum (without giving effect
to the following proviso) of $14 million in any calendar year);
provided, further, that such amount in any calendar year may be
increased by an amount not to exceed (1) the cash proceeds from the
sale of Capital Stock of the Company to its supervisory board members,
management board members or officers of the Company and its
Subsidiaries that occurs after July 30, 1999, plus (2) the cash
proceeds of key man life insurance policies received by the Company and
its Subsidiaries after July 30, 1999;
and the foregoing clauses (1), (2) and (3) of the immediately preceding
paragraph will not prohibit:
(w) any dividend, distribution or other payments by any Subsidiary of
the Company on its Equity Interests that is paid pro rata to all
holders of such Equity Interests;
(x) a Qualified Exchange;
(y) the payment of any dividend on Qualified Capital Stock within 60
days after the date of its declaration if such dividend could have been
made on the date of such declaration in compliance with the foregoing
provisions; or
(z) the payment of dividends by the Company in cash or Qualified
Capital Stock pursuant to the terms of any Parent Stock Instrument that
is incurred or issued (as applicable) in compliance with the
Indentures.
The full amount of any Restricted Payment made pursuant to the foregoing
clauses (u), (v), (w), (y) and (z), but not pursuant to clause (x) of the
immediately preceding sentence, however, will be counted as Restricted Payments
made for purposes of the calculation of the aggregate amount of Restricted
Payments available to be made referred to in clause (3) of the immediately
preceding paragraph.
For purposes of this covenant, the amount of any Restricted Payment made or
returned, if other than in cash, shall be the fair market value thereof, as
determined in the good faith reasonable judgment of our Supervisory Board,
unless stated otherwise, at the time made or returned, as applicable.
Additionally, on the date of each Restricted Payment, we shall deliver an
Officers' Certificate to the respective Trustee describing in reasonable detail
the nature of such Restricted Payment, stating the amount of such Restricted
Payment, stating in reasonable detail the provisions of the Indentures pursuant
to which such Restricted Payment was made and certifying that such Restricted
Payment was made in compliance with the terms of the Indentures.
Limitation on Dividends and Other Payment Restrictions Affecting
Subsidiaries
The Indentures provide that we will not, and will not permit any of our
Subsidiaries to, directly or indirectly, create, assume or suffer to exist any
consensual restriction on the ability of any Subsidiary of the Company to pay
dividends or make other distributions to or on behalf of, or to pay any
obligation to or on behalf of, or otherwise to
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transfer assets or property to or on behalf of, or make or pay loans or
advances to or on behalf of, the Company or any Subsidiary of the Company,
except:
(a) restrictions imposed by the Notes or the Indentures or by other
Indebtedness of the Company ranking pari passu with the Notes,
provided that such restrictions are no more restrictive than those
imposed by the Indentures and the Notes;
(b) restrictions imposed by applicable law;
(c) restrictions under Indebtedness outstanding on July 30, 1999,
including pursuant to the Credit Agreement;
(d) restrictions under any Acquired Indebtedness not incurred in violation
of the Indentures or any agreement (including any Equity Interest)
relating to any property, asset, or business acquired by the Company
or any of its Subsidiaries, which restrictions in each case existed at
the time of acquisition, were not put in place in connection with or
in anticipation of such acquisition, and are not applicable to any
Person, other than the Person acquired, or to any property, asset or
business, other than the property, assets and business so acquired;
(e) any such restriction or requirement imposed by Indebtedness incurred
under the Credit Agreement pursuant to the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock,"
provided that such restriction or requirement is no more restrictive
than that imposed by the Credit Agreement as of July 30, 1999;
(f) with respect solely to a Subsidiary of the Company imposed pursuant to
a binding agreement which has been entered into for the sale or
disposition of all or substantially all of the Equity Interests or
assets of such Subsidiary, provided that such restrictions apply
solely to the Equity Interests or assets of such Subsidiary which are
being sold;
(g) restrictions under Purchase Money Indebtedness not incurred in
violation of the Indentures, provided that such restrictions relate
only to the property financed with such Indebtedness;
(h) with respect to any Subsidiary, restrictions contained in the terms of
any Indebtedness incurred in compliance with the Indentures, or any
agreement pursuant to which such Indebtedness was issued, if
(A) the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial covenant
contained in such Indebtedness or agreement,
(B) the Company shall have reasonably determined that the encumbrance
or restriction is not materially more disadvantageous to the
Holders of the Notes than is customary in comparable financings,
and
(C) the Company shall have reasonably determined that any such
encumbrance or restriction will not materially affect the
Company's ability to make principal or interest payments on the
Notes; and
(i) in connection with and pursuant to permitted Refinancings,
replacements of restrictions imposed pursuant to clauses (a), (c),
(d), or (g), or this clause (i), of this paragraph that are not more
restrictive than those being replaced and do not apply to any other
Person or assets than those that would have been covered by the
restrictions in the Indebtedness so refinanced.
Notwithstanding the foregoing, (a) customary provisions restricting
subletting, assignment or transfer of any lease, license, conveyance, or
similar document or instrument entered into in the ordinary course of
business, consistent with industry practice and (b) any asset or property
subject to a Lien which is not prohibited to exist with respect to such asset
pursuant to the terms of the Indentures may be subject to customary
restrictions on the transfer or disposition thereof pursuant to such Lien.
Limitation on Issuances of Guarantees by Subsidiaries
Notwithstanding anything herein or in the Indentures to the contrary, if
any Subsidiary of the Company guarantees any other Indebtedness of the Company
(other than Indebtedness incurred pursuant to the Credit
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Agreement in accordance with the terms of the Indentures) ("Guaranteed
Indebtedness") then such Subsidiary must become a Guarantor (a "Subsidiary
Guarantor") of the Notes on a basis such that the Subsidiary's guarantee of the
Notes shall stand in substantially the same relative ranking in right of
payment to the guarantee of such other Indebtedness as the Notes stand in
relative ranking to such other Indebtedness; provided that this paragraph shall
not be applicable to any guarantee by any Restricted Subsidiary that (a)
existed at the time such Person became a Subsidiary of the Company and (b) was
not incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary of the Company.
The Guarantee of the Notes by a Subsidiary Guarantor shall be automatically
released upon (i) the sale or other disposition of all or substantially all of
the Company's and its Subsidiaries' beneficial interest in the Equity Interests
or assets of such Subsidiary Guarantor, provided that thereafter such
Subsidiary Guarantor shall cease to be a Subsidiary of the Company, (ii) the
consolidation or merger of any such Subsidiary Guarantor with any Person other
than the Company or a Subsidiary of the Company if, as a result of such
consolidation or merger, such Subsidiary Guarantor ceases to be a Subsidiary of
the Company (and shall not be a Subsidiary of the successor to the Company),
(iii) a Legal Defeasance, or (iv) the unconditional and complete release of
such Subsidiary Guarantor from its Guarantee of all Guaranteed Indebtedness.
Limitation on Liens Securing Indebtedness
The Indentures provide that we will not, and will not permit any of our
Subsidiaries to, create, incur, assume or suffer to exist any Lien of any kind,
other than Permitted Liens, upon any of their respective assets now owned or
acquired on or after the date of the Indentures or upon any income or profits
therefrom securing any Indebtedness of the Company, unless the Company
provides, and causes its Subsidiaries to provide, concurrently therewith, that
the Notes are equally and ratably so secured; provided that if such
Indebtedness is Subordinated Indebtedness, the Lien securing such Subordinated
Indebtedness shall be subordinate and junior to the Lien securing the Notes
with the same relative priority as such Subordinated Indebtedness shall have
with respect to the Notes.
Limitation on Sale of Assets and Subsidiary Stock
The Indentures provide that we will not, and will not permit any of our
Subsidiaries to, in one or a series of related transactions, convey, sell,
transfer, assign or otherwise dispose of, directly or indirectly, any of our or
their property, business or assets (including by merger or consolidation in the
case of a Subsidiary of the Company), and including any sale or other transfer
or issuance of any Equity Interests of any Subsidiary of the Company, whether
by the Company or a Subsidiary or through the issuance, sale or transfer of
Equity Interests by a Subsidiary of the Company, and including any sale and
leaseback transaction (any of the foregoing, an "Asset Sale"), unless:
(1)(a) the amount equal to the Net Cash Proceeds therefrom (the "Asset Sale
Offer Amount") is applied (i) within 360 days (or 540 days in the
case of a Special Character Asset Sale) after the date of such Asset
Sale to the optional redemption of the Notes in accordance with the
terms of the Indentures and other Indebtedness of the Company
ranking pari passu in right of payment with the Notes and with
similar provisions requiring the Company to redeem such Indebtedness
with the proceeds from such Asset Sale, pro rata in proportion to
the respective principal amounts (or accreted values in the case of
Indebtedness issued with original issue discount) of the Notes and
such other Indebtedness then outstanding or (ii) within 360 days (or
540 days in the case of a Special Character Asset Sale) after the
date of such Asset Sale to the repurchase of the Notes and such
other Indebtedness ranking pro rata in right of payment with the
Notes and with similar provisions requiring us to make an offer to
purchase such Indebtedness with the proceeds from such Asset Sale
pursuant to a cash offer (subject only to conditions required by
applicable law, if any) pro rata in proportion to the respective
principal amounts (or accreted values in the case of Indebtedness
issued with original issue discount) of the Notes and such other
Indebtedness then outstanding (the "Asset Sale Offer") at a purchase
price of 100% of principal amount (or accreted value in the case of
Indebtedness issued with original issue discount) (the "Asset Sale
Offer Price") together with accrued and unpaid interest and
Liquidated Damages, if any, to the date of payment, made within 360
days (or 540 days in the case of a Special Character Asset Sale) of
such Asset
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Sale, or (iii) within 360 days (or 540 days in the case of a Special
Character Asset Sale), to the repayment of Indebtedness then
outstanding pursuant to the Credit Agreement or, if required by the
terms of such Indebtedness, of Indebtedness issued by a Subsidiary of
the Company (in respect of which Indebtedness the Company is not a
direct or contingent obligor except by virtue of the Company's pledge
of Equity Interests of, and other interests of or claim on, such
Subsidiary or the Company's guarantee of such Subsidiary's Indebtedness
to the extent, in either case, the recourse against the Company is
limited to such Equity Interests or claim), or (b) within 360 days (or
540 days in the case of a Special Character Asset Sale) following such
Asset Sale, the Asset Sale Offer Amount is invested in assets and
property which in the good faith reasonable judgment of the Company
will immediately constitute or be a part of a Related Business of the
Company or such Subsidiary (if it continues to be a Subsidiary)
immediately following such transaction or is used to make Permitted
Investments in the Company or a Subsidiary of the Company (other than
Cash Equivalents or securities of the Company or any Person controlling
the Company except as permitted by the Indentures), provided that (i)
50% of the Net Cash Proceeds from Special Character Asset Sales and
100% of the net proceeds from any Asset Sale of an Investment made in
reliance on clause (g) of the definition of "Permitted Investments" may
be reinvested in any Permitted Investment (other than, in either case,
Cash Equivalents or securities of the Company or any Person controlling
the Company except as permitted by the Indentures) which in the good
faith reasonable judgment of the Company will immediately constitute or
be a part of a Related Business and (ii) 100% of the net proceeds from
an Asset Sale constituting the sale of an Investment in any Person
(excluding a Person that would be consolidated with the Company under
GAAP and excluding Related Assets of the Company or any of its
Subsidiaries) in which the Company or any of its Subsidiaries has an
Equity Interest may be reinvested in Investments permitted by clause
(e) or (f) of the definition of "Permitted Investments,"
(2) at least 75% of the total consideration for such Asset Sale or series
of related Asset Sales consists of cash, Cash Equivalents, Replacement
Assets or the assumption of Indebtedness of a Subsidiary,
(3) no Default or Event of Default shall have occurred and be continuing at
the time of, or would occur after giving effect to, on a pro forma
basis, such Asset Sale, and
(4) in the case of a transaction or series of related transactions
exceeding $15 million (or the foreign currency equivalent on the date
of the transaction) of consideration to any party thereto, the
Supervisory Board of the Company determines in its good faith
reasonable judgment that the Company or such Subsidiary, as applicable,
receives fair market value for such Asset Sale.
The Indentures provide that an acquisition of Notes pursuant to an Asset
Sale Offer may be deferred until the accumulated Net Cash Proceeds from Asset
Sales not applied to the uses set forth in 1(a)(i), (iii), or 1(b) above (the
"Excess Proceeds") exceeds $50 million (or the foreign currency equivalent
thereof), provided that, in the case of an Asset Sale by a Subsidiary of the
Company that is not a Wholly Owned Subsidiary, only the Company's and its
Subsidiaries' pro rata portion of such Net Cash Proceeds shall constitute Net
Cash Proceeds subject to the provisions of this covenant. Each Asset Sale Offer
shall remain open for 20 Business Days following its commencement (the "Asset
Sale Offer Period"). Upon expiration of the Asset Sale Offer Period, the
Company shall apply the Asset Sale Offer Amount, plus an amount equal to
accrued and unpaid interest and Liquidated Damages, if any, to the purchase of
all Indebtedness properly tendered (on a pro rata basis if the Asset Sale Offer
Amount is insufficient to purchase all Indebtedness so tendered) at the Asset
Sale Offer Price (together with accrued interest and Liquidated Damages, if
any). To the extent that the aggregate amount of Notes and such other pari
passu Indebtedness tendered pursuant to an Asset Sale Offer is less than the
Asset Sale Offer Amount, the Company may apply any remaining Net Cash Proceeds
to any purpose consistent with the other provisions of the Indentures, and
following the consummation of each Asset Sale Offer the Excess Proceeds amount
shall be reset to zero. For purposes of (2) above, total consideration received
means the total consideration received for such Asset Sales, minus the amount
of (a) Purchase Money Indebtedness secured solely by the assets sold and
assumed by a transferee, provided that the Company and the Subsidiaries are
released from any obligation in connection therewith; and (b) property that
within 30 days of such Asset Sale is converted into cash or Cash Equivalents,
provided that such cash and Cash Equivalents shall be treated as Net Cash
Proceeds attributable to the original Asset Sale for which such property was
received.
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Notwithstanding, and without complying with, the provisions of this
covenant:
(1) the Company and its Subsidiaries may, in the ordinary course of
business, (a) convey, sell, transfer, assign or otherwise dispose of
inventory and other assets acquired and held for resale in the ordinary
course of business and (b) liquidate and otherwise dispose of Cash
Equivalents;
(2) the Company and its Subsidiaries may convey, sell, transfer, assign or
otherwise dispose of property, businesses, or assets pursuant to and in
accordance with the covenant "Limitation on Merger, Sale or
Consolidation";
(3) the Company and its Subsidiaries may sell or dispose of damaged, worn
out or other obsolete personal property in the ordinary course of
business so long as such property is no longer necessary for the proper
conduct of the business of the Company or such Subsidiary, as
applicable, and the Company and its Subsidiaries may replace personal
property in the ordinary course of business so long as the replacement
property is necessary for the proper conduct of the business of the
Company or such Subsidiary, as applicable, and sell or dispose of such
replaced property in the ordinary course;
(4) the Company and its Subsidiaries may convey, sell, transfer, assign or
otherwise dispose of property, businesses, or assets to the Company or
any of its Subsidiaries;
(5) the Company and each of its Subsidiaries may surrender or waive
contract rights or settle, release or surrender contract, tort or other
claims of any kind in the ordinary course of business or grant Liens
not otherwise prohibited by the Indentures;
(6) the Company and its Subsidiaries may exchange assets for property,
businesses, or assets held by any Person (including by merger or
consolidation in the case of a Subsidiary of the Company); provided
that (a) property, businesses and assets, which in one or a series of
related transactions exceeds $15 million in value, received by the
Company or such Subsidiaries in any such exchange in the good faith
reasonable judgment of the Supervisory Board of the Company will
immediately constitute, be a part of, or be used in, a Related Business
of the Company or such Subsidiaries, (b) the Supervisory Board of the
Company has determined that the terms of any exchange, which in one or
a series of related transactions exceeds $15 million in fair market
value, are fair and reasonable, and (c) any cash or Cash Equivalents
received by the Company or any Subsidiary in such exchange shall be
treated as having been received as a result of an Asset Sale.
All Net Cash Proceeds from an Event of Loss shall be used all within the
period and as otherwise provided above in clause (1) of the first paragraph of
this covenant.
Any Asset Sale Offer shall be made in compliance with all applicable laws,
rules, and regulations, including, if applicable, Regulation 14E of the
Exchange Act and the rules and regulations thereunder and all other applicable
Federal and state securities laws. To the extent that the provisions of any
applicable securities laws, rules, or regulations conflict with the provisions
of this covenant, compliance by the Company or any of its subsidiaries with
such laws, rules or regulations shall not in and of itself cause a breach of
its obligations under this covenant.
If the payment date in connection with an Asset Sale Offer hereunder is on
or after an interest payment Record Date and on or before the associated
Interest Payment Date, any accrued and unpaid interest (and Liquidated Damages,
if any, due on such Interest Payment Date) will be paid to the Person in whose
name a Note is registered at the close of business on such Record Date, and
such interest (or Liquidated Damages, if applicable) will not be payable to
Holders who tender Notes pursuant to such Asset Sale Offer.
Limitation on Transactions with Affiliates
The Indentures provide that neither we nor any of our Subsidiaries will be
permitted on or after the Issue Date to enter into any contract, agreement,
arrangement or transaction with any Affiliate of the Company (an "Affiliate
Transaction"), or any series of related Affiliate Transactions, other than
Exempted Affiliate Transactions, (1) unless it
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is determined by the Supervisory Board as evidenced by a Board Resolution that
the terms of such Affiliate Transaction are fair and reasonable to us and no
less favorable to us than could have been obtained in an arm's length
transaction with a non-Affiliate, and (2) if involving consideration to either
party in excess of $15 million (or its foreign currency equivalent), unless
such Affiliate Transaction(s) is evidenced by an Officers' Certificate
addressed and delivered to the respective Trustee certifying that such
Affiliate Transaction (or Transactions) has been approved by a majority of the
members of the Supervisory Board of the Company that are disinterested in such
transaction, if there are any directors who are so disinterested, and (3) if
involving consideration to either party in excess of $15 million or $30 million
if there are disinterested directors (or in each case its foreign currency
equivalent), unless in addition we, prior to the consummation thereof, obtain a
written favorable opinion as to the fairness of such transaction to us from a
financial point of view from an independent investment banking firm of national
reputation in the United States or, if pertaining to a matter for which such
investment banking firms do not customarily render such opinions, an appraisal
or valuation firm of national reputation in the United States.
Limitation on Merger, Sale or Consolidation
The Indentures provide that the Company will not consolidate with or merge
with or into another Person or, directly or indirectly, sell, lease, convey or
transfer all or substantially all of its assets (computed on a consolidated
basis), whether in a single transaction or a series of related transactions, to
another Person or group of affiliated Persons, unless:
(1) either (a) the Company is the continuing entity or (b) the resulting,
surviving or transferee entity is a corporation organized under the
laws of The Netherlands or of the United States of America or any State
or the District of Columbia, any member of the European Economic Area
or Switzerland, and expressly assumes by supplemental indenture all of
the obligations of the Company in connection with the Notes and the
Indentures;
(2) no Default or Event of Default shall exist or shall occur immediately
after giving effect on a pro forma basis to such transaction;
(3) unless such transaction is solely the merger of the Company and one of
its previously existing Wholly Owned Subsidiaries and which transaction
is not in connection with any other transaction, immediately after
giving effect to such transaction, on a pro forma basis, the
consolidated resulting, surviving or transferee entity would
immediately thereafter be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Debt Incurrence Ratio set forth
in the covenant "Limitation on Incurrence of Additional Indebtedness
and Disqualified Capital Stock" or, if not, the Leverage Ratio would
immediately thereafter be no greater than the Leverage Ratio
immediately prior thereto; and
(4) each Subsidiary Guarantor, unless such Subsidiary Guarantor is the
Person with which the Company has entered into a transaction under this
covenant, shall have by amendment to its Guarantee of the Notes
confirmed that its Guarantee of the Notes shall apply to the
obligations of the Company or the surviving entity in accordance with
the Notes and the Indentures.
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company in accordance with the foregoing, the
successor corporation formed by such consolidation or into which the Company is
merged or to which such transfer is made shall succeed to and (except in the
case of a lease) be substituted for, and may exercise every right and power of,
the Company under the Indentures with the same effect as if such successor
corporation had been named therein as the Company, and (except in the case of a
lease) the Company shall be released from the obligations under the Notes and
the Indentures except with respect to any obligations that arise from, or are
related to, such transaction.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, the Company's interest in which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
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Limitation on Lines of Business
The Indentures provide that neither we nor any of our Subsidiaries will
directly or indirectly engage to any substantial extent in any line or lines of
business activity other than that which, in the reasonable good faith judgment
of our Supervisory Board, is a Related Business.
Limitation on Status as Investment Company
The Indentures will prohibit us and our Subsidiaries from being required to
register as an "investment company" (as that term is defined in the Investment
Company Act of 1940, as amended), or from otherwise becoming subject to
regulation under the Investment Company Act.
Reports
The Indentures provide that whether or not we are subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, we will deliver to the
respective Trustee and to each Holder and to prospective purchasers of Notes
identified to us, within 15 days after we are or would have been (if we were
subject to such reporting obligations) required to file such with the SEC,
annual and quarterly financial statements substantially equivalent to financial
statements that would have been included in reports filed with the Commission,
if we were subject to the requirements of Section 13 or 15(d) of the Exchange
Act, including, with respect to annual information only, a report thereon by
our certified independent public accountants as such would be required in such
reports to the Commission, and, in each case, together with a management's
discussion and analysis of financial condition and results of operations which
would be so required and, unless the Commission will not accept such reports,
file with the Commission the annual, quarterly and other reports which it is or
would have been required to file with the Commission.
Events of Default and Remedies
The Indentures define an "Event of Default" as:
(1) our failure to pay any installment of interest (or Liquidated Damages,
if any) on the Notes as and when the same becomes due and payable and
the continuance of any such failure for 30 days,
(2) our failure to pay all or any part of the principal of, Accreted Value
(as applicable) of, or premium on, if any, the Notes when and as the
same becomes due and payable at maturity, or on redemption, by
acceleration or otherwise, including, without limitation, payment of
the Change of Control Purchase Price or the Asset Sale Offer Price, or
otherwise on Notes validly tendered and not properly withdrawn pursuant
to a Change of Control Offer or Asset Sale Offer, as applicable,
(3) the failure by the Company or any Subsidiary of the Company to observe
or perform any other covenant or agreement contained in the Notes or
the Indentures and, except for the provisions under "Repurchase of
Notes at the Option of the Holder Upon a Change of Control,"
"Limitations on Sale of Assets and Subsidiary Stock," "Limitation on
Merger, Sale or Consolidation" and "Limitation on Restricted Payments,"
the continuance of such failure for a period of 30 days after written
notice is given to the Company by the respective Trustee or to the
Company and the respective Trustee by the Holders of at least 25% in
aggregate principal amount (principal amount at maturity in the case of
the Senior Discount Notes) of the respective series of Notes
outstanding,
(4) certain events of bankruptcy, insolvency or reorganization in respect
of the Company or any of its Significant Subsidiaries,
(5) a default in Indebtedness of the Company or any of its Subsidiaries
with an aggregate amount outstanding in excess of $50 million (or its
foreign currency equivalent) (a) resulting from the failure to pay
principal at maturity or otherwise at the end of any applicable grace
period for such payment pursuant to the original terms of such
Indebtedness or (b) as a result of which the maturity of such
Indebtedness has been accelerated prior to its stated maturity,
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(6) final unsatisfied judgments not covered by insurance aggregating in
excess of $50 million (or its foreign currency equivalent), at any one
time rendered against the Company or any of its Subsidiaries and not
stayed, bonded or discharged within 60 days.
If an Event of Default occurs and is continuing (other than an Event of
Default specified in clause (4) above relating to the Company) then in every
such case, unless the principal of all of the Notes shall have already become
due and payable, either the respective Trustees or the Holders of at least 25%
in aggregate principal amount (principal amount at maturity in the case of the
Senior Discount Notes) of the respective class Notes then outstanding, by
notice in writing to us (and to the respective Trustee if given by Holders) (an
"Acceleration Notice"), may declare all principal, determined as set forth
below, and accrued interest (and Liquidated Damages, if any) thereon to be due
and payable immediately. If an Event of Default specified in clause (4), above,
relating to the Company occurs, all principal, Accreted Value and accrued
interest (and Liquidated Damages, if any) thereon will be immediately due and
payable on all outstanding Notes without any declaration or other act on the
part of the respective Trustee or the Holders. The Holders of a majority in
aggregate principal amount of Notes generally are authorized to rescind such
acceleration if all existing Events of Default, other than the non-payment of
the principal or Accreted Value of, premium, if any, and interest on the Notes
which have become due solely by such acceleration and except a Default with
respect to any provision requiring a supermajority approval to amend, which
Default may only be waived by such a supermajority, have been cured or waived.
Prior to the declaration of acceleration of the maturity of the Notes, the
Holders of a majority in aggregate principal amount of the Notes at the time
outstanding may waive on behalf of all the Holders any Default, except a
Default with respect to any provision requiring a supermajority approval to
amend, which Default may only be waived by such a supermajority, and except a
Default in the payment of principal of or interest on any Note not yet cured or
a Default with respect to any covenant or provision which cannot be modified or
amended without the consent of the Holder of each outstanding Note affected.
Subject to the provisions of the Indentures relating to the duties of the
respective Trustee, the respective Trustee will be under no obligation to
exercise any of its rights or powers under the Indentures at the request, order
or direction of any of the Holders, unless such Trustee is indemnified and
secured to its satisfaction. Subject to all provisions of the Indentures and
applicable law, the Holders of a majority in aggregate principal amount of the
Notes at the time outstanding will have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the
respective Trustee, or exercising any trust or power conferred on the
respective Trustee.
Legal Defeasance and Covenant Defeasance
The Indentures provide that we may, at our option and at any time prior to
the Stated Maturity of the respective series of Notes, elect to have our
obligations and the obligations of the Guarantors discharged with respect to
the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that we
shall be deemed to have paid and discharged the entire indebtedness represented
by the Notes, and the Indentures shall cease to be of further effect as to all
outstanding Notes, except as to:
(1) rights of Holders to receive payments in respect of the principal of,
premium, if any, and interest (and Liquidated Damages, if any) on such
Notes when such payments are due from the trust funds;
(2) our obligations with respect to such Notes concerning issuing temporary
Notes, registration of Notes, mutilated, destroyed, lost or stolen
Notes, and the maintenance of an office or agency for payment and money
for security payments held in trust;
(3) the rights, powers, trust, duties, and immunities of the respective
Trustee, and our obligations in connection therewith; and
(4) the Legal Defeasance provisions of the Indentures.
In addition, we may, at our option and at any time, elect to have our
obligations released with respect to certain covenants under the Indentures
("Covenant Defeasance"), and thereafter any omission to comply with such
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obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes. We may exercise our Legal Defeasance
option regardless of whether we previously exercised Covenant Defeasance.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) we must irrevocably deposit with the respective Trustee, in trust, for
the benefit of the Holders of the Notes, U.S. legal tender (with
respect to the Senior Dollar Notes), legal tender in the countries
constituting the European Monetary Union (with respect to the Senior
Euro Notes), U.S. Government Obligations (with respect to the Senior
Dollar Notes), EEA Government Obligations (with respect to the Senior
Euro Notes), or a combination thereof (respectively), in such amounts
as will be sufficient, in the opinion of a nationally recognized firm
of independent public accountants, to pay the principal of, premium, if
any, and interest on such Notes on the stated date for payment thereof
or on the redemption date of such principal or installment of principal
of, premium, if any, or interest on such Notes, and the Holders of
Notes must have a valid, perfected, exclusive security interest in such
trust;
(2) in the case of Legal Defeasance, we shall have delivered to the
respective Trustee an opinion of counsel in the United States
reasonably acceptable to the respective Trustee confirming that:
(A) we have received from, or there has been published by the Internal
Revenue Service, a ruling or
(B) since the date of the Indentures, there has been a change in the
applicable U.S. federal income tax law,
in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the Holders of such Notes will not recognize
income, gain or loss for U.S. federal income tax purposes as a result of
such Legal Defeasance and will be subject to U.S. federal income tax on the
same amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred;
(3) in the case of Covenant Defeasance, we shall have delivered to the
respective Trustee an opinion of counsel in the United States
reasonably acceptable to such Trustee confirming that the Holders of
such Notes will not recognize income, gain or loss for U.S. federal
income tax purposes as a result of such Covenant Defeasance and will be
subject to U.S. federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such
Covenant Defeasance had not occurred;
(4) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit insofar as Events of Default from bankruptcy
or insolvency events are concerned, at any time in the period ending on
the 91st day after the date of deposit;
(5) such Legal Defeasance or Covenant Defeasance shall not result in a
breach or violation of, or constitute a default under the Indentures or
any other material agreement or instrument to which we or any of our
Subsidiaries are a party or by which we or any of our Subsidiaries are
bound;
(6) we shall have delivered to the respective Trustee an Officers'
Certificate stating that the deposit was not made by us with the intent
of preferring the Holders of such Notes over any other of our creditors
or with the intent of defeating, hindering, delaying or defrauding any
other of our creditors or others; and
(7) we shall have delivered to the respective Trustee an Officers'
Certificate and an opinion of counsel, each stating that the conditions
precedent provided for in, in the case of the Officers' Certificate,
(1) through (6) and, in the case of the opinion of counsel, clauses
(1), (with respect to the validity and perfection of the security
interest) (2), (3) and (5) of this paragraph have been complied with
and we shall have delivered to the respective Trustee an Officers'
Certificate, subject to such qualifications and exceptions as the
respective Trustee deems appropriate, to the effect that, assuming no
Holder of the Notes is an insider of the Company, the trust funds will
not be subject to the effect of any applicable Federal bankruptcy,
insolvency, reorganization or similar laws affecting creditors' right
generally.
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If the funds deposited with the respective Trustee to effect Covenant
Defeasance are insufficient to pay the principal of, premium, if any, and
interest on the Notes when due, then our obligations under the Indentures
will be revived and no such defeasance will be deemed to have occurred.
Satisfaction and Discharge
The Indentures will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of
Notes) as to all outstanding Notes when either:
(a) all such Notes theretofore authorized and delivered (except lost,
stolen or destroyed Notes which have been replaced or paid and Notes
for whose payment money has theretofore been deposited in trust or
segregated and held in trust by us and thereafter repaid to us or
discharged from such trust) have been delivered to the respective
Trustee for cancellation; or
(b)(1) we shall have given irrevocable and unconditional notice of
redemption for all of the outstanding Notes within 60 days of such
notice pursuant to the redemption provisions of the Indentures or
all Notes not theretofore delivered to the respective Trustee for
cancellation otherwise have become due and payable, and the Company
has irrevocably deposited or caused to be deposited with the
respective Trustee as trust funds in the trust for such purpose an
amount of money sufficient to pay and discharge the entire
indebtedness on the Notes not theretofore delivered to the
respective Trustee for cancellation, for principal, premium, if any,
and accrued interest (and Liquidated Damages, if any),
(2) the Company has paid all other sums payable by it under the
Indentures,
(3) the Company has delivered irrevocable instructions to the
respective Trustee to apply the deposited money toward the payment
of the Notes at maturity or the redemption date, as the case may
be, which must be within 60 days thereof and
(4) the Holders of the Notes have a valid, perfected, exclusive
security interest in such trust.
In addition, we must deliver an Officers' Certificate and an opinion of
counsel stating that all conditions precedent to satisfaction and discharge
have been complied with.
Amendments and Supplements
The Indentures contain provisions permitting the Company and the respective
Trustee to enter into a supplemental Indentures for certain limited purposes
without the consent of the Holders. With the consent of the Holders of not less
than a majority in aggregate principal amount (principal amount at maturity, in
the case of the Senior Discount Notes) of the respective series of Notes at the
time outstanding, the Company and the respective Trustee are permitted to amend
or supplement the Indentures or any supplemental indenture or modify the rights
of the Holders; provided that no such modification may, without the consent of
Holders of at least 66 2/3% in aggregate principal amount (principal amount at
maturity, in the case of the Senior Discount Notes) of Notes at the time
outstanding, modify the provisions (including the defined terms used therein)
of the covenant "Repurchase of Notes at the Option of the Holder upon a Change
of Control" in a manner adverse to the Holders and, provided that no such
modification may, without the consent of each Holder affected thereby:
(1) change the Stated Maturity of any Note, or reduce the principal amount
thereof or the rate of interest or accretion (or extend the time for
payment of interest, if any) thereon or any premium payable upon the
redemption thereof at the option of the Company, or change the place of
payment where, or the coin or currency in which, any Note or any
premium or the interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment on or after the
Stated Maturity thereof (or, in the case of redemption at the option of
the Company, on or after the Redemption Date), or reduce the Change of
Control Purchase Price or the Asset Sale Offer Price after the
corresponding Change of Control or Asset Sale has occurred or alter the
provisions (including the defined terms used therein) regarding the
right of the Company to redeem the Notes in a manner adverse to the
Holders, or
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(2) reduce the percentage in principal amount of the outstanding Notes, the
consent of whose Holders is required for any such amendment,
supplemental indenture or waiver provided for in the Indentures, or
(3) modify any of the waiver provisions, except to increase any required
percentage or to provide that certain other provisions of the
Indentures cannot be modified or waived without the consent of the
Holder of each outstanding Note affected thereby, or
(4) cause the Notes to become subordinate in right of payment to any other
Indebtedness.
Notices
All notices regarding the Notes will, so long as the rules of the
Luxembourg Stock Exchange require, be published in a daily newspaper of general
circulation in Luxembourg, which is expected to be the Luxembourger Wort.
Notices to holders of definitive Notes, if issued, shall also be mailed by
first class mail to each holder (or the first named of joint holders) at its
address appearing in the register on the appropriate date provided herein other
than in the case of a partial redemption of Notes, when notice shall be so
mailed only to each holder whose Notes are to be redeemed and a notice
published as aforesaid stating which Notes are to be redeemed. For so long as
Notes are represented by Global Notes, notice to holders shall (in addition to
publication as described above) also be given by delivery of the relevant
notice to DTC, Euroclear and Cedelbank for communication to the holders of the
related book-entry interests.
Concerning the Trustees
Each of the Indentures contain certain limitations on the rights of the
relevant Trustee, should it become a creditor of our company, to obtain payment
of claims in certain cases, or to realize on certain property received in
respect of any such claim as security or otherwise. Each Trustee will be
permitted to engage in other transactions; provided, however, if it acquires
any conflicting interest it must eliminate such conflict within 90 days, apply
to the SEC for permission to continue or resign.
Each of the Indentures provide that the Holders of a majority in principal
amount of the outstanding Notes issued thereunder will have the right to direct
the time, method and place of conducting any proceeding for exercising any
remedy available to the relevant Trustee, subject to certain exceptions. Each
Indenture provides that in case an Event of Default shall occur (which shall
not be cured), the relevant Trustee will be required, in the exercise of its
power, to use the degree of care of a prudent person in the conduct of his own
affairs. Subject to such provisions, each Trustee will be under no obligation
to exercise any of its rights or powers under the relevant Indenture at the
request of any Holder of such Notes, unless such Holder shall have offered to
such Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
Each of the Indentures provide for the appointment of a successor Trustee
upon the resignation or removal of the Trustee. The Trustee may resign at any
time by giving written notice to the Company. The Holders of a majority in
principal amount of the outstanding Notes may remove the Trustee at any time,
upon the occurrence of certain conditions.
Governing Law
Each of the Indentures provides that it and the Notes will be governed by,
and construed in accordance with, the laws of the State of New York without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
No Personal Liability of Partners, Stockholders, Officers, Directors
The Indentures provide that no direct or indirect stockholder, employee,
officer or director, as such, past, present or future of the Company, or any
successor entity shall have any personal liability in respect of the
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obligations of the Company under the Indentures or the Notes solely by reason
of his or its status as such stockholder, employee, officer or director.
Certain Definitions
"Accreted Value" means, as of any date of determination, the sum (rounded
to the nearest whole dollar) of (a) the initial offering price of each $1,000
((Euro)1,000 in the case of Senior Euro Discount Notes) in principal amount at
maturity of Senior Discount Notes and (b) the portion of the excess of the
principal amount of Senior Discount Notes over such initial offering price
which shall have been accreted thereon through such date, such amount to be so
accreted on a daily basis at the rate of 13.375% per annum compounded semi-
annually on each May 1 and November 1 from the date of issuance of the Senior
Discount Notes through the date of determination. On and after November 1,
2004, the Accreted Value of each Senior Discount Note shall be equal to its
principal amount at maturity.
"Acquired Indebtedness" means Indebtedness (including Disqualified Capital
Stock) of any Person existing at the time such Person becomes a Subsidiary of
the Company, including by designation, or is merged or consolidated into or
with the Company or one of its Subsidiaries.
"Acquisition" means the purchase or other acquisition of any Person or all
or substantially all the assets of any Person by any other Person, whether by
purchase, merger, consolidation, or other transfer, and whether or not for
consideration.
"Affiliate" means any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a Person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by
contract, or otherwise; provided that with respect to ownership interest in
the Company and its Subsidiaries, a Beneficial Owner of 10% or more of the
total voting power normally entitled to vote in the election of directors,
managers or trustees, as applicable, shall for such purposes be deemed to
constitute control.
"Annualized Consolidated EBITDA" means Consolidated EBITDA for the
Reference Period multiplied by four.
"Asset Acquisition" means (i) an Investment or capital contribution (by
means of transfers of cash or other property to others or payments for
property or services of the account or use of others, or otherwise) by the
Company or any Subsidiary in any other Person, or any acquisition or purchase
of Capital Stock of another Person by the Company or any Subsidiary, or (ii)
an acquisition by the Company or any Subsidiary of the property and assets
(other than Capital Stock) of any Person other than the Company or any
Subsidiary which constitute substantially all of a division, operating unit or
line of business of such Person or which is otherwise outside the ordinary
course of business.
"Average Life" means, as of the date of determination, with respect to any
security or instrument, the quotient obtained by dividing (1) the sum of the
products (a) of the number of years from the date of determination to the date
or dates of each successive scheduled principal (or redemption) payment of
such security or instrument and (b) the amount of each such respective
principal (or redemption) payment by (2) the sum of all such principal (or
redemption) payments.
"Beneficial Owner" or "beneficial owner" for purposes of the definition of
Change of Control and Affiliate has the meaning attributed to it in Rules 13d-
3 and 13d-5 under the Exchange Act (as in effect on the Issue Date), whether
or not applicable, except that a "person" shall be deemed to have "beneficial
ownership" of all shares that any such Person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York and
Amsterdam, The Netherlands are authorized or obligated by law or executive
order to close.
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"Capital Contribution" means any contribution to the equity of the Company
from a direct or indirect parent of the Company for which no consideration
other than the issuance of Qualified Capital Stock is paid.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means, with respect to any corporation, any and all shares,
interests, rights to purchase (other than convertible or exchangeable
Indebtedness that is not itself otherwise capital stock), warrants, options,
participations or other equivalents of or interests (however designated) in
stock issued by that corporation.
"Cash Equivalent" means:
(1) securities issued or directly and fully guaranteed or insured by (i)
the United States of America or any agency or instrumentality thereof,
or (ii) any member of the European Economic Area or Switzerland, or any
agency or instrumentality thereof provided that such country, agency or
instrumentality has a credit rating at least equal to that of the
United States of America (provided that, in each case, the full faith
and credit of such respective nation is pledged in support thereof), or
(2) time deposits and certificates of deposit and commercial paper issued
by the parent corporation of any domestic (United States) commercial
bank of recognized standing having capital and surplus in excess of
$500 million (or the foreign currency equivalent thereof), or
(3) commercial paper issued by others rated at least A-2 or the equivalent
thereof by Standard & Poor's Corporation or at least P-2 or the
equivalent thereof by Moody's Investors Service, Inc.
and in the case of each of (1), (2), and (3) maturing within one year after the
date of acquisition, or
(4) Euro or dollar time deposits with maturities of six months or less from
the date of acquisition, bankers' acceptances with maturities not
exceeding six months, and overnight bank deposits, in each case with
any domestic (United States) commercial bank having capital and surplus
in excess of $500 million (or the foreign currency equivalent thereof)
and a Keefe Bank Watch Rating of "B" or better; provided, in the case
of (1) through (4), that with respect to any non-domestic Person, Cash
Equivalents shall also mean those investments that are comparable to
clauses (ii) and (iv) above in such Person's country of organization or
country where it conducts business operations.
"Consolidation" means, with respect to any Person, the consolidation of the
accounts of the Subsidiaries with those of such Person, all in accordance with
GAAP; provided that "consolidation" will not include consolidation of the
accounts of any Unrestricted Subsidiary with the accounts of such Person. The
term "Consolidated" has a correlative meaning to the foregoing.
"Consolidated Coverage Ratio" of any Person on any date of determination
(the "Transaction Date") means the ratio, on a pro forma basis, of (a) the
aggregate amount of Consolidated EBITDA of such Person attributable to
continuing operations and businesses (exclusive of amounts attributable to
operations and business permanently discontinued or disposed of) for the
Reference Period to (b) the aggregate Consolidated Fixed Charges of such Person
(exclusive of amounts attributable to operations and businesses permanently
discontinued or disposed of, but only to the extent that the obligations giving
rise to such Consolidated Fixed Charges would no longer be obligations
contributing to such Person's Consolidated Fixed Charges subsequent to the
Transaction Date) during the Reference Period; provided that for purposes of
such calculation, (i) Acquisitions which occurred during the Reference Period
or subsequent to the Reference Period and on or prior to the Transaction Date
shall be assumed to have occurred on the first day of the Reference Period,
(ii) transactions giving rise to the need to calculate the Consolidated
Coverage Ratio shall be assumed to have occurred on the first day of the
Reference Period, (iii) the incurrence of any Indebtedness during the Reference
Period or subsequent to the Reference Period and on or prior to the Transaction
Date (and the application of the proceeds therefrom to the extent used to
refinance or retire other Indebtedness) shall
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be assumed to have occurred on the first day of such Reference Period, and (iv)
the Consolidated Fixed Charges of such Person attributable to interest on any
Indebtedness or dividends on any Disqualified Capital Stock bearing a floating
interest (or dividend) rate shall be computed on a pro forma basis as if the
average rate in effect from the beginning of the Reference Period to the
Transaction Date had been the applicable rate for the entire period, unless
such person or any of its Subsidiaries is a party to an Interest Swap or
Hedging Obligation (which shall remain in effect for the 12-month period
immediately following the Transaction Date) that has the effect of fixing the
interest rate on the date of computation, in which case such rate (whether
higher or lower) shall be used.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the Consolidated Net Income of such Person for such period adjusted to add
thereto (to the extent deducted from net revenues in determining Consolidated
Net Income), without duplication, the sum of
(1) Consolidated income tax expense,
(2) Consolidated depreciation and amortization expense,
(3) Consolidated Fixed Charges, and
(4) non-cash stock based compensation
less the amount of all cash payments made by such Person or any of its
Subsidiaries during such period to the extent such payments relate to non-cash
charges that were added back in determining Consolidated EBITDA for such period
or any prior period; provided that consolidated income tax expense,
depreciation and amortization of a Subsidiary that is not a Wholly Owned
Subsidiary shall only be added to the extent of the equity interest of such
Person in such Subsidiary.
"Consolidated Fixed Charges" of any Person means, for any period, the
aggregate amount (without duplication and determined in each case in accordance
with GAAP) of:
(a) interest expensed or capitalized, paid, accrued, or scheduled to be
paid or accrued (including, in accordance with the following sentence,
interest attributable to Capitalized Lease Obligations) of such Person
and its Consolidated Subsidiaries during such period, including (1)
original issue discount and non-cash interest payments or accruals on
any Indebtedness, (2) the interest portion of all deferred payment
obligations, and (3) all commissions, discounts and other fees and
charges owed with respect to bankers' acceptances and letters of credit
financings and currency and Interest Swap and Hedging Obligations, in
each case to the extent attributable to such period,
(b) the amount of dividends accrued or payable (or guaranteed) by such
Person or any of its Consolidated Subsidiaries in respect of Preferred
Stock (other than by Subsidiaries of such Person to such Person or such
Person's Wholly Owned Subsidiaries).
For purposes of this definition, (x) interest on a Capitalized Lease
Obligation shall be deemed to accrue at an interest rate reasonably determined
in good faith by the Company to be the rate of interest implicit in such
Capitalized Lease Obligation in accordance with GAAP and (y) interest expense
attributable to any Indebtedness represented by the guaranty by such Person or
a Subsidiary of such Person of an obligation of another Person shall be deemed
to be the interest expense attributable to the Indebtedness guaranteed.
"Consolidated Invested Equity Capital" means, with respect to any Person as
of any date, the sum of the Invested Equity Capital of such Person as of such
date and, without duplication, the Invested Equity Capital of each of its
Subsidiaries as of such date. For purposes of calculating the Consolidated
Invested Equity Capital of any Person as of any date, in order to avoid
duplication, the Invested Equity Capital of a Subsidiary of such Person shall
not include any amounts that would be included in the Consolidated Invested
Equity Capital of any equity owner of such Subsidiary, to the extent that such
amounts were utilized by such equity owner prior to such date to permit the
incurrence of Indebtedness pursuant to clauses 2(iii) and (c)(3) of the
"Limitation on Incurrence of Additional Indebtedness and Disqualified Capital
Stock" covenant. For example, if a direct Subsidiary of the Company has
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Consolidated Invested Equity Capital of $100 and incurs $225 of such
Indebtedness, then a direct or indirect Subsidiary of such Subsidiary will not
be deemed to have any Invested Equity Capital based on contributions or loans
to it by such first Subsidiary. In addition, the Invested Equity Capital of a
Subsidiary of a Person will never be considered to be greater than the Invested
Equity Capital of such Person, except as a result of contributions of Invested
Equity Capital to such Subsidiary by third parties.
"Consolidated Net Income" means, with respect to any Person for any period,
the net income (or loss) of such Person and its Consolidated Subsidiaries
(determined on a consolidated basis in accordance with GAAP) for such period,
adjusted to exclude (only to the extent included in computing such net income
(or loss) and without duplication):
(a) all gains (but not losses) which are either extraordinary (as
determined in accordance with GAAP) or are nonrecurring (including any
gain from the sale or other disposition of assets outside the ordinary
course of business or from the issuance or sale of any capital stock),
(b) the net income, if positive, of any Person, other than a Consolidated
Subsidiary, in which such Person or any of its Consolidated
Subsidiaries has an interest, except to the extent of the amount of any
dividends or distributions actually paid in cash to such Person or a
Consolidated Subsidiary of such Person during such period, but in any
case not in excess of such Person's pro rata equity interest share of
such Person's net income for such period,
(c) the net income or loss of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition, and
(d) the net income, if positive, of any such Person's Consolidated
Subsidiaries to the extent that the declaration or payment of dividends
or similar distributions is not at the time permitted by operation of
the terms of its charter or bylaws or any other agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation
applicable to such Consolidated Subsidiary other than the Indentures.
"Consolidated Subsidiary" means, for any Person, each Subsidiary (excluding
all Unrestricted Subsidiaries) of such Person (whether now existing or
hereafter created or acquired) the financial statements of which are
consolidated for financial statement reporting purposes with the financial
statements of such Person in accordance with GAAP.
"Consolidated Tangible Assets" of any Person means the total amount of
assets less applicable reserves and other properly deductible items which under
GAAP would be calculated on a consolidated balance sheet of the Person and its
Subsidiaries after deducting all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles, which, in
each case under GAAP, would be included on such consolidated balance sheet.
"Continuing Director" means during any period of 12 consecutive months
after the Issue Date, individuals who at the beginning of any such 12-month
period constituted the Supervisory Board of the Company (together with any new
supervisory directors whose election by the shareholders was from a list of
candidates drawn up by the holder or holders of our priority shares and new
supervisory directors designated in or provided for in an agreement regarding
the merger, consolidation or sale, transfer or other conveyance, of all or
substantially all of the assets of the Company or the Parent, if such agreement
was approved by a vote of such majority of supervisory directors).
"Credit Agreement" means the loan and note issuance agreement dated July
27, 1999 between certain Subsidiaries of the Company and Bank of America
International Limited, CIBC World Markets plc, Citibank N.A., MeesPierson N.V.,
Paribas, The Royal Bank of Scotland plc, Toronto Dominion Bank Europe Limited
and The Toronto Dominion Bank, including any related notes, guarantees,
collateral documents, instruments and agreements executed in connection
therewith, as such agreement and/or related documents may be amended, restated,
supplemented, renewed, replaced or otherwise modified from time to time whether
or not with the same agent, trustee, representative lenders or Holders, and,
subject to the proviso to the next succeeding sentence, irrespective of
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any changes in the terms and conditions thereof. Without limiting the
generality of the foregoing, the term "Credit Agreement" shall include
agreements in respect of Interest Swap and Hedging Obligations with lenders
party to the Credit Agreement and shall also include any amendment, amendment
and restatement, renewal, extension, restructuring, supplement or modification
to any Credit Agreement and all refundings, refinancings and replacements of
any Credit Agreement, including any agreement:
(1) extending the maturity of any Indebtedness incurred thereunder or
contemplated thereby,
(2) adding or deleting borrowers or guarantors thereunder, so long as
borrowers and guarantors include one or more of the Company and its
Subsidiaries and their respective successors and assigns,
(3) increasing the amount of Indebtedness incurred thereunder or available
to be borrowed thereunder; provided that on the date such Indebtedness
is incurred it would not be prohibited by the covenant "Limitation on
Incurrence of Additional Indebtedness and Disqualified Capital Stock,"
or
(4) otherwise altering the terms and conditions thereof in a manner not
prohibited by the other terms of the Indentures.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Capital Stock" means (a) except as set forth in clause (b),
with respect to any Person, Equity Interests of such Person that, by its terms
or by the terms of any security into which it is convertible, exercisable or
exchangeable, is, or upon the happening of an event or the passage of time or
both would be, required to be redeemed or repurchased (including at the option
of the holder thereof) by such Person or any of its Subsidiaries, in whole or
in part, on or prior to 91 days following the Stated Maturity of the respective
series of Notes and (b) with respect to any Subsidiary of the Company, any
Equity Interests of such Subsidiary other than (i) any common equity with no
economic preference, privileges, or redemption or repayment provisions or (ii)
preferred stock convertible into such common equity of such Subsidiary with no
payment of dividends or liquidation preference due or payable thereon on or
prior to 91 days following the Stated Maturity of the respective series of
Notes.
"EEA Government Obligation" means direct non-callable obligations of, or
non-callable obligations guaranteed by, any member nation of the European Union
for the payment of which obligation or guarantee the full faith and credit of
the respective nation is pledged; provided that such nation has a credit rating
at least equal to that of the highest rated member nation of the European
Economic Area.
"Equity Interest" of any Person means any shares, interests, participations
or other equivalents (however designated) in such Person's equity, and shall in
any event include any Capital Stock issued by, or partnership, participation or
membership interests in, such Person.
"Equity Offering" means (i) an underwritten public offering or floatation
of ordinary shares of the Company which has been registered under the
Securities Act or admitted to listing on the Amsterdam Stock Exchange or its
equivalent in any other European Union jurisdiction, in any case resulting in
Net Cash Proceeds to the Company of at least $100 million (or its foreign
currency equivalent), or (ii) a sale of Qualified Capital Stock of the Company
to any Person which is (or a controlled Affiliate of a Person which is),
engaged principally in a Related Business, resulting in Net Cash Proceeds to
the Company of at least $100 million (or its foreign currency equivalent);
provided, however, that a sale of Qualified Capital Stock of the Company to any
subsidiary of the Company or any Person that is a controlled Affiliate of the
Company shall not be an Equity Offering.
"Euro" or "(Euro)" means the currency adopted by those countries
participating in the third stage of European Monetary Union.
"European Economic Area" means the member nations of the European Economic
Area pursuant to the Oporto Agreement on the European Economic Area dated May
2, 1992 as amended.
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"European Union" means the member nations to the third stage of economic
and monetary union pursuant to the Treaty of Rome establishing the European
Community, as amended by the Treaty on European Union, signed at Maastricht on
February 7, 1992.
"Event of Loss" means, with respect to any property or asset, any (1) loss,
destruction or damage of such property or asset or (2) any condemnation,
seizure or taking, by exercise of the power of eminent domain or otherwise, of
such property or asset, or confiscation or requisition of the use of such
property or asset.
"Exchange Act" means the United States Securities Exchange Act of 1934, as
amended.
"Exempted Affiliate Transaction" means (i) Restricted Payments comprised of
pro rata dividends paid in cash on any class of Equity Interests and made in
compliance with the Indentures, (ii) transactions, at arms-length and as so set
forth in a Board Resolution, between or among holders of any Equity Interest of
any Subsidiary of the Company and such Subsidiary, so long as such holder is
not otherwise an Affiliate of the Company, (iii) transactions between or among
the Company, and its Subsidiaries, (iv) the Company or any of its Subsidiaries
entering into or performing any employment agreement, stock option agreement or
other agreement relating to the terms of employment, compensation or
termination of employment in the ordinary course of business of the Company or
such Subsidiary, (v) any contract, agreement, arrangement or transaction with
any Affiliate in effect as of the Issue Date and any amendment, waiver,
variation or other modification in respect of any such contract, agreement,
arrangement or transaction so long as such amendment, waiver, variation or
other modification is not disadvantageous to the Company and its Subsidiaries
in any material respect, (vi) Restricted Payments and Investments permitted
under the Indentures described under the covenant "Limitation on Restricted
Payments," (vii) transactions with customers, clients, suppliers, or purchasers
or sellers of goods or services, in each case in the ordinary course of
business and otherwise in compliance with the terms of the Indentures which are
fair to the Company and its Subsidiaries, in the reasonable determination of
the Company or Subsidiary, as the case may be, or are on terms no less
favorable to the Company or the Subsidiary than those that could be obtained in
a comparable arm's length transaction with an entity that is not an Affiliate
or Principal and is in the best interests of the Company or the Subsidiary, and
(viii) transactions with respect to network capacity or dark or lit
communications fiber capacity or telecommunications conduit between the Company
or any Subsidiary and any Unrestricted Subsidiary or other Affiliate and joint
sales and marketing pursuant to an agreement or agreements between the Company
or any Subsidiary and any Unrestricted Subsidiary or other Affiliate, provided
that in the case of this clause (viii), such agreements are on terms that are
no less favorable to the Company or the Subsidiary than those that could be
obtained in an arm's-length transaction with an entity that is not an Affiliate
or Principal and are in the best interests of the Company and the Subsidiary
entered into in the ordinary course of business.
"Existing Agreements" means (i) any and all instruments, as in effect on
the Issue Date, between the Company or any of its Subsidiaries and a commercial
lending institution or institutions, which makes borrowing of funds available
to the Company or any such Subsidiary from such institution or institutions and
(ii) any replacements of the instruments in clause (i) entered into by the
respective Subsidiary that was party to the instrument so replaced or their
respective successors and a commercial lending institution or institutions for
an amount up to the maximum amount of the instrument so replaced.
"Existing Indebtedness" means the Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the Credit Agreement) in existence
on the Issue Date reduced to the extent such amounts are repaid.
"GAAP" means United States generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession in the United States as in effect on the Issue Date.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generality of the foregoing, any
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obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of)
such Indebtedness or other obligation of such other Person (whether arising by
virtue of partnership arrangements, or by agreements to keep-well, to purchase
assets, goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of
assuring in any other manner the obligee of such Indebtedness or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); provided that the term "Guarantee" shall
not include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as verb has a corresponding meaning.
"Guarantor" is defined to mean any Person obligated under a Guarantee.
"Indebtedness" of any Person means, without duplication,
(a) all liabilities and obligations, contingent or otherwise, of any
Person, to the extent such liabilities and obligations would appear as
a liability upon the consolidated balance sheet of such Person in
accordance with GAAP, (1) in respect of borrowed money (whether or not
the recourse of the lender is to the whole of the assets of such Person
or only to a portion thereof), (2) evidenced by bonds, notes,
debentures or similar instruments, (3) representing the balance
deferred and unpaid of the purchase price of any property or services,
except (other than accounts payable or other obligations to trade
creditors which have remained unpaid for greater than 90 days past
their original due date) those incurred in the ordinary course of its
business that would constitute ordinarily a trade payable to trade
creditors;
(b) all liabilities and obligations, contingent or otherwise, of such
Person (1) evidenced by bankers' acceptances or similar instruments
issued or accepted by banks, (2) relating to any Capitalized Lease
Obligation, or (3) evidenced by a letter of credit or a reimbursement
obligation of such Person with respect to any letter of credit (other
than obligations with respect to letters of credit securing obligations
(excluding those obligations described in (a)(1) through (3) above)
entered into in the ordinary course of business of such Person to the
extent such letters of credit are not drawn upon);
(c) all net obligations of such Person under Interest Swap and Hedging
Obligations;
(d) all liabilities and obligations of others of the kinds described in the
preceding clauses (a), (b) or (c) that such Person has guaranteed or
provided credit support or that is otherwise its legal liability or
which are secured by any assets or property of such Person;
(e) any and all deferrals, renewals, extensions, refinancing and refundings
(whether direct or indirect) of, or amendments, modifications or
supplements to, any liability of the kind described in any of the
preceding clauses (a), (b), (c) or (d), or this clause (e), whether or
not between or among the same parties; and
(f) all Disqualified Capital Stock of such Person (measured at the greater
of its voluntary or involuntary maximum fixed repurchase price, plus
accrued and unpaid dividends).
For purposes hereof, the "maximum fixed repurchase price" of any Disqualified
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Disqualified Capital Stock as if such
Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indentures, and if such
price is based upon, or measured by, the fair market value of such Disqualified
Capital Stock, such fair market value to be determined in good faith by the
Supervisory Board of the Company.
The amount of any Indebtedness outstanding as of any date shall be (1) the
accreted value thereof, in the case of any Indebtedness issued with original
issue discount, but the accretion of original issue discount in accordance with
the original terms of Indebtedness issued with an original issue discount will
not be deemed to be an incurrence and (2) the principal amount thereof,
excluding any interest thereon, in the case of any other Indebtedness.
"Interest Swap and Hedging Obligation" means any obligation of any Person
pursuant to any interest rate swap agreement, interest rate cap agreement,
interest rate collar agreement, interest rate exchange agreement, currency
exchange agreement or any other agreement or arrangement designed to protect
against fluctuations in
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interest rates or currency values, including, without limitation, any
arrangement whereby, directly or indirectly, such Person is entitled to receive
from time to time periodic payments calculated by applying either a fixed or
floating rate of interest on a stated notional amount in exchange for periodic
payments made by such Person calculated by applying a fixed or floating rate of
interest on the same notional amount.
"Invested Equity Capital" means, with respect to any Person as of any date,
without duplication, the sum of (i) the total dollar amount contributed in cash
plus the value of all property contributed (valued at fair market value at the
time of contribution, determined in good faith by the Supervisory Board) to
such Person since the date of its creation in the form of common equity, plus,
(ii) the total dollar amount contributed in cash plus the value of all property
contributed (valued at fair market value at the time of contribution,
determined in good faith by the Supervisory Board) to such Person since the
date of creation by the holders of its common equity (and their Affiliates) in
consideration of the issuance of preferred equity or Indebtedness, on a basis
that is substantially proportionate to their common equity interests (with any
disproportionately large equity interests received by the Company or a
Subsidiary relative to their respective contributions being ignored for this
purpose), plus, (iii) the total dollar amount contributed in cash plus the
value of all property contributed (valued at fair market value at the time of
contribution, determined in good faith by the Supervisory Board) to such Person
since the date of its creation by the Company or a Wholly Owned Subsidiary of
the Company in consideration of the issuance of preferred equity or
Indebtedness, and less (iv) the value of all interest, returns in respect of
Indebtedness, dividends and other distributions (in whatever form and however
designated, valued at fair market value as determined in good faith by the
Supervisory Board) made by such Person since the date of its creation to the
holders of its common equity (and their Affiliates); provided that in no event
shall the aggregate amount of interest, dividends and other distributions made
to any holder of common equity of a Person (or its Affiliates) operate to
reduce the Invested Equity Capital of such Person by more than the total
contributions to such Person (per clauses (i) through (iii) above) by such
equity holder (and its Affiliates).
"Investment" by any Person in any other Person means (without duplication):
(a) the acquisition (whether by purchase, merger, consolidation or
otherwise) by such Person (whether for cash, property, services,
securities or otherwise) of capital stock, bonds, notes, debentures,
partnership or other ownership interests or other securities, including
any options or warrants, of such other Person or any agreement to make
any such acquisition;
(b) the making by such Person of any deposit with, or advance, loan or
other extension of credit to, such other Person (including the purchase
of property from another Person subject to an understanding or
agreement, contingent or otherwise, to resell such property to such
other Person) or any commitment to make any such advance, loan or
extension (but excluding accounts receivable, endorsements for
collection or deposits arising in the ordinary course of business);
(c) other than guarantees of Indebtedness of the Company or to the extent
permitted by the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock," the entering into by such
Person of any guarantee of, or other credit support or contingent
obligation with respect to, Indebtedness or other liability of such
other Person;
(d) the making of any capital contribution by such Person to such other
Person; and
(e) the designation by the Supervisory Board of the Company of any Person
to be an Unrestricted Subsidiary.
The Company shall be deemed to make an Investment in an amount equal to the
fair market value of the net assets of any subsidiary (or, if neither the
Company nor any of its Subsidiaries has theretofore made an Investment in such
subsidiary, in an amount equal to the Investments being made), at the time that
such subsidiary is designated an Unrestricted Subsidiary, and any property
transferred to an Unrestricted Subsidiary from the Company or a Subsidiary of
the Company shall be deemed an Investment valued at its fair market value at
the time of such transfer. Investments shall be measured by the fair market
value attributed to the Investment at the time made or returned, as applicable.
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"Issue Date" means the date of first issuance of the Notes under the
Indentures.
"Leverage Ratio" on any date of determination (the "Transaction Date") for
any Person means the ratio, on a pro forma basis, of (a) the aggregate amount
of Indebtedness of such Person and its Subsidiaries on a Consolidated basis to
(b) the aggregate amount of Annualized Consolidated EBITDA of such Person
attributable to continuing operations and business (exclusive of amounts
attributable to operations and businesses permanently discontinued or disposed
of); provided that for purposes of calculating Annualized Consolidated EBITDA
for this definition,
(1) Acquisitions which occurred during the Reference Period or subsequent
to the Reference Period and on or prior to the Transaction Date shall
be assumed to have occurred on the first day of the Reference Period,
(2) transactions giving rise to the need to calculate the Leverage Ratio
shall be assumed to have occurred on the first day of the Reference
Period,
(3) the incurrence of any Indebtedness or issuance of any Disqualified
Capital Stock during the Reference Period or subsequent to the
Reference Period and on or prior to the Transaction Date (and the
application of the proceeds therefrom to the extent used to refinance
or retire other Indebtedness) shall be assumed to have occurred on the
first day of the Reference Period, and
(4) the Consolidated Fixed Charges of such Person attributable to interest
on any Indebtedness or dividends on any Disqualified Capital Stock
bearing a floating interest (or dividend) rate shall be computed on a
pro forma basis as if the average rate in effect from the beginning of
the Reference Period to the Transaction Date had been the applicable
rate for the entire period, unless such Person or any of its
Subsidiaries is a party to an Interest Swap or Hedging Obligation
(which shall remain in effect for the 12-month period immediately
following the Transaction Date) that has the effect of fixing the
interest rate on the date of computation, in which case such rate
(whether higher or lower) shall be used.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable,
now owned or hereafter acquired. For purposes of this definition, the sale,
lease, conveyance, or other transfer by the Company or any Subsidiary of the
Company, in the ordinary course of its business and not constituting a security
interest in assets serving as collateral for any of their respective
obligations, including the granting of indefeasible rights of use or equivalent
arrangements with respect to, network capacity, communications fiber capacity
or conduit, shall not be a Lien.
"Liquidated Damages" means all liquidated damages then owing pursuant to
the Registration Rights Agreement.
"Net Cash Proceeds" means the aggregate amount of cash or Cash Equivalents
received by the Company in the case of a sale, or Capital Contribution in
respect, of Qualified Capital Stock and by the Company and its Subsidiaries in
respect of an Asset Sale, plus, in the case of an issuance of Qualified Capital
Stock upon any exercise, exchange or conversion of securities (including
options, warrants, rights and convertible or exchangeable debt) of the Company
that were issued for cash on or after July 30, 1999, the amount of cash
originally received by the Company upon the issuance of such securities
(including options, warrants, rights and convertible or exchangeable debt)
less, in each case, the sum of all payments, fees, commissions and (in the case
of Asset Sales, reasonable and customary), expenses (including, without
limitation, the fees and expenses of legal counsel and investment banking fees
and expenses) incurred in connection with such Asset Sale or sale of Qualified
Capital Stock, and, in the case of an Asset Sale only, less the amount
(estimated reasonably and in good faith by the Company) of income, franchise,
sales and other applicable taxes required to be paid by the Company or any of
its respective Subsidiaries in connection with such Asset Sale in the taxable
year that such sale is consummated or in the immediately succeeding taxable
year, the computation of which shall take into account the reduction in tax
liability resulting from any available operating losses and net operating loss
carryovers, tax credits and tax credit carryforwards, and similar tax
attributes.
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"Non-Recourse Indebtedness" means Indebtedness of a Person to the extent
that under the terms thereof and pursuant to applicable law, no personal
recourse could be had against the Company or its Subsidiaries (giving effect to
the designations of such Person as an Unrestricted Subsidiary) for the Payment
of the principal of or interest or premium or other amounts with respect to
such Indebtedness or for any claim based on such Indebtedness and that
enforcement of obligations on such Indebtedness is limited solely to recourse
against interests in specified assets.
"Obligation" means any principal, premium or interest payment, or monetary
penalty, or damages, due by the Company under the terms of the Notes or the
Indentures, including any Liquidated Damages due pursuant to the terms of the
Registration Rights Agreement.
"Offering" means the offering of the Notes by the Company.
"Officers' Certificate" means the officers' certificate to be delivered
upon the occurrence of certain events as set forth in the Indentures.
"Parent" means UnitedGlobalCom, Inc. or its successor(s).
"Parent Stock Instrument" means either (a) Indebtedness (including
Disqualified Capital Stock) and Qualified Capital Stock of the Company that is
convertible or exchangeable into, at the option of the Company or any holder
thereof, or secured by, or whose value to the holder thereof is dependent upon,
any shares of Parent's Capital Stock that were owned by the Company or any of
its Subsidiaries as of July 30, 1999, provided that such Indebtedness and
Capital Stock of the Company shall have been issued in consideration of cash,
the net proceeds of which shall have been received by the Company or (b) the
Class A Common Stock of Parent owned by the Company or any of its Subsidiaries
as of July 30, 1999 or, any like number of shares of Class B Common Stock of
Parent issued in exchange for the shares of the Class A Common Stock of Parent
held as of July 30, 1999.
"Permitted Indebtedness" means that:
(a) the Company may incur Indebtedness evidenced by the Notes and issued
pursuant to the Indentures up to the amounts being issued on the
original Issue Date;
(b) the Company may incur Refinancing Indebtedness with respect to any
Indebtedness (including Disqualified Capital Stock), described in
clause (a) or this clause (b) of this definition or incurred pursuant
to clause (2) of the second paragraph, and any Subsidiary may incur
Refinancing Indebtedness (including Disqualified Capital Stock),
described in this clause (b) or clause (c) of the third paragraph, of
the covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Capital Stock," and the Company and its Subsidiary may
incur Refinancing Indebtedness with respect to Indebtedness which is
outstanding on the Issue Date (after giving effect to the New
Acquisitions) (less the amount of any such Existing Indebtedness repaid
on or after the Issue Date or which was refinanced pursuant to this
clause (b));
(c) the Company and its Subsidiaries may incur Indebtedness solely in
respect of bankers acceptances, letters of credit and performance and
surety bonds and completion guarantees (to the extent that such
incurrence does not result in the incurrence of any obligation to repay
any obligation relating to borrowed money of others), all in the
ordinary course of business in accordance with customary industry
practices, in amounts and for the purposes customary in the Company's
industry;
(d) the Company may incur Indebtedness to any Subsidiary, and any
Subsidiary may incur Indebtedness to any other Subsidiary or to the
Company; provided that in the case of Indebtedness of the Company, such
obligations shall be unsecured and subordinated in all respects to the
Company's obligations pursuant to the Notes and any event that causes
such Subsidiary no longer to be a Subsidiary (including by designation
to be an Unrestricted Subsidiary) shall be deemed to be a new
incurrence of such Indebtedness, if then outstanding, subject to the
covenant "Limitation on Incurrence of Additional Indebtedness and
Disqualified Stock";
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(e) the Company and its Subsidiaries may incur Interest Swap and Hedging
Obligations that are incurred for the purpose of fixing or hedging
interest rate or currency risk with respect to any fixed or floating
rate Indebtedness that is permitted by the Indentures to be outstanding
or any receivable or liability the payment of which is determined by
reference to a foreign currency; provided that the notional amount of
any such Interest Swap and Hedging Obligation does not exceed the
principal amount of Indebtedness to which such Interest Swap and
Hedging Obligation relates;
(f) we and our Subsidiaries may guarantee Indebtedness of any of our
Subsidiaries, provided that the incurrence of such Indebtedness by such
Subsidiary is permitted under the Indentures; and
(g) Subsidiaries of the Company may issue preferred stock or Indebtedness
to the holders (or their Affiliates) of the common equity of such
Subsidiary on a basis that is substantially proportionate to their
common equity interests (with any disproportionately large equity
interests received by the Company or a Subsidiary of the Company
relative to their respective contributions being ignored for this
purpose).
"Permitted Investment" means:
(a) Cash Equivalents;
(b) intercompany Indebtedness to the extent permitted under clause (d) of
the definition of "Permitted Indebtedness";
(c) an Investment by the Company or a Subsidiary of the Company in a Person
engaged primarily in a Related Business if as a result of such
Investment such Person becomes a Subsidiary of the Company or is merged
with or into the Company or a Subsidiary of the Company, so long as the
surviving entity is the Company or a Subsidiary of the Company;
(d) an Investment in any Subsidiary of the Company;
(e) other Investments in any Person or Persons engaged primarily in a
Related Business with respect to which the Company maintains the power
to influence or participate in the management of such Person by virtue
of representation on such Person's board of directors or through a
contractual relationship with such Person or its holders of Capital
Stock;
(f) other Investments in any Person or Persons engaged primarily in a
Related Business with respect to which the Supervisory Board of the
Company or of the relevant Subsidiary determines in its good faith
reasonable judgment that the Company or any of its Subsidiaries will
receive as a result of such Investment commensurate network services
benefits (including by becoming a customer, client, supplier, purchaser
or seller of goods or services of or to such Person or Persons) from
the arrangements entered into as a result of such Investment;
(g) other Investments in any Person or Persons engaged primarily in a
Related Business; provided that, after giving pro forma effect to each
such Investment, the amount of all such Investments made solely in
reliance upon this clause (g) on and after July 30, 1999 that are
outstanding at any time does not exceed in the aggregate $100 million
(or the foreign currency equivalent thereof measured on the date of the
making of such Investment), plus, unless such amounts shall have been
credited under clause (3) of the "Limitation on Restricted Payments"
covenant and utilized to make a Restricted Payment, (w) the amount of
the Net Cash Proceeds to the Company from the sale of Qualified Capital
Stock (other than (i) to a Subsidiary of the Company, and (ii) to the
extent applied in a Qualified Exchange), (x) an amount equal to 50% of
the Net Cash Proceeds from Special Character Asset Sales, (y) an amount
equal to the Net Cash Proceeds to the Company or any of its
Subsidiaries of any sale of securities constituting a Parent Stock
Instrument (other than (i) to a Subsidiary of the Company, and (ii) to
the extent applied in connection with a Qualified Exchange) and (z) the
amount of Investments made pursuant to this clause (g) after July 30,
1999 that are returned to the Company or any Subsidiary on or prior to
the date of any such calculation, which amount shall be the lesser of
(i) the amount of the cash invested plus the value of all noncash
investments (valued at the fair market value at the time of the
Investment, determined in the good faith reasonable judgment of the
Company or the relevant Subsidiary) and (ii) the amount of the
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Net Cash Proceeds received plus the value of noncash proceeds received
(valued at the fair market value at the time of the return of such
Investment, determined in the good faith reasonable judgment of the
Company or the relevant Subsidiary);
(h) Investments made in the ordinary course of business as partial or full
payment for constructing a network relating principally to a Related
Business of the Company or any Subsidiary;
(i) Investments solely in the form and consisting of Capital Stock of the
Company (other than Disqualified Capital Stock);
(j) any Investment acquired by the Company or any of its restricted
Subsidiaries (a) in exchange for any other Investment or accounts
receivable held by the Company or any such Restricted Subsidiary in
connection with or as a result of a bankruptcy, workout, reorganization
or recapitalization of the issuer of such other investment or accounts
receivable or (b) as a result of a foreclosure by the Company or any of
its restricted Subsidiaries with respect to any secured Investment or
other transfer of title with respect to any secured Investment in
default;
(k) an Investment in prepaid expenses and lease, utility and workers'
compensation, performance and other similar deposits in the ordinary
course of business;
(l) loans, advances, or extensions of credit to employees, officers,
directors made in the ordinary course of business;
(m) the net obligations of any counterparty under Interest Swap and Hedging
Obligations obtained in conformity with industry practices;
(n) Investments made on or after July 30, 1999 in SBS not to exceed the
amounts required to be held by the Company pursuant to the Investment
Agreement by and between, SBS, the Company and United International
Holdings Inc., dated June 29, 1999, relating to the acquisition by the
Company of Equity Interests in SBS; and
(o) Investments made on or after July 30, 1999 directly or indirectly in
ARA Cable Services Inc. or ARA Programming & Distribution Ltd. of Saudi
Arabia, not to exceed $75 million.
"Permitted Lien" means:
(a) Liens existing on the Issue Date;
(b) Liens securing the Notes;
(c) Liens securing Indebtedness, or any agreement (including any Equity
Interest) relating to any property, asset, or business acquired, of a
Person existing at the time such Person becomes a Subsidiary (including
by designation) or is merged with or into the Company or a Subsidiary
or Liens securing Indebtedness incurred in connection with an
Acquisition, provided that such Liens were in existence prior to the
date of such acquisition, merger or consolidation, were not incurred in
anticipation thereof, and do not extend to any other assets than those
of the Person (or its businesses) being acquired (or so designated);
(d) leases or subleases granted to other Persons in the ordinary course of
business not materially interfering with the conduct of the business of
the Company or any of its Subsidiaries or materially detracting from
the value of the relative assets of the Company or any Subsidiary;
(e) Liens arising from precautionary Uniform Commercial Code financing
statement filings regarding operating leases entered into by the
Company or any of its Subsidiaries in the ordinary course of business;
(f) Liens securing Refinancing Indebtedness incurred to refinance any
Indebtedness that was previously so secured in a manner no more adverse
to the Holders of the Notes than the terms of the Liens securing such
refinanced Indebtedness, provided that the Indebtedness secured is not
increased and the Lien is not extended to any additional assets or
property that would not have been security for the Indebtedness
refinanced;
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(g) Liens securing Indebtedness incurred under the Credit Agreement and
other Indebtedness solely of Subsidiaries of the Company incurred in
accordance with the terms of the Indentures;
(h) Liens in favor of the Company or Liens on assets of Subsidiaries of the
Company in favor of other such Subsidiaries;
(i) Liens securing Refinancing Indebtedness that complies with the
definition of "Refinancing Indebtedness";
(j) Liens securing Acquired Indebtedness and Indebtedness assumed in
acquiring Related Assets, provided that such Liens were not put in
place in contemplation of the incurrence by the Company or its
Subsidiaries of such Indebtedness, such Liens do not extend to any
property or assets of the Company or any of its Subsidiaries other than
those acquired in connection therewith, and the Investment that is the
subject of such acquisition is a Permitted Investment;
(k) statutory liens of carriers, warehousemen, mechanics, material men,
landlords, repairmen or other like Liens arising by operation of law in
the ordinary course of business, provided that (1) the underlying
obligations are not overdue for a period of more than 30 days, or (2)
such Liens are being contested in good faith and by appropriate
proceedings and adequate reserves with respect thereto are maintained
on the books of the Company in accordance with GAAP; and
(l) Liens not otherwise permitted by the Indentures in an amount not to
exceed 5% of the Company's Consolidated Tangible Assets.
"Person" or "person" means any corporation, individual, limited liability
company, joint stock company, joint venture, partnership, limited liability
partnership, unincorporated association, governmental regulatory entity,
country, state or political subdivision thereof, trust, municipality or other
entity.
"Preferred Stock" means any Equity Interest of any class or classes of a
Person (however designated) which is preferred as to payments of dividends, or
as to distributions upon any liquidation or dissolution, over Equity Interests
of any other class of such Person.
"Principals" means Albert M. Carollo, Lawrence F. DeGeorge, Lawrence J.
DeGeorge, Curtis Rochelle, Marian Rochelle, Rochelle Investments, Ltd. (so
long as it is controlled by Curtis or Marian Rochelle), Gene W. Schneider, G.
Schneider Holdings, Co. and The Gene W. Schneider Family Trust (so long as
each is controlled by Gene W. Schneider or trustees appointed by him), Janet
S. Schneider, Mark L. Schneider, Apollo Cable Partners, L.P., and with respect
to any such Person means: (A) any controlling stockholder or 80% (or more)
owned Subsidiary of such Person, or with respect to each individual Person,
(i) family partnerships, corporations or other entities holding Equity
Interests in the Company, the transferee(s) or the surviving entities or
entities solely for the benefit of such Person or any of the Persons listed in
(ii), (iii), (iv) or (v) below, (ii) such Person's spouse, (iii) such Person's
children, grandchildren, stepchildren, step grandchildren and their spouses,
(iv) heirs, legatees and devisees, and (v) trusts solely for the benefit of
any of the foregoing; or (B) any trust corporation, partnership or other
entity, the beneficiaries, stockholders, partners, owners or Persons
beneficially holding an 80% or more controlling interest of which consist of
such Person and/or such other Persons referred to in the immediately preceding
clause (A).
"Pro Forma" or "pro forma" shall have the meaning set forth in Regulation
S-X of the Securities Act, unless otherwise specifically stated herein.
"Purchase Money Indebtedness" of any Person means any Indebtedness of such
Person to any seller or other Person incurred solely to finance the
acquisition (including in the case of a Capitalized Lease Obligation, the
lease), construction, installation or improvement of any after acquired real
or personal tangible property which, in the reasonable good faith judgment of
the Supervisory Board of the Company, is directly related to a Related
Business.
"Qualified Capital Stock" means any Capital Stock of the Company that is
not Disqualified Capital Stock.
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"Qualified Exchange" means:
(1) any legal defeasance, redemption, retirement, repurchase or other
acquisition of Capital Stock, or Indebtedness of the Company issued on
or after July 30, 1999 with the Net Cash Proceeds received by the
Company from the substantially concurrent sale of its Qualified Capital
Stock or, to the extent used to retire Indebtedness (other than
Disqualified Capital Stock) of the Company issued on or after
July 30, 1999, Subordinated Indebtedness of the Company,
(2) any exchange of Qualified Capital Stock of the Company for any Capital
Stock or Indebtedness of the Company issued on or after July 30, 1999,
or
(3) any issuance of Subordinated Indebtedness of the Company in exchange
for Indebtedness (other than Disqualified Capital Stock) of the Company
issued on or after July 30, 1999.
"Reference Period" with regard to any Person means the full fiscal quarter
ended immediately preceding any date upon which any determination is to be made
pursuant to the terms of the Notes or the Indentures, for which consolidated
financial statements of the Company are available.
"Refinancing Indebtedness" means Indebtedness (including Disqualified
Capital Stock) (a) issued in exchange for, or the proceeds from the issuance
and sale of which are used substantially concurrently to repay, redeem,
defease, refund, refinance, discharge or otherwise retire for value, in whole
or in part, or (b) constituting an amendment, modification or supplement to, or
a deferral or renewal of ((a) and (b) above are, collectively, a
"Refinancing"), any Indebtedness (including Disqualified Capital Stock and
Refinancing Indebtedness) in a principal amount (or, if issued with an original
issue discount, an original accreted value, determined in accordance with GAAP)
or, in the case of Disqualified Capital Stock, liquidation preference, not to
exceed (after deduction of reasonable and customary fees and expenses incurred
in connection with the Refinancing and the amount of any premium paid in
connection with such Refinancing in accordance with the terms of the documents
governing the Indebtedness (including Disqualified Capital Stock and
Refinancing Indebtedness) refinanced without giving effect to any modification
thereof made in connection with or in contemplation of such refinancing) the
lesser of (1) the principal amount or, in the case of Disqualified Capital
Stock, liquidation preference, of the Indebtedness (including Disqualified
Capital Stock and Refinancing Indebtedness) so Refinanced and (2) if such
Indebtedness being Refinanced was issued with an original issue discount, the
accreted value thereof (as determined in accordance with GAAP) at the time of
such Refinancing; provided that (A) such Refinancing Indebtedness shall only be
used to refinance outstanding Indebtedness (including Disqualified Capital
Stock) of such Person issuing such Refinancing Indebtedness (except that the
Company may refinance outstanding Indebtedness of a Subsidiary), (B) such
Refinancing Indebtedness shall (x) not have an Average Life shorter than the
Indebtedness (including Disqualified Capital Stock) to be so refinanced at the
time of such Refinancing and (y) in all respects, be no less contractually
subordinated or junior, if applicable, to the rights of Holders of the Notes
than was the Indebtedness (including Disqualified Capital Stock) to be
refinanced, (C) such Refinancing Indebtedness shall have a final stated
maturity or redemption date, as applicable, no earlier than the final stated
maturity or redemption date, as applicable, of the Indebtedness (including
Disqualified Capital Stock) to be so refinanced, and (D) such Refinancing
Indebtedness shall be secured (if secured) in a manner no more adverse to the
Holders of the Notes than the terms of the Liens (if any) securing such
refinanced Indebtedness, including, without limitation, the amount of
Indebtedness secured shall not be increased.
"Registration Rights Agreement" means the Registration Rights Agreement,
dated as of the Issue Date, by and among the Company and the other parties
named on the signature pages thereof, as such agreement may be amended,
modified or supplemented from time to time.
"Related Assets" means all assets, rights, contractual or otherwise, and
properties, whether tangible or intangible, used or intended for use in
connection with a Related Business; provided that Related Assets shall not
include any Equity Interests or Indebtedness of, or interests in, any Person.
"Related Business" means the business of constructing, creating,
developing, marketing or operating one or more cable, telephone or
communications systems, including, without limitation, any system for
transmitting, or
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providing service or product for the transmission of, voice, video or data
through transmission facilities, Internet service providers or any business
reasonably related to any of the foregoing and any business conducted by the
Company or any Subsidiary of the Company on the Issue Date; provided that the
determination of what constitutes a Related Business shall be made in good
faith by the Supervisory Board of the Company.
"Related Business Acquisition" means an Asset Acquisition of (i) properties
or assets to be used in a Related Business, (ii) of the Capital Stock of any
Person that becomes a Restricted Subsidiary as a result of such Asset
Acquisition or (iii) of the Capital Stock of any Person that becomes an
Unrestricted Subsidiary as a result of such Asset Acquisition, but only if such
asset Acquisition would be permitted pursuant to the covenant "Limitation on
Restricted Payments" or as a Permitted Investment; provided that, in the case
of clauses (ii) and (iii), such Person's assets and properties consist
principally of properties or assets that will be used in a Related Business.
"Replacement Assets" means property or assets that will be used in a
Related Business of the Company or any Subsidiary and Equity Interests of a
Person that becomes a Subsidiary of the Company.
"Restricted Investment" means, in one or a series of related transactions,
any Investment, other than other Permitted Investments.
"Restricted Payment" means, with respect to any Person:
(a) the declaration or payment of any dividend or other distribution in
respect of Equity Interests of such Person or any parent or Subsidiary
of such Person,
(b) any payment on account of the purchase, redemption or other acquisition
or retirement for value of Equity Interests of such Person or any
Subsidiary or parent of such Person,
(c) other than with the proceeds from the substantially concurrent sale of,
or in exchange for, Refinancing Indebtedness, any purchase, redemption,
or other acquisition or retirement for value of, any payment in respect
of any amendment of the terms of or any defeasance of, any Subordinated
Indebtedness, directly or indirectly, by such Person or a parent or
Subsidiary of such Person prior to the scheduled maturity, any
scheduled repayment of principal, or scheduled sinking fund payment, as
the case may be, of such Indebtedness and
(d) any Restricted Investment by such Person;
provided, however, that the term "Restricted Payment" does not include (1) any
dividend, distribution or other payment on or with respect to Equity Interests
of a Person or the parent of such Person to the extent payable solely in shares
of Qualified Capital Stock of such Person, or (2) any dividend, distribution or
other payment to the Company or any of its Subsidiaries by the Company or any
of its Subsidiaries, or (3) any payment on account of the exchange of shares of
Common Stock of Parent for a like number of substantially identical (except
with regard to voting rights) shares of Common Stock of Parent, or (4) payments
to or for the account of the Stichting Administratiekantor UPC (the
"Foundation") or its successors of amounts related to taxes payable upon the
grant of options to certain employees in shares of the Company held by the
Foundation, provided that, for purposes of this clause (4), neither the Company
nor any of its Subsidiaries shall be liable to any Person in respect of such
amounts, other than for the payment of such amounts actually received or to be
received by it, to the Foundation.
"Securities Act" means the United States Securities Act of 1933, as amended
"Significant Subsidiary" shall have the meaning provided under Regulation
S-X of the Securities Act, as in effect on the Issue Date.
"Special Character Asset Sale" means any Asset Sale solely consisting of
assets and property or interests therein comprising its interests in chello
broadband, UPC tv or Priority Telecom determined by the Company in its good
faith reasonable judgment.
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"Stated Maturity," when used with respect to any Note, means the date
specified in any Note as the fixed date on which the final payment of principal
and interest is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company that is
subordinated in right of payment by its terms or the terms of any document or
instrument relating thereto to the Notes, in any respect or when used in the
definitions of Restricted Payment or Qualified Exchange has a final stated
maturity on (except for the Notes) or after the Stated Maturity.
"Subsidiary," with respect to any Person, means (1) a corporation a
majority of whose Equity Interests with voting power, under ordinary
circumstances, to elect directors is at the time, directly or indirectly, owned
by such Person, by such Person and one or more Subsidiaries of such Person or
by one or more Subsidiaries of such Person, (2) any other Person (other than a
corporation) in which such Person, one or more Subsidiaries of such Person, or
such Person and one or more Subsidiaries of such Person, directly or
indirectly, at the date of determination thereof has majority ownership
interest, or (3) a partnership in which such Person or a Subsidiary of such
Person is, at the time, a general partner and in which such Person, directly or
indirectly, at the date of determination thereof has a majority ownership
interest. Notwithstanding the foregoing, an Unrestricted Subsidiary shall not
be a Subsidiary of the Company or of any Subsidiary of the Company. Unless the
context requires otherwise, Subsidiary means each direct and indirect
Subsidiary of the Company.
"Supervisory Board" means, with respect to any Person, the supervisory
board of such Person or any committee of the supervisory board of such Person
authorized, with respect to any particular matter, to exercise the power of the
supervisory board of such Person.
"Tax" or "Taxes" means any and all present or future taxes, levies,
imposts, duties, charges, fees, deductions or withholdings, and all liabilities
with respect thereto, together with any penalties, interest, or additions
thereto.
"Tax Event" means that as a result of any change in or amendment to the
laws, treaties or regulations of any Taxing Authority (or any official or
administrative pronouncement or action or judicial decision) interpreting or
applying such laws, treaties or regulations where such change or amendment is
proposed and becomes effective on or after the Issue Date, in making any
payment due or to become due under the Notes, we are or would be required on
the next succeeding payment date to pay Additional Amounts and the payment of
such Additional Amounts cannot be avoided by the use of any reasonable measures
available to us.
"Taxing Authority" means any nation or government or any political
subdivision thereof or any agency or instrumentality therein and any entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"Unrestricted Subsidiary" means any subsidiary of the Company that does not
own any Equity Interest of, or own or hold any Lien on any property of, the
Company or any other Subsidiary of the Company and that, at the time of
determination, shall be an Unrestricted Subsidiary (as designated by the
Supervisory Board of the Company); provided that such Subsidiary at the time of
such designation (a) has no Indebtedness other than Non-Recourse Indebtedness;
(b) is not party to any agreement, contract, arrangement or understanding with
the Company or any Subsidiary of the Company, unless the terms of any such
agreement, contract, arrangement or understanding are no less favorable to the
Company or such Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (c) is a Person with respect to
which neither the Company nor any of its Subsidiaries has any direct or
indirect obligation (x) to subscribe for additional Equity Interests or (y) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results; and (d) has not
guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Subsidiaries. The Supervisory Board
of the Company may designate any Unrestricted Subsidiary to be a Subsidiary,
provided that (1) no Default or Event of Default is existing or will occur as a
consequence thereof and (2) immediately after giving effect to such
designation, on a pro forma basis, the Company could incur at least $1.00 (or
its foreign currency equivalent) of Indebtedness pursuant to the Debt
Incurrence Ratio of the covenant "Limitation on Incurrence of Additional
Indebtedness and Disqualified Capital Stock." Each such designation shall
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be evidenced by filing with the respective Trustee a certified copy of the
resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions.
"U.S. Government Obligations" means direct non-callable obligations of, or
noncallable obligations guaranteed by, the United States of America for the
payment of which obligation or guarantee the full faith and credit of the
United States of America is pledged.
"Wholly Owned Subsidiary" means a Subsidiary all the Equity Interests of
which (other than directors' qualifying shares) are owned by the Company or one
or more Wholly Owned Subsidiaries of the Company.
Transfer and Exchange
A holder may transfer or exchange the notes in accordance with the
Indentures. We, the registrar and the trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and may
require a holder to pay any taxes and fees required by law or permitted by the
Indentures.
Book-Entry, Delivery and Form
A holder may transfer or exchange the notes in accordance with the
Indentures. We, the registrar and the trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and may
require a holder to pay any taxes and fees required by law or permitted by the
Indentures.
Form of notes, clearance and settlement
The old dollar denominated notes are, and the new dollar denominated notes
will be, represented by one or more notes in registered, global form. The new
dollar global notes will be deposited on the date of the closing date for
exchange of the old dollar denominated notes and the issuance of the new dollar
denominated notes with the trustee as custodian for DTC and registered in the
name of Cede & Co. as nominee of DTC, in each case for credit to the accounts
of DTC participants and indirect participants including, without limitation,
Morgan Guaranty Trust Company of New York, Brussels office, as operator of
Euroclear, and Cedelbank. The old euro denominated notes are, and the new euro
denominated notes will be, represented by a note in registered, global form.
The new euro global note will be deposited on the date of the acceptance for
exchange of the old euro denominated notes and the issuance of the new euro
denominated notes with the paying agent in London as common depositary for
Euroclear and Cedelbank. The euro notes will not be eligible for clearance
through DTC, except indirectly through DTC's participation in Euroclear or
Cedelbank.
Except in the limited circumstances set forth below, notes in certificated
form will not be issued.
Investors who purchased euro denominated notes pursuant to Rule 144A and
investors who purchased euro denominated notes pursuant to Regulation S who
exchange their euro denominated notes for euro notes in the exchange offer will
each hold their interests through the euro global note.
Depositary procedures
DTC. DTC has advised UPC as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities for
persons who have accounts with it and to facilitate the clearance and
settlement of securities transactions between DTC participants through
electronic book-entry changes in accounts of its participants, thereby
eliminating the need for physical movement of certificates. DTC participants
include securities brokers and dealers, banks, trust companies and clearing
corporations and may include other organizations. Indirect access to the DTC
system is available to others such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a DTC
participant, either directly or indirectly.
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Euroclear and Cedelbank. UPC understands as follows with respect to
Euroclear and Cedelbank: Euroclear and Cedelbank each hold securities for their
account holders and facilitate the clearance and settlement of securities
transactions by electronic book-entry transfer between their respective account
holders, thereby eliminating the need for physical movements of certificates
and any risk from lack of simultaneous transfers of securities. Euroclear and
Cedelbank each provide various services, including safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Each of Euroclear and Cedelbank can settle securities
transactions in any of more than 30 currencies, including euros. Euroclear and
Cedelbank each also deal with domestic securities markets in several countries
through established depository and custodialrelationships. The respective
systems of Euroclear and Cedelbank have established an electronic bridge
between their two systems across which their respective account holders may
settle trades with each other. Account holders in both Euroclear and Cedelbank
are world-wide financial institutions including underwriters, securities
brokers and dealers, banks, trust companies and clearing corporations. Indirect
access to both Euroclear and Cedelbank is available to other institutions that
clear through or maintain a custodial relationship with an account holder of
either system. An account holder's overall contractual relations with either
Euroclear or Cedelbank are governed by the respective rules and operating
procedures of Euroclear or Cedelbank and any applicable laws. Both Euroclear
and Cedelbank act under such rules and operating procedures only on behalf of
their respective account holders, and have no record of or relationship with
any persons who are not direct account holders.
Dollar notes. With respect to the dollar global notes, DTC has advised UPC
that pursuant to procedures established by it,
(1) upon initial deposit of a dollar global note, DTC will credit the
accounts of DTC participants, designated by the exchange agent, with
portions of the principal amount of such dollar global note deposited,
(2) for DTC participants, initial ownership of interests in such dollar
global notes will be shown on, and the transfer of ownership thereof
will be effected through, records maintained by DTC and
(3) for non-DTC participant owners, ownership interests in such dollar
global notes will only be shown on, and the transfer of ownership
thereof will only be effected through, the records of the DTC
participants, including Euroclear and Cedelbank, or others through
which they hold their account.
All interests in a dollar global note deposited with DTC, including those
held through Euroclear or Cedelbank, are subject to the procedures and
requirements of DTC. Those interests held through Euroclear or Cedelbank are
also subject to the procedures and requirements of such system.
Euro notes. With respect to the euro global note, investors who hold
accounts with the Euroclear operator or Cedelbank may acquire, hold and
transfer security entitlements with respect to the euro global note against the
Euroclear operator or Cedelbank and their respective property by book-entry to
accounts with the Euroclear operator or Cedelbank, each of which has an account
with the common depositary, and subject at all times to the procedures and
requirements of Euroclear or Cedelbank, as the case may be. "Security
entitlement" means the rights and property interests of an accountholder
against its securities intermediary under applicable law in or with respect to
a security, including any ownership, co-ownership, contractual or other rights.
Investors who do not have accounts with the Euroclear operator or Cedelbank may
acquire, hold and transfer security entitlements with respect to the euro
global note against the securities intermediary and its property with which
such investors hold accounts by book-entry to accounts with such securities
intermediary, which in turn may hold a security entitlement with respect to the
euro global note through the Euroclear operator or Cedelbank. Investors
electing to acquire security entitlements with respect to the euro global note
through an account with the Euroclear operator or Cedelbank or some other
securities intermediary must follow the settlement procedures of their
securities intermediary with respect to the settlement of new issues of
securities. Security entitlements with respect to the euro global note to be
acquired through an account with the Euroclear operator or Cedelbank will be
credited to such account as of the settlement date against payment in euro for
value as of the settlement date. Investors electing to acquire, hold or
transfer security entitlements with respect to a euro global note through an
account with the Euroclear operator, Cedelbank or some other securities
intermediary other than in connection with the initial distribution of the euro
notes must follow the settlement procedures of their securities intermediary
with respect to the settlement of secondary market transactions in securities.
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Except as described below, owners of interests in the dollar global notes
and the euro global note will not have notes registered in their names, will
not receive physical delivery of notes in certificated form and will not be
considered the registered owners or holders of notes for any purpose. So long
as DTC or its nominee, or the common depositary, as the case may be, is the
registered owner or holder of a global note, such party will be considered the
sole owner or holder of the notes represented by such global note for all
purposes under the indentures and the notes. Accordingly, each person owning a
beneficial interest in a global note must rely on the procedures of DTC,
Euroclear and Cedelbank, as the case may be, and their participants or account
holders to exercise any rights and remedies of a holder of notes under the
indentures. Payments of principal and interest on the global notes will be made
to DTC or its nominee, or to the common depositary on behalf of Euroclear and
Cedelbank, as the case may be, as the registered owners thereof.
The laws of some countries and some states in the United States require
that persons take physical delivery in definitive form of securities that they
own. Consequently, the ability to transfer beneficial interests in a global
note to such persons may be limited to that extent. Because DTC, Euroclear and
Cedelbank can act only on behalf of their respective participants or account
holders, as the case may be, the ability of a person having beneficial
interests in a global note to pledge such interests to persons or entities that
do not participate in the relevant clearing system, or otherwise take actions
in respect of such interests, may be affected by the lack of a physical
certificate evidencing such interests.
Payments on the global notes
Payments in respect of the principal of, premium, if any, and interest on a
global note will be made through a paying agent appointed pursuant to the
applicable indenture and will be payable to DTC or its nominee, or the common
depositary on behalf of Euroclear and Cedelbank, as the case may be, each in
its capacity as the registered holder of such notes under such indentures.
Under the terms of the indentures, UPC and the trustee will treat the persons
in whose names the notes, including the global notes, are registered as the
owners of the notes for the purpose of receiving such payments and for any and
all other purposes whatsoever. Consequently, none of UPC, the trustee, or any
agent of UPC or the trustee has or will have any responsibility or liability
for
(1) any aspect or accuracy of the records of the relevant clearing system,
the participants therein or the account holders thereof, as the case
may be, relating to payments made on account of beneficial ownership
interests in the global notes, or for maintaining, supervising or
reviewing any records of such clearing system, participant or account
holder relating to beneficial ownership interests in the global notes,
or
(2) any other matter relating to the actions and practices of the relevant
clearing system or the participants therein or the account holders
thereof.
DTC, Euroclear or Cedelbank, as the case may be, upon receipt of any such
payment, will immediately credit the accounts of their relevant participants or
account holders, as the case may be, with payments in amounts proportionate to
their respective holdings in principal amount of beneficial interests in the
relevant global note, as shown on the records of DTC, Euroclear or Cedelbank,
as the case may be. UPC expects that payments by such participants or account
holders, as the case may be, to the beneficial owners of global notes will be
governed by standing instructions and customary practices and will be the
responsibility of such participants or account holders. Neither UPC nor the
trustee will have responsibility or liability for the payment of amounts owing
in respect of beneficial interests in the global notes held by DTC or by the
common depositary for Euroclear and Cedelbank.
Transfers of global securities and interests therein
Unless definitive securities are issued,
(1) the dollar global notes may be transferred, in whole and not in part,
only to another nominee of DTC or to a successor of DTC or its nominee,
and
(2) the euro global note may be transferred, in whole and not in part, only
by Euroclear and Cedelbank to the common depositary, as the case ma
respectively, or to another nominee or successor of such parties or a
nominee of such successor.
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Transfers of beneficial interests in the dollar global notes will be
subject to the applicable rules and procedures of DTC and its direct and
indirect participants including, if applicable, those of Euroclear and
Cedelbank, which are subject to change from time to time. Transfers of
beneficial interests in the euro global note will be subject to the applicable
rules and procedures of Euroclear and Cedelbank, as the case may be, and their
respective account holders and intermediaries. Any secondary market trading
activity in beneficial interests in the global notes is expected to occur
through the participants or account holders and intermediaries, as the case may
be, of DTC, Euroclear and Cedelbank, and the securities custody accounts of
investors will be credited with their holdings against payment in same-day
funds on the settlement date.
No service charge will be made for any registration of transfer or exchange
of notes, but the trustee may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
Although DTC, Euroclear and Cedelbank have agreed to certain procedures to
facilitate transfers of interests in the global notes among participants in DTC
and account holders in Euroclear and Cedelbank, they are under no obligation to
perform or to continue to perform such procedures. These procedures may be
discontinued at any time. None of UPC, the trustee, or any agent of UPC or the
trustee will have any responsibility for the nonperformance or misperformance,
as a result of insolvency, mistake, misconduct or otherwise, by DTC, Euroclear
or Cedelbank or their respective participants, indirect participants, account
holders or intermediaries of their respective obligations under the rules and
procedures governing their operations.
UPC understands that under existing industry practices, if either UPC or
the trustee requests any action of holders of notes, or if an owner of a
beneficial interest in a global note desires to give instructions or take an
action that a holder is entitled to give or take under the indentures, DTC,
Euroclear or Cedelbank, as the case may be, would authorize their respective
participants or account holders, as the case may be, owning the relevant
beneficial interest to give instructions or take the action. The participants
or account holders would authorize indirect participants or intermediaries to
give instructions or take such action, or would otherwise act upon the
instructions of such indirect participants or intermediaries.
UPC understands that under existing practices of DTC, Euroclear and
Cedelbank, if less than all of the respective class of notes are to be redeemed
at any time, DTC, Euroclear or Cedelbank, as the case may be, will credit their
participants' or account holders' accounts on a proportionate basis, with
adjustments to prevent fractions, or by lot or on such other basis as DTC,
Euroclear or Cedelbank, as the case may be, deems fair and appropriate,
provided that no beneficial interests of less than $1,000 or (Euro)1,000, as
the case may be, may be redeemed in part.
Certificated notes
As long as DTC or the Common Depositary, or its respective nominee, is the
registered holder of a global note, DTC or the Common Depositary or such
nominee, as the case may be, will be considered the sole owner and holder of
the Notes represented by such global note for all purposes under the Indentures
and the Notes.
Unless
(1) in the case of a dollar global note DTC notifies us that it is
unwilling or unable to continue as depositary for a global note or
ceases to be a "Clearing Agency" registered under the Exchange Act;
(2) in the case of a euro global note, Euroclear and Cedelbank notify us
that they are unwilling or unable to continue as clearing agency;
(3) in the case of a euro global note, the Common Depositary notifies us
that they are unwilling or unable to continue as Common Depositary and
a successor Common Depositary is not appointed within 120 days of such
notice; or
(4) in the case of any Note, an event of default has occurred and is
continuing with respect to such Note, described below under "--
Certificated Notes," owners of beneficial interests in a global note
will not be entitled to have any portions of such global note
registered in their names, will not receive or be entitled
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to receive physical delivery of Notes in certificated form and will not
be considered the owners or holders of the global note (or any notes
represented thereby) under the Indentures or the Notes. In addition, no
beneficial owner of an interest in a global note will be able to
transfer that interest except in accordance with DTC's and/or
Euroclear's and Cedelbank's applicable procedures (in addition to those
under the Indentures referred to herein).
In the case of the issuance of certificated notes in the limited
circumstances set forth above, the holder of any such certificated note may
transfer the note by surrendering it at the offices or agencies of UPC
maintained for such purpose within the city and state of New York, and at the
office of the transfer agent in London. Until otherwise designated by UPC,
UPC's office or agency in the city and state of New York and London, England,
respectively, will be the offices of the trustee maintained for that purpose.
In the event of a partial transfer of a holding of notes represented by one
certificate, or partial redemption of such a holding represented by one
certificate, a new certificate shall be issued to the transferee in respect of
the part transferred or redeemed and a further new certificate in respect of
the balance of the holding not transferred or redeemed shall be issued to the
transferor, provided that no certificate in denominations less than $1,000 or
(Euro)1,000 as the case may be, shall be issued. Each new certificate to be
issued shall be available for delivery within ten business days at the office
of the trustee or the transfer agent in London. The cost of preparing,
printing, packaging and delivering the certificated notes shall be borne by
UPC.
UPC shall not be required to register the transfer or exchange of
certificated notes for a period of 15 days preceding:
. the due date for any payment of principal of or interest on the notes or
. a selection of notes to be redeemed.
Also, UPC is not required to register the transfer or exchange of any notes
selected for redemption. In the event of the transfer of any certificated
note, the trustee may require a holder, among other things, to furnish
appropriate endorsements and transfer documents, and UPC may require a holder
to pay any taxes and fees required by law and permitted by the indentures and
the notes.
If certificated notes are issued and a holder of a certificated note claims
that the note has been lost, destroyed or wrongfully taken or if the note is
mutilated and is surrendered to the trustee, UPC shall issue and the trustee
shall authenticate a replacement note if the trustee's and UPC's requirements
are met. If required by the trustee or UPC, an indemnity bond sufficient in
the judgment of both to protect UPC, the trustee or any paying agent or
authenticating agent appointed pursuant to the indentures from any loss which
any of them may suffer if a note is replaced must be posted. UPC may charge
for its expenses in replacing a note.
In case any such mutilated, destroyed, lost or stolen note has become or is
about to become due and payable, or is about to be redeemed or purchased by
UPC pursuant to the provisions of the indentures, UPCn its discretion may,
instead of issuing a new note, pay, redeem or purchase such note, as the case
may be.
Exchange Offer; Registration Rights
We and the initial purchasers of the old notes entered into the
registration rights agreement. Pursuant to the registration rights agreement,
we have filed with the SEC the exchange offer registration statement of which
this prospectus is a part.
We will file with the SEC a shelf registration statement to cover resales
of the notes by holders who satisfy certain conditions relating to the
provision of information in connection with the shelf registration statement
if:
. we are not required to file the exchange offer registration statement or
permitted to consummate the exchange offer because the exchange offer is
not permitted by applicable law or SEC policy; or
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. any holder of Transfer Restricted Securities notifies us prior to the
20th day following consummation of the exchange offer that:
--it is prohibited by law or SEC policy from participating in the
exchange offer; or
--it may not resell the new notes acquired by it in the exchange offer
to the public without delivering a prospectus and the prospectus
contained in the exchange offer registration statement is not
appropriate or available for such resales; or
--it is a broker-dealer and owns notes acquired directly from us or an
affiliate of our company.
We will use our best efforts to cause the applicable registration statement
to be declared effective as promptly as possible by the SEC.
For purposes of the foregoing, "Registrable Securities" means each Note
until:
. the date on which such Note has been exchanged by a person other than a
broker-dealer for a new Note in the exchange offer;
. following the exchange by a broker-dealer in the exchange offer of a
note for a new note, the date on which such new note is sold to a
purchaser who receives from such broker-dealer on or prior to the date
of such sale a copy of the prospectus contained in the exchange offer
registration statement;
. the date on which such note has been effectively registered under the
Securities Act and disposed of in accordance with the shelf registration
statement; or
. the date on which such note is distributed to the public pursuant to
Rule 144 under the Securities Act.
The registration rights agreement provides that:
. we will file an exchange offer registration statement with the SEC on or
prior to 90 days after the closing date;
. we will use our best efforts to have the exchange offer registration
statement declared effective by the SEC on or prior to 180 days after
the closing date;
. unless the exchange offer would not be permitted by applicable law or
SEC policy or would be required to remain open for a longer period, we
will commence the exchange offer and use our best efforts to issue, on
or prior to 45 business days after the date on which the exchange offer
registration statement was declared effective by the SEC, new notes in
exchange for all notes tendered prior thereto in the exchange offer; and
. if obligated to file the shelf registration statement, we will use our
best efforts to file the shelf registration statement with the SEC on or
prior to the later of (a) the date on which we would have been required
to file an exchange offer registration statement and (b) 60 days after
our obligation to file a shelf registration statement arises, and to
cause the shelf registration to be declared effective by the SEC on or
prior to 180 days after such obligation arises.
We will pay Liquidated Damages to each holder of notes if:
. we fail to file any of the registration statements required by the
registration rights agreement on or before the date specified for such
filing;
. any of such registration statements is not declared effective by the SEC
on or prior to the date specified for such effectiveness (the
"Effectiveness Target Date");
. we fail to consummate the exchange offer within 45 business days of the
Effectiveness Target Date with respect to the exchange offer
registration statement; or
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. the shelf registration statement or the exchange offer registration
statement is declared effective but thereafter ceases to be effective or
usable in connection with resales of Registrable Securities during the
periods specified in the registration rights agreement (each such event
referred to in the four bullet points of this paragraph, a "Registration
Default").
If a Registration Default occurs, liquidated damages will accrue on the
notes from and including the date on which the event shall occur up to but
excluding the date on which all those events have been cured. Liquidated
damages will be payable in cash semiannually in arrears each February 1 and
August 1, at a rate per annum equal to 0.50% of the principal amount of the
notes during the 90-day period immediately following the occurrence of any
Registration Default and shall increase by 0.25% per annum of the principal
amount of the notes at the end of each subsequent 90-day period, but in no
event shall the rates exceed 1.50% per annum in the aggregate regardless of the
number of Registration Defaults. All accrued liquidated damages will be paid by
us to the global note holder by wire transfer of immediately available funds or
by federal funds check and to holders of certificated securities by wire
transfer to the accounts specified by them or by mailing checks to their
registered addresses if no such accounts have been specified. Following the
cure of all Registration Defaults, the accrual of liquidated damages will
cease.
Holders of notes will be required to make certain representations to, as
described in the registration rights agreement, in order to participate in the
exchange offer and will be required to deliver certain information to be used
in connection with the shelf registration statement and to provide comments on
the shelf registration statement within the time periods set forth in the
registration rights agreement in order to have their notes included in the
shelf registration statement and benefit from the provisions regarding
liquidated damages set forth above.
Holders of notes will also be required to suspend their use of the
prospectus included in the shelf registration statement under certain
circumstances upon receipt of written notice to that effect from us.
We will apply to list the new notes on the Luxembourg Stock Exchange. The
new notes will have new common codes and new ISINs and will be accepted for
clearance through the accounts of Euroclear and Cedelbank. All necessary
actions and services in respect of the exchange offer may be done at the office
of the paying and transfer agent in Luxembourg. The paying and transfer agent
for these purposes is Citibank, N.A. acting through Banque Internationale a
Luxembourg.
The summary herein of certain provisions of the registration rights
agreement does not purport to be complete and is subject to, and is qualified
in its entirety by reference to, all the provisions of the registration rights
agreement. Capitalized terms used but not defined herein shall have the
respective meanings ascribed to such terms in the registration rights
agreement.
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DESCRIPTION OF OTHER DEBT
We and our consolidated and unconsolidated affiliates had the following
principal long-term and short-term debt facilities outstanding as of September
30, 1999, as well as the senior notes we sold in October 1999. Debt denominated
in currencies other than Dutch guilders has been translated to Dutch guilders
for the outstanding balance at September 30, 1999. Several of the debt
facilities listed below have financial covenants and other restrictions which
could limit access to funds.
<TABLE>
<CAPTION>
Facility Size Outstanding
Final or Principal At September 30,
Description (Borrower) Maturity Interest Rate Amount 1999
- ---------------------- ----------- ------------------------ ------------- ----------------
(in millions)
<S> <C> <C> <C> <C>
UPC and Consolidated
Subsidiaries:
Long-Term Debt
Senior Notes 2007 10.875% $200.0 --
2007 10.875% (Euro)100.0 --
2009 11.25% $252.0 --
2009 11.25% (Euro)101.0 --
2009 EURIBOR + 4.15% and (Euro)754.7 NLG1.663.2
8.54%
2009 10.875% (Euro)300.0 NLG661.1
Senior Discount Notes 2009 12.50% $735.0(2) NLG847.1
2009 13.375% $478.0(2) --
2009 13.355% (Euro)191.0(2) --
PCI Notes 2003 9.875% per annum $130.0(2) NLG271.8
@Entertainment 1998 2008 14.5% per annum $252.0(2) NLG309.7
Senior Discount Notes
@Entertainment 1999 2009 14.5% per annum $256.8(2) NLG325.5
Senior Discount Notes
@Entertainment 1999 2008 7% per annum on $36.0(2) NLG23.5
Series C principal at maturity
Senior Discount Notes
UPC Senior Credit 2006 EURIBOR/LIBOR + 0.75% to (Euro)1.000.0 NLG618.3
Facility 2.0% per annum
New TeleKabel Facility 2007 EURIBOR + 0.75% to 2.0% (Euro)340.0 NLG562.6
per annum
CNBH Facility 2008 AIBOR + 0.7/0.75% or a NLG274.0 NLG252.2
fixed rate advance +
0.7.0.75%
A2000 Group Facilities 2005-2006 AIBOR + 0.7/0.75% or a NLG510.0 NLG458.0
(1) fixed
rate advance + 0.7/0.75%
Mediareseaux Facility 2007 LIBOR + 0.75% to 2.0% FFR680.0 NLG86.2
RCF Credit Facility Dec 2005 PIBOR + 1.5% FFR252.4 NLG81.4
Rhone Vision Cable June 2002 LIBOR + 1% FFR680.0 NLG100.8
Facility
Videopole Facility 2000 EURIBOR + 1.25% FFR65.0 NLG8.2
DIC Loan 2000 8.0% per annum + 6.0% of $45.0 NLG93.2
principal anmount at
maturity
United Loan March 2001 10.75% per annum $100.0 NLG13.8
Short-Term Debt
Stjarn Facilities March 2000 NBU + 0.60%/STIBOR + SEK521.0 NLG84.6
1.25%
Stjarn Seller's Note August 2000 8.0% per annum $100.0 NLG207.0
A2000 Working Capital 2000 4.85% per annum NLG52.0 NLG47.9
Facility (1)
Unconsolidated
Affiliates:
Tevel Facilities 2007-2010 Fixed rate ranging from $248.5 NLG482.8
5.5% -
6.00%
Melita Facility 2007 7.44% - 7.93% Lml4.0 NLG53.8
Monor Facility 2006 LIBOR + 1.5% $60.0 NLG75.5
</TABLE>
(1)A2000 is currently negotiating a credit facility to replace the existing
facilities.
(2) At maturity
UPC October 1999 Senior Notes Offering
In October 1999, UPC closed a private placement offering consisting of six
tranches; $252 million and (Euro)101.0 million of 11 1/4% Senior Notes due
2009; $200.0 million and (Euro)100.0 million of 10 7/8% Senior Notes due 2007
and $478.0 million and (Euro)191.0 million aggregate principal amount of 13
3/8% Senior Discount Notes due 2009. The Senior
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Discount Notes were sold at 52.306% of the face amount yielding gross proceeds
of $250.0 million and (Euro)100.0 million and will accrue but not pay interest
until 2004. UPC has entered into cross-currency swaps, swapping the $252.0
million, 11 1/4% coupon into fixed and variable rate Euro notes with a notional
amount totaling (Euro)240.2 million, and swapping the $200.0 million. 10 7/8%
coupon into fixed and variable rate Euro notes with a notional amount totaling
(Euro)109.7 million.
Offering of Senior Notes in July 1999
In July 1999, we completed an offering of $800.0 million 10 7/8% senior
notes due 2009, (Euro)300.0 million 10 7/8% senior notes due 2009 and $735.0
million 12 1/2% senior discount notes due 2009. Interest payments on the senior
notes will be due semi-annually, commencing February 1, 2000. The senior
discount notes will not accrue interest until August 1, 2004. Commencing
February 1, 2005, interest on the senior discount notes will be payable semi-
annually. In order to minimize our currency and interest rate exposure, the
$800.0 million 10 7/8% senior notes have been swapped into senior euro notes
totalling (Euro)754.7 million. Of the senior euro notes, (Euro)377.35 million
have a fixed interest rate of 8.54% through August 1, 2004, thereafter
switching to a variable rate of EURIBOR +4.15%. The remaining (Euro)377.35
million have a variable interest rate of EURIBOR +4.15%, for an initial rate of
7.093%. The indentures governing our senior notes offered in July 1999 place
certain limitations on our ability, and the ability of our subsidiaries, to
borrow money, issue capital stock, pay dividends in stock or repurchase stock,
make investments, create certain liens, engage in certain transactions with
affiliates, and sell certain assets or merge with or into other companies.
Restrictions under our July and October 1999 Indentures
Our activities are restricted by the covenants of our indentures dated July
30 and October 29, 1999, under which senior notes and senior discount notes
were issued. Among other things, our indentures place certain limitations on
our ability, and the ability of our subsidiaries, to:
.borrow money,
.issue capital stock,
.pay dividends in stock or repurchase stock,
.make investments,
.create certain liens,
.engage in certain transactions with affiliates, and
.sell certain assets or merge with or into other companies.
Under the terms of our July and October 1999 indentures, if we raise
additional equity, we will be permitted to incur additional debt.
PCI Notes. Poland Communications, Inc. ("PCI"), @Entertainment's major
operating subsidiary, sold $130.0 million aggregate of senior notes in October
1996. The PCI notes bear interest at 9 7/8% and interest is payable on May 1
and November 1 of each year. The PCI notes mature on November 1, 2003.
The indenture governing the PCI notes contains covenants limiting, among
other things, PCI's ability to:
. incur additional indebtedness;
. make certain payments and distributions, including dividends;
. approve the issuance and sale of the capital stock of @Entertainment's
subsidiaries;
. sell its assets;
. create certain liens;
. enter into transactions with its affiliates;
. invest in non-controlled entities;
. guarantee indebtedness by subsidiaries;
. purchase of the notes upon the change of control;
. pay dividends and make other payments affecting @Entertainment's
subsidiaries;
. effect certain consolidations, mergers, and sale of assets;
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. pursue certain lines of business; and
. change its ownership.
Pursuant to the terms of the PCI indenture, @Entertainment has offered to
repurchase all of the PCI notes as a result of our acquisition of
@Entertainment. Pursuant to the repurchase offer, which expired on November 2,
1999 PCI has purchased $113.2 million aggregate principal amount of PCI notes
for an aggregate price of $114.4 million.
@Entertainment 1998 Senior Discount Notes. On July 14, 1998, @Entertainment
sold 252,000 units, each consisting of 14 1/2% senior discount notes due 2008
and warrants entitling the warrant holders to purchase 1,824,514 shares of
@Entertainment common stock. This 1998 offering generated approximately $125.1
million gross proceeds to @Entertainment. The senior discount notes are
unsubordinated and unsecured obligations of @Entertainment. Cash interest on
the senior discount notes will not accrue prior to July 15, 2003. After that,
cash interest will accrue at a rate of 14.5% per year and will be payable semi-
annually in arrears on January 15 and July 15 of each year, beginning on
January 15, 2004. The senior discount notes will mature on July 15, 2008.
Subsequent to the initial private placement of these notes, @Entertainment made
a registered offer to exchange these notes for its 1998 Senior Discount Notes.
The 1998 Senior Discount Notes have the same terms as the notes for which they
were exchanged (except for certain registration rights), were issued under the
same indenture and are treated as one series with such notes. @Entertainment
has also offered to repurchase these notes pursuant to the terms of the
@Entertainment Indenture. Pursuant to the repurchase offer, which expired on
November 2, 1999, @Entertainment has purchased $49.1 million aggregate
principal amount at maturity of @Entertainment 1998 Senior Discount Notes and
1999 Senior Discount Notes described below for an aggregate price of $26.5
million.
The indenture governing the 1998 Senior Discount Notes has covenants
substantially similar to the PCI indenture.
In connection with the acquisition of @Entertainment, we acquired all of
the existing warrants held in connection with the 1998 Senior Discount Notes.
@Entertainment 1999 Senior Discount Notes. In January 1999, @Entertainment
sold 256,800 units consisting of senior discount notes due 2009 and warrants to
purchase 1,813,665 shares of @Entertainment's common stock (the "1999 Units
Offering"). The senior discount notes were issued at a discount to their
aggregate principal amount at maturity yielding gross proceeds of approximately
$100.0 million. Cash interest on the senior discount notes will not accrue
prior to February 1, 2004. Thereafter, cash interest will accrue at a rate of
14 1/2% per annum, payable semi-annually in arrears on August 1 and February 1
of each year, commencing August 1, 2004. Subsequent to the initial private
placement of these notes, @Entertainment made a registered offer to exchange
these notes for its 1999 Senior Discount Notes. The 1999 Senior Discount Notes
have the same terms as the notes for which they were exchanged (except for
certain registration rights), were issued under the same indenture and are
treated as one series with such notes. @Entertainment has also offered to
repurchase these notes pursuant to the terms of the @Entertainment Indenture.
Pursuant to the repurchase offer, which expired on November 2, 1999,
@Entertainment has purchased $49.1 million aggregate principal amount at
maturity of @Entertainment 1999 Senior Discount Notes and 1998 Senior Discount
Notes described above for an aggregate price of $26.5 million.
The indenture governing the 1999 Senior Discount Notes has covenants
substantially similar to the PCI indenture.
In connection with the acquisition of @Entertainment, we acquired all of
the existing warrants held in connection with the 1999 Senior Discount Notes.
@Entertainment 1999 Series C Senior Discount Notes. On January 20, 1999,
@Entertainment sold $36.0 million aggregate principal amount at maturity of
series C senior discount notes generating approximately $9.8 million of gross
proceeds. The series C senior discount notes are senior unsecured obligations
of @Entertainment. The series C senior discount notes were issued at a discount
to their aggregate amount. Original issue discount will accrete from January
20, 1999, until July 15, 2008, the date of maturity of the series C senior
discount notes. Cash
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interest on the series C senior discount notes will accrue from July 15, 2004
at a rate of 7.0% per year on the principal amount at maturity, and will be
payable semi-annually in arrears, on July 15 and January 15 of each year
beginning January 15, 2005. Before January 15, 2004, cash interest on the
series C senior discount notes will not accrue. @Entertainment has also offered
to repurchase these notes pursuant to the terms of the @Entertainment
Indenture. Pursuant to the repurchase offer, which expired on November 2, 1999,
@Entertainment has purchased $49.1 million aggregate principal amount at
maturity of @Entertainment 1998 Senior Discount Notes and 1999 Senior Discount
Notes described below for an aggregate price of $26.5 million.
The indenture governing the series C senior discount notes has covenants
substantially similar to the PCI indenture.
Senior Revolving Credit Facility. We and certain of our subsidiaries were
parties to a NLG1.1 billion revolving credit facility. We repaid this facility
in full in July 1999 with the initial drawdown on the Senior Credit Facility
described below.
UPC Senior Credit Facility. On July 27, 1999, a newly-formed subsidiary,
UPC Facility B.V., Telekabel Wien and UPC Norge, as borrowers, and a syndicate
of banks executed a Loan and Note Issuance Agreement for a (Euro)1.0 billion
(NLG2.2 billion) multicurrency senior secured credit facility (the "UPC Senior
Credit Facility").
The UPC Senior Credit Facility matures on July 27, 2006 and is comprised of
two tranches. The (Euro)750.0 million Tranche A is a senior secured reducing
revolving credit facility. Tranche B is a (Euro)250.0 million term loan credit
facility. The Senior Credit Facility bears interest at EURIBOR (for borrowings
in euro) and at LIBOR (for all other borrowings) plus a margin of between 0.75%
and 2.0% (which margin is at least 1.5% for the first six months following
closing) plus an additional cost of funding calculation. In addition to
repaying our senior revolving credit facility, proceeds from the UPC Senior
Credit Facility are to be used for general corporate purposes, inter alia, to
fund certain acquisitions (see below), and certain permitted distributions,
including the payment of interest on funds downstreamed from the proceeds of
high yield issues and capital expenditures. Borrowings under the Senior Credit
Facility are limited by financial ratio tests. The UPC Senior Credit Facility
contains provisions that require its immediate prepayment at the option of the
majority banks, if (1) we cease to own more than 50% of, or lose our ability to
exercise control over, UPC Facility B.V., or (2) United ceases to own more than
50% and loses its ability to control us. In addition, the UPC Senior Credit
Facility limits UPC Facility B.V.'s and its subsidiaries' ability to make
acquisitions funded by loan proceeds with the UPC Senior Credit Facility to
(Euro)400.0 million over the life of the UPC Senior Credit Facility, with a
further limitation on new Eastern European acquisitions. Furthermore, the UPC
Senior Credit Facility contains certain financial covenants and restrictions on
UPC Facility B.V. and most of subsidiaries' ability to make dividends or other
payments to us, incur indebtedness, dispose of assets, merge and enter into
affiliate transactions. Net proceeds of certain disposals (including sales by
us of less than 50% of our current interest in UPC Facility B.V.) are required
to be used to prepay the facility. The UPC Senior Credit Facility does,
however, permit UPC Facility B.V. to upstream payments to us after April 1,
2002 for the purpose of servicing interest on our senior notes due 2009, if UPC
Facility B.V.'s ratio of senior debt to annualised net operating cash flow is
less than or equal to 4.5:1.0.
This facility is secured by, among other things, pledges of the shares of
UPC Facility B.V., UPC Norge, UPC Belgium, Cable-Network Austria Holding
("CNAH"), Stipdon and Telekabel Hungary. UPC Facility B.V., UPC Belgium, CNAH,
Stipdon and Telekabel Hungary are guarantors under the facility. The collateral
and guarantees under this facility also secure our liability under any currency
and/or interest rate hedging arrangements entered into in connection with the
senior notes and senior discount notes offered in July 1999, although only
(Euro)100.0 million of the indebtedness represented by such arrangements is
pari passu with the indebtedness under the UPC Senior Credit Facility.
New TeleKabel Facility (The Netherlands). In March 1999, TeleKabel Beheer
replaced their existing NLG690.0 million facility with a senior facility and
additional shareholder loans. The senior facility consists of a (Euro)340.0
million (NLG750.0 million) revolving facility to N.V. TeleKabel that will
convert to a term facility on December 31, 2001. (Euro)5.0 million of this
facility is in the form of an overdraft facility that is available until
December
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31, 2007. This facility was used, among other things, to repay a portion of the
NUON facility and for capital expenditures. The facility bears interest at the
Euro Interbank Offered Rate plus a margin between 0.75% and 2.00% based on
leverage multiples tied to N.V. TeleKabel's net operating income plus an
additional cost of funding calculator. The new facility is secured by, among
other things, a pledge over the shares in N.V. TeleKabel and by pledges over
shares in its subsidiaries as well as asset pledges. The facility restricts
N.V. TeleKabel's ability to incur additional debt. This facility generally
restricts the payment of dividends and distributions, unless, among other
things, we achieve certain financial ratios. This facility also restricts the
amount of management fees that can be paid to us. The facility is immediately
due and payable if TeleKabel Beheer ceases to own 100% of N.V. TeleKabel or if
we cease to own directly or indirectly more than 50% of TeleKabel Beheer.
CNBH Facility. In February 1998, CNBH entered into a secured NLG250.0
million ten-year term facility with a syndicate of banks led by Rabobank. In
August 1998, this facility was increased to NLG266.0 million. The facility
bears interest at AIBOR plus a margin of between 0.6% and 1.6%. Most of the
proceeds were used to repay in full a Combivisie bridge facility entered into
in connection with the acquisition of Combivisie (NLG122.0 million) and a KTE
bank facility (NLG65.0 million). The remaining amount under this facility is
available to finance certain capital expenditures. Beginning in 2001, CNBH will
be required to apply 50% of its excess cash flow to prepayment of this
facility. The facility restricts the incurrence of debt, the payment of
dividends and distributions and limits the amount of payments to us under our
general services agreement. In January 1999, this facility was increased to
NLG274.0 million. In connection with this facility, we entered into a project
support agreement providing, among other things, for us to retain majority
ownership of CNBH. In connection with this facility, CNBH also entered into a
NLG5.0 million ten-year term working capital facility with Rabobank.
A2000 Group Facilities. In January 1996, A2000 and its wholly owned
subsidiary Kabeltelevisie Amsterdam entered into bank facilities of NLG90.0
million and NLG375.0 million, respectively. In October 1996, A2000 Hilversum, a
wholly-owned subsidiary of A2000, entered into a bank facility of NLG45.0
million. These facilities have between nine- and ten-year terms and interest
rates of AIBOR + 0.75% or AIBOR + 0.7% or fixed-rate (fixed prior to each
advance) increased by 0.7% or 0.75% per annum. These facilities also restrict
the borrowers from incurring additional indebtedness and from paying dividends
and distributions, subject to certain exceptions. The A2000 facilities are
secured by mortgages and pledges, including pledges on Kabeltelevisie Amsterdam
and A2000 Hilversum shares and assets. A2000 is currently negotiating a credit
of up to NLG620.0 million to replace these facilities.
Mediareseaux Facility. In July 1998, Mediareseaux entered into an FFR680.0
million (NLG228.4 million) term facility with Paribas to finance capital
expenditures, working capital and acquisitions. This facility is secured by the
assets of Mediareseaux and a pledge of our stock of Mediareseaux. The
availability of this facility depends on revenue generated and its debt to
equity ratios. Drawings under this facility may be made until December 31,
2002. The repayment period runs from January 1, 2003 to final maturity in 2007.
Mediareseaux may not draw more than FFR120 million (NLG40.3 million) of this
facility for acquisitions. During the repayment period, Mediareseaux must apply
50% of its excess cash flow in prepaying the facility. This facility generally
restricts the payment of dividends and distributions. This facility also
restricts Mediareseaux from incurring additional indebtedness, subject to
certain exceptions. In July 1998, Mediareseaux also secured a 9.5 year FFR20
million (NLG6.7 million) overdraft facility, subject to the same terms and
conditions as this facility except for the availability tests which are not
applicable. Until certain financial covenants are met, we must own more than
51% of Mediareseaux. Generally, investments by Mediareseaux and its
subsidiaries require approval of the facility agent except for investments in
cash and certain marketable securities that are pledged to support the
facility. This facility also restricts the amount of management fees that
Mediareseaux may pay to us. Mediareseaux is currently negotiating the
refinancing of this facility with Paribas.
RCF Credit Facility. In 1990, RCF and six of its subsidiaries entered into
a FFR160.0 million (NLG53.8 million) credit facility with a consortium of banks
led by Banque Bruxelles Lambert to finance working capital and operations. In
1995, this facility was amended and extended to FFR252.4 million (NLG84.8
million) to refinance three further credit facilities entered into by other
subsidiaries of RCF with a consortium of banks including Banque Bruxelles
Lambert and led by Banque Nationale de Paris in an aggregate amount of FFR
108.0 million (NLG36.3
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million) in 1993. The loan bears an interest rate of PIBOR (the French
interbank offer rate) plus 1.5%, payable in arrears quarterly. The loan had to
be repaid in yearly installments of FFR34.6 million (NLG11.6 million) beginning
at the end of 1999 until December 31, 2005. Subject to certain exceptions, the
loan restricts RCF and certain of its subsidiaries from incurring certain
additional indebtedness, from having liens on or disposing of certain assets,
from merging or consolidating and from making dividend payments.
Rhone Vision Cable Credit Facility. In July 1996, Rhone Vision Cable
entered into a FFR680.0 million (NLG228.4 million) credit facility with Paribas
and NatWest Markets to finance construction and installation of Rhone Vision
Cable networks. The facility bears interest of LIBOR plus 1%, payable
quarterly. The facility must be repaid by June 30, 2002, or on the June 30th or
December 31st first occurring six months after network completion. The facility
is secured by pledges of all the shares and the most important assets of Rhone
Vision Cable and by a guarantee given by the Departement du Rhone (for up to
50% of any sum due under the facility). The facility restricts Rhone Vision
Cable's ability to secure additional financing, incur additional debt or
transfer shares and a change of control is deemed an event of default under the
facility. Moreover, under certain circumstances, the lenders are entitled to
set up a company as successor of Rhone Vision Cable to benefit from the terms
of the concession agreement and EPARI is entitled to prepay the facility and
assume Rhone Vision Cable's position.
Videopole Credit Facility. In October 1999, Videopole entered into a FFR
65.0 million (NLG21.8 million) credit facility with the Comptoir des
Entrepreneurs to finance the extention of existing network and working capital
operations. The facility must be repaid by December 31, 2000. The facility
bears interest of EURIBOR plus 1,25%.
DIC Loan. In November 1998, a subsidiary of DIC loaned us $90.0 million.
The loan from DIC was subsequently assigned to an Israeli bank. We used the
proceeds to acquire interests in the Israeli and Maltese systems. The loan from
DIC matures in November 2000 and is secured by our pledge of our ownership
interest in the Israeli system. The loan from DIC bears interest at the nominal
rate of 8% per annum. This interest is payable, together with an additional 6%
of the principal amount, on maturity. The loan from DIC may be repaid on
quarterly prepayment dates with three months prior notice by us. In connection
with the loan from DIC, we granted the Discount Group, our partner in the
Israeli system, an option to acquire $90.0 million, plus accrued interest, of
ordinary shares A at a price equal to 90% of the initial public offering price.
Subsequent to December 31, 1998, we negotiated an amendment to this option,
resulting in an option to acquire $45.0 million, plus accrued interest, of
ordinary shares A at a price equal to 90.0% of the initial public offering
price, and, if this option is exercised, another option to acquire $45.0
million, plus accrued interest, of ordinary shares A at a price equal to the 30
day average closing price of our ordinary shares A on the Stock Market of
Amsterdam Exchanges, or the initial public offering price, whichever is higher.
At our initial public offering, DIC exercised the first option and acquired
1,558,654 ordinary shares A. We repaid $45.0 million of the loan, plus accrued
interest, with proceeds from the option exercise. The other option is
exercisable until September 30, 2000.
United Loan. We borrowed approximately $70.0 million from United, a
substantial portion of which was repaid at the time of our initial public
offering. The loan bears interest at 10.75% per annum and is payable on March
31, 2001. The indebtedness is convertible at United's option into ordinary
shares A. Any conversion into or payment in ordinary shares A will be at
NLG63.91 per share, our initial public offering price. We intend to repay the
outstanding balance with proceeds of this offering.
Stjarn Facilities. In December 1998, Stjarn's parent company entered into a
SEK521.0 million loan agreement with Nordbanken AB to refinance certain debt.
The loan consists of a facility A, a medium term loan in the amount of SEK371.0
million, and a facility B, a short term loan in the amount of SEK150.0 million.
These facilities are secured by pledges of shares in Stjarn's parent company's
subsidiary and bears interest at the rate of STIBOR plus between 0.75% and
1.25%. Originally, the A facility was to be repaid in eleven semi-annual
installments of between SEK41.0 million and SEK25.0 million beginning in May
1999 until November 2004. The B facility has been fully repaid and replaced by
a revolving credit facility in the amount of SEK150.0 million. The commitment
fee for the revolving facility amounts to 0.30% and is based on the difference
between the committed credit amount and the utilized amount. The contract fee
is 0.15% and is based on the committed credit amount. Interest on utilized
funds amounts to NBU +0.60% units. The interest period is three months. The A
facility restricts
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Stjarn's ability to encumber its present or future assets and to enter into
sale-leaseback agreements. As a result of our acquisition of Stjarn, both the A
facility and the revolving facility will mature on March 31, 2000.
Stjarn Seller's Note. In connection with the acquisition of Stjarn in July
1999, UPC paid $100.0 million (NLG207.0 million) in the form of a one year note
("Stjarn Seller's Note") with interest at 8% per annum. Upon maturity of the
note, UPC will have the option to pay the note in either cash or UPC shares.
Tevel Facilities. In August 1998, Tevel entered into three secured loan
agreements totaling NIS965.5 million (NLG501.4 million) to finance the
acquisition of Gvanim and working capital. These facilities bear interest at a
fixed margin of 5.5% to 6.0% over the Israeli consumer price index. The loans
mature in the years 2007 to 2010 and the repayment periods of the principal
amounts commence in the year 2000. These facilities are secured by Tevel's
pledge of its ownership interest in Gvanim and limit Tevel's ability to pay
dividends, encumber, sell or transfer its assets, issue or allot shares, alter
its corporate structure and incur indebtedness.
Melita Facility. In December 1998, Melita, the Maltese system operator,
entered into two term loans and an overdraft facility, facilitating a total of
Lm14.0 million (NLG37.1 million) with a maturity in 2007 to refinance a Lm9.0
million facility and to finance capital expenditure and working capital. The
interest rates on the term loans and overdraft facility vary between 7.44% and
7.93%. The loans are secured by a general pledge on all of Melita's present and
future property. Availability depends on satisfaction of leverage covenants and
interest coverage. The loans restrict Melita's ability to encumber or transfer
its assets.
Monor Facility. In September 1997, Monor entered into a $50.0 million
(NLG106.5 million) term loan facility with a syndicate of banks led by Credit
Lyonnais. The proceeds of Monor's facility were used to repay indebtedness and
for capital expenditures in the build-out of Monor's network. Monor's facility
matures on December 31, 2006 and bears interest at LIBOR plus 1.5%. Monor's
facility is secured by a pledge over the shares of Monor and its assets. This
facility limits Monor's ability to encumber its assets, incur indebtedness and
pay dividends.
Restrictions under United Indentures
As a subsidiary of United, our activities are also restricted by the
covenants in United's indentures dated February 5, 1998 and April 29, 1999. The
United indentures generally limit the additional amount of debt that we or our
subsidiaries or controlled affiliates may borrow, or preferred shares that we
or they may issue.
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CERTAIN TAX CONSEQUENCES
The following is a summary of certain Netherlands tax consequences to
Netherlands resident holders and non-Netherlands resident holders and certain
United States federal income tax consequences to U.S. holders (as defined
below) under current law related to the ownership of the notes and the exchange
of the notes for exchange notes pursuant to the registration rights agreement.
This summary is for general information purposes only. A prospective investor
should not construe the contents hereof as tax advice. Each prospective
investor is urged to consult its tax advisor to determine all of the tax
consequences of owning the notes and exchanging the notes for registered notes,
including the applicability and effect of all state, local or foreign tax laws,
and of any changes in Netherlands or United States federal tax law or
administrative or judicial interpretation thereof after the date of this
offering memorandum. The notes and the exchange notes are referred to
collectively in this tax section as the "notes."
Certain Netherlands Tax Consequences
This overview is a summary of the principal Netherlands tax consequences
that will apply to holders of the notes. This summary is not exhaustive of all
the possible tax consequences that may be relevant to holders in light of their
particular circumstances. In particular, this summary does not cover all tax
consequences applicable to joint venture vehicles, such as limited liability
companies and partnership structures. This summary represents Arthur Andersen's
interpretation of existing law. No assurance can be given that tax authorities
or courts in The Netherlands will agree with such interpretation. The laws on
which this summary is based are subject to change, perhaps with retroactive
effect. A change to such laws may invalidate a part or all of this summary,
which will not be updated to reflect changes in laws.
Substantial Interest
An individual resident shareholder or a non-resident shareholder (entity or
individual) that owns, either via shares or options, directly or indirectly, 5%
or more of any class of shares, or 5% or more of the total issued share capital
of a company resident in The Netherlands (a "substantial interest") is subject
to special rules. Profit participation rights which give the holder rights to
5% or more of the annual profit or 5% or more of the liquidation proceeds of a
company resident in The Netherlands will also qualify as a substantial
interest. With respect to individuals, certain attribution rules exist in
determining the presence of a substantial interest. A shareholder is deemed to
own a substantial interest if (part of) a substantial interest has been
disposed of, on a non-recognition basis, and the shareholder continues to own
share in The Netherlands company.
Netherlands Tax Consequences for Resident Holders
Netherlands Income Tax. The amount of the discount in the senior discount
notes will be regarded as interest and will as such be subject to the following
Netherlands corporate income tax and Netherlands individual income tax rules.
Capital gains derived from the sale of the notes, interest and discount
received by a corporate holder will be subject to Netherlands corporate income
tax if the notes are attributable to a trade or business carried on (or deemed
to be carried on) by the holder.
Capital gains derived from the sale of the notes by an individual holder
will not be subject to individual income tax provided the individual holder
does not own a (deemed) substantial interest in UPC and provided the notes are
not assets of a business. Any interest or discount received on the notes and
any interest accrued in the period between the date of the latest interest
payment and the date of disposal of the notes by individuals will be subject to
Netherlands individual income tax.
Withholding Tax. The Netherlands will not levy withholding taxes from
resident holders on any payment under the notes.
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Net Wealth Tax. Individuals will be subject to Netherlands net wealth tax
if the notes are held at January 1 of a year. The Netherlands net wealth tax
does not apply to corporations.
Gift, Estate or Inheritance Taxes. Generally, Netherlands gift tax or
inheritance tax will be due with respect to a gift or inheritance of the notes
from a person who resided, or was deemed to have resided, in The Netherlands at
the time of the gift or his or her death.
For the purposes of The Netherlands gift and inheritance tax, an individual
with Netherlands nationality is deemed to be a resident of The Netherlands if
he or she has been resident of The Netherlands at any time during the ten years
preceding the time of gift or death. For the purpose of The Netherlands gift
tax, any person is deemed to be a resident of The Netherlands if that person
has been resident of The Netherlands at any time within the twelve months
preceding the time of the gift.
However, in case of a gift by an individual who at the time of the gift was
neither resident nor deemed to be resident in The Netherlands and such
individual dies within 180 days after the date of the gift, while being
resident or deemed to be resident in The Netherlands, such tax will be due.
Netherlands Tax Consequences for Non-resident Holders
Netherlands Income Tax. A person (entity or individual) is a "non-resident
holder" if that person:
(i) is not and has not been a resident or deemed resident of The
Netherlands for purposes of Netherlands tax legislation;
(ii) does not have or will not obtain an enterprise or an interest in an
enterprise which, in whole or in part, is carried on through a
permanent establishment or a permanent representative in The
Netherlands and to which enterprise or part of an enterprise the notes
are attributable;
(iii) is not directly entitled (the term directly means, in this context,
not through the (beneficial) ownership of shares or similar
securities) to all or a share to the profit of an enterprise that is
managed and controlled in The Netherlands while the notes form part
of the assets for, or are otherwise attributable to, such enterprise;
(iv) does not have or will not obtain a substantial interest (as defined
above) or deemed substantial interest in UPC according to the criteria
under Netherlands tax law currently in force or in the event such
holder does have such an interest, it qualifies as an asset of, or is
otherwise attributable to an enterprise; and
(v) does not carry out and has not carried out employment activities on the
territory of The Netherlands, or as director or board member of an
entity resident in The Netherlands or as a civil servant of a
Netherlands public body with which the holding of the notes is
connected.
A non-resident holder is not subject to Netherlands corporate income tax or
Netherlands individual income tax with respect to interest (including the
amount of the discount under the senior discount notes) and capital gains.
Withholding Tax. The Netherlands will not levy withholding taxes from non-
resident holders on payments under the notes.
Net Wealth Tax. A non-resident holder of the notes will not be subject to
Netherlands net wealth tax.
Gift, Estate or Inheritance Taxes. No gift, estate or inheritance taxes
will arise in The Netherlands in respect of the transfer of a note by way of
gift by a non-resident holder, or on the death of such person, provided the
transfer is not construed as an inheritance or gift made by or on behalf of a
person who is a resident or deemed resident of The Netherlands.
For the purpose of the Netherlands gift and inheritance tax, an individual
with Netherlands nationality is deemed to be a resident of The Netherlands if
that person has been resident of The Netherlands at any time during the
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ten years preceding the time of gift or death. For the purpose of the
Netherlands gift tax, any person is deemed to be a resident of The Netherlands
if that person has been resident of The Netherlands if at any time within
twelve months preceding the date of the gift.
However, in case of a gift by an individual who at the time of the gift was
neither resident nor deemed to be resident in The Netherlands and such
individual dies within 180 days after the date of the gift, while being
resident or deemed to be resident in The Netherlands, such tax will be due.
Exchange Offer
The exchange of notes for exchange notes will have no Netherlands tax
consequences provided the terms of the exchange notes, such as the face amount,
the interest rate or return, and the repayment schedule, do not differ from the
notes before the exchange.
European Union Proposal
Last year the European Commission submitted to the Council of Ministers of
the European Union a proposal requiring paying agents in a member state to
withhold tax at a minimum rate of 20% from interest, discount and premium
payments to individuals residing in other member states or institute an
information exchange system to report these payments to the tax authorities of
the other member state. The tax would not be withheld if an individual due such
payments provides the paying agent a certificate obtained from the tax
authorities of the member state in which the individual is resident, confirming
that the authorities are aware of the payment due the individual. The
information exchange system would require a member state to supply other member
states the details of any payments made by paying agents within its
jurisdiction to individuals resident in such other member state member state.
At this time, the European Commission is considering alternatives to the
proposal, although no one alternative has been formally proposed. If the
proposal is adopted in its current form, it will apply to payments made after
December 31, 2000.
Certain United States Federal Income Tax Consequences
The following is a general summary of certain United States federal income
tax consequences applicable to U.S. holders of the notes who are initial
purchasers of the notes and hold the notes as capital assets. This discussion
is intended as a descriptive summary only and does not purport to be a complete
analysis or listing of all potential tax considerations that may be relevant to
holders. This discussion is based on the current provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), the applicable Treasury
Regulations (the "Regulations") and public administrative and judicial
interpretations of the Code and the Regulations, all of which are subject to
change, which changes could be applied retroactively. This discussion is also
based on the information contained in this offering memorandum and the related
documents. This discussion does not cover all aspects of United States federal
taxation that may be relevant to, or the actual tax effect that any of the
matters described herein will have on, particular U.S. holders and does not
address state, local, or foreign tax consequences.
The tax consequences to a U.S. holder may vary depending on the U.S.
holder's particular situation or status. U.S. holders that are subject to
special rules under the Code, including insurance companies, tax-exempt
organizations, mutual funds, retirement plans, financial institutions, dealers
in securities or foreign currency, persons that hold the notes as part of a
straddle, hedge or synthetic security transaction, persons that have a
functional currency other than the United States dollar, investors in pass-
through entities, traders in securities that elect to mark to market and
certain expatriates.
As used in this discussion, the term "U.S. holder" means an initial
purchaser of a note who is a beneficial owner of a note and who is for United
States federal income tax purposes (i) a citizen or resident of the United
States, (ii) a corporation, partnership, or other entity created or organized
in or under the laws of the United States, of the District of Columbia, or of
any State (except, in the case of a partnership, to the extent provided in the
Regulations), (iii) an estate the income of which is subject to United States
federal income tax, regardless of its
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<PAGE>
source, or (iv) a trust (A) if (1) a court within the United States is able to
exercise primary supervision over the administration of the trust and (2) one
or more United States persons have the authority to control all substantial
decisions of the trust, or (B) that was in existence on August 20, 1996, was
treated as a U.S. Person under the Code on the previous date, and elected to
continue to be so treated.
Interest
Interest on the notes (other than in the case of discount notes which are
subject to the rules described below under "Discount Notes--Original Issue
Discount") and Additional Amounts, if any, paid in respect of taxes withheld
from on payments on the senior notes (as described in "Description of the
Notes--Additional Amounts") generally will be subject to tax to a U.S. holder
as ordinary income at the time accrued or received, in accordance with such
U.S. holder's regular method of accounting for United States federal income tax
purposes. The amount of interest required to be included in income by a U.S.
holder will also include the amount of taxes, if any, withheld by UPC. Interest
income on the senior notes will constitute foreign source income and a U.S.
holder may generally claim either a deduction or, subject to certain
limitations, a foreign tax credit, in respect of any foreign tax imposed on
such interest payments for United States federal income tax purposes. The rules
relating to foreign tax credits and the timing thereof are complex and U.S.
holders are urged to consult their tax advisors with regard to the availability
of a foreign tax credit and the application of the foreign tax credit
limitations to their particular situations.
A cash method U.S. holder receiving an interest payment in euros on a
senior euro note will be required to include in income the United States dollar
value of such payment (determined using the spot rate on the date such payment
is received) regardless of whether such payment is in fact converted into
United States dollars. No ordinary gain or loss will be recognized by such
holder if the euros are converted to United States dollars on the date
received. The United States federal income tax consequences of the conversion
of euros into United States dollars under other circumstances is described
below. See "--Transactions in Euros."
An accrual method U.S. holder will be required to include in income the
United States dollar value of the amount of interest income that has accrued on
a senior euro note in a taxable year, determined by translating such income
into United States dollars at the average rate of exchange for the relevant
accrual period (or portion thereof). The average rate of exchange for an
accrual period (or portion thereof) is the simple average of the exchange rates
for each business day of such period (or such other average that is reasonably
derived and consistently applied). In the alternative, an accrual method holder
may elect to translate interest income on a senior euro note using the spot
rate on the last day of an accrual period (or the last day of the taxable year
for the portion of such period within the taxable year). In addition, a holder
may elect to translate interest income on a senior euro note using the spot
rate on the date of receipt or payment if such date is within five business
days of the last day of an accrual period. Such elections (i) must be made in a
statement filed with the U.S. holder's United States federal income tax return,
(ii) are applicable to all debt instruments held by the U.S. holder for such
year and thereafter acquired, and (iii) may not be changed without the consent
of the Internal Revenue Service.
Upon actual receipt of a payment of interest on a senior euro note, an
accrual method U.S. holder will recognize ordinary gain or loss in an amount
equal to the difference between the United States dollar value of the payment
received (determined using the spot rate on the date such payment is received)
and the United States dollar value of the interest income previously accrued
during such accrual periods as described in the preceding paragraph. Any such
ordinary gain or loss will generally be treated as United States source
ordinary income or loss and not as an adjustment to interest income. The United
States federal income tax consequences of the conversion of euros into United
States dollars under other circumstances is described below. See "--
Transactions in Euros."
Senior Discount Notes--Original Issue Discount
The senior discount notes will be issued with a significant amount of
original issue discount for United States federal income tax purposes. As a
result, a U.S. holder who purchases a senior discount note will generally be
required to include original issue discount in gross income as it accrues for
United States federal income tax purposes
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regardless of the U.S. holder's regular method of tax accounting. Therefore,
the inclusion of original issue discount in gross income will take place in
advance of the receipt of cash payments on the senior discount notes. However,
U.S. holders of senior discount notes generally will not be required to include
separately in income cash payments of stated interest received on the senior
discount notes.
The amount of original issue discount with respect to each senior discount
note will be the excess of the "stated redemption price at maturity" of such
senior discount note over its "issue price." The "stated redemption price at
maturity" of each senior discount note will include all payments, whether
denominated as principal or interest, required to be made thereunder through
and including maturity. The "issue price" of a senior discount note will be
equal to the first price at which a substantial amount of the senior discount
notes are sold for money, excluding sales to persons acting in an underwriting
capacity.
Each U.S. holder will be required to include in gross income an amount
equal to the sum of the "daily portions" of the original issue discount on the
senior discount note for all days during the taxable year in which such holder
holds the senior discount note. The daily portion is determined by allocating
to each day in accrual period a ratable portion of the original issue discount
that accrued during that period. The amount of the original issue discount
attributable to each full accrual period will be equal to the product of the
"adjusted issue price" of the senior discount note (at the beginning of the
accrual period) and the "yield to maturity" of the senior discount notes
(taking into account the length of the particular accrual period). The adjusted
issue price of a senior discount note at the beginning of an accrual period
will be the original issue price of the senior discount note plus the aggregate
amount of original issue discount that has accrued in all prior accrual periods
less any payments (other than payments not taken into account in determining
the stated redemption price) made on the senior discount note. The yield to
maturity is the discount rate that, when used in computing the present value of
all principal and interest payments to be made on the senior discount note,
produces an amount equal to its issue price.
A U.S. holder of a senior euro discount note must include in income the
United States dollar value of the amount of original issue discount that has
accrued on a senior euro discount note in a taxable year, which is determined
by translating such original issue discount into United States dollars at the
average rate of exchange for the relevant accrual period (or portion thereof).
The average rate of exchange for an accrual period (or portion thereof) is the
simple average of the exchange rates for each business day of such period (or
such other average that is reasonably derived and consistently applied). In the
alternative, a U.S. holder may elect to translate the original issue discount
on a senior euro discount note using the spot rate on the last day of an
accrual period (or the last day of the taxable year for the portion of such
period within the taxable year). In addition, a holder may elect to use the
spot rate on the date of receipt of payment for such purpose if such date is
within five business days of the last date of an accrual period. Such elections
(i) must be made in a statement filed with the U.S. holder's United States
federal income tax return, (ii) are applicable to all debt instruments held by
the U.S. holder for such year and thereafter acquired, and (iii) may not be
changed without the consent of the Internal Revenue Service.
Upon actual receipt of a payment attributable to previously accrued
original issue discount on a senior euro discount note (including amounts
received upon a sale or other disposition of a senior euro discount note
attributable to such original issue discount), a U.S. holder will recognize
ordinary gain or loss with respect to accrued original issue discount for each
accrual period in an amount equal to the difference between the United States
dollar value of the payment received (determined using the spot rate on the
date such payment is received) in respect of such accrual period and the United
States dollar value of the original issue discount that has accrued during such
accrual period (as determined in the preceding paragraph). Any such ordinary
gain or loss will generally be treated as United States source ordinary income
or loss and not as an adjustment to interest income. The United States federal
income tax consequences of the conversion of euros into United States dollars
under other circumstances is described below. See "--Transactions in Euros."
We are required to furnish certain information to the Internal Revenue
Service regarding the original issue discount amounts. In addition, we will
furnish annually to record holders of the senior discount notes information
with respect to original issue discount accruing during the calendar year.
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<PAGE>
Effect of Liquidated Damages
We intend to treat the Liquidated Damages contingency described in
"Description of the Notes--Registration Rights; Liquidated Damages" as a remote
and incidental contingency for United States federal income tax purposes. In
the event Liquidated Damages are paid, such amounts will result in additional
income to U.S. holders when such payment is made. Payment of Liquidated Damages
made in euros should be includible in income in an amount equal to the United
States dollar value of such payment (determined using the spot rate on the date
such payment is made).
Exchange Offer
While there is no direct authority on the United States federal income tax
consequences of an exchange of notes for exchange notes, an exchange of notes
for exchange notes should not be a taxable event for U.S. federal income tax
purposes. A U.S. holder should therefore have the same tax basis and holding
period in the exchange notes as the U.S. holder had in the notes.
Dispositions
Upon the sale, exchange, retirement at maturity or other disposition of a
note (collectively, a "disposition") and subject to the special rules
applicable to senior euro notes and senior euro discount notes discussed below,
a U.S. holder will generally recognize gain or loss equal to the difference
between:
. the amount realized by such holder, except to the extent such amount is
attributable to accrued but unpaid stated interest (in the case of
notes other than the senior discount notes), which will be treated as
ordinary interest income, and
. such holder's adjusted tax basis in the note.
A U.S. holder's adjusted tax basis in a senior note generally will equal
the cost of the senior note, net of accrued but unpaid stated interest, to such
holder. A U.S. holder's adjusted tax basis in a senior discount note generally
will equal the cost of the senior discount note, increased by the amount of
original issue discount previously included in the U.S. holder's income and
reduced by the amount of any cash payments received on the senior discount
note. Except with respect to gains or losses attributable to changes in
currency exchange rates, as described below, any gain or loss recognized on a
note will be capital gain or loss and will generally be treated as United
States source gain or loss. In the case of an individual U.S. holder, capital
gain is generally taxable at a preferential rate if the U.S. holder's holding
period exceeds one year at the time of disposition. The deductibility of
capital losses is subject to limitations.
Upon the sale, exchange or redemption of a senior euro note, a holder
generally will recognize gain or loss equal to the difference between the
amount realized on the disposition (or, if it is realized in other than United
States dollars, the United States dollar value of the amount using the spot
rate on the date of such disposition) and the holder's adjusted tax basis in
such senior euro note. A U.S. holder's tax basis in a senior euro note
generally will be the United States dollar value of the purchase price of such
senior euro note on the date of a purchase (determined by translating the
purchase price into United States dollars at the spot rate on the date of
purchase). A U.S. holder will recognize exchange gain or loss on the
disposition of a senior euro note equal to the difference between (i) the
amount realized on the disposition (or the United States dollar amount if the
amount received is denominated in other than United States dollars) and (ii)
the U.S. holder's purchase price translated into U.S. dollars at the spot rate
on the date of purchase. Upon the sale, exchange or redemption of a senior euro
discount note, a holder generally will recognize gain or loss equal to the
difference between the amount realized on the disposition (or, if it is
realized in other than United States dollars, the United States dollar value of
the amount using the spot rate in effect on the date of such disposition) and
the holder's adjusted tax basis in such senior euro discount note. A U.S.
holder's tax basis in a senior euro discount note generally will be the United
States dollar value of the issue price of such senior euro discount note on the
issue date (determined by translating the purchase price into United States
dollars at the spot rate on the issue date), increased by the U.S. dollar
amount of previously accrued original issue discount (as determined above),
less the U.S. dollar amount of any cash payments received on the senior euro
discount note
226
<PAGE>
(determined by translating the amount of such payments into United States
dollars at the spot rate on the date such payment is received). A U.S. holder
will recognize exchange gain or loss on the disposition of a senior euro
discount note equal to the difference between U.S. dollar value of the issue
price of the senior euro discount note on date of disposition and the U.S.
dollar value of the issue price of the senior euro discount note on the issue
date.
Any exchange gain or loss on a senior euro note or senior euro discount
note will be treated as United States source ordinary income or loss and will
generally not be treated as an adjustment to interest income. Such foreign
currency gain or loss is recognized on the disposition of a senior euro note or
senior euro discount note only to the extent of total gain or loss recognized
on such disposition.
Transactions in Euros
Euros received as interest on a note, or as proceeds of the sale, exchange
or redemption of, a senior euro note or senior euro discount note will have a
tax basis equal to their United States dollar value at the time of receipt. A
U.S. holder of euros will recognize United States source income or loss on a
sale or other disposition of such euros equal to the difference between (1) the
amount of United States dollars, or the United States dollar value of the other
currency or property received in such sale or other disposition and (2) the
adjusted tax basis of such euros.
A U.S. holder that purchases a senior euro note or senior euro discount
note with previously owned euros would generally recognize gain or loss in an
amount equal to the difference, if any, between such holder's tax basis in such
euros and the United States dollar fair market value of such senior euro note
or senior euro discount note on the date of purchase. Generally, any such gain
or loss will be United States source ordinary income or loss. However, a holder
that converts United States dollars to euros and immediately uses such euros to
purchase a senior euro note or senior euro discount note ordinarily would not
recognize any exchange gain or loss in connection with such conversion or
purchase.
Information Reporting and Backup Withholding
Certain non-corporate U.S. holders may be subject to backup withholding at
a rate of 31% on payments of principal, premium and interest on, and the
proceeds of the disposition of, the notes. In general, backup withholding will
be imposed only if the U.S. holder
. fails to furnish its taxpayer identification number ("TIN"), which, for
an individual, would be his or her Social Security number,
. furnishes an incorrect TIN,
. is notified by the IRS that it has failed to report payments of
interest or dividends or
. under certain circumstances, fails to certify, under penalty of
perjury, that it has furnished a correct TIN and has been notified by
the IRS that it is subject to backup withholding tax for failure to
report interest or dividend payments.
In addition, such payments of principal and interest to U.S. holders will
generally be subject to information reporting.
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LEGAL MATTERS
Holme Roberts & Owen LLP, London, England, has advised us on certain U.S.
securities law matters in connection with this offering. Certain legal matters
relating to Dutch law will be passed upon for us by Loeff Claeys Verbeke,
Amsterdam, The Netherlands.
EXPERTS
Our consolidated financial statements for the six months ended December 31,
1995 and as of and for the years ended December 31, 1996, 1997 and 1998
included in this Registration Statement have been audited by Arthur Andersen,
independent auditors, as indicated in their report with respect thereto, and
are included herein upon the authority of said firm as experts in giving said
report.
The consolidated financial statements of United TeleKabel Holding N.V. for
the period from commencement of operations (August 6, 1998) until December 31,
1998 included in this Registration Statement have been audited by Arthur
Andersen, independent auditors, as indicated in their report with respect
thereto, and are included herein upon the authority of said firm as experts in
giving said report.
The consolidated financial statements of N.V. TeleKabel Beheer for the
years ended December 31, 1996 and 1997 included in this Registration Statement
have been audited by PricewaterhouseCoopers N.V., independent accountants as
stated in their report appearing herein, and are included herein upon the
authority of said firm as experts in giving said report.
The consolidated financial statements of N.V. TeleKabel Beheer for the year
ended December 31, 1998 included in this Registration Statement have been
audited by Arthur Andersen, independent auditors, and are included herein upon
authority of said firm as experts in giving said report.
The consolidated financial statements of @Entertainment, Inc. for the years
ended December 31, 1996, 1997 and 1998 included in this Registration Statement
have been audited by KPMG Polska Sp.zo.o, independent auditors, as indicated in
their report with respect thereto, and are included herein upon the authority
of said firm as experts in giving said report.
The consolidated financial statements of A2000 Holding N.V. for the years
ended December 31, 1997 and 1998 included in this Registration Statement have
been audited by Arthur Andersen, independent auditors, as indicated in their
report with respect thereto, and are included herein upon the authority of said
firm as experts in giving said report.
The consolidated financial statements of Kabel Plus, a.s. for the years
ended December 31, 1997 and 1998 included in this Registration Statement have
been audited by Arthur Andersen s.r.o, independent auditors, as indicated in
their report with respect thereto, and are included herein upon the authority
of said firm as experts in giving said report.
The consolidated financial statements of NBS Nordic Broadband Services AB
for the year ended December 31, 1998 included in this Registration Statement
have been audited by Ernst & Young AB, independent auditors, as indicated in
their report with respect thereto, and are included herein upon the authority
of said firm as experts in giving said report.
The consolidated financial statements of Singapore Telecom International
Svenska AB, as of and for the year ended March 31, 1998 and the Reconciliation
of Significant Differences between U.S. and Swedish Generally Accepted
Accounting Principles included in this Registration Statement have been so
included in reliance on the reports of PricewaterhouseCoopers, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The consolidated financial statements of SBS Broadcasting SA for the years
ended December 31, 1996, 1997 and 1998 included in this Registration Statement
have been audited by Ernst & Young, independent auditors, as indicated in their
report with respect thereto, and are included herein upon the authority of said
firm as experts in giving said report.
228
<PAGE>
ENFORCEMENT OF CIVIL LIABILITIES
We are incorporated under the laws of The Netherlands and certain members
of our Supervisory Board, our Board of Management and certain of the experts
named herein are residents of The Netherlands or other countries outside the
United States. Substantially all of our assets and the assets of such persons
are located outside the United States. As a result, it may not be possible for
investors to effect service of process within the United States upon us or such
persons, or to enforce against us or such persons in courts in the United
States, judgments of such courts predicated upon the civil liability provisions
of United States securities laws. We have been advised by legal counsel in The
Netherlands, Loeff Claeys Verbeke, that because there is no convention on
reciprocal recognition and enforcement of judgments in civil and commercial
matters between the United States and The Netherlands, a final judgment
rendered by a United States court will not automatically be enforced by the
courts in The Netherlands. In order to obtain a judgment that is enforceable in
the The Netherlands, the relevant claim will have to be relitigated before a
competent Dutch court. Under current practice, however, a final and conclusive
judgment rendered by a United States court will be recognized by a Dutch court
if it finds that (1) the final judgment results from proceedings compatible
with Dutch concepts of due process and (2) the final judgment does not
contravene public policy of The Netherlands. If the final judgment is
recognized by a Dutch court, that court generally will grant the same judgment
without relitigation on the merits. In addition, Dutch law does not recognize a
shareholder's right to bring a derivative action on behalf of a corporation.
AVAILABLE INFORMATION
We are subject to the informational reporting requirements of the U.S.
Securities Exchange Act of 1934, as amended, and in accordance therewith, file
reports, proxy statements and other information with the U.S. Securities and
Exchange Commission. Copies of reports, proxy statements and other information
may be inspected at the offices of the National Association of Securities
Dealers, Inc. 1735 K Street, N.W., Washington, D.C. 20006, U.S.A.
We also comply with our obligations under Dutch law to prepare annual
financial statements complying with the corporate law of The Netherlands and to
deposit the same at the Commercial Register of the Chamber of Commerce and
Industry in Amsterdam, The Netherlands.
229
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GENERAL INFORMATION
Listing
A notice relating to the issue of the notes and the Charter of our company
have been filed with the Chief Registrar of the District Court of Luxembourg
(Greffier en Chef du Tribunal d'Arrondissement de et a Luxembourg) where such
documents are available for inspection and where copies of such documents will
be obtainable upon request.
Clearing Systems
The notes have been accepted for clearance by Cedelbank and by Morgan
Guaranty Trust Company of New York, Brussels office as operator of the
Euroclear System. The CUSIPs and the International Security Identification
Numbers (ISINs) for the notes are as follows:
<TABLE>
<CAPTION>
Notes Series CUSIP ISIN Common
- ----- ------ --------- ------------ ---------
<S> <C> <C> <C> <C>
Senior Dollar Notes due
2007................... 144A 911300AG6 US911300AG64 010373662
Senior Dollar Notes due
2007................... REG S N90168AC4 USN90168AC45 010373620
Senior Euro Notes due
2007................... 144A N/A XS0103732714 010373271
Senior Euro Notes due
2007................... REG S N/A XS0103732045 010373204
Senior Dollar Notes due
2009................... 144A 911300AJ0 US911300AJ04 010373697
Senior Dollar Notes due
2009................... REG S N90168AE0 USN90168AE01 010373689
Senior Euro Notes due
2009................... 144A N/A XS0103734173 010373417
Senior Euro Notes due
2009................... REG S N/A XS0103733795 010373379
Senior Discount Euro
Notes due 2009......... 144A 911300AL5 US911300AL59 010373824
Senior Discount Dollar
Notes due 2009......... REG S N90168AG5 USN90168AG58 010373751
Senior Discount Euro
Notes due 2009......... 144A N/A XS0103734769 010373476
Senior Discount Euro
Notes due 2009......... REG S N/A XS0103734256 010373425
</TABLE>
Authorization
The issue of the notes was authorized by our Supervisory Board on October
19, 1999.
Documents
Copies of an English translation of our Statutes and By-laws will be
available for inspection so long as any notes are outstanding at the specified
office of the Paying Agent in Luxembourg.
Copies of the latest Annual Report and interim financial statements of UPC
will be available at the specified office of the Paying Agent in Luxembourg, so
long as any notes are outstanding.
Copies of the Purchase Agreement, Registration Rights Agreement and the
Indentures and the Paying and Transfer Agency Agreements will be available for
inspection at the specified office of the Paying Agent in Luxembourg so long as
any notes are outstanding.
Material Adverse Change
Except as disclosed in this prospectus, there has been no material adverse
change in the financial position of UPC, since September 30, 1999.
Litigation
Except as disclosed in this prospectus, we are not involved in any
litigation or arbitration proceedings relating to claims or amounts which are
material in the context of the issue of the notes nor, so far as we are aware,
is any such litigation or arbitration pending or threatened.
230
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
Independent Auditors' Report.......................................... F-4
Consolidated Balance Sheets as of December 31, 1997 and 1998 and
September 30, 1999 (unaudited) (Post-Acquisition).................... F-5
Consolidated Statements of Operations for the years ended December 31,
1996 and 1997 (Pre-Acquisition), for the year ended December 31, 1998
and for the nine months ended September 30, 1998 (unaudited) and 1999
(unaudited) (Post-Acquisition)....................................... F-6
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 1996 and 1997 (Pre-Acquisition), for the
year ended December 31, 1998 and for the nine months ended
September 30, 1999 (unaudited) (Post-Acquisition).................... F-7
Consolidated Statements of Cash Flows for the years ended December 31,
1996 and 1997 (Pre-Acquisition), for the year ended December 31, 1998
and for the nine months ended September 30, 1998 (unaudited) and 1999
(unaudited) (Post-Acquisition)....................................... F-9
Notes to the Consolidated Financial Statements........................ F-12
UNITED TELEKABEL HOLDING N.V.
Independent Auditors' Report.......................................... F-60
Consolidated Balance Sheet as of December 31, 1998.................... F-61
Consolidated Statement of Operations from August 6, 1998 (commencement
of operations) until December 31, 1998............................... F-62
Consolidated Statement of Cash Flows from August 6, 1998 (commencement
of operations) until December 31, 1998............................... F-63
Notes to Consolidated Financial Statements............................ F-64
N.V. TELEKABEL BEHEER
Report of Independent Accountants..................................... F-76
Independent Auditors' Report.......................................... F-77
Consolidated Balance Sheets as of December 31, 1997 and 1998.......... F-78
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998.................................................. F-79
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998.................................................. F-80
Consolidated Statement of Changes in Shareholder's Equity for the
years ended December 31, 1996, 1997 and 1998......................... F-81
Notes to Consolidated Financial Statements............................ F-82
@ENTERTAINMENT, INC.
Independent Auditors' Report.......................................... F-92
Consolidated Balance Sheets as of December 31, 1997 and 1998 and June
30, 1999 (unaudited)................................................. F-93
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998 and for the six months ended June 30, 1998 and
1999 (unaudited)..................................................... F-94
Consolidated Statements of Comprehensive Loss for the years ended
December 31, 1996, 1997 and 1998 and for the six months ended June
30, 1998 and 1999 (unaudited)........................................ F-95
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1996, 1997 and 1998 ........................ F-96
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999
(unaudited).......................................................... F-97
Notes to Consolidated Financial Statements............................ F-98
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
A2000 HOLDING N.V.
Independent Auditors' Report.......................................... F-132
Consolidated Balance Sheets at December 31, 1997 and 1998 and June 30,
1999 (unaudited)..................................................... F-133
Consolidated Statement of Income for the years ended December 31, 1997
and 1998 and the six months ended June 30, 1998 (unaudited) and 1999
(unaudited).......................................................... F-134
Consolidated Statements of Cash Flows for the years ended December 31,
1997 and 1998 and the six months ended June 30, 1998 (unaudited) and
1999 (unaudited)..................................................... F-135
Notes to Consolidated Financial Statements............................ F-136
KABEL PLUS a.s.
Report of Independent Public Accountants.............................. F-150
Consolidated Balance Sheets at December 31, 1997 and 1998 and
September 30, 1998 and 1999 (unaudited).............................. F-151
Consolidated Statements of Operations for the years ended December 31,
1997 and 1998 and the nine months ended September 30, 1998 and 1999
(unaudited).......................................................... F-152
Consolidated Statements of Cash Flows for the years ended December 31,
1997 and 1998 and the nine months ended September 30, 1998 and 1999
(unaudited).......................................................... F-153
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997 and 1998 and the nine months ended September 30,
1998 and 1999 (unaudited)............................................ F-154
Notes to Consolidated Financial Statements............................ F-155
NBS NORDIC BROADBAND SERVICES AB
Administration Report................................................. F-167
Consolidated Income Statement for 1998................................ F-168
Consolidated Balance Sheet as of December 31, 1998.................... F-169
Consolidated Cash Flow Statement for 1998............................. F-170
Notes to Financial Statements......................................... F-171
Report by the Independent Auditor..................................... F-178
Consolidated Income Statement for the six months ended June 30, 1999
(unaudited).......................................................... F-179
Consolidated Balance Sheet as of June 30, 1999 (unaudited)............ F-180
Consolidated Cash Flow Statement for the six months ended June 30,
1999 (unaudited)..................................................... F-182
Notes for the Financial Statements.................................... F-183
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB
Annual Report and Administration Report............................... F-184
Consolidated Income Statements for the 12 months ended March 31, 1998
and 1997............................................................. F-185
Consolidated Balance Sheets as of March 31, 1998 and 1997............. F-186
Consolidated Funds Statements for the 12 months ended March 31, 1998
and 1997............................................................. F-188
Income Statements--Parent Company for the 12 months ended March 31,
1998 and 1997........................................................ F-189
Balance Sheets--Parent Company as of March 31, 1998 and 1997.......... F-190
Funds Statements--Parent Company for the 12 months ended March 31,
1998 and 1997........................................................ F-192
Accounting Principles................................................. F-193
Notes to the Annual Accounts.......................................... F-195
Auditors' Report of the Annual General Meeting of the Shareholders.... F-201
Reconciliation of Significant Differences between US and Swedish
Generally Accepted Accounting Principles............................. F-202
Report of Independent Accountants on Reconciliation of Significant
Differences between US and Swedish Generally Accepted Accounting
Principles........................................................... F-204
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
SBS BROADCASTING SA
Report of Independent Auditors ....................................... F-205
Consolidated Balance Sheets at December 31, 1997 and 1998 and June 30,
1999 (unaudited)..................................................... F-206
Consolidated Statements of Operations for the years ended December 31,
1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999
(unaudited).......................................................... F-207
Consolidated Statements of Comprehensive Income for the years ended
December 31, 1996, 1997 and 1998 and the six months ended June 30,
1997 and 1998 (unaudited)............................................ F-207
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended December 31, 1997 and 1998 and the six months ended
June 30, 1999 (unaudited)............................................ F-208
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998 and the six months ended June 30, 1998 and 1999
(unaudited).......................................................... F-209
Notes to Consolidated Financial Statements............................ F-210
</TABLE>
F-3
<PAGE>
INDEPENDENT AUDITORS' REPORT
To United Pan-Europe Communications N.V.
We have audited the accompanying consolidated balance sheets of United Pan-
Europe Communications N.V. (a N.V. registered in The Netherlands) and
subsidiaries as of December 31, 1998 and December 31, 1997 (post-acquisition--
see Note 1), and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the years ended December 31,
1998 (post-acquisition--see Note 1), December 31, 1997 and December 31, 1996
(pre-acquisition--see Note 1). 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 Netherlands, which are substantially the same as those
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.
As discussed in Note 1 to the consolidated financial statements, the
Company's parent company (United International Holdings, Inc.) acquired the
remaining 50% interest in the Company effective December 11, 1997. Accordingly,
the assets, liabilities and shareholders' equity acquired have been adjusted to
reflect its parent's basis in the underlying net assets of the Company as of
December 11, 1997. The proportional assets and liabilities acquired were
recorded based upon their relative fair market values at the date of
acquisition. Accordingly, the pre-acquisition and post-acquisition consolidated
financial statements are not comparable in certain significant respects since
these consolidated financial statements report the financial position, results
of operations and cash flows on two separate accounting bases.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United Pan-
Europe Communications N.V. as of December 31, 1998 and December 31, 1997 (post-
acquisition--see Note 1), and the results of its operations and its cash flows
for the years ended December 31, 1998 (post-acquisition--see Note 1), December
31, 1997 and December 31, 1996 (pre-acquisition--see Note 1) in conformity with
accounting principles generally accepted in the United States of America.
Arthur Andersen
Amstelveen, The Netherlands,
March 29, 1999
F-4
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONSOLIDATED BALANCE SHEETS
(Stated in thousands of Dutch guilders, except share and per share amounts)
As a result of the UPC Acquisition in December 1997 (see Note 1), the purchase
method of accounting was used to record assets acquired and liabilities assumed
by the parent company. Such accounting generally results in increased
amortization and depreciation reported in future periods. Accordingly, the
accompanying financial statements of the Company are not comparable in certain
significant respects since these financial statements report financial
position, results of operations, and cash flows on two separate accounting
bases.
<TABLE>
<CAPTION>
As of December 31
-------------------- As of
1997 1998 September 30, 1999
--------- --------- ------------------
(Post-Acquisition)
(unaudited)
<S> <C> <C> <C>
ASSETS:
Current assets
Cash and cash equivalents............ 100,144 29,571 139.150
Restricted cash...................... 22,220 30,263 37,775
Subscriber receivables, net of
allowance for doubtful accounts of
6,445, 9,260 and 13,509,
respectively........................ 9,419 12,886 92,362
Costs to be reimbursed by affiliated
companies, net of allowance for
doubtful accounts of 2,209, 0 and
139, respectively................... 14,970 27,277 19,085
Other receivables.................... 19,103 25,845 115,346
Inventory............................ 13,040 24,121 132,031
Prepaid expenses and other current
assets.............................. 6,669 15,654 119,472
--------- --------- ----------
Total current assets............... 185,565 165,617 655,221
Marketable equity securities of
parent, at fair value................ 66,809 101,097 412,858
Investments in and advances to
affiliated companies, accounted for
under the equity method, net......... 413,649 493,051 500,158
Property, plant and equipment, net of
accumulated depreciation of 7,312,
87,708 and 285,340, respectively..... 484,982 602,997 3,512,313
Goodwill and other intangible assets,
net of accumulated amortization of
1,716, 39,109 and 163,134,
respectively......................... 690,046 680,032 5,446,246
Deferred financing costs, net of
accumulated amortization of 217,
9,288 and 3,829, respectively........ 23,943 21,663 140,544
Non-current restricted cash and other
assets............................... 50,710 3,322 22,928
--------- --------- ----------
Total assets....................... 1,915,704 2,067,779 10,690,268
========= ========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT):
Current liabilities
Accounts payable, including related
party payables of 12,223, 15,671 and
22,975, respectively................ 126,178 141,917 351,537
Accrued liabilities.................. 34,731 56,840 387,354
Subscriber prepayments and deposits.. 24,533 45,757 119,452
Short-term debt...................... 1,696 63,322 356,573
Note payable to shareholder.......... -- 175,012 13,809
Current portion of long-term debt.... 255,819 113,519 12,430
--------- --------- ----------
Total current liabilities.......... 442,957 596,367 1,241,155
Long-term debt........................ 966,100 1,174,749 6,407,013
Deferred taxes........................ 44,508 8,657 35,696
Deferred compensation................. 4,818 327,445 --
Other long-term liabilities........... 8,801 8,801 127,309
--------- --------- ----------
Total liabilities.................. 1,467,184 2,116,019 7,811,173
--------- --------- ----------
Commitments and contingencies (Notes
11 and 12)
Minority interests in subsidiaries.... 8,715 25,934 33,002
Shareholders' equity (deficit) (As
adjusted for the 3:2 stock split.
Note 10)
Priority stock, 4.40742 par value,
100 shares authorized and 0, 0 and
100 shares issued, respectively..... -- -- --
Ordinary stock, 4.40742 par value,
200,000,000 shares authorized and
92,062,589, 92,285,604 and
129,246,123 shares issued,
respectively........................ 61,348 61,497 573,853
Additional paid-in capital........... 650,864 672,016 3,518,033
Deferred compensation................ -- -- (61,488)
Treasury stock, at cost, 9,198,135,
9,198,135 and 0 shares of common
stock, respectively................. (110,385) (110,385) --
Accumulated deficit.................. (163,829) (727,050) (1,403,788)
Other cumulative comprehensive income
.................................... 1,807 29,748 219,483
--------- --------- ----------
Total shareholders' equity
(deficit)......................... 439,805 (74,174) 2,846,093
--------- --------- ----------
Total liabilities and shareholders'
equity (deficit).................. 1,915,704 2,067,779 10,690,268
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in thousands of Dutch guilders, except share and per share amounts)
As a result of the UPC Acquisition in December 1997 (see Note 1), the purchase
method of accounting was used to record assets acquired and liabilities assumed
by the parent company. Such accounting generally results in increased
amortization and depreciation reported in future periods. Accordingly, the
accompanying financial statements of the Company are not comparable in certain
significant respects since these financial statements report financial
position, results of operations, and cash flows on two separate accounting
bases.
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
1996 1997 1998
----------------- ----------------- ------------------
(Pre-Acquisition) (Pre-Acquisition) (Post-Acquisition)
<S> <C> <C> <C>
Service and other revenue.................... 245,179 337,255 408,970
Operating expense............................ (82,439) (118,508) (138,459)
Selling, general and administrative expense.. (81,176) (119,067) (481,703)
Depreciation and amortization................ (79,832) (132,888) (187,646)
---------- ---------- ----------
Net operating (loss) income................. 1,732 (33,208) (398,838)
Interest income.............................. 2,757 6,512 7,397
Interest expense............................. (14,263) (41,995) (92,308)
Interest expense, related party.............. (24,212) (28,743) (12,047)
Provision for loss on investment related
costs....................................... -- (18,888) (6,230)
Gain on sale of assets....................... -- -- --
Foreign exchange (loss) gain and other
expense..................................... (21,200) (41,063) 2,690
---------- ---------- ----------
Net loss before income taxes and other
items...................................... (55,186) (157,385) (499,336)
Share in results of affiliated companies,
net......................................... (30,712) (25,458) (63,823)
Minority interests in subsidiaries........... (2,208) 152 1,153
Income tax benefit (expense)................. (509) 1,649 (1,215)
---------- ---------- ----------
Net loss.................................... (88,615) (181,042) (563,221)
========== ========== ==========
Basic and diluted net loss per ordinary
share(1).................................... (0.96) (1.98) (6.80)
========== ========== ==========
Weighted-average number of ordinary shares
outstanding(1).............................. 92,062,589 91,533,381 82,869,342
- --------------------------------------------------
========== ========== ==========
</TABLE>
For the Nine Months
Ended September 30,
-------------------------
1998 1999
------------ -----------
(Post-Acquisition)
(Unaudited) (Unaudited)
Service and other revenue.................... 195,270 331,954
Operating expense............................ (66,111) (151,090)
Selling, general and administrative expense.. (62,374) (265,138)
Depreciation and amortization................ (94,953) (148,404)
------------ ------------
Net operating (loss) income................. (28,168) (232,678)
Interest income.............................. 2,017 13,520
Interest expense............................. (44,343) (60,156)
Interest expense, related party.............. (3,812) (1,951)
Provision for loss on investment related
costs....................................... -- --
Gain on sale of assets....................... -- 14,625
Foreign exchange (loss) gain and other
expense..................................... (8,234) (2,595)
------------ ------------
Net loss before income taxes and other
items...................................... (82,540) (269,235)
Share in results of affiliated companies,
net......................................... (31,619) (33,168)
Minority interests in subsidiaries........... 1,722 115
Income tax benefit (expense)................. 1,114 1,118
------------ ------------
Net loss.................................... (111,323) (301,170)
============ ============
Basic and diluted net loss per ordinary
share(1).................................... (1.34) (2.60)
============ ============
Weighted-average number of ordinary shares
outstanding(1).............................. 82,864,454 115,954,697
- --------------------------------------------------
============ ============
- --------------------
(1)As adjusted for the 3:2 stock split (Note 10).
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (2)
(Stated in thousands of Dutch guilders, except share amounts)
As a result of the UPC Acquisition in December 1997 (see Note 1), the purchase
method of accounting was used to record assets acquired and liabilities assumed
by the parent company. Such accounting generally results in increased
amortization and depreciation reported in future periods. Accordingly, the
accompanying financial statements of the Company are not comparable in certain
significant respects since these financial statements report financial
position, results of operations, and cash flows on two separate accounting
bases.
<TABLE>
<CAPTION>
Other
Cumulative
Priority Stock Ordinary Stock Additional Treasury Stock Comprehensive
----------------- ----------------- Paid-In Deferred --------------------- Accumulated Income
Shares Amount Shares(2) Amount Capital Compensation Shares(2) Amount Deficit (Loss)(1)
------- ------- ---------- ------ ---------- ------------ ----------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31,
1995........... 92,062,589 61,348 266,447 -- -- -- (48,856) (2,751)
Contribution by
United of
additional
Investment in
affiliate...... -- -- -- -- 21,344 -- -- -- -- --
Change in
cumulative
translation
Adjustments.... -- -- -- -- -- -- -- -- -- 5,021
Net loss........ -- -- -- -- -- (88,615) --
Total
comprehensive
income (loss).. -- -- -- -- -- -- -- -- -- --
------- ------- ---------- ------ -------- --- ----------- -------- -------- -------
Balances,
December 31,
1996
(Pre
Acquisition)... -- -- 92,062,589 61,348 287,791 -- -- -- (137,471) 2,270
Contribution by
United of
additional
investment in
affiliate...... -- -- -- -- 12,002 -- -- -- -- --
Gain on sale of
stock by
subsidiary..... -- -- -- -- 3,274 -- -- -- -- --
Change in
cumulative
translation
Adjustments.... -- -- -- -- -- -- -- -- -- (463)
Net loss for the
period from
January 1, 1997
to December 10,
1997........... -- -- -- -- -- -- -- -- (171,898) --
Total
comprehensive
income (loss).. -- -- -- -- -- -- -- -- -- --
------- ------- ---------- ------ -------- --- ----------- -------- -------- -------
Balances,
December 10,
1997
(Pre
Acquisition)... -- -- 92,062,589 61,348 303,067 -- -- -- (309,369) 1,807
Buyout of
shareholder's
interest....... -- -- -- -- -- -- (24,378,396) (292,561) -- --
Reissuance of
shares upon
Conversion of
PIK Notes...... -- -- -- -- (12,277) -- 15,180,261 182,176 -- --
Application of
push-down
accounting and
step up in
basis.......... -- -- -- -- 514,758 -- -- -- -- --
Elimination of
historical
accumulated
Deficit of UPC
attributable to
Philips........ -- -- -- -- (154,684) -- -- -- 154,684 --
Net loss for the
period from
December 11,
1997 to
December 31,
1997........... -- -- -- -- -- -- -- -- (9,144) --
Total
comprehensive
income (loss).. -- -- -- -- -- -- -- -- -- --
------- ------- ---------- ------ -------- --- ----------- -------- -------- -------
Balances,
December 31,
1997
(Post
Acquisition)... -- -- 92,062,589 61,348 650,864 -- (9,198,135) (110,385) (163,829) 1,807
Issuance of
shares for
Acquisition of
receivable..... -- -- 223,015 149 2,439 -- -- -- -- --
Contribution by
United of
additional
Investment in
affiliate...... -- -- -- -- 7,778 -- -- -- -- --
Issuance of
convertible
debt........... -- -- -- -- 10,935 -- -- -- -- --
Unrealized gain
on investment.. -- -- -- -- -- -- -- -- -- 44,223
Gain on sale of
investment..... -- -- -- -- -- -- -- -- -- (1,826)
Change in
cumulative
translation
Adjustments.... -- -- -- -- -- -- -- -- -- (14,456)
Net loss........ -- -- -- -- -- -- -- -- (563,221) --
Total
comprehensive
income (loss).. -- -- -- -- -- -- -- -- -- --
------- ------- ---------- ------ -------- --- ----------- -------- -------- -------
Balances,
December 31,
1998
(Post
Acquisition)... -- -- 92,285,604 61,497 672,016 -- (9,198,135) (110,385) (727,050) 29,748
======= ======= ========== ====== ======== === =========== ======== ======== =======
<CAPTION>
Total
---------
<S> <C>
Balances,
December 31,
1995........... 276,188
Contribution by
United of
additional
Investment in
affiliate...... 21,344
Change in
cumulative
translation
Adjustments.... 5,021
Net loss........ (88,615)
---------
Total
comprehensive
income (loss).. (83,594)
=========
Balances,
December 31,
1996
(Pre
Acquisition)... 213,938
Contribution by
United of
additional
investment in
affiliate...... 12,002
Gain on sale of
stock by
subsidiary..... 3,274
Change in
cumulative
translation
Adjustments.... (463)
Net loss for the
period from
January 1, 1997
to December 10,
1997........... (171,898)
---------
Total
comprehensive
income (loss).. (172,361)
=========
Balances,
December 10,
1997
(Pre
Acquisition)... 56,853
Buyout of
shareholder's
interest....... (292,561)
Reissuance of
shares upon
Conversion of
PIK Notes...... 169,899
Application of
push-down
accounting and
step up in
basis.......... 514,758
Elimination of
historical
accumulated
Deficit of UPC
attributable to
Philips........ --
Net loss for the
period from
December 11,
1997 to
December 31,
1997........... (9,144)
---------
Total
comprehensive
income (loss).. (9,144)
=========
Balances,
December 31,
1997
(Post
Acquisition)... 439,805
Issuance of
shares for
Acquisition of
receivable..... 2,588
Contribution by
United of
additional
Investment in
affiliate...... 7,778
Issuance of
convertible
debt........... 10,935
Unrealized gain
on investment.. 44,223
Gain on sale of
investment..... (1,826)
Change in
cumulative
translation
Adjustments.... (14,456)
Net loss........ (563,221)
---------
Total
comprehensive
income (loss).. (535,280)
=========
Balances,
December 31,
1998
(Post
Acquisition)... (74,174)
=========
</TABLE>
- ------------------
(footnotes on following page)
F-7
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (2)--(Continued)
(Stated in thousands of Dutch guilders, except share amounts)
<TABLE>
<CAPTION>
Priority Stock Ordinary Stock Additional Treasury Stock
----------------- ------------------- Paid-In Deferred -------------------- Accumulated
Shares Amount Shares(2) Amount Capital Compensation Shares(2) Amount Deficit
------- ------- ----------- ------- ---------- ------------ ---------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31,
1998
(Post-Acquisition).. -- -- 92,285,604 61,497 672,016 -- (9,198,135) (110,385) (727,050)
Change in par
value of
ordinary shares
(unaudited).... -- -- -- 345,244 (345,244) -- -- -- --
Issuance of
priority shares
(unaudited).... 100 -- -- -- -- -- -- -- --
Issuance of
ordinary shares
in public
offering, net
of offering
costs
(unaudited).... -- -- 35,401,865 156,031 2,393,263 -- 9,198,135 110,385 --
Issuance of
convertible
debt
(unaudited).... -- -- -- -- 29,006 -- -- -- --
Issuance of
ordinary shares
upon exercise
of DIC option
(unaudited).... -- -- 1,558,654 6,870 82,779 -- -- -- --
Issuance of
ordinary shares
for acquisition
of Videopole
(unaudited).... -- -- 955,376 4,211 130,575 -- -- -- --
Issuance of
warrants
(unaudited).... -- -- -- -- 64,400 -- -- -- --
Change in stock
option plan due
to public
offering
(unaudited).... -- -- -- -- 310,099 (31,772) -- -- --
Deferred
compensation
expense related
to stock
options, net
(unaudited).... -- -- -- -- 181,139 (127,531) -- -- --
Amortization of
deferred
compensation
(unaudited).... -- -- -- -- -- 97,815 -- -- --
Unrealized gain
on investment
(unaudited).... -- -- -- -- -- -- -- -- --
Change in
cumulative
translation
adjustments
(unaudited).... -- -- -- -- -- -- -- -- --
Net loss
(unaudited).... -- -- -- -- -- -- -- -- (676,738)
------- ------- ----------- ------- --------- -------- ---------- -------- ----------
Balances,
September 30,
1999
(unaudited).... 100 -- 130,201,499 573,833 3,518,033 (61,488) -- -- (1,403,788)
======= ======= =========== ======= ========= ======== ========== ======== ==========
<CAPTION>
Other
Cumulative
Comprehensive
Income
(Loss)(1) Total
------------- ----------
<S> <C> <C>
Balances,
December 31,
1998
(Post-Acquisition).. 29,748 (74,174)
Change in par
value of
ordinary shares
(unaudited).... -- --
Issuance of
priority shares
(unaudited).... -- --
Issuance of
ordinary shares
in public
offering, net
of offering
costs
(unaudited).... -- 2,659,679
Issuance of
convertible
debt
(unaudited).... -- 29,006
Issuance of
ordinary shares
upon exercise
of DIC option
(unaudited).... -- 89,649
Issuance of
ordinary shares
for acquisition
of Videopole
(unaudited).... -- 134,786
Issuance of
warrants
(unaudited).... -- 64,400
Change in stock
option plan due
to public
offering
(unaudited).... -- 278,327
Deferred
compensation
expense related
to stock
options, net
(unaudited).... -- 53,608
Amortization of
deferred
compensation
(unaudited).... -- 97,815
Unrealized gain
on investment
(unaudited).... 310,759 310,759
Change in
cumulative
translation
adjustments
(unaudited).... (121,024) (121,024)
Net loss
(unaudited).... -- (676,738)
------------- ----------
Balances,
September 30,
1999
(unaudited).... 219,483 2,846,093
============= ==========
</TABLE>
- ------------------
(1) As of December 31, 1995, 1996 and 1997 Other Cumulative Comprehensive
Income (Loss) represents foreign currency translation adjustments. As of
December 31, 1998, Other Cumulative Comprehensive Income represents foreign
currency translation adjustments of (12,649) and unrealized gain on
investment of 42,397. As of September 30, 1999, Other Cumulative
Comprehensive Income represents foreign currency translation adjustments of
(133,673) and unrealized gain on investment of 353,156.
(2) As adjusted for the 3:2 stock split (Note 10).
The accompanying notes are an integral part of these consolidated financial
statements.
F-8
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in thousands of Dutch guilders)
As a result of the UPC Acquisition in December 1997 (see Note 1), the purchase
method of accounting was used to record assets acquired and liabilities assumed
by the parent company. Such accounting generally results in increased
amortization and depreciation reported in future periods. Accordingly, the
accompanying financial statements of the Company are not comparable in certain
significant respects since these financial statements report financial
position, results of operations, and cash flows on two separate accounting
bases.
<TABLE>
<CAPTION>
For the Nine Months
For the Years Ended December 31, Ended September 30,
-------------------------------------- ----------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ----------- -----------
(Pre- (Pre- (Post- (Post-Acquisition)
Acquisition) Acquisition) Acquisition) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss................ (88,615) (181,042) (563,221) (179,706) (676,738)
Adjustments to reconcile
net loss to net cash
flows from operating
activities:
Depreciation and
amortization.......... 79,832 132,888 187,646 137,842 340,501
Amortization of
deferred financing
costs................. -- 642 9,234 6,653 19,418
Accretion of interest.. -- -- -- -- 33,474
Share in results of
affiliated companies,
net................... 30,712 25,458 63,823 46,789 55,857
Compensation expense
related to stock
options............... -- 4,818 322,627 32,493 109,485
Minority interests in
subsidiaries.......... 2,208 (152) (1,153) 1,930 (1,300)
Exchange rate
differences in loans.. 20,544 43,441 (12,653) (12,615) (4,508)
Gain on sale of
investment............ -- -- (1,826) -- (14,625)
Loss on repayment of
DIC loan.............. -- -- -- -- 5,012
Provision for loss on
investment related
costs................. -- 18,888 6,230 -- --
Other.................. 1,173 978 1,739 3,083 536
Changes in assets and
liabilities:
(Increase) decrease in
receivables........... (31,932) 24,102 (19,739) (21,401) (50,436)
Increase in
inventories........... (1,611) (2,229) (8,670) (4,160) (49,053)
Decrease (increase) in
other non-current
assets................ (309) (2,544) (2,004) (1,631) 8,616
Increase in other
current liabilities... 25,553 69,551 77,191 48,682 134,708
(Decrease) increase in
deferred taxes and
other long-term
liabilities........... 4,975 (2,366) 13,776 (6,601) (483)
-------- --------- -------- -------- ----------
Net cash flows from
operating activities... 42,530 132,433 73,000 51,358 (89,536)
-------- --------- -------- -------- ----------
Cash flows from
investing activities:
Restricted cash
(deposited) released,
net.................... -- (22,220) (8,043) 12,955 (7,512)
Purchase of parent
company's stock........ -- (66,809) -- -- --
Investment in bonds..... -- -- -- -- (34,493)
(Investments in and
advances to) repayment
from affiliated
companies, net......... 146,726 (3,869) (200,324) (13,766) (265,422)
Capital expenditures.... (106,647) (145,630) (281,678) (170,170) (650,628)
New acquisitions, net of
cash acquired.......... (46,473) (127,882) (210,039) (210,272) (3,810,987)
Release (deposit) to
acquire minority
interest in
subsidiary............. -- (47,000) 47,000 -- --
Sale of affiliated
companies.............. -- 11,070 39,737 -- 36,687
-------- --------- -------- -------- ----------
Net cash flows from
investing activities... (6,394) (402,340) (613,347) (381,253) (4,732,355)
-------- --------- -------- -------- ----------
Cash flows from
financing activities:
Proceeds from initial
public offering, net... -- -- -- -- 2,659,679
Proceeds from senior
notes.................. -- -- -- -- 3,150,092
Proceeds from exercise
of DIC option.......... -- -- -- -- 89,649
Proceeds from short-term
borrowings............. 302,959 260,560 29,390 -- 28,829
Proceeds from long-term
borrowings............. 23,113 1,141,539 529,630 337,969 1,347,542
Deferred financing
costs.................. -- (24,585) (10,023) (8,016) (118,843)
Repayments of long and
short-term borrowings.. (440,440) (587,929) (252,641) (215,447) (2,031,901)
(Repayments) borrowings
on note payable to
shareholder............ -- -- 176,078 161,925 (157,437)
Dividends paid to
minority shareholders.. (2,388) (171) (521) (521) --
Redemption of
convertible loans...... -- (170,371) -- -- --
Purchase shares from
shareholder............ -- (292,561) -- -- --
Repayments on short-term
note................... -- -- -- -- (36,358)
-------- --------- -------- -------- ----------
Net cash flows from
financing activities... (116,756) 326,482 471,913 275,910 4,931,252
-------- --------- -------- -------- ----------
Effect of exchange rates
on cash................ 366 (72) (2,139) (1,703) 218
-------- --------- -------- -------- ----------
Net increase (decrease)
in cash and cash
equivalents............ (80,254) 56,503 (70,573) (55,688) 109,579
Cash and cash
equivalents at
beginning of period.... 123,895 43,641 100,144 100,144 29,571
-------- --------- -------- -------- ----------
Cash and cash
equivalents at end of
period................. 43,641 100,144 29,571 44,456 139,150
======== ========= ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-9
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(Stated in thousands of Dutch guilders)
As a result of the UPC Acquisition in December 1997 (see Note 1), the purchase
method of accounting was used to record assets acquired and liabilities assumed
by the parent company. Such accounting generally results in increased
amortization and depreciation reported in future periods. Accordingly, the
accompanying financial statements of the Company are not comparable in certain
significant respects since these financial statements report financial
position, results of operations, and cash flows on two separate accounting
bases.
<TABLE>
<CAPTION>
For the Nine Months
For the Year Ended December Ended September 30,
-------------------------------------- -----------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ----------- -----------
(Pre- (Pre- (Post- (Post-Acquisition)
Acquisition) Acquisition) Acquisition) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Non-cash investing and financing activities:
Issuance of shares upon conversion of PIK notes............. -- 169,899 -- -- --
======= ======= ======== ======== ========
Contribution of net assets of Dutch cable systems to new
joint venture.............................................. -- -- 259,153 259,153 --
======= ======= ======== ======== ========
Purchase money notes payable to sellers..................... -- -- 36,720 36,720 --
======= ======= ======== ======== ========
Acquisition of interest in affiliate for United stock....... -- -- 9,935 -- --
======= ======= ======== ======== ========
Unrealized gain (loss) on investment........................ -- -- 42,397 (8,784) 310,759
======= ======= ======== ======== ========
Issuance of warrants........................................ -- -- -- -- 64,400
======= ======= ======== ======== ========
Stjarn Seller's Note........................................ -- -- -- -- 206,000
======= ======= ======== ======== ========
Supplemental cash flow disclosures:
Cash paid for interest...................................... (32,674) (80,810) (69,066) (60,766) (100,525)
======= ======= ======== ======== ========
Cash received for interest.................................. 2,757 5,077 6,990 3,539 21,458
======= ======= ======== ======== ========
Acquisition of Dutch cable assets:
Property, plant and equipment and other assets.............. -- -- (106,000) (106,000) --
Goodwill.................................................... -- -- (74,762) (74,762) --
------- ------- -------- -------- --------
Total cash paid............................................. -- -- (180,762) (180,762) --
======= ======= ======== ======== ========
Acquisition of Norway cable systems:
Working capital............................................. 2,221 3,790 -- -- --
Property, plant and equipment............................... (90,413) (23,541) -- -- --
Goodwill and other intangible assets........................ (71,509) (69,673) -- -- --
Other assets................................................ -- (57) -- -- --
Short-term debt............................................. 140,619 2,854 -- -- --
Other liabilities........................................... 10,271 1,557 -- -- --
------- ------- -------- -------- --------
Total cash paid............................................. (8,811) (85,070) -- -- --
======= ======= ======== ======== ========
Acquisition of remaining interest in UPC:
Property, plant and equipment............................... -- 18,271 -- -- --
Investments in and advances to affiliates................... -- 129,742 -- -- --
Goodwill.................................................... -- 366,745 -- -- --
------- ------- -------- -------- --------
Total allocation of purchase accounting Adjustments......... -- 514,758 -- -- --
======= ======= ======== ======== ========
Acquisition of 49% of United Telekabel Holding N.V.:
Property, plant and equipment............................... -- -- -- -- (409,526)
Investments in affiliated companies......................... -- -- -- -- (91,319)
Goodwill.................................................... -- -- -- -- (500,660)
Long-term liabilities....................................... -- -- -- -- 472,945
Net current liabilities..................................... -- -- -- -- 10,499
------- ------- -------- -------- --------
Total cash paid............................................. -- -- -- -- (518,061)
------- ------- -------- -------- --------
Cash acquired............................................... -- -- -- -- 26,576
------- ------- -------- -------- --------
-- -- -- -- (491,485)
- --------------------------------------------------
======= ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-10
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(Stated in thousands of Dutch guilders)
<TABLE>
<CAPTION>
For the Nine Months
For the Year Ended December Ended September 30,
-------------------------------------- -----------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ----------- -----------
(Pre- (Pre- (Post- (Post-Acquisition)
Acquisition) Acquisition) Acquisition) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Acquisition of 100% of
GelreVision:
Property, plant and
equipment............. -- -- -- -- (105,237)
Goodwill............... -- -- -- -- (143,423)
Long term liabilities.. -- -- -- -- 9,023
Net current
liabilities........... -- -- -- -- 5,712
------- ------- ------- ------- ----------
Total cash paid........ -- -- -- -- (233,925)
Cash acquired.......... -- -- -- -- 290
------- ------- ------- ------- ----------
-- -- -- -- (233,635)
======= ======= ======= ======= ==========
Acquisition of 100% of
SKT:
Property, plant and
equipment............. -- -- -- -- (42,003)
Goodwill............... -- -- -- -- (42,127)
Net current assets..... -- -- -- -- (6,520)
------- ------- ------- ------- ----------
Total cash paid........ -- -- -- -- (90,650)
Cash acquired.......... -- -- -- -- 2,449
------- ------- ------- ------- ----------
-- -- -- -- (88,201)
======= ======= ======= ======= ==========
Acquisition of 95.7% of
RCF:
Property, plant and
equipment............. -- -- -- -- (113,417)
Goodwill............... -- -- -- -- (13,633)
Net current assets..... -- -- -- -- (12,241)
Long-term liabilities.. -- -- -- -- 81,382
------- ------- ------- ------- ----------
Total cash paid........ -- -- -- -- (57,909)
Cash acquired.......... -- -- -- -- 69
------- ------- ------- ------- ----------
-- -- -- -- (57,840)
======= ======= ======= ======= ==========
Acquisition of 100% of
Stjarn:
Property, plant and
equipment ............ -- -- -- -- (88,933)
Goodwill............... -- -- -- -- (910,713)
Long-term liabilities.. -- -- -- -- 66,473
Net current liabili-
ties.................. -- -- -- -- 115,353
------- ------- ------- ------- ----------
Total purchase price... -- -- -- -- (817,820)
Seller's Note.......... -- -- -- -- 206,000
------- ------- ------- ------- ----------
Total cash paid........ -- -- -- -- (611,820)
Cash acquired.......... -- -- -- -- 7,811
------- ------- ------- ------- ----------
-- -- -- -- (604,009)
======= ======= ======= ======= ==========
Acquisition of 100% of
@Entertainment, Inc.:
Property, plant and
equipment ............ -- -- -- -- (402,165)
Goodwill............... -- -- -- -- (2,022,969)
Other assets........... -- -- -- -- (43,737)
Net current assets..... -- -- -- -- (105,040)
Long-term liabilities.. -- -- -- -- 919,561
------- ------- ------- ------- ----------
Total cash paid........ -- -- -- -- (1,654,350)
Cash acquired.......... -- -- -- -- 128,139
------- ------- ------- ------- ----------
-- -- -- -- (1,526,211)
======= ======= ======= ======= ==========
Acquisition of 50% of
A2000:
Property, plant and
equipment ............ -- -- -- -- (198,870)
Goodwill............... -- -- -- -- (565,183)
Net current liabili-
ties.................. -- -- -- -- 51,630
Long-term liabilities.. -- -- -- -- 267,632
------- ------- ------- ------- ----------
-- -- -- -- (444,786)
Receivables assumed.... -- -- -- -- (26,909)
------- ------- ------- ------- ----------
Total cash paid........ -- -- -- -- (471,700)
Cash acquired.......... -- -- -- -- 1,074
------- ------- ------- ------- ----------
-- -- -- -- (470,626)
======= ======= ======= ======= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997 (Pre-Acquisition),
AS OF DECEMBER 31, 1997 AND 1998 (Post-Acquisition),
FOR THE YEAR ENDED DECEMBER 31, 1998 (Post-Acquisition),
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (Unaudited) (Post-Acquisition),
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (Unaudited) (Post-
Acquisition)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
1. Organization and Nature of Operations
United Pan-Europe Communications N.V., formerly known as United and Philips
Communications B.V. ("UPC" or the "Company"), was formed for the purpose of
acquiring and developing multi-channel television and telecommunications
systems in Europe. On July 13, 1995, UnitedGlobalCom, Inc. ("United"),
(formerly known as United International Holdings, Inc.), a United States of
America corporation, and Philips Electronics N.V. ("Philips"), contributed
their respective ownership interests in European and Israeli multi-channel
television systems to UPC. Philips contributed to UPC its 95% interest in cable
television systems in Austria, its 100% interest in cable television systems in
Belgium, and its minority interests in multi-channel television systems in
Germany, The Netherlands (KTE) and France (Citecable). United contributed its
interests in multi-channel television systems in Israel, Ireland, the Czech
Republic, Malta, Norway, Hungary, Sweden and Spain. United also contributed
United States dollars ("$")78.2 million in cash (including accrued interest of
$3.2 million) to UPC and issued to Philips 3,169,151 shares of its Class A
Common Stock having a value of $50.0 million (at date of closing). In addition,
UPC issued to Philips $133.6 million of convertible subordinated pay-in-kind
notes (the "PIK Notes"). As a result of this transaction, United and Philips
each owned a 50% economic and voting interest in UPC.
On December 11, 1997, United acquired Philips' 50% interest in UPC (the
"UPC Acquisition"), thereby making it an effectively wholly-owned subsidiary of
United (subject to certain employee equity incentive compensation arrangements)
through its wholly-owned subsidiary UIH Europe, Inc. ("UIHE"). The entity's
name was changed to United Pan-Europe Communications N.V., and its legal seat
was transferred from Eindhoven to Amsterdam. Through its cable-based
communications networks in 10 countries in Europe and in Israel, UPC currently
offers cable television services and is further developing and upgrading its
network to provide digital video, voice and Internet/data services in its
Western European markets.
As part of the UPC Acquisition, (i) UPC purchased the 3,169,151 shares of
Class A Common Stock of United held by Philips (66,800), (ii) United purchased
169,899 of the accreted amount of UPC's PIK Notes and redeemed them for
15,180,261 shares of UPC, (iii) UPC repaid to Philips the remaining 170,371
accreted amount of the PIK Notes (339,800), (iv) United purchased 13,121,604
shares of UPC directly from Philips, and (v) UPC repurchased Philips' remaining
equity interest in UPC (24,378,396 shares). The UPC Acquisition was financed
with proceeds from a long-term revolving credit facility through UPC with a
syndicate of banks (305,200) (the "Senior Revolving Credit Facility"), a bridge
bank facility through a subsidiary of UPC $111,200 (224,000) (the "Bridge Bank
Facility") and a cash investment by United of 327,400. Approximately 479,000
drawn on the Senior Revolving Credit Facility was used to repay existing debt
of UPC in conjunction with the UPC Acquisition.
United acquisition of Philips' interest in UPC was accounted for as a step
acquisition under purchase accounting. As a result of UPC becoming effectively
wholly owned by United, such purchase accounting adjustments, along with
existing basis differences, were pushed down to the financial statements of UPC
and a new basis of accounting was established for the UPC net assets acquired
by United. As of December 11, 1997, the proportional net assets of UPC acquired
by United were recorded at fair market value based on the purchase price
F-12
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
paid by United, along with additional basis differences at the United level
existing as of that date. The total consideration paid to Philips for their 50%
interest in UPC, the resulting amount paid in excess of Philips' proportionate
share of UPC's net assets at that date plus United's existing basis in excess
of their proportionate share of UPC's net assets is summarized below. In
addition, the table below presents how such total excess was allocated to UPC's
underlying assets as of December 11, 1998.
<TABLE>
<S> <C>
UPC's net asset value at December 10, 1997........................ 56,853
Cash paid to Philips by UPC for 24,378,396 shares in UPC.......... (292,561)
Conversion by United of PIK notes acquired from Philips at cost to
15,180,261 of UPC's shares....................................... 169,899
--------
UPC's net asset value prior to application of push down
accounting....................................................... (65,809)
--------
United's proportionate share of UPC's net assets at December 10,
1997............................................................. 28,427
United's existing basis difference related to their original
interest in UPC dating back to July 1995 formation of UPC (as
adjusted through December 10, 1997).............................. 93,184
Cash paid to Philips by United for 13,121,604 shares in UPC....... 157,439
Conversion by United of PIK notes acquired from Philips at cost to
15,180,261 of UPC's shares....................................... 169,899
--------
448,494
--------
Total purchase accounting adjustment............................ 514,758
========
</TABLE>
The total purchase accounting adjustments were allocated to UPC's
underlying assets as follows:
<TABLE>
<S> <C>
Property, plant and equipment....................................... 18,271
Investment in and advances to affiliates............................ 129,742
Goodwill............................................................ 366,745
--------
Total............................................................. 514,758
========
</TABLE>
As a result of the UPC Acquisition and the associated push-down of United
basis on December 11, 1997, the consolidated balance sheets as of December 31,
1998 and 1997 as well as the consolidated statements of operations and cash
flows subsequent to December 31, 1998 are presented on a "post-acquisition"
basis. The primary difference in the consolidated statement of operations
presented on a "post-acquisition" basis compared to a "pre-acquisition" basis
consists of additional depreciation and amortization on the above purchase
accounting adjustments. The consolidated statements of operations and cash
flows for the year ended December 31, 1997 include the post-acquisition results
of the Company for the period from December 11, 1997 through December 31, 1997,
which reflects 1,980 of new basis depreciation and amortization resulting from
push-down accounting as well as approximately 4,034 of interest expense from
purchase related indebtedness. Due to immateriality, the entire fiscal year
ended December 31, 1997 is presented as "pre-acquisition" in the accompanying
consolidated statements of operations and cash flows.
F-13
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
The following pro forma consolidated operating results for the years ended
December 31, 1997 and 1996 give effect to the UPC Acquisition as if it had
occurred at the beginning of the periods presented. This pro forma consolidated
financial information does not purport to represent what the Company's results
of operations would actually have been if such transaction had in fact occurred
on such dates. he pro forma adjustments are based upon currently available
information and upon certain assumptions that management believes are
reasonable.
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1997 December 31, 1996
------------------------ ------------------------
Historical Pro Forma(1) Historical Pro Forma(1)
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
Service and other revenue... 337,255 337,255 245,179 245,179
Operating expense........... (118,508) (118,508) (82,439) (82,439)
Selling, general and
administrative expense..... (119,067) (119,067) (81,176) (81,176)
Depreciation and
amortization............... (132,888) (158,920) (79,832) (105,195)
---------- ---------- ---------- ----------
Net operating income
(loss)................... (33,208) (59,240) 1,732 (23,631)
Interest income............. 6,512 6,512 2,757 2,757
Interest expense............ (41,995) (83,221) (14,263) (55,465)
Interest expense, related
party...................... (28,743) -- (24,212) --
Provision for loss on
investment related costs... (18,888) (18,888) -- --
Foreign exchange loss and
other expense.............. (41,063) (32,622) (21,200) (16,906)
---------- ---------- ---------- ----------
Net loss before income
taxes and other items.... (157,385) (187,459) (55,186) (93,245)
Share in results of
affiliated companies, net.. (25,458) (33,627) (30,712) (39,361)
Minority interests in
subsidiaries............... 152 152 (2,208) (2,208)
Income tax benefit
(expense).................. 1,649 1,649 (509) (509)
---------- ---------- ---------- ----------
Net loss.................. (181,042) (219,285) (88,615) (135,323)
========== ========== ========== ==========
Basic and diluted net loss
per ordinary share......... (1.98) (2.64) (0.96) (1.63)
---------- ---------- ---------- ----------
Weighted-average number of
ordinary shares
outstanding................ 91,533,381 82,864,454 92,062,589 82,864,454
========== ========== ========== ==========
</TABLE>
- --------------------
(1) Includes additional depreciation and amortization related to the step-up
in basis in tangible assets, investments in and advances to affiliated
companies and new goodwill, interest expense from the Senior Revolving
Credit Facility and the Bridge Bank Facility, net of elimination of
historical interest expense on the PIK Notes and refinanced credit
facilities, and foreign exchange loss on the U.S. dollar-denominated
Bridge Bank Facility, net of elimination of historical foreign exchange
loss on the PIK Notes.
F-14
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
The following chart presents a summary of the Company's significant
investments in multi-channel television, programming and telephony operations
as of December 31, 1998:
UPC
<TABLE>
<S> <C>
Austria:
Telekabel Group ("Telekabel Group").................................... 95.0%
Belgium:
Radio Public N.V./S.A. ("TVD")......................................... 100.0%
Czech Republic:
KabelNet............................................................... 100.0%
Ceska Programova Spolecnost SRO ("TV Max")............................. 100.0%
France:
Mediareseaux Marne S.A. ("Mediareseaux")(1)............................ 99.6%
Hungary:
Telekabel Hungary ("Telekabel Hungary")................................ 79.3%
Telekabel Hungary Programming.......................................... 50.0%
Monor Communications Group, Inc. ("Monor")............................. 44.75%
Ireland:
Tara Television Limited ("Tara")....................................... 80.0%
Israel: (through UII)
Tevel Israel International Communications Ltd. ("Tevel")............... 46.6%
Malta: (through UII)
Melita Cable TV P.L.C. ("Melita")...................................... 50.0%
The Netherlands:
United Telekabel Holding N.V. ("UTH")(2)............................... 51.0%
Norway:
Janco Multicom ("Janco Multicom")...................................... 100.0%
Romania:
Multicanal Holdings.................................................... 100.0%
Control Cable Ventures................................................. 100.0%
Eurosat................................................................ 51.0%
Slovak Republic:
Trnavatel.............................................................. 75.0%
Kabeltel............................................................... 100.0%
</TABLE>
- --------------------
(1) The minority shareholder holds warrants giving it the right to purchase for
a nominal amount new shares corresponding to 4.6% of Mediareseaux's share
capital. Accordingly, we have a 95% economic interest in Mediareseaux.
(2) On August 6, 1998, UPC merged its Dutch cable television systems consisting
of its 50% interest in A2000 Holding N.V. ("A2000") and its wholly owned
subsidiary Cable Network Brabant Holding B.V. ("CNBH") with those of a
Dutch energy company ("NUON"), forming a new company, UTH. Following the
merger, UPC held 51% of UTH. In February 1999, UPC exercised its ability to
increase its interest to 100% (see Note 3).
F-15
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of the Company have been
prepared in accordance with United States generally accepted accounting
principles. The preparation of financial statements in conformity with United
States generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
In December 1998 and February 1999, UPC acquired telephony and programming
assets from United through the issuance of new shares (see Notes 3 and 16). As
the acquisition was between entities under common control, the transaction was
accounted for at historical cost, similar to pooling of interests accounting.
It is generally accepted that, consistent with a pooling-of-interests
accounting, prior period financial statements of the transferee are restated
for all periods in which the transferred operations were part of parent's
consolidated financial statements. Accordingly, we have restated all periods
presented as if UPC had acquired the telephony and programming assets from
United as of the date of United's initial investment.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
UPC and all subsidiaries where it exercises a controlling financial interest
through the ownership of a majority voting interest, except for UTH, from
inception through February 1, 1999 where because of certain minority
shareholder's rights the Company accounts for its investment in UTH using the
equity method of accounting. On February 17, 1999, UPC acquired the minority
shareholder's interest in UTH and began consolidating UTH effectively February
1, 1999. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash and investments with original
maturities of less than three months.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based upon the Company's assessment
of probable loss related to overdue accounts receivable. Upon disconnection of
the subscriber, the account is fully reserved. The allowance is maintained on
the books until receipt of payment, the account is deemed uncollectable or a
maximum of three years.
Restricted Cash
Cash held as collateral for letters of credit and other loans is classified
based on the expected expiration of such facilities.
Costs to be Reimbursed by Affiliated Companies
The Company incurs costs on behalf of affiliated companies, such as
salaries and benefits, travel and professional services. These costs are
reimbursed by the affiliated companies.
F-16
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
Marketable Equity Securities of Parent
The Company classifies its investments in marketable equity securities of
United as available-for-sale and reports such investments at fair market value.
Unrealized gains and losses are charged or credited to equity, realized gains
and losses and other than temporary declines in market value are included in
operations.
Investments in and Advances to Affiliated Companies, Accounted for under the
Equity Method
For those investments in companies in which the Company's ownership
interest is 20% to 50%, its investments are held through a combination of
voting common stock, preferred stock, debentures or convertible debt and/or the
Company exerts significant influence through board representation and
management authority, or in which majority control is deemed to be temporary,
the equity method of accounting is used. Under this method, the investment,
originally recorded at cost, is adjusted to recognize the Company's
proportionate share of net earnings or losses of the affiliates, limited to the
extent of the Company's investment in and advances to the affiliates, including
any debt guarantees or other contractual funding commitments. The Company's
proportionate share of net earnings or losses of affiliates includes the
amortization of the excess of its cost over its proportionate interest in each
affiliate's net tangible assets or the excess of its proportionate interest in
each affiliate's net tangible assets in excess of its cost.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Additions, replacements,
installation costs and major improvements are capitalized, and costs for normal
repair and maintenance of property, plant and equipment are charged to expense
as incurred. Assets constructed by subsidiaries of UPC incorporate overhead
expense and interest charges incurred during the period of construction;
investment subsidies are deducted. Depreciation is calculated using the
straight-line method over the economic life of the asset, taking into account
the residual value. The economic lives of property, plant and equipment at
acquisition are as follows:
<TABLE>
<S> <C>
Cable distribution networks................................... 7-20 years
Subscriber installation costs and converters.................. 5 years
MMDS distribution facilities.................................. 7-20 years
Office equipment, furniture and fixtures...................... 3-8 years
Buildings and leasehold improvements.......................... 20-33 years
Other......................................................... 3-10 years
</TABLE>
Goodwill and Other Intangible Assets
The excess of investments in consolidated subsidiaries over the net
tangible asset value at acquisition is amortized on a straight line basis over
15 years. Licenses in newly-acquired companies are recognized at the fair
market value of those licenses at the date of acquisition. Licenses in new
franchise areas include the capitalization of direct costs incurred in
obtaining the license. The license value is amortized on a straight-line basis
over the initial license period, up to a maximum of 20 years.
Recoverability of Tangible and Intangible Assets
The Company evaluates the carrying value of all tangible and intangible
assets whenever events or circumstances indicate the carrying value of assets
may exceed their recoverable amounts. An impairment
F-17
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
loss is recognized when the estimated future cash flows (undiscounted and
without interest) expected to result from the use of an asset are less than the
carrying amount of the asset. Measurement of an impairment loss is based on
fair value of the asset computed using discounted cash flows if the asset is
expected to be held and used. Measurement of an impairment loss for an asset
held for sale would be based on fair market value less estimated costs to sell.
Deferred Financing Costs
Costs to obtain debt financing are capitalized and amortized over the life
of the debt facility using the effective interest method.
Other Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"), which requires that an
enterprise (i) classify items of other comprehensive income by their nature in
a financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.
Revenue Recognition
Revenue is primarily derived from the sale of cable television services to
subscribers and is recognized in the period the related services are provided.
Initial installation fees are recognized as revenue in the period in which the
installation occurs, to the extent installation fees are equal to or less than
direct selling costs, which are expensed. To the extent installation fees
exceed direct selling costs, the excess fees are deferred and amortized over
the average contract period. All installation fees and related costs with
respect to reconnections and disconnections are recognized in the period in
which the reconnection or disconnection occurs because reconnection fees are
charged at a level equal to or less than related reconnection costs.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the Company's large number of customers and their dispersion across many
different countries in Europe.
Stock-Based Compensation
Stock-based compensation is recognized using the intrinsic value method for
the Company's stock option plans, which results in compensation expense for the
difference between the grant price and the fair market value at each new
measurement date.
Income Taxes
The Company accounts for income taxes under the asset and liability method
which requires recognition of deferred tax assets and liabilities for the
expected future income tax consequences of transactions which have been
included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and income tax basis of assets, liabilities and
loss carryforwards using enacted tax rates in effect for the year in which the
differences are expected to reverse. Net deferred tax assets are then reduced
by a valuation allowance if management believes it is more likely than not they
will not be realized. Withholding taxes are taken into consideration in
situations where the income of subsidiaries is to be paid out as dividends in
the near future. Such withholding taxes are generally charged to income in the
year in which the dividend income is generated.
F-18
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
Basic and Diluted Loss Per Share
The Company has adopted Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS 128"). "Basic loss per share" is determined by
dividing net loss available to ordinary shareholders by the weighted-average
number of ordinary shares outstanding during each period. "Diluted loss per
share" includes the effects of potentially issuable common stock, but only if
dilutive. Therefore, the Company's stock option plans and convertible
securities are excluded from the Company's diluted loss per share for all
periods presented because their effect would be anti-dilutive.
Foreign Operations and Foreign Exchange Rate Risk
The functional currency for the Company's foreign operations is the
applicable local currency for each affiliate company. Assets and liabilities of
foreign subsidiaries for which the functional currency is the local currency
are translated at exchange rates in effect at period-end, and the statements of
operations are translated at the average exchange rates during the period.
Exchange rate fluctuations on translating foreign currency financial statements
into Dutch guilders that result in unrealized gains or losses are referred to
as translation adjustments. Cumulative translation adjustments are recorded as
a separate component of shareholders' equity included in Other Comprehensive
Income (Loss).
Transactions denominated in currencies other than the local currency are
recorded based on exchange rates at the time such transactions arise.
Subsequent changes in exchange rates result in transaction gains and losses
which are reflected in income as unrealized (based on period-end translations)
or realized upon settlement of the transactions.
Cash flows from the Company's operations in foreign countries are
translated based on their functional currencies. As a result, amounts related
to assets and liabilities reported on the consolidated statements of cash flows
will not agree to changes in the corresponding balances on the consolidated
balance sheets. The effects of exchange rate changes on cash balances held in
foreign currencies are reported as a separate line below cash flows from
financing activities.
The Company and certain of its operating companies have notes payable and
notes receivable that are denominated in a currency other than their own
functional currency. In general, the Company and the operating companies do not
execute hedge transactions to reduce the Company's exposure to foreign currency
exchange rate risks. Accordingly, the Company may experience economic loss and
a negative impact on earnings and equity with respect to its holdings solely as
a result of foreign currency exchange rate fluctuations.
On January 1, 1999, eleven of the fifteen member countries of the European
Union fixed their conversion rates between their existing sovereign currencies
and the Euro, eliminating the foreign exchange rate fluctuation exposure of UPC
related to its operating subsidiaries in the eleven countries (includes UPC's
subsidiaries in The Netherlands, Austria, Belgium, France, Ireland and Spain).
UPC's investments in countries outside the eleven countries which have adopted
the Euro include Norway, Hungary, Israel and Malta.
F-19
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
New Accounting Principles
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which requires that a public
business enterprise report certain financial and descriptive information about
its reportable segments. The Company adopted SFAS 131 for the year ended
December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting For the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. SOP 98-1 identifies the characteristics of internal-use
software and provides examples to assist in determining when computer software
is for internal use. SOP 98-1 is effective for financial statements for fiscal
years beginning after December 15, 1998, for projects in progress and
prospectively, with earlier application encouraged. Management believes that
the adoption of SOP 98-1 will not have a material effect on the financial
statements.
The American Institute of Certified Public Accountants recently issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"), which is required to be adopted by affected companies for fiscal
years beginning after December 15, 1998. SOP 98-5 defines start-up and
organization costs, which must be expensed as incurred. In addition, all
deferred start-up and organization costs existing as of January 1, 1999 must be
written-off and accounted for as a cumulative effect of an accounting change.
The Company does not expect the adoption of SOP 98-5 to have a material effect
on its financial position or results of operations.
The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), which requires that companies
recognize all derivatives as either assets or liabilities in the balance sheet
at fair value. Under SFAS 133, accounting for changes in fair value of a
derivative depends on its intended use and designation. SFAS 133 is effective
for fiscal years beginning after June 15, 1999. The Company is currently
assessing the effect of this new standard.
In June 1999, the FASB approved Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities--
Deferral of the Effective Date of FASB Statement No. 133" ("SFAS 137"). SFAS
137 amends the effective date of SFAS 133. SFAS 133 will now be effective for
fiscal quarters of all fiscal years beginning after June 15, 2000. The Company
currently is assessing the effect of this new standard.
3. Acquisitions and Dispositions
Norkabel
In October 1996, the Company increased its ownership in Norkabelgruppen A/S
("Norkabel") from 8.3% to 100% for a purchase price of Norwegian kroner
("NKr")32.5 million (8,811). Details of the net assets acquired were as follows
(using the exchange rate as of December 31, 1996):
<TABLE>
<S> <C>
Working capital................................................. (2,221)
Property, plant and equipment................................... 90,413
Goodwill and other intangible assets............................ 71,509
Short-term debt................................................. (140,619)
Other liabilities............................................... (10,271)
--------
Total cash paid............................................... 8,811
========
</TABLE>
F-20
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
The following pro forma condensed consolidated operating results for the
period ended December 31, 1996 gives effect to the acquisition of Norkabel as
if it had occurred at the beginning of the period presented. This pro forma
condensed consolidated financial information does not purport to represent what
the Company's results of operations would actually have been if such
transaction 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>
For the Year Ended
December 31, 1996
----------------------
Historical Pro Forma
---------- ----------
<S> <C> <C>
Service and other revenue.......................... 245,179 288,749
========== ==========
Net loss........................................... (88,615) (121,097)
========== ==========
Basic and diluted net loss per ordinary share...... (0.96) (1.32)
========== ==========
Weighted-average number of ordinary shares
outstanding....................................... 92,062,589 92,062,589
========== ==========
</TABLE>
Janco Kabel-TV
In January 1997, UPC purchased a 70.2% interest in Janco Kabel-TV A/S
("Janco") for NKr313.8 million (85,070). Concurrent with the transaction, UPC
deposited 47,000 with a bank as collateral for an obligation to seller to
purchase the remaining 29.8% interest. Details of the net assets acquired at
70.2% were as follows (using the exchange rate as of December 31, 1996):
<TABLE>
<S> <C>
Working capital................................................... (3,790)
Property, plant and equipment..................................... 23,541
Goodwill and other intangible assets.............................. 69,673
Other assets...................................................... 57
Short-term debt................................................... (2,854)
Other liabilities................................................. (1,557)
------
Total cash paid................................................. 85,070
======
</TABLE>
In November 1997, UPC's wholly-owned subsidiary Norkabel merged with and
into UPC's 70.2%-owned subsidiary, Janco, to give UPC an 87.3% interest in the
new entity Janco Multicom. UPC received a call option and the minority
shareholder received a put option to acquire or respectively sell all the
remaining minority shareholders interest of Janco Multicom AS. In November
1998, UPC exercised its call option and acquired the remaining minority
shareholder interest in Janco Multicom AS for 37,200. The residual restricted
funds held with a bank as collateral were released.
F-21
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
The following pro forma condensed consolidated operating results for the
year ended December 31, 1996 gives effect to the acquisition of Janco as if it
had occurred at the beginning of 1996. This pro forma condensed consolidated
financial information does not purport to represent what the Company's results
of operations would actually have been if such transaction 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>
For the Year Ended
December 31, 1996
----------------------
Historical Pro Forma
---------- ----------
<S> <C> <C>
Service and other revenue.......................... 245,179 270,467
========== ==========
Net loss........................................... (88,615) (102,378)
========== ==========
Basic and diluted net loss per ordinary share...... (0.96) (1.11)
========== ==========
Weighted-average number of ordinary shares
outstanding....................................... 92,062,589 92,062,589
========== ==========
</TABLE>
Combivisie
Effective January 1, 1998, UPC acquired certain assets, including The
Netherlands cable systems of Stichting Combivisie Regio ("Combivisie"), for
180,762. The purchase was funded with a 60,000 draw on the Senior Revolving
Credit Facility and 120,762 of bank financing. Details of the net assets
acquired were as follows:
<TABLE>
<S> <C>
Property, plant and equipment and other assets.................... 106,000
Goodwill.......................................................... 74,762
-------
Total cash paid................................................. 180,762
=======
</TABLE>
The following pro forma condensed consolidated operating results for the
years ended December 31, 1997 and 1996 give effect to the acquisition of
Combivisie as if it had occurred at the beginning of the periods presented.
This pro forma condensed consolidated financial information does not purport to
represent what the Company's results of operations would actually have been if
such transaction 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>
For the Year Ended For the Year Ended
December 31, 1996 December 31, 1997
---------------------- ----------------------
Historical Pro Forma Historical Pro Forma
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Service and other revenue.. 245,179 272,322 337,255 366,227
========== ========== ========== ==========
Net loss................... (88,615) (90,919) (181,042) (182,330)
========== ========== ========== ==========
Basic and diluted net loss
per ordinary share........ (0.96) (0.99) (1.98) (1.99)
========== ========== ========== ==========
Weighted-average number of
ordinary shares
outstanding............... 92,062,589 92,062,589 91,533,381 91,533,381
========== ========== ========== ==========
</TABLE>
F-22
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
Telekabel Hungary
On June 29, 1998, UPC acquired Time Warner Entertainment Company's ("TWE")
interest in its Hungarian multi-channel television system assets for $9,500
(19,380) in cash and a non-interest bearing promissory note in the amount of
$18,000 (36,720) (the "Time Warner Note"). UPC and TWE retained their
respective percentage interests in the programming assets in Hungary. UPC has
granted TWE an option to acquire UPC's interest in such programming assets as
well as TV Max in consideration for the cancellation of the Time Warner Note.
On June 30, 1998, UPC merged its 100%-owned Hungarian multi-channel television
systems ("Kabelkom") with Hungary's second largest multiple system operator to
form the new joint venture Telekabel Hungary. UPC retains a 79.25% ownership
interest in the new entity. In March 1999, Time Warner exercised their option
to acquire UPC's interest in the programming assets and TV Max (See Note 16.)
A2000
In July 1995, prior to the formation of UPC, Philips Media and US WEST
formed a 50/50 joint venture ("A2000") for the purpose of acquiring certain
cable television distribution networks in the Amsterdam, Netherlands area. In
connection with this transaction Philips and US WEST borrowed NLG680 million on
a bridge loan basis from a bank. Such funds were used to (i) purchase from
certain municipalities licenses totaling NLG360 million (ii) make initial
capital contributions to A2000 totaling NLG90 million and (iii) fund
intercompany loans to A2000 totaling NLG230 million. Upon UPC's formation,
Philips Media assigned its ownership interest in licenses and its investment
and advances in A2000 to UPC. The following table reflects the amounts recorded
on UPC's books as a result of this transaction:
<TABLE>
<S> <C>
Licenses........................................................ 180,000
Investment and advances......................................... 160,000
Debt............................................................ (340,000)
</TABLE>
Subsequently, UPC and US WEST contributed approximately NLG45 million each
to a subsidiary of A2000 in order to increase its statutory equity for
financing purposes. During January 1996, A2000 obtained long-term financing of
NLG320 million and on behalf of UPC and US WEST reduced the bridge loan. UPC
and US WEST repaid the remaining portion of the bridge loan (totaling NLG360
million) through equal contributions of NLG180 million. UPC accounted for its
50% ownership interest in A2000 (until it was contributed into UTH) as an
equity method investment.
UTH
On August 6, 1998, UPC merged its Dutch cable television systems with those
of NUON, forming a new company, UTH (the "UTH Transaction"), which was
accounted for as the formation of a joint venture with NUON's and UPC's net
assets recorded at their historical carrying values. Following the merger, UPC
holds 51% of UTH. The agreement provides UPC with a call option exercisable
after August 6, 1999 to acquire 50% of NUON's 49% ownership interest in UTH. If
UPC exercises the call option, NUON can exercise the secondary put option,
requiring UPC to purchase its remaining interest in UTH. The agreement provides
NUON with a put option exercisable after August 6, 1999 to require UPC to
purchase 50% of NUON's 49% interest in UTH. If NUON exercises the put option,
UPC can exercise the secondary call option, requiring NUON to sell its
remaining interest in UTH to UPC. The UTH shareholder agreement provides for
essentially joint governance by NUON and UPC on almost all significant
participating and protective type rights until either the call or put option is
exercised. Although UPC retains a majority economic and voting interest in UTH,
because of joint governance on most significant operating decisions, UPC
accounts for its investment in UTH using the equity method of accounting.
F-23
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
On February 17, 1999, the Company acquired the remaining 49% of UTH from
NUON (the "NUON Transaction") for NLG518.1 million. In addition, UPC repaid
NUON and assumed from NUON a NLG33.3 million subordinated loan, including
accrued interest, dated December 31, 1998, owed by UTH to NUON. The purchase of
NUON's interest and payment of the loan were funded with proceeds from UPC's
initial public offering (see note 17).
Effectively February 1, 1999, UPC began consolidating its investment in
UTH. Details of the net assets acquired, based on preliminary purchase price
allocations using information currently available were as follows:
<TABLE>
<S> <C>
Property, plant and equipment................................... 349,306
Investments in affiliated companies............................. 91,319
Goodwill........................................................ 560,880
Long-term liabilities........................................... (472,945)
Net current liabilities......................................... (10,499)
--------
Total cash paid............................................... 518,061
========
</TABLE>
The following pro forma condensed consolidated operating results for the
years ended December 31, 1997 and 1998 and the nine months ended September 30,
1998 and 1999 give effect to the UTH Transaction and the NUON Transaction as if
they both had occurred at the beginning of the periods presented. This pro
forma condensed consolidated 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>
For the Nine For the Nine
For the Year Ended For the Year Ended Months Ended Months Ended
December 31, 1997 December 31, 1998 September 30, 1998 September 30, 1999
---------------------- ---------------------- ------------------------ ------------------------
Historical Pro Forma Historical Pro Forma Historical Pro Forma Historical Pro Forma
---------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service and other
revenue................ 337,255 474,488 408,970 595,011 306,215 429,632 608,558 620,959
========== ========== ========== ========== ========== =========== =========== ===========
Net loss................ (181,042) (210,417) (563,221) (616,491) (179,706) (214,123) (676,738) (685,481)
========== ========== ========== ========== ========== =========== =========== ===========
Weighted-average number
of ordinary shares
outstanding............ 91,533,381 91,533,381 82,869,342 82,869,342 82,864,454 127,464,454 120,586,863 129,176,492
========== ========== ========== ========== ========== =========== =========== ===========
Basic and diluted net
loss per ordinary
share.................. (1.98) (2.30) (6.80) (7.44) (2.17) (1.68) (5.61) (5.31)
========== ========== ========== ========== ========== =========== =========== ===========
</TABLE>
UII
In November 1998, the Company (i) acquired from TINTA its indirect 23.3%
and 25% interests in the Tevel and Melita systems for $91.5 million, doubling
the Company's respective ownership in these systems to 46.6% and 50%,
respectively, (ii) purchased an additional 5% interest in Princes Holdings and
5% of Tara in consideration for 384,531 shares of United held by UPC, and (iii)
sold the 5% interest in Princes Holdings, together with its existing 20%
interest, to TINTA for $20.5 million. The net payment of $71.0 million to TINTA
($68.0 million after closing adjustments) was funded with the proceeds of a
$90.0 million promissory note made by a subsidiary of the Company to its
primary partners in the Tevel system. (see Note 9--DIC Loan).
F-24
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
Purchase of Certain Telephony and Programming Assets from United
In December 1998, in exchange for 6,330,340 newly-issued ordinary shares of
UPC, United sold to us their:
. 44.75% economic interest in Monor, a traditional telephony and cable
television system in the Monor region of Hungary;
. 75% interest in Tara, a company providing Irish programming to the U.K.
markets.
Accordingly, because this was an exchange between entities under common
control, we have restated our financial statements for all periods in which
the operations of these companies were part of United's consolidated financial
statements (see Note 2 and Note 16).
Other
The assets of Intercabo, Portugal were sold in January 1998 for 4,000.
During 1997, the Company made a strategic decision to sell its interest in
Intercabo due to competitive factors which had recently emerged in Portugal.
After several offers to purchase Intercabo were received by the Company during
1997, it became apparent that the Company's investment in Intercabo had become
permanently impaired based on its decision to sell its investment.
Accordingly, an impairment loss of 18,888 was recognized during 1997, which
included the writedown of our investment, net of expected proceeds, of 13,436
and the writeoff of intercompany receivables of 5,452.
The operating results of Intercabo included in the Company's 1997
consolidated results included revenue of 549, a net operating loss of 4,945
and a net loss of 5,227.
F-25
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
4. Investments in and Advances to Affiliated Companies, Accounted for Under the
Equity Method
<TABLE>
<CAPTION>
As of September 30, 1999 (Unaudited)
------------------------------------------------------------------------
Investments in Cumulative Cumulative Cumulative
and Advances to Dividends Share in Results of Translation
Affiliated Companies Received Affiliated Companies Adjustments Total
-------------------- ---------- -------------------- ----------- -------
<S> <C> <C> <C> <C> <C>
Tevel(2) ............... 197,644 (12,121) (10,814) 2,631 177,340
Melita(2) .............. 27,984 -- (195) 778 28,567
Monor................... 9,890 -- (2,851) (14,910) (7,871)
Xtra Music.............. 20,097 -- (4,781) 389 15.705
IPS..................... 26,694 -- 2,263 3,231 32,188
SBS..................... 208,921 -- (7,784) 2,539 203,676
Fox Kids Poland......... 15,474 -- -- -- 15,474
Twoj Styi............... 21,288 -- -- 1,002 22,290
Other, net.............. 12,895 -- (263) 157 12,789
------- ------- ------- ------- -------
Total................. 540,887 (12,121) (24,425) (4,183) 500,158
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998
------------------------------------------------------------------------
Investments in Cumulative Cumulative Cumulative
and Advances to Dividends Share in Results of Translation
Affiliated Companies Received Affiliated Companies Adjustments Total
-------------------- ---------- -------------------- ----------- -------
<S> <C> <C> <C> <C> <C>
UTH(4).................. 272,508 -- (22,780) -- 249,728
Tevel(2)................ 191,716 (12,121) (777) (9,562) 169,256
Melita(2)............... 28,018 -- 1,985 (141) 29,862
Telekabel Hungary
Programming(3)......... 24,404 -- (7,723) (787) 15,894
Monor................... 21,358 -- (4,916) (14,835) 1,607
Xtra Music.............. 10,598 -- (1,067) -- 9,531
IPS..................... 10,419 -- (337) 2,514 12,596
Other, net.............. 4,568 -- 9 -- 4,577
------- ------- ------- ------- -------
Total................. 563,589 (12,121) (35,606) (22,811) 493,051
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1997
----------------------------------------------------------------
Investments in Cumulative Cumulative
and Advances to Share in Results of Translation
Affiliated Companies Affiliated Companies(1) Adjustment Total
-------------------- ----------------------- ----------- -------
<S> <C> <C> <C> <C>
A2000......... 220,933 (571) -- 220,362
UII(2)........ 103,029 (64) -- 102,965
Kabelkom...... 57,783 247 -- 58,030
Monor......... 21,358 (535) (5,426) 15,397
IPS........... 10,100 -- 3,212 13,312
Other, net.... 3,583 -- -- 3,583
------- ---- ------ -------
Total....... 416,786 (923) (2,214) 413,649
======= ==== ====== =======
</TABLE>
F-26
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
The Company had the following differences related to the excess of cost
over the net tangible assets acquired for its equity investments. Such
differences are being amortized over 15 years:
<TABLE>
<CAPTION>
As of December 31, 1997 As of December 31, 1998
-------------------------- -----------------------
Basis Accumulated Basis Accumulated
Difference Amortization(1) Difference Amortization
---------- --------------- ---------- ------------
<S> <C> <C> <C> <C>
A2000...................... 231,041 -- -- --
UTH........................ -- -- 2,781 (62)
Tevel(2)................... -- -- 152,417 (6,334)
Melita(2).................. -- -- 24,377 (852)
UII(2)..................... 64,618 -- -- --
Kabelkom................... 38,161 -- -- --
Telekabel Hungary
Programming(3)............ -- -- 14,419 (570)
Monor...................... 5,480 -- 1,672 (131)
Xtra Music................. -- -- 6,776 (138)
------- --- ------- ------
Total.................... 339,300 -- 202,442 (8,087)
======= === ======= ======
</TABLE>
- --------------------
(1) In connection with the UPC Acquisition, certain purchase accounting
adjustments were pushed down to the financial statements of UPC, a new
basis of accounting was established on December 11, 1997, and cumulative
share in results of affiliated companies and accumulated amortization was
reset to zero as of that date (see Note 1).
(2) In November 1998 the Company acquired from TINTA its interests in Tevel and
Melita, and sold its interest in Princes Holdings (see Note 3).
(3) Represents the Company's remaining investment in Telekabel Hungary
Programming after the transaction with TWE (see Note 3).
(4) In February 1999, the Company acquired the remaining 49% of UTH and began
consolidating UTH as of February 1, 1999 (see Note 3 and 17).
Summary financial information for Tevel is as follows:
<TABLE>
<CAPTION>
As of As of
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Cash............................................... 117 60
Tangible fixed assets.............................. 133,009 118,451
Other assets....................................... 35,895 447,057
------- -------
Total assets..................................... 169,021 565,568
======= =======
Current liabilities................................ 45,569 42,174
Notes payable...................................... 11,829 20,404
Long-term debt..................................... 9,794 426,604
Other long-term liabilities........................ 27,884 26,659
Shareholders' value................................ 73,945 49,727
------- -------
Total liabilities and shareholders' value........ 169,021 565,568
======= =======
</TABLE>
F-27
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
<TABLE>
<CAPTION>
For the Years
Ended December 31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Revenue......................................... 154,647 187,099 203,662
Costs........................................... (79,221) (91,499) (80,418)
Depreciation and amortization................... (26,839) (30,867) (47,977)
------- ------- -------
Net operating income.......................... 48,587 64,733 75,267
Financial charges, including interest expense
from related
Parties, and foreign exchange results......... (11,437) (7,948) (64,589)
Net loss before income taxes and other items.. 4,671 (5,745) 16,345
Share in results of affiliated companies........ 2,342 51 (12,414)
------- ------- -------
Net income.................................... 44,163 51,091 14,609
======= ======= =======
</TABLE>
Summary financial information for A2000 is as follows:
<TABLE>
<CAPTION>
As of As of
December 31, July 31,
1997 1998(1)
------------ --------
<S> <C> <C>
Liquid assets......................................... 6,868 2,336
Other current assets.................................. 35,557 53,177
Financial fixed assets................................ 543 634
Tangible fixed assets................................. 309,291 341,186
Intangible fixed assets............................... 122,189 117,797
------- -------
Total assets........................................ 474,448 515,130
======= =======
Current liabilities................................... 67,652 88,372
Provisions............................................ 2,154 1,508
Long-term debt........................................ 426,000 479,000
Shareholders' value................................... (21,358) (53,750)
------- -------
Total liabilities and shareholders' value........... 474,448 515,130
======= =======
</TABLE>
<TABLE>
<CAPTION>
For the For the
Years Ended Seven Months
December 31, Ended
---------------- July 31,
1996 1997 1998(1)
------- ------- ------------
<S> <C> <C> <C>
Revenue....................................... 89,893 101,450 69,668
Costs......................................... (49,064) (67,687) (52,329)
Depreciation and amortization................. (43,789) (50,846) (36,114)
------- ------- -------
Net operating loss.......................... (2,960) (17,083) (18,775)
Financial charges and other................... (12,745) (16,751) (13,617)
Income tax (provision) benefit................ (224) 9,826 --
------- ------- -------
Net loss.................................... (15,929) (24,008) (32,392)
======= ======= =======
</TABLE>
- --------------------
(1) Effective August 6, 1998, A2000 was contributed to UTH as part of the UTH
Transaction.
F-28
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
Summary financial information for UTH is as follows:
<TABLE>
<CAPTION>
For the
One Month
Ended
January 31,
1999
-----------
(unaudited)
<S> <C>
Revenue....................................................... 19,844
Costs......................................................... (12,629)
Depreciation and amortization................................. (8,246)
-------
Net operating loss.......................................... (1,031)
Share in result of affiliated companies....................... (5,022)
Financial charges and other................................... (4,768)
Income tax (provision) benefit................................ 242
-------
Net loss.................................................... (10,579)
=======
</TABLE>
5. Marketable Equity Securities of Parent
As a result of the UPC Acquisition, a subsidiary of UPC acquired 3,169,151
shares of United's Class A Common shares, valued at fair market value of 66,809
as of December 11, 1997. In November 1998, UPC used 384,531 shares to acquire
an additional 5% interest in each of Tara and PHL. Accordingly, unrealized
gains recorded in equity totaling approximately 1,826, were reversed out of
equity and recorded as a realized gain in the consolidated statement of
operations. As of December 31, 1998, the fair value of the remaining 2,784,620
shares was 101,097, resulting in an unrealized gain of 42,397 for the year
ended December 31, 1998. These shares are pledged under the Bridge Bank
Facility (see Note 9). As of December 31, 1998, the fair market value of the
shares was 101,097 (unaudited), resulting in an unrealized gain of 311,761
(unaudited) for the nine months ended September 30, 1999.
6. Property, Plant and Equipment
<TABLE>
<CAPTION>
As of December
31, As of
---------------- September 30,
1997(1) 1998 1999
------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Cable distribution networks................ 364,655 466,087 3,103,670
Subscriber premises equipment and
converters................................ 81,301 134,527 287,170
MMDS distribution facilities............... 12,958 13,873 16,234
Office equipment, furniture and fixtures... 13,074 35,294 83,196
Buildings and leasehold improvements....... 3,713 12,754 69,939
DTH........................................ -- -- 109,004
Other...................................... 16,593 28,170 128,440
------- ------- ---------
492,294 690,705 3,797,653
Accumulated depreciation................. (7,312) (87,708) (285,340)
------- ------- ---------
Net property, plant and equipment........ 484,982 602,997 3,512,313
======= ======= =========
</TABLE>
- --------------------
(1) In connection with the UPC Acquisition, certain purchase accounting
adjustments were pushed down to the financial statements of UPC, a new
basis of accounting was established on December 11, 1997, and accumulated
depreciation was reset to zero as of that date (see Note 1).
F-29
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
7. Goodwill and Other Intangible Assets
<TABLE>
<CAPTION>
As of December 31, As of
-------------------- September 30,
1997(1) 1998 1999
---------- --------- -------------
(unaudited)
<S> <C> <C> <C>
@Entertainment......................... -- -- 1,950,320
UTH.................................... -- -- 1,661,966
Stjarn................................. -- -- 917,612
Telekabel Group........................ 389,513 389,513 389,382
Mediareseaux........................... -- -- 226,743
Janco Multicom......................... 152,226 165,494 179,149
CNBH(2)................................ 80,491 -- --
Telekabel Hungary...................... -- 97,429 108,399
TVD.................................... 42,223 42,189 45,457
UPC.................................... -- -- 64,400
UPC Slovensko sr.o..................... -- -- 44,382
Other.................................. 27,309 24,516 21,570
--------- --------- ---------
691,762 719,141 5,609,380
Accumulated amortization............. (1,716) (39,109) (163,134)
--------- --------- ---------
Net goodwill and other intangible
assets.............................. 690,046 680,032 5,446,246
========= ========= =========
</TABLE>
- --------------------
(1) In connection with the UPC Acquisition, certain purchase accounting
adjustments were pushed down to the financial statements of UPC, a new
basis of accounting was established on December 11, 1997, and accumulated
amortization was reset to zero as of that date (see Note 1).
(2) Effective August 6, 1998, CNBH was contributed to UTH as part of the UTH
Transaction.
8. Short-Term Debt
Time Warner Note
Short-term debt as of December 31, 1998 includes the $18.0 million (34,020)
non-interest bearing Time Warner Note. In December 1998, Time Warner extended
the maturity date of its note for a period of 90 days to the earlier of June
30, 1999 or 90 days after written notice from Time Warner. Subsequent to
December 31, 1998, the Time Warner Note was cancelled as Time Warner exercised
its option to acquire our 50% interest in HBO Hungary and 100% interest in TV
Max (see Note 16).
Telekabel Hungary Facility
In October 1998, Telekabel Hungary entered into a DM65.6 million (NLG74.0
million) six-month secured bridge facility. Availability under this facility
depends on certain financial covenants. The DM49.2 million (NLG55.5 million)
international tranche of the facility and half of the DM16.4 million (NLG18.5
million) local tranche bear interest at LIBOR plus 2.5% per annum plus an
additional cost of funding calculation. The remaining half of the local tranche
must be drawn in Hungarian forints and bears interest at Budapest interbank
offered rates for Hungarian forints, plus 2.5% per annum plus an additional
cost of funding calculation. Telekabel Hungary is using the facility, among
other things, to finance capital expenditures and to acquire minority shares in
our Kabelkom systems. We have pledged our indirect 79.25% interest in Telekabel
Hungary to secure the facility. The facility also is secured by a pledge over
certain assets of the Telekabel Hungary group and a negative pledge. Telekabel
Hungary is currently negotiating a long-term facility with the lenders to
replace this bridge facility. As of December 31, 1998, the amount outstanding
under this facility totaled DM26.0 million (NLG29.3 million). Subsequent to
December 31, 1998, a subsidiary of UPC repaid the balance at the Telekabel
Hungary Facility (unaudited).
F-30
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
9. Long-Term Debt
<TABLE>
<CAPTION>
As of December 31, As of
-------------------- September 30,
1997 1998 1999
--------- --------- -------------
(unaudited)
<S> <C> <C> <C>
UPC Euro Senior Notes due 2009 (see
note 17).............................. -- -- 1,663,177
UPC Euro Senor Notes due 2009 (see note
17)................................... -- -- 661,113
UPC USD Senior Discount Notes due 2009
(see note 17)......................... -- -- 847,085
UPC Senior Credit Facility (see note
17)................................... -- -- 618,298
UPC Senior Revolving Credit Facility... 883,948 968,018 --
PCI Notes (see note 17)................ -- -- 271,812
@Entertainment 1998 Senior Discount
Notes (see note 17)................... -- -- 283,912
@Entertainment 1999 Senior Discount
Notes (see note 17)................... -- -- 318,919
@Entertainment 1999 Series C Senior
Discount Notes (see note 17).......... -- -- 23,490
New Telekabel Facility................. -- -- 562,571
CNBH Facility.......................... -- -- 252,221
A2000 Facilities....................... -- -- 458,000
UPC Bridge Bank Facility............... 252,500 113,519 --
Mediareseaux Facility.................. -- 40,344 86,195
RCF Facility (see note 17)............. -- -- 81,382
Rhone Vision Cable Credit Facility (see
note 17).............................. -- -- 100,785
Videopole Facility..................... -- -- 8,156
Bank and other loans................... 85,471 166,387 182,327
--------- --------- ---------
1,221,919 1,288,268 6,419,443
Less current portion................. (255,819) (113,519) (12,430)
--------- --------- ---------
Total................................ 966,100 1,174,749 6,407,013
========= ========= =========
</TABLE>
Senior Revolving Credit Facility
In October 1997, UPC and Norkabel as borrowers entered into a 1,100,000
multi-currency revolving credit facility with a syndicate of banks. Norkabel
was succeeded as a borrower by Janco Multicom after the merger of Janco and
Norkabel. In December 1997, Telekabel Wien and the other members of the
Telekabel Group also became borrowers under the Senior Revolving Credit
Facility. Although not a borrower, TVD is a guarantor under the Senior
Revolving Credit Facility. As of December 31, 1998, the amount outstanding
under the Senior Revolving Credit Facility for UPC, Telekabel Wien and Janco
Multicom was NLG620.0 million, NLG213.5 million and NLG134.5 million,
respectively. Amounts advanced under the Senior Revolving Credit Facility bear
interest at the London interbank offered rate ("LIBOR") plus a margin ranging
from 0.5% to 2.0% per annum. The aggregate amount available for borrowing under
the facility is reduced automatically by 5.0% per quarter beginning December
31, 2001. The borrowings of the Company and its subsidiaries in Austria,
Belgium and Norway are limited by financial covenants under the Senior
Revolving Credit Facility. The principal amount of all borrowings by the
Company and such subsidiaries may not exceed certain multiples of total
annualized net operating cash flow for the Company and such subsidiaries. In
addition, the principal amount of all borrowings of the Company and such
subsidiaries may not exceed certain multiples of their cable television net
operating cash flow. The Senior Revolving Credit Facility generally prohibits
dividends and other distributions to shareholders of the Company unless, among
other things, the Company achieves for at least two consecutive quarters
certain financial ratios. The Senior
F-31
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
Revolving Credit Facility also includes financial covenants relating to
interest and debt service coverage and application of proceeds from asset sales
and securities offerings. Borrowings by UPC and certain of its subsidiaries in
Austria, Belgium and Norway, under the Senior Revolving Credit Facility
together with borrowings under the Bridge Bank Facility may not exceed
1,300,000 before September 30, 2001. The Senior Revolving Credit Facility also
generally limits to 80,000 UPC's investments in, loans to and guarantees for,
certain of the Company's subsidiaries and downstream affiliates that are not
borrowers or guarantors under the Senior Revolving Credit Facility. Subsequent
to December 31, 1998, we agreed with our lenders under this facility to reduce
this facility amount from NLG1.1 billion to NLG1.0 billion in February 1999.
This amount will be further reduced by 5% each quarter beginning December 31,
2001 until final maturity. Subsequent to December 31, 1998 we repaid NLG620.0
million, excluding interest, of the amount outstanding by us under this
facility with the proceeds of the offering, which we plan subsequently to
reborrow under this facility (see Note 16).
Bridge Bank Facility
In connection with the UPC Acquisition, the Company entered into the
consolidated $125.0 million term Bridge Bank Facility with a syndicate of
banks. The Bridge Bank Facility is a one year bridge originally due December 5,
1998 and bears interest at LIBOR plus a margin ranging from 4.5% to 6.0% per
annum. In November 1998, the lenders granted an extension of the maturity date
to June 5, 1999. The Bridge Bank Facility generally prohibits dividends and
distributions and is secured by various upstream guarantees from, negative
pledges over and, in some cases, share pledges of, certain share holdings or
partnership interests of UPC in operating systems in The Netherlands, France,
Israel and Malta, as well as a first lien over approximately 2,784,620 shares
of UIH's Class A Common Stock which UPC acquired from Philips as part of the
UPC Acquisition. The Bridge Bank Facility prohibits all of the companies whose
interests are pledged from incurring additional indebtedness, subject to
certain exceptions. The Company must apply proceeds from disposals, if any, of
certain share holdings and partnership interests to prepayment of the facility,
which restricts the manner and terms on which the Company may dispose of these
assets. The Company must maintain on deposit with the bank a compensating
balance, restricted for payment of interest, until the facility matures. The
balance in this interest reserve account, including proceeds from the sale of
PHL, was 30,263 as of December 31, 1998. UPC repaid $64.9 million of the Bridge
Bank Facility during the year ended December 31, 1998 resulting in an
outstanding amount of $60.1 million (113,519) as of December 31, 1998.
Subsequent to December 31, 1998, we repaid the Bridge Bank Facility with
proceeds from the offering (see Note 16).
Mediareseaux Facility
In July 1998, Mediareseaux entered into an 9.5 year term facility with a
bank for an amount of French francs ("FRF")680 million ("Mediareseaux
Facility"). The purpose of the facility is to finance on-going capital
expenditures, working capital and acquisitions with a limit of FRF120 million.
The Mediareseaux Facility bears interest at LIBOR plus a margin ranging from
0.75% to 2.0%. The availability of the facility depends on revenue generated
and debt to equity ratios. The availability period ends at December 31, 2002.
The repayment period starts from January 1, 2003 to final maturity in 2007.
During the repayment period, Mediareseaux must apply 50% of its excess cash
flow in prepaying the facility. The Mediareseaux Facility generally restricts
the payment of dividends and distributions. This facility also restricts
Mediareseaux from incurring additional indebtedness, subject to certain
exceptions. In July 1998, Mediareseaux secured a 9.5 year FRF20.0 million
overdraft facility, subject to the same terms and conditions as the
Mediareseaux Facility except that the availability tests are not applicable. As
of December 31, 1998 an amount of FRF120 million (40,344) was outstanding under
the Mediareseaux Facility.
DIC Loan
In November 1998, a subsidiary of Discount Investment Corporation ("DIC")
loaned the Company a total of $90.0 million (the "DIC Loan") to acquire the
additional interests in Tevel and Melita. The DIC Loan matures in
F-32
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
November 2000 and is secured by the Company's pledge of its ownership interest
in Tevel. The DIC Loan bears interest at 8% and is payable, together with 106%
of the principal amount, on maturity. The DIC Loan may be repaid on quarterly
prepayment dates with three months' prior notice by the Company. In connection
with the DIC Loan, UPC granted to an affiliate of DIC an option to acquire a
total of $90.0 million, plus accrued interest, of ordinary shares of UPC at a
price equal to 90% of the initial public offering price. The exercise price of
this option, which expires upon the initial public offering, is payable in cash
or delivery of the DIC Loan promissory notes. UPC allocated the $90 million in
loan proceeds between the debt instrument and the equity option element on the
basis of relative fair values. Accordingly, the effective interest rate on the
debt instrument exceeds the stated rate as set forth above. Subsequent to
December 31, 1998, the option agreement was amended, resulting in a grant of
two options of $45 million each. DIC exercised its option for $45.0 million
(see Note 16).
Debt Maturities
The maturities of the Company's long-term debt are as follows:
<TABLE>
<S> <C>
12 months ended December 31, 1999.................................. 113,519
12 months ended December 31, 2000.................................. 160,152
12 months ended December 31, 2001.................................. --
12 months ended December 31, 2002.................................. 88,018
12 months ended December 31, 2003.................................. 224,034
Thereafter......................................................... 702,545
---------
Total............................................................ 1,288,268
=========
</TABLE>
Fair Value of Financial Instruments
Fair value is based on market prices for the same or similar issues.
Carrying value is used when a market price is unavailable.
<TABLE>
<CAPTION>
Fair
Book Value Market Value
---------- ------------
<S> <C> <C>
As of December 31, 1998:
Senior Revolving Credit Facility................... 968,018 968,018
Bridge Bank Facility............................... 113,519 113,519
Mediareseaux Facility.............................. 40,344 40,344
Bank and other loans............................... 166,387 166,387
Note payable to United(1).......................... 163,425 163,425
Time Warner Note................................... 34,020 34,020
Telekabel Hungary Facility......................... 29,297 29,297
--------- ---------
Total............................................ 1,515,010 1,515,010
========= =========
</TABLE>
- --------------------
(1) See Note 15 for terms of the note payable to United.
10. Shareholders' Equity
In February 1999, the Company's shareholders approved an amendment and
restatement of the Company's Articles of Association to effect a 3 for 2 stock
split and an increase in the number of authorized ordinary shares to
200,000,000, which was legally effected before the Company's planned initial
public offering. Therefore, all share and per share amounts in the accompanying
consolidated financial statements and notes thereto have been retroactively
restated to reflect this event.
F-33
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
The Company's shareholders also approved the issuance of 100 priority
shares, which have special approval and other rights, to United.
In addition, the Company's Articles of Association were amended and
restated to provide for the issuance of 49,999,900 Class A preference shares
and 200,000,000 Class B preference shares.
General
The equity classifications and amounts as stated in these consolidated
financial statements do not necessarily reflect the statutory equity of the
Company, as the statutory equity is subject to Dutch generally accepted
accounting principles. The statutory equity is the basis for any distributions
to shareholders. As of December 31, 1998, the Company is unable to make
dividend distributions to shareholders because of its accumulated deficit.
United Indenture
As a subsidiary of United, the Company's activities are restricted by the
covenants in United's indenture dated February 5, 1998 (the "United
Indenture"). The United Indenture generally limits the additional amount of
debt that UPC or its subsidiaries or controlled affiliates may borrow, or
preferred shares that they may issue. Generally, additional borrowings, when
added to existing indebtedness, must satisfy, among other conditions, at least
one of the following tests: (i) 7.0 times the borrower's consolidated operating
cash flow; (ii) 1.75 times its consolidated interest expense; or (iii) 225% of
the borrower's consolidated invested equity capital. In addition, there must be
no existing default under the United Indenture at the time of the borrowing.
The United Indenture also restricts UPC's ability to make certain asset sales
and certain payments. In connection with the initial public offering, UPC has
agreed with United that it will not take any action during the term of the
United Indenture that would result in a breach of the United Indenture
covenants. The maturity date of the United Indenture is February 2008 and
interest becomes payable in cash in February 2003.
Stock Option Plan
In June 1996, UPC adopted a stock option plan (the "Plan") for certain of
its employees and those of its subsidiaries. There are 6,000,000 total shares
available for the granting of options under the Plan, which are held by the
Stichting Administratiekantoor UPC (the "Foundation"), which administers the
Plan. Each option represents the right to acquire from the Foundation a
certificate representing the economic value of one share. Following
consummation of the initial public offering, any certificates issued to
employees who have exercised their options will be convertible into UPC common
stock. UIH appoints the board members of the Foundation and thus controls the
voting of the Foundation's common stock. The options are granted at fair market
value determined by the Company's Supervisory Board at the time of the grant.
The maximum term that the options can be exercised is five years from the date
of the grant. In order to introduce the element of "vesting" of the options,
the Plan provides that even though the options are exercisable immediately, the
shares to be issued or options granted in 1996 vest in equal monthly increments
over a three-year period from the effective date set forth in the option grant.
In March 1998, the Plan was revised to increase the vesting period for any new
grants of options to four years, vesting in equal monthly increments. Upon
termination of an employee (except in the case of death, disability or the
like), all unvested options previously exercised must be resold to the
Foundation at the original purchase price, or all vested options must be
exercised, within 30 days of the termination date. The Supervisory Board may
alter these vesting schedules in its discretion. An employee has the right at
any time to put his certificates or shares from exercised vested options to the
Foundation at a price equal to the fair market value. The Company can also call
such certificates or shares for a cash payment upon termination in order to
avoid dilution, except for certain awards, which can not be called by the
Company until expiration of the underlying options. The Plan also contains
anti-dilution protection and provides that,
F-34
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
in the case of change of control, the acquiring company has the right to
require UPC to acquire all of the options outstanding at the per share value
determined in the transaction giving rise to the change of control.
A summary of stock option activity for the Plan is as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- --------------------------
Number Weighted- Number Weighted- Number Weighted-
of Average of Average of Average
shares Exercise Price shares Exercise Price shares Exercise Price
--------- -------------- --------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 2,241,552 10.49 2,300,417 10.49 -- --
Granted during period... 2,343,000 12.10 -- -- 3,990,000 10.49
Cancelled during
period................. (14,052) 10.49 (58,865) 10.49 (9,583) 10.49
Exercised during
period................. (375,000) 10.49 -- -- (1,680,000) --
--------- ----- --------- ----- ---------- -----
Outstanding at end of
period................. 4,195,500 11.39 2,241,552 10.49 2,300,417 10.49
========= ===== ========= ===== ========== =====
Vested at end of
period(1).............. 4,340,008 10.79 3,197,331 10.49 1,786,898 10.49
========= ===== ========= ===== ========== =====
Exercisable at end of
period(1).............. 4,195,500 11.39 2,241,552 10.49 2,300,417 10.49
========= ===== ========= ===== ========== =====
</TABLE>
- --------------------
(1) Includes certificate rights as well as options.
The Company granted no stock options during the year ended December 31,
1997. The combined weighted-average fair values and weighted-average exercise
prices of options granted during the year ended December 31, 1998 and the year
ended December 31, 1996 are as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended
December 31, 1998 December 31, 1996
------------------------ ------------------------
Number Fair Exercise Number Fair Exercise
Options Value Price Options Value Price
--------- ----- -------- --------- ----- --------
<S> <C> <C> <C> <C> <C> <C>
Exercise price equal to
market price........... 2,343,000 12.10 12.10 3,990,000 10.49 10.49
</TABLE>
The following table summarizes information about stock options outstanding,
vested and exercisable as of December 31, 1998:
<TABLE>
<CAPTION>
Weighted-Average
Number Remaining Number Number
of Options Contractual Life of Options of Options
Exercise Price Outstanding (Years) Vested(1) Exercisable(1)
-------------- ----------- ---------------- ---------- --------------
<S> <C> <C> <C> <C>
10.49................ 1,852,500 2.47 3,487,118 1,852,500
12.00................ 2,195,250 4.63 838,859 2,195,250
13.57................ 147,750 4.71 14,031 147,750
--------- ---- --------- ---------
4,195,500 3.68 4,340,008 4,195,500
========= ==== ========= =========
</TABLE>
- --------------------
(1) Includes certificate rights as well as options.
The Plan is accounted for as a variable plan because, based on the Plan's
provisions, the rights conveyed to employees are the substantive equivalents to
stock appreciation type rights. Accordingly, compensation expense is recognized
at each financial statement date based on the difference between the grant
price and the estimated fair
F-35
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
value of the Company's common stock. Compensation expense of 268,109, 4,818 and
0 was recognized for the years ended December 31, 1998, December 31, 1997 and
December 31, 1996, respectively. The Company's estimate of the fair value of
its common stock as of December 31, 1998 utilized in recording compensation
expense under the Plan was NLG63.91, which is the initial public offering
price. Because the Company will account for the Plan as a variable plan up
until the consummation date of its initial public offering, and thereafter as a
fixed plan due to modifications to the Plan which will occur on that date, the
total compensation expense and deferred compensation expense recognized related
to options granted as of December 31, 1998 will not increase.
Phantom Stock Option Plan
As of March 1998, the Company adopted a phantom stock option plan (the
"Phantom Plan") which permits the grant of phantom stock rights in up to
2,400,000 shares of the Company's common stock. The rights are granted at fair
market value determined by the Company's Supervisory Board at the time of
grant, and generally vest in equal monthly increments over the four-year period
following the effective date of grant and may be exercised for ten years
following the effective date of grant. The Phantom Plan gives the employee the
right to receive payment equal to the difference between the fair market value
of a share of UPC common stock and the option base price for the portion of the
rights vested. UPC, at its sole discretion, may make payment in (i) cash, (ii)
freely tradable shares of UIH Class A Common Stock or (iii) if the Company's
stock is publicly traded, freely tradable shares of its stock. If the Company
chooses to make a cash payment, even though its stock is publicly traded,
employees have the option to receive an equivalent number of freely tradeable
shares of stock instead. Concurrent with the approval of the Phantom Plan, the
Supervisory Board ratified the grant of 1,232,250 and 825,000 phantom stock
rights at base prices of 12.00 and 13.57, respectively, and specified
retroactive vesting for several of the grants. The Phantom Plan contains anti-
dilution protection and provides that, in certain cases of a change of control,
all phantom options outstanding become fully exercisable.
A summary of stock option activity for the Phantom Plan is as follows:
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1998
------------------------
Number Weighted-
of Average
Share Exercise Price
--------- --------------
<S> <C> <C>
Outstanding at beginning of period.................. -- --
Granted during period............................... 2,057,500 12.63
Cancelled during period............................. -- --
Exercised during period............................. -- --
--------- -----
Outstanding at end of period........................ 2,057,500 12.63
========= =====
Vested and exercisable at end of period............. 470,469 12.15
========= =====
</TABLE>
The combined weighted-average fair values and weighted-average exercise
prices of options granted during the year ended December 31, 1998 are as
follows:
<TABLE>
<CAPTION>
Number Fair Exercise
Options Value Price
--------- ----- --------
<S> <C> <C> <C>
Exercise price equal to market price................ 2,057,250 12.63 12.63
</TABLE>
F-36
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
The following table summarizes information about stock options outstanding,
vested and exercisable as of December 31, 1998:
<TABLE>
<CAPTION>
Weighted-
Average Number of
Number of Remaining Options
Options Contractual Life Vested and
Exercise Price Outstanding (years) Exercisable
-------------- ----------- ---------------- -----------
<S> <C> <C> <C>
12.00............................... 1,232,250 8.54 425,469
13.57............................... 825,000 9.70 45,000
--------- ---- -------
2,057,250 9.00 470,469
========= ==== =======
</TABLE>
The Phantom Plan is accounted for as a variable plan in accordance with its
terms, resulting in compensation expense for the difference between the grant
price and the fair market value at each financial statement date. Compensation
expense of 52,374 was recognized for the year ended December 31, 1998. The
Company's estimate of the fair value of its common stock as of December 31,
1998 utilized in recording compensation expense under the Phantom Plan was
NLG63.91, which is the initial public offering price.
Subsidiary Stock Option Plan
As of June 1998, the Company adopted a phantom stock option plan (the
"chello Plan"), which permits the grant of phantom stock rights in up to
1,500,000 shares of chello, a wholly owned subsidiary of the Company. The
rights are granted at fair market value determined by chello's Supervisory
Board at the time of grant, and generally vest in equal monthly increments over
the four-year period following the effective date of grant and may be exercised
for ten years following the effective date of grant. The chello Plan gives the
employee the right to receive payment equal to the difference between the fair
market value of a share of chello and the option base price for the portion of
the rights vested. UPC, at its sole discretion, may make payment in (i) cash,
(ii) freely tradable shares of UIH Class A Common Stock or (iii) if the
Company's stock is publicly traded, freely tradable shares of its stock. If the
Company chooses to make a cash payment, even though its stock is publicly
traded, employees have the option to receive an equivalent number of freely
tradable shares of stock instead. Concurrent with the approval of the chello
Plan, the Supervisory Board ratified the grant of 570,000 options at a base
price of 10.00, and specified retroactive vesting for several of the grants. As
of December 31, 1998, the Company had recorded compensation expense of 2,144
for options granted under the chello Plan.
A summary of stock option activity for the chello broadband Plan is as
follows:
<TABLE>
<CAPTION>
For the Year Ended
December 31, 1998
----------------------
Number Weighted-
of Average
Shares Exercise Price
------- --------------
<S> <C> <C>
Outstanding at beginning of period.................... -- --
Granted during period................................. 570,000 10.00
Cancelled during period............................... -- --
Exercised during period............................... -- --
------- -----
Outstanding at end of period.......................... 570,000 10.00
======= =====
Vested and exercisable at end of period............... 70,625 10.00
======= =====
</TABLE>
The weighted-average remaining contractual life for these options is 9.47
as of December 31, 1998.
F-37
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
11. Commitments
The Company has entered into various operating lease agreements for office
space, office furniture and equipment, and vehicles. Rental expense under these
lease agreements totaled 8,057, 6,863 and 4,989 for the years ended December
31, 1998, December 31, 1997 and December 31, 1996 respectively.
The Company has operating lease obligations as follows:
<TABLE>
<S> <C>
12 months ended December 31, 1999..................................... 11,054
12 months ended December 31, 2000..................................... 8,770
12 months ended December 31, 2001..................................... 6,848
12 months ended December 31, 2002..................................... 4,854
12 months ended December 31, 2003 and thereafter...................... 4,346
------
Total............................................................... 35,872
======
</TABLE>
A2000 Funding
In September 1998, UTH entered into a subordinated loan agreement to
provide funding up to $30,000 for A2000. UTH's share of the funding is $15,000.
UPC is obligated to fund drawdowns on the loan in proportion to its 51%
ownership in UTH (representing a total funding obligation of $7,650). As of
December 31,1998, UPC had funded $3,750 of its commitment. Subsequent to year
end, the Company provided a letter of support to A2000 stating that it would
continue to provide to A2000 the funding necessary to continue operations
through at least 1999.
12. Contingencies
Legal
The Company is not a party to any material legal proceedings, nor is it
currently aware of any threatened material legal proceedings. From time to
time, the Company may become involved in litigation relating to claims arising
out of its operations in the normal course of its business.
Foreign Currency Exposure
The Bridge Bank Facility, the loan payable to United and the DIC loan are
denominated in U.S. dollars, totaling US$236.5 million as of December 31, 1998.
The Company has not executed any foreign forward exchange contract, or used any
other financial instrument, to hedge against this foreign currency exposure.
The Bridge Bank Facility and the United loan have been repaid subsequent to the
public offering. Of the $90.0 million DIC loan, $45.0 million has been repaid
concurrent with the public offering.
13. Income Taxes
In general, a Dutch holding company may benefit from the so-called
participation exemption. The participation exemption is a facility in Dutch
corporate tax law which allows a Dutch company to exempt any dividend income
and capital gains in relation with its participation in subsidiaries which are
legal entities of a foreign country. Capital losses are also exempted, apart
from liquidation losses (under stringent conditions). All costs incurred at the
UPC level which relate to an investment in a foreign subsidiary are not tax
deductible, e.g. interest expense on loans used for the financing of the
investment in the foreign subsidiary. In addition, currency exchange results on
these loans are covered by the participation exemption, e.g. gains are exempted
and losses are not tax deductible. For companies which only act as pure holding
companies, only the capital tax paid is tax deductible. For UPC, the primary
F-38
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
difference between taxable loss and net loss for financial reporting purposes
relates to the non-consolidation of its consolidated foreign subsidiaries for
Dutch tax purposes. The consolidated financial statements have been prepared
assuming partial tax basis for license fees capitalized relating to certain
acquisitions. Deferred taxes have been provided for that portion of the
licenses which management believes no tax basis will be allowed.
The significant components of the net deferred tax liability are as
follows:
<TABLE>
<CAPTION>
As of December
31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Deferred Tax Assets:
Tax net operating loss carryforward...................... 137,033 149,802
Stock-based compensation................................. 13,636 --
Other.................................................... 805 540
-------- --------
Total deferred tax assets.............................. 151,474 150,342
Valuation allowance...................................... (135,545) (136,580)
-------- --------
Deferred tax assets, net of valuation allowance........ 15,929 13,762
-------- --------
Deferred Tax Liabilities:
Intangible assets........................................ (11,061) (48,077)
Property, plant and equipment, net....................... (13,525) (10,193)
-------- --------
Total deferred tax liabilities......................... (24,586) (58,270)
-------- --------
Deferred tax liabilities, net.......................... (8,657) (44,508)
======== ========
</TABLE>
The difference between income tax expense provided in the financial
statements and the expected income tax benefit at statutory rates is reconciled
as follows:
<TABLE>
<CAPTION>
For the Years Ended December 31,
-----------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Expected income tax benefit at the
Dutch statutory rate of 35%......... (174,768) (55,085) (19,315)
Tax effect of permanent and other
differences:
Change in valuation allowance...... 51,471 27,471 14,555
Non-deductible expenses............ 117,925 19,583 3,829
International rate differences..... 3,520 3,232 1,105
Provision on investment............ 2,180 6,611 --
Other.............................. (1,543) (163) (683)
----------- ---------- ----------
Total income tax benefit......... (1,215) 1,649 (509)
=========== ========== ==========
</TABLE>
Tax loss carry forwards arise primarily in Norway, The Netherlands, Czech
Republic and Austria. The tax loss carry forwards of Norway, aggregating to
277,929 as of December 31, 1998 will expire during the years 1999-2008. The tax
loss carry forwards of The Netherlands, Belgium and Austria of 117,115 as of
December 31, 1998 have no expiration date. The tax loss carry forwards of the
Czech Republic of 29,677 as of December 31, 1998 will expire in the years 2001-
2005.
During 1996, the Austrian tax authorities passed legislation which had the
effect of eliminating approximately 256,000 of tax basis associated with
certain amounts of goodwill recorded at Telekabel Group effective January 1,
1997. This change in tax law is expected to be challenged on constitutional
grounds. However, there can be no
F-39
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
assurance of a successful repeal of such legislation. Accordingly, this change
caused Telekabel Group's effective tax rate to increase from the historical
effective tax rate through December 31, 1996, due to the non-deductibility of
such goodwill amortization subsequent to January 1, 1997.
14. Segment and Geographic Information
On December 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 "Disclosure About Segments of an Enterprise and Related
Information" ("SFAS 131"). The new rules establish revised standards for public
companies relating to the reporting of financial information about operating
segments. The adoption of SFAS 131 did not have a material effect on the
Company's consolidated financial statements but did affect the Company's
segment information disclosure.
The Company's business has historically been derived from our video
entertainment segment. This service has been provided in various European
countries where the Company owns and operates it systems. During 1997, the
Company introduced Internet/data and during 1999 the Company introduced
telephony in several of its systems.
The Company evaluates performance and allocates resources at the geographic
country level. The key operating performance criteria used in this evaluation
includes revenue growth, operating income before depreciation, amortization and
stock-based compensation expense ("Adjusted EBITDA"), and capital expenditures.
Management generally considers Adjusted EBITDA to be a helpful way to measure
the performance of cable television operations and communications companies. We
believe Adjusted EBITDA helps investors to assess the cash flow from our
operations from period to period and thus to value our business. Adjusted
EBITDA should not, however, be considered a replacement for net income, cash
flows or for any other measure of performance or liquidity under generally
accepted accounting principles, or as an indicator of a company's operating
performance. We are not entirely free to use the cash represented by our
Adjusted EBITDA as we please. Several of our consolidated operating companies
are restricted by the terms of their debt arrangements. Each company has its
own operating expenses and capital expenditure requirements, which can limit
our use of cash. Our presentation of Adjusted EBITDA may not be comparable to
statistics with a similar name reported by other companies. Not all companies
and analysts calculate EBITDA in the same manner. The Company does not view
segment results below Adjusted EBITDA, therefore, net interest expense, foreign
exchange gain (loss), share in results of affiliated companies, minority
interests in subsidiaries and income tax expense are not broken out by segment
below. Historically we did not fully allocate overhead and general and
administrative expenses to the new businesses. Full allocation began in 1999.
F-40
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
A summary of the segment information by geographic area is as follows:
<TABLE>
<CAPTION>
Revenue for the Year Ended December 31, 1996
------------------------------------------------------
Cable Programming
Television Telephony Internet/Data & Other Total
---------- --------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C>
The Netherlands:
Corporate............. -- -- -- 4,433 4,433
UPCtv................. -- -- -- -- --
chello................ -- -- -- -- --
Priority Telecom...... -- -- -- -- --
Operating companies... 21,633 -- -- -- 21,633
Austria................. 156,964 -- -- -- 156,964
Belgium................. 37,704 -- -- -- 37,704
Czech Republic.......... 7,746 -- -- -- 7,746
Norway.................. 14,541 -- -- -- 14,541
Hungary................. -- -- -- -- --
France.................. 179 -- -- -- 179
Other................... 1,979 -- -- -- 1,979
------- --- ----- ------ -------
Total............... 240,746 -- -- 4,433 245,179
======= === ===== ====== =======
<CAPTION>
Revenue for the Year Ended December 31, 1997
------------------------------------------------------
Cable Programming
Television Telephony Internet/Data & Other Total
---------- --------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C>
The Netherlands:
Corporate............. -- -- -- 9,228 9,228
UPCtv................. -- -- -- -- --
chello................ -- -- -- -- --
Priority Telecom...... -- -- -- -- --
Operating companies... 20,441 -- 228 -- 20,669
Austria................. 162,372 -- 411 -- 162,783
Belgium................. 31,805 -- 125 6,808 38,738
Czech Republic.......... 7,492 -- -- -- 7,492
Norway.................. 91,529 -- -- -- 91,529
Hungary................. -- -- -- -- --
France.................. 2,526 -- -- -- 2,526
Other................... 4,275 -- -- 15 4,290
------- --- ----- ------ -------
Total............... 320,440 -- 764 16,051 337,255
======= === ===== ====== =======
<CAPTION>
Revenue for the Year Ended December 31, 1998
------------------------------------------------------
Cable Programming
Television Telephony Internet/Data & Other Total
---------- --------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C>
The Netherlands:
Corporate............. -- -- -- 17,267 17,267
UPCtv................. -- -- -- -- --
chello................ -- -- -- -- --
Priority Telecom...... -- -- -- -- --
Operating companies... 32,887 386 -- -- 33,273
Austria................. 169,478 145 7,528 -- 177,151
Belgium................. 32,683 -- 1,556 2,543 36,782
Czech Republic.......... 8,909 -- -- -- 8,909
Norway.................. 92,290 -- 381 -- 92,671
Hungary................. 27,706 -- -- -- 27,706
France.................. 8,058 -- -- -- 8,058
Other................... 5,806 -- -- 1,347 7,153
------- --- ----- ------ -------
Total............... 377,817 531 9,465 21,157 408,970
======= === ===== ====== =======
</TABLE>
F-41
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
<TABLE>
<CAPTION>
Revenue for the Nine Months Ended September 30, 1998
(unaudited)
-------------------------------------------------------------
Cable
Television Telephony Internet/Data Programming Other Total
---------- --------- ------------- ----------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
The Netherlands:
Corporate............. -- -- -- -- 10,907 10,907
UPCtv................. -- -- -- -- -- --
chello................ -- -- -- -- -- --
Priority Telecom...... -- -- -- -- -- --
Operating companies... 32,887 386 -- -- -- 33,273
Austria................. 126,107 50 4,131 -- -- 130,288
Belgium................. 24,688 -- 913 -- 1,364 26,945
Czech Republic.......... 6,618 -- -- -- -- 6,618
Norway.................. 68,804 -- 230 -- -- 69,034
Hungary................. 13,777 -- -- -- -- 13,777
France.................. 5,189 -- -- -- -- 5,189
Poland.................. -- -- -- -- -- --
Sweden.................. -- -- -- -- -- --
Other................... 9,206 -- -- 978 -- 10,184
------- --- ----- --- ------ -------
Total............... 287,256 436 5,274 978 12,271 306,215
======= === ===== === ====== =======
</TABLE>
<TABLE>
<CAPTION>
Revenue for the Nine Months Ended September 30, 1999 (unaudited)
--------------------------------------------------------------------------
Cable DTH and
Television Telephony Internet/Data Programming Other Intercompany Total
---------- --------- ------------- ----------- ------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
The Netherlands:
Corporate............. -- -- -- -- 9,946 -- 9,946
UPCtv................. -- -- -- 109 -- -- 109
chello................ -- -- 7,625 -- -- (7,625) --
Priority Telecom...... -- -- -- -- -- -- --
Operating companies... 154,034 35,393 6,735 -- 155 -- 196,317
Austria................. 130,321 6,773 18,235 -- -- -- 155,329
Belgium................. 24,001 -- 3,330 -- -- -- 27,331
Czech Republic.......... 7,469 -- -- -- -- -- 7,469
Norway.................. 75,191 268 674 -- -- -- 76,133
Hungary................. 53,331 -- 143 -- -- -- 53,474
France.................. 27,139 2,393 665 -- -- -- 30,197
Poland.................. 22,122 -- -- 15,605 -- (7,211) 30,516
Sweden.................. 10,643 -- 304 -- -- -- 10,947
Other................... 9,532 -- -- 1,258 -- -- 10,790
------- ------ ------ ------ ------ ------- -------
Total............... 513,783 44,827 37,711 16,972 10,101 (14,836) 608,558
======= ====== ====== ====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
Adjusted EBITDA for the Year Ended December 31, 1996
------------------------------------------------------
Cable Programming
Television Telephony Internet/Data & Other Total
---------- --------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C>
The Netherlands:
Corporate............ -- -- -- (13,528) (13,528)
UPCtv................ -- -- -- -- --
chello............... -- -- -- -- --
Priority Telecom..... -- -- -- -- --
Operating companies.. 11,298 -- -- -- 11,298
Austria................ 81,618 -- -- -- 81,618
Belgium................ 14,592 -- -- -- 14,592
Czech Republic......... (7,477) -- -- -- (7,477)
Norway................. 6,347 -- -- -- 6,347
Hungary................ -- -- -- -- --
France................. (4,421) -- -- -- (4,421)
Other.................. (2,552) -- -- (4,313) (6,865)
------ --- --- ------- -------
Total.............. 99,405 -- -- (17,841) 81,564
====== === === ======= =======
</TABLE>
F-42
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
<TABLE>
<CAPTION>
Adjusted EBITDA for the Year Ended December 31, 1997
------------------------------------------------------
Cable Programming
Television Telephony Internet/Data & Other Total
---------- --------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C>
The Netherlands:
Corporate............ -- -- -- (12,205) (12,205)
UPCtv................ -- -- -- -- --
chello............... -- -- -- -- --
Priority Telecom..... -- -- -- -- --
Operating companies.. 12,491 -- 228 -- 12,719
Austria................ 80,475 -- 33 -- 80,508
Belgium................ 13,033 -- 124 1,892 15,049
Czech Republic......... (6,730) -- -- -- (6,730)
Norway................. 36,927 -- -- -- 36,927
Hungary................ -- -- -- -- --
France................. (4,634) -- -- -- (4,634)
Other.................. 1,003 -- -- (18,139) (17,136)
------- ------- ------- ------- -------
Total.............. 132,565 -- 385 (28,452) 104,498
======= ======= ======= ======= =======
<CAPTION>
Adjusted EBITDA for the Year Ended December 31, 1998
------------------------------------------------------
Cable Programming
Television Telephony Internet/Data & Other Total
---------- --------- ------------- ----------- -------
<S> <C> <C> <C> <C> <C>
The Netherlands:
Corporate............ -- -- -- (11,514) (11,514)
UPCtv................ -- -- -- (772) (772)
chello............... -- -- (15,854) -- (15,854)
Priority Telecom..... -- (3,516) -- -- (3,516)
Operating companies.. 22,089 108 (109) -- 22,088
Austria................ 89,839 (4,278) (4,549) -- 81,012
Belgium................ 15,051 -- (2,087) 299 13,263
Czech Republic......... (1,887) -- -- -- (1,887)
Norway................. 36,655 (1,499) (2,108) -- 33,048
Hungary................ 9,989 -- -- -- 9,989
France................. (2,494) (2,383) (200) -- (5,077)
Other.................. (437) -- 48 (8,956) (9,345)
------- ------- ------- ------- -------
Total.............. 168,805 (11,568) (24,859) (20,943) 111,435
======= ======= ======= ======= =======
</TABLE>
F-43
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
<TABLE>
<CAPTION>
Adjusted EBITDA for the Nine Months Ended September
30, 1998 (Unaudited)
---------------------------------------------------------------
Cable
Television Telephony Internet/Data Programming Other Total
---------- --------- ------------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
The Netherlands:
Corporate............. -- -- -- -- (3,900) (3,900)
UPCtv................. -- -- -- (843) -- (843)
chello................ -- -- (6,837) -- -- (6,337)
Priority Telecom...... -- (2,539) -- -- -- (2,593)
Operating companies... 22,089 108 (109) -- -- 22,088
Austria................. 69,273 (2,755) (3,757) -- -- 62,761
Belgium................. 11,646 -- (1,772) -- (168) 9,706
Czech Republic.......... (1,818) -- -- -- -- (1,818)
Norway.................. 26,891 (329) (903) -- -- 25,659
Hungary................. 5,439 -- -- -- -- 5,439
France.................. (1,931) (971) (60) -- -- (2,962)
Poland.................. -- -- -- -- -- --
Sweden.................. -- -- -- -- -- --
Other................... (1,480) (970) (59) (6,950) 3,101 (6,358)
------- ------- -------- ------- ------- -------
Total............... 130,109 (7,510) (12,997) (7,793) (967) 100,842
======= ======= ======== ======= ======= =======
<CAPTION>
Adjusted EBITDA for the Nine Months Ended September 30,
1999 (Unaudited)
---------------------------------------------------------------
Cable DTH and
Television Telephony Internet/Data Programming Other Total
---------- --------- ------------- ----------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
The Netherlands:
Corporate............. -- -- -- -- (48,386) (48,386)
UPCtv................. -- -- -- (12,244) -- (12,244)
chello................ -- -- (77,014) -- -- (77,014)
Priority Telecom...... -- (3,138) -- -- -- (3,138)
Operating companies... 72,865 (14,135) (9,039) -- 920 50,611
Austria................. 72,619 (14,734) 442 -- -- 58,327
Belgium................. 7,590 (7) (3,294) -- -- 4,289
Czech Republic.......... (723) -- -- -- -- (723)
Norway.................. 32,649 (9,795) (7,345) -- -- 15,509
Hungary................. 18,218 -- (43) -- -- 18,175
France.................. 6,193 (7,198) (2,850) -- (2,870) (6,725)
Poland.................. (2,058) -- -- (28,552) (3,656) (34,266)
Sweden.................. 5,692 (56) (2,113) -- -- 3,523
Other................... 3,271 26 (57) (7,099) (3,050) (6,909)
------- ------- -------- ------- ------- -------
Total............... 216,316 (49,037) (101,313) (47,895) (57,042) (38,971)
======= ======= ======== ======= ======= =======
</TABLE>
F-44
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
The following table reconciles Adjusted EBITDA to UPC's consolidated net loss
before income taxes:
<TABLE>
<CAPTION>
For the Year Ended For the Nine Months
December 31, Ended September 30,
--------------------------- -----------------------
1996 1997 1998 1998 1999
------- -------- -------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Adjusted EBITDA.......... 81,564 104,498 111,435 100,842 (38,971
Depreciation and amorti-
zation.................. (79,832) (132,888) (187,646) (137,842) (340,501)
Stock-based compensa-
tion.................... -- (4,818) (322,627) (32,493) (109,485)
------- -------- -------- -------- --------
Net operating (loss)
income................ 1,732 (33,208) (398,838) (69,493) (488,957)
Interest income.......... 2,757 6,512 7,397 4,621 22,819
Interest expense......... (38,475) (70,738) (104,355) (73,137) (187,750)
Provision for loss on in-
vestment related costs.. -- (18,888) (6,230) -- --
Gain on sale of assets... -- -- -- -- 14,625
Foreign exchange (loss)
gain and other expense.. (21,200) (41,063) 2,690 6,609 10,046
------- -------- -------- -------- --------
Net loss before income
taxes and other
items................. (55,186) (157,385) (499,336) (91,400) (629,217)
Share in results of af-
filiated companies,
net..................... (30,712) (25,458) (63,823) (46,789) (55,857)
Minority interests in
subsidiaries............ (2,208) 152 1,153 (1,930) 1,300
------- -------- -------- -------- --------
Net loss before income
tax benefit (ex-
pense)................ (88,106) (182,691) (562,006) (180,119) (683,774)
======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Depreciation and
Amortization
---------------------------
For the Years Ended
December 31,
---------------------------
1996 1997 1998
------- -------- --------
<S> <C> <C> <C>
The Netherlands:
Corporate......................................... (2,873) (3,271) (9,478)
UPCtv............................................. -- -- --
chello............................................ -- -- --
Priority Telecom.................................. -- -- (22)
Operating companies............................... (7,267) (8,372) (13,794)
Austria............................................ (42,762) (50,187) (77,281)
Belgium............................................ (13,206) (14,252) (20,486)
Czech Republic..................................... (5,574) (5,471) (7,702)
Norway............................................. (6,969) (47,703) (45,316)
Hungary............................................ -- -- (6,725)
France............................................. (281) (1,416) (4,129)
Other.............................................. (900) (2,216) (2,713)
------- -------- --------
Total............................................ (79,832) (132,888) (187,646)
======= ======== ========
</TABLE>
F-45
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
<TABLE>
<CAPTION>
Investments in Long-Lived
Affiliates Assets Capex
--------------- --------------- ---------------
December 31, December 31, December 31,
--------------- --------------- ---------------
1997 1998 1997 1998 1997 1998
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
The Netherlands:
Corporate...................... 413,649 493,051 1,787 5,171 6,534 2,423
UPCtv.......................... -- -- -- -- -- --
chello......................... -- -- -- 4,581 -- 4,588
Priority Telecom............... -- -- -- 31 -- 31
Operating companies............ -- -- 40,174 -- 7,953 18,578
Austria......................... -- -- 233,887 265,640 59,913 82,501
Belgium......................... -- -- 49,542 52,085 11,584 19,760
Czech Republic.................. -- -- 17,956 16,512 4,214 1,041
Norway.......................... -- -- 103,765 119,704 20,647 51,193
Hungary......................... -- -- -- 50,629 -- 13,386
France.......................... -- -- 28,159 76,220 22,809 52,394
Other........................... -- -- 9,712 12,424 3,656 6,816
------- ------- ------- ------- ------- -------
Total......................... 413,649 493,051 484,982 602,997 137,310 252,711
======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Total Assets
---------------------------------------
As of As of As of
December 31, December 31, September 30,
1997 1998 1999
------------ ------------ -------------
(Unaudited)
<S> <C> <C> <C>
The Netherlands:
Corporate.............................. 508,695 567,264 1,156,755
UPCtv.................................. -- 106 12,252
chello................................. -- 6,617 48,741
Priority Telecom....................... -- 174 1,399
Operating companies.................... 128,609 -- 3,221,349
Austria................................. 653,062 644,791 715,600
Belgium................................. 99,392 109,331 101,504
Czech Republic.......................... 30,089 21,730 18,405
Norway.................................. 435,345 414,038 496,746
Hungary................................. -- 164,280 239,415
France.................................. 36,769 96,563 1,068,073
Poland.................................. -- -- 2,501,365
Sweden.................................. -- -- 1,020,313
Other................................... 23,743 42,885 88,351
--------- --------- ----------
Total................................. 1,915,704 2,067,779 10,690,268
========= ========= ==========
</TABLE>
15. Related Party
Agreement with United
In February 1999, United and the Company became parties to a Management
Service Agreement (the "United Service Agreement"), with an initial term
through 2009, pursuant to which United will provide services such as
accounting, financial reporting, investor relations, human resources,
information technology, equipment procurement and testing expenses, corporate
offices lease payments and costs associated with corporate finance activities.
Under the United Service Agreement, the Company will pay United a fixed amount
each month (initially $0.3 million).
F-46
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
After the first year of the United Service Agreement, the fixed amount may be
adjusted from time to time by United to allocate corporate level expenses among
United's operating companies, including UPC, taking into account the relative
size of the operating companies and their estimated use of United resources. In
addition, UPC will continue to reimburse United for costs incurred by United
which are directly attributable to UPC. The United Service Agreement also
specifies the basis upon which United may second certain of its employees to
UPC. The Company generally is responsible for all costs incurred by United with
respect to any seconded employee's employment and severance.
Historically, UPC has been self sufficient from a corporate operations
perspective and required nominal assistance from its shareholders, Philips and
United, and solely from United subsequent to December 11, 1997. United and
Philips did not allocate any indirect overhead type costs to the Company from
inception through December 11, 1997 and United did not allocate any such costs
subsequent to December 11, 1997 through December 31, 1998. The only costs
historically charged to UPC were direct costs incurred by Philips and United on
UPC's behalf. Such costs were charged at cost. In connection with the Company's
initial public offering, United and the Company executed the United Service
Agreement which will provide for a fixed allocation in addition to direct out-
of-pocket reimbursements.
Related Party Payables
The Company classifies any unpaid invoices related to seconded employee
expenses or other expenses incurred by United on the Company's behalf as
related party payables on the balance sheet.
Loans to Employees
In 1996, UPC loaned certain employees of the Company amounts for the
exercise of the employees' stock options, taxes on options exercised, or both.
These recourse loans bear interest at 5.0% per annum. The employees' liability
to the Company is presented in the consolidated financial statements net of the
Company's obligation to the employees under the plan. As of December 31, 1998
and 1997, the receivable from employees, including accrued interest totaled
19,177 and 18,561, respectively.
Note Payable to Shareholder
UPC has entered into two promissory notes with United of $100.0 million
(March 1998) and $20.0 million (July 1998). UPC has borrowed $70.0 million and
$16.0 million, respectively, under these two notes (together, this "United
Loan" totals 163,425 as of December 31, 1998). The United Loan bears interest
at 10.75% per annum, is due in 2001, and is convertible at UIH's option into
ordinary shares of UPC at 12.00 per share (March 1998) and 13.57 per share
(July 1998). Total accrued interest as of December 31, 1998 was $6.1 million
(11,587). Subsequent to December 31, 1998, UPC repaid $60.0 million (NLG120
million) of the indebtedness outstanding under the $100.0 million note and all
of the indebtedness outstanding under the $20.0 million note with proceeds form
the initial public offering (see Note 16).
Acquisitions of Interest in PHL and TARA
In November 1998, we purchased from RCL, an entity owned by a discretionary
trust for the benefit of the members of the family of John Riordan, a member of
the Board of Management, (1) a 5% interest in Tara and (2) a 5% interest in our
Irish operating system. The price for these interests was 384,531 shares of
United Class A Common Stock that we acquired as part of the UPC Acquisition.
F-47
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
PIK Notes
In conjunction with the formation of UPC in July 1995, UPC issued to
Philips $133.6 million of convertible subordinated pay-in-kind notes due
January 1, 2005. The PIK Notes had an interest rate of 10.0% and were
convertible ordinary shares of UPC at $5.55 per share prior to the repayment
date. In conjunction with the UPC Acquisition on December 11, 1997, 170,371 of
the outstanding PIK Notes balance was paid by UPC, and United acquired the
remaining outstanding balance of 169,899. United then converted such PIK Notes
into 15,180,261 ordinary shares of UPC at a conversion rate of 11.19 per share
(see Note 1).
16. Subsequent Events
Initial Public Offering
During February 1999, the Company successfully completed an initial public
offering selling 44.6 million shares on the Amsterdam Stock Exchange and Nasdaq
National Market System and raising gross and net proceeds from the offering of
approximately NLG2,852.9 million and NLG2,669.6 million, respectively.
Concurrent with the offering, DIC exercised one of its two option agreements
acquiring approximately 1.6 million shares for NLG89.6 million. Proceeds from
the sale of the shares to DIC were used to replay $45.0 million of the DIC Loan
and related interest. Also concurrent with the offering, proceeds were used to
reduce the Senior Revolving Credit Facility (NLG635.8 million, including
accrued interest of NLG15.8 million), repay in its entirety the Bridge Bank
Facility (NLG110.0 million, net of the interest reserve account), acquire
NUON's 49% interest in UTH (NLG518.1 million), and the purchase from NUON of a
NLG33.0 million subordinated loan from UTH, including accrued interest (NLG33.3
million). Subsequent to the offering, we also repaid $80.0 million (NLG157.4
million) of the note payable to United.
Refinancing UTH
Subsequent to December 31, 1998, UTH replaced their existing NLG690.0
million facility with a senior facility ("New Telekabel Facility") and
additional shareholder loans. The senior facility consists of a Euro 340
million (NLG750 million) revolving facility to N.V. Telekabel that will convert
to a term facility on December 31, 2001. Euro 5 million of this facility will
be in the form of an overdraft facility that will be available until December
31, 2007. This facility was used to repay a portion of the UTH facility and for
capital expenditures. The new facility will bear interest at the Euro Interbank
Offered Rate plus a margin between 0.75% and 2.00% based on leverage multiples
tied to N.V. Telekabel's net operating income. The new facility is secured,
among other things, by a pledge over shares held by the borrower and will
restrict N.V. Telekabel's ability to incur additional debt.
Relationship with Microsoft
On January 25, 1999, UPC and Microsoft Corporation signed a letter of
intent providing for the establishment of a technical services relationship. In
connection with this letter of intent, we have agreed to grant Microsoft
warrants to purchase up to 3,800,000 shares or ADSs at Microsoft's option, at
an exercise price of $28.00. Half of these warrants will be issued at the
earlier of April 25, 1999 and the signing of the first definitive agreement.
These warrants will be exercisable after one year from issuance for a period of
three years. The other half of the warrants will be issued upon the signing of
the first definitive agreement. This half of the warrants will vest and become
exercisable based on performance criteria to be established in the definitive
agreements, although they also will not be exercisable until at least one year
after the date of the closing of UPC's initial public offering. The first half
of the warrants are for the right to negotiate to license technology from
Microsoft under definitive agreements to be negotiated in the future. UPC
expects to record as contract acquisition rights approximately NLG64.4 million
associated with the first half of the warrants. Such costs are expected to be
amortized on a straight-line basis over the
F-48
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
expected contract life, which is yet to be determined. The accounting for the
cost associated with the second half of the warrants will depend on the
ultimate nature of the performance criteria giving rise to the earn-out of
these warrants. These warrants will be recorded as such at fair value when it
is probable the performance criteria will be met in accordance with EITF Issue
No. 96-18.
DIC Loan
In connection with the loan from DIC, we granted the Discount Group, our
partner in the Israeli system, an option to $90.0 million, plus accrued
interest, ordinary shares at a price equal to 90% of the initial public
offering price. Subsequent to December 31, 1998, we negotiated an amendment to
this option, resulting in an option to acquire $45.0 million, plus accrued
interest, of ordinary shares at a price equal to 90.0% of the initial public
offering price, and, if this option is exercised, another option to acquire
$45.0 million, plus accrued interest, of ordinary shares at a price equal to
the 30 day average closing price of our shares on the Amsterdam Stock Exchange,
or the initial public offering price, whichever is higher. At the IPO, DIC
exercised the first option and thus acquired 1,558,654 ordinary shares of UPC.
The other option is exercisable until September 30, 2000.
Acquisition of Bratislavia Cable TV System
In March 1999, UPC reached final agreement with Siemens Austria ("Siemens")
to purchase Siemens' 95.63% interest in SKT s.r.o., the company that owns and
operates the cable TV system in Bratislava, Slovak Republic. The completion of
the purchase is subject to obtaining the approval of regulatory authorities.
The purchase price for the 95.63% interest is approximately NLG77.5 million
($41 million).
Purchase of IPS from United
In February 1999, United sold to us, in exchange for 4,955,264 of our
ordinary shares, United's approximately 33.5% interest in IPS, a group of
programming entities focusing on the Spanish- and Portuguese-speaking markets.
IPS had revenues of approximately NLG34.0 million for the year ended December
1998.
Exercise of Time Warner Option
Subsequent to December 31, 1998, the Time Warner Note was cancelled as Time
Warner exercised its option to acquire our 50% interest in HBO Hungary and 100%
interest in TV Max.
Agreement for the Purchase of Time Warner Cable France
In March 1999, UPC and Time Warner Entertainment reached a definitive
agreement for the purchase by UPC of 100% of Time Warner Cable France, a
company which controls and operates three cable TV systems in the suburbs of
Paris and Lyon and the city of Limoges. Completion of the purchase, which is
subject to regulatory approval, is expected to take place in the third quarter
of 1999.
17. Unaudited Events Subsequent to Date of Auditors' Report
Acquisition of Additional Interest in IPS
In May 1999, the Company acquired a further 16.5% interest in IPS from an
unaffiliated party for approximately USD7.6 million, increasing its ownership
to 50%.
Acquisition of SKT spol sr.o
In June 1999, UPC completed the acquisition of SKT spol sr.o., which
operates a cable television system in Bratislava, the capital of the Slovak
Republic. The purchase price was USD43.25 million (90.7 million) and was
F-49
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
accounted for under purchase accounting. This system passed approximately
173,000 homes and had approximately 161,000 subscribers as September 30, 1999.
Acquisition of GelreVision
In June 1999, UPC acquired through UTH 100% of the GelreVision multi-
channel television systems in The Netherlands. The acquisition increased UPC's
homes passed by 145,725 and its subscriber base by 132,400, based on September
30, 1999 data. The Company paid 233.9 million for GelreVision. These systems
are contiguous to UPC's A2000 and TeleKabel Beheer operations. The acquisition
was accounted for under purchase accounting.
Effective June 1, 1999, UPC began consolidating its investment in
GelreVision. Details of the net assets acquired, based on preliminary purchase
price allocations using information currently available, were as follows:
<TABLE>
<S> <C>
Property, plant and equipment................................... 105,237
Goodwill........................................................ 143,423
Long-term liabilities........................................... (9,023)
Net current liabilities......................................... (5,712)
-------
Total cash paid............................................... 233,925
=======
</TABLE>
The following pro forma condensed consolidated results for the nine months
ended September 30, 1999 and 1998 give effect to the acquisition of GelreVision
as if it had occurred at the beginning of the periods presented. This pro forma
condensed consolidated financial information does not purport to represent what
the Company's results of operations would actually have been if such
transaction 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>
For the Nine Months Ended For the Nine Months Ended
September 30, 1999 September 30, 1998
--------------------------- --------------------------
Historical Pro Forma Historical Pro Forma
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Service and other
revenue................ 306,215 325,973 620,959 608,558
============ ============= ============ ============
Net loss................ (179,706) (192,057) (685,481) (676,738)
============ ============= ============ ============
Weighted-average number
of ordinary shares
outstanding............ 82,864,454 127,464,454 129,176,492 120,586,863
============ ============= ============ ============
Basic and diluted net
loss per ordinary
share.................. (2.17) (1.51) (5.31) (5.61)
============ ============= ============ ============
</TABLE>
Acquisition of Reseaux Cables de France
In June 1999, UPC acquired through Mediareseaux, 95.7% of Reseaux Cables de
France, the fifth largest cable television operation in France, which operates
cable television systems throughout France. These systems passed approximately
202,475 homes and had an aggregate of approximately 74,275 subscribers as of
September 30, 1999. The purchase price was approximately FFR172.0 million (57.8
million) and was accounted for under purchase accounting. At closing UPC began
consolidating RCF, including its debt, which was 83.0 million.
F-50
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
RCF Credit Facility
In 1990, RCF and six of its subsidiaries entered into a FFR160.0 million
(53.8 million) credit facility with a consortium of banks to finance working
capital and operations. In 1995 this facility was amended and extended to
FFR252.4 million (84.8 million) to refinance three further credit facilities
entered into by other subsidiaries of RCF. The loan bears an interest rate of
PIBOR (the French interbank offer rate) + 1.5%, payable in arrears quarterly.
The loan has to be repaid in yearly installments of FFR34.6 million (11.6
million) beginning at the end of 1999 until December 31, 2005. Subject to
certain exceptions, the loan restricts RCF and certain of its subsidiaries
from incurring certain additional indebtedness, from having liens on or
disposing of certain assets, from merging or consolidating and from dividend
payments.
UPC Senior Notes and Senior Discount Notes due 2009
On July 27, 1999, UPC completed a private placement bond offering,
consisting of three tranches: USD800.0 million of ten-year senior notes due
2009 with a 10 7/8% coupon; Euro300.0 million of ten-year senior notes due
2009 with a coupon of 10 7/8%; and USD735.0 million aggregate principal amount
of ten-year 12 1/2% senior discount notes due 2009 ("UPC Notes due 2009"). The
senior discount notes were sold at 54.521% of face value amount yielding gross
proceeds of approximately USD400.0 million and will accrue interest, but no
interest is payable until 2004. The indentures governing the UPC Notes due
2009 place certain limitations on UPC's ability, and the ability of its
subsidiaries, to borrow money, issue capital stock, pay dividends in stock or
repurchase stock, make investments, create certain liens, engage in certain
transactions with affiliates, and sell certain assets or merge with or into
other companies.
Concurrent with the closing of the UPC Notes due 2009, UPC entered into a
cross-currency swap, swapping the USD800.0 million, 10 7/8% fixed rate senior
notes into fixed and variable rate Euro notes with a notional amount totaling
Euro 754.7 million. One half of the Euro notes (Euro377.35) have a fixed
interest rate of 8.54% through August 1, 2004, thereafter switching to a
variable interest rate of the Euro Interbank Offered Rate ("EURIBOR") + 4.15%.
The remaining Euro377.35 million have a variable interest rate of EURIBOR +
4.15% through August 1, 2009. The cross-currency swaps provide the bank with
the right to terminate the swap at fair value commencing August 1, 2004 with
the payment of a call premium equal to the call premium which would be paid by
UPC to the USD800.0 million senior note holders if the notes are called on or
after August 1, 2004. The Company accounted for the cross-currency swap by
bifurcating the instrument into two components, (1) the swap of USD fixed rate
debt for Euro variable and fixed rate debt through August 1, 2004 (the
earliest call date) and (2) the residual portion of the cross-currency swap.
The swap of USD fixed rate debt for Euro variable and fixed rate debt is
accounted for as a hedge, and accordingly the Company carries the Euro
denominated debt on the balance sheet and recognizes interest expense
according to the provisions of the Euro debt. The residual portion of the
cross-currency swap is marked to fair value at each reporting period through
the statement of operations.
UPC Senior Revolving Credit Facility
In July 1999, the outstanding debt under this facility was refinanced with
the new UPC Senior Credit Facility.
UPC Senior Credit Facility
On July 27, 1999, a newly formed subsidiary of UPC, UPC Facility B.V.,
Telekabel Wien and UPC Norge, as borrowers, and a syndicate of banks executed
a Loan and Note Issuance Agreement for a Euro1.0 billion (2.2 billion)
multicurrency senior secured credit facility (the "UPC Senior Credit
Facility").
F-51
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
The UPC Senior Credit Facility matures on July 27, 2006 and is comprised of
two tranches. Tranche A is a Euro750.0 million reducing revolving credit
facility. Tranche B is a Euro250.0 million term loan facility. The Senior
Credit Facility bears interest at the EURIBOR (for borrowings in Euro) and at
the London Interbank Offered Rate ("LIBOR") (for all other borrowings) plus a
margin of between 0.75% and 2.0% (which margin is at least 1.5% for the first
six months following closing) plus an additional cost of funding calculation.
In addition to repaying the UPC Senior Revolving Credit Facility, proceeds from
the UPC Senior Credit Facility are to be used for general corporate purposes,
inter alia, to fund certain acquisitions (see below), and certain permitted
distributions including the payment of interest on funds downstreamed from the
proceeds of high yield issues and capital expenditures. Borrowings under the
UPC Senior Credit Facility are limited by financial ratio tests. The UPC Senior
Credit Facility contains provisions that require its immediate prepayment, at
the option of the majority banks, if (1) UPC ceases to own more than 50% of, or
loses its ability to exercise control over, UPC Facility B.V., or (2) United
ceases to own more than 50% and loses its ability to control UPC. In addition,
the UPC Senior Credit Facility limits UPC Facility B.V.'s and its subsidiaries'
ability to make acquisitions funded by loan proceeds with the UPC Senior Credit
Facility to Euro400.0 million over the life of the UPC Senior Credit Facility,
with a further limitation on new Eastern European acquisitions. Furthermore,
the UPC Senior Credit Facility contains certain financial covenants and
restrictions on UPC Facility B.V. and most of subsidiaries' ability to make
dividends or other payments to UPC, incur indebtedness, dispose of assets,
merge and enter into affiliate transactions. Net proceeds of certain disposals
(including sales by UPC of less than 50% of its current interest in UPC
Facility B.V.) are required to be used to prepay the UPC Senior Credit
Facility. The UPC Senior Credit Facility does, however, permit UPC Facility
B.V. to upstream payments to UPC after April 1, 2002 for the purpose of
servicing interest on the UPC Notes due 2009, if UPC Facility B.V.'s ratio of
senior debt to annualised net operating cash flows is less than or equal to
4.5:10.
The UPC Senior Credit Facility is secured by, among other things, pledges
of the shares of UPC Facility B.V., UPC Norge, UPC Belgium, Cable-Network
Austria Holding B.V. ("CNAH"), Stipdon and Telekabel Hungary, UPC Facility
B.V., UPC Belgium, CNAH, Stipdon and Telekabel Hungary are guarantors under the
UPC Senior Credit Facility. The collateral and guarantees under the UPC Senior
Credit Facility also secure UPC's liability under any currency and/or interest
rate hedging arrangements entered into in connection with the UPC Notes due
2009, although only Euro100.0 million of the indebtedness represented by such
arrangements is pari passu with the indebtedness under the UPC Senior Credit
Facility.
Amendment to the Articles of Association
In July 1999, at the annual shareholders' meeting, the shareholders
approved the amendment of UPC's Articles of Association to authorize 100
million ordinary shares B with the right to cast 1 vote per share and to
increase the voting rights of the newly re-named ordinary shares A (formerly
the ordinary shares), the priority shares, the preference shares A and the
preference shares B to 100 votes per share. The shareholders also approved an
increase in the nominal value of each issued and outstanding ordinary share A
and each priority share from Euro 0.30 to Euro 2.0.
Acquisition of an Interest in SBS Broadcasting S.A.
In July 1999, UPC closed the purchase of approximately 4.8% of SBS
Broadcasting S.A. for cash of USD24.3 million (50.1 million). In August 1999,
UPC acquired an additional 8.5% for USD75.9 million (154.8 million), increasing
its ownership to 13.3% in SBS. UPC's investment in SBS is accounted for under
the equity method of accounting.
F-52
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
Acquisition of Stjarn TVnatet AB
In July 1999, UPC acquired Stjarn, which operates cable television systems
serving the greater Stockholm area, for a purchase price of USD397.0 million
(817.8 million). USD100.0 million (206.0 million) of the purchase price was
paid in the form of a one year note with interest at 8% per year and the
balance of the purchase price was paid in cash. Upon maturity of the note, UPC
will have the option to pay the note in either cash or its shares. The Stjarn
acquisition was structured as a purchase of shares of Stjarn's parent holding
company, NBS Nordic Broadband Services AB ("NBS Nordic"). The acquisition was
accounted for under purchase accounting. At closing UPC began consolidating
Stjarn, including its debt, which was 172.7 million.
Effective August 1, 1999, UPC began consolidating its investment in Stjarn,
including its debt, which was 172.7 million. Details of the net assets
acquired, based on preliminary purchase price allocations using information
currently available, were as follows:
<TABLE>
<S> <C>
Property, plant and equipment ......................... 88,933
Goodwill............................................... 910,713
Long-term liabilities.................................. (66,473)
Net current liabilities................................ (115,353)
--------
Total purchase price................................. 817,820
Seller's note........................................ (206,000)
--------
Total cash paid...................................... 611,820
========
</TABLE>
The following pro forma condensed consolidated results for the nine months
ended September 30, 1999 and 1998 give effect to the acquisition of Stjarn as
if it had occurred at the beginning of the periods presented. This pro forma
condensed consolidated financial information does not purport to represent what
the Company's results of operations would actually have been if such
transaction 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.
NBS Nordic acquired Stjarn on May 6, 1998. As NBS Nordic had no substantial
operations of its own prior to the acquisition of Stjarn, Stjarn is deemed to
be the predecessor to NBS Nordic. The pro forma condensed consolidated results
for the nine months ended September 30, 1998 include Stjarn, as if NBS Nordic
had acquired Stjarn on January 1, 1998.
<TABLE>
<CAPTION>
For the Nine Months For the Nine Months
Ended September 30, Ended September 30,
1999 1998
------------------------ ----------------------
Historical Pro Forma Historical Pro Forma
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Service and other
revenue................. 608,558 647,621 306,215 353,585
=========== =========== ========== ==========
Net loss................. (676,738) (772,819) (179,706) (270,296)
=========== =========== ========== ==========
Weighted-average number
of ordinary shares
outstanding............. 120,586,863 120,586,863 82,864,454 82,864,454
=========== =========== ========== ==========
Basic and diluted net
loss per ordinary
share................... (5.61) (6.41) (2.17) (3.26)
=========== =========== ========== ==========
</TABLE>
F-53
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
Acquisition of @Entertainment
In August 1999, UPC acquired 100% of @Entertainment for USD807.0 million
(1,654.4 million). The @Entertainment acquisition was accounted for under
purchase accounting. At closing UPC began consolidating, @Entertainment
including its debt, which was 924.0 million.
Effective August 1, 1999, UPC began consolidating its investment in
@Entertainment. Details of the net assets acquired, based on preliminary
purchase price allocations using information currently available, were as
follows:
<TABLE>
<S> <C>
Property, plant and equipment.......................... 402,165
Goodwill............................................... 2,022,969
Other assets........................................... 43,737
Net current assets..................................... 105,040
Long-term liabilities.................................. (919,561)
---------
Total cash paid...................................... 1,654,350
=========
</TABLE>
The following pro forma condensed consolidated results for the nine months
ended September 30, 1999 and 1998 give effect to the acquisition of
@Entertainment as if it had occurred at the beginning of the periods presented.
This pro forma condensed consolidated financial information does not purport to
represent what the Company's results of operations would actually have been if
such transaction 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>
For the Nine Months For the Nine Months
Ended September 30, Ended September 30,
1999 1998
------------------------ ----------------------
Historical Pro Forma Historical Pro Forma
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Service and revenue...... 608,558 704,269 306,215 384,902
=========== =========== ========== ==========
Net loss................. (676,738) (1,068,245) (179,706) (499,673)
=========== =========== ========== ==========
Weighted-average number
of ordinary shares
outstanding............. 120,586,863 120,586,863 82,864,454 82,864,454
=========== =========== ========== ==========
Basic and diluted net
loss per ordinary
share................... (5.61) (8.86) (2.17) (6.03)
=========== =========== ========== ==========
</TABLE>
@Entertainment and PCI Offers to Repurchase Notes
The consummation of the Company's tender offer of @Entertainment resulted
in a change of control, and as a result, @Entertainment was obligated to offer
to repurchase any @Entertainment senior notes that the note holders put to it
at 101% of their principal amount, plus accrued and unpaid interest.
@Entertainment and a wholly-owned subsidiary of @Entertainment, Poland
Communications, Inc. ("PCI") made offers to repurchase from the holders of
@Entertainment's 14 1/2% Series B Senior Discount Notes due 2008, 14 1/2%
Senior Notes due 2008, Series C Senior Discount Notes due 2008, 14 1/2% Series
B Senior Discount Notes due 2009, and 14 1/2% Senior Discount Notes due 2009
(collectively, the "@Entertainment Notes") and PCI's 9 7/8%
F-54
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
Series B Senior Notes Due 2003 and 9 7/8% Senior Notes Due 2003 (collectively,
the "PCI Notes"). The offers to repurchase were made in accordance with the
terms of the @Entertainment Notes indentures and PCI Notes indentures, which
provided that, following a change in control, each holder of @Entertainment
Notes and PCI Notes had the right, at such holder's option, to require
@Entertainment and PCI, respectively to repurchase all or a portion of such
holder's @Entertainment Notes and PCI Notes at the repurchase price.
The offers for the repurchase of the @Entertainment Notes and the PCI
Notes, which were made pursuant to the terms of the indentures covering each of
the @Entertainment Notes and the PCI Notes, expired at 12:01 PM, New York City
time, on November 2, 1999. Pursuant to its repurchase offer, @Entertainment has
purchased USD49.1 million aggregate principal amount at maturity of
@Entertainment Notes for an aggregate price of USD26.5 million and PCI has
purchased USD113.2 million aggregate principal amount of PCI Notes for an
aggregate price of USD114.4 million.
PCI Notes
Poland Communications, Inc. ("PCI"), @Entertainment's major operating
subsidiary sold USD130.0 million aggregate principal amount of senior notes
("PCI Notes") in October 1996, The PCI Notes bear interest at 9 7/8%, payable
on May 1 and November 1 of each year. The PCI Notes mature on November 1, 2003.
The indenture governing the PCI Notes contains covenants limiting, among
other things, @Entertainment's ability to incur additional indebtedness, make
certain payments and distributions, including dividends, issue and sell capital
stock of @Entertainment's subsidiaries, create certain liens, enter into
transactions with its affiliates, invest in non-controlled entities, guarantee
indebtedness by subsidiaries, purchase the notes upon a change of control, pay
dividends and make other payments affecting @Entertainment's subsidiaries,
effect certain consolidations, mergers, and sale of assets and pursue certain
lines of business.
Pursuant to the terms of the PCI indenture, @Entertainment has offered to
repurchase all of the PCI Notes as a result of UPC's acquisition of
@Entertainment. The repurchase offer expired on November 2, 1999.
@Entertainment 1998 Senior Discount Notes
On July 14, 1998, @Entertainment sold 252,000 units, consisting of 14 1/2%
senior discount notes due 2008 and warrants entitling the warrantholders to
purchase 1,824,514 shares of @Entertainment common stock. This 1998 offering
generated approximately USD125.1 million gross proceeds to @Entertainment. The
senior discount notes are unsubordinated and unsecured obligations of
@Entertainment. Cash interest on the senior discount notes will not accrue
prior to July 15, 2003. After that, cash interest will accrue at a rate of 14
1/2% per annum and will be payable semi-annually in arrears on January 15 and
July 15 of each year, beginning January 15, 2004. The senior discount notes
will mature on July 15, 2008. Subsequent to the initial private placement of
these notes, @Entertainment made a registered offer to exchange these notes for
its 1998 senior discount notes ("1998 Senior Discount Notes"). The 1998 Senior
Discount Notes have the same terms as the notes for which they were exchanged
except for certain registration rights), were issued under the same indenture,
and are treated as one series with such notes. @Entertainment has also offered
to repurchase these notes pursuant to the terms of the @Entertainment
indenture.
The indenture governing the 1998 Senior Discount Notes has covenants
substantially similar to the PCI indenture.
In connection with the acquisition of @Entertainment, UPC acquired all of
the existing warrants held in connection with the @Entertainment 1998 Senior
Discount Notes.
F-55
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
@Entertainment 1999 Senior Discount Notes
In January 1999, @Entertainment sold 256,800 units consisting of senior
discount notes due 2009 and warrants to purchase 1,813,665 shares of
@Entertainment's common stock. The senior discount notes were issued at a
discount to their aggregate principal amount at maturity yielding gross
proceeds of approximately USD100.0 million. Cash interest on the senior
discount notes will not accrue prior to February 1, 2004. Thereafter, cash
interest will accrue at a rate of 14 1/2% per annum, payable semi-annually in
arrears on August 1 and February 1 of each year, commencing August 1, 2004.
Subsequent to the initial private placement of these notes, @Entertainment made
a registered offer to exchange these notes for its 1999 senior discount notes
("1999 Senior Discount Notes"). The 1999 Senior Discount Notes have the same
terms as the notes for which they were exchanged (except for certain
registration rights), were issued under the same indenture, and are treated as
one series with such notes. @Entertainment has also offered to repurchase these
notes pursuant to the terms of the @Entertainment indenture.
The indenture governing the 1999 Senior Discount Notes has covenants
substantially similar to the PCI indenture.
In connection with the acquisition of @Entertainment, UPC acquired all of
the existing warrants held in connection with the @Entertainment 1999 Senior
Discount Notes.
@Entertainment 1999 Series C Senior Discount Notes
On January 20, 1999, @Entertainment sold USD36.0 million aggregate
principal amount at maturity of series C senior discount notes ("Series C
Senior Discount Notes") generating approximately USD9.8 million of gross
proceeds. The Series C Senior Discount Notes are senior unsecured obligations
of @Entertainment. The Series C Senior Discount Notes were issued at a discount
to their aggregate amount. Original issue discount will accrete from January
20, 1999, until July 15, 2008, the date of maturity of the Series C Senior
Discount Notes. Cash interest on the Series C Senior Discount Notes will accrue
from July 15, 2004 at a rate of 7.0% per annum on the principal amount at
maturity, and will be payable semi-annually in arrears, on July 15 and January
15 of each year beginning January 15, 2005. Before January 15, 2004, cash
interest on the Series C Senior Discount Notes will not accrue. @Entertainment
has also offered to repurchase these notes pursuant to the terms of the
@Entertainment indenture.
The indenture governing the Series C Senior Discount Notes has covenants
substantially similar to the PCI indenture.
Acquisition of Videopole
In August 1999, UPC acquired through Mediareseaux, 100% of Videopole, which
operates cable television systems in France for a total purchase price of
USD135.1 million (279.4 million). The purchase price was paid with cash of
USD69.9 million (144.6 million) and 955,376 of UPC's ordinary shares A. The
share price was based on a 20-day average stock price through August 2, 1999.
The acquisition was accounted for under purchase accounting. Effective August
1, 1999, UPC began consolidating its investment in Videopole, including its
debt, which was 41.8 million.
Acquisition of Time Warner Cable France
In August 1999, UPC acquired, through Mediareseaux, 100% of Time Warner
Cable France, a company that controls and operates three cable television
systems in the suburbs of Paris and Lyon and in the city of Limoges. The
purchase price was USD71.1 million (146.9 million). Simultaneously with the
acquisition of Time Warner Cable France, UPC acquired an additional 47.62%
interest of one of its operating systems, Rhone Vision Cable, in which Time
Warner France had a 49.88% interest, for FFR89.3 million (30.0 million),
increasing UPC's ownership in this
F-56
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
operating system to 97.5%. The systems passed approximately 249,750 homes and
had approximately 79,750 subscribers as of September 30, 1999. The acquisition
was accounted for under purchase accounting. Effective September 1, 1999, UPC
began consolidating its investment in Time Warner Cable France, including its
debt, which was 100.8 million.
Agreement to Acquire Kabel Haarlem B.V.
In August 1999, UPC won a bid to purchase Kabel Haarlem B.V., the
municipality-owned cable television network in Haarlem, for approximately 134.0
million. Kabel Haarlem B.V.'s system is located near Amsterdam. As of September
30, 1999, this system passed approximately 70,000 homes and had approximately
66,000 basic cable television subscribers. The acquisition is expected to close
during the first quarter of 2000.
Acquisition of 50% of A2000
In September 1999, UPC acquired, through UPC Nederland, the remaining 50%
of A2000 that it did not already own for USD229.0 million (471.7 million),
including the assumption of receivables from A2000 of approximately 27.0
million. The acquisition was accounted for under purchase accounting. At
closing UPC began consolidating, A2000 including its debt, which was 523.5
million. A2000 systems passed approximately 582,000 homes and had approximately
515,000 cable subscribers, 30,000 cable telephone subscribers and 19,000 high-
speed Internet subscribers as of September 30, 1999.
As of September 1, 1999, UPC began consolidating its investment in A2000.
Details of the net assets acquired, based on preliminary purchase price
allocations using information currently available, were as follows:
<TABLE>
<S> <C>
Property, plant and equipment.......................... 198,870
Goodwill............................................... 565,183
Net current liabilities................................ (51,630)
Long-term liabilities.................................. (267,632)
--------
444,791
Receivables assumed.................................... 26,909
--------
Total cash paid...................................... 471,700
========
</TABLE>
The following pro forma condensed consolidated results for the nine months
ended September 30, 1999 and 1998 give effect to the acquisition of A2000 as if
it had occurred at the beginning of the periods presented. The following pro
formas reflect UPC's 100% ownership in A2000 for the periods presented. This
pro forma condensed consolidated financial information does not purport to
represent what the Company's results of operations would actually have been if
such transaction 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>
For the Nine Months For the Nine Months
Ended September 30, Ended September 30,
1999 1998
------------------------ ----------------------
Historical Pro Forma Historical Pro Forma
----------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Service and other
revenue................. 608,558 725,472 306,215 396,449
=========== =========== ========== ==========
Net loss................. (676,738) (762,634) (179,706) (251,857)
=========== =========== ========== ==========
Weighted-average number
of ordinary
shares outstanding...... 120,586,863 120,586,863 82,864,454 82,864,454
=========== =========== ========== ==========
Basic and diluted net
loss per ordinary
share................... (5.61) (6.32) (2.17) (3.04)
=========== =========== ========== ==========
</TABLE>
F-57
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
Agreement to Acquire 47.5% of Monor
In September 1999, UPC agreed to acquire an additional 47.5% in Monor for
approximately USD45.0 million (93.2 million). The acquisition will increase
UPC's ownership in Monor to approximately 95.1%. As of September 30, 1999,
Monor's systems passed approximately 66,000 homes with nearly 32,000 basic
cable subscribers and had 73,000 traditional telephony lines in the Monor
region, an area which borders Budapest in Hungary. The acquisition is expected
to close in December 1999.
Agreement to Form a Joint Venture with Microsoft and Liberty Media
In September 1999, UPC agreed to form a joint venture with Microsoft and
Liberty Media Corporation. UPC will contribute the 2.8 million Class A shares
of United that it owns and the other parties will contribute 4.9 million Class
B shares of United. UPC will have a 50% interest in the new joint venture and
Liberty and Microsoft will share the other 50% and a USD287.0 million (594.1
million) redeemable preferred interest in the joint venture to balance out the
parties' ownership interests. UPC, together with Liberty and Microsoft, will
evaluate content and distribution opportunities in Europe.
The joint venture will hold approximately 14.5% of United's common stock on
a fully diluted basis. The joint venture and its members will be bound by
voting and standstill agreements with United and certain of its controlling
shareholders.
Secondary Offering of Ordinary Shares A
In October 1999, UPC closed the offering of 15,000,000 of its ordinary
shares A. The price was set at Euro59.75 per share, for gross proceeds of
approximately Euro896.2 million (1,975.0 million).
Rule 144A Senior Notes and Senior Discounts Notes Offering
In October 1999, UPC closed a private placement bond offering consisting of
six tranches: USD252 million and Euro101.0 million of ten year Senior Notes due
2009 with a 11 1/4% coupon; USD200.0 million and Euro100.0 million of eight
year Senior Notes due 2007 with a coupon of 10 7/8%; and USD478.0 million and
Euro191.0 million aggregate principal amount of ten year 13 3/8% Senior
Discount Notes due 2009. The Senior Discount Notes were sold at 52.306% of the
face amount yielding gross proceeds of USD250.0 million and Euro100.0 million
and will accrue but not pay interest until 2004. UPC has entered into cross-
currency swaps, swapping the USD252.0 million, 11 1/4% coupon into fixed and
variable rate Euro notes with a notional amount totaling Euro240.2 million, and
swapping the USD200.0 million, 10 7/8% coupon into fixed and variable rate Euro
Notes with a notional amount totaling Euro109.7 million.
Exchange Offering for UPC Senior Notes and Senior Discount Notes due 2009
In November 1999, UPC commenced a registered exchange offering for its USD
and Euro Senior Notes and USD Senior Discount Notes initially sold under Rule
144A in July 1999 as a private placement.
Kabel Plus Closing
On October 27, 1999, UPC completed the acquisition of a 94.6% interest in
Kabel Plus and took control of the Kabel Plus cable television systems, which
operate in the Czech and Slovak Republics. As of September 30, 1999, Kabel Plus
passed approximately 622,000 homes and had approximately 435,000 basic cable
television subscribers. The purchase price of USD150.0 million (312.7 million)
is in escrow pending registration of the ownership change, which is expected by
the end of November 1999. At closing UPC began consolidating Kabel Plus,
including its debt, which was 48.4 million.
F-58
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Monetary amounts stated in thousands of Dutch guilders, except share and per
share amounts)
Eastern European Transaction
UPC has agreed to sell 3% of its interest in its Eastern European
operations (other than @Entertainment) to Nimrod Kovacs for a purchase price
based on its investment in these interest at historical cost plus 12% interest
thereon from the time of investment through the date of closing. This is
approximately 7,995,000, assuming completion of expected financing in Eastern
Europe. Mr. Kovacs is a member of UPC's Board of Management, and UPC's
Executive Chairman, UPC Central Europe.
Agreement by Tevel to Acquire 35% in Golden Channels
In November 1999, Tevel, a 46.6% investment of UPC, agreed to purchase a
35% economic interest in Golden Channels for USD183.5 million (379.8 million).
Golden Channels is a competitor of Tevel in the Israel market. Its systems,
including Idan, passed approximately 461,347 homes and had approximately
322,945 basic subscribers at December 31, 1998. Close of the acquisition is
subject to regulatory approval.
F-59
<PAGE>
INDEPENDENT AUDITORS' REPORT
Introduction
We have audited the consolidated financial statements of UNITED TELEKABEL
HOLDING N.V., Amsterdam, The Netherlands, for the year 1998 for purpose of
inclusion in the Form 10-K of one of its shareholders. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
Scope
We conducted our audit in accordance with auditing standards generally
accepted in The Netherlands, which are substantially the same as those
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
audit provides a reasonable basis for our opinion.
Opinion
In our opinion, the consolidated financial statements give a true and fair
view of the financial position of the company as at December 31, 1998 and of
the result for the period from commencement of operations at August 6, 1998
then ended in accordance with accounting principles generally accepted in The
Netherlands.
Generally accepted accounting principles in The Netherlands vary in certain
significant respects from generally accepted accounting principles in the
United States of America. Application of generally accepted accounting
principles in the United States of America would have affected total assets,
statement of operations and shareholders' equity as at and for the period from
commencement of operations at August 6, 1998 ended December 31, 1998, to the
extent summarized in Note 18. to the consolidated financial statements.
Arthur Andersen
Amstelveen, The Netherlands,
March 19, 1999
F-60
<PAGE>
UNITED TELEKABEL HOLDING N.V.
CONSOLIDATED BALANCE SHEET
As of December 31, 1998
(stated in thousands of Dutch Guilders)
<TABLE>
<S> <C>
ASSETS
Fixed assets:
Intangible fixed assets............................................. 564,438
Tangible fixed assets............................................... 847,056
Affiliated companies................................................ 206,332
---------
Total fixed assets................................................ 1,617,826
---------
Current assets:
Inventories......................................................... 3,091
Receivables......................................................... 40,638
Cash and cash equivalents........................................... 10,475
---------
Total current assets.............................................. 54,204
---------
Total assets.......................................................... 1,672,030
=========
SHAREHOLDERS' EQUITY AND LIABILITIES
Shareholders' Equity.................................................. 635,521
Minority interest..................................................... 1,104
---------
636,625
Provisions............................................................ 42,054
Long-term liabilities................................................. 232,727
Current liabilities................................................... 760,624
---------
Total shareholders' equity and liabilities........................ 1,672,030
=========
</TABLE>
F-61
<PAGE>
UNITED TELEKABEL HOLDING N.V.
CONSOLIDATED STATEMENT OF OPERATIONS
For the Period From Commencement of Operations
(August 6, 1998) to December 31, 1998
(stated in thousands of Dutch Guilders)
<TABLE>
<S> <C>
Total revenues........................................................ 99,122
Direct operating expenses........................................... (33,172)
Selling, general and administrative expenses........................ (36,096)
Depreciation and amortization....................................... (39,490)
--------
Total operating expenses.............................................. (108,758)
--------
Operating loss...................................................... (9,636)
Financial income and expense........................................ (16,699)
--------
Loss before income taxes.............................................. (26,335)
Income taxes........................................................ 1,212
--------
Loss after taxes...................................................... (25,123)
Share in results of affiliated companies............................ (24,486)
--------
Group loss............................................................ (49,609)
Minority interest................................................... 235
--------
Net loss.............................................................. (49,374)
========
</TABLE>
F-62
<PAGE>
UNITED TELEKABEL HOLDING N.V.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Period From Commencement of Operations
(August 6, 1998) to December 31, 1998
(stated in thousands of Dutch Guilders)
<TABLE>
<S> <C>
Cash flows from operating activities:
Net loss............................................................ (49,374)
Adjustments to reconcile net loss to net cash flows from operating
activities:
Depreciation and amortization..................................... 39,490
Share in results of affiliated companies, net..................... 24,486
Minority interest in subsidiaries................................. (235)
Changes in assets and liabilities:
Decrease in current assets........................................ 40,098
(Decrease) in current liabilities................................. (55,186)
(Decrease) in deferred taxes and other provisions................. (1,132)
--------
Net cash flows from operating activities............................ (1,853)
--------
Cash flows from investing activities:
Capital expenditures................................................ (121,384)
Loan to affiliated companies........................................ (7,120)
Acquisitions, net of cash acquired.................................. (12,588)
--------
Net cash flows from investing activities............................ (141,092)
--------
Cash flows from financing activities:
Proceeds from short-term borrowings................................. 120,705
Proceeds from long-term borrowings.................................. 9,621
--------
Net cash flows from financing activities............................ 130,326
--------
Net decrease in cash and cash equivalents........................... (12,619)
Cash and cash equivalents at beginning of period.................... 100
Cash and cash equivalents contributed............................... 22,994
--------
Cash and cash equivalents at end of period.......................... 10,475
========
Supplemental cash-flow disclosures:
Cash paid for interest.............................................. (19,470)
========
Non-cash investing activities:
Contribution of Dutch cable systems
Working capital................................................... (73,850)
Affiliated companies.............................................. 223,698
Tangible fixed assets............................................. 764,762
Intangible fixed assets........................................... 550,911
Short-term debt................................................... (544,918)
Long-term liabilities............................................. (223,106)
Provisions........................................................ (35,696)
Cash and cash equivalents......................................... 22,994
--------
Equity contributed.................................................. 684,795
========
</TABLE>
F-63
<PAGE>
UNITED TELEKABEL HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the Period From Commencement of Operations
(August 6, 1998) to December 31, 1998
(Monetary amounts stated in thousands of Dutch Guilders)
1. Organization and Nature of Operations
United Telekabel Holding N.V. ("UTH" or the "Company"), legally seated in
Almere, The Netherlands, was legally formed in May 1998 and commenced
operations on August 6, 1998. UTH was formed as a joint venture between United
Pan-Europe Communications N.V. ("UPC") and N.V. NUON Energie-Onderneming voor
Gelderland, Friesland en Flevoland ("NUON"). UPC became a 51% shareholder and
NUON a 49% shareholder. UTH was formed for the purpose of offering cable-based
communications through its networks in The Netherlands. UTH currently offers
cable television services and is further developing and upgrading its network
to provide digital video, voice and Internet/data services in its Dutch
markets.
UTH commenced operations on August 6, 1998 when both shareholders
contributed their interests in Dutch cable television operating companies to
UTH. NUON contributed its interest in N.V. Telekabel Beheer ("Telekabel") and
UPC contributed its interest in Cable Network Brabant Holding B.V. ("CNBH") and
50% of the shares in A2000 Holding N.V. ("A2000"). UTH recorded the assets
contributed at their fair market value. The table below summarizes the opening
balance sheet of UTH, based on the net assets contributed at their fair market
values by NUON and UPC as of August 6, 1998.
<TABLE>
<S> <C>
Cash and cash equivalents contributed.............................. 23,094
Other current assets............................................... 83,827
Affiliated companies............................................... 223,698
Tangible fixed assets.............................................. 764,762
Intangible fixed assets............................................ 550,911
---------
Total assets..................................................... 1,646,292
=========
Short-term debt.................................................... 544,918
Other current liabilities.......................................... 157,677
Provisions......................................................... 35,696
Long-term liabilities.............................................. 223,106
Shareholders' equity and liabilities............................... 684,895
---------
Total shareholders' equity and liabilities....................... 1,646,292
=========
</TABLE>
Due to the fact that operations commenced at August 6, 1998, no comparative
financial statements have been presented. Proforma information (unaudited) is
presented in note 19.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in The Netherlands for
financial statements. The accounting policies followed in the preparation for
the consolidated financial statements, differ in some respects to those
generally accepted in the United States of America (US GAAP). See note 18.
The preparation of financial statements in conformity with Dutch generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of
F-64
<PAGE>
UNITED TELEKABEL HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
management, all adjustments (consisting of normal recurring accruals) have been
made which are necessary to present fairly the financial position of the
Company as of December 31, 1998 and the results of its operations for the
period from commencement of operations (August 6, 1998) to December 31, 1998.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
UTH and its group companies (the "UTH Group"). Group companies are companies or
other legal entities in which UTH has an ownership interest of more than 50% of
the issued share capital or that UTH otherwise controls. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The following chart presents a summary of UTH's significant investments in
multi-channel television, programming and telephony operations as of December
31, 1998:
<TABLE>
<CAPTION>
Name City Percentage Ownership
---- --------- --------------------
<S> <C> <C>
Cable Network Brabant Holding BV.............. Eindhoven 100
N.V. Telekabel Beheer......................... Arnhem 100
A2000 Holding N.V............................. Amsterdam 50(1)
Uniport Communications B.V.................... 80
</TABLE>
- --------
(1) Not consolidated
Foreign Currencies
Assets and liabilities denominated in foreign currencies are translated
into Dutch guilders at the yearend exchange rate. Transactions in foreign
currencies are translated at the exchange rate in effect at the time of the
transaction. The exchange results are recorded under financial income and
expense in the statement of income.
Balance Sheet
(a) General
Assets and liabilities are stated at face value unless indicated otherwise.
(b) Fixed assets
Intangible fixed assets
The excess of investments in consolidated subsidiaries over the net
tangible asset value at acquisition is amortized on a straight-line basis over
15 years. Licenses in newly acquired companies are recognized at the fair
market value of those licenses at the date of acquisition and include the
development costs incurred prior to the date a new license was acquired. The
license value is amortized on a straight-line basis over the initial license
period, up to a maximum of 20 years. Deferred financing costs are amounts spent
in connection with financing the UTH Group. The amortization period is the
period relating to the term of the financing. When assets are fully amortized,
the costs and accumulated amortization are removed from the accounts.
Tangible fixed assets
Tangible fixed assets are stated at cost. Additions, replacements,
installation costs and major improvements are capitalized, and costs for normal
repair and maintenance of tangible fixed assets are charged to expense as
incurred. Assets constructed by subsidiaries of UTH incorporate overhead
expense and interest charges incurred during the
F-65
<PAGE>
UNITED TELEKABEL HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
period of construction; investment subsidies are deducted. Depreciation is
calculated using the straight-line method over the economic life of the asset,
taking into account the residual value. The economic lives of tangible fixed
assets at acquisition are as follows:
<TABLE>
<S> <C>
Networks......................................................... 7-20 years
Buildings and leasehold improvements............................. 20-33 years
Machinery & Other................................................ 3-10 years
</TABLE>
Affiliated Companies
For those investments in companies in which UTH's ownership interest is 20%
to 50%, its investments are held through a combination of voting common stock,
preferred stock, debentures or convertible debt and/or UTH exerts significant
influence through board representation and management authority, or in which
majority control is deemed to be temporary, the equity method of accounting is
used. Under this method, the investment, originally recorded at fair market
value, is adjusted to recognize UTH's proportionate share of net earnings or
losses of the affiliates, limited to the extent of UTH's investment in and
advances to the affiliates, including any debt guarantees or other contractual
funding commitments. UTH's proportionate share of net earnings or losses of
affiliates includes the amortization of the excess of its cost over its
proportionate interest in each affiliate's net tangible assets or the excess
of its proportionate interest in each affiliate's net tangible assets in
excess of its cost.
(c) Receivables
Receivables are stated at face value, less an allowance for doubtfull
accounts. The allowance for doubtful accounts is based upon specific
identification of overdue accounts receivable. An allowance for a percentage
of the account is established once the receivable is overdue. Upon
disconnection of the subscriber, the account is fully reserved. The allowance
is maintained on the books until receipt of payment or for a maximum of three
years.
(d) Cash and Cash Equivalents
Cash and cash equivalents include cash and investments with original
maturities of less than three months.
(e) Provisions
Deferred tax liabilities arising from temporary differences between the
financial and tax bases of assets and liabilities are included in the
provisions. The principal differences arise in connection with valuation
differences of intangible fixed assets. In calculating the provision, current
tax rates are applied.
UTH accounts for income taxes under the asset and liability method, which
requires recognition of, deferred tax assets and liabilities for the expected
future income tax consequences of transactions, which have been included in
the financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
financial statement and income tax basis of assets, liabilities and loss carry
forwards using enacted tax rates in effect for the year in which the
differences are expected to reverse. Net deferred tax assets are then reduced
by a valuation allowance if management believes it is more likely than not
they will not be realized.
(f) Fair value of financial instruments
SFAS Statement No. 107, "Disclosures about Fair Values of Financial
Instruments" requires the disclosure of estimated fair values for all
financial instruments, both on- and off-balance sheet, for which it is
practicable to
estimate fair value. For certain instruments, including cash and cash
equivalents, receivables, current liabilities and certain provisions, it was
assumed that the carrying amount approximated fair value due to the short
maturity of those instruments. For short and long term debt, the carrying
value approximates the fair value since all debt instruments carry a variable
interest rate component except for the convertible loans which carried a fixed
interest rate. For
F-66
<PAGE>
UNITED TELEKABEL HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
investments in affiliated companies carried at cost, quoted market prices for
the same or similar financial instruments were used to estimate the fair
values. UTH has adopted the principles of this statement in its financial
statements. UTH did not have any material off-balance-sheet financial
instruments as of December 31, 1998.
(g) Recoverability of Tangible and Intangible fixed assets
UTH evaluates the carrying value of all tangible and intangible assets
whenever events or circumstances indicate the carrying value of assets may
exceed their recoverable amounts. An impairment loss is recognized when the
estimated future cash flows (undiscounted and without interest) expected to
result from the use of an asset are less than the carrying amount of the asset.
Measurement of an impairment loss is based on the fair value of the asset
computed using discounted cash flows if the asset is expected to be held and
used. Measurement of an impairment loss for an asset held for sale would be
based on fair market value less estimated costs to sell.
(h) Concentration of Credit Risk
Financial instruments which potentially subject UTH to concentrations of
credit risk consist principally of trade receivables. Concentrations of credit
risk with respect to trade receivables are limited due to UTH's large number of
customers.
(i) Other Comprehensive Income
UTH has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), which requires that an
enterprise (i) classify items of other comprehensive income by their nature in
a financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. As of
December 31, 1998, UTH had no other comprehensive income items.
Income Statement
Revenue is primarily derived from the sale of cable television services to
subscribers and is recognized in the period the related services are provided.
Initial installation fees are recognized as revenue in the period in which the
installation occurs, to the extent installation fees are equal to or less than
direct selling costs, which are expensed. To the extent installation fees
exceed direct selling costs, the excess fees are deferred and amortized over
the average contract period. All installation fees and related costs with
respect to reconnections and disconnections are recognized in the period in
which the reconnection or disconnection occurs.
New Accounting Principles
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting For the Costs of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. SOP 98-1 identifies the characteristics of internal-use
software and provides examples to assist in determining when computer software
is for internal use. SOP 98-1 is effective for financial statements for fiscal
years beginning after December 15, 1998, for projects in progress and
prospectively, with earlier application encouraged. Management believes that
the adoption of SOP 98-1 will not have a material effect on the financial
statements.
The American Institute of Certified Public Accountants recently issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"), which is required to be adopted by affected companies for fiscal
years beginning after December 15, 1998. SOP 98-5 defines start-up and
organization costs, which must be expensed as incurred. In addition, all
deferred start-up and organization costs existing as of January 1, 1999 must be
written-off and accounted for as a cumulative effect of an accounting change.
Management believes that the adoption of SOP 98-1 will not have a material
effect on the financial statements.
F-67
<PAGE>
UNITED TELEKABEL HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which requires that companies recognize
all derivatives as either assets or liabilities in the balance sheet at fair
value. Under SFAS 133, accounting for changes in fair value of a derivative
depends on its intended use and designation. SFAS 133 is effective for fiscal
years beginning after June 15, 1999. Management is currently assessing the
effect of this new standard.
3. Intangible fixed assets
<TABLE>
<CAPTION>
Licenses and Deferred
Total Goodwill Financing Costs
------- ------------ ---------------
<S> <C> <C> <C>
Value upon contribution............... 550,911 547,869 3,042
Investments........................... 30,996 29,745 1,251
Amortization.......................... (17,469) (17,149) (320)
------- ------- -----
Book value as of December 31, 1998.... 564,438 560,465 3,973
======= ======= =====
</TABLE>
<TABLE>
<CAPTION>
Balance as of December 31, 1998
-------------------------------------
Licenses and Deferred
Total Goodwill Financing Costs
------- ------------ ---------------
<S> <C> <C> <C>
Gross Value........................... 581,907 577,614 4,293
Amortization.......................... (17,469) (17,149) (320)
------- ------- -----
Book value as of December 31, 1998.... 564,438 560,465 3,973
======= ======= =====
</TABLE>
4. Tangible fixed assets
<TABLE>
<CAPTION>
Land and Machinery
Total Buildings Network & Other
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Value upon contribution............... 764,762 6,025 745,503 13,234
Additions............................. 104,315 130 102,023 2,162
Depreciation.......................... (22,021) (182) (20,005) (1,834)
------- ----- ------- ------
Book value as of December 31, 1998.... 847,056 5,973 827,521 13,562
======= ===== ======= ======
</TABLE>
<TABLE>
<CAPTION>
Balance as of December 31, 1998
-------------------------------------
Land and Machinery
Total Buildings Network & Other
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Cost.................................. 869,077 6,155 847,526 15,396
Depreciation.......................... (22,021) (182) (20,005) (1,834)
------- ----- ------- ------
Book value as of December 31, 1998.... 847,056 5,973 827,521 13,562
======= ===== ======= ======
</TABLE>
F-68
<PAGE>
UNITED TELEKABEL HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
5. Affiliated companies
<TABLE>
<CAPTION>
Total Investments Advances
------- ----------- --------
<S> <C> <C> <C>
Balance upon contribution...................... 223,698 223,698 --
Additions...................................... 7,120 -- 7,120
Share in result................................ (24,486) (24,486) --
------- ------- -----
Balance as of December 31, 1998................ 206,332 199,212 7,120
======= ======= =====
</TABLE>
The investments in affiliated companies as of December 31, 1998 are:
<TABLE>
<CAPTION>
Investments in and Cumulative Share
% Advances to In Results of
Ownership Affiliated Companies Affiliated Companies Total
--------- -------------------- -------------------- -------
<S> <C> <C> <C> <C>
A2000........... 50 229,481 (24,449) 205,032
Interway........ 33 1,337 (37) 1,300
------- ------- -------
Total........... 230,818 (24,486) 206,332
======= ======= =======
</TABLE>
UTH had the following differences related to the excess of cost over the
net tangible assets acquired for its equity investments. Such differences are
being amortized over 12 to 15 years:
<TABLE>
<CAPTION>
Basis Accumulated
Difference Amortization
---------- ------------
<S> <C> <C>
A2000................................................ 249,236 (8,200)
======= ======
</TABLE>
These differences have been presented as affiliated companies and share in
result of affiliated companies respectively.
Subsequent to year end, UPC provided a letter of support to A2000 stating
that it would continue to provide to A2000 the funding necessary to continue
operations through at least 1999.
Summary financial information for A2000 based on Dutch generally accepted
accounting principles is as follows:
<TABLE>
<CAPTION>
As of December 31,
1998
------------------
<S> <C>
Balance sheet
Intangible fixed assets................................... 113,361
Tangible fixed assets..................................... 356,623
Financial fixed assets.................................... 770
Liquid assets............................................. 369
Other current assets...................................... 37,482
-------
Total assets............................................ 508,605
=======
Provisions................................................ 1,610
Long-term debt............................................ 467,430
Current liabilities....................................... 125,813
-------
Total liabilities....................................... 594,853
-------
Total shareholders' value................................. (86,248)
=======
</TABLE>
F-69
<PAGE>
UNITED TELEKABEL HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
<TABLE>
<CAPTION>
For the Five Months
Ended December 31,
1998
-------------------
<S> <C>
Statement of income
Revenue.................................................. 53,954
Costs.................................................... (39,271)
Depreciation and amortization............................ (35,888)
Financial income/charges................................. (11,293)
-------
Net loss............................................... (32,498)
=======
</TABLE>
6. Receivables
Receivables as presented under current assets mature within one year and
are specified as follows:
<TABLE>
<S> <C>
Trade accounts receivable............................................. 22,519
Receivables from affiliated companies................................. 1,654
Prepaid expenses and accrued income................................... 1,447
Other receivables..................................................... 15,018
------
Total............................................................... 40,638
======
</TABLE>
A major item under "other receivables" is current reclaimable VAT 3,676. As
of December 31, 1998 the valuation allowance on trade receivables amounted to
538.
7. Cash and cash equivalents
Cash and cash equivalents include demand accounts held in a bank with a
maturity of less than three months.
8. Shareholders' Equity
UTH's issued share capital consists of 100,000 shares with a par value of
NLG 1 each. All issued shares are fully paid-in.
<TABLE>
<CAPTION>
Ordinary Additional Accumulated
Capital Paid-in Capital Deficit Total
-------- --------------- ----------- -------
<S> <C> <C> <C> <C>
Balance at inception......... 100 -- -- 100
Balances upon contribution of
properties to joint venture,
August 6, 1998.............. -- 684,795 -- 684,795
Net loss..................... -- -- (49,374) (49,374)
--- ------- ------- -------
100 684,795 (49,374) 635,521
=== ======= ======= =======
</TABLE>
9. Provisions
Provisions relate mainly to deferred taxation.
10. Long-term liabilities
<TABLE>
<CAPTION>
Average Amount
Range of Rate of Outstanding
Interest Interest December 31, 1998
-------- -------- -----------------
<S> <C> <C> <C>
Bank loans............................... 5-7.625% 5.2 235,947
</TABLE>
F-70
<PAGE>
UNITED TELEKABEL HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
Long-term liabilities at December 31, 1998 will be payable as follows:
<TABLE>
<CAPTION>
Bank Loans
----------
<S> <C>
1999.................................................. 3,220
2000.................................................. 2,353
2001.................................................. 8,404
2002.................................................. 16,948
2003.................................................. 30,104
Thereafter............................................ 174,918
-------
Total............................................... 235,947
=======
</TABLE>
On February 20, 1998 CNBH secured a 250,000 nine-year term facility, which
was amended in August 1998 to 266,000. The CNBH facility bears interest at the
applicable Amsterdam Interbank Offered Rate ("AIBOR") plus a margin ranging
from 0.60% to 1.60% per annum, and is secured by, among other things, an
encumbrance over CNBH's assets and a pledge of the shares of CNBH. The facility
is used to refinance several acquisitions and will furthermore be used for the
development and exploitation of enhanced cable TV services, data services and
telephony services. As of December 31, 1998, 219,000 was outstanding on the
facility.
The shares of UTH held by UPC are pledged for a certain loan of UPC.
11. Current Liabilities
The current liabilities relate to short-term debt and other liabilities
which are specified below:
<TABLE>
<S> <C>
(a)Short-term debt
Long-term debt repayable within one year........................... 3,220
Short-term debt to shareholders.................................... 662,403
-------
Total............................................................ 665,623
=======
</TABLE>
Short term debt to shareholders as of December 31, 1998
NUON's contribution to UTH included an existing 690,000-debt facility with
an outstanding balance of approximately 543,000 (as of August 6, 1998). This
facility bears an interest rate of 6.65% over the reporting period up to
November 30, 1998. As of November 30, 1998 this rate was increased with 1.5%.
As of December 31, 1998, approximately 614,000 was outstanding on the facility.
The debt facility is due March 15, 1999, with an extension period of 15 days.
As security for repayment of the debt facility, NUON received a pledge over the
shares of N.V. Telekabel Beheer (the assets contributed by NUON). UTH has
negotiated with the lenders to refinance the debt facility (see Note 20.).
Subordinated loans
UTH entered into a subordinated loan agreement with NUON in December 1998
for an amount of NLG 33.0 million. The interest payable is 5.5% on an annually
basis.This subordinated loan was entered into for purposes of continuing
funding of incurred losses and capital expenditures.UTH entered into a
subordinated loan agreement with UPC in December 1998 for an amount of NLG 15.2
million. The interest payable is 5.5% on an annually basis. This subordinated
loan was entered into for purposes of continuing funding of incurred losses and
capital expenditures.
F-71
<PAGE>
UNITED TELEKABEL HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
<TABLE>
<S> <C>
(b)Other Liabilities
Accounts payable to trade creditors................................ 47,459
Deposits by customers.............................................. 197
Other short-term liabilities....................................... 39,855
Deferred income and accrued expenses............................... 7,490
-------
Total............................................................ 95,001
-------
Total current liabilities........................................ 760,624
=======
</TABLE>
12. Information per geographical area
All operations of UTH are in The Netherlands. In addition, substantially
all operations relate to cable television services.
13. Personnel
Labour cost is specified as follows:
<TABLE>
<S> <C>
Salaries and wages.................................................... 9,173
Pension costs......................................................... 538
Social securities..................................................... 1,911
------
Total............................................................... 11,622
======
</TABLE>
The information about employees by category is as follows:
<TABLE>
<S> <C>
Operating................................................................ 160
Other.................................................................... 184
---
Total.................................................................. 344
===
</TABLE>
14. Financial income and expenses
<TABLE>
<S> <C>
Interest income..................................................... 14
Interest expense.................................................... (16,713)
-------
Total............................................................. (16,699)
=======
</TABLE>
Under interest expense an amount of 11,348 was accounted for as interest
related parties.
15. Income taxes
In general, a Dutch holding company may benefit from the so-called
participation exemption. The participation exemption is a facility in Dutch
corporate tax law which under certain conditions allows a Dutch company to
exempt any dividend income and capital gains in relation with its participation
in subsidiaries. Capital losses are also exempted, apart from liquidation
losses (under stringent conditions).
For UTH the primary difference between taxable loss and net loss for
financial reporting purposes relates to the amortization of goodwill. The
consolidated financial statements have been prepared assuming partial tax basis
for license fees capitalized relating to certain acquisitions. Deferred taxes
have been provided for that portion of the licenses which management believes
no tax basis will be allowed.
F-72
<PAGE>
UNITED TELEKABEL HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
The difference between income tax expense provided in the financial
statements and the expected income tax benefit at statutory rates is reconciled
as follows:
<TABLE>
<S> <C>
Expected income tax benefit at the Dutch statutory rate of 35%....... (9,217)
Tax effect of permanent and other differences:
Change in valuation allowance...................................... 6,541
Non-deductible expenses............................................ 1,464
------
Total income tax benefit......................................... (1,212)
======
</TABLE>
The significant components of the net deferred tax liability are as
follows:
<TABLE>
<S> <C>
Deferred Tax Assets:
Tax net operating loss carries forward............................ 20,112
Valuation allowance............................................... (20,112)
-------
Deferred tax assets, net of valuation allowance................. 0
-------
Deferred Tax Liabilities:
Intangible assets................................................. 33,438
Tangible fixed assets, net........................................ 962
-------
Total deferred tax liabilities.................................... 34,400
-------
Deferred tax liabilities, net................................... 34,000
=======
</TABLE>
The tax loss carry forwards have no expiration date.
16. Related parties transactions
UTH signed management services agreements with both of its shareholders. In
the reporting period an amount of NLG 4,255 has been taken into account as
expenses. In addition UTH delivers service to NUON. These services are rendered
at arms' length prices and made up 8% of the revenues over the reporting
period. As mentioned under Note 11 UTH has a short-term debt payable to NUON as
well as subordinated loans to both NUON and UPC. UPC charged an amount of 988
for salaries and related costs for employees seconded to UTH Group.
17. Commitments and Guarantees
The UTH Group has entered into various rent and lease agreements for office
space, cars etc. The terms of the agreements call for future minimum payments
as follows:
<TABLE>
<S> <C>
1999................................................................... 4,000
2000................................................................... 3,200
2001................................................................... 2,100
2002................................................................... 1,600
2003................................................................... 1,400
</TABLE>
Subsequent to December 31, 1998, UTH provided additional funding to A2000.
In total UTH's share of the funding commitment is $15,000. As of December 31,
1998, UTH had funded $3,750 of its commitment.
F-73
<PAGE>
UNITED TELEKABEL HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
18. US GAAP Reconciliation
General
The accounting policies followed in the preparation for the consolidated
financial statements differ in some respects to those generally accepted in the
United States of America (US GAAP).
The differences which have a material effect on net loss and/or
shareholders' equity and/or total assets are as follows:
-- The fair market value of licences, goodwill, land and buildings and
networks for US GAAP purposes should be set at historical cost of the
contributor. Consequently, no step-up in asset value is allowed for the
difference between historical cost and the fair market value of the
assets contributed by both UPC and NUON.
-- Deferred taxes have been established for the difference between book
and tax basis of contributed assets, if applicable.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires recognition of deferred tax assets and liabilities for the expected
future income tax consequences of transactions which have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based upon the difference between the financial and
tax bases of assets and liabilities and carryforwards using enacted tax rates
in effect for the year in which the differences are expected to reverse. UTH
has adopted the principles of this statement in its financial statements.
US GAAP information
The calculation of net loss, shareholders' equity and total assets,
substantially in accordance with US GAAP, is as follows:
Net loss as per Consolidated Statements of income.......... (49,374)
Adjustments to reported income (loss):
Amortisation of goodwill................................. 4,082
Share in results of affiliated companies................. 747
---------
Approximate net loss in accordance with US GAAP........ (44,545)
=========
Shareholders' equity as per Consolidated balance sheets.... 635,521
Adjustments to reported equity:
Goodwill................................................. (152,105)
Affiliated Companies..................................... (27,893)
---------
Approximate shareholders' equity in accordance with US
GAAP.................................................. 455,523
==========
Total assets as per Consolidated Balance sheets............ 1,672,030
Adjustments to reported assets:
Goodwill................................................. (152,105)
Affiliated Companies..................................... (27,893)
---------
Approximate total assets in accordance with US GAAP.... 1,492,032
==========
F-74
<PAGE>
UNITED TELEKABEL HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
19. Proforma information (unaudited)
On August 6, 1998 both shareholders contributed their interests in the
Dutch cable market into UTH. The following pro forma condensed consolidated
information for the year ended December 31, 1997 and 1998 give effect to the
UTH Transaction as if it had occurred at the beginning of the periods
presented. This pro forma condensed consolidated information does not purport
to represent what UTH's result of operations would actually have been if such
transaction 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>
For the Year Ended For the Year Ended
December 31, 1997 December 31, 1998
------------------ ------------------
<S> <C> <C>
Total revenues......................... 157,836 219,314
Net loss............................... (47,194) (90,600)
</TABLE>
20. Subsequent events
Subordinated loan
UTH entered into a subordinated loan agreement with UPC in March, 1999 for
an amount of 119,000 million. The interest is payable on an annually basis.
This subordinated loan was entered into for purposes of continuing funding of
incurred losses and capital expenditures.
NUON Share Purchase Agreement
On February 17, 1999, UPC acquired the remaining 49% of UTH. This
transaction completed the purchase by UPC of 100% of UTH. UPC purchased the
interest from NUON for 518,100. In addition, UPC repaid NUON and assumed from
NUON a 33,300 subordinated loan, including accrued interest dated December 31,
1998, owed by UTH to NUON.
Refinancing
Subsequent to December 31, 1998, UTH replaced their existing 690,000
facility with a senior facility and additional shareholder loans. The senior
facility consists of a Euro 340 million (750,000) revolving facility to
N.V. Telekabel Beheer that will convert to a term facility on December 31,
2001. Euro 5 million of this facility will be in the form of an overdraft
facility that will be available until December 31, 2007. This existing facility
will be used to repay a portion of the UTH facility and for capital
expenditures. The new facility will bear interest at the Euro Interbank Offered
Rate plus a margin between 0.75% and 2.00% based on the leverage multiples tied
to N.V. Telekabel Beheer's net operating income. The new facility will be
secured by, among other things, a pledge over shares held by the borrower and
will restrict N.V. Telekabel Beheer's ability to incur additional debt.
F-75
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of N.V. TeleKabel Beheer
We have audited the accompanying consolidated balance sheet of N.V.
TeleKabel Beheer, ("TeleKabel" or the "Company"), as of December 31, 1997 and
the related consolidated statements of operations, shareholder's equity and
cash flows for the years ended December 31, 1996 and 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in The Netherlands, which are substantially the same as those
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 financial statements referred to above present fairly,
in all material respects, the financial position of N.V. TeleKabel Beheer as of
December 31, 1997 and the results of its operations and its cash flows for the
years ended December 31, 1996 and 1997 in conformity with accounting principles
generally accepted in The Netherlands. We have not audited the consolidated
financial statements of N.V. Telekabel Beheer for any period subsequent to
December 31, 1997.
Accounting principles generally accepted in The Netherlands vary in certain
significant respects from generally accepted accounting principles in the
United States of America. The application of the latter would have affected the
determination of consolidated results for each of the two years in the period
ended December 31, 1997 and shareholders' equity as of December 31, 1996 and
1997 to the extent summarized in note 15 to the consolidated financial
statements.
PricewaterhouseCoopers N.V.
Arnhem, The Netherlands,
September 11, 1998
F-76
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholder of N.V. TeleKabel Beheer
We have audited the accompanying consolidated balance sheet of N.V.
TeleKabel Beheer ("TeleKabel" or the "Company"), as of December 31, 1998 and
the related consolidated statement of operations, shareholders' equity and cash
flows for the year ended December 31, 1998. 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 audit in accordance with auditing standards generally
accepted in The Netherlands, which are substantially the same as those
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
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of N.V. TeleKabel Beheer as of
December 31, 1998 and the results of its operations and its cash flows for the
year ended December 31, 1998 in conformity with accounting principles generally
accepted in The Netherlands.
Accounting principles generally accepted in The Netherlands vary in certain
significant respects from generally accepted accounting principles in the
United States of America. The application of the latter would have affected the
determination of consolidated results for the year in the period ended December
31, 1998 and shareholders' equity as of December 31, 1998 to the extent
summarized in note 15 to the consolidated financial statements.
Arthur Andersen
Amstelveen, The Netherlands,
February 26, 1999
F-77
<PAGE>
N.V. TELEKABEL BEHEER
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
(in thousands of Dutch Guilders, except per share data)
<TABLE>
<CAPTION>
December 31,
----------------
Note 1997 1998
---- ------- -------
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................. 17,465 23,533
Subscriber receivables, net........................... 4 9,608 14,463
Related party receivables............................. 6,949 4,604
Other receivables..................................... 5 13,521 4,219
Inventory............................................. 3,830 3,274
Investments........................................... 6 16,413 --
------- -------
Total current assets................................ 67,786 50,093
Tangible fixed assets, net.............................. 7 553,499 650,401
Intangible assets, net.................................. 8 194,562 261,671
Long term investments................................... 6 1,222 1,304
------- -------
Total assets........................................ 817,069 963,469
======= =======
Liabilities and Shareholder's Equity
Current liabilities:
Accounts payable...................................... 28,989 34,157
Payable to banks...................................... 18,884 11,896
Deferred income....................................... 9 6,341 7,488
Short-term debt payable to group companies............ 10 500,691 667,879
Other payables and accrued expenses................... 11,901 20,880
------- -------
Total current liabilities........................... 566,806 742,300
======= =======
Minority interest in subsidiaries....................... 11 2,321 --
Commitments and contingencies........................... 12 -- --
Shareholder's equity:
Common stock, NLG 10 par value, 100,000 shares
authorized and issued................................ 1,000 1,000
Additional paid-in capital............................ 251,354 251,354
Accumulated deficit................................... (4,412) (31,185)
------- -------
Total shareholder's equity.......................... 247,942 221,169
------- -------
Total liabilities and shareholder's equity.......... 817,069 963,469
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-78
<PAGE>
N.V. TELEKABEL BEHEER
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1996, 1997 and 1998
(in thousands of Dutch Guilders)
<TABLE>
<CAPTION>
Years ended December
31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Service and other revenue............................ 113,917 137,167 153,662
Operating expenses:
Purchases relating to sales.......................... (14,515) (18,615) (23,449)
Personnel expenses................................... (14,366) (18,034) (22,373)
Depreciation and amortization........................ (22,195) (31,418) (56,109)
Other operating expenses............................. (39,995) (41,705) (45,816)
------- ------- -------
Net operating (loss) income.......................... 22,846 27,395 5,915
Equity results in associates......................... (1,033) 1,022 (90)
Interest expense, related party...................... (14,134) (26,210) (32,598)
Other income/(expense), net.......................... (12,875) -- --
------- ------- -------
Income/(loss) before and after income taxes.......... (5,196) 2,207 (26,773)
Minority interests in subsidiaries................... 279 683 --
------- ------- -------
Net income/(loss).................................... (4,917) 2,890 (26,773)
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-79
<PAGE>
N.V. TELEKABEL BEHEER
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31, 1996, 1997 and 1998
(in thousands of Dutch Guilders)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income/(loss)............................... (4,917) 2,890 (26,773)
Adjustments to reconcile net loss to net cash
flows from operating activities:
Depreciation and amortization................... 22,195 31,418 56,109
Share in results of affiliated companies........ 1,033 (1,022) 90
Provision for doubtfull accounts receivable..... 458 559 263
Write off of investment in unlisted securities.. 8,915 -- --
Minority interests in subsidiaries.............. (279) (683) --
Changes in operating assets and liabilities:
(Increase)/decrease in receivables.............. (43,840) 15,990 6,529
(Increase)/decrease in inventories.............. (2,635) (1,195) 556
Increase/(decrease) in other current
liabilities.................................... 10,536 (9,583) 8,306
-------- -------- --------
Net cash flows from operating activities........ (8,534) 38,374 45,080
-------- -------- --------
Cash flows from investing activities:
(Purchase)/sale of unlisted securities.......... (9,592) (49) 16,250
Investment in affiliated companies.............. (5,233) (787) --
Capital expenditures............................ (215,767) (266,118) (222,450)
New acquisitions, net of cash acquired.......... -- -- --
-------- -------- --------
Net cash flows from investing activities........ (230,592) (266,954) (206,200)
-------- -------- --------
Cash flows from financing activities:
Proceeds from short-term debt to group company.. 238,148 246,045 167,188
Capital contribution............................ -- -- --
-------- -------- --------
Net cash flows from financing activities........ 238,148 246,045 167,188
Net increase (decrease) in cash and cash
equivalents.................................... (978) 17,465 6,068
Cash and cash equivalents at beginning of
period......................................... 978 -- 17,465
-------- -------- --------
Cash and cash equivalents at end of period...... -- 17,465 23,533
======== ======== ========
Significant non-cash investment and financing
activities:
Contribution in kind of cable networks by parent
company........................................ 252,154 -- --
Deferral of payment for acquisition of CAI
Zoetermeer..................................... 62,800 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-80
<PAGE>
N.V. TELEKABEL BEHEER
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
for the years ended December 31, 1996, 1997 and 1998
(in thousands of Dutch Guilders)
<TABLE>
<CAPTION>
Issued and
fully paid Share Other
capital premium Reserves Total
---------- ------- -------- -------
<S> <C> <C> <C> <C>
Balance as of December 31, 1995........... 200 -- (2,385) (2,185)
Capital contribution...................... 800 251,354 -- 252,154
Net loss.................................. -- -- (4,917) (4,917)
----- ------- ------- -------
Balance as of December 31, 1996........... 1,000 251,354 (7,302) 245,052
Net income................................ -- -- 2,890 2,890
----- ------- ------- -------
Balance as of December 31, 1997........... 1,000 251,354 (4,412) 247,942
Net loss.................................. -- -- (26,773) (26,773)
----- ------- ------- -------
Balance as of December 31, 1998........... 1,000 251,354 (31,185) 221,169
===== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-81
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dutch Guilders)
1. Organization and Nature of Operations
In 1998 N.V. Telekabel Beheer was contributed to United Telekabel Holding
N.V. ("UTH'), a legally formed company in May 1998. UTH commenced operations on
August 6, 1998. UTH was formed as a joint-venture between United Pan-Europe
Communications NV ("UPC") and N.V. NUON Energie-Onderneming voor Gelderland,
Friesland en Flevoland ("NUON"). UPC became a 51% shareholder and NUON a 49%
shareholder. UTH was formed for the purpose of offering cable-based
communications through its networks in The Netherlands. UTH currently offers
cable television services and is further developing and upgrading its network
to provide digital video, voice and Internet/data services in its Dutch
markets.
UTH commenced operations on August 6, 1998 when both shareholders
contributed their interests in Dutch cable television operating companies to
UTH. NUON contributed its interest in Telekabel and UPC contributed its
interest in Cable Network Brabant Holding B.V. ("CNBH") and 50% of A2000
Holding N.V. ("A2000"). N.V. Telekabel Beheer and its subsidiaries (Telekabel
or the Company) of Arnhem was a wholly owned subsidiary of the NUON, a local
government owned company, before the contribution to UTH. NUON's main activity
is the provision of energy to the provinces of Gelderland, Friesland en
Flevoland.
Telekabel was incorporated in The Netherlands by NUON on August 22, 1995.
Effective January 1, 1996, NUON contributed all of its cable television
networks to the Company in exchange for its equity interest in the Company.
TeleKabel and its subsidiaries main activities comprise investments in and
management of cable television network and related infrastructures, as well as
developing and rendering information, communication and transaction services.
2. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles in The Netherlands
("Dutch GAAP"). The consolidated financial statements are prepared under the
historical cost convention. The preparation of financial statements in
conformity with Dutch GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Principles of Consolidation
Subsidiary undertakings, which are those companies in which the Company,
directly or indirectly, has an interest of more than one half of the voting
rights or otherwise has power to exercise control over the operations, have
been consolidated. Subsidiaries are consolidated from the date on which
effective interest is transferred to the Company and are no longer consolidated
from the date of disposal. All intercompany transactions, balances and
unrealised surpluses and deficits on transactions between group companies have
been eliminated. Where necessary, accounting policies for subsidiaries have
been changed to ensure consistency with the policies adopted by the Company.
Separate disclosure is made of minority interests.
F-82
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
The following subsidiaries are included in the consolidation as of December
31, 1998. The subsidiaries are wholly-owned, unless indicated otherwise.
<TABLE>
<S> <C>
N.V. TeleKabel(1).................................................... Arnhem
TeleKabel Omroep Facilitair Bedrijf B.V.............................. Arnhem
Maxinetwerken B.V. .................................................. Ede
CAI Buren B.V.(2).................................................... Veenendaal
CAI Druten B.V.(2)................................................... Druten
CAI Geldermalsen B.V.(2)............................................. Veenendaal
CAI Lingewaal B.V.(2)................................................ Lingewaal
CAI Neerijnen-West B.V.(2)........................................... Neerijnen
CAI Tiel B.V.(2)..................................................... Tiel
CAI Wychen B.V.(2)................................................... Wychen
CAI Dodewaard B.V.(2)................................................ Dodewaard
CAI Almere B.V.(2)................................................... Almere
CAI Dronten B.V.(2).................................................. Dronten
CAI Lelystad B.V.(2)................................................. Lelystad
CAI Over-Betuwe B.V.(1)(2)........................................... Utrecht
CAI Heteren B.V.(1)(2)............................................... Heteren
CAI Gendt B.V.(1)(2)................................................. Gendt
CAI Elst B.V.(1)(2).................................................. Elst
CAI Bemmel B.V.(1)(2)................................................ Bemmel
CAI Valburg B.V.(1)(2)............................................... Andelst
CAI Wageningen B.V.(1)(2)............................................ Wageningen
Kabelexploitatiemaatschappij CAI Renkum B.V.(1)(2)................... Utrecht
CAI-NKM Nijmegen B.V.(1)(2).......................................... Nijmegen
CAI Midden-Betuwe B.V.(1)(2)......................................... Veenendaal
</TABLE>
- --------------------
(1) Statements of joint and several liability pursuant to Article 403, Book 2
of the Dutch Civil Code were issued for these companies.
(2) Cable Networks were acquired through an exchange transaction with Casema as
described in note 3.
Cash and Cash Equivalents
For the purposes of the cash flow statement, cash and cash equivalents
comprise cash in hand, deposits held at call with banks, and investments in
money market instruments.
Investments in Affiliated Companies
Investments in affiliated companies are accounted for by the equity method
of accounting. These are investments in which the Company has between 20% and
50% of the voting rights, and over which the Company exercises significant
influence, unless such influence is temporary, in which case the investment is
recorded at cost. Provisions are recorded for long-term impairment in value.
Equity accounting involves recognizing in the income statement the
Company's share of the affiliate's profit or loss for the year. The Company's
interest in the affiliate is carried in the balance sheet at an amount that
reflects its share of the fair value of the net assets of the affiliate. The
excess of the consideration over the Company's share of fair value of the
affiliate's net assets is recorded as goodwill and amortized over its expected
useful life.
F-83
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Additions, replacements
and major improvements are capitalized, and costs for normal repair and
maintenance of property, plant and equipment are charged to expense as
incurred. Assets constructed by the Company incorporate interest charges
incurred during the period of construction, and investment subsidies are
deducted. Starting in 1998, Telekabel's depreciation is calculated using the
straight-line method over the economic life of the asset, taking into account
the residual value, to come in line with the depreciation method used in the
Group. Before 1998, Telekabel used the annuity method which is a compounded
interest method whereby the depreciation is calculated based on the assumption
that depreciation plus the normal cost of capital to finance the assets are
constant over the life of the assets. This resulted in lower depreciation
charges in the earlier years of the assets life and higher charges in the later
years. Would Telekabel have kept the annuity method in place the depreciation
costs in 1998 would have been some NLG 12 million less. Upon disconnection of a
subscriber, the remaining book value of the subscriber equipment, excluding
converters which are recovered upon disconnection, and the capitalized labor
are written off and accounted for as an operating cost.
Goodwill and Other Intangible Assets
Goodwill is the excess of investments in consolidated subsidiaries and
affiliated companies over the fair value of the net tangible fixed asset value
at acquisition and is amortized on a straight line basis over its expected
usefull life.
Recoverability of Tangible and Intangible Assets
The Company evaluates the carrying value of all tangible and intangible
fixed assets whenever events or circumstances indicate the carrying value of
assets may exceed their recoverable amounts. An impairment loss is recognized
when the estimated future cash flows (undiscounted and without interest)
expected to result from the use of an asset are less than the carrying amount
of the asset. Measurement of an impairment loss is based on fair value of the
asset computed using discounted cash flows if the asset is expected to be held
and used. Measurement of an impairment loss for an asset held for sale would be
based on fair market value less estimated costs to sell.
Revenue Recognition
Revenue is primarily derived from the sale of cable television services to
subscribers and is recognized in the period the related services are provided.
Initial installation fees are recognized as revenue in the period in which the
installation occurs, to the extent installation fees are equal to or less than
direct selling costs, with any excess costs deferred and amortized over the
average subscriber period. To the extent installation fees exceed direct
selling costs, the excess fees would be deferred and amortized over the average
contract period. All installation fees and related costs with respect to
reconnections are recognized in the period in which the reconnection occurs.
Income Taxes
The Company accounts for income taxes under the asset and liability method
which requires recognition of deferred tax assets and liabilities for the
expected future income tax consequences of transactions which have been
included in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on the difference
between the financial statement and income tax basis of assets, liabilities and
loss carryforwards using enacted tax rates in effect for the year in which the
differences are expected to reverse. Net deferred tax assets are only recorded
if management believes it is more likely than not they will be realized.
F-84
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
3. Significant Acquisitions and Divestitures
In April of 1997 the Company entered into an agreement with Casema to
exchange its cable network interest in TeleKabel Oosterhout B.V., TeleKabel De
Bilt-Bilthoven B.V., TeleKabel Zoetermeer B.V. and Kabelexploitatie
Maatschappij Rijnland B.V. for 100% of the shares of CAI-OverBetuwe B.V., CAI-
Bemmel B.V., CAI-Elst B.V., CAI-Gendt B.V., CAI-Heteren B.V., CAI-Valburg B.V.,
CAI-Midden-Betuwe B.V., Kabelexploitatie Maatschappij CAI-Renkum B.V., CAI-
Buren B.V., CAI-Druten B.V., CAI-Geldermalsen B.V., CAI-Lingewaal B.V., CAI-
NKM-Nijmegen B.V., CAI-Neerijnen-West B.V., CAI-Tiel B.V., CAI-Wageningen B.V.,
CAI-Wychen B.V., CAI-Dodewaard B.V and cable network assets in the cities of
Dronten and Lelystad.
The exchange of cable networks was based on the number of subscriber
connections exchanged, measured as of January 1, 1997. Casema and TeleKabel
agreed that a compensation of 1,200 Guilders per subscriber would be paid for
any differences in the number of subscribers exchanged.
Additionally the agreement specified that TeleKabel was to acquire CAI-
Almere B.V. for a consideration of 1,500 Guilders per subscriber, based on the
number of subscribers at the date of the share transfer.
The transaction with Casema was originally scheduled to be completed as of
December 31, 1997. As of December 31, 1997, TeleKabel transferred its interest
in TeleKabel Oosterhout B.V., TeleKabel De Bilt-Bilthoven B.V. and 47.5% of its
interest in Kabelexploitatie Maatschappij Rijnland B.V. to Casema and received
the interest in the cable networks specified in note 2.
During 1998 the Company surrendered its interests in TeleKabel Zoetermeer
B.V. and the remaining 52.5% share in Kabelexploitatie Maatschappij Rijnland
B.V. in exchange for shares in CAI-Buren B.V., CAI-Druten B.V., CAI-
Geldermalsen B.V., CAI-Lingewaal B.V., CAI-Neerijnen-West B.V., CAI-Tiel B.V.,
CAI-Wychen B.V., CAI-Dodewaard B.V., CAI-Dronten B.V., and CAI-Lelystad B.V. as
part of the Casema transaction, and bought shares in CAI-Almere B.V.
The acquired cable networks were recorded in the books of the Company at
fair value of the cable networks at the date of the exchange.
Effective September 1997 the Company acquired the cable network from the
city of Arnhem and Casema for a total consideration of approximately NLG84,000,
the difference between the consideration and the fair value of the assets,
which approximated NLG46,000, was recorded as goodwill.
4. Subscriber Receivables
Subscriber receivables are stated net of an allowance for doubtful accounts
of NLG1,280, NLG1,017 and NLG458 as of December 31, 1998, 1997 and 1996,
respectively.
F-85
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
5. Other Receivables
Other receivables can be specified as follows:
<TABLE>
<CAPTION>
As of
December 31,
------------
1997 1998
------ -----
<S> <C> <C>
Prepayments and accrued income.................................. 877 333
Taxes and social security premiums.............................. -- 580
Other receivables............................................... 12,644 3,306
------ -----
13,521 4,219
====== =====
</TABLE>
Other receivables as of December 31, 1997 include an amount of NLG 10,560,
relating to the Casema transaction.
6. Investments in Affiliated Companies and Unlisted Securities
Movements in investments in and advances to affiliated companies can be
summarized as follows:
<TABLE>
<CAPTION>
Affiliated Unlisted
companies securities Total
---------- ---------- -------
<S> <C> <C> <C>
Book value as of January 1, 1997............. 4,200 1,577 5,777
Additions.................................. -- 49 49
Share in income affiliated companies....... 1,022 -- 1,022
Other...................................... -- 787 787
Reclassification........................... (4,000) 14,000 10,000
------ ------- -------
Book value as of December 31, 1997........... 1,222 16,413 17,635
------ ------- -------
Additions.................................. 9 -- 9
Sale....................................... -- (16,250) (16,250)
Share in income of affiliated companies.... (90) -- (90)
------ ------- -------
Book value as of December 31, 1998........... 1,141 163 1,304
====== ======= =======
</TABLE>
As of January 1, 1997 investment in affiliated companies relate to a 33.3%
interest in Interway Holding B.V. and a 30% interest in Euronet Internet B.V.
During 1997 the investment in Euronet Internet B.V. was reclassified to
unlisted securities, because this investment was considered as temporary. The
reclassification in 1997 includes the net book value of Euronet Internet B.V.
of NLG 4,000 and the unamortized goodwill of NLG 10,000. (see note 8). As of
December 31, 1998 investment in affiliated companies relates to a 33.3%
interest in Interway Holding B.V.
F-86
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
7. Property, Plant and Equipment
Tangible fixed assets can be summarized as follows:
<TABLE>
<CAPTION>
Other Assets
Land & Cable fixed under
buildings Networks assets construction Total
--------- -------- ------ ------------ --------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1997
Net book value as of
January 1, 1997........ 2,188 378,703 2,976 13,130 396,997
Additions............... 4,438 159,601 12,768 36,748 213,555
Disposals............... -- (26,157) -- (13,130) (39,287)
Depreciation............ (389) (15,359) (2,018) -- (17,766)
----- ------- ------ ------- --------
Net book value as of
December 31, 1997...... 6,237 496,788 13,726 36,748 553,499
===== ======= ====== ======= ========
Balance as of December
31, 1997
Historical cost......... 6,905 525,454 16,437 36,748 585,544
Accumulated
depreciation........... (668) (28,666) (2,711) -- (32,045)
----- ------- ------ ------- --------
Net book value.......... 6,237 496,788 13,726 36,748 553,499
===== ======= ====== ======= ========
Year ended December 31,
1998
Net book value as of
January 1, 1998........ 6,237 496,788 13,726 36,748 553,499
Additions............... 184 185,285 716 83,038 269,223
Disposals............... (44) (96,872) (3,081) (36,748) (136,745)
Depreciation............ (341) (32,908) (2,327) -- (35,576)
----- ------- ------ ------- --------
Net book value as of
December 31, 1998...... 6,036 552,293 9,034 83,038 650,401
===== ======= ====== ======= ========
Balance as of December
31, 1998
Historical cost......... 7,017 608,889 13,632 83,038 712,576
Accumulated
depreciation........... (981) (56,596) (4,598) -- (62,175)
----- ------- ------ ------- --------
Net book value.......... 6,036 552,293 9,034 83,038 650,401
===== ======= ====== ======= ========
</TABLE>
Estimated useful lives and the depreciation method used for tangible fixed
assets as of January 1, 1998 are as follows:
<TABLE>
<CAPTION>
Useful
life Depreciation
(years) Methodology
------- -------------
<S> <C> <C>
Land and buildings..................................... 40 Straight line
Cable networks:
Active parts (25%)................................... 7 Straight line
Passive parts (75%).................................. 20 Straight line
Other fixed assets..................................... 3-5 Straight line
</TABLE>
During 1995, 1996 and 1997, TeleKabel acquired, exchanged and received
cable networks as a capital contribution from NUON (see notes 1 and 3). The
Company analyzed the value of its complete network in order to record its cable
networks on a consistent basis under fixed assets. All cable network
connections were analysed on a cost per connection basis and compared to the
current cost of a technologically up to date connection. All connections were
valued at the cost of establishing a new and technologically up to date
connection, minus the cost to upgrade the existing connection to the most
current technology, referred to the "current replacement value". The net
difference between the book value and the current replacement value was
reclassified to intangible fixed assets, with similar useful lives.
F-87
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
8. Intangible Fixed Assets
Intangible fixed assets movements and balances can be summarized as
follows:
<TABLE>
<S> <C>
Year ended December 31, 1997
Net book value as of January 1, 1997................................ 187,980
Additions........................................................... 49,057
Reclassification.................................................... (10,000)
Disposals........................................................... (18,823)
Amortization........................................................ (13,652)
-------
Net book value as of December 31, 1997.............................. 194,562
=======
Balance as of December 31, 1997
Historical cost..................................................... 216,444
Accumulated amortization............................................ (21,882)
-------
Net book value...................................................... 194,562
=======
Year ended December 31, 1998
Net book value as of January 1, 1998................................ 194,562
Additions........................................................... 130,327
Disposals........................................................... (42,685)
Amortization........................................................ (20,533)
-------
Net book value as of December 31, 1998.............................. 261,671
=======
Balances as of December 31, 1998
Historical cost..................................................... 300,001
Accumulated amortization............................................ (38,330)
-------
Net book value...................................................... 261,671
=======
</TABLE>
As described in Note 2 TeleKabel has recorded any differences between the
"current replacement value" of the tangible fixed assets and the book value of
the cable networks on the date of acquisition, contribution or exchange as
goodwill. Such goodwill is amortized on a straight line basis over the
estimated useful life of the cable network (15 years). Goodwill paid on the
acquisition of other types of businesses is amortized over 5-10 years depending
on the nature of the business. The reclassification of goodwill in 1997 relates
to the reclassification of Euronet Internet B.V. from an equity investment to
investment recorded at cost (see note 6).
9. Deferred Income
Deferred income relates to connection fees charged to customers in excess
of the normal cost of creating a connection. Deferred income is released to
income over the expected life of the cable connection.
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ ------
<S> <C> <C>
Balance as of January 1...................................... 4,220 6,341
Addition: connection charges received from clients........... 2,445 1,559
Less: release to income statement............................ (324) (412)
------ ------
Balance end of period........................................ 6,341 7,488
====== ======
</TABLE>
F-88
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
10. Short Term Debt Payable to Group Companies
As of December 31, 1998, short term debt payable to Group Companies relates
to loans provided by both NUON and UPC for financing fixed assets. As of
December 31, 1997, short term debt payable to Group Companies relates to loans
provided by NUON. The interest rate charged by NUON in 1998 was 6.65% through
November 1998 and 8.15% in December 1998. The interest rate charged by UPC was
6.65%. The interest rate charged by NUON in 1997 was 6.5%. In December 1998
TeleKabel entered into a subordinated loan agreement with UTH for an amount of
NLG33.0 million. The interest is 5.5% on an annual basis. This subordinated
loan was entered into for purposes of continuing funding of incurred losses
and capital expenditures.
11. Minority Interest
The movements in the minority interest can be summarized as follows:
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
----- ------
<S> <C> <C>
Balance as of January 1.................................... 1,820 2,321
Changes of minority interest held by third party........... 1,184 (2,321)
Less: share third parties in income........................ (683) --
----- ------
Balance end of period...................................... 2,321 --
===== ======
</TABLE>
Due to the sale/swap of the related shares in the Casema transaction there
is no longer a minority interest.
12. Commitments and Contingent Liabilities
Leases
TeleKabel has commitments for leasing of company cars amounting to NLG 938
yearly as per December 31, 1998. Maximum maturity period of the lease
agreements is four years.
Rental Agreements
TeleKabel entered into rental agreements for an amount of NLG950 in 1999.
Other Commitments
In 1997 TeleKabel had other commitments on account of acquisitions. These
commitments were not material.
Statement of Liability
TeleKabel and some subsidiaries can be held liable to a number of group
companies included in the consolidation, as meant by Article 403, Part 9, Book
2 of the Dutch Civil Code. As partner in a partnership firm, one of the group
companies can be held liable for the commitments of this firm. The maximum
risk amounts to NLG 100.
F-89
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
Fiscal Unity
Until December 31, 1997, TeleKabel and NUON were included in the same
entity for value added tax and income tax purposes. TeleKabel is severally
liable for the material tax debts of the fiscal entity.
Legal
The Company is not a party to any material legal proceedings, nor is it
currently aware of any material legal proceedings. From time to time, the
Company may become involved in litigation relating to claims arising out of
its operations in the normal course of its business.
13. Income Taxes
Until October of 1996 the Company did not have an obligation to pay income
taxes, as it was a wholly owned subsidiary of a Dutch local government
institution. As a result of changed shareholders of TeleKabel's parent
company, in Dutch tax laws the Company is subject to Dutch income taxes since
October 10, of 1996. The Company is in discussion with the Dutch tax
authorities regarding the tax basis of its assets and liabilities. Based on
current best estimates of the outcome of these discussions the Company
believes that the tax basis of the Company's assets and liabilities will not
differ significantly from their bookvalues.
14. Subsequent Events
Subordinated Loan
Telekabel entered into a subordinated loan with UTH in March 1999 for an
amount of NLG 119 million. The interest is payable on an annual basis. This
subordinated loan was entered into for purposes of continuing funding of
incurred losses and capital expenditures.
NUON Share Purchase Agreement
On February 17, 1999, UPC acquired the remaining 49% of UTH, increasing its
ownership in UTH to 100%.
Refinancing
Subsequent to December 31, 1998, Telekabel replaced their existing NLG 690
million facility (through NUON) with a senior facility and additional
shareholder loans. The senior facility consists of a Euro 340 million [NLG
750 million] revolving facility that will convert to a term facility on
December 31, 2001. Euro 5 million of this facility will be in the form of an
overdraft facility that will be available until December 31, 2007. This
existing facility will be used to repay a portion of the UTH facility and for
capital expenditures. The new facility will bear interest at the Euro
Interbank Offered Race plus a margin between 0.75% and 2.00% based on the
leverage multiples tied to Telekabel's net operating income. The new facility
will be secured by, among other things, a pledge over shares held by the
borrower and will restrict Telekabel's ability to incur additional debt.
15. Differences between Generally Accepted Accounting Principles in The
Netherlands and the United States
The Company's consolidated financial statements are prepared in accordance
with Dutch GAAP, which differs in certain respects from accounting principles
generally accepted in the United States ("US GAAP"). The material differences
as they apply to the Company are summarized below:
(a) Depreciation of fixed assets
Until 1998, under Dutch GAAP the Company depreciated its cable network
assets using the annuity method of depreciation. Starting in 1998, the Company
changed the depreciation method into straight-line depreciation. Under US GAAP
cable network assets are depreciated on a straight-line basis.
F-90
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands of Dutch Guilders)
(b) Accounting for investments in affiliates
Under Dutch GAAP the Company records certain of its investments in
affiliates in which it holds an interest of 20% to 50% at the historical cost
of the investment (see Note 2). Under US GAAP these investments are accounted
for using the equity method of accounting.
(c) Accrued subscriber fees
Under Dutch GAAP the Company created an accrual for subscriber fees on the
acquisition balance sheet of the cable network in Leiderdorp. Monthly
subscription fees for subscribers in this area were lower than fees charged to
customers in other areas. The Company created an accrual, to be released over
the useful life of the cable network, which results in the equalization of
cable revenues. Under US GAAP this accrual was not recorded resulting in a
decrease of the amount of goodwill paid for the cable network.
Reconciliation of net (loss)/profit (in thousands of Dutch guilders):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net income/(loss) under Dutch GAAP............... (4,917) 2,890 (26,773)
US GAAP adjustment:
Depreciation on a straight line basis............ (6,477) (8,631) 1,385
Equity accounting for affiliates................. 250 (6,540) 6,290
Accrued subscriber fees:
Goodwill amortization............................ 86 86 (172)
Release of subscriber accrual.................... (258) (258) 516
Income tax effect of US GAAP adjustments......... 2,327 3,081 (605)
------- ------- --------
Net income/(loss) under US GAAP.................. (8,989) (9,372) (19,359)
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Reconciliation of shareholder's equity:
Total shareholders' equity under Dutch GAAP................ 247,942 221,169
US GAAP adjustment:
Depreciation on a straight line basis...................... (15,108) (13,723)
Equity accounting for affiliates........................... (6,290) --
Accrued subscriber fees:
Goodwill................................................... 172 --
Accrued subscriber fees.................................... (516) --
Income tax effect of US GAAP adjustments................... 5,408 4,803
------- -------
Total shareholder's equity under US GAAP................... 231,608 212,249
======= =======
</TABLE>
F-91
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
@Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of
@Entertainment, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
related consolidated statements of operations, comprehensive loss, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. 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 generally accepted auditing
standards 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
@Entertainment, Inc. and subsidiaries as of December 31, 1997 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles in the United States of America.
KPMG
Warsaw, Poland
March 29, 1999
F-92
<PAGE>
@ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------- June 30,
1997 1998 1999
-------- --------- -----------
(unaudited)
in thousands)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................... $105,691 $ 13,055 $ 74,284
Accounts receivable, net of allowance for
doubtful accounts of $766,000 in 1997,
$1,095,000 in 1998 and $1,594,000 in 1999
(unaudited) (note 4)........................ 4,544 7,408 7,609
Programming and broadcast rights (note 6).... 894 9,030 12,694
Other current assets (note 7)................ 13,104 21,063 20,086
-------- --------- ---------
Total current assets......................... 124,233 50,556 114,673
-------- --------- ---------
Property, plant and equipment:
Cable television systems assets.............. 134,469 175,053 159,378
DTH equipment................................ -- 68,419 66,111
Construction in progress..................... 6,276 2,739 4,312
Vehicles..................................... 2,047 2,792 3,094
Other........................................ 7,940 16,119 19,740
-------- --------- ---------
150,732 265,122 252,635
Less accumulated depreciation................ (33,153) (52,068) (62,940)
-------- --------- ---------
Net property, plant and equipment............ 117,579 213,054 189,695
Inventories for construction.................. 8,153 8,869 7,631
Intangible assets, net (note 8)............... 26,318 43,652 35,530
Notes receivable from affiliates.............. 691 -- --
Investment in affiliated companies (note 9)... 21,628 19,956 22,027
Other assets, net (note 7).................... 8,494 12,287 16,620
-------- --------- ---------
Total assets.................................. $307,096 $ 348,374 $ 386,176
======== ========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses........ $ 14,721 $ 40,464 $ 30,296
Accrued interest (note 11)................... 2,175 2,140 2,140
Deferred revenue............................. 1,257 4,366 5,729
Income taxes payable......................... 1,765 3,794 3,794
Current portion of notes payable (note 11)... -- 6,500 6,500
-------- --------- ---------
Total current liabilities.................... 19,918 57,264 48,459
-------- --------- ---------
Notes payable, less current portion (note
11).......................................... 130,110 257,454 376,038
-------- --------- ---------
Total liabilities............................ 150,028 314,718 424,497
-------- --------- ---------
12% cumulative redeemable preferred stock
(liquidation value $50,000,000 plus accrued
and unpaid dividends; 20,002,500 preferred
shares authorized; 45,000 Series A and 5,000
Series B outstanding) (unaudited)............ -- -- 30,830
Minority interest............................. 4,713 -- --
Commitments and contingencies (notes 18 and
19)
Stockholders' equity (note 1):
Preferred stock, $.01 par value; Authorized
20,000,000 shares; none issued and
outstanding................................. -- -- --
Common stock, $.01 par value; Authorized
70,000,000 shares in 1998 and 1997; issued
and outstanding 33,310,000 shares in 1997
and 1998 and 33,406,000 in 1999
(unaudited)................................. 333 333 336
Paid-in capital.............................. 230,339 237,954 264,664
Accumulated other comprehensive income....... (218) (467) (26,422)
Accumulated deficit.......................... (78,099) (204,164) (307,729)
-------- --------- ---------
Total stockholders' equity................... 152,355 33,656 (69,151)
-------- --------- ---------
Total liabilities and stockholders' equity... $307,096 $ 348,374 $ 386,176
======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-93
<PAGE>
@ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
---------------------------- -----------------------
1996 1997 1998 1998 1999
------- -------- --------- ----------- -----------
(unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenues................ $24,923 $ 38,138 $ 61,859 $ 25,477 $ 39,855
Operating expenses:
Direct operating
expenses (note 13)... 7,193 14,621 61,874 28,257 59,001
Selling, general and
administrative
expenses (note 15)... 9,289 49,893 74,494 29,027 37,209
Depreciation and
amortization......... 9,788 16,294 26,304 10,929 22,699
------- -------- --------- -------- ---------
Total operating
expenses............... 26,270 80,808 162,672 68,213 118,909
------- -------- --------- -------- ---------
Operating loss........ (1,347) (42,670) (100,813) (42,736) (79,054)
Interest and investment
income................. 1,274 5,754 3,355 1,545 2,413
Interest expense (note
11).................... (4,687) (13,902) (21,957) (7,002) (24,377)
Equity in
(losses)/profits of
affiliated companies... -- (368) (6,310) 721 (530)
Foreign exchange loss,
net.................... (761) (1,027) (130) (48) (1,989)
------- -------- --------- -------- ---------
Loss before income
taxes, minority
interest and
extraordinary item..... (5,521) (52,213) (125,855) (47,520) (103,537)
Income tax
(expense)/benefit (note
10).................... (1,273) 975 (210) (562) (27)
Minority interest....... 1,890 (3,586) -- (207) --
------- -------- --------- -------- ---------
Loss before
extraordinary item..... (4,904) (54,824) (126,065) (48,289) (103,564)
Extraordinary item-loss
on early extinguishment
of debt (note 11)...... (1,713) -- -- -- --
------- -------- --------- -------- ---------
Net loss.............. (6,617) (54,824) (126,065) (48,289) (103,564)
Accretion of redeemable
preferred stock........ (2,870) (2,436) -- -- (2,018)
Preferred stock
dividends (note 1)..... (1,738) -- -- -- --
Deficit/(excess) of
consideration paid for
preferred stock
under/(over) carrying
amount (note 1)........ 3,549 (33,806) -- -- --
------- -------- --------- -------- ---------
Net loss applicable to
holders of common
stock.................. $(7,676) $(91,066) $(126,065) $(48,289) $(105,582)
Basic and diluted loss
per common share:
Loss before
extraordinary item... $ (0.34) $ (3.68) $ (3.78) $ (1.45) $ (3.16)
Extraordinary item.... (0.10) -- -- -- --
------- -------- --------- -------- ---------
Net loss (note 14).... $ (0.44) $ (3.68) $ (3.78) $ (1.45) $ (3.16)
======= ======== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-94
<PAGE>
@ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
---------------------------- -----------------------
1996 1997 1998 1998 1999
------- -------- --------- ----------- -----------
(unaudited) (unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Net loss................ $(6,617) $(54,824) $(126,065) $(48,289) $(103,564)
Other comprehensive
income:
Translation
adjustment........... -- (218) (249) 1,335 (25,955)
------- -------- --------- -------- ---------
Comprehensive loss...... $(6,617) $(55,042) $(126,314) $(46,954) $(129,519)
======= ======== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-95
<PAGE>
@ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Preferred Stock Common Stock Other
---------------- ------------------ Paid-In Comprehensive Accumulated
Shares Amount Shares Amount Capital Income Deficit Total
------ -------- ---------- ------- -------- ------------- ----------- ---------
(in thousands, except share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 1,
1996................... 985 $ 10,311 11,037 $ 4,993 $ 1,544 $ -- $ (16,658) $ 190
Net loss............... -- -- -- -- -- (6,617) (6,617)
Stock dividend......... 166 1,738 -- -- (1,738) -- -- --
Proceeds from issuance
of common and
preferred stock (note
1).................... -- -- 7,911 (4,992) 87,021 -- -- 82,029
Cost of issuance (note
1).................... -- -- -- -- (1,028) -- -- (1,028)
Allocation of proceeds
to preferred (note
1).................... -- -- -- -- (32,156) -- -- (32,156)
Preferred stock
redemption (note 1)... (1,151) (12,049) -- -- 3,549 -- -- (8,500)
Accretion of redeemable
preferred stock
(note 1).............. -- -- -- -- (2,870) -- -- (2,870)
Reorganization (note
1).................... -- -- 18,929,052 188 (188) -- --
------ -------- ---------- ------- -------- ----- --------- ---------
Balance December 31,
1996................... -- -- 18,948,000 189 54,134 -- (23,275) 31,048
Translation
adjustment............ -- -- -- -- -- (218) -- (218)
Net loss............... -- -- -- -- -- -- (54,824) (54,824)
Net proceeds from
initial public
offering (note 1)..... -- -- 9,500,000 95 183,197 -- -- 183,292
Purchase of PCI series
A and C redeemable
preferred stock
(note 1).............. -- -- -- -- (33,806) -- -- (33,806)
Accretion of redeemable
preferred stock
(note 1).............. -- -- -- -- (2,436) -- -- (2,436)
Conversion of series B
redeemable preferred
stock (note 1)........ -- -- 4,862,000 49 11,148 -- -- 11,197
Stock option
compensation expense
(note 15)............. -- -- -- -- 18,102 -- -- 18,102
------ -------- ---------- ------- -------- ----- --------- ---------
Balance December 31,
1997................... -- -- 33,310,000 333 230,339 (218) (78,099) 152,355
Translation
adjustment............ -- -- -- -- -- (249) -- (249)
Net loss............... -- -- -- -- -- -- (126,065) (126,065)
Warrants attached to
Senior Discount Notes
(note 11)............. -- -- -- -- 7,615 -- -- 7,615
------ -------- ---------- ------- -------- ----- --------- ---------
Balance December 31,
1998................... -- $ -- 33,310,000 $ 333 $237,954 $(467) $(204,164) $ 33,656
====== ======== ========== ======= ======== ===== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-96
<PAGE>
@ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
---------------------------- -----------------------
1996 1997 1998 1998 1999
------- -------- --------- ----------- -----------
(unaudited) (unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $(6,617) $(54,824) $(126,065) $(48,289) $(103,564)
Adjustments to
reconcile net loss to
net cash provided
by/(used in) operating
activities:
Minority interest...... (1,890) 3,586 -- 207 --
Depreciation and
amortization.......... 9,788 16,294 26,304 10,929 22,699
Amortization of notes
payable discount and
issue costs........... 166 1,040 9,182 -- 16,707
Non-cash portion of
extraordinary item.... 1,566 -- -- -- --
Gain on sale of
investment
securities............ -- (358) -- -- --
Non-cash stock option
compensation expense.. -- 18,102 -- -- --
Equity in
losses/(profits) of
affiliated companies.. -- 368 6,310 (721) (530)
Other.................. -- -- 2,196 1,338 473
Changes in operating
assets and
liabilities:
Accounts receivable... (796) (3,191) (2,780) (5) (201)
Other current assets.. (1,862) (2,101) (7,959) (3,344) 977
Programming and
broadcast rights..... -- (894) (8,136) (5,699) (3,664)
Accounts payable and
accrued expenses..... 3,379 5,757 25,185 15,767 (5,789)
Income taxes payable.. 334 (2,707) 2,026 676 --
Accrued interest...... 2,175 -- (35) -- --
Deferred revenue...... (131) 155 3,104 (346) 1,836
Other current
liabilities.......... -- -- -- (221) --
------- -------- --------- -------- ---------
Net cash provided
by/(used in)
operating
activities.......... 6,112 (18,773) (70,668) (29,708) (71,056)
------- -------- --------- -------- ---------
Cash flows from
investing activities:
Construction and
purchase of property,
plant and equipment... (26,581) (39,643) (114,992) (45,539) (20,311)
Repayment of notes
receivable from
affiliates............ -- 2,521 -- -- --
Issuance of notes
receivable from
affiliates............ (2,491) (721) -- -- --
Purchase of investment
securities............ (25,940) -- -- -- --
Proceeds from maturity
of investment
securities............ -- 25,473 -- -- --
Purchase of other
assets................ (6,000) (10,200) -- -- --
Purchase of
intangibles........... -- -- -- (345) (145)
Investments in
affiliated companies.. (580) (21,420) (5,228) -- --
Purchase of
subsidiaries, net of
cash received
(note 5).............. (13,269) (20,852) (26,990) (10,559) --
Purchase of other
investments........... -- -- -- -- (1,753)
------- -------- --------- -------- ---------
Net cash used in
investing
activities.......... (74,861) (64,842) (147,210) (56,443) (22,209)
------- -------- --------- -------- ---------
Cash flows from
financing activities:
Net proceeds from
issuance of stock..... 81,001 183,292 -- -- 1,601
Redemption of preferred
stock................. (8,500) (60,000) -- -- --
Costs to obtain loans.. (6,513) (1,749) (5,960) (2,002) (5,156)
Proceeds from issuance
of notes payable...... 136,074 -- 123,985 -- 109,755
Repayment of notes
payable............... (27,893) (720) (398) 6,468 --
Proceeds from issuance
of warrants........... -- -- 7,615 -- 48,295
Repayments to
affiliates............ (39,280) -- -- -- --
------- -------- --------- -------- ---------
Net cash provided by
financing
activities.......... 134,889 120,823 125,242 4,466 154,495
------- -------- --------- -------- ---------
Net
increase/(decrease)
in cash and cash
equivalents......... 66,140 37,208 (92,636) (81,685) 61,230
Cash and cash
equivalents at
beginning of period.... 2,343 68,483 105,691 105,691 13,055
------- -------- --------- -------- ---------
Cash and cash
equivalents at end of
period................. $68,483 $105,691 $ 13,055 $ 24,006 $ 74,285
======= ======== ========= ======== =========
Supplemental cash flow
information:
Cash paid for
interest.............. $ 2,338 $ 12,873 $ 13,014 $ 6,476 $ 7,159
======= ======== ========= ======== =========
Cash paid for income
taxes................. $ 1,184 $ 1,732 $ 589 $ 395 $ 53
======= ======== ========= ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-97
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
1. Organization and Formation of Holding Company
@Entertainment, Inc. ("@Entertainment") was established as a Delaware
corporation in May 1997. @Entertainment succeeded Poland Communications, Inc.
("PCI") as the group holding company to facilitate an initial public offering
of stock in the United States and internationally. PCI was founded in 1990 by
David T. Chase, a Polish-born investor.
@Entertainment, Inc. and its subsidiaries (the "Company") offer pay
television services to business and residential customers in Poland. Its
revenues are derived primarily from monthly basic and premium service fees for
cable and digital satellite direct-to-home ("DTH") television services provided
primarily to residential, rather than business, customers. In September 1998,
the Company launched its DTH broadcasting service throughout Poland. In
addition to developing and acquiring programming for distribution on its cable
and DTH television networks, the Company commenced distribution of a branded
digital encrypted package of Polish-language programming under the brand name,
Wizja TV in June and September 1998 on its cable and DTH television networks,
respectively.
At December 31, 1998, @Entertainment wholly owned PCI, @Entertainment
Programming, Inc. ("@EPI")--United States corporations, @Entertainment Limited
("@EL"), @Entertainment Services Limited ("@ES") --United Kingdom corporations,
Sereke Holding B.V. ("Sereke")--a Netherlands corporation and Wizja TV Sp. z
o.o., Gound Zero Media Sp. z o.o. ("GZM") and Wizja TV Sp. z o.o Produkcyjna
Sp. z o.o., which are Polish corporations. PCI owns 92.3% of the capital stock
of Poland Cablevision (Netherlands) B.V. ("PCBV"), a Netherlands corporation
and first-tier subsidiary of PCI. @Entertainment, PCI and PCBV are holding
companies that directly or indirectly hold controlling interests in a number of
Polish cable television companies, collectively referred to as the "PTK
Companies". As of December 31, 1998, substantially all of the assets and
operating activities of the Company were located in Poland and the United
Kingdom.
The following is a description of the events leading up to the formation of
@Entertainment.
PCI had outstanding at December 31, 1995, 985 shares of preferred stock,
which were convertible into 812 shares of Class A common stock. PCI had the
option of redeeming the preferred stock in whole or in part from January 1,
1996 through December 31, 2002. However, as discussed below, the preferred
stock was exchanged for new series D preferred stock during March 1996.
During February 1996, PCI issued to certain stockholders an additional
2,437 shares of Class A common stock in accordance with the provisions of the
Shareholder Agreement dated June 27, 1991. The shares were issued at a nominal
value of $.01 each. Also during February 1996, PCI issued a stock dividend of
166 shares of series A preferred stock to the preferred stock stockholder.
During March 1996, PCI completed several transactions including restating
its certificate of incorporation, issuing new shares of stock, redeeming
preferred stock, and the repayment of affiliate debt. The restated certificate
of incorporation of PCI authorized a new class of $.01 par common stock, $1 par
series A preferred stock, $.01 par series B preferred stock, $.01 par series C
preferred stock, and $.01 par series D preferred stock. All shares of Class A
and Class B common stock previously issued and outstanding were exchanged for
new common stock. All issued and outstanding shares of preferred stock were
exchanged for new series D preferred stock, which were subsequently redeemed
for $8,500,000. Only common stock and series B preferred stock retained voting
rights and only holders of common stock were entitled to receive dividends.
Each series of preferred stock had redemption provisions; the series B
preferred stock were also convertible into common stock.
F-98
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@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
During March 1996, PCI issued 4,662 shares of common stock, 4,000 shares of
series A preferred stock, and 2,500 shares of series B preferred stock to ECO
Holdings III Limited Partnership ("ECO") in exchange for $65,000,000; and 2,000
shares of series C preferred stock and 812 shares of common stock were issued
to Polish Investments Holding Limited Partnership ("PIHLP") in exchange for
$17,029,000.
The PCI series A, series B and series C preferred stock have a mandatory
redemption date of October 31, 2004. At the option of the Company, the PCI
series A, series B and series C preferred stock may be redeemed at any time in
whole or in part at a redemption price per share of $10,000. Prior to the
mandatory redemption of the PCI series B preferred stock, the holders of any
shares of PCI series B preferred stock had the option to convert their shares
to 4,862 shares of PCI common stock. The preferred stock was recorded at its
mandatory redemption value on October 31, 2004, discounted at 12%, of
$32,156,000.
On June 22, 1997, all the holders of shares of PCI's common stock and
@Entertainment entered into a Contribution Agreement. Pursuant to the
Contribution Agreement, each holder of shares of PCI's common stock transferred
all shares of PCI common stock owned by it to @Entertainment. In addition, ECO
transferred all of the outstanding shares of PCI's series B preferred stock to
@Entertainment. All of these transfers (the "Share Exchange") were designed to
qualify as a tax-free exchange under section 351 of the Internal Revenue Code
of 1986, as amended. Each holder of PCI's common stock received 1,000 shares of
common stock of @Entertainment in exchange for each share of PCI's common stock
transferred by it (the "Capital Adjustment"). ECO also received an equivalent
number of shares of @Entertainment's series B preferred stock in exchange for
its shares of PCI's series B preferred stock. @Entertainment's series B
preferred stock has identical rights and preferences to those of PCI's series B
preferred stock, except that the ratio for conversion of such shares into
common stock increased from 1:1.9448 to 1:1,944.80 in order to reflect the
Capital Adjustment. The 2,500 outstanding shares of @Entertainment's series B
preferred stock automatically converted into 4,862,000 shares of common stock
of @Entertainment upon the closing of the initial public offering. The
formation of @Entertainment has been accounted for at historical cost in a
manner similar to pooling of interest accounting.
On June 20, 1997, PIHLP transferred all of the outstanding shares of PCI's
series C preferred stock to an entity owned by certain of the beneficial owners
of PIHLP and members of their families (the "Chase Entity"). The Chase Entity,
ECO and @Entertainment entered into a Purchase Agreement dated June 22, 1997
(the "Purchase Agreement"). Among other matters, the Purchase Agreement
obligated @Entertainment to purchase all of the outstanding shares of PCI's
series A preferred stock and series C preferred stock for cash from ECO and the
Chase Entity, respectively, at the closing of the IPO. The aggregate purchase
price of $60,000,000 for PCI's series A preferred stock and series C preferred
stock equaled the aggregate redemption price of such shares as set forth in
PCI's certificate of incorporation. The purchase resulted in a loss applicable
to common stockholders of $33,806,000 representing the excess of the
consideration paid for the preferred stock over the carrying amount of those
shares as of the date of the Reorganization (as defined hereinafter). The
aforementioned purchase was funded with a portion of the net proceeds of the
IPO.
The Company periodically accreted, until the date of the purchases
described above, from paid-in capital an amount that would provide for the
redemption value of the PCI series A, B and C preferred shares at October 31,
2004. The total amounts recorded for accretion for the years ended December 31,
1996 and 1997 were $2,870,000 and $2,436,000, respectively.
In June 1997, @Entertainment acquired all of the outstanding stock of @EL,
a new corporation organized under the laws of England and Wales (the "@EL
Incorporation").
In June 1997, certain employment agreements for the executive officers of
@Entertainment who were employed by PCI and their employee stock option
agreements were assigned to @Entertainment by PCI (the
F-99
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@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
"Assignment"). As part of the Assignment and the Capital Adjustment, the
employment agreements were amended to provide that each option to purchase a
share of PCI's common stock was exchanged for an option to purchase 1,000
shares of @Entertainment's common stock with a proportionate reduction in the
per share exercise price.
The Share Exchange, Capital Adjustment, @EL Incorporation and the
Assignment are collectively referred to as the "Reorganization". As a result of
the Reorganization, @Entertainment owns 100% of the outstanding shares of
common stock and preferred stock of PCI and 100% of @EL.
On August 5, 1997, the Company consummated an initial public offering of
9,500,000 shares of common stock at a price of $21 per share. Net proceeds to
the Company were approximately $183,292,000 after deduction of the underwriting
discount and other expenses of the offering.
2. Financial Position and Basis of Accounting
The Company generated an operating loss of $100,813,000 and negative cash
flows from operations of $70,668,000 for the year ended December 31, 1998,
primarily due to the significant costs associated with the development and
launch of the Company's DTH and programming businesses, promotion of those
businesses, and the development, production and acquisition of programming for
Wizja TV. Furthermore, the Company expects to experience substantial operating
losses and negative cash flows for at least the next two years in association
with the expansion of the DTH and programming businesses, and the continued
development of the cable business. As at December 31, 1998, the Company was
committed to pay at least $550,100,000 in guaranteed payments over the next
nine years of which at least approximately $254,200,000 million was committed
through the end of 2000. As at December 31, 1998 the Company had cash of
$13,055,000.
Given the above noted factors at December 31, 1998, management planned and
successfully completed debt and equity offerings in January, 1999 which
generated net proceeds to the Company of approximately $154,000,000 (see note
20). The Company believes that the net proceeds of these three recent offerings
and cash on hand will provide the Company with sufficient capital to fulfill
its current business plan and to fund guaranteed payments until it achieves
positive cash flow from operations. The Company's current business plan include
the following key assumptions:
(a) achieve rapid penetration of the Polish market by distributing DTH
Reception Units to 380,000 initial subscribers at prices significantly
decreased by promotional incentives. The Company continues to review
its business plan with respect to the level of promotional incentives
it will provide. During 1998 the Company reduced its plans with respect
to the initial subscribers receiving significant promotional incentives
from 500,000 to 380,000.
(b) the requirement to purchase 500,000 DTH Reception Units from Philips
prior to June 30, 2000. The Company continues to re-negotiate the terms
of their agreement with Philips, and during 1998 negotiated an
extension of the date by which the 500,000 Reception Units must be
purchased, from December 31, 1999 to June 30, 2000.
(c) a change in the cable strategy focus from acquisition and build-out of
cable networks to increased subscriber penetration in existing
networks. While the Company still plans build-out of the cable network
in strategic areas, the Company believes the most profitable means of
expanding its cable television business is to leverage its investment
in its cable networks by increasing the percentage of homes passed
which subscribe in its regional clusters.
Should management decide to change their business plan, including changes
in the above noted assumptions, they are confident that they can raise
additional financing. Future sources of financing for the Company could include
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@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
public or private debt or equity offerings or bank financing or any combination
thereof, subject to the restrictions contained in the indentures governing the
Company's senior outstanding indebtedness. However, there can be no assurance
that the Company will be able to do so on satisfactory terms, if at all.
Based on the above noted financial position and business plans, management
is confident that they will be able to continue as a going concern through June
30, 2000. Accordingly, these consolidated financial statements have been
prepared on a going concern basis which contemplates the continuation and
expansion of trading activities as well as the realization of assets and
liquidation of liabilities in the ordinary course of business.
3. Summary of Significant Accounting Policies
Basis of presentation
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States
of America ("U.S. GAAP").
The consolidated financial statements include the financial statements of
@Entertainment, Inc. and its wholly owned and majority owned subsidiaries. Also
consolidated is a 49% owned subsidiary for which the Company maintains control
of operating activities and has the ability to influence the appointment of
members to the Managing Board. All significant intercompany balances and
transactions have been eliminated in consolidation.
Cash and cash equivalents
Cash and cash equivalents consist of cash and other short-term investments
with original maturates of less than three months.
Use of estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with U.S. GAAP. Actual results could differ from those estimates.
Revenue Recognition
Cable television revenues:
Revenue from subscription fees is recognized on a monthly basis as the
service is provided. Installation fee revenue for connection to the Company's
cable television system, is recognized to the extent of direct selling costs
and the balance is deferred and amortized to income over the estimated average
period that new subscribers are expected to remain connected to the systems.
DTH subscription revenues:
During 1998, the Company commenced sale of its Wizja TV Package (consisting
of a one-year rental of a DTH reception system, installation and a one-year
subscription to the Company's DTH service) to retail customers for one up-front
payment at the time of installation. The Company recognizes subscription
revenues at the time of installation to the extent of direct selling costs
incurred, and the balance is deferred and amortized to income over the
remaining term of the subscription.
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@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
Other revenues:
Advertising revenues are recognized when advertisements are aired under
broadcast contracts.
Taxation
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
U.S. taxation:
The Company and PCI are subject to U.S. federal income taxation on their
worldwide income. The Polish, United Kingdom and Netherlands corporations are
foreign corporations which are not expected to be engaged in a trade or
business within the U.S. or to derive income from U.S. sources and accordingly,
are not subject to U.S. income tax.
Foreign taxation:
The Polish companies are subject to corporate income taxes, value added tax
(VAT) and various local taxes within Poland, as well as import duties on
materials imported by them into Poland. Under Polish law, the Polish companies
are exempt from import duties on certain in-kind capital contributions.
The Polish companies' income tax is calculated in accordance with Polish
tax regulations. Due to differences between accounting practices under Polish
tax regulations and those required by U.S. GAAP, certain income and expense
items are recognized in different periods for financial reporting purposes and
income tax reporting purposes which may result in deferred income tax assets
and liabilities.
Property, plant and equipment
Property, plant and equipment includes assets used in the development and
operation of the Company's DTH and cable television systems and set-top boxes.
During the period of construction, plant costs and a portion of design,
development and related overhead costs are capitalized as a component of the
Company's investment in DTH and cable television systems. When material, the
Company capitalizes interest costs incurred during the period of construction
in accordance with SFAS No. 34, "Capitalization of Interest Cost". During 1998,
the Company capitalized approximately $664,000 in interest. During 1996 and
1997, no interest costs were capitalized.
Cable and DTH subscriber related costs and general and administrative
expenses are charged to operations when incurred.
Depreciation is computed for financial reporting purposes using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Cable television system assets.................................. 10 years
DTH system assets............................................... 5 years
Settop boxes.................................................... 5 years
Vehicles........................................................ 5 years
Other property, plant and equipment............................. 5-10 years
</TABLE>
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@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
Inventories for construction
Inventories for construction are stated at the lower of cost, determined by
the average cost method, or net realizable value. Inventories are principally
related to construction in the various cable television systems.
Goodwill and other intangibles
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally ten years, with the exception of amounts
paid relating to non-compete agreements. The portion of the purchase price
relating to the non-compete agreements is amortized over the term of the
underlying agreements, generally five years.
Through its subsidiaries, the Company has entered into lease agreements
with the Polish national telephone company ("TPSA"), for the use of underground
telephone conduits for cable wiring. Costs related to obtaining conduit and
franchise agreements with housing cooperatives and governmental authorities are
capitalized and amortized generally over a period of ten years. In the event
the Company does not proceed to develop cable systems within designated cities,
costs previously capitalized will be charged to expense.
Programming and broadcast rights
During 1997 and 1998, the Company entered into contracts for the purchase
of certain exhibition or broadcast rights. Broadcast or exhibition rights
consist principally of rights to broadcast syndicated programs, sports and
feature films and are accounted for as a purchase of rights by the licensee.
The asset and liability for the rights acquired and obligations incurred under
a license agreement are reported by the Company, at the gross amount of the
liability, when the license period begins and certain specified conditions have
been met, in accordance with the guidelines established within SFAS No. 63,
"Financial Reporting by Broadcasters".
Deferred financing costs
Costs incurred to obtain financing have been deferred and amortized over
the life of the loan using the effective interest method. The amortization of
deferred financing costs is included in interest expense.
Investments in affiliated companies
Investments in affiliated companies are accounted for using the equity
method. Where the purchase price exceeds the fair value of the Company's
percentage of net assets acquired, the difference is amortized over the
expected period to be benefited as a charge to equity in profits of affiliated
companies. Where the expected period to be benefited is limited by licensing
agreements, the difference is amortized over the term of the licensing
agreement.
Minority interest
Recognition of the minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests' allocable
portion of the equity of those consolidated subsidiaries.
Stock-based compensation
The Company has adopted SFAS No. 123, "Accounting For Stock-Based
Compensation", which gives companies the option to adopt the fair value based
method for expense recognition of employee stock options and other stock-based
awards or to account for such items using the intrinsic value method as
outlined under APB Opinion No. 25, "Accounting For Stock Issued To Employees",
with pro forma disclosure of net loss and loss per
F-103
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@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
share as if the fair value method had been applied. The Company has elected to
apply APB Opinion No. 25 and related interpretations for stock options and
other stock-based awards.
Foreign currencies
Foreign currency transactions are recorded at the exchange rate prevailing
at the date of the transactions. Assets and liabilities denominated in foreign
currencies are remeasured at the rates of exchange at balance sheet date. Gains
and losses on foreign currency transactions are included in the consolidated
statement of operations.
The financial statements of foreign subsidiaries are translated to U.S.
dollars using (i) exchange rates in effect at period end for assets and
liabilities, and (ii) average exchange rates during the period for results of
operations. Adjustments resulting from translation of financial statements are
reflected in accumulated other comprehensive income as a separate component of
stockholders' equity.
Effective January 1, 1998, Poland is no longer deemed to be a highly
inflationary economy. In accordance with this change, the Company established a
new functional currency basis for non-monetary items of its Polish subsidiaries
in accordance with guidelines established within EITF Issue 92-4, "Accounting
For A Change In Functional Currency When An Economy Ceases To Be Considered
Highly Inflationary". That basis is computed by translating the historical
reporting currency amounts of non-monetary items into the local currency at
current exchange rates. As a result of this change, the Company's functional
currency bases exceeded the local currency tax bases of nonmonetary items. The
difference between the new functional currency and the tax bases have been
recognized as temporary differences.
Prior to January 1, 1998 the financial statements of foreign subsidiaries
were translated into U.S. dollars using (i) exchange rates in effect at period
end for monetary assets and liabilities, (ii) exchange rates in effect at
transaction dates (historical rates) for non monetary assets and liabilities,
and (iii) average exchange rates during the period for revenues and expenses,
other than those revenues and expenses that relate to non monetary assets and
liabilities (primarily amortization of fixed assets and intangibles) which are
translated using the historical exchange rates applicable to those non monetary
assets and liabilities. Adjustments resulting from translation of financial
statements were reflected as foreign exchange gains or losses in the
consolidated statements of operations.
Fair value of financial instruments
SFAS No. 107, "Disclosures about Fair Value Of Financial Instruments"
requires the Company to make disclosures of fair value information of all
financial instruments, whether or not recognized on the consolidated balance
sheets, for which it is practicable to estimate fair value.
The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses and Notes payable.
At December 31, 1997 and 1998, the carrying value of cash and cash
equivalents, accounts receivable, and accounts payable and accrued expenses on
the accompanying consolidated balance sheets approximates fair value due to the
short maturity of these instruments.
At December 31, 1997, the fair value of the Company's notes payable
approximated $128,420,000 based on the last trading price of the Notes payable
in 1997.
At December 31, 1998, the fair value of the Company's notes payable balance
approximates $230,194,000 based on the last trading price of the Notes payable
in 1998.
F-104
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@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
Impairment of long-lived assets
The Company assesses the recoverability of long-lived assets (mainly
property, plant and equipment, intangibles and certain other assets) on a
regular basis by determining whether the carrying value of the assets can be
recovered over the remaining lives through projected undiscounted future
operating cash flows, expected to be generated by such assets. If an impairment
in value is estimated to have occurred, the assets carrying value is reduced to
its estimated fair value. The assessment of the recoverability of long-lived
assets will be impacted if estimated future operating cash flows are not
achieved.
Commitments and contingencies
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties, and other sources are recorded when it is
probable that a liability has been incurred and the amount of the assessment
can be reasonably estimated.
Advertising costs
All advertising costs of the Company are expensed as incurred.
Reclassifications
Certain amounts have been reclassified in the prior year consolidated
financial statements to conform to the 1998 consolidated financial statement
presentation.
4. Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
Additions
Balance at Charged to Amounts Balance at
January 1 Expense Written Off December 31
---------- ---------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
1996
Allowance for Doubtful
Accounts.................... $510 $ 358 $ 323 $ 545
1997
Allowance for Doubtful
Accounts.................... $545 $ 494 $ 273 $ 766
1998
Allowance for Doubtful
Accounts.................... $766 $1,383 $1,054 $1,095
</TABLE>
5. Acquisitions
During 1998, the Company made several acquisitions of which details follow.
In each case, the acquisition was accounted for using the purchase method,
whereby the purchase price was allocated to the underlying assets and
liabilities based on their proportionate share of fair values on the date of
acquisition and any excess to goodwill. The results of operations of each of
the businesses acquired are included in the Company's consolidated financial
statements since the date of acquisition.
In February 1998, PCI acquired a cable television business for an aggregate
consideration of approximately $1,574,000. The purchase price exceeded the fair
value of the net liabilities acquired by approximately $2,041,000. In
association with this acquisition, the Company assumed a $2,150,000 loan from
Bank Rozwoju Exportu S.A. (refer to note 11).
In February and March 1998, the Company acquired the remaining 55% equity
interest in an affiliated company for approximately $9,389,000. The purchase
price exceeded the fair value of the net liabilities acquired by approximately
$9,945,000.
F-105
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@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
On July 16, 1998, the Company purchased the remaining 45.25% interest in a
subsidiary of the Company which was held by unaffiliated third parties for an
aggregate purchase price of approximately $10,655,000, of which approximately
$9,490,000 relates to non-compete agreements. The purchase price, excluding the
amount paid relating to the non-compete agreements, exceeded the fair value of
the assets acquired by $604,000. The portion of the purchase price relating to
the non-compete agreements will be amortized over the five-year term of the
agreements.
On August 15, 1998, PCI purchased the remaining approximately 50% minority
interest in a subsidiary of the Company which was held by unaffiliated third
parties for aggregate consideration of approximately $5,372,000. The purchase
price exceeded the fair value of the assets acquired by $1,104,000.
Additionally, during 1998 the Company acquired certain cable television
system assets and subscriber lists for aggregate consideration of approximately
$2,000,000. The purchase price did not materially exceed the fair value of the
assets acquired.
Had these acquisitions occurred on January 1, 1997, the Company's pro-forma
consolidated results for the years ended December 31, 1997 and 1998, would not
be materially different from those presented in the consolidated statements of
operations.
Effective January 1, 1997, PCI acquired the remaining 51% of a subsidiary
company for aggregate consideration of approximately $9,927,000. The
acquisition has been accounted for as a purchase with the purchase price
allocated among the assets acquired and liabilities assumed based upon the fair
values at the date of acquisition and any excess to goodwill. The purchase
price exceeded the fair value of the net assets acquired by approximately
$5,556,000.
In May 1997, PCI acquired a 54.75% ownership interest in a cable television
company for aggregate consideration of approximately $10,925,000. The
acquisition has been accounted for as a purchase with the purchase price
allocated among the assets acquired and liabilities assumed based upon the fair
values at the date of acquisition and any excess as goodwill. The results of
the acquired company have been included with the Company's results since the
date of acquisition. The purchase price exceeded the fair value of the net
assets acquired by approximately $9,910,000. Included in minority interest at
December 31, 1997 is approximately $450,000 relating to the acquisition of this
subsidiary.
During 1997, the Company acquired certain cable television system assets
and subscriber lists for aggregate consideration of approximately $3,200,000.
The acquisitions have been accounted for as fixed asset purchases with the
purchase price allocated among the fixed assets acquired based upon their fair
values at the dates of acquisition and any excess to goodwill. The purchase
prices exceeded the fair value of the assets acquired by approximately
$548,000.
During 1996, the Company acquired substantially all of the cable television
system assets of twenty-six cable television companies for aggregate
consideration of approximately $15,600,000. The acquisitions have been
accounted for as purchases with the purchase price allocated among the assets
acquired and liabilities assumed based upon their fair values at the date of
acquisition and any excess as goodwill. The results of the acquired companies
have been included with the Company's results since their dates of acquisition.
The purchase prices exceeded the fair value of the net assets acquired by
approximately $5,800,000.
6. Programming and Broadcast Rights
Programming and broadcast rights include approximately $894,000 and
$9,030,000 related to certain broadcast rights purchased as of December 31,
1997 and 1998, respectively, but not yet available for viewing.
F-106
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@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
7. Other Current and Non-Current Assets
Included in other current assets are $1,322,000 and $8,785,000 of VAT
receivables as of December 31, 1997 and 1998, respectively.
Also included in other current assets at December 31, 1997 and 1998 are
prepayments of $9,000,000 and $8,300,000, respectively, to Philips Business
Electronics B.V. ("Philips") toward the supply of decoders, satellite dishes
and services used in the Company's DTH satellite transmission system
("Reception Systems").
Included in other non-current assets at December 31, 1997 and 1998 are
deferred financing costs of $7,122,000 and $12,146,000, respectively relating
to the Company's notes payable (refer to note 11).
Included in other non-current assets at December 31, 1997 is a prepayment
of approximately $1,200,000 toward the formation of a programming related joint
venture with World Shopping Network Plc. As a final agreement was never
consummated, the amount was expensed in 1998.
8. Intangible assets
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
(in thousands)
<S> <C> <C>
Conduit and franchise agreements........................ $ 5,391 $ 5,409
Goodwill................................................ 13,338 27,510
Non-compete agreements.................................. 9,406 19,006
Other................................................... 1,543 1,336
------- -------
29,678 53,261
Less accumulated amortization........................... (3,360) (9,609)
------- -------
Net intangible assets................................... $26,318 $43,652
======= =======
</TABLE>
9. Investments in Affiliated Companies
Investment in affiliated companies at December 31, 1998 consist of 20% of
the common stock of Fox Kids Poland Ltd. ("FKP") and 50% of the common stock of
Twoj Styl Sp. z o.o. ("Twoj Styl"). At December 31, 1997 investments in
affiliated companies also included 45% of the common stock of GZM. During 1998,
the Company acquired the remaining interest in GZM (refer to note 5).
In December 1997, the Company acquired a 20% interest in FKP, a joint
venture formed to provide programming to the Company for an aggregate purchase
price of approximately $10,000,000. The purchase price exceeded the fair value
of the Company's ownership percentage of net assets by approximately
$10,000,000. This difference is being amortized over five years as a charge to
equity in profits of affiliated companies. During 1998, the Company contributed
an additional $4,926,000 to the joint venture which was accounted for as an
additional investment in affiliated companies. For the years ended December 31,
1997 and 1998, the Company recorded losses related to this investment of $0 and
$6,343,000, respectively.
In December 1997, the Company acquired a 50% interest in Twoj Styl, a
magazine publishing company for an aggregate purchase price of approximately
$11,100,000. In 1998, the Company paid approximately $302,000 for
F-107
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
stamp duty and professional fees, which was added to the cost of the
investment. The purchase price exceeded the fair value of the Company's
ownership percentage of net assets by approximately $9,600,000. This difference
is being amortized over ten years as a charge to equity in profits of
affiliated companies. For the years ended December 31, 1997 and 1998, the
Company recorded a profit/(loss) related to this investment of $152,000 and
$(181,000), respectively. In addition, the Company agreed to provide additional
future financing to Twoj Styl, either debt or equity, of up to $7,700,000 to
develop Polish-language programming and ancillary services. As of December 31,
1998, no additional financing had been provided.
It was not practicable to estimate the market value of the investments in
affiliated companies due to the nature of these investments, the relatively
short existence of the affiliated companies and the absence of quoted market
price for the affiliated companies.
10. Income Taxes
Income tax (expense)/benefit consists of:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- ---------
(in thousands)
<S> <C> <C> <C>
Year ended December 31, 1996:
U.S. Federal................................ $ (714) $ -- $ (714)
State and local............................. (531) -- (531)
Foreign..................................... (28) -- (28)
------- -------- ---------
$(1,273) $ -- $ (1,273)
======= ======== =========
Year ended December 31, 1997:
U.S. Federal................................ $ 1,438 $ -- $ 1,438
State and local............................. -- -- --
Foreign..................................... (463) -- (463)
------- -------- ---------
$ 975 $ -- $ 975
Year ended December 31, 1998:
U.S. Federal................................ $ -- $ -- $ --
State and local............................. -- -- --
Foreign..................................... (210) -- (210)
------- -------- ---------
$ (210) $ -- $ (210)
======= ======== =========
Sources of loss before income taxes and minority interest are presented as
follows:
<CAPTION>
Year ended December 31,
----------------------------
1996 1997 1998
------- -------- ---------
(in thousands)
<S> <C> <C> <C>
Domestic loss................................. $(2,602) $(20,628) $ (52,341)
Foreign loss.................................. (4,632) (31,585) (73,514)
------- -------- ---------
$(7,234) $(52,213) $(125,855)
======= ======== =========
</TABLE>
F-108
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
Income tax (expense)/benefit for the years ended December 31, 1996, 1997,
and 1998 differed from the amounts computed by applying the U.S. federal income
tax rate of 34 percent to pretax loss as a result of the following:
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------
1996 1997 1998
------- -------- --------
(in thousands)
<S> <C> <C> <C>
Computed "expected" tax benefit............... $ 2,460 $ 17,752 $ 43,061
Non-deductible expenses....................... (17) (101) (1,635)
Change in valuation allowance................. (3,504) (15,424) (30,299)
Adjustment for change in functional currency
bases........................................ -- -- (11,311)
Adjustment to deferred tax asset for enacted
changes in tax rates......................... -- (789) (695)
Foreign tax rate differences.................. (184) (463) 606
Other......................................... (28) -- 63
------- -------- --------
$(1,273) $ 975 $ (210)
======= ======== ========
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
December 31,
------------------
1997 1998
-------- --------
(in thousands)
<S> <C> <C>
Deferred tax assets:
Foreign net operating loss carryforward............... $ 6,471 $ 27,930
Domestic net operating loss carryforward.............. -- 7,459
Interest income....................................... 1,946 2,650
Service revenue....................................... 1,948 2,101
Accrued liabilities................................... 2,964 4,061
Deferred costs........................................ 2,001 6,447
Stock options......................................... 2,950 2,950
Deferred interest..................................... -- 2,183
Unrealized foreign exchange losses.................... 5,614 9,066
Other................................................. 139 1,393
-------- --------
Total gross deferred tax assets......................... 24,033 66,240
Less valuation allowance................................ (24,033) (54,332)
-------- --------
Net deferred tax assets................................. $ -- $ 11,908
======== ========
Deferred tax liabilities:
Fixed assets depreciation............................. $ -- $(11,786)
Other................................................. -- (122)
Total gross deferred tax liabilities.................. $ -- $(11,908)
-------- --------
Net deferred tax liability............................ $ -- $ --
======== ========
</TABLE>
The net increase in the valuation allowance for the years ended December
31, 1996, 1997 and 1998 was $667,000, $3,504,000 and $30,299,000 respectively.
In assessing the realiability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the
F-109
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
periods in which those temporary differences become deductible. Management
considers projected future taxable income and tax planning strategies in making
this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods which the deferred tax
assets are deductible, management believes it is more likely than not the
Company will realize the benefits of these deductible differences, net of the
existing valuation allowances at December 31, 1998.
Subsequently recognized tax benefits relating to the valuation allowance
for deferred tax assets as of December 31, 1998 will be reported in the
consolidated statement of operations.
Foreign loss carryforwards can be offset against the PTK Companies' taxable
income and utilized at a rate of one-third per year in each of the three years
subsequent to the year of the loss. If there is no taxable income in a given
year during the carryforward period, the portion of the loss carryforward to be
utilized is permanently forfeited. For losses incurred in U.S. taxable years
prior to 1998, loss carryforwards can be applied against taxable income three
years retroactively and fifteen years into the future. For losses incurred in
U.S. taxable years from 1998, loss carryforwards can be applied against taxable
income two years retroactively and twenty years into the future.
At December 31, 1998, the Company has foreign net operating loss
carryforwards of approximately $104,087,000, which will expire as follows:
<TABLE>
<CAPTION>
Year ending December 31, (in thousands)
------------------------ --------------
<S> <C>
1999..................................................... $ 28,066
2000..................................................... 26,814
2001 and thereafter...................................... 49,207
--------
$104,087
========
</TABLE>
11. Notes Payable
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
-------- --------
(in thousands)
<S> <C> <C>
@Entertainment Notes, net of discount.................... $ -- $125,513
PCI Notes, net of discount............................... 129,578 129,627
American Bank in Poland S.A. ("AmerBank") revolving
credit loan............................................. -- 6,500
Bank Rozwoju Exportu S.A. Deutsche Mark facility......... -- 1,912
Other.................................................... 532 402
-------- --------
130,110 263,954
less: current portion.................................... -- 6,500
-------- --------
Notes payable, net of current portion.................... $130,110 $257,454
======== ========
</TABLE>
@Entertainment Notes
On July 14, 1998, the Company sold 252,000 units (collectively, the
"Units") to two initial purchasers pursuant to a purchase agreement, each Unit
consisting of $1,000 principal amount at maturity of 14 1/2% Senior Discount
Notes (the "Notes") due 2008 and four warrants (each a "Warrant"), each
initially entitling the holder thereof to purchase 1.81 shares of common stock,
par value $0.01 per share (the "Common Stock") at an exercise price of $13.20
per share, subject to adjustment.
F-110
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
The Notes were issued at a discount to their aggregate principal amount at
maturity and, together with the Warrants generated gross proceeds to the
Company of approximately $125,100,000 of which $117,485,000 has been allocated
to the initial accreted value of the Notes and approximately $7,615,000 has
been allocated to the Warrants. The portion of the proceeds that is allocable
to the Warrants was accounted for as part of paid-in capital. The allocation
was made based on the relative fair values of the two securities at the time of
issuance. Net proceeds to the Company after deducting initial purchasers'
discount and offering expenses were approximately $118,972,000.
The Notes are unsubordinated and unsecured obligations. Cash interest on
the Notes will not accrue prior to July 15, 2003. Thereafter cash interest will
accrue at a rate of 14.5% per annum and will be payable semiannually in arrears
on January 15 and July 15 of each year, commencing January 15, 2004. The Notes
will mature on July 15, 2008. At any time prior to July 15, 2001, the Company
may redeem up to a maximum of 25% of the originally issued aggregate principal
amount at maturity of the notes at a redemption price equal to 114.5% of the
accreted value thereof at the redemption date, plus accrued and unpaid
interest, if any, to the date of redemption with some or all of the net cash
proceeds of one or more public equity offerings; provided, however, that not
less than 75% of the originally issued aggregate principal amount at maturity
of the notes remains outstanding immediately after giving effect to such
redemption. The effective interest rate of the notes is approximately 16.5%.
The Warrants initially entitle the holders thereof to purchase an aggregate
of 1,824,514 shares of Common Stock, representing, in the aggregate,
approximately 5% of the outstanding Common Stock on a fully-diluted basis
immediately after giving effect to the sale of the Units. The Warrants are
exercisable at any time and will expire on July 15, 2008.
Pursuant to the Indenture governing the Notes (the "Indenture"), the
Company is subject to certain restrictions and covenants, including, without
limitation, covenants with respect to the following matters: (i) limitation on
additional indebtedness; (ii) limitation on restricted payments; (iii)
limitation on issuance and sales of capital stock of restricted subsidiaries;
(iv) limitation on transactions with affiliates; (v) limitation on liens; (vi)
limitation on guarantees of indebtedness by restricted subsidiaries; (vii)
purchase of notes upon a change of control; (viii) limitation on sale of
assets; (ix) limitation on dividends and other payment restrictions affecting
restricted subsidiaries; (x) limitation on investments in unrestricted
subsidiaries; (xi) limitation on lines of business; and (xii) consolidations,
mergers and sales of assets. The Company is in compliance with these covenants.
PCI Notes
On October 31, 1996, PCI sold $130,000,000 aggregate principal amount of
Senior Notes ("PCI Notes") to an initial purchaser pursuant to a purchase
agreement. The initial purchaser subsequently completed a private placement of
the PCI Notes. In June 1997, substantially all of the outstanding PCI Notes
were exchanged for an equal aggregate principal amount of publicly-registered
PCI Notes.
The PCI Notes have an interest rate of 9 7/8% and a maturity date of
November 1, 2003. Interest is paid on the PCI Notes on May 1 and November 1 of
each year. As of December 31, 1997 and 1998 the Company accrued interest
expense of $2,175,000 and $2,140,000, respectively.
Prior to November 1, 1999, PCI may redeem up to a maximum of 33% of the
initially outstanding aggregate principal amount of the PCI Notes with some or
all of the net proceeds of one or more public equity offerings at a redemption
price equal to 109.875% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of redemption; provided that immediately
after giving effect to such redemption, at least $87 million aggregate
principal amount of the PCI Notes remains outstanding.
The PCI Notes are net of unamortized discount of $422,000 and $373,000 at
December 31, 1997 and 1998, respectively. The effective interest rate of the
PCI Notes is approximately 11.3%.
F-111
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
PCI has pledged to State Street Bank and Trust Company, the trustee for the
PCI Notes (for the benefit of the holders of the PCI Notes) intercompany notes
issued by PCBV, of a minimum aggregate principal amount (together with cash and
cash equivalents of PCI), equal to at least 110% of the outstanding principal
amount of the PCI Notes, and that, in the aggregate, provide cash collateral or
bear interest and provide for principal repayments, as the case may be, in
amounts sufficient to pay interest on the PCI Notes. Notes payable from PCBV to
PCI were $134,509,000 and $160,450,000 at December 31, 1997 and 1998,
respectively.
Pursuant to the PCI Indenture, PCI is subject to certain restrictions and
covenants, including, without limitation, covenants with respect to the
following matters: (i) limitation on additional indebtedness; (ii) limitation
on restricted payments; (iii) limitation on issuances and sales of capital
stock of subsidiaries; (iv) limitation on transactions with affiliates; (v)
limitation on liens; (vi) limitation on guarantees of indebtedness by
subsidiaries; (vii) purchase of PCI Notes upon a change of control; (viii)
limitation on sale of assets; (ix) limitation on dividends and other payment
restrictions affecting restricted subsidiaries; (x) limitation on investments
in unrestricted subsidiaries; (xi) limitation on lines of business; and (xii)
consolidations, mergers and sales of assets. The Company is in compliance with
these covenants.
Condensed parent only financial statements of @ Entertainment, Inc. are
provided in Note 12 in compliance with the requirements of Rules 5-04 and 12-04
of the Securities and Exchange Commission's Regulation S-X.
AmeriBank in Poland S.A. revolving credit loan
The revolving credit loan allowing the Company to borrow up to a maximum
principal amount of $6,500,000 on or before December 31, 1998, was fully drawn
as of December 31, 1998. The facility bears interest at LIBOR plus 3.0% (8.0%
as at December 31, 1998), is repayable in full on August 20, 1999, and is
secured by promissory notes en blanc from certain of the Company's
subsidiaries, and pledges of the shares of certain of the Company's
subsidiaries.
Bank Rozwoju Eksportu S.A. Deutsche-Mark Facility
The Deutsche-Mark facility represents a credit facility of DM 3,948,615 of
which approximately DM 3,204,000 was outstanding at December 31, 1998. The
facility bears interest at LIBOR plus 2.0% (5.3% as at December 31, 1998), is
repayable in full on December 27, 2002, and is ultimately secured by a pledge
of the common shares of one of the Company's subsidiaries.
Interest expense relating to notes payable was in the aggregate
approximately $4,687,000, $13,902,000 and $21,535,000 for the years ended
December 31, 1996, 1997 and 1998, respectively.
During 1996, the Company recorded an extraordinary loss related to the
early retirement of debt. The extraordinary loss was comprised of a $147,000
prepayment penalty and a $1,566,000 write-off of deferred financing costs.
F-112
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
12. Condensed Parent Only Financial Information of @Entertainment
The following parent only condensed financial statements were prepared in
accordance with generally accepted accounting principles in the United States
of America in a manner consistent with the consolidated financial statements
except that all subsidiaries have been accounted for under the equity method.
The parent only condensed financial statements as of and for periods prior to
the Reorganization represent those of PCI.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1997 1998
------- -------- ---------
(in thousands)
<S> <C> <C> <C>
Operating costs and expenses:
Selling, general and administrative
expenses.................................... $ 1,061 $ 14,662 $ 8,700
------- -------- ---------
Operating loss............................... (1,061) (14,662) (8,700)
Interest and investment income............... 1,076 2,489 8,458
Interest expense............................. (2,612) -- (8,608)
Foreign exchange gain, net................... -- -- 36
Equity in losses of affiliated companies..... (2,775) (42,651) (117,251)
------- -------- ---------
Loss before income taxes..................... (5,372) (54,824) (126,065)
Income tax expense........................... (1,245) -- --
------- -------- ---------
Net loss..................................... (6,617) (54,824) (126,065)
Accretion of redeemable preferred stock...... (2,870) (2,436) --
Preferred stock dividend..................... (1,738) -- --
Deficit/(excess) of carrying value of
preferred stock under/(over) consideration
paid........................................ 3,549 (33,806) --
------- -------- ---------
Net loss applicable to holders of common
stock....................................... $(7,676) $(91,066) $(126,065)
======= ======== =========
</TABLE>
CONDENSED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1997 1998
------- -------- ---------
(in thousands)
<S> <C> <C> <C>
Net loss...................................... $(6,617) $(54,824) $(126,065)
Other comprehensive income:
Translation adjustment...................... -- (218) (249)
------- -------- ---------
$(6,617) $(55,042) $(126,314)
======= ======== =========
</TABLE>
F-113
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
-------- ---------
(in thousands)
<S> <C> <C>
Assets
Cash and cash equivalents.............................. $ 71,565 $ 3,070
Accounts receivable, net............................... 290 168
Other current assets................................... 74 1,123
-------- ---------
Total current assets................................. 71,929 4,361
Other assets........................................... 11,252 17,230
Net investment in restricted net assets of wholly-owned
subsidiaries.......................................... 121,977 102,344
Net investment in unrestricted net assets of wholly-
owned subsidiaries.................................... (51,822) 37,312
-------- ---------
Total assets......................................... $153,336 $ 161,247
======== =========
Liabilities and Stockholders' Equity
Accounts payable and accrued expenses.................. $ 981 $ 2,078
Notes payable.......................................... -- 125,513
-------- ---------
Total liabilities.................................... 981 127,591
Stockholders' equity:
Preferred stock, $0.01 par value; Authorized 20,000,000
shares; none issued and outstanding................... -- --
Common stock, $.01 par value; Authorized 70,000,000
shares in 1997 and 1998; issued and outstanding
33,310,000 shares in 1997 and 1998.................... 333 333
Paid-in capital........................................ 230,339 237,954
Accumulated other comprehensive income................. (218) (467)
Accumulated deficit.................................... (78,099) (204,164)
-------- ---------
Total stockholders' equity........................... 152,355 33,656
-------- ---------
Total liabilities and stockholders' equity........... $153,336 $ 161,247
======== =========
</TABLE>
F-114
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Preferred stock Common Stock Other
---------------- ------------------ Paid-in Comprehensive Accumulated
Shares Amount Shares Amount Capital Income Deficit Total
------ -------- ---------- ------- -------- ------------- ----------- ---------
(in thousands, except share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 1,
1996................... 985 $ 10,311 11,037 $ 4,993 $ 1,544 $ -- $ (16,658) $ 190
Net loss................ -- -- -- -- -- -- (6,617) (6,617)
Stock dividend.......... 166 1,738 -- -- (1,738) -- -- --
Issuance of stock....... -- -- 7,911 (4,992) 53,837 -- -- 48,845
Preferred stock
redemption............. (1,151) (12,049) -- -- 3,549 -- -- (8,500)
Accretion of redeemable
preferred stock........ -- -- -- -- (2,870) -- -- (2,870)
Reorganization.......... -- -- 18,929,052 188 (188) -- -- --
------ -------- ---------- ------- -------- ----- --------- ---------
Balance January 1,
1997................... -- $ -- 18,948,000 $ 189 $ 54,134 $ -- $ (23,275) $ 31,048
Net loss................ -- -- -- -- -- -- (54,824) (54,824)
Translation adjustment.. -- -- -- -- -- (218) -- (218)
Net proceeds from
initial
public offering........ -- -- 9,500,000 95 183,197 -- -- 183,292
Purchase of PCI series A
and C redeemable
preferred stock........ -- -- -- -- (33,806) -- -- (33,806)
Accretion of redeemable
preferred stock........ -- -- -- -- (2,436) -- -- (2,436)
Conversion of series B
redeemable preferred
stock.................. -- -- 4,862,000 49 11,148 -- -- 11,197
Stock option
compensation expense... -- -- -- -- 18,102 -- -- 18,102
------ -------- ---------- ------- -------- ----- --------- ---------
Balance December 31,
1997................... -- $ -- 33,310,000 $ 333 $230,339 $(218) $ (78,099) $ 152,355
Net loss................ -- -- -- -- -- -- (126,065) (126,065)
Translation adjustment.. -- -- -- -- -- (249) -- (249)
Warrants attached to
Senior Discount Notes.. -- -- -- -- 7,615 -- -- 7,615
------ -------- ---------- ------- -------- ----- --------- ---------
Balance December 31,
1998................... -- $ -- 33,310,000 $ 333 $237,954 $(467) $(204,164) $ 33,656
====== ======== ========== ======= ======== ===== ========= =========
</TABLE>
F-115
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1996 1997 1998
--------- -------- ---------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $ (6,617) $(54,824) $(126,065)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization of notes payable discount and
issue costs............................... 164 1,040 8,301
Loss of subsidiaries....................... 12,862 42,651 117,070
Gain on sale of investment securities...... -- (358) --
Non-cash stock option compensation
expense................................... -- 8,677 --
Equity in losses of affiliated companies... -- -- (181)
Changes in operating assets and liabilities:
Accounts receivable........................ (35) (142) 122
Other current assets....................... (1,300) 114 (1,049)
Other assets............................... -- -- (121)
Accounts payable and accrued expenses...... 2,855 (2,008) 1,097
Income taxes payable....................... 4,472 (4,472) --
--------- -------- ---------
Net cash provided by/(used in) operating
activities.............................. 12,401 (9,322) (826)
--------- -------- ---------
Cash flows from investing activities:
Proceeds from maturity of investment
securities................................ (25,115) 25,473 --
Investment in, and loans and advances to
affiliated companies...................... (122,337) (111,670) (186,809)
Purchase of other assets................... (8,200) (11,252) --
--------- -------- ---------
Net cash used in investing activities.... (155,652) (97,449) (186,809)
--------- -------- ---------
Cash flows from financing activities:
Net proceeds from issuance of stock........ 81,001 183,292 --
Redemption of preferred stock.............. (8,500) (60,000) --
Costs to obtain loans...................... (6,513) -- (5,960)
Proceeds from issuance of Notes payable.... 136,074 -- 117,485
Proceeds from issuance of warrants......... -- -- 7,615
Repayment of notes payable................. (10,000) -- --
Net cash provided by financing
activities.............................. 192,062 123,292 119,140
--------- -------- ---------
Net increase/(decrease) in cash and cash
equivalents............................. 48,811 16,521 (68,495)
--------- -------- ---------
Cash and cash equivalents at beginning of
year.......................................... 6,233 55,044 71,565
--------- -------- ---------
Cash and cash equivalents at end of period..... $ 55,044 $ 71,565 $ 3,070
========= ======== =========
Supplemental cash flow information:
Cash paid for interest....................... $ 2,338 $ -- $ --
========= ======== =========
Cash paid for income taxes................... $ 1,184 $ -- $ --
========= ======== =========
</TABLE>
F-116
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
13. Related Party Transactions
During the ordinary course of business, the Company enters into
transactions with affiliated parties. The principal related party transactions
are described below.
Programming
Programming is provided to the Company by certain of its affiliates. The
Company incurred programming fees from these affiliates of $412,000, $559,000
and $418,000 for the years ended December 31, 1996, 1997 and 1998.
Print Media Services
An affiliate of the Company provides print media services to the Company.
The Company incurred operating costs related to these services of $4,355,000
for the year ended December 31, 1998. The Company did not incur any costs from
this affiliate prior to 1998.
14. Per Share Information
Basic loss per share has been computed by dividing net loss attributable to
common stockholders by the weighted average number of common shares outstanding
during the year. The effect of potential common shares (stock options and
warrants outstanding) is antidilutive, accordingly, dilutive loss per share is
the same as basic loss per share.
The Company has presented historical loss per common share information
assuming the common stock exchange of 1 to 1,000 shares occurred on January 1,
1995.
The following table provides a reconciliation of the numerator and
denominator in the loss per share calculation:
<TABLE>
<CAPTION>
Six months ended
Year ended December 31, June 30,
---------------------------- -----------------------
1996 1997 1998 1998 1999
------- -------- --------- ----------- -----------
(unaudited) (unaudited)
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net loss attributable to
common stockholders
(in thousands)......... $(7,676) $(91,066) $(126,065) $(48,289) $(105,582)
Weighted average number
of common shares
outstanding (in
thousands)............. 17,271 24,771 33,310 -- --
Nominal issuance (in
thousands)............. 346 -- -- -- --
Basic weighted average
number of common shares
outstanding (in
thousands)............. 17,617 24,771 33,310 33,310 33,385
Loss per share-basic and
diluted................ $ (0.44) $ (3.68) $ (3.78) $ (1.45) $ (3.16)
</TABLE>
15. Stock Option Plan
On June 22, 1997, the Company adopted a stock option plan (the "1997 Plan")
pursuant to which the Company's Board of Directors may grant stock options to
officers, key employees and consultants of the Company. The 1997 Plan
authorizes grants of options to purchase up to 4,436,000 shares, subject to
adjustment in accordance with the 1997 Plan. At December 31, 1998, options for
3,924,000 shares had been granted. Of this amount, 1,671,000 options became
exercisable upon the IPO but cannot be sold for a period of two years from July
30, 1997.
F-117
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
The Company granted 1,671,000 stock options in January 1997 at a price
substantially below the IPO price of $21.00 per share. Such options vested in
full upon the completion of the IPO. In accordance with generally accepted
accounting principles, the Company recognized approximately $18,102,000 of
compensation expense included in selling, general, and administrative expenses
for these options in 1997 representing the difference between the exercise
price of the options and the fair market value of the shares on the date of
grant. All other stock options were granted with exercise prices at or below
the fair market value of the shares on the date of grant.
Future stock options are granted with an exercise price that must be at
least equal to the stock's fair market value at the date of grant. With respect
to any participant who owns stock possessing more than 10% of the voting power
of all classes of stock of the Company, the exercise price of any incentive
stock option granted must equal at least 110% of the fair market value on the
grant date and the maximum term of an incentive stock option must not exceed
five years. The term of all other options granted under the 1997 Plan may not
exceed ten years. Options become exercisable at such times as determined by the
Board of Directors and as set forth in the individual stock option agreements.
Generally, all stock options vest ratably over 2 to 5 years commencing one year
after the date of grant.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
Weighted
Number of Average
shares Exercise Price
--------- --------------
<S> <C> <C>
Balance at January 1, 1996........................ -- $ --
Granted........................................... 241,000 $ 1.99
Balance at December 31, 1996 (none exercisable)... 241,000 $ 1.99
Granted........................................... 2,083,000 $ 5.98
Balance at December 31, 1997 (none exercisable)... 2,324,000 $ 5.57
Granted........................................... 1,600,000 $12.31
Balance at December 31, 1998 (2,643,000 exercis-
able)............................................ 3,924,000 $ 8.32
</TABLE>
No options were exercised or forfeited during 1998.
At December 31, 1998 the range of exercise prices, weighted-average
remaining contractual life and number exercisable of outstanding options was as
follows:
<TABLE>
<CAPTION>
Weighted-Average
Contractual
Range of Number of Weighted-Average Remaining Life Number Weighted-Average
Exercise Prices Shares Exercise Price (Years) Exercisable Exercise Price
--------------- --------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
1.99-3.79............... 1,912,000 3.51 5.44 1,912,000 3.51
12.00-15.24............. 2,012,000 12.89 8.98 731,900 12.46
--------- ---------
3,924,000 8.32 2,643,900 5.98
</TABLE>
The per share weighted-average fair value of stock options granted during
1998 was $4.22 on the date of grant using the Black Scholes option-pricing
model with the following weighted-average assumptions: expected volatility
43.0%, expected dividend yield 0.0%, risk-free interest rate of 5.72%, and an
expected life of 4 years.
F-118
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss and
net loss per share would have increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------
1996 1997 1998
------- -------- ---------
(in thousands, except
per share data)
<S> <C> <C> <C>
Net loss--as reported........................... $(6,617) $(54,824) $(126,065)
Net loss--pro forma............................. $(6,617) $(56,607) $(131,511)
Basic and diluted net loss per share--as
reported....................................... $ (0.44) $ (3.68) $ (3.78)
Basic and diluted loss per share--pro forma..... $ (0.44) $ (3.75) $ (3.95)
</TABLE>
16. Leases
Building Leases
The Company leases several offices and warehouses within Poland under
cancelable operating leases. The Company has a noncancelable operating lease
for a building in the United Kingdom which houses the majority of its technical
equipment relating to the DTH network. The noncancelable lease expires in 2002,
and contains a renewal option for an additional five years. Future minimum
lease payments as of December 31, 1998 are $2,725,000 in 1999, $2,806,000 in
2000, $2,890,000 in 2001 and $2,977,000 in 2002.
DTH Technical Equipment Lease
The Company has an eight year agreement with British Telecommunications plc
("BT") for the lease and maintenance of certain satellite uplink equipment. The
agreement requires the payment of equal monthly installments of $50,000
approximating future minimum commitments of $600,000 in 1999, $576,000 in 2000,
$576,000 in 2001, $576,000 in 2002 and $1,728,000 in 2003 and thereafter. Other
than the BT uplink equipment, the Company owns all of the required broadcasting
equipment at its transmission facility in the United Kingdom.
Conduit Leases
The Company also leases space within various telephone duct systems from
TPSA under cancelable operating leases. The TPSA leases expire at various
times, and a substantial portion of the Company's contracts with TPSA permit
termination by TPSA without penalty at any time either immediately upon the
occurrence of certain conditions or upon provision of three to six months
notice without cause. Refer to note 19 for further detail.
All of the agreements provide that TPSA is the manager of the telephone
duct system and will lease space within the ducts to the Company for
installation of cable and equipment for the cable television systems. The lease
agreements provide for monthly lease payments that are adjusted quarterly or
annually, except for the Gdansk lease agreement which provides for an annual
adjustment after the sixth year and then remains fixed through the tenth year
of the lease.
Minimum future lease commitments for the aforementioned conduit leases
relate to 1999 only, as all leases are cancelable in accordance with the
aforementioned terms. The future minimum lease commitments related to these
conduit leases approximates $622,000 for the six months ending June 30, 1999.
F-119
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
Transponder Leases
During 1997, the Company entered into certain operating leases pursuant to
which the Company is liable for charges associated with each of its three
transponders on the Astra satellites, which can amount to a maximum of
$6,750,000 per year for each transponder and up to $182 million for all three
transponders for the term of their leases. The future minimum lease payments
applicable to the transponders approximate $20,250,000 in 1999, $20,250,000 in
2000, $20,250,000 in 2001, $20,250,000 in 2002 and $101,250,000 in 2003 and
thereafter. The leases for the two transponders on the Astra 1F satellite and
the transponder on the Astra 1G satellite will expire in 2007. The Company's
transponder leases provide that the Company's rights are subject to termination
in the event that the lessor's franchise is withdrawn by the Luxembourg
Government.
Total rental expense associated with the aforementioned operating leases
for the years ended December 31, 1996, 1997 and 1998 was $892,000, $3,696,000
and $10,521,000, respectively.
F-120
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
17. Segment Information
@Entertainment and its subsidiaries operate in three business segments: (1)
cable television, (2) digital direct-to-home television and programming, and
(3) corporate functions. The accounting policies of the segments are the same
as those described in the summary of significant accounting policies. The
Company accounts for intersegment sales and transfers as if the sales or
transfers were to third parties, that is, at current market prices. In addition
to other operating statistics, the Company measures its financial performance
by EBITDA, an acronym for earnings before interest, taxes depreciation and
amortization. The Company defines EBITDA to be net loss adjusted for interest
and investment income, depreciation and amortization, interest expense, foreign
currency gains and losses, equity in losses of affiliated companies, income
taxes, extraordinary items, non-recurring items (e.g., compensation expense
related to stock options), gains and losses from the sale of assets other than
in a normal course of business and minority interest. The items excluded from
EBITDA are significant components in understanding and assessing the Company's
financial performance. The Company believes that EBITDA and related measures of
cash flow from operating activities serve as important financial indicators in
measuring and comparing the operating performance of media companies. EBITDA is
not a U.S. GAAP measure of loss or cash flow from operations and should not be
considered as an alternative to cash flows from operations as a measure of
liquidity.
<TABLE>
<CAPTION>
DTH and
Cable Programming Corporate Total
--------- ----------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
1998
Revenues from external customers.. $ 52,971 $ 8,888 $ -- $ 61,859
Intersegment revenues............. -- 13,432 -- 13,432
Operating loss.................... (23,066) (69,047) (8,700) (100,813)
EBITDA............................ (1,431) (64,378) (8,700) (74,509)
Depreciation and amortization..... (21,635) (4,669) -- (26,304)
Investment in equity method
investees........................ -- 8,533 11,373 19,956
Segment total assets.............. 193,785 132,998 21,591 348,374
Expenditures for segment assets... 42,639 72,353 -- 114,992
1997
Revenues from external customers.. $ 38,138 $ -- $ -- $ 38,138
Intersegment revenues............. -- -- -- --
Operating loss.................... (20,308) (10,210) (12,152) (42,670)
EBITDA............................ 5,387 (10,186) (3,475) (8,274)
Net loss.......................... (35,087) (7,668) (12,069) (54,824)
Significant non-cash items:
Stock option compensation
expense.......................... 9,425 -- 8,677 18,102
Investment in equity method
investees........................ -- 10,876 11,252 22,128
Segment total assets.............. 187,449 36,466 83,181 307,096
Expenditures for segment assets... 33,786 5,857 -- 39,643
Six months ended June 30, 1999
(unaudited)
Revenues from external customers.. $ 30,264 $ 9,591 $ -- $ 39,855
Intersegment revenues............. -- 10,350 -- 10,350
Operating loss.................... (10,380) (63,913) (4,761) (79,054)
EBITDA............................ 1,834 (53,436) (4,753) (56,355)
Segment total assets.............. 174,063 143,416 68,697 386,176
Six months ended June 30, 1998
(unaudited)
Revenues from external customers.. $ 24,571 $ 906 $ -- $ 25,477
Intersegment revenues............. -- -- -- --
Operating loss.................... (3,540) (35,416) (3,780) (42,736)
EBITDA............................ 6,380 (34,407) (3,780) (31,807)
Segment total assets.............. 195,326 77,471 11,961 284,758
</TABLE>
F-121
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
In 1997, the cable segment includes the activities of Mozaic Entertainment,
Inc., a subsidiary which provided programming content for the cable business.
In 1998, the Company's programming activity related solely to the development
of the Wizja TV platform and has been included in the DTH and programming
segment. For the year ended December 31, 1997, Mozaic Entertainment, Inc.
revenues and operating loss were $563,000 and $2,071,000, respectively. For the
year ended December 31, 1998, Mozaic Entertainment, Inc. was dormant. During
1996 the Company operated in one business segment (cable).
Total revenues and long-lived assets for the Company analyzed by
geographical location is as follows:
<TABLE>
<CAPTION>
Total Revenues Long-lived Assets
----------------------- -----------------
Year ended December 31, December 31,
1996 1997 1998 1997 1998
------- ------- ------- -------- --------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C>
Poland............................. $24,923 $38,138 $61,859 $152,614 $257,625
United Kingdom..................... -- -- -- 7,930 20,208
Other.............................. -- -- -- -- 29
------- ------- ------- -------- --------
Total.............................. $24,923 $38,138 $61,859 $160,544 $277,862
======= ======= ======= ======== ========
</TABLE>
All of the Company's revenue is derived from activities carried out in
Poland. Long-lived assets consist of property, plant, and equipment,
inventories for construction, intangible assets, and other assets.
18. Commitments and Contingencies
Purchase Commitments
The Company has concluded an agreement with Philips, whereby Philips will
supply reception systems, as well as retail, installation and support services
in connection with the launch of the Company's DTH business in Poland. Philips
will be the exclusive supplier to the Company of the first 500,000 DTH
reception systems and will not distribute any other digital integrated receiver
decoders under the Philips trademark in Poland until December 31, 1999 or any
earlier date on which the Company has secured 500,000 initial subscribers to
its DTH service in Poland. Philips has granted the Company an exclusive license
of its CryptoWorks(R) technology in Poland for the term of the agreement, which
will terminate when the Company has purchased 500,000 DTH reception systems
from Philips, unless terminated earlier in accordance with the terms of the
agreement or extended by mutual consent of Philips and the Company. As of
December 31, 1998, the Company had an aggregate minimum commitment toward the
purchase of the Reception Systems of approximately $129,213,000 up to June 30,
2000.
Programming, Broadcast and Exhibition Right Commitments
The Company has entered into long-term programming agreements and
agreements for the purchase of certain exhibition or broadcast rights with a
number of third party content providers for its DTH and cable systems. The
agreements have terms which range from one to seven years and require that the
license fees be paid either at a fixed amount payable at the time of execution
or based upon a guaranteed minimum number of subscribers connected to the
system each month. At December 31, 1998, the Company had an aggregate minimum
commitment in relation to these agreements of approximately $214,299,000 over
the next seven years, approximating $37,198,000 in 1999, $38,428,000 in 2000,
$40,627,000 in 2001, $44,837,000 in 2002 and $53,209,000 in 2003 and
thereafter.
F-122
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
Consulting Agreements
The Company has entered into a two-year consultancy arrangement with Samuel
Chisholm and David Chance (each individually a "Consultant"), pursuant to which
the Company will pay to a Consultant a fee of $10,000 per consultancy day,
based on a minimum, on average over each 12 month period, of a total of 4
Consultancy Days per month, and the Company will pay an additional fee of
$10,000 to a Consultant for any additional days in any month on which a
Consultant provides consulting services to the Company. The consultancy
agreement is not subject to cancellation by either party except as a result of
a breach of the consultancy agreement.
Regulatory Approvals
The Company is in the process of permits from the Polish State Agency for
Radiocommunications ("PAR") for several of its cable television systems. If
these permits are not obtained, PAR could impose penalties such as fines or in
severe cases, revocation of all permits held by an operator or the forfeiture
of the operator's cable networks. Management of the Company does not believe
that these pending approvals result in a significant risk to the Company.
Litigation and Claims
On April 17, 1998, the Company signed a letter of intent with Telewizyjna
Korporacja Partycypacyjna S.A. ("TKP") and the shareholders of TKP, namely,
Canal+ S.A., Agora S.A., and PolCom Invest S.A. which provided for bringing
together the Company's Wizja TV programming platform and the Canal+ Polska
premium pay television channel and for the joint development and operation of a
DTH service in Poland. The letter of intent called for the Company to invest
approximately $112 million in TKP, and to sell substantially all of the
Company's DTH and programming assets to TKP for approximately $42 million. The
TKP joint venture was to be owned 40% by the Company, 40% by Canal+ S.A., 10%
by Agora S.A. and 10% by PolCom Invest S.A, The letter of intend contained a
standstill provision whereby neither the Company nor TKP could, for a period of
45 days after the execution of the letter of intent, launch any digital pay
television service. As a result, the Company postponed its launch of the Wizja
TV programming package and its DTH service which was originally scheduled for
April 18, 1998. The establishment of the joint venture was subject to the
execution of definitive agreements, regulatory approvals and certain other
closing conditions.
The definitive agreements were not agreed and executed by the parties by
the date set forth in the letter of intent (the "Signature Date"). Therefore,
the Company terminated the letter of intent on June 1, 1998. TKP and its
shareholders have informed the Company that they believe the Company did not
have the right to terminate the letter of intent.
Under the terms of the letter of intent, TKP is obligated to pay the
Company a $5 million break-up fee within 10 days of the signature date if the
definitive agreements were not executed by the signature date, unless the
failure to obtain such execution was caused by the Company's breach of any of
its obligations under the letter of intent. If there was any such breach by the
Company, the Company would be obligated to pay TKP $10 million. However, if any
breach of the letter of intent by TKP caused the definitive agreements not to
be executed, TKP would be obligated to pay the Company a total of $10 million
(including the $5 million break-up fee). In the event that TKP fails to pay the
Company any of the above-referenced amounts owed to the Company, TKP's
shareholders are responsible for the payment of such amounts.
F-123
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
The Company has demanded TKP to pay the Company the $5 million break-up fee
as a result of the failure to execute the definitive agreements by the
signature date. While the Company was waiting for the expiration of the 10-day
period for payment of the break-up fee, TKP initiated arbitration proceedings
before a three-member arbitration panel in Geneva, Switzerland. In the
arbitration proceedings TKP and its shareholders contend that the Company
breached the letter of intent, that such breach was the cause of the parties'
failure to agree and execute the definitive agreements, and that the Company is
therefore liable for $10 million in damages under the letter of intent. In its
response the Company denies these allegations and claims that TKP is liable for
at least $15 million in damages pursuant to the letter of intent.
This $15 million figure is composed of a claim for a $5 million break-up
fee, $5 million in damages due to the claim that TKP and its shareholders
breached the letter of intent, thereby causing the parties' failure to agree
and execute the definitive agreements, and at least $5 million as an
indemnification for liabilities incurred by the Company as a result of certain
actions taken with respect to assets to be acquired or contracts to be assumed
by TKP. The Company does not believe that the arbitration proceedings will have
a material adverse effect on its business, financial condition or results of
operations.
Two of the Company's cable television subsidiaries and four other unrelated
Polish cable operators and HBO Polska Sp. z o.o., have been made defendants in
a lawsuit instituted by Polska Korporacja Telewizyjna Sp. z o.o., a subsidiary
of Canal+. The primary defendant in the proceedings is HBO Polska Sp. z o.o.
which is accused of broadcasting the HBO television program in Poland without a
license from the Council as required by the Radio and Television Act of 1992,
as amended, and thereby undertaking an activity constituting an act of unfair
competition. The Company does not believe that the final disposition of the
lawsuit will have a material adverse effect on its consolidated financial
position or results of operations.
From time to time, the Company is subject to various claims and suits
arising out of the ordinary course of business. While the ultimate result of
all such matters is not presently determinable, based upon current knowledge
and facts, management does not expect that their resolution will have a
material adverse effect on the Company's consolidated financial position or
results of operations.
19. Concentrations of Business and Credit Risk
DTH Business
The Company expects to experience substantial operating losses and negative
free cash flows for at least the next two years due to (i) the large
investments required for the acquisition of equipment and facilities for its
DTH business, including providing DTH reception systems to 380,000 initial
subscribers at a price significantly decreased by promotional incentives
pursuant to the Company's business strategy, and the administrative costs
required in connection with commencing its DTH business operations and (ii) the
large investments required to develop, produce and acquire the programming for
Wizja TV. There can be no assurance that the Company will be able to generate
operating income or positive cash flows in the future or that its operating
losses and negative cash flows will not increase.
Supplier Agreement
Certain critical components and services used in the Company's DTH
satellite transmission system, including the DTH reception system, as well as
retail, installation and support services, are initially to be provided
exclusively by Philips. The Company has concluded an agreement with Philips
providing for Philips to be the exclusive supplier to the Company of the first
500,000 DTH reception systems in connection with the launch of the Company's
DTH
F-124
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
business in Poland. Philips has granted the Company an exclusive license of its
CryptoWorks7 technology in Poland for the term of the agreement, which will
terminate when the Company has purchased 500,000 DTH reception systems from
Philips, unless terminated earlier in accordance with the terms of the
agreement or extended by mutual consent of Philips and the Company. Philips has
agreed not to distribute any other IRDs under the Philips' trademark in Poland
until December 31, 1999 or any earlier date on which the Company has secured
500,000 initial subscribers to its DTH service in Poland. The Company's
agreement with Philips provides that after such period the Company may license
one or two suppliers of IRDs in addition to Philips and Philips shall license
its CryptoWorks7 technology to such additional suppliers for the Polish market.
Although the agreement with Philips provides a means by which the Company could
obtain a second and third supplier for all or part of its future requirements
for DTH reception systems, there can be no assurance that the Company will be
able to secure such additional suppliers.
The failure of Philips to deliver DTH reception systems on schedule, or at
all, would delay or interrupt the development and operation of the Company's
DTH service and thereby could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's agreement with Philips provides for full distribution,
installation and servicing through more than 1,200 Philips authorized
electronics retailers located throughout Poland. Philips has agreed to
distribute a complete subscription package, comprising the DTH reception
system, as well as the necessary installation and support services through
Philips' retail network in Poland, and will therefore be the primary point of
contact for subscribers to the Company's DTH service. Failure by Philips'
retail network to provide the desired levels of service, quality and expertise
(which are outside the control of the Company) could have a material adverse
impact on the Company's operations and financial condition.
Piracy
The delivery of subscription programming requires the use of encryption
technology to prevent signal theft or "piracy." Historically, piracy in the
cable television and European A-DTH industries has been widely reported. The
Company's IRDs incorporate Philips' CryptoWorks(R) proprietary encryption
technology as part of its conditional access system. These IRDs use smartcard
technology, making it possible to change the conditional access system in the
event of a security breach either through over-the-air methods such as issuing
new electronic decryption "keys" over-the-air as part of the Company's regular
DTH broadcasts or by issuing new smartcards. To the Company's knowledge, there
has not been a breach of CryptoWorks(R) since its introduction in Malaysia in
1996. To the extent a breach occurs, the Company will take countermeasures,
including over-the-air measures and, if necessary, the replacement of
smartcards. Although the Company expects its conditional access system,
subscriber management system and smartcard system to adequately prevent
unauthorized access to programming, there can be no assurance that the
encryption technology to be utilized in connection with the Company's DTH
system will remain effective. If the encryption technology is compromised in a
manner which is not promptly corrected, the Company's revenue and its ability
to contract or maintain contracts for programming services from unrelated third
parties would be adversely affected.
Use of TPSA Conduits
The Company's ability to build out its existing cable television networks
and to integrate acquired systems into its cable television networks depends
on, among other things, the Company's continued ability to design and obtain
access to network routes, and to secure other construction resources, all at
reasonable costs and on satisfactory terms and conditions. Many of such factors
are beyond the control of the Company. In addition, at December 31, 1998,
approximately 56.5% of the Company's cable plant had been constructed utilizing
pre-existing conduits of TPSA. A substantial portion of the Company's contracts
with TPSA for the use of such conduits permits termination by TPSA without
penalty at any time either immediately upon the occurrence of certain
conditions or upon provision of three to six months' notice without cause.
F-125
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
Limited Insurance Coverage
While the Company carries general liability insurance on its properties,
like many other operators of cable television systems it does not insure the
underground portion of its cable television networks. Due to the high cost of
insurance policies relating to satellite operations, the Company does not
insure against possible interruption of access to the transponders leased by it
for satellite transmission of its broadcasting. Accordingly, any catastrophe
affecting a significant portion of the Company's cable television networks or
disrupting its access to its leased satellite transponders could result in
substantial uninsured losses and could have a material adverse effect on the
Company.
Year 2000
The Company's cable television, DTH and programming operations are
dependent upon computer systems and other technological devices with imbedded
microprocessor chips that are intended to utilize dates and process data beyond
December 31, 1999. In January 1997, the Company developed a plan to address the
impact that potential year 2000 problems may have on Company operations and to
implement necessary changes to address such problems (the "Y2K Plan"). During
the course of the development of its Y2K Plan, the Company has identified
certain critical operations, which need to be year 2000 compliant for the
Company to operate effectively. These critical operations include accounting
and billing systems, customer service and service delivery systems, and field
and headend devices.
Largely as a result of its high rate of growth over the past few years, the
Company has entered into an agreement to purchase a new system to replace its
current accounting system and an agreement to purchase specialized billing
software for the Company's new customer service and billing center. The vendors
of the new accounting system and of the billing software have confirmed to the
Company that these products are year 2000 compliant. The Company has completed
the testing phase of the new accounting system, and the implementation phase
was substantially completed at the end of 1998. The Company has implemented the
new billing software for DTH subscribers and expects implementation of the
billing software to be completed for the majority of its cable subscribers by
the end of 1999.
The Company believes that its most significant year 2000 risk is its
dependency upon third party programming, software, services and equipment,
because the Company does not have the ability to control third parties in their
assessment and remediation procedures for potential year 2000 problems. Should
these parties not be prepared for year 2000 conversion, their products or
services may fail and may cause interruptions in, or limitations upon, the
Company's provision of the full range of its DTH and/or cable service to its
customers. In an effort to prevent any such interruptions or limitations, the
Company is in the process of communicating with each of its material third
party suppliers of programming, software, services and equipment to determine
the status of their year 2000 compliance programs. The Company expects to
complete this process by September 30, 1999, and it anticipates that all phases
of its Y2K Plan will be completed by December 31, 1999.
The Company has not yet developed a contingency plan to address the
situation that may result if the Company or its third party suppliers are
unable to achieve year 2000 compliance with regard to any products or services
utilized in the Company's operations. The Company does not intend to decide on
the development of such a contingency until it has gathered all of the relevant
Year 2000 compliance data from its third party suppliers.
The Company has not yet determined the full cost of its Y2K Plan and its
related impact on the financial condition of the Company. The Company has to
date not incurred any replacement or remediation costs for equipment or systems
as a result of year 2000 non-compliance. Rather, due to the rapid growth and
development of its cable system and its DTH service, the Company had made
substantial capital investments in equipment and systems for reasons other than
year 2000 concerns. The total cost of the Company's new accounting system and
billing software package is estimated to be approximately $2,400,000.
F-126
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
The Company believes that any year 2000 compliance issues it may face can
be remedied without a material financial impact on the Company, but no
assurance can be made in this regard until all of the data has been gathered
from the Company's third party suppliers. At this date the Company cannot
predict the financial impact on its operations if year 2000 problems are caused
by products or services supplied to the Company by such third parties.
Credit Worthiness
All of the Company's customers are located in Poland. As is typical in this
industry, no single customer accounted for more than five percent of the
Company's sales in 1997 or 1998. The Company estimates an allowance for
doubtful accounts based on the credit worthiness of its customers as well as
general economic conditions. Consequently, an adverse change in those factors
could effect the Company's estimate of its bad debts.
20. Subsequent Events
Units Offering
On January 22, 1999, the Company sold 256,800 Units to two initial
purchasers pursuant to a purchase agreement, each Unit consisting of $1,000
principal amount at maturity of 14 1/2% Senior Discount Notes due 2009 and four
warrants, each initially entitling the holder thereof to purchase 1.7656 shares
of common stock, par value $0.01 per share at an exercise price of $9.125 per
share, subject to adjustment.
The Notes were issued at a discount to their aggregate principal amount at
maturity and, together with the Warrants generated gross proceeds to the
Company of approximately $100,003,000 of which $92,551,000 has been allocated
to the initial accreted value of the notes and approximately $7,452,000 has
been allocated to the Warrants. The portion of the proceeds that is allocable
to the Warrants will be accounted for as part of paid-in capital. The
allocation was made based on the relative fair values of the two securities at
the time of issuance. Net proceeds to the Company after deducting initial
purchasers' discount and offering expenses were approximately $96,000,000.
The Notes are unsubordinated and unsecured obligations. Cash interest on
the Notes will not accrue prior to February 1, 2004. Thereafter cash interest
will accrue at a rate of 14.5% per annum and will be payable semiannually in
arrears on August 1 of each year and February 1 of each year, commencing August
1, 2004. The notes will mature on February 1, 2009. At any time prior to
February 1, 2002, the Company may redeem up to a maximum of 35% of the
originally issued aggregate principal amount at maturity of the notes at a
redemption price equal to 117.5% of the accreted value thereof at the
redemption date, plus accrued and unpaid interest, if any, to the date of
redemption with some or all of the net cash proceeds of one or more public
equity offerings; provided, however, that not less than 65% of the originally
issued aggregate principal amount at maturity of the notes remains outstanding
immediately after giving effect to such redemption.
The Warrants initially entitle the holders thereof to purchase 1,813,665
shares of Common Stock, representing, in the aggregate, approximately 5% of the
outstanding Common Stock on a fully-diluted basis (using the treasury stock
method) immediately after giving effect to the offering and Preference
Offering. The Warrants are exercisable at any time and will expire on February
1, 2009.
Pursuant to the Indenture governing the Notes, the Company is subject to
certain restrictions and covenants, including, without limitation, covenants
with respect to the following matters: (i) limitation on additional
indebtedness; (ii) limitation on restricted payments; (iii) limitation on
issuance and sales of capital stock of restricted subsidiaries; (iv) limitation
on transactions with affiliates; (v) limitation on liens; (vi) limitation on
issuance of guarantees of indebtedness by restricted subsidiaries; (vii)
purchase of Notes upon a change of control; (viii) limitation on sale of
assets; (ix) limitation on dividends and other payment restrictions affecting
restricted subsidiaries; (x) limitation on investments in unrestricted
subsidiaries; (xi) limitation on lines of business; and (xii) consolidations,
mergers and sales of assets. The Company is in compliance with these covenants.
F-127
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
Costs associated with the notes offering of approximately $3,875,000,
including the initial purchasers' discount will be capitalized and amortized
over the term of the Notes.
Also on January 22, 1999 @Entertainment sold Series A 12% Cumulative
Preference Shares and Series B 12% Cumulative Preference Shares (collectively,
the "Cumulative Preference Shares") and warrants (each a "Preference Warrant")
for total gross proceeds of $50 million (before deducting commissions and
offering costs of approximately $1.8 million). Dividends (whether or not earned
or declared) will cumulate on a daily basis from the original issue date and
will be payable semi-annually in arrears on March 31, and September 30 of each
year, commencing on March 31, 1999 (each a "Dividend Payment Date") to holders
of record on the fifteenth day immediately preceding the relevant Dividend
Payment Date. The Company at its option may, but shall not be required to,
redeem in US Dollars for cash the Cumulative Preference Shares, including any
Series B Cumulative Preference Shares, at any time on or after March 31, 2000,
in whole or in part, at the redemption price of 112% of the sum of (i) the
Initial Liquidation Preference ($50 million in the aggregate) and (ii)
accumulated and unpaid dividends, if any, to the date of redemption. On January
30, 2010, the Company will be required (subject to contractual and other
restrictions on the ability to redeem capital stock) to redeem all outstanding
Cumulative Preference Shares, including any Series B Cumulative Preference
Shares, at a price in US Dollars equal to the Initial Liquidation Preference
thereof plus all accumulated and unpaid dividends thereon (if any) to the date
of redemption. The Company will not be required to make sinking fund payments
with respect to the Cumulative Preference Shares. The Preference Warrants
initially entitle the holders thereof to purchase an aggregate of 5.5 million
shares of Common Stock at an exercise price of $10.00 per share. The preferred
shares will be classified outside of stockholders' equity.
Series C Notes Offering
On January 20, 1999, the Company sold $36,001,321 aggregate principal
amount at maturity of its Series C Notes due 2008. The Series C Notes are
senior unsecured obligations of the Company ranking pari passu in right of
payment with all other existing and future unsubordinated obligations of the
Company. The Series C Notes were issued at a discount to their aggregate
principal amount at maturity and generated gross proceeds to the Company of
approximately $9.8 million. Net proceeds to the Company after deducting the
initial purchaser's discount and offering expenses were approximately $9.4
million. The original issue discount will accrete from January 20, 1999 until
the stated maturity of the Series C Notes on July 15, 2008. In addition, cash
interest on the Series C Notes will accrue from July 15, 2004 at a rate of 7.0%
per annum on the principal amount at maturity, and will be payable semiannually
in arrears on July 15 and January 15 of each year commencing January 15, 2005.
Prior to July 15, 2004 there will be no accrual of cash interest on the Series
C Notes. The Series C Notes will mature on July 15, 2008.
Pursuant to the Series C Indenture, the Company is subject to certain
restrictions and covenants, including, without limitation, covenants with
respect to the following matters: (i) limitation on additional indebtedness;
(ii) limitation on restricted payments; (iii) limitation on issuance and sales
of capital stock of restricted subsidiaries; (iv) limitation on transactions
with affiliates; (v) limitation on liens; (vi) limitation on guarantees of
indebtedness by restricted subsidiaries; (vii) purchase of Notes upon a change
of control; (viii) limitation on sale of assets; (ix) limitation on dividends
and other payment restrictions affecting restricted subsidiaries; (x)
limitation on investments in unrestricted subsidiaries; (xi) limitation on
lines of business; and (xii) consolidations, mergers and sales of assets. The
Company is in compliance with these covenents.
F-128
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
21. Subsequent Events (unaudited)
D-DTH Reception Systems
On April 1, 1999, the Company began selling digital direct-to-home ("D-
DTH") reception systems to customers. Prior to April 1, 1999, the systems were
leased to customers, classified as fixed assets and depreciated over 5 years.
Due to this change, the Company now classifies reception systems as inventory.
In the three months ended June 30, 1999 the Company wrote down the value of all
reception systems acquired in the three months ended June 30, 1999 and held
unsold prior to April 1, 1999 to the net realizable value. The effect of the
change was to increase operating loss by approximately $22,218,000 or $0.67 per
share for the three and six months ended June 30, 1999.
Warrant Exercises
In June 1999, certain holders of warrants exercised their right to purchase
shares of common stock of the Company. The warrant holders exercised a total of
87,940 warrants of which 64,200 related to the 14 1/2% Senior Discount Notes
due 2009 and 23,740 related to the 14 1/2% Senior Discount Notes due 2008. The
Company issued 156,320 shares of common stock for total cash proceeds of
$1,601,000.
In July and August 1999, certain warrant holders exercised their right to
purchase shares of common stock of the Company. The warrant holders exercised a
total of 203,800 and 7,600 warrants issued with the 14 1/2% Senior Discount
Notes due 2008 and 14 1/2% Senior Discount Notes due 2009, respectively. In
connection with the exercise of these warrants, the Company issued 382,296
shares of common stock for total cash proceeds of approximately $4,992,000.
Consumption of Tender Offer and Merger
On June 2, 1999, the Company entered into an Agreement and Plan of Merger
with United Pan-Europe Communications N.V. ("UPC"), whereby UPC and its wholly-
owned subsidiary, Bison Acquisition Corp. ("Bison"), initiated a tender offer
to purchase all of the outstanding shares of the Company in an all cash
transaction valuing the Company's shares of common stock at $19.00 per share.
The tender offer, initiated pursuant to the Agreement and Plan of Merger
with UPC and Bison, closed at 12:00 midnight on August 5, 1999, and Bison was
merged into the Company on August 9, 1999. Upon the completion of the merger,
each share of the Company's common stock and preferred stock then issued and
outstanding was canceled, and the Company became a wholly owned subsidiary of
UPC.
Exchange Offerings
The Company filed a registration statement on Form S-4 with the SEC in
connection with an offer to exchange the 14 1/2% Senior Discount Notes for 14
1/2% Series B Senior Discount Notes due 2009 (the "Exchange Notes"). The
registration statement was declared effective on May 13, 1999. The Warrants and
shares of common stock underlying the Warrants issued in the Units offering
were registered on a registration statement on Form S-3. This registration
statement was declared effective on July 2, 1999.
The Series A 12% Cumulative Redeemable Preference Shares, the Series A 12%
Cumulative Redeemable Preference Shares, and the Preference Warrants issued in
the Preference offering were registered on a registration statement on Form S-
3. This registration statement was declared effective on July 2, 1999.
F-129
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
Programming, Broadcast and Exhibition Rights
The Company has entered into long-term programming agreements and
agreements for the purchase of certain exhibition or broadcast rights with a
number of third party content providers for its digital direct-to-home ("D-
DTH") and cable systems. The agreements have terms which range from one to
seven years and require that the license fees be paid either at a fixed amount
payable at the time of execution or based upon a guaranteed minimum number of
subscribers connected to the system each month. At June 30, 1999, the Company
had an aggregate minimum commitment in relation to these agreements of
approximately $202,024,000 over the next seven years, approximating $29,872,000
for the remainder of 1999, $35,356,000 in 2000, $38,453,000 in 2001,
$40,589,000 in 2002, $29,218,000 in 2003 and $28,536,000 in 2004 and
thereafter.
Purchase Commitments
As of June 30, 1999, the Company had an aggregate minimum commitment toward
the purchase of the D-DTH reception systems from Philips Business Electronics
B.V. ("Philips") of approximately $87,730,000 by June 30, 2000.
Acquisitions
On February 25, 1999, @Entertainment purchased for approximately $1.8
million a 30% interest in Mozowiecki Klub Sporting Sportowa S.A., a joint stock
company which owns Hoop Pekoes Pruszkow, a Polish basketball team. In
connection with this acquisition @Entertainment has agreed to act as a sponser
for Hoop Pekaes Pruskow.
On March 31, 1999 a subsidiary of PCI purchased certain cable television
system assets for an aggregate consideration of approximately $509,000. The
acquisition was accounted for using the purchase method. Whereby the purchase
price was allocated among the fixed assets acquired based on their fair value
on the date of acquisition and any access to goodwill. The purchase price
exceeded fair value of the assets acquired by approximately $108,000.
Subsequent to June 30, 1999, a subsidiary of the Company entered into an
agreement to acquire 100% of a cable television system for a total
consideration of approximately $7,330,000. The consummation of this transaction
is subject to Polish Ministry of Telecommunications approval. The acquisition
will be accounted for under the purchase method where the purchase price will
be allocated to the underlying assets and liabilities based upon their
estimated fair values and any excess to goodwill. The acquisition is not
expected to have a material effect on the Company's results of operations in
1999.
Subsequent to June 30, 1999, a subsidiary of the Company purchased all of
the assets and subscriber lists of a cable television system for a total
consideration of approximately $2,800,000. The purchase will be accounted for
under the purchase method where the purchase price will be allocated to the
underlying assets based upon their estimated fair values and any excess to
goodwill.
PCBV Minority Stockholders' Claim
On or about July 8, 1999, five minority shareholders (the "minority
shareholders") of Poland Cablevision (Netherlands) B.V. ("PCBV"), an indirect
subsidiary of @Entertainment, filed a lawsuit, Civil Action No. C2-99-621,
against @Entertainment, Poland Communications, Inc. ("PCI"), Advent Capital
Corporation, Chase Enterprises, Inc., Chase International Corporation, Goldman,
Sachs & Co., UPC, Cheryl Chase, and Arnold Chase, in the United States District
Court, for the Southern District of Ohio, Eastern Division.
F-130
<PAGE>
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1996, 1997 and 1998
The relief sought by the minority shareholders includes: (1) unspecified
damages in excess of $75,000, (2) an order lifting the restrictions against
transfer of shares set forth in the Shareholders' Agreement among PCBV's
shareholders, as amended (the "Shareholders' Agreement"), so that the minority
shareholders can liquidate their shares in PCBV, (3) damages in the amount of
1.7 percent of the anticipated payment by UPC for the shares of @Entertainment
as set forth in the Agreement and Plan of Merger between @Entertainment and UPC
dated June 2, 1999, and (4) attorneys' fees and costs incurred in prosecuting
the lawsuit; and such other relief as the Court deems just and proper.
The amended complaint sets forth eight claims for relief based on
allegations that the defendants, including @Entertainment and PCI, committed
the following wrongful acts: (1) breached a covenant not to compete contained
in the Shareholders' Agreement prohibiting any shareholders of PCBV from having
any direct or indirect interest in any aspect of the cable television business
in Poland, as a result of @Entertainment's and PCI's cable and D-DTH operations
in Poland, (2) breached a covenant in the Shareholders' Agreement requiring
that any contract entered into by PCBV with any other party affiliated with PCI
be commercially reasonable or be approved by certain of the minority
shareholders, by causing PCBV to enter into certain management and service
agreements that were allegedly not commercially reasonable and/or were not
approved by certain minority shareholders, (3) breached a provision in the
Shareholders' Agreement that allegedly required co-defendant Chase
International Corp. ("CIC") to offer the minority shareholders the right to
participate in certain sales of PCBV shares and that required CIC to give
written notice of any offer to purchase the minority shareholders' shares in
PCBV, by failing to provide the minority shareholders with the right to
participate in or with written notice of offers to purchase, (4) breached their
fiduciary duty to the minority shareholders by failing to provide them with
written notice of any offers to purchase PCBV's stock and with timely
information and periodic reports about the financial condition or business or
operating results of PCBV, (5) breached the agreement between PCBV and CIC,
which allegedly limited the amount of management fees that could be paid
annually by PCBV to CIC to $250,000, by causing PCBV to enter into management
agreements with other subsidiaries of PCI calling for payment of annual
management fees in excess of $250,000, (6) made false and misleading statements
in (a) PCI's offering memorandum by referring to negotiations between PCI and
the minority shareholders and to PCI's alleged offer to purchase their
outstanding shares in PCBV, which negotiations and offer allegedly never
transpired, (b) @Entertainment's offering memoranda by indicating that PCI
agreed to share the profits of its subsidiaries with the minority shareholders
on a pro rata basis and to purchase their outstanding shares in PCBV, which
agreements allegedly were never made and which negotiations allegedly never
occurred, and (c) @Entertainment's Forms 10-K by referring to a supplemental
agreement under which PCI agreed to share the profits of entities in which it
has a direct or indirect ownership interest with the minority shareholders on a
pro rata basis and under which PCI agreed to share 7.7 percent of the profits
from competing endeavors with the minority shareholders, which supplemental
agreement allegedly was never made; (7) colluding to defraud the minority
shareholders by failing to make reference in certain Forms 8-K, 8-K/A and 14D-1
to the minority shareholders or their alleged rights and claims, and
(8) colluding to divert assets of PCBV to affiliates of PCI and PCBV, including
@Entertainment, that allegedly compete with PCI and PCBV by falling to make
reference in certain Forms 8-K, 8-K/A and 14D-1 to the minority shareholders or
their alleged rights and claims and by falling to provide any information to
the minority shareholders so that they could value their rights and claims.
The Company intends to defend the lawsuit vigorously. The Company has also
conducted negotiations to purchase the minority shareholders' outstanding
shares in PCBV. If the negotiations produce a sale by the minority shareholders
of their shares in PCBV to the Company, the lawsuit would most likely be
terminated. The Company is unable to predict the outcome of those negotiations.
F-131
<PAGE>
INDEPENDENT AUDITORS' REPORT
Introduction
We have audited the consolidated balance sheets of A2000 Holding N.V.,
Eindhoven, The Netherlands, as of December 31, 1997 and 1998 and the related
consolidated statements of income and shareholders' equity and cash flows for
the years then ended. These financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
Scope
We conducted our audit in accordance with auditing standards generally
accepted in The Netherlands, which are substantially the same as those
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
audit provides a reasonable basis for our opinion.
Opinion
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of A2000 Holding N.V. as of
December 31, 1997 and 1998 and of the results of its operations and its cash
flows for the years then ended in accordance with accounting principles
generally accepted in The Netherlands.
Generally accepted accounting principles in The Netherlands vary in certain
significant respects from generally accepted accounting principles in the
United States. Application of generally accepted accounting principles in the
United States would have affected total assets, results of operations and
shareholders' equity as at and for the years ended December 31, 1997 and 1998
to the extent summarized in Note 21 to the consolidated financial statements.
Arthur Andersen
Amstelveen, The Netherlands,
March 9, 1999
F-132
<PAGE>
A2000 HOLDING N.V.
CONSOLIDATED BALANCE SHEETS
(Before allocation of net loss)
(Currency--Thousands of Dutch guilders)
<TABLE>
<CAPTION>
June 30,
1999 1998 1997
----------- ------- -------
(unaudited)
<S> <C> <C> <C>
ASSETS
Fixed Assets:
Intangible fixed assets..... 108,070 113,362 123,307
Tangible fixed assets....... 382,936 356,623 309,292
Financial fixed assets...... 1,094 325 325
-------- ------- -------
Total fixed assets...... 492,100 470,310 432,924
-------- ------- -------
Current Assets:
Inventory................... 21,343 15,932 9,496
Prepaid on inventory........ -- -- 2,980
-------- ------- -------
21,343 15,932 12,476
-------- ------- -------
Accounts receivable:
Trade..................... 23,646 19,484 20,194
Other receivables and
prepaid expenses......... 902 2,075 2,818
-------- ------- -------
24,548 21,559 23,012
-------- ------- -------
Securities.................. 218 218 218
Cash........................ 233 369 6,868
-------- ------- -------
Total current assets.... 46,342 38,078 42,574
-------- ------- -------
Total assets............ 538,442 508,388 475,498
======== ======= =======
SHAREHOLDERS' EQUITY AND
LIABILITIES
Shareholders' equity.......... (122,997) (86,248) (20,240)
-------- ------- -------
Provisions.................... 1,553 1,610 319
-------- ------- -------
Long-term loans............... 458,000 458,000 426,000
-------- ------- -------
Short-term liabilities:
Bank........................ 42,190 48,183 --
Suppliers................... 52,135 30,098 41,541
Shareholders................ 60,369 23,248 4,792
Affiliated companies........ 271 886 466
Taxes and social security
contributions.............. 7,743 5,907 2,436
Other debts and accrued
liabilities................ 39,178 26,704 20,184
-------- ------- -------
Total short-term
liabilities............ 201,886 135,026 69,419
-------- ------- -------
Total shareholders'
equity and
liabilities............ 538,442 508,388 475,498
======== ======= =======
</TABLE>
F-133
<PAGE>
A2000 HOLDING N.V.
CONSOLIDATED STATEMENT OF INCOME
(Currency--Thousands of Dutch guilders)
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998 1998 1997
----------- ----------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues.............................. 74,944 59,558 124,167 100,677
------- ------- ------- -------
Cost of operating expenses:
Wages and salaries.................. 16,165 13,844 29,290 21,205
Depreciation/amortization of
(in)tangible fixed assets.......... 32,436 32,801 73,254 49,478
Loss on disposal of assets.......... 483 27 85 1,443
Other operating expenses............ 43,020 32,013 64,312 46,222
------- ------- ------- -------
92,104 78,685 166,941 118,348
------- ------- ------- -------
Operating result.................. (17,160) (19,127) (42,774) (17,671)
------- ------- ------- -------
Financial income and expense:
Currency exchange gain/(loss)....... (5,134) (788) 1,100 (364)
Interest income..................... 362 426 674 523
Interest expense.................... (14,817) (10,230) (25,021) (16,444)
------- ------- ------- -------
(19,589) (10,592) (23,247) (16,285)
------- ------- ------- -------
Result before credit from income
taxes............................ (36,749) (29,719) (66,021) (33,956)
------- ------- ------- -------
Credit from income taxes.............. 0 0 13 9,826
------- ------- ------- -------
Net loss.......................... (36,749) (29,719) (66,008) (24,130)
======= ======= ======= =======
</TABLE>
F-134
<PAGE>
A2000 HOLDING N.V.
CONSOLIDATED CASH FLOW STATEMENT
(Currency--Thousands of Dutch Guilders)
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998 1998 1997
--------- --------- -------- --------
Unaudited Unaudited
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss............................. (36,749) (29,719) (66,008) (24,130)
------- ------- -------- --------
Depreciation of tangible fixed
assets.............................. 27,144 27,899 63,193 39,739
Amortization of intangible fixed
assets.............................. 5,292 4,902 10,061 9,739
Increase (decrease) provisions....... (57) 1,550 1,291 (10,425)
------- ------- -------- --------
32,379 34,351 74,545 39,053
------- ------- -------- --------
Increase inventory................... (5,411) (12,570) (3,456) (3,772)
Decrease (increase) in receivables... (2,989) (2,241) 1,453 (5,744)
Increase in short-term liabilities
other than loans.................... 36,003 4,405 874 27,897
------- ------- -------- --------
Change in working capital.......... 27,603 (10,406) (1,129) 18,381
------- ------- -------- --------
Net cash from (used in) operating
activities........................ 23,233 (5,774) 7,408 33,304
------- ------- -------- --------
Cash flows from investing activities:
Additions to tangible fixed assets,
net................................. (53,457) (53,486) (110,524) (118,498)
Additions to intangible fixed
assets.............................. -- -- (116) (1,326)
Additions to financial fixed assets.. (769) -- -- --
------- ------- -------- --------
Net cash used in investing
activities........................ (54,226) (53,486) (110,640) (119,824)
------- ------- -------- --------
Cash flows from financing activities:
Proceeds from long-term loans........ -- 43,000 32,000 60,000
Proceeds from short-term loans....... 30,857 9,602 64,733 --
------- ------- -------- --------
Net cash from financing
activities........................ 30,857 52,602 96,733 60,000
------- ------- -------- --------
Net decrease in cash............... (136) (6,658) (6,499) (26,520)
======= ======= ======== ========
Supplemental cash flow disclosures:
Cash paid for interest............... (9,777) (11,076) (23,635) (18,701)
Cash received for interest........... -- -- -- --
</TABLE>
F-135
<PAGE>
A2000 HOLDING N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Currency--Thousands of Dutch Guilders)
1.General
(a) Activities
A2000 Holding N.V. ("the company"), having its legal seat in Eindhoven, is
engaged in the holding of subsidiaries. The subsidiaries are engaged in the
construction, maintenance and exploitation of cable related infrastructure with
the purpose of passing on radio-and television signals and to provide data and
telecommunication services.
(b) Shareholders
The company is equally owned by the following shareholders (50%:)
. MediaOne International B.V. ("MediaOne"), formerly US West International
B.V., legally seated in Eindhoven
.United Telekabel Holding N.V. ("UTH"), legally seated in Amsterdam
During 1998, the former direct shareholder United Pan-European
Communications B.V. ("UPC"), contributed its share in the company into UTH,
which is held for 51% by UPC at December 31, 1998.
(c) Parent Companies Related Transactions
The company is charged by the parent companies for services supplied and
interest. In 1998 UPC charged an amount of 2,187 for interest, salaries and
related costs for employees seconded to A2000. The charges from MediaOne in
1998 relate to interest and salaries of 2,206.
(d) Comparative Financial Statements
Certain reclassifications have been made to the December 31, 1997 financial
statements for comparative purposes.
(e) Interim Financial Statements
The interim financial statements as of June 30, 1999 and for the six months
ended June 30, 1998 and 1999 are unaudited. In management's opinion, the
unaudited financial statements as of June 30, 1999 and for the six months ended
June 30, 1998 and 1999 include all adjustments necessary for fair presentation.
Such adjustments were of a normal recurring nature.
(f) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that effect amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Actual results may differ from the estimates.
F-136
<PAGE>
A2000 HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Currency--Thousands of Dutch Guilders)
2. Principles of Consolidation
All significant intercompany balances and transactions are eliminated in
consolidation. The consolidated financial statements include the financial
statements of the company and the following wholly owned subsidiaries, all
having their legal seat in Amsterdam:
. Kabeltelevisie Amsterdam B.V. ("KTA")
. A2000 Hilversum B.V.
3. Accounting Principles
(a) General
Assets and liabilities are stated at face value unless indicated otherwise.
Assets and liabilities denominated in foreign currencies are translated
into Dutch guilders at the yearend exchange rate. Transactions in foreign
currencies are translated at the exchange rate in effect at the time of the
transaction. The exchange results are recorded under financial income and
expense in the statement of income.
(b) Intangible Fixed Assets
Costs in connection with the financing are capitalized and amortized over
the duration of the underlying loan.
Costs in connection with the launch of new services are capitalized and
amortized on a straight-line basis over a period of 5 years.
The intangible fixed assets originating from the acquisition of the
Purmerend, Ouderkerk aan de Amstel and Hilversum networks represent the
difference of the acquisition cost and the purchase price of the tangible
fixed assets at the time of the acquisition.
The intangible fixed assets originating from the acquisition of KTA and the
cable networks of Zaanstaad and Landsmeer represent the difference of the net
asset value and the acquisition cost of the investment at the time of the
acquisition. The net asset value is determined taking the fair value of the
tangible fixed assets on the acquisition date into account.
The intangible fixed assets are amortized on a straight-line basis over a
period of 15 years.
(c) Tangible Fixed Assets
Tangible fixed assets are stated at the acquisition cost, less straight-
line depreciation. The depreciation is calculated on the basis of acquisition
cost less residual value and the estimated useful life of the related asset.
The estimated useful lives are:
<TABLE>
<S> <C>
Buildings........................................ 25 years
Networks......................................... 8-15 years
Other tangible fixed assets...................... 3-10 years
</TABLE>
F-137
<PAGE>
A2000 HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Currency--Thousands of Dutch Guilders)
The acquisition cost of the tangible fixed assets of newly acquired
subsidiaries is based on the fair value of these tangible fixed assets at the
time of acquisition.
(d) Financial Fixed Assets
The investments in other subsidiaries are stated at acquisition cost or, in
case of permanent impairment of the value of the subsidiaries, at lower equity
value as determined on the basis of the financial statements of the subsidiary.
Receivables are stated at face value, unless indicated otherwise.
(e) Inventory
Inventory is stated at the lower of (first-in, first-out) cost or market
value.
(f) Accounts Receivable
Accounts receivable are stated at face value, less an allowance for
possible uncollectable accounts.
(g) Securities
Securities are stated at the lower of purchase price or market value.
(h) Provisions
Provisions represent the present value of personnel reorganization
commitments (calculated at an interest rate of 7%) and a provision for
voluntary early retirement of certain employees of the company. The voluntary
early retirement provision is calculated by an independent actuary, using an
interest rate of 4%.
(i) Recognition of Income
Net sales are determined on the basis of the value (excluding taxes) of the
subscriptions, usage, signal deliveries and program suppliers invoiced.
Other revenues and expenses are recorded in the period in which they
originate.
(j) Recoverability of Tangible and Intangible Assets
The company evaluates the carrying value of all tangible and intangible
fixed assets whenever events or circumstances indicate the carrying value of
assets may exceed their recoverable amounts. An impairment loss is recognized
when the estimated future cash flows (undiscounted and without interest)
expected to result from the use of an asset are less than the carrying amount
of the asset. Measurement of an impairment loss is based on fair value of the
asset computed using discounted cash flows if the asset is expected to be held
and used. Measurement of an impairment loss for an asset held for sale would be
based on fair market value less estimated costs to sell.
F-138
<PAGE>
A2000 HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Currency--Thousands of Dutch Guilders)
(k) Concentration of Credit Risk
Financial instruments which potentially subject the company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are limited due
to the company's large number of customers and their dispersion across many
different countries in Europe.
(l) New United States Accounting Principles
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"), which requires that a public
business enterprise report certain financial and descriptive information about
its reportable segments. The Company adopted SFAS 131 for the year ended
December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed of Obtained for Internal Use" ("SOP 98-1"), which provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. SOP 98-1 identifies the characteristics of internal-use
software and provides examples to assist in determining when computer software
is for internal use. SOP 98-1 is effective for financial statements for fiscal
years beginning after December 15, 1998, for projects in progress and
prospectively, with earlier application encouraged. The company has adopted the
principles of this statement in the accompanying financial statements as of
January 1, 1999. Reference is made to note 21, US GAAP reconciliation.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which requires that companies recognize
all derivatives as either assets or liabilities in the balance sheet at fair
value. Under SFAS 133, accounting for changes in fair value of a derivative
depends on its intended use and designation. In June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of SFAS
133", ("SFAS 137"). SFAS 137 amends the effective date of SFAS 133 until fiscal
quarters of all fiscal years beginning after June 15, 2000. The company is
currently assessing the effect of this new standard.
4. Intangible Fixed Assets
The movement in intangible fixed assets is as follows:
<TABLE>
<CAPTION>
Book Value Book Value
January 1, 1998 Additions Amortization December 31, 1998
--------------- ----------- ------------ -----------------
<S> <C> <C> <C> <C>
Goodwill and licenses... 118,380 -- (9,284) 109,096
Financing Cost.......... 3,764 65 (462) 3,367
Start-up Cost........... 1,163 51 (315) 899
------- --- ------- -------
123,307 116 (10,061) 113,362
======= === ======= =======
<CAPTION>
Book Value Book Value
January 1, 1999 Additions Amortization June 30, 1999
--------------- ----------- ------------ -----------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Goodwill and licenses... 109,096 -- (4,642) 104,454
Financing Cost.......... 3,367 -- (249) 3,118
Start-up Cost........... 899 -- (401) 498
------- --- ------- -------
113,362 -- (5,292) 108,070
======= === ======= =======
</TABLE>
F-139
<PAGE>
A2000 HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Currency--Thousands of Dutch Guilders)
The composition of intangible fixed assets as of December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
Historical Accumulated Book Value
Cost Amortization December 31, 1997
----------- ------------ -----------------
<S> <C> <C> <C>
Goodwill............................. 139,245 (20,865) 118,380
Financing Cost....................... 4,588 (824) 3,764
Start-up Cost........................ 1,163 -- 1,163
------- ------- -------
144,996 (21,689) 123,307
======= ======= =======
The composition of intangible fixed assets as of December 31, 1998 is as
follows:
<CAPTION>
Historical Accumulated Book Value June
Cost Amortization 30, 1998
----------- ------------ -----------------
<S> <C> <C> <C>
Goodwill............................. 139,245 (30,149) 109,096
Financing Cost....................... 4,653 (1,286) 3,367
Start-up Cost........................ 1,214 (315) 899
------- ------- -------
145,112 (31,750) 113,362
======= ======= =======
The composition of intangible fixed assets as of June 30, 1999 is as
follows:
<CAPTION>
Historical Accumulated Book Value
Cost Amortization June 30, 1999
----------- ------------ -----------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Goodwill............................. 139,245 (34,791) 104,454
Financing Cost....................... 4,653 (1,535) 3,118
Start-up Cost........................ 1,214 (716) 498
------- ------- -------
145,112 (37,042) 108,070
======= ======= =======
</TABLE>
5. Tangible Fixed Assets
The movement in tangible fixed assets is as follows:
<TABLE>
<CAPTION>
Book Value
January 1, Reclassifi- Movement
1998 cations Additions in projects
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Land and buildings............... 29,614 1,020 8,918 --
Networks......................... 253,451 622 99,710 --
Other tangible fixed assets...... 9,397 (1,642) 4,290 --
Tangible fixed assets under
construction.................... 16,830 -- -- 1,328
------- ------ ------- -----
309,292 -- 112,918 1,328
======= ====== ======= =====
</TABLE>
<TABLE>
<CAPTION>
Book Value
December 31,
Retirements Depreciation 1998
----------- ------------ ------------
<S> <C> <C> <C>
Land and buildings...................... (3,653) (2,220) 33,679
Networks................................ -- (57,099) 296,684
Other tangible fixed assets............. (69) (3,874) 8,102
Tangible fixed assets under
construction........................... -- -- 18,158
------ ------- -------
(3,722) (63,193) 356,623
====== ======= =======
</TABLE>
F-140
<PAGE>
A2000 HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Currency--Thousands of Dutch Guilders)
<TABLE>
<CAPTION>
Book Value
January 1, Movement
1999 Reclassifications Additions in projects
---------- ----------------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Land and buildings...... 33,679 -- 4,933 --
Networks................ 296,684 -- 26,762 --
Other tangible fixed
assets................. 8,102 -- 3,708 --
Tangible fixed assets
under construction..... 18,158 -- -- 18,537
------- ---- ------ ------
356,623 -- 35,403 18,537
======= ==== ====== ====== ===
</TABLE>
<TABLE>
<CAPTION>
Book Value
June 30,
Retirements Depreciation 1999
----------- ------------ ------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Land and buildings...................... (583) (1,082) 37,047
Networks................................ -- (23,602) 299,844
Other tangible fixed assets............. -- (2,460) 9,350
Tangible fixed assets under
construction........................... -- -- 36,695
------- -------- -------
(583) (27,144) 382,936
======= ======== =======
The composition of tangible fixed assets as of December 31, 1997 is as
follows:
<CAPTION>
Book Value
Historical Accumulated December 31,
Cost Depreciation 1997
----------- ------------ ------------
<S> <C> <C> <C>
Land and buildings...................... 33,095 (3,481) 29,614
Networks................................ 325,296 (71,845) 253,451
Other tangible fixed assets............. 18,118 (8,721) 9,397
Tangible fixed assets under
construction........................... 16,830 -- 16,830
------- -------- -------
393,339 (84,047) 309,292
======= ======== =======
The composition of tangible fixed assets as of December 31, 1998 is as
follows:
<CAPTION>
Book Value
Historical Accumulated June 30,
Cost Depreciation 1998
----------- ------------ ------------
<S> <C> <C> <C>
Land and buildings...................... 37,504 (3,825) 33,679
Networks................................ 423,853 (127,169) 296,684
Other tangible fixed assets............. 21,866 (13,764) 8,102
Tangible fixed assets under
construction........................... 18,158 -- 18,158
------- -------- -------
501,381 (144,758) 356,623
======= ======== =======
</TABLE>
F-141
<PAGE>
A2000 HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Currency--Thousands of Dutch Guilders)
The composition of tangible fixed assets as of June 30, 1999 is as follows:
<TABLE>
<CAPTION>
Book Value
Historical Accumulated June 30,
Cost Depreciation 1999
----------- ------------ -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Land and buildings...... 41,004 (3,957) 37,047
Networks................ 450,615 (150,771) 299,844
Other tangible fixed
assets................. 25,574 (16,224) 9,350
Tangible fixed assets
under construction..... 36,695 -- 36,695
------- -------- -------
553,888 (170,952) 382,936
======= ======== =======
</TABLE>
6. Financial Fixed Assets
The composition of financial fixed assets is as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ -----------
(unaudited)
<S> <C> <C>
Investment in affiliated company....................... 65 119
Subordinated loan to affiliated company................ 260 975
--- -----
325 1,094
=== =====
</TABLE>
On August 15, 1996 the company acquired 25% in the share capital of Media
Groep West B.V., having its legal seat in Amsterdam, for an amount of 65.
At December 31, 1998 the equity value of the company's interest in Media
Groep West B.V. is lower than its acquisition cost. However, in the opinion of
management the value of the investment is not permanently impaired and
therefore the carrying value of the company's interest in Media Groep West B.V.
has not been written down to the lower equity value.
According to the provisions of the Dutch Civil Code the equity value and
net result for the year of Media Groep West B.V. are not disclosed.
The subordinated loan granted bears an interest of 7% per year and is
redeemable on August 15, 2006.
7. Accounts Receivable
Accounts receivable as presented under current assets mature within one
year. As of December 31, 1998 the amount trade receivable is after deduction of
an allowance for doubtful amounts of 11,081 (1997--10,042).
The movement in the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Balance January 1................................................ 10,042 4,566
Charged to expense............................................... 3,962 5,476
Uncollectible balances written off............................... (2,923) --
------ ------
Balance December 31.............................................. 11,081 10,042
====== ======
</TABLE>
F-142
<PAGE>
A2000 HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Currency--Thousands of Dutch Guilders)
8. Securities
This relates to certificates in Stichting Vecaitex, having its legal seat
in Dordrecht and to certificates in the Amsterdam Arena in Amsterdam, The
Netherlands.
9. Cash
No restrictions on usage of cash exist. Cash has original maturities of
less than three months.
10. Shareholders' Equity
The movement in shareholders' equity is as follows:
<TABLE>
<CAPTION>
Issued and Additional
Paid-in Paid-in
Capital Capital
---------- ----------
<S> <C> <C>
Balance January 1, 1997................................... 200 26,000
Allocation of 1996 net loss............................... -- --
Net loss.................................................. -- --
--- ------
Balance January 1, 1998................................... 200 26,000
Allocation of 1997 net loss............................... --
Net loss.................................................. -- --
--- ------
Balance December 31, 1998................................. 200 26,000
Allocation of 1998 net loss (Unaudited)................... -- --
Net loss (Unaudited)...................................... -- --
--- ------
Balance June 30, 1999 (Unaudited)......................... 200 26,000
=== ======
</TABLE>
<TABLE>
<CAPTION>
Other
reserves Net
(deficit) Loss Total
--------- ------- --------
<S> <C> <C> <C>
Balance January 1, 1997........................... (7,623) (14,687) 3,890
Allocation of 1996 net loss....................... (14,687) 14,687 --
Net loss.......................................... -- (24,130) (24,130)
-------- ------- --------
Balance January 1, 1998........................... (22,310) (24,130) (20,240)
Allocation of 1997 net loss....................... (24,130) 24,130 --
Net loss.......................................... -- (66,008) (66,008)
-------- ------- --------
Balance December 31, 1998......................... (46,440) (66,008) (86,248)
Allocation of 1998 loss (Unaudited)............... (66,008) 66,008 --
Net loss (Unaudited).............................. -- (36,749) (36,749)
-------- ------- --------
Balance June 30, 1999 (Unaudited)................. (112,448) (36,749) (122,997)
======== ======= ========
</TABLE>
F-143
<PAGE>
A2000 HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Currency--Thousands of Dutch Guilders)
11. Provisions
The movement in provisions is as follows:
<TABLE>
<CAPTION>
June 30,
1999 1998 1997
----------- ----- ----
(unaudited)
<S> <C> <C> <C>
Balance January 1...................................... 1,610 319 943
Addition............................................... -- 1,414 --
Release................................................ (57) (123) (624)
----- ----- ----
Balance................................................ 1,553 1,610 319
===== ===== ====
</TABLE>
12. Long-Term Loans
The company and its subsidiary KTA entered into a long-term loan agreement
with ABN AMRO BANK N.V. on February 16, 1996. The total facility amounts to
465,000. KTA's facility amounts to 375,000, consisting of 250,000 long-term
debt, 75,000 "construction loan facility' and 50,000 "working capital
facility'. The company's facility amounts to 90,000. The interest rate is
variable and based on Aibor + 0.75%.
A2000 Hilversum B.V. entered into a long-term loan agreement with ABN AMRO
BANK N.V. on October 16, 1996. The total facility amounts to 45,000,
consisting of 26,000 long-term loan, 17,000 "construction loan facility' and
2,000 "working capital facility'. The interest is variable and based on
Aibor + 0.7%.
At June 30, 1999 these facilities have been used for an amount of
approximately 500,190 (1998 --506,183).
Long term liabilities at December 31, 1998 will be payable as follows:
<TABLE>
<CAPTION>
Year Loans
---- -------
<S> <C>
1999................................. --
2000................................. 27,000
2001................................. 52,500
2002................................. 54,500
2003................................. 100,000
thereafter........................... 224,000
-------
458,000
=======
</TABLE>
The company's facilities are secured by mortgages and pledges, including
pledges on KTA's and A2000 Hilversum's shares and their assets. The loan
agreement restricts the borrowers from incurring additional indebtedness,
subject to certain exceptions.
13. Short-term liabilities to shareholders
The shareholders granted to the company subordinated loans amounting to a
maximum of USD30,000. At December 31, 1998, the facility has been used for an
amount of USD8,750. The loans will be repaid to the shareholders after
completion of the refinancing. The interest rate is variable and based on
Libor +1%.
14. Income taxes
The company and its Dutch fully owned subsidiaries constitute a fiscal
entity as of January 1, 1996. The tax loss carry-forwards of the fiscal entity
are available for an unlimited period of time to reduce future tax
liabilities.
F-144
<PAGE>
A2000 HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Currency--Thousands of Dutch Guilders)
The company and its Dutch fully owned subsidiaries have a pre fiscal unity
tax loss carry-forwards available for an unlimited period of time to reduce
future tax liabilities. Currently, the actual tax loss carry-forward is not
known, given certain discussions with the tax authorities. Management is
convinced that the outcome will be favorable for the company. Given the
companys tax loss carry-forward position the provision for deferred taxes has
been released in 1997 to the statement of income.
The difference between the income tax benefit and the actual income tax
benefit are as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
"Expected" income tax benefit at the Dutch
statutory rate of 35%.................................. (23,103) (11,885)
Tax effect of permanent and other differences:
Change in valuation allowance......................... 18,038 6,925
Non-deductible expenses............................... 5,065 4,960
Release deferred tax.................................... -- (9,500)
Other................................................... (13) (326)
------- -------
Total income tax benefit.............................. (13) (9,826)
======= =======
</TABLE>
The net deferred tax liability of the Company consists of the following:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Deferred tax assets:
Tax net operating loss carryforward........................ 37,810 19,772
Valuation allowance........................................ (29,498) (10,272)
------- -------
Deferred tax assets, net of valuation Allowance.......... 8,312 9,500
------- -------
Deferred tax liabilities:..................................
Property, plant and equipment.............................. (8,312) (9,500)
------- -------
Deferred tax liabilities, net.............................. -- --
======= =======
</TABLE>
15. Commitments
(a) Rent and operating leases
Long-term commitments in connection with rent and lease agreements amount
to approximately 4,360 and terminate in 2007. The terms of the agreements call
for future minimum payments as of December 31, 1998 as follows:
<TABLE>
<S> <C>
1999................................... 1,546
2000................................... 1,352
2001................................... 621
2002................................... 178
thereafter............................. 661
-----
4,358
=====
</TABLE>
(b) Purchase commitments
Purchase commitments outstanding as of December 31, 1998 amount to
approximately 3,200.
F-145
<PAGE>
A2000 HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Currency--Thousands of Dutch Guilders)
(c) Commitments to broadcasting companies
At the sale of the shares of KTA, the Municipality of Amsterdam stipulated
a yearly compensation of 3,700 payable by KTA to certain television-and radio
broadcasters. This amount is subject to yearly indexation based on the price
index of consumption. This commitment will expire in 2005.
(d) Interest hedges
In April 1997, A2000 bought an interest cap at 5.68% which matures in May
2002. The principal amount is 90,000. In April 1997, A2000 bought an interest
floor at 5.68% which matures in May 2002. The principal amount is 45,000.
As per May 18, 1998, company retains an interest swap which fixes a
principal amount of 250,000 at 5.72% interest per annum till February 18, 2002.
Since June 18, 1998, A2000 holds an interest swap, fixing a principal amount of
43,000 at 5.50% per annum till December 31, 2003.
The fair values of the financial instruments is based on market prices for
the same and similar issues. Carrying value is used when a market price is
unavailable. The fair value of the financial instruments approximates the
bookvalue.
16. Segment and Geographic Information
On December 31, 1998 the Company adopted Statement of Financial Accounting
Standards No. 131 "Disclosure about Segments of an Enterprise and Related
Information" ("SFAS 131"). The new rules establish revised standard for public
companies relating to the reporting of financial information about operating
segments. The adoption of SFAS 131 did not have a material effect on the
Company's consolidated financial statements but did affect the Company's
segment information disclosure.
Revenues are generated in The Netherlands. During 1997, the Company
introduced internet/data and telephony in several of its systems.
The key operating performance criteria used in this evaluation includes
revenue growth, operating income before depreciation and amortization
("Adjusted EBITDA"), and capital expenditures. The Company does not view
segment results below Adjusted EBITDA, therefore net interest expense, foreign
exchange gain (loss), share in results of affiliated companies, minority
interests in subsidiaries and income tax expense are not broken out by segment
below.
The segmented revenue information is summarized as follows:
<TABLE>
<CAPTION>
For the Year
For the three months For the six months ended December
ended June 30, ended June 30, 31,
----------------------- ----------------------- ---------------
1999 1998 1999 1998 1998 1997
----------- ----------- ----------- ----------- ------- -------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cable.......... 27,705 26,522 54,447 54,291 106,160 96,406
Telephony...... 7,959 2,851 14,228 4,096 12,898 1,115
Internet....... 3,001 633 5,791 910 4,393 33
Other.......... 300 124 478 261 716 3,123
------ ------ ------ ------ ------- -------
Total........ 38,965 30,130 74,944 59,558 124,167 100,677
====== ====== ====== ====== ======= =======
</TABLE>
F-146
<PAGE>
A2000 HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Currency--Thousands of Dutch Guilders)
The segmented adjusted EBITDA information is summarized as follows:
<TABLE>
<CAPTION>
For the Year
For the three months For the six months ended December
ended June 30, ended June 30, 31,
----------------------- ----------------------- ----------------
1999 1998 1999 1998 1998 1997
----------- ----------- ----------- ----------- ------- -------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cable................... 8,603 11,648 23,217 22,480 45,213 28,180
Telephony............... (2,365) (3,102) (5,215) (6,607) (12,137) 583
Internet................ (1,634) (1,158) (3,204) (2,460) (3,312) (79)
Other................... 300 124 478 261 716 3,123
------- ------- ------- ------- ------- -------
Total................. 4,904 7,512 15,276 13,674 30,480 31,807
======= ======= ======= ======= ======= =======
Following is a reconciliation of Adjusted EBITDA to the Company's net loss
before income taxes:
<CAPTION>
For the Year
For the three months For the six months ended December
ended June 30, ended June 30, 31,
----------------------- ----------------------- ----------------
1999 1998 1999 1998 1998 1997
----------- ----------- ----------- ----------- ------- -------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Adjusted EBITDA......... 4,904 7,512 15,276 13,674 30,480 31,807
Depreciation and
amortization........... (17,981) (16,737) (32,436) (32,801) (73,254) (49,478)
------- ------- ------- ------- ------- -------
Operating result...... (13,077) (9,225) (17,160) (19,127) (42,774) (17,671)
------- ------- ------- ------- ------- -------
Interest income......... 259 71 362 426 674 523
Interest expense........ (7,689) (5,009) (14,817) (10,230) (25,021) (16,444)
Foreign exchange (loss)
gain and other
expense................ (2,152) (315) (5,134) (788) 1,100 (364)
------- ------- ------- ------- ------- -------
Net loss before income
taxes................ (22,659) (14,478) (36,749) (29,719) (66,021) (33,956)
======= ======= ======= ======= ======= =======
</TABLE>
17. Personnel
Labor cost is specified as follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Salaries and wages............................................... 23,900 19,561
Pension cost and early retirement................................ 2,308 691
Other social security contributions.............................. 3,082 953
------ ------
29,290 21,205
====== ======
</TABLE>
The average number of (full-time) personnel during the year was 286
(1997 -- 247) employed in the following functional areas:
<TABLE>
<CAPTION>
Average Average
1998 1997
------- -------
<S> <C> <C>
Management...................................................... 2 2
Technical personnel............................................. 103 89
Supportive and administrative personnel......................... 95 99
Commercial personnel............................................ 86 57
--- ---
286 247
=== ===
</TABLE>
F-147
<PAGE>
A2000 HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Currency--Thousands of Dutch Guilders)
18. Depreciation/amortization of (in)tangible fixed assets:
The depreciation/amortization of (in)tangible fixed assets is specified as
follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Depreciation tangible fixed assets............................... 63,193 39,739
Amortization intangible fixed assets............................. 10,061 9,739
------ ------
73,254 49,478
====== ======
</TABLE>
19. Financial Income and Expense
The financial income and expense are specified as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998 1998 1997
----------- ----------- ------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Interest income:
Affiliated company.................. 19 9 18 27
Other............................... 343 417 656 496
------- ------- ------- -------
362 426 674 523
======= ======= ======= =======
Interest expense:
Shareholders........................ (1,264) -- (73) --
Other............................... (13,553) (10,230) (24,948) (16,444)
------- ------- ------- -------
(14,817) (10,230) (25,021) (16,444)
======= ======= ======= =======
</TABLE>
20. Financial situation
As a result of the investments in the new infrastructure and the start up
of new services the company has a negative cash flow and a negative equity. The
shareholders provided the company an USD30,000 loan facility of which USD8.750
was drawn on December 31, 1998. Based on the outcome of the negotiations of the
contract with the municipality of Amsterdam and others and the launch, on a
large scale, of digital set top boxes the company has further reassessed its
finance needs for the long term. Accordingly, the company has requested several
banks to put in a bridge loan before September 6, 1999, in order to allow the
company time to create a definite finance structure while maintaining normal
activities and finishing the upgrade of the network.
One of the shareholders has confirmed that they will provide adequate
funding to the company and its subsidiaries. When required they will contribute
the necessary equity and/or funding and intend to continue operating the
company and its subsidiaries as a going concern, for the 18 months period
subsequent to December 31, 1998.
21. US GAAP RECONCILIATION
The accounting policies followed in preparation for the consolidated
financial statements differ in some respect to the generally accepted
accounting principles in the United States.
F-148
<PAGE>
A2000 HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Currency--Thousands of Dutch Guilders)
In 1998 and 1997 there were no material differences. The 1999 difference
with an effect on net loss, shareholders' equity and total assets results from
the following:
The American Institute of Certified Public Accountants recently issued
Statement of Position 98-5, "Reporting on the Costs of start-up Activities
("SOP 98-5"), which is required to be adopted by affected companies for fiscal
years beginning after December 15, 1998. SOP 98-5 defines start-up and
organization costs existing as of January 1, 1999 must be written-off and
accounted for as a cumulative effect of an accounting change.
The calculation of net loss, shareholders equity and total assets
substantially in accordance with US GAAP, is as follows:
<TABLE>
<CAPTION>
Unaudited
6 months
ended
June 30,
1999
---------
<S> <C>
Net loss under Dutch GAAP........................................... (36,749)
US GAAP adjustment:
Differences related to accounting for start-up cost, net............ 401
---------
Net loss under US GAAP............................................ (36,348)
=========
<CAPTION>
Unaudited
6 months
ended
June 30,
1999
---------
<S> <C>
Total shareholders equity under Dutch GAAP.......................... (122,997)
US GAAP adjustment:
Differences related to accounting for start-up cost, net............ (498)
---------
Total shareholders equity under US GAAP........................... (123,495)
=========
Total assets under Dutch GAAP....................................... 538,442
US GAAP adjustment:
Differences related to accounting for start-up cost, net............ (498)
---------
Total assets under US GAAP........................................ 537,944
=========
</TABLE>
F-149
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Kabel Plus, a. s. and subsidiaries:
We have audited the accompanying consolidated balance sheets of Kabel Plus,
a. s. (a Czech joint stock company) and subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of operations, cash flows and
shareholders' equity for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Kabel Plus, a. s. and
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles in the United States.
ARTHUR ANDERSEN, s.r.o.
Prague, Czech Republic
June 18, 1999
Except for Note 15, as to which the date is
June 22, 1999
F-150
<PAGE>
KABEL PLUS, a. s. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997
(Czech Crowns--Kc in Thousands)
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998 1998 1997
------------- ---------- ------------- ----------
(unaudited) (unaudited)
ASSETS
<S> <C> <C> <C> <C>
Current assets
Cash and cash
equivalents............. 62,822 84,139 98,705 258,428
Restricted cash.......... 18,421 27,334 27,334 12,302
Accounts receivable, net
of allowances for
doubtful accounts of
247,550 (unaudited);
231,787; 234,749
(unaudited) and 225,976,
respectively............ 91,393 95,537 102,710 89,723
Inventory................ 83,717 115,912 138,060 115,503
Prepaid expenses......... 13,013 20,896 11,322 22,145
Other current assets..... 2,868 7,414 2,147 4,410
---------- ---------- ---------- ----------
Total current assets... 272,234 351,232 380,278 502,511
---------- ---------- ---------- ----------
Intangible assets, net of
accumulated amortization
of 46,540; 44,253; 55,827
and 33,999, respectively.. 17,171 18,407 19,164 9,591
Property, plant and
equipment, net of
accumulated depreciation
of 1,286,339 (unaudited);
1,127,078; 1,018,251
(unaudited) and 826,997,
respectively.............. 2,843,309 3,005,067 3,121,038 3,197,853
Investments in affiliates.. 23,264 25,264 73,764 78,446
---------- ---------- ---------- ----------
Total assets........... 3,155,978 3,399,970 3,594,244 3,788,401
========== ========== ========== ==========
Current liabilities
Accounts payable......... 140,892 174,733 246,372 346,558
Accrued liabilities...... 33,020 71,719 73,734 55,092
Short term bank debt..... 804,841 -- 715,856 562,811
---------- ---------- ---------- ----------
Total current
liabilities........... 978,753 246,452 1,035,962 964,461
---------- ---------- ---------- ----------
Long term bank debt........ -- 784,686 -- --
Due to parent.............. -- 879,153 3,290,447 2,977,222
---------- ---------- ---------- ----------
Total liabilities...... 978,753 1,910,291 4,326,409 3,941,683
---------- ---------- ---------- ----------
Share capital consisting as
of September 30, 1999 of
15,052 shares per Kc 100
and 2,300 shares per Kc
1,000, as of December 31,
1998 of 15,052 shares per
Kc 100 and 1,792 shares
per Kc 1,000 and as of
September 30, 1998 and
December 31, 1997 of
15,052 shares per Kc 100
and 435 shares per Kc
1,000..................... 3,805,200 3,297,200 1,940,200 1,940,200
Less: Receivables for
subscriptions............. (3,700) (3,700) (3,700) (3,700)
Share premium and reserve
fund...................... 3,476,661 3,045,439 1,894,371 1,894,371
Other cumulative
comprehensive income
(loss).................... (10,705) (12,200) (11,482) (1,988)
Accumulated deficit........ (5,090,231) (4,837,060) (4,551,554) (3,982,165)
Total shareholders'
equity................ 2,177,225 1,489,679 (732,165) (153,282)
---------- ---------- ---------- ----------
Total liabilities and
shareholders' equity.. 3,155,978 3,399,970 3,594,244 3,788,401
========== ========== ========== ==========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
The accompanying notes are an integral part of these consolidated financial
statements
F-151
<PAGE>
KABEL PLUS, a. s. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Czech Crowns--Kc in Thousands)
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998 1998 1997
------------- --------- ------------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Revenues.................... 648,420 770,382 557,157 641,721
-------- --------- -------- ---------
Operating costs and
expenses:
Operating................. 182,216 243,069 180,102 485,787
Services from MediaOne.... 48,320 69,505 57,779 34,645
General and
administrative........... 285,152 398,939 274,784 262,457
Depreciation and
amortization............. 250,521 330,959 235,272 263,091
-------- --------- -------- ---------
Total operating costs and
expenses................. 766,209 1,042,472 747,937 1,045,980
-------- --------- -------- ---------
Loss from operations........ (117,789) (272,090) (190,780) (404,259)
-------- --------- -------- ---------
Other (income) expense:
Interest expense on
loan from parent......... 58,595 429,998 313,226 404,738
Other interest expense,
net...................... 51,683 55,324 61,492 67,528
Foreign exchange (gains)
losses, net.............. (1,847) 2,975 (2,361) (63,418)
Other..................... 26,951 95,040 6,252 66,896
-------- --------- -------- ---------
Total other (income)
expenses................. 135,382 583,337 378,609 475,744
-------- --------- -------- ---------
Net loss before equity in
net income from
affiliates................. (253,171) (855,427) (569,389) (880,003)
Equity in net income (loss)
from affiliates............ -- 2,000 -- (1,383)
-------- --------- -------- ---------
Net loss.................... (253,171) (853,427) (569,389) (881,386)
======== ========= ======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-152
<PAGE>
KABEL PLUS, a. s. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Czech Crowns--Kc in thousands)
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998 1998 1997
------------- -------- ------------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. (253,171) (853,427) (569,389) (881,386)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization........... 250,521 330,959 235,272 263,091
Provision for doubtful
accounts............... 15,763 5,811 8,773 67,044
Provision against
financial investments.. -- 51,182 -- --
(Income) loss from sales
of fixed assets........ 19,334 (698) (1,017) 973
Equity in net income of
affiliates............. -- 2,000 -- 1,382
Changes in working
capital:
Increase in
receivables, prepaid
expenses and other
assets, net.......... 33,005 (13,789) (31,230) (100,325)
Decrease in accounts
payable and accrued
liabilities, net..... (89,812) (155,198) (78,499) (43,474)
Accrued interest and
currency differences... 58,595 398,319 255,669 429,099
-------- -------- -------- ----------
Net cash (used in)
operating
activities......... 34,235 (234,841) (180,421) (263,596)
Cash flows from investing
activities:
Decrease in investments in
affiliates............... 2,000 -- 4,681 (8,172)
Purchases of property,
plant and equipment...... (112,913) (148,480) (111,360) (576,490)
Proceeds from sales of
fixed assets............. 14,953 2,189 1,903 49,931
-------- -------- -------- ----------
Net cash (used in)
investing
activities......... (95,960) (146,291) (104,776) (534,731)
Cash flows from financing
activities:
Proceeds from parent...... -- -- -- 160,953
Amounts drawn down from
banks.................... 30,000 221,875 150,000 562,811
Payments of long term
debt..................... -- -- -- (2,159,844)
Increase in share
capital.................. -- -- -- 417,000
Increase in share premium
and legal reserve fund... -- -- -- 1,742,844
-------- -------- -------- ----------
Net cash provided by
financing
activities......... 30,000 221,875 150,000 723,764
-------- -------- -------- ----------
Change in cumulative foreign
currency translation
adjustment................. 1,495 (10,212) (9,494) 4,774
Net decrease in cash........ (30,230) (159,257) (144,691) (74,563)
Cash at beginning of year... 111,473 270,730 270,730 345,293
-------- -------- -------- ----------
Cash at end of year......... 81,243 111,473 126,039 270,730
======== ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-153
<PAGE>
KABEL PLUS, a. s. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
(Czech Crowns--Kc in Thousands)
<TABLE>
<CAPTION>
Share
Premium Other Total
Share Receivables for and Reserve Accumulated Comprehensive Comprehensive
Capital Subscriptions Fund Deficit Income Income
--------- --------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1996................... 1,523,200 (3,700) 156,301 (3,100,779) -- --
Net loss................ -- -- -- (881,386) -- (881,386)
Cumulative translation
adjustment............. -- -- -- -- (1,988) (1,988)
---------
Total Comprehensive
income (loss).......... -- -- -- -- -- (883,374)
=========
Increase in share
capital................ 417,000 -- 1,742,844 -- --
Other................... -- -- (4,774) -- --
--------- ------ --------- ---------- -------
Balances, December 31,
1997................... 1,940,200 (3,700) 1,894,371 (3,982,165) (1,988)
========= ====== ========= ========== =======
Net loss................ -- -- -- (853,427) -- (853,427)
Cumulative translation
adjustment............. -- -- -- -- (10,212) (10,212)
---------
Total Comprehensive
income (loss).......... -- -- -- -- -- (863,639)
=========
Increase in share
capital................ 1,357,000 -- 1,149,600 -- --
Other................... -- -- 1,468 (1,468) --
--------- ------ --------- ---------- -------
Balances, December 31,
1998................... 3,297,200 (3,700) 3,045,439 (4,837,060) (12,200)
========= ====== ========= ========== =======
Balances, December 31,
1997................... 1,940,200 (3,700) 1,894,371 (3,982,165) (1,988)
========= ====== ========= ========== =======
Net loss (unaudited).... -- -- -- (569,389) -- (569,389)
Cumulative translation
adjustment
(unaudited)............ -- -- -- -- (9,494) (9,494)
---------
Total comprehensive
income (loss)
(unaudited)............ -- -- -- -- -- (578,883)
--------- ------ --------- ---------- ------- =========
Balances, September 30,
1998 (unaudited)....... 1,940,200 (3,700) 1,894,371 (4,551,554) (11,482)
========= ====== ========= ========== =======
Balances, December 31,
1998................... 3,297,200 (3,700) 3,045,439 (4,837,060) (12,200)
========= ====== ========= ========== =======
Net loss (unaudited).... -- -- -- (253,171) -- (253,171)
Cumulative translation
adjustment
(unaudited)............ -- -- -- -- 1,495 1,495
---------
Total comprehensive
income (loss)
(unaudited)............ -- -- -- -- -- (251,676)
=========
Increase in share
capital................ 508,000 -- 429,748 -- --
Other................... -- -- 1,474 -- --
--------- ------ --------- ---------- ------- ---------
Balances, September 30,
1999 (unaudited)....... 3,805,200 (3,700) 3,476,661 (5,090,231) (10,705)
========= ====== ========= ========== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-154
<PAGE>
KABEL PLUS, a.s. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 1998 and 1997
(Czech Crowns--Kc in Thousands)
1. Organization and Operations
Kabel Plus, a. s. (the Company) is a joint stock company incorporated in
1990 under the laws of the Czech Republic. The Company was formed for the
purpose of establishing, constructing and operating cable television and
telephony networks, developing programming for, and broadcasting of, Kabel Plus
film channel in the territory of the Czech and Slovak Republics.
The shareholders of the Company as of September 30, 1999 and December 31,
1998 are as follows:
September 30,
1999 December 31,
(unaudited) 1998
------------- ------------
MediaOne Czech Cable
Company (MCCC).......... 97.47% 97.09%
JUDr. Petr Siroky........ 2.50% 2.88%
Other.................... 0.03% 0.03%
The following table summarizes the subsidiaries which make up the
consolidated group. The financial statements as of and for the nine months
ended, September 30, 1999 (unaudited) and as of and for the year ended,
December 31, 1998 of each subsidiary have been used in the preparation of these
consolidated financial statements. The structure of the consolidated group has
not changed since December 31, 1997.
Foreign subsidiaries Ownership
-------------------- -------------
Kabel Plus Banska
Bystrica, a. s. ........ 100%
Kabel Plus Bratislava, a.
s....................... 100%
Czech subsidiaries
------------------
Kabel Plus Praha, a. s... 100%
Kabel Plus Jizni Morava,
a. s.................... 100%
Kabel Plus Severni
Morava, a. s............ 100%
Kabel Plus Stredni
Morava, a. s............ 100%
Kabel Plus Vychodni
Cechy, a. s............. 100%
Kabel Plus Severni Cechy,
a. s.................... 100%
Kabel Plus Ceske
Budejovice, a. s. ...... 100%
Kabel Plus Tel, a. s..... 100%
Trade & Technology, a.
s....................... 100%
Czech Link, s. r. o. .... 50%
Sat Net, s. r. o......... 100%
2. Summary of Significant Accounting Policies
General Accounting Principles
The consolidated financial statements have been prepared from records
originating and maintained in the Czech and Slovak Republics, the countries in
which the Company and its subsidiaries are incorporated. The accounting
principles followed in these records are those required by Czech and Slovak
law. The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles in the United States
of America (U.S. GAAP). They have been prepared by restating the Company's
local consolidated financial statements, as of and for the nine months ended,
September 30, 1999 (unaudited) and 1998 (unaudited) and as of and for the years
ended, December 31, 1998 and 1997.
F-155
<PAGE>
KABEL PLUS, a. s. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
as of December 31, 1998 and 1997
(Czech Crowns--Kc in Thousands)
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and all of its wholly and majority owned subsidiaries except for Kabel Plus
Rodina, Triton and BESY Praha (see Note 4). These companies are not included
in the consolidation due to the fact that their financial statements, taken
individually and/or in total, are not material to the consolidated group.
Companies owned more than 20% but less than 50% with the exception of Kabel
Plus Vychodni Slovensko a. s. (See Note 4) are accounted for using the equity
method.
All significant intercompany accounts and transactions have been
eliminated.
Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the year.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
Management believes that the carrying value of the Company's financial
instruments approximates fair value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risks with respect to trade receivables are limited
due to the Company's large number of customers and their dispersion across the
Czech and Slovak Republics.
Statement of Cash Flows
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Income taxes and
interest paid during the nine months ended September 30, 1999 and 1998 and
during 1998 and 1997 year are as follows:
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998 1998 1997
------------- ------- ------------- ------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Income taxes......................... -- -- -- --
Interest............................. 57,301 112,823 72,346 18,547
</TABLE>
Restricted Cash
Amounts of cash pledged as customs guarantees were classified as restricted
cash on the balance sheet.
Revenue Recognition
Subscription revenue is recognized monthly in accordance with contracts
signed with the cable TV and telephony subscribers. Installation revenue is
recognized in the period when the installation occurs. Telephony subscribers
are billed monthly in arrears based on usage.
F-156
<PAGE>
KABEL PLUS, a. s. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
as of December 31, 1998 and 1997
(Czech Crowns--Kc in Thousands)
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based upon the Company's assessment
of probable loss related to overdue accounts receivable.
Intangible Assets, net
Intangible assets are primarily composed of licenses and are carried at
acquisition and related costs and amortized over five years.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated
depreciation. Betterments and improvements on property, plant and equipment are
capitalized at cost. Repairs and maintenance are expensed as incurred. Upon
sale or retirement of property, plant and equipment, the cost and related
accumulated depreciation are eliminated from the accounts.
Depreciation is calculated using the straight-line method over the
following estimated useful lives:
<TABLE>
<CAPTION>
Years
--------
<S> <C>
Buildings........................... 45
Machinery and equipment............. 8 -- 15
Vehicles and furniture and
fixtures........................... 4 -- 8
Cable Networks:
Stations including serial
systems.......................... 8
Cable network equipment........... 18 -- 20
Primary and secondary network
equipment........................ 8
Tercial networks.................. 20
Software and other.................. 4
</TABLE>
Inventory
Inventory is stated at the lower of costs and market. Inventory costs have
been determined by the weighted average method. Costs of purchased inventory
include external costs and internal transit costs.
Taxes
Corporate income tax is calculated in accordance with the Czech and Slovak
tax regulations at a rate of 35% and 40%, respectively. Certain items of income
and expense are recognized in different periods for tax and financial
accounting purposes. The differences relate primarily to depreciation, bad debt
provision and obsolete inventory provision.
See Note 9 for further discussion of taxes. Net tax operating losses can be
carried forward for seven and five years to offset taxable income in the Czech
and Slovak Republics, respectively.
Translation of Foreign Currency Transactions
Foreign currency transactions are recorded at the exchange rate in effect
on the date of the transaction. Assets and liabilities denominated in foreign
currencies at December 31, 1998 and 1997 are translated to Czech crowns at
F-157
<PAGE>
KABEL PLUS, a. s. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
as of December 31, 1998 and 1997
(Czech Crowns--Kc in Thousands)
the exchange rate in effect on that date. At September 30, 1999 and 1998 the
assets and liabilities denominated in foreign currencies are not restated at
the exchange rate in effect on that date, however, the impact on the financial
statements of not translating is immaterial.
Exchange rate differences arising on settlement of transactions or on
reporting foreign currency transactions at rates different from those at which
they were originally recorded are included in the statement of operations as
they occur.
Comprehensive Income
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," (SFAS No. 130), which requires
companies to report all changes in equity during a period, except those
resulting from investment by owners and distribution to owners, in the
financial statement for the period in which they are recognized. The Company
has chosen to disclose Comprehensive Income, which encompasses net income
(loss) and foreign currency translation adjustments, in the Consolidated
Statement of Changes in Equity. Prior years have been restated to conform to
the SFAS No. 130 requirements.
New Accounting Principle
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities (SFAS No. 133)," which requires that companies recognize
all derivatives as either assets or liabilities in the balance sheet at fair
value. Under SFAS 133, accounting for changes in fair value of a derivative
depends on its intended use and designation. SFAS 133 is effective for fiscal
years beginning after June 15, 1999. The Company does not expect that the
adoption of SFAS 133 will have a material impact on the consolidated financial
statements of the Company since it does not hold derivative instruments.
F-158
<PAGE>
KABEL PLUS, a. s. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
as of December 31, 1998 and 1997
(Czech Crowns--Kc in Thousands)
3. Property, Plant and Equipment
The composition of property, plant and equipment at September 30, 1999,
December 31, 1998, September 30, 1998 and December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Name September 30, 1999 1998 September 30, 1998 1997
---- ------------------ ---------- ------------------ ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Land.................... 30,652 13,643 15,670 13,670
Buildings and cable
networks............... 2,231,124 2,501,419 2,530,260 2,415,584
Machinery and
equipment.............. 1,557,181 1,315,363 1,320,057 1,158,934
Other tangible assets... 85,252 109,798 87,584 126,913
Construction in
progress............... 225,439 191,922 187,718 309,749
---------- ---------- ---------- ---------
Total................. 4,129,648 4,132,145 4,139,289 4,024,850
Accumulated
depreciation........... (1,286,339) (1,127,078) (1,018,251) (826,997)
---------- ---------- ---------- ---------
Property, plant and
equipment, net......... 2,843,309 3,005,067 3,121,038 3,197,853
========== ========== ========== =========
</TABLE>
Amortization and depreciation expense for the nine months ended September
30, 1999 and 1998 was Kc 250,521 (unaudited) and Kc 235,272 (unaudited),
respectively, and for 1998 and 1997 was Kc 330,959 and Kc 263,091,
respectively.
4. Investments
Investments by the Company, net, in other companies not included in the
consolidation as of September 30, 1999, December 31, 1998, September 30, 1998
and December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Name Ownership September 30, 1999 1998 September 30, 1998 1997
---- --------- ------------------ ------- ------------------ ------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Kabel Plus Vychodne
Slovensko a. s. ....... 48.00% 63,252 63,252 63,252 67,934
Kabel Plus Sport a. s... 40.00% 6,451 8,451 6,451 6,451
Genus TV, a. s.......... 40.75% 4,011 4,011 4,011 4,011
Other................... 50 50 50 50
Subtotal................ 73,764 75,764 73,764 78,446
Provision for diminution
in value............... (50,500) (50,500) -- --
------- ------- ------ ------
Total................. 23,264 25,264 73,764 78,446
======= ======= ====== ======
</TABLE>
The above is a list of companies where the Company holds more than, or
equal to a 20%
share of their basic capital. Kabel Plus Sport a. s. has been accounted for
using the equity method, as explained in Note 2. The remaining companies are
accounted for at cost for financial reporting purposes as their financial
statements, taken individually and/or in total, are not material to the
consolidated group.
Kabel Plus Vychodne Slovensko a. s. constructs and operates cable
television networks in Eastern Slovakia. In 1998 Kabel Plus recognized a 80%
provision for permanent diminution of its investment in Kabel Plus
Vychodne Slovensko a. s. due to lack of control over the company and resulting
low value of the investment.
Kabel Plus Sport, a. s. produces TV game show programs and sporting events.
Genus TV, a. s. was organized for the purpose of operating local studios.
F-159
<PAGE>
KABEL PLUS, a. s. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
as of December 31, 1998 and 1997
(Czech Crowns--Kc in Thousands)
The major components (unaudited) of the equity method investee, Kabel Plus
Sport a. s., financial position and results of operations as of September 30,
1999, December 31, 1998, September 30, 1998 and December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
September 30, 1999 1998 September 30, 1998 1997
------------------ ------ ------------------ ------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Property, plant and
equipment............... 7,173 6,901 6,730 9,234
Total assets............. 27,431 31,329 31,500 27,063
Total liabilities........ 6,599 9,913 10,900 11,336
Equity................... 20,808 21,194 19,794 15,587
Revenues................. 38,522 52,274 39,205 48,344
Depreciation and
amortization............ 4,841 5,927 4,445 8,415
Earnings before interest,
taxes, depreciation &
amortization............ 8,650 12,656 9,492 4,365
Net income............... 4,514 5,609 4.207 (3,214)
</TABLE>
5. Debt
On December 18, 1996, the Company entered into a revolving credit facility
in the amount of Kc 1,345,350 and an overdraft facility in the amount of Kc
134,535 with a group of banks. This arrangement was designed to subordinate the
existing loans with USWCC (see Note 6 for further information). The interest
rate on the revolving credit facility was PRIBOR (Prague Interbank Offer Rate)
plus 1% per annum. The interest rate on the overdraft facility was the rate as
advised by the bank or alternatively the average daily PRIBOR rate plus 1% per
annum. The due date on both facilities was December 1, 1998.
On November 30, 1998, the Company extended the above revolving credit
facility and overdraft facility for the same amounts as indicated above but at
different interest rates. The interest rate on the revolving credit facility is
PRIBOR plus 1.25% per annum. The interest rate on the overdraft facility is the
rate as advised by the bank or alternatively the average daily PRIBOR plus
1.25% per annum. As of the date of this report, the interest rate on the
overdraft facility was 10% per annum. The due date on both facilities is June
30, 2000.
These loan agreements include various covenants and restrictions with which
the Company must comply. Some of the major covenants pertain to the average
number of subscribers and earnings before interest, taxes, depreciation and
amortization. At September 30, 1999 (unaudited) and 1998 (unaudited) and
December 31, 1998 and 1997, the Company was in compliance with all such
covenants.
As of September 30, 1999 and December 31, 1998, the Company had drawn Kc
804,841 (unaudited) and Kc 774,840, respectively, of the revolving credit
facility. Interest accrued through September 30, 1999 and December 31, 1998
amounted to Kc 5,071 (unaudited) and Kc 5,869, respectively. As of
September 30, 1999 (unaudited) and December 31, 1998, there was no balance on
the overdraft facility.
F-160
<PAGE>
KABEL PLUS, a. s. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
as of December 31, 1998 and 1997
(Czech Crowns--Kc in Thousands)
6. Due to Parent
At September 30, 1999, December 31, 1998, September 30, 1998 and December
31, 1997, the Company had the following outstanding debt with its parent,
MediaOne Czech Cable Company (MCCC), formerly US West Czech Cable Company
(USWCCC):
<TABLE>
<CAPTION>
Amount in Amount in Amount in Amount in
Date of Interest Kc at Kc at Kc at Kc at
Facility Maturity Rate 9/30/99 12/31/98 9/30/98 12/31/97
------------ ---------- -------- ----------- --------- ----------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Kc 2,708,961 12/31/2011 13.5% -- 879,153 3,290,447 2,977,222
=== ======= ========= =========
</TABLE>
In December 1998, MCCC capitalized Kc 2,506,600 of its loan into equity
(see Note 7 for further information). The balance outstanding as of December
31, 1998 consists of the interest accrued on the original loan. These amounts
of interest remain to be subject to further interest charges at the same rate
as the original loan of 13.5%. The outstanding balance as of September 30, 1998
and December 31, 1997 of the facility of 3,290,447 (unaudited) and Kc
2,977,222, respectively, included accrued interest of Kc 783,847 (unaudited)
and Kc 477,633, respectively.
7. Share Capital
At September 30, 1999 (unaudited) the Company's share capital consisted of
15,052 shares at Kc 100 per share and 2,300 shares at Kc 1,000 per share,
totalling Kc 3,805,200.
At December 31, 1998, the Company's share capital consisted of 15,052
shares at Kc 100 per share and 1,792 shares at Kc 1,000 per share, totaling Kc
3,297,200. Share capital of Kc 3,700 remains unpaid at September 30, 1999
(unaudited), December 31, 1998, September 30, 1998 (unaudited) and December 31,
1997 (37 shares at Kc 100 per share).
On December 30, 1998, MCCC increased the share capital of Kabel Plus, a. s.
by issuing 1,357 shares at Kc 1,000 per share. These shares were acquired by
MCCC through the conversion of its loan outstanding of Kc 2,506,600 (see Note
6). Out of this amount, Kc 1,357,000 was recorded to share capital and
1,149,600 was recorded to share premium.
At September 30, 1998 (unaudited) and at December 31, 1997, the Company's
share capital consisted of 15,052 shares at Kc 100 per share and 435 shares at
Kc 1,000 per share, totaling Kc 1,940,200.
8. Reserve Fund
Czech regulations require joint stock companies to establish a reserve fund
for contingencies against future losses and other events. Contributions must be
a minimum of 20% of after-tax profit in the first year in which profits are
made and 5% of profit each year thereafter, until the fund reaches at least 20%
of capital. Approximately Kc 127,959 (unaudited), Kc 126,485, Kc 83,400
(unaudited) and Kc 83,400, respectively, in the statutory reserve fund is
included in share premium and reserve fund in the accompanying consolidated
balance sheet as of September 30, 1999, December 31, 1998, September 30, 1998
and December 31, 1997.
9. Income Taxes
Czech and Slovak laws do not permit consolidated tax returns, therefore
income taxes are calculated on an individual company basis. The primary
differences between taxable loss and net accounting loss relate to the
recognition of depreciation, bad debt provision and provision for obsolete
inventory. In 1998 and 1999, the corporate income tax rate for the Czech and
Slovak Republics was 35% and 40%, respectively.
F-161
<PAGE>
KABEL PLUS, a. s. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
as of December 31, 1998 and 1997
(Czech Crowns--Kc in Thousands)
Taxable losses in the Czech and Slovak Republics may be carried forward up
to seven and five years, respectively, to reduce taxable income in future
years. At December 31, 1998, the Company had net operating loss carryforwards
for income tax purposes aggregating approximately Kc 2,625,419, which expire
in varying amounts through 2005. There is a plan for merger of the Czech
wholly owned subsidiaries into Kabel Plus, a. s. Under this plan,
approximately Kc 537,000 of net operating loss carryforwards would be lost
during the merger process.
As the Company has incurred losses since inception, the Company has not
formally adopted the accounting for income taxes under the provisions of
Statement of Financial Accounting Standards No. 109 (SFAS 109) "Accounting for
Income Taxes". SFAS 109 requires recognition of deferred tax assets and
liabilities for the expected future income tax consequences of events which
have been included in the financial statements or tax returns. The
determination of deferred tax assets and liabilities under SFAS 109 is based
on the differences between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Had the Company adopted SFAS 109, deferred tax assets (before valuation
allowances) would have been approximately Kc 1,140,833 (unaudited), Kc
1,250,456 Kc 1,106,225 (unaudited) and Kc 910,426, respectively, as of
September 30, 1999, December 31, 1998, September 30, 1998 and December 31,
1997. As realization of deferred tax assets is dependent upon sufficient
future taxable income during the period that temporary differences and
carryforwards are expected to be available to reduce taxable income,
Management would have elected to record a valuation allowance for the entire
amount of deferred tax assets. As a result, Management believes net deferred
tax assets would have been nil as of September 30, 1999 and 1998 and December
31, 1998 and 1997. The most significant deferred tax asset results from the
Company's net operating loss carryforwards for income tax purposes.
10. Transactions with Related Parties
The Company has a secondment agreement with MediaOne, in which MediaOne
provides certain personnel and other services to the Company. The agreement
requires the Company to reimburse MediaOne for one hundred percent of these
costs. For the nine months ended September 30, 1999 and 1998 these costs were
Kc 48,320 (unaudited) and Kc 57,779 (unaudited), respectively, and in 1998 and
1997, they were Kc 72,557 and Kc 87,128, respectively.
The Company also has certain loan agreements with MediaOne Czech Cable
Company as explained in Note 6.
11. Commitments and Contingencies
Property Swap
In 1996, Kabel Plus, a.s. entered into a letter of intent with United and
Philips Communications ("UPC") to swap certain of their cable properties in
the Czech and Slovak Republics in 1997. This transaction was terminated in the
first half of 1998 and there are currently no plans for a similar transaction.
Licenses
The Company has been granted three telephony licenses in the Czech Republic
and numerous cable television licenses throughout the Czech and Slovak
Republics. Some of the cable television licenses have provisions that require
the Company to provide cable service to the residents of the licensed areas
within certain time frames. To date, the Company has been able to meet its
obligations resulting from these transactions.
F-162
<PAGE>
KABEL PLUS, a. s. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
as of December 31, 1998 and 1997
(Czech Crowns--Kc in Thousands)
Land and Building Dispute
During 1998, the former owners of the land and building located in Prague
filed a lawsuit contesting ownership of the building and land by the Company.
In case that Kabel Plus, a. s. should lose this lawsuit it would have to pay
rent for the land retroactively since 1993.
Nortel Equipment
The Company purchased telephone equipment in 1995 designed to operate on a
certain frequency. The Czech Telecommunication Office changed in 1999 its
frequency plan, which does not allow the existing equipment to be used after
December 31, 1999. This would cause a loss to the Company of approximately Kc
25 million. Management is currently in negotiations with the Czech
Telecommunication Office to obtain an exception to the frequency plan for
another three years. Management believes that these negotiations will be
successful and as a result no adjustments to the accompanying financial
statements have been made.
Tax Legislation
The Czech and Slovak Republics currently have a number of laws related to
various taxes imposed by both federal and regional governmental authorities.
Applicable taxes include value added tax, corporate tax, and payroll (social)
taxes, together with others. In addition, laws related to these taxes have not
been in force for significant periods, in contrast to more developed market
economies; therefore, implementing regulations are often unclear or
nonexistent. Accordingly, few precedents with regard to issues have been
established. Often, differing opinions regarding legal interpretations exist
both among and within government ministries and organizations; thus, creating
uncertainties and areas of conflict. Tax declarations, together with other
legal compliance areas (as examples, customs and currency control matters) are
subject to review and investigation by a number of authorities, who are enabled
by law to impose extremely severe fines, penalties and interest charges. These
facts create tax risks in the Czech and Slovak Republics substantially more
significant than typically found in countries with more developed tax systems.
Management believes that it has adequately provided for tax liabilities in the
accompanying financial statements; however, the risk remains that relevant
authorities could take differing positions with regard to interpretive issues
and the effect could be significant.
Operating Leases
The Company has entered into leases for a variety of items, including
office space, automobiles, cable networks and various types of equipment.
As of December 31, 1998 the Company has future operating lease commitments
as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1999.................................. 9,742
2000.................................. 9,239
2001.................................. 9,077
2002.................................. 8,635
2003.................................. 8,363
2004.................................. 7,346
</TABLE>
F-163
<PAGE>
KABEL PLUS, a. s. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
as of December 31, 1998 and 1997
(Czech Crowns--Kc in Thousands)
Year 2000 (unaudited)
The operations of the Company could be adversely affected by the Year 2000
problem as the Company significantly relies on information systems in its
business. As a result, management established and charged a project team with
the task of identifying potential problems arising from systems and products
unable to function as a result of the inability of many computer systems to
recognize dates for the year 2000 and afterward. Systems that use only two
digits to record a year (e.g., 2000 is entered as 00), can malfunction when
dates are used in processing. The systems potentially affected include, but are
not limited to, accounting, subscriber, inventory and vendor management
systems. The Company is currently testing these systems to determine whether
they will be "Year 2000" compliant. The Company is replacing or upgrading
systems that are not year 2000 compliant. In addition, the Company has
completed its contingency plans for the systems identified as critical to the
Company's operations.
The Company estimated a cost of Kc 10 million that will need to be spent
during 1999 to remediate its Year 2000 problem. The failure to adapt the
Company's systems to year 2000 compliance and uncertainty as to the compliance
of systems used by its suppliers and customers may have a significant negative
impact on the Company's financial performance and its intended level of
operations. However, due to the nature of the problem, the level of potential
loss cannot be quantified with certainty.
12. Revenues
For the nine months ended September 30, 1999 and 1998 and for the years
ended December 31, 1998 and December 31, 1997, revenues of the Company
consisted of the following:
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998 1998 1997
------------- ------- ------------- -------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Average number of subscribers..... 359,313 373,533 375,357 375,631
------- ------- ------- -------
Subscriber revenue
Mini............................ 251,255 281,397 209,067 195,191
Klasik.......................... 141,242 144,193 110,379 130,021
Premium......................... 73,445 78,605 57,940 9,852
------- ------- ------- -------
Subtotal.......................... 465,942 504,195 377,386 335,064
Installation revenue.............. 21,698 22,341 16,539 40,746
Non-cable revenue (inventory
sales, telephony)................ 160,780 243,846 163,232 265,911
------- ------- ------- -------
Total revenue..................... 648,420 770,382 557,157 641,721
======= ======= ======= =======
</TABLE>
As of September 30, 1999 subsidiaries Kabel Plus Praha, a.s. (located in
Prague), Kabel Plus Severini Morava, a.s. (located Ostrava) and Kabel Plus
Stredni Morava, a.s. (located in Olomouc) represent approximately 43% of total
revenues of the Company.
13. Management's Plan for Company
The Company has incurred losses since inception, including losses of Kc
253,171 (unaudited) and Kc 569,389 (unaudited), respectively, for the nine
months ended September 30, 1999 and 1998 and Kc 853,427 and Kc 881,386,
respectively, for the years ended December 31, 1998 and December 31, 1997.
In 1996, management prepared, and the shareholders approved, a
restructuring plan for the Company. Under this plan, the Company increased its
share capital by Kc 417,000 by subscribing for 4,170 shares with a nominal
value of Kc 100 at a price of Kc 498 per share. The difference between the
nominal value (Kc 417,000) and the
F-164
<PAGE>
KABEL PLUS, a. s. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS--(Continued)
as of December 31, 1998 and 1997
(Czech Crowns--Kc in Thousands)
subscription value (Kc 2,076,643) amounting to Kc 1,659,643 was recorded as
share premium. The proceeds from issuance of share capital were used to repay
the USD 30,000 and USD 40,000 loans due to parent. The difference between the
Kc equivalent of the amount at which these loans were repaid, Kc 2,159,844 and
the subscription value of the share capital, Kc 2,076,643, amounting to Kc
83,201, was recorded as share premium.
In December 1998 the shareholders approved a further restructuring plan by
converting the principal amount of the loan from MCCC to equity. This resulted
in an increase in share capital of Kc 1,357,000 and in share premium of Kc
1,149,600 (See Note 7).
Further capital increase took place in June 1999 when the remaining balance
outstanding due to MCCC of Kc 937,748 was converted into the Company's equity.
The total share capital was increased to Kc 3,805,200 and the equity reached Kc
2,232,191.
Since MCCC acquired a controlling interest in the Company, several steps
have been taken to improve its financial stability. As discussed in Note 5, the
Company extended a revolving credit facility that will provide the Company with
adequate funds to meet its operating and capital expenditure needs through June
2000. In addition, MediaOne has increased its management presence in the
Company and is in the process of restructuring the Company and its subsidiaries
in order to make the Company more profitable. Thus far, the Company and its
subsidiaries have increased the rates charged to subscribers and taken steps to
reduce operating costs, specifically in the areas of programming and personnel,
and improve the security of its plant in order to reduce theft of service and
bad debt. In addition, The Company has taken, and continues to take, steps to
improve the programming it provides to customers, as well as centralize systems
and processes to maximize efficiencies and control.
The Company reached a milestone in 1998 when the subsidiaries reached
positive EBITDA for the first time (EBITDA is defined as net loss plus
depreciation and amortization, net interest, net other financial and income tax
expenses less equity in net income from affiliates). The operating strategies
the Company has put in place are yielding positive financial results which is
expected to continue into the future.
14. Reconciliation of Accumulated Deficit and Current Year Net Loss
The following table summarizes the differences in accumulated deficit and
net loss between Company's statutory accounts and U.S. GAAP:
<TABLE>
<CAPTION>
September 30, September 30,
1999 1998 1998 1997
------------- ---------- ------------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Accumulated deficit per
statutory accounts....... (5,006,977) (4,753,806) (4,468,300) (3,898,911)
Adjustments required by
U.S. GAAP:
Foreign exchange losses... (83,254) (83,254) (83,254) (83,254)
---------- ---------- ---------- ----------
U.S. GAAP accumulated
deficit.................. (5,090,231) (4,837,060) (4,551,554) (3,982,165)
========== ========== ========== ==========
Net loss per statutory
accounts................. (253,171) (853,427) (569,389) (853,893)
Adjustment required by
U.S. GAAP:
Foreign exchange losses... -- -- -- (27,493)
---------- ---------- ---------- ----------
U.S. GAAP net loss........ (253,171) (853,427) (569,389) (881,386)
========== ========== ========== ==========
</TABLE>
15. Subsequent Event
During a general meeting of the shareholders on June 22, 1999, the
shareholders approved the conversion of outstanding accrued interest due to the
Company's parent (MCCC) totaling Kc 938,000 (as of June 22, 1999). Out of this
amount, Kc 508,000 will be recorded as share capital and the remaining 430,000
will be recorded as share premium. The change has not been registered with the
Czech courts to date.
F-165
<PAGE>
KABEL PLUS, a.s. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
as of Decembner 31, 1998 and 1997
(Czech Crowns -- Kc in Thousands)
On October 27, 1999, MCCC sold its 97.47% interest in Kabel Plus to united
Pan-Europe Communications N.V. (UPC).
As part of future financing plan for Kabel Plus, UPC has agreed to provide
a loan to Kabel Plus during November 1999 which will be used to repay the
existing loan from Citibank including accrued interest (see Note 5) as of the
date of repayment.
During the 3rd quarter of 1999 as part of the process of centralizing
accounting and finance functions the Company has restructured its fixed assets
register. As a result, the items totaling approximately Kc 270,000 categorized
as buildings and cable networks have been reclassified to land and machinery
and equipment (see Note 3).
F-166
<PAGE>
NBS NORDIC BROADBAND SERVICES AB
ADMINISTRATION REPORT
Ownership
NBS Nordic Broadband Services AB ("NBS") is the parent company of the
Stjarnan Multimedia group. NBS is among others owned by Scandinavian Equity
Partners Ltd. On May 6, 1998 all the shares of the subsidiary Stjarnan
Multimedia Invest AB (last year called Singapore Telecom International Svenska
AB) were acquired. The purchase price was kSEK 730,000 paid in cash.
Information concerning the operations
NBS shall, by itself or through wholly- or partially-owned subsidiaries,
operate within telecommunications and cable television and other similar
businesses. The operations have taken place in Greater Stockholm.
Significant events during the year
The subsidiary StjarnTVnatet AB (556497-8210), previously Stjarnan
Multimedia Invest, merged on November 13, 1998 with the former subsidiary
StjarnTVnatet AB (556000-4391). The accounting for this merger has been
performed in accordance with the draft recommendation of "Accounting of merger
regarding a wholly-owned subsidiary" from the Swedish Accounting Standards
Board.
Stjarnan Multimedia AB has during the year issued shares, warrants and
convertible loans.
Significant events subsequent to year end
The subsidiary StjarnTVnatet AB acquired on February 1, 1998 Stockholms
Kabel TV AB, a cable television operator in Stockholm. Stockholms Kabel TV has
approximately 7,000 connected households.
F-167
<PAGE>
NBS NORDIC BROADBAND SERVICES AB
CONSOLIDATED INCOME STATEMENT FOR 1998 (SEK 000's)
<TABLE>
<S> <C>
Net sales............................................................. 189,148
--------
189,148
Operating expenses
Program and distribution costs........................................ (77,324)
Other external costs.................................................. (46,459)
Personnel costs (Note 1).............................................. (29,265)
--------
Total operating expenses excluding depreciation....................... (153,048)
Operating profit before depreciation.................................. 36,100
Depreciation of tangible and intangible fixed assets (Note 2)......... (45,597)
Operating loss........................................................ (9,497)
Result from financial investments
Other interest income and similar items (Note 3)...................... 5,415
Interest expense and similar items (Note 3)........................... (19,676)
Loss after financial items............................................ (23,758)
Deduction acquired profit (Note 9).................................... (1,027)
Tax on current year result (Note 4)................................... (2,924)
--------
NET LOSS FOR THE YEAR................................................. (27,709)
========
</TABLE>
F-168
<PAGE>
NBS NORDIC BROADBAND SERVICES AB
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 (SEK 000's)
<TABLE>
<S> <C>
ASSETS
Fixed assets
Intangible assets (Note 2)
Goodwill.............................................................. 503,679
Improvement expenses on others property............................... 915
-------
504,594
Tangible assets (Note 2)
Equipment, tools fixtures and fittings................................ 103,877
Construction in progress and advance payments for tangible assets..... 43,586
-------
147,463
Total fixed assets.................................................. 652,057
Current assets
Current receivables
Accounts receivable--trade............................................ 15,404
Other receivables..................................................... 2,313
Prepaid expenses and accrued income (Note 5).......................... 3,158
-------
20,875
Current investments
Other current investments............................................. 80,000
Cash and bank balances................................................ 84,499
Total current assets................................................ 185,374
-------
TOTAL ASSETS........................................................ 837,431
=======
EQUITY AND LIABILITIES
Equity (Note 6)
Restricted equity
Share capital (22,700,000 shares at a par value of SEK 1 each)........ 22,700
Other restricted capital.............................................. 3,788
-------
26,488
Non-restricted equity
Non-restricted reserves............................................... 202,500
Loss for the year..................................................... (27,709)
-------
174,791
Total equity........................................................ 201,279
Provision
Deferred tax liability................................................ 25,071
-------
Total provisions.................................................... 25,071
Long-term liabilities
Interest-bearing
Liabilities to credit institutions (Note 10).......................... 297,500
Other liabilities (Note 11)........................................... 4,264
-------
Total long-term liabilities......................................... 301,764
Current liabilities
Interest-bearing
Liabilities to credit institutions (Note 10).......................... 223,500
Non-interest-bearing
Accounts payable--trade............................................... 23,696
Income tax liabilities................................................ 5,983
Other liabilities..................................................... 4,266
Accrued expenses and deferred income (Note 7)......................... 51,872
-------
Total current liabilities........................................... 309,317
-------
TOTAL EQUITY AND LIABILITIES........................................ 837,431
=======
Memorandum items
PLEDGED ASSETS AND CONTINGENT LIABILITIES
Pledged assets (Note 8)............................................... 480,164
Contingent liabilities (Note 8)....................................... 11,994
</TABLE>
F-169
<PAGE>
NBS NORDIC BROADBAND SERVICES AB
CONSOLIDATED CASH FLOW STATEMENT FOR 1998 (SEK 000's)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net sales............................................................. 189,148
Operating expenses.................................................... (153,048)
--------
Net cash flow before changes in working capital....................... 36,100
Increase (-) decrease (+) of operating receivables.................... (6,714)
Increase (+) decrease (-) of operating liabilities.................... 99,212
--------
Net cash flow from operations......................................... 128,598
Received interest and result from current investments................. 5,415
Paid interest......................................................... (19,676)
Paid income-taxes..................................................... (1,790)
--------
Net cash flow provided by operating activities........................ 112,547
CASH FLOW FROM INVESTING ACTIVITIES
Deduction of investments.............................................. 75,000
Investments in fixed assets........................................... (55,829)
Investments in shares................................................. (752,037)
--------
Net cash flow from investing activities............................... (732,866)
CASH FLOW FROM FINANCING ACTIVITIES
Payments regarding options............................................ 1,988
Shareholder's contribution............................................ 202,500
New share issue....................................................... 24,400
Raised loans.......................................................... 472,264
Amortisation of loan.................................................. (9,000)
--------
Net cash flow from financing activities............................... 692,152
CHANGE IN CASH AND BANK............................................... 71,833
Cash and bank at beginning of year.................................... 12,666
Cash and bank at end of year.......................................... 84,499
</TABLE>
F-170
<PAGE>
NBS NORDIC BROADBAND SERVICES AB
NOTES TO THE FINANCIAL STATEMENTS
Principles Used in Preparing the Consolidated Financial Statements
These consolidated financial statements represent a financial year that
deviate from NBS statutory financial year. Audited statutory accounts for NBS
in 1998 have been filed for the period January 3, 1997 to June 30, 1998 and
July 1, 1998 to December 31, 1998.
NBS acquired StjarnTVnatet AB on May 6, 1998. StjarnTVnatet AB is included
in the statutory accounts from April 1, 1998. The following information and
principles have been used to prepare these financial statements:
Income statement
i) Income statements for the two statutory financial periods ended in 1998
have been added together to show operations during 1998.
ii) StjarnTVnatet AB is included in the statutory accounts as of April 1,
1998 and its revenues and costs are included in the accounts as of that date.
In order to include StjarnTVnatet AB as of May 6, 1998, the net profit relating
to StjarnTVnatet AB for the period April 1, 1998 to May 5, 1998 has been
eliminated (see also Note 9).
Balance sheet
ii) The balance sheet as presented is the audited balance sheet as of
December 31, 1998. The presented balance sheet differs in one respect from the
statutory accounts. Correction has been made in the balance sheet for the loss
brought forward referring to the loss reported for the period January to June
1998 which has been included in the loss for 1998.
The following notes and comments to the financial statements are
translations from the audited statutory accounts. Certain information relating
to the parent company has been included even though its statutory financial
statements has been left out.
Accounting Principles and Annual Report Information
Consolidated accounts
The group accounts have been consolidated in accordance with acquisition
accounting. In addition to the parent company's equity, the group equity
includes the subsidiaries' results generated after the acquisition date.
Goodwill is calculated as the difference between the group acquisition value of
the subsidiaries', shares and the actual value of acquired identifiable assets
and liabilities, at the time of acquisition. Goodwill is depreciated according
to plan.
The consolidated accounts consist of the annual accounts for all
subsidiaries. A subsidiary is a company in which the parent company, directly
or indirectly, owns shares representing more than 50% of the votes.
There are no appropriations or untaxed reserves recorded in the
consolidated accounts. Instead, deferred taxes related to untaxed reserves are
shown in the consolidated income statement as part of the group tax expense.
The proportion of equity in appropriations and untaxed reserves is shown in the
income statement as part of the profit for the year and in the balance sheet as
restricted equity. A revaluation of the deferred tax liability is made every
year at the prevailing tax rate, currently 28 percent, and is recorded in the
consolidated income statement as part of the tax expense for the year.
Other principles
Assets and liabilities are valued at acquisition value unless otherwise
stated.
Trade receivables are valued at amounts deemed collectable.
F-171
<PAGE>
NBS NORDIC BROADBAND SERVICES AB
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
Receivables and liabilities in foreign currency are valued at closing day
rates.
Premiums received from sales of warrants are accounted for in restricted
equity as Share premium reserve.
Depreciation according to plan on intangible and tangible fixed assets is
based on the acquisition value and expected economic life of each asset.
Equipment
Machinery and equipment have been depreciated according to plan, which is
based on an economic life of 3 and 5 years respectively.
Distribution plants
Plants have been depreciated according to plan, which is based on an
economic life of 3, 7 or 10 years.
Improvement expenses on others property
Improvement expenses have been depreciated according to plan, which is
based on an economic life of 20 years.
Goodwill
Goodwill related to the acquisition of the StjarnTVnatet Group, formerly
Stjarnan Multimedia Invest Group, is depreciated on a straight-line basis over
a 20 year period. The length of the depreciation period is due to the long-
term strategic nature of the acquisition and the duration of the essential
underlying contracts with the real estate owners concerning cable
installations. Furthermore, the name StjarnTV is well established on the
market.
Notes (SEK 000's)
Note 1 Average number of employees, salaries, other remuneration and payroll
overhead
Number of employees:
<TABLE>
<S> <C>
Men...................................................................... 34
Women.................................................................... 27
---
Total.................................................................. 61
</TABLE>
Salaries, other remuneration and payroll overhead:
<TABLE>
<S> <C>
Board of Directors and Managing Director
Salaries and other remuneration...................................... 4,655
(of which is bonus).................................................. (2,561)
Pension costs........................................................ 446
Other employees
Salaries and other remuneration...................................... 14,120
------
Total
Salaries and other remuneration...................................... 18,775
Payroll overhead..................................................... 7,845
(of which are pension costs)......................................... (1,153)
</TABLE>
F-172
<PAGE>
NBS NORDIC BROADBAND SERVICES AB
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
The Managing Director is covered by an employment contract according to
which the notice period is 6 months. In addition to this, severance pay equal
to a remuneration for a 12 month is payable, if the notice is served by the
Group. There are no other pension commitments than those stated above.
Note 2 Intangible and tangible fixed assets
<TABLE>
<S> <C>
Intangible assets
Improvement expenses on others property
Opening cost value..................................................... --
Purchases.............................................................. 927
Closing cost value..................................................... 927
Opening accumulated depreciation....................................... --
Depreciation for the year.............................................. (12)
-------
Closing accumulated depreciation....................................... (12)
Residual value according to plan....................................... 915
Goodwill
Opening cost value..................................................... 522,226
-------
Closing cost value..................................................... 522,226
Depreciation for the year.............................................. (18,547)
-------
Closing accumulated depreciation....................................... (18,547)
Residual value according to plan....................................... 503,679
</TABLE>
<TABLE>
<S> <C>
Equipment, tools fixtures and fittings of which;
1. Distribution plants
Cost value
Opening cost value.................................................... 231,732
Purchases............................................................. 2,399
Completed projects.................................................... 6,451
--------
Closing cost value.................................................... 240,582
Depreciation according to plan
Opening accumulated depreciation...................................... (121,363)
Depreciation for the year............................................. (25,590)
--------
Closing accumulated depreciation...................................... (146,953)
Residual value according to plan...................................... 93,629
2. Equipment
Cost value
Opening cost value.................................................... 10,519
Purchases............................................................. 8,737
Disposals............................................................. (2,822)
--------
Closing cost value.................................................... 16,434
Depreciation according to plan
Opening accumulated depreciation...................................... (7,561)
Disposals............................................................. 2,822
Depreciation for the year............................................. (1,447)
--------
Closing accumulated depreciation...................................... (6,186)
</TABLE>
F-173
<PAGE>
NBS NORDIC BROADBAND SERVICES AB
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
<TABLE>
<S> <C>
Residual value according to plan....................................... 10,248
Total residual value according to plan................................. 103,877
Construction in progress and advanced payments for tangible assets
Opening cost value..................................................... 6,273
Purchases.............................................................. 45,998
Completed projects..................................................... (6,451)
Reclassification....................................................... (2,234)
-------
Closing cost value..................................................... 43,586
</TABLE>
Leasing
The Group has entered into the following operating lease agreements related
to premises:
<TABLE>
<S> <C>
Future minimum lease payments in:
1999................................................................... 3,400
2000................................................................... 3,400
2001................................................................... 3,400
After 2001:............................................................ 5,950
</TABLE>
The rent for 1998 has amounted to 2,958.
The Group leases ducts and the use of fibre optical cable. The duration of
the contract is 20 years and it follows generally accepted market terms.
The Group has also to a lesser extent leasing agreements regarding cars,
office equipment and small offices. All contracts follow generally accepted
market terms.
Note 3 Other interest income and interest expense
<TABLE>
<S> <C>
Interest income....................................................... 5,415
Interest expense...................................................... 19,676
</TABLE>
There are no intra-group interest income or expense included above.
Note 4 Tax on current year result
<TABLE>
<S> <C>
Current tax paid on the profit for this and earlier years.............. 1,790
Deferred taxes......................................................... 1,134
-----
Total................................................................ 2,924
</TABLE>
F-174
<PAGE>
NBS NORDIC BROADBAND SERVICES AB
NOTES TO THE FINANCIAL STATEMENTS-- (Continued)
Note 5 Current receivables
<TABLE>
<CAPTION>
Prepaid expenses and accrued income
<S> <C>
Prepaid rent.............................................................. 997
Accrued interest income................................................... 106
Other..................................................................... 2,055
-----
Total..................................................................... 3,158
</TABLE>
Note 6 Equity
<TABLE>
<CAPTION>
Non-
Restricted restricted Profit/loss
Share capital reserves reserves for the year
------------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Opening balance.............. 100
Unconditional shareholder's
contribution................ 202,500
Options granted.............. 1,988
New share issue.............. 22,600 1,800
Loss for the year............ (27,709)
------ ----- ------- -------
Closing balance.............. 22,700 3,788 202,500 (27,709)
</TABLE>
Each share corresponds to one vote.
NBS has during the year issued two subordinated loans with detachable
warrants. The subordinated loans and the warrants were subscribed by
StjarnTVnatet AB. The subordinated loans and the warrants have been sold on
their due date.
The warrants Series I allows the subscription of 1,820,000 new shares in
NBS at an issue price of SEK 16. The period of application for the subscription
of shares is between the October 20, 1998 and October 20, 2004.
The warrants Series II allows the subscription of 2,040,000 new shares in
NBS at an issue price of SEK 25. The period of application for the subscription
of shares is between the October 20, 1998 and the October 20, 2004.
Note 7 Accrued expenses and deferred income
<TABLE>
<S> <C>
Accrued costs of personnel............................................... 3,069
Accrued program costs.................................................... 4,111
Deferred income.......................................................... 27,867
Other.................................................................... 16,825
------
Total.................................................................... 51,872
</TABLE>
Note 8 Pledged assets and contingent liabilities
<TABLE>
<CAPTION>
Pledged assets
<S> <C>
Shares in subsidiary.................................................... 480,164
-------
Total................................................................... 480,164
<CAPTION>
Contingent liabilities
<S> <C>
Guarantees.............................................................. 321
Royalty commitment...................................................... 11,673
-------
Total................................................................... 11,994
</TABLE>
F-175
<PAGE>
NBS NORDIC BROADBAND SERVICES AB
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
The indirectly owned subsidiary SpaceNet AB has in a prior year entered
into a royalty agreement with NUTEK and with Industrifonden, according to which
NBS is obliged to pay royalty on certain sales until the end of the contract
period in 2000 and 2005, respectively. The royalty commitment including an
annual interest is limited to 11,673, of which 9,673 refers to Industrifonden.
Note 9 Acquired profit
All shares in Stjarnan Multimedia Invest AB were acquired on May 6, 1998.
Acquired profit relate to the period April 1, 1998 to May 5, 1998.
Note 10 Liabilities to credit institutions
<TABLE>
<CAPTION>
Liabilities to credit institutions
Current liabilities
<S> <C>
Due within 1 year....................................................... 223,500
<CAPTION>
Long-term liabilities
<S> <C>
Due between 1 and 5 years............................................... 297,500
Due after 5 years....................................................... --
Total liabilities to credit institutions................................ 521,000
</TABLE>
Note 11 Convertible loan
<TABLE>
<S> <C>
Outstanding loan amount................................................... 4,264
</TABLE>
The loan is due on October 20, 2006, unless conversion has been made before
that date. The loan bears an annual interest equivalent to twelve months STIBOR
plus 1.7 %. The conversion rate is set at SEK 16 per share. The outstanding
loan entitles to conversion to 404,000 new shares in NBS.
Note 12 Participation in group companies
<TABLE>
<CAPTION>
Corporate Portion of Net book
identity Regis- Number of equity value
number tered office shares % Dec 31, 1998
Directly owned: ----------- ------------ ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
StjarnTVnatet AB........ 556497-8210 Sthlm 50,000,000 100 752,037
<CAPTION>
Indirectly owned:
<S> <C> <C> <C> <C> <C>
SpaceNet AB............. 556226-4589 Sthlm -- 100 --
Stockholms Stads Televi-
sions AB............... 556070-3547 Sthlm -- 100 --
StjarnTV AB............. 556308-7534 Sthlm -- 100 --
</TABLE>
Note 13 US GAAP reconciliation
The accounting policies followed in preparation for the consolidated
financial statements differ in some respect to the generally accepted
accounting principles in the United States.
F-176
<PAGE>
NBS NORDIC BROADBAND SERVICES AB
NOTES TO THE FINANCIAL STATEMENTS--(Continued)
The principle differences between Swedish GAAP and US GAAP are presented
below together with explanations of the adjustments that affect consolidated
net loss, total equity and total assets as of the year ended December 31, 1998.
<TABLE>
<S> <C>
Reconciliation of Net Loss
Swedish GAAP Net Loss........................................... (27,709)
Leases.......................................................... (3,664)
Goodwill amortization........................................... (1,177)
Deferred tax effect on US GAAP adjustment....................... 1,026
---------
US GAAP Net Loss................................................ (31,524)
Reconciliation of Equity
Swedish GAAP Equity............................................. 201,279
Leases.......................................................... (4,841)
Deferred tax effect on US GAAP adjustment....................... 1,026
---------
US GAAP Equity.................................................. 197,464
Reconciliation of Assets
Swedish GAAP Assets............................................. 837,431
Leases.......................................................... 176,080
Goodwill........................................................ 35,053
---------
US GAAP Assets.................................................. 1,048,564
=========
</TABLE>
Leases
The Group leases certain equipment which in accordance with Swedish GAAP is
treated as operating leases. For US GAAP purposes these leases fall under the
criteria for capitalization in accordance with FAS 13 and should thus be
capitalized. The reclassified leases have been recorded as assets and
obligations at their estimated fair value in the above reconciliation. At the
acquisition by EQT, lease obligations exceeded leased assets by SEK36.2 million
and this amount has been accounted for as goodwill. Depreciation has been
computed principally using the straight-line method over the estimated useful
lives of assets, 20 years.
F-177
<PAGE>
REPORT BY THE INDEPENDENT AUDITOR
I have audited the consolidated balance sheet of NBS Nordic Broadband
Services AB (publ) ("NBS"), Sweden, for the year ended December 31, 1998 and
the related consolidated statements of income and cash flows for the year then
ended. The consolidated financial statements are derived from audited accounts
for the period January 3, 1997 to June 30, 1998 and July 1, 1998 to December
31, 1998 prepared in accordance with Swedish GAAP as described in Principles
Used in Preparing the Consolidated Financial Statements in the Notes to the
attached financial statements. The significant differences between accounting
principles generally accepted in Sweden and those generally accepted in the
United States of America so far as concerns the financial statements referred
to are summarized in Note 13 on which we have performed an examination
including such procedures as we considered necessary in the circumstances.
These financial statements are the responsibility of the company's management.
My responsibility is to express an opinion on these financial statements based
on my audit.
I conducted my audit in accordance with auditing standards generally
accepted in Sweden which are substantially the same as those generally accepted
in the United States of America. Those standards require that I plan and
perform the audit to obtain reasonable assurance that the financial statements
are free of material misstatements. 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 the management, as well as evaluating the overall
presentation of the financial statement. I believe that my audit provides a
reasonable basis for my opinion.
NBS is registered in Sweden and maintains accounting records and prepare
its financial statements in accordance with generally accepted accounting
principles in Sweden and in the currency of SEK. The accompanying financial
statements have solely been prepared on the request of NBS and are intended
solely for a fair presentation of the legal entity operations for 1998 and to
describe substantial differences between Swedish and US GAAP as described in
Note 13.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NBS Nordic Broadband
Services AB (publ) as of December 31, 1998, and of the results of its
operations and its cash flows for the year then ended in accordance with
accounting principles generally accepted in Sweden.
Generally accepted accounting principles in Sweden vary in certain
significant respects from generally accepted accounting principles in the
United States of America. Application of generally accepted accounting
principles in the United States would have affected total assets, results of
the operations and shareholder's equity for the year ended on December 31, 1998
to the extent summarised in Note 13 to the consolidated financial statements.
Stockholm Sweden
May 4, 1999
Jan-Erik Soderhielm
Authorised Public Accountant
Ernst & Young AB
F-178
<PAGE>
NBS NORDIC BROADBAND SERVICES AB
CONSOLIDATED INCOME STATEMENT FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999
(Unaudited) (SEK 000's)
<TABLE>
<S> <C>
Net sales............................................................. 135,713
--------
135,713
Operating expenses
Program and distribution costs........................................ (55,790)
Other external costs.................................................. (29,779)
Personnel costs....................................................... (22,763)
--------
Total operating expenses excluding depreciation....................... (108,332)
Operating profit before depreciation.................................. 27,381
Depreciation of tangible and intangible fixed assets.................. (33,319)
--------
Operating loss........................................................ (5,938)
Result from financial investments
Other interest income and similar items............................... 1,408
Interest expense and similar items.................................... (11,849)
--------
Loss after financial items............................................ (16,379)
Tax on current year result............................................ --
--------
NET LOSS FOR THE YEAR................................................. (16,379)
========
</TABLE>
F-179
<PAGE>
NBS NORDIC BROADBAND SERVICES AB
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 (Unaudited) (SEK 000's)
<TABLE>
<S> <C>
ASSETS
Fixed Assets
Intangible assets
Goodwill............................................................... 494,985
Improvement expenses on other property................................. 2,006
-------
496,991
Tangible assets
Equipment, tolls fixtures and fittings................................. 148,565
Construction in progress and advance payments for tangible assets...... 52,868
-------
201,433
Total fixed assets..................................................... 698,424
Current assets
Current receivables
Accounts receivable--trade............................................. 18,992
Other receivables...................................................... 2,026
Prepaid expenses and accrued income.................................... 4,328
-------
25,346
Cash and bank balances................................................. 30,227
Total current assets................................................... 55,573
-------
TOTAL ASSETS........................................................... 753,997
=======
</TABLE>
F-180
<PAGE>
NBS NORDIC BROADBAND SERVICES AB
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 (Unaudited) (SEK 000's)
<TABLE>
<S> <C>
EQUITY AND LIABILITIES
Equity
Restricted equity
Share capital (22,700,000 shares at a par value of SEK 1 each)......... 22,700
Other restricted capital............................................... 4,066
-------
26,706
Non-restricted equity
Non-restricted reserves................................................ 174,790
Loss for the year (16,379)
-------
158,411
Total equity........................................................... 185,117
Provisions
Deferred tax liability................................................. 25,285
-------
Total provisions....................................................... 25,285
Long-term liabilities
Interest-bearing
Liabilities to credit institutions..................................... 330,000
Other liabilities...................................................... 4,648
-------
Total long-term liabilities............................................ 334,648
Current liabilities
Interest-bearing
Liabilities to credit institutions..................................... 109,073
Non-interest-bearing
Accounts payable - trade............................................... 49,004
Other liabilities...................................................... 7,459
Accrued expenses and deferred income................................... 43,411
-------
Total current liabilities.............................................. 99,874
-------
TOTAL EQUITY AND LIABILITIES........................................... 753,997
=======
</TABLE>
F-181
<PAGE>
NBS NORDIC BROADBAND SERVICES AB
CONSOLIDATED CASH FLOW STATEMENT FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999
(Unaudited) (SEK 000's)
CASH FLOWS FROM OPERATING ACTIVITIES
Net sales......................................................... 135,713
Operating expenses................................................ (108,332)
--------
Net cash flow before changes in working capital................... 27,381
Increase (-) decrease (+) of operating receivables................ 10,525
Increase (-) decrease (+) of operating liabilities................ (2,148)
--------
Net cash flow from operations..................................... 35,758
Received interest and result from current investments............. 1,521
Paid interest..................................................... (11,020)
Paid income taxes................................................. (942)
--------
Net cash flow provided by operating activities.................... 25,317
========
CASH FLOW FROM INVESTING ACTIVITIES
Investment in fixed assets........................................ (68,234)
Investment in shares.............................................. (6,928)
--------
Net cash flow from investing activities........................... (75,162)
========
CASH FLOW FROM FINANCING ACTIVITIES
Decrease in other current investments............................. 80,000
New share issue................................................... --
Raised loans...................................................... 109,073
Amortisation of loan.............................................. (193,500)
--------
Net cash flow from financing activities........................... (4,427)
========
CHANGE IN CASH AND BANK........................................... (54,272)
Cash and bank at beginning of year................................ 84,499
Cash and bank at end of year...................................... 30,227
F-182
<PAGE>
NBS NORDIC BROADBAND SERVICES AB
NOTES FOR THE FINANCIAL STATEMENTS (Unaudited)
U.S. GAAP reconciliation (SEK 000's)
The accounting policies followed in preparation for the consolidated
financial statements differ in some respect to the generally accepted
accounting principles in the United States.
The principle differences between Swedish GAAP and U.S. GAAP are presented
below together with explanations of the adjustments that affect consolidated
net loss, total equity and total assets as of the period ended June 30, 1999.
<TABLE>
<S> <C>
Reconciliation of Net Loss
Swedish GAAP Net Loss.................................................. (16,379)
Leases................................................................. (4,252)
Goodwill amortization.................................................. (905)
Deferred tax effect on U.S. GAAP adjustment............................ 1,191
-------
U.S. GAAP Net Loss..................................................... (20,345)
Reconciliation of Equity
Swedish GAAP Equity.................................................... 185,117
Leases................................................................. (9,232)
Goodwill amortization.................................................. (2,082)
Deferred tax effect on U.S. GAAP adjustment............................ 2,585
-------
U.S. GAAP Equity....................................................... 176,388
Reconciliation of Assets
Swedish GAAP Assets.................................................... 753,997
Leases................................................................. 181,800
Goodwill............................................................... 34,148
-------
U.S. GAAP Assets....................................................... 969,945
</TABLE>
Leases
The Group leases certain equipment which in accordance with Swedish GAAP is
treated as operating leases. For U.S. GAAP purposes these leases fall under the
criteria for capitalization in accordance with the FAS 13 and should thus be
capitalized. The reclassified leases have been recorded as assets and
obligations at their estimated fair value in the above reconciliation. At the
acquisition by EQT, lease obligations exceeded leased assets by SEK36.2 million
and this amount has been accounted for as goodwill. Depreciation has been
computed principally using the straight-line method over the estimated useful
lives of assets, 20 years.
F-183
<PAGE>
(Translation from the Swedish original)
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB--STOCKHOLM Reg no 556497-8210
ANNUAL REPORT
The board of directors and the managing director of Singapore Telecom
International Svenska AB herewith present the following report for the
financial year 1 April 1997 -- 31 March 1998.
ADMINISTRATION REPORT
The company is a subsidiary of Singapore Telecom International Pte Ltd
which during the financial year became a part of a group whose parent company
is Singapore Telecom Ltd. (STI Svenska AB is owned since 6 May 1998 via
Stjarnan Multimedia AB by Scandinavian Equity Partners Ltd which in its turn is
owned by, among others, Investor and SE-Banken.)
The company is engaged in for own account or via wholly or partly owned
companies telephone, and cable network for television, operations and similar
associated activities.
Result and appropriation
The group result for the year is MSEK -- 20,1 (MSEK -- 22,6).
The group non-restricted equity amounts to at 31 March 1998:
<TABLE>
<S> <C> <C>
Non-restricted reserves kSEK 345,250
Profit for the year kSEK (20,052)
----
kSEK 325,198
</TABLE>
Proposed appropriation of profits in the parent company
At the disposal of the annual general meeting are the following
unappropriated earnings:
<TABLE>
<S> <C> <C>
Profit brought forward SEK 414,878,291
Profit for the year SEK --
---
SEK 414,878,291
</TABLE>
The board of directors and the managing director propose that SEK
414,878,291 be carried forward.
Regarding the company's operations, reference is made to the following
balance sheets, income statements, funds statements and related notes.
F-184
<PAGE>
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB--STOCKHOLM
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
1 April 1997 1 April 1996
31 March 1998 31 March 1997
------------- -------------
kSEK kSEK
<S> <C> <C>
Net sales--Note 1 and 2............................ 248,998 242,894
-------- --------
Operating Expenses
Program and distribution costs..................... (102,505) (100,554)
Other external costs............................... (34,223) (30,457)
Personnel costs--Note 3............................ (26,216) (24,674)
Depreciation of tangible fixed assets--Note 4...... (79,300) (77,413)
-------- --------
Total operating expenses........................... (242,244) (233,098)
Operating profit................................... 6,754 9,796
Result from financial investments--Note 5
Interest income and similar items.................. 6,278 5,054
Other expense and similar items.................... (22,187) (27,477)
Loss after financial items......................... (9,155) (12,627)
Tax on ordinary profit for the year--Note 6........ (10,897) (9,990)
-------- --------
NET LOSS FOR THE YEAR.............................. (20,052) (22,617)
======== ========
</TABLE>
F-185
<PAGE>
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB--STOCKHOLM
CONSOLIDATED BALANCE SHEETS AT 31 MARCH
<TABLE>
<CAPTION>
1998 1997
------- -------
kSEK kSEK
<S> <C> <C>
ASSETS
Fixed assets
Intangible fixed assets--Note 4
Goodwill...................................................... 321,415 369,228
Tangible fixed assets--Note 4
Equipment, tools, fixtures and fittings....................... 113,327 120,271
Construction-in-progress and advance payments for tangible
fixed assets................................................. 6,273 8,618
------- -------
Total tangible fixed assets................................... 119,600 128,889
------- -------
Total fixed assets............................................ 441,015 498,117
Current assets
Current receivables--Note 7
Accounts receivable--trade.................................... 25,940 29,291
Other receivables............................................. 2,966 1,125
Prepaid expenses and accrued income........................... 1,682 1,534
------- -------
30,588 31,950
Current investments
Other current investments..................................... 155,000 110,000
Cash and bank balances........................................ 12,566 17,453
------- -------
Total current assets.......................................... 198,154 159,403
------- -------
TOTAL ASSETS.................................................. 639,169 657,520
======= =======
</TABLE>
F-186
<PAGE>
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB--STOCKHOLM
CONSOLIDATED BALANCE SHEETS AT 31 MARCH
<TABLE>
<CAPTION>
1998 1997
------- -------
kSEK kSEK
<S> <C> <C>
EQUITY AND LIABILITIES
Equity--Note 8
Restricted equity
Share capital................................................... 50,000 50,000
Other restricted reserves ...................................... 175,000 175,000
</TABLE>
Non-restricted equity/Accumulated deficit
<TABLE>
<S> <C> <C>
Profit/Loss brought forward................................... 345,250 (38,773)
Net loss for the year......................................... (20,052) (22,617)
------- -------
Total equity.................................................. 550,198 163,610
Provisions
Provisions for taxation....................................... 23,937 19,976
------- -------
Total provisions.............................................. 23,937 19,976
Long-term liabilities
Accounts payable--group companies--Note 10.................... -- 400,000
------- -------
Total long-term liabilities................................... -- 400,000
Current liabilities
Accounts payable--trade....................................... 12,026 12,931
Liabilities to group companies................................ -- 8,225
Income tax liability.......................................... 6,387 7,725
Other liabilities............................................. 9,099 8,718
Accrued expenses and deferred income--Note 9.................. 37,522 36,335
------- -------
Total current liabilities..................................... 65,034 73,934
------- -------
TOTAL EQUITY AND LIABILITIES.................................. 639,169 657,520
======= =======
PLEDGED ASSETS AND CONTINGENT LIABILITIES
Pledged assets ............................................... None None
Contingent liabilities--Note 11............................... 109,993 109,243
</TABLE>
F-187
<PAGE>
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB--STOCKHOLM
CONSOLIDATED FUNDS STATEMENTS AT 31 MARCH
<TABLE>
<CAPTION>
1998 1997
-------- --------
kSEK kSEK
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net sales................................................... 248,998 242,894
Operating expenses.......................................... (162,944) (155,685)
-------- --------
Net cash flows before changes in working capital............ 86,054 87,209
Increase(-)/Decrease(+) in operating receivables............ 1,362 (3,983)
Increase(+)/Decrease(-) in operating liabilities............ (8,900) 3,523
-------- --------
Net cash flows from operations.............................. 78,516 86,749
Received interest........................................... 6,278 5,054
Paid interest............................................... (15,547) (27,477)
Paid income taxes........................................... (6,936) (7,978)
-------- --------
Net cash flows provided by operating activities............. 62,311 56,348
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in current investments............................. (45,000) (40,000)
Investments in fixed assets................................. (22,198) (14,410)
Proceeds from sale of fixed assets.......................... -- 66
-------- --------
Net cash flows from investing activities.................... (67,198) (54,344)
CHANGE IN CASH AND BANK..................................... (4,887) 2,004
Cash and bank at beginning of year.......................... 17,453 15,449
Cash and bank at end of year................................ 12,566 17,453
CHANGE IN LIQUID ASSETS
Liquid assets at the beginning of the year.................. 127,307 85,449
Liquid assets at the end of the year........................ 167,410 127,453
</TABLE>
F-188
<PAGE>
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB--STOCKHOLM
PARENT COMPANY INCOME STATEMENTS
<TABLE>
<CAPTION>
1 April 1997 1 April 1996
31 March 1998 31 March 1997
------------- -------------
kSEK kSEK
<S> <C> <C>
Net sales--Note 1 and 2............................. -- 226
------- -------
Operating expenses
Other external costs................................ (463) (5,720)
------- -------
Total operating expenses............................ (463) (5,720)
Operating loss...................................... (463) (5,494)
Result from financial investments--Note 5
Interest income and similar items................... 6 12
Interest expense and similar items.................. (22,169) (27,460)
------- -------
Result from financial investments................... (22,626) (32,942)
Appropriations--Note 12............................. 22,626 32,942
Tax on current year result--Note 6.................. -- --
------- -------
RESULT FOR THE YEAR................................. -- --
======= =======
</TABLE>
F-189
<PAGE>
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB--STOCKHOLM
PARENT COMPANY BALANCE SHEETS AT 31 MARCH
<TABLE>
<CAPTION>
1998 1997
------- -------
kSEK kSEK
<S> <C> <C>
ASSETS
Fixed Assets
Financial fixed assets
Participations in group companies--Note 13...................... 625,000 625,000
------- -------
Total fixed assets.............................................. 625,000 625,000
Current assets
Current receivables--Note 7
Receivables from group companies................................ 14,747 17,378
Other receivables............................................... -- 5
------- -------
14,747 17,383
Cash and bank balances.......................................... 156 146
Total current assets............................................ 14,903 17,529
------- -------
TOTAL ASSETS.................................................... 639,903 642,529
======= =======
</TABLE>
F-190
<PAGE>
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB--STOCKHOLM
PARENT COMPANY BALANCE SHEETS AT 31 MARCH
<TABLE>
<CAPTION>
1998 1997
------- -------
kSEK kSEK
<S> <C> <C>
EQUITY AND LIABILITIES
Equity--Note 8
Restricted equity (1)
Share capital (50,000,000 shares of par value SEK 1 each)...... 50,000 50,000
Statutory reserve.............................................. 175,000 175,000
------- -------
225,000 225,000
Non-restricted equity
Profit brought forward......................................... 414,878 8,238
Result for the year............................................ -- --
------- -------
414,878 8,238
Total equity................................................... 639,878 233,238
Long-term liabilities
Liabilities to group companies--Note 10........................ -- 400,000
Current liabilities
Liabilities to group companies................................. -- 8,225
Accrued expenses and deferred income--Note 9................... 25 1,066
------- -------
Total current liabilities...................................... 25 9,291
------- -------
TOTAL EQUITY AND LIABILITIES................................... 639,903 642,529
======= =======
PLEDGED ASSETS AND CONTINGENT LIABILITIES
Pledged assets................................................. None None
Contingent liabilities......................................... None None
</TABLE>
F-191
<PAGE>
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB--STOCKHOLM
PARENT COMPANY FUNDS STATEMENTS AT 31 MARCH
<TABLE>
<CAPTION>
1998 1997
------- -------
kSEK kSEK
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net sales..................................................... -- 226
Operating expenses............................................ (463) (5,720)
------- -------
Net cash flows before changes in working capital.............. (463) (5,494)
Increase(-)/Decrease(+) in operating receivables.............. 2,636 5,001
Increase(+)/Decrease(-) in operating liabilities.............. (9,266) (5,300)
Group contribution received................................... 22,626 32,942
------- -------
Net cash flows from operations................................ 15,533 27,149
Received interest............................................. 6 12
Paid interest................................................. (15,529) (27,460)
------- -------
Net cash flows provided by operating activities............... 10 (299)
CHANGE IN CASH AND BANK....................................... 10 (299)
Cash and bank at beginning of year............................ 146 445
Cash and bank at end of year.................................. 156 146
CHANGE IN LIQUID ASSETS
Liquid assets at the beginning of the year.................... 146 445
Liquid assets at the end of the year.......................... 156 146
</TABLE>
F-192
<PAGE>
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB--STOCKHOLM
ACCOUNTING PRINCIPLES
The group
The consolidated accounts have been prepared according to the purchase
method. Apart from the equity of the parent company, the group's equity only
includes the results of the subsidiaries after acquisition. The difference
between the group's cost of acquisition for the shares in the subsidiaries and
the fair values of acquired identifiable assets and liabilities in the
subsidiaries at the time of acquisition, is shown as goodwill and is amortised
according to plan. If negative goodwill arises it is accounted for as a
provision.
The consolidated accounts include the accounts of all of the subsidiaries. A
subsidiary is a company in which the parent company owns, directly or
indirectly, shares which represent more than 50% of the voting rights.
All group internal transactions and profits have been eliminated.
The consolidated accounts do not include appropriations and untaxed
reserves. Instead the estimated deferred tax relating to the appropriations is
shown in the consolidated income statement as part of the group's tax expense.
The equity portion of these appropriations and the untaxed reserves
respectively is included as part of the net profit for the year in the income
statement and in the balance sheet as other restricted reserves under
restricted equity. The deferred tax is re-evaluated each year using the current
tax rate and the change is included in the consolidated income statement as a
part of the tax expense for the year.
The group and the parent company
Assets and liabilities of the group and parent company are valued at
acquisition value unless otherwise stated.
Receivables--trade are valued at the amounts they are expected to realise.
Receivables and liabilities denominated in foreign currencies have been
translated at the year-end rates of exchange.
The cost of leasing fixed assets is normally expensed over the leasing
period. When a lease agreement implies an obligation to take over the leased
object after a certain time and with agreed terms of ownership, then it is
accounted for as a fixed asset. The remaining payment obligations are included
among the liabilities.
Depreciation according to plan of intangible and tangible fixed assets are
based on the acquisition cost of the assets (revaluation value) and the
expected economic life of each asset.
Equipment
Machinery and equipment have been depreciated according to plan, which is
based on an economic life of three and five years respectively. (Depreciation
based on an expected economic life of 3 years is used for IT-equipment
purchased from 1 April 1997. IT-equipment purchased before 1 April 1997 is
depreciated over five years.)
F-193
<PAGE>
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB--STOCKHOLM
ACCOUNTING PRINCIPLES
Distribution plants
Plants have been depreciated according to a plan, which is based on
economic lives of three, seven and ten years respectively. (Depreciation based
on an expected economic life of 3 years is used for IT-equipment purchased
from 1 April 1997. IT-equipment purchased before 1 April 1997 is depreciated
over five years.)
Goodwill
Goodwill is depreciated according to a plan over a period of ten years.
Group companies are all companies in the same group of companies where the
parent company is a Swedish limited liability company, a partnership or a
foreign company, i e not only a parent company and a subsidiary but a fellow
subsidiary as well.
Book depreciation made corresponds to the maximum depreciation allowed by
the Swedish taxation legislation.
With the exception for the above-mentioned changes referring to
depreciation on IT-equipment and IT-plants, the same accounting principles
were applied in the previous year.
F-194
<PAGE>
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB--STOCKHOLM
NOTES TO THE ANNUAL ACCOUNTS
Note 1. Allocation of net sales
Net sales and operating profit are allocated by business lines as follows:
<TABLE>
<CAPTION>
Net sales Operating profit
-------------------- -------------------
1997/1998 1996/19977 1997/1998 1996/1997
--------- ---------- --------- ---------
kSEK kSEK kSEK kSEK
<S> <C> <C> <C> <C>
The group
Cable TV activities.................... 248,998 242,894 6,754 9,796
The parent company..................... -- 226 (463) (5,494)
</TABLE>
Note 2. Purchases and sales between group companies
The group
Out of the total purchases and sales for the year kSEK 0 (1996/1997 kSEK
265) of the purchases and kSEK 0 (1996/1997 kSEK 265) of the sales concern
other group companies.
The parent company
Out of the total purchases and sales for the year kSEK 0 (1996/1997 kSEK
39) of the purchases and kSEK 0 (1996/1997 kSEK 226) of the sales concern other
group companies.
Note 3. Average number of employees, salaries, other remuneration and social
security costs
Average number of employees
<TABLE>
<CAPTION>
The group The parent company
------------------- -------------------
1997/1998 1996/1997 1997/1998 1996/1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Men..................................... 35 37 -- --
Women................................... 22 21 -- --
Total................................... 57 58 -- --
</TABLE>
Salaries, other remuneration and social costs:
<TABLE>
<CAPTION>
The group The parent company
------------------- -------------------
1997/1998 1996/1997 1997/1998 1996/1997
--------- --------- --------- ---------
kSEK kSEK kSEK kSEK
<S> <C> <C> <C> <C>
Board of directors and the managing
director
Salaries and other remuneration....... 1,202 1,128 -- --
of which is bonus..................... 196 185 -- --
Pension costs......................... 536 460 -- --
Other employees
Salaries and other remuneration....... 15,275 14,915 -- --
Total
Salaries and other remuneration....... 16,477 16,043 -- --
Social costs.......................... 7,649 7,501 -- --
of which pension costs................ 1,576 1,424 -- --
</TABLE>
Regarding the managing director, the company has not entered into an
employment agreement or agreement concerning compensation such as severance pay
or similar.
F-195
<PAGE>
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB--STOCKHOLM
NOTES TO THE ANNUAL ACCOUNTS--(Continued)
Note 4. Intangible and tangible fixed assets
<TABLE>
<CAPTION>
The group The parent company
-------------------- -------------------
1997/1998 1996/1997 1997/1998 1996/1997
--------- --------- --------- ---------
kSEK kSEK kSEK kSEK
<S> <C> <C> <C> <C>
Goodwill
Opening acquisition value........... 478,129 478,129 -- --
Closing acquisition value........... 478,129 478,129 -- --
Opening accumulated depreciation.... (108,901) (61,088) -- --
Depreciation for the year........... (47,813) (47,813) -- --
-------- -------- --- ---
Closing accumulated depreciation.... (156,714) (108,901) -- --
Net book value according to plan.... 321,415 369,228 -- --
Equipment, tools, fixtures and
fittings of which:
1. Distribution plants
Acquisition value
Opening acquisition value........... 207,728 201,018 -- --
Purchases........................... 24,577 8,387 -- --
Sales and disposals................. -- (289) -- --
Reclassifications................... (573) (1,388) -- --
-------- -------- --- ---
Closing acquisition value........... 231,732 207,728 -- --
Depreciation according to plan
Opening accumulated depreciation.... (91,181) (62,650) -- --
Sales and disposals................. -- (79) -- --
Depreciation for the year........... (30,182) (28,452) -- --
-------- -------- --- ---
Closing accumulated depreciation.... (121,363) (91,181) -- --
Net book value according to plan.... 110,369 116,547 -- --
2. Equipment
Acquisition value
Opening acquisition value........... 9,988 8,571 -- --
Purchases........................... 541 1,591 -- --
Sales and disposals................. (10) (174) -- --
-------- -------- --- ---
Closing acquisition value........... 10,519 9,988 -- --
Depreciation according to plan
Opening accumulated depreciation.... (6,264) (5,592) -- --
Sales and disposals................. 8 476 -- --
Depreciation for the year........... (1,305) (1,148) -- --
Closing accumulated depreciation.... (7,561) (6,264) -- --
-------- -------- --- ---
Net book value according to plan.... 2,958 3,724 -- --
</TABLE>
F-196
<PAGE>
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB--STOCKHOLM
NOTES TO THE ANNUAL ACCOUNTS--(Continued)
<TABLE>
<CAPTION>
The group The parent company
------------------- -------------------
1997/1998 1996/1997 1997/1998 1996/1997
--------- --------- --------- ---------
kSEK kSEK kSEK kSEK
<S> <C> <C> <C> <C>
Construction-in-progress and advanced
payments for tangible assets
Opening acquisition value............. 8,618 2,798 -- --
Purchases............................. 21,839 19,793 -- --
Reclassifications..................... (24,184) (13,973) -- --
Accumulated closing acquisition
value................................ 6,273 8,618 -- --
</TABLE>
Note 5. Other interest income, interest expense and similar items
<TABLE>
<CAPTION>
The group The parent company
------------------- -------------------
1997/1998 1996/1997 1997/1998 1996/1997
--------- --------- --------- ---------
kSEK kSEK kSEK kSEK
<S> <C> <C> <C> <C>
Interest income......................... 6,278 5,054 6 12
Interest expense........................ 22,187 27,477 22,169 27,460
</TABLE>
Interest income includes kSEK 0 (kSEK 0) income from other group companies.
Interest expense includes kSEK 22,168 (kSEK 27,457) expense from other
group companies.
Note 6. Tax on ordinary profit for the year
<TABLE>
<CAPTION>
The group The parent company
------------------- -------------------
1997/1998 1996/1997 1997/1998 1996/1997
--------- --------- --------- ---------
kSEK kSEK kSEK kSEK
<S> <C> <C> <C> <C>
Tax paid on the profit for the year
and earlier years.................... 6,936 7,978 -- --
Deferred taxes........................ 3,961 2,012 -- --
------ ----- --- ---
Total................................. 10,897 9,990 -- --
====== ===== === ===
</TABLE>
Note 7. Current assets
Prepaid expenses and accrued income
<TABLE>
<CAPTION>
The group The parent company
------------------- -------------------
1997/1998 1996/1997 1997/1998 1996/1997
--------- --------- --------- ---------
kSEK kSEK kSEK kSEK
<S> <C> <C> <C> <C>
Prepaid rent........................... 427 322 -- --
Accrued interest income................ 450 198 -- --
Other.................................. 805 1 014 -- --
Total.................................. 1 682 1 534 -- --
Receivables from group companies
Receivable from StjarnTVnatet AB....... -- -- 14,747 17,378
</TABLE>
F-197
<PAGE>
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB--STOCKHOLM
NOTES TO THE ANNUAL ACCOUNTS--(Continued)
Note 8. Shareholders' equity
<TABLE>
<CAPTION>
Non- Profit/Loss
Share Restricted restricted for the
capital reserves reserves year
------- ---------- ---------- -----------
kSEK kSEK kSEK kSEK
<S> <C> <C> <C> <C>
The Group
Opening balance..................... 50,000 175,000 (38,773) (22,617)
Transfer of profit 1996/1997........ -- -- (22,617) 22,617
Unconditional shareholders'
contribution....................... -- -- 406,640 --
Loss for the year................... -- -- -- (20,052)
------ ------- ------- -------
Closing balance..................... 50,000 175,000 345,250 (20,052)
</TABLE>
<TABLE>
<CAPTION>
Profit Profit/loss
Share Statutory brought for the
capital reserve forward year
------- --------- ------- -----------
kSEK kSEK kSEK kSEK
<S> <C> <C> <C> <C>
The parent company
Opening balance......................... 50,000 175,000 8,238 --
Transfer of profit 1996/1997 according
to decision taken at the annual general
meeting of shareholders................ -- -- -- --
Unconditional shareholders'
contribution........................... -- -- 406,640 --
Net profit/loss for the year............ -- -- -- --
------ ------- ------- ------
Closing balance......................... 50,000 175,000 414,878 --
Each share represents one vote.
</TABLE>
Note 9. Accrued expenses and deferred income
<TABLE>
<CAPTION>
The group The parent company
------------------- -------------------
1997/1998 1996/1997 1997/1998 1996/1997
--------- --------- --------- ---------
kSEK kSEK kSEK kSEK
<S> <C> <C> <C> <C>
Accrued costs of personnel.............. 2,420 2,136 -- --
Accrued program costs................... 4,382 3,516 -- --
Deferred income......................... 23,371 22,132 -- --
Other items............................. 7,349 8,551 25 1,066
------ ------ ----- -----
Total................................... 37,522 36,335 25 1,066
====== ====== ===== =====
</TABLE>
Note 10. Liabilities to group companies
<TABLE>
<CAPTION>
The group The parent company
------------------- -------------------
1997/1998 1996/1997 1997/1998 1996/1997
--------- --------- --------- ---------
kSEK kSEK kSEK kSEK
<S> <C> <C> <C> <C>
Promissory note loan STI Pte Ltd....... -- 400,000 -- 400,000
</TABLE>
F-198
<PAGE>
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB--STOCKHOLM
NOTES TO THE ANNUAL ACCOUNTS--(Continued)
Note 11. Contingent liabilities
<TABLE>
<CAPTION>
The group The parent company
------------------- -------------------
1997/1998 1996/1997 1997/1998 1996/1997
--------- --------- --------- ---------
kSEK kSEK kSEK kSEK
<S> <C> <C> <C> <C>
Conditional shareholders'
contribution......................... 98,550 98,550 -- --
Guarantees............................ 336 268 -- --
Royalty commitment.................... 11,107 10,425 -- --
------- ------- ----- -----
Total................................. 109,993 109,243 -- --
======= ======= ===== =====
</TABLE>
The subsidiary SpaceNet AB has earlier entered into a royalty agreement
with NUTEK and with Industrifonden, according to which the company is obliged
to pay royalty on certain sales until the end of the contract period in the
year 2000 for NUTEK and 2005 for Industrifonden. The royalty commitment
includes an annual interest estimate maximised to kSEK 11.107.
Note 12. Appropriations
<TABLE>
<CAPTION>
Parent company
-------------------
1997/1998 1996/1997
--------- ---------
kSEK kSEK
<S> <C> <C>
Group contribution
Received from StjarnTVnatet AB.............................. 22,626 32,942
</TABLE>
Note 13. Participations in group companies
<TABLE>
<CAPTION>
Extent of holding Net book value
------------------ ---------------------------
Share of
Registration Registered Number of capital
no office shares in % 31 March 1998 31 March 1997
------------ ---------- --------- -------- ------------- -------------
kSEK kSEK
<S> <C> <C> <C> <C> <C> <C>
StjarnTVnatet AB........ 556000-4391 Stockholm 1,036,500 100 625,000 625,000
</TABLE>
F-199
<PAGE>
Note 14. Annual accounts
Annual accounts regarding Singapore Telecom Ltd, registered in Singapore,
may be obtained from:
Singapore Telecommunications Limited
31 Exeter Road, Comcentre, Singapore
239732 Singapore
Stockholm, 29 May 1998
Bjorn Svedberg Bengt Halse Conni Jonsson
Chairman
Thomas von Koch Kjell Hellberg
Managing Director
Jane Norlander Anders Sandberg
Employee Employee
representative representative
My audit report was submitted on 29 May, 1998.
Ulla Nordin Buisman
Authorised Public Accountant
PricewaterhouseCoopers
F-200
<PAGE>
(Translation from the Swedish original)
AUDITOR'S REPORT
To the annual general meeting of the shareholders of
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB
(Org No 556497-8210)
I have audited the annual report, the consolidated financial statements, the
accounting records and the administration by the board of directors and the
managing director of Singapore Telecom International Svenska AB for the
financial year 1 April 1997--31 March 1998. These accounts and the
administration of the Company are the responsibility of the board of directors
and the managing director. My responsibility is to express an opinion on the
annual report, the consolidated financial statements and the administration
based on my audit.
I conducted my audit in accordance with generally accepted auditing standards
in Sweden. Those standards require that I plan and perform the audit to obtain
reasonable assurance that the annual report and the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the annual
report and the consolidated financial statements. An audit also includes
assessing the accounting principles used and their application by the board of
directors and the managing director, as well as evaluating the overall
presentation of information in the annual report and the consolidated financial
statements. I examined significant decisions, actions taken and circumstances
of the Company in order to be able to determine the liability, if any, to the
Company of any board member or the managing director or whether they have in
any way acted in contravention of the Companies Act, the Annual Accounts Act or
the Articles of Association. I believe that my audit provides a reasonable
basis for my opinion set out below.
In my opinion the annual report and the consolidated financial statements have
been prepared in accordance with the Annual Accounts Act.
I recommend
that the income statements and the balance sheets of the parent company and the
Group be adopted and
that the unappropriated earnings of the parent company be dealt with in
accordance with the proposal in the administration report.
In my opinion, the members of the board of directors and the managing director
have not committed any act or been guilty of any omission, which could give
rise to any liability to the Company.
I recommend
that the members of the board of directors and the managing director be
discharged from liability for the financial year.
Stockholm, 29 May 1998
Ulla Nordin Buisman
Authorised Public Accountant
F-201
<PAGE>
SINGAPORE TELECOM INTERNATIONAL SVENSKA AB--STOCKHOLM
Reconciliation of Significant Differences between US and Swedish generally
accepted accounting principles
The group's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in Sweden (Swedish GAAP), which differ
in some respects from the accounting principles generally accepted in the
United States (U.S. GAAP).
The principal differences between Swedish GAAP and U.S. GAAP that affect the
net loss, and total equity as of and for the years ended March 31, 1998 and
1997 are presented below together with explanations of certain additional
differences.
<TABLE>
<CAPTION>
For the years ended
March 31,
----------------------
1998 1997
---------- ----------
(in thousands of SEK)
<S> <C> <C>
Reconciliation of net loss
Net loss reported under Swedish GAAP.................. (20,052) (22,617)
U.S. GAAP adjustments:
Leases................................................ (9,853) (9,341)
Goodwill.............................................. (882) (882)
Tax effect of U.S. GAAP adjustments................... 2,759 2,615
---------- ----------
Net loss under US GAAP................................ (28,028) (30,225)
========== ==========
<CAPTION>
For the years ended
31 March
----------------------
1998 1997
---------- ----------
(in thousands of SEK)
<S> <C> <C>
Reconciliation of equity
Total equity reported under Swedish GAAP.............. 550,198 163,610
U.S. GAAP adjustments:
Leases................................................ (30,555) (20,702)
Goodwill.............................................. (2,866) (1,984)
Tax effect of U.S. GAAP adjustments................... 8,555 5,796
---------- ----------
Total equity under US GAAP............................ 525,332 146,720
========== ==========
</TABLE>
Leases
The Group entered into lease agreements for certain strategic equipment
beginning on January 1, 1993. These leases have, in accordance with Swedish
GAAP, been treated as operating leases. For US GAAP purposes, these leases meet
the capitalization criteria in accordance with SFAS 13 and thus have been
treated as financial leases and have been capitalized. The capitalized leases
have been recorded as an asset and the corresponding obligation as a liability
at their net present value of future minimum lease payments in the US GAAP
reconciliation. Depreciation has been computed principally using the straight-
line method over the estimated useful lives of the assets of 20 years.
Goodwill
StjarnTVnatet AB, a wholly-owned subsidiary of Singapore Telecom International
Svenska AB ("STI"), maintains the lease as described above. Since neither these
leased assets nor lease liabilities were included in the statutory accounts of
StjarnTVnatet AB, these assets and liabilities were not considered when
determining the fair value of the acquired StjarnTVnatet assets and liabilities
on December 20, 1994. The excess of the acquired lease obligations over the
fair value of the leased assets would have reduced the net assets acquired and
thus increased the acquisition goodwill under US GAAP. This increase in
goodwill has been recorded as a US GAAP adjustment and depreciated over its ten
year estimated useful life.
F-202
<PAGE>
Cash flow information
US GAAP requires that a statement of cash flows according to SFAS 95 Statement
of Cash Flows be included as part of the financial statements. Swedish
accounting standards allow the presentation of a Funds Statement. The main
difference between the statement of cash flow prepared in accordance with US
GAAP and the Funds Statement presented in the Singapore Telecom International
Svenska AB financial statements is the following:
The US GAAP cash flows statement reports changes in cash and cash equivalents
which include short-term highly liquid investments with an original maturity of
three months or less but excludes bank overdrafts. The STI financial statements
define cash and cash equivalents as cash in hand and deposits repayable on
demand.
The table below has been included to present cash flow totals from operating,
investing and financing activities in line with SFAS 95 for the years ended
March 31, 1998 and 1997. Adjustments from the Swedish cash flow include (a) a
reclassification of the change in investments included in cash flows from
investing activities to a change in cash and cash equivalents and (b) the
effects of the adjustment related to the capitalization of leases.
Under a US GAAP presentation, the following amounts would have been
reported:
<TABLE>
<CAPTION>
For the years ended
March 31
----------------------
1998 1997
---------- ----------
(in thousands of SEK)
<S> <C> <C>
Net cash provided operating activities.................. 66,131 59,514
Net cash used in investing activities................... (22,198) (14,344)
Net cash used in financing activities................... (3,820) (3,166)
Net increase in cash and cash equivalents............... 40,113 42,004
Cash and cash equivalents at beginning of year.......... 127,453 85,449
Cash and cash equivalents at end of year................ 167,566 127,453
</TABLE>
Non-cash financing activities:
The Company's shareholder, STI Pte Ltd, forgave its long term promissory note
of 400,000,000 SEK and accrued interest of 6,640,000 SEK due from the Company.
The Company has treated this transaction as a reduction of liabilities to group
companies and an increase to non-restricted reserves (equity).
New U.S. accounting standards not yet adopted
In June 1997, the FASB issued SFAS No. 130 Reporting Comprehensive Income and
is effective for fiscal years beginning after 15 December 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. This standard requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. It requires that an
enterprise (a) classify items of comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in-
capital in the equity section of a statement of financial position. Management
believes that the Company currently does not have items of a material nature
that would require presentation in a separate statement of comprehensive
income.
F-203
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS Reconciliation of Significant
Differences between US and Swedish Generally Accepted Accounting Principles
To the Board of Directors of StjarnTVnatet AB (formerly Singapore Telecom
International Svenska AB)
Our audit of the consolidated financial statements of Singapore Telecom
International Svenska AB referred to in our report dated May 29, 1998 appearing
on page F-201 of this filing on Form S-4 also includes an audit of the
accompanying Reconciliation of Significant Differences between US and Swedish
Generally Accepted Accounting Principles. In our opinion, this reconciliation
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers Stockholm, Sweden September 17, 1999
F-204
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
SBS Broadcasting SA
We have audited the accompanying consolidated balance sheets of SBS
Broadcasting SA (formerly Scandinavian Broadcasting System SA) as of December
31, 1997 and 1998 and the related consolidated statements of operations,
comprehensive income, shareholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SBS
Broadcasting SA at December 31, 1997 and 1998 and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with accounting principles generally
accepted in the United States of America.
ERNST & YOUNG
Statsautoriseret Revisionsaktieselskab
Copenhagen, Denmark
February 26, 1999
F-205
<PAGE>
SBS BROADCASTING SA
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. Dollars)
<TABLE>
<CAPTION>
December 31,
-------------------- June 30,
1997 1998 1999
--------- --------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and short-term cash investments....... $ 91,596 $ 63,381 $ 52,252
Short-term investments, at market value.... 46,134 45,525 14,006
Accrued interest receivable................ 216 109 36
Accounts receivable trade, net of allowance
for doubtful accounts of $1,550 in 1998
($1,046 in 1997).......................... 50,799 59,760 53,782
Accounts receivable, associated companies.. 1,766 639 6,224
Restricted cash and cash in escrow......... 1,710 1,291 1,306
Program rights inventory, current.......... 66,934 74,443 64,472
Other current assets....................... 11,753 8,833 16,910
--------- --------- ---------
Total current assets..................... 270,908 253,981 208,988
Buildings, equipment and improvements, net
of accumulated depreciation............... 25,457 24,180 20,922
Program rights inventory, noncurrent....... 29,500 45,244 62,163
Intangible assets, net of accumulated
amortization.............................. 63,448 59,712 52,461
Deferred financing cost, net of accumulated
amortization.............................. 7,699 6,872 6,389
Investments in unconsolidated
subsidiaries.............................. 10,191 11,553 12,101
Notes receivable........................... 8,749 8,112 8,152
Other assets............................... 11,608 18,167 28,988
--------- --------- ---------
Total assets............................. $ 427,560 $ 427,821 $ 400,164
========= ========= =========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable........................... $ 26,831 $ 15,805 $ 19,051
Accrued expenses........................... 37,419 42,006 40,716
Program rights payable, current............ 44,141 45,370 50,041
Notes payable, current..................... 11,918 9,463 6,574
Current portion of long-term debt.......... 3,317 2,627 2,346
Deferred income............................ 622 2,599 4,719
--------- --------- ---------
Total current liabilities.................. 124,248 117,870 123,447
Program rights payable, noncurrent......... 12,766 25,550 21,642
Convertible subordinated debentures and
notes..................................... 230,250 230,250 230,250
Other long-term debt....................... 53,116 51,014 47,915
Other noncurrent liabilities............... 10,211 15,756 17,621
Minority interests......................... 9,832 5,356 732
Shareholders' deficit:
Common shares (authorized 75,000, issued
13,829 (1997) and 14,933 (1998) at par
value $1.50).............................. 20,744 22,400 22,410
Additional paid-in capital................. 171,679 197,135 197,219
Accumulated deficit........................ (196,258) (229,977) (245,130)
Unearned compensation...................... (318) (22) --
Treasury Stock at cost (48 Common Shares).. -- (1,154) (1,154)
Other comprehensive income................. (8,710) (6,357) (14,788)
--------- --------- ---------
Total shareholders' deficit.............. (12,863) (17,975) (41,443)
--------- --------- ---------
Total liabilities and shareholders'
deficit................................. $ 427,560 $ 427,821 $ 400,164
========= ========= =========
</TABLE>
F-206
<PAGE>
SBS BROADCASTING SA
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of U.S. Dollars, except share and per share data)
<TABLE>
<CAPTION>
Six months ended
Years Ended December 31, June 30,
---------------------------- -----------------------
1996 1997 1998 1998 1999
-------- -------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net revenue............. $182,434 $242,838 $350,535 $166,639 $195,342
Operating expenses:
Station operating
expenses............. 179,563 204,316 263,484 126,753 143,903
Selling, general and
administrative
expenses............. 50,266 55,190 68,779 30,799 39,345
Corporate expenses.... 7,822 9,177 9,576 4,261 5,111
Non-cash
compensation......... -- 2,676 1,142 325 22
Depreciation.......... 8,045 9,839 9,484 4,787 4,588
Amortization.......... 3,652 5,060 9,790 4,861 4,971
-------- -------- -------- -------- --------
Total operating
expenses........... 249,348 286,258 362,255 171,786 197,940
-------- -------- -------- -------- --------
Operating loss.......... (66,914) (43,420) (11,720) (5,147) (2,598)
Equity in loss of
unconsolidated
subsidiaries........... (1,301) (3,150) (3,536) (530) (2,314)
Interest income......... 7,368 3,469 6,318 3,038 1,809
Interest expense........ (13,221) (14,333) (24,708) (11,688) (11,677)
Foreign exchange losses,
net.................... (193) (4,665) (3,202) (3,830) (4,839)
Investment losses, net.. -- (801) 376 33 388
Other income (expense),
net:
Sale of shares in
TVNorge.............. 615 6,262 -- -- --
Sale of shares in MTV
Oy................... -- 2,814 -- -- --
Other................. (1,202) (1,863) (2,638) (568) 293
-------- -------- -------- -------- --------
Loss before income
taxes and minority
interest............. (74,848) (55,687) (39,110) (18,692) (18,938)
Income taxes and
income tax benefit,
net................ (250) (29) (636) (187) (266)
-------- -------- -------- -------- --------
Loss before minority
interest............. (75,098) (55,716) (39,746) (18,879) (19,204)
Minority interest in
losses, net............ 7,559 11,866 6,027 4,913 4,051
-------- -------- -------- -------- --------
Net loss................ $(67,539) $(43,850) $(33,719) $(13,966) $(15,153)
======== ======== ======== ======== ========
Net loss per common
share, basic and
diluted................ $ (4.96) $ (3.18) $ (2.30) $ (0.97) $ (1.01)
======== ======== ======== ======== ========
Average common shares
outstanding (in
thousands)............. 13,605 13,780 14,677 14,426 14,890
======== ======== ======== ======== ========
</TABLE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of U.S. Dollars)
<TABLE>
<CAPTION>
Six months ended June
Years ended December 31, 30,
---------------------------- -----------------------
1996 1997 1998 1998 1999
-------- -------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss)........ $(67,539) $(43,850) $(33,719) $(13,966) $(15,153)
Currency translation
adjustment............ (4,922) (12,089) 3,223 (1,111) (9,255)
Unrealized holding
gains during period... 1,994 2,534 1,472 240 1,223
Less: reclassification
adjustment for gains
included in net
income................ (1,422) (1,896) (2,342) (211) (399)
-------- -------- -------- -------- --------
Comprehensive net income
(loss).................. $(71,889) $(55,301) $(31,366) $(15,048) $(23,584)
======== ======== ======== ======== ========
</TABLE>
F-207
<PAGE>
SBS BROADCASTING SA
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands of U.S. Dollars)
<TABLE>
<CAPTION>
Additional Other
Common Paid-In Accumulated Unearned Treasury Comprehensive
Shares Capital Deficit Compensation Stock Income Total
------- ---------- ----------- ------------ -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... $20,364 $139,930 $ (84,869) $ -- $ -- $ 7,091 $ 82,516
Unrecognized gain on
sale of 30.0% of
SBS6.................. -- 22,150 -- -- -- -- 22,150
Issuance of 95,000
common shares in
connection with the
acquisition of a
convertible note in
Kanal A............... 142 2,206 -- -- -- -- 2,348
Currency translation
adjustment............ -- -- -- -- -- (4,922) (4,922)
Change in unrecognized
loss on short-term
investments........... -- -- -- -- -- 572 572
Net loss............... -- -- (67,539) -- -- -- (67,539)
------- -------- --------- ------ ------- -------- --------
Balance at December 31,
1996................... $20,506 $164,286 $(152,408) $ -- $ -- $ 2,741 $ 35,125
Grant of options for
175,000 common
shares................ -- 188 -- (188) -- -- --
Exchange of options for
91,462 common shares
(Note 9).............. -- 2,195 -- (2,195) -- -- --
Option and share
compensation.......... -- -- -- 2,065 -- -- 2,065
Issuance of 158,028
common shares in
exchange for cash in
connection with the
Rete Mia acquisition.. 238 2,230 -- -- -- -- 2,468
Reduction of exercise
price of the 1,000,000
Paramount warrants
issued in 1995........ -- 2,780 -- -- -- -- 2,780
Currency translation
adjustment............ -- -- -- -- -- (12,089) (12,089)
Change in unrecognized
gain (loss) on short-
term investments...... -- -- -- -- -- 638 638
Net loss............... -- -- (43,850) -- -- -- (43,850)
------- -------- --------- ------ ------- -------- --------
Balance at December 31,
1997................... $20,744 $171,679 $(196,258) $ (318) $ -- $ (8,710) $(12,863)
Exchange of options for
91,462 common shares.. 137 (137) -- -- -- -- --
Issuance of 30,150
common shares in
connection with option
and share
compensation.......... 46 693 -- -- -- -- 739
Amortization of
unearned
compensation.......... -- -- -- 296 -- -- 296
Exercise of warrants
for 500,000 common
shares................ 750 11,433 -- -- -- -- 12,183
Issuance of 482,285
common shares in
public offering....... 723 13,467 -- -- -- -- 14,190
Purchase of treasury
stock 47,500 common
shares................ -- -- -- -- (1,154) -- (1,154)
Currency translation
adjustment............ -- -- -- -- -- 3,223 3,223
Change in unrecognized
gain (loss) on short-
term investments...... -- -- -- -- -- (870) (870)
Net loss............... -- -- (33,719) -- -- -- (33,719)
------- -------- --------- ------ ------- -------- --------
Balance at December 31,
1998................... $22,400 $197,135 $(229,977) $ (22) $(1,154) $ (6,357) $(17,975)
Unaudited:
Exercise of options as
to 7,000 common
shares................ 10 84 -- -- -- -- 94
Amortization of
unearned
compensation.......... -- -- -- 22 -- -- 22
Currency translation
adjustment............ -- -- -- -- -- (9,255) (9,255)
Change in unrecognized
gain on short-term
investments........... -- -- -- -- -- 824 824
Net loss............... -- -- (15,153) -- -- -- (15,153)
------- -------- --------- ------ ------- -------- --------
Balance at June 30,
1999................... $22,410 $197,219 $(245,130) $ -- $(1,154) $(14,788) $(41,443)
======= ======== ========= ====== ======= ======== ========
</TABLE>
F-208
<PAGE>
SBS BROADCASTING SA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. Dollars)
<TABLE>
<CAPTION>
Six months ended
Years Ended December 31, June 30,
---------------------------- -----------------------
1996 1997 1998 1998 1999
-------- -------- -------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss................ $(67,539) $(43,850) $(33,719) $(13,966) $(15,153)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Depreciation and
amortization........... 11,697 14,899 19,274 9,648 9,559
Equity in (income) loss
of unconsolidated
subsidiaries, net of
distributions
received............... 962 (1,880) (1,678) (2,397) 239
Non-cash interest
expense................ 525 612 2,011 488 508
Unrealized exchange loss
on long-term debt...... -- -- 2,847 -- 1,134
Non-cash other income,
net.................... (1,513) (9,076) -- -- --
Non-cash compensation... -- 2,676 1,142 325 22
Net loss (gain) on sale
of short-term
investments............ -- 801 (376) (33) (388)
Minority interest in
loss................... (7,559) (11,866) (6,027) (4,913) (4,051)
Changes in operating
assets and liabilities,
net of amounts
acquired:
Accounts receivable..... (10,463) (25,409) (7,708) (7,189) (5,477)
Program rights
inventory, net......... (8,435) (11,137) (8,597) (101) (10,460)
Other current assets.... (2,211) 1,762 4,645 (540) (7,800)
Other noncurrent
assets................. 81 (4,591) (5,976) (3,605) (14,375)
Accounts payable and
accrued expenses....... 17,116 19,989 (5,487) (6,474) 6,158
Deferred income......... (256) (462) 1,966 1,081 2,369
Other liabilities....... -- 5,402 7,150 (950) 4,590
-------- -------- -------- -------- --------
Cash provided by (used
in) operating
activities............. (67,595) (62,130) (30,533) (28,626) (33,125)
-------- -------- -------- -------- --------
Cash flows from investing
activities:
Purchases of short-term
investments............ -- (61,858) (139,632) (85,276) --
Sales and maturities of
short-term
investments............ -- 28,626 139,748 51,246 32,735
Cash capital
expenditures........... (6,274) (15,516) (11,616) (6,871) (4,306)
Net proceeds from sale
of unconsolidated
companies.............. -- 3,968 -- -- --
Net proceeds from sale
of minority interests.. 42,686 8,599 -- -- --
Payment to purchase
notes receivable....... (7,846) (1,740) -- -- --
Payment for purchase of
acquired businesses,
net of cash acquired... (5,933) (31,549) (7,848) (1,824) --
-------- -------- -------- -------- --------
Cash provided by (used
in) in investing
activities............. 22,633 (69,470) (19,348) (42,725) 28,429
-------- -------- -------- -------- --------
Cash flows from financing
activities:
Net change in short-term
borrowings............. 13,532 180 (3,043) 548 (1,977)
Proceeds from issuance
of convertible
subordinated debentures
and notes.............. -- 75,000 -- 26,507 94
Deferred financing
costs.................. -- (2,733) -- -- --
Proceeds from issuance
of common shares in
subsidiaries........... -- 8,841 1,259 -- --
Proceeds from issuance
of long-term debt...... 11,820 44,516 -- -- 404
Proceeds from exercise
of warrant............. -- -- 12,183 -- --
Proceeds from issuance
of common shares....... -- 2,468 14,190 -- --
Purchase of treasury
stock.................. -- -- (1,154) -- --
Net change in restricted
cash and cash in
escrow................. 25 (1,280) 419 368 (15)
Payment of long-term
debt................... (1,205) -- (1,815) (172) (1,628)
Payment of capital lease
obligations............ (973) (966) (1,012) (473) (277)
-------- -------- -------- -------- --------
Cash provided by
financing activities... 23,199 126,026 21,027 26,778 (3,399)
-------- -------- -------- -------- --------
Effect of exchange rate
changes on short-term
cash investments....... (1,922) (4,900) 639 847 (3,034)
Net change in short-term
cash investments....... (23,685) (10,474) (28,215) (43,726) (11,129)
Cash and short-term cash
investments, beginning
of period.............. 125,755 102,070 91,596 91,596 63,381
-------- -------- -------- -------- --------
Cash and short-term cash
investments, end of
period................. $102,070 $ 91,596 $ 63,381 $ 47,870 $ 52,252
======== ======== ======== ======== ========
Cash paid for interest.. $ 12,636 $ 13,118 $ 23,928
======== ======== ========
Cash paid for taxes..... $ -- $ 251 $ 675
======== ======== ========
</TABLE>
F-209
<PAGE>
SBS BROADCASTING SA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. Dollars)
Noncash investing and financing activities:
1996
The Company issued 95,000 Common Shares in exchange for a subordinated note
convertible into 33.0% of the share capital of Kanal A in Slovenia.
The Company entered into a capital lease for studio equipment recorded at
NLG 5,680,000 ($3,421,000).
F-210
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
SBS Broadcasting SA (the "Company" or "SBS") was formed in Luxembourg in
1989 and commenced operations in 1990. The Company was organized to acquire and
operate commercial television stations in Scandinavia and other areas in
Europe, and has expanded its operations to include commercial radio stations.
The consolidated financial statements include the accounts of the Company and
its subsidiaries in which the Company has management control in Sweden,
Denmark, Norway, Finland, Flemish Belgium, the Netherlands, Hungary and
Luxembourg. The Company accounts for its other investments in 20%-50% owned
subsidiaries under the equity method.
All intercompany transactions and balances have been eliminated.
Reporting Currency
The Company prepares its financial statements in United States dollars.
Under Luxembourg law, the Company has elected to file its statutory financial
statements and to pay dividends in United States dollars.
Currency Translation
The functional currency of the Company's subsidiaries and its equity
investees is the local currency of the country in which the subsidiaries and
investees conduct their operations. Balance sheet accounts are translated from
the local currencies into United States dollars at the year-end exchange rate
and items in the statements of operations are translated at the average
exchange rate. Resulting translation adjustments are charged or credited to
other comprehensive income. Translation adjustments arising from intercompany
financing of a long-term investment nature are accounted for similarly. Some
transactions of the Company and its subsidiaries are made in currencies
different from their functional currency. Gains and losses from these
transactions are included in operations.
Forward Exchange Contracts
From time to time the Company enters into forward exchange contracts to
minimize the short-term impact of foreign currency fluctuations on assets,
liabilities and firm commitments denominated in currencies other than the
functional currency of the reporting entity. The Company's foreign exchange
contracts amounted to $23,102,000 and $19,351,000 at December 31, 1997 and
1998, respectively. Gains and losses on assets and liabilities are recognised
in net income in the period in which exchange rate changes occur, in accordance
with the requirements of Statement of Financial Accounting Standards No. 52
"Foreign Currency Translation". Gains and losses on hedge contracts on firm
commitments are deferred and recognized in net income in the period in which
the commitments are expensed.
Start-up Expenses
Start up expenses are expensed as incurred.
Risks and Uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The Company provides advertising air-time to national, regional and local
advertisers within the geographic areas in which the Company operates. Credit
is extended based on an evaluation of the customer's financial condition, and
generally advance payment is not required. Anticipated credit losses are
provided for in the consolidated financial statements and consistently have
been within management's expectations.
F-211
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's broadcasting operations generate revenues primarily in
Norwegian kroner, Swedish kronor, Danish kroner, Finnish mark, Belgian franc,
Dutch guilder and Hungarian forint and incur substantial operating expenses in
these and other foreign currencies. The Company also incurs substantial
operating expenses for programming in United States dollars and other foreign
currencies. Fluctuations in the value of foreign currencies may cause United
States dollar translated amounts to change in comparison with previous periods.
Cash and Short-Term Cash Investments
Cash and short-term cash investments represent cash and short-term deposits
with maturities of less than three months at the time of purchase.
Short-Term Investments
At December 31, 1997 and 1998, the Company had short-term investments of
$46,134,000 and $45,525,000, respectively, which were classified as available-
for-sale. The short-term investments are comprised of equity securities and US
Floating Rate Notes with maturities ranging from one to 32 years. The Company
has applied the provisions of Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities" in all
periods presented.
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
Currency Gross Estimated
Translation Unrealized Fair
Cost Adjustment Gain/(Loss) Value
------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
December 31, 1997:
US Floating Rate Notes........... $39,953 $-- $ (14) $39,939
US Treasury Notes................ 3,080 -- 9 3,089
German Government Bonds.......... 3,082 14 10 3,106
------- ---- ----- -------
$46,115 $ 14 $ 5 $46,134
======= ==== ===== =======
December 31, 1998:
US Floating Rate Notes........... $44,469 $-- $(467) $44,002
Equity securities................ 1,907 -- (384) 1,523
------- ---- ----- -------
$46,376 $-- $(851) $45,525
======= ==== ===== =======
</TABLE>
Program Rights
Program rights and the related liabilities are recorded at their gross
value when the license period begins and the programs are available for use.
These rights are either expensed when the program is aired or amortized on an
accelerated basis when the Company is entitled to more than one airing. Program
rights are classified as current or noncurrent based on anticipated usage in
the following year. The related program rights liability is classified as
current or noncurrent based on the payment terms of the related license
agreements.
Buildings, Equipment and Improvements
Buildings, equipment and improvements are carried at cost. Buildings are
depreciated on a straight-line basis over a period of up to 50 years. Equipment
is depreciated on a straight-line basis over its expected useful life at rates
varying between 20% and 33% per annum. Leasehold improvements are amortized
over the shorter of their expected lives or the noncancelable term of the
lease.
Intangible Assets
Goodwill, representing the excess of the cost of acquired businesses over
the fair values assigned to assets and liabilities acquired, is amortized over
a 20-year period. Broadcasting licenses and other intangible assets are carried
at
F-212
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
cost and amortized on a straight-line basis over the terms of the licenses. The
carrying values of goodwill and other long-lived assets are reviewed
periodically to determine whether they may have become impaired. If this review
indicates that goodwill and other long-lived assets will not be recoverable, as
determined based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the Company's carrying value of the goodwill and
other long-lived assets is reduced by the difference between the carrying
amount and the estimated fair value. All of the Company's goodwill and other
long-lived assets have been ascribed to its operating entities.
Revenue Recognition
The Company recognizes revenue for advertising time sold in the period in
which the advertisement airs and for the sale of air-time (use of transmission
capability) in the period in which it is provided.
Barter Transactions
Barter transactions represent the exchange of commercial air time for
programming, merchandise or services. The transactions are recorded at the fair
market value of the asset received or service rendered. Barter revenues for the
years ended December 1996, 1997 and 1998 were $8,024,000, $7,199,000 and
$12,330,000, respectively.
Comparable amounts are recorded as expenses, subject to timing differences.
Advertising
Advertising costs are expensed as incurred. Advertising expense totaled
$16,349,000, $19,684,000 and $23,211,000 in 1996, 1997 and 1998, respectively.
Income Taxes
The Company accounts for income taxes using the liability method. Deferred
tax assets and liabilities are recognized for the expected future tax
consequences of events that have been recognized in the financial statements or
tax returns.
Earnings Per Share
In 1998, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is similar to the previously reported fully diluted earnings per share.
All earnings per share amounts for all periods have been restated to conform to
the Statement 128 requirements.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock issued to Employees" (ABP 25) and related
Interpretations in accounting for its employee stock options.
Other Post-Retirement and Post-Employment Benefits
The Company does not provide its employees with post-retirement and post-
employment benefits.
Impact of Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after June 15, 1999. Management does
not anticipate that the adoption of the new Statement will have a significant
effect on earnings or the financial position of the Company.
F-213
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. Acquisitions, Dispositions and Start-up Operations
Norway
Effective March 1, 1996, the Company sold 33.3% of TVNorge to Schibsted for
NOK 133,000,000 ($20,525,000). In connection with this transaction, the Company
agreed to pay a distribution fee to Schibsted and A-Pressen of up to NOK
72,000,000 for providing assistance in getting affiliated stations to sign up
with TVNorge in order for TVNorge to increase its distribution. The
distribution fee paid or to be paid is based on TVNorge's increase in
distribution, and the Company expensed NOK 40,000,000 ($6,192,000),
NOK 20,828,000 ($2,946,000) and NOK 7,447,000 ($986,000) in 1996, 1997 and
1998, respectively. Also, in 1996 the Company expensed NOK 20,078,000
($3,108,000) for defined costs, which the Company agreed to absorb, relating to
TV Pluss, at that time, a subsidiary of Schibsted. The net gain of NOK
3,971,000 ($615,000) on the sale of 33.3% of TVNorge was recorded in 1996 as
other income.
In April 1996, the Company granted A-Pressen an option to purchase 16% of
TVNorge from the Company which was exercised in March 1997. The cash purchase
price was NOK 81,624,000 ($11,500,000) including interest of 6% per year for
the period March 1, 1996 until the payment of the purchase price. A net gain of
NOK 44,271,000 ($6,262,000) was recorded in 1997 as other income.
In May 1997, TVNorge entered into a definitive cooperation agreement with
TV2, a national television station in Norway. Under the agreement, TV2 assumed
primary responsibility for programming of TVNorge with the objective of
creating two distinct and complementarily branded national stations. TV2 has
guaranteed TVNorge specific audience levels for the calendar years 1998-2001
and contributed NOK 40,000,000 ($5,657,000) towards TVNorge's local station
costs in 1997. The NOK 40,000,000 was recorded as revenue in TVNorge's results
of operations in 1997.
In June 1997, TV2 acquired 49.3% of the shares in TVNorge from Schibsted
and A-Pressen, as a consequence of which SBS owns 50.7% and TV2 owns 49.3% of
TVNorge.
Sweden
Kanal 5. In September 1995, SBS acquired the remaining 25% of Kanal 5 not
previously owned by the Company for SEK 47,500,000 ($6,819,000), of which SEK
35,000,000 ($5,000,000) was paid in 1995 and the remaining SEK 12,500,000
($1,617,000) was paid in April 1998. The Company's obligation to pay contingent
purchase price based on earnings did not become payable.
GE Program Group. On August 1, 1993, the Company acquired 30% of the Common
Shares of GE Program Group. The 70% shareholder of GE Program Group has the
right to exercise a call option over a five year period ending December 31,
1999, to acquire the Company's 30% shareholding in GE Program Group at a fixed
price of SEK 53,125,000, plus a compounded annual interest of 25% based on the
Company's original acquisition price of SEK 42,500,000 calculated from August
15, 1993.
The Company provides management services to GE Program Group. The charge
for such services was $671,000, $577,000, and $569,000 for 1996, 1997 and 1998,
respectively.
Radio Operations. In March 1998 the Company finalized its acquisition of
the operating entities Radio City in Malmoe and Gothenburg for an approximate
amount of SEK 14,500,000 ($1,795,000) bringing its ownership to 100% of both
stations, and in November 1998, the Company acquired the remaining 51% of Radio
Klassiska Hits in Stockholm for SEK 24,781,000 ($3,073,612) bringing its
ownership of this operating entity to 100%. The Company also owns 100% of Radio
City in Stockholm.
F-214
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Finland
In the period from 1994 to 1997, the Company acquired interests in five
radio operations in Finland for an aggregate amount FIM 53,829,000
($10,939,000). Hereafter, the Company owns 100% of: Radio Sata in Turku, Radio
Mega in Oulu and Radio 957 in Tampere and owns 90.3% of Radio City FM in
Helsinki and 92.7% of Radio KISS FM.
In March 1997, the Company sold its 3% interest in MTV Oy, Finland, for FIM
20,059,800 ($3,968,000) realizing a net gain of ($2,814,000) recorded as other
income.
All of the above acquisitions were accounted for under the purchase method.
The acquired entities were included in the financial statements of the Company
from the dates of their acquisitions.
Flemish Belgium
In the second half of 1994, the Company formed VT4 Limited ("VT4"), a
Dutch-language television channel, which is transmitted by satellite from the
UK and is carried by all the cable systems in Flemish Belgium. VT4 began
broadcasting in February 1995.
The Netherlands
In August 1995, the Company launched SBS6, a 100% owned satellite-to-cable
television channel. In May 1996, De Telegraaf acquired a 30% interest in SBS6
for NLG 55,000,000 ($32,164,000). The gain of $22,150,000 on this transaction
was recorded as a capital contribution as prescribed under Staff Accounting
Bulletin No. 84 with respect to sales of stock of subsidiaries when the
subsidiary is newly-formed.
Italy
In January 1997, the Company acquired 10.1% of Rete Mia, a national over-
the- air television network in Italy. The purchase price was $7,617,000, of
which $5,117,000 was paid in cash and approximately $2,500,000 was paid in
exchange for 158,028 Common Shares. The Company has been granted options to
acquire the remaining 89.9% of Rete Mia, in whole or in part, for a total price
of $75,000,000, which is payable, at the Company's option, in Italian lira at a
fixed exchange rate.
The Company has entered into a loan and option agreement with the owners of
FINELCO, which owns and operates RETE 105, a national radio network in Italy.
As of December 31, 1998, the Company had advanced $7,336,000 to the owners of
FINELCO and incurred an additional $759,000 of capitalized expenses relating to
such agreements. The prospective sellers under such agreements have refused to
consummate the transactions contemplated thereby. The Company has therefore
commenced proceedings in Italy seeking to enforce such agreements and has
obtained certain prejudgment remedies.
Hungary
In June 1997, TV2, a company established by the Company and MTM, was
awarded a broadcast license. TV2, the first commercial station in Hungary was
launched in October 1997. The Company projects the aggregate capital
requirement for TV2 will be approximately $40,000,000 during the start-up phase
of which $12,500,000 has been funded through equity contributions or interim
loans by SBS, MTM and Tele-Munchen ($8,500,000 by the Company) and $27,500,000
has been financed by three institutions, lead by the EBRD. The financing is
secured by liens on the assets of TV2 and by a pledge of all the outstanding
shares in TV2. The financing is also supported by standby equity commitments
from the shareholders of TV2 of up to $16,000,000. The Company owns 49% of TV2,
with MTM owning 38.5% and Tele-Munchen owning 12.5%. The Company is responsible
for 67.5% of the standby equity funding requirements of TV2, based on its 61.5%
economic interest and agreements made in conjunction with obtaining an option
to increase its economic interest to 67.5%. In addition, the Company, together
with Tele-
F-215
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Munchen, may be required to provide all or part of the standby equity funding
requirements relative to MTM's equity interest. As a result, the Company may be
required to provide approximately 83.1% of the $16,000,000 of standby equity
commitments from the shareholders of TV2. The Company, along with MTM and Tele-
Munchen, also has given a limited guarantee of all outstanding amounts under
the financing. Payment under the guarantee will be required only in the event
TV2 loses its broadcast rights or is rendered insolvent because of a final
judgment or order issued against TV2 in connection with certain pending
litigation involving TV2, the Hungarian National Radio and Television Board and
Magyar RTL.
Other
The Company is involved in other development opportunities, including
television projects in Slovenia and Switzerland. In 1996 the Company has
acquired a note in the principal amount of $2,375,000, which, by its terms is
convertible into 33% of the share capital of Kanal A in Slovenia, in exchange
for 95,000 Common Shares of the Company. The Company has invested $23,770,000
($21,395,000 in cash) in the Slovenia project as of December 31, 1998, of which
$10,592,000 has been capitalized, and an aggregate loss of $13,178,000 has been
recorded as equity in loss in unconsolidated subsidiaries in 1996, 1997 and
1998. In July 1998, the Company and TA-Media Group, a leading publisher in
Switzerland, formed a 50/50 joint venture, which in March 1999 was awarded a
national broadcasting license in Switzerland. The joint venture intends to
launch, in September 1999, a national channel targeted at the German speaking
community of Switzerland, and featuring a mix of general entertainment and news
programming. The Company projects the aggregate capital required to be
approximately $40,000,000 during the start-up phase, of which 50% will be
funded by the Company.
In December 1998, the Company signed an agreement with the EBRD to
establish and fund EBS, which intends to make equity investments in television
and radio operations in Central and Eastern Europe. The capital commitments of
the EBS shareholders at initial closing were contemplated to be $80,000,000, of
which the Company has agreed to fund, on a project by project basis,
$50,000,000. The initial closing is subject to various conditions having been
satisfied and has not yet taken place. The EBS agreement contemplates a maximum
aggregate funding commitment of all shareholders of $150,000,000, of which the
Company's commitment will be reduced to $40,000,000.
3. Program Libraries
Paramount
In March 1995, the Company formalized a ten-year agreement with Viacom
Enterprises and Paramount Television to broadcast the film and television
library of Paramount Television, including Viacom's off-network syndication
titles, for Norway, Sweden, Denmark, Finland, Flemish Belgium and the
Netherlands. The Paramount Television Group program library includes 14,500
series episodes and 2,000 movies.
The program library under the agreement includes free television rights
owned by Paramount and/or Viacom not currently licensed to a third party and
access to any series, feature films or movies of the week in the aforementioned
territories which either (a) have previously been licensed for free television
exhibition in the territories, or (b) have been available for free television
exhibition in the territories for at least 18 months and not licensed. The 18-
month period for feature films is measured from the end of the pay television
exhibition period and the 18-month period for series is determined on a season
by season basis.
In consideration, the Company agreed to pay $20,000,000 to Paramount of
which $14,000,000 was paid in March 1995, $2,500,000 will be paid in 2000 and
$3,500,000 in 2002. Simultaneously, Paramount purchased a warrant to purchase
1,000,000 Common Shares expiring in 2000 with an exercise price of $35 per
share for $4,000,000.
F-216
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In April 1997, the Company reached an agreement to amend its existing
program license agreement with Paramount to add Hungary and Slovenia and to
remove Finland from the licensed territories, and to give the Company the right
to two runs of licensed library product. In consideration for the extension,
the Company has agreed to reduce the exercise price of the warrant to $25 per
share and to extend its term until June 30, 2002. The fair value of the change
in the terms of the warrant as of the date of the amendment to the agreement of
$2,780,000 was capitalized as program rights inventory in 1997, which are being
amortized over the remaining term of the amended license agreement, and a like
amount was recorded as additional paid in capital.
The Company amortizes the Paramount library agreement on a straight-line
basis commencing upon the initial broadcast date in each territory.
DreamWorks
In November 1996, the Company entered into a long-term exclusive
programming agreement with DreamWorks. The agreement is for five years and
covers Norway, Sweden, Denmark, Flemish Belgium, the Netherlands and Slovenia.
Under the agreement, the Company has the exclusive rights to all first-run
television series, provided that such series have been broadcast by one of the
six largest networks in the United States. The agreement limits DreamWorks'
obligation to provide one-hour television series to five such series each year
of the agreement and limits DreamWorks' obligations to provide television mini-
series to ten such mini-series over the five-year term of the agreement. In
addition to the television series, the agreement grants the Company the right
to the first 50 theatrical movies produced, with a delay in the release of such
movies by the Company of approximately three years from the release in the
United States. The Company estimates the arrangement with DreamWorks will lead
to a total acquisition amounting to $38,500,000, payable over the availability
period, which due to the movies is more than five years. Amounts paid for
programming under the DreamWorks agreement are based on contractual terms.
The related programming expense charged to operations amounted to $19,000,
$878,000 and $863,000 for 1996, 1997 and 1998, respectively. The Company had
DreamWorks program rights of $1,172,000 and $1,592,000, and program rights
payable to DreamWorks of $1,373,000 and $245,000 at December 31, 1997 and 1998,
respectively.
4. Buildings, Equipment and Improvements
Buildings, Equipment and Improvements consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
Technical, other equipment, furniture and
fixtures......................................... $48,765,000 $57,009,000
Buildings and leasehold improvements.............. 5,328,000 6,339,000
----------- -----------
54,093,000 63,348,000
Less accumulated depreciation..................... 28,636,000 39,168,000
----------- -----------
Net buildings, equipment and improvements......... $25,457,000 $24,180,000
=========== ===========
</TABLE>
Included in technical and other equipment are $5,259,000 and $5,399,000 of
assets held under various capital leases as of December 31, 1997 and 1998,
respectively. Depreciation of these assets for the years ended December 31,
1996, 1997 and 1998 amounted to $1,200,000, $1,233,000 and $1,101,000,
respectively.
F-217
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Intangible Assets
Intangible Assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
Goodwill............................................ $60,020,000 $63,420,000
Broadcasting licenses............................... 16,529,000 16,593,000
Other intangible assets............................. -- 2,618,000
----------- -----------
76,549,000 82,631,000
Less accumulated amortization....................... 13,101,000 22,919,000
----------- -----------
Net intangible assets............................... $63,448,000 $59,712,000
=========== ===========
</TABLE>
6. Notes Payable, Current
Notes Payable, Current are all due on demand and consisted of the
following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
----------- ----------
<S> <C> <C>
Kredietbank.......................................... $ 6,500,000 $2,892,000
Generale Bank........................................ 5,418,000 5,784,000
Christiania Bank og Kreditkasse...................... -- 787,000
----------- ----------
$11,918,000 $9,463,000
=========== ==========
</TABLE>
The weighted average interest rates were 3.82% and 4.65% at December 31,
1997 and 1998, respectively.
SBS Broadcasting SA has guaranteed the loans of subsidiaries from
Kredietbank and Generale Bank and the loan from Kredietbank is also
collateralized by certain receivables having a book value of $10,394,000 at
December 31, 1998.
Based upon prevailing interest rates on similar debt instruments, the
Company believes that the carrying value of its notes payable approximates fair
value.
7. Convertible Subordinated Debentures and Notes
During the third quarter of 1995, the Company sold an aggregate of
$155,250,000 in principal amount of 7.25% Convertible Subordinated Debentures
Due 2005 (the "Convertible Subordinated Debentures"), raising net proceeds to
the Company of $149,644,000. Interest is payable semi-annually on February 1
and August 1 of each year. The Convertible Subordinated Debentures are
convertible, at the option of the holder, at any time prior to maturity, into
shares of the Company's Common Stock at a conversion price of $28.67 per Common
Share. The Convertible Subordinated Debentures are redeemable, in part or in
whole, at the option of the Company, including accrued and unpaid interest to
the date of redemption and a redemption premium.
In November 1997, the Company sold an aggregate of $75,000,000 in principal
amount of 7% Convertible Subordinated Notes Due 2004 (the "Notes"), raising net
proceeds to the Company of approximately $72,300,000 after the deduction of
fees and expenses of the offering paid by the Company. Interest on the Notes is
payable semi-annually in June and December each year. Holders of the Notes are
entitled to convert the Notes into Common Shares at a conversion price of
$29.13 per share. After December 5, 2000, the Notes are redeemable, in whole or
in part at the option of the Company, including accrued and unpaid interest to
the date of redemption and a redemption premium.
F-218
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Convertible Subordinated Debentures and Notes are subordinated to all
existing and future Senior Debt of the Company, as defined in the indentures.
The indentures under which the Convertible Subordinated Debentures and Notes
were issued do not restrict the incurrence of additional senior or other
indebtedness by the Company.
Upon a change of control, each holder of the Convertible Subordinated
Debentures and Notes has the right to cause the Company to repurchase all of
such holder's Convertible Subordinated Debentures and Notes at a price in each
case equal to 100% of the principal amount of the Convertible Subordinated
Debentures and Notes plus any accrued and unpaid interest to the date of
repurchase. In addition, in the event of certain changes in tax laws and
certain other limited circumstances requiring additional payments by the
Company, the Convertible Subordinated Debentures and Notes are redeemable in
whole, but not in part, at the option of the Company at any time. The
redemption price under these circumstances is equal to the principal amount of
the Convertible Subordinated Debentures and Notes plus any accrued and unpaid
interest to the date of redemption.
The fair value of the Convertible Subordinated Debentures at December 31,
1998 was $160,839,000 based on public market trading.
The fair value of the Convertible Subordinated Notes at December 31, 1998
was $80,715,000 based on public market trading.
8. Other Long-term Debt
Other Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
EBRD Loan........................................... $27,508,000 $28,444,000
Christiania Bank og Kreditkassen.................... 10,246,000 9,868,000
Skandinaviska Enskilda Banken....................... 10,000,000 8,300,000
Advertising Service Agreement....................... 4,914,000 4,423,000
Coutts & Co......................................... 2,050,000 1,948,000
Obligations under capital leases.................... 1,522,000 422,000
Other............................................... 193,000 236,000
----------- -----------
56,433,000 53,641,000
Less current portion................................ 3,317,000 2,627,000
----------- -----------
$53,116,000 $51,014,000
=========== ===========
</TABLE>
Of the principal amount of the EBRD loan, $14,300,000 is denominated in US
Dollar and the balance is denominated in Deutsche Mark ("DM"). The loan is
repayable in escalating semi-annual installments commencing in June 2000 and
has a final maturity in December 2005. The loan is secured by all tangible and
intangible assets of TV2 and a pledge of all outstanding shares of TV2.
Interest is payable at a floating rate of libor +1.5% for $6,700,000 and
DM11,530,700 and libor +1.4% for $7,000,000 and DM12,047,000. The remaining
$600,000 bears interest at an annual rate of 15%. Interest is payable semi-
annually from the inception of the loan. The Company is committed to provide
standby equity contributions to TV2 of up to $13,300,000 and has also granted a
limited guarantee in connection with the loan.
The Christiania Bank loan was obtained by TVNorge to finance operations and
is repayable in annual installments commencing in June 2000 and has a final
maturity in 2002. Interest at an average floating rate of nibor +0.6% is
payable quarterly from the inception of the loan. The shareholders of TVNorge
have guaranteed the loan proportionate to their shareholding.
F-219
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The loan from Skandinaviska Enskilda Banken ("SE Banken") is repayable in
annual installments commencing in 1998 and has a final maturity in 2000. The
loan is secured by a pledge of the shares in Kanal 5 AB and Kanal 5 Ltd.
Interest is payable at an average floating rate of libor +0.9%.
Under an Advertising Service Agreement concluded simultaneously with the
Loan Agreement with Postabank, Budapest, the principal and interest on the loan
of HUF 1 billion will be repaid primarily by providing advertising services. If
not repaid by way of advertising services the loan becomes repayable in cash in
October 2002. Interest accrues at an annual rate of 22%.
The Coutts & Co. loan of (Pounds)1,250,000 is repayable in annual
installments commencing 1998 and has a final maturity in 2005 and is secured by
a mortgage over the corporate office in London. Interest at a floating rate of
approximately 7.75% and 9.25% for the first (Pounds)600,000 and
(Pounds)650,000, respectively, is payable with the installments of the loan.
In December 1998 the Company entered into a $35,000,000 multi-currency
revolving and term facility with Chase Manhattan Bank. The borrower group is
currently comprised of the Company, Kanal 5, VT4 and the Radio Division. There
are cross-guarantees between these companies and their subsidiaries and Kanal 5
Limited has also entered into a fixed and floating charge. The Company has
pledged its shares in all 100% (indirectly) owned subsidiaries within the
borrower group and its interest in Broadcast Danmark/Nordisk, which is 80%
owned, except for the shares in Kanal 5 AB and Kanal 5 Ltd., which are
currently pledged in connection with the SE Banken facility. The pledge will be
transferred to Chase Manhattan Bank when SE Banken is repaid (see below). In
addition, an assignment was made over certain intercompany loans made by the
Company to its subsidiaries. The Company has not yet made a drawdown under the
facility but can do so until December 31, 2000. A condition to drawdown is the
repayment of the SE Banken $10,000,000 facility (Balance December 31, 1998--
$8,300,000). The interest rate will be at libor plus a margin ranging from 1%
to 1.75% depending upon the leverage ratio. The Company will repay the facility
in installments over three years beginning in December 2000.
The aggregate amount of scheduled principal maturities on long-term debt
for each of the remaining years subsequent to December 31, 1998 are as follows:
<TABLE>
<S> <C>
1999............................................................. $ 2,627,000
2000............................................................. 11,205,000
2001............................................................. 6,001,000
2002............................................................. 13,638,000
2003............................................................. 8,569,000
Thereafter....................................................... 11,601,000
-----------
$53,641,000
===========
</TABLE>
Based upon prevailing interest rates on similar debt instruments, the
Company believes that the carrying value of its long-term debt approximates
fair value. As of December 31, 1998, the Company had credit lines available
amounting to $33,540,000 including the Chase Manhattan Bank, and repayment of
the SE Banken loan.
9. Stock Options
The Company adopted a 1992 Share Incentive Plan and a 1994 Share Incentive
Plan (collectively, the "Plans") under which 1,800,000 Common Shares are
reserved for issuance upon the exercise of options granted thereunder. In 1996
and 1998, the shareholders approved an increase of an aggregate of 3,000,000
Common Shares available for issuance under the Plans. In October, 1995, the
Company formalized the Company's Long-Term Employees' Stock Ownership Plan
("ESOP"), reserving 60,000 shares of the Company's Common Stock for awards to
employees, vesting over three years. As of December 31, 1998, no shares had
been awarded under the ESOP.
F-220
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In April, 1997, holders of then vested in-the-money options were offered
unrestricted Common Shares and holders of unvested options or vested out-of-
the-money options were offered restricted Common Shares to vest over periods of
up to three years depending upon the remaining terms of their employment
arrangements. Holders of options to purchase an aggregate of 338,500 Common
Shares elected to exchange their options for 91,462 Common Shares of which 916
were restricted shares at December 31, 1998. Holders of options to purchase
105,000 Common Shares elected not to exchange their options. Also, in April,
1997 the exercise price of all outstanding out-of-the-money options held by
members of senior management of the Company were reset with reference to the
then prevailing market price for the Company's Common Shares. All of these
option became unvested as of April, 1997 and new vesting periods for each
option was recommenced.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a BlackScholes option pricing model with the following assumptions:
riskfree interest rates of 6.5%; dividend yield of 0%; volatility factor of the
expected market price of the Company's Common Stock of 0.41; and a weighted-
average expected life of the options of ten years as of the date of grant.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The
Company's pro forma information follows (in thousands, except for per share
information):
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Pro forma net loss............................ $(68,475) $(50,550) $(44,157)
Pro forma basic and diluted loss per share.... $ (5.03) $ (3.67) $ (3.01)
</TABLE>
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1996 1997 1998
------------------------ ------------------------ ------------------------
Options Weighted-average Options Weighted-average Options Weighted-average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
------- ---------------- ------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of
year................... 2,007 $18.72 2,270 $19.08 2,711 $17.42
Granted................. 275 $22.56 780 $19.56 598 $27.19
Exercised............... -- -- -- -- -- --
Forfeited............... (12) $21.90 -- -- -- --
Exchanged for Common
Shares................. -- -- (339) $20.14 -- --
Outstanding at end of
year................... 2,270 $19.08 2,711 $17.42 3,309 $19.19
Exercisable at end of
year................... 1,739 $18.03 1,791 $16.26 2,861 $18.01
Weighted-average fair
value of options
granted during the
year................... $13.24 $ 9.80 $15.34
</TABLE>
Below is additional information related to stock options at December 31,
1998
<TABLE>
<CAPTION>
Weighted Average
Options Remaining Weighted Average
Range of Exercise Price (000) Contractual Life Exercise Price
----------------------- ------- ---------------- ----------------
<S> <C> <C> <C>
$00.00-10.00...................... 235 3.35 $ 1.50
$10.01-20.00...................... 1,703 6.27 $16.89
$20.01-30.00...................... 1,196 7.22 $23.79
$30.01-40.00...................... 175 8.63 $33.87
-----
3,309 6.53 $19.19
</TABLE>
F-221
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Luxembourg Capital Requirements
Luxembourg company law requires that an appropriation be made to legal
reserve of a minimum of 5% of the parent company's annual net income until this
reserve equals 10% of subscribed capital. Through December 31, 1998, no amount
has been required to be allocated to the legal reserve. The legal reserve may
not be distributed in the form of cash dividends or otherwise during the life
of the Company. The appropriation to legal reserve becomes effective upon
approval at the general meeting of shareholders. As of December 31, 1998, the
Company is not permitted to make any dividend distributions under Luxembourg
law.
11. Income Taxes
The Company and each of its subsidiaries file separate tax returns in their
country of incorporation. The Company's provision for (benefit from) income
taxes in each period reflects various taxes in certain jurisdictions in which
the Company does business. No benefit has been recorded in the financial
statements for net operating losses, as the entire carryforward has been offset
by a valuation allowance. The tax benefit associated with the pretax losses in
each period has been offset by increases in the valuation allowance. Management
believes that sufficient uncertainty exists regarding the realizability of the
deferred tax assets that a valuation allowance is required. Deferred income
taxes represent the tax effect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of the Company's
deferred tax assets as of December 31, 1997 and 1998 (there are no significant
deferred tax liabilities) are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------
1997 1998
-------- ---------
(in thousands)
<S> <C> <C>
Net operating loss carryforwards....................... $ 96,257 $ 94,103
Excess book over tax depreciation...................... 2,285 632
Development costs capitalized for tax purposes......... 86 --
Other.................................................. (3,703) 7,667
Less: Valuation allowance.............................. $(94,925) $(102,402)
-------- ---------
Net deferred tax assets................................ $ -- $ --
======== =========
</TABLE>
The tax loss carryforwards available at December 31, 1998 and their
expiration years are as follows:
<TABLE>
<CAPTION>
Expiration year Denmark Norway Finland Total
--------------- ------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C>
1999........................................ $ 2,473 $ -- -- $ 2,473
2000........................................ 3,490 -- -- 3,490
2001........................................ 3,086 -- -- 3,086
2002........................................ 10,188 -- -- 10,188
2003........................................ 12,469 -- -- 12,469
2004........................................ -- -- 57 57
2005........................................ -- 1,640 879 2,519
2006........................................ -- 35,086 1,470 36,556
2007........................................ -- 17,850 1,678 19,528
2008........................................ -- 10,962 849 11,811
------- ------- ------ --------
Total....................................... $31,706 $65,538 $4,933 $102,177
======= ======= ====== ========
</TABLE>
F-222
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Tax losses may be carried forward indefinitely in the following
territories:
<TABLE>
<S> <C>
Luxembourg.......................................................... $101,776
Belgium............................................................. 7,118
Netherlands......................................................... 31,021
Sweden.............................................................. 12,222
UK.................................................................. 43,039
Hungary............................................................. 20,236
--------
Total............................................................. $215,412
========
</TABLE>
12. Fair Value of Financial Instruments
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
------------------ ------------------
Carrying Fair Carrying Fair
amount value amount value
-------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Cash and short-term cash
investments...................... $ 91,596 $ 91,596 $ 63,381 $ 63,381
Short-term investments............ 46,134 46,134 45,525 45,525
Notes payable, current............ (11,918) (11,918) (9,463) (9,463)
Convertible subordinated
debentures....................... (155,250) (156,803) (155,250) (160,839)
Convertible subordinated notes.... (75,000) (74,063) (75,000) (80,715)
Other long term debt.............. (56,433) (56,433) (53,641) (53,641)
Foreign currency exchange
contract......................... -- (546) -- (147)
</TABLE>
13. Segment Reporting
The Company divides its operations into three categories: (i) "Scandinavian
Television operations" which includes TVNorge (in Norway), Kanal 5 (in Sweden)
and TvDanmark (in Denmark), (ii) "European Television operations" which
includes VT4 (in Flemish Belgium), SBS6 (in the Netherlands) and TV2 (in
Hungary), and (iii) "Radio operations" which includes Voice Radio (in Denmark),
Radio City in Stockholm, Radio City in
F-223
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Malmoe, Radio City in Gothenburg and Radio Klassiska Hits in Stockholm (in
Sweden) and Radio Sata, Radio Mega, Radio KISS FM, Radio City and Radio 957
("Radio Finland"). There are no material product transfers between segments of
the Company. The segment data is as follows:
<TABLE>
<CAPTION>
Six months ended
Years Ended December 31, June 30,
---------------------------- -----------------------
1996 1997 1998 1998 1999
-------- -------- -------- ----------- -----------
(in thousands) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Scandinavian Television
Operations
Net revenues:
TVNorge (in Norway)... $ 28,223 $ 35,291 $ 42,068 $19,941 $22,677
Kanal 5 (in Sweden)... 30,294 48,065 55,577 28,432 28,221
TvDanmark (in
Denmark)............. 17,236 20,108 32,370 14,581 17,409
Other................. 24 -- 107 -- 1,655
-------- -------- -------- ------- -------
Total net revenues...... 75,777 103,464 130,122 62,954 69,962
-------- -------- -------- ------- -------
Station operating
expenses............. 70,404 83,632 106,706 51,321 54,132
Selling, general and
administrative
expenses............. 26,240 28,573 29,049 13,319 14,157
Depreciation.......... 3,380 4,711 4,045 1,724 2,136
Amortization.......... 2,790 2,625 3,205 1,590 1,591
-------- -------- -------- ------- -------
Total operating
expense................ 102,814 119,541 143,005 67,954 72,016
-------- -------- -------- ------- -------
Loss from operations.... $(27,037) $(16,077) $(12,883) $(5,000) $(2,054)
======== ======== ======== ======= =======
Assets at year-end...... $106,195 $110,876 $133,522
======== ======== ========
<CAPTION>
Six months ended
Years Ended December 31, June 30,
---------------------------- -----------------------
1996 1997 1998 1998 1999
-------- -------- -------- ----------- -----------
(in thousands) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
European Television
Operations
Net revenues:
VT4 (in Belgium)...... $ 46,468 $ 43,267 $ 50,562 $25,376 $29,425
SBS6 (in the
Netherlands)......... 50,087 72,585 96,780 42,817 58,414
TV2 (in Hungary)...... -- 8,787 48,566 23,882 24,258
Other................. (529) (976) (213) (192) --
-------- -------- -------- ------- -------
Total net revenues...... 96,026 123,663 195,695 91,883 112,097
-------- -------- -------- ------- -------
Station operating
expenses............. 104,664 115,277 147,964 71,232 84,695
Selling, general and
administrative
expenses............. 17,791 18,140 27,623 11,692 18,488
Depreciation.......... 4,249 4,331 4,568 2,650 2,025
Amortization.......... -- 1,237 4,735 2,414 2,216
-------- -------- -------- ------- -------
Total operating
expense................ 126,704 138,985 184,890 87,988 107,424
-------- -------- -------- ------- -------
Income (loss) from
operations............. $(30,678) $(15,322) $ 10,805 $ 3,895 $ 4,673
======== ======== ======== ======= =======
Income (loss) from
operations excluding
TV2 (in Hungary)....... $(30,678) $ (9,459) $ 15,733
======== ======== ========
Assets at year-end...... $105,219 $167,520 $172,443
======== ======== ========
</TABLE>
F-224
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<S> <C> <C> <C> <C> <C>
Radio Operations
Net revenues:
Denmark............... $ 3,333 $ 4,300 $ 5,444 $ 2,772 $ 3,150
Sweden................ 3,213 3,453 8,560 3,794 4,291
Finland............... 4,085 7,958 10,714 5,236 5,842
-------- -------- -------- -------- --------
Total net revenues...... 10,631 15,711 24,718 11,802 13,283
-------- -------- -------- -------- --------
Station operating
expenses............. 4,495 5,407 8,814 4,200 5,076
Selling, general and
administrative
expenses............. 6,235 8,477 12,107 5,788 6,700
Depreciation.......... 416 797 871 413 427
Amortization.......... 394 744 1,294 593 1,066
-------- -------- -------- -------- --------
Total operating
expense................ 11,540 15,425 23,086 10,994 13,269
-------- -------- -------- -------- --------
Income (loss) from
operations............. $ (909) $ 286 $ 1,632 $ 808 $ 14
======== ======== ======== ======== ========
Assets at year-end...... $ 22,746 $ 30,045 $ 35,476
======== ======== ========
<CAPTION>
Six months ended
Years Ended December 31, June 30,
---------------------------- -----------------------
1996 1997 1998 1998 1999
-------- -------- -------- ----------- -----------
(in thousands) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Consolidated
Net revenue............. $182,434 $242,838 $350,535 $166,639 $195,342
-------- -------- -------- -------- --------
(Loss) income from
operating segments..... (58,624) (31,113) (446) (297) 2,633
Corporate expenses...... (7,822) (9,177) (9,576) (4,261) (5,111)
Non-cash compensation... -- (2,676) (1,142) (325) (22)
Amortization related to
unconsolidated
subsidiaries........... (468) (454) (556) (264) (98)
-------- -------- -------- -------- --------
Loss from operations.... (66,914) (43,420) (11,720) $ (5,147) $ (2,598)
======== ========
Equity in loss of
unconsolidated
subsidiaries........... (1,301) (3,150) (3,536)
Interest income......... 7,368 3,469 6,318
Interest expense........ (13,221) (14,333) (24,708)
Foreign exchange losses,
net.................... (193) (4,665) (3,202)
Investment gains
(losses)............... -- (801) 376
Other income
(expenses)............. (587) 7,213 (2,638)
Income tax and tax
benefits............... (250) (29) (636)
Minority interest in
losses, net............ 7,559 11,866 6,027
-------- -------- --------
Net loss................ $(67,539) $(43,850) $(33,719)
-------- -------- --------
Assets employed by
segments............... $234,160 $308,441 $341,441
Short-term cash
investments and other
corporate assets....... 105,595 119,119 86,380
-------- -------- --------
Total assets at year-
end.................... $339,755 $427,560 $427,821
======== ======== ========
</TABLE>
14. Pension Plans
The Company contributes to defined contribution plans for the management
level personnel at its subsidiaries and to a multi-employer defined
contribution pension plan for essentially all of its Swedish employees, which
plans are maintained by third party insurance companies. Contributions are
determined as a percentage of salaries with increases in relation to years of
employment. During the years ended December 31, 1996, 1997 and 1998, expenses
under these plans were $248,000, $452,000 and $551,000, respectively.
F-225
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Commitments
As of December 31, 1998, the Company was committed to purchase broadcast
rights for programming under various agreements (excluding DreamWorks)
amounting to approximately $112,836,000. The commitment period for the
Company's purchase of programming generally ranges from twelve months to five
years.
The Company was committed at December 31, 1998 to subscribe (through
December 31, 2003) to viewer rating services with aggregate payments of
$4,136,000.
Expense under operating leases, principally for transponder and uplink,
amounted to $20,569,000, $24,279,000 and $42,686,000 in the years ended
December 31, 1996, 1997 and 1998, respectively. Future minimum annual rental
payments under noncancelable leases during each of the five years subsequent to
December 31, 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Years Ended December 31, leases leases
------------------------ ------- ---------
<S> <C> <C>
1999....................................................... $439 $ 44,084
2000....................................................... 42 39,836
2001....................................................... -- 37,616
2002....................................................... -- 26,309
2003....................................................... -- 23,568
Thereafter................................................. -- 33,232
---- --------
Minimum lease payments..................................... 481 $204,645
---- --------
Less executory costs....................................... (2)
----
Net minimum payments....................................... 479
Imputed interest........................................... (57)
----
Present value of minimum lease payments.................... $422
----
</TABLE>
In February 1995, the Company issued a Guarantee and Indemnity under which
the Company guarantees the repayment to Morgan Grenfell Limited of the sum of
(Pounds)300,000 ($498,000) relating to a loan made to one of the Company's
officers as a condition of his employment.
16. Subsequent Events
CME Transaction
On March 29, 1999 the Company entered into a Reorganization Agreement with
Central European Media Enterprises, Ltd. ("CME"), which provides, among other
things, for (i) the acquisition by the Company of all the assets, business,
properties and rights of CME; (ii) the assumption by the Company of, and
indemnification of CME with respect to, all liabilities, obligations and
commitments of CME; (iii) the issuance, and the reservation for future
issuance, by the Company to CME of a number of SBS Common Shares, par value
$1.50 per share ("Common Shares"), equal to 0.5 times the total number of
shares of CME's Class A Common Stock and Class B Common Stock outstanding, and
issuable pursuant to the exercise of options and warrants outstanding,
immediately prior to the closing of such transaction; and (iv) the immediate
commencement of the winding up of CME and distribution of the Company's Common
Shares so received by CME to CME's shareholders. The combined company will
retain the name SBS Broadcasting SA.
F-226
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SBS shareholders will be asked to approve the Reorganization Agreement and
the transactions described therein and to confirm the issuance of up to
approximately 14.3 million shares of the Company's Common Shares in conjunction
with the transaction (such number of Common shares being computed on the basis
of the treasury stock method with respect to currently outstanding CME
options). Certain SBS directors, who together own approximately 6.5% of the
Company's issued and outstanding Common Shares, entered into an agreement with
CME whereby they each agreed, among other things, to vote their shares in favor
of the transaction. Ronald S. Lauder, who controls approximately 69% of the
vote of CME, has entered into an agreement with the Company whereby he commits
to vote his CME shares in favor of the transaction. The completion of the
transactions contemplated by the Reorganization Agreement is subject to
shareholder approvals and to the satisfaction of certain additional conditions
precedent. In the event that the transaction is not consummated, the
Reorganization Agreement provides various rights to the Company and to CME,
depending upon the circumstances.
CME owns interests in television broadcasting properties in six Central and
Eastern European countries, including NOVA TV in the Czech Republic, PRO TV in
Romania, POP TV in Slovenia, Markiza TV in the Slovak Republic, Studio 1+1 in
the Ukraine and TV3 in Hungary. CME is listed on the Nasdaq Stock Market and
trades under the symbol CETV.
F-227
<PAGE>
PRINCIPAL OFFICE OF UPC
Fred. Roeskestraat 123
PO Box 74763
1076 EE Amsterdam
The Netherlands
AUDITORS OF UPC
Arthur Andersen
PO Box 75381
1070 AJ Amsterdam
The Netherlands
LEGAL ADVISORS TO UPC
Holme Roberts & Owen LLP
Heathcoat House
20 Savile Row
London W1X 1AE
United Kingdom
Loeff Claeys Verbeke
Apollolaan 15
1077 AB Amsterdam
The Netherlands
TRUSTEE, REGISTRAR, TRANSFER AGENT AND PRINCIPAL PAYING AGENT
CITIBANK N.A.
5 Carmelite Street
London EC4Y 0PA
United Kingdom
PAYING AGENT AND LISTING AGENT
Banque Internationale a Luxembourg
69 route d'Esch
L-2953 Luxembourg
Luxembourg
<PAGE>
[LOGO OF UPC]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Company has entered into indemnification agreements with its directors
and executive officers, providing for indemnification by the Company against any
liability to which a director or executive officer may be subject for judgments,
settlements, penalties, fines and expenses of defense (including attorneys'
fees, bonds and costs of investigation), arising out of or in any way related to
acts or omissions as a member of the Management or Supervisory Board, or an
executive officer, or in any other capacity in which services are rendered to
the Company or its subsidiaries. The Company believes that the indemnification
agreements will assist the Company in attracting and retaining qualified
individuals to serve as directors and executive officers. The agreements provide
that a director or officer is not entitled to indemnification under such
agreements (i) if indemnification is expressly prohibited under applicable law,
(ii) for certain violations of securities laws or (iii) for certain claims
initiated by the officer or director. Generally, under Dutch law, a director
will not be held personally liable for decisions made with reasonable business
judgment, absent self dealing. In addition, indemnification may not be available
to directors or officers under Dutch law if any act or omission by a director or
officer would qualify as willful misconduct or gross negligence. Due to the lack
of applicable case law, it is not clear whether indemnification is available in
case of breach of securities laws of the United States.
ITEM 21. EXHIBITS AND FINANCIAL DATA SCHEDULES.
(a) The following is a complete list of Exhibits filed as part of this
Registration Statement, which are incorporated herein:
<TABLE>
<C> <S>
3.1 Amended and Restated Articles of Association of UPC(16)
4.1 Indenture dated as of October 29, 1999, between UPC and Citibank N.A, as
Trustee with respect to 10 7/8% Senior Notes due 2007(18)
4.2 Indenture dated as of October 29, 1999, between UPC and Citibank N.A., as
Trustee with respect to 11 1/4% Senior Notes due 2009(18)
4.3 Indenture dated as of October 29, 1999, between UPC and Citibank N.A., as
Trustee with respect to 13 3/8% Senior Discount Notes due 2009(18)
5.1 Opinion of Loeff Claeys Verbeke regarding the legality of the 10 7/8%
Senior Notes due 2007, 11 1/4% Senior Notes and 13 3/8% Senior Discount
Notes due 2009.
5.2 Opinion of Holme Roberts & Owen LLP regarding the legality of the 10 7/8%
Senior Notes due 2007, 11 1/4% Senior Notes and 13 3/8% Senior Discount
Notes due 2009.
8.1 Opinion of Holme Roberts & Owen LLP regarding certain United States
federal income tax matters.
8.2 Opinion of Arthur Andersen Belastingadviseurs regarding certain
Netherlands tax matters.
10.1 Amended and Restated Securities Purchase and Conversion Agreement dated
as of December 1,1997, by and among Philip Media B.V. ("Philips Media"),
Philips Media Network B.V. ("Phillips Networks"), Joint Venture, Inc.
("JVI") and UPC(1)
10.3 Indenture dated as of February 5, 1998, between United International
Holdings, Inc. ("United") and Firstar Bank of Minnesota, N.A.
("Firstar")(2)
10.4 Indenture dated as of April 29, 1999, between United and Firstar(3)
10.5 Option Agreement dated November 5, 1998, among UPC, DIC and PEC(4)
10.6 Amendment to Option Agreement dated February 4, 1999, between UPC, DIC
and PEC(5)
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
10.7 Form of Registration Rights Agreement among UPC, DIC and PEC(4)
10.8 Form of Shareholders Agreement among UPC, DIC and PEC(4)
10.9 Sales Agreement dated December 17, 1997, between Stichting Combivisie
Regio, Setelco B.V. and UPC(6)
10.10 Purchase Agreement dated November 6, 1998, between Binan Investments
B.V., UA-UII, Inc. and UA-UII Management Inc.(4)
10.11 Shareholders Agreement dated July 6, 1995, between The Municipality of
Amsterdam, A2000 Holding N.V., and Kabeltelevisie Amsterdam B.V.(6)
10.12 Consent Agreement dated September 27, 1997, between United and Philips
Communications B.V., US West International, B.V., Philips Media, United
and JVI(4)
10.13 Syndicate Agreement dated June 26, 1995, concluded between the
Osterreichische Philips Industrie Ges.m.b.H. Cable-Networks Austria
Holding B.V. and Kabel-TV-Wien Ges.m.b.H.(7)
10.14 Articles of Association of Telekabel Wien Gesellschaft m.b.H.(7)
10.15 Agreement dated November 30, 1993, between Kabel-TV Wien Gesellschaft
m.b.H. and Telekabel Wien Gesellschaft m.b.H.(7)
10.16 Rules of Procedure of Telekabel Wien Gesellschaft m.b.H., as amended on
April 10, 1995(8)
10.17 Agreement dated November 30, 1977, between Kabel-TV Wien and Telekabel
Fernsehnetz-Betriebsgesellschaft m.b.H.(8)
10.18 Policy Agreement dated November 30, 1977, between Kabel-TV Wien and
Osterreichishe Philips Industrie Gesellschaft m.b.H.(8)
10.19 Tax Liability Agreement dated October 7, 1997, between UPC, Philips
Media, Philips Coordination Center, Philips Networks, United, and
JVI(4)
10.20 Agreement dated April 2, 1998, for the contribution of the Dutch Cable
Assets of UPC and NUON to UTH(6)
10.21 United Pan-Europe Communications N.V. Phantom Stock Option Plan, March
20, 1998(4)
10.22 Amended Stock Option Plan dated February 8, 1999, between UPC and
Stichting Administratie Kantoor UPC(9)
10.23 Form of Master Seconded Employee Services Agreement(5)
10.24 Form of United Registration Rights Agreement(10)
10.25 Form of United Management Services Agreement(5)
10.26 Consulting Agreement dated June 1, 1995, between United and Mark L.
Schneider(10)
10.27 Agreement dated as of February 11, 1999 between United and UPC(9)
10.28 Promissory Note dated January 25, 1999, with UPC as borrower, and UIH
Europe, Inc. as holder, in the principal amount of US$100,000,000(6)
10.29 Share Purchase Agreement dated January 19, 1999, by and between UPC,
Belmarken Holding B.V., NUON, N.V. Kraton and UTH, as amended(5)
10.30 Final Amendment to Share Purchase Agreement dated as of February 17,
1999(11)
10.31 Investment Agreement between SBS BROADCASTING SA and Registrant dated
June 29, 1999(12)
10.32 Agreement and Plan of Merger among @Entertainment, Inc., United Pan-
Europe Communications N.V. and Bison Acquisition Corp. dated as of June
2, 1999(12)
10.33 Form of Stockholders Agreement dated as of June 2, 1999 among
@Entertainment, Inc., United Pan-Europe Communications N.V., Bison
Acquisition Corp. and the other parties signatory thereto(12)
10.35 Share Purchase Agreement between the Sellers represented by EQT
Scandinavia Limited and United Pan-Europe Communications N.V.(12)
10.36 Loan and Note Issuance Agreement between UPC Facility B.V., Telekabel
Wien and Janco Multicom and Bank of America International Limited, CIBC
World Markets plc, Citibank N.A., MeesPierson N.V., Paribas, The Royal
Bank of Scotland plc, Toronto Dominion Bank Europe Limited, and The
Toronto-Dominion Bank, as Facility Agent and Security Agent(12)
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.37 Share Purchase Agreement dated June 23, 1999, between UPC and MediaOne
International B.V.(17)
10.38 Indenture dated as of October 31, 1996, between Poland Communication,
Inc. ("PCI") and State Street Bank and Trust Company relating to PCI's
9 7/8% Senior Notes due 2003 and its 9 7/8% Series B Senior Notes due
2003(13)
10.39 Indenture dated as of July 14, 1998, between @Entertainment and Bankers
Trust Company relating to @Entertainment's 14 1/2% Senior Discount Notes
due 2008 and its 14 1/2% Series B Senior Discount Notes due 2008(14)
10.40 Indenture dated as of January 20, 1999, between @Entertainment and
Bankers Trust Company relating to @Entertainment's Series C Senior
Discount Notes due 2008(15)
10.41 Indenture dated as of January 27, 1999, between @Entertainment and
Bankers Trust Company relating to @Entertainment's 14 1/2% Senior
Discount Notes due 2009 and its 14 1/2% Series B Senior Discount Notes
due 2009(15)
10.42 Indenture dated as of July 30, 1999, between UPC and Citibank N.A, as
Trustee with respect to 10 7/8% Senior Notes(12)
10.43 Indenture dated as of July 30, 1999, between UPC and Citibank N.A., as
Trustee with respect to 12 1/2% Senior Discount Notes(12)
21.1 Subsidiaries of UPC
23.1 Consent of Arthur Andersen (UPC)
23.2 Consent of Arthur Andersen (United TeleKabel Holding N.V.)
23.3 Consent of PricewaterhouseCoopers N.V. (N.V. TeleKabel Beheer)
23.4 Consent of Arthur Andersen (N.V. TeleKabel Beheer)
23.5 Consent of KPMG Polska Sp.z o.o (@Entertainment)
23.6 Consent of Arthur Andersen (A2000 Holding N.V.)
23.7 Consent of Arthur Andersen (Kabel Plus, a.s.)
23.8 Consent of Ernst & Young AB (NBS Nordic Broadband Services AB)
23.9 Consent of PricewaterhouseCoopers (Singapore Telecom International
Svenska AB)
23.10 Consent of Ernst & Young (SBS Broadcasting SA)
23.11 PricewaterhouseCoopers auditing standards letter
24.1 Powers of Attorney
25.1 Form T-1, Statement of Eligibility of Citibank N.A.
</TABLE>
- -------------------
(1) Incorporated by reference from Form 8-K filed by United, dated December 11,
1997 (File No. 0-21974).
(2) Incorporated by reference from Form S-4 Registration Statement filed by
United on March 3, 1998 (File No. 333-47).
(3) Incorporated by reference from Form 8-K filed by United, dated April 29,
1999 (File No. 0-21974).
(4) Incorporated by reference from Form S-1 Registration Statement filed by UPC
on November 24, 1998 (File No. 333-67895).
(5) Incorporated by reference from Amendment No. 8 to Form S-1/A Registration
Statement filed by UPC on February 10, 1999 (File No. 333-67895).
(6) Incorporated by reference from Amendment No. 4 to Form S-1/A Registration
Statement filed by UPC on January 25, 1999 (File No. 333-67895).
(7) Incorporated by reference from Amendment No. 2 to Form S-1/A Registration
Statement filed by UPC on January 13, 1999 (File No. 333-67895).
(8) Incorporated by reference from Amendment No. 9 to Form S-1/A Registration
Statement filed by UPC on February 11, 1999 (File No. 333-67895).
(9) Incorporated by reference from Form 10-K filed by UPC for the year ended
December 31, 1999 (File No. 000-25365).
II-3
<PAGE>
(10) Incorporated by reference from Amendment No. 6 to Form S-1/A Registration
Statement filed by UPC on February 4, 1999 (File No. 333-67895).
(11) Incorporated by reference from Form 8-K filed by UPC, dated March 4, 1999
(File No. 000-25365).
(12) Incorporated by reference from Form 8-K filed by UPC, dated July 30, 1999
(File No. 000-25365).
(13) Incorporated by reference from Amendment No. 3 to Form S-4 filed by Poland
Communication, Inc. on May 12, 1997 (File No. 333-20307).
(14) Incorporated by reference from Amendment No. 1 to Form S-4 filed by
@Entertainment on August 10, 1998 (File No. 333-60659).
(15) Incorporated by reference from Amendment No. 1 to Form S-4 filed by
@Entertainment on May 13, 1999 (File No. 333-72361).
(16) Incorporated by reference from Amendment No. 1 to Form S-1 Registration
Statement filed by UPC on September 23, 1999 (File No. 333-84427).
(17) Incorporated by reference from Amendment No. 2 to Form S-1 Registration
Statement filed by UPC on September 30, 1999 (File No. 333-84427).
(18) Incorporated by reference from Form 10-Q filed by UPC, for the quarter
ended September 30, 1999 (File No. 000-25365).
(b) Financial Statement Schedules.
<TABLE>
<S> <C>
FINANCIAL STATEMENT SCHEDULE I
Independent Auditors' Report on Schedules................................ II-5
Condensed Financial Information of United Pan-Europe Communications N.V.
Condensed Information as to the Financial Condition of United Pan-Europe
Communications N.V. .................................................... II-6
Condensed Information as to the Operations of United Pan-Europe
Communications N.V. .................................................... II-7
Condensed Information as to the Cash Flows of United Pan-Europe
Communications N.V. .................................................... II-8
Note to Schedule......................................................... II-9
FINANCIAL STATEMENT SCHEDULE II
Valuation and Qualifying Accounts........................................ II-11
</TABLE>
II-4
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
To United Pan-Europe Communications N.V.
We have audited, in accordance with auditing standards generally accepted in
The Netherlands, which are substantially the same as those generally accepted in
the United States of America, the consolidated financial statements of United
Pan-Europe Communications N.V. included in this Registration Statement and have
issued our report thereon dated March 29, 1999. Our audit was made for the
purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. The following schedules are the responsibility of the
Company's management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
consolidated financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic consolidated financial
statements as indicated in our report with respect thereto and, in our opinion,
based on our audit, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
Arthur Andersen
Amstelveen, The Netherlands,
March 29, 1999
II-5
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
PARENT ONLY
SCHEDULE I
Condensed Information as to the Financial Condition of the Registrant
(Stated in thousands of Dutch guilders, except share and per share amounts)
<TABLE>
<CAPTION>
As of December 31,
-------------------------------------
1997 1998
------------------ ------------------
(Post-Acquisition) (Post-Acquisition)
<S> <C> <C>
ASSETS:
Current assets
Cash and cash equivalents............. 43,306 7,048
Related party receivables............. 36,364 115,633
Other receivables, net................ 18,690 2,330
Other current assets.................. 2,761 7,938
--------- ---------
Total current assets................ 101,121 132,949
Investments in, loans and other advances
to affiliated companies, accounted for
under the equity method, net........... 1,110,080 978,905
Property, plant and equipment, net of
accumulated depreciation of 23 and 460,
respectively........................... 1,022 982
Deferred financing costs, net of
accumulated amortization of 110 and
625, respectively...................... 16,813 15,617
Non-current restricted cash and other
assets................................. 48,541 650
--------- ---------
Total assets........................ 1,277,577 1,129,103
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities
Related party accounts payable........ 34,402 8,719
Accrued liabilities................... 12,776 56,901
Note payable to shareholder........... -- 119,070
Short-term debt....................... -- 34,020
Short-term debt, related party........ 228,097 39,125
--------- ---------
Total current liabilities........... 275,275 257,835
Long-term debt.......................... 490,468 620,000
Long-term Notes payable to shareholder.. -- --
Other related party debt................ 29,609 --
Deferred compensation................... 4,818 325,302
Deferred taxes and other................ 37,602 140
--------- ---------
Total liabilities................... 837,772 1,203,277
--------- ---------
Shareholders' equity
Common stock, 0.667 par value,
200,000,000 shares authorized,
81,000,000 shares issued............. 61,348 61,497
Additional paid-in capital............ 650,864 672,016
Deferred compensation................. -- --
Other cumulative comprehensive income
(loss)............................... 1,807 29,748
Accumulated deficit................... (163,829) (727,050)
Treasury stock, at cost, 9,198,135
shares of common stock............... (110,385) (110,385)
--------- ---------
Total shareholders' equity.......... 439,805 (74,174)
--------- ---------
Total liabilities and shareholders'
equity............................. 1,277,577 1,129,103
========= =========
</TABLE>
II-6
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
PARENT ONLY
SCHEDULE I
Condensed Information as to the Operations of the Registrant (Stated
in thousands of Dutch guilders, except share and per share amounts)
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
1996 1997 1998
----------------- ----------------- ------------------
(Pre-Acquisition) (Pre-Acquisition) (Post-Acquisition)
<S> <C> <C> <C>
Management fee income from related parties............................. 4,433 3,088 10,648
Corporate general and administrative expense........................... (1,679) (11,605) (323,309)
Depreciation and amortization.......................................... (335) (736) (437)
---------- ---------- ----------
Net operating loss................................................... 2,419 (9,253) (313,098)
Interest income........................................................ 1,898 2,830 1,919
Interest income, related party......................................... 27,353 44,867 62,359
Interest expense....................................................... (8,418) (15,143) (1,187)
Interest expense, related party........................................ (27,511) (33,362) (58,326)
Foreign exchange loss, net............................................. (20,236) (12,864) (14,535)
---------- ---------- ----------
Net loss before income taxes and other items......................... (24,495) (22,925) (322,868)
Share in results of affiliated companies, net.......................... (64,120) (159,571) (240,353)
Income taxes........................................................... -- 1,454 --
---------- ---------- ----------
Net loss............................................................. (88,615) (181,042) (563,221)
========== ========== ==========
Basic and diluted net loss per common share............................ (0.96) (1.98) (6.80)
========== ========== ==========
Weighted-average number of common shares outstanding................... 92,062,589 91,533,381 82,869,342
========== ========== ==========
</TABLE>
II-7
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
PARENT ONLY
SCHEDULE I
Condensed Information as to the Cash Flows of the Registrant
(Stated in thousands of Dutch guilders)
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------------------------
1996 1997 1998
----------------- ----------------- ------------------
(Pre-Acquisition) (Pre-Acquisition) (Post-Acquisition)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................ (88,615) (181,042) (563,221)
Adjustments to reconcile
net loss to net cash
flows from operating
activities:
Depreciation and
amortization.......... 335 736 437
Share in results of
affiliated companies,
net................... 67,154 169,961 240,353
Foreign exchange loss,
net................... 20,236 12,864 14,535
Compensation expense
related to stock
options............... -- 4,818 320,484
Other.................. (1,545) (5,444) (7,877)
Changes in assets and
liabilities:
(Increase) decrease in
receivables........... 86,309 (6,359) (12,308)
Increase in other non-
current assets........ (27) (1,457) (1,538)
Increase (decrease) in
other current
liabilities........... 22,022 46,600 20,677
Increase (decrease) in
deferred taxes and
other................. -- 2,303 1,117
-------- -------- --------
Net cash flows from
operating activities... 105,869 42,980 12,659
-------- -------- --------
Cash flows from investing activities:
Investments in, loans to
and advances to
affiliated companies,
net.................... (44,805) (294,532) (498,641)
Capital expenditures.... (2,249) (1,308) (5,192)
Deposit to acquire
minority interest in
subsidiary............. -- (47,000) 47,000
Sale of affiliated
companies.............. -- 11,070 --
Dividends received...... -- -- 8,977
Loans repaid by
subsidiaries........... -- 350,250 175,692
-------- -------- --------
Net cash flows from
investing activities... (47,054) 18,480 (272,164)
-------- -------- --------
Cash flows from financing activities:
Proceeds from short-term
borrowings............. -- 91,415 --
Proceeds from short-term
borrowings, related
party.................. -- 228,097 129,925
Proceeds from long-term
borrowings............. -- 498,699 131,020
Deferred financing
costs.................. -- (17,139) (515)
Repayments long and
short-term borrowings.. (150,158) (377,443) (37,183)
Redemption of
convertible loans...... -- (170,171) --
Purchase shares from
shareholder............ -- (292,561) --
-------- -------- --------
Net cash flows from fi-
nancing activities..... (150,158) (39,103) 223,247
-------- -------- --------
Net (decrease) increase
in cash and cash equiv-
alents................. (91,343) 22,357 (36,258)
Cash and cash equiva-
lents at beginning of
period................. 112,292 20,949 43,306
Cash contributed upon
formation.............. -- -- --
-------- -------- --------
Cash and cash equiva-
lents at end of peri-
od..................... 20,949 43,306 7,048
======== ======== ========
Non-cash investing and financing activities:
Issuance of shares upon
conversion of PIK
Notes.................. -- 169,899 --
-------- -------- --------
Supplemental cash flow
disclosures:
Cash paid for interest.. (9,271) (52,447) (16,561)
======== ======== ========
Cash received for inter-
est.................... 26,277 25,091 27,529
======== ======== ========
</TABLE>
II-8
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTE TO PARENT ONLY
SCHEDULE I
AS OF DECEMBER 31, 1997 AND 1998
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
1. Organization and Nature of Operations
United Pan-Europe Communications N.V., formerly known as United and Philips
Communications B.V. ("UPC" or the "Company") was formed for the purpose of
acquiring and developing multi-channel television and telecommunications systems
in Europe. On July 13, 1995, United GlobalCom, Inc. ("United")(formerly known as
United International Holdings, Inc.), a United States of America corporation,
and Philips Electronics N.V. ("Philips"), contributed their respective ownership
interests in European and Israeli multi-channel television systems to UPC.
Philips contributed to UPC its 95% interest in cable television systems in
Austria, its 100% interest in cable television systems in Belgium, and its
minority interests in multi-channel television systems in Germany, The
Netherlands (KTE) and France (Citecable). United contributed its interests in
multi-channel television systems in Israel, Ireland, the Czech Republic, Malta,
Norway, Hungary, Sweden and Spain. United also contributed United States dollars
("$")78.2 million in cash (including accrued interest of $3.2 million) to UPC
and issued to Philips 3,169,151 shares of its Class A Common Stock having a
value of $50.0 million (at date of closing). In addition, UPC issued to Philips
$133.6 million of convertible subordinated pay-in-kind notes (the "PIK Notes").
As a result of this transaction, United and Philips each owned a 50% economic
and voting interest in UPC.
On December 11, 1997, United acquired Philips' 50% interest in UPC (the "UPC
Acquisition"), thereby making it an effectively wholly-owned subsidiary of
United (subject to certain employee equity incentive compensation arrangements)
through its wholly-owned subsidiary UIH Europe, Inc. ("UIHE"). The entity's name
was changed to United Pan-Europe Communications N.V., and its legal seat was
transferred from Eindhoven to Amsterdam. Through its cable-based communications
networks in 10 countries in Europe and in Israel, UPC currently offers cable
television services and is further developing and upgrading its network to
provide digital video, voice and Internet/data services in Western European
markets.
As part of the UPC Acquisition, (i) UPC purchased the 3,169,151 shares of
Class A Common Stock of United held by Philips (66,800), (ii) United purchased
169,899 of the accreted amount of UPC's PIK Notes and redeemed them for
15,180,261 shares of UPC, (iii) UPC repaid to Philips the remaining 170,371
accreted amount of the PIK Notes (339,800), (iv) United purchased 13,121,604
shares of UPC directly from Philips, and (v) UPC repurchased Philips' remaining
equity interest in UPC (24,378,396 shares). The UPC Acquisition was financed
with proceeds from a long-term revolving credit facility through UPC with a
syndicate of banks (305,200) (the "Senior Revolving Credit Facility"), a bridge
bank facility through a subsidiary of UPC $111,200 (224,000) and a cash
investment by United of 327,400. Approximately 479,000 drawn on the Senior
Revolving Credit Facility was used to repay existing debt of UPC in conjunction
with the UPC Acquisition.
United's acquisition of Philips' interest in UPC was accounted for as a step
acquisition under purchase accounting. As a result of UPC becoming effectively
wholly owned by United, such purchase accounting adjustments, along with
existing basis differences, were pushed down to the financial statements of UPC
and a new basis of accounting was established for the UPC net assets acquired by
United. As of December 11, 1997, the proportional net assets of UPC acquired by
United were recorded at fair market value based on the purchase price paid by
United, along with additional basis differences at the United level existing as
of that date. The total purchase accounting adjustments of 514,758 were
allocated to UPC's underlying net assets.
As a result of the UPC Acquisition and the associated push-down of United
basis on December 11, 1997, the condensed information as to financial position
of registrant as of December 31, 1997 and December 31, 1998 is presented on a
"post-acquisition" basis. The condensed information as to the operations and the
cash flows of the
II-9
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTE TO PARENT ONLY
SCHEDULE I (Continued)
registrant for the year ended December 31, 1997 include the post-acquisition
results of the Company for the period from December 11, 1997 through December
31, 1997, which reflects 1,980 of new basis depreciation and amortization
resulting from push-down accounting as well as approximately 4,034 of interest
expense from purchase related indebtedness which is included in the Parent's
share in result of affiliated companies, net. Due to immateriality, the entire
fiscal year ended December 31, 1997 is presented as "pre-acquisition" in the
accompanying condensed information as to the operations and cash flows of
registrant.
II-10
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
(In thousands of Dutch Guilders)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E Column F
- -------- --------- -------- ------------ ------------- ---------
Additions
---------------------
Balance
at Charged Balance
Beginning to at End of
Description of Period Expense Acquisitions Deductions(1) Period
- ----------- --------- -------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts receivable:
Year ended December
31, 1998............. 6,445 2,021 1,128 (334) 9,260
===== ===== ===== ====== =====
Year ended December
31, 1997............. 5,835 2,093 543 (2,026) 6,445
===== ===== ===== ====== =====
Year ended December
31, 1996............. 5,342 907 835 (1,249) 5,835
===== ===== ===== ====== =====
Six months ended
December 31, 1995.... -- -- 5,342 -- 5,342
===== ===== ===== ====== =====
Allowance for costs to
be reimbursed:
Year ended December
31, 1998............. 2,209 109 -- (2,318) --
===== ===== ===== ====== =====
Year ended December
31, 1997............. 4,620 1,221 -- (3,632) 2,209
===== ===== ===== ====== =====
Year ended December
31, 1996............. 5,303 794 -- (1,477) 4,620
===== ===== ===== ====== =====
Six months ended
December 31, 1995.... 4,137 1,166 -- -- 5,303
===== ===== ===== ====== =====
Allowance for
Investments in
Affiliated Companies:
Year ended December
31, 1998............. -- -- -- -- --
===== ===== ===== ====== =====
Year ended December
31, 1997............. 4,186 -- -- (4,186) --
===== ===== ===== ====== =====
Year ended December
31, 1996............. 4,946 -- -- (760) 4,186
===== ===== ===== ====== =====
Six months ended
December 31, 1995.... -- 4,946 -- -- 4,946
===== ===== ===== ====== =====
</TABLE>
- --------------------
(1) Represents uncollectible balances written off to the allowance account and
the effect of currency translation adjustments.
II-11
<PAGE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned hereby undertakes:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c) under the Securities Act of 1933, as amended (the
"Securities Act"), the issuer undertakes that such reoffering prospectus will
contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition
to the information called for by the other Items of the applicable form.
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415 under the Securities Act, will be
filed as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public 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 proceedings) 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 controlling precedent, submit to a court of appropriate
jurisdiction the question whether indemnification by it is against public policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned hereby undertakes to respond to requests for information
that is incorporated by reference into the prospectus pursuant to Items 4,
10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
(d) The undersigned hereby undertakes to supply by means of a post-effective
amendment all information concerning a transaction, and the company being
acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
(e) The undersigned hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the registrant's annual
report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(f) The undersigned hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
II-12
<PAGE>
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
Prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement; and
(iii) to include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(4) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the undersigned pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed part of the registration
statement as of the time it was declared effective.
The undersigned hereby undertakes to file an application for the purpose of
determining the eligibility of the applicable trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act of 1939 ("Act") in accordance with
the rules and regulations of the Commission under Section 305(b)(2) of the Act.
II-13
<PAGE>
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 S-4 and has duly caused this Registration
Statement Amendment to be signed on its behalf by the undersigned, thereunto
duly authorized, in London, England, on this 13th day of December 1999.
United Pan-Europe Communications N.V.
a Dutch Public limited liability company
By: /s/ Ray D. Samuelson
----------------------------------------
Ray D. Samuelson, Managing Director,
Finance and Accounting
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has caused this Registration Statement to be signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman of Board of Management December 13, 1999
- ------------------------------------ and Chief Executive Officer
Mark L. Schneider
* President; Vice Chairman, December 13, 1999
- ------------------------------------ chello broadband
John F. Riordan
* Senior Vice President, Legal December 13, 1999
- ------------------------------------ and General Counsel
Anton H.E. v. Voskuijlen
* Managing Director, Eastern December 13, 1999
- ------------------------------------ Europe
Nimrod J. Kovacs
* Managing Director, Strategy, December 13, 1999
- ------------------------------------ Acquisitions and Corporate
Charles H. R. Bracken Development
/s/ Ray D. Samuelson Managing Director, Finance and December 13, 1999
- ------------------------------------ Accounting (Chief Accounting
Ray D. Samuelson Officer)
* Chairman of Supervisory Board December 13, 1999
- ------------------------------------ and Authorized U.S.
Michael T. Fries Representative
* Supervisory Board Member December 13, 1999
- ------------------------------------
Richard De Lange
* Supervisory Board Member December 13, 1999
- ------------------------------------
Tina M. Wildes
</TABLE>
II-14
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Supervisory Board Member December 13, 1999
- ------------------------------------
Ellen P. Spangler
Supervisory Board Member December 13, 1999
- ------------------------------------
Antony P. Ressler
* Supervisory Board Member December 13, 1999
- ------------------------------------
John P. Cole
*By: /s/ Ray D. Samuelson
-------------------------------
Ray D. Samuelson,
Attorney-in-fact
</TABLE>
II-15
<PAGE>
Exhibit 5.1
To: United Pan-Europe Communications N.V.
Fred. Roeskestraat 123
P.O. Box 74763
1070 BT Amsterdam
The Netherlands
Amsterdam, December 13, 1999
Dear Sirs,
We, the undersigned, have acted as special counsel on certain matters of
Netherlands law to United Pan-Europe Communications N.V. (the "Company") in
connection with the filing by the Company of a Registration Statement, on Form
S-4, (the "Registration Statement"), including a Prospectus (the "Prospectus")
dated December 13, 1999, under the Securities Act of 1933, as amended, with the
United States Securities and Exchange Commission, relating to an offer to
exchange (i) senior Dollar notes due 2009 (the "Dollar Senior Notes"), (ii)
senior Euro notes due 2009 (the "Euro Senior Notes") and (iii) senior Dollar
discount notes due 2009 (the "Dollar Senior Discount Notes", and together with
the Dollar Senior Notes and the Euro Senior Notes, the "Outstanding Notes") for
(i) series B senior Dollar notes due 2009, (ii) series B senior Euro notes due
2009 and (iii) series B senior Dollar discount notes due 2009, respectively
(together the "Exchange Notes"). The Outstanding Notes have been issued pursuant
to a Purchase Agreement between the Company, Goldman Sachs International and
Donaldson, Lufkin & Jenrette International, dated July 27, 1999, a Registration
Rights Agreement between the Company, Goldman Sachs International and Donaldson,
Lufkin & Jenrette International, dated July 30, 1999 (the "Registration Rights
Agreement"), an Indenture between the Company and Citibank, N.A., dated July 30,
1999 relating to the Dollar Senior Notes and the Euro Senior Notes (the "Senior
Notes Indenture"), and an Indenture between the Company and Citibank, N.A.,
dated July 30, 1999 relating to the Dollar Senior Discount Notes (the "Discount
Notes Indenture", and together with the Senior Notes Indenture, the
"Indentures").
In rendering this opinion, we have examined and relied upon the following
documents:
1. a copy of an executed Registration Statement;
2. a copy of the Prospectus;
3. a copy of the executed Registration Rights Agreement;
<PAGE>
4. copies of the executed Indentures;
5. an excerpt dated December 13, 1999 of the registration of the Company in the
Trade Register of the Chamber of Commerce of Amsterdam, the Netherlands (the
"Trade Register"), confirmed by telephone to be correct as of the date
hereof (the "Excerpt");
6. a copy of the articles of association (statuten) of the Company, dated July
26, 1999 (the "Articles") as, according to the Trade Register, in force on
the date hereof;
and such other documents and such treaties, laws, rules, regulations, and the
like, as we have deemed necessary as a basis for the opinions hereinafter
expressed.
We have further relied on the statements made by a managing director of the
Company in a certificate dated December 13, 1999 (the "Company Certificate") and
we have assumed without independent verification, except as indicated otherwise
herein, that such statements are correct as of the date hereof.
We have further relied on a legal opinion rendered by Holme Roberts & Owen LLP
as US counsel to the Company dated December 13, 1999 (the "HRO Opinion"), and we
have assumed without independent verification that the contents of the HRO
Opinion are correct as of the date hereof.
For the purpose of the opinions expressed herein, we have further assumed:
(i) the genuineness of all signatures, the authenticity of all agreements,
certificates, instruments and other documents submitted to us as
originals and the conformity to the originals of all agreements,
certificates, instruments and other documents submitted to us as faxed or
photostatic copies;
(ii) that the Registration Rights Agreement and the Indentures constitute the
legal, valid and binding obligations of the Company and are enforceable
against the Company in accordance with their terms under the laws of the
State of New York by which they are expressed to be governed and under
the laws of any other relevant jurisdiction other than the laws of the
Netherlands;
(iii) that the Exchange Notes, when duly executed, authenticated and delivered
pursuant to the Indentures, constitute the legal, valid and binding
obligations of the Company and are enforceable against the Company in
accordance with their terms under the laws of the State of New York by
which they are expressed to be governed (for this assumption we have
relied solely on the HRO Opinion) and under the laws of any other
relevant jurisdiction other than the laws of the Netherlands;
(iv) that the Company has not been dissolved (ontbonden), granted a suspension
of payment (surseance verleend) or declared bankrupt (failliet
verklaard). Although not constituting conclusive evidence thereof, our
assumption is supported by (a) the
<PAGE>
contents of the Company Certificate, (b) the contents of the Excerpt and
(c) information obtained today by telephone from the bankruptcy clerks
office (faillissementsgriffie) of the district court in Amsterdam;
(v) that the selling restrictions for the Netherlands as set out in the
section `The Exchange Offer' of the Prospectus have been and will be
complied with.
Based upon such assumptions and subject to such qualifications and subject to
factual matters or documents not disclosed to us in the course of our
investigation, we are of the opinion that:
Status
- ------
The Company has been duly incorporated as a public company with limited
liability (naamloze vennootschap) and is validly existing under the laws of the
Netherlands.
Choice of Law
- -------------
The choice of the laws of the State of New York as the law governing the
Exchange Notes is valid and binding on the Company under the laws of the
Netherlands, except (i) to the extent that any term of the Exchange Notes or any
provision of the laws of the State of New York applicable to the Exchange Notes
is manifestly incompatible with the public policy of the Netherlands, and (ii) a
Netherlands court may give effect to mandatory rules of the laws of another
jurisdiction with which the situation has a close connection, if and insofar as,
under the laws of that other jurisdiction (including the Netherlands) those
rules must be applied, whatever the governing law chosen by the parties. With
the express reservation that we are not qualified to assess the exact meaning
and consequences of the respective terms of the Exchange Notes under the laws of
the State of New York, none of such terms on its face is manifestly incompatible
with the public policy of the Netherlands or should be expected to give rise to
situations where mandatory rules of Netherlands law will be applied by a
Netherlands court irrespective of the law otherwise applicable thereto.
Legal Validity
- --------------
Provided that the choice of the laws of the State of New York as the law
governing the Exchange Notes will be held valid and binding upon the Company as
discussed above, the Exchange Notes, when duly executed, authenticated and
delivered pursuant to the Indentures, will constitute the legal, valid and
binding obligations of the Company, enforceable against the Company in
accordance with their terms.
This opinion is subject to the following qualifications:
a. The opinions expressed herein may be affected or limited by the provisions
of any applicable bankruptcy (faillissement), insolvency, fraudulent
conveyance (actio Pauliana), reorganisation, moratorium (surseance van
betaling), and other or similar laws of general application now or
hereafter in effect, relating to or affecting the enforcement or protection
of creditors' rights.
b. In the absence of an applicable convention between the State of New York
and the
<PAGE>
Netherlands, a judgement rendered by a court in the State of New York will
not be enforced by the courts of the Netherlands. In order to obtain a
judgement which is enforceable in the Netherlands the claim must be
relitigated before a competent Netherlands court. A judgement rendered by a
court in the State of New York will, under current practice, be recognised
by a Netherlands court (i) if that judgement results from proceedings
compatible with Netherlands concepts of due process, and (ii) if that
judgement does not contravene the public policy of the Netherlands. If the
judgement is recognised by a Netherlands court, that court will generally
grant the same claim without relitigation on the merits. The enforcement in
the Netherlands of foreign judgements and the Exchange Notes will be
subject to the rules of civil procedure as applied by the Netherlands
courts.
c. Under the laws of the Netherlands each power of attorney (volmacht) or
mandate (lastgeving), whether or not irrevocable, granted by the Company in
the Indentures or in the Exchange Notes will terminate by force of law, and
without notice, upon insolvency or bankruptcy of the Company. To the extent
that the appointment by the Company of a process agent would be deemed to
constitute a power of attorney or a mandate, this qualification would
apply.
d. Any provision in the Indentures or in the Exchange Notes permitting that
concurrent proceedings are brought in different jurisdictions may not be
enforceable in the Netherlands.
e. If a facsimile signature will be used for the Exchange Notes, each
signatory should approve such use of his signature and evidence of such
approval may be required for the enforcement of the Exchange Notes in the
Netherlands. If any of the Exchange Notes were executed by attaching
thereto the facsimile signature of any person who does not hold office at
the issue date of such Notes, or if such Exchange Notes will be issued on a
date on which the person whose facsimile signature is attached thereto no
longer holds office, it may be necessary for the enforcement of such
Exchange Notes in the Netherlands that the holder of such Exchange Notes
shall present both such Exchange Notes and evidence of such approval.
We express no opinion on any law other than the law of the Netherlands
(unpublished case law not included) as it currently stands. We express no
opinion on any laws of the European Communities (insofar as not directly
applicable or having direct effect in the Netherlands).
In this opinion Netherlands legal concepts are expressed in English terms and
not in their original Dutch terms. The concept concerned may not be identical to
the concepts described by the same English term as they exist under the laws of
other jurisdictions. This opinion may, therefore, only be relied upon under the
express condition that any issues of interpretation or liability arising
thereunder will be governed by Netherlands law and be brought before a
Netherlands court.
This opinion is strictly limited to the matters stated herein and may not be
read as extending by implication to any matters not specifically referred to.
Nothing in this opinion should be taken as
<PAGE>
expressing an opinion in respect of any representations or warranties contained
in the Registration Statement, the Registration Rights Statement, the
Indentures, the Prospectus or any other document examined in connection with
this opinion except as expressly confirmed herein.
This opinion is addressed to you and may only be relied upon by you in
connection with the issue of the Notes, and may not be relied upon by, or
(except as required by applicable law) be transmitted to, or filed with any
other person, firm, company, or institution other than with the United States
Securities and Exchange Commission as Exhibit 5.1 to the Registration Statement,
without our prior written consent.
Yours sincerely,
/s/ Victor de Seriere /s/ Niels van de Vijver
_____________________ _______________________
Victor de Seriere Niels van de Vijver
<PAGE>
December 13, 1999
EXHIBIT 5.2
United Pan-Europe Communications N.V.
Fred. Roeskestraat 123
1070 BT AMSTERDAM
The Netherlands
Ladies and Gentlemen:
We have acted as special United States counsel to United Pan-Europe
Communications N.V., a Netherlands company (the "Company"), in connection with
the filing by the Company under the Securities Act of 1933, as amended (the
"Act"), of a registration statement on Form S-4 (the "Registration Statement")
with the United States Securities and Exchange Commission (the "Commission") on
December 13, 1999. Pursuant to the Registration Statement, up to U.S.
$200,000,000 and (Euro)100,000,000 aggregate principal amount of the Company's
outstanding 10 7/8% Senior Notes due 2007, U.S. $252,000,000 and
(Euro)101,000,000 aggregate principal amount of the Company's outstanding 11
1/4% Senior Notes due 2009 and U.S. $478,000,000 and (Euro)191,000,000 aggregate
principal amount at maturity of the Company's outstanding 13 3/8% Senior
Discount Notes due 2009 (the "Outstanding Notes") are exchangeable for up to
like amounts of the Company's 10 7/8% Series B Senior Notes due 2007, 11 1/4%
Series B Senior Notes due 2009 and 13 /8% Series B Senior Discount Notes due
2009 (the "Exchange Notes"). The Outstanding Notes were, and the Exchange Notes
will be, issued pursuant to indentures (the "Indentures") dated as of October
29, 1999 between the Company and Citibank N.A., as trustee (the "Trustee"),
registrar, paying agent and transfer agent.
In our capacity as special United States counsel to the Company, we have
examined the Registration Statement, the Indentures filed as exhibits to the
Registration Statement, the Outstanding Notes, a form of the Exchange Notes
contained in such Indenture and originals or copies certified or otherwise
identified to our satisfaction of such documents as we have deemed necessary or
appropriate to enable us to render the opinions expressed below.
In rendering this opinion we have assumed that the Indentures have been duly
authorized, executed and delivered by the Trustee and the Company.
Based upon the foregoing, it is our opinion that when the Exchange Notes are
exchanged for the Outstanding Notes as contemplated in the Registration
Statement, assuming they have been duly authorized, executed, issued and
delivered by the Company under the laws of The Netherlands and have been duly
authenticated by the Trustee, the Exchange Notes will constitute the legal,
valid and binding obligations of the Company, enforceable against the Company in
accordance with their terms, except as enforcement thereof may be limited by
bankruptcy, insolvency (including, without limitation, all laws relating to
fraudulent transfers), reorganization, moratorium and other similar laws
relating to or affecting enforcement of creditors' rights generally and by
possible judicial action giving effect to foreign governmental actions or
foreign laws affecting creditors' rights and except as enforcement thereof is
subject to general principles of equity (regardless of whether such enforcement
may be sought in a proceeding in equity or law).
We express no opinion as to matters governed by any law other than laws of
the State of New York and the federal laws of the United States. In rendering
the opinion expressed herein, we have, with your approval, relied without
independent investigation as to all matters governed by or involving conclusions
under the law of the Netherlands upon the opinion (including the qualifications,
assumptions and limitations expressed therein) of Loeff Claeys Verbeke, Dutch
counsel for the Company, of even date herewith, a copy of which is being filed
as Exhibit 5.1 to the Registration Statement.
We hereby consent to the filing of this opinion as Exhibit 5.2 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" contained in the prospectus which is included in the Registration
Statement.
Very truly yours,
Holme Roberts & Owen LLP
By: /s/ Francis R. Wheeler
Francis R. Wheeler, Partner
<PAGE>
EXHIBIT 8.1
December 13, 1999
United Pan-Europe Communications
Fred. Roeskestraat 123
P.O. Box 74763
1076 EE Amsterdam
The Netherlands
Re: 10 7/8% Series B Senior Subordinated Notes Due 2009 and
12 1/2% Series B Senior Discount Subordinated Notes Due 2009,
Form S-4 Registration Statement
Ladies and Gentlemen:
We have acted as United States tax counsel to United Pan-Europe Communications
N.V., a Netherlands company (the "Company"), in connection with the filing by
the Company under the Securities Act of 1933, as amended (the "Act"), of a
registration statement on Form S-4 with the United States Securities and
Exchange Commission (the "Registration Statement"). Pursuant to the Registration
Statement, (i) up to $800,000,000 and 300,000,000 euro aggregate principal
amount at maturity of the Company's outstanding 10 7/8% Senior Notes due 2009
(the "Outstanding Senior Notes") are exchangeable for up to a like principal
amount of the Company's 10 7/8% Series B Senior Notes due 2009 (the "Exchange
Senior Notes"), and (ii) up to $735,000,000 aggregate principal amount at
maturity of the Company's outstanding 12 1/2% Senior Discount Notes due 2009
(the "Outstanding Discount Notes") are exchangeable for up to a like principal
amount of the Company's 12 1/2% Series B Senior Discount Notes due 2009 (the
"Exchange Discount Notes," and collectively with the Outstanding Senior Notes,
Exchange Senior Notes, and Outstanding Discount Notes, the "Notes," and the
offer of the Company to exchange the Exchange Notes for the Outstanding Notes,
the "Exchange Offer"). The Outstanding Notes were, and the Exchange Notes will
be, issued pursuant to indentures dated as of July 30, 1999 between the Company
and Citibank N.A. (the "Indentures").
We have prepared the discussion included in the Registration Statement under the
caption "Certain U.S. Federal Income Tax Consequences." The discussion under
that caption is our opinion of the material United States federal income tax
<PAGE>
United Pan - Europe Communications N. V.
December 13, 1999
Page 2
consequences expected to result to the holders, subject to the conditions,
limitations, and assumptions described therein.
The discussion does not cover all aspects of United States federal taxation that
may be relevant to, or the actual tax effect that any of the matters described
therein will have on, any particular holder, and it does not address foreign,
state, or local tax consequences. The discussion does not cover the tax
consequences that might be applicable to holders that are subject to special
rules under the Code (including insurance companies, tax-exempt organizations,
mutual funds, retirement plans, financial institutions, dealers in securities or
foreign currency, persons that hold the notes as part of a straddle, hedge or
synthetic security transaction, persons that have a functional currency other
than the United States dollar, investors in pass-through entities, traders in
securities that elect to mark to market, certain expatriates, and non-U.S.
holders). The discussion does not address the United States federal income tax
consequences that may result from a modification of the Notes.
Our opinion is based on the current provisions of the Internal Revenue Code of
1986, as amended (the "Code"), the applicable Treasury regulations (the
"Regulations"), and public administrative and judicial interpretations of the
Code and the Regulations, all of which are subject to change, which changes
could be applied retroactively. Our opinion also is based on the facts and
agreements contained in (i) the Registration Statement, (ii) the Indentures, and
(iii) the Note Registration Rights Agreement, dated July 30, 1999, among the
Company and the Initial Purchasers (collectively, the "Note Documents"). We
understand that the Note Documents set forth the complete agreement among the
parties with respect to the Notes. We also have relied on certain
representations from you with respect to factual matters, which representations
we have not independently verified.
Our opinion may change if (i) the applicable law changes, (ii) any of the facts
with respect to the Notes (as included in the Note Documents, and the
representations made by you) are inaccurate, incomplete, or change, (iii) if the
conduct of the parties is materially inconsistent with the facts reflected in
the Note Documents or the representations or (iv) any of the assumptions we have
made herein are not correct.
<PAGE>
United Pan - Europe Communications N. V.
December 13, 1999
Page 3
Our opinion represents only our legal judgment based on current law and the
facts as described above. Our opinion has no binding effect on the Internal
Revenue Service or the courts. The Internal Revenue Service may take a position
contrary to our opinion, and if the matter is litigated, a court may reach a
decision contrary to the opinion.
We hereby consent to the filing of this opinion letter with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the use
of our name therein.
Very truly yours,
Holme Roberts & Owen LLP
<PAGE>
EXHIBIT 8.2
[letterhead of Arthur Andersen]
December 13, 1999
United Pan-Europe Communications N.V.
Fred. Roeskestraat 123
1076 EE AMSTERDAM
The Netherlands
Re.: 10 7/8% Senior Notes due 2007
11 1/4% Senior Notes due 2009
13 3/8% Senior Discount Notes due 2009
S-4 Registration Statement
Ladies and Gentlemen:
We have acted as Netherlands tax counsel to United Pan-Europe Communications
N.V., a Netherlands company (the "Company"), in connection with the filing by
the Company under the Securities Act of 1933, as amended (the "Act"), of a
registration statement on Form S-4 with the United States Securities and
Exchange Commission (the "Registration Statement").
Pursuant to the Registration Statement, (i) up to $200,000,000 and 100,000,000
euro aggregate principal amount at maturity of the Company's outstanding 10 7/8%
Senior Notes due 2007 (the "Outstanding Senior Notes due 2007") are exchangeable
for up to a like principal amount of the Company's 10 7/8% Series B Senior Notes
due 2007 (the "Exchange Senior Notes due 2007"), (ii) up to $252,000,000 and
101,000,000 euro aggregate principal amount at maturity of the Company's
outstanding 11 1/4% Senior Notes due 2009 (the "Outstanding Senior Notes due
2009") are exchangeable for up to a like principal amount of the Company's 11
1/4% Series B Senior Notes due 2009 (the "Exchange Senior Notes due 2009"), and
(iii) up to $478,000,000 and 191,000,000 euro aggregate principal amount at
maturity of the Company's outstanding 13 3/8% Senior Discount Notes due 2009
(the "Outstanding Discount Notes") are exchangeable for up to a like principal
amount of the Company's 13 3/8% Series B Senior Discount Notes due 2009 (the
"Exchange Discount Notes," and collectively with the Outstanding Senior Notes
due 2007 and Outstanding Senior Notes due 2009, Exchange Senior Notes due 2007
and Exchange Senior Notes due 2009, and Outstanding Discount Notes, the "Notes,"
and the offer of the Company to exchange the Exchange Notes for the Outstanding
Notes, the "Exchange Offer"). The Outstanding Notes were, and the Exchange Notes
will be, issued pursuant to indentures dated as of October 29, 1999 between the
Company and Citibank N.A. (the "Indentures").
Page 1
<PAGE>
We have prepared the discussion in the Registration Statement under the caption
"Certain Tax Consequences - Certain Netherlands Tax Consequences," which is only
addressing the Dutch fiscal aspects applicable to holders of the Notes. The
discussion under that caption is our opinion of the expected material Dutch
fiscal consequences of the Exchange for holders of the Notes, subject to the
conditions, limitations and assumptions described therein.
We express no opinion as to any law other than the tax laws of The Netherlands
in force at the date hereof as applied and interpreted according to present case
law of the Netherlands courts, administrative rulings and authoritative tax law
scholars. We have no obligation to update this opinion. Our opinion has no
binding effect on the Dutch tax authorities and/or Dutch courts. The Dutch tax
authorities may take a position contrary to our opinion and if the matter is
litigated, a court may reach a decision contrary to our opinion.
In addition, we draw your attention to the fact that in The Netherlands a tax
reform is pending which could become effective as of January 1, 2001. It could
in particular change the taxation in relation to notes held by individual
holders resident or deemed resident of The Netherlands. As this proposed new
legislation is still pending, it may be subject to change.
Our opinion is based on the facts and agreements contained in (i) the
Registration Statement dated December 13, 1999, (ii) the Indentures, (iii) the
Note Registration Rights Agreement, dated October 29, 1999, among the Company
and the Initial Purchasers and (iv) the Purchase Agreement, dated October 22,
1999, among the Company and the Initial Purchasers (collectively, the "Note
Documents"), which we received by e-mail and/or fax. We assume that the Note
Documents will be properly executed in the form submitted to and examined by us
and referred to herein and will be valid and binding when executed.
Our opinion may change if (i) applicable law changes, (ii) any of the facts with
respect to the Notes (as included in the Note Documents, and the representations
made by you) are inaccurate, incomplete, or change, (iii) if the conduct of the
parties is materially inconsistent with the facts reflected in the Note
Documents or the representations or (iv) any of the assumptions we have made
herein are not correct.
We hereby consent to the filing of this opinion letter with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the use
of our name therein.
Yours sincerely,
ARTHUR ANDERSEN
Belastingadviseurs
/s/ /s/
Sander Kloosterhof Hugo Everaerd
<PAGE>
Exhibit 21.1
UPC Subsidiaries
----------------
Entity Jurisdiction
chello broadband Australia
- -------------------------------------------------------------------------------
Wien I GmbH Austria
- -------------------------------------------------------------------------------
Telekabel Fernsehnetz Klagenfurt Betriebsgesellschaft mbH Austria
- -------------------------------------------------------------------------------
Telekabel-Fernsehnetz Wiener Neustadt/Neunkirchen Austria
Betriebsgesellschaft mbH
- -------------------------------------------------------------------------------
Telekabel Wien GmbH Austria
- -------------------------------------------------------------------------------
Telekabel Fernsehnetz Graz Betriebsgesellschaft mbH Austria
- -------------------------------------------------------------------------------
Telekabel-Fernsehnetz Region Baden Betriebsgesellschaft mbH Austria
- -------------------------------------------------------------------------------
chello broadband GmbH Austria
- -------------------------------------------------------------------------------
Priority Wireless Telecommunications GmbH Austria
- -------------------------------------------------------------------------------
UPC Belgium S.A. Belgium
- -------------------------------------------------------------------------------
UCI Enterprises Inc. Colorado
- -------------------------------------------------------------------------------
UIH Iberian Progamming, Inc. Colorado
- -------------------------------------------------------------------------------
UPC Aviation, Inc.
Colorado
- -------------------------------------------------------------------------------
UIH
Colorado
- -------------------------------------------------------------------------------
UPC Romania, Inc.
Colorado
- -------------------------------------------------------------------------------
United International Investments Colorado G.P.
- -------------------------------------------------------------------------------
Melita Partnership Colorado G.P.
- -------------------------------------------------------------------------------
Mozaic Entertainment, Inc. Connecticut
- -------------------------------------------------------------------------------
Poland Communications, Inc. Connecticut
- -------------------------------------------------------------------------------
Kabel Net Holding A.S. Czech Republic
- -------------------------------------------------------------------------------
Kabel Net Brno A.S. Czech Republic
- -------------------------------------------------------------------------------
UII Management Delaware G.P.
- -------------------------------------------------------------------------------
UIH Romania Ventures, Inc. Delaware
- -------------------------------------------------------------------------------
Kabelkom Management Co. Delaware G.P.
- -------------------------------------------------------------------------------
Kabelkom Holding Co. Delaware G.P.
- -------------------------------------------------------------------------------
@Entertainment, Inc. Delaware
- -------------------------------------------------------------------------------
@Entertainment Programming, Inc. Delaware
- -------------------------------------------------------------------------------
Fox Kids Poland, Inc.
Delaware
- -------------------------------------------------------------------------------
Ibercom, Inc.
Delaware
- -------------------------------------------------------------------------------
chello broadband USA, Inc. Delaware
- -------------------------------------------------------------------------------
UPC Staffing, Inc. Delaware
- -------------------------------------------------------------------------------
MediaReseaux S.A. France
- -------------------------------------------------------------------------------
UPC France S.A.
France
- -------------------------------------------------------------------------------
chello broadband S.A.R.L. France
- -------------------------------------------------------------------------------
Sud Ouest Videopole France
- -------------------------------------------------------------------------------
Sud Est Videopole France
- -------------------------------------------------------------------------------
Videopole Holding S.A. France
- -------------------------------------------------------------------------------
1
<PAGE>
- -------------------------------------------------------------------------------
Videopole Services France
- -------------------------------------------------------------------------------
Videopole Assistance France
- -------------------------------------------------------------------------------
Videopole Publication France
- -------------------------------------------------------------------------------
A.C.Associes France
- -------------------------------------------------------------------------------
Ain Videopole France
- -------------------------------------------------------------------------------
Ardennes Videopole France
- -------------------------------------------------------------------------------
Atlantique Videopole France
- -------------------------------------------------------------------------------
Aveyron Videopole France
- -------------------------------------------------------------------------------
Bourgogne Videopole France
- -------------------------------------------------------------------------------
Cablage Dynamique Videopole France
- -------------------------------------------------------------------------------
Citecable Caladois France
- -------------------------------------------------------------------------------
Citecable Centre Bretagne France
- -------------------------------------------------------------------------------
Citecable Auverge France
- -------------------------------------------------------------------------------
Citecable Essonne France
- -------------------------------------------------------------------------------
Citecable Saintonge France
- -------------------------------------------------------------------------------
Citecable Goussainville France
- -------------------------------------------------------------------------------
Citecable Jurassienne France
- -------------------------------------------------------------------------------
Citecable S.A. France
- -------------------------------------------------------------------------------
CiteReseau S.A. France
- -------------------------------------------------------------------------------
Est Videopole France
- -------------------------------------------------------------------------------
Franche Comte Videopole France
- -------------------------------------------------------------------------------
Investissements Reseaux Participations SA France
- -------------------------------------------------------------------------------
Iroise Videopole France
- -------------------------------------------------------------------------------
Loire Videopole France
- -------------------------------------------------------------------------------
MediaPartic S.A. France
- -------------------------------------------------------------------------------
Nord Est Cable Carling L'Hopital France
- -------------------------------------------------------------------------------
Nord Est Cable France
- -------------------------------------------------------------------------------
Nord Videopole France
- -------------------------------------------------------------------------------
Ouest Videopole France
- -------------------------------------------------------------------------------
Regicom Partenariat France
- -------------------------------------------------------------------------------
Reseaux Participations S.A. France
- -------------------------------------------------------------------------------
2
<PAGE>
- -------------------------------------------------------------------------------
Reseaux Cables de France S.A. France
- -------------------------------------------------------------------------------
Reseaux Cables du Bretagne Sud France
- -------------------------------------------------------------------------------
Reseaux Cables du Perigord France
- -------------------------------------------------------------------------------
Reseaux Cable du Roannais France
- -------------------------------------------------------------------------------
Reseaux Cable du Pays Yonnais France
- -------------------------------------------------------------------------------
Reseaux Cable Choletais France
- -------------------------------------------------------------------------------
Reseaux Cable du Nivernais France
- -------------------------------------------------------------------------------
Reseaux Cables Cote d'Azur France
- -------------------------------------------------------------------------------
Reseaux Cables du Hainaut France
- -------------------------------------------------------------------------------
Reseaux Cables de L'Indre France
- -------------------------------------------------------------------------------
Rhone Vision Cable S.A.S. France
- -------------------------------------------------------------------------------
Savoie Videopole France
- -------------------------------------------------------------------------------
Seine et Marne Videopole France
- -------------------------------------------------------------------------------
SIRC Holding SNC France
- -------------------------------------------------------------------------------
SIRC SNC France
- -------------------------------------------------------------------------------
SLC Tignes Videopole France
- -------------------------------------------------------------------------------
Somerco SARL France
- -------------------------------------------------------------------------------
chello broadband GmbH Germany
- -------------------------------------------------------------------------------
UPC Magyarovszag Kft. Hungary
- -------------------------------------------------------------------------------
Sopron Varosi Onallo Kozsolgalati Televizio Kft. Hungary
- -------------------------------------------------------------------------------
UPC Ireland Ltd. Ireland
- -------------------------------------------------------------------------------
Melita Cable P.L.C. Malta
- -------------------------------------------------------------------------------
UPC Intermediates B.V. The Netherlands
- -------------------------------------------------------------------------------
UPC Nederland Services B.V. The Netherlands
- -------------------------------------------------------------------------------
chello broadband Nederland B.V. The Netherlands
- -------------------------------------------------------------------------------
Cable Network Zuid-Oost Brabant Holding B.V. The Netherlands
- -------------------------------------------------------------------------------
Cable Network Holding B.V. The Netherlands
- -------------------------------------------------------------------------------
Priority Telecom N.V. The Netherlands
- -------------------------------------------------------------------------------
Priority Telecom Netherlands B.V. The Netherlands
- -------------------------------------------------------------------------------
Priority Wireless B.V. The Netherlands
- -------------------------------------------------------------------------------
UPC Nederland N.V. The Netherlands
- -------------------------------------------------------------------------------
A2000 Holding N.V. The Netherlands
- -------------------------------------------------------------------------------
Kabeltelevisie Amsterdam B.V. The Netherlands
- -------------------------------------------------------------------------------
A2000 Hilversum B.V The Netherlands
- -------------------------------------------------------------------------------
3
<PAGE>
- -------------------------------------------------------------------------------
Media Groep West B.V. The Netherlands
- -------------------------------------------------------------------------------
Cable Network Brabant Holding B.V. The Netherlands
- -------------------------------------------------------------------------------
N.V. TeleKabel Beheer The Netherlands
- -------------------------------------------------------------------------------
N.V. TeleKabel The Netherlands
- -------------------------------------------------------------------------------
Medianet B.V.
The Netherlands
- -------------------------------------------------------------------------------
TeleKabel Omroep Facilitair Bedrijf B.V. The Netherlands
- -------------------------------------------------------------------------------
Cable-Networks Austria Holding B.V. The Netherlands
- -------------------------------------------------------------------------------
Algemene Kabel Exploitatie Maatschappij B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Geldermalsen B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Wijchen B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Tiel B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Buren B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Dodewaard B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Neerijnen-West B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Midden Betuwe B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Renkum B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Wageningen B.V. The Netherlands
- -------------------------------------------------------------------------------
Belmarken Holding B.V The Netherlands
- -------------------------------------------------------------------------------
CAI Over Betuwe B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Heteren B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Elst B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Bemmel B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Valburg B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Gendt B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Almere B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Lingewaal B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Dronten B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Lelystad B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI Druten B.V. The Netherlands
- -------------------------------------------------------------------------------
CAI NKM-Nijmegen B.V. The Netherlands
- -------------------------------------------------------------------------------
Interway Holding B.V. The Netherlands
- -------------------------------------------------------------------------------
4
<PAGE>
- -------------------------------------------------------------------------------
Binan Investments B.V. The Netherlands
- -------------------------------------------------------------------------------
U.C.T. - Netherlands B.V. The Netherlands
- -------------------------------------------------------------------------------
Stipdon Investments B.V. The Netherlands
- -------------------------------------------------------------------------------
UPC Facility B.V. The Netherlands
- -------------------------------------------------------------------------------
Zeblas B.V. The Netherlands
- -------------------------------------------------------------------------------
Selasa Holding B.V. The Netherlands
- -------------------------------------------------------------------------------
Paruse B.V. The Netherlands
- -------------------------------------------------------------------------------
Bicatobe Investments B.V. The Netherlands
- -------------------------------------------------------------------------------
Kabeltelevisie Son en Breugel B.V. The Netherlands
- -------------------------------------------------------------------------------
TeleKabel Hungary N.V. The Netherlands
- -------------------------------------------------------------------------------
Zomerwind Holding B.V. The Netherlands
- -------------------------------------------------------------------------------
Uniport Communications B.V. The Netherlands
- -------------------------------------------------------------------------------
Cable Network Netherlands Holding B.V. The Netherlands
- -------------------------------------------------------------------------------
Kabeltelevisie Eindhoven N.V. The Netherlands
- -------------------------------------------------------------------------------
UPC Programming B.V. The Netherlands
- -------------------------------------------------------------------------------
UPC Slovakia Holding B.V. The Netherlands
- -------------------------------------------------------------------------------
UPC Czech Holding B.V. The Netherlands
- -------------------------------------------------------------------------------
UPC Romania Holding B.V. The Netherlands
- -------------------------------------------------------------------------------
United Telekabel Holding II B.V. The Netherlands
- -------------------------------------------------------------------------------
Iberian Programming Services CV The Netherlands
- -------------------------------------------------------------------------------
Plator Holding B.V. The Netherlands
- -------------------------------------------------------------------------------
Nidlo B.V. The Netherlands
- -------------------------------------------------------------------------------
Poland Cablevision (Netherlands) B.V. The Netherlands
- -------------------------------------------------------------------------------
Wizja TV B.V. (fka Sereke Holding B.V.) The Netherlands
- -------------------------------------------------------------------------------
Gelrevision UPC Holding B.V.
The Netherlands
- -------------------------------------------------------------------------------
GAMOG Gelre Flevo Mediadiensten B.V. The Netherlands
- -------------------------------------------------------------------------------
GAMOG Gelre Flevo Media Infra B.V. The Netherlands
- -------------------------------------------------------------------------------
chello broadband N.V. The Netherlands
- -------------------------------------------------------------------------------
chello broadband B.V. The Netherlands
- -------------------------------------------------------------------------------
Hungary Holding Co. New York G.P.
- -------------------------------------------------------------------------------
United Pan-Europe Communications Norge A.S. Norway
- -------------------------------------------------------------------------------
chello broadband A.S. Norway
- -------------------------------------------------------------------------------
5
<PAGE>
- -------------------------------------------------------------------------------
Priority Telecom A.S Norway
- -------------------------------------------------------------------------------
Czestochowska TK Sp. z o.o. (in liquidation) Poland
- -------------------------------------------------------------------------------
Wizja TV Spoka Produkcyjna Sp z o.o. Poland
- -------------------------------------------------------------------------------
ETV Sp. z o.o. Poland
- -------------------------------------------------------------------------------
Gosat-Service Sp.z o.o. Poland
- -------------------------------------------------------------------------------
Ground Zero Media Sp. z o.o. Poland
- -------------------------------------------------------------------------------
At Media Sp. z o.o. Poland Poland
- -------------------------------------------------------------------------------
Poland
- -------------------------------------------------------------------------------
Polska Telewizja Kablowa Operator Sp. z o.o. Poland
- -------------------------------------------------------------------------------
Polska Telewizja Kablowa S.A. Poland Poland
- -------------------------------------------------------------------------------
Polska Telewizja Kablowa Szczecin Sp. z o.o. Poland
- -------------------------------------------------------------------------------
Polska Telewizja Kablowa Warszawa S.A. Poland
- -------------------------------------------------------------------------------
Poltelkab Sp. z o.o. Poland
- -------------------------------------------------------------------------------
Szczecinska Telewizja Kablowa Sp. z o.o. Poland
- -------------------------------------------------------------------------------
Telkat Sp. z o.o. Poland
- -------------------------------------------------------------------------------
TV Kabel Sp. z o.o. Poland
- -------------------------------------------------------------------------------
TV-SAT Ursus Sp. z o.o. Poland (in liquidation) Poland
- -------------------------------------------------------------------------------
Wizja TV Sp. z o.o Poland
- -------------------------------------------------------------------------------
Multicanal Televisao por Cabo, SGPS, Lda. Portugal
- -------------------------------------------------------------------------------
Intercabo - Televisao por Cabo, SGPS, Lda. Portugal
- -------------------------------------------------------------------------------
Intercabo Centro Televisao por Cabo, S.A. Portugal
- -------------------------------------------------------------------------------
Intercabo Atlantico - Comunicacoes por Cabo, S.A. Portugal
- -------------------------------------------------------------------------------
Intercabo Norte - Comunicacoes por Cabo, S.A. Portugal
- -------------------------------------------------------------------------------
Intercabo Capital - Comunicacoes por Cabo, S.A. Portugal
- -------------------------------------------------------------------------------
Intercabo Sul - Comunicacoes por Cabo, S.A. Portugal
- -------------------------------------------------------------------------------
Bragatel - Companhia de Televisao por Cabo de Braga S.A. Portugal
- -------------------------------------------------------------------------------
6
<PAGE>
- -------------------------------------------------------------------------------
Eurosat S.R.L. Romania
- -------------------------------------------------------------------------------
Multicanal Holdings S.R.L. Romania
- -------------------------------------------------------------------------------
Control Cable Ventures S.R.L. Romania
- -------------------------------------------------------------------------------
Selectronic S.R.L. Romania
- -------------------------------------------------------------------------------
Diplomatic International Comimpex S.R.L. Romania
- -------------------------------------------------------------------------------
Trnavatel s r.o. Slovak Republic
- -------------------------------------------------------------------------------
UPC Slovensko s r.o. Slovak Republic
- -------------------------------------------------------------------------------
KabelTel S.R.O. Slovak Republic
- -------------------------------------------------------------------------------
Burgos Sistemas de Cable S.A. Spain
- -------------------------------------------------------------------------------
NBS Nordic Broadband Servics AB Sweden
- -------------------------------------------------------------------------------
SpaceNet AB Sweden
- -------------------------------------------------------------------------------
Starport SA Sweden
- -------------------------------------------------------------------------------
Stjarnan Multimedia Holding AB Sweden
- -------------------------------------------------------------------------------
Stjarnan Multimedia Varlden AB Sweden
- -------------------------------------------------------------------------------
StjarnTV AB Sweden
- -------------------------------------------------------------------------------
StjarnTVnatet AB Sweden
- -------------------------------------------------------------------------------
Stockholms Kabel TV AB Sweden
- -------------------------------------------------------------------------------
Stockholms Stads Televisions AB Sweden
- -------------------------------------------------------------------------------
UPC AG Switzerland
- -------------------------------------------------------------------------------
Xtra Music Limited UK
- -------------------------------------------------------------------------------
Wizja Television Limited (fka At Entertainment Limited) UK
- -------------------------------------------------------------------------------
chello broadband Limited UK
- -------------------------------------------------------------------------------
UPC Services Ltd. UK
- -------------------------------------------------------------------------------
Tara Television UK UK
- -------------------------------------------------------------------------------
At Entertainment Services Limited UK
- -------------------------------------------------------------------------------
Tara Television Global Limited UK
- -------------------------------------------------------------------------------
Bison Acquisition Corp. (US?)
- -------------------------------------------------------------------------------
7
<PAGE>
EXHIBIT 23.1
As independent public auditors, we hereby consent to the use in this
Registration Statement of our reports dated March 29, 1999, on United Pan-
Europe Communications N.V. as of December 31, 1998 and 1997 and for the years
ended December 31, 1998, 1997 and 1996, included in this Registration Statement,
and to all references to our Firm included in this Registration Statement.
Arthur Andersen
Amstelveen, The Netherlands
December 13, 1999
<PAGE>
EXHIBIT 23.2
As independent public auditors, we hereby consent to the use in this
Registration Statement of our report dated March 19, 1999, on United Telekabel
Holding N.V. as of December 31, 1998, and for the period from August 6, 1998,
(commencement of operations) until December 31, 1998, included in this
Registration Statement, and to all references to our Firm included in this
Registration Statement.
Arthur Andersen
Amstelveen, The Netherlands
December 13, 1999
<PAGE>
EXHIBIT 23.3
We hereby consent to the use in the Registration Statement on Form S-4 of
United Pan-Europe Communications N.V. our report dated September 11, 1998,
relating to the financial statements of N.V. Telekabel Beheer, which appear in
such Registration Statement. We also consent to the reference to us under the
heading "Experts" in such Registration Statement.
PricewaterhouseCoopers N.V.
Arnhem, The Netherlands
December 13, 1999
<PAGE>
EXHIBIT 23.4
As independent public auditors, we hereby consent to the use in this
Registration Statement of our report dated February 26, 1999, on N.V. Telekabel
Beheer as of December 31, 1998, and for the year then ended, included in this
Registration Statement, and to all references to our Firm included in this
Registration Statement.
Arthur Andersen
Amstelveen, The Netherlands
December 13, 1999
<PAGE>
EXHIBIT 23.5
The Board of Directors
@Entertainment, Inc.:
We hereby consent to the use in this Registration Statement of our reports,
dated March 29, 1999, on @Entertainment, Inc.'s consolidated financial
statements as of December 31, 1998 and 1997 and for the years ended December 31,
1998, 1997 and 1996, included in this Registration Statement, and to the
reference to our Firm under the heading "Experts" in this Registration
Statement.
KPMG
Warsaw, Poland
December 13, 1999
<PAGE>
EXHIBIT 23.6
As independent public auditors, we hereby consent to the use in this
Registration Statement of our report dated March 9, 1999, on A2000 Holding N.V.
as of December 31, 1998 and 1997, and for the years then ended, included in this
Registration Statement, and to all references to our Firm included in this
Registration Statement.
Arthur Andersen
Amstelveen, The Netherlands
December 13, 1999
<PAGE>
EXHIBIT 23.7
As independent public auditors, we hereby consent to the use in this
Registration Statement of our report dated June 18, 1999 except for Note 15, as
to which the date is June 22, 1999, on Kabel Plus a.s. as of December 31, 1998
and 1997 and for the years then ended, included in this Registration Statement,
and to all references to our Firm included in this Registration Statement.
Arthur Andersen, s.r.o.
Prague, Czech Republic
December 13, 1999
<PAGE>
EXHIBIT 23.8
As independent public auditors, we hereby consent to the use in this
Registration Statement of United Pan-Europe Communications N.V. on Form S-4 of
the English translation of our report dated May 4, 1999, relating to the
financial statements as per December 31, 1998 of NBS Nordic Broadband Services
AB (publ) Org No 556536-1598 which appear in such Registration Statement. The
original copy of this report is in the Swedish language. We also consent to the
reference to us under the heading "Experts" in such Registration Statement.
Ernst & Young AB
Stockholm, Sweden
December 13, 1999
<PAGE>
EXHIBIT 23.9
The Board of Directors
StjarnTVnatet AB
We hereby consent to the use in this Registration Statement of United Pan-
Europe Communications N.V. on Form S-4 of the English translation of our report
dated May 29, 1998, relating to the financial statements and the financial
statement schedules of Singapore Telecom International Svenska AB (now
StjarnTVnatet AB) org No 556497-8210, which appear in such Registration
Statement. The original signed copy of this report is in the Swedish language.
We also consent to the inclusion of our report dated September 17, 1999 relating
to the Reconciliation of Significant Differences between US and Swedish
Generally Accepted Accounting Principles of Singapore Telecom International
Svenska AB which appear in the Registration Statement. We also consent to the
references to us under the heading "Experts" in such Registration Statement.
PricewaterhouseCoopers
Stockholm, Sweden
December 13, 1999
<PAGE>
EXHIBIT 23.10
As independent public auditors, we hereby consent to the use in this
Registration Statement of our report, dated February 26, 1999, on SBS
Broadcasting SA (formerly Scandinavian Broadcasting System SA) as of December
31, 1997 and 1998 and for the years ended December 31, 1996, 1997 and 1998,
included in this Registration Statement, and to all references to our Firm
included in this Registration Statement.
Ernst & Young
Statsautoriseret Revlsionsaktiesclskab
Copenhagen, Denmark
December 13, 1999
<PAGE>
Exhibit 23.11
To the Board of Directors of Stjarn TVnatet AB (formerly Singapore
International Svenska AB)
We conducted our audit of the financial statements of Singapore Telecom
International Svenska AB for the year ended March 31, 1998 in accordance with
auditing standards generally accepted in Sweden, which are substantially the
same as those generally accepted in the United States.
PricewaterhouseCoopers
Stockholm, Sweden
September 17, 1999
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints Mark L. Schneider, Anton H.E. v. Voskuijlen, John F.
Riordan, and Ray D. Samuelson, and each of them, his or her attorneys-in-fact,
with full power of substitution, for him or her in any and all capacities, to
sign a registration statement to be filed with the Securities and Exchange
Commission (the "Commission") on Form S-4 in connection with the registration by
United Pan-Europe Communications N.V., a Dutch Public limited liability company
(the "Company"), of Senior Notes and Senior Discount Notes to be offered in
exchange for other Senior Notes and Senior Discount Notes, and all amendments
(including post-effective amendments) thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Commission; and to sign all documents in connection with the qualification and
issuance of such notes with Blue Sky authorities; granting unto said attorneys-
in-fact full power and authority to perform any other act on behalf of the
undersigned required to be done in the premises, hereby ratifying and confirming
all that said attorneys-in-fact may lawfully do or cause to be done by virtue
hereof.
Date Signature
December 13, 1999 /s/
-------------------------
Charles H. R. Bracken
December 13, 1999 /s/
-------------------------
John P. Cole
December 13, 1999 /s/
-------------------------
Richard De Lange
December 13, 1999 /s/
-------------------------
Michael T. Fries
December 13, 1999 /s/
-------------------------
Nimrod J. Kovacs
December 13, 1999
-------------------------
Anthony P. Ressler
December 13, 1999 /s/
-------------------------
John F. Riordan
December 13, 1999 /s/
-------------------------
Ray D. Samuelson
December 13, 1999 /s/
-------------------------
Mark L. Schneider
December 13, 1999 /s/
-------------------------
Ellen P. Spangler
December 13, 1999 /s/
-------------------------
Tina M. Wildes
December 13, 1999 /s/
-------------------------
Anton H.E. v. Voskuijlen
<PAGE>
EXHIBIT 25.1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an application to determine eligibility of a Trustee
pursuant to Section 305(b)(2)_____
------------------------------------
CITIBANK, N.A.
(Exact name of trustee as specified in its charter)
13-5266470
(I.R.S. employer
identification no.)
399 Park Avenue, New York, New York 10043
(Address of principal executive office) (Zip Code)
------------------------------------
United Pan-Europe Communications N.V.
(Exact name of obligor as specified in its charter)
The Netherlands 98-0191997
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
Fred. Roeskestraat 123 Michael T. Fries, Chairman
P.O. Box 74763 c/o UnitedGlobalCom, Inc.
1076 EE Amsterdam, The Netherlands 4643 South Ulster Street, Suite 1300
+31 20 778 9840 Denver, Colorado 80237
(Address and telephone number of Telephone: (303) 770-4001
principal executive offices) (Name, address and telephone
number of agent for service)
------------------------------------
Debt Securities
(Title of the indenture securities)
<PAGE>
1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Comptroller of the Currency, Washington, D.C.
Federal Reserve Bank of New York
35 Liberty Street, New York, NY
Federal Deposit Insurance Corporation
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
2. Affiliations with Obligor.
If the obligor is an affiliate of the trustee, describe each affiliation
None.
16. List of Exhibits.
-----------------
List below all exhibits filed as part of this Statement of Eligibility.
-----------------------------------------------------------------------
Exhibits identified in parentheses below, on file with the Commission,
----------------------------------------------------------------------
are incorporated herein by reference as exhibits hereto.
--------------------------------------------------------
Exhibit 1 - Copy of Articles of Association of the Trustee, as now in
effect. (Exhibit 1 to T-1 to Registration Statement No.
2-79983)
Exhibit 2 - Copy of certificate of authority of the Trustee to commence
business. (Exhibit 2 to T-1 to Registration Statement No.
2-29577)
Exhibit 3 - Copy of authorization of the Trustee to exercise corporate
trust powers. (Exhibit 3 to T-1 to Registration Statement
No. 2-55519)
Exhibit 4 - Copy of existing By-Laws of the Trustee. (Exhibits 4 to T-1
to Registration Statement No. 33-34988)
Exhibit 5 - Not applicable.
2
Exhibit 6 - The consent of the Trustee required by Section 321(b) of
the Trust Indenture Act of 1939. (Exhibit 6 to T-1 to
Registration Statement No.33-19227.)
Exhibit 7 - Copy of the latest Report of Condition of the Trustee
dated as of March 31, 1998
Exhibit 8 - Not applicable.
Exhibit 9 - Not applicable.
<PAGE>
-------------------
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee,
Citibank, N.A., a national banking association organized and existing under the
laws of the United States of America, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in The City of New York and State of New York, on the 23rd day
of September, 1999.
CITIBANK, N.A.
By /s/ Jillian Hamblin
---------------------
Jillian Hamblin
Assistant Vice President
<PAGE>
Charter No. 1461
Comptroller of the Currency
Northeastern District
REPORT OF CONDITION
CONSOLIDATING
DOMESTIC AND FOREIGN
SUBSIDIARIES OF
Citibank, N.A.
of New York in the State of New York, at the close of business on June 30, 1999,
published in response to call made by comptroller of the Currency, under Title
12, United States Code, Section 161. Charter Number 1461 Comptroller of the
Currency Northeastern District.
<TABLE>
<S> <C>
ASSETS
Thousands of dollars
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin..................................$ 8,353,000
Interest-bearing balances........................................................... 12,917,000
Held-to-maturity securities......................................................... 0
Available-for-sale securities....................................................... 38,392,000
Federal funds sold and securities purchased under agreements to resell.............. 9,122,000
Loans and lease financing receivables:
Loans and Leases, net of unearned income............................................$ 197,977,000
LESS:
Allowance for loan and lease losses................................................. 4,671,000
Loans and leases, net of unearned income, allowance, and reserve.................... 193,306,000
Trading assets...................................................................... 26,919,000
Premises and fixed assets (including capitalized leases)............................ 3,957,000
Other real estate owned............................................................. 388,000
Investments on unconsolidated subsidiaries and associated companies................. 1,179,000
Customers' liability to this bank on acceptances outstanding........................ 1,193,000
Intangible assets................................................................... 4,368,000
Other assets........................................................................ 12,514,000
TOTAL ASSETS.......................................................................$ 312,608,000
LIABILITIES
Deposits:
In domestic offices................................................................. $ 40,703,000
Noninterest-bearing................................................................. $ 13,139,000
Interest-bearing.................................................................... 27,564,000
In foreign offices, Edge and Agreement subsidiaries, and IBFs....................... 184,168,000
Noninterest-bearing................................................................. 11,869,000
Interest-bearing.................................................................... 172,299,000
Federal funds purchased and securities sold under agreements to repurchase.......... 7,586,000
Trading liabilities................................................................. 23,220,000
Other borrowed money (includes mortgage indebtedness and obligations under
capitalized leases):
With a remaining maturity of one year or less....................................... 10,700,000
With a remaining maturity of more than one year through three years............... 1,294,000
With a remaining maturity of more than three years.................................. 2,551,000
Bank's liability on acceptances executed and outstanding............................ 1,228,000
Subordinated notes and debentures................................................... 6,600,000
Other liabilities................................................................... 13,858,000
TOTAL LIABILITIES.................................................................... $291,908,000
Perpetual preferred stock and related surplus....................................... 0
Common stock........................................................................ $ 751,000
Surplus............................................................................. 9,861,000
Undivided profits and capital reserves.............................................. 10,997,000
Net unrealized holding gains (losses) on available-for-sale securities.............. (19,000)
Accumulated net gains (losses) on cash flow hedges.................................. 0
Cumulative foreign currency translation adjustments................................. (710,000)
TOTAL EQUITY CAPITAL................................................................. $ 20,700,000
TOTAL LIABILITIES, LIMITED LIFE PREFERRED STOCK, AND EQUITY CAPITAL.................. $312,608,000
</TABLE>
I, Roger W. Trupin, Controller of the above-named bank do hereby declare that
this Report of Condition is true and correct to the best of my knowledge and
belief.
ROGER W. TRUPIN
CONTROLLER
We, the undersigned directors, attest to the correctness of this Report of
Condition. We declare that it has been examined by us, and to the best of our
knowledge and belief has been prepared in conformance with the instructions and
is true and correct.
JOHN S. REED
WILLIAM R. RHODES
PAUL J. COLLINS
DIRECTORS
EQUITY CAPITAL
<PAGE>
<TABLE>
<S> <C>
Perpetual preferred stock and related surplus................................................ 0
Common Stock................................................................................. $ 751,000
Surplus...................................................................................... 9,609,000
Undivided profits and capital reserves....................................................... 11,201,000
Net unrealized holding gains (losses) on available-for-sale securities....................... 27,000
Accumulated net gains (losses) on cash flow hedges........................................... 0
Cumulative foreign currency translation adjustments.......................................... (699,000)
TOTAL EQUITY CAPITAL......................................................................... $ 20,889,000
TOTAL LIABILITIES AND EQUITY CAPITAL......................................................... $ 309,515,000
ASSETS
Thousands
of dollars
Cash and balances due from depository institutions:
Noninterest-bearing balances and currency and coin........................................... $ 9,506,000
Interest-bearing balances.................................................................... 12,615,000
Held-to-maturity securities.................................................................. 0
Available-for-sale securities................................................................ 36,981,000
Federal funds sold and securities purchased under agreements to resell....................... 7,560,000
Loans and lease financing receivables:
Loans and Leases, not of unearned income..................................................... $ 192,415,000
LOSS: Allowance for loan and lease losses.................................................... 4,704,000
Loans and Leases, net of unearned income, allowance, and reserve............................. $ 192,711,000
Trading assets............................................................................... 27,650,000
Promises and fixed assets (including capitalized losses)..................................... 3,924,000
Other real estate owned...................................................................... 366,000
Investments in unconsolidated subsidiaries and associated companies.......................... 1,123,000
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Customers' liability to this bank on acceptances outstanding................................. 1,228,000
Intangible assets............................................................................ 4,017,000
Other Assets................................................................................. 11,834,000
TOTAL ASSETS................................................................................. $ 309,515,000
LIABILITIES
Deposits: In domestic offices................................................................ $ 41,555,000
Noninterest-bearing.......................................................................... $ 13,930,000
Interest-bearing............................................................................. 27,625,000
In foreign offices, Edge and Agreement subsidiaries, and IBFs................................ 179,468,000
Noninterest-bearing.......................................................................... 13,309,000
Interest-bearing............................................................................. 166,159,000
Federal funds purchased and securities sold under agreements to repurchase................... 7,516,000
Trading liabilities.......................................................................... 24,124,000
Other borrowed money (includes mortgage indebtedness and obligations under
capitalized leases): With a remaining maturity of one year or less........................... 11,128,000
With a remaining maturity of more than one year through three years.......................... 1,454,000
With a remaining maturity of more than three years........................................... 2,512,000
Bank's liability on acceptances executed and outstanding..................................... 1,283,000
Subordinated notes and debentures........................................................... 6,600,000
Other liabilities........................................................................... 12,986,000
TOTAL LIABILITIES............................................................................ 288,626,000
EQUITY CAPITAL
</TABLE>
I, Roger W. Trupin, Controller of the above-named bank do hereby declare that
this Report of Condition is true and correct to the best of my knowledge and
belief.
<PAGE>
ROGER W. TRUPIN CONTROLLER
We, the undersigned directors, attest to the correctness of this Report of
Condition. We declare that it has been examined by us, and to the best of our
knowledge and belief has been prepared in conformance with the instructions and
is true and correct.
PAUL J. COLLINS
JOHN S. REED
WILLIAM R. RHODES
