<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to_________
Commission File No. 000-25365
United Pan-Europe Communications N.V.
(Exact name of Registrant as specified in its charter)
The Netherlands 98-0191997
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Beech Avenue 100, P.O. Box 74763
1070 BT Amsterdam, The Netherlands 1070 BT
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (31) 20-778-9840
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the Registrant's common stock as of August
14, 2000 was:
437,190,276 ordinary shares A, including
shares represented by American Depository Receipts
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
TABLE OF CONTENTS
PART 1 - FINANCIAL INFORMATION
------------------------------
<TABLE>
<CAPTION>
Page
Number
------
Item 1 - Financial Statements
------
<S> <C>
Consolidated Balance Sheets as of June 30, 2000 (Unaudited) and December 31, 1999......................... 1
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2000 and 1999
(Unaudited)............................................................................................... 2
Consolidated Statement of Shareholders' Equity for the Six Months Ended
June 30, 2000 (Unaudited)............................................................................ 3
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000
and 1999 (Unaudited)................................................................................. 4
Notes to Consolidated Financial Statements (Unaudited).................................................... 6
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations............. 23
------
Item 3 - Quantitative and Qualitative Disclosure About Market Risk......................................... 46
------
</TABLE>
PART II - OTHER INFORMATION
---------------------------
<TABLE>
<CAPTION>
<S> <C>
Item 4 - Submission of Matters to a Vote of Security Holders............................................... 51
------
Item 5 - Other Information................................................................................. 52
------
Item 6 - Exhibits and Reports on Form 8-K.................................................................. 60
------
</TABLE>
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONSOLIDATED BALANCE SHEETS
(Stated in thousands of Euros, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
ASSETS: 2000 1999
--------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents................................................................................ 562,226 1,025,460
Restricted cash.......................................................................................... 17,135 17,135
Subscriber receivables, net of allowance for doubtful accounts of 28,467 and 16,754, respectively....... 88,628 59,860
Other receivables, including related party receivables of 9,322 and 10,500, respectively................. 127,995 101,870
Inventory................................................................................................ 127,265 66,403
Prepaid expenses and other current assets................................................................ 124,032 72,925
--------- -----------
Total current assets............................................................................... 1,047,281 1,343,653
Other investments.......................................................................................... 360,234 623,341
Investments in and advances to affiliated companies, accounted for under the equity method, net............ 758,286 242,847
Property, plant and equipment, net of accumulated depreciation of 392,940 and 194,205, respectively........ 2,625,029 1,908,414
Goodwill and other intangible assets, net of accumulated amortization of 263,265 and 133,667, respectively. 3,772,564 2,611,413
Deferred financing costs, net of accumulated amortization of 13,165 and 5,937, respectively................ 128,932 77,861
Other assets............................................................................................... 26,734 1,734
--------- -----------
Total assets....................................................................................... 8,719,060 6,809,263
========= ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities
Accounts payable, including related party payables of 2,700 and 2,785, respectively...................... 323,457 239,747
Accrued liabilities...................................................................................... 431,988 273,141
Subscriber prepayments and deposits...................................................................... 82,069 41,208
Short-term debt.......................................................................................... 734,995 163,241
Current portion of long-term debt........................................................................ 12,158 50,291
--------- -----------
Total current liabilities.......................................................................... 1,584,667 767,628
Long-term debt............................................................................................. 5,713,994 3,903,410
Deferred taxes............................................................................................. 14,063 15,961
Deferred compensation...................................................................................... 57,967 70,804
Other long-term liabilities................................................................................ 25,219 19,365
--------- -----------
Total liabilities.................................................................................. 7,395,910 4,777,168
--------- -----------
Commitments and contingencies, see Note 10.
Minority interests in subsidiaries......................................................................... 19,003 11,895
Shareholders' equity (As adjusted for stock split, see Note 11)
Priority stock, 1.0 par value, 300 shares authorized, 300 and 300 shares issued, respectively.......... - -
Ordinary stock, 1.0 par value, 600,000,000 shares authorized, 437,190,276 and 435,604,497
shares issued and outstanding, respectively.......................................................... 437,191 435,605
Additional paid-in capital............................................................................... 2,611,521 2,371,951
Deferred compensation.................................................................................... (118,317) (47,425)
Accumulated deficit...................................................................................... (1,949,747) (1,114,219)
Other cumulative comprehensive income ................................................................... 323,499 374,288
--------- -----------
Total shareholders' equity......................................................................... 1,304,147 2,020,200
--------- -----------
Total liabilities and shareholders' equity......................................................... 8,719,060 6,809,263
========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
1
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in thousands of Euros, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months For the Six Months
-------------------------- ---------------------------
Ended June 30, Ended June 30,
-------------------------- ---------------------------
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Service and other revenue....................................... 237,989 83,103 437,589 150,634
Operating expense............................................... (151,138) (38,128) (293,020) (68,562)
Selling, general and administrative expense..................... (85,412) (72,970) (252,573) (120,314)
Depreciation and amortization................................... (159,162) (38,665) (289,865) (67,343)
----------- ----------- ----------- -----------
Net operating loss........................................ (157,723) (66,660) (397,869) (105,585)
Interest income................................................. 8,756 3,907 22,129 6,135
Interest expense................................................ (167,289) (10,828) (307,682) (28,183)
Foreign exchange gain (loss) and other income (expense), net.... (43,999) 5,781 (123,952) 5,459
----------- ----------- ----------- -----------
Net loss before income taxes and other items.............. (360,255) (67,800) (807,374) (122,174)
Share in results of affiliated companies, net................... (9,843) (5,852) (31,058) (15,051)
Minority interests in subsidiaries.............................. 1,506 87 2,490 52
Income tax benefit.............................................. 435 674 414 508
----------- ----------- ----------- -----------
Net loss.................................................. (368,157) (72,891) (835,528) (136,665)
=========== =========== =========== ===========
Basic and diluted net loss per ordinary share(1)................ (0.84) (0.19) (1.92) (0.39)
=========== =========== =========== ===========
Weighted-average number of ordinary shares
outstanding(1)................................................ 436,496,338 387,738,369 436,053,889 347,864,091
=========== =========== =========== ===========
</TABLE>
(1) As adjusted for the stock split. See Note 11.
The conversion of Dutch Guilder amounts into Euros related to the financial
information presented prior to the creation of the Euro, was calculated
using the exchange rate of 1 Euro to 2.20371 Dutch Guilders.
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Stated in thousands of Euros, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Priority Stock Ordinary Stock Additional
------------------------ ---------------------- Paid-In
Shares Amount Shares (2) Amount Capital
---------- ---------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1999........................... 300 - 435,604,497 435,605 2,371,951
Issuance of shares related to converted United Loan.. - - 624,942 625 (625)
Issuance of warrants................................. - - - - 121,010
Deferred compensation expense related to
stock options and restricted stock, net ......... - - - - 53,381
Amortization of deferred compensation ............... - - - - -
SAB 51 gain on subsidiary's issuance of shares....... - - - - 53,765
Issuance of shares related to acquisiton
of minority interest in UPC France............... - - 960,837 961 12,039
Unrealized loss on investments....................... - - - - -
Change in cumulative translation adjustments ........ - - - - -
Net loss ............................................ - - - - -
Total comprehensive income (loss).................... - - - - -
---------- ---------- ----------- --------- ------------
Balance, June 30, 2000............................... 300 - 437,190,276 437,191 2,611,521
========== ========== =========== ========= ============
Other Cumulative
Comprehensive
Deferred Accumulated Income
Compensation Deficit (Loss) (1) Total
-------------- ------------- ---------------- --------------
<S> <C> <C> <C> <C>
Balance, December 31, 1999........................... (47,425) (1,114,219) 374,288 2,020,200
Issuance of shares related to converted United Loan.. - - - -
Issuance of warrants................................. - - - 121,010
Deferred compensation expense related to
stock options and restricted stock, net ......... (53,381) - - -
Amortization of deferred compensation ............... (17,511) - - (17,511)
SAB 51 gain on subsidiary's issuance of shares....... - - - 53,765
Issuance of shares related to acquisiton
of minority interest in UPC France............... - - - 13,000
Unrealized loss on investments....................... - - (53,664) (53,664)
Change in cumulative translation adjustments ........ - - 2,875 2,875
Net loss ............................................ - (835,528) - (835,528)
--------------
Total comprehensive income (loss).................... - - - (886,317)
-------------- ------------- ---------------- --------------
Balance, June 30, 2000............................... (118,317) (1,949,747) 323,499 1,304,147
============== ============= ================ ==============
</TABLE>
(1) As of December 31, 1999, Other Cumulative Comprehensive Income (Loss)
represents foreign currency translation adjustments of 4,023 and unrealized gain
on investments of 370,265. As of June 30, 2000, Other Cumulative Comprehensive
Income (Loss) represents foreign currency translation adjustments of 6,898 and
unrealized gain on investments of 316,601.
(2) As adjusted for the stock split. (see Note 11)
The conversion of Dutch Guilder amounts into Euros related to the
financial information presented prior to the creation of
the Euro, was calculated using the exchange rate of
1 Euro to 2.20371 Dutch Guilders.
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in thousands of Euros, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
----------------------------
Ended June 30,
----------------------------
2000 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. (835,528) (136,665)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization......................... 289,865 67,343
Amortization of deferred financing costs.............. 8,175 927
Accretion of interest expense......................... 110,199 4,588
Share in results of affiliated companies, net......... 31,058 15,051
Compensation expense related to stock options......... (27,421) 45,462
Minority interests in subsidiaries.................... (2,490) (52)
Exchange rate differences in loans.................... 110,889 201
Other................................................. (9,322) (4,764)
Changes in assets and liabilities:
Increase in subscriber receivables................. (28,768) (14,716)
Increase in other receivables...................... (58,695) (4,350)
Increase in inventories............................ (21,881) (16,916)
Increase in other non-current assets............... (41,693) (12,383)
Increase in other current liabilities.............. 238,150 25,468
Increase in deferred taxes and other
long-term liabilities............................ 3,972 2,767
------------- ------------
Net cash flows from operating activities.................. (233,490) (28,039)
------------- ------------
Cash flows from investing activities:
Restricted cash released, net............................. - 8,900
Investment in securities, net............................. (44,538) (15,652)
Investments in and advances to affiliated companies, net.. (310,954) (23,136)
Capital expenditures...................................... (551,740) (143,112)
Acquisitions, net of cash acquired........................ (1,356,930) (395,316)
Sale of affiliated companies.............................. - 16,648
------------- ------------
Net cash flows from investing activities.................. (2,264,162) (551,668)
------------- ------------
Cash flows from financing activities:
Proceeds from initial public offering, net................ - 1,207,083
Proceeds from senior notes................................ 1,594,161 -
Proceeds from exercise of DIC option...................... - 40,681
Proceeds from short-term borrowings....................... 572,162 6,985
Proceeds from long-term borrowings........................ 358,133 309,596
Deferred financing costs.................................. (58,378) (4,809)
Repayments of long-term and short-term borrowings......... (431,593) (703,029)
Repayments on note payable to shareholder................. - (71,442)
Repayments on short-term note............................. - (16,499)
------------- ------------
Net cash flows from financing activities.................. 2,034,485 768,566
------------- ------------
Effect of exchange rates on cash.......................... (67) 146
------------- ------------
Net (decrease) increase in cash and cash equivalents...... (463,234) 189,005
Cash and cash equivalents at beginning of period.......... 1,025,460 13,419
------------- ------------
Cash and cash equivalents at end of period................ 562,226 202,424
============= ============
The conversion of Dutch Guilder amounts to Euros related to the financial information presented prior
to the creation of the Euro, was calculated using the exchange rate as of January 1, 1999, which was
1 Euro to 2.20371 Dutch Guilders.
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
4
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS (2)
(Stated in thousands of Euros, except share and per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months
-----------------------------
Ended June 30,
-----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Non-cash investing and financing activities
Unrealized (loss) gain on investments........................ (53,664) 136,135
============= =============
Issuance of warrants......................................... 121,010 29,223
============= =============
Supplemental cash flow disclosures:
Cash paid for interest....................................... (113,781) (34,056)
============= =============
Cash received for interest................................... 23,879 5,735
============= =============
Significant Acquisitions:
Acquisition of K&T Group (1):
Property, plant and equipment................................ (236,959) -
Investments in affiliated companies.......................... (8,767) -
Goodwill..................................................... (817,893) -
Long-term liabilities........................................ 234,457 -
Net current liabilities...................................... 8,455 -
------------- -------------
(820,707) -
Receivables acquired......................................... (225,581) -
------------- -------------
Total cash paid.......................................... (1,046,288) -
============= =============
Acquisition of 49% of United Telekabel Holding N.V.:
Property, plant and equipment................................ - (185,835)
Investments in affiliated companies.......................... - (41,439)
Goodwill..................................................... - (227,190)
Long-term liabilities........................................ - 214,613
Net current liabilities...................................... - 4,765
------------- -------------
Total cash paid.......................................... - (235,086)
Cash acquired............................................ - 12,060
------------- -------------
- (223,026)
============= =============
The conversion of Dutch Guilder amounts to Euros related to the financial information presented prior
to the creation of the Euro, was calculated using the exchange rate of
1 Euro to 2.20371 Dutch Guilders.
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
(1) These amounts are based on the preliminary purchase price allocation.
5
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2000
(Monetary amounts stated in thousands of Euros,
except share and per share amounts)
(Unaudited)
1. Organization and Nature of Operations
United Pan-Europe Communications N.V. (''UPC'' or the ''Company'') was
established as a joint venture for the purpose of acquiring and developing
multi-channel television and telecommunications systems in Europe. On July 13,
1995, UnitedGlobalCom, Inc. (''United''), a Delaware corporation, and Philips
Electronics N.V. (''Philips''), an N.V. in The Netherlands, contributed their
respective ownership interests in European and Israeli multi-channel television
systems to UPC. As a result of this transaction, United and Philips each owned
a 50% economic and voting interest in UPC. On December 11, 1997, United
acquired Philips' 50% interest in UPC, thereby making it an effectively wholly-
owned subsidiary of United (subject to certain employee equity incentive
compensation arrangements). In February 1999, UPC concluded an initial public
offering. UPC's network footprint covers 17 countries in Europe and Israel and
offers communication services in many European countries through its business
lines: cable television, telephony, internet/data services, direct-to-home
("DTH") and programming.
The following chart presents a summary of the Company's significant
investments as of June 30, 2000:
6
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
UPC'S Ownership
---------------------
<S> <C>
Austria:
Telekabel Group.............................................................. 95.0%
Belgium:
UPC Belgium (formerly Radio Public N.V./S.A.)................................ 100.0%
Czech Republic:
KabelNet..................................................................... 100.0%
Kabel Plus................................................................... 99.9%
France:
UPC France (1)............................................................... 92.0%
Germany:
PrimaCom AG ("Primacom") (2)................................................. 25.1%
Hungary:
UPC Magyarorszag (formerly Telekabel Hungary)................................ 100.0%
Monor Communications Group, Inc. ("Monor")................................... 98.7%
Ireland:
Tara Televison Limited ("Tara").............................................. 80.0%
Israel:
Tevel Israel International Communications Ltd. ("Tevel")..................... 46.6%
Malta:
Melita Cable TV P.L.C. ("Melita")............................................ 50.0%
The Netherlands:
UPC Nederland (formerly United Telekabel Holding N.V. ("UTH")) (3)........... 100.0%
Priority Telecom N.V. ("Priority Telecom")................................... 100.0%
chello broadband N.V. ("chello")............................................. 100.0%
UPC Programming B.V. ("UPCtv")............................................... 100.0%
Norway:
UPC Norge AS ("UPC Norge") (formerly Janco Multicom)......................... 100.0%
ElTele Ostfold............................................................... 100.0%
Poland:
UPC Polska, Inc ("UPC Polska") (formely @Entertainment, Inc.
("@Entertainment"))........................................................ 100.0%
UPC Broadcast Centre Ltd. ("UPC Broadcast Centre") (formely Wizja TV)........ 100.0%
Poland Communications, Inc. ("PCI").......................................... 100.0%
Romania:
Eurosat...................................................................... 51.0%
AST Romania (4).............................................................. 70.0%
Slovak Republic:
Trnavatel.................................................................... 95.0%
Kabeltel..................................................................... 100.0%
UPC Slovensko s r.o. (formerly SKT spol s r.o.).............................. 100.0%
Spain:
Iberian Programming Services ("IPS")......................................... 50.0%
Munditelecom................................................................. 51.0%
Sweden:
UPC Sweden (formerly StjarnTVnatet AB ("Stjarn"))........................... 100.0%
United Kingdom:
Xtra Music Ltd............................................................... 41.0%
Other:
SBS Broadcasting SA ("SBS").................................................. 23.5%
</TABLE>
(1) Our investments in Mediareseaux, Videopole, Time Warner Cable France, RCF
and Intercomm are held through UPC France.
(2) Our investment in Primacom was increased during the first quarter of 2000
to 25.1% and is being accounted for under the equity method of accounting.
As of December 31, 1999 this investment was classified as an "other
investment" and was accounted for under SFAS 115 as an available for sale
investment.
(3) Our investments in GelreVision, A2000, Telekabel Velp, K&T Group, Tebecai
and Haarlem are held through UPC Nederland.
(4) Our investments in Multicanal Holdings, Control Cable Ventures, Diplomatic
International and Selektronic are held through AST Romania.
7
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Summary of Significant Accounting Policies
Change in Reporting Currency to the Euro
Effective December 31, 1999, UPC changed its reporting currency to the Euro.
Prior to December 31, 1999, UPC's reporting currency was the Dutch guilder. On
January 1, 1999, the exchange rate between the Dutch guilder and the Euro was
fixed at 2.20371 Dutch guilders to 1 Euro. UPC has restated its prior year
consolidated financial statements by retroactively applying the fixed exchange
rate of 2.20371 to the Dutch guilder amount previously reported. The
comparative financial statements reported in Euros depict the same trends as
would have been presented if UPC had continued to present its financial
statements in Dutch guilders.
Basis of Presentation
The accompanying consolidated financial statements of the Company have been
prepared in accordance with United States generally accepted accounting
principles. The preparation of financial statements in conformity with United
States generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities, at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
In management's opinion, all adjustments of a normal, recurring nature have
been made which are necessary to present fairly the financial position of the
Company as of June 30, 2000 and the results of its operations for the six and
three months ended June 30, 2000 and 1999. For a more complete understanding of
the Company's financial position and results of operations see the consolidated
financial statements of the Company included in the Company's annual report on
Form 10-K for the year ended December 31, 1999.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the
accounts of UPC and all subsidiaries where it exercises a controlling interest
through the ownership of a majority voting interest, except for UTH from
inception (August 6, 1998) through February 1, 1999, where because of certain
minority shareholder's rights the Company accounted for its investment in UTH
using the equity method of accounting. On February 17, 1999, UPC acquired the
minority shareholder's interest in UTH and began consolidating UTH effective
February 1, 1999. All significant intercompany accounts and transactions have
been eliminated in consolidation.
New Accounting Principles
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, ''Accounting for Derivative Instruments
and Hedging Activities'' (''SFAS 133''), which requires that companies recognize
all derivatives as either assets or liabilities in the balance sheet at fair
value. Under SFAS 133, accounting for changes in fair value of a derivative
depends on its intended use and designation. In June 1999, the FASB approved
Statement of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of the Effective Date of FASB
Statement No. 133" ("SFAS 137"). SFAS 137 amends the effective date of SFAS
133, which will now be effective for UPC's first quarter 2001. The Company is
currently assessing the effect of this new standard.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 "Views on Selected Revenue Recognition Issues"
("SAB 101") which provides the staff's views in applying generally accepted
accounting principles to selected revenue recognition issues. Implementation of
SAB 101 is required for the fourth quarter of 2000. The Company is currently
assessing the effect of this new standard.
8
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Reclassifications
Certain prior period amounts have been reclassified for comparability with
the June 30, 2000 presentation.
3. Acquisitions
United Telekabel Holding N.V.
In February 1999, UPC acquired the remaining 49% of UTH which it did not
already own from NUON for 235.1 million. In addition, UPC repaid NUON and
assumed from NUON a 15.1 million subordinated loan, including accrued interest,
dated December 23, 1998, owed by UTH to NUON. Effective February 1, 1999, UPC
began consolidating its investment in UTH.
StjarnTVnatet AB
In July 1999, UPC acquired Stjarn, which operates cable television systems
serving the greater Stockholm area, for a purchase price of USD397.0 million
(371.1 million). USD100.0 million (93.5 million) of the purchase price was paid
in the form of a one year note with interest at 8% per annum and the balance of
the purchase price was paid in cash. The Stjarn acquisition was structured as a
purchase of shares of Stjarn's parent holding company, NBS Nordic Broadband
Services AB ("NBS Nordic"). The acquisition was accounted for under purchase
accounting. Effective August 1, 1999, UPC began consolidating its investment in
Stjarn.
@Entertainment Inc.
In August 1999, UPC acquired 100% of @Entertainment, Inc.
("@Entertainment"), which provides cable television, DTH satellite television
and related programming services in Poland, for a purchase price of USD807.0
million (750.7 million). The acquisition was accounted for under purchase
accounting. Effective August 1, 1999, UPC began consolidating its investment in
@Entertainment.
A2000
In September 1999, UPC acquired, through UPC Nederland, the remaining 50% of
A2000 that it did not already own for USD229.0 million (214.0 million),
including the assumption of receivables from A2000 of approximately 12.2
million. The acquisition was accounted for under purchase accounting. As of
September 1, 1999, UPC Nederland began consolidating its investment in A2000.
Eneco K&T Group
In March 2000, UPC acquired the Eneco K&T Group ("K&T"), the cable interests
of N.V. ENECO, for a consideration of 1,046.3 million, including acquired
receivables of approximately 225.6 million. The acquisition was accounted for
under purchase accounting. Effective March 31, 2000, UPC began consolidating its
investment in K&T Group.
Pro Forma Information
The following unaudited pro forma condensed consolidated operating results
for the six months ended June 30, 2000 and 1999 give effect to UPC's
acquisitions of the remaining 49% of UTH, 100% of Stjarn, 100% of
@Entertainment, the remaining 50% of A2000 and 100% of K&T Group as if these
acquisitions had occurred at the beginning of the period presented. This
unaudited pro forma condensed consolidated financial information does not
purport to represent what the Company's results of operations would actually
have been if such transactions had in fact occurred on such date. The Company
uses preliminary purchase price allocations when reporting the value of certain
assets and liabilities acquired in business combinations. The Company finalizes
such purchase price allocations within one year of consummating a business
combination. Accordingly, the pro forma operating results reflect the usage of
these preliminary purchase price allocations in addition to other currently
available information and certain assumptions that management believes are
reasonable.
9
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
For the Six Months Ended For the Six Months Ended
June 30, 2000 June 30, 1999
-------------------------- ---------------------------
Historical Pro Forma Historical Pro Forma
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Service and other revenue.............. 437,589 454,833 150,634 282,897
============ =========== ============ ===========
Net loss............................... (835,528) (884,516) (136,665) (426,733)
============ =========== ============ ===========
Weighted-average number of
ordinary shares outstanding........ 436,053,889 436,053,889 347,864,091 357,020,733
============ =========== ============ ===========
Basic and diluted net loss
per ordinary share................. (1.92) (2.03) (0.39) (1.20)
============ =========== ============ ===========
</TABLE>
The following acquisitions were also completed or agreed upon subsequent to
December 31, 1999.
Tebecai Netwerken B.V. and Tebecai Telecom B.V.
In February 2000, UPC acquired, through UPC Nederland, 100% of the shares of
Tebecai Netwerken B.V. and Tebecai Telecom B.V. ("Tebecai"), for a purchase
price of 62.2 million. Tebecai owns and operates cable networks in Zutphen,
Doetinchem and the surrounding municipalities. The acquisition was accounted
for under purchase accounting. Effective February 1, 2000, UPC Nederland began
consolidating its investment in Tebecai.
Intercomm France Holding S.A.
In February 2000, UPC acquired, through UPC France, Intercomm France Holding
S.A. ("Intercomm") (a wholly-owned subsidiary of Intercomm Holdings, L.L.C.).
UPC funded the acquisition with 36.0 million cash and shares in UPC France.
Following the transaction, UPC controls 92% of its combined French entities with
Intercomm Holdings LLC owning the remaining 8%. The acquisition was accounted
for under purchase accounting. Effective March 1, 2000, UPC France began
consolidating its investment in Intercomm.
ElTele Ostfold and Vestfold Systems
In March 2000, UPC aquired 100% of the equity of ElTele Ostfold and
Vestfold ("ETO") from the energy companies Fredrikstad Energi as, Ostfold
Energiverk and Hafslund. UPC paid NKR 320.0 million (39.3 million) for the
companies. Effective March 1, 2000, UPC began consolidating its investment in
ETO.
SBS
In February 2000, UPC acquired an additional 10.2% of SBS for 162.5 million,
increasing its ownership to approximately 23.5%. The investment in SBS is
accounted for under the equity method of accounting.
UPC Magyarorszag Minority Interest
In March 2000, UPC acquired the 20.75% minority stake held in UPC
(Magyarorszag) by the First Hungary Fund for 63.9 million in cash. This
transaction allows UPC to assume 100% control of its Hungarian operations.
Kabel Haarlem B.V.
In March 2000, UPC acquired 100% of the Haarlem cable network. UPC paid 62.2
million. Haarlem's cable network is located close to UPC Nederland's existing
properties. Effective March 1, 2000, UPC Nederland began consolidating its
investment in Haarlem.
10
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Awards for Wireless Licenses
In March 2000, UPC's wireless communications division, Priority Wireless, won
two national licenses to build and operate Broadband Fixed Wireless Access
networks in the 3.5 GHz band in Spain and Switzerland. In addition, UPC was
awarded regional 26 GHZ licenses in Geneva and Zurich. The Spanish license was
awarded at no cost by the Ministry of Public Works and Telecommunications in a
competitive tender based on technical and financial ability. Priority Wireless
won the Swiss license for 95.2 million, which was funded in July, by competing
in a public auction. The auction was conducted by Ofcom, the Swiss regulator
for telecommunications services.
In April 2000, Priority Wireless secured another broadband fixed wireless
access license in Finland. The Finnish license is a 26 GHz broadband fixed
wireless access license which covers the nine most populous regions in Finland,
including the capital Helsinki. The license was granted at no cost by Finland's
regulatory authority.
Agreement to Acquire an Interest in EWT/TSS Group
In April 2000, UPC announced that, through its subsidiary UPC Germany Gmbh
("UPC Germany"), it will acquire 100% of EWT/TSS Group ("EWT/TSS"). The
consideration for the acquisition of EWT/TSS is 25% cash and 75% stock in UPC
Germany. The cash position is expected to be approximately 237.2 million.
EWT/TSS is headquartered in Augsburg, Germany. The acquisition is expected to
close in the third quarter of 2000. Following the acquisition, UPC will own 51%
of UPC Germany.
Agreement to Acquire Cignal Global Communications
In April 2000, Priority Telecom, announced that it has signed a Memorandum of
Understanding to acquire Cignal Global Communications ("Cignal"), a US based
provider of global network services. In a stock-based deal, Priority Telecom is
acquiring 100% of Cignal in exchange for a 16% interest in Priority Telecom.
The transaction is subject to regulatory approval and is expected to close
during the third quarter of 2000.
Agreement to Acquire Interest in Telewest Communications plc
On June 26, 2000, UPC announced that it will acquire a 25% economic interest
in Telewest Communications plc ("Telewest"). The economic interest in Telewest
will be acquired by UPC from United as part of a series of related transactions
by United and Liberty Media Corporation ("Liberty") whereby Liberty will
contribute to United its European and Latin American broadband assets in return
for USD200 million cash and 75.3 million Class B Shares of United.
The Liberty broadband assets contributed to United will include a non-voting,
99% economic interest in a limited liability company ("LLC") which holds 724.3
million ordinary shares of Telewest, representing approximately 25% of the total
issued share capital in Telewest. Subsequent to closing, United has agreed to
contribute the LLC interest to UPC in exchange for 128.2 million shares of UPC,
increasing United's ownership in UPC from approximately 51% today to 61% on a
pro forma basis. The remaining 1% of the LLC and sole management power over the
LLC will be held by Liberty. UPC has a right to obtain this interest after
clearance of all appropriate regulatory and third party approvals. UPC will
account for its interest in Telewest under the equity method of accounting.
Closing of the transaction is subject to certain regulatory, shareholder
and third party approvals which the parties expect to complete in the fourth
quarter of 2000.
11
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Investments in and Advances to Affiliated Companies, Accounted for Under
the Equity Method
<TABLE>
<CAPTION>
As of June 30, 2000
--------------------------------------------------------------------------------
Investments in Cumulative Cumulative Cumulative
and Advances to Dividends Share in Results of Translation
Affiliated Companies Received Affiliated Companies Adjustments Total
-------------------- ------------ -------------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Tevel............................................ 89,817 (5,500) (3,240) 4,700 85,777
Melita........................................... 12,699 - (492) 915 13,122
Xtra Music....................................... 11,493 - (1,414) (2,787) 7,292
IPS.............................................. 10,065 (2,742) 2,083 5,686 15,092
SBS.............................................. 261,999 - (11,793) 12,192 262,398
Fox Kids Poland.................................. 7,171 - (260) (14) 6,897
Twoj Styl........................................ 10,023 - 1,198 145 11,366
PrimaCom......................................... 345,096 - (11,406) - 333,690
Other, net....................................... 23,539 - (4,830) 3,943 22,652
-------------------- ------------ -------------------- ----------- ----------
Total............................................ 771,902 (8,242) (30,154) 24,780 758,286
==================== ============ ==================== =========== ==========
</TABLE>
5. Other Investments
Marketable Equity Securities of United, at Fair Value
As of June 30, 2000, a subsidiary of UPC owned 5,569,240 shares of United's
Class A Common shares with a fair market value of 273,016. The fair market
value of the shares at December 31, 1999 was 390,881, resulting in an unrealized
loss of 117,865 for the six months ended June 30, 2000.
In September 1999, UPC agreed to form a 50 / 50 joint venture or a similar
arrangement with Liberty to evaluate content and distribution opportunities in
Europe. UPC would have contributed its 5.6 million Class A common shares of
United that it owns to the joint venture. Due to the Telewest transaction (see
Note 3), formation of the joint venture will not be consummated.
Terayon Warrants
UPC has warrants to acquire from Terayon Communication Systems, Inc
("Terayon"), 2 million shares of Terayon's Common Stock (listed on Nasdaq), at a
price of USD 30.75 per share. UPC has recorded an unrealized gain of 70.2
million in its shareholders' equity statement as of June 30, 2000.
6. Property, Plant and Equipment
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Cable distribution networks....................... 2,315,035 1,610,058
Subscriber premises equipment and converters...... 252,308 152,713
DTH and MMDS distribution facilities.............. 120,998 78,772
Office equipment, furniture and fixtures.......... 132,531 71,712
Buildings and leasehold improvements.............. 110,596 109,147
Other............................................. 86,501 80,217
------------- ------------
3,017,969 2,102,619
Accumulated depreciation................... (392,940) (194,205)
------------- ------------
Property, plant and equipment, net......... 2,625,029 1,908,414
============= ============
</TABLE>
12
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Goodwill and Other Intangible Assets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- --------------
<S> <C> <C>
UPC Nederland.................................... 1,667,135 758,962
UPC Polska....................................... 956,661 929,956
UPC Sweden....................................... 436,776 427,927
UPC N.V.......................................... 157,887 29,223
Telekabel Group.................................. 176,688 176,694
UPC France....................................... 218,737 117,054
UPC Magyarorszag................................. 114,429 54,725
Kabel Plus....................................... 90,272 84,799
UPC Norge........................................ 82,532 84,874
ElTele Ostfold................................... 26,054 -
Monor............................................ 22,929 24,268
UPC Slovensko s.r.o.............................. 22,715 22,883
UPC Belgium...................................... 21,816 20,863
Other............................................ 41,198 12,852
------------- --------------
4,035,829 2,745,080
Accumulated amortization..................... (263,265) (133,667)
------------- --------------
Goodwill and other intangible assets, net.... 3,772,564 2,611,413
============= ==============
8. Short-Term Debt
June 30, December 31,
2000 1999
------------- --------------
UPC Bridge Loan................................. 300,000 -
New A2000 Facilities............................ 231,428 -
Stjarn Seller's Note (1)........................ 104,864 99,378
DIC Loan........................................ 46,843 -
Gelrevision Facility............................ 34,941 -
Stjarn Facilities............................... 8,331 39,088
A2000 Facility.................................. - 20,447
Other Bank Loans................................ 8,588 4,328
-------------- --------------
Total.................................. 734,995 163,241
============== ==============
</TABLE>
(1) Subsequent to June 30, 2000, the Stjarn Seller's Note reached maturity.
UPC has elected to settle the note in Ordinary Shares A.
UPC Bridge Loan
In connection with the K&T acquisition, UPC Nederland has received a short
term bridge loan of Euro 500 million secured with guarantees of certain of our
dutch assets. Drawdowns on the UPC Bridge Loan were to refinance certain
existing intercompany loans from UPC NV. The UPC Bridge Loan expires in
December 2000. The UPC Bridge Loan bears an annual interest rate of EURIBOR +
2.0% / 2.5%. UPC intends to use the Euro 4 billion financing (see Note 9) to
fully repay this facility. Subsequent to June 30, 2000 the remaining Euro 200
million has been drawn.
Stjarn Facilities
In June, all outstanding debt under the Term A facility was repaid, while the
current account facility is still in place (SEK 150 million).
13
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A2000 Facility Refinancing
In January 2000, UPC Netherlands (A2000) refinanced its existing bank
facilities with a one year term-loan bridge facility of 231.4 million and a one
year revolving credit bridge facility ("New A2000 Facilities") of 49.9 million,
subject to certain availability covenants. The facilities are secured by
mortgages and pledges, including pledges on the shares of A2000 Holding,
Kabeltelevisie Amsterdam and A2000 Hilversum. The borrowers are restricted from
incurring additional indebtedness and from paying dividends and distributions,
subject to certain exceptions. These facilities bear an annual interest rate of
EURIBOR +1.0%. The facilities expire in December 2000.
9. Long-Term Debt
As of As of
June 30, December 31,
2000 1999
--------- ------------
Senior Notes July 1999 Offering.............. 1,524,599 1,473,840
Senior Notes October 1999 Offering........... 1,024,567 985,739
Senior Notes January 2000 Offering........... 1,688,507 --
UPC Senior Credit Facility................... 556,814 357,482
@Entertainment Notes......................... 293,165 284,310
UPC Nederland Facilities..................... 363,403 584,650
UPC France Facilities........................ 211,179 145,249
Other........................................ 63,918 122,431
--------- ------------
5,726,152 3,953,701
Less current portion................... (12,158) (50,291)
--------- ------------
Total............................... 5,713,994 3,903,410
========= ============
January 2000 Senior Notes and Discount Notes Offering
In January 2000, UPC closed a bond offering consisting of four tranches: USD
300 million of senior notes due 2010 with an 11 1/2 % coupon; USD 600 million
and Euro 200 million of senior notes due 2010 with an 11 1/4% coupon; and USD
1.0 billion aggregate principal amount 13 3/4% senior discount notes due 2010.
The senior discount notes were sold at 51.224% of the face amount, yielding
gross proceeds of USD 512.2 million. The senior discount notes will accrue, but
not pay, interest until August 2005, at which date the interest payments will
become current. UPC has entered into cross-currency swaps, swapping a total of
USD 300 million of the 11 1/2% series into a fixed Euro coupon of 10% with a
notional value of Euro 297 million until August 2008.
Stand-by Facility
At the end of March 2000, a fully committed Euro 2.0 billion stand-by
revolving credit facility was provided. The facility is guaranteed by UPC and
certain subsidiaries. When drawn, the facility will bear interest of EURIBOR
+6.0 -7.0%, stepping up after March 31, 2001 with periodic increases capped at
an annual rate of 18.0%. An annual commitment fee of 0.50% is applicable over
the undrawn amount. A drawing fee ranging from 1.5% to 2.0% is applicable for
each drawing. The commitment terminates on December 31, 2000, and reaches
maturity on March 29, 2007.
UPC France Refinancing
On April 7, 2000 Mediareseaux refinanced its existing debt and the existing
debt of Videopole and RCF with a Euro 250 million Bridge Facility of which Euro
148 million was outstanding at June 30, 2000. The refinancing of the Rhone
Vision Cable Credit Facility with this facility is envisaged for the third
quarter of 2000. Availability is subject to revenues and debt to equity ratios.
In general, this facility restricts the payment of dividends and distributions.
14
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Euro 4 Billion Financing
UPC has accepted an 8.0 and 8.75-year Euro 4 billion operating and term
loan commitment ("The UPC Bank Facilities"). The UPC Bank Facilities will bear
interest at EURIBOR + 0.75% - 4.0% depending on certain ratios. The UPC Bank
Facilities are arranged and fully underwritten by Chase Manhattan Bank and
Toronto Dominion Securities, with further syndication underway. The facilities
will refinance existing operating company bank debt currently totaling
approximately Euro 1.7 billion, as of June 30, 2000. The new loan facilities
will be used to finance the further digital rollout and triple play on the
existing cable television companies currently owned by UPC, except for its
Polish and German assets. It is envisaged that the loan will be closed and drawn
in the third quarter of 2000.
10. Commitments and Contingencies
Leases
UPC has entered into various long-term agreements with third parties,
varying in term from 10 to 15 years, for indefeasible rights of use ("IRU's") on
fiber optic cable. Under these agreements UPC has commitments for discounted
future minimum lease payments and for operation and maintenance charges, which
total to approximately Euro 125.0 million.
A subsidiary of UPC leases DTH technical equipment, conduit and satellite
transponder capacity, as well as several offices and warehouses. At June 30,
2000, these leases had an aggregate minimum commitment of approximately USD170.0
million (178.3 million) over the next seven years.
UPC has entered into an agreement for the long-term lease of satellite
transponder capacity providing service from Europe to Europe, North America and
South America. The term of the agreement is 156 months, with a minimum aggregate
total cost of approximately USD114.0 million (119.5 million) payable in monthly
installments based on capacity used.
Programming, Broadcast and Exhibition Rights
A subsidiary of UPC has entered into long-term programming agreements and
agreements for the purchase of certain exhibition or broadcast rights with a
number of third-party content providers for its digital direct-to-home ("DTH")
and cable systems. At June 30, 2000, these long-term agreements had an aggregate
minimum commitment of approximately USD197.8 million (207.4 million) over the
next seven years.
UPC has entered into a long-term programming agreement for the right to
receive and transmit programming for certain of its cable systems. The initial
term of the agreement is seven years, but may be extended for an additional
period of three years. UPC pays a monthly license fee based on subscribers and
other factors, with initial minimum aggregate total costs of approximately
USD153.5 million (161.0 million).
Litigation and Claims
From time to time, the Company is subject to various claims and suits
arising out of the ordinary course of business. While the ultimate result of all
such matters is not presently determinable, based upon current knowledge and
facts, management does not expect that their resolution will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
11. Shareholders' Equity
At an extraordinary general meeting of shareholders in March 2000, the
shareholders approved the amendment of UPC's Articles of Association to (i)
split each ordinary share A, priority share, preference share A and preferred
share B (as of December 31, 1999, with a nominal value of Euro2.00 each) into
three shares with a nominal value of Euro1.00 each, (ii) split each ordinary
share B (as of December 31, 1999, with a nominal value of Euro0.02 each) into
three shares with a nominal value of Euro0.01 each and (iii) pay up an amount of
Euro145.2 million on account of the share premium reserve of the Company. All
share and per share amounts in the accompanying consolidated financial
statements and notes thereto have been retroactively restated to reflect the
share split from 3:1. The change in nominal value has been reflected in the
consolidated statement of shareholders' equity as if it occurred at the
beginning of 1999.
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.
United Indenture
As a subsidiary of United, UPC's activities are restricted by the covenants
in United's indentures dated February 5, 1998 and April 29, 1999 (the ''United
Indentures''). The United Indentures generally limit 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) may not exceed 7.0 times the borrower's
consolidated operating cash flow; (ii) operating cash flow must exceed 1.75
times its consolidated interest expense; or (iii) may not exceed 225% of the
borrower's consolidated invested equity capital. In addition, there must be no
existing default under the United Indentures at the time of the borrowing. The
United Indentures also restrict UPC's ability to make certain asset sales and
certain payments. UPC has agreed with United that it will not take any action
that would result in a breach of the United Indenture covenants. The maturity
dates of the United Indentures are February 2008 and May 2009, respectively.
Microsoft Warrants Agreement
On January 25, 1999, UPC and Microsoft Corporation signed a letter of
intent providing for the establishment of a technical services relationship. In
connection with this letter of intent, UPC granted Microsoft warrants to
purchase up to 11,400,000 shares or ADSs at Microsoft's option, at an exercise
price of USD9.33 (Euro 9.78). Half of the warrants are exercisable after one
year from issuance for a period of up to three years. The other half of the
warrants were to vest and
15
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
become exercisable based on certain performance criteria to be established in
the definitive agreements. The first half of the warrants were for the right to
negotiate the licensing of technology from Microsoft under definitive agreements
to be negotiated in the future. UPC recorded as contract acquisition rights
approximately 29.2 million associated with the first half of the warrants. The
accounting for the cost associated with the second half of the warrants was not
initially recognized as it depended on the establishment of the ultimate nature
of the performance criteria related to earning these warrants.
In May 2000, UPC and Microsoft entered into an Interim Technology
Agreement. The Interim Technology Agreement is effective until either June 30,
2003 or the execution of a definitive technology agreement. The Interim
Technology Agreement is non-exclusive and was entered into for the purpose of
assisting UPC in delivering interactive TV to UPC customers using a Microsoft
platform. Simultaneously with entering into the Interim Technology Agreement,
Microsoft announced its intention to exercise the first tranche of warrants and
the original warrant agreement was modified to waive the performance criteria on
the second tranche of warrants. The total cash exercise price payable by
Microsoft upon the exercise of the first tranche of warrants is USD53.2 million
(Euro 55.8 million), which will be offset by a development contribution of
USD20.0 million (Euro 21.0 million) from UPC to Microsoft under the Interim
Technology Agreement. The USD20.0 million (Euro 21.0 million) payment will be
accounted for as a contract acquisition right for the technology associated with
the Interim Technology Agreement. The second tranche of warrants is also
accounted for as a contract acquisition right of approximately USD108.2 million
(Euro 121.0 million). The amortization period for the remaining contract rights
from the first tranche of warrants and the new contract rights from the second
tranche of warrants, as well as the USD20.0 million (Euro 21.0 million)
development contribution, will be the three year life of the Interim Technology
Agreement. The exercise of the first tranche of warrants and the net cash
payment to UPC is expected to occur in the third quarter of 2000.
12. Segment and Geographic Information
UPC's business has historically been derived from its cable television
segment. This service has been provided in various European countries where UPC
owns and operates its systems. During 1997, UPC introduced internet/data
services and during 1999 UPC introduced telephone services in several of its
systems and began to develop its content and programming business. In August
1999, UPC acquired @Entertainment, which has a DTH business. In 1999, UPC began
separating its competitive local exchange carrier ("CLEC") business, which is
included in the telephone segment.
UPC evaluates performance and allocates resources at the geographic country
level and by business line. The key operating performance criteria used in this
evaluation include revenue growth and operating income before depreciation,
amortization and stock-based compensation expense ("Adjusted EBITDA").
Management generally considers Adjusted EBITDA to be a helpful way to measure
the performance of cable television operations and communications companies.
Management believes Adjusted EBITDA helps investors to assess the cash flow from
UPC's operations from period to period and thus to value its business. Adjusted
EBITDA should not, however, be considered a replacement for net income, cash
flows or for any other measure of performance or liquidity under generally
accepted accounting principles, or as an indicator of a company's operating
performance. UPC is not entirely unrestricted to use the cash represented by
its Adjusted EBITDA. Several of UPC's consolidated operating companies are
restricted by the terms of their debt arrangements. Each company has its own
operating expenses and capital expenditure requirements, which can limit UPC's
use of cash. UPC's presentation of Adjusted EBITDA may not be comparable to
statistics with a similar name reported by other companies. Not all companies
and analysts calculate Adjusted EBITDA in the same manner.
16
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the segment information by geographic area is as follows:
<TABLE>
<CAPTION>
Revenue for the Three Months Ended June 30, 2000
---------------------------------------------------------------------------------------------------
Digital/
Cable Internet/ Corporate Inter-
Television Telephony Data DTH Programming & Other company Total
---------- --------- --------- -------- ----------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The Netherlands:
Corporate............... - - - - - - - -
UPCtv................... - - - - 686 - - 686
chello.................. - - 7,231 - - - (7,166) 65
Priority Telecom........ - 3,492 - - - - - 3,492
Operating companies..... 57,045 24,734 8,926 - - 363 - 91,068
Austria................... 20,527 7,827 6,444 - - - - 34,798
Belgium................... 4,033 349 1,091 - - - - 5,473
Czech Republic............ 6,034 240 - - - 735 - 7,009
Norway.................... 12,103 800 574 - - - - 13,477
Hungary .................. 11,501 5,325 70 - - 7 - 16,903
France.................... 15,047 2,324 644 - - - - 18,015
Poland.................... 18,402 - - 13,063 14,971 - (14,243) 32,193
Sweden.................... 8,282 234 1,587 - - - - 10,103
Other .................... 4,041 - - - - 666 - 4,707
---------- --------- --------- -------- ----------- --------- ------- -------
Total ................... 157,015 45,325 26,567 13,063 15,657 1,771 (21,409) 237,989
========== ========= ========= ======== =========== ========= ======= =======
Revenue for the Three Months Ended June 30, 1999
---------------------------------------------------------------------------------------------------
Digital/
Cable Internet/ Corporate Inter-
Television Telephony Data DTH Programming & Other company Total
---------- --------- --------- -------- ----------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The Netherlands:
Corporate.............. - - - - - 688 - 688
UPCtv.................. - - - - 12 - - 12
chello................. - - 1,306 - - - (1,306) -
Priority Telecom....... - - - - - - - -
Operating companies.... 24,519 5,779 840 - - - - 31,138
Austria.................. 19,451 934 2,620 - - - - 23,005
Belgium.................. 3,750 - 525 - - - - 4,275
Czech Republic........... 1,122 - - - - - - 1,122
Norway................... 11,437 29 95 - - - - 11,561
Hungary ................. 7,949 - 17 - - - - 7,966
France................... 1,394 320 120 - - - - 1,834
Poland................... - - - - - - - -
Sweden................... - - - - - - - -
Other ................... 1,289 - - - 213 - - 1,502
---------- --------- --------- -------- ------------ --------- ------- -------
Total .................. 70,911 7,062 5,523 - 225 688 (1,306) 83,103
========== ========= ========= ======== =========== ========= ======= =======
</TABLE>
17
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Revenue for the Six Months Ended June 30, 2000
--------------------------------------------------------------------------------------------------
Digital/
Cable Internet/ Corporate Inter-
Television Telephony Data DTH Programming & Other company Total
---------- --------- --------- --------- ----------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The Netherlands:
Corporate................. - - - - - - -
UPCtv..................... - - - - 1,197 - - 1,197
chello.................... - - 12,662 - - - (12,547) 115
Priority Telecom.......... - 5,359 - - - - - 5,359
Operating companies....... 100,335 40,469 14,180 - - 363 - 155,347
Austria..................... 41,224 14,948 12,041 - - - - 68,213
Belgium..................... 7,677 627 1,903 - - - - 10,207
Czech Republic.............. 12,312 498 - - - 1,770 - 14,580
Norway...................... 24,366 1,255 978 - - - - 26,599
Hungary .................... 23,267 10,624 128 - - 7 - 34,026
France...................... 29,127 4,199 1,053 - - - - 34,379
Poland...................... 35,660 - - 22,673 27,985 - (26,809) 59,509
Sweden...................... 16,502 234 2,432 - - - - 19,168
Other....................... 7,978 - - - - 912 - 8,890
---------- --------- --------- --------- ----------- --------- ------- --------
Total...................... 298,448 78,213 45,377 22,673 29,182 3,052 (39,356) 437,589
========== ========= ========= ========= =========== ========= ======= ========
<CAPTION>
Revenue for the Six Months Ended June 30, 1999
--------------------------------------------------------------------------------------------------
Digital/
Cable Internet/ Corporate Inter-
Television Telephony Data DTH Programming & Other company Total
---------- --------- --------- --------- ----------- --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The Netherlands:
Corporate................ - - - - - 1,478 - 1,478
UPCtv.................... - - - - 12 - - 12
chello................... - - 1,698 - - - (1,698) -
Priority Telecom......... - - - - - - - -
Operating companies...... 39,374 8,971 1,141 - - - - 49,486
Austria.................... 39,247 1,046 4,729 - - - - 45,022
Belgium.................... 7,332 - 931 - - - - 8,263
Czech Republic............. 2,138 - - - - - - 2,138
Norway..................... 22,364 31 180 - - - - 22,575
Hungary.................... 15,830 - 45 - - - - 15,875
France..................... 2,812 329 128 - - - - 3,269
Poland..................... - - - - - - - -
Sweden..................... - - - - - - - -
Other...................... 2,127 - - - 389 - - 2,516
---------- --------- --------- --------- ----------- --------- ------- --------
Total..................... 131,224 10,377 8,852 - 401 1,478 (1,698) 150,634
========== ========= ========= ========= =========== ========= ======= ========
</TABLE>
18
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Adjusted EBITDA for the Three Months Ended June 30, 2000
-----------------------------------------------------------------------------------------
Digital/
Cable Internet/ Corporate
Television Telephony Data DTH Programming & Other Total
----------- --------- --------- ------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
The Netherlands:
Corporate..................... - - - - - (22,314) (22,314)
UPCtv......................... - - - - (12,553) - (12,553)
chello........................ - - (33,957) - - (1,231) (35,188)
Priority Telecom.............. - (10,985) - - - - (10,985)
Operating companies........... 28,123 (10,386) (6,236) - - (4,541) 6,960
Austria........................ 11,084 (1,874) 336 - - - 9,546
Belgium........................ 1,512 (124) (1,389) - - - (1)
Czech Republic................. 1,352 13 - (52) - 215 1,528
Norway......................... 4,408 (3,393) (955) - - (127) (67)
Hungary........................ 4,173 2,906 (1,060) (80) - 7 5,946
France......................... 5,171 (6,787) (3,078) - - (311) (5,005)
Poland......................... 433 - - (1,264) (12,650) (875) (14,356)
Sweden......................... 2,782 (1,077) (2,419) - - - (714)
Other ......................... 1,428 553 (3,196) (59) (136) 593 (817)
----------- --------- --------- ------- ---------- -------- --------
Total ....................... 60,466 (31,154) (51,954) (1,455) (25,339) (28,584) (78,020)
=========== ========= ========= ======= ========== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Adjusted EBITDA for the Three Months Ended June 30, 1999
-----------------------------------------------------------------------------------------
Digital/
Cable Internet/ Corporate
Television Telephony Data DTH Programming & Other Total
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
The Netherlands:
Corporate..................... - - - - - (5,614) (5,614)
UPCtv......................... - - - - (2,292) - (2,292)
chello........................ - - (12,187) - - - (12,187)
Priority Telecom.............. - (543) - - - - (543)
Operating companies........... 11,829 (1,689) (1,058) - - (311) 8,771
Austria........................ 10,548 (2,759) 15 - - - 7,804
Belgium........................ 1,335 - (448) - - - 887
Czech Republic................. (38) - - - - - (38)
Norway......................... 5,358 (1,060) (878) - - - 3,420
Hungary ....................... 2,426 - (10) - - - 2,416
France......................... (151) (1,175) (380) - - - (1,706)
Poland......................... - - - - - - -
Sweden......................... - - - - - - -
Other ......................... 432 - (80) - (393) - (41)
----------- --------- --------- ------- ---------- -------- --------
Total ....................... 31,739 (7,226) (15,026) - (2,685) (5,925) 877
=========== ========= ========= ======= ========== ======== ========
</TABLE>
19
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Adjusted EBITDA for the Six Months Ended June 30, 2000
-----------------------------------------------------------------------------------------
Digital/
Cable Internet/ Corporate
Television Telephony Data DTH Programming & Other Total
---------- --------- --------- ------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
The Netherlands:
Corporate........................ - - - - - (45,015) (45,015)
UPCtv.........,,,................ - - - - (20,200) - (20,200)
chello........................... - - (61,106) - - (1,231) (62,337)
Priority Telecom................. - (13,719) - - - - (13,719)
Operating companies.............. 49,595 (20,836) (11,515) - - (4,541) 12,703
Austria............................ 22,328 (3,443) 504 - - - 19,389
Belgium............................ 2,973 (265) (2,523) - - - 185
Czech Republic..................... 2,280 36 - (52) - 631 2,895
Norway............................. 9,313 (6,217) (1,804) - - (127) 1,165
Hungary ........................... 7,817 5,846 (2,129) (80) - 7 11,461
France............................. 6,688 (9,533) (4,064) - - (311) (7,220)
Poland............................. 1,505 - - (5,607) (27,259) (1,199) (32,560)
Sweden............................. 6,518 (1,782) (4,505) - - - 231
Other ............................. 3,095 373 (4,895) (59) (200) (717) (2,403)
---------- --------- --------- ------- ----------- --------- ---------
Total ........................... 112,112 (49,540) (92,037) (5,798) (47,659) (52,503) (135,425)
========== ========= ========= ======= =========== ========= =========
Adjusted EBITDA for the Six Months Ended June 30, 1999
-----------------------------------------------------------------------------------------
Digital/
Cable Internet/ Corporate
Television Telephony Data DTH Programming & Other Total
---------- --------- --------- ------- ----------- --------- ---------
The Netherlands:
Corporate........................ - - - - - (10,262) (10,262)
UPCtv............................ - - - - (2,830) - (2,830)
chello........................... - - (17,657) - - - (17,657)
Priority Telecom................. - (692) - - - - (692)
Operating companies.............. 19,508 (2,611) (1,547) - - (311) 15,039
Austria............................ 21,818 (4,779) (144) - - - 16,895
Belgium............................ 2,322 - (1,064) - - - 1,258
Czech Republic..................... (256) - - - - - (256)
Norway............................. 9,952 (2,509) (1,992) - - - 5,451
Hungary ........................... 5,123 - (12) - - - 5,111
France............................. (156) (2,135) (837) - - - (3,128)
Poland............................. - - - - - - -
Sweden............................. - - - - - - -
Other ............................. 619 - (80) - (2,248) - (1,709)
---------- --------- --------- ------- ----------- --------- ---------
Total ........................... 58,930 (12,726) (23,333) - (5,078) (10,573) 7,220
========== ========= ========= ======= =========== ========= =========
</TABLE>
20
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Following is a reconciliation of Adjusted EBITDA to UPC's net loss before income
taxes:
<TABLE>
<CAPTION>
For the Three Months Ended June 30, For the Six Months Ended June 30,
----------------------------------- ---------------------------------
2000 1999 2000 1999
----------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Adjusted EBITDA...................................... (78,020) 877 (135,425) 7,220
Depreciation and amortization........................ (159,162) (38,665) (289,865) (67,343)
Stock-based compensation ............................ 79,459 (28,872) 27,421 (45,462)
----------------- ---------------- ---------------- --------------
Net operating loss................................... (157,723) (66,660) (397,869) (105,585)
Interest income...................................... 8,756 3,907 22,129 6,135
Interest expense..................................... (167,289) (10,828) (307,682) (28,183)
Foreign exchange gain (loss) and other income
(expense), net...................................... (43,999) 5,781 (123,952) 5,459
----------------- ---------------- ---------------- --------------
Net loss before income taxes and other items......... (360,255) (67,800) (807,374) (122,174)
Share in results of affiliated companies, net........ (9,843) (5,852) (31,058) (15,051)
Minority interests in subsidiaries................... 1,506 87 2,490 52
----------------- ---------------- ---------------- --------------
Net loss before income tax benefit................... (368,592) (73,565) (835,942) (137,173)
================= ================ ================ ==============
</TABLE>
Total Assets
----------------------------------
As of June 30, As of December 31,
2000 1999
----------------------------------
The Netherlands:
Corporate................. 1,670,020 1,939,369
UPCtv..................... 35,067 28,427
chello.................... 88,651 36,609
Priority Telecom.......... 59,407 4,164
Operating companies....... 3,093,887 1,526,945
Austria..................... 416,526 354,120
Belgium..................... 50,189 47,528
Czech Republic.............. 164,037 158,812
Norway...................... 263,926 243,451
Hungary .................... 301,504 214,108
France...................... 794,469 495,673
Poland...................... 1,237,129 1,211,373
Sweden...................... 447,753 471,944
Other ...................... 96,495 76,740
---------------- --------------
Total .................... 8,719,060 6,809,263
================ ==============
21
<PAGE>
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Comprehensive Income (Loss)
The components of total comprehensive income (loss) are as follows:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 30, June 30,
-------------------------- ------------------------
2000 1999 2000 1999
------------- ------------ ------------ ----------
<S> <C> <C> <C> <C>
Net loss........................................... (368,157) (72,891) (835,528) (136,665)
Other comprehensive income (loss):
Change in cumulative translation adjustments... (33,226) (807) 2,875 3,813
Change in unrealized gain (loss) on investments (102,426) 69,329 (53,664) 136,135
------------- ------------ ------------ ----------
Total comprehensive income (loss)........ (503,809) (4,369) (886,317) 3,283
============= ============= ============ ==========
</TABLE>
14. Subsequent Events
Award of Fixed Wireless License in France
On July 12, 2000, UPC announced its Priority Wireless subsidiary was
awarded one of the two national French fixed wireless licenses. The license
gives UPC access to both 3.5 and 26GHz spectrum throughout France. The license
was awarded at no cost by the Autorite de Regulation des Telecommunications
(ART), the French regulatory authority. UPC won this license jointly with
Marine-Wendel and NRJ through their consortium Fortel, in which Priority
Wireless has a 47.5% interest. UPC will be responsible for constructing,
managing, and delivering services over the network.
Agreement with Excite@Home to Form Joint Venture
On July 18, 2000, UPC, United and Excite@Home announced an agreement to
merge UPC's chello broadband subsidiary with Excite@Home's international
broadband operations to form Excite chello. Excite chello will combine
Excite@Home's international portal, media and high-speed data ventures with
chello's high-speed internet operations and its exclusive access to the
broadband networks of UPC and United. The Excite brand will be the consumer
media experience for all Excite chello portal services and the chello brand will
be the new company's broadband access service. The merger is expected to close
by year end 2000, pending regulatory approval, consent of certain international
partners and close of financing. In addition, Liberty has agreed to invest
200.0 million in Excite chello, and each of Excite@Home and United have
committed to invest 100.0 million. The investment by Liberty Media, Excite@Home
and United will all be in the form of convertible notes.
Acquisition of DattelKabel
On July 27, 2000, UPC acquired 100% of the equity interest in
DattelKabel, a.s. from Nuon International Projects B.V. (a wholly owned
subsidiary of Nuon, N.V.). DattelKabel is a Prague-based cable TV operator. UPC
has paid 41.5 million for DattelKabel including approximately 18.7 million
of assumed debt.
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
(Stated in thousands of Euros, unless stated otherwise)
The following discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. These forward-
looking statements may include, among other things, statements concerning our
plans, objectives and future economic prospects, expectations, beliefs, future
plans and strategies, anticipated events or trends and similar expressions
concerning matters that are not historical facts. These forward-looking
statements involve both known and unknown risks, uncertainties and other factors
that may cause our actual results, performance or achievements, or industry
results, to be materially different from what we say or imply with the forward-
looking statements. These factors include, among other things, changes in
television viewing preferences and habits by our subscribers and potential
subscribers, their acceptance of new technology, programming alternatives and
new video services we may offer. They also include subscribers' and potential
subscribers' acceptance of our newer technology and internet/data services, our
ability to manage and grow our newer telephone and internet/data services, our
ability to secure adequate capital to fund other system growth and development
and our planned acquisitions, risks inherent in investment and operations in
foreign countries, changes in government regulation, and changes in the nature
of key strategic relationships with joint ventures. We have announced many
potential acquisitions, many of which are subject to various conditions, some of
which may not occur. These forward-looking statements apply only as of the time
of this report and we have no obligation or plans to provide updates or
revisions to these forward-looking statements or any other changes in events or
circumstances on which these forward-looking statements are based. The
following discussion and analysis of financial condition and results of
operations covers the three and six months ended June 30, 2000 and 1999, as
restated to include Ibercom, Inc. for all periods in which its operations were
part of United's consolidated results, and should be read together with our
consolidated financial statements and related notes included elsewhere herein.
These consolidated financial statements provide additional information regarding
our financial activities and condition.
Introduction
Our network footprint covers 17 counties in Europe and Israel. We provide
communications services in many European countries through our business lines:
cable television, telephony, internet/data services, DTH and programming. Our
subscriber base is the largest of any group of broadband communications networks
operated across Europe. We intend to continue to increase our presence in the
European market through acquisitions as the European telecommunications market
consolidates, and to implement our branded package of video, voice and
internet/data product offerings in systems we acquire.
We commenced our present business in July 1995. Most of our operating
systems have provided video services for a long time. During late 1997, we
introduced internet/data services as a product offering in our consolidated
systems. During 1998, we began the development of several other new businesses
including chello broadband, Priority Telecom and UPCtv. During 1998, the
internet/data service business and telephone business were developed at both
local country operating companies and at the corporate Pan-European level. In
1999, we began development of our CLEC business and our wireless business. Also
in 1999, through the acquisition of @Entertainment, we acquired a DTH platform.
Acquisitions
Since formation, we have developed largely through acquisitions. The most
recent acquisitions have resulted in significant growth in our consolidated
revenues and expenditures. The following table summarizes our larger
acquisitions during 1999 and the first six months of 2000.
23
<PAGE>
<TABLE>
<CAPTION>
Interest Closing Purchase
Operating Companies Acquired Location Date Price
------------------------------------- ---------- -------------------- ---------------------- ---------------
(millions of euro)
<S> <C> <C> <C> <C>
UTH (1).............................. 49% The Netherlands February 1999 235.1
Gelrevision.......................... 100% The Netherlands June 1999 106.1
SBS.................................. 13.3% Pan-European July/August 1999 93.0
10.2% Pan-European February 2000 162.5
Stjarn............................... 100% Sweden July 1999 371.1
Videopole............................ 100% France August 1999 126.8
Time Warner Cable France............. 100% France August 1999 80.3
@Entertainment....................... 100% Poland August 1999 750.7
A2000 (2)............................ 50% The Netherlands September 1999 214.0(4)
Czech/Slovak
Kabel Plus........................... 94.6% Republics October 1999 141.9
Primacom AG.......................... 25.1% Germany December 1999 - March 2000 344.2
Intercomm............................ 100% France February 2000 100.0
Tebecai.............................. 100% The Netherlands February 2000 62.2
ElTele Ostfold / Vestfold............ 100% Norway March 2000 39.3
Kabel Haarlem B.V.................... 100% The Netherlands March 2000 62.2
Eneco K&T Group...................... 100% The Netherlands March 2000 1,046.3(4)
UPC Magyarorszag (3).................. 20.75% Hungary March 2000 63.9
</TABLE>
(1) We acquired the 49% of UTH which we did not already own.
(2) We acquired the 50% of A2000 which we did not already own.
(3) We acquired the 20.75% of UPC Magyarorszag which we did not already own.
(4) Including acquired/assumed receivables.
Cable Distribution Activities in 2000
Acquisition of Intercomm France
In February 2000, our subsidiary, UPC France, acquired Intercomm France
("Intercomm") from Intercomm Holdings. This acquisition added approximately
550,000 franchise homes to our cable footprint in France. Over 400,000 of
Intercomm's homes are located close to a number of the properties acquired by us
in our 1999 acquisitions of the Reseaux Cables de France and Videopole networks,
thus facilitating the roll-out of our triple play strategy in those areas. We
funded this acquisition with a 36 million cash payment and 8% of the shares in
UPC France.
Acquisition of Tebecai Netwerken B.V. and Tebecai Telecom B.V.
In February 2000, we acquired Tebecai Netwerken B.V. and Tebecai Telecom B.V.
("Tebecai"), a cable system based in the east of The Netherlands. Tebecai owns
and operates cable networks in Zutphen, Doetinchem and the surrounding
municipalities. At closing, the company had approximately 78,000 basic cable
television subscribers and 2,800 internet subscribers. Tebecai's network is
fully upgraded and 80% two-way capable. The Tebecai transaction continues our
strategy of acquiring cable systems which are located adjacent to our existing
operations.
Acquisition of ElTele Ostfold and Vestfold
In March 2000, we acquired 100% of the equity of ElTele Ostfold and
Vestfold from the energy companies Fredrikstad Energi as, Ostfold Energiverk and
Hafslund. At closing, ElTele Ostfold and Vestfold had approximately 300
kilometers of fibre and approximately 125 business customers between them and
are among the leading providers of broadband services to business customers in
the Ostfold, Vestfold, Telemark and Buskerud regions of Norway. The business
activities of the companies will be incorporated into UPC's Priority Telecom
CLEC division while the infrastructure will be managed by UPC Norway and used to
service both business and residential customers. As a result of the
acquisition, we also acquired a 26 GHZ spectrum in Norway.
24
<PAGE>
Acquisition of UPC Magyaroszag Minority Interest
In March 2000, we acquired the 20.75% minority stake in UPC Magyaroszag
for 63.9 million in cash. This transaction allowed us to assume 100% control of
its Hungarian operations.
Acquisition of Kabel Haarlem B.V.
In March 2000, we acquired 100% of the Haarlem cable network in The
Netherlands for 62.2 million. We plan to introduce our cable telephone and high
speed internet services to subscribers of the Haarlem cable network as quickly
as possible. We will also introduce our digital set-top computer to subscribers
of the network in the fourth quarter of 2000.
Acquisition of Eneco K&T Group
In March 2000, we acquired the Eneco K&T Group ("K&T") for a consideration of
1,046.3 million, including acquired receivables of 225.6 million. K&T owns and
operates cable networks in Rotterdam, Dordrecht and the surrounding
municipalities. With approximately 610,000 homes passed, K&T had some 590,000
basic cable television subscribers and over 6,000 broadband Internet
subscribers, at closing. K&T's network is substantially upgraded and, with 85%
of the network two-way capable, we are ready to offer most of these customers
interactive broadband services. In addition, K&T's glass fibre ring which covers
an area of approximately 100km around The Hague, offers us the opportunity to
quickly roll out internet/data and telephone services and rapidly build its base
of business subscribers in The Netherlands.
Agreement to Acquire EWT/TSS Group
In April 2000, we announced that, our subsidiary UPC Germany Gmbh ("UPC
Germany"), has agreed to acquire 100% of EWT/TSS Group ("EWT/TSS"). The
consideration for the acquisition is 25% cash and 75% stock in UPC Germany.
EWT/TSS is the fourth largest independent German broadband cable operator and
has approximately 1.1 million homes passed and 650,000 subscribers in Germany.
The company offers broadband cable video and Internet access services and has
commenced cable telephone services in Berlin. Following this transaction, our
interest in UPC Germany will be 51%. We expect the acquisition to close in the
third quarter of 2000. After completion of the transaction, the Stritzl family,
who currently run the company, will retain significant influence on the
operations of the EWT/TSS group by becoming a large minority shareholder in UPC
Germany.
Agreement to Acquire Interest in Telewest Communications plc
On June 26, 2000, we announced our agreement to acquire a 25% economic
interest in Telewest Communications plc ("Telewest"), with approximately 4.7
million homes passed, 1.2 million cable subscribers and 1.7 million fixed line
telephony subscribers per date of announcement. We will acquire the economic
interest in Telewest from United as part of a series of related transactions by
United and Liberty Media Corporation ("Liberty") whereby Liberty will contribute
to United its European and Latin American broadband assets in return for USD 200
million cash and 75.3 million Class B Common Shares of United.
The Liberty broadband assets contributed to United will include a non-
voting, 99% economic interest in a limited liability company ("LLC") which holds
724.3 million ordinary shares of Telewest, representing approximately 25% of the
total issued share capital in Telewest. Subsequent to closing, United will
contribute the LLC interest to us in exchange for 128.2 million of our shares,
increasing United's ownership in us from approximately 51% today to 61% on a pro
forma basis. The remaining 1% of the LLC and sole management power over the LLC
will be held by Liberty. We have a right to obtain this interest after clearance
of all appropriate regulatory and third party approvals.
Closing of the transaction is subject to certain regulatory, shareholder
and third party approvals which the parties expect to complete in the fourth
quarter.
25
<PAGE>
Acquisition of DattelKabel
In July 2000, we acquired 100% of the equity interest in DattelKabel, a.s.
from Nuon International Projects B.V. (a wholly owned subsidiary of Nuon, N.V.).
DattelKabel is a Prague-based cable TV operator. DattelKabel had approximately
130,500 homes passed and 55,325 basic cable TV subscribers at the time of
closing of this transaction. Dattelkabel also has around 1,425 residential and
business broadband internet customers. Its network has been fully upgraded to
862 MHz standard, with over 94% of homes passed capable of receiving two-way
signals.
The purchase price was 41.5 million for DattelKabel, including approximately
18.7 million of assumed debt.
Internet Activities in 2000
Agreement with Excite@Home to Form Joint Venture
On July 18, 2000, together with United and Excite@Home, we announced an
agreement to merge our chello broadband subsidiary with Excite@Home's
international broadband operations to form Excite chello. Excite chello will
combine Excite@Home's international portal, media and high-speed data ventures
with chello's high-speed internet operations and its exclusive access to our and
United's broadband networks. The Excite brand will be the consumer media
experience for all Excite chello portal services and the chello brand will be
the new company's broadband access service. The merger is expected to close by
year end 2000, pending regulatory approval, consent of certain international
partners and close of financing. In addition, Liberty has agreed to invest 200.0
million in Excite chello, and each of Excite@Home and United have committed to
invest 100.0 million . The investment by Liberty, Excite@Home and United will
all be in the form of convertible notes.
Receipt of License to Offer Internet Service in Poland
On July 28, 2000, we announced that a subsidiary of @Entertainment, Polska
Telewizja Kablowa ("PTK") was granted a data transmission license by the
Ministry of Communications for rendering of telecommunication services and a
permit to build and use telecommunication networks. The data transmission
license enables PTK to introduce internet access over all its cable networks in
Poland. PTK plans to gradually introduce internet services in the cities where
PTK operates upon completion of upgrading of networks and testing the service.
The first cities will be Warsaw and Krakow. In Poland, just like in other
countries, we will offer the internet access service through our subsidiary,
chello broadband.
Telephony Activities in 2000
Agreement to Acquire Cignal Global Communications
In April 2000, Priority Telecom, announced that it has signed a Memorandum of
Understanding to acquire Cignal Global Communications ("Cignal"), a US-based
provider of global network services. Priority Telecom is acquiring 100% of
Cignal in exchange for a 16% interest in Priority Telecom.
The networks will combine Cignal's seven Gbps of long-haul capacity
connecting Europe, the Americas and Asia with Priority Telecom's access to
12,000+ kms of local loop fibre in key European cities including Oslo,
Stockholm, Amsterdam, Rotterdam, Brussels, Vienna, Prague and Budapest. The
combined companies currently operate in 18 markets providing access to
approximately 750,000 businesses, and plan to market a wide range of products
and services including broadband data, private IP networking, ATM, hosting,
leased line and voice services.
Awards of Wireless Licenses
In March 2000, our wireless communications division, Priority Wireless, won
two national licenses to build and operate broadband fixed wireless access
networks in the 3.5 GHz band in Spain and Switzerland. In addition, we were
awarded regional 26 GHZ licenses in Geneva and Zurich. The Spanish license
was awarded
26
<PAGE>
at no cost by the Ministry of Public Works and Telecommunications in a
competitive tender based on technical and financial ability. Priority Wireless
won the Swiss license for 95.2 million by competing in a public auction.
In April 2000, Priority Wireless secured another broadband fixed wireless
access license in Finland. The Finnish license is a 26 GHz broadband fixed
wireless access license which covers nine regions in Finland, including the
capital Helsinki. The license was granted at no cost by Finland's regulatory
authority.
In July 2000, Priority Wireless was awarded one of the two national French
fixed wireless licenses. The license gives us access to both 3.5 and 26GHz
spectrum throughout France. The license was awarded at no cost by the French
regulatory authority. We won this license jointly with Marine-Wendel and NRJ
through their consortium Fortel in which Priority Wireless has a 47.5% interest.
We will be responsible for constructing, managing, and delivering services over
the network.
Programming Activities in 2000
Formation of Programming Joint Venture with MTV Networks Europe
In March 2000, UPCtv and MTV Networks Europe formed a 50/50 joint venture
partnership which plans to produce and distribute two new 24-hour music channels
specifically targeted at the Polish marketplace: MTV Polska, and VH1 Polska. In
addition, the company will be responsible for creation and distribution of
related MTV and VH1 branded web-sites, and will act as distribution agent in
Poland for MTV Networks Europe's digital channel portfolio, including M2, MTV
Extra, MTV Base and VH1 Classic. Both MTV Polska and VH1 Polska will be
distributed via the UPC Polska DTH and PTK cable platforms as well as other
cable operators.
Agreement to Develop Programming
In April 2000, we announced the launch of a new channel in association with
Buena-Vista International ("BVI"), a division of Disney Television, and Sony
Pictures Entertainment ("SPE") to offer a 24 hour premium movie channel in The
Netherlands and Belgium. The channel, called CineNova, shows both new and
library film content from Hollywood and around the world including BVI,
Columbia, Tristar and Touchstone Pictures and will be transmitted over our cable
networks in both countries as well as those of MediaKabel and Casema. The
channel was launched in May 2000 in The Netherlands and is expected to be
available in Belgium beginning in September 2000. We have a 10% stake in the new
venture, while BVI and SPE will each take a 45% stake.
Adjusted EBITDA
Management generally considers Adjusted EBITDA to be a helpful way to measure
the performance of cable television operations and communications companies.
Adjusted EBITDA represents earnings before net interest expense, income tax
expense (benefit), 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. We
believe Adjusted EBITDA helps investors to assess the cash flow from our
operations from period to period and thus to value our business. Adjusted
EBITDA should not, however, be considered a replacement for net income, cash
flows or for any other measure of performance or liquidity under generally
accepted accounting principles, or as an indicator of a company's operating
performance. We are not entirely unrestricted to use the cash represented by
our Adjusted EBITDA. Several of our consolidated operating companies are
restricted by the terms of their debt arrangements. Each company has its own
operating expenses and capital expenditure requirements, which can limit our use
of cash. Our presentation of Adjusted EBITDA may not be comparable to
statistics with a similar name reported by other companies. Not all companies
and analysts calculate Adjusted EBITDA in the same manner.
The introduction of telephony services and internet/data services had a
significant negative impact on operating income (loss) and Adjusted EBITDA
during 1999 and the first six months of 2000. We expected this negative impact
due to the high costs associated with obtaining subscribers, branding and
launching these new services against the incumbent operators. This negative
impact is expected to decline. We intend for these new businesses to be
Adjusted EBITDA positive after two to three years following introduction of the
service, but there can be no assurance this will occur.
27
<PAGE>
We currently classify our business into six segments, comprised of 1) cable
television, 2) telephony (Priority Telecom and UPC affiliates), 3) internet/data
(chello and UPC affiliates), 4) DTH, 5) programming and 6) digital, corporate
and other. Included in the telephony segment is CLEC business, which we began
separating in 1999. The following table presents an overview of our revenue
and our Adjusted EBITDA by segment for the three and six months ended June 30,
2000 and 1999.
<TABLE>
<CAPTION>
For the Three Months Ended June 30, For the Six Months Ended June 30,
----------------------------------- ---------------------------------
2000 1999 2000 1999
----------------------------------- ---------------------------------
(Euros, in thousands) (Euros, in thousands)
<S> <C> <C> <C> <C>
Revenue:
Cable.............................. 157,015 70,911 298,448 131,224
Telephony.......................... 45,325 7,062 78,213 10,377
Internet/data...................... 26,567 5,523 45,377 8,852
DTH................................ 13,063 - 22,673 -
Programming........................ 15,657 225 29,182 401
Digital, Corporate and Other....... 1,771 688 3,052 1,478
Intercompany....................... (21,409) (1,306) (39,356) (1,698)
------- ------ ------- -------
237,989 83,103 437,589 150,634
======= ====== ======= =======
Adjusted EBITDA:
Cable.............................. 60,466 31,739 112,112 58,930
Telephony.......................... (31,154) (7,226) (49,540) (12,726)
Internet/data...................... (51,954) (15,026) (92,037) (23,333)
DTH................................ (1,455) - (5,798) -
Programming........................ (25,339) (2,685) (47,659) (5,078)
Digital, Corporate and Other....... (28,584) (5,925) (52,503) (10,573)
------- ------ ------- -------
(78,020) 877 (135,425) 7,220
======= ====== ======= =======
</TABLE>
Overview of Our Activities
To date, our primary source of revenue has been cable television services.
For the three and six months ended June 30, 2000, our cable television services
accounted for approximately 66.0% and 68.2%, respectively, of our consolidated
revenues, compared to 85.3% and 87.1% for the same periods in 1999. We believe
that an increasing percentage of our future revenues will come from our other
services. Within a decade, video services could account for half of our total
revenue, as our revenues from other services continue to increase. These are
forward-looking statements and will not be fulfilled unless our new services
grow dramatically. Our capital constraints, technological limitations,
competition, lack of programming, loss of personnel, adverse regulation and many
other factors could prevent our new services from growing as we expect.
We believe that our new services will continue to have a negative impact on
our operating income and Adjusted EBITDA due to the one-time costs associated
with obtaining customers. We have defined these costs as "customer acquisition
costs" and track these costs on a regular basis. Customer acquisition costs
consist of sales commissions and call for action type advertising.
28
<PAGE>
Cable Television
Our operating systems generally offer a range of video service subscription
packages including a basic tier, which typically includes 26 to 32 channels, and
an expanded basic tier, which typically includes 6 to 13 additional channels.
In some systems, we also offer mini-tiers, premium programming, which typically
includes 2 channels, and pay-per-view programming, which includes 5 to 10
channels.
Historically, video services revenue has increased as a result of:
. acquisitions of systems,
. subscriber growth from both well established and developing systems and
. increases in revenue per subscriber from basic rate increases and the
introduction of expanded basic tiers and pay-per-view services.
Pricing
We usually charge a one-time installation fee when we connect video
subscribers, a monthly subscription fee that depends on whether basic or
expanded basic tier service is offered, 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.
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 generally based upon a percentage of revenue and
typically range from 3% to 5% in Belgium and are approximately 13.5% in Austria.
Other operating expenses include operating personnel, service vehicles,
maintenance and plant electricity.
Selling, general and administrative expenses include branding, marketing and
customer acquisition costs, personnel related costs, such as legal and
accounting, human resources, office facilities and other overhead costs.
Results of Operations - Cable Television
The following table sets forth information from, or derived from, our
consolidated statements of operations for the three and six months ended June
30, 2000 and 1999.
29
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended June 30, For the Six Months Ended June 30,
----------------------------------- ---------------------------------
2000 1999 2000 1999
----------------------------------- ---------------------------------
(Euros, in thousands) (Euros, in thousands)
<S> <C> <C> <C> <C>
Service and other revenue..................... 157,015 70,911 298,448 131,224
Operating expense............................. (59,285) (19,976) (116,589) (39,950)
Selling, general and administrative expense... (37,264) (19,196) (69,747) (32,344)
------- ------- ------- -------
60,466 31,739 112,112 58,930
Adjustments:
Stock-based compensation expense.............. - - - -
------- ------- ------- -------
Adjusted EBITDA............................... 60,466 31,739 112,112 58,930
======= ======= ======= =======
As a percentage of revenue:
Operating expense............................. -37.8% -28.2% -39.1% -30.4%
======= ======= ======= =======
Selling, general and administrative expense... -23.7% -27.1% -23.4% -24.6%
======= ======= ======= =======
Adjusted EBITDA............................... 38.5% 44.8% 37.6% 44.9%
======= ======= ======= =======
</TABLE>
Revenue - Cable Television
During the three months ended June 30, 2000, our cable television revenue
increased 86.1 million to 157.0 million from 70.9 million for the three months
ended June 30, 1999, a 121.4% increase. During the six months ended June 30,
2000, our cable television revenue increased 167.2 million to 298.4 million from
131.2 million for the six months ended June 30, 1999, a 127.4% increase. For
both the three month period and the six month period, the increase in cable
television revenue resulted primarily from our acquisitions, which are included
in our consolidated results of operations from their respective dates of
acquisition. Cable television revenue for the three months ended June 30, 2000
attributable to acquisitions which closed subsequent to our initial public
offering in February 1999 totaled 78.9 million, or 91.6% of the total
increase. Of this increase, acquisitions in The Netherlands represent 43.9%,
acquisitions in France represent 23.2%, the acquisition in Poland represents
11.1% and the acquisition in Sweden represents 11.8%. The increase in cable
television revenue for the six months ended June 30, 2000 attributable to
acquisitions which closed subsequent to our initial public offering in February
1999 totaled 155.4 million, or 92.9% of the total increase. Of this
increase, acquisitions in The Netherlands represent 35.0%, acquisitions in
France represent 22.8%, the acquisition in Poland represents 23.0% and the
acquisition in Sweden represents 10.6%. The remaining increase in cable
television revenue came from subscriber growth and increased revenue per
subscriber.
Operating Expense - Cable Television
During the three months ended June 30, 2000, our cable television operating
expense increased 39.3 million to 59.3 million from 20.0 million for the three
months ended June 30, 1999, a 196.5% increase. During the six months ended June
30, 2000, our cable television operating expense increased 76.6 million to 116.6
million from 40.0 million for the six months ended June 30, 1999, a 191.5%
increase. The increase in cable television operating expense primarily relates
to our acquisitions, which are included in our consolidated results of
operations from their respective dates of acquisition. The increase in cable
television operating expense for the three months ended June 30, 2000
attributable to acquisitions which closed subsequent to our initial public
offering, totaled 29.7 million, or 75.6% of the increase. Of this increase,
acquisitions in The Netherlands represents 50.6%, acquisitions in France
represent 22.4%, the acquisition in Poland represents 4.7% and the acquisition
in Sweden represents 9.4%. The increase in cable television operating expense
for the six months ended June 30, 2000, attributable to acquisitions which
closed subsequent to our initial public offering, totaled 54.7 million, or 71.3%
of the increase. Of this increase, acquisitions in The Netherlands represents
35.2%, acquisitions in France represent 28.2%, the acquisition in Poland
represents 15.1% and the acquisition in Sweden represents 9.3%.
As a percentage of revenue, operating expense increased from 28.2% for the
three months ended June 30, 1999 to 37.8% for the three months ended June 30,
2000 and increased from 30.4% for the six months ended June 30, 1999 to 39.1%
for the six months ended June 30, 2000. This increase is primarily due to higher
30
<PAGE>
operating costs as a percentage of revenue for systems we acquired during 1999
and the first half of 2000. We expect to reduce this percentage in future years
through revenue growth and operating efficiencies.
Selling, General and Administrative Expense - Cable Television
During the three months ended June 30, 2000, our cable television SG&A
expense increased 18.1 million to 37.3 million from 19.2 million for the three
months ended June 30, 1999, a 94.3% increase. During the six months ended June
30, 2000, our cable television SG&A expense increased 37.4 million to 69.7
million from 32.3 million for the six months ended June 30, 1999, a 115.8%
increase. The increase in cable television SG&A expense primarily relates to
our acquisitions which closed subsequent to our initial public offering, which
are included in our consolidated results of operations from their respective
dates of acquisition. The increase in cable television SG&A expense for the
three months ended June 30, 2000 attributable to acquisitions which closed
subsequent to our initial public offering totaled 18.8 million, or 104.4% of
the increase. Of this increase, acquisitions in The Netherlands represents
26.6%, acquisitions in France represent 26.1%, the acquisition in Poland
represents 18.7% and the acquisition in Sweden represents 16.7%. The increase
in cable television SG&A expense for the six months ended June 30, 2000,
attributable to acquisitions which closed subsequent to our initial public
offering, totaled 40.9 million, or 109.4% of the increase. Of this increase,
acquisitions in The Netherlands represents 20.0%, acquisitions in France
represents 24.9%, the acquisition in Poland represents 33.5% and the acquisition
in Sweden represents 11.9%. The increase in cable television SG&A expense
related to new acquisitions was partially offset by decreased SG&A expense from
our existing systems.
As a percentage of revenue, SG&A expense decreased from 27.1% for the three
months ended June 30, 1999 to 23.7% for the three months ended June 30, 2000 and
decreased from 24.6% for the six months ended June 30, 1999 to 23.4% for the six
months ended June 30, 2000. Management expects that as the new acquisitions are
integrated, these costs as a proportion of net revenues will continue to trend
downwards as a percentage of revenue.
Telephony
We began to offer cable telephone services in July 1997. We currently offer
local cable telephony services, under the brand name Priority Telecom, in our
Austrian, Dutch, French and Norwegian systems. Priority Telecom launched its
service on a trial basis in Vienna in November 1998 and in February 1999
launched its business and residential service. Our Priority Telecom service was
officially launched in an area of UPC France in March 1999, UPC Norge in April
1999, and a part of UPC Nederland's service area in May 1999. We also provide
national and international long distance voice telephony services. In addition
to our cable telephony operations, our Monor system in Hungary offers
traditional telephony services.
Our operating systems offer a full complement of telephony services,
including caller ID, call waiting, call forwarding, call blocking, distinctive
ringing and three-way calling.
We believe that our networks and facilities provide the opportunity for cost-
effective access to potential business telephony customers and an excellent
starting point for expanding our CLEC business within our footprint. Priority
Telecom has further expanded its Pan-European CLEC network via recent
acquisitions of networks in Spain, Norway and France. Priority Telecom is
positioned as our Pan-European CLEC. This position will be established via both
organic growth and acquisitions. In the business market, Priority Telecom offers
product packages of traditional voice telephone and IP Data services to the
small and medium sized business customers. For the large segment, tailor-made
solutions are currently offered in the Netherlands and Priority Telecom aims at
marketing these solutions on a Pan-European scale.
Pricing
In order to achieve high-growth from early market entry, we price our
telephony service at a discount compared to services offered by incumbent
telecommunications operators. Initially, we will also waive or substantially
discount installation fees.
Revenue from residential telephony consists of a flat monthly line rental and
a usage charge based upon minutes. Other telephony revenue includes IP data
services to the small and medium sized business customers, carrier select
revenue, as well as lease line and other business revenues.
31
<PAGE>
Costs of Operations
Our telephony cost of operations include interconnection costs, number
portability fees, network operations, customer operations and customer care.
Interconnection costs are variable based upon usage as determined through
negotiated interconnect agreements.
Selling, general and administrative expense includes branding, marketing and
customer acquisition costs, personnel related costs, such as stock-based
compensation expense, legal and accounting, human resources, office facilities
and other overhead costs. Customer acquisition costs consist of sales
commissions and call-for-action type advertising.
Results of Operations - Telephony
The following table sets forth information from, or derived from, our
consolidated statements of operations for the three and six months ended June
30, 2000 and 1999.
<TABLE>
<CAPTION>
For the Three Months Ended June 30, For the Six Months Ended June 30,
----------------------------------- ---------------------------------
2000 1999 2000 1999
----------------------------------- ---------------------------------
(Euros, in thousands) (Euros, in thousands)
<S> <C> <C> <C> <C>
Service and other revenue...................... 45,325 7,062 78,213 10,377
Operating expense.............................. (37,581) (6,159) (64,901) (9,914)
Selling, general and administrative expense.... (31,859) (13,669) (59,488) (16,834)
------- ------- ------- -------
(24,115) (12,766) (46,176) (16,371)
Adjustments:
Stock-based compensation expense............... (7,039) 5,540 (3,364) 3,645
------- ------- ------- -------
Adjusted EBITDA................................ (31,154) (7,226) (49,540) (12,726)
======= ======= ======= =======
As a percentage of revenue:
Operating expense.............................. -82.9% -87.2% -83.0% -95.5%
======= ======= ======= =======
Selling, general and administrative expense.... -70.3% -193.6% -76.1% -162.2%
======= ======= ======= =======
Adjusted EBITDA................................ -68.7% -102.3% -63.3% -122.6%
======= ======= ======= =======
</TABLE>
Revenue - Telephony
During the three months ended June 30, 2000, our telephony revenue increased
38.2 million to 45.3 million from 7.1 million for the three months ended June,
1999, a 538.0% increase. During the six months ended June 30, 2000, our
telephony revenue increased 67.8 million to 78.2 million from 10.4 million for
the six months ended June, 1999, a 651.9% increase. During 1999, we launched
local telephony services, under the brand name Priority Telecom, in our
Austrian, Dutch, French and Norwegian systems. In addition, A2000, which we
began consolidating effective September 1, 1999, had existing telephony
service from July 1997. We acquired Monor in late December 1999, and began
consolidating its operations effective January 1, 2000.
Operating Expense - Telephony
During the three months ended June 30, 2000, our telephony operating expense
increased 31.4 million to 37.6 million from 6.2 million for the three months
ended June 30, 1999, a 506.5% increase. During the six months ended June 30,
2000, our telephony operating expense increased 55.0 million to 64.9 million
from 9.9 million for the six months ended June 30, 1999, a 555.6% increase.
32
<PAGE>
Selling, General and Administrative Expense - Telephony
During the three months ended June 30, 2000, our telephony SG&A expense
increased 18.2 million to 31.9 million from 13.7 million for the three months
ended June 30, 1999, a 132.8% increase. During the six months ended June 30,
2000, our telephony SG&A expense increased 42.7 million to 59.5 million from
16.8 million for the six months ended June 30, 1999, a 254.2% increase.
Telephony SG&A expense for both the three and six months ended June 30, 2000 as
compared to 1999 increased primarily due to the launch during 1999 of local
telephony services, under the brand name Priority Telecom, in our Austrian,
Dutch, French and Norwegian systems. In addition, during the six months ended
June 30, 2000, we continued to incur costs related to the development of the
Priority Telecom brand.
Internet/data
We are in the early stages of executing our internet/data business, and the
profitability of both the internet as a mass market delivery vehicle and our
business is unproven. Our expansion plans contemplate geographic coverage
across several continents, with locally tailored content and products and
services in multiple languages. We operate our internet/data business
internationally through chello broadband and locally through our local operating
companies.
chello launched its service in April 1999 and has now launched its services
in 9 countries. chello provides high-speed internet access and local portal and
integrated broadband content to our local operating companies and non-affiliated
operating companies through franchise agreements. Under the franchise
agreements, chello provides our affiliates and non-affiliated local operators
with high-speed connectivity through AORTA, caching, local language broadband
portals, and marketing support for a fee based upon a percentage of subscription
and installation revenue. In the future the franchise agreements further
provide that the local operator will receive a percentage of the revenue from
chello generated e-commerce and advertising.
Our local operating companies manage the local network including the upgrade,
management and maintenance, sales and training, customer support and service,
installation and cost of customer premise equipment. To date, substantially all
of chello's revenues are subscription-based and derived from our local operating
companies. These intercompany revenues have been eliminated in our consolidated
operating results. We believe we have an opportunity to grow non-affiliated
revenue through the chello service in future years. We cannot predict whether
our products and services, including broadband internet services in general,
will become accepted or profitable in these markets.
Pricing
To date, virtually all of our revenues have been derived from monthly
subscription fees of which chello receives approximately 40% for its service.
Most local operators have chosen to waive installation charges. In the future,
we expect to generate revenues from advertising and e-commerce as we develop our
portals and our digital set-top computer services. Currently, our services are
offered to residential subscribers at flat subscription fees ranging from 27 to
40 per month, including VAT. Our flat fee is designed to be generally lower
than the costs associated with dial-up internet access, including the access
fees and phone charges with dial-up access. For business subscribers to
services other than our standard broadband internet access services, we
generally agree pricing with local operators on a case by case basis, depending
on the size and capacity requirements of the businesses.
Cost of Operations
Our operating expenses consist primarily of leased-line and network
development and management costs associated with AORTA and our network
generally. Additional costs of operations include, local connectivity costs,
and help desk and customer care costs. Stock-based compensation expenses
related to personnel directly working in operations are also a part of our
operating expense.
Selling, general and administrative expenses include branding, marketing,
customer acquisition costs, personnel-related costs, including stock-based
compensation expenses, legal and accounting, office facilities and other
overhead. Customer acquisition costs include commissions and call-for-action
type advertising.
33
<PAGE>
Results of Operations - Internet/data
The following table sets forth information from, or derived from, our
consolidated statements of operations for the three and six months ended June
30, 2000 and June 30, 1999.
<TABLE>
<CAPTION>
For the Three Months Ended June 30, For the Six Months Ended June 30,
----------------------------------------- -----------------------------------------
2000 1999 2000 1999
----------------------------------------- -----------------------------------------
Affiliates chello Affiliates chello Affiliates chello Affiliates chello
---------- ------- ---------- ------- ---------- ------- ---------- -------
(Euros, in thousands) (Euros, in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Service and other revenue .................. 19,336 7,231 4,217 1,306 32,715 12,662 7,154 1,698
Operating expense........................... (16,321) (11,757) (3,305) (7,746) (33,034) (31,186) (6,190) (10,049)
Selling, general and administrative expense. (21,012) 4,164 (3,751) (7,145) (30,612) (29,925) (6,640) (11,069)
---------- ------- ---------- ------- ---------- ------- ---------- -------
(17,997) (362) (2,839) (13,585) (30,931) (48,449) (5,676) (19,420)
Adjustments:
Stock-based compensation expense............ - (33,595) - 1,398 - (12,657) - 1,763
---------- ------- ---------- ------- ---------- ------- ---------- -------
Adjusted EBITDA............................. (17,997) (33,957) (2,839) (12,187) (30,931) (61,106) (5,676) (17,657)
========== ======= ========== ======= ========== ======= ========== =======
As a percentage of revenue:
Operating expense........................... -84.4% -162.6% -78.4% -593.1% -101.0% -246.3% -86.5% -591.8%
========== ======= ========== ======= ========== ======= ========== =======
Selling, general and administrative expense. -108.7% 57.6% -88.9% -547.1% -93.6% -236.3% -92.8% -651.9%
========== ======= ========== ======= ========== ======= ========== =======
Adjusted EBITDA............................. -93.1% -469.6% -67.3% -933.2% -94.5% -482.6% -79.3% -1039.9%
========== ======= ========== ======= ========== ======= ========== =======
</TABLE>
Revenue - Internet/data
During the three months ended June 30, 2000, our internet/data revenue
increased 21.1 million to 26.6 million from 5.5 million for the three months
ended June 30, 1999, a 383.6% increase. During the six months ended June 30,
2000, our internet/data revenue increased 36.5 million to 45.4 million from 8.9
million for the six months ended June 30, 1999, a 410.1% increase. The increase
in internet/data revenue for both the three and six month periods ended
June 30, 2000 compared to 1999 is primarily due to the launch of residential and
business cable-modem high-speed internet access services, branded chello
broadband in April 1999. During the second quarter of 1999, we launched chello
broadband on the upgraded portion of our networks in Austria, Belgium, France,
The Netherlands (with the exception of A2000) and Norway. We launched chello
broadband in our A2000 system and in Sweden in the fourth quarter of 1999.
Internet/data revenue for the three months ended June 30, 2000 and 1999,
includes 7.2 million and 1.3 of intercompany revenues, respectively, which are
eliminated in our consolidated operating results. Internet/data revenue for
the six months ended June 30, 2000 and 1999, includes 12.5 million and 1.7 of
intercompany revenues, respectively, which are eliminated in our consolidated
operating results.
Operating Expense - Internet/data
During the three months ended June 30, 2000, our internet/data operating
expense increased 17.0 million to 28.1 million from 11.1 million for the three
months ended June 30, 1999, a 153.2% increase. During the six months ended
June 30, 2000, our internet/data operating expense increased 48.0 million to
64.2 million from 16.2 million for the six months ended June 30, 1999, a 296.3%
increase. The increase in internet/data operating expense for both the three
month and six month periods ended June 30, 2000 compared to 1999 is primarily
due to the launch of residential and business cable-modem high-speed internet
access services, branded as chello broadband in April 1999. This increase is
partially offset by a stock-based compensation credit recorded in the second
quarter of 2000. For the three months ended June 30, 2000, internet/data
operating expense includes a stock-based compensation credit of 5.7 million,
compared to stock-based compensation expense of nil for the three months ended
June 30, 1999. For the six months ended June 30, 2000, internet/data operating
expense includes a stock-based compensation credit of 2.6 million, compared to
stock-based compensation expense of nil for the six months ended June 30, 1999.
During the second quarter of 2000, chello recorded a credit for stock-based
compensation due to a decrease in the value of chello's equity. The decreased
value resulted from the delay of chello's initial public offering. chello's
stock option plan is accounted for under variable plan accounting.
34
<PAGE>
PAGE>
Selling, General and Administrative Expense - Internet/data
During the three months ended June 30, 2000, our internet/data SG&A expense
increased 5.9 million to 16.8 million from 10.9 million for the three months
ended June 30, 1999, a 54.1% increase. During the six months ended June 30,
2000, our internet/data SG&A expense increased 42.8 million to 60.5 million from
17.7 million for the six months ended June 30, 1999, a 241.8% increase. During
both the three and six months ended June 30, 2000 as compared to 1999,
internet/data SG&A expense increased due to the launch of residential and
business cable-modem high-speed internet access services. This increase is
partially offset by a stock-based compensation credit recorded in the second
quarter of 2000. Included in the internet/data SG&A expense for the three months
ended June 30, 2000 is a 27.9 million stock-based compensation credit, compared
to 1.4 million expense for the three months ended June 30, 1999. For the six
months ended June 30, 2000, internet/data SG&A expense includes a 10.0 million
stock-based compensation credit, compared to 1.8 million expense for the six
months ended June 30, 1999. As noted above, chello's stock-based compensation
decrease in the second quarter of 2000 was due to a decrease in chello's
valuation.
DTH
Through the acquisition of @Entertainment in August 1999, we have obtained a
DTH platform serving the Polish market place. Prior to the acquisition of
@Entertainment we had no DTH activities. Subsequent to our acquisition of
@Entertainment we began to restructure the Polish DTH and programming business
by separating them into two business lines. @Entertainment has been rebranded as
UPC Polska Inc ("UPCPolska"). We have incurred significant start-up and
restructuring costs in this endeavor. During the second quarter of 2000, we
began to extend our DTH operations to Hungary, Czech Republic and Slovakia. We
expect to launch services in these areas in the fourth quarter of 2000.
Pricing
For our DTH services, we generally charge a one-time installation fee when we
connect the subscriber, a monthly subscription fee for a basic service and
additional monthly subscription fees for premium programming, which includes a
movie channel and a sports channel. For the period from the date of acquisition
of @Entertainment, August 6, 1999 to November 7, 1999, we sold our DTH reception
systems to our customers at a price below cost due to promotional incentives.
Subsequent to November 7, 1999, we have retained ownership of these systems.
Costs of Operations
DTH operating costs include the costs of programming rights, production
costs, and distribution costs, including transponder fees and operating costs.
A significant portion of these costs are fixed in nature through contractual
commitments. For the period from the date of acquisition of @Entertainment,
August 6, 1999, to November 7, 1999, we sold our DTH reception systems to our
customers at a price below cost due to promotional incentives. Subsequent to
November 7, 1999, we have retained ownership of these systems.
Selling, general and administrative expenses includes branding, marketing and
customer acquisition costs, personnel related costs, such as legal and
accounting, human resources, office facilities and other overhead costs.
Results of Operations - DTH
The following table sets forth information from, or derived from, our
consolidated statements of operations for the three and six months ended June
30, 2000. The results of operations for DTH are from UPC Polska, which was
acquired in August 1999.
35
<PAGE>
<TABLE>
<CAPTION>
For the Three Months For the Six Months
Ended June 30, Ended June 30,
-------------------- ------------------
2000 2000
-------------------- ------------------
(Euros, in thousands)
<S> <C> <C>
Service and other revenue....................... 13,063 22,673
Operating expense............................... (9,900) (18,247)
Selling, general and administrative expense..... (4,618) (10,224)
-------------------- ------------------
(1,455) (5,798)
Adjustments:
Stock-based compensation expense................ -- --
-------------------- ------------------
Adjusted EBITDA................................. (1,455) (5,798)
==================== ==================
As a percentage of revenue:
Operating expense............................... -75.8% -80.5%
==================== ==================
Selling, general and administrative expense..... -35.4% -45.1%
==================== ==================
Adjusted EBITDA................................. -11.1% -25.6%
==================== ==================
</TABLE>
Programming
Our consolidated programming business has been created through internal
development and through acquisitions. Historically we have been and are
involved in several country-specific programming ventures, including those
dedicated to creating channels for Spain, Israel, Ireland and Malta. We have
developed and launched eight channels of various genres since May 1999 and we
are constructing a Pan-European digital distribution platform that will enable
digital distribution of our new channels and other signals to our upgraded
networks. Through the acquisition of @Entertainment in August 1999, we have
obtained a Polish-language programming business under the brand name Wizja TV.
Wizja TV has been rebranded UPC Broadcast Centre Ltd ("UPC Broadcast Centre").
Both directly and through other joint ventures, UPC Broadcast Centre produces
television programming. We distribute our programming packages to third parties,
as well as to affiliates.
We expect substantial operating losses related to our programming activities
to continue while we develop and expand our subscriber base.
Pricing
For our programming channels, including our UPCtv and some UPC Broadcast
Centre channels, we primarily charge cable operators on a per-subscriber fee
basis.
Costs of Operations
Programming operating costs include the costs of programming rights,
production costs, and distribution costs, including transponder fees and
operating costs. A significant portion of these costs are fixed in nature
through contractual commitments.
Selling, general and administrative expenses include branding, marketing,
personnel related costs, such as legal and accounting, human resources, office
facilities and other overhead costs.
Results of Operations - Programming
The following table sets forth information from, or derived from, our
consolidated statements of operations for the three and six months ended June
30, 2000 and June 30, 1999.
36
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended June 30, For the Six Months Ended June 30,
------------------------------------ ----------------------------------
2000 1999 2000 1999
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
(Euros, in thousands) (Euros, in thousands)
Service and other revenue......................... 15,657 225 29,182 401
Operating expense................................. (31,168) (1,874) (60,347) (2,688)
Selling, general and administrative expense....... (9,891) (1,099) (16,620) (2,992)
-------------- --------------- -------------- --------------
(25,402) (2,748) (47,785) (5,279)
Adjustments:
Stock-based compensation expense.................. 63 63 126 201
-------------- --------------- -------------- --------------
Adjusted EBITDA................................... (25,339) (2,685) (47,659) (5,078)
============== =============== ============== ==============
As a percentage of revenue:
Operating expense................................. -199.1% -832.9% -206.8% -670.3%
============== =============== ============== ==============
Selling, general and administrative expense....... -63.2% -488.4% -57.0% -746.1%
============== =============== ============== ==============
Adjusted EBITDA................................... -161.8% -1193.3% -163.3% -1266.3%
============== =============== ============== ==============
</TABLE>
Revenue - Programming
During the three months ended June 30, 2000, our programming revenue
increased 15.5 million to 15.7 million from 0.2 million for the three months
ended June 30, 1999. During the six months ended June 30, 2000, our programming
revenue increased 28.8 million to 29.2 million from 0.4 million for the six
months ended June 30, 1999. The increase is primarily due to our acquisition of
@Entertainment (rebranded as UPC Polska). Programming revenue from UPC Polska's
subsidiary, UPC Broadcast Centre, for the three and six months ended June 30,
2000 was 15.0 million and 28.0 million, respectively.
Programming revenue for the three months ended June, 2000 and 1999, includes
14.2 million and nil, respectively, of intercompany revenues, which are
eliminated in our consolidated operating results. Programming revenue for the
six months ended June, 2000 and 1999, includes 26.8 million and nil,
respectively, of intercompany revenues, which are eliminated in our consolidated
operating results.
Operating Expense - Programming
During the three months ended June 30, 2000, our programming operating
expense increased 29.3 million to 31.2 million from 1.9 million for the three
months ended June 30, 1999. During the six months ended June 30, 2000, our
programming operating expense increased 57.6 million to 60.3 million from 2.7
million for the six months ended June 30, 1999. The increase is primarily due to
our acquisition of UPC Polska. Programming operating expense from UPC Polska's
subsidiary, UPC Broadcast Centre, for the three and six months ended June 30,
2000 was 27.2 million and 48.2 million, respectively. The remaining increase in
operating expense for programming for the three and six months ended June 30,
2000 relates to development activity from UPCtv.
SG&A Expense - Programming
During the three months ended June 30, 2000, SG&A expense for our
programming business increased 8.8 million to 9.9 million from 1.1 million for
the three months ended June 30, 1999, a 800.0% increase. During the six months
ended June 30, 2000, SG&A expense for our programming business increased 13.6
million to 16.6 million from 3.0 million for the six months ended June 30, 1999,
a 453.3%. The increase is due to our acquisition of UPC Polska. The SG&A expense
of UPC Polska's subsidiary, UPC Broadcast Centre, for the three and six months
ended June 30, 2000 was 7.0 million and 2.8 million, respectively.
37
<PAGE>
Results of Operations - Corporate and Other
The following table sets forth information from, or derived from, our
consolidated statements of operations for the three and six months ended June
30, 2000 and June 30, 1999.
<TABLE>
<CAPTION>
For the Three Months Ended June 30, For the Six Months Ended June 30,
------------------------------------ ----------------------------------
2000 1999 2000 1999
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
(Euros, in thousands) (Euros, in thousands)
Service and other revenue......................... 1,771 688 3,052 1,478
Operating expense................................. (6,535) (374) (8,072) (1,469)
Selling, general and administrative expense....... 15,068 (30,006) (35,957) (48,540)
-------------- --------------- -------------- --------------
10,304 (29,692) (40,977) (48,531)
Adjustments:
Stock-based compensation expense.................. (38,888) 23,767 (11,526) 37,958
-------------- --------------- -------------- --------------
Adjusted EBITDA................................... (28,584) (5,925) (52,503) (10,573)
============== =============== ============== ==============
As a percentage of revenue:
Operating expense................................. -369.0% -54.4% -264.5% -99.4%
============== =============== ============== ==============
Selling, general and administrative expense....... 850.8% -4361.3% -1178.1% -3284.2%
============== =============== ============== ==============
Adjusted EBITDA................................... -1614.0% -861.2% -1720.3% -715.4%
============== =============== ============== ==============
</TABLE>
Selling, General and Administrative Expense - Corporate and Other
For the three and six months ended June 30, 2000, we recorded a stock-based
compensation credit of 38.9 million and 11.5 million, respectively, in
corporate and other SG&A expense compared to a stock-based compensation expense
of 23.8 million and 38.0 million for the comparable periods in 1999. A decrease
in our stock price resulted in a stock-based compensation credit for our
phantom stock option plan, which requires variable accounting. Excluding stock-
based compensation, our corporate and other SG&A for the three and six months
ended June 30, 2000 was 23.8 million and 47.5 million, respectively. For the
three and six months ended June 30, 1999, corporate and other SG&A excluding
stock-based compensation, was 6.2 million and 10.6 million, respectively. The
increased costs in 2000 relate to the development of our digital set-top
computer as well as increased systems costs related to the planning and
preparation for implementing Pan-European, financial and customer care systems.
We also incurred costs in the six months ended June 30, 2000 related to the
development of our regulatory office, as well as additional staffing costs for
communications, legal, finance, treasury, investor relations and corporate
development.
The following analysis relates to our consolidated operations as a whole.
Depreciation and Amortization
During the three months ended June 30, 2000, our depreciation and
amortization expense increased 120.5 million to 159.2 million from 38.7 million
for the three months ended June 30, 1999, a 311.4% increase. During the six
months ended June 30, 2000, our depreciation and amortization expense increased
217.9 million to 285.2 million from 67.3 million for the six months ended June
30, 1999, a 323.8% increase. Of this increase, approximately 48.3 million and
79.8 million for the three month and six months, respectively, relates to
increased amortization expense for goodwill created in connection with
acquisitions which closed subsequent to our initial public offering.
Amortization related to acquisitions made in The Netherlands and Poland
represents 46.8% and 33.5% for the three months ended June 30, 2000 and 36.3%
and 40.7% for the six months ended June 30, 2000, respectively. Depreciation
expense also increased due to the acquisitions which closed subsequent to our
initial public offering, which we have consolidated, as well as additional
depreciation expense on capital expenditures to upgrade the network in our
Western European systems and new-build for developing systems.
38
<PAGE>
Interest Income
During the three months ended June 30, 2000 as compared to the three months
ended June 30, 1999, interest income increased 4.9 million to 8.8 million from
3.9 million, a 125.6% increase. During the six months ended June 30, 2000,
interest income increased 16.0 million to 22.1 million from 6.1 million, a
262.3% increase. During the three and six months ended June 30, 2000, we earned
interest income on the cash received from the proceeds of our January 2000 debt
offering, as well as from the remaining proceeds of our October 1999 debt
offering and our October 1999 secondary equity offering.
Interest Expense
During the three months ended June 30, 2000 as compared to the three months
ended June 30, 1999, interest expense increased 156.5 million to 167.3 million
from 10.8 million. During the six months ended June 30, 2000 as compared to the
three months ended June 30, 1999, interest expense increased 279.5 million to
307.7 million from 28.2 million. The increase in 2000 is primarily due to our
offering of senior notes and senior discount notes in July 1999, October 1999
and January 2000. In addition, interest expense related to the @Entertainment
senior discount notes is consolidated in our results effective August 1, 1999. A
significant amount of our interest expense in 2000 relates to accretion on our
discount notes which is not currently cash pay. See ''Liquidity and Capital
Resources''.
<TABLE>
<CAPTION>
For the Three Months Ended June 30, For the Six Months Ended June 30,
------------------------------------ ----------------------------------
2000 1999 2000 1999
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
(Euros, in thousands) (Euros, in thousands)
Cash Current Pay:
Bank......................................... (27,886) (7,048) (39,672) (20,239)
Senior Notes................................. (64,408) - (136,245) -
Other........................................ (12,642) (552) (13,391) (2,429)
-------------- --------------- -------------- --------------
(104,936) (7,600) (189,308) (22,668)
Non-Cash Accretion:
Discount Notes............................... (55,657) - (104,946) -
DIC Loan..................................... (2,161) (2,626) (5,253) (4,588)
Deferred Financing........................... (4,535) (602) (8,175) (927)
-------------- --------------- -------------- --------------
(62,353) (3,228) (118,374) (5,515)
-------------- --------------- -------------- --------------
Total Interest Expense......................... (167,289) (10,828) (307,682) (28,183)
============== =============== ============== ==============
</TABLE>
Foreign Exchange Gain (Loss) and Other Income (Expense)
Foreign exchange gain (loss) and other income (expense), net, reflected a
loss of 44.0 million for the three months ended June 30, 2000, compared to a
gain of 5.8 million for the same period in 1999. For the six months ended June
30, 2000, foreign exchange gain (loss) and other income (expense) reflected a
loss of 124.0 million compared to a gain of 5.5 million for the six months ended
June 30, 1999. The increased foreign exchange loss during the three and six
months ended June 30, 2000 was due primarily to our dollar-denominated senior
discount notes and the increased value of the U.S. dollar against the Euro
subsequent to December 31, 1999.
Share in Results of Affiliated Companies, Net
For the three months ended June 30, 2000, our share in net losses of
affiliated companies increased 3.9 million to 9.8 million from 5.9 million for
the three months ended June 30, 1999. For the six months ended June 30, 2000,
our share in net losses of affiliated companies increased 16.0 million to 31.1
million from 15.1 million for the six months ended June 30, 1999. The increase
was primarily due to increased losses, which includes the amortization of excess
basis, from SBS, Primacom and Tevel for the three and six months ended June 30,
2000. These increases were partially offset by the consolidation of UTH
effective February 1, 1999 and the consolidation of A2000 effective September 1,
1999.
39
<PAGE>
Statements of Cash Flows
We had cash and cash equivalents of 562.2 million as of June 30, 2000, an
increase of 359.8 million from 202.4 million as of June 30, 1999.
Cash Flows from Operating Activities
During the six months ended June 30, 2000, net cash flow from operating
activities decreased 205.5 million to a use of 233.5 million compared to a use
of 28.0 million for the comparable period in 1999. This decrease was primarily
related to increased cash needs for working capital related to entities acquired
during 1999 and 2000, and start-up costs for internet/data, telephone and
development activities.
Cash Flows from Investing Activities
We used approximately 2,264.2 million of cash in investing activities during
the six months ended June 30, 2000, compared to 551.7 million for the six months
ended June 30, 1999. During the six months ended June 30, 2000, cash was used
principally for acquisitions, including Eneco, for 1,046.3 million, net of cash
acquired, UPC Magyaroszag for 63.9 million, net of cash acquired, Tebecai for
62.2 million, net of cash acquired , Haarlem for 62.2 million, net of cash
acquired and other acquisitions totaling 122.3 million, net of cash acquired.
Capital expenditures for property, plant and equipment represented 551.7
million. During this period we made a net investment in affiliates of 311.0
million, including our acquisitions of an additional 10.5% interest in SBS for
162.5 million, including direct costs incurred, shares in Primacom AG for 123.6
million and other investments in affiliates of 24.9 million. We also made a
net investment in securities of 44.5 million.
For the six months ended June 30, 1999, cash for investing activities was
used principally for acquisitions, including UTH for 223.0 million, net of cash
acquired, Gelrevision for 106.0 million, net of cash acquired, and other
acquisitions for 66.3 million, net of cash acquired. Capital expenditures for
property, plant and equipment represented 143.1 million. We had a net decrease
in restricted cash of 8.9 million from the release of 13.8 million upon pay-off
of the bridge bank facility, net of a deposit of 4.9 million related to an
acquisition. During this period we made net investments in affiliates of 23.1
million and we received proceeds from the sale of our Hungarian programming
assets of 16.6 million. We also made an investment in securities of 15.7
million.
Cash Flows from Financing Activities
We had 2,034.5 million of cash flows from financing activities during the
six months ended June 30, 2000, compared to 768.6 million for the six months
ended June 30, 1999. The principal source of cash for the six months ended June
30, 2000, was net proceeds from our senior notes and discount notes offering in
January 2000 of 1,594.2 million. For the six months ended June 30, 2000,
additional sources of cash were from long-term and short-term borrowings of
358.1 million and 572.1 million, respectively. Long-term borrowings included
borrowings under the UPC Senior Credit Facility of 200.0 million, 148.0 million
under the new France Facility, and other borrowings of 10.1 million. We used
proceeds of 231.4 million from the New A2000 Facility to pay off the existing
A2000 Facilities. We had additional proceeds from short-term debt of 340.7
million, including 32.9 million from the GelreVision facility, and 300.0 million
from the new UPC Bridge Loan. We paid down other long-term and short-term loans
of 200.2 million, including three French facilities amounting to 90.4 million,
the Stjarn facility amounting to 41.5 million, and the Monor facility amounting
to 33.3 million. During the six months ended June 30, 2000, we incurred deferred
financing costs of 58.4 million.
For the six months ended June 30, 1999, the principal source of cash was net
proceeds from our initial public offering of 1,207.1 million. Additional
sources of cash were from long-term and short-term borrowings of 309.6 million
and 7.0 million, respectively. Long-term borrowings included borrowings on the
UTH Facility of 245.0 million, borrowings under the UPC Senior Revolving Credit
Facility of 50.0 million and borrowings on the Mediareseaux Facility of 13.3
million and other borrowings of 1.3 million. Concurrent with the initial public
offering, DIC exercised its option to acquire our shares for proceeds of 40.7
million, which we used to pay 39.8 million of the DIC Loan. We used proceeds
from the initial public offering to pay 281.3 million of the UPC Senior
Revolving Credit Facility, 50.0 million of the UPC Bridge Bank Facility and 71.4
million of the United Loan. As part of the acquisition of UTH in February
1999, we also paid a loan to NUON of 15.0 million. In March 1999, UTH paid off
its existing credit facility of 281.3 million with proceeds from the New
Telekabel Facility and funding from UPC. We paid down other loans of 35.6
million, including 18.9 million
40
<PAGE>
for the Telekabel Hungary Facility. We used proceeds from the sale of our
programming assets in Hungary to pay the Time Warner Note totaling 16.5 million.
Consolidated Capital Expenditures
Since 1995, we have been upgrading our existing cable television system
infrastructure and constructing our new-build infrastructure with two-way high
capacity technology to support digital video, telephony 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 have received commitments from Philips and Motorola for the development
and purchase of an integrated digital set-top computer for video and
internet/data services, as well as for internet-based telephony. UPC Nederland
(A2000) agreed with the City of Amsterdam to commence deployment during the year
2000, a significant number of digital set-top computers to our existing
customers who elect to take our expanded tier service.
In addition to the network infrastructure and related equipment and capital
resources described above, development of our newer businesses, chello
broadband, Priority Telecom, including CLEC, our digital distribution platform
and DTH, including expansion into Central Europe, require capital expenditures
for construction and development of our Pan-European distribution and
programming facilities, including our origination facility, network operating
center, near video on demand server complex and related support systems and
equipment. For the year ended December 31, 2000, we have budgeted 1.8 billion
for capital expenditures, excluding capital expenditures for certain of our new
acquisitions.
Liquidity and Capital Resources
Historically, we have financed our operations and acquisitions primarily
from:
. cash contributed by United upon our formation,
. debt financed at the UPC corporate level and project debt financed at the
operating company level,
. equity raised in our initial public offering and secondary offering,
. debt raised in our July 1999, October 1999 and January 2000 offerings of
senior notes and senior discount notes, and
. operating cash flow.
In general, we have used the cash contributed by United upon formation and
debt and equity raised at the UPC corporate level to fund acquisitions,
developing systems and corporate overhead. We have financed our well-established
systems and, when possible, our developing systems, with project debt and
operating cash flow. Well-established systems generally have stable positive
cable cash flows that are used to partially offset funding necessary for new
product offerings, including telephony and internet/data.
We and our consolidated affiliates had the following principal long-term and
short-term debt facilities outstanding as of June 30, 2000. Debt denominated in
currencies other than Euros has been translated to Euros for the outstanding
balance as of June 30, 2000. Several of the debt facilities listed below have
financial covenants and other restrictions which could limit access to funds.
See our notes to consolidated financial statements for additional details.
41
<PAGE>
<TABLE>
<CAPTION>
Facility Size or Outstanding
Final Principal At June 30,
Description (Borrower) Maturity Interest Rate Amount 2000
------------------------------------------- ---------- ------------------------------- ---------------- -----------------
<S> <C> <C> <C> <C>
(in millions) (in millions of Euros)
UPC and Consolidsolidated Subsidiaries:
Long-Term Debt
Senior Notes 2007 EURIBOR + 4.8% and 9.92% Euro 190.7 190.7
2007 10.875% Euro100.0 100.0
2009 EURIBOR + 4.8% and 9.92% Euro 240.2 238.4
2009 11.25% Euro101.0 100.3
2009 EURIBOR + 4.15% and 8.54% Euro754.7 754.7
2009 10.875% Euro300.0 300.0
2010 11.250% USD 600.0 624.8
2010 10.000% Euro 297.0 294.8
2010 11.250% Euro 200.0 198.6
Senior Discount Notes 2009 12.50% USD735.0 (1) 469.9
2009 13.375% USD478.01(1) 286.2
2009 13.375% Euro191.0(1) 109.0
2010 13.750% USD1,000.0 (1) 570.3
PCI Notes 2003 9.875% per annum USD130.0 15.2
@Entertainment 1998 Senior Discount Notes 2008 14.5% per annum USD224.2 126.8
@Entertainment 1999 Senior Discount Notes 2009 14.5% per annum USD235.5 137.6
@Entertainment 1999 Series C 2008 7% per annum on USD36.0 13.5
Senior Discount Notes principal at maturity
UPC Senior Credit Facility 2006 EURIBOR/LIBOR + 0.75% to Euro1,000.0 556.8
2.0% per annum
New TeleKabel Facility 2007 EURIBOR + 0.75% to 2.0% per Euro340.0 225.2
annum
CNBH Facility 2008 AIBOR + 0.6% to 1.6% per NLG274.0 121.2
annum
Rhone Vision Cable Facility June 2002 LIBOR + 1% FFR680.0 61.0
UPC France Facility 2001 EURIBOR + 2.5% Euro250.0 148.0
Short-Term Debt
Stjarn Facilities 2000 NBU + 0.60% / STIBOR + 1.25% SEK521.0 8.3
Stjarn Seller's Note August 2000 8.0% per annum USD 100.0 104.9
New A2000 Facilities 2000 EURIBOR + 1.0% per annum NLG620.0 231.4
UPC Bridge Loan 2000 EURIBOR + 2.0% / 2.5% per annum Euro500.0 300.0
DIC Loan 2000 8.0% per annum + 6.0% of USD45.0 46.8
principal amount at maturity
(1) At maturity.
</TABLE>
Restrictions under our July 1999, October 1999 and January 2000 Indentures
Our activities are restricted by the covenants of our indentures dated
July 30, 1999, October 29, 1999 and January 20, 2000, under which senior notes
and senior discount notes were issued. Among other things, our indentures place
certain limitations on our ability, and the ability of our subsidiaries, to
borrow money, issue capital stock, pay dividends in stock or repurchase stock,
make investments, create certain liens, engage in certain transactions with
affiliates, and sell certain assets or merge with or into other companies.
Under the terms of our indentures, if we raise additional equity, we will be
permitted to incur additional debt.
42
<PAGE>
Restrictions under United Indentures
As a subsidiary of United, our activities are restricted by the covenants in
United's indentures dated February 5, 1998 and April 29, 1999. The United
indentures generally limit the additional amount of debt that we or our
subsidiaries or controlled affiliates may borrow, or preferred shares that we or
they may issue.
Sources of Capital
We had 562.2 million of unrestricted cash and cash equivalents on hand as of
June 30, 2000. In addition, we had borrowing capacity at the corporate and
project debt level. In 1999, we raised over 5.0 billion from a combination of
banks, bond markets and equity markets. We intend to continue to access these
sources of capital, as well as less traditional sources including vendor
financing, equity partners, and leasing structures.
In January 2000, we closed a bond offering consisting of four tranches: USD
300 million of senior notes due 2010 with an 11 1/2% coupon; USD 600 million and
Euro 200 million of senior notes due 2010 with an 11 1/4% coupon; and USD 1.0
billion aggregate principal amount 13 3/4% senior discount notes due 2010. The
senior discount notes were sold at 51.224% of the face amount, yielding gross
proceeds of USD 512.2 million. The senior discount notes will accrue, but not
pay, interest until August 2005, at which date the interest payments will become
current. UPC has entered into cross-currency swaps, swapping a total of USD 300
million of the 11 1/2% series into a fixed Euro coupon of 10% with a notional
value of Euro 297 million until August 2008.
In January 2000, UPC Nederland (A2000) refinanced its existing bank
facilities with a one year term-loan bridge facility of 231.4 million and a one
year revolving credit bridge facility of 49.9 million, subject to certain
availability covenants. The facilities are secured by mortgages and pledges,
including pledges on A2000 Holding, Kabeltelevisie Amsterdam and A2000
Hilversum. The borrowers are restricted from incurring additional indebtedness
and from paying dividends and distributions, subject to certain exceptions.
These facilities bear interest at an annual rate of EURIBOR +1.0%. The
facilities expire in December 2000.
At the end of March 2000 a fully committed Euro 2 billion standby revolving
credit facility was provided. The facility is guaranteed by UPC and certain
subsidiaries. When drawn, the facility will bear interest of EURIBOR + 6.0% -
7.0%, stepping up after March 31, 2001 with periodic increases capped at an
annual rate of 18%. An annual commitment fee of 0.50% is applicable over the
undrawn amount. A drawing fee ranging from 1.5% to 2.0% is applicable for each
drawing. The commitment terminates on December 31, 2000, and reaches maturity on
March 29, 2007.
On April 7, 2000 Mediareseaux refinanced its existing debt and the existing
debt of Videopole and RCF with a Euro 250 million Bridge Facility of which Euro
148 million was outstanding at June 30, 2000. The refinancing of the Rhone
Vision Cable Credit Facility with this facility is envisaged for the third
quarter of 2000. Availability is subject to revenues and debt to equity ratios.
In general, this facility restricts the payment of dividends and distributions.
In connection with the Eneco K&T acquisition, UPC Nederland has received a
short-term bridge loan of Euro 500 million secured with guarantees of certain of
our Dutch Assets. The purpose of the bridge is to refinance certain existing
inter-company loans to UPC NV. The bridge will expire in December 2000. Euro 300
million has been drawn on the bridge as of June 30, 2000. The Euro 4 billion
financing will fully repay this facility. Subsequent to June 30, 2000 the
remaining Euro 200 million was drawn.
UPC has accepted an 8.0 and 8.75-year Euro 4 billion operating and term loan
commitment ("The UPC Bank Facilities"). The UPC Bank Facilities will bear
interest at EURIBOR + 0.75% - 4% depending on certain ratios. The UPC Bank
Facilities are arranged and fully underwritten by Chase Manhattan Bank and TD
Securities, with further syndication underway. The facilities will refinance
existing operating company bank debt currently totaling approximately Euro 1.7
billion, at June 30, 2000. Subject to certain availability tests, the new loan
facilities will add approximately Euro 2.3 billion of available liquidity and
will be used to finance the further digital rollout and triple play on all the
existing cable TV companies currently owned by UPC, except for its Polish and
German assets. It is anticipated that the loan will be closed and drawn in the
third quarter of 2000.
43
<PAGE>
Certain Dutch Tax Issues
One of our Dutch systems was assessed for a transfer tax on immovable
property in the amount of 0.8 million for the purchase of a cable network. We
have always regarded our cable networks as movable property and not subject to
such transfer tax. We are appealing this tax assessment. Should we be
unsuccessful, our Dutch systems may be assessed for taxes on similar
transactions. We cannot predict the extent to which the taxes could be assessed
retroactively or the amount of tax that our systems may be assessed for,
although it may be substantial, being 6% of the value attributable to our
systems at the date of transfer. Because we own 100% of UPC Nederland, any tax
liabilities assessed against our Dutch systems will be consolidated with our
results. We believe that, if our appeal is unsuccessful, most cable television
companies and other utilities in The Netherlands would become subject to similar
tax liabilities. If this happens, we expect these entities would lobby the Dutch
tax authorities with us against such tax assessments. We cannot assure that such
lobbying would be successful.
In October 1999, the Dutch tax authorities issued an assessment on the 1995
tax return of one of our subsidiaries. The assessment, on a taxable amount of
approximately 36.3 million, resulted in a tax payable of approximately 12.7
million. The Dutch tax authorities indicated that this assessment was issued to
reserve the rights of the Dutch tax authorities pending expiration of time under
the statute of limitations. The assessment does not express an opinion of the
Dutch tax authorities on the taxes due and is still subject to discussion. We
filed an appeal against the assessment to defend our tax filing position, if
necessary.
Inflation and Foreign Currency Exchange Rate Losses
To date, we have not been impacted materially by inflation.
The value of our monetary assets and liabilities is affected by fluctuations
in foreign currency exchange rates as accounts payable for certain equipment
purchases and certain operating expenses, such as DTH and 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. Historically,
we and our operating companies have not hedged our exposure to foreign currency
exchange rate operating 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. In connection with our
offerings of senior notes in July 1999, October 1999 and January 2000, we
entered into cross-currency swap agreements, exchanging dollar-denominated notes
for Euro-denominated notes.
The functional currency for our operations generally is the applicable local
currency for each operating company. We have consolidated operations in
countries outside of the European Monetary Union including Norway, Sweden,
Poland, Hungary, Romania, the Czech Republic and the Slovak Republic and
operations which report in US dollars. Assets and liabilities of foreign
subsidiaries are translated at the 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 Euros 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
with 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.
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
44
<PAGE>
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 functional.
We do not expect the introduction of the Euro to materially affect our cable
television and other operations. However, we do believe the introduction of the
Euro will reduce our exposure to risk from foreign currency and interest rate
fluctuations.
45
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
Investment Portfolio
As of June 30, 2000, UPC has cash and cash equivalents of approximately
562.2 million. UPC has invested this cash in highly liquid instruments which
meet high credit quality standards with original maturities at the date of
purchase of less than three months. These investments will be subject to
interest rate risk and foreign exchange fluctuations (with respect to amounts
invested in currencies outside the European Monetary Union); however, the
Company does not expect any material losses with respect to its investment
portfolio.
Impact of Foreign Currency Rate Changes
We are exposed to foreign exchange rate fluctuations related to our monetary
assets and liabilities, including those of our operating subsidiaries, which are
denominated in currencies outside of the European Monetary Union. Our exposure
to foreign exchange rate fluctuations also arises from intercompany charges.
The tables below provide information about UPC's and its consolidated
subsidiaries' foreign currency exchange risk for cash and debt which is
denominated in foreign currencies outside of the European Monetary Union as of
June 30, 2000, including cash flows based on the expected repayment date and
related weighted-average interest rates for debt. The information is presented
in Euro equivalents, as the Euro is the Company's reporting currency. The
instruments' actual cash flows are denominated in US Dollars and Polish Zloty.
Amount Outstanding
as of June 30, 2000
-------------------------
Book Value Fair Value
----------- ------------
(Euros, in thousands)
Cash and Cash Equivalents
--------------------------------------------
USD Cash.................................... 15,460 15,460
Polish Zloty................................ 7,332 7,332
46
<PAGE>
<TABLE>
<CAPTION>
Amount Outstanding Expected Repayment
as of June 30, 2000 as of December 31,
-------------------------- ------------------------------------------
Book Value Fair Value 2000 2001 2002 2003 2004
----------- ------------ --------- ------ ------ --------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
(Euros, in thousands)
US Dollar Denominated Facilities
------------------------------------------------------
DIC Loan.............................................. 46,843 46,843 46,843 - - - -
8.0% per annum + 6.0% of principal at maturity.....
Stjarn Seller's Note.................................. 104,864 104,864 104,864 - - - -
8.0% per annum
UPC USD Senior Discount Notes, 2009................... 469,882 381,507 - - - - -
12.5 % per annum
UPC USD Senior Discount Notes, 2009................... 286,153 245,603 - - - - -
13.375 % per annum
UPC USD Senior Discount Notes, 2010................... 570,292 498,085 - - - - -
13.750% per annum
UPC USD Senior Notes, 2010............................ 624,843 559,952 - - - - -
11.25% per annum
PCI Notes ............................................ 15,187 15,187 - - - 15,187 -
9.875% per annum
@Entertainment 1998 Senior Discount Notes............. 126,833 132,351 - - - - -
14.5% per annum
@Entertainment 1999 Senior Discount Notes............. 137,603 131,454 - - - - -
14.5% per annum
@Entertainment 1999 Series C Senior Discount Notes.... 13,542 13,542 - - - - -
7.0% per annum on the principal amount at maturity
</TABLE>
Historically, we and our operating companies have not executed hedge
transactions to reduce the Company's exposure to foreign currency exchange rate
risk related to our foreign currency denominated cash and debt. 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. In connection with our offerings of senior notes in
July 1999, October 1999 and January 2000, we entered into cross-currency swap
agreements, exchanging dollar-denominated notes for Euro denominated notes.
Interest Rate Sensitivity
The table below provides information about our financial instruments that
are sensitive to changes in interest rates as of June 30, 2000, including cash
flows based on the expected repayment dates and the related weighted-average
interest rates. The information is presented in Euro equivalents, as the Euro is
the Company's reporting currency.
47
<PAGE>
<TABLE>
<CAPTION>
Amount Outstanding Expected Repayment
as of June 30, 2000 as of December 31,
----------------------- ---------------------------------------------------
Book Value Fair Value 2000 2001 2002 2003 2004
----------- ----------- -------- --------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(Euros, in thousands)
Variable Rate Facilities
-------------------------------------------
UPC 10.875% Euro Senior Notes due 2009..... 754,717 728,332 - - - - -
EURIBOR+4.15% and 8.54%, .
average rate in 2000 of 7.15% and 8.54%
UPC 10.875% USD Senior Notes due 2007...... 190,658 186,651 - - - - -
EURIBOR+4.8% and 9.92%,
average rate in 2000 of 8.3% and 9.92%
UPC 11.25% USD Senior Notes due 2009....... 238,409 236,685 - - - - -
EURIBOR+4.8% and 9.92%,
average rate in 2000 of 8.3% and 9.92%
UPC Senior Credit Facility (1)............. 556,814 556,814 556,814 - - - -
EURIBOR/LIBOR + 0.75% to 2.0%,
average rate in 2000 of 7.2%
New Telekabel Facility (1)................. 225,150 225,150 225,150 - - - -
EURIBOR + 0.75% to 2.0%,
average rate in 2000 of 5.9%
CNBH Facility (1).......................... 121,237 121,237 121,237 - - - -
AIBOR + 0.6% to 1.6%
average rate in 2000 of 5.3%
New A2000 Facilities (1)................... 231,428 231,428 231,428 - - - -
EURIBOR + 1.0%
average rate in 2000 of 4.7%
RVC Credit Facility (1).................... 60,960 60,960 60,960 - - - -
LIBOR + 1.0%,
average rate in 2000 of 4.9%
UPC NL Bridge Loan (1)..................... 300,000 300,000 300,000 - - - -
EURIBOR + 2.0 / 2.5%,
average rate in 2000 of 6.4%
UPC France Facility (1).................... 147,952 147,952 147,952 - - - -
EURIBOR + 2.5%
average rate in 2000 of 6.5%
</TABLE>
(1) Expected to be refinanced by The Euro 4 billion Facility.
48
<PAGE>
<TABLE>
<CAPTION>
Amount Outstanding Expected Repayment
as of June 30, 2000 as of December 31,
---------------------- ---------------------------------------------
Book Value Fair Value 2000 2001 2002 2003 2004
----------- ---------- -------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(Euros, in thousands)
Fixed Rate Facilities
----------------------------------------------------
DIC Loan............................................ 46,843 46,843 46,843 - - - -
8.0% per annum + 6.0% of principal at maturity
UPC Euro Senior Notes, 2009......................... 300,000 258,000 - - - - -
10.875% per annum
UPC USD Senior Discount Notes, 2009................. 469,882 381,507 - - - - -
12.5 % per annum
UPC USD Senior Discount Notes, 2009................. 286,153 245,603 - - - - -
13.375 % per annum
UPC Euro Senior Discount Notes, 2009................ 109,043 93,590 - - - - -
13.375 % per annum
UPC USD Senior Discount Notes, 2010................. 570,292 498,085 - - - - -
13.75 % per annum
UPC Euro Senior Notes, 2007......................... 100,000 89,000 - - - - -
10.875 % per annum
UPC Euro Senior Notes, 2009......................... 100,304 88,880 - - - - -
11.25 % per annum
UPC USD Senior Notes, 2010.......................... 624,843 559,952 - - - - -
11.25 % per annum
UPC Euro Senior Notes, 2010......................... 294,802 279,976 - - - - -
11.50 % per annum
UPC Euro Senior Notes, 2010......................... 198,570 176,000 - - - - -
11.25 % per annum
PCI Notes........................................... 15,187 15,187 - - - 15,187 -
9.875% per annum
@Entertainment 1998 Senior Discount Notes........... 126,833 132,351 - - - - -
14.5% per annum
@Entertainment 1999 Senior Discount Notes........... 137,603 131,454 - - - - -
14.5% per annum
@Entertainment 1999 Series C Senior Discount Notes.. 13,542 13,542 - - - - -
7.0% per annum on the principal amount at
maturity
Stjarn Seller's Note................................ 104,864 104,864 104,864 - - - -
8.0% per annum
</TABLE>
Equity Prices
As of June 30, 2000, we are exposed to equity price fluctuations related to
our investment in equity securities. Our investment in United is classified as
available for sale. Changes in the price of the stock are reflected as
unrealized gains (losses) in our statement of shareholders' equity, until such
time as the stock is sold and any unrealized gain (loss) will be reflected in
the statement of operations. Our investments in PrimaCom AG and SBS
Broadcasting S.A. are accounted for under the equity method of accounting.
Fair Value as of
Number of Shares June 30, 2000
-------------------------- --------------------------
(Stated in thousands of Euros, except share amounts)
United............... 5,569,240 273,016
PrimaCom AG.......... 4,948,039 232,558
SBS.................. 6,000,000 342,892
Terayon (1).......... 2,000,000 110,338
(1) Represent warrants to acquire shares. Fair Value based on Black and Scholes
model per June 30, 2000.
49
<PAGE>
As of June 30, 2000, we are also exposed to equity price fluctuations
related to our debt which is convertible into our ordinary shares. The table
below provides information about our convertible debt, including expected cash
flows and related weighted-average interest rates.
Amount Outstanding Expected Repayment
as of June 30, 2000 as of December 31,
------------------------ --------------------
Convertible Debt Book Value Fair Value 2000 2001
------------------------------ ----------- ----------- -------- ----------
(Euros, in thousands)
DIC Loan...................... 46,843 46,843 46,843 -
8.0% per annum + 6.0%
of principal at maturity
Stjarn Seller's Note.......... 104,864 104,864 104,864 -
8.0% per annum
50
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
Our 2000 Annual Meeting of Shareholders took place on June 9, 2000. In addition
to electing two new members to our Board of Management, shareholders also voted
upon the following matters:
. To adopt the Annual Accounts of the Company for the fiscal year ended
December 31, 1999;
. To grant discharge to the members of the Supervisory Board and the Board
of Management from liability in respect of the exercise of their duties
during the fiscal year ended December 31, 1999;
. To grant authority to the Board of Management to repurchase up to 10% of
the Company's outstanding share capital for a period of 18 months (until
December 9, 2001); and
. To appoint the firm Arthur Andersen as independent auditors.
With respect to each matter voted upon at the annual meeting, a majority of the
votes cast by shareholders were cast in favor of such proposal.
51
<PAGE>
Item 5. Other Information
Summary Operating Data 2000
The operating data set forth below reflects the aggregate statistics of the
operating systems in which the Company has an ownership interest.
<TABLE>
<CAPTION>
As of June 30, 2000
--------------------------------------------------------------------------------
Homes in Two way UPC
Service Homes Homes Basic Basic Paid-in
Area Passed Passed Subscribers Penetration Ownership
------------- ------------ ------------ ------------ --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Multi-channel TV:
Consolidated companies:
Norway............................... 529,000 469,248 84,531 330,292 70.4% 100.0%
Sweden............................... 770,000 421,624 228,153 248,706 59.0% 100.0%
Belgium.............................. 530,000 152,052 152,052 123,484 81.2% 100.0%
France............................... 2,460,357 1,111,477 230,531 381,519 34.3% 92.0%
The Netherlands...................... 2,541,686 2,431,861 1,953,910 2,253,204 92.7% 100.0%
Austria.............................. 1,080,900 910,550 867,300 478,520 52.6% 95.0%
Hungary (UPC Magyarorszag)........... 915,500 704,988 131,451 535,907 76.0% 100.0%
Hungary (Monor)...................... 85,561 70,587 84,906 33,158 47.0% 98.7%
Poland............................... 1,950,000 1,793,375 - 1,038,256 58.8% 100.0%
Czech Republic....................... 868,823 777,419 17,740 356,601 45.9% 100.0%
Romania.............................. 509,320 395,910 - 260,307 65.7% 51.0-70.0%
Slovak Republic...................... 417,813 295,914 - 244,343 82.6% 95.0-100.0%
Non-consolidated companies:
Germany (Primacom) (1)............... 1,422,826 1,422,826 30,456 919,641 64.6% 25.1%
Israel............................... 660,000 623,274 388,735 437,318 70.2% 46.6%
Malta................................ 177,000 175,986 - 79,393 45.1% 50.0%
------------- ------------ ------------ ------------
Total........................... 14,918,786 11,757,091 4,169,765 7,720,649
============= ============ ============ ============
Direct to Home (DTH):
Consolidated companies:
Poland............................... - - - 378,217 N/A 100.0%
------------- ------------ ------------ ------------
Total........................... - - - 378,217
============= ============ ============ ============
Programming:
Consolidated companies:
Tara Television...................... - - - 3,228,922 N/A 80.0%
Non-consolidated companies:
Iberian Program Services (13)........ - - - 876,000 N/A 50.0%
------------- ------------ ------------ ------------
Total........................... - - - 4,104,922
============= ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
As of June 30, 2000
-----------------------------------------
UPC UPC UPC
Equity in Equity in Equity in
Homes in Homes Basic
Service Area Passed Subscribers
------------- ------------ --------------
<S> <C> <C> <C>
Multi-channel TV:
Consolidated companies:
Norway............................... 529,000 469,248 330,292
Sweden............................... 770,000 421,624 248,706
Belgium.............................. 530,000 152,052 123,484
France............................... 2,263,528 1,022,559 350,997
The Netherlands...................... 2,541,686 2,431,861 2,253,204
Austria.............................. 1,026,855 865,023 454,594
Hungary (UPC Magyarorszag)........... 915,500 704,988 535,907
Hungary (Monor)...................... 83,114 68,568 32,210
Poland............................... 1,950,000 1,793,375 1,038,256
Czech Republic....................... 868,823 777,419 356,601
Romania.............................. 343,604 270,677 177,672
Slovak Republic...................... 416,758 295,042 243,776
Non-consolidated companies:
Germany (Primacom) (1)............... 357,129 357,129 230,830
Israel............................... 307,560 290,446 203,790
Malta................................ 88,500 87,993 39,697
------------ ------------ ------------
Total........................... 12,992,057 10,008,004 6,620,016
============ ============ ============
Direct to Home (DTH):
Consolidated companies:
Poland............................... - - 378,217
------------ ------------ ------------
Total........................... - - 378,217
============ ============ ============
Programming:
Consolidated companies:
Tara Television...................... - - 2,583,138
Non-consolidated companies:
Iberian Program Services (13)........ - - 438,000
------------ ------------ ------------
Total........................... - - 3,021,138
============ ============ ============
</TABLE>
52
<PAGE>
Summary Operating Data 2000 (continued)
<TABLE>
<CAPTION>
As of June 30, 2000
---------------------------------------------------------------------------------
UPC
Subscribers Lines UPC Equity in
-------------------------- ------------------------- Paid-in Residential
Residential Businesses Residential Businesses Ownership Subscribers
------------- ------------ ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Cable Telephony
Consolidated companies:
Norway................................. 7,788 164 8,620 3,014 100.0% 7,788
France ................................ 24,163 10 24,874 529 92.0% 22,230
The Netherlands........................ 101,258 177 119,707 12,973 100.0% 101,258
Austria................................ 67,326 1,068 68,762 3,050 95.0% 63,960
------------- ------------ ------------ ------------ ------------
Total............................. 200,535 1,419 221,963 19,566 195,236
============= ============ ============ ============ ============
Non-Cable Telephony
Consolidated companies:
The Netherlands
(Uniport Carrier Select) (2)......... 28,748 8,341 - - 80.0% 22,998
Mundi Telecom.......................... 3,479 2,877 - - 51.0% 1,774
Czech Republic......................... 3,613 - 3,613 - 100.0% 3,613
Hungary (Monor) (3).................... 65,075 3,384 67,248 6,577 98.7% 63,214
------------- ------------ ------------ ------------ ------------
Total............................. 100,915 14,602 70,861 6,577 91,599
============= ============ ============ ============ ============
<CAPTION>
As of June 30, 2000
------------------------------------------
UPC UPC UPC
Equity in Equity in Equity in
Business Residential Business Lines
Subscribers Lines Served Served
------------ ------------- ---------------
<S> <C> <C> <C>
Cable Telephony
Consolidated companies:
Norway................................. 164 8,620 3,014
France ................................ 9 22,884 487
The Netherlands........................ 177 119,707 12,973
Austria................................ 1,015 65,324 2,898
------------ ------------- ---------------
Total............................. 1,365 216,535 19,372
============ ============= ===============
Non-Cable Telephony
Consolidated companies:
The Netherlands
(Uniport Carrier Select) (2)......... 6,673 - -
Mundi Telecom ......................... 1,467 - -
Czech Republic......................... - 3,613 -
Hungary (Monor) (3).................... 3,287 65,325 6,389
------------ ------------- ---------------
Total............................. 11,427 68,938 6,389
============ ============= ===============
</TABLE>
53
<PAGE>
Summary Operating Data 2000 (continued)
<TABLE>
<CAPTION>
As of June 30, 2000
---------------------------------------------------------------------------------
3rd Party UPC
Subscribers ISP Subscribers (9) UPC Equity in
-------------------------- ------------------------- Paid-in Residential
Residential Businesses Residential Businesses Ownership Subscribers
------------- ------------ ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Data services
Consolidated companies:
Norway................................. 6,980 190 - - 100.0% 6,980
Sweden................................. 18,515 - - - 100.0% 18,515
Belgium................................ 11,519 - - - 100.0% 11,519
France................................. 7,003 - - - 92.0% 6,443
The Netherlands........................ 101,646 2,053 15,483 239 100.0% 101,646
Austria................................ 62,978 2,604 - - 95.0% 59,829
Hungary (UPC Magyarorszag)............. 517 - - - 100.0% 517
Non-consolidated companies:
Germany (Primacom) (1)................. 150 - - - 25.1% 38
------------- ------------ ------------ ------------ ------------
Total............................. 209,308 4,847 15,483 239 205,487
============= ============ ============ ============ ============
<CAPTION>
As of June 30, 2000
------------------------------------------
UPC UPC UPC
Equity in Equity in Equity in
Business Residential Business Lines
Subscribers Lines Served Served
------------ ------------- ---------------
<S> <C> <C> <C>
Data services
Consolidated companies:
Norway................................. 190 - -
Sweden................................. - - -
Belgium................................ - - -
France................................. - - -
The Netherlands........................ 2,053 15,483 239
Austria................................ 2,474 - -
Hungary (UPC Magyarorszag)............. - - -
Non-consolidated companies:
Germany (Primacom) (1)................. - - -
------------ ------------- ---------------
Total............................. 4,717 15,483 239
============ ============= ===============
</TABLE>
54
<PAGE>
Summary Financial Data 2000 (4)
<TABLE>
<CAPTION>
As of June 30,
For the six months period ended June 30, 2000 (8) 2000
----------------------------------------------------------------------------------
Net Net Long-
Operating Income/ Adjusted Capital Term
Revenue Income/(loss) (loss) EBITDA (5) Expenditures (6) Debt (7)
------------ ------------ ---------- ------------ ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
(Euros, in thousands)
Consolidated companies:
Norway............................... 26,599 (15,316) (28,567) 1,165 38,180 228,081
Sweden............................... 19,168 (18,293) (21,664) 231 7,969 29,647
Belgium.............................. 10,207 (4,375) (4,686) 185 4,757 -
France............................... 34,379 (35,168) (46,272) (7,220) 70,528 238,769
The Netherlands...................... 155,347 (87,834) (137,775) 11,569 155,019 354,169
Austria.............................. 68,213 (6,330) (11,445) 19,389 66,359 163,507
Hungary (UPC Magyarorszag)........... 21,712 (1,427) (5,739) 4,762 23,940 -
Hungary (Monor)...................... 12,314 3,171 (426) 6,699 1,336 -
Poland............................... 59,509 (87,537) (137,220) (32,560) 71,940 294,434
Czech Republic....................... 14,580 (4,856) (9,882) 2,895 2,810 -
Romania.............................. 2,350 888 263 989 404 -
Slovak Republic...................... 5,949 (2,700) (2,936) 1,899 1,910 -
Non-consolidated companies:
Israel (12).......................... 72,975 N/A (12,449) 21,857 N/A 233,683
Malta................................ 7,995 1,400 (212) 2,678 2,067 28,774
Germany (Primacom) (11).............. 55,162 (11,011) (13,576) 20,947 24,488 213,283
Programming:
Consolidated companies:
Tara Television...................... 957 (1,576) (1,515) (1,392) 40 -
Unconsolidated companies:
Iberian Program Services............. 17,437 5,013 4,840 6,789 290 -
SBS (11)............................. 240,576 (1,977) (23,126) 8,821 20,672 113,919
</TABLE>
55
<PAGE>
Summary Operating Data 1999
The operating data set forth below reflect the aggregate statistics of the
operating systems in which the Company has an ownership interest.
<TABLE>
<CAPTION>
As of June 30, 1999
----------------------------------------------------------------------------------------
Homes in Two way UPC
Service Homes Homes Basic Basic Paid-in
Area Passed Passed Subscribers Penetration Ownership
------------ ------------- ------------ ------------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Multi-channel TV:
Consolidated companies:
Norway............................ 529,900 465,951 30,022 323,265 69.4% 100.0%
Belgium........................... 133,060 133,060 116,804 125,786 94.5% 100.0%
France............................ 412,500 287,087 85,201 108,140 37.7% 95.7-99.6%
The Netherlands (UTH)............. 1,132,722 1,064,942 798,227 1,006,459 94.5% 100.0%
Austria........................... 1,078,980 905,430 685,520 461,018 50.9% 95.0%
Hungary (UPC Magyarorszag)........ 901,500 550,423 - 449,337 81.6% 79.3%
Czech Republic.................... 229,531 157,586 - 54,691 34.7% 100.0%
Romania........................... 180,000 99,274 - 61,944 62.4% 51.0-100.0%
Slovak Republic................... 344,343 211,295 - 185,633 87.9% 75.0-100.0%
Non-consolidated companies:
The Netherlands (A2000)........... 580,198 580,198 386,109 532,297 91.7% 50.0%
Israel............................ 602,000 592,326 373,312 410,380 69.3% 46.6%
Malta............................. 179,000 166,415 - 73,051 43.9% 50.0%
Hungary (Monor)................... 85,000 70,061 - 31,686 45.2% 47.5%
------------ ------------- ------------ -------------------
Total........................ 6,388,734 5,284,048 2,475,195 3,823,687
============ ============= ============ ===================
<CAPTION>
As of June 30, 1999
-------------------------------------------
UPC UPC UPC
Equity in Equity in Equity in
Homes in Homes Basic
Service Area Passed Subscribers
-------------- ------------- -------------
<S> <C> <C> <C>
Multi-channel TV:
Consolidated companies:
Norway............................ 529,900 465,951 323,265
Belgium........................... 133,060 133,060 125,786
France............................ 402,173 278,042 104,811
The Netherlands (UTH)............. 1,132,722 1,064,942 1,006,459
Austria........................... 1,025,031 860,159 437,967
Hungary (UPC Magyarorszag)........ 714,439 436,210 356,100
Czech Republic.................... 229,531 157,586 54,691
Romania........................... 165,300 84,770 50,799
Slovak Republic................... 339,068 206,957 182,821
Non-consolidated companies:
The Netherlands (A2000)........... 290,099 290,099 266,149
Israel............................ 280,532 276,024 191,237
Malta............................. 89,500 83,208 36,526
Hungary (Monor)................... 40,412 33,310 15,065
------------- ------------- ------------
Total........................ 5,371,767 4,370,318 3,151,676
============= ============= ============
</TABLE>
56
<PAGE>
Summary Operating Data 1999 (continued)
<TABLE>
<CAPTION>
As of June 30, 1999
----------------------------------------------------------------------------------------
UPC
Subscribers Lines served UPC Equity in
-------------------------- -------------------------------- Paid-in Residential
Residential Businesses Residential Businesses Ownership Subscribers
------------ ------------- ------------ ------------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Telephony
Consolidated companies:
Norway............................ 364 - 451 - 100.0% 364
France............................ 5,041 - 5,160 - 99.6% 5,021
The Netherlands (UTH) (2)......... 18,154 5,953 18,154 5,963 100.0% 18,154
Austria........................... 7,159 216 7,197 682 95.0% 6,801
Non-consolidated companies:
The Netherlands (A2000) (10) 26,064 3 29,060 830 50.0% 13,032
Hungary (Monor) (3)............... - - 64,915 6,806 47.5% -
------------ ------------- ------------ ------------------- ------------
Total........................ 56,782 6,172 124,937 14,281 43,372
============ ============= ============ =================== ============
Dataservices
Consolidated companies:
Norway............................ 1,062 4 N/A N/A 100.0% 1,062
Belgium........................... 3,332 469 N/A N/A 100.0% 3,332
France............................ 936 - N/A N/A 99.6% 932
The Netherlands (UTH)............. 10,848 145 N/A N/A 100.0% 10,848
Austria........................... 20,424 914 N/A N/A 95.0% 19,403
Hungary (UPC Magyarorszag)........ 60 61 N/A N/A 79.3% 48
Non-consolidated companies:
The Netherlands (A2000)........... 13,682 740 N/A N/A 50.0% 6,841
------------ ------------- ------------ ------------------- ------------
Total........................ 50,344 2,333 N/A N/A 42,466
============ ============= ============ =================== ============
<CAPTION>
As of June 30, 1999
---------------------------------------------
UPC UPC UPC
Equity in Equity in Equity in
Business Residential Business Lines
Subscribers Lines Served Served
------------- ------------- ----------------
<S> <C> <C> <C>
Telephony
Consolidated companies:
Norway............................ - 451 -
France............................ - 5,139 -
The Netherlands (UTH) (2)......... 5,953 18,154 5,963
Austria........................... 205 6,837 648
Non-consolidated companies:
The Netherlands (A2000) (10) 2 14,530 415
Hungary (Monor) (3)............... - 30,863 3,236
------------- ------------- ----------------
Total........................ 6,160 75,974 10,262
============= ============= ================
Dataservices
Consolidated companies:
Norway............................ 4 N/A N/A
Belgium........................... 469 N/A N/A
France............................ - N/A N/A
The Netherlands (UTH)............. 145 N/A N/A
Austria........................... 868 N/A N/A
Hungary (UPC Magyarorszag)........ 48 N/A N/A
Non-consolidated companies:
The Netherlands (A2000)........... 370 N/A N/A
------------- ------------- ----------------
Total........................ 1,904 N/A N/A
============= ============= ================
</TABLE>
57
<PAGE>
Summary Financial Data 1999 (4)
<TABLE>
<CAPTION>
As of June 30,
For the six months period ended June 30, 1999 (8) 1999
--------------------------------------------------------------------------
Net Long-
Income/ Adjusted Capital Term
Revenue (loss) EBITDA (5) Expenditures (6) Debt (7)
------------ ------------- ------------ ------------------- --------------
<S> <C> <C> <C> <C> <C>
(Euros, in thousands)
Consolidated companies:
Norway............................ 22,575 (15,937) 5,451 19,280 91,492
Belgium........................... 8,263 (3,102) 1,258 2,673 -
France............................ 3,269 (6,455) (3,127) 17,283 64,610
The Netherlands (UTH)............. 58,490 (28,174) 19,611 42,176 363,503
Austria........................... 45,022 (2,016) 16,895 25,374 116,351
Hungary (UPC Magyarorszag)........ 15,875 527 5,111 10,194 22
Czech Republic.................... 2,138 (1,112) (256) 1,249 -
Romania........................... 1,134 177 474 157 -
Slovak Republic................... 993 (802) 197 255 -
Non-consolidated companies:
The Netherlands (A2000)........... 34,008 (16,676) 6,932 24,258 219,947
Israel............................ 77,551 1,163 40,056 14,282 223,794
Malta............................. 7,349 501 3,115 3,446 22,160
Hungary (Monor)................... 9,284 1,854 6,014 1,532 32,613
</TABLE>
58
<PAGE>
(1) Statistics of Primacom are as of December 31, 1999.
(2) UTH's 80% subsidiary Uniport offers a carrier select telephony service.
(3) Our Monor service offers traditional telephony service.
(4) The financial information presented herein has been taken from unaudited
financial information of the respective operating companies that were
providing service as of June 30, 2000. Certain information presented herein
has been derived from financial statements prepared in accordance with
foreign generally accepted accounting principles which differ from U.S.
generally accepted accounting principles.
(5) Adjusted EBITDA represents operating income before depreciation,
amortization and stock-based compensation expense. Industry analysts
generally consider Adjusted EBITDA to be a helpful way to measure the
performance of cable television operations and communications companies
such as us. We believe Adjusted EBITDA helps investors to assess the cash
flow from our operations from period to period and thus to value our
business. Adjusted EBITDA should not, however, be considered a replacement
for net income, cash flow or for any other measure of performance or
liquidity under generally accepted accounting principles or as an indicator
of a company's operating performance. We are not entirely unrestricted to
use the cash represented by our Adjusted EBITDA. Several of our
consolidated operating companies are restricted by terms of their debt
arrangements. Each company has its own operating expenses and capital
expenditure requirements, which can limit our use of cash. Our
representation of Adjusted EBITDA may not be comparable to statistics with
a similar name reported by other companies. Not all companies and analysts
calculate Adjusted EBITDA in the same manner.
(6) Tangible CAPEX only.
(7) Excludes intercompany debt.
(8) Financial data for new acquisitions (1999 and 2000) are included from their
effective date of consolidation.
(9) Internet subscribers who are served by non-UPC internet providers.
(10) A2000 offers cable telephony service.
(11) Financial data represent the six months ended March 31, 2000, as extracted
from documents filed with the SEC.
(12) Financial data represent the five months ended May 31, 2000.
(13) Statistics of Iberian Program Services exclude 528,000 DTH subscribers.
59
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K filed during the Quarter
<TABLE>
<CAPTION>
Date of Report Item Reported Financial Statements
--------------------- ----------------------------- ----------------------
<S> <C> <C>
March 28, 2000 (as Acquisition of K&T Group and SBS Broadcasting S.A.
Amended by Form Amendment of Exchange Offer Eneco KabelTV and
8-K\A filed May 12, Agreement with SBS Telecom Group
2000) Broadcasting S.A.
April 11, 2000 Amendment Agreement to None.
Exchange Offer Agreement with
SBS Broadcasting S.A.
May 22, 2000 Termination of Exchange Offer None.
Agreement with SBS
Broadcasting S.A.
</TABLE>
60
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNITED PAN-EUROPE COMMUNICATIONS N.V.
Date: August 14, 2000
---------------
By: /S/ Charles H.R. Bracken
-------------------------
Charles H.R. Bracken
Board of Management Member and Chief Financial Officer
(A Duly Authorized Officer and Principal Financial Officer)
61
