<PAGE>
As Filed With the Securities and Exchange Commission on January 26, 1999
Registration No. 333-67895
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Amendment No. 5
to
FORM S-1
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 98-0191997
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
Fred. Roeskestraat 123
P.O. Box 74763
1070 BT Amsterdam, The Netherlands
(31) 20-7789840
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
----------------
Michael T. Fries, Supervisory Board Member
United International Holdings, 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:
Garth B. Jensen, Esq. Katherine Ashton, Esq.
Holme Roberts & Owen LLP Debevoise & Plimpton
1700 Lincoln, Suite 4100 25 Old Broad Street
Denver, Colorado 80203 London EC2N 1HQ England
(303) 861-7000 (44) 171-786-9000
----------------
Approximate Date of Commencement of Proposed Sale to the Public: As soon
as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
----------------
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 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information 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 +
+preliminary prospectus is not an offer to sell these securities nor does it +
+seek an offer to buy these securities in any jurisdiction where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated January 26, 1999.
[LOGO OF UNITED PAN-EUROPE COMMUNICATIONS N.V. APPEARS HERE]
United Pan-Europe Communications N.V.
40,000,000 Ordinary Shares
in the form of American Depositary Shares or Ordinary Shares
----------
This is an initial public offering of ordinary shares of United Pan-Europe
Communications N.V. UPC is also offering the ordinary shares in the form of
American Depositary Shares. Each ADS represents one ordinary share. This
prospectus relates to an offering of 17,600,000 ordinary shares, in the form of
ordinary shares or ADSs, in the United States. In addition, 22,400,000 ordinary
shares, in the form of ordinary shares or ADSs, are being offered outside the
United States.
At UPC's request, the underwriters have reserved, out of the shares being
offered in the United States, $300 million worth of ordinary shares at the
initial public offering price for sale to Microsoft Corporation. This would
represent 10,157,750 ordinary shares at the midpoint of the offering price
range. If Microsoft purchases all of these shares, it will own about 8.3%, and
United International Holdings, Inc. will own about 63%, of UPC immediately
after this offering.
UPC and the underwriters currently estimate that the initial public offering
price will be between (Euro) 24.00 (NLG52.89) and (Euro) 27.00 (NLG59.50) per
ordinary share. This is equivalent to a price range of $27.80 to $31.27 per ADS
at an exchange rate of (Euro) 0.86341 per $1.00. UPC intends to list the
ordinary shares in bearer form on the Official Market of the Amsterdam Stock
Exchange under the symbol "UPC". UPC also intends to have the ADSs quoted on
the Nasdaq National Market System under the symbol "UPCOY".
----------
See "Risk Factors" beginning on page 10 to read about certain factors you
should consider before buying ordinary shares or ADSs.
----------
Neither the Securities and Exchange Commission nor any other regulatory body
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.
----------
<TABLE>
<CAPTION>
Per ADS Per Ordinary Share Total, at ADS price
------- ------------------ -------------------
<S> <C> <C> <C>
Initial public offering price.. $ (Euro) $
Underwriting discount.......... $ (Euro) $
Proceeds, before expenses, to
UPC........................... $ (Euro) $
</TABLE>
The U.S. underwriters may, under certain circumstances, purchase up to an
additional 1,150,000 ordinary shares, in the form of ordinary shares or ADSs,
from UPC at the initial public offering price less the underwriting discount.
The international underwriters may similarly purchase up to an additional
3,450,000 ordinary shares, in the form of ordinary shares or ADSs.
----------
Joint Global Coordinators
Goldman Sachs International Morgan Stanley Dean Witter
----------
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
Donaldson, Lufkin & Jenrette
----------
Prospectus dated , 1999.
<PAGE>
VIDEO, VOICE & DATA COMMUNICATIONS [Company Logo]
[MAP OF EUROPE AND ISRAEL IDENTIFYING LOCATION OF UPC'S OPERATING SYSTEMS]
Countries in which our systems
are located
Video
We offer subscribers some of the most advanced analog video
services available today, as well as a large choice of FM radio
programs. Approximately 3.4 million homes, an average of 70% of the
homes passed by the cable in our systems, subscribe to our basic
video services. Many of our operations are two-way capable, which
allows us to offer additional revenue-generating services.
Voice
Our fiber and broadband coaxial cable network and current
subscriber relationships provide ready access to potential
residential telephone customers. We plan to offer local telephone
services to our customers in Austria, The Netherlands, France and
Norway under the Priority Telecom name (Nedpoint in the A2000 system
in Amsterdam and surrounding areas). Our state-of-the-art networks
also create the opportunity to reach potential business telephone
customers on a cost-effective pan-European basis.
Data
Our chello broadband subsidiary is launching a European Internet
access gateway with specially created content. chello broadband plans
to serve our operating companies, as well as third-party cable
operators across Europe. We have already launched a cable modem-
based, high-speed Internet access service in many of our European
markets.
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS: BUILDING A PAN-EUROPEAN NETWORK TO BRING
VIDEO, VOICE AND DATA COMMUNICATIONS TO HOMES AND BUSINESSES
[PHOTOS OF OUR OPERATIONS]
<PAGE>
[PHOTOS OF OUR OPERATIONS]
<PAGE>
PROSPECTUS SUMMARY
This summary highlights more detailed information and financial statements
contained later in this prospectus. This summary does not contain all of the
information that you should consider before investing in the shares. You should
read the entire prospectus carefully, especially the risks of investing in the
shares discussed under "Risk Factors".
General Information About Us and Our Business
Overview
United Pan-Europe Communications N.V. owns and operates cable-based
communications networks in ten countries in Europe and in Israel. We provide
cable television services. Some of our systems also provide telephone and
Internet access services. Today, our systems constitute the largest pan-
European group of broadband communications networks, based on numbers of
subscribers in more than one European country. We have systems in Austria, The
Netherlands, Belgium, Norway and France. These systems are strategically
located in the capital cities of Vienna, Amsterdam, Brussels, Oslo and suburban
Paris. We also have systems in Israel, Malta and Eastern Europe. We are a
subsidiary of United International Holdings, Inc., a leading international
provider of video, telephone and data services.
Our systems had about 5.9 million homes in their license areas at September
30, 1998. Of these, about 4.9 million homes were passed by the cable in our
network and thus capable of receiving our services. About 3.4 million of these
(70%) subscribed to our basic video services. We have majority ownership of our
Western European systems (other than the A2000 system in Amsterdam and
surrounding areas) and most of our other systems. Measured by our ownership
percentage of individual systems, we have an equity interest in about 3.0
million homes passed by, and 2.0 million subscribers served by, our cable
systems.
In our Western European markets, we are upgrading our existing network to
two-way transmission capability. This enables us to provide digital video,
telephone and Internet/data services. At September 30, 1998, our systems had
about 13,850 cable telephone and about 12,725 Internet access subscribers.
Relationship with Microsoft
We plan to establish a relationship with Microsoft Corporation to work
jointly on Internet, telephone and video projects. See "Relationship with
Microsoft" and "Risk Factors -- Our Relationship with Microsoft May Not Work
Out".
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 can offer telephone and other telecommunications
services. Due to this change in regulation and technological advances, a single
cable link to the home can deliver video, telephone and Internet/data services.
We can now offer all three services as an integrated package in the markets
where we have upgraded our network. We have already begun to do so in some
markets.
We plan to offer local telephone services, called Priority Telecom (Nedpoint
in the A2000 systems), in our Austrian, Dutch, French and Norwegian systems.
A2000, the Amsterdam system, has offered cable telephone services since July
1997. By September 30, 1998, A2000 served approximately 16,000 lines covering
13,850 cable telephone subscribers. In November 1998, we launched cable
telephone service on a trial basis in Vienna.
We have launched a cable modem-based, high speed Internet access service in
Austria, Belgium, The Netherlands and Norway. Cable modem technology can
provide Internet access at speeds up to 100 times faster than traditional
modems using telephone lines. By September 30, 1998, we had more than 12,125
residential and 600 business cable modem Internet access subscribers. We will
begin offering new Internet access gateway and content services, which we call
chello broadband, in our upgraded Western European networks during the first
quarter of 1999.
3
<PAGE>
Network Upgrade
Since 1994, we have been upgrading our Western European cable television
infrastructure. When we upgrade, we replace parts of the coaxial cable with
fiber optic lines and upgrade the remaining coaxial cable to make it capable of
two-way transmission. By September 30, 1998, the upgraded parts of our networks
in Austria, Belgium, The Netherlands and France passed about 54% of the 2.6
million homes passed by those networks. We plan to reach about 87% by the end
of 1999.
By September 30, 1998, our systems had about 4,375 kilometers of high-
capacity active fiber optic infrastructure. We also had more than 35,340
kilometers of coaxial distribution cable. About 25,200 kilometers of this
coaxial cable is capable of two-way transmission.
Our Growth Strategy
We believe our leading position in providing video services across Europe
will help us to expand our three lines of business. Our strategy is to become a
leading provider of video distribution and programming services, telephone
services and Internet/data services.
The key elements of our strategy are to:
. keep increasing our average revenue per subscriber by developing our
expanded basic tier service, pay-per-view and audio-only program offerings,
. take advantage of our upgraded cable television infrastructure to offer
telephone and Internet/data services, and
. keep acquiring systems near our current systems and increase the percentage
we own in some systems.
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, measured by the
number of subscribers and by revenues. We have grown by strategically acquiring
cable television systems and developing our existing systems. The operating and
financial information in the tables below show this growth.
We do not own 100% of all of our operating companies. The second table
measures the operating data by the percentage we own of our operating
companies. The third table presents consolidated financial information.
<TABLE>
<CAPTION>
At December 31,
----------------------------- At September 30,
Operating Data 1995 1996 1997 1998
- -------------- --------- --------- --------- ----------------
<S> <C> <C> <C> <C>
Homes in service area............ 4,332,400 4,007,760 4,134,656 5,867,686
Homes passed..................... 3,457,232 3,254,865 3,553,756 4,900,030
Two-way homes passed(1).......... -- -- 674,457 1,396,651
Basic Video subscribers(2)....... 2,153,422 2,061,197 2,311,708 3,430,903
Internet/data subscribers........ -- -- 1,907 12,736
Telephone subscribers............ -- -- 3,255 13,849
<CAPTION>
At December 31,
----------------------------- At September 30,
Proportionate Operating Data 1995 1996 1997 1998
- ---------------------------- --------- --------- --------- ----------------
<S> <C> <C> <C> <C>
Homes in service area............ 2,055,000 2,650,156 2,870,982 3,821,549
Homes passed..................... 1,635,938 2,088,108 2,351,539 3,008,195
Two-way homes passed(1).......... -- -- 541,082 919,653
Basic Video subscribers(2)....... 1,011,004 1,321,004 1,514,606 2,035,753
Internet/data subscribers........ -- -- 1,622 8,272
Telephone subscribers............ -- -- 1,627 3,531
</TABLE>
<TABLE>
<CAPTION>
Years Ended
Six Months Ended December 31, For the Nine
December 31, ------------------ Months Ended
Consolidated Financial Information 1995(3) 1996 1997 September 30, 1998
- ---------------------------------- ---------------- -------- -------- ------------------
(Dutch guilders, in thousands)
<S> <C> <C> <C> <C>
Revenues................ 100,179 245,179 337,155 305,237
Adjusted EBITDA(4)...... 33,756 85,877 116,030 107,792
Adjusted EBITDA Margin
(Adjusted
EBITDA/Revenues)....... 33.7% 35.0% 34.4% 35.3%
Net operating (loss)
income................. (2,468) 1,545 (28,004) (61,932)
Net Loss................ (41,529) (75,836) (165,966) (171,852)
Cash flows from
operating activities.... 38,493 41,542 132,584 52,071
Cash flows from
investing activities.... (500,106) (6,394) (402,340) (381,253)
Cash flows from
financing activities.... 465,508 (116,756) 326,482 275,910
</TABLE>
4
<PAGE>
- -------
(1) These are homes passed by coaxial cable or fiber plant capable of both
transmitting and receiving video, voice and data signals. Our Israeli
systems are not included in the total because they can provide only two-way
impulse pay-per-view video services.
(2) See "Business -- Historical Growth" for a description of how we calculate
the number of our basic video subscribers.
(3) We began as a joint venture in July 1995.
(4) 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.
This information comes from our historical financial statements. Industry
analysts generally consider Adjusted EBITDA to be an appropriate measure of
the performance of cable television operations and communications companies
such as us. Adjusted EBITDA should not be considered as an alternative to
net income or to cash flows or to any other generally accepted accounting
principles measure of performance of liquidity or as an indicator of a
company's operating performance. This presentation of Adjusted EBITDA may
not be comparable to similarly titled measurements reported by other
companies because not all companies and analysts calculate EBITDA in the
same manner.
Relationship with UIH
United International Holdings, Inc. will own about 63% of our ordinary
shares and all of our priority shares immediately after this offering. This
means UIH will continue to control us for the foreseeable future. The rules of
the Amsterdam Stock Exchange restrict the number of shares UIH may sell for the
next three years unless the shares are sold in a public offering. UIH is a
leading provider of video, voice and data services in Europe, the Asia/Pacific
region and Latin America. At September 30, 1998, UIH's systems passed 9.7
million homes and served 4.4 million basic video subscribers. Measured by the
percentage it holds of its operating systems (including us), UIH's systems
passed 6.0 million homes and served 2.5 million subscribers. UIH's Class A
Common Stock trades on the Nasdaq National Market System under the symbol
"UIHIA".
The Offering
The information throughout this prospectus assumes that the underwriters do
not exercise their option to purchase additional ordinary shares in this
offering. The following information also assumes an initial public offering
price of (Euro) 25.50, the midpoint of the offering price range.
<TABLE>
<S> <C>
The Offering............ U.S. offering 17,600,000 ordinary shares
International
offering 22,400,000 ordinary shares
--------------------------
Total 40,000,000 ordinary shares
==========================
</TABLE>
Directed Shares......... We have asked the underwriters to reserve, out of
the shares in the U.S. offering, $300 million
worth of ordinary shares at the initial public
offering price for sale to Microsoft Corporation.
This would represent 10,157,750 ordinary shares at
the midpoint of the offering price range.
Shares Outstanding...... After this offering, we will have 123,087,469
ordinary shares and 100 priority shares issued and
outstanding. Priority shares have special approval
and other rights.
Use of Proceeds......... We intend to use the net proceeds from this
offering:
. to fund costs of about NLG500 million to NLG750
million to improve our cable network to provide
telephone and Internet/data services, and to
pay for new activities in our video
distribution and programming businesses,
. pending such use, to repay debt of NLG620
million, which we intend to reborrow under the
same credit agreement for such use,
5
<PAGE>
. to pay about NLG445 million as part of the
purchase price for the remaining 49% of United
Telekabel Holding, our Dutch holding company,
.to repay other debt of about NLG270 million, and
.for general corporate purposes and future
acquisitions.
Listing/Trading
Symbols................. ADSs on Nasdaq: "UPCOY"
Ordinary shares on the Amsterdam Stock Exchange:
"UPC"
Risk Factors............
You should review the "Risk Factors" section for a
discussion of certain factors about us, the
industries in which we operate and this offering
that you should consider before buying ordinary
shares or ADSs.
Payment and Delivery.... The underwriters expect to deliver the ADSs against
payment in U.S. dollars through The Depository
Trust Company's book-entry facilities and to
deliver the ordinary shares against payment in
euros through the book-entry facilities of NECIGEF
(the Dutch clearing house), Euroclear and Cedel on
or about February , 1999.
American Depositary Shares
We are selling our ordinary shares in the form of ordinary shares or ADSs.
ADSs are American depositary shares that represent our shares. Each ADS, as of
the date of issuance of the ADSs, will represent one ordinary share. Citibank
N.A. will issue the ADSs. Because ADSs usually make owning foreign shares
easier, ADSs are commonly used in offerings by foreign companies. We are using
them because we believe they will provide you with the following benefits:
. Citibank will normally convert the cash dividends and other payments made
from Dutch guilders or euros to U.S. dollars for you. Citibank will also
assist you in claiming refunds for Dutch withholding taxes, if such refunds
are available.
. In those cases where we solicit your vote, we expect Citibank to put in
place procedures to allow you to vote the shares, so you will not need to
come to The Netherlands or comply with Dutch law to exercise your right to
vote.
. We expect to make certain information available in English. This would
include notices of meetings of shareholders, the taking of any action by
shareholders other than at a meeting, or of any action regarding
distributions on the shares. Citibank will make this information available
in the United States. We will also ask Citibank to send you or otherwise
make available to you other notices and reports made to shareholders and
our annual and semi-annual reports, which will also be in English.
. Although you must pay the fees associated with owning ADSs, you will not
need to make special custody arrangements to hold the shares in The
Netherlands.
Your specific rights in the ADSs and in our ordinary shares underlying the
ADSs are set out in an agreement among us, Citibank and you, as an ADS holder.
To understand the terms of the ADSs, you should read carefully the section in
this prospectus entitled "Description of American Depositary Shares", which
describes the agreement. We also encourage you to read the agreement, which is
an exhibit to our registration statement filed with the U.S. Securities and
Exchange Commission. See "Available Information".
6
<PAGE>
Summary Consolidated Selected Financial Data of the Company
The December 31, 1995, 1996 and 1997 and September 30, 1998 financial data
come from our audited consolidated financial statements in this prospectus. The
September 30, 1997 information comes from unaudited financial statements in
this prospectus. Pursuant to our articles of association that will be amended
prior to the closing of this offering, we will convert every two of our
ordinary shares into three ordinary shares. We have prepared all of the
information in this prospectus as if this "stock split" has already happened.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
Six Months Ended December 31, September 30,
December 31, ---------------------- ----------------------
1995(1) 1996 1997 1997 1998(2)
---------------- ---------- ---------- ---------- ----------
(Dutch guilders, in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Service and other
revenue................ 100,179 245,179 337,155 250,061 305,237
Operating expense....... (32,806) (80,479) (111,919) (87,206) (97,472)
Selling, general &
administrative
expense................ (33,617) (78,823) (114,024) (80,061) (132,466)
Depreciation and
amortization........... (36,224) (84,332) (139,216) (99,903) (137,231)
---------- ---------- ---------- ---------- ----------
Net operating (loss)
income................. (2,468) 1,545 (28,004) (17,109) (61,932)
---------- ---------- ---------- ---------- ----------
Net loss before income
taxes and other items.. (19,314) (55,308) (154,084) (113,247) (125,260)
---------- ---------- ---------- ---------- ----------
Net loss................ (41,529) (75,836) (165,966) (129,984) (171,852)
========== ========== ========== ========== ==========
Basic and diluted loss
per ordinary share(3).. (0.51) (0.94) (2.06) (1.60) (2.39)
========== ========== ========== ========== ==========
Weighted-average number
of ordinary shares
outstanding(3)......... 81,000,000 81,000,000 80,488,992 81,000,000 71,801,865
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1997(2) As of September 30, 1998(3)
-------------------------- ---------------------------
(Dutch guilders, in thousands)
<S> <C> <C>
Balance Sheet Data:
Property, plant and
equipment.............. 483,693 527,069
Intangible assets....... 725,513 678,741
Total assets............ 1,919,815 1,849,968
Short-term and long-term
debt................... 1,261,533 1,343,201
Total liabilities....... 1,501,506 1,594,356
Total shareholders'
equity................. 411,530 221,347
</TABLE>
- -------
(1) We began operations as a joint venture in July 1995.
(2) We applied certain accounting changes to calculate this information to take
into account UIH's purchase of its partner's interest in us on December 11,
1997. For more information about these accounting changes, see "Pro Forma
Selected Consolidated Financial Data" and note 1 to the audited
consolidated financial statements at the back of this prospectus.
(3) We calculated "Basic and diluted loss per ordinary share" by dividing net
loss available to ordinary shareholders by the weighted-average number of
ordinary shares outstanding during each period.
7
<PAGE>
Corporate Ownership Structure
The diagram below summarizes our operations and equity ownership percentages
in our operating systems on September 30, 1998. In November 1998, we increased
our ownership of the Israeli system to 46.6% and the Maltese system to 50%, and
sold our 20% interest in our Irish operating company. In December 1998, we
acquired from UIH 46.3% of the Hungarian (Monor) telephone system and 75% of
the programming service, Tara. After we sell shares in this offering, we will
buy the 49% of our Dutch holding company, United Telekabel Holding, that we do
not own.
[FLOW CHART APPEARS HERE]
United Pan-Europe Communications N.V.(1)
Operating Systems
Consolidated Systems
Austria
Telekabel Group
95%
100%
Belgium
TVD
100%
Norway
Janco Multicom
99.6%(2)
France
Mediareseaux
Eastern Europe
Hungary(3) - 79.25%
Czech Republic - 100%
Romania(3) - 51-100%
Slovak Republic(3) - 75-100%
Unconsolidated Systems
51%
The Netherlands
United Telekabel
Holding
50%
A2000
100%
CNBH
Telekabel
Beheer
Israel
Tevel
Malta
Melita Cable
Business Lines
Video Distribution and
Programming Services
Telephony Services
Priority Telecom
Internet/Data Services
chello broadband
- -------
(1) This chart excludes a 33.5% interest in IPS, a group of programming
entities focusing on the Spanish- and Portuguese-speaking markets, which we
have agreed to purchase from UIH, and other interests.
(2) A minority partner of Mediareseaux holds warrants giving it the right to
purchase an additional 4.6% of Mediareseaux's share capital. See "Corporate
Ownership Structure -- France".
(3) Our 79.25%-owned Hungarian system owns several operating companies. We own
51% of one Romanian local operating company and 100% of two others. We own
75% of one Slovakian local operating company and 100% of another.
8
<PAGE>
Summary Operating and Financial Data
<TABLE>
<CAPTION>
For the Nine Months
Ended
At September 30, 1998 September 30, 1998
--------------------------------------------------------------- -------------------------------
UPC Homes Two-Way Basic Basic Total Proportionate
Ownership Under Homes Homes Video Video Adjusted Adjusted
Interest License Passed Passed Subscribers Penetration Revenue EBITDA EBITDA(1)
--------- --------- --------- --------- ----------- ----------- ------- -------- -------------
(Dutch guilders, in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Western European
Systems
Austria................ 95.0% 1,070,640 897,938 487,055 442,596 49.3% 130,288 62,735 59,598
Belgium................ 100.0 133,000 133,000 85,939 127,574 95.9% 26,944 9,807 9,807
France................. 99.6 86,000 60,712 60,712 20,955 34.5% 5,189 (2,962) (2,950)
The Netherlands:
A2000(2).............. 25.5 575,000 569,459 329,101 516,729 90.7% 90,234 21,620 5,513
UTH(2)................ 51.0 935,132 907,078 422,902 855,277 94.3% 156,690 79,034 40,307
Norway................. 100.0 529,924 461,759 10,942 319,769 69.3% 69,035 25,750 25,750
--------- --------- --------- ---------
Subtotal.............. 3,329,696 3,029,946 1,396,651 2,282,900
Other Systems
Israel(3).............. 23.3 600,000 568,999 -- 395,680 69.5% 222,481 121,338 28,272
Malta(3)............... 25.0 179,000 161,310 -- 68,149 42.2% 22,226 9,357 2,339
Ireland(3)............. 20.0 380,000 377,206 -- 145,251 38.5% 58,342 22,448 4,490
--------- --------- --------- ---------
Subtotal.............. 1,159,000 1,107,515 -- 609,080
Eastern Europe
Hungary................ 79.25 901,500 490,966 -- 413,119 84.1% 39,225 14,416 11,425
Czech Republic......... 100.0 229,531 148,963 -- 52,268 35.1% 6,618 (1,818) (1,818)
Romania:
Multicanal............ 100.0 70,000 21,220 -- 7,405 34.9% 405 163 163
Control Cable......... 100.0 80,000 48,454 -- 32,128 66.3% 1,890 1,003 1,003
Eurosat............... 51.0 30,000 26,000 -- 19,367 74.5% 562 216 110
Slovak Republic:
Trnavatel............. 75.0 21,839 16,782 -- 11,507 68.6% 923 296 222
Kabeltel.............. 100.0 46,120 10,184 -- 3,129 30.7% 240 (369) (369)
--------- --------- --------- ---------
Subtotal.............. 1,378,990 762,569 -- 538,923
========= ========= ========= =========
Total................. 5,867,686 4,900,030 1,396,651 3,430,903
========= ========= ========= =========
UPC Proportionate
Interest(1).......... 3,821,549 3,008,195 919,653 2,035,753
========= ========= ========= =========
</TABLE>
- -------
(1) We have calculated proportionate information by multiplying the applicable
statistic for each operating system by our percentage ownership of the
operating system.
(2) At the same time as we sell shares in this offering, we will increase our
ownership of UTH to 100% and A2000 to 50%.
(3) In November 1998, we doubled our ownership of our Israeli system to 46.6%
and our Maltese system to 50%. As part of this transaction, we sold our
entire interest in our Irish system.
Our Address and Telephone Number
Our office address is Fred. Roeskestraat 123, 1076 EE Amsterdam, The
Netherlands. Our telephone number is +31 20 778 98 40.
9
<PAGE>
RISK FACTORS
You should consider carefully the following risk factors, as well as all of
the other information in this prospectus, before buying shares.
We Expect to Continue to Make Net Losses for the Foreseeable Future
We have made net losses every year since we started business in July 1995.
Through September 30, 1998, we had recognized cumulative losses of about
NLG455.2 million. We have had positive operating cash flow since we started
business, but we are now actively expanding our video services business and
introducing other new lines of business. At the moment, the new lines of
business 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 the foreseeable future. Continuing to make net losses could
increase our capital needs. If we never become profitable, the value of our
shares may fall.
Failure to Raise Necessary Capital Could Restrict Our Growth
Setting up and running cable television and telecommunications systems
requires significant capital. Lack of capital could harm our business.
Many of our operating companies are expanding and upgrading their networks
to offer new services. Technological change may make even more upgrades
necessary if our operating companies are to compete in their markets. Our
financial resources, even with the proceeds from this offering, may not be
enough for our capital needs. Also, we plan 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. Not upgrading our operating systems or making other planned
capital expenditures could harm our operations and competitive position. We
have budgeted NLG515.1 million for capital expenditures in 1999 for our
consolidated companies (not including NLG187.5 of UTH's projected capital
expenditures, which we will consolidate after this offering) and during the
year we must also repay or refinance over NLG750 million of indebtedness. See
"Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Consolidated Capital
Expenditures" and "-- Liquidity and Capital Resources -- Sources of Capital".
We continue to look for acquisition opportunities in our existing markets.
We have agreed, for example, to buy our partner's interest in United Telekabel
Holding, our Dutch holding company. We have made no other commitments for any
significant transactions. We want to acquire systems near our existing systems
that we can run efficiently and in which we can introduce our new services. If
we pursue new acquisition or development opportunities, we may need to raise
more capital. We might do so 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, then the growth of our
business, our operating results and our financial condition would be harmed.
We are Highly Leveraged and Our Capacity to Borrow is Limited
We are highly leveraged. On September 30, 1998, we owed NLG303.6 million in
short-term consolidated debt and NLG1,039.6 million in long-term consolidated
debt. On September 30, 1998, our total long-term debt was about 80.3% of our
total capitalization. See "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 certain
transactions between subsidiaries. The terms of UIH's debt securities also
restrict our ability to incur more debt.
Our Relationship with Microsoft May Not Work Out
We and Microsoft may never reach final agreement on the terms of our
relationship. Even if we do reach agreement, the relationship may not bring the
benefits that we expect. It is also possible that regulatory concerns may
hamper the development of our relationship. Our relationship will not be
exclusive and Microsoft may enter into similar relationships with other
European
10
<PAGE>
companies, including any of our competitors. We have reserved an allocation of
shares for Microsoft in this offering, but Microsoft might not buy any shares
in this offering.
The Success of Our New Telephone and Internet/Data Services Depends on Evolving
Technology
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 grow and be competitive.
We plan to offer new services, including:
. additional video channels and tiers,
. pay-per-view services with frequent starting times (known as "impulse"
pay-per-view),
. high speed data and Internet access services, and
. cable telephone services.
We cannot guarantee that we will be able to achieve the technological
advances needed for these new services to be competitive. We also cannot be
sure that demand for our services will develop or be maintained in the light of
other new technological advances. There could be delays in introducing our new
services, such as cable modem-based high speed Internet access and cable
telephone. They may also not operate as intended.
Our New Telephone and Internet/Data Services Involve System, Marketing,
Competition and Timing Risks
We only recently began to offer local telephone and Internet/data services.
We face several risks in implementing these new services. They involve many
operating complexities. We will need to develop and enhance new services,
products and systems, as well as new 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 down
successful marketing.
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 interconnect
agreements in place. We are negotiating interconnect agreements for our planned
telephone markets that do not yet have them. This may involve time-consuming
negotiations and regulatory proceedings. Incumbent telecommunications operators
may not agree to interconnect on a time scale or at rates (and on other terms)
that will permit us to offer profitable telephone services.
We cannot guarantee that we will be able to introduce our new service
offerings on schedule. They may not meet our financial expectations. This would
impede our planned growth and financial condition.
The Scalability, Speed and Technology of the Network Has Not Been Proved for
Our New Telephone and Internet/Data Services
We cannot be sure whether our Internet access business will be able to
handle a large number of online subscribers at high data transmission speeds.
As the number of subscribers goes up, we may have to add more fiber connection
points in order to maintain the high speeds. This would need more capital,
which we may be unable to raise. If we cannot offer high data transmission
speeds, customer demand for our Internet/data services would go down. This
would harm our Internet/data business, our operating results and our financial
condition.
We have not yet tested the technology we plan to use for telephone services
for the numbers of subscribers we expect. It may not function successfully at
these scales. This would harm our
11
<PAGE>
telephone operations. We plan to use back-up batteries for our cable phones
for operation during power failures. These may run out in prolonged power
failures. This would interrupt the service and could lead to customer
dissatisfaction.
Lack of Necessary Equipment Could Delay or Impair Our Expansion
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.
We May Not Be Able To Obtain the Necessary Programming
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, there is only a
limited amount of local language programming available. There we must
repackage other programming in the local language. We also plan to commit
substantial resources to obtaining and developing new programming. We expect
to seek partners for this. We may not, however, find the appropriate partners
or successfully implement our programming plans.
Developing Expanded Basic Tier Video Services Involves Risks
We may, where appropriate and permitted, move some of our more highly
valued channels from basic tiers, which are generally price regulated, to
expanded basic tiers for which we charge more. In many systems, we would need
consent from the local authorities to do this. We may be unable to obtain this
consent on satisfactory terms or on the desired schedule. Subscribers to the
basic tier services accustomed to receiving certain channels may not wish to
pay additional fees to receive these channels in the expanded basic tier.
Thus, the movement of channels out of the basic tiers could lead to customer
dissatisfaction.
We Expect Competition in Video Services to Increase
The cable television industry in many of our markets is competitive and
changing rapidly. We expect that competition with new entrants who have other
multi-channel television technologies will increase. These may include:
. direct to home satellite services,
. private cable systems, and
. ""wireless'' cable delivered by radio transmission.
We may also face competition from other communications and entertainment
media companies. These could include incumbent telecommunications operators.
In some franchise areas, our rights to provide video services are not
exclusive and we may have to compete with other cable operators.
The Competitiveness of the Telephone Services Industry Poses Risks for New
Entrants
We will face competition from incumbent telecommunications operators and
other new entrants to the European telephone market. Some of these competitors
have more experience in providing telephone services than we have. Some 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 goal 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 gone down significantly in recent years and we
12
<PAGE>
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. Because these are our principal
competitors, this could force us to lower our rates to remain competitive.
Competition in Internet/Data Services is Also Growing Quickly
The Internet services business in Europe is highly competitive. At the
moment, we compete with Internet service providers that offer traditional
modems using telephone lines, including many incumbent telecommunications
operators. These providers usually employ traditional low-speed telephone lines
and higher speed connections. We expect chello broadband to face competition
from other Internet service providers that also use higher speed, higher
capacity cable modems. These include @Home and Roadrunner as they move to the
European market. In the future, we expect to compete with other
telecommunications service providers, including incumbent telecommunications
operators, using other broadband technologies.
Rapid Growth Would Impose Significant Challenges on Our Operations
We are pursuing a new business plan with initiatives across many new
business lines and countries. If we succeed, our operations will grow and
expand rapidly. We expect that this will place significant additional demands
on our management. A number of the members of our management joined us only
recently. If we achieve this growth, our continued success will depend on how
well we manage the growth. We will need to improve our information, management,
operational and financial systems. Our business, operating results and
financial condition may be harmed if we fail to manage growth effectively.
We Depend Upon Key Personnel
There is intense competition for qualified personnel in our businesses and
technologies. Our success and growth strategy depend upon being able to attract
and hold onto key management, technological and operating personnel. These
include Mark Schneider, John Riordan, Timothy Bryan, Scott Bachman, Timothy
Morel and Joseph Webster. It is particularly difficult for us to keep a
successful management team because many of them must live and work away from
their home countries. For example, our Managing Director of Video Entertainment
recently resigned for personal reasons and we are seeking an equally qualified
replacement. It is difficult to find other experienced managers. We may not be
able to attract and hold onto key employees. This could hinder the introduction
of our new services as planned and may harm our business, operating results and
financial condition.
Video Services Are Regulated in Most of Our Markets
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.
Such restrictions could limit our revenues and growth plans and have a
significant effect on our operations. For example, see "Regulation -- The
Netherlands -- Video Services".
Regulation May Affect Our Plans to Introduce Our New Telephone and
Internet/Data Services
The primary scope of current regulation in the telecommunications sector in
our Western European markets has been to remove the monopoly power of incumbent
telecommunications operators. While this has given us the opportunity to enter
the telephone and Internet/data markets, the regulatory regimes present some
risks. As we explained above, the markets are highly competitive, largely as a
result of such regulation. Also, our operating companies need to obtain and
retain licenses and other regulatory approvals for our 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 us 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 appropriate interconnect
13
<PAGE>
arrangements on schedule. Problems such as these would delay the introduction
of the new services.
The Internet access business has not been materially restricted by
regulation in our markets. The legal and regulatory environment of Internet
access and 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
. other claims based on the nature and content of Internet materials.
In Austria, the local cities have veto rights over the introduction of new
services. This would include our telephone and Internet/data services. While
the cities have not used their veto power in the past, they could use this
power to restrict the manner in which we introduce our new services.
We Will Continue to be Controlled by UIH and Governed by the Terms of its Debt
Securities
Immediately after this offering, UIH will own about 63% of our ordinary
shares and all of our priority shares. As a result, UIH will be able to control
the election of all but one of the members of the Supervisory Board. Philips
has had the right to appoint one member since UIH acquired 50% of us from
Philips in 1997. If our partner in our Israeli system exercises its option to
purchase our shares, it will have the right to appoint one member of the
Supervisory Board. UIH will be able to determine the outcome of almost all
corporate actions requiring the approval of our shareholders. Thus, UIH will
continue to control substantially all of our business affairs and policies.
The Supervisory Board has the power to approve transactions in which UIH
has an interest. This power is subject to directors' fiduciary duties to our
other shareholders. Nonetheless, conflicts may arise between the interests of
UIH and our other shareholders. For example, UIH may choose to invest in other
properties or have long-term debt obligations. UIH could cause us to provide
financial resources to our shareholders. This could limit our current strategy
of investing in our new businesses.
As a subsidiary of UIH, we are governed by the terms of UIH's debt
securities. We have agreed with UIH not to take any action that would result in
a breach of these terms. They limit 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 UIH's
debt securities, a breach that is not caused by us could still restrict us from
incurring more debt or taking other actions. Many other terms of UIH's debt
securities affect the way we operate and organize transactions.
Computer Systems May Not Achieve Year 2000 Readiness
We rely greatly on computer systems and other technological devices. These
may not be capable of recognizing dates beginning on January 1, 2000. This
problem could cause any of our cable television, telephone, Internet/data or
programming operations to malfunction or fail.
UIH's Board of Directors has set up a task force to assess and try to
remedy the effect of potential Year 2000 problems on its critical operations,
including those of UPC. Some of our critical operations depend on other
companies, such as our ability to connect our telephone customers to persons
who use other telephone service providers. We cannot control how these other
companies assess and remedy their own Year 2000 problems. We are communicating
with these companies to find out more about the status of their Year 2000
compliance programs. The task force will evaluate and develop contingency plans
as needed. These may not be sufficient, however, to prevent interruptions on
our systems. If we or other companies on whom we depend fail to
14
<PAGE>
implement Year 2000 procedures on time, our business, operating results and
financial condition could be significantly harmed.
Foreign Currency Exchange Rate Fluctuations May Cause Losses
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. This may
continue to be the case for the foreseeable future. On a consolidated basis, as
of September 30, 1998, about 25% of our debt was denominated in currencies
other than Dutch guilders. Some of our operating companies also owe debt and
have receivables that are denominated in other currencies. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources". This exposes them to risk from foreign
currency exchange rate fluctuations.
At the UPC level, the value of our investment in an operating company is
affected by the exchange rate between the Dutch guilder and the local currency
of the operating company.
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 fluctuations. Since
we began business, we have had cumulative foreign exchange losses of about
NLG59.1 million.
The Market for Our Shares May be Affected by Future Sales
After this offering, the 40,000,000 shares sold in this offering will be
freely tradeable in the United States without restriction or further
registration under the U.S. securities laws. They will also be freely tradable
on the Amsterdam Stock Exchange. Sales of shares after the offering by UIH, our
officers and directors, and those of our business partners that will receive
shares at the same time as this offering, are subject to legal and contractual
restrictions. These restrictions will expire after varying time periods. The
market price of our shares could drop if substantial amounts of shares are sold
in the public market or if sales of substantial amounts of shares are expected
to occur. This could also impair our ability to raise capital through offering
equity securities. For more information about the legal and contractual
restrictions on the sale of shares by UIH, our officers and directors, and
those of our business partners that will receive shares at the same time as
this offering, see "Shares Eligible for Future Sale".
Investors in this Offering Will Experience Immediate and Substantial Dilution
Purchasers of shares in this offering will experience immediate and
substantial dilution in the net tangible book value of NLG43.28 per share
(based on an assumed initial public offering price of NLG56.20 per share, the
midpoint of the offering price range). In addition, we have other securities
outstanding which, upon exercise or conversion, could result in further
dilution.
We Do Not Intend to Pay Dividends For the Foreseeable Future
We have never paid dividends on our shares. We do not intend to pay
dividends in the foreseeable future. The terms of some of our existing debt
facilities prevent us from paying dividends. At the moment, we do not have
sufficient statutory capital under Dutch regulations to make distributions. You
should therefore not expect to receive dividends on our shares in the
foreseeable future.
15
<PAGE>
USE OF PROCEEDS
Based on the midpoint of the offering price range, the net proceeds to us
from this offering are expected to be approximately NLG2,124.7 million
((Euro)964.1 million and $1,116.7 million). We plan to use the proceeds from
this offering:
. to fund costs, which we estimate to be approximately NLG500 million to
NLG750 million in the aggregate, associated with the network upgrade (40-
60%), the build and launch of our telephone and Internet/data businesses
(20-40%), and new activities in our video distribution and programming
businesses (15-25%),
. pending such use, to repay NLG620 million of indebtedness incurred under
our senior revolving credit facility (the "Tranche A Facility"), which we
plan to reborrow under that facility for such use,
. to pay approximately NLG445 million as the cash portion of the purchase
price for the remaining 49% of UTH we do not own, including a NLG33
million subordinated note and related interest owed by UTH to NUON,
. to repay approximately NLG156 million of indebtedness and the interest
due thereon owed to UIH,
. to repay approximately NLG114 million of indebtedness incurred under our
bridge bank facility (the "Tranche B Facility"), and
. for general corporate purposes and future acquisitions.
Until the net proceeds of this offering are used as described above, we
intend to hold such proceeds in short-term, interest-bearing, investment grade
securities, including governmental obligations and other money market
instruments.
The Tranche A Facility bears interest at LIBOR plus a margin of 0.5% to
2.0% and matures in 2006. The Tranche B Facility bears interest at LIBOR plus a
margin of 4.5% to 6.0% and matures in June 1999. As of September 30, 1998,
approximately NLG972 million and NLG114 million were outstanding under the
Tranche A Facility and the Tranche B Facility, respectively. A portion of the
Tranche A Facility was used to refinance certain of our operating companies'
indebtedness. A portion of the Tranche A Facility and the entire Tranche B
Facility were used to fund UIH's acquisition of its partner's interest in us.
The UIH loan bears interest at 10.75% per annum. As of September 30, 1998,
approximately NLG156 million was outstanding under this loan. The funds loaned
by UIH were used to reduce our indebtedness under the Tranche B Facility and to
fund business operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources".
DIVIDEND POLICY
We have never declared or paid cash dividends on our ordinary shares. We do
not intend to pay dividends for the foreseeable future. Certain of our debt
facilities currently prohibit us from paying dividends. In addition, Dutch
regulations limit our distributions from statutory capital equity. See "Risk
Factors -- We Do Not Intend to Pay Dividends for the Foreseeable Future".
16
<PAGE>
EXCHANGE RATE DATA
We report all of our historical financial results in Dutch guilders
("NLG"). 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, 1997 use the same exchange rates used for the 1997
financial statements. For amounts after December 31, 1997, we have used
September 30, 1998 exchange rates, except as otherwise noted. 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 (Euro)0.45378 per NLG1.00. On January 22, 1999, the
exchange rate was (Euro)0.86341 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. On January 22, 1999, the
exchange rate was NLG1.9027 per $1.00.
<TABLE>
<CAPTION>
At and for the Year At and for the
Ended December 31,(1) Nine Months
------------------------ Ended
1993 1994 1995 1996 1997 September 30, 1998(1)
---- ---- ---- ---- ---- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Exchange rate at end of
period........................ 1.95 1.74 1.60 1.73 2.03 1.88
Average exchange rate during
period........................ 1.86 1.81 1.60 1.69 1.97 2.02
Highest exchange rate during
period........................ 1.96 1.98 1.75 1.76 2.12 2.09
Lowest exchange rate during
period........................ 1.76 1.67 1.52 1.61 1.73 1.88
</TABLE>
- --------
(1) Source: Federal Reserve Statistical Release H.10(512). Exchange rates have
been rounded to the nearest 1/100th of one dollar.
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 (unless otherwise
indicated) of each functional currency.
<TABLE>
<CAPTION>
Average Rate
Average Rate Twelve Average Rate
Average Rate Balance Sheet Twelve Months Balance Sheet Months Balance Sheet Nine Months
Six Months Rate at Ended Rate at Ended Rate at Ended
Dec. 31, 1995 Dec. 31, 1996 Dec. 31, 1996 Dec. 31, 1997 Dec. 31, 1997 September 30, 1998 September 30, 1998
------------- ------------- ------------- ------------- ------------- ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Austrian
Schilling...... 0.1592 0.1595 0.1593 0.1602 0.1599 0.1602 0.16019
Belgian Franc... 0.0544 0.0545 0.0544 0.0546 0.0545 0.0547 0.05463
Czech Koruna.... 0.0606 0.0637 0.0626 0.0585 0.0622 0.0624 0.06121
French Franc.... -- 0.3330 0.3295 0.3369 0.3243 0.3365 0.33627
German Mark..... -- -- -- -- -- 1.12718 1.1276
Hungarian Forint
(per 100
units)......... -- -- -- 0.99 1.05 0.86 0.947
Irish Pound..... -- -- -- 2.89 2.96 2.82 2.829
New Israeli
Shekel......... -- -- -- 0.5720 0.5522 0.4913 0.55342
Maltese Lira.... -- -- -- 5.11 4.99 5.05 5.112
Norwegian
Kroner......... -- 0.2711 0.2645 0.2745 0.2755 0.2553 0.26689
Romania Lei (per
100 units)..... -- -- -- 0.0250 0.0277 0.0204 0.0238
Slovak Koruna... -- -- -- 0.0579 0.0579 0.0542 0.05777
U.S. Dollar..... 1.61 1.74 1.69 2.02 1.95 1.890 2.024
</TABLE>
17
<PAGE>
DILUTION
Our net tangible book value as of September 30, 1998, was negative NLG547.7
million or negative NLG7.63 per ordinary share. Pro forma for our purchase from
UIH of UIH's interests in Monor, Tara and IPS in exchange for 11,285,604 of our
ordinary shares (the "Pro Forma Adjustment") net tangible book value as of
September 30, 1998 would have been negative NLG534.9 million or negative
NLG6.44 per share. "Net tangible book value per share" is determined by
subtracting our total liabilities and minority interests from our total
tangible assets and dividing the remainder by the number of shares outstanding,
including those issued shares held by the foundation that administers our
Equity Stock Option Plan. See "Management -- Stock Option Plans". After giving
effect to our sale of 40,000,000 ordinary shares in this offering at an
estimated initial public offering price of NLG56.20 per share, the midpoint of
the offering price range, and application of the estimated net proceeds
therefrom, our net tangible book value as of September 30, 1998, pro forma for
the Pro Forma Adjustment, would have been NLG1,589.8 million or NLG12.92 per
share. This represents an immediate increase in net tangible book value of
NLG19.36 per share to existing shareholders and an immediate dilution in net
tangible book value of NLG43.28 per share to new shareholders purchasing shares
in this offering. "Dilution per share" represents the difference between the
price per share to be paid by new shareholders for the shares issued in this
offering and the net pro forma tangible book value per share as of September
30, 1998. The following table illustrates this per share dilution:
<TABLE>
<CAPTION>
Dutch
guilders
------------
<S> <C> <C>
Assumed inital offering price per ordinary share............... 56.20
Negative net tangible book value per ordinary share
(including the Pro Forma Adjustment) before this offering... (6.44)
Increase per ordinary share attributable to this offering.... 19.36
-----
Net tangible book value per ordinary share, as adjusted to
reflect this offering......................................... 12.92
-----
Dilution per ordinary share purchased by new investors......... 43.28
=====
</TABLE>
The following table sets forth as of September 30, 1998, pro forma for the
Pro Forma Adjustment, the number of ordinary shares purchased from us, the
total cash and other consideration paid to us by UIH, the Foundation and the
purchasers of the shares in this offering, at an estimated initial public
offering price of NLG56.20 per share, the midpoint of the offering price range.
If the Discount Group exercises its option to acquire approximately $90 million
of our ordinary shares at 90% of the per share price in this offering,
purchasers of shares in this offering will experience additional dilution. See
"Certain Transactions and Relationships -- The Discount Group's Option".
<TABLE>
<CAPTION>
Ordinary Shares Total Consideration
---------------------- ------------------------
Number Percent Amount Percent
----------- ------- ----------- --------
(Dutch
guilders,
in
thousands)
<S> <C> <C> <C> <C>
UIH..................... 77,087,469(1) 62.63 633,949(2) 22.00
Foundation(3)........... 6,000,000 4.87 -- --
Investors in this
offering............... 40,000,000 32.50 2,248,000 78.00
----------- ------ ----------- --------
Total................. 123,087,469 100.00 2,881,949 100.00
=========== ====== =========== ========
</TABLE>
- --------
(1) UIH's share ownership is comprised of 75,000,000 total outstanding ordinary
shares excluding the 6,000,000 shares held by the Foundation, less
outstanding treasury shares of 9,198,135 plus 11,285,604 new ordinary
shares issued to UIH for its contribution to us of UIH's interest in Monor,
Tara and IPS.
(2) Represents cash and the book value of all property contributed by UIH to us
upon our formation and afterwards, additional consideration paid by UIH to
Philips upon our formation and the amount paid by UIH to acquire Philips'
interest in us.
(3) Represents shares held in the Foundation to administer the stock option
plan for our employees, some of which are still subject to our repurchase
right. These options have exercise prices of between NLG10.49 and NLG13.57.
Proceeds from the exercise of these options remain in the Foundation. Upon
liquidation of the Foundation, any remaining assets revert to UIH. See
"Management -- Stock Option Plans".
18
<PAGE>
CAPITALIZATION
The following table sets forth our non-restricted cash and cash
equivalents, short-term debt and consolidated capitalization as of September
30, 1998 and as adjusted to reflect this offering and the application of the
net proceeds from this offering, the NUON Acquisition and the issuance of
11,285,604 of our ordinary shares to UIH in connection with UIH's contribution
of its interests in Monor, Tara and IPS. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations". The table should be
read in conjunction with our audited consolidated financial statements and the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included in this prospectus.
<TABLE>
<CAPTION>
As of September 30, 1998
---------------------------------
Actual As Adjusted
--------------- ----------------
(Dutch guilders, in thousands)
<S> <C> <C>
Non-restricted cash and cash equivalents.. 44,340 870,466 (1)
=============== ===============
Short-term debt:
Time Warner Note........................ 34,020 34,020
UTH short-term debt..................... -- 576,400 (2)
UIH Loan................................ 156,030 -- (1)
Tranche B Facility...................... 113,519 -- (1)
--------------- ---------------
Total short-term debt................. 303,569 610,420
=============== ===============
Long-term debt:
Tranche A Facility...................... 971,978 351,978 (1)
Mediareseaux Facility................... 20,190 20,190
UTH long-term debt...................... -- 224,092 (3)
Bank and other loans.................... 47,464 47,464
--------------- ---------------
Total long-term debt.................. 1,039,632 643,724
--------------- ---------------
Minority interest in subsidiaries......... 34,265 34,265
NUON equity obligation.................... -- 106,000 (4)
Shareholders' equity:
Ordinary shares......................... 54,000 82,062 (5)
Additional paid-in capital.............. 631,323 2,618,059 (5)
Equity warrants......................... -- 57,500 (6)
Deferred compensation................... (5,826) (5,826)
Treasury stock.......................... (122,662) --
Accumulated deficit..................... (318,089) (318,089)
Other cumulative comprehensive income
(loss) ................................ (17,399) (17,399)
--------------- ---------------
Total shareholders' equity............ 221,347 2,416,307
--------------- ---------------
Total capitalization................ 1,295,244 3,200,296
=============== ===============
</TABLE>
- --------
(1) Non-restricted cash and cash equivalents have been increased for net
proceeds of this offering, net of repayment of the UIH Loan, the Tranche B
Facility, NLG620 million of the Tranche A Facility, which we plan to
reborrow under this same facility, and funds due to NUON for our purchase
of the remaining 49% interest of UTH. See "Use of Proceeds".
(2) Represents short-term debt to be consolidated in connection with the
purchase of UTH. In January 1999, UTH received commitments from a group of
banks to refinance this facility on a long-term basis.
(3) Represents long-term debt to be consolidated in connection with the
purchase of UTH.
(4) Represents our equity obligation to NUON due six months after the closing
of this offering.
(5) Reflects the issuance of 11,285,604 ordinary shares to UIH in connection
with UIH's contribution to us of its interests in Monor, Tara, and IPS and
the sale of 40,000,000 common shares in this offering, including 9,198,135
shares held by a wholly-owned subsidiary. See "Certain Transactions and
Relationships -- Previously-Issued Shares". Due to our stock split, the
nominal value of our ordinary shares has been reduced from NLG1.00 to
NLG0.67.
(6) Represents the fair value of the initially vested portion (50%) of the
3,800,000 warrants expected to be issued to Microsoft in connection with
our technology relationship. The remaining 50% will be based on performance
criteria to be established jointly by Microsoft and us. No initial fair
value has been assigned to the performance-based portion of these warrants.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the six months ended
December 31, 1995, the years ended December 31, 1996 and 1997 and the nine
months ended September 30, 1998 have been derived from our audited consolidated
financial statements included in this prospectus. The following selected
consolidated financial data for the nine months ended September 30, 1997 has
been derived from unaudited financial statements included in this prospectus
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. The consolidated financial data for the years ended
December 31, 1993 and 1994 have been derived from the audited financial
statements of the European cable television operations of Philips Electronics
N.V. ("Philips") contributed to us upon our formation as a joint venture. The
following consolidated financial data for the six months ended June 30, 1995
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 UIH and Philips, the cable
television properties contributed by Philips are deemed to be our predecessor.
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 in this prospectus.
<TABLE>
<CAPTION>
Predecessor in Interest UPC
---------------------------- -----------------------------------------------------------
Year Ended Six Months Six Months Year Ended Nine Months Ended
December 31, Ended Ended December 31, September 30,
---------------- June 30, December 31, ---------------------- ----------------------
1993 1994 1995 1995 1996 1997 1997 1998(1)
------- ------- ---------- ------------ ---------- ---------- ---------- ----------
(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............... 171,300 183,600 91,100 100,179 245,179 337,155 250,061 305,237
Operating expense...... (43,800) (44,100) (23,000) (32,806) (80,479) (111,919) (87,206) (97,472)
Selling, general &
administrative
expense............... (38,600) (44,500) (23,600) (33,617) (78,823) (114,024) (80,061) (132,466)
Depreciation and
amortization.......... (44,100) (42,200) (21,100) (36,224) (84,332) (139,216) (99,903) (137,231)
------- ------- ------- ---------- ---------- ---------- ---------- ----------
Net operating income
(loss)................ 44,800 52,800 23,400 (2,468) 1,545 (28,004) (17,109) (61,932)
Interest income........ -- -- -- 6,403 2,757 6,512 1,561 4,621
Interest expense....... -- -- -- (19,873) (38,475) (72,544) (45,522) (74,558)
Provision for loss on
investment related
costs................. -- -- -- -- -- (18,888) (10,000) --
Foreign exchange gain
(loss) and other
expense............... -- -- -- (3,376) (21,135) (41,160) (42,177) 6,609
------- ------- ------- ---------- ---------- ---------- ---------- ----------
Net income (loss)
before income taxes
and other items....... 44,800 52,800 23,400 (19,314) (55,308) (154,084) (113,247) (125,260)
Shares in result of
affiliated companies,
net................... (300) (2,800) (2,300) (22,179) (17,811) (10,637) (15,807) (42,167)
Minority interests in
subsidiaries.......... (200) (200) -- (191) (2,208) (2,894) (1,339) (4,838)
Income tax benefit
(expense)............. -- -- -- 155 (509) 1,649 409 413
------- ------- ------- ---------- ---------- ---------- ---------- ----------
Net income (loss)...... 44,300 49,800 21,100 (41,529) (75,836) (165,966) (129,984) (171,852)
======= ======= ======= ========== ========== ========== ========== ==========
Basic and diluted loss
per ordinary
share(2).............. n/a n/a n/a (0.51) (0.94) (2.06) (1.60) (2.39)
========== ========== ========== ========== ==========
Weighted-average number
of ordinary shares
outstanding(2)........ n/a n/a n/a 81,000,000 81,000,000 80,488,992 81,000,000 71,801,865
========== ========== ========== ========== ==========
</TABLE>
- -------
(1) As a result of UIH's acquisition of Philips' interest in us and the
associated push-down of UIH's basis on December 11, 1997, this information
is presented on a "post-acquisition" basis.
(2) "Basic and diluted loss per ordinary share" is determined by dividing net
loss available to ordinary shareholders by the weighted-average number of
ordinary shares outstanding during each period.
20
<PAGE>
<TABLE>
<CAPTION>
Predecessor in Interest UPC
------------------------ ----------------------------------------------
As of As of As of
December 31, As of As of December 31, September 30,
--------------- June 30, December 31, ------------------- -------------
1993 1994 1995 1995 1996 1997(1) 1998(1)
------- ------- -------- ------------ --------- --------- -------------
(Dutch guilders, in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Selected Balance Sheet
Data:
Non-restricted cash and
cash equivalents....... 600 700 400 123,895 42,631 99,315 44,340
Other current assets.... 13,200 14,700 10,000 172,687 82,912 84,892 101,177
Investments in
affiliated companies... 5,200 5,900 5,200 236,262 224,157 384,940 365,724
Property, plant and
equipment.............. 193,400 197,800 192,000 277,785 414,669 483,693 527,069
Intangible assets....... -- 2,300 2,200 297,024 353,657 725,513 678,741
Total assets........... 213,000 222,000 220,400 1,108,442 1,119,180 1,919,815 1,849,968
Short-term debt......... 3,400 3,400 -- -- 449,892 257,515 303,569
Other current
liabilities............ 25,100 41,100 132,300 92,574 118,659 181,846 198,513
Long-term debt.......... -- -- -- 236,140 275,802 1,004,018 1,039,632
Total liabilities...... 149,000 165,100 132,300 777,506 856,060 1,501,506 1,594,356
Total shareholders'
equity................ 64,000 56,900 86,700 329,536 258,566 411,530 221,347
</TABLE>
- --------
(1) As a result of UIH's acquisition of Philips' interest in us and the
associated push-down of UIH's basis on December 11, 1997, this information
is presented on a "post-acquisition" basis.
21
<PAGE>
PRO FORMA SELECTED CONSOLIDATED FINANCIAL DATA
In August 1998, we and a Dutch energy company ("NUON") created United
Telekabel Holding ("UTH") by contributing each of our interests in Dutch cable
television systems to the new company (the "UTH Transaction"). We contributed
our 100% interest in CNBH and our 50% interest in A2000. NUON contributed its
100% interest in N.V. TeleKabel Beheer ("Telekabel Beheer"). We held 51% of
UTH, with NUON owning the remaining 49%. Effective August 1998, we
deconsolidated our assets contributed to UTH and accounted for our interest in
UTH under the equity method (see note 3 to the audited consolidated financial
statements included in this prospectus). In January 1999, we agreed to purchase
NUON's 49% ownership interest in UTH, increasing our ownership of UTH to 100%
(the "NUON Transaction"), for NLG487.6 million, plus interest at 5.5%
compounded annually from January 1, 1998. In addition, we will purchase from
NUON a NLG33.0 million subordinated loan dated December 23, 1998, and owed by
UTH to NUON, plus interest on the loan at 5.5% from December 23, 1998 until the
closing date. The NUON Transaction is expected to close in February 1999. Upon
closing of the NUON Transaction, we will consolidate 100% of the results of
UTH. See "Corporate Ownership Structure -- The Netherlands -- UTH".
The following unaudited pro forma consolidated condensed balance sheet
gives effect to the NUON Transaction as if it had occurred on September 30,
1998. The following
unaudited pro forma consolidated statement of operations for the year ended
December 31, 1997 gives effect to (1) UIH's acquisition of Philips' 50%
interest in us in December 1997 (the "UPC Acquisition") as if it had occurred
as of January 1, 1997 and (2) the UTH Transaction and the NUON Transaction, as
if both had occurred as of January 1, 1997. The following unaudited pro forma
consolidated statement of operations for the nine months ended September 30,
1998 gives effect to the UTH Transaction and the NUON Transaction, as if both
had occurred as of January 1, 1997.
The following pro forma consolidated condensed 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 consolidated condensed financial information and accompanying notes
should be read in conjunction with our audited consolidated financial
statements and the notes thereto, and other financial information, including
"Management's Discussion and Analysis of Financial Condition and Results of
Operations", included in this prospectus.
<TABLE>
<CAPTION>
As of September 30, 1998
-------------------------------------
NUON
Historical Transaction(1) Pro Forma
Consolidated Condensed Balance Sheet: ---------- -------------- ---------
(Dutch guilders, in thousands)
<S> <C> <C> <C>
ASSETS:
Cash and cash equivalents................. 44,340 2,562 46,902
Restricted cash........................... 9,265 -- 9,265
Subscriber receivables, net............... 12,369 13,810 26,179
Costs to be reimbursed by affiliated
companies, net........................... 25,369 -- 25,369
Other current assets...................... 54,174 69,527 123,701
--------- --------- ---------
Total current assets..................... 145,517 85,899 231,416
Marketable equity securities of parent, at
fair value............................... 58,025 -- 58,025
Investments in and advances to affiliated
companies, accounted for under the equity
method, net ............................. 365,724 (63,270)(2) 302,454
Property, plant and equipment, net........ 527,069 779,629 1,306,698
Goodwill and other intangible assets,
net...................................... 678,741 683,820 (3) 1,362,561
Deferred financing costs, net............. 22,142 -- 22,142
Non-current restricted cash and other
assets................................... 52,750 -- 52,750
--------- --------- ---------
Total assets............................. 1,849,968 1,486,078 3,336,046
========= ========= =========
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
As of September 30, 1998
------------------------------------
NUON
Historical Transaction(1) Pro Forma
---------- -------------- ---------
(Dutch guilders, in thousands)
<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable, accrued liabilities and
other current liabilities .............. 198,513 132,850 331,363
Short term debt.......................... 34,020 257,500(4) 291,520
Notes payable............................ 156,030 -- 156,030
Current portion of long term debt ....... 113,519 579,009 692,528
--------- --------- ---------
Total current liabilities............... 502,082 969,359 1,471,441
Long-term debt........................... 1,039,632 481,592(5) 1,521,224
Deferred taxes and other long-term
liabilities............................. 52,642 35,127 87,769
--------- --------- ---------
Total liabilities....................... 1,594,356 1,486,078 3,080,434
--------- --------- ---------
Minority interest in subsidiaries........ 34,265 -- 34,265
--------- --------- ---------
Shareholders' equity..................... 221,347 -- 221,347
--------- --------- ---------
Total liabilities and shareholders'
equity.................................. 1,849,968 1,486,078 3,336,046
========= ========= =========
</TABLE>
- --------
(1) The unaudited pro forma effects on the balance sheet include (1)
elimination of our equity investment in UTH, (2) the purchase of the
remaining 49% interest in UTH, including the purchase price allocation
related to the acquisition, and (3) additional debt assuming that the
acquisition of the remaining 49% ownership interest in UTH would be funded
with debt.
In accordance with the terms of the purchase agreement for the acquisition
of NUON's 49% interest in UTH and assuming offering proceeds of NLG2,248
million, the purchase price, including the NLG33 million subordinated note
and related interest, would be funded with approximately NLG445 million in
cash proceeds from this offering and the remaining amount totaling
approximately NLG106 million would be satisfied six months after closing of
the NUON Transaction by an issuance of our ordinary shares to NUON or, at
our option, in cash. These pro formas have been prepared assuming the
entire purchase price will be settled in cash.
(2) Represents the net decrease in investments in and advances to affiliated
companies as a result of the NUON Transaction:
<TABLE>
<S> <C>
De-consolidation of UPC's historical investments in and
advances to UTH........................................... NLG(248,791)
Consolidation of historical UTH investments in and advances
to affiliated companies................................... NLG 185,521
-----------
NLG (63,270)
===========
</TABLE>
(3) Represents the increase in goodwill as a result of the NUON Transaction:
<TABLE>
<S> <C>
Consolidation of historical UTH goodwill..................... NLG403,629
Additional pro forma goodwill related to the NUON
Transaction................................................. NLG280,191
----------
NLG683,820
==========
</TABLE>
(4) Represents the increase in short-term debt for the portion of the seller
financing from NUON due no later than November 30, 1999 incurred in
connection with the NUON Transaction.
(5) Represents the increase in long-term debt as a result of the NUON
Transaction:
<TABLE>
<S> <C>
Consolidation of historical UTH long-term debt................ NLG224,092
Seller financing due December 31, 2000........................ NLG257,500
----------
NLG481,592
==========
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30, 1998
------------------------------------
Pro Forma
Adjustments
---------------
UTH and NUON
Historical Transactions(1) Pro Forma
---------- --------------- ---------
(Dutch guilders,
in thousands except per share data)
<S> <C> <C> <C>
Consolidated Condensed Statement of
Operations:
Service and other revenue................ 305,237 123,417 428,654
Operating expense........................ (97,472) (42,585) (140,057)
Selling, general and administrative
expense................................. (132,466) (29,836) (162,302)
Depreciation and amortization............ (137,231) (60,577)(4) (197,808)
-------- ------- --------
Net operating loss....................... (61,932) (9,581) (71,513)
Interest income.......................... 4,621 -- 4,621
Interest expense......................... (74,558) (50,282)(5) (124,840)
Provision for loss on investment related
costs................................... -- -- --
Foreign exchange gain (loss) and other
expense................................. 6,609 -- 6,609
-------- ------- --------
Net loss before income taxes and other
items................................... (125,260) (59,863) (185,123)
Share in results of affiliated companies,
net..................................... (42,167) 5,509 (6) (36,658)
Minority interests in subsidiaries....... (4,838) -- (4,838)
Income tax benefit (expense)............. 413 -- 413
-------- ------- ========
Net loss................................. (171,852) (54,354) (226,206)
======== ======= ========
Basic and diluted net loss per ordinary
share(2)................................ (2.39) (0.76) (3.15)
======== ======= ========
Supplemental basic and diluted net loss
per ordinary share(2)................... (1.43) (0.76) (2.05)
======== ======= ========
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31, 1997
------------------------------------------------------------------------
Pro Forma Adjustments
--------------------------------------
UTH
UPC and NUON
Historical Acquisition(3) Transactions(1) Pro Forma
------------- --------------- ---------------- -------------
(Dutch guilders, in thousands except per share data)
<S> <C> <C> <C> <C>
Consolidated Condensed
Statement of
Operations:
Service and other
revenue................ 337,155 -- 137,233 474,388
Operating expense....... (111,919) -- (43,783) (155,702)
Selling, general and
administrative
expense................ (114,024) -- (35,682) (149,706)
Depreciation and
amortization........... (139,216) (19,704)(7) (58,255)(4) (217,175)
------------- ------------ ------------ -------------
Net operating loss...... (28,004) (19,704) (487) (48,195)
Interest income......... 6,512 -- -- 6,512
Interest expense........ (72,544) (12,483)(8) (54,535)(5) (139,562)
Provision for loss on
investment related
costs.................. (18,888) -- -- (18,888)
Foreign exchange gain
(loss) and other
expense................ (41,160) 8,441 (9) -- (32,719)
------------- ------------ ------------ -------------
Net loss before income
taxes and other items.. (154,084) (23,746) (55,022) (232,852)
Share in results of
affiliated companies,
net.................... (10,637) (8,169)(10) (4,731)(6) (23,537)
Minority interests in
subsidiaries........... (2,894) -- 683 (2,211)
Income tax benefit
(expense).............. 1,649 -- 3,081 4,730
------------- ------------ ------------ -------------
Net loss................ (165,966) (31,915) (55,989) (253,870)
============= ============ ============ =============
Basic and diluted net
loss per ordinary
share(2)............... (2.06) (0.44) (0.78) (3.54)
============= ============ ============ =============
Supplemental basic and
diluted net loss per
ordinary share(2)...... (2.06) 0.35 (0.78) (2.19)
============= ============ ============ =============
</TABLE>
- --------
(1) The unaudited pro forma effects on the statement of operations for the
nine months ended September 30, 1998 include (1) the consolidation of
Telekabel Beheer's historical statement of operations for the seven months
ended July 31, 1998, (2) the consolidation of UTH's statement of
operations for the two months ended September 30, 1998, (3) the reversal
of UPC's share in results of UTH recorded, (4) additional depreciation and
amortization related to the purchase price allocation for the acquisition
of Telekabel Beheer and (5) additional interest expense assuming the
acquisition of NUON's 49% ownership interest in UTH would be funded with
seller financing from NUON at an interest rate of 5.5% per annum.
The unaudited pro forma effects on the statement of operations for the year
ended December 31, 1997 include (1) the consolidation of Telekabel Beheer's
historical statement of operations for the year ended December 31, 1997, (2)
additional depreciation and amortization related to the purchase price
allocation for the acquisition of Telekabel Beheer and (3) additional
interest expense assuming the acquisition of NUON's 49% ownership interest
in UTH would be funded with seller financing from NUON at an interest rate
of 5.5% per annum.
In accordance with the terms of the purchase agreement for the acquisition
of NUON's 49% interest in UTH and assuming offering proceeds of NLG2,248
million, the purchase price, including the NLG33 million subordinated note
and related interest, would be funded with approximately NLG445 million in
cash proceeds from this offering and the remaining amount totaling
approximately NLG106 million would be satisfied six months after closing of
the NUON Transaction by an issuance of our ordinary shares to NUON or, at
our option, in cash. These pro formas have been prepared assuming the
entire purchase price will be settled in cash.
(2) "Basic and diluted loss per ordinary share" is determined by dividing net
loss available to ordinary shareholders by the weighted-average number of
ordinary shares outstanding during each period. Supplemental basic and
diluted net loss per ordinary share gives pro forma effect to a reduction
of debt related interest expense for that debt that will be paid down from
offering proceeds. The number of pro forma outstanding shares has been
increased for the proceeds necessary to reduce the debt.
(3) In connection with UIH's acquisition of Philips' interest in us, our net
assets acquired by UIH were recorded at fair market value based on the
purchase price paid by UIH. As a result of our becoming essentially wholly
owned by UIH, certain purchase accounting adjustments, along with existing
basis differences, were pushed down to our financial statements and a new
basis of accounting was established for our net assets acquired by UIH.
The pro forma effects on the statement of operations for the year ended
December 31, 1997 include (1) additional depreciation and amortization
related to the step-up in basis in tangible assets and the excess of the
purchase price over Philips' interest in our net assets, (2) the increase
in interest expense from the new Tranche A Facility and Tranche B Facility
incurred to finance UIH's acquisition of Philips' interest in us, as well
as foreign exchange loss on the U.S. dollar-denominated Tranche B
Facility, (3) elimination of historical interest expense and the related
foreign exchange loss on the U.S. dollar-denominated pay-in-kind
convertible notes (the "PIK Notes") and (4) elimination of historical
interest expense on those existing credit facilities that were refinanced
through the proceeds from the Tranche A and Tranche B Facilities.
25
<PAGE>
(4) Represents the increase in depreciation and amortization as a result of
the NUON Transaction:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Consolidation of historical Telekabel
Beheer depreciation and
amortization........................ NLG(32,128) NLG(39,963)
Consolidation of historical UTH
depreciation and amortization for
the two months ended September 30,
1998................................ NLG(14,730) --
Additional amortization of excess
purchase price in connection with
the NUON Transaction................ NLG(13,719) NLG(18,292)
---------- ----------
NLG(60,577) NLG(58,255)
========== ==========
</TABLE>
(5) Represents the increase in interest expense as a result of the NUON
Transaction:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Consolidation of historical Telekabel
Beheer interest expense............. NLG(21,227) NLG(26,210)
Consolidation of historical UTH
interest expense for the two months
ended September 30, 1998............ NLG (7,811) --
Interest expense on NLG515 million
seller financing (assuming 5.5% per
annum) in connection with the NUON
Transaction......................... NLG(21,244) NLG(28,325)
---------- ----------
NLG(50,282) NLG(54,535)
========== ==========
</TABLE>
(6) Represents the net increase in share in results of affiliates as a result
of the NUON Transaction:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
------------------ -----------------
<S> <C> <C>
Reversal of UPC's historical share in
results of UTH for the two months
ended September 30, 1998............ NLG 8,325 --
Consolidation of historical Telekabel
Beheer share in results of
affiliated companies................ NLG 6,237 NLG(4,731)
Consolidation of historical UTH share
in results of affiliated companies.. NLG(9,053) --
--------- ---------
NLG 5,509 NLG(4,731)
========= =========
</TABLE>
(7) Represents additional depreciation and amortization as a result of the
step-up in basis of property, plant and equipment, license costs and
goodwill as a result of the UPC Acquisition (see note 1 to the audited
consolidated financial statements included in this prospectus).
(8) Represents the net increase in interest expense as a result of the UPC
Acquisition:
<TABLE>
<S> <C>
Elimination of historical interest expense on the PIK Notes... NLG28,743
Elimination of historical interest on refinanced credit
facilities................................................... NLG19,700
Additional interest expense on the Tranche A Facility
(assuming borrowings of NLG786,000 at an interest rate of
5.5%)........................................................ NLG(40,828)
Additional interest expense on the Tranche B Facility
(assuming borrowings of NLG224,000 at an interest rate of
9.5%)........................................................ NLG(20,098)
----------
NLG(12,483)
==========
</TABLE>
(9) Represents the net decrease in foreign exchange loss as a result of the
UPC Acquisition.
<TABLE>
<S> <C>
Elimination of historical foreign exchange loss of the PIK
Notes...................................................... NLG 43,441
Pro Forma foreign exchange loss on the Tranche B Facility... NLG(35,000)
==========
NLG 8,441
==========
</TABLE>
(10) Represents the net increase on share results of affiliated companies as a
result of the amortization of the step-up in basis of investments in and
advances to affiliated companies accounted for under the equity method as
a result of the UPC Acquisition.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. Our actual
results may differ significantly from the results discussed in the forward-
looking statements. The following discussion and analysis of financial
condition and results of operations covers the six months from July 1, 1995
(commencement of the joint venture between UIH and Philips) to December 31,
1995, the years ended December 31, 1996 and 1997, and the nine months ended
September 30, 1997 and 1998 and should be read together with our consolidated
financial statements and related notes included in this prospectus. These
consolidated financial statements provide additional information regarding our
financial activities and condition.
Introduction
Commencing our present business in July 1995, we currently own and operate
the largest pan-European group of broadband communications networks (based on
the number of subscribers in more than one European country) and offer analog
cable television services. We are further developing and upgrading our network
to provide digital video, voice and Internet/data services in our Western
European markets. We and Microsoft recently signed a letter of intent to
establish a relationship to work jointly on Internet, telephone and video
projects. See "Relationship with Microsoft" and "Risk Factors -- Our
Relationship with Microsoft May Not Work Out".
As of September 30, 1998, we consolidated the results from our systems in
Austria, Belgium, Norway, France, Hungary, the Czech Republic, Romania and the
Slovak Republic. Unconsolidated systems included our interests in the Dutch,
Israeli and Maltese systems and programming interests in Hungary and the Czech
Republic. We account for these unconsolidated systems using the equity method
of accounting. During the nine-month period ended September 30, 1998, we
consolidated some of our Dutch systems for a seven-month period ended July 31,
1998. Thereafter, all of the Dutch systems were accounted for using the equity
method. After the closing of this offering, we will acquire the remaining 49%
interest in UTH, our Dutch holding company, and will begin consolidating the
results of UTH's systems other than A2000.
History of UPC
Since formation, we have developed largely through acquisitions. The most
recent acquisitions have resulted in significant growth in consolidated
revenues and expenditures.
July 1995 We operated from July 1995 to December 1997 as a
Formation of UPC 50/50 joint venture between UIH and Philips. At the
formation of the joint venture in July 1995, Philips
contributed to us, among other things, its 95% interest
in cable television systems in Austria, its 100% interest
in cable television systems in Belgium and its minority
interests in cable television systems in France
(Citecable), Germany and The Netherlands (KTE). UIH
contributed to us its minority interests in cable
television systems in Hungary, Ireland, Israel, Malta,
Norway, Spain and Sweden and its majority interest in the
Czech Republic and Portugese systems and $75.0 million in
cash (and accrued interest of $3.2 million) and issued to
Philips $50.0 million of UIH common stock. In addition,
Philips received convertible notes of UPC totalling
$133.6 million to make up the difference in values
between the assets contributed by UIH and the assets
contributed by Philips.
July 1995 In July 1995, in connection with our formation, we
A2000 Acquisition agreed to acquire from Philips 50% of A2000, which had
recently acquired the existing cable television systems
from the City of Amsterdam and four surrounding
27
<PAGE>
municipalities. Although this transaction closed in
September 1995, A2000 was accounted for using the equity
method of accounting, effective as of July 1, 1995.
September 1995 In September 1995, we acquired the remaining 96.2% of
KTE Acquisition the Dutch KTE system (the "KTE Acquisition") and began
consolidating its results.
September 1996 In September 1996, we increased our ownership in
Norkabel and Norkabel (Norway) from 8.3% to 100% (the "Norkabel
Kabelkom Acquisition"), Kabelkom (Hungary) from 3.9% to
Acquisitions effectively 50% and the Swedish system from 2.1% to
25.9%. We subsequently sold our interest in the Swedish
system. Norkabel was consolidated effective upon the
Norkabel Acquisition. Kabelkom was accounted for using
the equity method.
January 1997 In January 1997, we acquired 70.2% of Janco, a cable
Janco Acquisition system in Oslo, Norway, from Helsinki Media (the "Janco
Acquisition"). 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. Because of
certain contractual arrangements with Helsinki Media, we
have consolidated 100% of the operations of Janco
Multicom since formation.
December 1997 On December 11, 1997, we and UIH acquired the 50% of
UPC Acquisition our ordinary shares held by Philips for NLG450.0
million. As part of the UPC Acquisition, we purchased
3.17 million shares of Class A Common Stock of UIH held
by Philips (NLG66.8 million) and we and UIH purchased
all of the PIK Notes from Philips (NLG339.8 million).
The UPC Acquisition was financed with proceeds from the
Tranche A and Tranche B Facilities and cash from UIH.
Miscellaneous We sold our unconsolidated interests in our systems
System Sales in France (Citecable) in 1996, Germany in 1997 and Spain
(1996-1998) in 1998 and our consolidated interest in Portugal in
1998.
January 1998 Effective January 1, 1998, we acquired the Combivisie
Combivisie cable television systems (the "Combivisie Acquisition")
Acquisition and in the region surrounding our KTE system in The
CNBH Formation Netherlands for a purchase price of 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.
June 1998 On June 29, 1998, we acquired from Time Warner
Eastern Europe Entertainment Company L.P. ("Time Warner") 50% of
Transactions Kabelkom, the Hungarian cable television system holding
company ("Kabelkom"), 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 (the "Telekabel
Hungary Acquisition"). We own 79.25% of Telekabel
Hungary, Hungary's largest cable television operator and
started consolidating its results as of such date.
28
<PAGE>
August 1998 In August 1998, we and NUON combined all of our Dutch
UTH 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. We 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. See "Corporate
Ownership Structure -- The Netherlands -- UTH". As a
result of the UTH Transaction, since August 1, 1998, we
have not consolidated the results of CNBH and account for
UTH using the equity method of accounting (although, as
described below, we have agreed to purchase the other 49%
of UTH). See "Pro Forma Selected Consolidated Financial
Data".
November 1998 We held our interest in the Israeli, Maltese and
Increase in Israeli Irish operating systems through a partnership with a
and subsidiary of Tele-Communications International, Inc.
Maltese Systems ("TINTA"). In November 1998, we acquired TINTA's indirect
Ownership 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 this acquisition
through a loan from our primary partners in the Israeli
operating system. See "-- Liquidity and Capital
Resources -- Current Debt Facilities -- DIC Loan" and
"Shares Eligible for Future Sale".
November 1998 As part of the Israeli and Maltese transaction
Sale of Irish described above, in November 1998, we purchased from
System Riordan Communications Ltd. ("RCL"), an indirect 5%
interest in an Irish multi-channel television system and
5% of Tara Television Limited ("Tara"), a company
providing Irish programming to the U.K. markets. The
purchase price was 384,531 shares of UIH 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 TINTA for $20.5 million, offsetting part of
the purchase price payable for the Israeli and Maltese
systems. See "Certain Transactions and Relationships".
December 1998 In December 1998, UIH sold to us in exchange for
Purchase of Monor 6,330,340 of our ordinary shares UIH's:
and Tara from UIH
. 50% voting and 46.3% economic interest in Monor
Communications Group Inc. ("Monor"), a company that
operates a traditional telephone system in the
Monor region of Hungary (see "Business --Operating
Companies -- Eastern Europe"), and
. 75% interest in Tara, a company with revenues of
approximately NLG1.0 million for the nine months
ended September 30, 1998. See "Relationship with
UIH and Related Transactions".
February 1999
Purchase of IPS
from UIH .UIH has agreed to sell us, in exchange for 4,955,264
of our ordinary shares, UIH'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 NLG23.5 million for the nine
months ended September 30, 1998. This transaction is
expected to close in February 1999. See "Relationship
with UIH and Related Transactions".
29
<PAGE>
February 1999 In January 1999, we agreed to buy NUON's 49%
Purchase of ownership interest in UTH for NLG487.6 million plus an
UTHMinority interest payment on this amount at a rate of 5.5% from
Interest January 1, 1998 until the closing date. In addition, we
will purchase from NUON a NLG33.0 million subordinated
loan dated December 23, 1998 owed by UTH to NUON plus
interest on the loan at 5.5% from December 23, 1998 until
the closing date. This transaction will close
concurrently with the completion of this offering. Half
of the purchase price is payable in cash and, assuming
offering proceeds of more than NLG1,400 million, an
additional 20% of the offering proceeds in excess of
NLG1,400 million is also payable in cash. The remaining
amount of the purchase price is due after six months in
our ordinary shares at their market value at that time
or, at our option, in cash. If we raise gross proceeds of
NLG2,248 million in this offering, approximately NLG445
million of cash will be payable at the closing with
approximately NLG106 million due after six months in our
ordinary shares or, at our option, in cash. We will own
100% of UTH following this acquisition. We will pledge
our shares in UTH to NUON to secure our performance of
the agreement.
30
<PAGE>
Overview of Our Activities
Services
To date, our primary source of revenue has been video entertainment
services. For the year ended December 31, 1997 and the nine months ended
September 30, 1998, our video services accounted for approximately 95.1% and
92.4%, respectively, of our consolidated revenues. For the same periods, our
Internet/data service accounted for about 0.2% and 1.7%, respectively, of our
consolidated revenue and our telephone services accounted for 0% and 0.2%,
respectively.
Our operating systems generally offer a range of video service subscription
packages including a basic tier (26 to 32 channels) and an expanded basic tier
(6 to 13 additional channels). In some systems, we also offer mini-tiers,
premium programming (typically 2 channels) and pay-per-view programming (5 to
10 channels).
Historically, video services revenue has increased as a result of:
. acquisitions of systems, primarily in The Netherlands and Norway,
. subscriber growth from both well established and developing systems,
primarily in our Austrian and Eastern European systems, and
. increases in revenue per subscriber from basic rate increases and the
introduction of expanded basic tiers and pay-per-view services.
For a discussion of our revenue recognition policies, see note 2 of the
Notes to Consolidated Financial Statements.
We believe that an increasing percentage of our future revenues will come
from telephone and Internet/data services. See "Risk Factors -- The Success of
Our New Telephone and Internet/Data Services Depends on Evolving Technology",
"Business -- UPC Telephone Services: Priority Telecom" and "UPC Internet/Data
Services: High Speed Access and chello broadband".
Pricing
We usually charge a one-time installation fee when we connect subscribers,
a monthly subscription fee that depends on the level of service (ranging from
basic to expanded basic tiers), and incremental amounts for those subscribers
purchasing pay-per-view and premium programming, which are generally offered
only to expanded basic tier subscribers.
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. See "Regulation".
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 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 3% to 5% in Belgium and are approximately 13.5% in
Austria. Other direct operating expenses include operating personnel, service
vehicles, maintenance and plant electricity.
Selling, general and administrative ("SG&A") 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 require variable plan accounting. Increases in the
fair market value of our shares results in compensation charges (or credits, in
the case of decreases in fair market value) that are expensed for vested
options and deferred and amortized over their remaining vesting period for
unvested options. This charge is generally a non-cash expense unless the option
holder puts the vested option to us for cash. After the offering, we have the
right to settle the option in shares upon exercise; therefore options issued
pursuant to the Stock Option Plan will no longer require variable plan
accounting.
31
<PAGE>
Results of Operations
The following table sets forth information from, or derived from, our
Consolidated Statements of Operations for the six months ended December 31,
1995, the years ended December 31, 1996 and 1997, and the nine months ended
September 30, 1997 and 1998. For additional information regarding the operating
results of our consolidated and unconsolidated operating companies, see
"Business -- Operating Companies".
<TABLE>
<CAPTION>
For the
Six Months For the Years Nine Months
Ended Ended Ended
December 31, December 31, September 30,
------------ ----------------- ------------------
1995 1996 1997 1997 1998(1)
------------ ------- -------- -------- --------
(Dutch guilders, in thousands)
<S> <C> <C> <C> <C> <C>
Service and other
revenue.................. 100,179 245,179 337,155 250,061 305,237
Operating expense......... (32,806) (80,479) (111,919) (87,206) (97,472)
Selling, general and
administrative expense
("SG&A")................. (33,617) (78,823) (114,024) (80,061) (132,466)
Depreciation and
amortization............. (36,224) (84,332) (139,216) (99,903) (137,231)
------- ------- -------- -------- --------
Net operating income
(loss).................. (2,468) 1,545 (28,004) (17,109) (61,932)
Interest income........... 6,403 2,757 6,512 1,561 4,621
Interest expense.......... (19,873) (38,475) (72,544) (45,522) (74,558)
Provision for loss on
investment related
costs.................... -- -- (18,888) (10,000) --
Foreign exchange gain
(loss) and other
expense.................. (3,376) (21,135) (41,160) (42,177) 6,609
------- ------- -------- -------- --------
Net loss before income
taxes and other items... (19,314) (55,308) (154,084) (113,247) (125,260)
Share in results of
affiliated companies,
net...................... (22,179) (17,811) (10,637) (15,807) (42,167)
Minority interests in
subsidiaries............. (191) (2,208) (2,894) (1,339) (4,838)
Income tax benefit
(expense)................ 155 (509) 1,649 409 413
------- ------- -------- -------- --------
Net loss................. (41,529) (75,836) (165,966) (129,984) (171,852)
======= ======= ======== ======== ========
Other information:
Consolidated Adjusted
EBITDA(2)................ 33,756 85,877 116,030 82,794 107,792
As a Percentage of
Revenue:
Operating expense......... 32.7% 32.8% 33.2% 34.9% 31.9%
Selling, general and
administrative expense... 33.6 32.1 33.8 32.0 43.4
Adjusted EBITDA(2)........ 33.7 35.0 34.4 33.1 35.3
Depreciation and
amortization............. 36.2 34.4 41.3 40.0 45.0
Net operating (loss)
income................... (2.5) 0.6 (8.3) (6.8) (20.3)
Net loss.................. (41.5) (30.9) (49.2) (52.0) (56.3)
</TABLE>
- --------
(1) As a result of the UPC Acquisition and the associated push-down of UIH's
basis on December 11, 1997, this information is presented on a "post-
acquisition" basis.
(2) Adjusted EBITDA represents earnings before net interest expense, income tax
expense, depreciation, amortization, stock-based compensation charges,
minority interest, shares in results of affiliated companies (net),
currency exchange gains (losses) and other non-operating income (expense)
items.
Revenue
During the nine months ended September 30, 1998, our revenue increased
NLG55.2 million to NLG305.2 million from NLG250.0 million for the nine months
ended September 30, 1997, a 22.1% increase. Approximately one-third of this
increase was attributable to the Combivisie Acquisition in January 1998 and was
consolidated through July 31, 1998. The balance of this increase came from
subscriber growth and in revenue per subscriber in Austria, and increased
revenue from subscriber growth in the systems we are developing in France and
Eastern Europe. In addition, effective July 1, 1998, we began consolidating
Telekabel Hungary, which increased revenues during the period by NLG13.8
million.
During the year ended December 31, 1997, our revenue increased NLG92.0
million to NLG337.2 million from NLG245.2 million for the year ended December
31, 1996, a 37.5% increase. A substantial portion of this increase was
attributable to the Norkabel Acquisition in October 1996 and the Janco
Acquisition in January 1997 (together, NLG77.0 million). The remaining increase
in revenue was attributable to
32
<PAGE>
subscriber growth in the Austrian systems and increases in subscription fees in
some systems. In addition, revenue for the year ended December 31, 1997
included revenues from developing systems in France, Romania and the Slovak
Republic, which were not included in the 1996 operating results.
Revenues for the year ended December 31, 1996 were 22.4% greater than
annualized revenues for the six months ended December 31, 1995, primarily due
to the consolidation of the KTE system for the entire 1996 reporting period and
of Norkabel following the Norkabel Acquisition in October 1996. The remaining
increase in revenue comprised subscriber growth in Austria and the Czech
Republic and increased revenue from other developing systems in Eastern Europe.
Operating Expense
During the nine months ended September 30, 1998, our operating expense
increased NLG10.3 million to NLG97.5 million from NLG87.2 million for the nine
months ended September 30, 1997, an 11.8% increase. Approximately one-third of
this increase was attributable to the Combivisie Acquisition. Effective July 1,
1998, our operations include the results of Telekabel Hungary, which increased
operating expenses during the period by NLG4.9 million. 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 34.9% for the
comparable nine-month period in 1997 to 31.9%. This was due primarily to the
lower operating costs in the Combivisie system. 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
NLG31.4 million to NLG111.9 million from NLG80.5 million the previous year, a
39.0% increase. Most of this increase was attributable to the Norkabel
Acquisition in October 1996 and the Janco Acquisition in January 1997 (together
NLG27.5 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.
Operating expenses for the year ended December 31, 1996 were 22.7% greater
than annualized operating expenses for the six months ended December 31, 1995.
This was due primarily to the consolidation of the KTE system.
Selling, General and Administrative Expense
During the nine months ended September 30, 1998, our SG&A expense increased
NLG52.5 million to NLG132.5 million from NLG80.0 million for the nine months
ended September 30, 1997, a 65.6% increase. A substantial portion of this
increase and the increase as a percentage of net revenue resulted from a stock-
based compensation charge of NLG32.5 million attributable to our stock option
plans for the nine months ended September 30, 1998. A portion of this increase
was also attributable to the Combivisie Acquisition and the Telekabel Hungary
Acquisition, with the remaining increase comprising additional SG&A expenses
related to the development of new businesses, including further development of
Internet/data services and preparation for the launch of telephone services in
Austria, The Netherlands (CNBH), Norway and France. We expect SG&A expense as a
percentage of revenue to continue to increase as new video, telephone and
Internet/data services are introduced and due to increased stock-based
compensation expense. We anticipate incurring stock-based compensation expense
of approximately NLG240 million under our Stock Option Plan and Phantom Stock
Option Plan for the three months ended December 31, 1998 (based on an initial
public offering price of NLG56.20 per share, the midpoint of the offering price
range).
During the year ended December 31, 1997, our SG&A expense increased NLG35.2
million to NLG114.0 million from NLG78.8 million for the prior year, a 44.7%
increase. A substantial portion of this increase was attributable to the
Norkabel Acquisition in October 1996 and the Janco Acquisition in January 1997
(together NLG19.1 million), as well as the inclusion of expenses
33
<PAGE>
related to developing systems in France, Romania and the Slovak Republic that
were not included in 1996. SG&A 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.
SG&A expense for the year ended December 31, 1996 was 17.2% greater than
annualized SG&A expense for the six months ended December 31, 1995, primarily
due to the consolidation of the KTE system for the entire reporting period and
of Norkabel following the Norkabel Acquisition in October 1996.
Our allowance for doubtful accounts as a percentage of trade receivables
for the years ended December 31, 1996 and 1997 and the nine month period ended
September 30, 1998 was 37.9%, 43.2% and 43.4%, 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. As a percentage of revenue, our receivable balance is less than one
half of a month of revenue.
Depreciation and Amortization
During the nine months ended September 30, 1998, our depreciation and
amortization expense increased NLG37.3 million to NLG137.2 million from NLG99.9
million for the nine months ended September 30, 1997, a 37.3% increase. A
substantial portion of this increase (NLG22.1 million) and the increase as a
percentage of net revenue was attributable to the application of push down
accounting, including goodwill created in connection with the UPC Acquisition.
The remaining increase comprised additional depreciation related to the
Combivisie Acquisition and Telekabel Hungary Acquisition, 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 NLG54.9 million to NLG139.2 million from NLG84.3 million in
1996, a 65.1% increase. The majority of the increase was directly attributable
to the Norkabel Acquisition in October 1996 and the Janco Acquisition in
January 1997 (together, NLG47.5 million). The remaining increase comprised
additional depreciation from capital expenditures to upgrade the network in our
primary systems and new-build for developing systems.
Depreciation and amortization for the year ended December 31, 1996 was
16.4% greater than annualized depreciation and amortization expense for the six
months ended December 31, 1995, primarily due to the consolidation of the KTE
system for the entire reporting period and of Norkabel following the Norkabel
Acquisition in October 1996.
In connection with the letter of intent entered into with Microsoft
Corporation providing for the establishment of a technical services
relationship, we have agreed to grant Microsoft warrants to purchase up to
3,800,000 ADSs (or ordinary shares, at Microsoft's option). Half of these
warrants will be exercisable after one year for a period of three years and the
other half will vest 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 this offering. We expect to
record as contract acquisition rights approximately NLG57.5 million associated
with these warrants. Such costs are expected to be amortized on a straight-line
basis over the expected contract life, which is yet to be determined.
Operating Income (Loss); Adjusted EBITDA
During the nine month period ended September 30, 1998, operating loss
increased NLG44.8 million to NLG61.9 million from NLG17.1 million, a 262.0%
increase. Most of the increase resulted from the stock-based compensation
charge of NLG32.5 million related to our stock option plans as well as new
depreciation and amortization expense from the UPC Acquisition, the Combivisie
Acquisition and the Telekabel Hungary Acquisition. The cable television
industry generally measures the performance of a cable television company in
terms of operating income before depreciation, amortization and other non-cash
charges ("Adjusted EBITDA"). Adjusted EBITDA increased NLG25.0 million to
NLG107.8 million from NLG82.8 million, a 30.2% increase.
34
<PAGE>
During the year ended December 31, 1997, operating loss increased to
NLG28.0 million from operating income of NLG1.6 million for the year ended
December 31, 1996. This increase was primarily related to depreciation and
amortization expense. Adjusted EBITDA increased NLG30.1 million to NLG116.0
million from NLG85.9 million, a 35.0% increase. During the year ended December
31, 1997, Adjusted EBITDA as a percentage of revenue dropped from 35.0% in 1996
to 34.4%, a decrease of about 1.7%. This decrease was primarily related to
negative Adjusted EBITDA from developing systems in France and the Slovak
Republic.
During the year ended December 31, 1996, we generated operating income of
NLG1.5 million as compared to an annualized operating loss of
NLG4.9 million for the six months ended December 31, 1995. This increase was
primarily related to depreciation and amortization expense. Adjusted EBITDA
increased NLG18.4 million to NLG85.9 million as compared to annualized Adjusted
EBITDA of NLG67.5 million for the six months ended December 31, 1995, a 27.3%
increase.
We believe the introduction of telephone services and Internet/data
services will have a negative impact on operating income and Adjusted EBITDA
during the remainder of 1998 and a significant negative impact on operating
income and Adjusted EBITDA during 1999. Thereafter, this negative impact is
expected to decline. 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. See "Risk Factors -- Failure to Raise Necessary Capital Could
Restrict Our Growth".
Interest Expense
During the nine months ended September 30, 1998, interest expense increased
NLG29.1 million to NLG74.6 million from NLG45.5 million during the same period
in 1997, a 64.0% increase. This increase was due primarily to increases in
indebtedness related to the UPC Acquisition in December 1997, the Combivisie
Acquisition in January 1998 and the Telekabel Hungary Acquisition in June 1998.
See "-- Liquidity and Capital Resources".
During the year ended December 31, 1997, interest expense increased NLG34.0
million to NLG72.5 million from NLG38.5 million during the same period in 1996,
an 88.3% increase. This increase was due primarily to additional indebtedness
incurred for the Norkabel Acquisition in October 1996 and, to a lesser extent,
indebtedness incurred to fund developing systems, corporate overhead and the
UPC Acquisition. See "-- Liquidity and Capital Resources".
Interest expense for the year ended December 31, 1996 was 3.2% less than
annualized interest expense for the six-month period ended December 31, 1995.
Provision for Loss on Investment Related Costs
The provision for loss on investment-related costs totaled NLG18.9 million
for the year ended December 31, 1997. During 1997, we made a strategic decision
to sell our interest in our Portugese system due to competitive pressures
beyond our control. After receiving several offers for the sale of our
Portugese 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 expense reflected a gain of NLG6.6
million for the nine months ended September 30, 1998 as compared to a loss of
NLG42.2 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 the first nine months of 1998 as compared to the same period in
1997. We intend to repay part of our remaining U.S. dollar-denominated
indebtedness with proceeds from this offering. See "Use of Proceeds".
Foreign exchange loss and other expense increased NLG20.1 million to a loss
of NLG41.2
35
<PAGE>
million for the year ended December 31, 1997 from a loss of NLG21.1 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 the PIK
Notes.
Foreign exchange loss and other expense increased NLG14.3 million to a loss
of NLG21.1 million for the year ended December 31, 1996 from a loss of NLG6.8
million for the annualized six-month period ended December 31, 1995. This
increase 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 the PIK Notes. See "Risk Factors -- Foreign Currency
Exchange Rate Fluctuations May Cause Losses".
Share in Results of Affiliated Companies, Net
The table below sets forth our share in results of affiliated companies for
the applicable periods:
<TABLE>
<CAPTION>
For the
For the Years Nine Months
July 1, 1995 to Ended Ended
December 31, December 31, September 30,
--------------- ---------------- ----------------
1995 1996 1997 1997 1998
--------------- ------- ------- ------- -------
(Dutch guilders, in thousands)
<S> <C> <C> <C> <C> <C>
A2000..................... (6,500) (19,965) (25,458) (20,051) (26,631)
UTH....................... -- -- -- -- (8,325)
Hungary (Kabelkom,
programming and cable
television)(1)........... -- (262) 4,431 2,179 (6,974)
UII Partnership (Israel,
Ireland and Malta)....... (1,409) 1,896 10,589 3,291 3,414
Other(2).................. (14,270) 520 (199) (1,226) (3,651)
------- ------- ------- ------- -------
Total................... (22,179) (17,811) (10,637) (15,807) (42,167)
======= ======= ======= ======= =======
</TABLE>
- --------
(1) Effective July 1, 1998 we acquired the Hungarian cable television holding
company and began consolidation of its operations. The Hungarian
programming business continues to be accounted for using the equity method
of accounting.
(2) During 1995, Other represented our share in results from our investments in
Spain, Germany, KTE (Netherlands) and France. During 1996, Other
represented our share in results from Spain, France and Germany. During
1997 and 1998, Other substantially represented our share in results from TV
Max, a Czech and Slovak Republic programming business.
For the nine months ended September 30, 1998, our share in net losses of
affiliated companies increased to NLG42.2 million from NLG15.8 million for the
nine months ended September 30, 1997, a 167.1% increase, for the comparable
period in 1997. A substantial portion of the increase in share in net losses
was attributable to additional amortization of goodwill of A2000, Hungary
(Kabelkom) and the UII Partnership (Israel, Ireland and Malta) related to the
new basis of accounting established in the step acquisition of us by UIH. A2000
also had increased losses as it began to introduce telephone services during
this period. The share in net losses of Hungary (Kabelkom) for the nine months
ended September 30, 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.
For the year ended December 31, 1997, our share in net losses of affiliated
companies decreased to NLG10.6 million from NLG17.8 million for the previous
year, a 40.4% decrease, primarily as a result of improved earnings from the
partnership holding the Israeli, Irish and Maltese systems.
For the year ended December 31, 1996, our share in net losses of affiliated
companies decreased to NLG17.8 million from NLG44.4 million for the annualized
six-month period ended December 31, 1995, a 60.0% decrease, primarily as a
result of our 1995 write-down to net realizable value of other investments in
Spain, France and Germany.
36
<PAGE>
Statements of Cash Flows
We had cash and cash equivalents of NLG44.3 million as of September 30,
1998, a decrease of NLG55.0 million from NLG99.3 million as of December 31,
1997. Cash and cash equivalents as of December 31, 1997 represented an increase
of NLG56.7 million from NLG42.6 million as of December 31, 1996. Cash and cash
equivalents increased NLG123.9 million during the six months ended December 31,
1995. Details of the change in cash and cash equivalents are set forth in the
table below.
<TABLE>
<CAPTION>
Nine Months
Six Months Years Ended Ended
Ended December 31, September 30,
December 31, ------------------ ------------------
1995 1996 1997 1997 1998
------------ -------- -------- -------- --------
(Dutch guilders, in thousands)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities.............. 38,493 41,542 132,584 75,894 52,071
Cash flows from investing
activities.............. (500,106) (6,394) (402,340) (246,937) (381,253)
Cash flows from financing
activities.............. 465,508 (116,756) 326,482 196,913 275,910
Effect of exchange rates
on cash................. 1,950 344 (42) 334 (1,703)
-------- -------- -------- -------- --------
Net increase (decrease)
in cash and cash
equivalents............. 5,845 (81,264) 56,684 26,204 (54,975)
Cash and cash equivalents
at beginning of period.. 118,050 123,895 42,631 42,631 99,315
-------- -------- -------- -------- --------
Cash and cash equivalents
at end of period........ 123,895 42,631 99,315 68,835 44,340
======== ======== ======== ======== ========
</TABLE>
Cash Flows from Operating Activities
During the nine-month period ended September 30, 1998, net cash flow from
operating activities decreased NLG23.8 million to NLG52.1 million from NLG75.9
million for the comparable period in 1997, a 31.4% decrease. This decrease was
primarily related to increased cash needs for working capital.
Net cash flow from operating activities totaled NLG132.6 million for the
year ended December 31, 1997, as compared to NLG41.5 million for the year ended
December 31, 1996, an increase of NLG91.1 million. This increase was primarily
related to cash generated from working capital including increased current
liabilities and a reduction of accounts receivable.
Net cash flow from operating activities totaled NLG38.5 million for the
period ended December 31, 1995.
Cash Flows from Investing Activities
We used approximately NLG381.3 million of cash in investing activities
during the nine months ended September 30, 1998, compared to NLG246.9 million
for the nine months ended September 30, 1997. During the nine months ended
September 30, 1998 cash was used principally for new acquisitions including the
acquisitions of Combivisie and Kabelkom (together, NLG200.2 million), and for
capital expenditures for property, plant and equipment, including goodwill and
other tangible assets (NLG170.2 million) such as system upgrade and new-build
activities. During the nine months ended September 30, 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, and capital expenditures including upgrade and new-build activities
totaling NLG92.7 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 the Janco Acquisition and other acquisitions (NLG127.9
million), for a cash-funded letter of credit to purchase the remaining interest
in Janco Multicom (NLG47.0 million), for the continuation of our upgrade and
new-build construction program (NLG145.6 million of capital expenditures and
also including goodwill and other tangible assets) and for the purchase of UIH
stock (NLG66.8 million). In contrast, during the year ended December 31, 1996
cash was used principally for purchases of property, plant and equipment and
goodwill and other intangible assets (NLG106.6 million), for the continuation
of our upgrade and new-build construction and for
37
<PAGE>
acquisitions (NLG46.5 million) (primarily our acquisition of our partner's
interest in the partnership that held the Norwegian, Swedish and Hungarian
cable 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.
We used NLG500.1 million in investing activities during the six months
ended December 31, 1995, principally for capital expenditures (NLG132.2
million), investments in and advances to our affiliates, primarily A2000
(NLG339.7 million), and acquisitions (NLG28.1 million), mainly in The
Netherlands.
Cash Flows from Financing Activities
We had NLG275.9 million of cash flows from financing activities during the
nine months ended September 30, 1998, as compared to NLG196.9 million for the
nine months ended September 30, 1997. Principal sources of cash during that
period included gross proceeds from long-term debt (NLG338.0 million) including
additional borrowings from the Tranche A Facility and the CNBH Facility and
borrowings from UIH (NLG161.9 million). We repaid short-term borrowings of
approximately NLG215.4 million during the same period, including a portion of
the Tranche B Facility (NLG131.1 million) and a KTE bank facility (NLG65.0
million).
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 the
Tranche A Facility (NLG883.9 million), the Tranche B Facility (NLG252.5
million), bank loans and other obligations in The Netherlands (NLG65.0 million)
and other obligations primarily related to the Janco Acquisition and the
refinancing of Norkabel (NLG200.7 million). During the same period, we repaid
approximately NLG587.9 million of short-term borrowings, including Dutch credit
facilities (NLG384.7 million), short-term debt assumed in the Norkabel
acquisition (NLG138.4 million), other short-term credit arrangements (NLG22.1
million) and other long-term debt (NLG24.8 million). In December 1997, we also
repaid NLG170.4 million of the PIK Notes and purchased NLG292.6 million of
ordinary shares from Philips as part of the UPC Acquisition.
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.
During the six months ended December 31, 1995, our cash flows from
financing activities were NLG465.5 million. Financing activities during the six
months ended December 31, 1995 included debt assumed in the KTE Acquisition and
funding of development projects in Eastern Europe.
38
<PAGE>
Consolidated Capital Expenditures
The table below sets forth our consolidated capital expenditures for the
last two fiscal years and the nine months ended September 30, 1998 and
projected capital expenditures for the three months ended December 31, 1998 and
year ended December 31, 1999. The information below does not reflect capital
expenditures by A2000, UTH, Tevel or other unconsolidated systems. See the
"Budgeted Capital Expenditures and Capital Resources" section of the respective
operating systems in "Business --Operating Companies". Our actual capital
expenditures for the remainder of 1998 and for the year ended 1999 may differ
significantly from the projected amounts included below. See "Risk Factors --
Failure to Raise Necessary Capital Could Restrict Our Growth".
<TABLE>
<CAPTION>
Historical Projected
--------------------------------------- -------------------------
Nine Months Three Months
Year Ended Year Ended Ended Ended Year Ended
December 31, December 31, September 30, December 31, December 31,
1996 1997 1998(1) 1998 1999(2)
------------ ------------ ------------- ------------ ------------
(Dutch guilders, in thousands)
<S> <C> <C> <C> <C> <C>
Cable Network:
Upgrade................ 61,345 48,484 66,744 20,000 196,600
New build.............. 12,581 55,042 38,096 33,500 99,600
------- ------- ------- ------- -------
Total Cable Network.... 73,926 103,526 104,840 53,500 296,200
Master Telecom Center:
Video services......... 8,713 4,734 3,343 1,800 15,500
Cable telephone
(Priority Telecom).... -- -- 4,444 15,700 27,900
Internet/data
services.............. 349 4,480 357 4,000 7,200
------- ------- ------- ------- -------
Total Master Telecom
Center.............. 9,062 9,214 8,144 21,500 50,600
Customer Premise
Equipment (CPE):
Video services......... 4,179 5,833 9,614 5,400 13,500
Cable telephone
(Priority Telecom).... -- -- 4 -- 52,500
Internet/data
services.............. 430 3,890 8,283 6,900 20,300
------- ------- ------- ------- -------
Total CPE............ 4,609 9,723 17,901 12,300 86,300
Support Systems and
Equipment (SSE)........ 8,098 9,221 11,521 19,700 15,500
Other................... 4,347 5,629 11,742 4,800 2,900
------- ------- ------- ------- -------
Total SSE and Other.. 12,445 14,850 23,263 24,500 18,400
New Businesses:
chello broadband....... -- -- 1,340 16,200 31,000
Digital Distribution
Platform.............. -- -- -- -- 32,600
------- ------- ------- ------- -------
Total New
Businesses.......... -- -- 1,340 16,200 63,600
Intangibles and Other... 6,605 8,317 14,682 -- --
------- ------- ------- ------- -------
Total Capital
Expenditures........ 106,647 145,630 170,170 128,000 515,100
======= ======= ======= ======= =======
</TABLE>
- --------
(1) CNBH has been deconsolidated as of August 1, 1998; its capital expenditures
amounting to NLG18.6 million for the first seven months of 1998, are
included for the nine months ended September 30, 1998.
(2) UTH's projected capital expenditures are not included in the above table
but will become our full responsibility upon the completion of our purchase
of the remaining 49% of UTH. Total 1999 capital expenditures for UTH are
expected to be NLG187.5 million, including NLG81.4 million of cable
network, NLG43.1 million of customer premise equipment and NLG63.0 million
of Master Telecom Center and support systems and equipment.
Cable Network
Since our formation as a joint venture, we have been aggressively upgrading
our existing cable television system infrastructure and constructing our new-
build infrastructure with two-way high capacity HFC 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
39
<PAGE>
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.
During the nine months ended September 30, 1998, we spent approximately
NLG104.8 million in cable network capital expenditures. We currently anticipate
cable network capital expenditures of approximately NLG53.5 million during the
last three months of 1998. For 1999, we have budgeted cable network capital
expenditures of approximately NLG296.2 million.
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 SDH and other telephone-related equipment. For Internet/data
service, this includes servers and equipment for connection to the Internet.
See "Technology".
During the nine months ended September 30, 1998, we spent approximately
NLG8.1 million for Master Telecom Center equipment. For the last three months
of 1998, we currently anticipate spending approximately NLG21.5 million. For
1999, we have budgeted capital expenditures for Master Telecom Center equipment
of approximately NLG50.6 million.
Customer Premise Equipment
Customer premise equipment includes television set-top converters for video
services, cable phone 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.
During the nine months ended September 30, 1998, we spent approximately
NLG17.9 million on customer premise equipment. During the last three months of
1998, we anticipate spending approximately NLG12.3 million.
For 1999, we have budgeted capital expenditures for customer premise
equipment of approximately NLG86.3 million. We are negotiating supply
arrangements for the development and purchase of an integrated digital set-top
box for video and Internet/data services, as well as for IP-based telephone. We
expect these negotiations to be completed shortly for equipment delivery in
late 1999.
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 nine months ended September
30, 1998, we spent NLG23.3 million in total support systems and equipment. We
anticipate we will spend NLG24.5 million through the last three months of 1998.
For 1999, we have budgeted NLG18.4 million for support systems and equipment.
See "Risk Factors -- Our New Telephone and Internet/Data Services Involve
System, Marketing, Competition and Timing Risks".
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, require capital expenditures
for construction and development of our pan-European distribution and
programming facilities, including our origination facility, network operating
center, NVOD server complex and related support systems and equipment. For the
nine months ended September 30, 1998, we incurred capital expenditures of
approximately NLG1.3 million for chello broadband. We plan to spend
approximately NLG16.2 million for capital expenditures for chello broadband for
the last three months of 1998. We have budgeted for 1999 approximately NLG31.0
million and NLG32.6 million, respectively, for capital expenditures for
40
<PAGE>
chello broadband and our digital distribution platform.
Liquidity and Capital Resources
We have financed our operations and acquisitions primarily from (1) cash
contributed by UIH upon our formation, (2) debt financed at the UPC corporate
level and project debt financed at the operating company level, and (3)
operating cash flow. We have both well-established and developing systems. In
general, we have used the cash contributed by UIH 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.
Also, well-established systems generally have stable positive cash flows that,
to the extent permitted by applicable credit facilities, may be used to fund
other operations. 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.
41
<PAGE>
Current Debt Facilities
We, our consolidated subsidiaries and our unconsolidated affiliates had the
following long-term and short-term debt outstanding as of September 30, 1998.
Debt denominated in currencies other than Dutch guilders has been translated to
Dutch guilders for the last column.
<TABLE>
<CAPTION>
Outstanding
At
Final September 30,
Description (Borrower) Use of Funds Maturity Interest Rate Facility Size 1998
---------------------- ------------ -------- ------------- ------------- -------------
(in millions)
<C> <S> <C> <C> <C> <C>
UPC and Consolidated Subsidiaries:
Long-Term Debt
Tranche A Facility UIH/Philips transaction; 2006 LIBOR + 0.5% to NLG1,100.0(1) NLG972.0
(UPC, Janco Multicom, Telekabel Refinancing; Acquisitions; 2.0% per annum
Wien) Capital expenditures;
Working Capital
Mediareseaux Facility Capital expenditures; 2002 FRF LIBOR + 0.75% FRF680.0 NLG20.2
(Mediareseaux) Acquisitions; Working to 2.0%
Capital
DIC Loan (UPC) To increase interests in 2000 8.0% per annum $90.0 -- (2)
Israeli and Maltese + 6.0% of principal
operating systems amount at maturity
UIH Loan (UPC) To repay indebtedness and Mar. 2001 10.75% per annum $120.0 NLG156.0
fund new business
Janco Letter of Credit (UPC) To acquire minority share 2001 5% per annum n/a NLG37.6(3)
of Janco Multicom
Short-Term Debt
Time Warner Note Acquisition of Kabelkom June 1999 Non-interest bearing $18.0 NLG34.0
(UPC) distribution assets
Tranche B Facility (UPC) UPC Acquisition June 1999 LIBOR + 4.5% $125.0 NLG113.5
to 6.0%
Telekabel Hungary Capital Expenditures, April 1999 BUBOR + 2.5% DM65.6 -- (4)
Facility (Telekabel Hungary) Acquisitions; Working
Capital
Unconsolidated Affiliates:
UTH Facility (5)(6) Acquisitions; Capital Mar. 1999 Fixed rate of 8.15% NLG690 NLG576.4
(Telekabel Beheer) expenditures; Working
capital
A2000 Group Facilities Acquisition of 2005-2006 AIBOR + 0.7/0.75% or NLG510.0 NLG492.5
(A2000 and subsidiaries) KT Amsterdam and a fixed rate advance
KT Hilversum; Capital + 0.7/0.75%
Expenditures; Working
Capital
CNBH Facility (CNBH)(6) Acquisition of Combivisie; 2008 AIBOR + 0.60% to NLG266.0 NLG209.3
Capital expenditures 1.6% per annum
Other (CNBH)(6) Various Various Various Various NLG17.4
Tevel Facilities (Tevel) Acquisition of Gvanim; 2007-2010 Fixed rate ranging NIS928.3 NLG513.7
Working Capital from 5.5%-6.0%
Melita Facility (Melita) Capital Expenditures; 2004 Cost of funding Lm9.0 NLG40.9
Refinancing + 1.0% to 2.5%
Monor Facility (Monor) To repay indebtedness and 2006 LIBOR + 1.5% $50.0 $46.0
finance capital
expenditures
</TABLE>
- --------
(1) The Tranche A Facility is a revolving credit facility. The total commitment
of NLG1.1 billion (which will be reduced to NLG1.0 billion after this
offering) is reduced by 5% each quarter beginning December 31, 2001 until
final maturity.
(2) One of our subsidiaries drew down the full amount of this loan in November
1998.
(3) We paid NLG37.2 million from available restricted cash to acquire 12.7% of
Janco Multicom in November 1998, and the letter of credit was subsequently
cancelled.
(4) This facility was entered into after September 30, 1998. Telekabel Hungary
drew DM26.0 million under this facility in November 1998.
(5) The UTH Facility has been funded by NUON. UTH intends to replace this
facility and has received an underwritten commitment for such refinancing.
(6) We have agreed to buy the remaining 49% of UTH from NUON. Following this
acquisition, we intend to consolidate the results of UTH. CNBH is wholly-
owned by UTH.
42
<PAGE>
Tranche A Facility. In October 1997, we and Norkabel as borrowers entered
into a NLG1.1 billion multi-currency revolving credit facility with a syndicate
of banks led by The Toronto-Dominion Bank. 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 Tranche A Facility. Although currently not a borrower, TVD
is a guarantor under the Tranche A Facility. As of September 30, 1998, the
amount outstanding under the Tranche A Facility owed by us, Telekabel Wien and
Janco Multicom was NLG620.0 million, NLG213.4 million and NLG138.5 million,
respectively. The Tranche A Facility is secured by a pledge of the stock and
assets of certain of our subsidiaries.
Our borrowings and those of our subsidiaries in Austria, Belgium and Norway
are limited by financial covenants under the Tranche A Facility. The principal
amount of all our borrowings and those of our subsidiaries may not exceed
certain multiples of total annualized net operating cash flow for us and our
subsidiaries. In addition, the principal amount of all our borrowings and those
of our subsidiaries may not exceed certain multiples of our cable television
net operating cash flow. The Tranche A Facility generally prohibits dividends
and other distributions to our shareholders unless, among other things, we
achieve certain financial ratios for at least two consecutive quarters. The
Tranche A Facility also includes financial covenants relating to interest and
debt service coverage and application of proceeds from asset sales and debt or
equity offerings.
We have agreed with our lenders under this facility to reduce the Tranche A
Facility amount from NLG1.1 billion to NLG1.0 billion. We intend to repay up to
NLG620 million of the amount outstanding by us under the Tranche A Facility
with the proceeds of the offering, which we plan subsequently to reborrow under
that facility. See "Use of Proceeds".
Mediareseaux Facility. In July 1998, Mediareseaux entered into an FRF680.0
million (NLG228.8 million) term facility with Paribas (the "Mediareseaux
Facility") to finance capital expenditures, working capital and acquisitions.
The Mediareseaux Facility is secured by the assets of Mediareseaux and a pledge
of our stock of Mediareseaux. The availability of the Mediareseaux Facility
depends on revenue generated and its debt to equity ratios. Drawings under the
Mediareseaux 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 FRF120 million (NLG40.4 million) of this facility for acquisitions.
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 also secured a 9.5 year FRF20 million
(NLG6.7 million) overdraft facility, subject to the same terms and conditions
as the Mediareseaux 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. The Mediareseaux Facility also restricts the amount of management
fees that Mediareseaux may pay to us.
DIC Loan. In November 1998, a subsidiary of DIC loaned us $90.0 million
(the "DIC Loan"). The DIC Loan was subsequently assigned to an Israeli bank. We
used the proceeds to acquire interests in the Israeli and Maltese systems. The
DIC Loan matures in November 2000 and is secured by our pledge of our ownership
interest in the Israeli system. The DIC Loan 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 DIC Loan may be repaid on quarterly
prepayment dates with three months' prior notice by us. In connection with
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the DIC Loan, we granted our partner in the Israeli system an option to acquire
approximately $90.0 million of ordinary shares at a price equal to 90% of the
initial public offering price. The exercise price of this option is payable in
cash or delivery of the DIC Loan promissory note. If we elect to receive
payment in the form of the promissory note, the DIC Loan will be cancelled. If
we elect to receive payment in cash, we intend to use the cash to repay the DIC
Loan. See "Dilution" and "Shares Eligible for Future Sale".
UIH Loan. We have entered into two promissory notes with UIH of $100.0
million (March 1998) and $20.0 million (July 1998). We have borrowed a total of
$79.0 million, excluding accrued interest, under these two notes (together, the
"UIH Loan"). The UIH Loan bears interest at 10.75% per annum. The UIH Loan is
payable on March 31, 2001. The $100.0 million note is convertible at UIH's
option into ordinary shares and the $20.0 million note may be repaid in our
ordinary shares. Any conversion into or payment in ordinary shares will be at
the initial public offering price. We plan to repay the UIH Loan with proceeds
from the offering. See "Use of Proceeds".
Time Warner Note. In connection with the Kabelkom transaction, we entered
into an $18.0 million (NLG34.0 million) promissory note with Time Warner. The
Time Warner Note matures on the earlier of June 30, 1999 or 90 days after
written notice from Time Warner. We may, however, prepay the Time Warner Note
in certain instances. We expect that the Time Warner Note will be cancelled if
Time Warner exercises its option to acquire our 50% interest in HBO Hungary and
100% interest in TV Max.
Tranche B Facility. In connection with the UPC Acquisition, we entered into
a $125.0 million term Tranche B Facility with a syndicate of banks led by The
Toronto-Dominion Bank. In March 1998, we repaid $63.0 million of the Tranche B
Facility with proceeds borrowed from UIH. The Tranche B Facility is due on June
5, 1999 or the
earlier closing of this offering. The Tranche B Facility is secured by certain
of our assets, including a pledge of our shares in UIH.
We intend to repay the Tranche B Facility with proceeds from the offering.
See "Use of Proceeds".
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
("BUBOR"), 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.
UTH Facility. NUON has entered into a short-term financing arrangement with
Telekabel Beheer, with a maximum availability of NLG690 million. This UTH
Facility bears interest at 8.15% per annum and is payable in March 1999. The
UTH Facility is secured by a pledge of shares in Telekabel Beheer and all of
its direct and indirect subsidiaries.
UTH intends to replace this facility with a senior facility and a junior
facility and has received commitments, subject to due diligence and
documentation, from a number of lenders for such refinancing.
Bank of America, Citibank, Deutsche Bank, MeesPierson and Paribas issued a
commitment for a ^295 million (NLG650 million) revolving facility to a
subsidiary of UTH that will convert to a term facility on December 31, 2001
(the "Senior UTH Facility"). A small portion of this facility will be in the
form of an overdraft facility that will be available until December 31, 2007.
This Senior UTH Facility will be used to repay a portion of the UTH Facility
and for capital expenditures. The
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Senior UTH Facility will bear interest at EURIBOR (Euro Interbank Offered Rate)
plus a margin between 0.75% and 2.25% based on leverage multiples tied to UTH's
net operating income. The Senior UTH Facility will be secured by, among other
things, a pledge over shares held by the borrower and debt of Telekabel Beheer
and will restrict Telekabel Beheer's ability to incur additional debt.
Goldman Sachs Credit Partners, MeesPierson and Paribas issued a commitment
to UTH for a NLG217.5 million secured debt facility that will be due March 31,
2001 (the "Junior UTH Facility"). The Junior UTH Facility will bear interest at
LIBOR plus a margin ranging from 4.75% to 8.5%. If the Junior UTH Facility is
not paid in full on its maturity date, it will automatically convert to a term
loan that will be due March 31, 2006, and UTH will be required to issue
warrants to the lenders to purchase up to 5% of its fully-diluted capital
stock. The Junior UTH Facility will be used to repay the remaining UTH Facility
and will be secured by, among other things, pledges of UTH's stock in its
subsidiaries and negative covenants. This facility will restrict UTH's ability
to incur additional debt.
Other than Bank of America, all of the lenders under these two facilities
are underwriters or affiliates of underwriters in this offering. See
"Underwriting".
A2000 Facilities. In January 1996, A2000 and its wholly owned subsidiary KT
Amsterdam entered into bank facilities of NLG90.0 million and NLG375.0 million,
respectively. In October 1996, KT 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 a fixed-rate +0.7% or 0.75% per annum and restrict the borrowers from
incurring additional indebtedness, subject to certain exceptions. The A2000
facilities are secured by a pledge of the KT Amsterdam shares and its assets.
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 CNBH Facility was increased to NLG266.0 million. Most of the
proceeds were used to repay in full a Combivisie bridge facility in connection
with the Combivisie Acquisition (NLG122.0 million) and a KTE bank facility
(NLG65.0 million). The remaining amount under the CNBH 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 the CNBH Facility. The
facility restricts the payment of dividends and distributions and limits the
amount of payments to us under our general services agreement. In connection
with the CNBH Facility, we entered into a project support agreement providing,
among other things, for us to retain majority ownership of CNBH. In connection
with the CNBH Facility, CNBH also entered into a NLG5.0 million ten-year term
working capital facility with Rabobank.
Tevel Facilities. In August 1998, Tevel entered into three secured loan
agreements totalling NIS928.3 million (NLG456.1 million) to finance the
acquisition of Gvanim and working capital. The Tevel 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. The Tevel Facilities are secured
by Tevel's pledge of its ownership interest in Gvanim and limit Tevel's ability
to pay dividends, encumber its assets and incur indebtedness.
Melita Facility. In October 1996, Melita, which operates the Maltese
systems, entered into a secured term bond facility of Lm9.0 million (NLG45.5
million) to refinance a then-outstanding term facility and to finance capital
expenditures and working capital. Availability under this facility depends on
satisfaction of various covenants. The loan matures October 2004 and the
repayment period commences in 1999. Melita is currently exploring a refinancing
of this facility that would expand its borrowing capacity.
Monor Facility. In September 1997, Monor entered into a $50 million term
loan facility with a syndicate of banks led by Credit Lyonnais. The proceeds of
the Monor Facility were used to repay indebtedness and for capital expenditures
in the build-out of Monor's network. The Monor Facility matures on December 31,
2006 and bears interest at LIBOR plus 1.5%. The Monor Facility is secured by a
pledge over our and PenneCom's shares in Monor and its assets.
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Restrictions Under UIH Indenture
As a subsidiary of UIH, our activities are restricted by the covenants in
UIH's indenture dated February 5, 1998. The UIH Indenture generally limits the
additional amount of debt that we or our subsidiaries or controlled affiliates
may borrow, or preferred shares that we or they may issue. Generally,
additional borrowings, when added to existing indebtedness, must satisfy, among
other conditions, at least one of the following tests:
. not exceed 7.0 times the borrower's consolidated operating cash flow,
. operating cash flow must exceed 1.75 times its consolidated interest
expense, or
. not exceed 225% of the borrower's consolidated invested equity capital.
In addition, there must be no existing default under the UIH Indenture at
the time of the borrowing. The UIH Indenture also restricts our ability to make
certain asset sales and certain payments. In connection with this offering, we
have agreed with UIH that we will not take any action during the term of the
UIH Indenture that would result in a breach of the UIH Indenture covenants. The
maturity date of the UIH Indenture is February 2008 and interest becomes
payable in cash in February 2003. See "Risk Factors -- We Will Continue to be
Controlled by UIH and Governed by the Terms of its Debt Securities" and
"Relationship With UIH and Related Transactions -- UIH Indenture".
Sources of Capital
We had approximately NLG44.3 million of unrestricted cash and cash
equivalents on hand as of September 30, 1998. We intend to reborrow under the
Tranche A Facility the amount repaid with proceeds of this offering. In
addition, we have additional borrowing capacity at the corporate and project
debt level including CNBH, Mediareseaux and Telekabel Hungary facilities. We
also have NLG12.3 million available from excess cash released after we
exercised our option to acquire the remaining interest in Janco, as well as
$22.0 million of proceeds from the sale of our Irish operating system, PHL.
We are obligated to satisfy significant payment and purchase obligations in
the near term, including the repayment of:
. the Time Warner Note, payable on the earlier of 90 days after notice by
Time Warner or June 30, 1999,
. the Tranche B Facility which has been extended to the earlier of the
closing of the offering or June 1999,
. the UTH Facility, payable in March 1999, for which UTH has received
replacement commitments from its banks, and
. the Telekabel Hungary Facility, payable in April 1999.
We believe that our existing capital resources combined with the
anticipated refinancing or extensions of some short-term facilities will enable
us to satisfy our requirements for the coming 12 months. Without such
refinancings and extensions, we may need to sell assets or obtain additional
equity or debt financing. See "Risk Factors -- We are Highly Leveraged and Our
Capacity to Borrow is Limited".
The proceeds from this offering are expected to be used primarily for
capital expenditures and to fund other costs associated with our network
upgrade, the build and launch of our telephone and Internet/data services new
businesses as well as our video distribution and programming businesses. We
will repay a portion of the Tranche A Facility with the proceeds from this
offering, but we then plan to reborrow the amount so repaid for such uses. A
portion of the proceeds from this offering will also be used to pay part of the
purchase price for the remaining 49% of UTH we are acquiring and to repay the
Tranche B Facility and the UIH Loan. See "Use of Proceeds".
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. See "Risk
Factors -- Failure to Raise Necessary Capital Could Restrict Our Growth".
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Certain Dutch Property Tax Issues
One of our Dutch systems was recently assessed for a transfer tax on
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. Because we will own 100% of UTH after the
closing of this offering, any tax liabilities assessed against our Dutch
systems (other than the A2000 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 with us the
Dutch tax authorities against such tax assessments.
Inflation and Foreign CurrencyExchange Rate Risks
To date, we have not been impacted materially by inflation.
Our monetary assets and liabilities are subject to foreign currency
exchange risk 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. See "Risk Factors --
Foreign Currency Exchange Rate Fluctuations May Cause Losses".
The functional currency for our operations generally is the applicable
local currency for each
operating company. Assets and 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. See "Exchange Rate Data".
New Accounting Principles
The U.S. 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. We intend to adopt SFAS 131 for the year ended
December 31, 1998.
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
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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 September 30, 1998, our deferred start-up and organization costs were
insignificant. We intend to adopt SOP 98-5 for fiscal year 1999.
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. We currently are assessing the effect of
this new standard.
Year 2000 Conversion
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.
The Year 2000 problem could cause miscalculations, resulting in our cable
television and telephone systems or programming services malfunctioning or
failing to operate.
Year 2000 Compliance Program
In response to possible Year 2000 problems, the Board of Directors of UIH
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 includes our staff and staff from UIH, and subcommittees at the
operating company levels and reports directly to the UIH Board. We will
continue to be a part of the Task Force following the offering. In creating a
program to minimize Year 2000 problems, the Task Force identified certain
critical operations of our business. These critical operations are service
delivery systems, field and headend devices, customer service and billing
systems, and corporate management and administrative operations (e.g.,
cash flow, accounts payable and accounts receivable, operations).
The Task Force has established a three phase program to address potential
Year 2000 problems:
. Identification Phase: identify and evaluate computer systems and other
devices (e.g. headend devices, switches and set top boxes) on a system by
system basis for Year 2000 compliance.
. Implementation Phase: establish a database and evaluate the information
obtained in the Identification Phase, determine priorities, implement
corrective procedures, define costs and ensure adequate funding.
. Testing Phase: test the corrective procedures to verify that all material
compliance problems will operate on and after January 1, 2000, and
develop, as necessary, contingency plans for material operations.
About 85% of our operating systems have completed the Identification Phase
and the Task Force is working on the Implementation Phase for these systems.
The remaining operating systems are expected to complete the Identification
Phase by March 1999. The Task Force has researched almost half of the items
identified during the Identification Phase as to Year 2000 compliance. Of the
items researched, approximately 83% are either compliant or can be easily
remediated without significant cost to us. Currently, the Task Force expects
to complete its research on substantially all of the items identified during
first quarter 1999. The Identification Phase for our corporate, management and
administrative operations has been completed, and the Task Force is currently
evaluating the results of that Phase in order to implement any necessary
corrective procedures. Based on current data, we expect the computer systems
for all corporate operations to comply with Year 2000 by mid-1999 without
needing material remediation or replacement.
The Task Force has targeted mid-1999 for commencement of the Testing Phase.
At this time, we anticipate that all material aspects of the program will be
completed before January 1, 2000. Currently, UIH is managing the program with
its internal Task Force. During the
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Implementation Phase, the Task Force will also be evaluating the need for
external resources to complete the Implementation Phase and implement the
Testing Phase.
In addition to its program, UIH is a member of a Year 2000 working group,
which has 12 cable television companies and meets under the auspices of Cable
Labs. The dialogue with the other cable operators has assisted UIH in
developing its Year 2000 program. Part of the agenda of the working group is to
develop test procedures and contingency plans for critical components of
operating systems for the benefit of all its members. The test procedures are
expected to be available to members, including UIH, during the first quarter of
1999. Until the test procedures are completed, the working group will not
develop any contingency plans.
Third-Party Dependence
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 interconnects. We do not have the
ability to control such 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. We are in the process of communicating with these parties on
the status of their Year 2000 compliance programs in an effort to prevent any
possible interruptions or failures. To date, responses to such communications
have been limited and the responses received state only that the party is
working on Year 2000 issues and does not have a definitive position at this
time. We expect, however, that more parties will disclose the extent of their
Year 2000 compliance programs during the first half of 1999. In addition, the
task force has been monitoring the web sites of these third parties for
information regarding their Year 2000 compliance programs and our and UIH's
purchasing department has begun to exert pressure on third party vendors for
Year 2000 compliance information. Nonetheless, we are unable to assess fully
the risk posed by its dependence upon such third parties' systems. The Task
Force is considering certain limited contingency plans, including preparing
back-up programming and stand-by power generators. Such contingency plans may
not, however, resolve the problem in a satisfactory manner.
With respect to other third-party systems, each of our operating systems is
responsible for inquiring of its vendors and other entities with which it does
business (e.g., utility companies, financial institutions and facility owners)
as to such entities' Year 2000 compliance programs. Each of our operating
companies has begun this process and to assist our operating companies in this
process, we have hired two Year 2000 consultants, one for Eastern Europe and
one for Western Europe, who will visit each operating company and work with
them to identify and report to us any potential Year 2000 compliance problems.
These consultants will also contact third party vendors regarding their Year
2000 compliance measures.
The Task Force is working closely with the manufacturers of its headend
devices to remedy any Year 2000 problems assessed in the headend equipment.
Recent information from the two primary manufacturers of such equipment
indicate that most of the equipment used in our operating systems are not date-
sensitive. Where such equipment needs to be upgraded for Year 2000 issues, such
vendors are upgrading without charge. These upgrades are expected to be
completed before year-end 1999, but this process is not entirely within our
control. With respect to billing and customer care systems, we use standard
billing and customer care programs from several vendors. A few of our operating
systems, including two in The Netherlands, one in Romania and one in Hungary
are using Custom Fox-Pro Billing and Customer Care Systems, which have been
examined for Year 2000 compliance. We are generally upgrading our billing and
customer care systems for other reasons and do not expect the Year 2000 aspect
of this cost to be significant. The Task Force is working with such vendors to
achieve Year 2000 compliance for all of our systems.
Minority-Held Systems
We also have non-controlling interests in cable television and telephone
operations, including A2000. MediaOne International, our partner in A2000, is
undertaking and implementing a program to ensure that the operations of A2000
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will be Year 2000 compliant. The Task Force is including other minority
investments in its program. Of these investments, about 75% have completed
their Identification Phase of the program and the Task Force is in the process
of making recommendations to these entities as to Year 2000 compliance matters.
Our remaining investments are expected to complete the Identification Phase by
March 1999. No assurance can be given, however, that these entities will
implement the recommendations or otherwise be Year 2000 compliant. Overall, the
Task Force will continue to analyze the Year 2000 program and will revise the
program as necessary throughout the remainder of 1999, including procedures to
ensure third parties' Year 2000 compliance.
Cost of Compliance
The Task Force has not yet determined 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 to anticipate Year
2000 problems. Because the systems' upgrades also result in Year 2000
compliance, however, we have not had to devote a large amount of investment
specifically to the Year 2000 issue. The Task Force has identified certain
replacement and remediation costs and, based on the Task Force review to date,
we currently estimate that these costs will not exceed NLG4.0 million
(excluding any costs associated with our interest in A2000). Although no
assurance can be made, we believe that the known Year 2000 compliance issues
can be remedied without a material financial impact on us. No assurance can be
made, however, as to the total cost for the 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.
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.
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. We
believe the introduction of the euro will reduce our exposure to risk from
foreign currency and interest rate fluctuations.
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BUSINESS
Overview
We own and operate cable-based communications networks in ten countries in
Europe and in Israel. We provide cable television services. Some of our systems
also provide telephone and Internet access services. Today, our systems
constitute the largest pan-European group of broadband communications networks,
based on numbers of subscribers in more than one European country.
Company Growth Strategy
Our goal is to become a leading pan-European provider of integrated video,
telephone and Internet/data services. Key elements of our strategy to achieve
this goal are:
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. Generally, basic tier
pricing is regulated while the expanded basic tier is not price regulated.
Increased programming offerings will also help increase the average revenue per
subscriber by making our expanded basic tier more attractive to subscribers. We
are involved in several country-specific programming ventures that develop
local language programming for various markets. We are also developing,
together with partners, eight new pan-European channels for the cable
television market and have already secured a portion of the content required
for these channels.
We are seeking partners to construct a pan-European digital distribution
platform, UPC's EuroHits, that will enable digital distribution of our new
channels. Full digitalization, 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 would
enable subscribers to customize their subscriptions for our products and
services to suit their lifestyles and personal interests. See "-- UPC Video
Services: Video Distribution and Programming -- Digital Distribution Platform".
Capitalize on the Unique Infrastructure and Economic Advantages of Our
Telephone Market Opportunity
We believe that the ability to leverage our existing subscriber base and
upgraded network will provide us with an advantage over other new entrants in
the telephone services market. In particular, we believe that our networks and
facilities provide the opportunity for cost-effective access to both
residential and business customers. 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 to services offered
by incumbent telecommunications operators. We recently began marketing our pan-
European telephone business as Priority Telecom (Nedpoint in the A2000 systems)
and plan to offer these services in our Austrian, Dutch, Norwegian and French
systems.
Capitalize on Internet/Data Service Opportunity
We have launched residential and business cable-modem based high speed
Internet access services in Austria, Belgium, The Netherlands and Norway and
plan to launch our Internet portal and content business, branded as chello
broadband, in our upgraded Western European markets beginning in early 1999. We
believe that our 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 intend to emphasize the speed, 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.
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Consolidation and Acquisitions
We have realized significant gains in our businesses by selectively
acquiring cable television and telecommunications systems near our current
operating areas and increasing our ownership percentage in some systems. Our
strategy also has been to dispose of some minority ownership interests where
control could not be obtained and commence new greenfield projects where we
believed we could create significant value. We intend to continue this asset
rationalization program of selective acquisitions and dispositions.
Implementation of New Services
The following table shows 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
-------------------------------------------------------------
Expanded Premium Impulse Pay- Internet/Data Cable
System Basic Tier Channels Per-View Services Telephone
- ------ ---------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Austria................. May 1997 -- May 1997 Sept. 1997 Nov. 1998
Belgium................. Oct. 1996 Planned Planned Sept. 1997 --
The Netherlands(1)...... Oct. 1996 Planned Apr. 1997 Oct. 1997 July 1997
Norway.................. 1989 1990 Planned Mar. 1998 Planned 1999
France.................. Oct. 1996 Oct. 1996 Apr. 1998 Planned 1999 Planned 1999
Israel.................. 1990 -- 1994 -- --
Hungary................. 1991 1991 -- Planned --
Czech Republic.......... 1994 1994 -- -- --
Romania................. Apr. 1998 Feb. 1998 -- -- --
Slovakia................ 1995 April 1997 -- Planned --
Malta................... 1994 1994 Planned Planned --
</TABLE>
- --------
(1) We began offering (1) an expanded basic tier in October 1996 in the A2000
systems in Amsterdam and surrounding areas and in December 1996 in our KTE
system in Eindhoven, (2) impulse pay-per-view in April 1997 in the A2000
systems and in June 1998 in our CNBH systems, (3) Internet access services
on a trial basis in October 1997 in portions of the A2000 systems, and (4)
cable telephone services on a trial basis in July 1997 in the A2000 system
in Purmerend and are currently offering these services in Hilversum,
Zaanstad and portions of Amsterdam.
UPC Video Services: Video Distribution and Programming
Video Distribution Overview
We own and operate established cable television systems and are
constructing new systems. At September 30, 1998, our operating systems had
approximately 3.4 million subscribers to their basic tier video services. Video
distribution services accounted for approximately 92.4% of our consolidated
revenue in the first nine months of 1998. An average of 70% of the homes passed
by our systems subscribe to our basic tier video services. We offer our
subscribers some of the most advanced analog video services available today and
a large choice of FM radio programs. 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.
To increase our average revenue per subscriber, we are focusing on enhanced
and expanded video service offerings. These offerings include:
. thematic groupings of tiered video services in key genres,
. enhanced pay-per-view services, and
. premium movie channels.
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
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our more recently acquired systems, 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.
Growth Strategy
We are focusing on a multi-part growth strategy: (i) create and/or acquire
additional channels and programming for pay-per-view services; (ii) increase
sales by integrating our video services with telephone and Internet/data
services; (iii) selectively upgrade our networks to offer increased programming
through digitalization, and (iv) where appropriate and permitted, migrate high-
value channels from the basic tier to the expanded basic tier.
We have demonstrated that we can achieve higher average revenue per
subscriber in our Norwegian (Norkabel), Israeli and Maltese systems, which were
constructed and operated initially by UIH, as compared to average revenue per
subscriber in the former Philips systems in Austria, Belgium and The
Netherlands (KTE).
We have increased our average revenue per subscriber by offering enhanced
services. For example, we have offered 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 the first nine months of 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 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.
[CHART APPEARS HERE]
Average monthly revenue per video subscriber for selected UPC systems
and for the U.K. and the U.S. for the nine months ended
September 30, 1998 (in Dutch guilders)
Hungary 11.06
A2000 14.25
UTH 17.95
Belgium 19.76
Austria 29.01
Janco 13.05
Norkabel 29.37
France 26.26
Malta 36.91
Israel 67.68
U.K.(1) 75.72
U.S.(2) 74.82
The Netherlands Norway
- --------------
(1) Kagan World Media, Ltd. Data is for the three months ended September 30,
1998.
(2) Paul Kagan Associates, Inc., Cable Television Investor
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The higher average revenue per subscriber in our Israeli, Norwegian and
Maltese systems is attributable to offering enhanced video services. Depending
on the system, this was done through introducing new channels (including
country-specific program channels) and stand-alone pay-per-view and migrating
channels from rate-regulated basic service to unregulated tiers. Our systems in
Austria, Belgium and The Netherlands have high penetration rates but generally
lower revenues per subscriber than our systems that were developed by UIH.
The digital pan-European distribution platform, if completed as planned,
would make it possible for our improved programming offerings to have a more
robust impact. We expect that a digital distribution platform will be in place
in our upgraded markets by the end of 1999. See "-- Digital Distribution
Platform".
Video Programming Overview/Growth Strategy
Popular programming is another key factor for increasing our video services
revenue. We believe it will also be a potential source of additional revenue
from sales to other cable television operators and satellite companies in
Europe. We have enhanced our existing, and are continuing to develop and
acquire new ownership interests in, programming services. The core of our
programming strategy is to create high-quality, local-language channels either
through joint ventures with content providers or other partners or by direct
licensing agreements. We intend to establish and manage these joint ventures
and also secure and distribute third-party channels and NVOD programming on a
pan-European basis. We expect that these new channels will be added to the
expanded basic tier in a number of our operating systems, furthering our
strategy of increasing average revenue per subscriber.
Current Programming Activities
We are involved in several country-specific programming ventures including
creating channels for the Czech Republic (MAX, SuperMAX and HBO Czech), Hungary
(HBO Hungary), Israel (a movie channel and a general entertainment channel) and
Malta (Premiere and Max). 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
current 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,
we have granted Time Warner an option to purchase our interests in the Czech
and Hungarian programming services.
We recently acquired UIH's 75% interest in Tara and have agreed to acquire
UIH's 33.5% interest in IPS. Tara provides Irish general entertainment
programming to the U.K. markets. IPS produces a movie channel, a documentary
channel, a children's channel and a music channel for the Spanish and
Portuguese markets. As of September 30, 1998, Tara and IPS sold programming
content to non-UPC cable operators serving an aggregate of approximately 1.0
million subscribers.
Planned Programming Activities
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 adapt our channels affordably for distribution to multiple European
markets and languages. We plan to (1) launch five new 24-hour channels by the
end of 1999 and three channels thereafter, (2) acquire rights to up to 30
channels created by third parties over the next few years and (3) acquire
rights to and distribute up to 75 NVOD channels over the next few years. The
initial five planned channels are:
.UPC QuesTV: an action/adventure channel that we will adapt for European
markets pursuant to licensing and revenue sharing arrangement from QuesTV,
.Club: a women's interest channel created by licensing content from E!,
Carlton Food Network, and others,
.UPC Sport One: a sports channel created by licensing content from ESPN,
.EX-Extreme Sports: an extreme sports channel created by licensing content
from X-Dream, and
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.Wingspan: an Air and Space Channel: a topical channel adapted for European
markets pursuant to a licensing and revenue sharing arrangement with Wingspan
International.
Because QuesTV and Wingspan already exist in other markets, our role will
be limited to subtitling and dubbing, and therefore, our costs will be lower
than for new channels. In the case of new channels (Club, UPC Sport One and EX-
Extreme Sports), our role will also include 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 NVOD programming on a pan-European basis.
Digital Distribution Platform
We are seeking partners to construct a satellite-based pan-European digital
distribution platform, UPC's EuroHits, that will enable digital distribution of
our new channels and other television signals to our upgraded networks. If this
planned digital distribution platform is constructed, we would convert our
impulse pay-per-view services into an NVOD 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 NVOD service would likely include between 12 and 16 new movie titles per
month that will be broadcast as frequently as every 15 minutes, thus enabling
subscribers to choose a movie at a convenient start time. Although NVOD
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. We also have acquired the rights to and would launch a low-cost digital
audio service on this digital distribution platform that could provide 20
channels of CD-quality music in the expanded basic tier and 70 additional
channels as a premium service.
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 would enable subscribers to customize their subscriptions for our
products and services to suit their lifestyles and personal interests. If 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
would involve a significant amount of capital investment and the use of new
technologies. There can be no assurance 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 Our Growth"
and "Technology -- Planned Digital Distribution Platform".
UPC Telephone Services: Priority Telecom
Overview
We believe that our existing customer base and upgraded network give us a
unique opportunity to provide telephone service in Europe. We plan to offer
local telephone services, called Priority Telecom (Nedpoint in the A2000
systems), in our Austrian, Dutch, French and Norwegian systems. We also plan to
develop national and international long distance voice and data 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 on a pan-European basis.
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. In
November 1998, we launched Priority Telecom's cable telephone service on a
trial basis in Vienna.
We are negotiating to connect our local fiber networks, primarily through
interconnections and capacity leases with other new telecommunications service
providers, to provide
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<PAGE>
long-distance telephone services across several European markets. This strategy
will allow us to keep a greater number of calls on our own network, thereby
reducing the amount of interconnect fees we must pay to other telecommunication
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. The telephone market is large in our Western
European markets as evidenced by the revenues of the respective incumbent
national telecommunications operators, which substantially dominate these
markets. The current local telephone rates charged to subscribers are
especially high in comparison to those in the United States, where the market
has been liberalized for a longer period. The following table shows this
disparity:
<TABLE>
<CAPTION>
Total 1995 Revenue
Incumbent of National Average 1996 Monthly
Telecommunications Telecommunications Local Telephone Revenue
Operator Operators(1) per Residential Line(2)
------------------ ------------------ -----------------------
(U.S. dollars)
(in millions)
<S> <C> <C> <C>
Austria.......... PTA $ 4,306 $69.95
Belgium.......... Belgacom 4,310 53.89
France........... France Telecom 26,648 43.25
The Netherlands.. KPN 8,488 50.58
Norway........... TeleNor 3,134 44.33
United States.... Various 191,026 13.93
</TABLE>
- --------
(1) Source: Organization for Economic Cooperation and Development (OECD).
(2) Source: OECD monthly basket of local public switched telephone network
(PSTN) residential charges, 1996. A PSTN is a switched network available to
the public for making telephone calls and, in this table, refers to
incumbent national telecommunications operators' networks. Monthly basket
includes cost of connection (spread over 60 months/12), the monthly line
rental and 20 hours of local off-peak usage. No long distance charges are
included.
With approximately 3,225 kilometers of telephone-capable fiber optic cable
already deployed in its 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 2.9 million homes and, through us, long standing cable
television-based relationships with approximately 2.2 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.
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 interconnect
arrangements provided by incumbent telecommunications operators. We believe,
however, that our strategy for Priority Telecom will allow us to compete
effectively with incumbent telecommunications operators and any other local
loop providers who subsequently enter the market. See "Risk Factors -- The
Competitiveness of the Telephone Industry Poses Risks for New Entrants".
Priority Telecom Growth Strategy
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,
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<PAGE>
. 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 ("SOHO") 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 (SOHO) 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 SOHO customers.
2.Medium Businesses Served by Cable Phone. Priority Telecom's network will
be able to reach many medium 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 plans to exploit its expected 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 SOHO market sectors represent the primary
business opportunity for Priority Telecom. Simple marketing offers will be used
to encourage rapid take-up by overcoming consumer inertia and increasing brand
awareness of our products. The approach will include, for example, innovative
offers and periodic deep discounts. Large and medium business customers will be
marketed through a key account management direct sales force targeting specific
industry sectors (such as other licensed operators, Internet service providers
("ISPs"), banks and financial services, retail, professional services, etc.).
We plan to utilize cable phone equipment with various line capabilities.
For the residential/SOHO market, a one-, two- or four-line unit will be
utilized. Five- and twelve-line cable phone equipment units will be used to
provide service to segments of the medium business market. Large businesses
generally will be connected to the network with direct fiber connections using
self-healing fiber optic ring Synchronous Digital Hierarchy (SDH) 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. See "Technology".
The A2000 Experience
A2000 has successfully launched cable telephone services in parts of its
systems under the brand name Nedpoint. As of September 30, 1998, A2000 had
approximately 16,000 lines covering 13,850 cable telephone subscribers. As of
the same date, A2000 achieved a penetration rate of approximately 10.8% of the
homes marketed in Purmerend, its first market where the service was launched in
July 1997. The installation rate for A2000 averaged over 350 installations per
week during the three months ended September 30, 1998. Current churn rates are
approximately 4.8% on an annualized basis, although we expect churn rates to
increase due to typical subscriber moves and the introduction of telephone
number portability, which is expected to be introduced in A2000's operating
areas in early 1999.
Following the common European pricing model, A2000's tariffs are usage-
based rather than a flat fee and every call is metered. In September 1998,
A2000's average monthly
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<PAGE>
revenue per telephone subscriber was approximately NLG76.36. This compares with
approximately NLG64.50 for KPN subscribers during 1997, although this amount
may decrease as a result of KPN rate cuts in January 1999. A2000 believes that
interconnect rates with KPN may decline, thereby reducing its costs. See
"Regulation -- The Netherlands".
Cost of Implementation
Traditional telephone service is carried over twisted copper pair in the
local loop. Cable phone 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 phone 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. See
"Technology".
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 per line for the voice switch, $36 per line for the Host
Digital Terminal (HDT) and $404 (for two lines of capacity) for the equipment
required in the home. Nortel has supplied the Company's DMS 100E telephone
switches. We have cable phone equipment supply agreements with Tellabs and
Nortel. We will also need to undertake a substantial upgrade of our customer
care and billing system for each operating system providing telephone services.
See "Risk Factors -- Our New Telephone and Internet/Data Services Involve
System, Marketing, Competition and Timing Risks" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
Interconnect Agreements
A2000 and KPN have entered into an interconnect agreement covering all of
A2000's homes and businesses passed that will be capable of receiving telephone
service. Similarly, Telekabel Wien (Austria) has completed an interconnect
arrangement with PTA covering all of Telekabel Wien's homes and businesses
passed, Janco Multicom (Norway) has completed an interconnect agreement with
TeleNor covering all of Janco Multicom's homes and businesses passed and
Mediareseaux has completed an interconnect agreement with France Telecom
covering all of Mediareseaux's homes and businesses passed. Interconnect
agreements are in advanced stages of negotiations for our systems in The
Netherlands (UTH) representing the balance of the customers planned to be
marketed by late 1999. There can be no assurance that incumbent
telecommunications operators will agree to interconnections in a timely manner
or at rates and on other terms that will permit us to offer profitable
telephone services. See "Regulation".
Roll-Out and Implementation Schedule
Cable telephone service in The Netherlands to areas outside of the A2000
systems will be provided by UTH. The rollout for these areas is scheduled to
begin during the second half of 1999. We plan to set tariffs at a rate
discounted from those of the incumbent telecommunications operator. Priority
Telecom launched its service on a trial basis in Vienna in November 1998. It
intends to launch service to business and residential areas in Vienna passing
approximately 100,000 homes in early 1999. Priority Telecom's service is
scheduled to be rolled out in Vienna to an additional 362,000 homes during the
second quarter 1999, with plans to offer the service to the balance of the
approximately 217,000 remaining homes passed in Vienna capable of receiving the
service by the end of 1999.
Priority Telecom is scheduled to be launched on the entire network in
France and on upgraded portions of the network in Norway during the first half
of 1999.
Because strong back office systems are important to support and integrate
successfully Priority Telecom and our other services, we have
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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 -- Our New Telephone and Internet/Data
Services Involve System, Marketing, Competition and Timing Risks" and "-- The
Scalability, Speed and Technology of the Network is Unproven".
Pan-European Backbone
We intend to develop 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 late-1999. See "Technology".
Traditional Telephone System
In addition to our cable telephone operations, our recently acquired Monor
system has offered traditional telephone services since December 1994 and as of
September 30, 1998, had approximately 66,900 traditional telephone lines.
Regulation
Regulation significantly affects our telephone business, including its
profitability and the timing of its introduction. See "Regulation".
UPC Internet/Data Services: High Speed Access and chello broadband
Overview
At year-end 1997, International Data Corporation (IDC) estimated that there
were approximately 69 million World Wide Web users, of which approximately 24%
were in Western Europe. By 2002, IDC estimates that the number of World Wide
Web users will increase to approximately 320 million, with approximately 26% of
these in Western Europe. To capitalize on this opportunity, we have created
chello broadband, our portal Internet and data service division.
chello broadband is launching a European portal with broadband content
enabled by its pan-European AORTA-branded broadband Internet protocol (IP)
backbone to service our operating companies, as well as third-party cable
operators across Europe.
We believe we can gain more residential and business Internet customers by
using our existing cable network and customer base and by continuing to improve
our network. We have launched a cable modem-based, high speed Internet access
service in Austria, Belgium, The Netherlands and Norway. The launch of chello
broadband in our upgraded Western European markets is scheduled to begin during
the first quarter of 1999. As of September 30, 1998, we had more than 12,125
residential and 600 business cable modem Internet access subscribers.
Market Opportunity
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 its Western European markets.
<TABLE>
<CAPTION>
Number of
World Wide
Web Users(1)
-------------------
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>
- --------
(1) Source: International Data Corporation.
With approximately 3,225 kilometers of high-capacity two-way active fiber
plant deployed throughout our Western Europe systems, we believe that chello
broadband has a competitive advantage over traditional ISPs that rely on dial-
up access. chello broadband also has broadband, coaxial cable access to
approximately 3.0 million homes, and is able to leverage our long standing
cable television-based relationships with approximately 2.3 million residential
subscribers in chello broadband's planned Internet markets. As
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<PAGE>
an Internet portal, chello broadband also plans to associate with other cable
television operators to provide service to their subscribers.
Current Internet Access Technologies
We believe that the slow speed of current residential Internet access is a
significant deterrent for Internet users. This slowness results from the
predominance of telephone dial-up modems, which have a maximum access speed of
only 56 kb/sec and an actual realized speed that is generally lower. 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:
(1) 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, (2) a global standard has been created and accepted,
and (3) customers are served by a shared infrastructure, which allows for lower
cost service offerings.
Cable modem service, such as that employed by chello broadband, consists of
a cable modem in the customer's home or office that permits the customer's
personal computer to connect to the Internet at speeds up to 100 times faster
than most dial-up modem services. Cable modem service initially will be
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. chello broadband intends to store 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 will
enable chello broadband to aggregate the volume of data stored for availability
at high speeds to its customers. Although chello broadband will price 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 also
intend to target chello broadband's service to SOHO and medium-sized business
customers who may view the services as a lower cost alternative to leased
lines.
We 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. See "Technology".
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 (ISPs) in its markets. We currently compete with traditional dial-up
ISPs and ISDN providers (including many incumbent telecommunications service
providers) and expect that chello broadband will face competition from other
broadband cable modem service providers, such as @Home and Roadrunner as they
move to the European market. In the future, we expect competition from
providers using other broadband technologies.
chello broadband Growth Strategy
We are creating 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 intends to provide, 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 intend to market chello broadband to the residential/SOHO and medium
business segments. We believe that local partners, in addition to our operating
systems, will be crucial for chello broadband's success. chello broadband
intends to enter into partnerships with non-UPC local cable operators in order
to share responsibilities in creating the service and
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revenues generated by the service. We may offer equity securities of chello
broadband to its partners or other investors to fund further development or to
encourage third-party cable operators to become chello broadband affiliates,
as we plan to do with Microsoft. See "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 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 intends to develop an Internet portal business by
partnering with providers of local, regional, national and international
content, rather than attempting to create the majority of its own 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 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 (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. See "Technology".
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 NLG600 per cable modem
for the required equipment in the home in early 1999. We are currently
negotiating with the 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 Motorola.
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 Our Growth".
Internet Access Experience To Date
We have launched a residential and business cable modem-based, high-speed
Internet access service in Austria, Belgium, The Netherlands and Norway. We
have marketed our current Internet service as a high speed Internet access
product excluding many of the value added services that chello broadband
expects to provide. Marketing efforts for our Internet access service have
been limited to date but we intend to implement a more substantial brand
marketing program from the launch of chello broadband's service.
Roll-Out and Implementation Schedule
The launch of chello broadband in our upgraded Western European markets is
scheduled to begin during the first quarter of 1999. 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.
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Pan-European Backbone
chello broadband intends to develop its AORTA-branded pan-European
backbone. This backbone 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. The pan-European backbone will also enable chello
broadband to aggregate the volume of data stored for availability at high
speeds to its customers and 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 currently expected to be in place for international Internet traffic
by early to mid-1999. See "Technology".
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
Austria: Telekabel Group
The following selected financial data have been derived from the
financial statements of Telekabel Group ("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 includes a translation using the September 30, 1998 average
exchange rate of 0.16019 Dutch guilders per Austrian schilling ("AS").
<TABLE>
<CAPTION>
Translation
Year Ended December 31, to Guilders
--------------------------- Nine Months ------------------
Ended Nine Months Ended
1995 1996 1997 September 30, 1998 September 30, 1998
------- ------- --------- ------------------ ------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues................ (AS) 921,000 985,338 1,018,095 813,333 NLG130,288
Net operating income
(loss)................. (AS) 148,300 144,595 138,724 (12,985) NLG (2,080)
Adjusted EBITDA......... (AS) 468,200 512,356 507,022 391,631 NLG 62,735
Adjusted EBITDA margin.. 50.8% 52.0% 49.8% 48.2% 48.2%
Total capital
expenditures........... (AS) 287,849 388,813 374,717 325,095 NLG 52,077
</TABLE>
<TABLE>
<CAPTION>
At December 31,
------------------------- At September 30,
1995 1996 1997 1998
------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C>
Other Data:
Homes passed............... 855,246 872,016 890,305 897,938
Basic video subscribers.... 414,775 428,453 435,859 442,596
Basic video penetration.... 48.5% 49.1% 49.0% 49.3%
Avg. mo. service rev. per
video subscriber(1)....... (NLG) 26.43 27.54 27.79 29.01
Two-way homes passed....... -- -- 339,900 487,055
Internet subscribers:
Residential............... -- -- 1,177 5,106
Business.................. -- -- 21 312
</TABLE>
--------
(1) Service revenues excluding installation revenue for the years ended
December 31, 1995, 1996 and 1997 and for the nine months ended
September 30, 1998 have been converted to Dutch guilders using the
average exchange rate for the first nine months of 1998.
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
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<PAGE>
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. 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, in
Vienna, the approval of the municipality. See "Regulation -- Austria".
Telekabel Group launched an Internet access service in September 1997 and
had approximately 5,400 Internet access subscribers as of September 30, 1998,
with current average monthly additions of 1,200 customers. It plans to
introduce the chello broadband service in early 1999. In addition, Telekabel
Group launched Priority Telecom's cable telephone service in Vienna on a trial
basis in November 1998. Following intervention of regulatory authorities on
behalf of Telekabel Group, Telekabel Group entered into an interconnect
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 home. In early 1992, Telekabel
Wien initiated the rebuild and upgrade of its existing cable network in Vienna.
The upgrade, which incorporates high capacity 860 Mhz technology and is
expected to be 75% complete by the end of 1999, was approximately 54% complete
and passed approximately 487,050 homes as of September 30, 1998.
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 ten
channels of programming. Telekabel Group also offers approximately 50 channels
of pay digital radio programming to subscribers in Vienna.
Results of Operations. For the nine months ended, September 30, 1998,
Telekabel Group had total revenues of approximately NLG130.3 million
representing approximately 42.7% of our consolidated revenues for the same
period, and Adjusted EBITDA of approximately NLG62.7 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 NLG81.1 million.
Telekabel Group's Adjusted EBITDA margin declined slightly from 49.8% for the
year ended December 31, 1997 to 48.2% for the nine months ended September 30,
1998. This decline was due primarily to the increased start up costs associated
with Telekabel Group's cable telephone and Internet/data services. These costs
were approximately NLG6.5 million for the first nine months of 1998. The
Adjusted EBITDA margin for Telekabel Group's video services business on a
stand-alone basis was
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<PAGE>
approximately 55.0% for the nine months ended September 30, 1998. A large
component of Telekabel Group's operating expenses are franchise and other fees
paid to the respective municipalities, which were approximately NLG17.5 million
and approximately NLG17.1 million, respectively, for the nine months ended
September 30, 1997 and 1998.
Budgeted Capital Expenditures and Capital Resources. Telekabel Group has
budgeted approximately NLG86.3 million and NLG208.0 million for capital
expenditures in 1998 and 1999, respectively, 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.
Telekabel Group incurred through September 30, 1998 capital expenditures of
approximately NLG9.2 million since December 1997 for the development of its
telephone business and approximately NLG22.4 million since the end of 1996 for
its Internet/data business.
Competition. Telekabel Group's cable systems compete with a DTH service
that is available throughout Austria. Currently, DTH 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 in Vienna where we
estimate that DTH penetration is approximately 8%. Competition in the
Internet/data business in Austria is intensifying. PTA, the national incumbent
telephone service provider, is promoting its ISDN lines and a number of other
companies recently have entered, or are expected to enter, the market. Upon
launch of its telephone service in Vienna, Telekabel Group began competing with
PTA. New facilities-based competitors in Telekabel Group's 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".
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<PAGE>
Belgium: Radio Public N.V./S.A.
The following selected financial data have been derived from the
financial statements of Radio Public N.V./S.A., which is marketed under the
name "TVD". These financial statements have been prepared in accordance
with Dutch GAAP with the Belgian franc as the functional currency. The
following selected financial data includes a translation using the
September 30, 1998 average exchange rate of 0.05463 Dutch guilders per
Belgian franc ("BEF").
<TABLE>
<CAPTION>
Translation
Year Ended December 31, to Guilders
------------------------- Nine Months ------------------
Ended Nine Months Ended
1995 1996 1997 September 30, 1998 September 30, 1998
------- ------- ------- ------------------ ------------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues................ (BEF) 681,539 693,990 710,521 493,216 NLG 26,944
Net operating income
(loss)................. (BEF) 21,183 (39,540) (34,716) (161,596) NLG (8,828)
Adjusted EBITDA......... (BEF) 255,000 268,232 267,815 179,513 NLG 9,807
Adjusted EBITDA margin.. 37.4% 38.7% 37.7% 36.4% 36.4%
Total capital
expenditures........... (BEF) 47,915 56,018 213,728 294,710 NLG 16,100
<CAPTION>
At December 31,
------------------------- At September 30,
1995 1996 1997 1998
------- ------- ------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Other Data:
Homes passed............ 133,000 133,000 133,000 133,000
Basic video
subscribers............ 127,843 127,815 127,529 127,574
Basic video
penetration............ 96.1% 96.1% 95.9% 95.9%
Avg. mo. service rev.
per video
subscriber(1).......... (NLG) 18.92 19.20 19.58 19.76
Two-way homes passed.... -- -- 27,600 85,939
Internet subscribers:
Residential............ -- -- 214 926
Business............... -- -- 42 204
</TABLE>
--------
(1) Service revenues excluding installation revenue for the years ended
December 31, 1995, 1996 and 1997 and for the nine months ended
September 30, 1998 have been converted to Dutch guilders using the
average exchange rate for the first nine months of 1998.
Overview/Growth Strategy. TVD, our 100% owned subsidiary, provides cable
television and communications services in selected areas of Brussels and nearby
Leuven in Belgium. We estimate that there are currently approximately 133,000
homes under license in TVD's franchise areas.TVD, which currently has 96%
penetration, plans to grow through the introduction of new services that
currently are not subject to the price regulations applicable to basic cable
services.
TVD's management believes there is a strong demand for enhanced services in
its market. TVD introduced expanded basic tier in October 1996 and an Internet
access service in September 1997. As of September 30, 1998, TVD had 5,003
expanded basic subscribers and 926 residential and 204 business Internet access
subscribers. TVD plans to introduce the chello broadband service in 1999. As
TVD upgrades additional portions of its network to full two-way capability, it
plans to introduce impulse pay-per-view in the second quarter of 1999. We are
exploring the possibility of providing cable telephone services.
Network. TVD owns the complete cable television infrastructure for each of
its systems from the headend to the home, with the exception of Etterbeek
(15,000 subscribers), where TVD has an agreement with the municipality to
operate the network until at least 2016. In late 1996, TVD began upgrading its
network through fiber optic overlay of its trunk lines and replacement of all
amplifiers. Employing high capacity 860 Mhz technology, TVD's upgraded networks
passed approximately 85,925 homes, or 65% of its total network as of September
30, 1998. TVD expects to complete this upgrade by mid-1999.
Programming. TVD offers in Brussels a basic tier consisting of 32 channels,
17 expanded
65
<PAGE>
basic programs in six tiers, 20 FM radio channels and 42 premium digital radio
channels. Its system in Leuven offers a basic tier consisting of 37 channels,
an expanded basic tier with six channels, 20 FM radio channels and 42 premium
digital radio channels. TVD also distributes five premium channels (three in
Brussels and two in Leuven), which are provided by Canal+.
Results of Operations. For the nine months ended September 30, 1998, TVD
had total revenues of approximately NLG26.9 million, representing approximately
8.8% of our consolidated revenues for the same period, and Adjusted EBITDA of
approximately NLG9.8 million. For the year ended December 31, 1997, TVD 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. TVD's Adjusted EBITDA margin declined
from 37.7% for the year ended December 31, 1997 to 36.4% for the nine months
ended September 30, 1998. This decline was due primarily to the increased start
up costs associated with TVD's Internet/data services. These costs were
approximately NLG1.8 million, for the nine months ended September 30, 1998. The
Adjusted EBITDA margin for TVD's video services business on a stand-alone basis
was approximately 47.2% for the nine months ended September 30, 1998. In early
1998, TVD 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 effected.
Budgeted Capital Expenditures and Capital Resources. TVD has budgeted
approximately NLG20.2 million and NLG25.7 million for capital expenditures in
1998 and 1999, respectively, 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. TVD expects to fund these
expenditures through available cash flow.
Since June 1997, TVD incurred through September 30, 1998 capital
expenditures of approximately NLG2.9 million for the development of its
Internet/data business.
Competition. TVD has effectively full penetration (approximately 96%) in
its market. TVD faces competition, however, 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. As of
September 30, 1998, TVD had approximately 28,400 subscribers in Leuven. To
date, TVD has experienced only limited competition from DTH providers. In its
Internet access business, TVD competes with traditional dial-up ISP's. Also,
the Company understands that in Leuven, Telenet will offer a broadband access
and content service using Iverlek's new cable network.
Regulatory Issues. The regulatory environment in which TVD 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".
The Netherlands: United Telekabel Holding (UTH)
Our Dutch operations are held through UTH, an unconsolidated subsidiary, of
which we hold 51% and NUON holds 49%. We will acquire the remaining 49% of UTH
at the closing of this offering. UTH holds three principal operating companies:
CNBH (which holds the combined KTE and Combivisie systems), Telekabel Beheer,
both of which it wholly owns, and A2000, of which it owns 50%. MediaOne owns
the other 50% of A2000. UTH does not consolidate the results of A2000.
Financial and operating information for UTH's consolidated companies (KTE,
Combivisie and Telekabel Beheer) are presented separately in this section
because of the separate history of each entity. A2000 is also presented
separately.
Prior to the creation of UTH and CNBH, our first investment in The
Netherlands was a 3.8% ownership interest in KTE, which operates in Eindhoven.
KTE was contributed by Philips upon our formation. Shortly after formation, we
acquired 50% of A2000, the Amsterdam and surrounding areas system, 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.
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<PAGE>
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. UTH is
in the process of integrating all of the operations of CNBH and Telekabel
Beheer. See "Corporate Ownership Structure -- The Netherlands -- UTH". UTH owns
and operates systems in the regions of Brabant, Flevoland, Friesland and
Gelderland, and holds the 50% of A2000. Because of the large number of current
subscribers located in four large clusters in The Netherlands, UTH is
constructing a fiber backbone to interconnect its region-wide networks.
In September 1998, UTH acquired 80% of Uniport, a carrier select telephone
service with approximately 16,000 subscribers.
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<PAGE>
The following selected financial data have been derived from the
financial statements of Kabeltelevisie Eindhoven ("KTE"), Stichting
Combivisie Regio ("Combivisie") and NV TeleKabel Beheer ("Telekabel
Beheer"), which are now wholly owned by UTH. 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 Telekabel Beheer to form UTH.
These financial statements have been prepared in accordance with Dutch GAAP
with the Dutch guilder as the functional currency.
<TABLE>
<CAPTION>
KTE Combivisie Telekabel Beheer
--------------------------- ------------------------- -----------------------------
Year Ended December 31, Year Ended December 31, Year Ended December 31,
--------------------------- ------------------------- -----------------------------
1995 1996 1997(1) 1995 1996 1997 1995 1996 1997(1)
------- ------- --------- ------- ------- ------- ------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues................ (NLG) 16,544 17,932 20,669 25,661 27,143 29,001 3,656 113,917 137,167
Net operating income
(loss)................. (NLG) 5,152 1,650 2,156 10,547 11,958 12,864 (1,628) 22,846 27,395
Adjusted EBITDA......... (NLG) 9,948 11,298 12,719 17,948 19,816 21,032 (188) 45,041 58,813
Adjusted EBITDA margin.. 60.0% 63.0% 61.5% 69.9% 73.0% 72.5% (5.1)% 39.5% 42.9%
Total capital
expenditures........... (NLG) 2,006 5,591 8,192 6,847 9,250 19,121 2,802 36,000 71,875
<CAPTION>
At December 31, At December 31, At December 31,
--------------------------- ------------------------- -----------------------------
1995 1996 1997(1) 1995 1996 1997 1995 1996 1997(1)
------- ------- --------- ------- ------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Other Data:
Homes passed............ 88,290 89,116 95,442 136,375 139,062 143,376 96,250 511,300 642,000
Basic video
subscribers............ 83,408 84,660 90,671 130,429 133,775 139,249 89,500 475,000 595,000
Basic video
penetration............ 94.5% 95.0% 95.0% 95.6% 96.2% 97.1% 93.0% 92.9% 92.7%
Average mo. service rev.
per video
subscriber(2).......... (NLG) 16.60 17.69 18.03 15.65 16.21 17.19 14.93 15.69 16.20
Two-way homes passed.... -- -- 90,000 -- -- 35,000 -- -- 50,000
</TABLE>
<TABLE>
<CAPTION>
UTH(3)
------------------
Nine Months
Ended
September 30, 1998
------------------
(in thousands)
<S> <C> <C>
Selected Financial Data:
Revenues............................................ (NLG) 156,690
Net operating income................................ (NLG) 10,571
Adjusted EBITDA..................................... (NLG) 79,034
Adjusted EBITDA margin.................................... 50.4%
Total capital expenditures.......................... (NLG) 117,814
<CAPTION>
At September 30,
1998
------------------
<S> <C> <C>
Other Data:
Homes passed.............................................. 907,078
Basic video subscribers................................... 855,277
Basic video penetration................................... 94.3%
Average mo. service rev. per video subscriber(2).... (NLG) 17.95
Two way homes passed...................................... 422,902
</TABLE>
--------
(1) In July 1997, we acquired a cable system in Son en Breugel with
approximately 5,000 subscribers. KTE's December 31, 1997 data includes
financial data for the six months of the Son en Breugel system as it
has been integrated into KTE. Telekabel Beheer acquired several
networks during 1997.
(2) Service revenue excludes installation revenue.
(3) Because UTH began operations in August 1998, the financial information
presented for the nine-month period includes results of CNBH, Telekabel
Beheer and Uniport for the first seven months of 1998 and results of
UTH from formation to September 30, 1998.
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<PAGE>
Overview/Growth Strategy. Both KTE and Combivisie introduced an expanded
basic tier in December 1996, and CNBH (into which KTE and Combivisie were
combined in 1998) launched impulse pay-per-view services in June 1998.
UTH intends to launch chello broadband's Internet/data services in the CNBH
systems in early 1999. In addition, UTH plans to introduce the initial phase of
cable telephone services in the CNBH systems in early 1999 upon completion of
an interconnect agreement. Telekabel Beheer introduced an Internet access
service in November 1997 in parts of its networks and also delivers a private
branch exchange (PBX)-based business telephone service, including leased line
management, on-site services and telephone equipment, to its former 100%
shareholder, NUON, and several other companies. As part of the purchase
agreement with NUON for the remaining 49% of UTH, UTH and NUON have agreed to
enter into a preferred supplier arrangement through December 31, 2007, whereby
UTH will be the preferred supplier for NUON and its subsidiaries for
telecommunications and Internet services and NUON will be the preferred
supplier to UTH for energy and energy-related services.
In August, 1998, UTH acquired from Nutsbedrijf Regio Eindhoven, a 16,700
subscriber cable television system in the Eindhoven region. This acquisition
enabled us to increase its cluster of operations in and around the Eindhoven
area. See "Corporate Ownership Structure -- The Netherlands -- UTH".
Network. Each of UTH's systems owns 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 89% completed by year-end 1999. As of September
30, 1998, approximately 47.0% of UTH's homes 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. The eight channels in
UTH's expanded basic tier consist of 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. UTH is not certain when it will successfully
conclude these discussions. See "Risk Factors -- We May Not Be Able to Obtain
the Necessary Programming".
Results of Operations. For the nine months ended September 30, 1998, UTH
had total revenues of approximately NLG156.7 million, representing
approximately 28.4% of our consolidated revenues for the same period if we
consolidated the results of UTH and A2000, and Adjusted EBITDA of approximately
NLG79.0 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 and NLG58.8, respectively.
Budgeted Capital Expenditures and Capital Resources. UTH has budgeted
approximately NLG191.9 million and NLG187.5 million for capital expenditures in
1998 and 1999, 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. UTH
expects to fund these expenditures through available cash flow, drawings from
the CNBH Facility and proceeds from the anticipated refinancing of the UTH
Facility. After we have purchased the remaining 49% of UTH from NUON, we will
have full responsibility for UTH's projected capital expenditures. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources --Current Debt Facilities" and
"-- Consolidated Capital Expenditures".
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<PAGE>
UTH incurred through September 30, 1998 capital expenditures of
approximately NLG5.0 million since May 1998 for the development of its
telephone business and approximately NLG6.8 million since June 1997 for its
Internet/data business.
Competition. UTH is the only cable system in its franchise area. To date,
UTH has maintained a high level of penetration (approximately 94%) and
competition from off-air (received with an antenna) television signals, DTH and
local SMATV systems has been limited. In its Internet access business, UTH will
compete with dial-up ISPs such as KPN (World Access/Planet Internet), NLNet and
World Online. Upon launch of telephone services, UTH will compete primarily
with KPN.
Regulatory Issues. The regulatory environment in which UTH 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 "-- The Netherlands".
The Netherlands: A2000 Holding N.V.
The following selected financial data have been derived from the
financial statements of A2000 Holding N.V. ("A2000"). These financial
statements have been prepared in accordance with Dutch GAAP with the Dutch
guilder as the functional currency. Since August 6, 1998, through UTH, we
have a net 25.5% interest in A2000. When we purchase the remaining 49% of
UTH from NUON, our interest in A2000 will increase to 50%.
<TABLE>
<CAPTION>
Year Ended December 31, Nine Months
------------------------- Ended
1995(1) 1996 1997 September 30, 1998
------- ------- ------- ------------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues................ (NLG) 37,493 89,893 101,450 90,234
Net operating income
(loss) ................ (NLG) (2,715) (2,960) (17,083) (27,542)
Adjusted EBITDA......... (NLG) 17,115 40,829 33,763 21,620
Adjusted EBITDA margin.. 45.6% 45.4% 33.3% 24.0%
Total capital
expenditures........... (NLG) 6,917 44,740 120,242 80,170
<CAPTION>
At December 31,
------------------------- At September 30,
1995 1996 1997 1998
------- ------- ------- ------------------
<S> <C> <C> <C> <C> <C>
Other Data:
Homes passed............ 516,998 555,459 565,740 569,459
Basic video
subscribers............ 488,631 523,940 518,160 516,729
Basic video
penetration............ 94.5% 94.3% 91.6% 90.7%
Avg. mo. service rev.
per video
subscriber(2).......... (NLG) 12.96 12.96 13.29 14.25
Two way homes passed.... -- -- 125,180 329,101
Telephone subscribers... -- -- 3,255 13,849
Internet subscribers.... -- -- 450 5,456
</TABLE>
--------
(1) Because A2000 was formed in July 1995, these figures represents the six
months ended December 31, 1995 only.
(2) Service revenues excluding installation revenue.
Overview/Growth Strategy. A2000, a 50/50 joint venture between UTH and
MediaOne, currently enjoys basic penetration rates of approximately 91% in its
two systems that serve Amsterdam and its surrounding communities (Landsmeer,
Purmerend, Zaanstad and 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 on a trial basis
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:
70
<PAGE>
Priority Telecom -- The A2000 Experience". As of September 30, 1998, A2000 had
approximately 12,000 subscribers to its expanded basic tier, approximately
13,850 cable telephone subscribers and approximately 5,450 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 and
approximately 30% of the subscribers who subscribe to its telephone services
also subscribe to one or both of the other services. We plan to use the
information gathered from our telephone experience in A2000 as we launch cable
telephone services in our other primary markets. See "-- UPC Telephone
Services: Priority Telecom".
See "Corporate Ownership Structure -- The Netherlands -- A2000".
Network. A2000 owns its infrastructure from the head end to the home and is
in the process of upgrading its cable television infrastructure. As of
September 30, 1998, approximately 329,100 homes (or 58% of A2000's systems)
were passed by the high capacity 860 Mhz upgraded network, with total rebuild
expected to be completed by the end of 1999.
Programming. A2000 currently offers 26 channels of cable programming and 39
FM radio channels to its basic tier subscribers in the A2000 systems. A2000
offers programming in many languages, including Dutch, English, German,
Italian, French and Turkish.
A2000's expanded basic tier carries 13 channels. Programming includes both
ethnic (Asian, Chinese and Arabic) and thematic (science fiction, travel,
music, adult and art) content. A2000 has moved some popular channels, including
MBC and the National Geographic Channel, from the basic tier service to the
expanded basic tier. A2000 also distributes two premium channels provided by
Canal+. Canal+ has recently commenced litigation against A2000 demanding direct
access to A2000's network in order to introduce its own digital decoder. We do
not believe A2000 will be obliged to provide the access demanded by Canal+ and,
even if it were, we do not believe providing such access would have a material
effect on A2000's business.
Increases in the price of the basic tier service are restricted by
agreements between A2000 and Amsterdam and the other municipalities in its
franchise areas. Because these prices are kept at a low level, A2000's basic
tier revenues are limited. A2000, therefore, charges programming suppliers
carriage fees for the transmission of their channels. See "Regulation -- The
Netherlands -- Video Services". Some of A2000's programming suppliers have been
unwilling to pay such carriage fees and Discovery, Eurosport, CNN and MTV have
withdrawn their channels from A2000's basic tier offering. A2000 has offered to
include these channels in its expanded basic tier or in separate mini-tiers,
although it does not expect this issue to be resolved in the near term. While
A2000 has experienced typical and anticipated customer dissatisfaction with the
change of programs in the basic tier, it has not experienced additional churn
that can be directly attributed to these changes.
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.
Results of Operations. For the nine months ended September 30, 1998, A2000
had total revenues of approximately NLG90.2 million. For the same period, A2000
had Adjusted EBITDA of approximately NLG21.6 million. For the year ended
December 31, 1997, A2000 had total revenues of approximately NLG101.5 million
and Adjusted EBITDA of approximately NLG33.8 million. A2000's Adjusted EBITDA
margin declined from 33.3% for the year ended December 31, 1997 to 24.0% for
the nine months ended September 30, 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 NLG13.8 million for the nine months ended September 30, 1998. The
Adjusted EBITDA margin for A2000's video services business on a stand-alone
basis was approximately 43.5% for the nine months ended September 30, 1998.
71
<PAGE>
Budgeted Capital Expenditures and Capital Resources. A2000 has budgeted
approximately NLG146.4 million and NLG135.4 million for capital expenditures in
1998 and 1999, respectively, 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. A2000 expects to fund these
expenditures through available cash flow and support from its shareholders.
Since January 1997, A2000 has incurred capital expenditures through
September 30, 1998 of approximately NLG34.3 million for the development of its
telephone business and approximately NLG11.3 million for its Internet/data
business.
Competition. A2000 currently has a high penetration rate in its service
area (approximately 91%). Its primary competition is from DTH providers. To
date, however, A2000's programming rights, low basic cable fees, restrictive
regulations on the installation of dishes and high installation costs have
limited DTH as a meaningful competitor. In its Internet access service, A2000
currently is the only high speed access provider in its operating area. A2000
expects to compete with KPN, which is testing a high speed Internet access
service, in the near future. A2000 also competes with traditional dial-up
providers, including KPN's World Access/Planet Internet, NLNet and Euronet. In
its telephone business, A2000 currently competes with KPN, Telfort
and Worldcom. A2000 is competing on the basis of price and the ability to
integrate certain of its services.
Regulatory Issues. The regulatory environment in which A2000 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 "-- The Netherlands". As discussed above
under "-- Programming", price increases of basic tier video services are
restricted by agreements with local municipalities, which has led to some
difficulties with programming suppliers. See "Regulation -- The Netherlands".
72
<PAGE>
Norway: Janco Multicom
The following selected financial data have been derived from the
financial statements of Norkabelgruppen A/S ("Norkabel"), Janco Kabel-TV
A/S ("Janco") and Janco Multicom ("Janco Multicom"). Norkabel and Janco
merged in 1997 to form Janco Multicom. The 1995 and 1996 financial
statements have been prepared in accordance with Norwegian GAAP with the
Norwegian kroner as the functional currency. Because Janco Multicom's
financial statements are consolidated with our financial statements, the
1997 and September 30, 1998 financial statements have been prepared in
accordance with Dutch GAAP with the Norwegian kroner as the functional
currency. There is no material difference between Dutch and Norwegian GAAP
for the purposes of the financial information provided below. The following
selected financial data includes a translation using the September 30, 1998
average exchange rate of 0.26689 Dutch guilders per Norwegian kroner
("NKr").
<TABLE>
<CAPTION>
Norkabel Janco
-------------------------------- --------------------------
Year Ended December 31, Year Ended December 31,
-------------------------------- --------------------------
1995 1996 1995 1996
--------------- ---------------- -------------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues................ (NKr) 216,062 215,621 101,488 101,699
Net operating income
(loss)................. (NKr) (1,749) 9,114 17,418 17,329
Adjusted EBITDA......... (NKr) 67,939 68,446 37,837 39,619
Adjusted EBITDA margin.. 31.4% 31.7% 37.3% 39.0%
Total capital
expenditures........... (NKr) 10,857 16,518 24,533 28,600
<CAPTION>
At December 31, At December 31,
-------------------------------- --------------------------
1995 1996 1995 1996
--------------- ---------------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Other Data:
Homes passed............ 217,267 221,441 222,500 225,000
Basic video
subscribers............ 152,257 156,915 159,210 160,331
Basic video
penetration............ 70.1% 70.9% 71.6% 71.3%
Average mo. service rev.
per video
subscriber(1).......... (NLG) 28.17 27.54 12.14 12.16
<CAPTION>
Janco Multicom
-----------------------------------------------
Translation to
Guilders
--------------
Nine Months Nine Months
Year Ended Ended Ended
December 31, September 30, September 30,
1997 1998 1998
--------------- ---------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Selected Financial Data:
Revenues................ (NKr) 332,192 258,663 NLG 69,035
Net operating income
(loss)................. (NKr) (101,216) (98,216) NLG (26,213)
Adjusted EBITDA......... (NKr) 134,660 96,482 NLG 25,750
Adjusted EBITDA margin.. 40.5% 37.3% 37.3%
Total capital expendi-
tures.................. (NKr) 74,863 114,549 NLG 30,572
<CAPTION>
At December 31, At September 30,
1997 1998
--------------- ----------------
<S> <C> <C> <C>
Other Data:
Homes passed............ 457,551 461,759
Basic video
subscribers............ 319,654 319,769
Basic video
penetration............ 69.9% 69.3%
Average mo. service rev.
per video
subscriber(1).......... (NLG) 20.13 21.14
Two way homes passed.... 5,171 10,942
Internet subscribers.... 153 471
</TABLE>
--------
(1) Service revenues excluding installation revenue for the years ended
December 31, 1995, 1996 and 1997 and for the nine months ended
September 30, 1998 have been converted to Dutch guilders using the
average exchange rate for the first nine months of 1998.
73
<PAGE>
Overview/Growth Strategy. Since our acquisition of control, our strategy
for our Norwegian systems has been to integrate more fully these operating
subsidiaries to take advantage of economies of scale in implementing our
technical, operational and marketing expertise. 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 with a non-exclusive
license to provide cable television services in the Oslo area. In November
1997, we merged Norkabel into Janco forming Janco Multicom. Following the
merger, we retained 87.3% of Janco Multicom. We acquired the remaining 12.7%
interest in Janco Multicom in November 1998.
As a result of the merger, Janco Multicom is Norway's largest cable
television operator with approximately 47% of the total Norwegian cable
television market as of September 30, 1998. Janco Multicom owns and operates 16
cable television systems in Norway located primarily in the southeast and along
the southwestern coast, as well as its main network in Oslo. The well-
established Norwegian cable television market has 69% penetration, as of
September 30, 1998, primarily due to poor over-the-air reception in much of
Norway and a significant demand for television entertainment.
Our goals for our Norwegian operating systems are to continue to increase
Janco Multicom's homes passed and penetration rate, improve its average revenue
per subscriber by providing additional programming and services and increase
average revenue per subscriber in the former Janco systems at least up to the
levels in the former Norkabel systems. During the nine months ended September
30, 1998, the average revenue per subscriber for the former Norkabel systems
was over twice that for the former Janco 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. These revenue enhancing
techniques are currently being implemented in the former Janco systems.
Janco Multicom launched an Internet access service in March 1998 and plans
to introduce the chello broadband service in the first quarter of 1999. We also
plan to introduce Priority Telecom's cable telephone service in 1999 in the
upgraded portions of Janco Multicom's network. See "-- UPC Internet/Data
Services: High Speed Access and chello broadband ", and "-- UPC Telephone
Services: Priority Telecom ".
Network. Janco Multicom 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. Janco Multicom 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 of this upgrade. The
upgrade, which began in April 1998, is scheduled to be completed over the next
three to four years.
Programming. Janco Multicom currently offers subscribers 31 channels of
programming in four tiers: (1) basic, including "must carry" (a limited number
of broadcast channels required by the government to be carried); (2) an
expanded basic tier; (3) a "mini-tier" of certain selected channels; and (4)
premium services. Because English is widely understood in Norway, Janco
Multicom is able to use English-language programming to supplement the limited,
but increasing, supply of available Scandinavian-language programming.
Results of Operations. For the nine months ended September 30, 1998, Janco
Multicom had total revenues of approximately NLG69.0 million, representing
approximately 22.6% of our consolidated revenues for the same period, and
Adjusted EBITDA of approximately NLG25.8 million. For the year ended December
31, 1997, Janco Multicom 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 NLG37.1 million. Janco Multicom's
Adjusted EBITDA margin declined from 40.5% for the year ended December 31, 1997
to 37.3% for
74
<PAGE>
the nine months ended September 30, 1998. This decline was due primarily to the
increased start up costs associated with Janco Multicom's Internet/data
services launched in early 1998 and telephone service scheduled for launch in
1999. For that period, the Adjusted EBITDA margin for Janco Multicom's video
services business on a stand-alone basis was approximately 39.1% for the nine
months ended September 30, 1998.
Budgeted Capital Expenditures and Capital Resources. Janco Multicom has
budgeted approximately NLG56.2 million and NLG86.9 million for capital
expenditures in 1998 and 1999, 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. Janco Multicom expects to fund these expenditures through available
cash flow and support from us.
Since December 1997, Janco Multicom has incurred capital expenditures
through September
30, 1998 of approximately NLG6.6 million for the development of its telephone
business and, since January 1997, capital expenditures of approximately NLG4.0
million for its Internet/data business.
Competition. Janco Multicom experiences limited competition from DTH
providers. In its Internet access business, Janco Multicom expects to compete
with TeleNor, the Norwegian incumbent telecommunications operator, which is
expected to launch a broadband Internet access service this fall; and 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. Upon
the launch of telephone services, Janco Multicom will also compete in this
business with TeleNor.
Regulatory Issues. The regulatory environment in which Janco Multicom
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".
75
<PAGE>
Israel: Tevel Israel International Communications Ltd.
The following selected financial data have been derived from the
financial statements of Tevel Israel International Communications Ltd.
("Tevel"). 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 as of September 30, 1998. The
following selected financial data includes a translation using the
September 30, 1998 average exchange rate of 0.55342 Dutch guilders per New
Israeli shekel ("NIS").
<TABLE>
<CAPTION>
Translation
Year Ended December 31, to Guilders
------------------------- -------------
Nine Months Nine Months
Ended Ended
September 30, September 30,
1995 1996 1997 1998(2) 1998
------- ------- ------- ---------------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Selected Financial Data:
Revenues................ (NIS) 309,430 341,966 373,021 402,011 NLG222,481
Net operating income
(loss)................. (NIS) 59,859 83,487 97,590 89,345 49,445
Adjusted EBITDA......... (NIS) 155,561 185,288 204,251 219,251 NLG121,338
Adjusted EBITDA margin.. 50.3% 54.2% 54.8% 54.5% 54.5%
Total capital
expenditures........... (NIS) 73,315 50,099 58,963 72,820 NLG40,300
<CAPTION>
At December 31,
------------------------- At September 30,
1995 1996 1997 1998 (2)
------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C>
Other Data:
Homes passed............ 318,721 334,426 350,392 568,999
Basic video
subscribers............ 218,230 231,712 241,874 395,680
Basic video
penetration............ 68.5% 69.3% 69.0% 69.5%
Avg. mo. service rev.
per video
subscriber(1).......... (NLG) 60.88 62.54 64.20 67.68
Two-way homes passed.... 318,721 334,426 350,392 359,050
</TABLE>
--------
(1) Service revenues excluding installation revenue for the years ended
December 31, 1995, 1996 and 1997 and for the nine months ended
September 30, 1998 have been converted to Dutch guilders using the
average exchange rate for the first nine months of 1998.
(2) 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 September 30, 1998
includes six months of Gvanim's operating results.
Overview/Growth Strategy. Tevel has exclusive cable television broadcasting
franchises for the entire Tel Aviv metropolitan area, the region of Ashdod-
Ashkelon (30 miles south of Tel Aviv) and the Jezreel Valley (80 miles
northeast of Tel Aviv). We currently own 46.6% of Tevel. In April 1998, Tevel
acquired 100% of Gvanim Cable Television Ltd. ("Gvanim") and has since
integrated fully Gvanim's operations with its own. Gvanim and its 90%-owned
subsidiary Gvanim-Krayot operate cable television systems in the Rishon-
Leziyon, Ramla-Lod, Modiin, Haifa Bay, Karmiel, Maalot and Lower Galilee areas
of Israel. There are approximately 207,000 homes passed in the Gvanim
franchises and as of September 30, 1998, Gvanim and its subsidiary had
approximately 144,500 subscribers. The Gvanim acquisition increased Tevel's
total subscribers as of September 30, 1998 to more than 395,675 in franchise
areas representing over 594,000 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".
76
<PAGE>
In addition to its cable operations, Tevel owns 50% of Globcall, a
telecommunications company that designs, installs and maintains switching
systems (PBX) for businesses. As of September 30, 1998, Globcall served
approximately 47,100 outlets. Tevel also owns 33% of Netvision, one of Israel's
leading Internet service providers that had over 80,000 dial-up subscribers as
of September 30, 1998.
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 (approximately 50 channels) with a 60 MHz
return path providing approximately 359,050 homes passed with two-way
capability for impulse pay-per-view services only. Tevel plans to upgrade all
of its systems to 860 MHz HFC 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 HFC technology. Tevel
expects that the upgrade of all of its systems will be substantially complete
by mid-1999.
Programming. Tevel offers basic subscribers 45 channels of programming,
including a wide range of entertainment, news, sports, performing arts and
educational channels, as well as five pay-per-view channels in all of Tevel's
areas. Currently, over 40% of Tevel's subscribers purchase at least one pay-
per-view buy 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 grant
of such licenses may be conditional upon Tevel and Gvanim obtaining their
programming from independent third parties. As explained below, their
programming is currently provided by an affiliate.
Tevel and the other Israeli cable television operators own a programming
company, I.C.P. Israel Cable Programming Company Limited ("ICP"). 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. A children's channel, a
sports channel and a channel showing nature, science and art documentaries are
produced by third parties.
Results of Operations. For the nine months ended September 30, 1998, Tevel
had total revenues of approximately NLG222.5 million and Adjusted EBITDA of
approximately NLG121.4 million. These amounts include six months of revenue
from the Gvanim systems acquired in April 1998. For the year ended December 31,
1997, Tevel had total revenues of approximately NLG206.0 million and Adjusted
EBITDA of approximately NLG112.8 million. Tevel's Adjusted EBITDA margin
declined slightly from 54.8% for the year ended December 31, 1997 to 54.5% for
the nine months ended September 30, 1998. This decline was due primarily to
reorganization costs after the merger with Gvanim. The costs associated with
the reorganization reduced Tevel's Adjusted EBITDA by approximately NIS2.5
million (NLG1.4 million).
Budgeted Capital Expenditures and Capital Resources. Tevel has budgeted
approximately NLG50.6 million and NLG42.6 million for capital expenditures in
1998 and 1999, respectively, primarily to continue to upgrade its network.
Tevel expects to fund these expenditures through available cash flow. To
finance the Gvanim acquisition, Tevel has borrowed NIS928.3 million under a
nine-year term loan. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations --Liquidity and Capital Resources --
Current Debt Facilities -- Tevel Facilities".
Competition. Because Tevel has exclusive cable television licenses, to date
it has experienced no competition from other multi-channel television
providers. The Israeli government recently passed legislation, however, to
grant licenses to DTH operators. To date, applications for these licenses have
been submitted by Bezeq, the Israeli incumbent telecommunications service
provider, Clal and Canal+. These operators are expected to begin providing DTH
services by mid-1999. ICP may be required to sell to DTH operators its channels
that are currently offered exclusively to cable television operators. See
"Regulation -- Israel".
77
<PAGE>
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".
France: Mediareseaux Marne, S.A.
Overview/Growth Strategy. We have an approximate 99% ownership interest and
a 95% economic interest in Mediareseaux Marne S.A. ("Mediareseaux"), which
currently holds cable television franchises for 114,000 homes in the Marne-la-
Vallee area east of Paris. See "Corporate Ownership Structure -- France".
Mediareseaux began construction of its network in September 1996, and as of
September 30, 1998, Mediareseaux's system passed approximately 60,700 homes and
had approximately 20,950 basic subscribers, giving it a penetration rate of
34.5%. 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 0.24 movies per expanded basic tier subscriber per
month. Since inception, Mediareseaux's average monthly service revenue per
subscriber has averaged over NLG26.
In July 1998, Mediareseaux obtained a 15 year telephone license for an area
that includes 1.5 million homes in the eastern suburbs of Paris and in
September 1998, Mediareseaux began installing a telephone switch. Mediareseaux
plans to begin offering telephone services by mid-1999 within its cable
television franchise area and has obtained frequencies for a trial offering of
local wireless services. Mediareseaux also plans to offer chello broadband's
Internet access services in 1999. To expand its operations, Mediareseaux is
pursuing potential acquisition opportunities and plans to develop these
franchises as one clustered system offering integrated video, cable telephone
and Internet/data services.
Network. Mediareseaux owns the complete cable television infrastructure for
each of its cable systems from the headend to the home. The HFC network was
started with a 750 MHz UHF-VHF frequency band network with a 5-65 MHz return
path. The systems' post-1998 construction incorporates 860 MHz HFC capacity
with a 5-65 MHz return providing full two-way capability. As of September 30,
1998, Mediareseaux's network passed approximately 71% of the 86,000 homes then
in its franchise areas. Since September 1998, we have increased the number of
our franchises and we expect the network to pass all 114,000 homes in our
current franchise areas by the end of 1999.
Programming. Mediareseaux's current programming offers: (1) a basic eight-
channel package containing off-air, local and promotional programs; (2) four
extended basic tiers (News & Current Events, Youth & Discovery, International
channels, Sports & Leisure) containing five to ten channels each; (3) three
premium tiers containing three children's channels, three sports channels and
four movie channels; and (4) ten impulse pay-per-view channels.
Results of Operations. As of September 30, 1998, Mediareseaux had total
revenues of approximately NLG5.2 million for the nine months then ended,
representing approximately 1.7% of our consolidated revenues for the same date,
and Adjusted EBITDA of approximately negative NLG3.0 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.
Budgeted Capital Expenditures and Capital Resources. Mediareseaux has
budgeted approximately NLG56.7 million and NLG64.0 million for capital
expenditures in 1998 and 1999, respectively, primarily to complete construction
of the network in its franchise area, 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 the Mediareseaux 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 -- Mediareseaux Facility".
Competition. Mediareseaux competes with other video service providers in
its license areas including satellite providers such as Canal Satellite and
TPS. Mediareseaux expects to face competition mainly from France Telecom, the
78
<PAGE>
French incumbent telecommunications provider and Cegetel when it launches its
cable telephone services. Upon the launch of its Internet access service,
Mediareseaux expects to face competition from France Telecom's Wanadoo service,
Cegetel (which now includes AOL, Compuserve and HOL) and Infonie, among others.
Regulatory Issues. Mediareseaux is authorized to operate cable networks for
audio-visual services in the territory of Syndicat Mixte de Videocommunication
de l'Est parisien ("SYMVEP") and the territory of the city of Rosny-sous-Bois
pursuant to two licenses, valid until 2026 and 2022 respectively, granted by
the Conseil Superieur de l'Audiovisuel in September 1997. In order to operate
its cable television infrastructure, however, Mediareseaux was required to
enter into public service delegation agreements with local authorities. The
terms of Mediareseaux's agreements with the SYMVEP and with Rosny-sous-Bois
govern, among other things, Mediareseaux's 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. Mediareseaux has also entered into public domain
occupancy agreements with each city in the SYMVEP region giving Mediareseaux
the right to establish its cable network in the public domain. Mediareseaux did
not conclude separate public domain occupancy agreements with Rosny-sous-Bois
as such rights were contained in the public service delegation agreement.
Mediareseaux holds licenses granted by the Minister of Telecommunications
in June 1998 for the establishment and operation of a public telecommunications
network and for the provision of voice telephone in three French departments of
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. Mediareseaux is currently negotiating an
interconnect agreement with France Telecom. Pursuant to Article L34.8 II of the
Post and Telecommunication Code, France Telecom's interconnection rates must be
cost oriented and offered on non-discriminatory terms. Mediareseaux has entered
into an interconnect agreement with France Telecom. Mediareseaux expects,
however, that it will seek to renegotiate some provisions of the interconnect
agreement during 1999.
Malta: Melita Cable TV P.L.C.
Overview/Growth Strategy. Melita Cable TV P.L.C. ("Melita") operates an
exclusive franchise network in Malta. Currently, we and Melita Cable Holdings
each own 50% of Melita. As of September 30, 1998, Melita passed approximately
161,300 homes and had 68,150 basic video subscribers representing a 42.3%
penetration rate. 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. Currently, Melita passes over 161,300 homes, or 96% of the
network. 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.
Programming. Melita currently provides 52 channels of programming, grouped
in three tiers:
. reception (local and foreign off-air channels),
. basic (reception service plus nine additional satellite services), 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.
Results of Operations. For the nine months ended September 30, 1998, Melita
had revenues of approximately NLG22.2 million and Adjusted
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EBITDA of approximately NLG9.4 million. For the same period, Melita had average
monthly service revenue per video subscriber of NLG36.91. 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 NLG15.4 million and NLG24.4 million for capital expenditures in
1998 and 1999, respectively, 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
Condition and Results of Operations -- Liquidity and Capital Resources --
Current Debt Facilities -- Melita Facility".
Competition. With the exception of a small number of home satellite
receivers and a few hotel SMATV installations, competition in Malta is limited
primarily to approximately 15 foreign (Italian and Sicilian) broadcast
channels.
Regulatory Issues. 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.
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Eastern Europe
The following selected financial data have been derived from the
financial statements of the respective companies. The financial statements
for our operating companies in Hungary, the Czech Republic, Romania and the
Slovak Republic have been prepared in accordance with generally accepted
accounting principles in the respective jurisdictions or The Netherlands
with the functional currency of such jurisdictions the Hungarian forint,
Czech koruna, the Romanian lei and the Slovakian koruna, respectively. The
following December 31, 1997 and September 30, 1998 selected financial data
has been converted to Dutch guilders using the same exchange rates used in
the 1997 financial statements and the September 30, 1998 average exchange
rates, respectively. See "Exchange Rate Data".
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, 1997 Ended September 30, 1998
-------------------------------------------- --------------------------------------------
Net Total Net Total
Operating Adjusted Capital Operating Adjusted Capital
Income Adjusted EBITDA Expendi- Income Adjusted EBITDA Expendi-
Revenue (Loss) EBITDA Margin tures Revenue (Loss) EBITDA Margin tures
------- --------- -------- -------- -------- ------- --------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Hungary(1)
Kabelkom........... (NLG) 32,717 11,660 14,857 45.4% 11,213 -- -- -- -- --
Kabeltel........... (NLG) 9,555 (283) 778 8.1% 6,759 -- -- -- -- --
Telekabel Hungary.. (NLG) -- -- -- -- -- 39,225 9,919 14,416 36.8% 16,141
Czech Republic...... (NLG) 7,492 (13,116) (6,730) n/a 4,217 6,618 (6,816) (1,818) n/a 831
Romania(2).......... (NLG) 2,192 1,051 1,359 63.4% 857 2,857 1,041 1,382 48.3% 616
Slovak Republic..... (NLG) 1,547 (1,826) (1,011) n/a 2,799 1,163 (750) (73) n/a 3,117
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1998
----------------------------------------------------------
Avg. Mo.
Basic Basic Service Rev.
Homes Video Video per Video UPC Net
Passed Subscribers Penetration Subscriber(3) Ownership
------- ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Hungary................. 490,966 413,119 84.1% NLG11.06 79.3%
Czech Republic.......... 148,963 52,268 35.1% NLG13.20 100.0%
Romania................. 95,674 58,900 61.6% NLG 6.27 51.0-100.0% (4)
Slovak Republic......... 26,966 14,636 54.2% NLG 8.20 75.0-100.0% (5)
</TABLE>
--------
(1) Kabelkom and Kabeltel were contributed to Telekabel Hungary on June 30,
1998 and since then their results have been consolidated at Telekabel
Hungary. The financial information presented for the nine months ended
September 30, 1998 comprises:
. Kabelkom's results for the first six months of 1998 (revenues of
approximately NLG18.6 million, Adjusted EBITDA of approximately NLG8.6
million, Adjusted EBITDA Margin of 46.2%, net operating income of
approximately NLG6.7 million and capital expenditures of approximately
NLG3.2 million),
. Kabeltel's results for the first six months of 1998 (revenues of
approximately NLG6.8 million, Adjusted EBITDA of approximately NLG1.1
million, Adjusted EBITDA Margin of 16.2%, net operating income of
approximately NLG0.5 million and capital expenditures of approximately
NLG8.7 million), and
. Telekabel Hungary's results for the three months ended September 30,
1998 (revenues of approximately NLG13.8 million, Adjusted EBITDA of
approximately NLG4.7 million, Adjusted EBITDA Margin of 34.1%, net
operating income of approximately NLG2.7 million and capital
expenditures of approximately NLG4.2 million).
(2) Because Eurosat was acquired in May 1998, only four months of its
results have been included in the financial results for the Romanian
Systems.
(3) Service revenues exclude installation revenue for the nine months ended
September 30, 1998 and have been converted using the average exchange
rate for the first nine months of 1998.
(4) We own 100% of each of Control Cable Ventures and Multicanal Holdings
systems and 51% of Eurosat.
(5) We own 75% of the 11,507-subscriber Trnavatel system and 100% of the
3,129-subscriber Kabeltel (Slovak) system.
Hungary: Telekabel Hungary
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. As of September 30, 1998,
Telekabel Hungary had approximately
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413,100 subscribers. There are no current plans to launch telephone or
Internet/data services in Telekabel Hungary's systems.
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 NLG10.50 for the year ended
December 31, 1997.
Network. Telekabel Hungary, together with local minority partners for some
systems, owns the complete cable television infrastructure for each of its
systems from the headend to the home. We are upgrading these networks. As of
September 30, 1998, approximately 17,300 customers were already served by the
rebuilt network. The upgraded network throughout Budapest will be 750 MHz HFC
technology with 65 MHz return path. As of September 30, 1998, Telekabel
Hungary's network passed approximately 64,000 HFC homes.
Programming. Telekabel Hungary offers subscribers four tiers of programming
comprising approximately 35 channels:
. basic tier which includes lifeline (a limited number of broadcast and
satellite channels required by the government to be carried),
. an expanded basic tier, and
. a premium service, HBO-Hungary.
Approximately 15 channels, including HBO-Hungary, are available in Hungarian.
In the Telekabel Hungary systems, 75% of all subscribers passed by the upgraded
network take the expanded basic tier package.
Results of Operations. As of September 30, 1998, combined revenues and
Adjusted EBITDA for the nine months then ended were approximately NLG39.2
million and NLG14.4 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 Telekabel Hungary 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 NLG39.0 million and NLG57.1 million for capital
expenditures in 1998 and 1999, respectively, primarily to continue the network
upgrade, line extensions and acquisitions. Telekabel Hungary expects to fund
these expenditures through available cash flow, the Telekabel Hungary Facility
and support from us. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations --Liquidity and Capital Resources".
Competition. Telekabel Hungary currently has high penetration in its
service area (averaging over 84%) and faces limited competition. We understand,
however, that potential competitors may begin to offer DTH services in
Budapest.
Regulatory Issues. Cable operators in Hungary are not granted franchises;
however, all cable operators must be properly registered with the appropriate
government agency. Moreover, although there is no rate regulation in Hungary,
rates are subject to consumer pricing and anti-competition reviews by the
government. Further, a single cable operator may not provide service to homes
exceeding in the aggregate one-sixth of the Hungarian population.
Hungary: Monor
Monor, our Hungarian operating company in which we own a 46.3% economic
interest, has offered traditional telephone services since December 1994. Monor
has 85,000 homes in its franchise area, with approximately 84,000 traditional
telephone homes passed and approximately 67,350 cable television homes passed.
It served approximately 66,900 traditional telephone access lines and
approximately 29,150 cable television subscribers as of September 30, 1998.
Revenues for the year ended December 31, 1997 of approximately NLG28.1 million.
As of September 30, 1998, Monor had total revenues of
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approximately NLG26.6 million and EBITDA of approximately NLG16.8 million for
the nine months then ended. Monor had approximately $46.0 million of
outstanding bank debt as of September 30, 1998.
Czech Republic
Overview/Growth Strategy. We own 100% of KabelNet, its Czech Republic
subsidiaries that provide cable and MMDS ("wireless" cable) television services
in the cities of Prague and Brno (the Czech Republic's second largest city). At
September 30, 1998, the MMDS system served approximately 42,600 subscribers in
both cities and the cable system served approximately 9,500 subscribers in
Prague. KabelNet's penetration rate was 35.1% as of September 30, 1998. There
are no current plans to launch telephone or Internet/data services in
KabelNet's systems.
Network. KabelNet's systems currently offer programming over an MMDS
network and an HFC 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.
Programming. The Czech MMDS systems offer subscribers three tiers of
programming comprising approximately 16 channels: (1) five "must carry"
channels, (2) a 15-channel basic tier (which includes the "must carry"
channels), and (3) one premium channel, HBO-Czech. Approximately nine channels,
including HBO Czech, are available in Czech/Slovak. Currently, approximately
12% of KabelNet's cable subscribers take the expanded basic tier package.
Result of Operations. For the nine months ended September 30, 1998,
KabelNet had total revenues of approximately NLG6.6 million and Adjusted EBITDA
of approximately negative NLG1.8 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.
Budgeted Capital Expenditures and Capital Resources. KabelNet has budgeted
approximately NLG1.1 million and NLG2.5 million for capital expenditures in
1998 and 1999 respectively, primarily to expand MMDS distribution. KabelNet
expects to fund these expenditures through available cash flow and funding from
us. KabelNet has no bank debt.
Competition. KabelNet faces competition in its service area. Currently,
parts of its service areas have been overbuilt (i.e., a cable network has been
installed where one already exists) by Cable Plus and Dattel Kabel in Prague
and Cable Plus in Brno.
Regulation. There is no rate regulation of cable/MMDS services in the Czech
Republic. Rate increase notifications must be sent out ninety days in advance,
however, as conditions of the franchises awarded by the municipalities. All
cable operators must have a valid Establishment and Operating permit, which is
issued by the Czech Telecommunications office. Additionally, all cable
operators must be registered with the Council for Radio and Television
Broadcasting.
Romania
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, and Multicanal Holdings, located in
Bucharest, Romania's capital, of which we own 100% interest, 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, 1998, our combined Romania
operations passed approximately 95,675 homes and served approximately 58,900
subscribers, representing a penetration rate of 61.6%. 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 (750 MHz in Bacau). The rebuild
in Ploiesti (24,000 subscribers) is complete and the rebuild in Slobozia and
Bacau (30,000 subscribers) are expected to be completed by 2000. The Romanian
systems have no plans to introduce two-way services at this time.
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Programming. The Romanian systems offer subscribers one to three tiers of
programming with approximately 28-34 channels: (1) basic tier, (2) an expanded
basic tier, and (3) a premium service, HBO Romania. HBO Romania was launched in
Ploiesti and Bucharest in February and April 1998, respectively. We also
launched an expanded basic tier in Ploiesti in April 1998. Approximately 12
channels, including HBO Romania, are available in Romanian. Currently, 15.8% of
the basic tier subscribers take the expanded basic tier package.
Result of Operations. As of September 30, 1998, the combined Romanian
systems had total revenues of approximately NLG2.9 million for the nine months
then ended and Adjusted EBITDA of approximately NLG1.4 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 NLG1.1 million and NLG1.5 million for
capital expenditures in 1998 and 1999 respectively, primarily to finish
upgrading the networks. The 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
its 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.
Slovak Republic
Overview/Growth Strategy. We entered the Slovakian market in 1995 and
currently have over 68,000 homes in our franchise areas. Together with a local
partner, we are developing projects in the cities of Trnava ("Trnavatel"),
Zvolen, Nove Zamky and Levice (all three operated as "KabelTel"). We own 75% of
Trnavatel and 100% of KabelTel. Construction of the network in Trnava has been
completed. The three KabelTel cities are all currently under construction,
which is expected to be completed by the end of 1999. As of September 30, 1998,
our Slovakian operations passed approximately 27,000 homes and served
approximately 14,625 subscribers, representing a penetration rate of 54.2%.
There are no current plans to launch telephone or Internet/data services in the
Slovakian systems.
Network. The Slovakian systems own the HFC cable network from the headend
to the home. There are no plans to introduce two-way services to the Slovakian
systems' network at this time.
Programming. The Slovakian systems offer subscribers three tiers of
programming on approximately 34 channels: (1) a basic tier, (2) an expanded
basic tier, and (3) a premium service, HBO Czech. Approximately 12 channels,
including HBO Czech, are available in Slovak/Czech. Currently, 92.7% of the
subscribers take the expanded basic tier package.
Result of Operations. As of September 30, 1998, the Slovakian systems had
combined total revenues of approximately NLG1.2 million for the nine months
then ended and Adjusted EBITDA of approximately negative NLG0.1 million. For
the year ended December 31, 1997, the Slovakian operations had total revenues
of approximately NLG1.5 million and Adjusted EBITDA of approximately negative
NLG1.0 million.
Budgeted Capital Expenditures and Capital Resources. The Slovakian systems
have budgeted approximately NLG3.4 million and NLG2.0 million for capital
expenditures in 1998 and 1999, respectively, primarily to complete construction
of the network. The Slovakian systems expect to fund these expenditures through
available cash flow and support from us. The Slovakian systems have no third-
party debt.
Competition. In the KabelTel cities of Levice and Nove Zamky, there are no
competitors to our systems. In Zvolen there are two competitors. One is an
unencrypted MMDS service operated by Cable Plus, a subsidiary of US WEST, and
the
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other is a small private SMATV operator. Trnavatel faces no direct competition.
Regulation. There is no regulatory body in the Slovak Republic that issues
cable franchises, however, an operating permit is required. Most private cable
operators have their own agreements with each city and/or large co-operative
housing associations. Moreover, there is no rate regulation on cable
activities. Cable operators are subject, however, to consumer pricing reviews
and the laws on monopolistic positioning in the market and must register with
the broadcast council and submit channel line-ups as part of the permit
process.
Other Business Information
Employees
As of September 30, 1998, we, together with our consolidated subsidiaries,
had approximately 1,360 employees. We believe that our relations with our
employees are generally good.
At December 31, 1995, 1996 and 1997 we, together with our consolidated
subsidiaries, had approximately 407, 704 and 815 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.
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. See also "Business --Operating Companies -- The
Netherlands: A2000 Holding N.V. -- Programming".
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.
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TECHNOLOGY
The following is a general discussion of the technology we employ. It is
presented for illustrative purposes only and, except where indicated, is not
intended to reflect the technology of any particular operating system. For more
information regarding the technology status of our operating companies, see the
"Network" sections of each operating company in "Business --Operating
Companies". In order to explain some of the technical terms in this section, we
have included a glossary following this section.
Our Network
We typically own the complete cable television infrastructure for each of
our systems from the headend to the home. Since 1994, we have been rebuilding
and upgrading the existing one-way video distribution infrastructure in the
majority of our operating systems by replacing the entire coaxial trunk network
with a fiber optic trunk network and upgrading the remaining coaxial
neighborhood distribution network to full two-way capability. Our upgraded
network incorporates two-way capable 860 MHz Hybrid Fiber Coaxial ("HFC")
technology that provides sufficient bandwidth in the upstream portion (from the
subscriber to the Master Telecom Center) and the downstream portion (from the
Master Telecom Center to the subscriber) of the network. This provides us with
increased channel capacity and permits the introduction of digital services,
such as enhanced video, telephone and Internet/data services.
Our network upgrade to fiber optic cable enables us to offer analog video,
digital video, and digital telephone and Internet/data services that are not
possible with our non-upgraded network. In addition, our fiber optic network
supports higher penetration rates for these services and provides a higher
level of quality and reliability than the network that is being upgraded. As a
result of the upgrade, our customers are able to receive new competitive
services that they could not receive before, including:
. better voice quality from our digital telephone services than the
incumbent telecommunications operator provides,
. a much faster Internet service than dial-up services and without local
telephone connection charges, and
. digital television signals that are superior to the current analog
signals.
The network upgrade consists of two phases: (1) the basic network upgrade
and (2) the enhanced upgrade that includes the incremental investments
necessary to introduce digital video, telephone or Internet/data services. The
basic upgrade includes the installation of HFC technology throughout the
network. This includes the fiber optic cable, fiber nodes, fiber optic
transmitters and receivers, and the replacement of coaxial amplifiers and
multi-port taps in the coaxial neighborhood distribution network.
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Non-Upgraded Network Architecture. Our typical non-upgraded network
architecture (from the headend to the subscriber) is depicted in the diagram
below:
[FLOW CHART APPEARS HERE]
Our non-upgraded cable systems usually consist of stand-alone cable
television headends that are connected to a coaxial dual 45-450 MHz trunk
network. The trunk network is connected to a neighborhood distribution network
that terminates at a multi-port tap device, which connects individual
subscribers. The traditional cable television headend collects the satellite
and terrestrial video signals and distributes these signals to the trunk
network. The trunk network carries small numbers of analog television channels
(15-20 channels on each dual trunk) to a neighborhood substation combiner. This
substation combines each of the dual 45-450 MHz trunk systems so that the 30-40
analog television channels can be distributed on one 45-860 MHz coaxial
distribution network. The smaller cascades of distribution amplifiers then
relay these signals to the final amplifiers where the signal is transferred
through a passive multi-port tap device. These multi-port tap devices allow
individual subscribers to be connected to the network through in-home coaxial
cable connected directly to a television set, thereby terminating the cable
television signal. The majority of our systems acquired from Philips did not
use set-top converters to terminate the signals at the television sets. Our
Israeli, Maltese and Norwegian systems use analog set-top technology, however,
to decode scrambled analog channels before subscribers can view the channels on
their television sets.
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Basic Network Upgrade
The architecture of the basic network upgrade, which is the first phase, is
depicted in the diagram below:
[FLOW CHART APPEARS HERE]
The basic network upgrade consists of the following steps:
Converting Headends into Distribution Hubs and the Master Telecom Center
Existing headends are converted into distribution hubs by adding fiber
optic transmitters and fiber optic receivers. The distribution hubs will also
house certain telephone and Internet equipment installed during the enhanced
services upgrade. See "-- Upgrade for Enhanced Services". For telephone and
Internet/data services, these distribution hubs are connected by high speed
Synchronous Digital Hierarchy ("SDH") fiber optic rings (with transmission
speeds of up to 2.4 Gbps per fiber pair) to the Master Telecom Center. SDH
technology automatically detects disruptions in the fiber and reroutes signals
within 1/20th of a second, thereby providing reliable service to these
customers. The Master Telecom Center aggregates the video, voice and data
signals in one central location for transmission to the distribution hubs.
Several distribution hubs are then connected to each other by high-speed
digital SDH backbone networks throughout each country. Video is also
distributed to the distribution hubs over fiber optic cables.
Inserting Fiber Nodes and Connecting Them to Distribution Hubs
Our basic fiber upgrade consists of replacing the trunk network with a high
capacity fiber network. First, fiber optic transmitters and receivers are
installed in the distribution hub. Next, the dual 45-450 MHz trunk amplifiers
are replaced with fiber optic nodes. These nodes consist of conversion
equipment to change the optical signals back to radio frequencies. Eight to
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twelve fiber nodes are connected by fiber optic cable in a ring configuration
to the distribution hub. The fiber node transmits signals between the fiber
connected to the distribution hub and the coaxial neighborhood distribution
network. Each distribution hub can support enough fiber subrings to
interconnect 20,000-40,000 subscribers. This phase is where the majority of the
construction activity takes place. The old trunk network typically was directly
buried underground without ducts.This phase of construction replaces existing
direct-buried cable with fiber optic cable in underground conduits.
Replacing the Distribution Amplifiers in the Remaining Coaxial Plant
The remaining distribution amplifiers typically have to be replaced to be
able to transmit the two-way signals necessary for enhanced services such as
impulse pay-per-view, telephone and Internet/data services. Typically, these
older generation amplifiers are not capable of operating without distorting the
extra channels or digital signals required for telephone or Internet/data
services. The expanded channel requirements and the "density" of the digital
signals will distort the older distribution amplifiers, causing either poor
picture quality or inadequate performance of telephone or Internet services.
Therefore, replacement of distribution amplifiers is usually required.
Upgrade the Final Amplifier and Multi-port Tap
The final stage of the basic two-way upgrade program is the replacement of
final amplifiers and multi-port taps. The final amplifiers are typically one-
way and of an older generation technology, similar to the distribution
amplifiers. Although the multi-port taps are capable of passing frequencies up
to 860 MHz, they are only one-way devices. After these devices are replaced,
the network from the distribution hub to the subscriber's home becomes fully
two-way capable.
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Final Configuration of the Basic Upgrade
The following diagram depicts the actual structure of the basic upgrade
being constructed for our system in Vienna, Austria. This architecture is
typical of our other upgraded systems. Five distribution hubs are shown
interconnected by fibers configured in a bi-directional SDH ring architecture
operating at 2.4 Gbps per fiber pair. Distribution hub number one is located
with the Master Telecom Center, where the telephone switch and Internet servers
are located. The Master Telecom Center is in the process of being connected to
the pan-European backbone network operating at 140 Mbps.
After the Vienna city backbone is constructed and interconnected to each
distribution hub, the local fiber subrings are constructed to extend fiber into
a neigborhood. The diagram depicts how distribution hub number two fans out
with four separate fiber subrings and connects each fiber node.
[MAP APPEARS HERE]
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Concurrent Broadband Bandwidth
Our upgraded network architecture will provide cost-effective methods to
distribute the greatest amount of concurrent broadband bandwidth into
subscribers' homes. We have dedicated one fiber transmitter and associated
receiver per fiber node, thereby allocating the full 5-65 MHz upstream / 85-860
MHz downstream of two-way bandwidth to each home passed. The following two
diagrams show the allocation of upstream (from the subscriber to the Master
Telecom Center) and downstream (from the Master Telecom Center to the
subscriber) bandwidth.
In the upstream direction, we have constructed an architecture to support
frequencies from 5-65 MHz. We place non-critical upstream transmissions from
subscriber set-top terminals in the 5-15 MHz portion of the bandwidth.
Typically, our analog set-top boxes transmit impulse pay-per-view buy
information at 10 MHz. This type of upstream information can be collected at
operator- defined polling intervals and is not disturbed by impulse noise
typical in the 5-15 MHz frequency range. Real-time services such as
Internet/data and telephone require frequencies undisturbed by impulse noise or
other transient disturbances and are allocated upstream spectrum in the 15-
65 MHz range. The following diagram details the allocated spectrum in the
upstream path from the subscriber's home to the fiber node. The fiber node then
converts the electrical signals to optical wavelengths for further transmission
to the distribution hub, then to the Master Telecom Center.
[DIAGRAM APPEARS HERE]
Upstream Scalability. We are currently deploying impulse pay-per-view
(IPPV) set-top boxes, Internet cable modems and telephone cable phone modems in
fiber nodes averaging 1,000 homes passed. Because the IPPV set-top boxes
transmit movie purchase information infrequently, the fiber node could support
in excess of two set-top boxes per home passed.
We have allocated two 6 MHz channels for upstream communications from
Internet cable modems to the Master Telecom Center. The currently deployed
technology allows 10 Mbps of digital transmission capacity per 6 MHz channel.
One 6 MHz channel can be allocated to residential subscribers and the other 6
MHz channel is allocated to small and medium enterprises
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(SMEs). These two 6 MHz channels have been designed to support 600 customers in
total with a minimum throughput for each customer of four to five times ISDN
BRI (128 Kbps) speed, or approximately 512-640 Kbps. The design allows for 25%
of the 600 customers (150) to be accessing the bandwidth simultaneously at this
speed. However, burst speeds for an individual subscriber can reach 2 Mbps.
Our current suppliers of cable phone technology both use the same
transmission format to transmit thirty 64 Kbps time-slots in a 2 Mbps
bitstream. This means that one 2 Mbps bitstream fits into a 1.5 MHz radio
frequency channel and could support 30 simultaneous phone calls. However, we
deploy technology at the distribution hub via the Host Digital Terminal (HDT)
that provides a 4 to 1 concentration. This concentration allows 120 customers
to use the same bandwidth without experiencing a call blocking problem. Our
deployment of this concentration technology is designed to allow the customer
at least 99% accessability to the network, the standard for most public
networks.
We then allocate 1.5 MHz channels in the upstream direction to allow for
telephone penetrations of 600 lines in the fiber node. More
1.5 MHz channels can be added to support increased penetration.
In summary, assuming 1,000 homes passed per fiber node, our current
technology would support simultaneously in excess of two set-top boxes per home
passed, 600 cable modems and 600 telephone lines.
Improvements in Upstream Transmission Technologies. We intend to deploy the
U.S.-based cable modem standard (MCNS/DOCSIS) in 1999, which will increase the
transmission capacity in the same 6 MHz upstream channel from the current 10
Mbps to 30 Mbps. Likewise, we expect to take advantage of improving
technologies for placing more phone calls within the same amount of radio
frequency bandwidth.
Downstream Scalability. In the downstream direction, we have the
flexibility to allocate the combination of analog and digital channels. The
diagram below depicts a model where we would allocate a maximum of 65 analog
television channels and 240 MHz of bandwidth for digital services:
[DIAGRAM APPEARS HERE]
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Because both the upstream and downstream frequencies are transmitted
simultaneously and received on a single coaxial cable, the above model would
provide capacity for: 65 analog television channels occupying 520 MHz of
bandwidth, 100 FM radio channels occupying 20 MHz of bandwidth, Digital Video
Broadcast (DVB) streams (280 channels) occupying 224 MHz of digital bandwidth
(840 Mbps of transmission capacity), 24 MHz of Internet capacity (40 Mbps of
transmission capacity) and 16 MHz of telephone capacity (eight 2.048 Mbps
channels). In this example, we would bring 65 analog television channels and
approximately 900 Mbps of concurrent digital capacity into each home. We have
the flexibility, however, to define the ratio of analog to digital channels
allocated in each market.
Upgrade for Enhanced Services
The second phase of our network upgrade is the incremental investment
necessary to introduce digital video, telephone or Internet/data services. This
enhanced upgrade involves the installation of certain equipment in the Master
Telecom Center, the distribution hubs and the customer premises required to
connect subscribers for digital video, telephone or Internet/data services
through the upgraded network.
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, the voice mail platform, SDH transmission and other telephone-
related equipment. For Internet/data service, this includes servers and
equipment for connection to the Internet.
Cable Telephone Network and Infrastructure
Traditional telephone signals are carried over twisted copper pairs in the
local loop. Cable phone technology allows telephone signals to be carried over
upgraded HFC technology infrastructure without requiring the costly overbuild
of the local loop in order to install twisted copper pair. Therefore, instead
of an expensive rebuild, cable phone technology only requires the addition of
equipment at the Master Telecom Center, the distribution hub and in the 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 (Customer Interface Unit or "CIU"), that is
usually mounted on the wall inside the home. Cables run from the CIU to other
parts of the home where services are required. 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. The
subscriber is connected to the cable phone network using the existing home
telephone wiring and telephones.
We plan to utilize cable phone equipment with various line capabilities.
For the residential/SOHO market, a one-, two- or four-line unit will be
utilized. Eight- and twelve-line cable phone equipment units will be used to
provide service to both multiple dwelling units ("MDUs") and segments of the
medium business market. This type of installation uses the HFC-based coaxial
network to terminate into the MDU or business customer's premise. The interface
with the subscriber's phone will be the existing twisted-pair in-house wiring
system. The subscribers receive all the services with voice quality that is
equal to or better than that of the incumbent telecommunications operator.
Large businesses generally will be connected to the network with direct
fiber connections using "self-healing" SDH fiber optic ring technology. This
technology automatically detects disruptions in the fiber and reroutes calls
within 1/20th of a second, thereby providing reliable service to these
customers. Typically, these medium to large businesses will be served by
installing SDH Add/Drop Multiplexors (ADMs) at the business premises.
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The diagram below depicts the technology for adding cable phone at the
distribution hub and subscriber residence, as well as the telephone
configuration for MDUs and medium and large businesses:
[DIAGRAM OF TELEPHONE ARCHITECTURE APPEARS HERE]
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Our upgraded network has been designed to support up to 600 telephone lines
per fiber node. Assuming 1,000 homes passed per fiber node and 35% of telephone
subscribers order a second line, this configuration would support over 440
subscribers, or approximately 44% of homes passed. Higher penetration rates
could be supported either by allocating another radio frequency channel (one
1.5 MHz channel can support an additional 120 lines) or sub-dividing the fiber
node by adding another fiber optic transmitter/receiver pair (at an investment
of approximately NLG20 per line). Our network architecture has been designed to
allow for future fiber node subdivision without having to spend incremental
capital on fiber optic construction. We also have the extra fiber capacity at
each fiber node to connect directly businesses that require more capacity than
cable phone installations.
Most of our networks have been constructed in a similar manner to utility
networks. These networks are underground, access to the plant is from access-
restricted cabinets and wiring is inside the homes. Some non-UPC cable phone
installations have experienced noise in the line caused by ingress resulting
from a wide range of factors including poor construction practices, improperly
used fittings or cable plant that is exposed to the elements (overhead, aeriel
plant) typical of cable television networks constructed in the United States
before the use of two-way plant was contemplated. The high quality construction
of our Western European networks allows very little noise in cable phone lines
due to ingress.
Consumers expect their telephones, unlike cable television services, to be
powered separately from the main power and thus continue to function in the
event of a power outage. To meet this requirement, we are installing
uninterruptable power supplies at the Master Telecom Center, distribution hubs
and fiber nodes to ensure that the network can continue a "lifeline" service if
the local power supply fails. To enable the CIU to function in a power outage,
we provide standard emergency back-up power by installing rechargeable, sealed
lead acid batteries with a projected five-year life. These batteries are housed
within the CIU and are able to provide over eight hours of standby time or two
hours of talk time in the event of a power outage. The batteries recharge
themselves from the main electricity source when the power resumes. If the
power outage is longer than eight hours, however, these CIUs would likely not
remain functional. See "Risk Factors -- The Scalability, Speed and Technology
of the Network is Unproven".
Internet Access Technologies
We believe that the slow speed of current residential Internet access is a
significant deterrent for Internet users. This slowness results from the
predominance of telephone dial-up modems as the access means, where the maximum
speed of the fastest dial-up modem on the market is either 56 Kbps or 64-128
Kpbs ISDN. 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: (1) 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, (2) a global standard has been created
and accepted (MCNS/DOCSIS), and (3) customers are served by a shared
infrastructure, which allows for lower cost service offerings.
Cable modem technologies were launched in our Austrian, Belgian, Dutch and
Norwegian networks on a trial basis in 1997. Our existing two-way
infrastructure is used to provide high speed Internet access to the subscribing
home or business. Cable modem service, such as that employed by chello
broadband, consists of a cable modem in the customer's home or office that
permits the customer's personal computer to connect to the Internet through the
network at speeds up to 100 times faster than the fastest dial-up modem
services. This service provides extremely fast downloading of most commonly
viewed pages, CD quality video and sound and quality desktop audio/video
conferencing.
Pan-European Backbone
We intend to develop a pan-European backbone. The backbone is designed to
link our major cable networks through a combination of leased capacity
arrangements between Vienna,
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Amsterdam, Brussels and Oslo. Our pan-European backbone will also be capable
of being linked to the United States through two leased fiber routes. In
October 1998, we entered into a contract with Hermes Europe Railtel for the
purchase of transmission capacity. This agreement allows chello broadband and
Priority Telecom to purchase fiber-optic based high speed transmission
capacity for their services.
When fully developed, this pan-European backbone would link Priority
Telecom's and chello broadband's national networks and points-of-presence with
other countries and international gateway facilities, including international
Internet network access points and international voice and data switching
hubs. Through the use of this IP network, Priority Telecom and chello
broadband plan to offer solutions for international carrier traffic
distribution and other voice and data services.
The following diagram depicts this architecture:
[MAP APPEARS HERE]
In the above diagram, chello broadband's pan-European backbone, branded
AORTA, will interconnect the 155 Mbps ring to three major Internet exchange
points -- Amsterdam (AIX), Stockholm (GIX) and Vienna (E-Bone). Each of these
major European Internet exchange points will provide chello broadband with
Tier 1 Internet connectivity, which is the highest level of interconnection
performance on the Internet backbone, when chello broadband expands to
strategic Internet exchanges. Tier 1 Internet peering offers transit network
rights to and from the large Internet providers throughout Europe. chello
broadband intends to interconnect to the U.S. network access points in
Washington D.C. and New York via a 45 Mbps transatlantic fiber link.
To provide additional capacity and provide redundancy for the pan-European
backbone, we intend to implement a satellite Internet network.
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This network will augment the backbone to provide high capacity Internet
connectivity in countries where the costs for high fiber bandwidth is
prohibitive. This satellite architecture also would provide a more cost-
effective method to transmit data from the U.S. to Europe than the
transatlantic fiber.
The pan-European backbone and the satellite Internet network will allow
broadband Internet subscribers to experience access speeds that are up to 100
times faster than traditional dial-up services. chello broadband will also
implement caching technology at the local Master Telecom Centers that keeps the
most popular Web content close to the local customer for quick retrieval.
Local Access Network Architecture. We have implemented in Austria,
Belgium, The Netherlands and Norway a local Internet access architecture with
server farms located in each Master Telecom Center. The broadband content and
backbone interconnection are interfaced with the local Internet access platform
through the caching and other chello broadband servers.
Digital Distribution Platform
We are seeking partners to construct a pan-European digital video
distribution platform. The pan-European digital video distribution platform, if
constructed, would provide an economical way to deploy digital video avoiding
the expense of separate encoding and conditional access systems at every
headend. The aggregation of programming through a central UPC uplink facility
would provide cost-efficient digital distribution to multiple cable companies
throughout Europe, making it easier for both us and other companies to buy
services. We would carry programming versioned for multiple languages in one
data stream and use remote storage and playout to deliver NVOD services.
Our planned digital distribution platform would accomodate video
compression, playout and overall conditional access control for us and non-
affiliates. We have designed this distribution architecture to provide the
basis for additional revenues beyond the cost-efficient delivery of digital
channels. First, it includes a unique way to overcome the complexity of rights
issues for NVOD. Simultaneous pan-European broadcasting is not possible with
NVOD, because rights windows vary by country. Our solution is to broadcast NVOD
programming to remote content servers at the headend, which will store the
programming and play it out according to local schedules.
We believe that if this digital distribution platform is constructed, it
will provide the first pan-European digital video distribution platform with
coverage, content and conditional access mechanisms to attract European cable
companies (including our own operations).
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GLOSSARY OF TECHNICAL TERMS
Backbone - A high-capacity network that links together other networks of
lower capacity.
Bandwidth - The capacity, in terms of volume and speed, of cable to
transmit information. This is measured in Hertz (cycles per second) or bits per
second (bps).
Bitstream - A stream of data produced by compressing analog video or audio
information into digital signals.
Cable Modem Termination System (CMTS) - Equipment located in the
Distribution Hub that converts optical Internet/data signals into radio
frequency signals.
Call Blocking - The restriction of telephone lines from making calls to
other lines due to a lack of available capacity.
Central Content Server (CCS) - This is the centralized server element of
the Near Video On Demand (NVOD) portion of the digital distribution platform.
All NVOD programs are stored on this server for subsequent delivery to the
Remote Content Servers (RCS) located within the various cable headends. See "--
Remote Content Server".
Coaxial Cable (Coax) - A transmission medium consisting of one or more
central wire conductors, surrounded by dielectric insulator, and encased in
either a woven wire mesh or extruded metal sheathing. The electromagnetic wave
travels between the outer shield and the conductor. Coax can carry a much
higher bandwidth than the wire pair used in traditional telephone networks.
Compression - A method that reduces the bandwidth or bits necessary to
transmit or store information.
Conditional Access - The part of the digital distribution platform that is
used to control access to what a subscriber may view and how the digital set-
top box will function. Coupled with data encryption, conditional access
provides the primary security element of the distribution system.
Data over Cable System Interface Specification (DOCSIS) - U.S.-based
standard for increasing the amount of data that can be transmitted over HFC-
based networks.
Digital Video Broadcasting (DVB) - Extensive set of standards that defines
the way digital entertainment services (television in particular) are packaged
and transported throughout Europe. The DVB standards have been adopted by the
European Union as the standard for digital broadcasting.
Distribution Amplifier - A device used to increase the radio frequency
signal to compensate for signal loss.
Distribution Hub - A building or equipment facility that houses voice,
video and data equipment before sending these signals to the Fiber Nodes.
Downstream - Signals travelling to the subscriber's home from the Master
Telecom Center.
Encoding - The act of changing data into a series of electrical or optical
pulses for more efficient travel, thus reducing overhead and bandwidth
requirements.
Fiber Node - A device that receives and transmits optical signals and
reconverts the optical signal to an electrical signal for transmission on
coaxial cables.
Final Amplifier - The last coaxial amplifier between the fiber node and the
subscriber connection. The amplifier feeds the subscriber multi-port tap.
Gbps - Giga bits per second. One billion bits of information transmitted in
one second.
Headend - The equipment at a cable system that receives the program
signals, whether by satellite, broadcast or tape, processes them and
retransmits them to subscribers through the network.
Host Digital Terminal (HDT) - Equipment located in the Distribution Hub
that converts
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optical telephone signals into radio frequency channels.
Hybrid Fiber Coax (HFC) - A technology designed to receive multiple
broadcast and/or non-broadcast signals and to distribute them through a
combination of coaxial and fiber-optic cable to subscribers. HFC technology
also enables service providers to offer two-way telecommunications services.
Impulse Pay-Per-View (IPPV) - Pay-per-view service that enables the
subscriber to purchase programming by using the subscriber's set-top box and
remote control (i.e. on impulse) rather than calling the cable operator in
advance of transmission.
Integrated Services Digital Network (ISDN) - A set of standards for the
transmission of simultaneous voice, data and video information over fewer
channels than would otherwise be needed.
Internet Protocol (IP) - A standard used in routing, transmitting and
delivering packets of data between Internet hosts.
Kbps - Kilo bits per second. One thousand bits of information transmitted
in one second.
Local Area Network (LAN) - A network that covers a limited geographical
area (usually within one building site) and interconnects a variety of
computers and terminals.
Master Telecom Center (MTC) - The primary technical facility of each cable
system. This facility typically includes the cable television equipment,
telephone switch equipment, voice mail platform, fiber optic equipment,
Internet servers and modem interfaces.
Mbps - Mega bits per second. One million bits of information transmitted in
one second.
Multichannel Multipoint Distribution System (MMDS) - Wireless cable
transmitting a number of television channels to households in a limited area.
Multi-Port Tap - A device that interconnects one or more customers to the
coaxial network. The device provides isolation between each individual
subscriber's connection and the network.
Near Video-On-Demand (NVOD) - An advanced form of impulse pay-per-view that
offers more "purchase opportunities" to the consumer by showing programs more
frequently than IPPV. NVOD operations require a greater number of channels on a
system than traditional IPPV.
Neighborhood Substation Combiner - A device that combines radio frequencies
from the network so the combined output is in the frequency range of 54-860
MHz.
Radio Frequency - The medium that carries information. A typical broadband
network uses radio frequencies between 80 and 860 MHz to carry signals from the
Master Telecom Center to the subscriber.
Receiver (Rx) - A device used to receive radio frequency signals. This
could be a satellite receiver or a television receiver in a subscriber's home.
Remote Content Server (RCS) - This is the remote server in the digital
distribution platform that is used for NVOD services. The RCS is located in the
Master Telecom Center of a broadband network. All NVOD programs are stored on
this server for playout to the digital set-top box. See "-- Central Content
Server ".
Subscriber Management System - Refers to the system used by a network
operator to manage its subscribers. Typical functions can include billing,
marketing, workforce management and scheduling.
Synchronous Digital Hierarchy (SDH) -The European version of the
synchronous optical network (SONET) transmission standard designed for "self-
healing" broadband optical networks. These can detect a break in the fiber and
reroute the signal.
Transmitter (Tx) - A device that typically uses radio frequencies to
transmit information to one or more locations where the information is
recovered by a receiver. See "-- Receiver (Rx)".
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Transport Control Protocol (TCP) - One of the components of the
transmission control protocol/Internet protocol (TCP/IP) that provides routing
among networks and, in some cases, within a particular network.
Trunk Amplifier - A device that increases the electrical signal on the main
transportation cables of a coaxial network and usually carries signals to and
from the fiber optic node and the distribution amplifier or final amplifier.
Upstream - Signals travelling from the subscriber's home to the Master
Telecom Center.
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CORPORATE OWNERSHIP STRUCTURE
We own 100% of our operating systems in Norway, Belgium and the Czech
Republic. Below is a description of those operating systems in which we hold
less than 100%.
Austria
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 (or two members if four to six members have been
appointed by shareholder resolution). KTV's director has a veto right with
respect to the introduction and provision of new cable television and other
services (including the provision of tiered channels, pay-per-view,
Internet/data services and telephone services), the enlargement of the current
cable-network, pricing arrangements and integration of different services.
Although we believe the cooperation between KTV's director and the other
directors has been successful in the past, there can be no assurance that KTV's
director will approve the planned new activities in Austria.
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 (the "Vienna
Agreements"). We have agreed to indemnify Philips for any liability under
Philips' guarantee.
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".
Philips, KTV and ourselves have agreed that the Vienna Agreements will run
until December 31, 2022 with an option to extend them.
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 (in the case of Telekabel Wien) 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.
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 UIH 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 wholly-owned subsidiary, even though the services will continue to be
marketed by Telekabel Group.
The Netherlands
UTH
We and NUON own 51% and 49%, respectively, of the ordinary share capital of
UTH. We will purchase NUON's 49% of UTH at the closing of this offering. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- History of UPC".
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UTH has pledged its interest in Telekabel Beheer and its subsidiaries to
secure the UTH Facility, which it has received commitments from its banks to
replace. If NUON is not repaid, it will have the right to sell the relevant
companies to repay the indebtedness. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations --Liquidity and Capital
Resources -- Current Debt Facilities -- UTH Facility".
A2000
UTH and MediaOne International ("MediaOne"), an international developer and
manager of cable television, telephone and wireless communications properties,
each own 50% of the ordinary share capital of A2000. A2000 owns 100% of
Kabeltelevisie Amsterdam B.V. ("KT Amsterdam"), which operates cable systems in
Amsterdam, Landsmeer, Purmerend, Zaanstad and Ouder-Amstel, and 100% of A2000
Hilversum B.V. ("KT Hilversum"), which operates a cable system in Hilversum.
The Municipality of Amsterdam owns one priority share in KT Amsterdam, which
gives the municipality the right to block the merger, demerger, dissolution and
liquidation of KT Amsterdam, certain amendments to KT Amsterdam's articles of
association, the issue of KT Amsterdam shares to persons other than A2000, the
appointment of a legal entity as a managing director and the granting of voting
rights to a pledgee of A2000's shares of KT Amsterdam. Furthermore, the
Municipality of Amsterdam's approval is required for any change of control over
A2000. Approval cannot be withheld if the buyer is a reputable
telecommunications and/or cable television operator or financial institution.
A2000, KT Amsterdam and KT Hilversum are each managed by a management
board, responsible for day-to-day management, under the supervision of a non-
executive supervisory board. The supervisory boards of A2000 and KT Hilversum
consist of an even number of directors: one half are appointed upon binding
nomination from MediaOne and one half are appointed upon binding nomination
from UTH. Certain major decisions require approval by at least 75% of the
shareholders. KT Amsterdam's supervisory board consists of three directors, one
appointed by each of MediaOne, UTH and the municipality. The KT Amsterdam and
KT Hilversum management boards consist of at least one managing director (the
chief executive officer), appointed by UTH, and a chief financial officer,
appointed by MediaOne, as well as other members appointed by both. The A2000
management board consists of an even number of directors, currently two, one
appointed by UTH and one appointed by MediaOne. Certain major decisions
affecting KT Amsterdam, such as approval of business plans and annual budgets,
require approval of the majority of the supervisory board of KT Amsterdam.
A2000 is a 50/50 joint venture that requires the agreement of both owners
for certain management decisions. From time to time, there has been
disagreement between its owners as to some of the operations of A2000. We do
not believe, however, that A2000's operations or prospects have been materially
affected by these disagreements.
France
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 have only a 95% economic interest in Mediareseaux.
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.
Israel
We currently own indirectly 46.6% of Tevel, our Israel operating system. We
acquired 23.3% of this interest in November 1998. An Israeli corporation owned
by DIC Communication and Technology Ltd. and PEC Israel Economic Corporation
(the "Discount Group") owns 48.4% of Tevel and a private Israeli investor holds
the remaining 5% of Tevel.
Tevel is managed by a board of directors. We have the right to designate
one of Tevel's five
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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 shareholders' 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 buy out option while the DIC Loan is outstanding. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources --Current Debt Facilities -- DIC Loan".
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 with affiliates of the
Discount Group and 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. Tevel, we and the Discount Group
have rejected these claims and the parties are attempting to settle such
disagreement.
Malta
We currently own indirectly 50% of the ordinary share capital of Melita. We
acquired 25% of this interest in November 1998. See "Prospectus Summary --
Recent Developments". The remaining 50% is owned by Melita Cable Holdings Ltd.
("MCHL"), a Maltese company owned by Maltese citizens, as required by Melita's
franchise agreement.
The day-to-day management of Melita is vested in its board of directors.
Melita currently has nine directors of whom we appointed four, MCHL appointed
four and we and MCHL jointly appointed the president. Certain major actions
require our approval and the approval of a majority of the directors of MCHL.
Neither we, MCHL nor our affiliates may compete with Melita with respect to
providing video signals to homes in Malta. Each of us now may offer our
interest in Melita to the other. If either of us elects not to purchase the
other's interest, we both must cooperate to sell all of Melita. If either of us
sells our interest in Melita to a third party, the one which is selling must
give the other an opportunity to sell to that third party.
We provide management services and second personnel to Melita pursuant to a
management agreement that expires
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December 31, 2004, for which we are paid a fee equal to 5% of the gross
revenues of Melita and are reimbursed for expenses, including costs of our
personnel, who provide substantially full-time service to Melita.
Hungary
Telekabel Hungary
We and The First Hungary Fund Ltd. ("FHF"), an investment fund, indirectly
own 79.25% and 20.75%, respectively, of the ordinary share capital of Telekabel
Hungary. Telekabel Hungary owns interests ranging from approximately 96.88% in
one and 100% in seven of the eight Kabelkom systems contributed by us and 100%
in five and 99.96% in one of the Kabeltel systems contributed by FHF. Our
shares of Telekabel Hungary are pledged in favor of Telekabel Hungary's DEM65.6
million bridge finance lenders. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources --Current Debt Facilities -- Telekabel Hungary Facility".
One of our wholly-owned subsidiaries is solely responsible for 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 FHF. The parties have agreed that the supervisory
director appointed by FHF may block the required supervisory board approval of
any element of the business plans and budgets of Telekabel Hungary and its
subsidiaries that he reasonably determines would decrease the shareholders'
value of Telekabel Hungary to the detriment of FHF 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 FHF's
representative so long as FHF owns at least 10% of Telekabel Hungary's share
capital.
Moreover, we and FHF 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 U.S. Securities Act of 1933
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 so declines.
Monor
Monor Telefon Tarsasag Rt ("Monor") has the exclusive, local-loop telephone
concession for the region of Monor, Hungary. We and our partner, PenneCom B.V.,
each own about a 44.75% economic interest and about a 37.5% voting interest in
Monor. The remaining economic and voting interests are owned by several
Hungarians.
Romania
We have interests in three Romanian cable companies: indirect 100%
interests in Multicanal Holdings, SRL, located in Bucharest, and Control Cable
Ventures, SRL, with operations in Ploiesti and Slobozia, and a 51% interest in
Eurosat, with operations in Bacau. The other shareholders of Eurosat are local
investors.
Slovak Republic
We operate in the Slovak Republic through two Slovak limited liability
companies: KabelTel S.R.O. ("KabelTel"), and Trnavatel S.R.O. ("Trnavatel"). We
have a 100% indirect interest in KabelTel, and a 75% indirect interest in
Trnavatel. Salko Ltd., a Slovak corporation, owns 20% and the City of Trnava
owns 5% of the remaining interest in Trnavatel. KabelTel has operations in the
cities of Zvolen, Levice and Nove Zamky, while Trnavatel operates in Trnava.
Programming Companies
Tara
We own 80% of Tara. The remaining 20% of Tara is owned by RTE Commercial
Enterprises Ltd. ("RTE"), an affiliate of the Irish national broadcasting
company. Tara is managed by a board of directors.
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IPS
IPS is a group of three related entities, one corporation and two
partnerships, focusing on the Spanish and Portuguese markets. Following our
acquisition of UIH's interest, we will hold an approximately 33.5% interest in
these entities. The other partners of IPS are a subsidiary of The Walt Disney
Corporation and entities owned by the Urbina Group.
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REGULATION
The provision of video, telephone and Internet/data services in the
countries in which we operate is regulated. See "Risk Factors -- Video Services
Are Regulated in Most of Our Markets" and "-- Regulation May Affect Our Plans
to Introduce Our New Telephone and Internet/Data Services". 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 (the "EU"). Below is a summary of
the regulatory environment in the European Union and the European Economic Area
member countries in which we operate and of the regulatory environment in
Israel. See "Business -- Operating Companies" for a discussion of certain
regulations in other of our operating markets.
European Union
Austria, The Netherlands, Belgium and France 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 opening of competition and 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. As
a result, most of the markets in which we operate 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. Following the EU Commission's Services
Directive (90/388/EEC), dated June 28, 1990, as amended, the exclusive rights
of such incumbent operators to provide telecommunications services were
gradually removed so that competing operators and service providers would be
entitled to offer such services. 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), dated
October 18, 1995, which required member states to remove existing restrictions
on the use of cable television networks to provide communications services
other than cable television services. As a result, cable television operators
became able to use their networks to provide telecommunications services except
for public voice telephone. In 1996, the EU Commission issued the "Full
Competition Directive" (96/19/EC), which required most member states to remove
the exclusive rights of incumbent public voice telephone operators by January
1, 1998. The establishment and provision of telecommunications networks was
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.
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 of more than ECU50 million must
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account separately for their telecommunications services and any cable
television services. In The Netherlands, Belgium and in certain circumstances,
Norway, 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.
A draft Directive of the EU Commission, if issued, will require member
states to enact legislation directing incumbent telecommunications operators to
separate their cable television and telecommunications operations into distinct
legal entities. This directive is likely to affect how incumbent
telecommunications operators position themselves in cable television or
broadband services by encouraging them to restructure their existing
operations, which may increase their competition with us, although the
incumbent operators do not currently compete in the cable television services
market.
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), which sets forth the general
framework for interconnection, including general obligations to allow other
telecommunications operators to interconnect with their networks. The directive
requires member states to impose obligations on 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). They must
offer interconnection without discriminating between operators, which offer
similar services, and their interconnection charges must follow the principles
of transparency and be based on the actual cost of providing the
interconnection. 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 a cost basis 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. See "Risk Factors -- Regulation May
Affect Our Plans to Introduce Our New Telephone and Internet/Data Services" and
"-- Implementing Our New Telephone and Internet Services Involves Many Risks".
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 change national legislation so
that providers of telecommunications services 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 must be objective, transparent and non-discriminatory. Member states
may issue individual licenses in certain situations. For example, the provision
of public voice telephone and the establishment or provision of public
telecommunication networks may be subject to individual licenses. In addition,
telecommunications operators with significant market power (typically 25% of
the relevant market), may be required by member states to hold individual
licenses carrying more burdensome conditions than the authorizations held by
other providers.
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
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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 the video
services market, the EU Commission 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/EG),
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 EU
member states will be required to allow broadcast signals to be made into their
territories so long as the broadcaster complies with the law of the originating
member state. 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.
We plan to enter into joint venture agreements with programming providers
in order to launch eight new channels in late 1999, 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
EU 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.
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. 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, significant decisions of the operating company must be approved by a
unanimous vote of the board of directors, one member of which is currently
appointed by the municipality. In Vienna, the municipality's appointee is
currently in charge of the Vienna system's programming. The municipality's
appointee has a veto right over the introduction and provision of new cable
television and other services (including the provision of tiered channels, pay-
per-view, Internet/data services and telephone services), the enlargement of
the current cable-network, pricing arrangements and integration of different
services. While the municipality has not used its veto power in the past, there
can be no assurance that the municipality will not use its veto power in the
future and hinder the implementation of our strategies for our video, telephone
or Internet/data services. The agreements between the other Telekabel Group
members and their municipalities require each member to consult with its
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municipality prior to making similar business decisions.
Video Services
Regulatory Framework. The Cable and Satellite Broadcast Radio Law (Kabel
und Satelliten Rundfunkgesetz or "KSRG") governs the provision of video
services in Austria. The Regional Radio and Cable Broadcast Authorities
regulate the operation of cable television networks.
Notifications. 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.
Programming. Under the KSRG, Telekabel Group is required to carry two "must
carry" public Austrian channels in its basic tier service. In July 1997,
previous prohibitions on cable network operators transmitting programming
produced by them were lifted. Pursuant to the terms of the agreement with
Vienna, however, Telekabel Wien is prohibited from producing programming.
Price Regulation. Pricing of the basic tier service is subject to price
control by the Austrian Wage and Price Commission. Approval from the Wage and
Price Commission generally must be sought where the desired increase is greater
than 50% of the consumer price index. Historically, all of 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 provided that the offering
of each respective service begins by February 1999 at the latest.
Interconnection. Austria's Telecommunications Act generally implements the
terms of the EU Directive on Interconnection in Telecommunications. In November
1998, the Telekabel Group entered into an interconnect agreement with PTA, the
incumbent operator. Difficulty and delay in negotiations and agreement led
Telekabel Group to seek the intervention of the Austrian telecommunications
regulator, which determined the principal terms of the agreement. See
"Business -- UPC Telephone Services: Priority Telecom -- Interconnect
Agreements".
Price Regulation. Although there are no voice-telephone pricing
regulations, the Telekom Control Commission must be notified of the tariff
structure and any subsequent rate increases. In addition, if the Telekabel
Group 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 the Telecommunications Act. Under Austria's
Telecommunications Act, Telekabel Group does not require licenses to provide
Internet/data services. It need only notify the Telekom Control Commission of
the services it intends to provide.
Belgium
Video Services
Regulatory Framework. The law of March 30, 1995, for Brussels, the decree
of January 25, 1995 of the Council of the Flemish Community
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and the decree of July 17, 1987 of the Council of the French Community govern
the provision of video services in Belgium. Only the first two regulations are
relevant to TVD's operations.
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 (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 TVD
operates. During 1996, 1997 and 1998, all of TVD'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.
Programming. In all of the regions of Belgium, cable television operators
are required to transmit particular local, national and other channels as part
of their basic tier service. There are usually between 11 and 13 of these
"must-carry" channels.
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. Increases are generally approved as long as the increase is below
the level of inflation. Historically, all of TVD's price increases have been
approved.
Franchise Fees. Since 1995, cable regulations came into force, which
granted 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,
TVD was a party to concession agreements with the municipalities in its
franchise areas, which obliged it to pay certain franchise fees. TVD has not
paid franchise fees since 1995 when the cable regulations went into effect
(although in Etterbeek, TVD pays the municipality an annual amount).
Nonetheless, certain municipalities have requested payment of the old franchise
fees, which amount to 5% of the operating system's annual gross revenues. TVD
does not believe that it is obliged to pay these fees because it believes that
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 secondary
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 in
Belgium.
Licenses. TVD had a provisional license to build and operate a public
telecommunications network and has applied for a permanent license to build and
operate a telecommunications network. TVD has submitted an application for a
license to offer voice telephone services and expects to receive a license
during the first half of 1999.
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
TVD must make certain notifications to the Institut Belge des Postes et
Telecommunications ("IBPT") regarding the services it intends to provide. In
addition, TVD is required to hold either a provisional or a permanent license
to build and operate a telecommunications network in order to offer
Internet/data services on its own infrastructure.
The Netherlands
Video Services
Regulatory Framework. The liberalization of the Dutch telecommunications
and cable television sector has generally proceeded at a quicker pace than set
by the EU directives. The new Telecommunications Act (the "Dutch
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Telecommunications Act"), took effect, with the exception of a few provisions,
on December 15, 1998 and further liberalizes these sectors. The Dutch
Telecommunications Act governs the installation and operation of fixed
telecommunications infrastructures (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,
(collectively, the "Media Laws").
Under the new Dutch Telecommunications Act, the Dutch Independent Post and
Telecommunications Authority ("OPTA") is charged with regulating the provision
of telecommunications services. Under the Media Laws, video service providers
are subject to certain content requirements, which are overseen by the
Commissariaat voor de Media (the "Media Authority").
Registration. The new Dutch Telecommunications Act does not require a
license for the installation, maintenance or operation of a cable network.
Existing network operators need only register with OPTA within six months after
December 15, 1998. The registration of a network does not give an operator any
exclusive right. Any 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 telecommunication networks
rights of way to install and maintain cable, which are identical to those
currently enjoyed by KPN, our principal competitor in The Netherlands.
Programming. Pursuant to the Dutch Telecommunications Act and Media Laws,
cable television network providers must transmit to all of 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 originally purchased their cable television
networks from the local municipalities. Pursuant to the terms of the agreements
with the municipalities, the Dutch operating companies are obligated to
continue to provide basic tier services of between 20 and 30 television
channels, including the 15 required under the Media Laws.
Cable television operators are allowed to transmit their own programs
within The Netherlands upon obtaining a broadcast license from the Media
Authority. 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.
Price Regulation. Under several of the agreements with the municipalities
described above, for a number of years the respective municipality's consent is
required for increases of the price of the basic tier service which exceed
certain agreed levels. Such consent is not required for price increases
resulting from costs beyond the control of the operating companies, such as
copyright fees, consumer price index increases and municipal duties and levies,
which can be passed on to subscribers. Because the base subscription rate for
the basic tier service has been kept at a low level, particularly in Amsterdam,
the operating companies make up their revenue by charging programming suppliers
carriage fees for the transmission of their channels. As A2000's basic tier
price has been particularly restricted, A2000's carriage fees have been higher
than those of the other Dutch systems held by UTH. Some of A2000's programming
suppliers have been unwilling to pay such carriage fees and have withdrawn
their channels from A2000's offering. Some of them have brought legal actions
challenging the carriage fees, arguing that A2000's carriage fees are an abuse
of its market strength. To date, none of A2000's programming suppliers have
succeeded in their actions against A2000. See "Business -- Operating
Companies -- The Netherlands: A2000 Holding N.V. -- Programming".
The price of the basic tier service may also be regulated by the Dutch
Ministry of Culture, but it has not yet intervened to stop price increases.
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Telephone and Internet/Data Services
Regulatory Framework. Until recently, the fixed telecommunications
infrastructure was a statutory monopoly of KPN, the Dutch incumbent
telecommunications provider. As described above, the Dutch telecommunications
sector has been liberalized in advance of and in accordance with European Union
telecommunications policy and cable television networks may now be used for the
provision of all telecommunications services.
Interconnection. The Dutch Telecommunications Act generally implements EU
telecommunications policy. A2000 has entered into an interconnect agreement
with KPN and UTH is currently negotiating an interconnect agreement for its
systems.
Price Regulation. While A2000's telephone service is not currently subject
to price regulation, the prices of its competitor, KPN, are. OPTA has recently
indicated that KPN should reduce its end-user tariffs and substantially reduce
its interconnection prices to reflect costs.
Internet/Data Services. Under the Dutch Telecommunications Act,
Internet/data services are regulated as telecommunications services. As such,
our Dutch operating systems need only register with OPTA as providers of public
telecommunication services and/or networks.
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.
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, Janco Multicom has obtained a three-year programming 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 package
subscription fee in line with the Official Consumer Price Index. There are no
specific pricing restrictions on expanded basic tier services.
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. See "-- European Union -- Telephone and
Internet/Data Services".
Registration. For telephone operators and service providers without
significant market power, as is currently the case with Janco Multicom, 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 telecommunication
company with interconnection to its network on a non-discriminatory basis.
Interconnection rates charged by TeleNor must be on a cost-basis. Janco
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Multicom has entered into an interconnection agreement with TeleNor.
Pricing. Providers of public telephone without significant market power,
including Janco Multicom, are not subject to any specific pricing regulations.
Internet/Data Services. Cable television networks do not require a license
or notification to provide Internet/data services. They need only register the
service with the Norwegian Post and Telecommunications Authority.
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 in 1999. We expect
that these reforms will include opening the multi-channel television business
to competition by granting licenses to DTH 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 Ministry of Communications policy of
introducing DTH before that date. In November 1998, the Israeli High Court of
Justice decided that DTH 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.
The Communications Ministry announced its schedule in July 1998 for
granting DTH licenses and we understand that the Ministry has now received
three license applications.
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. Gvanim, which was recently
acquired by Tevel, holds exclusive franchises which expire in 2005 and 2002. 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, exclusive cable television franchises
are expected 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 service 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 Israel Cable Programming Company Limited
("ICP"), a programming company owned by Tevel, Gvanim and the other Israeli
cable television companies. The other three channels are produced 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 Practices Tribunal in June 1996, which expires in June 1999 (the "ICP
Agreement"). Pursuant to the ICP Agreement, ICP may continue to produce the
general entertainment and movie channels but must pay $8.5 million in annual
production fees to the three independent channels. In addition, ICP is
obligated to spend 15% of its programming expenses on programming from local
producers.
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The Restrictive Trade Practices Tribunal is currently considering requiring
cable network operators either to divest their interests in content suppliers
(which may increase programming costs) or to supply the previously cable-
exclusive content they produce to the DTH providers once they are operational.
In addition, 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. The ICP Agreement
currently prohibits "tiering" of video services.
Since its establishment, Tevel has offered its subscribers the "super-basic
package" (currently comprised of 45 channels of programming). In light of
expected future competition by the DTH providers, including the fact that the
DTH providers will be entitled to provide "tiering" of their video services,
Tevel and other cable television providers have applied to the Ministry of
Communications for approval of "tiering" of their respective services upon
opening the multi-channel television business to competition. The Ministry has
not yet responded to this request. It appears that the Ministry intends to
delay introduction of "tiering" by the cable television operators to ease the
entering of the DTH providers into the market. Tevel and the other cable
television operators have filed an appeal to the High Court of Justice
challenging the Ministry's intention. The Court has decided that it will
commence the appeal hearing if the parties do not reach an arrangement by the
end of February 1999.
Pricing. Cable television service subscription fees are subject to
regulation through the franchise agreements and through the ICP Agreement.
Currently, the ICP Agreement is more restrictive than the franchise agreements
and permits basic service subscription fees to be increased by a maximum of
1.9% per year above the cost of living index.
Telephone and Internet/Data Services
As part of the proposed liberalization of the telecommunications market in
1999, Tevel and Gvanim expect to be permitted to supply Internet/data and local
telephone services in their franchise areas.
Other
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 (for
example, cable television) conditional upon subscription to another service
(for example, 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.
Our Israeli operating companies are not currently permitted to offer
integrated services.
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MANAGEMENT
Immediately after this offering, UIH will own approximately 63% of our
outstanding ordinary shares and all of our priority shares. Because we are a
strategic holding of UIH, UIH will continue to control us for the foreseeable
future. Currently two members of our three-member Supervisory Board are also
directors or officers of UIH and upon completion of the offering, five members
of our seven-member Supervisory Board will be directors, officers or employees
of UIH.
Supervisory Board
Our general affairs and business and the board that manages us (the "Board
of Management") are supervised by a board appointed by the general meeting of
shareholders (the "Supervisory Board") upon proposal of UIH as the holder of
our priority shares. The Supervisory Board also provides advice to the Board of
Management and certain decisions of the Board of Management specified in our
articles of association require the Supervisory Board's prior approval. The
Supervisory Board may also decide that certain other resolutions of the Board
of Management are subject to its approval. In fulfilling their duties, all
members of the Supervisory Board must serve our best interests.
Our articles of association provide for at least three directors
("Supervisory Directors") to serve on the Supervisory Board. Under Dutch law,
Supervisory Directors cannot serve as members of our Board of Management
("Managing Directors"), nor may a person serve as a Supervisory Director after
the annual general meeting of shareholders during the fiscal year of such
person's 72nd birthday. Accordingly, Mr. Gene Schneider, UIH's Chairman and
Chief Executive Officer and the current Chairman of the Supervisory Board, will
resign from the Supervisory Board immediately prior to the closing of this
offering. Pursuant to the rules and procedures of the Supervisory Board, he
will become a non-voting advisor to the Supervisory Board with the right to
attend and participate in the meetings of the Supervisory Board.
Other than the Supervisory Director that Philips may appoint directly, the
Supervisory Directors are appointed at the general meeting of shareholders from
a list proposed by UIH as the holder of the priority shares. The proposal 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. See
"Summary of Certain Provisions of the Articles of Association and Other
Matters" and "Certain Transactions and Relationships --Relationship with
Philips".
If the Discount Group, our partner in our Israeli system, exercises an
option we have granted it to purchase some of our ordinary shares, UIH will
give the Discount Group the right to nominate a Supervisory Director. See
"Certain Transactions and Relationships -- The Discount Group's Option".
Decisions of the Supervisory Board generally require the approval of a
majority of the votes cast at a meeting where a majority of the Supervisory
Directors are present and represented.
Other than the Supervisory Director Philips appoints, which only Philips
may remove, the general meeting may remove any Supervisory Director by two-
thirds of the votes cast representing more than one-half of the issued nominal
capital. If UIH as the holder of the priority shares proposes the removal, the
Supervisory Director may be removed by a majority of the votes cast at a
general meeting. The general meeting also decides the remuneration of the
Supervisory Directors.
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Our Supervisory Board currently consists of three members. Five additional
persons will become Supervisory Board members and Mr. Gene Schneider will
resign immediately prior to the closing of this offering. UIH has selected four
nominees and will select an additional person following this offering who will
be an independent director. The Supervisory Directors and nominees are:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gene W. Schneider....................... 72 Supervisory Director and
Chairman of Supervisory Board(1)
Richard De Lange........................ 53 Supervisory Director
Michael T. Fries........................ 35 Supervisory Director
John P. Cole, Jr. ...................... 68 Supervisory Director Nominee
Antony P. Ressler....................... 38 Supervisory Director Nominee
Ellen P. Spangler....................... 50 Supervisory Director Nominee
Tina Wildes............................. 38 Supervisory Director Nominee
</TABLE>
--------
(1) Mr. Gene Schneider will resign from and become an advisor to the
Supervisory Board immediately prior to the closing of this offering.
Gene W. Schneider has served as a member of the Supervisory Board since
July 1995. Immediately prior to this offering, Mr. Schneider will resign from
and become an advisor to the Supervisory Board. Mr. Schneider is also the
Chairman of the Board of Directors of UIH, a position he has held since its
inception in May 1989. In addition to serving as UIH's Chairman, Mr. Schneider
has served as UIH's Chief Executive Officer since October 1995. From October
1995 until September 1998, Mr. Schneider also served as UIH's President.
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 Dutch Philips
organization (Philips Nederland B.V. and Nederlandse Philips Bedrijven B.V.).
He also continues to serve 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 President of Philips
Lighting Europe from December 1990 until April 1995.
Michael T. Fries has been a member of the Supervisory Board since September
1998. He is also President of UIH and President and Chief Executive Officer of
UIH Latin America, Inc., a wholly-owned subsidiary of UIH, positions he has
held since September 1998. Mr. Fries also serves as President and Chief
Executive Officer of UIH Asia/Pacific Communications, Inc., a majority-owned
subsidiary of UIH, positions he has held since June 1995 and December 1996,
respectively. Prior to becoming President of UIH Asia/Pacific Communications,
Inc., Mr. Fries served as UIH's Senior Vice President, Development, in which
capacity he was responsible for managing UIH's acquisitions and new business
development activities since March 1990, including UIH's expansion into the
Asia/Pacific, Latin American and European markets.
John P. Cole Jr. has been nominated for membership on the Supervisory Board
following this offering and has been a director of UIH 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.
Antony P. Ressler has been nominated for membership on the Supervisory
Board following this offering and has been a director of UIH since October
1993. Mr. Ressler is one of the founding principals of Apollo Advisors, L.P.
and Ares Management, L.P., which through several funds
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represent institutional investors with respect to corporate acquisitions and
securities investments. Mr. Ressler is also a director of Allied Waste
Industries, Inc., Vail Resorts, Inc. and Koo Koo Roo Enterprises, Inc.
Ellen P. Spangler has been nominated for membership on the Supervisory
Board following this offering. Ms. Spangler is the Senior Vice President of
Business and Legal Affairs and Secretary of UIH, positions she has held since
December 1996. Prior to assuming her current positions, she served as a Vice
President of UIH and her responsibilities included business and legal affairs,
programming and assisting on development projects. Prior to joining UIH in
January 1991, she served as Director of Business Affairs, Programming at Tele-
Communications, Inc. from 1987 to 1991 and as Acquisitions Counsel at Tele-
Communications, Inc. from 1984 to 1987.
Tina Wildes has been nominated for membership on the Supervisory Board
following this offering. Ms. Wildes is the Senior Vice President of Operations
and Development Oversight of UIH, a position she has held since May 1998. From
October 1997 until May 1998, Ms. Wildes served as Senior Vice President of
Programming for UIH. From 1994 to 1997, she was Regional Vice President of UIH
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
UIH's European operating companies, including operations in Sweden, Norway,
Malta, Israel, Spain and Portugal.
Following this offering, the Supervisory Board will establish an Audit
Committee and a Compensation Committee. It is expected that these committees
will consist initially of all of the Supervisory Directors until such time as
the Supervisory Board determines the composition of these committees.
Family Relationships
Tina Wildes, Supervisory Board Nominee, 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
Management and policy making for us and our subsidiaries is entrusted to
the Board of Management under the supervision of the Supervisory Board. The
Board of Management must have at least one member and, if there are two or more
members, the Supervisory Board may designate one member as our Chief Executive
Officer and one member as our President, although one person could have both
designations. Members of the Board of Management are appointed by the general
meeting of shareholders from a list proposed by UIH as the holder of the
priority shares. The proposal may be set aside by two-thirds of the votes cast
at the general meeting representing more than one-half of the issued nominal
capital.
The general legal authority to represent the company is vested in the Board
of Management and two Board of Management members acting jointly are authorized
to represent the company. Certain decisions by the Board of Management set
forth in the articles of association or otherwise determined from time to time
by the Supervisory Board require the approval of the Supervisory Board.
Moreover, UIH may, after consultation with the Supervisory Board, determine
that certain decisions by the Board of Management require UIH's approval as the
holder of our priority shares.
The general meeting may remove any member of the Board of Management by
two-thirds of the votes cast representing more than one-half of the issued
nominal capital. If UIH as the holder of the priority shares proposes the
removal, the member of the Board of Management may be removed by a majority of
the votes cast at a general meeting. In addition, such members may be suspended
by the vote of a majority of the Supervisory Board at a meeting at which at
least half of the Supervisory Directors are present or represented. Such
suspension may be discontinued by the general meeting of shareholders at any
time. The remuneration and other conditions of employment of each member of the
Board of Management are determined by the Supervisory Board.
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The members of the Board of Management and our other key employees are:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Board of Management
Mark L. Schneider................ 43 Chairman of Board of Management and Chief
Executive Officer
John F. Riordan.................. 55 Vice Chairman of Board of Management and
President, Advanced Communications
J. Timothy Bryan................. 37 Board of Management Member, President and
Chief Financial Officer
Anton H.E. v. Voskuijlen......... 41 Board of Management Member, Senior Vice
President, Legal and General Counsel
Nimrod J. Kovacs................. 49 Board of Management Member and Managing
Director, Eastern Europe
Other Key Employees
Scott Bachman.................... 43 Managing Director, Technology and
Purchasing
Steven D. Butler................. 39 Managing Director, UPC Capital and
Treasurer
Timothy Morel.................... 37 Managing Director, Internet/Data Services
and Chief Executive Officer, chello
broadband
Simon Oakes...................... 40 Managing Director, Programming
Ray D. Samuelson................. 45 Managing Director, Finance and Accounting
Joseph Webster................... 36 Managing Director, Telephony Services and
Chief Executive Officer, Priority Telecom
</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 UIH and President and Chief Executive Officer of
UIH Europe/Middle East Communications, Inc. and from May 1996 to December 1996,
Mr. Schneider was Chief of Strategic Planning and Operational Oversight of UIH.
He served as President of UIH from July 1992 until March 1995 and was Senior
Vice President of UIH from May 1989 until July 1992. Mr. Schneider also worked
as a consultant for UIH from March 1995 to May 1996. Mr. Schneider has been a
member of the board of directors of UIH since 1993.
John F. Riordan was appointed our Executive Vice President in March 1998,
and a member of our Board of Management in September 1998. In September 1998,
Mr. Riordan also was appointed Vice Chairman and President of our Advanced
Communications division, overseeing implementation of our Internet/data
services and digital distribution platform. From April 1997 until March 1998,
he was a member of our Supervisory Board. Mr. Riordan also has served as a
director of UIH since March 1998. Mr. Riordan was Chairman and Chief Executive
Officer from 1992 to November 1998 of Princes Holdings Limited, the Irish
multi-channel television operating company of which we owned 20% until its sale
in November 1998. From 1987 to 1990, Mr. Riordan was chairman of the Riordan
Group.
J. Timothy Bryan has been our President and Chief Financial Officer and a
member of our Board of Management since September 1998. Prior to that, he
served as a member of our Supervisory Board since December 1996. He was also
Chief Financial Officer, Treasurer and Assistant Secretary of UIH from December
1996 until September 1998. From 1993 until joining UIH, Mr. Bryan served as
Treasurer of Jones Financial Group, Inc., an affiliate of Jones
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International Limited, where he was primarily responsible for corporate finance
activities. Mr. Bryan also served as Treasurer of Jones Intercable, Inc. from
1990 until 1993.
Anton H.E. v. Voskuijlen has served as our Senior Vice President and
Managing Director, Legal and General Counsel since April 1997, where he is
responsible for all of our legal affairs, and a member of our Board of
Management since September 1998. From July 1996 until April 1997, Mr. van
Voskuijlen served as our Vice President and General Counsel. From March 1994
until joining us, he served as Vice President, Business Affairs and Legal
Counsel of Philips Media in New York, New York and prior to that time, Mr. van
Voskuijlen spent 15 years as an attorney with the Philips Group in its mergers
& acquisitions and corporate legal departments in Eindhoven, The Netherlands.
Nimrod J. Kovacs 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 UIH, including President of UIH 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.
Steven D. Butler was appointed Managing Director of UPC Capital and our
Treasurer in February 1998, 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 our Vice President and
Treasurer. Prior to that, Mr. Butler served as Director of Finance at UIH since
May 1991.
Timothy Morel was appointed our Managing Director of Internet/Data Services
in January 1998. In that role, Mr. Morel is responsible for chello broadband
and all of our related Internet and data activities. Prior to joining us, Mr.
Morel worked with AT&T UK Ltd. as Managing Director of AT&T Worldnet Dial
Services from January 1997 to January 1998, where he was responsible for the
business operations, marketing, technology, sales, publishing and personnel,
developed the Internet commerce strategy and implemented the service delivery.
From May 1995 to December 1996, Mr. Morel served as Director of Internet
Commerce and Multimedia with AT&T and from 1992 to 1995, he served as Business
Development Director, Finance sector at Novell UK Limited.
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 Main 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.
Ray D. Samuelson was appointed our Managing Director of Finance and
Accounting in February 1998, responsible for all of 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 UIH. Prior to
Mr. Samuelson's appointment with UIH, he was seconded as a U S WEST employee
from 1990 to 1992 as the Chief Financial Officer of UIH and U S WEST's Norway,
Sweden and Hungary cable television partnership and from 1978 to 1990, was a
certified public accountant with Arthur Andersen & Co.
Joseph Webster has served as our Managing Director of Telephony Services
since February 1998 and is also the Chief Executive Officer of Priority
Telecom. From February 1997 until his appointment with us, Mr. Webster served
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as Regional Vice President & General Manager at Time Warner Communications in
Raleigh, North Carolina. From February 1994 to January 1997, Mr. Webster served
as Vice President & General Manager at Time Warner Communications, where he was
responsible for a start-up provider of competitive telecommunications services.
From May 1993 to February 1994, Mr. Webster served as Vice President of
Teleport Communications Group in Detroit, Michigan.
Our Managing Director of Video Entertainment recently resigned for personal
reasons. We are seeking to fill this position with a qualified person from one
of our operating companies, from another UIH system or from outside.
Compensation of Supervisory Board Members
All of the members of the Supervisory Board (including those to be
appointed following this offering) other than Mr. De Lange and the additional
independent director to be nominated by UIH are directors or employees of UIH.
None of these members receive additional compensation for serving on the
Supervisory Board. We have not yet determined the amount of compensation for
the additional independent director.
Compensation of Management Board Members
The aggregate 1999 salary compensation for the entire Board of Management
is approximately NLG3,111,000. 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 UIH have concluded a secondment arrangement, pursuant to which
certain U.S. citizens employed by UIH are seconded to us. See "Relationship
with UIH and Related Transactions". To date, compensation for all members of
our management who are employees of UIH has been set by the compensation
committee of UIH and compensation for all of our other employees has been
determined by the Supervisory Board. Our Supervisory Board intends to establish
a compensation committee following the completion of this offering composed of
members of the Supervisory Board. The members of our management that are
employees of UIH, however, will continue to have their compensation set by the
UIH's compensation committee. None of the members of the UIH 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 UIH.
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Executive Compensation
The following table sets forth the 1997 compensation for our current and
former chief executive officers and the four other highest compensated
executive officers at fiscal year end 1997 (the "Named Executive Officers").
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation(1)
------------------------------
Other Annual All Other
Name and Principal Position Salary Bonus Compensation(2) Compensation(3)
- --------------------------- ------- ------ --------------- ---------------
(Dutch guilders)
<S> <C> <C> <C> <C>
Mark L. Schneider(4)............ 584,940 -- -- --
Chief Executive Officer
Lars Andersen(5)................ 287,826 75,428 31,829 --
Managing Director, Norway
Scott Bachman(6)................ 356,810 -- 31,673 306,862
Managing Director, Technology
and Purchasing
Michael Simmons(7).............. 379,339 -- 28,783 195,417
Former Managing Director,
Portugal
David D'Ottavio(8).............. 589,202 -- 30,120 130,042
Former Co-Chief Executive
Officer
Robert Gardner(9)............... 295,114 10,000 33,860 101,540
Former Managing Director, Czech
Republic
Jacques Hackenberg(10).......... 257,374 -- 21,614 --
Former Co-Chief Executive
Officer
</TABLE>
- --------
(1) Compensation amounts (except for automobile allowance payments and school
fees, if applicable, which were paid in Dutch guilders) for Mr. Schneider,
Mr. Bachman, Mr. Simmons, Mr. D'Ottavio and Mr. Gardner were converted
from U.S. dollars to Dutch guilders using the 1997 average exchange rate.
Compensation amounts for Mr. Andersen were converted from Norwegian kroner
to Dutch guilders using the 1997 average exchange rate.
(2) Consisted of automobile lease, operating and maintenance payments, and
health and life insurance payments for some Named Executive Officers.
(3) Our executive officers who are United States citizens are employed by UIH
and seconded to us. UIH 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 UIH for such expenses. These
expenses and adjustments include home leave payments for trips back to the
employee's home country, housing allowance, school tuition fees for the
employee's children and "hypo tax" payments to equalize the employee's
foreign tax rate with what the employee would have paid in the United
States. See "-- Agreements with Executive Officers". Certain compensation
identified in this column also consisted of matching employer
contributions under UIH's Employee 401(k) Plan or the Company's Pension
Plan, as applicable.
(4) Mr. Schneider was appointed as our Chief Executive Officer in April 1997.
The salary amount shown consisted of salary paid to Mr. Schneider by UIH
for his duties to us and UIH.
(5) Mr. Andersen received a performance-based bonus for 1997. Other annual
compensation consisted of NLG31,829 for Mr. Andersen's automobile
allowance.
(6) Other annual compensation consisted of NLG22,698 for Mr. Bachman's
automobile allowance and NLG8,975 for health and life insurance payments.
Other compensation consisted of NLG232,483 related to Mr. Bachman's non-
U.S. assignment, NLG65,118 of hypo tax payments and NLG9,262 of matching
employer contributions under UIH's Employee 401(k) Plan.
(7) We sold our interest in its Portuguese system in February 1998. Mr.
Simmons no longer is our employee. Other annual compensation consisted of
health and life insurance payments and other compensation consisted of
NLG70,193 related to Mr. Simmons' non-U.S. assignment, NLG115,962 of hypo
tax payments and NLG9,262 of matching employer contributions under UIH's
Employee 401(k) Plan.
(8) Mr. D'Ottavio served as our Co-Chief Executive Officer with Mr. Hackenberg
until May 1997. The above salary amounts reflect payments through the end
of the year. Other annual compensation consisted of NLG15,105 for Mr.
D'Ottavio's automobile allowance and NLG15,015 for health and life
insurance payments and other compensation consisted of NLG58,835 related
to Mr. D'Ottavio's non-U.S. assignment, NLG65,118 of hypo tax payments and
NLG6,074 of matching employer contributions under UIH's Employee 401(k)
Plan.
(9) Mr. Gardner received a performance-based bonus for 1997. Other annual
compensation consisted of NLG43,200 for Mr. Gardner's automobile allowance
and NLG7,954 for health and life insurance payments. Other compensation
consisted of NLG33,860 related to Mr. Gardner's non-U.S. assignment and
NLG67,680 of hypo tax payments.
(10) Mr. Hackenberg served as our Co-Chief Executive Officer with Mr. D'Ottavio
until May 1997. The above salary amounts reflect payments through the end
of the year. Other annual compensation consisted of NLG21,614 for Mr.
Hackenberg's housing allowance.
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The following table sets forth information with respect to the only Named
Executive Officers holding unexercised options as of December 31, 1997. No
Named Executive Officers exercised any options during 1997. See "-- Stock
Option Plans" and "Security Ownership of Certain Beneficial Owners and
Management".
Aggregated Fiscal Year-end Option Values
<TABLE>
<CAPTION>
Number of Securities
Underlying
Unexercised Options Value of Unexercised
at Fiscal Year-End In-the-Money Options(1)
------------------------- ---------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Jacques Hackenberg........ 362,500 87,500 NLG16,569,875 NLG3,999,625
</TABLE>
- --------
(1) Represents the difference between the price of the ordinary shares in this
offering (based on an estimated initial public offering price of NLG56.20,
the midpoint of the offering price range) and the exercise price of the
options (NLG10.49 for all options set forth above).
Agreements with Executive Officers
We do not have employment agreements with any Named Executive Officers. Mr.
Gardner and Mr. Simmons had employment agreements with UIH that have been
terminated. Mr. Schneider has a consulting agreement with UIH and Mr. Bachman
has an employment agreement with UIH. Upon his appointment as president, Mr.
Bryan entered into an employment agreement with UIH. We and UIH are parties to
a Secondment Agreement, pursuant to which Mr. Schneider and Mr. Bryan, together
with all of our other U.S. citizen employees, are seconded to us. See
"Relationship with UIH and Related Transactions". Pursuant to the Secondment
Agreement, we reimburse UIH for all expenses incurred by UIH in connection with
the seconded employees. Mr. Andersen has an employment agreement directly with
Janco Multicom.
Mr. Schneider's consulting agreement with UIH 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 is terminated without cause or 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.
Mr. Bryan's employment agreement with UIH is for a term expiring on March
31, 2001. Mr. Bryan's employment agreement provides for an initial base salary
of NLG607,200 which was increased to NLG667,920 on January 1, 1999, and is
subject to periodic adjustments. In addition to his base salary, Mr. Bryan is
also entitled to tax equalization payments and other amounts related to his
non-U.S. assignment. If Mr. Bryan's employment is terminated, other than for
cause as specified in the agreement, he is entitled to receive the balance of
payments due under the remaining term of the agreement.
Mr. Bachman's three year employment agreement with UIH will expire on
February 6, 1999. He and UIH are currently negotiating a new agreement. Mr.
Bachman's current employment agreement provides for an initial base salary of
NLG344,080, which was increased to NLG371,606 in February 1998. In addition to
his base salary, Mr. Bachman also is entitled to tax equalization payments and
other amounts related to his non-U.S. assignment.
Mr. Gardner and UIH entered into an employment agreement on October 2,
1995, pursuant to which Mr. Gardner was seconded to us as Managing Director of
KabelNet, our Czech Republic operating company. Mr. Gardner's employment
agreement was for an initial term of three years at a base salary of
NLG293,480. Mr. Gardner's employment agreement was terminated on March 5, 1998.
Mr. Simmons and UIH entered into an employment agreement on July 24, 1995,
pursuant to which Mr. Simmons was seconded to us as Managing Director of UPC
Portugal, our former Portuguese operating company. Mr. Simmons' employment
agreement was for an initial term of three years at an initial base salary of
NLG364,320, which was increased to NLG380,714 on July 1, 1996 and NLG403,563 on
July 1, 1997. We recently sold our Portuguese system and terminated Mr.
Simmons' employment effective November 1, 1998 and in connection therewith,
entered into a severance agreement
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with Mr. Simmons that will pay him the equivalent of three months' salary in
exchange for a release of any claims he may have against UIH or us.
Mr. Andersen and Janco Multicom entered into an amended employment
agreement on February 24, 1997, which expires on December 31, 1999. Under the
amended agreement, Mr. Andersen became the Managing Director of Janco Multicom
effective June 30, 1997. The amended agreement increased Mr. Andersen's base
salary to NKr1,137,500 (NLG303,587) effective April 1, 1997. Mr. Andersen is
also eligible for an annual performance-based bonus of up to 25% of his base
salary, based on Janco Multicom achieving certain financial and operational
milestones, and Mr. Andersen's general management performance. Mr. Andersen
also receives an automobile allowance. If Mr. Andersen remains with Janco
Multicom until the expiration of the amended agreement, he is entitled to a
bonus equal to the total of all bonuses paid to him during his amended
employment term and upon termination of his employment, he is entitled to six
months severance pay, including benefits. Mr. Andersen's employment agreement
contains a confidentiality provision, a covenant not to compete for six months
after termination and a covenant not to interfere with any of our other
employees for one year after termination.
Stock Option Plans
Equity Stock Option Plan.
Under our Stock Option Plan (the "Plan"), the Supervisory Board may grant
incentive stock options to our employees. There are 6,000,000 total shares
available for the granting of options under the Plan. Options under the Plan
must be granted at fair market value (as determined by the Supervisory Board)
at the time of grant. The ordinary shares available under the Plan are held by
Stichting Administratiekantoor UPC (the "Foundation"), which administers the
Plan. Each option represents the right to acquire from the Foundation a
depositary receipt representing the economic value of one share. Upon
termination of the lock-up period following consummation of the offering, any
depositary receipts issued to employees who have exercised their options will
be convertable into ordinary shares. UIH appoints the board members of the
Foundation and thus controls the voting of the Foundation's ordinary shares.
Proceeds from the exercise of these options remain in the Foundation. Upon
liquidation of the Foundation, any remaining assets revert to UIH.
All options are exercisable upon grant and for the next five years. 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 are deemed to "vest" 1/36th each month for a
three-year period from the date of option grant (which 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 (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.
The Plan contains limited anti-dilution protection in the case of stock
splits, stock dividends and the like. The Plan also provides that, in the case
of 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 1998, we loaned Mr. van Voskuijlen
NLG40,500 (tax only) in relation to an additional grant. These recourse loans
(except for Mr. van Voskuijlen's) bear interest at the Dutch statutory rate.
For 1998, this rate was 6% per annum. All loans made in 1996
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are due 18 months after the date of this offering. Mr. van Voskuijlen's loans
are due upon exercise of his options and do not bear interest.
Through September 30, 1998, options to acquire a total of 6,333,000 shares
have been granted under the Plan. Of these, options representing 375,000 shares
have been exercised and resold to the Foundation and, therefore, are available
for future option grants. Options representing 82,501 shares have been
cancelled. The exercise prices for the options are NLG10.49 (3,990,000 shares,
of which 1,680,000 have been exercised), NLG12.00 (2,195,250 shares) and
NLG13.57 (147,750 shares). In March 1998, we granted Mark Schneider options for
975,000 shares at an exercise price of NLG12.00, the price at which shares were
sold in the UPC Acquisition in December 1997. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview of our
Activities -- Costs of Operations".
Phantom Stock Option Plan
Under our Phantom Stock Option Plan (the "Phantom Plan"), the Supervisory
Board has granted certain employees the right to receive a cash amount equal to
the difference between the fair market value of the shares and the stated grant
price for a specified number of phantom options ("Phantom Options"). Through
September 30, 1998, options representing 2,057,250 phantom shares remained
outstanding. The grant prices for the Phantom Options are NLG12.00 (1,232,250
options) and NLG13.57 (825,000 options). 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 grant. 356,265 of the outstanding Phantom
Options were fully vested on September 30, 1998. The Phantom Plan contains
limited anti-dilution protection in the case of stock splits, stock dividends
and the like. The Phantom Plan also provides that, in certain cases of a change
of control, all phantom options outstanding become fully exercisable.
The Phantom Plan also provides that upon the offering, an employee holding
phantom options may convert these into options for shares under the Plan. If
the employee elects not to do so, upon exercise of the Phantom Options we may
elect to issue such number of shares equal to the value of the cash difference
in lieu of paying the cash. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview of our Activities --
Costs of Operations".
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 also may be limited by mandatory provisions of Dutch law, such as in
the case of bankruptcy, and this discharge only extends to actions or omissions
not disclosed in or apparent from the adopted annual accounts. In case of such
actions or omissions, the members of the Supervisory Board or Board of
Management will be jointly and severally liable toward third parties for any
loss sustained by such third parties as a result of such actions or omissions,
unless the Supervisory Board or 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 made with
reasonable business judgment.
Our articles of association also provide that we must indemnify any person
who (1) is or was a member of the Supervisory Board or the Board of Management,
(2) suffers any loss as a result of their position as a member of such boards,
and (3) acted in good faith in carrying out their duties. This indemnification
does 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 appropriate. A majority of the members of the Supervisory
Board must approve
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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.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the ownership
of all classes of securities as of January 26, 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 persons
nominated to become Supervisory Directors; (3) each of our executive officers;
and (4) all of our directors, director nominees and executive officers as a
group. This information reflects the 4,955,264 ordinary shares that UIH will
receive from us in exchange for its interest in IPS.
<TABLE>
<CAPTION>
Ordinary Shares
-----------------------------
Percentage
------------------
Prior to Following
Beneficial Owner Number offering offering
---------------- ---------- -------- ---------
<S> <C> <C> <C>
United International Holdings, Inc.(1).......... 83,087,469 100.0% 67.5%
Gene W. Schneider(2)............................ 83,087,469 100.0 67.5
Michael T. Fries................................ -- -- --
Richard De Lange................................ -- -- --
John P. Cole, Jr.(3)............................ 83,087,469 100.0 67.5
Antony P. Ressler(4)............................ 83,087,469 100.0 67.5
Ellen P. Spangler............................... -- -- --
Tina Wildes..................................... -- -- --
Mark L. Schneider(5)............................ 83,087,469 100.0 67.5
J. Timothy Bryan................................ --
John F. Riordan(6).............................. 83,087,469 100.0 67.5
Anton H.E. v. Voskuijlen(7)..................... 300,000 * *
All directors, director nominees and executive
officers as a group (11 persons)(1)............ 83,087,469 100.0 67.5
</TABLE>
- --------
* Less than 1%.
(1) Includes 6,000,000 ordinary shares held by the Foundation, the board
members of which are appointed by UIH. Messrs. G. Schneider, Cole,
Ressler, M. Schneider and Riordan are directors of UIH, and as such,
together with UIH's other directors, share voting and dispositive power
over our shares held by UIH. The directors of UIH disclaim any beneficial
ownership of these shares. UIH owns all of the issued and outstanding
priority shares. The address of United International Holdings, Inc. is
4643 South Ulster Street, Suite 1300, Denver, Colorado 80237, U.S.A.
(2) Represents 83,087,469 ordinary shares beneficially owned by UIH. Mr. G.
Schneider is Chairman of the Board of UIH. He disclaims any beneficial
ownership of UIH's UPC shares.
(3) Represents 83,087,469 ordinary shares beneficially owned by UIH. Mr. Cole
is a Director of UIH. He disclaims any beneficial ownership of UIH's UPC
shares.
(4) Represents 83,087,469 ordinary shares beneficially owned by UIH. Mr.
Ressler is a Director of UIH. He disclaims any beneficial ownership of
UIH's UPC shares.
(5) Includes 83,087,469 ordinary shares beneficially owned by UIH. Of the
6,000,000 ordinary shares held by the Foundation, Mr. M. Schneider holds
currently exercisable options for 975,000 ordinary shares of which options
for 548,438 ordinary shares are subject to our repurchase right, which
expires April 1, 2001. Mr. M. Schneider is a Director of UIH. He disclaims
any beneficial ownership of UIH's UPC shares.
(6) Includes 83,087,469 ordinary shares beneficially owned by UIH. Of the
6,000,000 ordinary shares held by the Foundation, Mr. Riordan holds
currently exercisable options for 525,000 ordinary shares of which options
for 295,313 ordinary shares are subject to our repurchase right, which
expires April 1, 2001.
(7) Represents currently exercisable options for 300,000 ordinary shares of
which options for 56,250 ordinary shares are subject to our repurchase
right, which expires January 1, 2002. These shares are registered in the
name of the Foundation.
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CERTAIN TRANSACTIONS AND RELATIONSHIPS
Relationship with Philips
We began operations as a joint venture between UIH and Philips in July
1995. Both shareholders contributed various assets to us.
In December 1997, we and UIH acquired all of Philips' interest in us. As
part of this transaction, we purchased from Philips (1) 3.17 million shares of
UIH Class A Common Stock for NLG66.8 million, the then current market value of
such shares, (2) a portion of the PIK Notes at their fully accreted value for
NLG170.4 million, and (3) 16.252 million ordinary shares for NLG292.6 million.
We also converted the remaining PIK Notes purchased by UIH into 10.12 million
ordinary shares. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- History of UPC".
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 UPC
Acquisition. Under the 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 UIH have agreed to use our reasonable best efforts to obtain
the release of Philips by the City of Vienna 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 UIH.
Loans to Executive Officers
In 1996, we loaned Mr. van Voskuijlen NLG106,245 and in 1998, we loaned him
NLG40,500 to enable him to pay the tax on the stock options received in those
years. These recourse loans bear no interest. The loans are due upon exercise
of his options. We made similar loans to other employees for the purpose of
exercising and/or paying tax on options. See "Management -- Stock Option
Plans".
Acquisitions and Dispositions
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 UIH
Class A Common Stock that we acquired as part of the UPC Acquisition. We
subsequently sold our newly-acquired 5% interest in the Irish operating system,
together with our existing 20% interest in this system, to TINTA. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- History of UPC".
The Discount Group's Option
In connection with the DIC Loan, we granted an option to the Discount
Group, our partner in our Israeli system, to acquire ordinary shares at a price
per share equal to the price in this offering, discounted by a factor of 10%.
The aggregate purchase price for the shares is equal to the sum of $90 million,
plus interest thereon at the rate of 8% per annum from November 9, 1998 through
the closing of the exercise of the option. Assuming an initial public offering
price per share of NLG56.20, the midpoint of the offering price range, if the
Discount Group exercises its option, it will own about 2.5% of our outstanding
ordinary shares.
The option will expire if not exercised on or before February 5, 1999
unless the final price per share in this offering is less than NLG51.33, in
which case the Discount Group will be given approximately one additional
business day from the date it receives notice of such final offering price to
exercise the option. The Discount Group's exercise of the option is irrevocable
unless the final price per share in the offering is greater than NLG58.66, in
which case the Discount Group will be given approximately one additional
business day from the date it receives notice of such final offering price to
revoke its exercise of the option.
If the option is exercised, the Discount Group will receive certain
registration rights with respect to the shares it acquires. In addition, we
will enter into a shareholders' agreement with the Discount Group and UIH.
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Under the shareholders' agreement, the Discount Group will receive the
right to appoint members of our supervisory board commensurate with the
Discount Group's aggregate shareholdings in us, including at least one
supervisory board member for as long as the Discount Group (together with
affiliates) retains at least 50% of the number of ordinary shares originally
acquired upon the exercise of the option. In addition, the Discount Group will
receive the right to participate on equal terms in connection with sales of
ordinary shares by UIH, including the right to sell the Discount Group's entire
interest in us in connection with a sale by UIH of a controlling interest in
us. The Discount Group will also receive the right to negotiate with UIH prior
to certain sales of ordinary shares by UIH. UIH will receive a right of first
refusal with respect to a sale of ordinary shares by the Discount Group and the
right to require that the Discount Group agree to a merger or sale of all of
our shares proposed by UIH. In addition, there are certain limited restrictions
on the entities or persons to whom the Discount Group may transfer its ordinary
shares.
Previously-Issued Shares
9,198,135 of the ordinary shares to be sold in this offering were
previously held by one of our wholly-owned subsidiaries. These shares will be
transferred to us prior to the closing of this offering and we will receive the
proceeds from their sale.
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RELATIONSHIP WITH UIH AND RELATED TRANSACTIONS
UIH is a leading provider of video, voice and data services outside the
United States. Together with its strategic and financial partners, UIH has
ownership interests in multi-channel television systems in operation or under
construction in over 20 countries. UIH's operations are organized in three
geographic regions: (1) Europe, consisting of UIH'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.
As of September 30, 1998, UIH's systems encompassed the following:
<TABLE>
<CAPTION>
September 30, 1998
------------------------
UIH UIH
Aggregate Proportionate
---------- -------------
<S> <C> <C>
Homes in service area.................................. 12,069,286 7,437,097
Homes passed........................................... 9,674,663 6,043,266
Basic video subscribers................................ 4,351,491 2,513,027
Telephone lines........................................ 100,520 40,283
Internet/data subscribers.............................. 12,736 8,278
</TABLE>
Control by UIH
Immediately prior to this offering, UIH held effectively all of the voting
control over us and held all of our issued and outstanding ordinary shares,
other than approximately 7.7% of such shares that have been registered in the
name of the Foundation to support our stock option plan (which will represent
4.9% of our issued and outstanding ordinary shares after this offering). UIH
appoints the board members of the Foundation and thus controls the voting of
these shares as well. See "Management -- Stock Option Plan". Upon completion of
the offering, UIH will own approximately 63% of our outstanding ordinary shares
and all of our outstanding priority shares. Because we are a strategic holding
of UIH, UIH will continue to control us for the foreseeable future. See "Risk
Factors -- We Will Continue to be Controlled by UIH and Governed by the Terms
of its Debt Securities". Currently two members of our three-member Supervisory
Board are also directors or officers of UIH and upon completion of this
offering, five members of our seven-member Supervisory Board will be directors,
officers or employees of UIH.
Transactions with UIH
Since the UPC Acquisition, UIH has loaned us approximately $79.0 million,
excluding interest, to repay indebtedness and fund new business. The UIH Loan
is payable March 31, 2001 and bears interest at a rate of 10.75% per annum. The
UIH Loan is convertible into ordinary shares at UIH's option at the initial
public offering price. UIH also loaned us an additional $7.5 million in
December 1998, which we have repaid. We plan to repay the UIH Loan with
proceeds from the offering. See "Use of Proceeds".
As part of the UPC Acquisition, we acquired approximately 3.17 million
shares of UIH's Class A Common Stock. We subsequently sold 384,531 of these
shares for certain interests in the Irish system and Tara. We currently hold
approximately 2.8 million shares, which currently represents approximately 7%
of UIH's outstanding common stock. We have given UIH the right to acquire these
shares of UIH Class A Common Stock at their market value, based on a ten-
trading day average.
UIH has sold to us, in exchange for 6,330,340 of our ordinary shares, UIH's
50% voting and 46.3% economic interest in Monor and its interest in the Tara
programming joint venture. UIH has agreed to sell to us its interest in the IPS
programming joint venture in exchange for 4,955,264 ordinary shares. This
transaction is expected to close in February 1999.
Agreements with UIH
Subject to certain limitations, beginning one year after the date of this
offering, UIH may require us to file a registration statement under the Act
with respect to all or a portion of UIH's Ordinary Shares (or ADSs if UIH so
requests), 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
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F-3, as the case may be. UIH 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 UIH's ordinary shares on Form S-3 more than
once in any six-month period. UIH also has the right to have its ordinary
shares 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
UIH rights comparable to those described above with respect to the listing or
qualification of the ordinary shares held by UIH on the Amsterdam Stock
Exchange or on any other exchange and in any other jurisdiction where we
previously have taken action to permit the public sale of our securities.
UIH incurs certain overhead and other expenses at the corporate level on
behalf of us and its other operating companies. These include expenses 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. UIH also incurs direct
costs for its operating companies such as travel and salaries for UIH employees
performing services on behalf of its respective operating companies. We and UIH
are parties to a management service agreement, with an initial term through
2009, pursuant to which UIH will continue to perform these services for us.
Under the management service agreement, we will pay UIH a fixed amount each
month (initially $300,000) as its portion of such unallocated expenses. After
the first year of the management services agreement, the fixed amount may be
adjusted from time to time by UIH to allocate these corporate level expenses
among UIH's operating companies, including us, taking into account the relative
size of the operating companies and their estimated use of UIH resources. In
addition, we will continue to reimburse UIH for costs incurred by UIH that are
directly attributable to us.
We and UIH are also parties to a secondment agreement that specifies the
basis upon which UIH may second certain of its employees to us. UIH'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 UIH with
respect to any seconded employee's employment and severance. UIH may terminate
a seconded employee's employment if the employee's conduct constitutes willful
misconduct that is materially injurious to UIH. During the year ended December
31, 1997, we incurred approximately NLG11.9 million, for costs associated with
the seconded employees, reimbursable to UIH.
We have agreed with UIH that so long as UIH holds 50% or more of our
outstanding ordinary shares, (1) UIH will not pursue any video services,
telephone or Internet access business in Europe or the Middle East or any
programming or Internet content business specifically directed to the European
or the Middle Eastern 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
business in markets outside of Europe and the Middle East in which UIH then
operates unless we have first presented such business opportunity to UIH and
UIH has elected not to pursue such business opportunity.
We have agreed to sell to UIH, upon request, all or any portion of the UIH
Class A Common Stock held by us at a price based upon the trading price of such
stock during a specified period prior to sale. UIH and we have also agreed that
we will provide audited financial statements to UIH in such form and with
respect to such periods as shall be necessary or appropriate to permit UIH to
comply with its reporting obligations as a publicly traded company and that we
will not change our accounting principles without UIH's prior consent. We have
consented to the public disclosure by UIH of all matters deemed necessary or
appropriate by UIH in its sole discretion to satisfy the disclosure obligations
of UIH or any affiliate thereof under the United States federal securities laws
or to avoid potential liability thereunder. We have also agreed to indemnify
UIH against all liabilities UIH may incur in connection with UIH's
indemnification obligations under the underwriting agreement.
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UIH Indenture
We, as a subsidiary of UIH, are subject to the provisions of the UIH
Indenture governing UIH's senior secured discount notes due 2008. The UIH
Indenture contains covenants that, among other things, limit the ability of UIH
and its subsidiaries, including us, to:
. incur indebtedness and issue certain preferred stock in amounts exceeding
that permitted based upon financial ratio and other tests,
. repurchase equity interests from third parties other than UIH,
. make investments in non-controlled entitie,
. enter into agreements that would restrict the ability to make
distributions, loans or other payments to equity holders,
. create certain liens,
. sell assets or issue equity for 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 UIH.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources -- Restrictions Under UIH
Indenture" and "Risk Factors". We will continue to be controlled by UIH and
governed by the terms of its debt securities. We have agreed with UIH that, for
as long as we are subject to the provisions of the UIH Indenture, as amended or
supplemented, or any other indenture or agreement to which UIH is a party
governing indebtedness of UIH that replaces or refinances any indebtedness
governed by the UIH Indenture, as amended or supplemented, we will not take any
action that will result in a breach of the UIH Indenture.
UIH's senior secured discount notes were issued pursuant to the UIH
Indenture, dated as of February 5, 1998, by and between UIH and Firstar Bank of
Minnesota N.A., as trustee. The foregoing description of certain covenants of
the UIH Indenture 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 UIH
Indenture, which are hereby incorporated by reference. A copy of the UIH
Indenture has been incorporated as an exhibit to the registration statement
filed with the United States Securities and Exchange Commission of which this
prospectus forms a part.
RELATIONSHIP WITH MICROSOFT
We have signed a non-binding letter of intent with Microsoft Corporation to
establish a technical services relationship and, as part of this, 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
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 would be chaired by Scott Bachman,
our Managing Director of Technology, and would include representatives from
Microsoft and us. In addition, we and Microsoft would be preferred suppliers to
one another, with Microsoft having the first opportunity to license
technologies to us. We would be given the opportunity to present and offer our
products to Microsoft offices in Europe. We and Microsoft would also cooperate
to advocate mutually-agreed standards and regulations to the bodies in our
service territories who set technical standards. See "Risk Factors -- Our
Relationship with Microsoft May Not Work Out".
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 binding agreement with Microsoft, we will grant Microsoft warrants
to purchase up to 3,800,000 ADSs (or ordinary shares, at Microsoft's option),
which would represent approximately 3.0% of our outstanding share capital
following this offering. These warrants can be exercised at a strike price of
the lesser of $28.00 and the per share price in this offering. These warrants
will not be exercisable until at least one year after the date of the closing
of this offering and will expire three years after they become exercisable. 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
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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 in any public or private equity offering at such offering's 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).
Microsoft has agreed that, if it purchases any ordinary shares or ADSs in
this offering, it will agree not to dispose of such shares or ADSs for six
months following this offering (which, if we enter into binding agreements, as
expected, will be extended to one year) nor will it acquire more than 15% of
our total share capital without the prior written approval of our Supervisory
Board. See "Underwriting" and "Shares Eligible for Future Sale".
DESCRIPTION OF SHARE CAPITAL
Pursuant to the articles of association (as these will be amended prior to
the closing of this offering), our authorized share capital is ^135,000,000,
and includes 200,000,000 ordinary shares, 100 priority shares, 49,999,900 class
A preference shares, and 200,000,000 class B preference shares. Each of our
shares has a nominal value of ^0.30. Upon completion of the offering,
123,087,469 ordinary shares and 100 priority shares will be issued and fully
paid. No preference shares will be outstanding. The following description of
our share capital is qualified in its entirety by reference to the full text of
the articles of association, which have been included as an exhibit to the
registration statement.
Ordinary Shares
Ordinary shares may, at the option of the shareholder, be registered shares
or bearer shares. A shareholder may convert ordinary shares in bearer form into
registered ordinary shares at any time, and vice versa. We have applied for
listing of the ordinary shares in bearer form on the Amsterdam Stock Exchange.
Ordinary shares in bearer form will be embodied in a single global share
certificate, which we will lodge with The Netherlands Centraal Instituut voor
Giraal Effectenverkeer B.V. ("NECIGEF"), for safe-keeping on behalf of the
parties entitled to such ordinary shares. The ordinary shares in bearer form
can only be transferred through the giro-based securities transfer system of
NECIGEF.
Holders of registered ordinary shares will be entered in our shareholders
register and share certificates will not be issued. At the request of the
registered shareholder, we will, without fee, issue a non-negotiable extract
from the shareholders register in the name of the holder. A deed of transfer,
together with our acknowledgment in writing, is required to transfer registered
shares.
Issue of Ordinary Shares; Preemptive Rights; Voting Rights. Pursuant to the
articles of association, all unissued shares of the authorized capital may be
issued by the Board of Management upon approval of both the Supervisory Board
and UIH as holder of the priority shares. The authority of the Board of
Management to issue ordinary shares will end five years after the amendment to
our articles of association being completed prior to this offering unless
extended by the articles of association or by resolution of the general meeting
of shareholders, for a period not exceeding five years in each instance. If no
such extension is given, issues of ordinary shares will require a resolution of
the general meeting of shareholders in addition to approval of the Supervisory
Board and UIH. A resolution of the general meeting of shareholders to extend
the authority of the Board of Management to issue shares requires the approval
of both the Supervisory Board and UIH.
Except for issues of ordinary shares in return for non-cash consideration
and shares issued to our employees or employees of any of our subsidiaries as
defined under Dutch law (each, a "Group Company"), holders of ordinary shares
will have preemptive rights to subscribe for their pro-rata amount of all our
new ordinary share issuances. These rights may be restricted or excluded,
however, by a resolution of the Board of Management upon approval of both the
Supervisory Board and UIH.
Each ordinary share represents the right to cast one vote at a general
meeting of shareholders.
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Priority Shares
All of the priority shares are held by UIH. Except for the transfer of
priority shares to us, priority shares can only be transferred with the
approval of the Board of Management and the Supervisory Board. In addition to
holding a controlling majority of ordinary shares, UIH, as the holder of the
priority shares, has some specific rights and powers over us including (1) the
right to approve the issuance by us of our shares, (2) the right to approve the
exclusion or restriction of the preemptive rights of existing shareholders, (3)
the right to nominate members for appointment to the Management and Supervisory
Boards, which nominations may only be set aside by a resolution of the general
meeting of shareholders adopted by two-thirds of the votes cast representing
more than one-half of the issued nominal capital, (4) the right to approve
certain decisions of our Board of Management, and (5) the exclusive right to
propose amendments to the articles of association and to propose our merger,
split up or dissolution. Priority shares are issued in the same way as ordinary
shares, but carry no preemptive rights. Priority shares are entitled to a
nominal annual dividend of 5% of their nominal value, to the extent of
distributable profits.
At such time as UIH holds less than 15% of the issued and outstanding
ordinary shares, UIH will transfer all of the priority shares to a foundation,
the trustees of which will be our Supervisory Directors.
Preference Shares
The Articles of Association provide for the issuance of class A and class B
preference shares.
Class A preference shares may be issued exclusively for financing purposes.
Holders of class A preference shares do not share in our reserves although they
may be entitled to a share premium reserve if it were so decided at the time of
their first issuance. Class A preference shares are not listed. The class A
preference shares will be registered shares and shares certificates will not be
issued. Class A preference shares can be issued in the same way as ordinary
shares, but carry no preemptive rights. Each class A preference share will
represent the right to cast one vote at a general meeting of shareholders.
Class A preference shares will be paid an annual dividend, the amount of which
will be determined at the time of their first issuance by the Board of
Management, to the extent of distributable profits.
Class B preference shares are designed as a preventive measure against
unfriendly takeover bids. The minimum amount required to be paid on the class B
preference shares upon issuance is 25% of the nominal amount issued. In the
event of a hostile takeover bid, class B preference shares may be issued to a
legal entity charged with caring for our interests and preventing influences
that may threaten our continuity, independence or identity. Holders of class B
preference shares do not share in our reserves and such shares are not listed.
The class B preference shares will be registered shares and share certificates
will not be issued. Class B preference shares can be issued in the same way as
ordinary shares, but carry no preemptive rights. Each class B preference share
will represent the right to cast one vote at a general meeting of shareholders.
Class B preference shares will be paid a cumulative annual dividend calculated
on the basis of the deposit interest rate of the European Central Bank to the
paid up part of their nominal value, to the extent of distributable profits.
Class B preference shares may be issued by the Board of Management upon
approval of both the Supervisory Board and UIH, as the holder of the priority
shares, if such power has been granted to the Board of Management by the
general meeting of shareholders or by the articles of association.
Notwithstanding, if class B preference shares are proposed to be issued and
such shares would exceed 100% of all of our other outstanding shares, such
issuance will require the approval of the general meeting of shareholders. In
all instances where class B preference shares are issued, we must explain the
reason for the issuance within four weeks thereof at a general meeting of
shareholders. Within two years after the first issuance of class B preference
shares, a general shareholders meeting must be held to vote on whether the
class B preference shares should be repurchased or cancelled. If such a
resolution is not adopted, another meeting is held within two years of the
previous meeting and this procedure is repeated until no more class B
preference shares are outstanding.
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SUMMARY OF ADDITIONAL MATERIAL PROVISIONS
OF THE ARTICLES OF ASSOCIATION AND OTHER MATTERS
General
We were incorporated under Dutch law on December 21, 1990 as a private
limited liability company ("besloten vennootschap met beperkte
aansprakelijkheid"), and were converted in connection with the UPC Acquisition
on December 11, 1997 into a public limited liability company ("naamloze
vennootschap"). We have our corporate seat in Amsterdam, The Netherlands and
are registered in the Amsterdam Commercial Register under number 33-274-976.
We are not subject to the rules for large companies
("structuurvennootschappen").
Set forth below is a summary of certain additional material provisions of
the articles of association (as the same was amended on February , 1999) and
Dutch corporate law. This summary does not purport to be complete and is
qualified in its entirety by reference to the Articles of Association and the
law of The Netherlands. Copies of the Articles of Association and our most
recent annual accounts and annual report may be obtained in both Dutch and
English upon written request to us at our principal office.
Corporate Purpose
Article 3 of our articles of association provides that our business
activity shall be, among other things, (1) to own, operate, and develop
subscription and multi-channel television systems, to render related
consulting, engineering and programming services and to provide other
communications services, (2) to incorporate, manage and finance, and to
participate in other companies and enterprises, and (3) to take up loans, land
and make investments and acquire, transfer and dispose of claims and assets in
general.
Acquisition of Our Own Shares
We may acquire our own shares subject to certain provisions of Dutch law.
We may only acquire our own shares for consideration if (1) the shareholders'
equity less the payment required to make the acquisition does not fall below
the sum of the paid-up and called portion of the share capital and any
statutory reserves, and (2) we and our subsidiaries would thereafter not hold
or hold in pledge shares with an aggregate nominal value exceeding one-tenth
of our issued share capital. Shares held by us in our own capital may not be
voted or counted for quorum purposes at shareholders' meetings.
Acquisitions by us of our own shares may be effected by our Board of
Management, subject to the approval of the Supervisory Board and UIH as the
holder of our priority shares, only if the general meeting of shareholders has
authorized the Board of Management to effect such acquisitions. It is expected
that such a resolution of the general meeting will be adopted prior to the
completion of the offering. Such resolutions expire within 18 months and must
be renewed. Acquisitions by us of our own shares that are listed on a stock
exchange do not require the above-mentioned authorization of the general
meeting if made for the purpose of transferring such shares to our employees
or employees of a company in our group.
Obligations to Disclose Holdings
Pursuant to the Dutch Act of Disclosure of Holdings in Listed Companies
1996 ("Wet melding zeggenschap in ter beurze genoteerde vennootschappen
1996"), any holder of five percent or more of our issued capital or voting
control at the time the ordinary shares are listed on the Amsterdam Stock
Exchange must notify both us and the Securities Board of The Netherlands.
Moreover, anyone obtaining or divesting ordinary shares after listing on the
Amsterdam Stock Exchange and thereby causing that holder's percentage of
issued capital or voting control to come under a different range must also
notify us and the Securities Board of The Netherlands. The aforementioned
ranges are: 0 to 5%, 5 to 10%, 10 to 25%, 25 to 50%, 50 to 66 2/3% and 66 2/3%
or more. Failure to disclose one's shareholdings is a violation of the Dutch
Economic Offenses Act, and may result in civil penalties, including suspension
of voting rights.
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Shareholders Meeting
We are required to hold a shareholders' meeting annually, as well as if
convened by the Supervisory Board, the Board of Management or UIH, as the
holder of our priority shares. Unless otherwise required by law or our articles
of association, all decisions of the general meeting of shareholders may be
adopted by a majority of the votes cast.
Adoption of Annual Accounts and Discharge
Within five months following the end of each fiscal year, the Board of
Management must prepare annual accounts accompanied by an annual report. This
period may be extended by the general meeting of shareholders on account of
special circumstances for up to six months. The annual accounts and report must
then be submitted to the Supervisory Board, which will present a report on it
to the general meeting of shareholders. The annual accounts and the annual
report will be available to shareholders from the day of notice convening the
annual general meeting of shareholders.
The general meeting of shareholders may discharge the members of the Board
of Management and Supervisory Board from liability in respect of the exercise
of their duties during the fiscal year concerned. Such discharge is subject to
mandatory provisions of Dutch law, including those relating to liability of
members of supervisory boards and management boards upon bankruptcy of a
company. Moreover, this discharge does not extend to actions or omissions not
disclosed in or apparent from the adopted annual accounts.
Dividends
Subject to certain exceptions, dividends are only paid by us on profits as
shown in our annual financial statements. We may not pay dividends if the
payment would reduce shareholders' equity below the sum of the paid-up capital
and any reserves required by Dutch law. Pursuant to the articles of
association, the priority shares have preferential dividend rights. See
"Description of Share Capital -- Priority Shares". Thereafter, the Board of
Management, upon approval of the Supervisory Board, shall determine how much of
the remaining profit shall be allocated to our reserves before dividends are
paid on the ordinary shares. To date, we have not paid dividends on our
ordinary shares and do not intend to do so for the foreseeable future. See
"Dividend Policy" and "Risk Factors -- We Do Not Intend to Pay Dividends for
the Foreseeable Future". The Board of Management may declare, upon approval of
the Supervisory Board and the general meeting of the shareholders, that some or
all of the dividends will be paid in our shares rather than in cash. The Board
of Management may, with the prior approval of the Supervisory Board and subject
to certain statutory provisions, distribute one or more interim dividends. Any
dividends paid but not claimed by the recipient within five years revert to us.
Capital Reduction
Upon the proposal of our Board of Management and after approval by the
Supervisory Board, the general meeting of shareholders may resolve to reduce
the issued share capital by cancellation of shares or by reducing the nominal
value of our shares, subject to certain statutory provisions and the provisions
of the articles of association.
Amendment of the Articles of Association; Dissolution; Legal Merger; Split-up
Only UIH, as the holder of our priority shares, may propose amendments to
our articles of association as well as to effect our legal merger, split-up or
dissolution. The general meeting of shareholders cannot effect our merger,
split-up or dissolution or amend our articles of association if the proposal is
made by any one other than UIH as the holder of our priority shares.
Liquidation Rights
In the event that we are dissolved or liquidated, the assets remaining
after payment of all debts are to be distributed to holders of our share
capital as follows: first, to any issued and outstanding class B preference
shares in an amount equal to any previously declared but unpaid dividend and
the paid-up amount of such class B preference shares; second, to any issued and
outstanding class A preference shares in an amount equal to any previously
declared but
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unpaid dividend and the paid-up amount of such class A preference shares;
third, to the holders of priority shares in an amount equal to their nominal
value; and, fourth any remaining assets shall be distributed to the holders of
ordinary shares in proportion to the nominal value of their holdings.
DESCRIPTION OF AMERICAN DEPOSITARY SHARES
We have summarized below the material terms of the ADSs and the material
provisions of the deposit agreement among us, Citibank, N.A., as the depositary
and all holders and beneficial owners from time to time of the ADSs evidenced
by American Depositary Receipts ("ADRs") issued under the deposit agreement.
Because it is a summary, this description does not contain all of the
information that may be important to you relating to the ADSs and the deposit
agreement. For complete information, you should read the entire deposit
agreement and the ADR. Terms used in this description that are capitalized but
not defined have the meanings given to such terms in the deposit agreement. A
copy of the deposit agreement is available for review at the principal office
of the depositary, currently located at 111 Wall Street, New York, New York
10043, U.S.A.
American Depositary Shares
The depositary will issue ADSs only pursuant to the deposit agreement. ADSs
represent an ownership interest in us much like a share of common stock
represents an ownership interest in a corporation. An ADR is a certificate
issued by the depositary that represents the ADSs issued pursuant to the
deposit agreement. Each ADR represents the whole number of ADSs indicated on
the ADR. Each ADS represents, as of the date of the issuance of the ADSs, one
of our ordinary shares or rights to such share (such ordinary shares or rights
to such share, together with all other securities, cash or property held in
respect or in lieu of such ordinary shares or rights under the deposit
agreement, are referred to in this summary as the deposited securities).
Ordinary shares will be deposited into accounts maintained by Citibank
N. A., Amsterdam as the custodian and agent of the depositary with Nederlandse
Centraal Instituut voor Giraal Effectenverkeer B.V. ("NECIGEF"), the Dutch
central securities depositary. Only persons in whose names ADSs are registered
will be treated by us and the depositary as the absolute owners of such ADSs.
Deposit of Ordinary Shares
The ordinary shares to be represented by the ADSs will be deposited in
bearer form with the custodian and credited to an account maintained by the
custodian at NECIGEF. The custodian will be the holder of record of all such
ordinary shares. Subject to the terms and conditions of the deposit agreement
and applicable law, upon receipt of notice from the custodian confirming the
deposit of such ordinary shares to the account of the custodian at NECIGEF, the
depositary will have the custodian execute and deliver ADRs evidencing ADSs to
or upon the order of the person(s) named in the notice. Ownership of the
deposited ordinary shares will be shown on, and transfers of the ownership will
be effected through, the records maintained by NECIGEF or institutions with
accounts at NECIGEF.
Requirements for Deposit
Subject to the terms and conditions of the deposit agreement and applicable
law, ordinary shares or evidence of rights to receive ordinary shares other
than restricted securities (as discussed below) may be deposited by any person
(including the depositary in its individual capacity but subject, however, in
our case or any of our affiliates, to the limitations set forth in the deposit
agreement and applicable law) by delivery of the ordinary shares to the
custodian along with the following:
. appropriate instrument(s) of transfer or endorsement, in a form
satisfactory to the custodian,
. such certifications and payments (including, without limitation, the
transaction fees and related charges) and evidence of such payments
(including, without limitation, stamping or otherwise marking such
ordinary shares as may be required by the depositary or the custodian in
accordance with the provisions of the deposit agreement),
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. a written order directing the depositary to execute and deliver an ADR or
ADRs evidencing the number of ADSs representing the ordinary shares so
deposited,
. evidence satisfactory to the depositary that all necessary Dutch
governmental approvals have been granted, or there has been compliance
with the applicable Dutch rules and regulations, and
. any agreement, instrument or proxy that may be required by the depositary
or the custodian until the ordinary shares are registered in the name of
the depositary, the custodian or any nominee.
Subject to the terms of the deposit agreement, the depositary will instruct
the custodian not to, and the depositary itself will not knowingly, accept for
deposit (1) any ordinary shares, ADRs or ADSs that are restricted securities as
that term is defined in Rule 144(a)(3) of the United States Securities Act of
1933, as amended (the "Securities Act"), or (2) any fractional ordinary shares
or fractional deposited securities or a number of ordinary shares or deposited
securities that would require the issuance of fractional ADSs. No ordinary
shares will be accepted for deposit unless:
. the shares are accompanied by evidence (if required) satisfactory to the
depositary or the custodian that all conditions to such deposit under
Dutch laws and regulations have been satisfied, and
. all necessary approvals have been granted by any Dutch governmental body
which regulates currency exchange.
Pre-Release Transactions
The depositary may issue ADRs against rights to receive ordinary shares
from us, any agent of ours, or any custodian, registrar, transfer agent,
clearing agency or other entity involved in the ownership or transaction
records in respect of the ordinary shares. Generally, neither the depositary
nor the custodian, in their capacity as such, may lend deposited securities or
ADSs. The depositary, however, reserves the right to issue ADSs prior to the
receipt of ordinary shares ("Pre-Release") and to deliver ordinary shares prior
to the receipt and cancellation of ADSs, subject to the conditions specified in
the deposit agreement. Persons to whom ADRs or ordinary shares are so issued or
delivered to, among other things, must enter into a written agreement with, and
provide collateral to, the depositary. Such collateral, but not earnings
thereon, will be held for the benefit of the beneficial owners and holders (but
not for the benefit of the person or entity to whom ADSs are issued prior to
the receipt of ordinary shares or to whom ordinary shares are issued prior to
the cancellation of ADRs).
Withdrawal of Deposited Securities
You may surrender at the principal office of the depositary your ADSs in
order to withdraw the deposited securities represented by the ADSs. Upon
payment by you of the charges, fees and expenses of the depositary provided in
the deposit agreement and any applicable taxes or governmental charges and
subject to the terms and conditions of the deposit agreement, our articles of
association and other applicable laws, you or a person you designate will be
entitled to delivery of the deposited securities represented by the ADSs so
surrendered. ADSs may be surrendered in order to withdraw deposited securities
by delivery of the ADR evidencing such ADSs (if held in registered form) or by
book-entry delivery of such ADSs to the depositary. An ADR surrendered for such
purposes must be (if required by the depositary) properly endorsed in blank or
accompanied by proper instruments of transfer in blank. The holder of the ADR
will be required to execute and deliver to the depositary a written order
containing delivery instructions. Such endorsements, instruments and
instructions must, in all cases, meet the requirements set forth in the deposit
agreement.
Upon receipt of satisfactory documentation and subject to the terms and
conditions of the deposit agreement, our articles of association, and the
provisions of or governing the deposited securities and other applicable laws,
the custodian will deliver as promptly as practicable by means of book entry
transfer recorded on the books of NECIGEF or a NECIGEF participant to a
designated NECIGEF participant, the deposited securities represented by such
ADSs, to or for the
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account of such person. The depositary may make delivery to such person at its
principal office of any dividends or cash distributions with respect to the
deposited securities represented by such ADSs, or of any proceeds of sale of
such dividends, distributions or rights, which may at the time be held by the
depositary.
The depositary will not accept for surrender an ADR evidencing ADSs
representing less than one ordinary share. In the case of surrender of an ADR
evidencing a number of ADSs representing other than a whole number of ordinary
shares, the depositary will cause ownership of the appropriate whole number of
ordinary shares to be delivered in accordance with the terms of the deposit
agreement, and will issue and deliver to such person surrendering the ADR cash
proceeds from the sale by the depositary of any fractional share.
At the request, risk and expense of any holder surrendering an ADR, and for
the account of such holder, the depositary will direct the custodian to forward
any cash or other property (other than securities) held in respect of, and any
certificate or certificates and other proper documents of or relating to title
to, the deposited securities represented by such ADR to the depositary for
delivery at its principal office, and for further delivery to such holder. A
holder must give such direction by letter or, at the request, risk and expense
of such holder, by cable, telex or facsimile transmission.
Dividends, Other Distributions and Rights
Cash Dividend. Subject to certain limitations described below, the
depositary has agreed to pay you cash dividends, other cash distributions or
proceeds from the sale of any ordinary shares and related rights and securities
upon confirmation from the custodian of its receipt of such dividends,
distributions or proceeds.
The depositary will convert any cash dividend, other cash distribution or
proceeds into U.S. dollars if, at the time the depositary receives such amounts
in a foreign currency, in the depositary's reasonable judgment it can do so on
a practicable basis and can transfer the U.S. dollars to the United States. The
depositary will distribute such amounts as promptly as practicable (net of
applicable fees, charges, and the depositary's expenses and taxes, duties or
other governmental charges required to be withheld) to the holders entitled to
receive such amounts as of the record date in proportion to the number of ADSs
held by the holder as of the record date. The depositary will distribute only
such amount as can be distributed, however, without attributing to any holder a
fraction of one cent, and any balance not so distributed will be held by the
depositary (without liability for interest thereon) and will be added to and
become part of the next amount received by the depositary for distribution to
holders outstanding at the time of the next distribution.
If the depositary reasonably determines that any foreign currency received
by the depositary or the custodian cannot be converted on a reasonable basis
into U.S. dollars and transferred to the United States or if any required
approval or license of any government or agency is denied or in the opinion of
the depositary is not obtainable at reasonable cost or within a reasonable
time, the depositary may (1) convert such foreign currency and make a
distribution in U.S. dollars to the holders for whom such conversion, transfer
and distribution is lawful and practical, (2) distribute such foreign currency
to holders for whom it is lawful and practicable, or (3) hold such foreign
currency uninvested and without liability for interest thereon for the
respective accounts of the holders entitled to receive it.
Share Dividend. Upon receipt of confirmation of the deposit of a dividend
in, or free distribution of, ordinary shares from the custodian, the depositary
will establish a record date and, subject to the terms of the deposit
agreement, either
. distribute to the holders as of the record date in proportion to the
number of ADSs held as of such record date, additional ADSs, which
represent the total number of ordinary shares received as such dividend,
or free distribution, subject to the other terms of the deposit agreement
(including, without limitation, the payment of any applicable fees and
charges of, and expenses incurred by, the depositary and
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taxes, duties or other governmental charges required to be withheld), or
. if additional ADSs are not distributed, each ADS issued and outstanding
after the record date will, to the extent permissible by law, then also
represent rights and interests in the additional ordinary shares
distributed upon the deposited securities represented thereby (net of the
applicable fees and charges of, and expenses incurred by, the depositary
and taxes).
Instead of delivering fractional ADSs, the depositary will sell the number of
ordinary shares represented by the aggregate of such fractions and distribute
the net proceeds of such sale upon the terms of the deposit agreement.
If the depositary determines that any distribution in property (including
ordinary shares) is subject to any tax or other governmental charges which the
depositary is obligated to withhold, or, if we have furnished to the depositary
an opinion of U.S. counsel determining that ordinary shares must be registered
under the Securities Act, or other laws in order to be distributed to holders
(and we have informed the depositary that no such registration statement has
been declared effective), the depositary may dispose of all or a portion of
such property in such amounts and in such manner, including by public or
private sale, as the depositary deems necessary and practicable. The depositary
will distribute the net proceeds of any such sale (after deduction of (1) taxes
and (2) fees and charges and the depositary's expenses) to holders entitled to
the proceeds upon the terms described in the deposit agreement. The depositary
will hold and/or distribute any unsold balance of such property in accordance
with the provisions of the deposit agreement.
Elective Dividend. Upon receipt of notice that we wish to distribute a
dividend payable at the election of the holders of deposited securities in cash
or in additional ordinary shares, and we wish such elective distribution to be
made available to holders and beneficial owners of ADSs, the depositary, upon
consultation with us, will determine, whether it is lawful and reasonably
practicable to make such elective distribution available to the holders and
beneficial owners of ADSs.
The depositary has agreed to make such elective distribution available to
holders and beneficial owners only if (1) the depositary has determined that
such distribution is reasonably practicable and (2) the depositary has received
satisfactory documentation required under the terms of the deposit agreement.
If the above conditions are not satisfied, the depositary will, to the
extent permitted by law, distribute to the holders, on the basis of the same
determination as is made in the local market in respect of the ordinary shares
for which no election is made, either cash or additional ADSs representing such
additional ordinary shares, in either case, upon the terms of the deposit
agreement. If the above conditions are satisfied, the depositary will fix a
record date and establish procedures to enable holders to elect to receive the
proposed dividend in cash or in additional ADSs upon the terms described in the
deposit agreement.
The depositary is not obligated to make available to holders a method to
receive the elective dividend in ordinary shares (rather than ADSs). We can not
assure you that holders generally, or any holder in particular, will be given
the opportunity to receive elective distributions on the same terms and
conditions as the holders of the deposited securities.
Rights. The depositary has agreed, upon receipt of notice that we intend to
make rights available to holders of deposited securities, to make such rights
available to any holder only if:
. we have requested that such rights be made available to holders,
. the depositary has received satisfactory legal documentation from us
within the terms of the deposit agreement, and
. the depositary has determined that such distribution of rights is
reasonably practicable.
In the event any of the conditions listed above are not satisfied, the
depositary will proceed with the sale of the rights as described below. In the
event all conditions listed above are satisfied, the depositary will fix a
record date and establish procedures to distribute such rights and
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to enable the holders to exercise the rights upon payment of the applicable
fees and charges of, and expenses incurred by, the depositary and taxes. We
will assist the depositary to the extent necessary in establishing such
procedures. The depositary is not obligated to make available to the holders a
method to exercise such rights to subscribe for ordinary shares rather than
ADSs.
If (1) we do not request the depositary to make the rights available to
holders or request that the rights not be made available to holders, (2) the
depositary does not receive satisfactory legal documentation from us or
determines it is not reasonably practicable to make the rights available to
holders, or (3) any rights made available are not exercised and appear to be
about to lapse, the depositary will determine whether it is lawful and
reasonably practicable to sell such rights, in a riskless principal capacity,
at such place and upon such terms (including public or private sale) as it may
deem proper. The depositary will, upon such sale, convert and distribute
proceeds of the sale (net of applicable fees and charges, the depositary's
expenses and taxes) upon the terms set forth in the deposit agreement.
If the depositary is unable to make any rights available to holders or to
arrange for the sale of the rights upon the terms described in the deposit
agreement, the depositary will allow such rights to lapse. The depositary will
not be responsible for:
. any failure to determine that it may be lawful or feasible to make such
rights available to holders in general or any holders in particular,
. any foreign exchange exposure or loss incurred in connection with such
sale, or exercise, or
. the content of any materials forwarded to the holders on our behalf of us
in connection with the rights distribution.
If we have furnished an opinion of U.S. counsel that registration under the
Securities Act or any other applicable law of the rights or the securities to
which any rights relate may be required in order for us to offer the rights or
the securities to holders and to sell the securities represented by such
rights, the depositary will not distribute such rights to the holders unless
and until a registration statement under the Securities Act (or other
applicable law) covering such offering is in effect.
In the event that taxes or other governmental charges are required to be
withheld, the amount distributed to the holders will be reduced accordingly. In
the event that the depositary determines that any distribution in property
(including ordinary shares and rights to subscribe therefor) is subject to any
tax or other governmental charges which the depositary is obligated to
withhold, the depositary may dispose of all or a portion of such property
(including ordinary shares and rights to subscribe therefor) in such amounts
and in such manner, including by public or private sale, as the depositary
deems necessary and practicable to pay any such taxes or charges.
We cannot assure you that holders generally, or any holder in particular,
will be given the opportunity to exercise rights on the same terms and
conditions as the holders of deposited securities or to exercise such rights.
The deposit agreement does not require us to file any registration
statement in respect of any rights or ordinary shares or other securities to be
acquired upon the exercise of such rights.
Distributions Other Than Cash, Shares or Rights.
The depositary will not make a distribution of property other than cash,
ordinary shares or rights to purchase additional ordinary shares, unless such
distribution is permissible under Dutch law and (1) we will have requested the
depositary to make such distribution to holders, (2) the depositary has
received satisfactory legal documentation within the terms of the deposit
agreement, and (3) the depositary has determined that such distribution is
reasonably practicable.
Upon satisfaction of the requirements listed above and receipt of payment
or net of applicable fees, charges and the depositary's expenses and taxes, the
depositary will distribute the property so received to the holders of record as
of the record date, in proportion to the respective number of ADSs held by them
and in such manner as the depositary reasonably deems practicable in
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accomplishing such distribution (upon receipt of payment or net of applicable
fees, charges and the depositary's expenses and taxes). The depositary may
dispose of all or a portion of the property so distributed and deposited, in
such amounts and in such manner (including public or private sale) as the
depositary may deem practicable or necessary to satisfy any taxes (including
applicable interest and penalties) or other governmental charges applicable to
the distribution.
If (1) we do not request the depositary to make such distribution to
holders or request it not to make such distribution to holders, (2) the
depositary does not receive satisfactory legal documentation within the terms
of the deposit agreement or (3) the depositary determines that all or a portion
of such distribution is not reasonably practicable or feasible, the depositary
will sell or cause such property to be sold in a public or private sale, at
such place or places and upon such terms as it may deem proper. The depositary
will (1) cause the proceeds of such sale, if any, to be converted into U.S.
dollars and (2) distribute the proceeds of such conversion received by the
depositary (net of applicable fees and charges and the depositary's expenses
and taxes) to the holders as of the record date on the same terms as cash
distributions set forth in the deposit agreement. If the depositary is unable
to sell the property, the depositary may dispose of the property in any way it
deems practicable under the circumstances.
Changes Affecting Deposited Securities
Upon any:
. change in nominal or par value of deposited securities,
. split-up, consolidation or any other reclassification of deposited
securities or,
. recapitalization, reorganization, merger or consolidation or sale of
assets affecting us or to which we are a party,
any securities that shall be received by the depositary or the custodian in
exchange for, or in conversion or replacement of or otherwise in respect of,
deposited securities will, subject to the terms of the deposit agreement, be
treated as newly deposited securities under the deposit agreement. In this
event, the ADSs will from that point on, subject to the terms of the deposit
agreement and in compliance with applicable laws (including any registration
requirements under the Securities Act), represent the new deposited securities
received in exchange or conversion.The depositary may, however, with our
approval, and will, if we request, subject to the provisions of the deposit
agreement and receipt of an opinion of our counsel satisfactory to the
depositary that such distributions are not in violation of any applicable laws
or regulations, execute and deliver new ADRs or call for the surrender of
outstanding ADRs to be exchanged for new ADRs.
Fixing Record Dates
Whenever:
. the depositary receives notice from us of the fixing of a record date for
the determination of holders of deposited securities entitled to receive
any distribution,
. for any reason the depositary causes a change in the number of ordinary
shares that are represented by each ADS,
. the depositary receives notice of any meeting of holders of ordinary
shares or other deposited securities, or
. for any other reason the depositary deems necessary and convenient in
connection with the giving of notice, solicitation of any consent or any
other matter,
the depositary will fix, after consultation with us, a record date (which will
be as close as practicable to the applicable record date for the ordinary
shares) for the determination of the holders entitled to receive such dividend
or distribution or give instructions for the exercise of voting rights at any
such meeting, or give or withhold such consent, or receive such notice or
otherwise take action, or exercise the rights of holders with respect to any
changed number of ordinary shares represented by each ADS subject to the
provisions of the deposit agreement.
Subject to the terms and conditions of the deposit agreement, only the
holders of ADRs at
the close of business on the record date will be entitled to receive such
distribution, to give such voting instructions, to receive such notice or
solicitation, or otherwise take action.
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Voting of the Shares
You may instruct the depositary to vote the deposited securities underlying
your ADSs as described below.
As soon as practicable after receipt of notice of any meeting of holders of
deposited securities at which the holders of ordinary shares or other deposited
securities are entitled to vote, or of solicitation of consents or proxies from
holders of ordinary shares or other deposited securities, the depositary will
fix a record date applicable to holders of ADSs and, if we so request, mail to
holders:
. such information as is contained in such notice of meeting or
solicitation of consent or proxy,
. a statement in English, in a form provided by us, that the holders at the
close of business on the record date will be entitled to instruct the
depositary as to the exercise of the voting or other rights, if any,
pertaining to the number of ordinary shares or other deposited securities
represented by such holder's ADSs, subject to the terms of the deposit
agreement, any applicable law, our articles of association and the
provisions of or governing the deposited securities (which provisions, if
any, we will summarize in pertinent part), and
. a brief statement as to the manner in which such instructions may be
given.
The depositary will not, and will instruct the custodian and each of their
nominees, if any, not to vote the ordinary shares or other deposited securities
represented by the ADSs evidenced by an ADR other than in accordance with such
instructions from the holder. Ordinary shares or other deposited securities
represented by ADSs for which no specific voting instructions are received by
the depositary from the holder will not be voted. The depositary, the custodian
and each of their respective nominees (if any) may not exercise any voting
discretion over any ordinary shares or other deposited securities.
We cannot assure you that holders generally or any holder in particular will
receive the notice described above with sufficient time to enable the holder to
return voting instructions to the depositary in a timely manner.
Reports and Notices
On or before the first date on which we give notice, by publication or
otherwise, of any meeting of holders of ordinary shares or any deposited
securities, or any such meeting at which such holders are entitled to vote, or
any adjourned meeting, or of the taking of any action by such holders other
than at a meeting, or of the taking of any action in respect of any cash or
other distributions or the offering of any rights in respect of deposited
ordinary shares, or any deposited securities, or for any other reason, pursuant
to the deposit agreement, we will be required to transmit to the depositary and
the custodian a copy of the notice thereof in the English language in the form
given or to be given to holders of ordinary shares or any deposited securities.
We will also furnish to the custodian and the depositary an English language
copy of a summary of any applicable provisions or proposed provisions of our
articles of association that may be relevant or pertain to such notice or to a
vote to be taken at the meeting.
The depositary will, subject to applicable law, arrange for the prompt
transmittal by the custodian to the depositary of such notices and any other
reports and communications that are both received by the depositary or the
custodian and made generally available by us to the registered holders of
ordinary shares or other deposited securities. The depositary will arrange for
the mailing of copies thereof to all registered holders or make such notices,
reports and other communications available to all registered holders on a basis
similar to that for holders of ordinary shares or other deposited securities or
on such other basis as we may advise the depositary or as may be required by
any applicable law, regulation or stock exchange requirement. Pursuant to the
deposit agreement, we will deliver to the depositary and the custodian a copy
of our articles of association along with the provisions of or governing the
ordinary shares or other deposited securities represented by the ADSs.
The depositary will make a copy of any other notices, reports and other
communications issued by us in connection therewith available for inspection by
the registered holders of the ADRs evidencing the ADSs representing such
ordinary shares governed by such provisions at the depositary's principal
office, at the office of the custodian and at any other designated transfer
office.
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Disclosure of Beneficial Ownership
We or the depositary may from time to time request the holders or former
holders of ADRs to provide information as to the capacity in which they hold or
held ADSs and regarding the identity of any other persons then or previously
holding any beneficial or other interest in such ADRs and the nature of such
interest and various other matters. Each such holder agrees to provide any such
information reasonably requested by us or the depositary pursuant to the
deposit agreement whether or not still a holder at the time of such request.
To the extent that provisions of or governing any deposited securities or
the applicable rules and regulations of any governmental authority may require
disclosure relating to ordinary shares and other securities of ours or limit
beneficial or other ownership of deposited securities and provide for blocking
transfer and voting or other rights to enforce such disclosure or limit such
ownership, the depositary will use its reasonable efforts to comply with our
instructions as to ADRs in respect of any such enforcement or limitation and
holders and beneficial owners must comply with all such disclosure requirements
and ownership limitations and must cooperate with the depositary's compliance
with our instructions. See also "Summary of Additional Material Provisions of
the Articles of Association and Other Matters-- Obligations to Disclose
Holdings".
Upon request by us or any Dutch governmental authority, the depositary will
as promptly as practicable furnish to us a list, as of a recent date, of the
names, addresses and holdings of ADSs by all persons in whose names ADSs are
registered on the books of the depositary.
Inspection of Transfer Books
The depositary will keep books at its principal office for the registration
and transfer of ADRs, which at all reasonable times will be open for inspection
by holders and us, provided that such inspection will not to the depositary's
knowledge be for the purpose of communicating with holders in the interest of a
business or object other than our business or a matter related to the deposit
agreement or the ADSs.
Amendment of the Deposit Agreement
We may agree with the depositary to amend the deposit agreement and the
form of ADR without your consent for any reason and at any time in a way that
we deem necessary and desirable. Any amendment or supplement that imposes or
increases any fees or charges (other than charges in connection with foreign
exchange control regulations, and taxes and other governmental charges,
delivery and related expenses), or that otherwise materially prejudices any
substantial existing right of holders or beneficial owners, will not, however,
become effective as to outstanding ADRs until the expiration of 30 days after
the depositary gives notice of the amendment or supplement to the holders of
outstanding ADRs. An amendment or supplement will be deemed not to materially
prejudice any substantial rights of holders or beneficial owners if it:
. is reasonably necessary in order for the ADSs to be registered under the
Securities Act or for ADSs or ordinary shares to be traded solely in
electronic book-entry form and
. does not impose or increase any fees or charges to be borne by holders.
Every holder and beneficial owner at the time any amendment or supplement
so becomes effective will be deemed, by continuing to hold such ADS or ADSs, to
consent and agree to such amendment or supplement and to be bound by the
deposit agreement as amended and supplemented thereby. In no event will any
amendment or supplement impair the right of the holder to surrender such ADR
and receive the deposited securities represented thereby, except in order to
comply with mandatory provisions of applicable law.
Notwithstanding the foregoing, if any governmental body should adopt new
laws, rules or regulations which would require amendment or supplement of the
deposit agreement to ensure compliance therewith, we and the depositary may
amend or supplement the deposit agreement and the ADR at any time in accordance
with such changed laws, rules or regulations. Such
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amendment or supplement to the deposit agreement in such circumstances may
become effective before a notice of such amendment or supplement is given to
holders or within any other period of time as required for compliance with
such laws, rules or regulations.
Termination of the Deposit Agreement
The depositary must terminate the deposit agreement at any time at our
written request, by mailing notice of such termination to the holders of all
ADRs then outstanding at least 30 days prior to the date fixed in such notice
for such termination. If 60 days have expired after (1) the depositary has
delivered to us a written notice of its election to resign, or (2) we have
delivered to the depositary a written notice of the removal of the depositary,
and in either case a successor depositary has not been appointed and accepted
its appointment as provided under the deposit agreement, the depositary may
terminate the deposit agreement by mailing notice of such termination to the
holders of all ADRs then outstanding at least 30 days prior to the date fixed
for such termination.
On and after the date the deposit agreement terminates and upon surrender
of an ADR at the principal office of the depositary, upon the payment of the
charges of the depositary for the surrender of ADRs, subject to the conditions
and restrictions of the depositary agreement, and upon payment of any
applicable taxes or governmental charges, you will be entitled to delivery, to
you or a person you designated, of the amount of deposited securities
represented by such ADR. If any ADRs remain outstanding after the date the
deposit agreement terminates, the registrar thereafter will discontinue the
registration of transfers of ADRs, and the depositary will suspend the
distribution of dividends to the holders thereof, and will not give any
further notices or perform any further acts under the deposit agreement,
except that the depositary will:
. continue to collect dividends and other distributions pertaining to
deposited securities,
. sell rights as provided in the deposit agreement, and
. continue to deliver deposited securities,
subject to the conditions and restrictions set forth in the deposit
agreement, together with any dividends or other distributions received with
respect thereto and the net proceeds of the sale of any rights or other
property, in exchange for ADRs surrendered to the depositary (net of
applicable fees, charges and the depositary's expenses and taxes).
At any time after the expiration of six months from the date the deposit
agreement terminates, the depositary may sell the deposited securities and
hold uninvested the net proceeds, together with any other cash then held by it
without liability for interest for the pro rata benefit of the holders of ADRs
not previously surrendered. Thereafter, the depositary will be discharged from
all obligations under the deposit agreement with respect to the ADRs and the
ordinary shares, deposited securities and ADSs, except to account for such net
proceeds and other cash (net of applicable fees, charges of and expenses
incurred by, the depositary and taxes). Upon the termination of the deposit
agreement, we will be discharged from all obligations under the deposit
agreement as to the ADRs and the ordinary shares, deposited securities and
ADSs except for certain specified obligations to the depositary under the
terms of the deposit agreement.
Charges of Depositary
The depositary will charge the holders fees for receiving deposits and
issuing ADRs, for delivering deposited securities against surrender of ADRs,
for transfering of ADRs, for splits and combining ADRs, for selling or
exercising rights or for other services performed upon the terms set forth in
the deposit agreement. The depositary and we reserve the right to modify,
reduce or increase any fees or charges for services performed.
The depositary will charge any party to whom ADRs are issued (including,
without limitation, deposit or issuance pursuant to a stock dividend or stock
split declared by us or an exchange of shares for the ordinary shares or
deposited securities, or a distribution of ADRs pursuant to a change in
deposited securities as contemplated in the deposit agreement), or who
surrenders ADRs the following fees:
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ADR holders must pay: For:
$5.00 (or less) per 100 ADRs
. Each issuance of an ADR
. Each cancellation of an ADR, including if the
agreement terminates
. Any cash distribution (excluding cash and
share dividends to registered holders but
including the sale of rights and other
distributions)
$2.00 (or less) per 100 ADRs
. Any distribution of ADSs pursuant to other
free share distributions or the exercise of
rights
$5.00 (or less) per 100 ADRs
The depositary will provide you, without charge, a copy of its latest fee
schedule upon request. In addition, holders, beneficial owners and persons
depositing shares will be requested to pay taxes and other governmental
charges, registration fees, cable, telex and facsimile transmission and
delivery expenses, and customary and other expenses incurred by the depositary
in connection with its obligations and duties under the deposit agreement.
Holders, beneficial owners, persons depositing ordinary shares and persons
surrendering ADRs in order to withdraw deposited securities will pay:
. taxes (including applicable interest and penalties) and other
governmental charges,
. any registration fees as may from time to time be in effect for the
registration of ordinary shares or other deposited securities on our share
register and applicable to the transfer of ordinary shares, and
. such air courier, cable, telex and facsimile transmission, delivery
expenses and such expenses as are incurred by the depositary in the
conversion of foreign currency into dollars, as provided in the deposit
agreement.
Liability for Taxes
Holders will pay to the depositary any Dutch or other tax, assessment or
other governmental charge or expense payable by the depositary or the custodian
or either of their respective nominees as the holder of any deposited
securities represented by ADSs evidenced by an ADR. The custodian may refuse
the deposit of ordinary shares and the depositary may refuse to issue ADSs, to
deliver ADRs, register the transfer, split-up or combination of ADRs and
(subject to the terms of the deposit agreement) the withdrawal of deposited
securities until the depositary receives full payment of such tax, charge,
penalty or interest. Every holder and beneficial owner agrees to indemnify the
depositary, us, the custodian, and any of their agents, officers, employees and
affiliates for, and to hold each of them harmless from, any claims with respect
to taxes (including applicable interest and penalties thereon) arising from any
tax benefit obtained for such holder and/or beneficial owner.
Execution, Transfer and Surrender of ADSs; Certain Limitations
Subject to the terms and conditions of the deposit agreement, transfers of
ADSs shall be registered on the books of the depositary upon surrender to the
depositary of the ADR(s) evidencing such ADSs, properly endorsed or accompanied
by proper instrument of transfer (including signature guarantees in accordance
with standard industry practice) and duly stamped as may be required.
Prior to the execution and delivery, registration, registration of
transfer, split-up, combination or surrender of any ADR or the delivery of any
distribution thereon or withdrawal of any deposited securities, the depositary
or the custodian may require:
. payment from the depositor of ordinary shares or the presenter of the ADR
of an amount sufficient to reimburse it for any tax or other governmental
charge and any stock transfer or registration fee with respect thereto
(including any such tax or charge and fee with respect to ordinary shares
being deposited or withdrawn) and any applicable fees and charges of the
depositary,
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. the production of proof satisfactory to it as to the identity and
genuineness of any signature appearing on any form, certification or other
document delivered to the depositary in connection with the deposit
agreement, and
. compliance with any laws or governmental regulations relating to the
execution and delivery of ADRs or ADSs or to the withdrawal of the
deposited securities and such other regulations as the depositary and we
may establish consistent with the provisions of the deposit agreement and
applicable law.
The delivery of ADRs against deposits of ordinary shares generally or against
deposits of particular ordinary shares may be suspended, or the delivery of
ADRs against the deposit of particular ordinary shares may be withheld, or the
registration of transfer of ADRs in particular instances may be refused, or the
registration of transfers of ADRs generally may be suspended, during any period
when the transfer books of the depositary, a share registrar or NECIGEF are
closed or if any such action is deemed necessary or advisable by the depositary
or us, in good faith, at any time or from time to time because of any
requirement of law, any government or governmental body or commission or any
securities exchange on which the ADRs or ordinary shares are listed, or under
any provision of the deposit agreement or provisions of or governing the
deposited securities, or any meeting of our shareholders or for any other
reason, subject, in all cases, to the U.S. securities laws.
The surrender of outstanding ADSs and withdrawal of deposited securities
may not be suspended or refused, except as permitted by law and regulations in
connection with
. temporary delays caused by closing transfer books of the depositary, a
share registrar or NECIGEF or the deposit of ordinary shares in connection
with voting at the shareholders; meeting, or the payment of dividends,
. the payment of fees, taxes and similar charges, and
. compliance with any U.S. or foreign laws or governmental regulations
relating to the ADRs or to the withdrawal of the deposited securities.
Limitation on Liability
Neither we, the depositary, nor any of our or their directors, officers,
agents or affiliates will be liable to any holder or beneficial owner or other
person if prevented from or delayed or subject to civil penalty in performing
their obligations under the deposit agreement by the laws of any country, by
any governmental authority or by any circumstances beyond their control or, in
the case of the depositary, by any provision of our articles of association or
of the deposited securities. Neither we nor the depositary nor any of our or
their respective directors, employees, agents or affiliates will be liable to
any holder or beneficial owner or other person by reason of any exercise of, or
failure to exercise, any discretion provided for under the deposit agreement.
Neither we nor the depositary will be liable if any holders of deposited
securities benefit from any distribution, offering, right or other benefit
which is not, under the terms of the deposit agreement, made available to any
or all holder(s) or beneficial owners of ADSs issued thereunder. Our obligation
and the obligations of the depositary under the deposit agreement are expressly
limited to performing their respective duties specified therein in good faith
and without negligence. We and the depositary have each agreed to indemnify the
other in certain circumstances arising out of acts performed or omitted in
connection with the deposit agreement as well as arising out of the offer or
sale of the ADSs, ADRs or ordinary shares and any offering document relating
thereto.
Governing Law
The deposit agreement and the ADSs will be governed by, and construed in
accordance with, the laws of the State of New York without reference to the
principles of choice of law thereof.
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TAXATION
The following discussion is the opinion of Holme Roberts & Owen LLP on the
material U.S. federal income tax consequences and of Arthur Andersen on the
material Dutch tax consequences, under current law, regarding the acquisition,
ownership and disposition of the ordinary shares or ADSs. This opinion does
not, however, address the income taxes imposed by any political subdivision of
the United States or The Netherlands or any tax imposed by any other
jurisdiction. This opinion does not discuss every aspect of taxation that may
be relevant to a particular taxpayer under special circumstances or who is
subject to special treatment under applicable law and is not intended to be
applicable in all respects to all categories of investors. For example, certain
types of investors, such as:
. insurance companies,
. tax-exempt persons,
. financial institutions,
. regulated investment companies,
. dealers in securities,
. persons who hold ordinary shares or ADSs as part of a hedging, straddle,
constructive sale or conversion transaction,
. persons whose functional currency is not the U.S. dollar, and
. U.S. persons owning (directly, indirectly, or constructively), 10% or
more of the ordinary shares or ADSs,
may be subject to different tax rules not discussed below. This opinion assumes
that the deposit agreement and any related agreement will be performed in
accordance with its terms and that we are organized and our business conducted
in the manner outlined in this prospectus. Changes in our organizational
structure or the manner in which we conduct our business may invalidate this
opinion. The laws upon which this opinion is based are subject to change,
perhaps with retroactive effect. A change to such laws may invalidate this
opinion which will not be updated to reflect changes in laws. PROSPECTIVE
INVESTORS SHOULD CONSULT THEIR TAX ADVISORS REGARDING THEIR PARTICULAR PERSONAL
TAX CONSEQUENCES OF ACQUIRING, OWNING AND DISPOSING OF THE ORDINARY SHARES OR
THE ADSs.
In general, for U.S. federal income tax and Dutch tax purposes, holders of
ADSs will be treated as owners of the ordinary shares represented by such ADSs.
Dutch Taxes
The following is the opinion of Arthur Andersen regarding the material
Dutch tax consequences of investing in the ordinary shares and ADSs. This
opinion 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.
Substantial Interest
A shareholder that owns, either via shares or options, directly or
indirectly, five percent or more of any class of, or five percent or more of
the total issued share capital of a company resident in The Netherlands (a
"Substantial Interest") is subject to special rules. With respect to
individuals, certain attribution rules exist in determining the presence of a
Substantial Interest. Unless indicated otherwise, the term "shareholder", as
used herein, includes an individual and entities as defined under Dutch tax law
holding ordinary shares or ADSs, but does not include any such person owning a
Substantial Interest in us.
Dutch Tax Consequences for Residents or Deemed Residents of the Netherlands
Dutch Dividend Withholding Tax
Dividends we distribute are subject to withholding tax at a rate of 25%,
unless:
(1) the participation exemption applies and the ordinary shares or ADSs are
attributable to the business carried out in The Netherlands,
(2) or dividends are distributed to a qualifying EU corporate shareholder
satisfying the conditions of the EU directive, or
(3) the rate is reduced by treaty.
Dividends may include:
. distributions of cash,
. distributions of property in kind,
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. constructive dividends,
. hidden dividends,
. liquidation proceeds in excess of recognized paid-in capital,
. proceeds from the redemption of shares in excess of recognized paid-in
capital,
. stock dividends equal to their nominal value (unless distributed out of
our recognized paid-in share premium), and
. and the repayment of paid-in capital not recognized as capital.
The term recognized paid-in capital or share premium relates to our paid-in
capital or share premium as recognized for Dutch tax purposes.
Generally, a shareholder that resides, or is deemed to reside, in The
Netherlands will be allowed a credit against Dutch income tax or corporation
tax for the tax withheld on dividends paid on ordinary shares or ADSs. A legal
entity resident in The Netherlands that is not subject to Dutch corporate
income tax, may, under certain conditions, request a refund of the tax
withheld.
Dividends we pay to a corporate shareholder that qualifies for the
"participation exemption" (as defined in Article 13 of The Netherlands
Corporation Tax Act 1969 (the "Corporation Tax Act")) will not be subject to
the dividend withholding tax if the ordinary shares or ADSs are attributable to
the shareholder's business carried out in The Netherlands. A resident corporate
shareholder will qualify for the participation exemption if, among other
things, the resident shareholder owns at least five percent of our nominal
paid-up capital.
Dutch Individual Income Tax and Corporation Income Tax
If the ordinary shares or ADSs are held by an individual who resides, or is
deemed to reside, in The Netherlands, income derived from the ordinary shares
or ADSs is subject to Dutch income tax on a net income basis at graduated
rates. An individual generally is entitled to a dividend exemption of NLG1,000
a year (NLG2,000 a year for married couples). Ordinary shares or ADSs
distributed to individual shareholders from our share premium account (as
recognized for Dutch tax purposes) are also exempt from Dutch income tax. The
dividend exemption is not available to an individual shareholder if the
ordinary shares or ADSs are;
(1) attributable to a trade or business carried on by the shareholder, or
(2) form part of a Substantial Interest.
Dividends accruing to individual shareholders that hold a Substantial Interest
are subject to income tax at a rate of 25% on a net basis.
Dividends received from ordinary shares or ADSs by an entity that resides,
or is deemed to reside, in The Netherlands will be subject to Dutch corporation
tax on a net basis unless the company's shareholding qualifies for the
participation exemption. Dividends received from ordinary shares or ADSs by a
pension fund as defined in the Corporation Tax Act are not subject to Dutch
corporation tax.
Capital Gains Realized From the Sale or Exchange of Ordinary Shares or ADSs
Capital gains derived from the sale, conversion or disposition of ordinary
shares or ADSs by an individual shareholder who resides, or is deemed to
reside, in The Netherlands are not subject to Dutch income tax provided:
(1) the ordinary shares or ADSs were not acquired directly or indirectly by
us or our subsidiaries,
(2) the shareholder did not have a Substantial Interest in our share
capital at the time of the sale or exchange, and
(3) the ordinary shares or ADSs were not assets of a business.
Capital gains realized by an individual shareholder that is a resident or a
deemed resident of The Netherlands on the disposal of ordinary shares or ADSs
forming part of a Substantial Interest are subject to tax at a rate of 25%.
Capital gains realized by an individual resident shareholder from the sale or
exchange of ordinary shares or ADSs forming part of the assets of a
shareholder's business are subject to tax on a net income basis at the
progressive income tax rates.
If the ordinary shares or ADSs are held by an entity that is a resident or
a deemed resident of The Netherlands, capital gains realized from the
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sale or exchange of ordinary shares or ADSs are subject to corporation tax
unless the shareholding qualifies for the participation exemption. If the
ordinary shares or ADSs are held by a qualifying pension fund, gains realized
from the sale or exchange of ordinary shares or ADSs are exempt from Dutch
corporation tax.
Dutch Net Wealth Tax
An individual who resides, or is deemed to reside, in The Netherlands
generally will be subject to a net wealth tax at a rate of 0.7% on the fair
market value of the ordinary shares or ADSs, with certain exceptions.
Dutch Gift Tax and Inheritance Tax
Dutch gift tax or inheritance tax will be due with respect to a gift or
inheritance of ordinary shares or ADSs from an individual who resided, or was
deemed to have resided, in The Netherlands at the time of the gift or his or
her death. A Dutch national is deemed to have been a resident of The
Netherlands if he or she was a resident in The Netherlands at any time during
the 10 years preceding the date of the gift or the date of his or her death.
For gift tax purposes, each person (regardless of nationality) is deemed to be
a Dutch resident if he or she was a resident in The Netherlands at any time
during the 12 months preceding the date of the gift. The 10-year and 12-month
residency rules may be modified by treaty.
Liability for payment of the gift tax or inheritance tax rests with the
donee or heir, respectively. The rate at which these taxes are levied is
primarily dependent on the fair market value of the gift or inheritance and
the relationship between the donor and donee or the deceased and heir(s).
Exemptions may apply under specific circumstances.
Dutch Tax Consequences for Non-Residents of The Netherlands
Dutch Dividend Withholding Tax
Dividends we distribute are subject to withholding tax at a rate of 25%,
unless:
(1) the participation exemption applies and the ordinary shares or ADSs are
attributable to the business carried out in The Netherlands, or
(2) dividends are distributed to a qualifying EU corporate shareholder
satisfying the conditions of the EU directive, or
(3) the rate is reduced by treaty.
Dividends may include
. distributions of cash,
. distributions of property in kind,
. constructive dividends,
. hidden dividends,
. liquidation proceeds in excess of recognized paid-in capital,
. proceeds from the redemption of shares in excess of recognized paid-in
capital,
. stock dividends equal to their nominal value unless distributed out of
our recognized paid-in share premium, and
. the repayment of paid-in capital not recognized as capital.
The term recognized paid-in capital or share premium relates to our paid-in
capital or share premium as recognized for Dutch tax purposes.
A non-resident shareholder may benefit from a reduced dividend withholding
tax rate pursuant to an income tax treaty in effect between the shareholder's
country of residence and The Netherlands. Under most Dutch income tax
treaties, the withholding tax rate is reduced to 15% or less provided:
(1) the recipient shareholder does not have a permanent establishment in
The Netherlands to which the ordinary shares and ADSs are attributable,
and
(2) the recipient shareholder is the beneficial owner of the dividends.
Under the Income Tax Treaty of December 18, 1992, concluded between The
Netherlands and the United States (the "Treaty"), dividends we pay to a
resident of the United States generally will be subject to a dividend
withholding tax rate of 15%. The rate may be reduced to five percent if the
beneficial owner is a United States corporation that directly holds 10% or
more of our voting power. The Treaty exempts from withholding tax, dividends
received by exempt pension trusts and exempt organizations, under conditions
as defined in the Treaty. Except in the case of exempt organizations,
dividends paid may benefit from the
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reduced dividend withholding tax rate (or exemption from dividend withholding
tax) by filing the proper forms in advance of the dividend payment. Exempt
organizations remain subject to the statutory withholding rate of 25% and must
file a return to claim a refund of the tax withheld.
A shareholder may not claim Treaty benefits unless:
(1) it is a "resident" of the United States, as that term is defined in the
Treaty, and
(2) Article 26 (the "treaty shopping rules") does not preclude the
shareholder's ability to claim Treaty benefits.
The withholding of tax on ordinary share or ADS dividend distributions to a
non-resident corporate shareholder carrying on a business through a Dutch
permanent establishment is not required as long as:
(1) the Dutch participation exemption applies, and
(2) the ordinary shares or ADSs form a part of the permanent
establishment's business assets.
To qualify for the participation exemption, this entity should hold at least
five percent of our nominal paid-up capital and the ordinary shares or ADSs
must form a part of the permanent establishment's business assets.
Dutch Individual Income Tax and Corporation Income Tax
A non-resident shareholder will not be subject to Dutch income tax on
dividends received from us provided such shareholder does not or has not:
(1) carried on a business in The Netherlands through a permanent
establishment or a permanent representative that includes in its assets
the ordinary shares or ADSs,
(2) held a Substantial Interest in our share capital or, in the event the
non-resident shareholder, has held a Substantial Interest in us, such
interest was a business asset in the hands of the shareholder,
(3) shared directly (not through the beneficial ownership of shares or
similar securities) in the profits of an enterprise managed and
controlled in The Netherlands that owned or was deemed to have owned
the ordinary shares or ADSs, and
(4) carried out employment activities in The Netherlands or served as a
director or board member of any entity resident in The Netherlands, or
served as a civil servant of a Dutch public entity with which the
holding of the ordinary shares or ADSs was connected.
Capital Gains Realized From the Sale or Exchange of Ordinary Shares or ADSs
A non-resident shareholder will not be subject to Dutch income tax on
capital gains derived from the sale, conversion or disposition of ordinary
shares or ADSs provided the non-resident shareholder does not or has not:
(1) carried on a business in The Netherlands through a permanent
establishment or a permanent representative that included in its
assets, the ordinary shares or ADSs,
(2) held a Substantial Interest in our share capital or, in the event the
non-resident shareholder has held a Substantial Interest in us, such
interest was a business asset in the hands of the shareholder,
(3) shared directly (not through the beneficial ownership of shares or
similar securities) in the profits of an enterprise managed and
controlled in The Netherlands which owned or was deemed to have owned
ordinary shares or ADSs, and
(4) carried out employment activities in The Netherlands, or served as a
director or board member of any entity resident in The Netherlands, or
served as a civil servant of a Dutch public entity, with which the
holding of the ordinary shares or ADSs was connected.
Capital gains derived from the sale, conversion or disposition of ordinary
shares or ADSs by a non-resident corporate shareholder, carrying on a business
through a permanent
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establishment in The Netherlands, are not subject to Dutch corporation tax
provided:
(1) the Dutch participation exemption would apply, and
(2) the ordinary shares or ADSs are attributable to the business carried
out in The Netherlands.
To qualify for the participation exemption, the shareholder must hold at least
5% of our nominal paid-up capital and meet certain other requirements.
Under most Dutch tax treaties, the right to tax capital gains realized by a
non-resident shareholder from the sale or exchange of ordinary shares or ADSs
is allocated to the shareholder's country of residence.
Dutch Net Wealth Tax
A non-resident individual shareholder will not be subject to Dutch net
wealth tax in respect of the ordinary shares or ADSs provided the non-resident
shareholder does not or has not:
(1) carried on a business in The Netherlands through a permanent
establishment or a permanent representative that included in its assets
the ordinary shares or ADSs, and
(2) shared directly (not through the beneficial ownership of shares or
similar securities) in the profits of an enterprise managed and
controlled in The Netherlands, which owned or was deemed to have owned
ordinary shares or ADSs.
Dutch Gift Tax and Inheritance Tax
A gift or inheritance of ordinary shares or ADSs from a non-resident
shareholder will not be subject to Dutch gift tax or inheritance tax in the
hands of the donee or heir provided the non-resident shareholder was not:
(1) a Dutch national who has been resident in The Netherlands at any time
during the 10 years preceding the date of gift or the date of death or,
in the event he or she was resident in The Netherlands during such
period, the non-resident shareholder was not a Dutch national at the
time of gift or death,
(2) solely for the purpose of the gift tax, a resident of The Netherlands
at any time during the 12 months preceding the time of the gift,
(3) engaged in a business in The Netherlands through a permanent
establishment or a permanent representative which included in its
assets the ordinary shares or ADSs, and
(4) shared directly (not through the beneficial ownership of shares or
similar securities) in the profits of an enterprise managed and
controlled in The Netherlands which owned or is deemed to have owned
ordinary shares or ADSs.
United States Federal Income Tax
The following is the opinion of Holme Roberts & Owens LLP regarding the
material U.S. federal income tax consequences to U.S. Shareholders of an
investment in the ordinary shares or ADSs. To the extent the following
summarizes the Dutch taxation rules on the reduction of the amount of dividend
withholding tax to be paid over to the Dutch Tax Administration, it is based on
the opinion of Arthur Andersen.
For purposes of this opinion a "U.S. Shareholder" is a holder of ordinary
shares or ADSs that is an individual citizen or resident of the United States,
a corporation organized under the laws of the United States or any state of the
United States, or any other person subject to U.S. federal income tax on a net
income basis with respect to the ordinary shares or ADSs.
Taxes on Income
The gross amount of any distribution (including Dutch withholding tax
thereon) actually or constructively received by a U.S. Shareholder with respect
to ordinary shares or ADSs will be a dividend. The dividend will be included in
the gross income of the U.S. Shareholder as ordinary income to the extent of
our current and accumulated earnings and profits (as determined
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under U.S. federal income tax principles). Dividends paid on ordinary shares or
ADSs generally will constitute income from sources outside the United States
and will not be eligible for the dividends received deduction that may be
allowed to United States corporate shareholders on dividends paid out of income
from sources within the United States.
A distribution in excess of our current and accumulated earnings and
profits will be treated first as a nontaxable return of capital to the extent
of such U.S. Shareholder's adjusted tax basis in its ordinary shares or ADSs,
and any distribution in excess of such basis will constitute gain, which gain
will be capital gain if the ordinary shares or ADSs are held as capital assets.
The amount of any distribution paid in Dutch guilders will be the dollar
value of the Dutch guilders on the date of distribution, regardless of whether
the U.S. Shareholder converts the payment into dollars. Gain or loss, if any,
recognized by a U.S. Shareholder on the sale, conversion or disposition of
Dutch guilders will be ordinary income or loss. Such gain or loss will
generally be income or loss from sources within the United States for foreign
tax credit limitation purposes.
Subject to certain conditions and limitations, tax withheld in The
Netherlands in accordance with the Treaty will be treated as a foreign tax that
U.S. Shareholders may elect to deduct in computing their U.S. federal taxable
income or credit against their U.S. federal income tax liability. Amounts paid
in respect of dividends on ordinary shares or ADSs will generally be treated
for U.S. foreign tax credit purposes as "passive income" or, in the case of
certain holders, "financial services income". Additional withholding tax, if
any, in excess of the rate applicable under the Treaty generally will not be
eligible for credit against the U.S. Shareholder's U.S. federal income tax
liability.
Dutch withholding tax may not be creditable against the U.S. Shareholder's
federal income tax liability however, to the extent we are allowed to reduce
the amount of dividend withholding tax paid over to the Dutch Tax
Administration by crediting withholding tax imposed on certain dividends paid
to us. We will endeavor to provide to U.S. Shareholders the information they
will need to calculate their foreign tax credit.
Sale or Other Disposition of the Ordinary Shares or ADSs
A U.S. Shareholder will generally recognize gain or loss for U.S. federal
income tax purposes upon the sale or exchange of ordinary shares or ADSs in an
amount equal to the difference between the amount realized from such sale or
exchange and the U.S. Shareholder's tax basis for such ordinary shares or ADSs.
Such gain or loss will be a capital gain or loss if the ordinary shares or ADSs
are held as a capital asset. Any such gain or loss generally would be treated
as U.S. source.
Passive Foreign Investment Company
We have determined that we are not currently a passive foreign investment
company ("PFIC") for U.S. federal income tax purposes. This is a factual
determination that must be made annually and thus may change. If we were
determined to be a PFIC, any gain from the sale or exchange of ordinary shares
or ADSs by a U.S. Shareholder would be allocated ratably to each year in the
holder's holding period and would be treated as ordinary income. U.S. federal
income tax would be imposed on the amount allocated to each year prior to the
year of disposition at the highest rate in effect for that year. In addition,
interest would be charged at the rate applicable to underpayments on the tax
payable in respect of the amount so allocated. The same rules would apply to
"excess distributions", which are defined generally as distributions exceeding
125% of the average annual distributions made by us over the shorter of the
holder's holding period or the three preceding years. We will evaluate our PFIC
status on an annual basis and will inform U.S. Shareholders in the event that
we determine that we are a PFIC.
The tax consequences described above would not apply if the U.S.
Shareholder made a qualified electing fund ("QEF") election for the first tax
year in the U.S. Shareholder's holding period in which we were a PFIC. If a QEF
election is made, a U.S. Shareholder would include in income its pro rata share
of our ordinary income
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and net capital gain for years in which we are a PFIC (regardless of whether
amounts are distributed to an electing U.S. shareholder.) In the event that we
become a PFIC, we will provide the information necessary for our U.S.
Shareholders to make a QEF election.
A U.S. Shareholder who owns ordinary shares or ADSs during any year that we
are a PFIC must file Internal Revenue Service Form 8621.
Foreign Personal Holding Company Classification
We could be classified as a foreign personal holding company ("FPHC") if in
any taxable year:
(1) five or fewer individuals who are U.S. citizens or residents own
(directly or constructively through certain attribution rules) more
than 50% of the total voting power of all classes of our stock entitled
to vote or the total value of our stock, and
(2) at least 60% (50% in certain cases) of our gross income consists of
"foreign personal holding company income", which generally includes
passive income such as dividends, interest, gains, rent and royalties.
Classification as an FPHC would in general require each U.S. Shareholder who
held ordinary shares or ADSs on the last day of the taxable year to include in
gross income as a dividend such shareholder's pro rata portion of our
undistributed foreign personal holding company income.
After giving effect to certain ownership attribution rules, five or fewer
U.S. individuals are presently treated as owning more than 50% of the total
voting power of all classes of UPC stock. However, 60% of our gross income for
the current year does not at this time consist of passive income. Thus, we do
not expect to be a FPHC for 1998 or for the foreseeable future. This is a
factual determination that must be made annually and thus the status of whether
we are a FPHC is subject to change.
Backup Withholding
A U.S. shareholder of ordinary shares or ADSs may be subject to backup
withholding at a rate of 31% with respect to dividends on, or the proceeds of a
sale or other disposition of, such ordinary shares or ADSs unless:
(1) such U.S. Shareholder is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or
(2) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding and otherwise complies with
applicable backup withholding rules.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the ordinary
shares or the ADSs and no prediction can be made of the effect, if any, that
the sale or availability for sale of ordinary shares or ADSs will have on the
market price of the ordinary shares or the ADSs. Sales of substantial amounts
of such securities in the public market, or the perception that such sales
could occur, could adversely affect the market price of the ordinary shares
and the ADSs and could impair our future ability to raise capital through an
offering of its equity securities.
Upon consummation of this offering, we will have outstanding 123,087,469
ordinary shares and 100 priority shares. The ordinary shares and ADSs sold in
this offering will be freely tradable in the United States by persons other
than us or our "affiliates" as that term is defined in SEC Rule 144 (discussed
below). The Discount Group, our partner in our Israeli system, may exercise an
option to purchase some of our ordinary shares. See "Certain Transactions and
Relationships -- The Discount Group's Option". All of the issued and
outstanding priority shares and ordinary shares held by UIH and, if it
exercises its option, by the Discount Group, are "restricted securities"
within the meaning of Rule 144 and may be sold in the public market only if
registered or (discussed below) sold under an exemption from registration
under the Securities Act, including the exemption provided by Rule 144.
We and UIH have agreed with the underwriters that, without the prior
written consent of the underwriters, we will not (and in our case, we will not
permit any of our subsidiaries to) directly or indirectly offer, other than in
the offering, sell, contract to sell, announce our intention to sell, pledge,
grant any option to purchase or otherwise dispose of, or file a registration
statement or similar document relating to, any shares or any security
convertible into or exchangeable for shares, or in any manner transfer all or
a portion of the economic consequences associated with, or any security
convertible into or exchangeable for shares, for a period of one year from the
date of this prospectus, subject to certain exceptions. Certain of our
employees have made a similar agreement with the underwriters for a period of
180 days. Microsoft has agreed that, if it purchases any shares or ADSs in
this offering, it will agree to abide by similar resale restrictions for at
least a six-month period. See "Relationship with Microsoft" and
"Underwriting". If the Discount Group exercises its option, it has agreed to
similar restrictions, but only for 90 days.
Because we do not have a history of net profits, Amsterdam Stock Exchange
regulations prohibit members of our Supervisory Board and Board of Management
from disposing of their ordinary shares owned prior to this offering for a
period of four years from the date on which the ordinary shares begin trading
on the Amsterdam Stock Exchange. Because no members of the Supervisory Board
or Board of Management have exercised their options or otherwise own ordinary
shares, however, this provision is not applicable. In addition, under the
Amsterdam Stock Exchange Rules, UIH and any other holder of 5% or more of our
outstanding share capital collectively may not, for three years after this
offering, subject to certain exceptions, sell more than 25% of the shares
outstanding prior to this offering. This lock-up requirement applies unless we
report a profit, in which case these shareholders collectively are entitled to
dispose of a maximum of (1) 50% of the shares issued prior to this offering if
a profit was made during one year or (2) 75% of the shares issued prior to
this offering if a profit was made during two years. The Amsterdam Stock
Exchange has agreed to grant permission to these shareholders to dispose of
their remaining interest if such disposition is consummated through a public
secondary offering involving a due diligence investigation, the issuance of a
prospectus and compliance with the other listing rules of the Amsterdam Stock
Exchange occurring at least one year after this offering.
In general, under Rule 144 of the Securities Act, any of our affiliates, or
a person (or persons whose shares are aggregated) who has beneficially owned
restricted securities for at least one year (including the holding period of
any prior owner except an affiliate) is entitled to sell in any three-month
period a number of shares that does not exceed the greater of (1) 1% of the
number of shares then outstanding (approximately 1,231,000 shares immediately
after this offering); or (2) the average weekly trading volume of the ADSs on
the Nasdaq National Market during the four calendar weeks immediately
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preceding. Sales under Rule 144 are also subject to requirements relating to
manner of sale, notice and availability of current public information about us.
Under Rule 144(k), a person (or persons whose shares are aggregated) who has
not been one of our affiliates at any time during the 90 days immediately
preceding the sale and who has beneficially owned his or her shares for at
least two years is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144. In general, under Rule 701 of the Securities Act, any of our
employees, consultants or advisors who purchases shares from us pursuant to
Rule 701 in connection with a compensatory stock or option plan or other
written agreement is eligible to resell, unless contractually restricted, such
shares 90 days after the effective date of this offering in reliance on Rule
144, but without compliance with certain restrictions, including the holding
period, contained in Rule 144.
EXPERTS
Our consolidated financial statements for the six months ended December 31,
1995 and as of and for the years ended December 31, 1996 and 1997 and the nine
months ended September 30, 1998 included in this prospectus 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 Telekabel Beheer for the period
from August 22, 1995 to December 31, 1995, and as of and for the years ended
December 31, 1996 and 1997 included in this prospectus have been audited by
PricewaterhouseCoopers, independent public accountants, and are included herein
upon the authority of said firm as experts in giving said report.
LEGAL MATTERS
Certain legal matters in connection with the offering will be passed upon
for us by Holme Roberts & Owen LLP, Denver, Colorado U.S.A. The validity of the
ordinary shares offered hereby will be passed upon for us by Loeff Claeys
Verbeke, Amsterdam, The Netherlands. Certain legal matters will be passed upon
for the underwriters by Debevoise & Plimpton, U.S. counsel to the underwriters.
ENFORCEMENT OF CIVIL LIABILITIES
We are organized 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 Netherlands, the relevant claim may have to be relitigated before a
competent Dutch court. Under current Dutch law, however, a final judgment
rendered by a United States court will be given effect by a Dutch court (1) if
the final judgment results from proceedings compatible with Dutch concepts of
due process and (2) if the final judgment does not contravene public policy of
The Netherlands. If the final judgment is given effect 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.
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AVAILABLE INFORMATION
We have filed with the U.S. Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 under the Securities Act
about the securities offered hereby. This prospectus does not contain all of
the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to us and the ordinary
shares and ADSs, please refer to the registration statement, including the
exhibits and schedules thereto, which may be inspected at, and copies thereof
may be obtained at prescribed rates from, the public reference facilities of
the Commission at the addresses set forth below.
After consummation of this offering, we will be subject to the
informational reporting requirements of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and in accordance therewith, will file reports,
proxy statements and other information with the Commission. Such reports, proxy
statements and other information and the registration statement and exhibits
and schedules thereto may be inspected without charge at, and copies thereof
may be obtained at prescribed rates from, the public reference facilities of
the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C.
20549, U.S.A. and at the Commission's regional offices at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, U.S.A. and 7 World Trade Center,
Suite 1300, New York, New York 10048, U.S.A. The public may obtain information
on the operation of the Commission's public reference facilities by calling the
Commission in the United States at 1-800-SEC-0330. The Commission also
maintains a web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. When the ADSs begin trading on the Nasdaq
National Market, 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. Copies of these
documents will also be filed with the Amsterdam Stock Exchange.
We will furnish to the depositary copies of our annual reports in English,
which will include a review of our operations and annual audited consolidated
financial statements presented in conformity with U.S. GAAP. We will also
furnish the depositary with our consolidated unaudited quarterly condensed
balance sheets and statements of income in English, presented in conformity
with U.S. GAAP, as well as English language versions of all notices of
shareholders' meetings, proxy statements and other reports and communications
that we make generally available to our shareholders. The depositary will, at
our request and to the extent permitted by law, make such notices, reports and
communications available to record holders of ADRs and will mail to all record
holders of ADRs a notice containing the information (or a summary of the
information) contained in any notice of a shareholders' meeting received by the
depositary. See "Description of American Depositary Shares".
We will 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.
AMSTERDAM STOCK EXCHANGE LISTING
On February , 1999, the Board of Management after obtaining the approval
of the general meeting of shareholders and the Supervisory Board, resolved to
file an application for admission to listing of the ordinary shares on the
Official Market of the Amsterdam Stock Exchange. On February , 1999, the Board
of Management authorized thereto by the general meeting of shareholders by a
written resolution dated February , 1999 and having obtained the approval of
the Supervisory Board, resolved to issue ordinary shares to a nominal amount of
approximately ^0.30 per share and to exclude the pre-emptive rights in this
respect.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
Number
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<S> <C>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
Independent Auditors' Report......................................... F-2
Consolidated Balance Sheets as of December 31, 1996 (Pre-
Acquisition), December 31, 1997 and September 30, 1998 (Post-
Acquisition)........................................................ F-3
Consolidated Statements of Operations for the Six Months Ended
December 31, 1995, for the Years Ended December 31, 1996 and 1997
and for the Nine Months Ended September 30, 1997 (Unaudited) (Pre-
Acquisition) and September 30, 1998
(Post-Acquisition).................................................. F-4
Consolidated Statements of Shareholders' Equity for the Six Months
Ended December 31, 1995, for the Years Ended December 31, 1996 and
1997 (Pre-Acquisition) and for the Nine Months Ended September 30,
1998 (Post-Acquisition)............................................. F-5
Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 1995, for the Years Ended December 31, 1996 and 1997
and for the Nine Months Ended September 30, 1997 (Unaudited) (Pre-
Acquisition) and September 30, 1998 (Post-Acquisition).............. F-6
Notes to Consolidated Financial Statements........................... F-8
N.V. TELEKABEL BEHEER
Report of Independent Accountants.................................... F-39
Consolidated Balance Sheets as of December 31, 1996 and 1997......... F-40
Consolidated Statements of Operations from August 22, 1995 (date of
incorporation) until December 31, 1995 and for the Years Ended
December 31, 1996 and 1997.......................................... F-41
Consolidated Statements of Cash Flows from August 22, 1995 (date of
incorporation) until December 31, 1995 and for the Years Ended
December 31, 1996 and 1997.......................................... F-42
Consolidated Statement of Changes in Shareholder's Equity from August
22, 1995 (date of incorporation) until December 31, 1995 and for the
Years Ended December 31, 1996 and 1997.............................. F-43
Notes to Consolidated Financial Statements........................... F-44
Condensed Consolidated Balance Sheet as of June 30, 1998
(Unaudited)......................................................... F-54
Condensed Consolidated Statements of Operations for the Six Months
Ended June 30, 1997 and 1998 (Unaudited)............................ F-55
Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1997 and 1998 (Unaudited)............................ F-56
Notes to Condensed Consolidated Financial Statements................. F-57
</TABLE>
F-1
<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, 1996 (pre-acquisition -- see Note 1), December
31, 1997 and September 30,1998 (post-acquisition -- see Note 1), and the
related consolidated statements of operations, shareholders' equity and cash
flows for the six months ended December 31, 1995, the years ended December 31,
1996 and 1997 (pre-acquisition -- see Note 1) and September 30, 1998 (post-
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, 1996 (pre-acquisition --see Note
1), December 31, 1997 and September 30,1998 (post-acquisition -- see Note 1),
and the results of its operations and its cash flows for the six months ended
December 31, 1995, the years ended December 31, 1996 and December 31, 1997
(pre-acquisition -- see Note 1) and the nine months ended September 30, 1998
(post-acquisition -- Note 1) in conformity with accounting principles generally
accepted in the United States of America.
ARTHUR ANDERSEN
Amstelveen, The Netherlands,
January 14, 1999
F-2
<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 As of
December 31, September 30,
---------------------- -------------
1996 1997 1998
------------ --------- -------------
(Pre-
Acquisition) (Post-Acquisition)
<S> <C> <C> <C>
ASSETS:
Current assets
Cash and cash equivalents............................................................... 42,631 99,315 44,340
Restricted cash......................................................................... -- 22,220 9,265
Subscriber receivables, net of allowance for doubtful accounts of 5,835, 7,153 and
9,493, respectively.................................................................... 9,581 9,419 12,369
Costs to be reimbursed by affiliated companies, net of allowance for doubtful accounts
of 4,620, 2,210 and 668, respectively.................................................. 14,351 14,970 25,369
Other receivables....................................................................... 44,020 19,103 18,293
Inventory............................................................................... 12,057 13,040 22,140
Prepaid expenses and other current assets............................................... 2,903 6,140 13,741
--------- --------- ---------
Total current assets.................................................................. 125,543 184,207 145,517
Marketable equity securities of parent, at fair value.................................... -- 66,809 58,025
Investments in and advances to affiliated companies, accounted for under the equity
method, net............................................................................. 224,157 384,940 365,724
Property, plant and equipment, net of accumulated depreciation of 91,819, 7,312 and
64,915, respectively.................................................................... 414,669 483,693 527,069
Goodwill and other intangible assets, net of accumulated amortization of 41,763, 3,791
and 43,198, respectively................................................................ 353,657 725,513 678,741
Deferred financing costs, net of accumulated amortization of 0, 217 and 6,870,
respectively............................................................................ -- 23,943 22,142
Non-current restricted cash and other assets............................................. 1,154 50,710 52,750
--------- --------- ---------
Total assets.......................................................................... 1,119,180 1,919,815 1,849,968
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities
Accounts payable, including related party payables of 12,319, 12,233 and 10,781,
respectively........................................................................... 62,082 122,587 102,652
Accrued liabilities..................................................................... 11,473 34,726 34,250
Subscriber prepayments and deposits..................................................... 45,104 24,533 61,611
Short-term debt......................................................................... 424,449 1,696 34,020
Note payable to shareholder............................................................. 22,080 -- 156,030
Current portion of long-term debt....................................................... 3,363 255,819 113,519
--------- --------- ---------
Total current liabilities............................................................. 568,551 439,361 502,082
Long-term debt........................................................................... 19,467 1,004,018 1,039,632
Long-term notes payable to shareholder................................................... 256,335 -- --
Deferred taxes........................................................................... 5,202 44,508 7,978
Other long-term liabilities.............................................................. 6,505 13,619 44,664
--------- --------- ---------
Total liabilities..................................................................... 856,060 1,501,506 1,594,356
--------- --------- ---------
Commitments and contingencies (Notes 11 and 12)
Minority interests in subsidiaries....................................................... 4,554 6,779 34,265
--------- --------- ---------
Shareholders' equity (As adjusted for the 3:2 stock split. Note 10)
Common stock, 0.667 par value, 200,000,000 shares authorized, 81,000,000 shares issued.. 54,000 54,000 54,000
Additional paid-in capital.............................................................. 315,570 621,164 631,323
Deferred compensation................................................................... -- -- (5,826)
Treasury stock, at cost, 9,198,135 shares of common stock............................... -- (122,662) (122,662)
Accumulated deficit..................................................................... (117,365) (146,237) (318,089)
Other cumulative comprehensive income (loss)............................................ 6,361 5,265 (17,399)
--------- --------- ---------
Total shareholders' equity............................................................ 258,566 411,530 221,347
--------- --------- ---------
Total liabilities and shareholders' equity............................................ 1,119,180 1,919,815 1,849,968
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<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 Six
Months Ended For the Years Ended For the Nine Months Ended
December 31, December 31, September 30,
------------ ------------------------- -------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(Pre- (Pre- (Pre- (Pre- (Post-
Acquisition) Acquisition) Acquisition) Acquisition) Acquisition)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Service and other
revenue................ 100,179 245,179 337,155 250,061 305,237
Operating expense....... (32,806) (80,479) (111,919) (87,206) (97,472)
Selling, general and
administrative
expense................ (33,617) (78,823) (114,024) (80,061) (132,466)
Depreciation and
amortization........... (36,224) (84,332) (139,216) (99,903) (137,231)
---------- ---------- ---------- ---------- ----------
Net operating (loss)
income................ (2,468) 1,545 (28,004) (17,109) (61,932)
Interest income......... 6,403 2,757 6,512 1,561 4,621
Interest expense........ (8,945) (14,263) (43,801) (22,954) (67,410)
Interest expense,
related party.......... (10,928) (24,212) (28,743) (22,568) (7,148)
Provision for loss on
investment related
costs.................. -- -- (18,888) (10,000) --
Foreign exchange loss
and other expense...... (3,376) (21,135) (41,160) (42,177) 6,609
---------- ---------- ---------- ---------- ----------
Net loss before income
taxes and other
items................. (19,314) (55,308) (154,084) (113,247) (125,260)
Share in results of
affiliated companies,
net.................... (22,179) (17,811) (10,637) (15,807) (42,167)
Minority interests in
subsidiaries........... (191) (2,208) (2,894) (1,339) (4,838)
Income tax benefit
(expense).............. 155 (509) 1,649 409 413
---------- ---------- ---------- ---------- ----------
Net loss............... (41,529) (75,836) (165,966) (129,984) (171,852)
========== ========== ========== ========== ==========
Basic and diluted net
loss per ordinary
share(1)............... (0.51) (0.94) (2.06) (1.60) (2.39)
========== ========== ========== ========== ==========
Weighted-average number
of ordinary shares
outstanding(1)......... 81,000,000 81,000,000 80,488,992 81,000,000 71,801,865
========== ========== ========== ========== ==========
</TABLE>
- --------
(1)As adjusted for the 3:2 stock split (Note 10).
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(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
Ordinary Stock Additional Treasury Stock Cumulative Total
----------------- Paid-In Deferred --------------------- Accumulated Comprehensive Comprehensive
Shares Amount Capital Compensation Shares Amount Deficit Income (Loss)(1) Income (Loss)
---------- ------ ---------- ------------ ----------- -------- ----------- ---------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances upon
contribution of
properties to
joint venture,
July 1, 1995... 81,000,000 54,000 315,570 -- -- -- -- -- --
Cumulative
translation
adjustments.... -- -- -- -- -- -- -- 1,495 1,495
Net loss........ -- -- -- -- -- -- (41,529) (41,529)
--------
Total
comprehensive
income (loss).. -- -- -- -- -- -- -- -- (40,034)
---------- ------ -------- ------- ----------- -------- -------- ------- ========
Balances,
December 31,
1995........... 81,000,000 54,000 315,570 -- -- -- (41,529) 1,495
Change in
cumulative
translation
adjustments.... -- -- -- -- -- -- -- 4,866 4,866
Net loss........ -- -- -- -- -- -- (75,836) (75,836)
--------
Total
comprehensive
income (loss).. -- -- -- -- -- -- -- -- (70,970)
---------- ------ -------- ------- ----------- -------- -------- ------- ========
Balances,
December 31,
1996........... 81,000,000 54,000 315,570 -- -- -- (117,365) 6,361
Change in
cumulative
translation
adjustments.... -- -- -- -- -- -- -- (1,096) (1,096)
Net loss for the
period from
January 1, 1997
to December 10,
1997........... -- -- -- -- -- -- (156,822) -- (156,822)
--------
Total
comprehensive
income (loss).. -- -- -- -- -- -- -- -- (157,918)
---------- ------ -------- ------- ----------- -------- -------- ------- ========
Balances,
December 10,
1997
(Pre-
Acquisition)... 81,000,000 54,000 315,570 -- -- -- (274,187) 5,265
Buyout of
shareholder's
interest....... -- -- -- -- (24,378,396) (292,561) -- -- --
Reissuance of
shares upon
conversion of
PIK Notes...... -- -- -- -- 15,180,261 169,899 -- -- --
Application of
push-down
accounting and
step-up in
basis.......... -- -- 442,688 -- -- -- -- -- --
Elimination of
historical
accumulated
deficit of UPC
attributable to
Philips........ -- -- (137,094) -- -- -- 137,094 -- --
Net loss for the
period from
December 11,
1997 to
December 31,
1997........... -- -- -- -- -- -- (9,144) -- (9,144)
--------
Total
comprehensive
income (loss).. -- -- -- -- -- -- -- -- (167,062)
---------- ------ -------- ------- ----------- -------- -------- ------- ========
Balances,
December 31,
1997
(Post-
Acquisition)... 81,000,000 54,000 621,164 -- (9,198,135) (122,662) (146,237) 5,265
Deferred
compensation
related to
stock options.. -- -- 10,159 (10,159) -- -- -- -- --
Amortization of
deferred
compensation... -- -- -- 4,333 -- -- -- -- --
Unrealized loss
on investment.. -- -- -- -- -- -- -- (8,784) (8,784)
Change in
cumulative
translation
adjustments.... -- -- -- -- -- -- -- (13,880) (13,880)
Net loss........ -- -- -- -- -- -- (171,852) -- (171,852)
--------
Total
comprehensive
income (loss).. -- -- -- -- -- -- -- -- (194,516)
---------- ------ -------- ------- ----------- -------- -------- ------- ========
Balances,
September 30,
1998 (Post-
Acquisition)... 81,000,000 54,000 631,323 (5,826) (9,198,135) (122,662) (318,089) (17,399)
========== ====== ======== ======= =========== ======== ======== =======
<CAPTION>
Total
---------
<S> <C>
Balances upon
contribution of
properties to
joint venture,
July 1, 1995... 369,570
Cumulative
translation
adjustments.... 1,495
Net loss........ (41,529)
Total
comprehensive
income (loss).. --
---------
Balances,
December 31,
1995........... 329,536
Change in
cumulative
translation
adjustments.... 4,866
Net loss........ (75,836)
Total
comprehensive
income (loss).. --
---------
Balances,
December 31,
1996........... 258,566
Change in
cumulative
translation
adjustments.... (1,096)
Net loss for the
period from
January 1, 1997
to December 10,
1997........... (156,822)
Total
comprehensive
income (loss).. --
---------
Balances,
December 10,
1997
(Pre-
Acquisition)... 100,648
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.......... 442,688
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).. --
---------
Balances,
December 31,
1997
(Post-
Acquisition)... 411,530
Deferred
compensation
related to
stock options.. --
Amortization of
deferred
compensation... 4,333
Unrealized loss
on investment.. (8,784)
Change in
cumulative
translation
adjustments.... (13,880)
Net loss........ (171,852)
Total
comprehensive
income (loss).. --
---------
Balances,
September 30,
1998 (Post-
Acquisition)... 221,347
=========
</TABLE>
- -------
(1) As of December 31, 1995, 1996 and 1997 Other Cumulative Comprehensive
Income (Loss) represents foreign currency translation adjustments. As of
September 30, 1998 the components of Other Cumulative Comprehensive Income
(Loss) include (8,615) and (8,784) for foreign currency translation
adjustments and unrealized loss on investment, respectively.
(2) As adjusted for the 3:2 stock split (Note 10).
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<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 Six
Months Ended For the Years Ended For the Nine Months Ended
December 31, December 31, September 30,
------------ ------------------------- -------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(Pre- (Pre- (Pre- (Pre- (Post-
Acquisition) Acquisition) Acquisition) Acquisition) Acquisition)
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss................ (41,529) (75,836) (165,966) (129,984) (171,852)
Adjustments to reconcile
net loss to net cash
flows from operating
activities:
Depreciation and
amortization.......... 36,224 84,332 139,216 99,903 137,231
Amortization of
deferred financing
costs................. -- -- 642 -- 6,653
Share in results of
affiliated companies,
net................... 22,179 17,811 10,637 15,807 42,167
Compensation expense
related to stock
options............... -- -- 4,818 -- 32,493
Minority interests in
subsidiaries.......... 191 2,208 2,894 1,339 4,838
Exchange rate
differences in related
party convertible
loans................. 3,474 20,544 43,441 39,301 (12,615)
Provision for loss on
investment related
costs................. -- -- 18,888 10,000 --
Other.................. 1,444 1,173 978 2,452 3,083
Changes in assets and
liabilities:
(Increase) decrease in
receivables........... (50,955) (32,575) 21,504 (131) (20,700)
Increase in
inventories........... (6,956) (2,091) (2,737) (4,721) (4,160)
Increase in other non-
current assets........ (789) (309) (2,544) (63) (2,038)
Increase in other
current liabilities... 76,740 22,353 61,373 31,717 42,729
(Decrease) increase in
deferred taxes and
other long-term
liabilities........... (1,530) 3,932 (560) 10,274 (5,758)
-------- -------- --------- -------- --------
Net cash flows from
operating activities... 38,493 41,542 132,584 75,894 52,071
-------- -------- --------- -------- --------
Cash flows from
investing activities:
Restricted cash
(deposited) released... -- -- (22,220) -- 12,955
Purchase of parent
company's stock........ -- -- (66,809) --
(Investments in and
advances to) repayment
from affiliated
companies, net......... (339,737) 146,726 (3,869) (3,354) (13,766)
Capital expenditures.... (132,230) (106,647) (145,630) (92,664) (170,170)
New acquisitions, net of
cash acquired.......... (28,139) (46,473) (127,882) (125,368) (210,272)
Deposit to acquire
minority interest in
subsidiary............. -- -- (47,000) (47,000) --
Sale of affiliated
companies.............. -- -- 11,070 21,449 --
-------- -------- --------- -------- --------
Net cash flows from
investing activities... (500,106) (6,394) (402,340) (246,937) (381,253)
-------- -------- --------- -------- --------
Cash flows from
financing activities:
Proceeds from short-term
borrowings............. 465,699 302,959 260,560 241,604 --
Proceeds from long-term
borrowings............. -- 23,113 1,141,539 128,932 337,969
Deferred financing
costs.................. -- -- (24,585) (4,138) (8,016)
Repayments of long and
short-term borrowings.. -- (440,440) (587,929) (169,480) (215,447)
Borrowings on note
payable to
shareholder............ -- -- -- -- 161,925
Dividends paid to
minority shareholders.. (191) (2,388) (171) (5) (521)
Redemption of
convertible loans...... -- -- (170,371) -- --
Purchase shares from
shareholder............ -- -- (292,561) -- --
-------- -------- --------- -------- --------
Net cash flows from
financing activities... 465,508 (116,756) 326,482 196,913 275,910
-------- -------- --------- -------- --------
Effect of exchange rates
on cash................ 1,950 344 (42) 334 (1,703)
-------- -------- --------- -------- --------
Net increase (decrease)
in cash and cash
equivalents............ 5,845 (81,264) 56,684 26,204 (54,975)
Cash and cash
equivalents at
beginning of period.... -- 123,895 42,631 42,631 99,315
Cash contributed upon
formation.............. 118,050 -- -- -- --
-------- -------- --------- -------- --------
Cash and cash
equivalents at end of
period................. 123,895 42,631 99,315 68,835 44,340
======== ======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<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 Six
Months Ended For the Years Ended For the Nine Months Ended
December 31, December 31, September 30,
------------ ------------------------- -------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ------------ ------------
(Pre- (Pre- (Pre- (Pre- (Post-
Acquisition) Acquisition) Acquisition) Acquisition) Acquisition)
(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
====== ======= ======== ======= ========
Purchase money notes
payable to sellers.... -- -- -- -- 36,720
====== ======= ======== ======= ========
Unrealized loss on
investment............ -- -- -- -- (8,784)
====== ======= ======== ======= ========
Supplemental cash flow
disclosures:
Cash paid for
interest.............. (8,945) (32,674) (80,810) (17,619) (60,766)
====== ======= ======== ======= ========
Cash received for
interest.............. 6,403 2,757 5,077 1,561 3,539
====== ======= ======== ======= ========
Acquisition of Dutch
cable assets:
Property, plant and
equipment and other
assets................ -- -- -- -- (106,000)
Goodwill............... -- -- -- -- (74,762)
------ ------- -------- ------- --------
Total cash paid........ -- -- -- -- (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) (105,785) -- --
Other assets........... -- -- (57) -- --
Short-term debt........ -- 140,619 2,854 -- --
Other liabilities...... -- 10,271 1,557 -- --
------ ------- -------- ------- --------
Total consideration.... -- (8,811) (121,182) -- --
Less obligation to
seller................ -- -- 36,112 -- --
------ ------- -------- ------- --------
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 .............. -- -- 294,675 -- --
------ ------- -------- ------- --------
Total allocation of
purchase accounting
adjustments........... -- -- 442,688 -- --
====== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1995 (Pre-Acquisition),
AS OF AND FOR THE YEAR ENDED DECEMBER 31 1996 (Pre-Acquisition),
AS OF DECEMBER 31, 1997 (Post-Acquisition),
FOR THE YEAR ENDED DECEMBER 31, 1997 (Pre-Acquisition),
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (Unaudited) (Pre-Acquisition),
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (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, United International Holdings, Inc.
("UIH"), 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).
UIH contributed its interests in multi-channel television systems in Israel,
Ireland, the Czech Republic, Malta, Norway, Hungary, Sweden and Spain. UIH 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, UIH and
Philips each owned a 50% economic and voting interest in UPC.
On December 11, 1997, UIH acquired Philips' 50% interest in UPC (the "UPC
Acquisition"), thereby making it an effectively wholly-owned subsidiary of UIH
(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 UIH held by Philips (66,800), (ii) UIH 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) UIH purchased 13,121,604
shares of UPC directly from Philips, and (v) UPC repurchased Philips' remaining
equity interest in UPC (24,378,396 shares) (450,000). The UPC Acquisition was
financed with proceeds from a long-term revolving credit facility through UPC
with a syndicate of banks (305,200) (the "Tranche A Facility"), a bridge bank
facility through a subsidiary of UPC $111,200 (224,000) (the "Tranche B
Facility") and a cash investment by UIH of 327,400. Approximately 479,000 drawn
on the Tranche A Facility was used to repay existing debt of UPC in conjunction
with the UPC Acquisition.
UIH'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 UIH, 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 UIH.
As of December 11, 1997, the proportional net assets of UPC acquired by UIH
were recorded at fair market value based
F-8
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
on the purchase price paid by UIH, along with additional basis differences at
the UIH 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 UIH'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>
Cash paid to Philips for their 50% interest in UPC (37,500,000
shares acquired NLG12 per share).................................. 450,000
Philips' proportionate share of UPC's net assets................... (50,324)
-------
Basis adjustment related to buyout of Philips' proportionate
interest in UPC................................................... 399,676
UIH's existing basis difference related to their original interest
in UPC dating back to the July 1995 formation of UPC (as adjusted
through December 11, 1997)........................................ 43,012
-------
Total purchase accounting adjustment............................... 442,688
=======
The total purchase accounting adjustments were allocated to UPC's
underlying assets as follows:
Property, plant and equipment...................................... 18,271
Investment in and advances to affiliates........................... 129,742
Goodwill........................................................... 294,675
-------
Total............................................................ 442,688
=======
</TABLE>
As a result of the UPC Acquisition and the associated push-down of UIH
basis on December 11, 1997, the consolidated balance sheets as of December 31,
1997 and September 30, 1998 as well as the consolidated statements of
operations and cash flows subsequent to December 31, 1997 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 1,640 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-9
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following pro forma consolidated operating results for the years ended
December 31, 1996 and 1997 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. 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 (1) Historical Pro Forma (1)
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
Service and other revenue.. 245,179 245,179 337,155 337,155
Operating expense.......... (80,479) (80,479) (111,919) (111,919)
Selling, general and
administrative expense.... (78,823) (78,823) (114,024) (114,024)
Depreciation and
amortization.............. (84,332) (105,195) (139,216) (158,920)
---------- ---------- ---------- ----------
Net operating income
(loss)................... 1,545 (19,318) (28,004) (47,708)
Interest income............ 2,757 2,757 6,512 6,512
Interest expense........... (14,263) (55,465) (43,801) (85,027)
Interest expense, related
party .................... (24,212) -- (28,743) --
Provision for loss on
investment related costs.. -- -- (18,888) (18,888)
Foreign exchange loss and
other expense............. (21,135) (16,841) (41,160) (32,719)
---------- ---------- ---------- ----------
Net loss before income
taxes and other items.... (55,308) (88,867) (154,084) (177,830)
Share in results of
affiliated companies,
net....................... (17,811) (26,460) (10,637) (18,806)
Minority interests in
subsidiaries.............. (2,208) (2,208) (2,894) (2,894)
Income tax benefit
(expense)................. (509) (509) 1,649 1,649
---------- ---------- ---------- ----------
Net loss.................. (75,836) (118,044) (165,966) (197,881)
========== ========== ========== ==========
Basic and diluted net loss
per ordinary share........ (0.94) (1.64) (2.06) (2.76)
========== ========== ========== ==========
Weighted-average number of
ordinary shares
outstanding............... 81,000,000 71,801,865 80,488,992 71,801,865
========== ========== ========== ==========
</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 Tranche A Facility
and Tranche B 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 Tranche B Facility, net of elimination
of historical foreign exchange loss on the PIK Notes.
F-10
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following chart presents a summary of the Company's significant
investments in multi-channel television, programming and telephony operations
as of September 30, 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").............................. 99.6%
Hungary:
Telekabel Hungary ("Telekabel Hungary")............................... 79.3%
Telekabel Hungary Programming ........................................ 50.0%
Ireland: (through United International Investments ("UII") (1))
Princes Holdings Ltd ("Princes Holdings")............................. 20.0%
Israel: (through UII (1))
Tevel Israel International Communications Ltd. ("Tevel").............. 23.3%
Malta: (through UII (1))
Melita Cable TV P.L.C. ("Melita")..................................... 25.0%
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) UII is a United States general partnership between UPC and Tele-
Communications International, Inc. ("TINTA"). In November 1998, UPC
acquired TINTA's interests in Tevel and Melita, and sold UPC's interest in
Princes Holdings to TINTA for a net payment to TINTA of $68.0 million
(128,520). As a result of the transaction, UPC's interest in Tevel and
Melita increased to 46.6% and 50.0% respectively (see Note 16).
(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 holds 51% of UTH, with the ability to increase its interest to
75.5% (see Notes 3 and 16).
F-11
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Liquidity and Capital Resources
For the nine months ended September 30, 1998, the Company incurred a net
operating loss of (61,932) and had a working capital deficit of (356,565). The
Company expects to incur operating losses and net losses for the foreseeable
future as it incurs additional costs associated with the upgrade and expansion
of the Company's network, the expansion of its marketing and sales organization
and the introduction of new services such as digital video, voice and
Internet/data services. The Company is currently in the process of seeking
additional sources of funds, which could include private equity, public equity,
bank financing and/or public debt. The Company may or may not be successful in
completing all or any of such financings. The Company believes, however, that
reduction in the Company's planned capital expenditures combined with, if
necessary, the sale of certain non-strategic assets, are sufficient to sustain
its operations through at least January 1, 2000.
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.
Principles of Consolidation
The accompanying consolidated financial statements include the operations
of UPC since its formation effective July 1, 1995 and all subsidiaries where it
exercises a controlling financial interest through the ownership of a majority
voting interest, except for UTH, where because of certain minority shareholders
rights the Company accounts for its investment in UTH using the equity method
of accounting. 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 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.
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-12
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Marketable Equity Securities of Parent
The Company classifies its investments in marketable equity securities of
UIH 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 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.
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-13
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
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
F-14
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
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.
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 plans to adopt SFAS 131 for the year ended
December 31, 1998.
F-15
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 ("SOP 98-1"), "Accounting For the Costs of
Computer Software Developed or Obtained for Internal Use", 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 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.
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-16
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following pro forma condensed consolidated operating results for the
periods ended December 31, 1995 and 1996 give effect to the acquisition of
Norkabel 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 Six Months
Ended For the Year Ended
December 31, 1995 December 31, 1996
---------------------- ----------------------
Historical Pro Forma Historical Pro Forma
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Service and other revenue.. 100,179 129,666 245,179 288,749
========== ========== ========== ==========
Net loss................... (41,529) (58,781) (75,836) (108,318)
========== ========== ========== ==========
Basic and diluted net loss
per ordinary share........ (0.51) (0.73) (0.94) (1.34)
========== ========== ========== ==========
Weighted-average number of
ordinary shares
outstanding............... 81,000,000 81,000,000 81,000,000 81,000,000
========== ========== ========== ==========
</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). Details of the net assets acquired at
100% 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............................ 105,785
Other assets.................................................... 57
Short-term debt................................................. (2,854)
Other liabilities............................................... (1,557)
-------
Total consideration........................................... 121,182
Less obligation to seller..................................... (36,112)
-------
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. Concurrent with the transaction, UPC deposited
47,000 with a bank as collateral for a call option to purchase the remaining
12.7% interest. Including accrued interest, the deposit totaled 49,517 as of
September 30, 1998, and is classified as restricted cash in other non-current
assets. UPC has all the rights and obligations of full ownership of Janco
Multicom and therefore consolidates 100% of its financial results. In November
1998, UPC exercised and paid the call obligation for 37,200 (see Note 16).
F-17
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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........................................... (75,836) (89,599)
========== ==========
Basic and diluted net loss per ordinary share...... (0.94) (1.11)
========== ==========
Weighted-average number of ordinary shares
outstanding....................................... 81,000,000 81,000,000
========== ==========
</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 Tranche A Facility
and 120,762 of bank financing. Details of the net assets acquired, based on a
preliminary allocation of the purchase price, 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, 1996 and 1997 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.. 245,179 272,322 337,155 366,127
========== ========== ========== ==========
Net loss................... (75,836) (78,140) (165,966) (167,254)
========== ========== ========== ==========
Basic and diluted net loss
per ordinary share........ (0.94) (0.96) (2.06) (2.08)
========== ========== ========== ==========
Weighted-average number of
ordinary shares
outstanding............... 81,000,000 81,000,000 80,488,992 80,488,992
========== ========== ========== ==========
</TABLE>
F-18
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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.
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 for
approximately 244,000 plus an interest payment of 5.5% over the call price from
January 1, 1998 until the exercise date. If the exercise date is after August
6, 2000, the interest rate will go up to 9.0%. If UPC exercises the call
option, NUON can exercise the secondary put option, requiring UPC to purchase
its remaining interest in UTH for approximately 244,000 plus interest. 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. The price UPC would
have to pay equals approximately 166,000 plus an interest payment of 4.5% over
the put price from January 1, 1998 until the exercise date. If NUON exercises
the put option, UPC can exercise the secondary call option, requiring NUON to
sell its remaining interest in UTH to UPC for approximately 166,000 plus
interest. 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. See Note 16.
A2000
In July 1995, Philips Media and US WEST as equal partners acquired A2000
for a total purchase price of approximately NLG680 million. Upon UPC's
formation, Philips Media assigned its ownership interest in A2000 to UPC. The
acquisition was financed with a bridge loan from a bank to both UPC and US
WEST. Additionally, UPC and US WEST contributed approximately NLG45 million
each to a subsidiary of A2000. 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. Approximately NLG180 million of the purchase price
was allocated to license rights with the remainder allocated to its investment
in A2000.
F-19
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The following pro forma condensed consolidated operating results for the
nine months ended September 30, 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 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 Ended
September 30, 1997 September 30, 1998
--------------------- ---------------------
Historical Pro Forma Historical Pro Forma
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Service and other revenue...... 250,061 236,948 305,237 274,091
========== ========== ========== ==========
Net loss....................... (129,984) (122,268) (171,852) (165,804)
========== ========== ========== ==========
Basic and diluted net loss per
ordinary share................ (1.60) (1.51) (2.39) (2.31)
========== ========== ========== ==========
Weighted-average number of
ordinary shares outstanding... 81,000,000 81,000,000 71,801,865 71,801,865
========== ========== ========== ==========
</TABLE>
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.
4. Investments in and Advances to Affiliated Companies, Accounted for Under the
Equity Method
<TABLE>
<CAPTION>
As of December 31, 1996
--------------------------------------------------------------
Investments in Cumulative
and Advances to Share in Results of Valuation
Affiliated Companies Affiliated Companies Allowance Total
-------------------- ----------------------- --------- -------
<S> <C> <C> <C> <C>
A2000........ 189,802 (26,465) -- 163,337
UII.......... 10,270 487 -- 10,757
Kabelkom..... 41,885 (262) -- 41,623
Other, net... 21,430 (8,804) (4,186) 8,440
------- ------- ------ -------
Total...... 263,387 (35,044) (4,186) 224,157
======= ======= ====== =======
<CAPTION>
As of December 31, 1997
--------------------------------------------------------------
Investments in Cumulative
and Advances to Share in Results of Valuation
Affiliated Companies Affiliated Companies(1) Allowance Total
-------------------- ----------------------- --------- -------
<S> <C> <C> <C> <C>
A2000........ 220,933 (571) -- 220,362
UII.......... 103,029 (64) -- 102,965
Kabelkom..... 57,783 247 -- 58,030
Other, net... 3,583 -- -- 3,583
------- ------- ------ -------
Total...... 385,328 (388) -- 384,940
======= ======= ====== =======
</TABLE>
F-20
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
As of September 30, 1998
-----------------------------------------------------------------------
Investments in 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..................... 257,116 -- (8,325) -- 248,791
UII (2)................. 100,948 (12,212) 3,351 (7,081) 85,006
Telekabel Hungary
Programming (3)........ 24,316 -- (6,728) (996) 16,592
Xtra Music.............. 9,450 -- -- -- 9,450
Other, net.............. 9,536 -- (3,651) -- 5,885
------- ------- ------- ------ -------
Total................... 401,366 (12,212) (15,353) (8,077) 365,724
======= ======= ======= ====== =======
</TABLE>
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, 1996 As of December 31, 1997 As of September 30, 1998
----------------------- -------------------------- ----------------------------
Basis Accumulated Basis Accumulated Basis Accumulated
Difference Amortization Difference Amortization(1) Difference Amortization
---------- ------------ ---------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
A2000................... 180,012 (18,000) 231,041 -- -- --
UII (2)................. -- -- 64,618 -- 57,537 (3,605)
Kabelkom................ 33,353 (556) 38,161 -- -- --
Telekabel Hungary
Programming (3)........ -- -- -- -- 14,695 (510)
------- ------- ------- --- ------------ ------------
Total................... 213,365 (18,556) 333,820 -- 72,232 (4,116)
======= ======= ======= === ============ ============
</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 16).
(3) Represents the Company's remaining investment in Telekabel Hungary
Programming after the transaction with TWE (see Note 3).
Summary financial information for UTH is as follows:
<TABLE>
<CAPTION>
As of
September 30,
-------------
1998
-------------
<S> <C>
Liquid assets................................................. 2,562
Other current assets.......................................... 83,337
Investments in and advances to affiliated companies accounted
for under the equity method, net............................. 185,521
Tangible fixed assets......................................... 779,629
Intangible fixed assets....................................... 403,629
---------
Total assets................................................ 1,454,678
=========
Current liabilities........................................... 711,775
Provisions.................................................... 35,211
Long-term debt................................................ 224,092
Shareholders' value........................................... 483,600
---------
Total liabilities and shareholders' value................... 1,454,678
=========
</TABLE>
F-21
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
For the
Period from
August 6,
1998
(Inception)
to
September 30,
-------------
1998
-------------
<S> <C>
Revenue....................................................... 36,498
Costs......................................................... (21,180)
Depreciation and amortization................................. (14,730)
-------
Net operating income........................................ 588
Interest income and expense, including interest expense from
related parties, and foreign exchange results................ (7,811)
-------
Net loss before income taxes and other items................ (7,223)
Share in results of affiliated companies...................... (9,053)
-------
Net loss.................................................... (16,276)
=======
</TABLE>
NUON's contribution to UTH included an existing 630,000 debt facility with
an outstanding balance of approximately 543,000 (as of August 6, 1998). The
debt facility is due November 30, 1998, 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 is
currently negotiating with the lenders to refinance the debt facility, however
there can be no assurance a refinancing will be completed prior to the due date
of the facility. See Note 16.
Summary financial information for A2000 is as follows:
<TABLE>
<CAPTION>
As of
As of July
December 31, 31,
--------------- -------
1996 1997 1998(1)
------- ------- -------
<S> <C> <C> <C>
Liquid assets...................................... 33,389 6,868 2,336
Other current assets............................... 24,997 35,557 53,177
Financial fixed assets............................. 543 543 634
Tangible fixed assets.............................. 230,304 309,291 341,186
Intangible fixed assets............................ 132,018 122,189 117,797
------- ------- -------
Total assets....................................... 421,251 474,448 515,130
======= ======= =======
Current liabilities................................ 40,908 67,652 88,372
Provisions......................................... 11,693 2,154 1,508
Long-term debt..................................... 366,000 426,000 479,000
Shareholders' value................................ 2,650 (21,358) (53,750)
------- ------- -------
Total liabilities and shareholders' value.......... 421,251 474,448 515,130
======= ======= =======
</TABLE>
F-22
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
For the
Period from For the
June 2, 1995 For the Years Seven Months
to Ended December Ended
December 31, 31, July 31,
------------ ---------------- ------------
1995 1996 1997 1998(1)
------------ ------- ------- ------------
<S> <C> <C> <C> <C>
Revenue......................... 37,493 89,893 101,450 69,668
Costs........................... (20,378) (49,064) (67,687) (52,329)
Depreciation and amortization... (19,830) (43,789) (50,846) (36,114)
------- ------- ------- -------
Net operating loss............ (2,715) (2,960) (17,083) (18,775)
Financial charges and other..... (4,621) (12,745) (16,751) (13,617)
Income tax (provision) benefit.. (287) (224) 9,826 --
------- ------- ------- -------
Net loss...................... (7,623) (15,929) (24,008) (32,392)
======= ======= ======= =======
</TABLE>
- --------
(1) Effective August 6, 1998, A2000 was contributed to UTH as part of the UTH
Transaction.
5. Marketable Equity Securities of Parent
As a result of the UPC Acquisition, a subsidiary of UPC acquired 3,169,151
UIH Class A Common shares, valued at fair market value of 66,809 as of December
11, 1997. As of September 30, 1998, the fair value of these shares was 58,025,
resulting in an unrealized loss of (8,784) for the nine months ended September
30, 1998. These shares are pledged under the Tranche B Facility (see Note 9).
6. Property, Plant and Equipment
<TABLE>
<CAPTION>
As of
December 31, As of
---------------- September 30,
1996 1997(1) 1998
------- ------- -------------
<S> <C> <C> <C>
Cable distribution networks................. 325,987 364,655 412,873
Subscriber premises equipment and
converters................................. 128,627 81,301 114,820
MMDS distribution facilities................ 14,845 12,958 13,351
Office equipment, furniture and fixtures.... 15,713 13,074 28,674
Buildings and leasehold improvements........ 6,080 3,713 13,554
Other....................................... 15,236 15,304 8,712
------- ------- -------
506,488 491,005 591,984
Accumulated depreciation.................. (91,819) (7,312) (64,915)
------- ------- -------
Net property, plant and equipment......... 414,669 483,693 527,069
======= ======= =======
</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-23
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Goodwill and Other Intangible Assets
<TABLE>
<CAPTION>
As of
December 31, As of
---------------- September 30,
1996 1997(1) 1998
------- ------- -------------
<S> <C> <C> <C>
Telekabel Group........................... 200,307 389,513 390,818
Janco Multicom............................ 71,657 190,283 169,825
CNBH(2)................................... 83,851 80,491 --
Telekabel Hungary......................... -- -- 81,716
TVD....................................... 5,852 42,223 43,721
Other..................................... 33,753 26,794 35,859
------- ------- -------
395,420 729,304 721,939
Accumulated amortization................ (41,763) (3,791) (43,198)
------- ------- -------
Net goodwill and other intangible
assets................................. 353,657 725,513 678,741
======= ======= =======
</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
Short-term debt as of December 31, 1996 included 286,028 drawn on a
revolving credit facility and acquisition facility with a Dutch bank as well as
short-term debt of Norkabel of 138,421 assumed as part of the acquisition of
Norkabel in October 1996. The weighted-average interest rate on these short-
term borrowings as of December 31, 1996 was approximately 4.1% per annum. Both
facilities were repaid from proceeds from the Tranche A Facility at the end of
1997. The balance at September 30, 1998 primarily consists of the $18.0 million
(34,020) non-interest bearing Time Warner Note. The Time Warner Note matures on
the earlier of (i) December, 1998 or (ii) 90 calendar days after written notice
from TWE, which notice has not been given as of September 30, 1998.
9. Long-Term Debt
<TABLE>
<CAPTION>
As of
December 31, As of
----------------- September 30,
1996 1997 1998
------ --------- -------------
<S> <C> <C> <C>
Tranche A Facility......................... -- 883,948 971,978
Tranche B Facility......................... -- 252,500 113,519
Mediareseaux Facility...................... -- -- 20,190
Bank and other loans....................... 22,830 123,389 47,464
------ --------- ---------
22,830 1,259,837 1,153,151
Less current portion..................... (3,363) (255,819) (113,519)
------ --------- ---------
Total.................................... 19,467 1,004,018 1,039,632
====== ========= =========
</TABLE>
Tranche A 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
F-24
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Telekabel Group also became borrowers under the Tranche A Facility. Although
not a borrower, TVD is a guarantor under the Tranche A Facility. As of
September 30, 1998, the amount outstanding under the Tranche A Facility for
UPC, Telekabel Wien and Janco Multicom was 620,000, 213,448 and 138,530,
respectively. Amounts advanced under the Tranche A 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 Tranche A 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, before December 31, 1998, 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
Tranche A 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 Tranche A
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 Tranche A Facility together with borrowings under
the Tranche B Facility may not exceed 1,300,000 before September 30, 2001. The
Tranche A 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 Tranche A Facility.
Under this limitation, as of September 30, 1998, the Company would not have
been permitted to make any additional investments, loans and guarantees. In
connection with the potential initial public offering of the Company's
securities (the "Offering"), the Company is negotiating with the Tranche A
Facility banks for certain waivers of covenants and conditions of the Tranche A
Facility. There can be no assurance that the Company will be successful in
obtaining such waivers.
Tranche B Facility
In connection with the UPC Acquisition, the Company entered into the
consolidated $125.0 million term Tranche B Facility with a syndicate of banks.
The Tranche B Facility is a one year bridge financing due December 5, 1998 and
bears interest at LIBOR plus a margin ranging from 4.5% to 6.0% per annum. The
maturity date is extendable to June 5, 1999 upon certain conditions being met.
The Tranche B 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 3,169,151 shares of UIH's Class A Common Stock
which UPC acquired from Philips as part of the UPC Acquisition. The Tranche B
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 was 9,265 as of September 30, 1998. UPC repaid $64.9 million of
the Tranche B Facility during the nine months ended September 30, 1998
resulting in an outstanding amount of $60.1 million (113,519) as of September
30, 1998. In November 1998 the lenders granted an extension of the maturity
date to June 5, 1999, and agreed to provide a waiver, subject to documentation
and other conditions, to allow the Company to keep the proceeds from the sale
of the Company's interest in Princes Holdings (see Note 16).
F-25
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 an 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 September 30, 1998 an amount of FRF60.0 million (20,190) was outstanding
under the Mediareseaux Facility.
Bank and Other Loans
Bank and other loans includes a payable of 37,634 to the minority
shareholder of Janco Multicom, which accretes interest at 5% per annum. The
payable relates to the contemplated exercise price of the call option for the
remaining 12.7% of Janco Multicom, which was exercised and paid in November
1998 (see Note 16).
Debt Maturities
The maturities of the Company's long-term debt are as follows (Unaudited):
<TABLE>
<S> <C>
12 months ended September 30, 1999............................. 113,519
12 months ended September 30, 2000............................. 23
12 months ended September 30, 2001............................. 37,659
12 months ended September 30, 2002............................. --
12 months ended September 30, 2003............................. 1,704
Thereafter..................................................... 1,000,246
---------
Total........................................................ 1,153,151
=========
</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 September 30, 1998:
Tranche A Facility................................. 971,978 971,978
Tranche B Facility................................. 113,519 113,519
Mediareseaux Facility.............................. 20,190 20,190
Bank and other loans............................... 47,464 47,464
Note payable to UIH(1)............................. 156,030 156,030
Time Warner Note................................... 34,020 34,020
--------- ---------
Total............................................ 1,343,201 1,343,201
========= =========
</TABLE>
- --------
(1) See Note 15 for terms of the note payable to UIH.
F-26
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. Shareholders' Equity
The Company's shareholders have 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 will
be 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.
The Company's shareholders have also approved the issuance of 100 priority
shares, which have special approval and other rights, to UIH.
In addition, the Company's Articles of Association to be amended and
restated 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 September 30, 1998, the Company is unable to make
dividend distributions to shareholders because of its accumulated deficit.
UIH Indenture
As a subsidiary of UIH, the Company's activities are restricted by the
covenants in UIH's indenture dated February 5, 1998 (the "UIH Indenture"). The
UIH 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 UIH Indenture at the time of the borrowing. The UIH
Indenture also restricts UPC's ability to make certain asset sales and certain
payments. In connection with the Offering, UPC has agreed with UIH that it will
not take any action during the term of the UIH Indenture that would result in a
breach of the UIH Indenture covenants. The maturity date of the UIH 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 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 1/36th each month for 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 and the options vest 1/48th each month. 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
F-27
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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, 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, 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,
---------------------------------------------------- For the Nine Months Ended
1996 1997 September 30, 1998
-------------------------- ------------------------- --------------------------------
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.............. -- -- 2,300,417 10.49 2,241,552 10.49
Granted during period... 3,990,000 10.49 -- -- 2,343,000 12.10
Cancelled during
period................. (9,584) 10.49 (58,865) 10.49 (14,052) 10.49
Exercised during
period................. (1,680,000) -- -- -- (375,000) 10.49
---------- ----- --------- ----- -------------- ----------
Outstanding at end of
period................. 2,300,417 10.49 2,241,552 10.49 4,195,500 11.39
========== ===== ========= ===== ============== ==========
Vested at end of
period(1).............. 1,786,898 10.49 3,197,331 10.49 4,128,548 10.75
========== ===== ========= ===== ============== ==========
Exercisable at end of
period(1).............. 2,300,417 10.49 2,241,552 10.49 4,195,500 11.39
========== ===== ========= ===== ============== ==========
</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, 1996 and the nine
months ended September 30, 1998 are as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Nine Months Ended
December 31, 1996 September 30, 1998
------------------------ -----------------------------
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........... 3,990,000 10.49 10.49 2,343,000 12.10 12.10
</TABLE>
The following table summarizes information about stock options outstanding,
vested and exercisable as of September 30, 1998:
<TABLE>
<CAPTION>
Weighted-Average
Number Remaining Number Number
of Options Contractual Life of Options of Options
Exercise Price Outstanding (Years) Vested Exercisable
-------------- ----------- ---------------- ---------- -----------
<S> <C> <C> <C> <C>
10.49.................... 1,852,500 2.72 3,443,126 1,852,500
12.00.................... 2,195,250 4.88 681,344 2,195,250
13.57.................... 147,750 4.96 4,079 147,750
--------- ---- --------- ---------
4,195,500 3.93 4,128,548 4,195,500
========= ==== ========= =========
</TABLE>
F-28
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 and deferred
compensation expense is recognized at each financial statement date based on
the difference between the grant price and the estimated fair value of the
Company's common stock. Compensation expense of 4,818 and 28,160 was recognized
for the year ended December 31, 1997 and the nine months ended September 30,
1998, respectively. The Company's estimate of the fair value of its common
stock as of September 30, 1998 utilized in recording compensation expense and
deferred compensation expense under the Plan was NLG17.57. Because the Company
will account for the Plan as a variable plan up until the consummation date of
its planned initial public offering (the "Offering"), and thereafter as a fixed
plan due to modifications to the Plan which will occur on that date, additional
compensation expense and deferred compensation expense will be recognized
subsequent to September 30, 1998 through the Offering date to the extent the
ultimate Offering price is greater than NLG17.57. For each NLG3.33 per share
increase in the Offering price over the NLG17.57 utilized by the Company to
record compensation expense as of September 30, 1998, additional compensation
expense totaling approximately NLG16,600 would have been recognized in the
Company's statement of operations and deferred compensation expense would have
increased by approximately NLG3,000 as of that date.
Phantom Stock Option Plan
In September 1998, the Company's Supervisory Board approved 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
tradable 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. The Phantom Plan also
provides that upon consummation of the Offering, an employee holding phantom
options may convert these into options for shares under the Plan.
A summary of stock option activity for the Phantom Plan is as follows:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, 1998
-------------------------------
Number Weighted-
of Average
Shares Exercise Price
-------------- ----------------
<S> <C> <C>
Outstanding at beginning of period............... -- --
Granted during period............................ 2,057,250 12.63
Cancelled during period.......................... -- --
Exercised during period.......................... -- --
-------------- ----------
Outstanding at end of period..................... 2,057,250 12.63
============== ==========
Vested and exercisable at end of period.......... 356,265 12.03
============== ==========
</TABLE>
F-29
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The combined weighted-average fair values and weighted-average exercise
prices of options granted during the nine months ended September 30, 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>
The following table summarizes information about stock options outstanding,
vested and exercisable as of September 30, 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 8.79 348,453
13.57.................................. 825,000 9.95 7,812
--------- ---- -------
2,057,250 9.25 356,265
========= ==== =======
</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 4,333 was recognized for the nine months ended September 30, 1998.
The Company's estimate of the fair value of its common stock as of September
30, 1998 utilized in recording compensation expense and deferred compensation
expense under the Phantom Plan was NLG17.57. Because the Company will account
for the Phantom Plan as a variable plan at least until the consummation date
the Offering, additional compensation expense will be recognized subsequent to
September 30, 1998 through the Offering date to the extent the ultimate
Offering price is greater than NLG17.57. For each NLG3.33 per share increase in
the Offering price over the NLG17.57 utilized by the Company to record
compensation expense as of September 30, 1998, additional compensation expense
totaling approximately NLG2,600 would have been recognized in the Company's
statement of operations and deferred compensation expense would have increased
by approximately NLG4,200 as of that date.
Subsidiary Stock Option Plan
In September 1998, the Company's Supervisory Board approved 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.
F-30
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
A summary of stock option activity for the chello broadband Plan is as
follows:
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30, 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.......... 35,625 10.00
============= ============
</TABLE>
The weighted-average remaining contractual life for these options is 9.72
years as of September 30, 1998.
F-31
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 2,528, 4,989, 6,863, 5,147 and 5,769 for the six
months ended December 31, 1995, the years ended December 31, 1996 and 1997 and
the nine months ended September 30, 1997 and 1998, respectively.
The Company has operating lease obligations as follows:
<TABLE>
<S> <C>
12 months ended September 30, 1999................................ 16,126
12 months ended September 30, 2000................................ 13,754
12 months ended September 30, 2001................................ 5,929
12 months ended September 30, 2002................................ 4,539
12 months ended September 30, 2003 and thereafter................. 3,748
------
Total........................................................... 44,096
======
</TABLE>
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 Tranche B Facility and the loan payable to UIH are denominated in U.S.
dollars, totaling $142,619 (269,549) as of September 30, 1998. The Company has
not executed any foreign forward exchange contract, or used any other financial
instrument, to hedge against this foreign currency exposure.
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
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.
F-32
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The significant components of the net deferred tax liability are as
follows:
<TABLE>
<CAPTION>
As of
December 31, As of
----------------- September 30,
1996 1997 1998
------- -------- -------------
<S> <C> <C> <C>
Deferred Tax Assets:
Tax net operating loss carryforward...... 103,635 149,802 129,125
Other.................................... 6,934 540 706
------- -------- --------
Total deferred tax assets.............. 110,569 150,342 129,831
Valuation allowance...................... (75,630) (136,580) (116,434)
------- -------- --------
Deferred tax assets, net of valuation
allowance............................. 34,939 13,762 13,397
------- -------- --------
Deferred Tax Liabilities:
Intangible assets........................ (31,688) (48,077) (11,229)
Property, plant and equipment, net....... (8,453) (10,193) (10,146)
------- -------- --------
Total deferred tax liabilities......... (40,141) (58,270) (21,375)
------- -------- --------
Deferred tax liabilities, net.......... (5,202) (44,508) (7,978)
======= ======== ========
</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
For the For the Years Ended Nine Months Ended
Six Months Ended December 31, September 30,
December 31, -------------------- -------------------
1995 1996 1997 1997 1998
---------------- --------- --------- ----------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Expected income tax
benefit at the Dutch
statutory rate of 35%.. (6,760) (19,358) (53,929) (39,636) (43,841)
Tax effect of permanent
and other differences:
Change in valuation
allowance............ 987 14,555 27,471 21,851 9,132
Non-deductible
expenses............. 4,000 3,872 18,427 19,089 34,624
International rate
differences.......... 797 1,105 3,232 1,614 2,424
Provision on
investment........... -- -- 6,611 (3,500) --
Other................. 1,131 (683) (163) 991 (1,926)
------ --------- --------- ------- -------
Total income tax
benefit............ 155 (509) 1,649 409 413
====== ========= ========= ======= =======
</TABLE>
Tax loss carry forwards arise primarily in Norway, The Netherlands, Czech
Republic and Austria. The tax loss carry forwards of Norway, aggregating to
261,967 as of September 30, 1998 will expire during the years 1999-2008. The
tax loss carry forwards of The Netherlands, Belgium and Austria of 110,705 as
of September 30, 1998 have no expiration date. The tax loss carry forwards of
the Czech Republic of 27,950 as of September 30, 1998 will expire in the years
2001-2005.
F-33
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 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 Information
The Company's reportable segments are the various geographic regions in
which it operates multi-channel television, programming and/or telephony
operations. The total assets of The Netherlands--corporate include UPC's
investments, advances and current accounts with affiliated companies.
<TABLE>
<CAPTION>
Revenue
----------------------------------------------------
For the
For the Six For the Years Ended Nine Months Ended
Months Ended December 31, September 30,
December 31, ------------------- -------------------
1995 1996 1997 1997 1998
------------ --------- --------- ----------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
The Netherlands:
Corporate............ 1,242 4,433 3,088 1,303 10,221
Operating
companies........... 4,297 21,633 26,712 17,051 39,141
Austria................ 72,802 156,964 162,783 121,063 130,288
Belgium................ 19,752 37,704 38,737 30,585 26,945
Czech Republic......... 2,086 7,746 7,492 5,455 6,618
Norway................. -- 14,541 91,529 70,131 69,035
France................. -- 179 2,526 1,584 5,189
Hungary................ -- -- -- -- 13,777
Other.................. -- 1,979 4,288 2,889 4,023
------- --------- --------- ------- -------
Total.............. 100,179 245,179 337,155 250,061 305,237
======= ========= ========= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Net Operating (Loss) Income
------------------------------------------------------
For the
For the Six For the Years Ended Nine Months Ended
Months Ended December 31, September 30,
December 31, -------------------- -------------------
1995 1996 1997 1997 1998
------------ --------- --------- ----------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
The Netherlands:
Corporate............. (631) (872) (2,758) (798) (14,199)
Operating companies... 282 4,828 7,313 2,819 1,822
Austria................. 12,171 23,034 22,182 17,748 (2,080)
Belgium................. (3,518) (2,151) (1,892) (260) (8,828)
Czech Republic.......... (10,772) (12,307) (13,116) (10,386) (6,816)
Norway.................. -- (767) (27,885) (16,963) (26,213)
France.................. -- (4,701) (5,933) (4,585) (6,155)
Hungary................. -- -- -- -- 2,749
Other................... -- (5,519) (5,915) (4,684) (2,212)
------- --------- --------- ------- -------
Total............... (2,468) 1,545 (28,004) (17,109) (61,932)
======= ========= ========= ======= =======
</TABLE>
F-34
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
Total Assets
---------------------------------------
As of December 31,
------------------- As of September 30,
1996 1997 1998
--------- --------- -------------------
<S> <C> <C> <C>
The Netherlands:
Corporate.......................... 271,417 479,983 447,789
Operating companies................ 120,626 128,609 8,442
Austria.............................. 409,107 653,062 631,786
Belgium.............................. 76,574 99,392 102,301
Czech Republic....................... 35,149 30,089 28,080
Norway............................... 168,574 471,327 408,836
France............................... 13,283 36,769 69,467
Hungary.............................. -- -- 128,190
Other................................ 24,450 20,584 25,077
--------- --------- ---------
Total............................ 1,119,180 1,919,815 1,849,968
========= ========= =========
</TABLE>
15. Related Party
Related Party Payables
The Company classifies any unpaid invoices related to seconded employee
expenses or other expenses incurred by UIH 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, 1996
and 1997, the receivable from employees, including accrued interest totaled
18,774 and 18,561, respectively.
Note Payable to Shareholder
UPC has entered into two promissory notes with UIH of $100.0 million (March
1998) and $20.0 million (July 1998). UPC has borrowed $63.0 million and $16.0
million, respectively, under these two notes (together, this "UIH Loan" totals
149,310 as of September 30, 1998). The UIH Loan bears interest at 10.75% per
annum, is payable on demand, 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).
If the Offering is consummated, the UIH Loan would become due on March 31, 2001
and be convertible at UIH's option into ordinary shares of UPC at the offering
price. Total accrued interest as of September 30, 1998 was $3.6 million
(6,720). UPC intends to repay the UIH loan with proceeds from the Offering.
As of December 31, 1996, TVD had drawn down 22,080 (including accrued
interest) on a current line of credit with Philips. This account was repaid in
conjunction with the UPC Acquisition on December 11, 1997.
F-35
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 UIH acquired the
remaining outstanding balance of 169,899. UIH 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).
Cost allocations from UIH
Historically, UPC has been self sufficient from a corporate operations
perspective and required nominal assistance from its shareholders, Philips and
UIH, and solely from UIH subsequent to December 11, 1997. UIH and Philips did
not allocate any indirect overhead type costs to the Company from inception
through December 11, 1997 and UIH did not allocate any such costs subsequent
to December 11, 1997 through September 30, 1998. The only costs historically
charged to UPC were direct costs incurred by Philips and UIH on UPC's behalf.
Such costs were charged at cost. In connection with the Company's planned
Offering, UIH and the Company have executed a management services agreement
which will provide for a fixed allocation in addition to direct out-of-pocket
reimbursements.
16. Subsequent Events
Purchase of Certain Telephony and Programming Assets from UIH
In March 1998, in exchange for 11,285,604 newly-issued ordinary shares of
UPC, UIH has agreed to sell to UPC UIH's:
. 50% voting and 46.3% economic interest in Monor Communications Group,
Inc. ("Monor"), a traditional telephony and cable television system in
the Monor region of Hungary;
. 75% interest in Tara Television Limited ("Tara"), a company providing
Irish programming to the U.K. markets; and
. approximately 33.5% interest in Iberian Programming Services ("IPS"), a
group of programming companies focusing on the Spanish and Portuguese-
speaking markets.
In December 1998, UPC closed the Monor and Tara transactions. IPS is
expected to close in February 1999.
Agreement with UIH
UIH and the Company became parties to a Management Service Agreement (the
"UIH Service Agreement"), with an initial term through 2009, pursuant to which
UIH 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 UIH Service Agreement, the Company
will pay UIH a fixed amount each month (initially $0.3 million). After the
first year of the UIH Service Agreement, the fixed amount may be adjusted from
time to time by UIH to allocate corporate level expenses among UIH's operating
companies, including UPC, taking into account the relative size of the
operating companies and their estimated use of UIH resources. In addition, UPC
will continue to reimburse UIH for costs incurred by UIH which are directly
attributable to UPC. The UIH Service Agreement also specifies the basis upon
which UIH may second certain of its employees to UPC. The Company generally is
responsible for all costs incurred by UIH with respect to any seconded
employee's employment and severance.
F-36
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Janco Multicom
In November 1998, the Company exercised and paid the call obligation for
37,200 which was funded from the Company's restricted cash established as
collateral for the purchase. Remaining funds in the account were released from
restriction.
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 UIH 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. The promissory note is due in November
2000, bears interest at an effective rate of 11%, including a note premium, and
is secured by a floating charge and pledge on the assets of the Company's
subsidiary which holds the Company's interest in Tevel.
DIC Loan
In November 1998, a subsidiary of Discount Investment Corporation ("DIC")
loaned the Company $90.0 million (the "DIC Loan") to acquire the additional
interests in Tevel and Melita. The DIC Loan matures in 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 DIC an option to acquire $90.0 million of ordinary shares of
UPC at a price equal to 90% of the 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 note. UPC will allocate 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 will exceed the stated rate as set forth above.
A2000 Funding
Subsequent to September 30, 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 January 11, 1999, UPC had funded $5,000 of its commitment.
Time Warner Note
In December 1998, Time Warner extended the maturity date of its note for a
period of 90 days.
UTH
On January 19, 1999, UPC agreed to purchase NUON's 49% ownership interest
in UTH for 487.6 million plus interest of 5.5% from January 1, 1998, until the
closing date. In addition, UPC will repay NUON and assume from NUON a 33.0
million subordinated loan owed by UTH to NUON plus interest of 5.5% from
December 23, 1998, until the closing date. The transaction will close
concurrent with the completion of an IPO, or failing such IPO, on or before
November 30, 1999. In the event of an IPO, NLG445.2 million of the purchase
price will be payable in cash (assuming IPO proceeds of
F-37
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
NLG2,248 million) and, six months after UPC's shares are listed on a stock
exchange, the remaining NLG106 million of the purchase price will be payable in
UPC's shares or, at UPC's option, in cash. Failing such IPO, the purchase
agreement provides for payment to NUON on December 31, 2000 in the form of an
18 month note for 50% of the total purchase price (together with interest) with
the remaining purchase price due in cash upon closing. If UPC is unable to
consummate the purchase of NUON's 49% ownership interest in UTH by November 30,
1999, NUON has the right to cause the sale of UTH. In such case, NUON will
first receive an amount of the sales proceeds equal to the agreed upon purchase
price and UPC would receive the balance.
Refinancing UTH
In January 1999, N.V. Telekabel Beheer received commitments for a revolving
facility of NLG650,000, which will bear interest at Euro interbank offered rate
("EURIBOR") plus a margin between 0.75% and 2.25%. In addition, in January
1999, UTH received commitments for a NLG225,000 secured debt facility, which
will bear interest at LIBOR plus a margin ranging from 4.75% to 8.5%.
In January 1999, NUON agreed to extend the NLG630,000 debt facility due
date (see Note 4) until March 15, 1999, with an extension period of 14 days.
F-38
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder of N.V. TeleKabel Beheer
We have audited the accompanying consolidated balance sheets of N.V.
TeleKabel Beheer, ("TeleKabel" or the "Company"), as of December 31, 1996 and
1997 and the related consolidated statements of operations, shareholder's
equity and cash flows for the period from August 22, 1995 (date of
incorporation) until December 31, 1995 and 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, 1996 and December 31, 1997 and the results of its operations and
its cash flows for the period from August 22, 1995 (date of incorporation)
until December 31, 1995 and the years ended December 31, 1996 and 1997 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 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, except for Note 14, for which the date is January 14, 1999
F-39
<PAGE>
N.V. TELEKABEL BEHEER
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1997
(in thousands of Dutch guilders, except per share data)
<TABLE>
<CAPTION>
December 31,
----------------
Note 1996 1997
---- ------- -------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. -- 17,465
Subscriber receivables, net............................ 4 5,184 9,608
Related party receivables.............................. 30,639 6,949
Other receivables...................................... 5 10,804 13,521
Inventory.............................................. 2,635 3,830
Investments............................................ 6 1,577 16,413
------- -------
Total current assets................................... 50,839 67,786
Tangible fixed assets, net............................. 7 396,997 553,499
Intangible assets, net................................. 8 187,980 194,562
Long term investments.................................. 6 4,200 1,222
------- -------
Total assets......................................... 640,016 817,069
======= =======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable....................................... 13,844 28,989
Payable to banks....................................... 42,916 18,884
Deferred income........................................ 9 4,220 6,341
Short-term debt payable to shareholder................. 10 254,646 500,691
Other payables and accrued expenses.................... 77,518 11,901
------- -------
Total current liabilities............................ 393,144 566,806
=== ======= =======
Minority interest in subsidiaries...................... 11 1,820 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.................................... (7,302) (4,412)
--- ------- -------
Total shareholder's equity........................... 245,052 247,942
--- ------- -------
Total liabilities and shareholder's equity......... 640,016 817,069
=== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-40
<PAGE>
N.V. TELEKABEL BEHEER
CONSOLIDATED STATEMENTS OF OPERATIONS
from August 22, 1995 (date of incorporation) until December 31, 1995 and
the years ended December 31, 1996 and 1997
(in thousands of Dutch guilders)
<TABLE>
<CAPTION>
4 months and
9 days period Years ended
ended December 31,
December 31, ----------------
1995 1996 1997
------------- ------- -------
<S> <C> <C> <C>
Service and other revenue...................... 3,656 113,917 137,167
Operating expenses:
Purchases relating to sales.................... (1,041) (14,515) (18,615)
Personnel expenses............................. (442) (14,366) (18,034)
Depreciation and amortization.................. (1,440) (22,195) (31,418)
Other operating expenses....................... (2,361) (39,995) (41,705)
------ ------- -------
Net operating (loss) income.................... (1,628) 22,846 27,395
Equity results in associates................... -- (1,033) 1,022
Interest expense, related party................ (757) (14,134) (26,210)
Other income/(expense), net.................... -- (12,875) --
------ ------- -------
Income/(loss) before and after income taxes.... (2,385) (5,196) 2,207
Minority interests in subsidiaries............. -- 279 683
------ ------- -------
Net income/(loss).............................. (2,385) (4,917) 2,890
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-41
<PAGE>
N.V. TELEKABEL BEHEER
CONSOLIDATED STATEMENTS OF CASH FLOWS
from August 22, 1995 (date of incorporation) until December 31, 1995 and
the years ended December 31, 1996 and 1997
(in thousands of Dutch guilders)
<TABLE>
<CAPTION>
4 months and 9 Years ended
days period ended December 31,
December 31, ------------------
1995 1996 1997
----------------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income/(loss)....................... (2,385) (4,917) 2,890
Adjustments to reconcile net loss to net
cash flows from operating activities:
Depreciation and amortization........... 1,440 22,195 31,418
Share in results of affiliated
companies.............................. -- 1,033 (1,022)
Provision for doubtfull accounts
receivable............................. -- 458 559
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...... (2,376) (43,840) 15,990
Increase in inventories................. -- (2,635) (1,195)
Increase in other current liabilities... (5,749) 10,536 (9,583)
------ -------- --------
Net cash flows from operating
activities............................. (9,070) (8,534) 38,374
------ -------- --------
Cash flows from investing activities:
Purchase of unlisted securities......... (900) (9,592) (49)
Investment in affiliated companies...... -- (5,233) (787)
Capital expenditures.................... (2,802) (215,767) (266,118)
New acquisitions, net of cash acquired.. (2,948) -- --
------ -------- --------
Net cash flows from investing
activities............................. (6,650) (230,592) (266,954)
------ -------- --------
Cash flows from financing activities:
Proceeds from short-term debt to parent
company................................ 16,498 238,148 246,045
Capital contribution.................... 200 -- --
------ -------- --------
Net cash flows from financing
activities............................. 16,698 238,148 246,045
------ -------- --------
Net increase (decrease) in cash and cash
equivalents............................ 978 (978) 17,465
Cash and cash equivalents at beginning
of period.............................. -- 978 --
------ -------- --------
Cash and cash equivalents at end of
period................................. 978 -- 17,465
====== ======== ========
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-42
<PAGE>
N.V. TELEKABEL BEHEER
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
for the years ended December 31, 1997, 1996 and 1995
(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
===== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-43
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dutch guilders)
1. Organization and Nature of Operations
N.V. TeleKabel Beheer and its subsidiaries (TeleKabel or the Company) of
Arnhem was a wholly owned subsidiary of the N.V. NUON Energie-Onderneming voor
Gelderland, Friesland en Flevoland (NUON), a local government owned company.
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-44
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands of Dutch guilders)
The following subsidiaries are included in the consolidation as of December
31, 1997. The subsidiaries are wholly-owned, unless indicated otherwise.
<TABLE>
<S> <C>
N.V. TeleKabel (1)........................................... Arnhem
Kabelexploitatie Maatschappij Rijnland B.V. (52.5%).......... Alphen a/d Rijn
TeleKabel Omroep Facilitair Bedrijf B.V...................... Arnhem
Maxinetwerken B.V. .......................................... Ede
TeleKabel Zoetermeer B.V. ................................... Zoetermeer
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 recognising 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
usefull life.
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 incorporate interest charges incurred during
the period of construction, and investment subsidies are deducted. Depreciation
is calculated using the annuity or straight line method over the economic life
of the asset, taking into account the residual value. The annuity method 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
F-45
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands of Dutch guilders)
are constant over the life of the assets. This results in lower depreciation
charges in the earlier years of the assets life and higher charges in the later
years. 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.
3. Significant acquisitions and divestitures
During October of 1995 the Company acquired a 72.5% interest in
Kabelexploitatie Maatschappij Rijnland B.V. ("KMR"). The total cash
consideration, for this acquisition amounted to NLG 4,950. The excess of the
total consideration over the fair value of the net assets acquired was
allocated to goodwill.
Effective January 1, 1996 NUON contributed its cable networks with a book
value of approximately NLG 248,550 to TeleKabel. These cable networks were
recorded in TeleKabel at their book values, in exchange for additional paid in
capital by NUON.
F-46
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands of Dutch guilders)
Effective January 1, 1996 NUON contributed its shares in N.V. TeleKabel
Friesland to TeleKabel in exchange for 80,000 shares of TeleKabel. The
contribution was recorded at its book value recorded in NUON amounting to NLG
3,604.
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 NLG 1,200 per subscriber will 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 NLG 1,500 per subscriber, based on the
number of subscribers at the date of the share transfer. This acquisition was
not consummated before December 31, 1997.
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. Refer to note 14 for
the transfer of the remaining cable networks.
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 NLG
84,000, the difference between the consideration and the fair value of the
assets, which approximated NLG 46,000, was recorded as goodwill.
4. Subscriber receivables
Subscriber receivables are stated net of an allowance for doubtfull
accounts of NLG 1,017 and NLG 458 as of December 31, 1997 and 1996,
respectively.
5. Other receivables
Other receivables can be specified as follows:
<TABLE>
<CAPTION>
As of December 31,
-------------------
1996 1997
--------- ---------
<S> <C> <C>
Prepayments and accrued income........................... 7,926 877
Taxes and social security premiums....................... 1,771 --
Other receivables........................................ 1,107 12,644
--------- ---------
10,804 13,521
========= =========
</TABLE>
F-47
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands of Dutch guilders)
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, 1996............. -- 900 900
Additions.................................. 5,233 10,492 15,725
Write off of investment in unlisted
securities................................ -- (8,915) (8,915)
Share in income of affiliated companies.... (1,033) 0 (1,033)
Other...................................... -- (900) (900)
------ ------ ------
Book value as of December 31, 1996........... 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
====== ====== ======
</TABLE>
As of December 31, 1996 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).
The write off of investment in unlisted securities in 1996 mainly relates
to the write off of the company's investment in Sport 7, a television channel
that closed its operation in December of 1996.
F-48
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO THE 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
Land & Cable fixed Assets under
buildings Networks assets construction Total
--------- -------- ------ ------------ -------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1996
Net book value as of
January 1, 1996......... -- 60,011 378 -- 60,389
Additions................ 2,467 332,341 3,291 13,130 351,229
Disposals................ -- (680) -- -- (680)
Depreciation............. (279) (12,969) (693) -- (13,941)
----- ------- ------ ------- -------
Net book value as of
December 31, 1996....... 2,188 378,703 2,976 13,130 396,997
===== ======= ====== ======= =======
Balance as of December
31, 1996
Historical cost.......... 2,467 391,672 3,669 13,130 410,938
Accumulated
depreciation............ (279) (12,969) (693) -- (13,941)
----- ------- ------ ------- -------
Net book value........... 2,188 378,703 2,976 13,130 396,997
===== ======= ====== ======= =======
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
===== ======= ====== ======= =======
</TABLE>
Estimated useful lives and the depreciation method used for tangible fixed
assets 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 Annuity method
Passive parts (75%)................................. 20 Annuity method
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 note 3). As a result of the
different ways the Company obtained the cable networks it operates and
historical origins of these networks, the basis of valuation of these networks
varied significantly. The Company decided to analyse 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
F-49
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands of Dutch guilders)
the "current replacement value". The net difference between the book value and
the current replacement value is recorded under intangible fixed assets.
8. Intangible fixed assets
Intangible fixed assets movements and balances can be summarized as
follows:
<TABLE>
<S> <C>
Year ended December 31, 1996
Net book value as of January 1, 1996................................ 16,065
Additions........................................................... 180,169
Amortization........................................................ (8,254)
-------
Book value as of December 31, 1996.................................. 187,980
=======
Balance as of December 31, 1996
Historical cost..................................................... 196,234
Accumulated amortization............................................ (8,254)
-------
Net book value...................................................... 187,980
=======
Year ended December 31, 1997
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
=======
</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).
F-50
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands of Dutch guilders)
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,
--------------
1996 1997
------ ------
<S> <C> <C>
Balance as of January 1.................................... -- 4,220
Addition: connection charges received from clients......... 4,697 2,445
Less: release to income statement.......................... (477) (324)
------ ------
Balance end of period...................................... 4,220 6,341
====== ======
</TABLE>
10. Short term debt payable to shareholder
Relates to loans provided by NUON for financing fixed assets. The interest
rate charged in 1997 was 6.5% (1996: 6.35%).
11. Minority interest
The movements in the minority interest can be summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Balance as of January 1...................................... 2,099 1,820
Changes of minority interest held by third party............. -- 1,184
Less: share third parties in income.......................... (279) (683)
------ ------
Balance end of period........................................ 1,820 2,321
====== ======
</TABLE>
12. Commitments and contingent liabilities
Leases
TeleKabel has commitments for leasing of company cars amounting to NLG 928
yearly as per December 31, 1997. Maximum maturity period of the lease
agreements is four years.
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-51
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO THE 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 liabilites. 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
During 1998 the Company surrendered its interest 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 and CAI-Almere B.V., CAI-Dronten B.V., and CAI-Lelystad
B.V. as part of the Casema transaction (see note 3).
Early 1998, NUON and United Pan-Europe Communications N.V. (UPC) signed the
merger documents to combine their cable network activities in The Netherlands.
The companies completed the merger on August 6, 1998. As a result, the
TeleKabel shares have been transferred to the newly incorporated holding
company named United TeleKabel Holding N.V.
On January 19, 1999, UPC agreed to purchase NUON's 49% ownership interest
in UTH, increasing its ownership in UTH to 100%. The transaction will close
concurrent with the completion of an IPO, or failing such IPO, on or before
November 30, 1999.
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
Under Dutch GAAP the Company depreciates its cable network assets using the
annuity method of depreciation. Under US GAAP cable network assets are
depreciated on a straight line basis.
(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.
F-52
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
(in thousands of Dutch guilders)
(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>
4 months and
9 days period Years ended
ended December 31,
December 31, --------------
1995 1996 1997
------------- ------ ------
<S> <C> <C> <C>
Net income/(loss) under Dutch GAAP................ (2,385) (4,917) 2,890
US GAAP adjustment:
Depreciation on a straight line basis............. -- (6,477) (8,631)
Equity accounting for affiliates.................. -- 250 (6,540)
Accrued subscriber fees:
Goodwill amortization............................. -- 86 86
Release of subscriber accrual..................... -- (258) (258)
Income tax effect of US GAAP adjustments.......... -- 2,327 3,081
------ ------ ------
Net income/(loss) under US GAAP................... (2,385) (8,989) (9,372)
------ ------ ------
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Reconciliation of shareholder's equity:
Total shareholders' equity under Dutch GAAP................ 245,052 247,942
US GAAP adjustment:
Depreciation on a straight line basis...................... (6,477) (15,108)
Equity accounting for affiliates........................... 250 (6,290)
Accrued subscriber fees:
Goodwill................................................... 86 172
Accrued subscriber fees.................................... (258) (516)
Income tax effect of US GAAP adjustments................... 2,327 5,408
------- -------
Total shareholder's equity under US GAAP................... 240,980 231,608
======= =======
</TABLE>
F-53
<PAGE>
N.V. TELEKABEL BEHEER
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
AS OF JUNE 30, 1998
(in thousands of Dutch guilders, except for per share data)
<TABLE>
<CAPTION>
June 30, 1998
-------------
<S> <C>
ASSETS
Current assets
Cash and cash equivalents...................................... 11,554
Subscriber receivables, net.................................... 46,641
Inventory...................................................... 3,986
-------
Total current assets......................................... 62,181
Tangible fixed assets, net....................................... 578,773
Intangible assets, net........................................... 248,491
Long term investments............................................ 1,375
-------
Total assets................................................. 890,820
=======
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities
Accounts payable............................................... 38,410
Deferred income................................................ 5,092
Short-term debt payable to shareholder......................... --
Related party payables......................................... 529,086
Other payables and accrued expenses............................ 75,196
-------
Total current liabilities.................................... 647,784
Shareholder's equity
Common stock, NLG 10 par value, 100,000 shares authorized and
issued........................................................ 1,000
Additional paid-in capital..................................... 251,354
Accumulated deficit............................................ (9,318)
-------
Total shareholder's equity................................... 243,036
-------
Total liabilities and shareholder's equity................... 890,820
=======
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
F-54
<PAGE>
N.V. TELEKABEL BEHEER
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE 6 MONTHS ENDED JUNE 30, 1997 AND 1998
(in thousands of Dutch guilders)
<TABLE>
<CAPTION>
For the
Six Months Ended
June 30,
------------------
1997 1998
-------- --------
<S> <C> <C>
Service and other revenue................................... 64,372 74,328
Operating expenses:
Purchases relating to sales............................... (8,746) (11,145)
Personnel expenses........................................ (8,991) (9,703)
Depreciation and amortization............................. (15,944) (21,765)
Other operating expenses.................................. (18,108) (19,015)
-------- --------
Net operating (loss) income................................. 12,583 12,700
Equity results in associates.............................. (1,037) (15)
Interest expense, related party........................... (11,329) (17,591)
Other income/(expense), net............................... (39) 0
-------- --------
Income/(loss) before and after income taxes................. 178 (4,906)
Minority interests in subsidiaries........................ (58) 0
-------- --------
Net income/(loss)........................................... 120 (4,906)
======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
F-55
<PAGE>
N.V. TELEKABEL BEHEER
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE 6 MONTHS ENDED JUNE 30, 1997 AND 1998
(in thousands of Dutch guilders)
<TABLE>
<CAPTION>
For the
Six Months Ended
June 30,
-----------------
1997 1998
-------- -------
<S> <C> <C>
Net cash flows from operating activities..................... (8,266) 2,594
-------- -------
Cash flows from investing activities:
Capital expenditures......................................... (145,070) (36,900)
New acquisitions, net of cash acquired....................... 0 0
-------- -------
Net cash flows from investing activities..................... (145,070) (36,900)
-------- -------
Cash flows from financing activities:
Proceeds from short-term debt to parent company.............. 146,530 28,395
-------- -------
Net cash flows from financing activities..................... 146,530 28,395
-------- -------
Net increase (decrease) in cash and cash equivalents......... (6,806) (5,911)
Cash and cash equivalents at beginning of period............. -- 17,465
-------- -------
Cash and cash equivalents at end of period................... (6,806) 11,554
======== =======
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
F-56
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of Dutch guilders)
1. Basis of presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the months ended
June 30, 1998 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1998. For further information, refer
to the consolidated financial statements and footnotes thereto included herein
for the year ended December 31, 1997.
2. Significant acquisitions and divestitures
During 1998 the Company surrendered its interest in TeleKabel Zoetermeer
B.V. and the remaining 52.5% of the shares 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 and CAI-Almere B.V., CAI-Dronten B.V., and
CAI-Lelystad B.V. as part of the Casema transaction.
Early 1998, NUON and United Pan-Europe Communications N.V. (UPC) signed the
merger documents to combine their cable network activities in The Netherlands.
The companies completed the merger on August 6, 1998. As a result, the
TeleKabel shares have been transferred to the newly incorporated holding
company named United TeleKabel Holding N.V.
On January 19, 1999, UPC agreed to purchase NUON'S 49% ownership interest
in UTH, increasing its ownership in UTH to 100%. The transaction will close
concurrent with the completion of an IPO, or failing such IPO, on or before
November 30, 1999.
3. 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
Under Dutch GAAP the Company depreciates its cable network assets using the
annuity method of depreciation. Under US GAAP these are depreciated on a
straight line basis.
(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 of the 1997 figures). 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.
F-57
<PAGE>
N.V. TELEKABEL BEHEER
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS --
(Continued)
(in thousands of Dutch guilders)
Reconciliation of net (loss)/profit (in thousands of Dutch guilders):
<TABLE>
<CAPTION>
For the
Six Months Ended
June 30,
------------------
1997 1998
-------- --------
<S> <C> <C>
Net income/(loss) under Dutch GAAP.......................... 120 (4,906)
US GAAP adjustment:
Depreciation on a straight line basis....................... (4,316) (5,264)
Equity accounting for affiliates............................ (3,270) (500)
Accrued subscriber fees:
Goodwill amortization....................................... 43 (172)
Release of subscriber accrual............................... (129) 516
Income tax effect of US GAAP adjustments.................... 1,541 1,722
-------- --------
Net income/(loss) under US GAAP............................. (6,011) (8,604)
======== ========
</TABLE>
Reconciliation of shareholder's equity:
<TABLE>
<CAPTION>
As of
June 30, 1998
-------------
<S> <C>
Total shareholders' equity under Dutch GAAP....................... 243,036
US GAAP adjustment:
Depreciation on a straight line basis............................. (20,372)
Equity accounting for affiliates.................................. (6,790)
Income tax effect of US GAAP adjustments.......................... 7,130
-------
Total shareholder's equity under US GAAP.......................... 223,004
=======
</TABLE>
F-58
<PAGE>
INDEX TO FINANCIAL STATEMENT SCHEDULES
<TABLE>
<S> <C>
FINANCIAL STATEMENT SCHEDULE I
Condensed Financial Information of Registrant
Independent Auditors' Report on Schedules................................ S-2
Condensed Information as to the Financial Condition of Registrant........ S-3
Condensed Information as to the Operations of Registrant................. S-4
Condensed Information as to the Cash Flows of the Registrant............. S-5
Note to Schedule......................................................... S-6
FINANCIAL STATEMENT SCHEDULE II
Valuation and Qualifying Accounts........................................ S-8
</TABLE>
- --------
* Previously filed.
** To be filed by amendment.
(1) Incorporated by reference from Form 8-K filed by UIH, dated December 11,
1997 (File No. 0-21974).
(2) Incorporated by reference from Form S-4 filed by UIH, dated March 3, 1998
(File No. 333-47245).
S-1
<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 Form S-1 and have
issued our report thereon dated January 14, 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,
January 14, 1999
S-2
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
PARENT ONLY
SCHEDULE I
Condensed Information as to the Financial Condition of Registrant
(Stated in thousands of Dutch guilders, except share and per share amounts)
<TABLE>
<CAPTION>
As of December 31, As of September 30,
------------------------------------ -------------------
1996 1997 1998
----------------- ------------------ -------------------
(Pre-Acquisition) (Post-Acquisition) (Post-Acquisition)
<S> <C> <C> <C>
ASSETS:
Current assets
Cash and cash
equivalents.......... 20,949 43,306 7,189
Related party
receivables.......... 30,416 36,364 134,144
Other receivables,
net.................. 18,986 18,690 1,946
Other current assets.. 2,054 2,761 3,159
-------- --------- ---------
Total current
assets............. 72,405 101,121 146,438
Investments in, loans
and other advances to
affiliated companies,
accounted for under the
equity method, net..... 772,574 1,119,724 1,168,139
Property, plant and
equipment, net of
accumulated
depreciation of 333, 23
and 351, respectively.. 1,279 1,022 1,042
Deferred financing
costs, net of
accumulated
amortization of 0, 110
and 1,393,
respectively........... -- 16,813 16,200
Non-current restricted
cash and other assets.. 84 48,541 50,158
-------- --------- ---------
Total assets........ 846,342 1,287,221 1,381,977
======== ========= =========
LIABILITIES AND
SHAREHOLDERS' EQUITY:
Current liabilities
Related party accounts
payable.............. 17,095 34,402 25,429
Accrued liabilities... 7,408 12,776 13,009
Note payable to
shareholder.......... -- -- 119,070
Short-term debt....... 289,360 -- 34,020
Short-term debt,
related party........ -- 228,097 251,993
-------- --------- ---------
Total current
liabilities........ 313,863 275,275 443,521
Long-term debt ......... -- 528,386 657,634
Long-term notes payable
to shareholder......... 256,335 -- --
Other related party
debt................... 17,578 29,609 26,349
Deferred taxes and
other.................. -- 42,420 33,126
-------- --------- ---------
Total liabilities... 587,776 875,690 1,160,630
-------- --------- ---------
Shareholders' equity
Common stock, 0.667
par value,
150,000,000 shares
authorized,
81,000,000 shares
issued............... 54,000 54,000 54,000
Additional paid-in
capital.............. 315,570 621,164 631,323
Deferred
compensation......... -- -- (5,826)
Other cumulative
comprehensive income
(loss)............... 6,361 5,265 (17,399)
Accumulated deficit... (117,365) (146,237) (318,089)
Treasury stock, at
cost, 9,198,135
shares of common
stock................ -- (122,662) (122,662)
-------- --------- ---------
Total shareholders'
equity............. 258,566 411,530 221,347
-------- --------- ---------
Total liabilities
and shareholders'
equity............. 846,342 1,287,221 1,381,977
======== ========= =========
</TABLE>
S-3
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
PARENT ONLY
SCHEDULE I
Condensed Information as to the Operations of Registrant
(Stated in thousands of Dutch guilders, except share and per share amounts)
<TABLE>
<CAPTION>
For the Six For the Years Ended
Months Ended December 31, For the Nine
December 31, ----------------------------------- Months Ended
1995 1996 1997 September 30, 1998
----------------- ----------------- ----------------- ------------------
(Pre-Acquisition) (Pre-Acquisition) (Pre-Acquisition) (Post-Acquisition)
<S> <C> <C> <C> <C>
Management fee income
from related parties... 1,242 4,433 3,088 10,221
Corporate general and
administrative
expense................ (3,016) (1,679) (11,605) (49,051)
Depreciation and
amortization........... (621) (335) (736) (328)
---------- ---------- ---------- ----------
Net operating loss.... (2,395) 2,419 (9,253) (39,158)
Interest income......... 6,212 1,898 2,830 1,295
Interest income, related
party.................. 9,169 27,353 44,867 47,656
Interest expense........ (6,929) (8,418) (16,949) (27,727)
Interest expense,
related party.......... (11,068) (27,511) (33,362) (16,681)
Foreign exchange loss,
net.................... (4,192) (20,236) (12,864) (9,702)
---------- ---------- ---------- ----------
Net loss before income
taxes and other
items................ (9,203) (24,495) (24,731) (44,317)
Share in results of
affiliated companies,
net.................... (32,326) (51,341) (142,689) (129,231)
Income taxes............ -- -- 1,454 1,696
---------- ---------- ---------- ----------
Net loss.............. (41,529) (75,836) (165,966) (171,852)
========== ========== ========== ==========
Basic and diluted net
loss per common share.. (0.51) (0.94) (2.06) (2.39)
========== ========== ========== ==========
Weighted-average number
of common shares
outstanding............ 81,000,000 81,000,000 80,488,992 71,801,865
========== ========== ========== ==========
</TABLE>
S-4
<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 Six
Months Ended For the Years Ended December 31, For the Nine
December 31, ----------------------------------- Months Ended
1995 1996 1997 September 30, 1998
----------------- ----------------- ----------------- ------------------
(Pre-Acquisition) (Pre-Acquisition) (Pre-Acquisition) (Post-Acquisition)
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss................ (41,529) (75,836) (165,966) (171,852)
Adjustments to reconcile
net loss to net cash
flows from operating
activities:
Depreciation and
amortization.......... 621 335 736 328
Share in results of
affiliated companies,
net................... 29,292 54,375 153,079 129,230
Foreign exchange loss,
net................... 4,192 20,236 12,864 9,702
Compensation expense
related to stock
options............... -- -- 4,818 32,493
Other.................. (1,975) (1,545) (3,638) (1,280)
Changes in assets and
liabilities:
(Increase) decrease in
receivables........... (147,454) 86,309 (6,359) (81,036)
Increase in other non-
current assets........ (57) (27) (1,457) (2,015)
Increase (decrease) in
other current
liabilities........... 20,197 22,022 46,600 (8,740)
Increase (decrease) in
deferred taxes and
other................. -- -- 2,303 (37,454)
-------- -------- -------- --------
Net cash flows from
operating activities... (136,713) 105,869 42,980 (130,624)
-------- -------- -------- --------
Cash flows from
investing activities:
Investments in, loans to
and advances to
affiliated companies,
net.................... (325,087) (44,805) (294,532) (166,289)
Capital expenditures.... (1,054) (2,249) (1,308) (348)
Deposit to acquire
minority interest in
subsidiary............. -- -- (47,000) --
Sale of affiliated
companies.............. -- -- 11,070 --
Loans repaid by
subsidiaries........... -- -- 350,250 --
-------- -------- -------- --------
Net cash flows from
investing activities... (326,141) (47,054) 18,480 (166,637)
-------- -------- -------- --------
Cash flows from
financing activities:
Proceeds from short-term
borrowings............. 433,231 -- 91,415 --
Proceeds from short-term
borrowings, related
party.................. -- -- 228,097 23,896
Proceeds from long-term
borrowings............. 23,865 -- 498,699 130,000
Proceeds from note
payable to
shareholder............ -- -- -- 110,508
Deferred financing
costs.................. -- -- (17,139) --
Repayments long and
short-term borrowings.. -- (150,158) (377,443) (3,260)
Redemption of
convertible loans...... -- -- (170,171) --
Purchase shares from
shareholder............ -- -- (292,561) --
-------- -------- -------- --------
Net cash flows from
financing activities... 457,096 (150,158) (39,103) 261,144
-------- -------- -------- --------
Net (decrease) increase
in cash and cash
equivalents............ (5,758) (91,343) 22,357 (36,117)
Cash and cash
equivalents at
beginning of period.... -- 112,292 20,949 43,306
Cash contributed upon
formation.............. 118,050 -- -- --
-------- -------- -------- --------
Cash and cash
equivalents at end of
period................. 112,292 20,949 43,306 7,189
======== ======== ======== ========
Non-cash investing and
financing activities:
Issuance of shares upon
conversion of PIK
notes................. -- -- 169,899 --
======== ======== ======== ========
Supplemental cash flow
disclosures:
Cash paid for
interest.............. (6,713) (9,271) (52,447) 21,580
======== ======== ======== ========
Cash received for
interest.............. 3,949 26,277 25,091 888
======== ======== ======== ========
</TABLE>
S-5
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTE TO PARENT ONLY
SCHEDULE I
AS OF DECEMBER 31, 1996 (Pre-Acquisition), DECEMBER 31, 1997 AND
SEPTEMBER 30, 1998 (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, United International Holdings, Inc.
("UIH"), 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).
UIH contributed its interests in multi-channel television systems in Israel,
Ireland, the Czech Republic, Malta, Norway, Hungary, Sweden and Spain. UIH 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, UIH and
Philips each owned a 50% economic and voting interest in UPC.
On December 11, 1997, UIH acquired Philips' 50% interest in UPC (the "UPC
Acquisition"), thereby making it an effectively wholly-owned subsidiary of UIH
(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 UIH held by Philips (66,800), (ii) UIH 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) UIH purchased 13,121,604
shares of UPC directly from Philips, and (v) UPC repurchased Philips' remaining
equity interest in UPC (24,378,396 shares) (450,000). The UPC Acquisition was
financed with proceeds from a long-term revolving credit facility through UPC
with a syndicate of banks (305,200) (the "Tranche A Facility"), a bridge bank
facility through a subsidiary of UPC $111,200 (224,000) (the "Tranche B
Facility") and a cash investment by UIH of 327,400. Approximately 479,000 drawn
on the Tranche A Facility was used to repay existing debt of UPC in conjunction
with the UPC Acquisition.
UIH'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 UIH, 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 UIH.
As of December 11, 1997, the proportional net assets of UPC acquired by UIH
were recorded at fair market value based on the purchase price paid by UIH,
along with additional basis differences at the UIH level existing as of that
date. The total purchase accounting adjustments of 442,688 were allocated to
UPC's underlying net assets.
S-6
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTE TO PARENT ONLY
SCHEDULE I -- (Continued)
As a result of the UPC Acquisition and the associated push-down of UIH
basis on December 11, 1997, the condensed information as to financial position
of registrant as of December 31, 1997 and September 30, 1998 is presented on a
"post-acquisition" basis. The condensed information as to the operations and
the cash flows of the 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 1,640 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.
S-7
<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 Balance
at Charged at End
Beginning to of
Description of Period Expense Acquisitions Deductions(1) Period
----------- --------- -------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts receivable:
Nine months ended
September 30, 1998..... 7,153 1,368 1,032 (60) 9,493
===== ===== ===== ====== =====
Year ended December 31,
1997................... 5,835 2,093 543 (1,318) 7,153
===== ===== ===== ====== =====
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:
Nine months ended
September 30, 1998..... 2,209 109 -- (1,650) 668
===== ===== ===== ====== =====
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:
Nine months ended
September 30, 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.
S-8
<PAGE>
UNDERWRITING
UPC, UIH and the underwriters for the U.S. offering (the "U.S.
Underwriters") named below have entered into an underwriting agreement with
respect to the ordinary shares and ADSs being offered in the United States.
Subject to certain conditions, each U.S. Underwriter has severally agreed to
purchase the number of
ordinary shares indicated in the following table. Goldman, Sachs & Co.,
Morgan Stanley & Co. Incorporated and Donaldson, Lufkin & Jenrette Securities
Corporation are the representatives of the U.S. Underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. ..................................
Morgan Stanley & Co. Incorporated......................
Donaldson, Lufkin & Jenrette Securities Corporation....
----
Total................................................
====
</TABLE>
----------------
The U.S. Underwriters may choose to take some or all of their ordinary
shares in the form of ADSs.
If the U.S. Underwriters sell more ordinary shares than the total number
set forth in the table above, the U.S. Underwriters have an option to buy up to
an additional 1,150,000 ordinary shares from UPC to cover such sales. They may
exercise the option for 30 days after the date of this prospectus. If any
ordinary shares are purchased pursuant to the option, the U.S. Underwriters
will severally purchase ordinary shares in approximately the same proportion as
set forth in the table above. The U.S. Underwriters may choose to take some or
all of their additional ordinary shares in the form of ADSs.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the U.S. Underwriters by UPC. Such amounts are
shown assuming both no exercise and full exercise of the U.S. Underwriters'
option to purchase additional shares.
Paid by UPC
No Exercise Full Exercise
----------- -------------
Per Share... (Euro) (Euro)
Total....... (Euro) (Euro)
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any ordinary shares sold by the underwriters to securities dealers may be sold
at a discount of up to (Euro)(NLG ) per ordinary share or $ per ADS from the
initial public offering price. Any such securities dealers may resell any
shares purchased from the underwriters to certain other brokers or dealers at a
discount of up to (Euro)(NLG ) per ordinary share or $ per ADS from the initial
public offering price. If all the shares are not sold at the initial offering
price, the representatives may change the offering price and the other selling
terms. In accordance with customary practice in public offerings on the
Amsterdam Stock Exchange, seatholders of the Amsterdam Stock Exchange who are
not underwriters may, in the offering outside the United States, be allowed a
concession not in excess of % of the initial public offering price.
UPC and UIH have entered into an underwriting agreement with the
underwriters for the sale by UPC of 22,400,000 ordinary shares (in the form of
ordinary shares or ADSs) outside the United States. The terms and conditions of
both offerings are the same and the sale of shares in both offerings are
conditioned on each other. Goldman Sachs International and Morgan Stanley & Co.
International Limited are representatives of the underwriters for the offering
outside the United States (the "International Underwriters"). UPC has granted
the International Underwriters an option to purchase up to an aggregate of an
additional 3,450,000 ordinary shares (in the form of ordinary shares or ADSs)
similar to the option granted to the U.S. Underwriters.
The underwriters for both of the offerings have entered into an agreement
in which they agree to restrictions on where and to whom they and any dealer
purchasing from them may offer shares as a part of the distribution of the
shares. The underwriters also have agreed that they may sell shares between
each of the underwriting groups.
UPC and UIH have each agreed with the underwriters not to dispose of or
hedge any of
U-1
<PAGE>
their shares or securities convertible into or exchangeable for shares, subject
to certain exceptions, during the period from the date of this prospectus
continuing through the date one year after the date of this prospectus, except
with the prior written consent of the Joint Global Coordinators. This agreement
does not apply to any existing employee benefit plans. Certain of UPC's
employees have made a similar agreement with the underwriters for a period of
180 days. At the date of this prospectus, these employees hold options under
our Stock Option Plan which represent the right to acquire about 2,600,000
ordinary shares. See "Management -- Stock Option Plans". If the Discount Group
exercises its option, it has agreed to similar restrictions for 90 days. See
"Shares Available for Future Sale" for a discussion of certain transfer
restrictions.
The representatives do not expect sales to discretionary accounts to exceed
5% of the total number of ordinary shares (including ordinary shares in the
form of ADSs) offered.
Prior to the offerings, there has been no public market for the ordinary
shares or ADSs. The initial public offering price will be negotiated among UPC
and the Joint Global Coordinators. Among the factors to be considered in
determining the initial public offering price of the shares, in addition to
prevailing market conditions, will be UPC's historical performance, estimates
of UPC's business potential and earnings prospects, an assessment of UPC's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
The ordinary shares will be listed on the Official Market of the Amsterdam
Stock Exchange under the symbol "UPC" and the ADSs will be quoted on the NASDAQ
National Market under the symbol "UPCOY". MeesPierson is acting as listing and
paying agent in connection with the listing of the ordinary shares on the
Amsterdam Stock Exchange.
In connection with the offerings, the underwriters may purchase and sell
ordinary shares or ADSs in the open market. These transactions may include
short sales, stabilizing transactions and purchases to cover positions created
by short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offerings.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the shares
while the offerings are in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the
representatives have repurchased shares sold by or for the account of such
underwriter in stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the ordinary shares or ADSs. As a result, the price
of the ordinary shares or ADSs may be higher than the price that otherwise
might exist in the open market. If these activities are commenced, they may be
discontinued by the underwriters at any time. These transactions may be
effected on the Amsterdam Stock Exchange, on NASDAQ, in the over-the-counter
market or otherwise.
UPC and UIH have agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
UPC has also agreed to pay the representatives an amount in reimbursement of
some of their expenses.
This prospectus may be used by the underwriters and other dealers in
connection with offers and sales of the shares, including sales of shares
initially sold by the underwriters in the offering being made outside the
United States, to persons located in the United States.
The expected payment and closing date is February , 1999. Delivery of the
ADRs evidencing the ADSs will be made in New York, New York, through the book-
entry facilities of The Depository Trust Company, against payment in U.S.
dollars in immediately available funds. Delivery of ordinary shares will be
made in book-entry form through the facilities of NECIGEF, Morgan Guaranty
Trust Company of New York, Brussels office, as operator of the Euroclear
System, and Cedel Bank, societe anonyme, against payment in euros in
immediately available funds.
U-2
<PAGE>
Goldman Sachs Credit Partners, L.P., MeesPierson and Paribas have agreed to
become lenders to UTH, UPC's Dutch holding company, under the Junior UTH
Facility. MeesPierson N.V., Paribas, Deutsche Bank AG London, Citibank, N.A.
and another bank have agreed to become lenders to a subsidiary of UTH pursuant
to the Senior UTH Facility. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources". Each of the lenders named above is an underwriter or an affiliate
of an underwriter.
At UPC's request, the underwriters have reserved, out of the shares being
offered in the United States, $300 million worth of ordinary shares at the
initial public offering price for sale to Microsoft Corporation, which may be
sold to Microsoft in the form of ordinary shares or ADSs. This would represent
10,157,750 ordinary shares at the midpoint of the offering price range. If
Microsoft purchases all of the reserved shares, it will own approximately 8.3%
of UPC after this offering (without giving effect to the warrants it may
receive in connection with its technical services relationship with UPC). The
number of shares available for sale to the general public will be reduced to
the extent any of these reserved shares are purchased by Microsoft. Microsoft
has agreed that, if it does purchase any of such reserved shares, it will enter
into an agreement subjecting such shares to resale restrictions, similar to
those to which UPC and UIH have agreed, for a period of at least six months
after the date of this prospectus. In addition, Microsoft has agreed that, if
it does purchase any of such reserved shares, it will enter into an agreement
that it will not acquire more than 15% in the aggregate of UPC's outstanding
share capital without the prior approval of the Supervisory Board of UPC. See
"Relationship with Microsoft".
At UPC's request, the underwriters have reserved for sale at the initial
public offering price up to 200,000 ordinary shares that may be sold to
directors, officers or employees of UPC. These shares may also be sold to other
persons associated with UPC's directors, officers or employees. The number of
shares available for sale to the general public will be reduced to the extent
such shares are purchased. Any of these reserved shares not so purchased will
be offered by the underwriters on the same basis as the other shares offered
hereby.
U-3
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You
must not rely on any unauthorized information or representations. This
prospectus is an offer to sell or to buy only the shares offered hereby, but
only under circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus is current only as of its date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Exchange Rate Data....................................................... 17
Dilution................................................................. 18
Capitalization........................................................... 19
Selected Consolidated Financial Data..................................... 20
Pro Forma Selected Consolidated Financial Data........................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Business................................................................. 51
Technology............................................................... 86
Glossary of Technical Terms.............................................. 98
Corporate Ownership Structure............................................ 101
Regulation............................................................... 106
Management............................................................... 115
Security Ownership of Certain Beneficial Owners and Management........... 126
Certain Transactions and Relationships................................... 127
Relationship with UIH and Related Transactions........................... 129
Relationship with Microsoft.............................................. 131
Description of Share Capital............................................. 132
Summary of Additional Material Provisions of the Articles of Association
and Other Matters....................................................... 134
Description of American Depositary Shares................................ 136
Taxation................................................................. 147
Shares Eligible for Future Sale.......................................... 154
Experts.................................................................. 155
Legal Matters............................................................ 155
Enforcement of Civil Liabilities......................................... 155
Available Information.................................................... 156
Amsterdam Stock Exchange Listing......................................... 156
Index to Financial Statements............................................ F-1
Index to Financial Statement Schedules................................... S-1
Underwriting............................................................. U-1
</TABLE>
---------------
Through and including , 1999 (the 25th day after the date of this
prospectus), all dealers effecting transactions in the American Depositary
Shares representing the ordinary shares or the ordinary shares, whether or not
participating in this offering, may be required to deliver a prospectus. This
requirement is in addition to a dealer's obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or
subscription.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
United Pan-Europe Communications N.V.
Ordinary Shares
in the form of
American Depositary Shares
or Ordinary Shares
---------------
[LOGO OF UNITED PAN-EUROPE COMMUNICATIONS N.V. APPEARS HERE]
---------------
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
Donaldson, Lufkin & Jenrette
Representatives of the Underwriters
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO OF UNITED PAN-EUROPE COMMUNICATIONS N.V. APPEARS HERE]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Capitalized terms used but not defined in Part II have the meanings
ascribed to them in the Prospectus contained in this Registration Statement.
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the expenses (other than underwriting
discounts and commissions) expected to be incurred in connection with the
issuance and distribution of the securities registered hereby, all of which
expenses, except for the Commission registration fee, are estimated:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............. $387,710
NASD and blue sky fees.......................................... 30,500
Legal fees and expenses......................................... 1,600,000
Accounting fees................................................. 1,000,000
Printing and engraving expenses................................. 1,900,000
Miscellaneous................................................... 332,535
----------
Total........................................................... $5,250,745
==========
</TABLE>
The above expenses will be borne by UPC.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement**
3.1 Amended and Restated Articles of Association of UPC**
4.1 Form of Deposit Agreement*
4.2 The Articles of Association of UPC are included as Exhibit 3.1.
5.1 Opinion of Loeff Claeys Verbeke as to validity of ordinary shares**
8.1 Opinion of Holme Roberts & Owen LLP as to certain tax matters**
8.2 Opinion of Arthur Andersen as to certain 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. ("Philips Networks"),
the Company, Joint Venture, Inc. ("JVI") and the Company (1)
10.2 Loan Agreement for NLG1,100,000,000 multi-currency Revolving Credit
Facility dated as of October 8, 1997, between UPC and certain of its
subsidiaries and The Toronto-Dominion Bank as Agent for the financial
institutions identified therein, as amended by a Supplement Agreement
dated December 8, 1997(2)
10.3 Loan Agreement dated December 5, 1997, between Belmarken Holdings
B.V. ("Belmarken") as the Borrower, Cable Network Netherlands Holding
B.V., Binan Investments B.V. and Stipdon Investments B.V. as
Guarantors, The Toronto-Dominion Bank and Toronto-Dominion Capital as
Arrangers, the banks and financial institutions listed therein, The
Toronto-Dominion Bank as Agent and The Toronto-Dominion Bank as
Security Trustee, as amended by Waiver and amendment letter dated
December 11, 1997(2)
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
10.4 Registration Rights Agreement dated as of December 5, 1997, by and
among the Company, Belmarken, and The Toronto-Dominion Bank as the
Security Trustee(1)
10.5 Indenture dated as of February 5, 1998, between UIH and Firstar
Bank of Minnesota, N.A.(2)
10.6 Credit Facility Agreement dated February 20, 1998, between Cable
Network Brabant Holding B.V. ("CNBH") and Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A.*
10.7 Second Amendment Agreement to Credit Facility Agreement and to
Project Support Agreement dated September 30, 1998, between CNBH
and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A.*
10.8 Bank Facility Agreement dated January 31, 1996, between
Kabeltelevisie Amsterdam B.V. and ABN AMRO Bank N.V. in the
principal amount of up to NLG 375,000,000*
10.9 Loan Agreement dated August 31, 1998, between N.V. TeleKabel
Beheer, as borrower, and N.V. NUON Energie-Onderneming voor
Gelderland, Friesland en Flevoland, as lender*
10.10 Facility Agreement dated July 26, 1998, between Mediareseaux Marne
S.A., Paribas and the Banks and Financial Institutions listed in
Schedule 1 thereto*
10.11 Promissory Note dated November 9, 1998, made by Cable Network Zuid-
Oost Brabant Holding B.V. payable to the order of DIC Loans Ltd. in
the principal amount of $90,000,000*
10.12 Option Agreement dated November 5, 1998, among UPC, DIC and PEC*
10.13 Form of Registration Rights Agreement among UPC, DIC and PEC*
10.14 Form of Shareholders Agreement among UPC, DIC and PEC*
10.15 Sales Agreement dated December 17, 1997, between Stichting
Combivisie Regio, Setelco B.V. and UPC*
10.16 Purchase Agreement dated November 6, 1998, between Binan
Investments B.V., UA-UII, Inc. and UA-UII Management Inc.*
10.17 Shareholders Agreement dated July 6, 1995, between The Municipality
of Amsterdam, A2000 Holding N.V., and Kabeltelevisie Amsterdam
B.V.*
10.18 Consent Agreement dated September 27, 1997, between United and
Philips Communications B.V., US West International, B.V., Philips
Media B.V., UIH and JVI*
10.19 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.*
10.19A Articles of Association of Telekabel Wien Gesellschaft m.b.H.*
10.19B Agreement dated November 30, 1993, between Kabel-TV Wien
Gesellschaft m.b.H and Telekabel Wien Gesellschaft m.b.H.*
10.19C Rules of Procedure of Telekabel Wien Gesellschaft m.b.H., as
amended on April 10, 1995*
10.20 Tax Liability Agreement dated October 7, 1997, between UPC, Philips
Media B.V., Philips Coordination Center, Philips Media Networks
B.V., United International Holdings, Inc. ("UIH"), and Joint
Venture, Inc.("JVI")*
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
10.21 Agreement dated April 2, 1998, for the contribution of the Dutch
Cable Assets of UPC and NUON to UTH*
10.21A Shareholders Agreement dated August 6, 1998, between the Company,
NUON and UTH*
10.22 Joint Venture Agreement dated February 13, 1996, regarding A2000
Holding N.V. between US West International B.V. and UPC*
10.23 United Pan-Europe Communications N.V. Phantom Stock Option Plan,
March 20, 1998*
10.24 Amended Stock Option Plan dated March 18, 1998, between UPC and
Stichting
Administratie Kantoor UPC*
10.25 Form of Master Seconded Employee Services Agreement**
10.26 Form of UIH Registration Rights Agreement*
10.27 Form of UIH Management Services Agreement**
10.28 Consulting Agreement, dated June 1, 1995, between UIH and Mark L.
Schneider**
10.29 Employment Agreement, dated October 1, 1998, between UIH and J.
Timothy Bryan*
10.30 Form of Agreement between UIH and the Company**
10.31 Promissory Note dated January 25, 1999, with the Company as
borrower, and
UIH Europe, Inc. as holder, in the principal amount of
US$100,000,000*
10.32 Promissory Note dated January 25, 1999, with UPC Intermediates B.V.
as borrower, and UIH Europe, Inc. as holder, in the principal
amount of US$20,000,000*
10.33 Share Purchase Agreement dated January 19, 1999, by and between the
Company, Belmarken Holding B.V., NUON, N.V. Kraton and UTH, as
amended**
21.1 Subsidiaries of UPC*
23.1 Consent of Arthur Andersen (United Pan-Europe Communications N.V.)
23.2 Consent of PricewaterhouseCoopers N.V. (N.V. TeleKabel Beheer)*
23.3 The consent of Holme Roberts & Owen LLP is included in Exhibit 8.1
23.4 The consent of Loeff Claeys Verbeke is included in Exhibit 5.1
24.1 Powers of Attorney*
27.1 Financial Data Schedule*
99.1 Consents of Persons nominated for UPC's Supervisory Board*
</TABLE>
- --------
* Previously filed
** To be filed by amendment.
(1) Incorporated by reference from Form 8-K filed by UIH, dated December 11,
1997 (File No. 0-21974).
(2) Incorporated by reference from Form S-4 filed by UIH, dated March 3, 1998
(File No. 333-47245).
II-3
<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 Amendment No. 5 to Form S-1 and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in Amsterdam, The Netherlands, on this 26th day of January
1999.
United Pan-Europe Communications N.V. a
Dutch Public limited liability company
/s/ J. Timothy Bryan
By: ____________________________________
J. Timothy Bryan, President and
Chief Financial Officer
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>
Title/Position Held
Signature With the Registrant Date
--------- ------------------- ----
<S> <C> <C>
* Chairman of the Supervisory Board January 26, 1999
_________________________________
Gene W. Schneider
/s/ Michael T. Fries Supervisory Board Member and January 26, 1999
_________________________________ Authorized U.S. Representative
Michael T. Fries
Supervisory Board Member January , 1999
_________________________________
Richard De Lange
* Chairman of Board of Management January 26, 1999
_________________________________ and Chief Executive Officer
Mark L. Schneider
/s/ J. Timothy Bryan Board of Management Member, January 26, 1999
_________________________________ President and Chief Financial
J. Timothy Bryan Officer
* Board of Management Member and January 26, 1999
_________________________________ Vice Chairman
John F. Riordan
* Board of Management Member, January 26, 1999
_________________________________ Senior Vice President and
Anton H.E. v. Voskuijlen Managing Director
* Board of Management Member and January 26, 1999
_________________________________ Managing Director, Eastern
Nimrod J. Kovacs Europe
* Managing Director, Finance and January 26, 1999
_________________________________ Accounting (Principal Accounting
Ray D. Samuelson Officer)
</TABLE>
/s/ J. Timothy Bryan
*By: ____________________________
J. Timothy Bryan
Attorney-in-fact
II-4
<PAGE>
EXHIBIT INDEX
Exhibit
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<C> <S>
1.1 Form of Underwriting Agreement**
3.1 Amended and Restated Articles of Association of UPC**
4.1 Form of Deposit Agreement*
4.2 The Articles of Association of UPC are included as Exhibit 3.1.
5.1 Opinion of Loeff Claeys Verbeke as to validity of ordinary shares**
8.1 Opinion of Holme Roberts & Owen LLP as to certain tax matters**
8.2 Opinion of Arthur Andersen as to certain 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. ("Philips Networks"),
the Company, Joint Venture, Inc. ("JVI") and the Company (1)
10.2 Loan Agreement for NLG1,100,000,000 multi-currency Revolving Credit
Facility dated as of October 8, 1997, between UPC and certain of its
subsidiaries and The Toronto-Dominion Bank as Agent for the
financial institutions identified therein, as amended by a
Supplement Agreement dated December 8, 1997(2)
10.3 Loan Agreement dated December 5, 1997, between Belmarken Holdings
B.V. ("Belmarken") as the Borrower, Cable Network Netherlands
Holding B.V., Binan Investments B.V. and Stipdon Investments B.V. as
Guarantors, The Toronto-Dominion Bank and Toronto-Dominion Capital
as Arrangers, the banks and financial institutions listed therein,
The Toronto-Dominion Bank as Agent and The Toronto-Dominion Bank as
Security Trustee, as amended by Waiver and amendment letter dated
December 11, 1997(2)
10.4 Registration Rights Agreement dated as of December 5, 1997, by and
among the Company, Belmarken, and The Toronto-Dominion Bank as the
Security Trustee(1)
10.5 Indenture dated as of February 5, 1998, between UIH and Firstar Bank
of Minnesota, N.A. (the "UIH Indenture")(2)
10.6 Credit Facility Agreement dated February 20, 1998, between Cable
Network Brabant Holding B.V. ("CNBH") and Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A.*
10.7 Second Amendment Agreement to Credit Facility Agreement and to
Project Support Agreement dated September 30, 1998, between CNBH and
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A.*
10.8 Bank Facility Agreement dated January 31, 1996, between
Kabeltelevisie Amsterdam B.V. and ABN AMRO Bank N.V. in the
principal amount of up to NLG 375,000,000*
10.9 Loan Agreement dated August 31, 1998, between N.V. TeleKabel Beheer,
as borrower, and N.V. NUON Energie-Onderneming voor Gelderland,
Friesland en Flevoland, as lender*
10.10 Facility Agreement dated July 26, 1998, between Mediareseaux Marne
S.A., Paribas and the Banks and Financial Institutions listed in
Schedule 1 thereto*
10.11 Promissory Note dated November 9, 1998, made by Cable Network Zuid-
Oost Brabant
Holding B.V. payable to the order of DIC Loans Ltd. in the principal
amount of
$90,000,000*
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.12 Option Agreement dated November 5, 1998, among UPC, DIC and PEC*
10.13 Form of Registration Rights Agreement among UPC, DIC and PEC*
10.14 Form of Shareholders Agreement among UPC, DIC and PEC*
10.15 Sales Agreement dated December 17, 1997, between Stichting
Combivisie Regio,
Setelco B.V. and UPC*
10.16 Purchase Agreement dated November 6, 1998, between Binan
Investments B.V.,
UA-UII, Inc. and UA-UII Management Inc.*
10.17 Shareholders Agreement dated July 6, 1995, between The Municipality
of Amsterdam,
A2000 Holding N.V., and Kabeltelevisie Amsterdam B.V.*
10.18 Consent Agreement dated September 27, 1997, between United and
Philips
Communications B.V., US West International, B.V., Philips Media
B.V., UIH and JVI*
10.19 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.*
10.19A Articles of Association of Telekabel Wien Gesellschaft m.b.H.*
10.19B Agreement dated November 30, 1993, between Kabel-TV Wien
Gesellschaft m.b.H. and Telekabel Wien Gesellschaft m.b.H.*
10.19C Rules of Procedure of Telekabel Wien Gesellschaft m.b.H., as
amended on April 10, 1995*
10.20 Tax Liability Agreement dated October 7, 1997, between the Company,
Philips Media
B.V., Philips Coordination Center, Philips Media Networks B.V.,
United International
Holdings, Inc. ("UIH"), and Joint Venture, Inc.("JVI")*
10.21 Agreement dated April 2, 1998, for the contribution of the Dutch
Cable Assets of the
Company and NUON to UTH*
10.21A Shareholders Agreement dated August 6, 1998, between the Company,
NUON and UTH*
10.22 Joint Venture Agreement dated February 13, 1996, regarding A2000
Holding N.V.
between US West International B.V. and the Company*
10.23 United Pan-Europe Communications N.V. Phantom Stock Option Plan,
March 20, 1998*
10.24 Amended Stock Option Plan dated March 18, 1998, between UPC and
Stichting
Administratie Kantoor UPC*
10.25 Form of Master Seconded Employee Services Agreement**
10.26 Form of UIH Registration Rights Agreement*
10.27 Form of UIH Management Services Agreement**
10.28 Consulting Agreement, dated June 1, 1995, between UIH and Mark L.
Schneider**
10.29 Employment Agreement, dated October 1, 1998, between UIH and J.
Timothy Bryan*
10.30 Form of Agreement between UIH and the Company**
10.31 Promissory Note dated January 25, 1999, with the Company as
borrower, and UIH Europe, Inc. as holder, in the principal amount
of US$100,000,000*
10.32 Promissory Note dated January 25, 1999, with UPC Intermediates B.V.
as borrower, and with UIH Europe, Inc. as holder, in the principal
amount of US$20,000,000*
10.33 Share Purchase Agreement dated January 19, 1999, by and between the
Company, Belmarken Holding B.V., NUON, N.V. Kraton and UTH, as
amended**
21.1 Subsidiaries of UPC*
</TABLE>
<PAGE>
<TABLE>
<S> <C>
23.1 Consent of Arthur Andersen (United Pan-Europe Communications N.V.)
23.2 Consent of PricewaterhouseCoopers N.V. (N.V. TeleKabel Beheer)*
23.3 The consent of Holme Roberts & Owen LLP is included in Exhibit 8.1
23.4 The consent of Loeff Claeys Verbeke is included in Exhibit 5.1
24.1 Powers of Attorney*
27.1 Financial Data Schedule*
99.1 Consents of Persons nominated for the Company's Supervisory Board*
</TABLE>
- --------
* Previously filed
** To be filed by amendment.
(1) Incorporated by reference from Form 8-K filed by UIH, dated December 11,
1997 (File No. 0-21974).
(2) Incorporated by reference from Form S-4 filed by UIH, dated March 3, 1998
(File No. 333-47245).
<PAGE>
EXHIBIT 23.1
As independent public auditors, we hereby consent to the use in this
Registration Statement of our reports, dated January 14, 1999 on United Pan-
Europe Communications N.V. for the nine months ended September 30, 1998, the
years ended December 31, 1997 and 1996 and the six months ended December 31,
1995, included in this Registration Statement, and to all references to our
Firm included in this Registration Statement.
ARTHUR ANDERSEN
Amstelveen, The Netherlands
January 26, 1999
