<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: March 28, 2000
United Pan-Europe Communications N.V.
(Exact Name of Registrant as Specified in Charter)
The Netherlands 000-25365 98-0191997
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation) Identification #)
Fred. Roeskestraat 123, P.O. Box 74763
1070 BT Amsterdam, The Netherlands
(Address of Principal Executive Office)
(31) 20-778-9840
(Registrant's telephone number, including area code)
<PAGE>
ITEM 5. OTHER EVENTS.
- ----------------------
On March 28, 2000, UPC closed its acquisition of the Eneco KabelTV and
Telecom Group ("K&T Group"), which owns and operates cable television networks
in Rotterdam, Dordrecht and surrounding municipalities in The Netherlands.
On March 9, 2000, UPC announced that it had entered into an Exchange Offer
Agreement with SBS Broadcasting S.A. ("SBS") to acquire the approximately 76.5%
of the shares of SBS that it did not already own. SBS creates, acquires,
packages and distributes programming and other media content in many countries
in Europe via television channels, radio stations and the Internet. The
acquisition is subject to a number of conditions, including regulatory approval.
The Exchange Offer Agreement is subject to certain "termination events",
including if the average closing share price for UPC Ordinary Shares A on NASDAQ
for any consecutive ten day period occurring from the date of the Agreement
until the third business day prior to the commencement of the offer is less than
or equal to USD49.00 per share. Notwithstanding the occurrence of this "trigger
event", occasioned by the decline in the average closing price for UPC Ordinary
Shares A, UPC has elected not to terminate the Agreement. Pursuant to a letter
agreement (the "Amendment Agreement") dated April 11, 2000, the parties have
agreed to amend the Exchange Offer Agreement to provide that, in the event that
the average closing price for UPC Ordinary Shares A does not exceed USD49.00 per
share over a randomly selected ten day period immediately prior to the scheduled
commencement of the Offer, UPC will have the right to terminate the Exchange
Offer Agreement.
Attached hereto are financial statements for SBS and K&T Group. The
attached unaudited pro forma consolidated condensed balance sheet information
assumes that these acquisitions, together with our January 2000 senior notes and
discount notes offering, occurred on December 31, 1999. The attached unaudited
pro forma consolidated condensed statement of operations information assumes
these acquisitions, as well as our July 1999 acquisition of StjarnTVnatet and
our August 1999 acquisition of @ Entertainment, had occurred on January 1, 1999.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
- -------------------------------------------
(a) Financial Statements.
<TABLE>
<CAPTION>
Page
----
<S> <C>
SBS Broadcasting S.A.
Report of Independent Auditors............................................................................................... F-1
Consolidated Balance Sheets at December 31, 1998 and 1999.................................................................... F-2
Consolidated Statements of Operations and Comprehensive Income for the years ended December 31, 1997, 1998 and 1999.......... F-3
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999............... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999................................... F-5
Notes to Consolidated Financial Statements................................................................................... F-7
Statutory Financial Statements of TV3 Ltd., Switzerland
Report of the Statutory Auditors............................................................................................. F-24
Balance sheet at December 31, 1999........................................................................................... F-25
Statement of Income for the 18 month period ended December 31, 1999.......................................................... F-26
Notes to the Financial Statements............................................................................................ F-27
Eneco KabelTV and Telecom Group
Report of Independent Public Accountants..................................................................................... F-29
Combined Balance Sheet at December 31, 1999................................................................................... F-30
Combined Statement of Operations for the year ended December 31, 1999......................................................... F-32
Combined Statement of Shareholder's Equity for the year ended December 31, 1999............................................... F-33
Combined Statement of Cashflows for the year ended December 31, 1999.......................................................... F-34
Notes to Combined Financial Statements........................................................................................ F-35
</TABLE>
<PAGE>
(b) Pro Forma Financial Information
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following unaudited pro forma condensed consolidated financial data are
presented to reflect the pro forma effect of our acquisition of an initial 23.5%
interest in SBS and our offer to acquire the remaining 76.5% of SBS, our
acquisition of 100% of the K&T Group and our offering of senior notes and
discount notes in January 2000. The unaudited pro forma condensed consolidated
statement of operations for the year ended December 31, 1999 also reflects our
acquisition of StjarnTVnatet ("Stjarn") in July 1999 and our acquisition of @
Entertainment in August 1999. The unaudited pro forma condensed consolidated
balance sheet and statement of operations and the notes thereto do not purport
to represent what our results of operations would actually have been if such
transactions had in fact occurred on such dates. The pro forma adjustments are
based upon currently available information and upon certain assumptions that we
believe are reasonable. All share and per share amounts have been adjusted to
reflect UPC's three for one stock split in March 2000.
In August 1999, we acquired 100% of @ Entertainment for 750.7 million. The
@ entertainment acquisition was accounted for under the purchase accounting
method. We began consolidating @ Entertainment effective August 1, 1999.
In July 1999, we acquired 100% of Stjarn for 371.1 million. USD100.0
million (97.5 million) was paid in the form of a one-year seller's note with
interest of 8% per annum and the balance was paid in cash. Upon maturity of the
note, we will have the option to pay the note in either cash or our shares. The
Stjarn acquisition was structured as a purchase of shares of Stjarn's parent
holding company, NBS Nordic Broadband Services AB ("NBS Nordic"). We began
consolidating Stjarn effective August 1, 1999.
In July 1999, we closed the purchase of approximately 4.8% of SBS for 22.7
million. In August we acquired an additional 8.5% of SBS for 70.2 million.
During 1999, we accounted for our investment in SBS under the equity method of
accounting. In February 2000, we further increased our investment in SBS by
acquiring an additional 10.2% for 163.5 million.
In March 2000, we closed the purchase of the K&T Group. We acquired 100% of
the K&T Group shares and the outstanding debt of the K&T Group, totaling 1.1
billion. We will consolidate the K&T Group effective March 31, 2000.
In March 2000, we announced an offer to acquire the remaining 76.5% of SBS
which we do not currently own. We have agreed to initiate an exchange offer to
acquire SBS's shares at a per share price of USD40 in cash plus 0.5174286 of a
share of our ordinary shares A, subject to adjustment. We will adjust the stock
portion of the purchase price under certain circumstances so that the SBS
shareholders will receive not less than USD77.50 and not more than USD86.00 for
each SBS share exchanged, based on the average share price prevailing on the
trading days shortly prior to making the exchange offer. For purposes of the pro
formas, we have used our closing share price of USD73.34 (euro 73.85) on March
9, 2000, the date we announced our offer. We have also assumed for purposes of
the pro formas, that all holders of SBS's stock options tender their options,
for a net payment to be made by us, 60% in cash and the remaining 40% value in
our shares. Under the terms of the share exchange agreement, the option holders
have the right to choose up to 60% cash, our shares or a combination, in
exchange for their options.
The following unaudited pro forma condensed balance sheet also gives effect
to our offering of senior notes and discount notes and the related swaps in
January 2000. For purposes of the unaudited pro forma condensed statement of
operations, the acquisition of @ Entertainment is funded with proceeds from our
senior notes and discount notes in July 1999, the acquisition of Stjarn is
funded with a seller's note and proceeds from our senior notes and senior
discount notes in July 1999, our acquisitions in July/August 1999 and January
2000 of SBS are funded with proceeds of our initial public offering and our
secondary offering, respectively, and our acquisition of K&T Group and our
tender for the remaining shares of SBS are funded with proceeds of our senior
notes and discount notes offerings in October 1999 and January 2000.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The following unaudited pro forma condensed balance sheet as of December
31, 1999, gives effect to (1) the offering of our senior notes and discount
notes, and the related swaps, in January 2000, (2) our acquisition of the K&T
Group in March 2000, and (3) our acquisition in February 2000 of an additional
10.2% interest in SBS and our offer to acquire the remaining 76.5% shares of SBS
which we do not already own (together the "SBS Transactions"), as if each had
occurred on December 31, 1999.
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1999
---------------------------------------------------------------
Pro Forma Adjustments
--------------------------------------------------
K&T
Group
UPC January Notes Acquisition SBS
Historical Offering (d) Transactions (j)
------------ --------------- ----------- ------------------
(in thousands of euros)
<S> <C> <C> <C> <C>
ASSETS:
Current assets
Cash and cash equivalents ................................... 1,025,460 1,585,333 (a) (1,065,230)(e) (1,264,887)(k)
Restricted cash ............................................. 17,135 - - 1,385
Short term investments ...................................... - - - 31,146
Subscriber receivables, net ................................. 59,860 - 3,792 62,997
Costs to be reimbursed by affiliated companies, net ......... 10,500 - - -
Other current assets ........................................ 223,707 - 11,260 120,690
---------- ---------- ---------- ----------
Total current assets ................................... 1,336,662 1,585,333 (1,050,178) (1,048,669)
Other investments ................................................ 623,341 - - 30,210
Investments in and advances to affiliated companies, net ........ 242,847 - 6,318 (76,711)(l)
Property, plant and equipment, net ............................... 1,908,414 - 200,746 24,810
Goodwill and other intangible assets, net ........................ 2,611,413 - 862,103 (f) 2,566,323 (m)
Deferred financing costs, net .................................... 77,861 32,777 (b) - 2,694
Other assets ..................................................... 1,734 - - 77,296 (n)
---------- ---------- ---------- ----------
Total assets ........................................... 6,802,272 1,618,110 18,989 1,575,953
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities
Accounts payable, accrued liabilities and other current
liabilities .............................................. 565,207 - 18,842 154,703
Short-term debt ............................................. 163,241 - - (g) 6,551
Current portion of long-term debt ........................... 50,291 - - (h) 11,548
---------- ---------- ---------- ----------
Total current liabilities .............................. 778,739 - 18,842 172,802
Long-term debt ................................................... 3,903,410 1,618,110 (c) - (i) 33,444 (o)
Deferred taxes ................................................... 15,961 - - -
Deferred compensation ............................................ 52,702 - - -
Other long-term liabilities ...................................... 19,365 - - 43,943
---------- ---------- ---------- ----------
Total liabilities ...................................... 4,770,177 1,618,110 18,842 250,189
---------- ---------- ---------- ----------
Minority interests in subsidiaries ............................... 11,895 - 147 7,184
---------- ---------- ---------- ----------
Total shareholders' equity ............................. 2,020,200 - - 1,318,580 (p)
---------- ---------- ---------- ----------
Total liabilities and shareholders' equity.............. 6,802,272 1,618,110 18,989 1,575,953
========== ========== ========== ==========
<CAPTION>
As of December 31, 1999
-----------------------
UPC
Pro Forma
-----------
<S> <C>
ASSETS:
Current assets
Cash and cash equivalents ................................... 280,676
Restricted cash ............................................. 18,520
Short term investments ...................................... 31,146
Subscriber receivables, net ................................. 126,649
Costs to be reimbursed by affiliated companies, net ......... 10,500
Other current assets ........................................ 355,657
----------
Total current assets ................................... 823,148
Other investments ................................................ 653,551
Investments in and advances to affiliated companies, net ........ 172,454
Property, plant and equipment, net ............................... 2,133,970
Goodwill and other intangible assets, net ........................ 6,039,839
Deferred financing costs, net .................................... 113,332
Other assets ..................................................... 79,030
----------
Total assets ........................................... 10,015,324
==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities
Accounts payable, accrued liabilities and other current
liabilities .............................................. 738,752
Short-term debt ............................................. 169,792
Current portion of long-term debt ........................... 61,839
----------
Total current liabilities .............................. 970,383
Long-term debt ................................................... 5,554,964
Deferred taxes ................................................... 15,961
Deferred compensation ............................................ 52,702
Other long-term liabilities ...................................... 63,308
----------
Total liabilities ...................................... 6,657,318
----------
Minority interests in subsidiaries ............................... 19,226
----------
Total shareholders' equity ............................. 3,338,780
----------
Total liabilities and shareholders' equity ............. 10,015,324
==========
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
(a) Represents the pro forma increase in cash and cash equivalents as a result of UPC's
offering of senior notes and discount notes in January 2000, net of offering costs . 1,585,333
==============
(b) Represents the pro forma increase in deferred offering costs as a result of
UPC's offering of senior notes and discount notes in January 2000 ................. 32,777
==============
(c) Represents the pro forma increase in long-term debt as a result of UPC's
offering of senior notes and discount notes in January 2000. ...................... 1,618,110
==============
(d) Represents the historical amounts included in the K&T balance sheet as of
December 31, 1999, except as indicated in (e), (f), (g), (h) and (i),
converted from Dutch guilders to euros at the fixed exchange rate.
(e) Represents the pro forma decrease in cash and cash equivalents related to
the acquisition of K&T:
Historical K&T cash and cash equivalents ....................................... -
Purchase price paid by UPC for K&T shares and receivables
from N.V. Eneco ............................................................. (1,065,230)
--------------
(1,065,230)
==============
(f) Represents the pro forma increase in goodwill and other intangibles as a
result of the K&T acquisition:
Historical K&T goodwill and other intangibles .................................. 46,015
Additional pro forma goodwill and other intangibles due to the
K&T acquisition:
Historical shareholder's equity .......................................... (8,884)
Purchase price paid by UPC for K&T shares ................................ 824,972
-------------
816,088
--------------
862,103
==============
(g) Represents the pro forma decrease in short-term debt of K&T as a result of
the payment of the balance by UPC as part of the acquisition. The payment
of the debt by UPC is recorded by UPC as a receivable from K&T, which
eliminates in consolidation.
Historical K&T short-term debt ................................................. 83,991
Payment of balance by UPC ...................................................... (83,991)
--------------
-
==============
(h) Represents the pro forma decrease in current portion of long-term debt of
K&T as a result of the payment of the balance by UPC as part of the
acquisition. The payment of the debt by UPC is recorded by UPC as a
receivable from K&T, which eliminates in consolidation.
Historical K&T current portion of long-term debt ............................... 31,651
Payment of balance by UPC ...................................................... (31,651)
--------------
-
==============
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(i) Represents the pro forma decrease in long-term debt of K&T as a result of
the payment of the balance by UPC as part of the acquisition. The payment
of the debt by UPC is recorded by UPC as a receivable from K&T, which
eliminates in consolidation.
Historical K&T long-term debt .................................................. 124,617
Payment of balance by UPC ...................................................... (124,617)
--------------
-
==============
(j) Represents the historical amounts included in the SBS balance sheet as of
December 31, 1999, except as indicated in (k), (l), (m), (n), (o) and (p),
converted from US dollars to euros at the spot exchange rate as of
December 31, 1999.
(k) Represents the pro forma decrease in cash and cash equivalents as result of
the SBS Transactions:
Historical SBS cash and cash equivalents ....................................... 68,245
Net cash received by SBS related to UPC's purchase of 3,000,000
newly issued SBS shares in February 2000 .................................... 161,624
Cash paid by UPC related to UPC's purchase of 3,000,000
newly issued SBS shares in February 2000 .................................... (163,512)
Net cash paid by UPC related to tender offer for remaining shares of
SBS.......................................................................... (1,331,244)
--------------
(1,264,887)
==============
(l) Represents the pro forma net decrease in investments in and advances to
affiliated companies as a result of the SBS Transactions:
Historical SBS investments in and advances to affiliates ....................... 19,743
Increase in UPC investments in and advances to affiliates due to
UPC's acquisition of an additional interest in SBS in February 2000 ......... 163,512
Elimination of UPC's investments in and advances to affiliates
due to consolidation of SBS ................................................. (259,966)
--------------
(76,711)
==============
(m) Represents the pro forma increase in goodwill and other intangibles as a
result of the SBS Transactions:
Historical SBS goodwill and other intangibles .................................. 54,373
Additional pro forma goodwill and other intangibles due to the
SBS Transactions:
Historical SBS shareholders' equity ...................................... (162,101)
Increase in SBS shareholders' equity related to shares issued to UPC
in February 2000 ...................................................... (161,624)
Conversion of SBS warrants and convertible debt to equity ................ (74,115)
Purchse price paid by UPC ................................................ 2,909,790
-------------
2,511,950
--------------
2,566,323
==============
(n) Represents the pro forma decrease in other assets from the exercise of the SBS
warrants as a result of the SBS Transactions:
Historical SBS other assets..................................................... 78,706
Exercise of outstanding SBS warrants in UPC tender offer........................ (1,410)
--------------
77,296
==============
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(o) Represents the pro forma decrease in long-term debt from the conversion of
SBS's convertible debentures as a result of the UPC tender offer:
Historical SBS long-term debt .................................................. 108,969
Conversion of SBS convertible debentures in UPC tender offer ................... (75,525)
---------------
33,444
===============
(p) Represents the increase in shareholder's equity as a result of the issuance
of 17,854,029 UPC ordinary shares A, assuming a price of USD73.34 (euro 73.85)
per share, to the holders of SBS's outstanding shares and option holders in
UPC's tender offer. ............................................................... 1,318,580
===============
</TABLE>
<PAGE>
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
The following unaudited pro forma condensed statement of operations for the
year ended December 31, 1999, gives effect to (1) our acquisition of @
Entertainment in August 1999, (2) our acquisition of Stjarn in July 1999, (3)
our acquisition of the K&T Group in March 2000, and (4) our acquisition in
July/August 1999 of a 13.3% interest in SBS, our acquisition of an additional
10.2% interest in SBS in February 2000 and our offer to acquire the remaining
shares of SBS in March 2000, as if each had occurred on January 1, 1999.
<TABLE>
<CAPTION>
For the Year Ended December 31, 1999
-------------------------------------------------------------------
Pro Forma Adjustments
------------------------------------------------------
UPC @Entertainment Stjarn K&T Group
Historical Acquisition (a) Acquisition(d) Acquisition (h)
------------ ----------------- -------------- -----------------
(in thousands of euros, except share and per share amounts)
<S> <C> <C> <C> <C>
Service and other revenue ................................. 447,501 43,432 17,726 74,778
Operating expense ......................................... (293,778) (65,488) (7,284) (28,725)
Selling, general and administrative expense ............... (466,260) (47,220) (5,483) (18,582)
Depreciation and amortization ............................. (266,070) (47,933)(b) (17,804) (e) (82,064)(i)
------------ ------------ --------- -----------
Net operating loss .................................. (578,607) (117,209) (12,845) (54,593)
Interest income ........................................... 28,064 2,612 168 -
Interest expense .......................................... (186,408) (60,080)(c) (23,467) (f) (107,704)(j)
Gain on sale of assets .................................... 1,501 - - -
Foreign exchange gain (loss) and other income
(expense), net .......................................... (22,561) (2,024) (7,714) (g) (3,636)(k)
------------ ------------ --------- -----------
Net loss before income taxes and other items ........ (758,011) (176,701) (43,858) (165,933)
Share in results of affiliated companies, net ............. (29,760) (929) - (1,682)
Minority interests in subsidiaries ........................ 1,651 - - (29)
Income tax benefit (expense) .............................. 1,822 (28) 258 170
------------ ------------ --------- -----------
Net loss ............................................ (784,298) (177,658) (43,600) (167,474)
============ ============ ========= ===========
Basic and diluted net loss per ordinary share(1) .......... (2.08)
============
Weighted-average number of ordinary shares
outstanding(1) .......................................... 377,969,829
============
<CAPTION>
For the Year Ended December 31, 1999
------------------------------------
SBS UPC
Transactions (l) Pro Forma
---------------- -------------
<S> <C> <C>
Service and other revenue ................................. 440,075 1,023,512
Operating expense ......................................... (326,958) (722,233)
Selling, general and administrative expense ............... (100,480) (638,025)
Depreciation and amortization ............................. (188,726)(m) (602,597)
------------ ------------
Net operating loss .................................. (176,089) (939,343)
Interest income ........................................... 4,428 35,272
Interest expense .......................................... (166,119)(n) (543,778)
Gain on sale of assets .................................... - 1,501
Foreign exchange gain (loss) and other income
(expense), net .......................................... (11,887)(o) (47,822)
------------ ------------
Net loss before income taxes and other items ........ (349,667) (1,494,170)
Share in results of affiliated companies, net ............. (9,834)(p) (42,205)
Minority interests in subsidiaries ........................ 3,695 5,317
Income tax benefit (expense) .............................. (573) 1,649
------------ ------------
Net loss ............................................ (356,379) (1,592,409)
============ ============
Basic and diluted net loss per ordinary share(1) .......... (3.79)
============
Weighted-average number of ordinary shares
outstanding(1) .......................................... 403,835,994 (q)
============
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(1) As adjusted for UPC's 3 for 1 stock split in March 2000.
(a) Represents the historical results of operations of @ Entertainment for the
seven months ended July 31, 1999, except as indicated in (b) and (c),
converted from US dollars to euros using the average exchange rate for the
seven months ended July 31, 1999.
(b) Represents the increase in depreciation and amortization expense as a
result of the @ Entertainment acquisition:
Historical amortization and depreciation expense of @ Entertainment ............... (22,139)
Amortization of the goodwill purchase price allocation for the @ Entertainment
acquisition under purchase accounting, based on a 15 year life ................. (25,794)
---------------
(47,933)
===============
(c) @ Entertainment acquisition:
Historical interest expense of @ Entertainment .................................... (26,664)
Interest expense as a result of UPC's July 1999 senior notes
incurred for the @ Entertainment acquisition, at a blended
weighted average interest rate of 8.3% ......................................... (33,416)
---------------
(60,080)
===============
(d) Represents the historical results of operations of NBS Nordic for the seven months
ended July 31, 1999, except as indicated in (e), (f) and (g), converted from
Swedish kronor to euros using the average exchange rate for the seven months
ended July 31, 1999.
(e) Represents the increase in depreciation and amortization expense as a result of the
Stjarn acquisition:
Historical amortization and depreciation expense of Stjarn......................... (5,373)
Amortization of the goodwill purchase price allocation for the Stjarn acquisition
under purchase accounting, based on a 15 year life ............................. (12,431)
---------------
(17,804)
===============
(f) Represents the increase in interest expense as a result of the Stjarn acquisition:
Historical interest expense of Stjarn.............................................. (2,973)
Interest expense as a result of the Stjarn seller's notes, at an interest rate
of 8.0% ........................................................................ (4,335)
Interest expense as a result of UPC's July 1999 senior notes incurred for the
@ Stjarn acquisition, at a blended weighted average interest rate of 10.875% ... (16,159)
---------------
(23,467)
===============
(g) Represents the increase in foreign exchange gain (loss) and other income (expense),
net as a result of the Stjarn acquisition:
Historical foreign exchange gain (loss) and other income (expense), net of
Stjarn.......................................................................... -
Foreign exchange loss related to the proceeds of the US dollar-denominated Stjarn
seller's note .................................................................. (7,714)
---------------
(7,714)
===============
(h) Represents the historical results of operations of K&T Group for the year
ended December 31, 1999, except as indicated in (i), (j) and (k), converted
from Dutch guilders to euros using the fixed exchange rate.
(i) Represents the increase in depreciation and amortization expense as a
result of the K&T Group acquisition:
Historical amortization and depreciation expense of K&T Group ..................... (27,669)
Amortization of the goodwill purchase price allocation for the K&T Group
acquisition under purchase accounting, based on a 15 year life ................. (54,395)
---------------
(82,064)
===============
(j) Represents the net increase in interest expense as a result of the K&T
Group acquisition:
Historical interest expense of K&T Group .......................................... (11,967)
Elimination of historical interest expense due to payment by UPC of all
outstanding debt of SBS ........................................................ 11,967
Interest expense as a result of UPC's October 1999 and January 2000 senior
notes incurred for the K&T Group acquisition, at a blended
weighted average interest rate of 10.1% ........................................ (107,704)
---------------
(107,704)
===============
(k) Represents the increase in foreign exchange gain (loss) and other income
(expense), net as a result of the K&T Group acquisition:
Historical foreign exchange gain (loss) and other income (expense), net of
K&T Group ................................................................... -
Foreign exchange loss related to the proceeds of the US dollar-denominated
senior notes used to acquire K&T group ...................................... (3,636)
---------------
(3,636)
===============
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(l) Represents the historical results of operations of SBS for the year ended
December 31, 1999, except as indicated in (m), (n), (o) and (p),
converted from US dollars to euros using the average exchange rate for the
year ended December 31, 1999.
(m) Represents the increase in depreciation and amortization expense as a
result of the SBS Transactions:
Historical amortization and depreciation expense of SBS ........................... (21,658)
Elimination of historical amortization related to SBS warrants .................... 395
Amortization of the goodwill purchase price allocation for the SBS Transactions
under purchase accounting, based on a 15 year life ............................. (167,463)
---------------
(188,726)
===============
(n) Represents the net increase in interest expense as a result of the SBS
Transactions:
Historical interest expense of SBS ................................................ (19,871)
Elimination of historical interest expense due to conversion of SBS
convertible debt to equity ..................................................... 5,600
Interest expense as a result of UPC's October 1999 and January 2000 senior notes
incurred for UPC's offer to acquire the remaining shares of SBS, at a blended
weighted average interest rate of 11.4% ........................................ (151,848)
---------------
(166,119)
===============
(o) Represents the increase in foreign exchange gain (loss) and other income
(expense), net as a result of the SBS Transactions:
Historical foreign exchange gain (loss) and other income (expense), net of
SBS ............................................................................ (9,332)
Foreign exchange loss related to the proceeds of the US dollar-denominated
senior notes used for the tender offer ......................................... (2,555)
---------------
(11,887)
===============
(p) Represents the net decrease in share in results of affiliated companies as
a result of the SBS Transactions:
Historical share in results of affiliated companies of SBS ........................ (15,017)
Elimination of historical share in results of affiliated companies recorded
by UPC for its 13.3% interest in SBS for the five months ended
December 31, 1999 .............................................................. 5,183
---------------
(9,834)
===============
(q) For pro forma purposes, the purchase price for UPC's acquisition in
July/August 1999 of 13.3% of SBS for approximately 95.0 million and UPC's
acquisition in January 2000 of an additional 10.2% interest in SBS for
approximately 163.5 million, are assumed to have been funded from the
proceeds of UPC's initial public offering and secondary offering,
respectively. Consequently, the pro forma weighted shares outstanding for
the year ended December 31, 1999 assumes the issuance of 10,339,211
ordinary shares A at the initial offering price and 8,507,369 ordinary
shares A at the secondary offering price of 9.18 and 19.22, respectively,
net of underwriters' commissions.
Additionally, for pro forma purposes, 17,854,029 ordinary shares A are
assumed to be outstanding for the year ended December 31, 1999, related to
UPC's ordinary shares A to be issued for the SBS tender offer.
</TABLE>
<PAGE>
(c) Exhibits
None.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
UNITED PAN-EUROPE COMMUNICATIONS N.V.
DATE: April 19, 2000 By: /s/ Anton M. Tuijten
--------------------------------------------
Anton M. Tuijten
General Counsel and member of the Board of
Management
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
SBS Broadcasting SA
We have audited the accompanying consolidated balance sheets of SBS
Broadcasting SA (formerly Scandinavian Broadcasting System SA) as of December
31, 1998 and 1999 and the related consolidated statements of operations,
comprehensive income, shareholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. These standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SBS
Broadcasting SA at December 31, 1998 and 1999 and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States.
ERNST & YOUNG
Statsauteriseret Revisionsaktieselskab
Copenhagen, Denmark
March 1, 2000
Except for Note 16, as to which the date is March 29, 2000.
F-1
<PAGE>
ASSETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
--------- ---------
Current assets:
<S> <C> <C>
Cash and short-term cash investments.................................................... $ 63,381 $ 67,770
Short-term investments, at market value................................................. 45,525 30,929
Accrued interest receivable............................................................. 109 142
Accounts receivable trade, net of allowance for doubtful accounts of $1,435 in 1999
($1,550 in 1998).................................................................... 59,760 62,559
Accounts receivable, affiliates......................................................... 639 381
Restricted cash and cash in escrow...................................................... 1,291 1,375
Program rights inventory, current....................................................... 74,443 86,153
Other current assets.................................................................... 8,833 33,176
--------- ---------
Total current assets................................................................... 253,981 282,485
Buildings, equipment and improvements, net of accumulated depreciation..................... 24,180 24,638
Goodwill and intangible assets, net of accumulated amortization............................ 59,712 53,995
Program rights inventory, non-current...................................................... 45,244 50,750
Deferred financing cost, net of accumulated amortization................................... 6,872 2,675
Investments in unconsolidated subsidiaries................................................. 11,553 4,857
Investments in equity securities........................................................... --- 30,000
Accounts receivable, affiliates, non-current............................................... --- 14,749
Notes receivable........................................................................... 8,112 10,090
Other assets............................................................................... 18,167 17,319
--------- ---------
Total assets........................................................................... $ 427,821 $ 491,558
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................................................ $ 15,805 $ 18,666
Accrued expenses........................................................................ 42,006 52,173
Program rights payable, current......................................................... 45,370 65,932
Notes payable, current.................................................................. 9,463 6,505
Current portion of long-term debt....................................................... 2,627 11,468
Deferred income......................................................................... 2,599 16,856
--------- ---------
Total current liabilities.............................................................. 117,870 171,600
Program rights payable, non-current........................................................ 25,550 16,208
Convertible subordinated debentures and notes.............................................. 230,250 75,000
Other long-term debt....................................................................... 51,014 33,212
Deferred income............................................................................ --- 10,072
Other non-current liabilities.............................................................. 15,756 17,358
Minority interests......................................................................... 5,356 7,134
Shareholders' equity:
Common shares (authorized 75,000, issued 14,933 (1998) and 22,529 (1999) at par value
$1.50)................................................................................. 22,400 33,795
Additional paid-in capital.............................................................. 197,135 420,357
Accumulated deficit..................................................................... (229,977) (272,811)
Unearned compensation................................................................... (22) (1,890)
Treasury Stock at cost, Common Shares: 48 (1998) and 18 (1999)......................... (1,154) (443)
Accumulated other comprehensive income.................................................. (6,357) (18,034)
--------- ---------
Total shareholders' equity (deficit)................................................... (17,975) 160,974
--------- ---------
Total liabilities and shareholders' equity (deficit)................................... $ 427,821 $ 491,558
========= =========
</TABLE>
F-2
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net revenue............................... $242,838 $350,535 $412,557
Operating expenses:
Station operating expenses............. 204,316 262,665 296,689
Selling, general and administrative 55,190 68,779 81,205
expenses..............................
Corporate expenses..................... 9,177 9,576 10,930
Non-cash compensation.................. 2,676 1,142 2,062
Depreciation........................... 9,839 9,484 9,006
Amortization........................... 5,060 10,609 11,297
Termination of CME Reorganization
Agreement............................. --- --- 9,825
-------- -------- --------
Total operating expenses.............. 286,258 362,255 421,014
-------- -------- --------
Operating loss............................ (43,420) (11,720) (8,457)
Equity in loss of unconsolidated
subsidiaries............................. (3,150) (3,536) (14,078)
Interest income........................... 3,469 6,318 4,151
Interest expense.......................... (14,333) (24,708) (18,628)
Foreign exchange losses, net.............. (4,665) (3,202) (9,083)
Investment gains (losses), net............ (801) 376 423
Other income (expense), net:
Sale of shares in TVNorge.............. 6,262 --- ---
Sale of shares in MTV Oy............... 2,814 --- ---
Other.................................. (1,863) (2,638) (89)
-------- -------- --------
Loss before income taxes and minority (55,687) (39,110) (45,761)
interest..............................
Income taxes.............................. (29) (636) (537)
-------- -------- --------
Loss before minority interest.......... (55,716) (39,746) (46,298)
Minority interest in losses, net.......... 11,866 6,027 3,464
-------- -------- --------
Net loss.................................. $(43,850) $(33,719) $(42,834)
======== ======== ========
Net loss per common share, basic and
diluted.................................. $(3.18) $(2.30) $(2.38)
======== ======== ========
Average common shares outstanding (in
thousands)............................... 13,780 14,677 $ 18,027
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands of U.S. Dollars)
Years Ended December 31,
--------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net income (loss)............................ $(43,850) $(33,719) $(42,834)
Currency translation adjustment............ (12,089) 3,223 (12,570)
Unrealized holding gains during period..... 2,534 1,472 1,107
Less: reclassification adjustment for
gains included in net income......... (1,896) (2,342) (214)
-------- -------- --------
Comprehensive net income (loss).............. $(55,301) $(31,366) $(54,511)
======== ======== ========
</TABLE>
F-3
<PAGE>
<TABLE>
<CAPTION>
Accumulated
Additional other
Common Paid-In Accumulated Unearned Treasury Comprehensive
Shares Capital Deficit Compensation Stock Income Total
-------- ---------- ----------- ------------ -------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996.................. $ 20,506 $ 164,286 $ (152,408) $ -- $ -- $ 2,741 $ 35,125
Grant of options for
175,000 common shares -- 188 -- (188) -- -- --
Exchange of options for
91,462 common shares
(Note 9).............. -- 2,195 -- (2,195) -- -- --
Option and share
compensation.......... -- -- -- 2,065 -- -- 2,065
Issuance of 158,028
common shares in
exchange for cash in
connection with the
Rete Mia acquisition.. 238 2,230 -- -- -- -- 2,468
Reduction of exercise
price of the 1,000,000
Paramount warrants
issued in 1995........ -- 2,780 -- -- -- -- 2,780
Currency translation
adjustment............ -- -- -- -- -- (12,089) (12,089)
Change in unrecognized
gain (loss) on short-
term investments...... -- -- -- -- -- 638 638
Net loss............... -- -- (43,850) -- -- -- (43,850)
-------- --------- ---------- --------- ------- --------- ---------
Balance at December 31,
1997.................... $ 20,744 $ 171,679 $ (196,258) $ (318) $ -- $ (8,710) $ (12,863)
Exchange of options for
91,462 common shares.. 137 (137) -- -- -- -- --
Issuance of 30,150
common shares in
connection with
option and share
compensation.......... 46 693 -- -- -- -- 739
Amortization of unearned
compensation.......... -- -- -- 296 -- -- 296
Exercise of warrants
for 500,000 common 750 11,433 -- -- -- -- 12,183
shares................
Issuance of 482,285
common shares in
public offering....... 723 13,467 -- -- -- -- 14,190
Purchase of treasury
stock 47,500 common
shares................ -- -- -- -- (1,154) -- (1,154)
Currency translation
adjustment............ -- -- -- -- -- 3,223 3,223
Change in unrecognized
gain (loss) on short-
term investments...... -- -- -- -- -- (870) (870)
Net loss................. -- -- (33,719) -- -- -- (33,719)
-------- --------- ---------- --------- ------- --------- ---------
Balance at December 31,
1998.................. $ 22,400 $ 197,135 $ (229,977) $ (22) $(1,154) $ (6,357) $ (17,975)
Exercise of options as
to 29,500 Common
Shares................ 44 398 -- -- -- -- 442
5,414,912 Common Shares
issued upon conversion
of Debentures......... 8,123 147,285 -- -- -- -- 155,408
Issuance of 2,152,320
Common Shares to UPC.. 3,228 71,609 -- -- -- -- 74,837
Stock compensation....... -- 3,930 -- (3,930) 711 -- 711
Amortization of
unearned compensation. -- -- -- 2,062 -- -- 2,062
Currency translation
adjustment............ -- -- -- -- -- (12,570) (12,570)
Change in unrecognized
gain on short-term
investments........... -- -- -- -- -- 893 893
Net loss................. -- -- (42,834) -- -- -- (42,834)
-------- --------- ---------- --------- ------- --------- ---------
Balance at December 31,
1999.................. $ 33,795 $ 420,357 $ (272,811) $ (1,890) $ (443) $ (18,034) $ 160,974
======== ========= ========== ========= ======= ========= =========
</TABLE>
F-4
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................. $(43,850) $ (33,719) $(42,834)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 14,899 19,274 20,303
Equity in (income) loss of
unconsolidated subsidiaries, net of
distributions received............. (1,880) (1,678) 9,160
Non-cash interest expense............... 612 2,011 810
Gain on sale of unconsolidated companies -- -- (1,171)
Unrealized exchange loss on long-term
debt................................ -- 2,847 2,733
Non-cash other income, net.............. (9,076) -- --
Non-cash compensation................... 2,676 1,142 2,062
Net loss (gain) on sale of short-term
investments......................... 801 (376) (394)
Minority interest in loss............... (11,866) (6,027) (3,464)
Changes in operating assets and
liabilities, net of amounts acquired:
Accounts receivable................... (25,409) (7,708) (10,057)
Accounts receivable, affiliates....... -- -- (14,749)
Program rights inventory, net......... (11,137) (8,597) (10,689)
Other current assets.................. 1,762 4,645 (20,788)
Other noncurrent assets............... (4,591) (5,976) (5,588)
Accounts payable and accrued expenses. 19,989 (5,487) 6,359
Deferred income....................... (462) 1,966 5,192
Other liabilities..................... 5,402 7,150 13,261
-------- -------- --------
Cash used in operating activities... (62,130) (30,533) (49,854)
-------- -------- --------
Cash flows from investing activities:
Purchases of short-term investments....... (61,858) (139,632) (27,482)
Sales and maturities of short-term
investments......................... 28,626 139,748 43,362
Cash capital expenditures................. (15,516) (11,616) (18,532)
Net proceeds from sale of unconsolidated
companies........................... 3,968 -- 6,423
Net proceeds from sale of minority
interests........................... 8,599 -- --
Payment to purchase notes receivable...... (1,740) -- --
Payment for purchase of acquired
businesses, net of cash acquired.... (31,549) (7,848) (17,197)
-------- -------- --------
Cash used in investing activities... (69,470) (19,348) (13,426)
-------- -------- --------
Cash flows from financing activities:
Net change in short-term borrowings....... 180 (3,043) (2,041)
Proceeds from issuance of convertible
subordinated debentures and notes... 75,000 -- --
Deferred financing costs.................. (2,733) -- --
Proceeds from issuance of common shares
in subsidiaries..................... 8,841 1,259 5,788
Proceeds from issuance of long-term debt.. 44,516 -- --
Proceeds from exercise of warrant......... -- 12,183 --
Proceeds from issuance of common shares... 2,468 14,190 75,279
Purchase of treasury stock................ -- (1,154) --
Net change in restricted cash and cash
in escrow........................... (1,280) 419 (84)
Payment of long-term debt................. -- (1,815) (6,208)
Payment of capital lease obligations...... (966) (1,012) (185)
-------- -------- --------
Cash provided by financing
activities...................... 126,026 21,027 72,549
-------- -------- --------
Effect of exchange rate changes on short-term
cash investments.................... (4,900) 639 (4,880)
Net change in short-term cash investments..... (10,474) (28,215) 4,389
Cash and short-term cash investments,
beginning of period................. 102,070 91,596 63,381
-------- -------- --------
Cash and short-term cash investments, end
of period........................... $ 91,596 $ 63,381 $ 67,770
======== ======== ========
Cash paid for interest........................ $ 13,118 $ 23,928 $ 22,533
======== ======== ========
Cash paid for taxes........................... $ 251 $ 675 $ 215
======== ======== ========
</TABLE>
F-5
<PAGE>
SBS BROADCASTING SA
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. Dollars)
Noncash investing and financing activities:
1999
Non-cash purchases of acquired business amounted to $12,500,000 for Bidlet
AB, $2,000,000 for HSX Holding Inc. and $5,000,000 for Radio Noordzee FM.
F-6
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Organization and basis of presentation
SBS Broadcasting SA (the "Company" or "SBS") was formed in Luxembourg in
1989 and commenced operations in 1990. The Company was organized to acquire and
operate commercial television stations in Scandinavia and other areas in Europe,
and has expanded its operations to include commercial radio stations and
Internet related activities. The consolidated financial statements include the
accounts of the Company and its subsidiaries in which the Company has management
control in Sweden, Denmark, Norway, Finland, Flemish Belgium, the Netherlands,
Hungary and Luxembourg. The Company accounts for its other investments in 20%-
50% owned subsidiaries under the equity method.
All intercompany transactions and balances have been eliminated.
Reporting currency
The Company prepares its financial statements in United States dollars.
Under Luxembourg law, the Company has elected to file its statutory financial
statements and to pay dividends in United States dollars.
Currency translation
The functional currency of the Company's subsidiaries and its equity
investees is the local currency of the country in which the subsidiaries and
investees conduct their operations. Balance sheet accounts are translated from
the local currencies into United States dollars at the year-end exchange rate
and items in the statements of operations are translated at the average exchange
rate for the year. Resulting translation adjustments are charged or credited to
other comprehensive income. Translation adjustments arising from intercompany
financing of a long-term investment nature are accounted for similarly. Some
transactions of the Company and its subsidiaries are made in currencies
different from their functional currency. Gains and losses from these
transactions are included in operations.
Forward exchange contracts
From time to time the Company enters into forward exchange contracts to
minimize the short-term impact of foreign currency fluctuations on assets,
liabilities and firm commitments denominated in currencies other than the
functional currency of the reporting entity. The Company's foreign exchange
contracts amounted to $19,351,000 and $29,304,000 at December 31, 1998 and 1999,
respectively. Gains and losses on assets and liabilities are recognized in net
income in the period in which exchange rate changes occur, in accordance with
the requirements of Statement of Financial Accounting Standards No. 52 "Foreign
Currency Translation", except for gains and losses on hedge contracts on firm
commitments which are deferred and recognized in net income in the period in
which the commitments are expensed.
Start-up Costs
Start up costs are expensed as incurred.
Risks and uncertainties
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
F-7
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The Company provides advertising air-time to national, regional and local
advertisers within the geographic areas in which the Company operates. Credit is
extended based on an evaluation of the customer's financial condition, and
generally advance payment is not required. Anticipated credit losses are
provided for in the consolidated financial statements and consistently have been
within management's expectations.
The Company's consolidated broadcasting operations generate revenues
primarily in Norwegian kroner, Swedish kronor, Danish kroner, Finnish mark,
Belgian franc, Dutch guilder and Hungarian forint and incur substantial
operating expenses in these and other foreign currencies. The Company also
incurs substantial operating expenses for programming in United States dollars
and other foreign currencies. Fluctuations in the value of foreign currencies
may cause United States dollar translated amounts to change in comparison with
previous periods.
Cash and short-term cash investments
Cash and short-term cash investments represent cash and short-term deposits
with maturities of less than three months at the time of purchase.
Short-term investments
At December 31, 1998 and 1999, the Company had short-term investments of
$45,525,000 and $30,929,000, respectively, which were classified as available-
for-sale. The short-term investments at December 31, 1999 are comprised of US
Floating Rate Notes with maturities ranging from one to 31 years. The Company
has applied the provisions of Statement of Financial Accounting Standards No.
115 "Accounting for Certain Investments in Debt and Equity Securities" in all
periods presented.
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
Currency Gross Estimated
Translation Unrealized Fair
Cost Adjustment Gain/(Loss) Value
----------------- ---------------- ---------------- ----------------
December 31, 1998:
<S> <C> <C> <C> <C>
US Floating Rate Notes.................. $44,469 $ -- $(467) $44,002
Equity Securities....................... 1,907 -- (384) 1,523
----------------- ---------------- ---------------- ----------------
$46,376 $ -- $(851) $45,525
================= ================ ================ ================
December 31, 1999:
US Floating Rate Notes.................. $30,887 $ -- $ 42 $30,929
----------------- ---------------- ---------------- ----------------
$30,887 $ -- $ 42 $30,929
================= ================ ================ ================
</TABLE>
Program rights
Program rights and the related liabilities are recorded at their gross
value when the license period begins and the programs are available for use.
These rights are either expensed when the program is aired or amortized on an
accelerated basis when the Company is entitled to more than one airing. Program
rights are classified as current or noncurrent based on anticipated usage in the
following year. The related program rights liability is classified as current or
noncurrent based on the payment terms of the related license agreements.
Buildings, equipment and improvements
Buildings, equipment and improvements are carried at cost. Buildings are
depreciated on a straight-line basis over a period of up to 50 years. Equipment
is depreciated on a straight-line basis over its expected useful life at rates
varying between 20% and 33% per annum. Leasehold improvements are amortized over
the shorter of their expected lives or the noncancelable term of the lease.
F-8
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Intangible assets
Goodwill, representing the excess of the cost of acquired businesses over
the fair values assigned to assets and liabilities acquired, is amortized over a
20-year period. Broadcasting licenses and other intangible assets are carried at
cost and amortized on a straight-line basis over the terms of the licenses. The
carrying values of goodwill and other long-lived assets are reviewed
periodically to determine whether they may have become impaired. If this review
indicates that goodwill and other long-lived assets will not be recoverable, as
determined based on the undiscounted cash flows of the entity acquired over the
remaining amortization period, the Company's carrying value of the goodwill and
other long-lived assets is reduced by the difference between the carrying amount
and the estimated fair value. All of the Company's goodwill and other long-lived
assets have been ascribed to its operating entities.
Revenue recognition
The Company recognizes revenue for advertising time sold in the period in
which the advertisement airs and for the sale of air-time (use of transmission
capability) in the period in which it is provided.
Barter transactions
Barter transactions represent the exchange of commercial air-time for
programming, merchandise or services. The transactions are recorded at the fair
market value of the asset received or service rendered. Barter revenues for the
years ended December 1997, 1998 and 1999 were $7,199,000, $12,330,000, and
$14,723,000 respectively.
Comparable amounts are recorded as expenses, subject to timing differences.
Advertising
Advertising costs are expensed as incurred. Advertising expense totaled,
$19,684,000, $23,211,000 and $29,333,000 in 1997, 1998 and 1999, respectively.
Income taxes
The Company accounts for income taxes using the liability method. Deferred
tax assets and liabilities are recognized for the expected future tax
consequences of events that have been recognized in the financial statements or
tax returns.
Earnings per share
In 1998, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is similar to the previously reported fully diluted earnings per share.
All earnings per share amounts for all periods have been restated to conform to
the Statement 128 requirements.
Reclassification
In the 1998 income statement, an amount of $ 819,000 has been reclassified
from station operating expenses to depreciation and amortization expenses,
affecting station operating cash flow, as compared to previous years'
presentation, in order to make 1998 comparable to 1999.
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock issued to Employees" (ABP 25) and related
Interpretations in accounting for its employee stock options.
F-9
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Other post-retirement and post-employment benefits
The Company does not provide its employees with post-retirement and post-
employment benefits.
Impact of recently issued accounting standards
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, Accounting for Derivative Instruments and Hedging Activities, which is
required to be adopted in years beginning after December 15, 2000. Management
does not anticipate that the adoption of the new Statement will have a
significant effect on earnings or the financial position of the Company.
2. Acquisitions, Dispositions and Start-up Operations
Norway
March 1, 1996, the Company sold 33.3% of TVNorge to Schibsted. In
connection with this transaction, the Company agreed to pay a distribution fee
to Schibsted and A-Pressen of up to NOK 72,000,000 for providing assistance in
getting affiliated stations to sign up with TVNorge in order for TVNorge to
increase its distribution. The distribution fee paid or to be paid is based on
TVNorge's increase in distribution, and the Company expensed NOK 40,000,000
($6,192,000), NOK 20,828,000 ($2,946,000) and NOK 7,447,000 ($986,000) in 1996,
1997 and 1998, respectively. In 1999 the distribution did not increase and no
distribution fee was paid.
In March 1997, A-Pressen exercised its option to purchase 16% of TVNorge
from the Company. The cash purchase price was NOK 81,624,000 ($11,500,000)
including interest of 6% per year for the period March 1, 1996 until the payment
of the purchase price. A net gain of NOK 44,271,000 ($6,262,000) was recorded in
1997 as other income.
In May 1997, TV2, a private Norwegian commercial television station owned
by, in part, Schibsted and A-Pressen, acquired 49.3% of the shares of TVNorge
from Schibsted and A-Pressen, as a consequence of which, SBS owns 50.7% and TV2
owns 49.3% of TVNorge. TV2 contributed NOK 40,000,000 ($5,657,000) towards
TVNorge's local station costs in 1997. The NOK 40,000,000 was recorded as
revenue in TVNorge's results of operations in 1997. Also in May 1997, SBS,
TVNorge and TV2 entered into cooperation, program and guarantee agreements (the
"Cooperation Agreement"), under which TV2 assumed the ultimate responsibility of
programming TVNorge. Under the Cooperation Agreement TV2 was required to
compensate TVNorge if TVNorge's gross rating points fell short of certain agreed
levels.
In December 1999, the Company, TVNorge and TV2 (in Norway) agreed to
terminate the Cooperation Agreement. As of January 1, 2000, TVNorge regained
full control and authority of its own programming, scheduling and promotion. As
settlement under the now terminated Cooperation Agreement, TV2 agreed to pay
TVNorge up to NOK 335,000,000 ($41,719,000) in cash over a two-year period and
to compensate TVNorge NOK 30,000,000 ($3,736,000) in free airtime on TV2 over a
three-year period. TV2 will receive NOK 10,000,000 ($1,245,000) from the
Company in 2000, in settlement of the program agreement. In 1998, NOK 31,098,000
($4,119,000) was recorded as revenue under the Cooperation Agreement and in 1999
NOK 184,076,000 ($23,629,000) was recorded as revenue and NOK 2,093,000
($268,000) was recorded as interest income, in relation to the settlement of the
now terminated Cooperation Agreement.
Sweden
Broadcast Text International (BTI)
During 1999, the Company acquired 51% of BTI, one of Europe's largest
suppliers of subtitling for television, video, cinema and DVD, by contributing
subtitling agreements for a majority of the Company's television stations.
Effective January 1, 2000, SBS acquired the remaining 49% of BTI from Telenor
A/S. The Company will pay Telenor A/S NOK 22,500,000 ($2,802,000) in cash over
a period of 13 months from March 2000, and an additional amount of up to NOK
3,500,000 ($435,000) may be payable based on BTI achieving defined earnings in
2000 and 2001.
GE Program Group. In October 1999, the 70% shareholder of GE Program Group
exercised a call option to acquire the Company's 30% shareholding in GE Program
Group, and the Company sold its 30% shareholding,
F-10
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
for a price of SEK 53,125,000 ($6,423,000) realizing a net gain of $1,171,000.
At closing, the Company received SEK 26,562,500 ($3,211,000), SEK 13,281,250
($1,555,000) plus interest, will be paid in September 2000 and the balance of
SEK 13,281,250 ($1,555,000), plus interest, will be paid in September 2001.
The Company provided management services to GE Program Group. The charge
for such services was $577,000, $569,000, and $356,000 for 1997, 1998 and 1999,
respectively.
Radio Operations. In March 1998 the Company finalized its acquisition of
the operating entities Radio City in Malmoe and Gothenburg for an approximate
amount of SEK 14,500,000 ($1,795,000) bringing its ownership to 100% of both
stations, and in November 1998, the Company acquired the remaining 51% of Radio
106.7 Rockklassiker in Stockholm for SEK 24,781,000 ($3,073,612) bringing its
ownership of this operating entity to 100%. On November 11, 1999, the Company
acquired 50% of a radio-broadcasting license from Sky Radio AB. The license
will be made available to the 100% owned operating entity, Radio Easy FM, a
radio station in Stockholm. In consideration for the license, goodwill and
equipment, the Company paid $2,462,200 in cash. The Company also owns 100% of
Radio City in Stockholm.
Finland
In March 1997, the Company sold its 3% interest in MTV Oy, Finland, for FIM
20,059,800 ($3,968,000) realizing a net gain of ($2,814,000) recorded as other
income.
The Netherlands
In the Netherlands, the Company operates SBS6, and in March 1999 the
Company launched NET5. Both are satellite-to-cable television channels, of
which the Company owns 70%, and De Telegraaf owns 30%.
In November 1999 the Company signed an agreement to acquire, effective
August 1, 1999, 51% of Publimusic, a Dutch corporation which owns and operates
Radio Noordzee FM, a national Dutch radio station. The interest was acquired
from Strengholt B.V.. Consideration for the 51% interest consisted of
$2,000,000 in cash that was paid upon the signing of the agreement and a
commitment to provide $5,000,000 of television advertising time to Radio
Noordzee over a three-year period. A further $1,500,000 of cash consideration
may be payable depending on the performance of the station during 2000 and 2001.
Hungary
In October 1997, TV2, the first commercial television station in Hungary,
was launched. TV2 is owned 49.0% by the Company, 38.5% by MTM and 12.5% by
Tele-Munchen. The capital requirements of TV2 during its start-up phase have
been funded through equity contributions or interim loans by its shareholders
and by approximately $27,500,000 of project financing from three institutions,
lead by the EBRD. The financing is secured by liens on the assets of TV2 and by
the pledge of all of the outstanding shares of TV2. As a result of the capital
increase in TV2 in December 1999, the standby equity commitment currently
amounts to $12,000,000. As a result of the Company's potential economic
interest of up to 67.5% and the possibility of being responsible for all or part
of MTM's equity interest, the Company may be responsible for up to 83.1% of the
remaining $12,000,000 of standby equity.
On February 18, 2000, the Company and CME entered into a term sheet, which
set out the principal terms and conditions agreed in connection with a
contemplated transaction between the Company and CME in Hungary, Poland and
Slovenia. On February 21, 2000, the Company acquired all of CME's broadcasting
assets, including programming inventories, real estate, and related tangible and
intangible assets in Hungary (collectively, the "Hungarian Assets") for a total
consideration of $16,000,000. The Company simultaneously agreed to sell a one-
half interest in the Hungarian Assets to CLT-UFA for $9,000,000.
Switzerland
In September 1999, the Company and TA-Media Group, a leading publisher in
Switzerland, launched TV3, a national channel targeted at the German speaking
community of Switzerland. The Company projects the aggregate capital required
to be approximately $60,000,000 during the start-up phase, of which 50% will be
funded by the Company. At December 31, 1999, the Company had funded
$15,337,000, and recorded equity losses of $9,376,000 in 1999.
F-11
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
TV3 - Switzerland
Summarized below are significant elements of TV3's financial position and
results of operations:
December 31, 1999
-----------------
Net revenue............................ $ 5,778,000
Operating loss......................... (18,093,000)
Net loss............................... (19,566,000)
Current assets......................... $ 7,013,000
Non-current assets..................... 12,086,000
------------
Total assets........................ $ 19,099,000
Current liabilities.................... $ 17,158,000
Non-current liabilities................ 19,781,000
------------
Total liabilities................... $ 36,939,000
============
Slovenia
In Slovenia, the Company operates Kanal A, a national over-the-air
television station, under management and funding arrangements. The Company has
invested $30,144,000 in the Slovenia project as of December 31, 1999, of which
$10,414,000 has been capitalized, and a loss of $19,730,000 has been recorded as
equity in loss in unconsolidated subsidiaries up to December 31, 1999.
In February 2000, the Company and CME agreed that CME would acquire the
Company's interest in Slovenia for $12,000,000, subject to the completion of
satisfactory documentation and satisfaction on or before June 30, 2000, of
certain conditions precedent, including requisite regulatory approvals.
Italy
HOT Italia, in which the Company is a partner, owns a 10.1% interest in
Rete Mia, a national terrestrial network whose signal is estimated to reach 77%
of all Italian television households and has an option to purchase the remaining
89.9% of the station. HOT Italia is 51.0% owned by HOT Home Order Television
Europe, Europe's leading home shopping television service. Rete Mia does not
have a broadcasting license, but currently operates pursuant to a provisional
authorization granted by operation of law, which will be in force until Rete Mia
is granted a license or its request for a license is rejected. An application
for a license was made in May 1999 and, if successful, it is the intention of
HOT Italia to utilize the broadcasting capacity of the station to introduce live
home shopping to the Italian market. The Company has invested a total of
$13,572,000 in the HOT Italia joint venture as of December 31, 1999, and the
Company anticipates additional funding requirements of approximately $15,000,000
in connection with its participation in HOT Italia.
The Company has entered into loan and acquisition agreements with the
owners of FINELCO, which owns and operates RETE 105, a national radio network in
Italy. The prospective sellers under such agreements have refused to consummate
the transactions contemplated thereby. The Company has therefore commenced
proceedings in Italy seeking to enforce such agreements. As of December 31,
1999, the Company had advanced $7,336,000 against the purchase price, and
incurred additional capitalized expenses of $1,485,000.
Other
In December 1998 the Company signed an agreement with the EBRD to establish
and fund EBS for the purposes of making equity investments in television and
radio operating companies in Central and Eastern Europe. The capital
commitments of the EBS shareholders upon signing were contemplated to be
$80,000,000, of which the Company agreed to fund, on a project-by-project basis,
a total of $50,000,000. The Company's funding commitment can be reduced by up
to $10,000,000 upon additional capital contributions by new investors. The
initial closing has been subject to various conditions and has not yet taken
place. The agreement expires on March 31, 2000.
F-12
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
In December 1999 the Company made a $10,000,000 investment for a minority
position in Lions Gate Entertainment Corp. ("Lions Gate"), a Canadian integrated
entertainment company engaged in the development, production and distribution of
feature films, television series, movies-of-the-week, mini-series and animated
programming. In conjunction with the investment, Howard A. Knight, the
Company's Vice Chairman and Chief Operating Officer has been appointed to the
Lions Gate Board of Directors. Other investors in the offering included Tele-
Munchen, one of the Company's partners in TV2 in Hungary.
New Media
In November 1999, the Company acquired a 15% equity stake in Bidlet, a
Swedish online auction site, for $2,500,000 in cash and $12,500,000 in
advertising time over five years.
In December 1999 the Company acquired a 7.1% interest in HSX Holding Inc.
("HSX"), consisting of Class B Preferred Stock. The Company also received
warrants to acquire an additional interest in HSX. HSX is a US based digital
media company which operates an online entertainment experience, driven by its
music and film stock market web site, the Hollywood Stock Exchange. The Company
paid $3,000,000 in cash and is committed to provide $2,000,000 in advertising
time.
3. Program Libraries
Paramount
In March 1995, the Company and affiliates of Viacom Inc. and Paramount
entered into a ten-year license agreement for a limited exclusive license to
broadcast the film and television library of the Paramount Television Group and
Viacom in Norway, Sweden, Denmark, Finland, Flemish Belgium and the Netherlands.
The Company agreed to pay $20,000,000 to Paramount, an affiliate of Viacom, of
which $14,000,000 was paid in March 1995, $2,500,000 will be paid in 2000 and
$3,500,000 will be paid in 2002. Simultaneously, Paramount purchased for
$4,000,000 a warrant (the "Paramount Warrant") expiring in 2000 to purchase one
million Common Shares in the Company at an exercise price of $35.00 per share.
In July 1997, the Company reached an agreement to amend the existing program
license agreement to add Hungary and Slovenia and to remove Finland from the
license territories, and to give the Company the right to two runs of licensed
library product, which includes all new Paramount feature films, all new
Paramount series product and the Paramount library. In consideration for the
amendment, the Company agreed to reduce the exercise price of the Paramount
Warrant to $25.00 per share, subject to anti-dilution adjustments, and to extend
its term until June 30, 2002. The fair value of the change in the terms of the
Paramount Warrant as of the date of the amendment to the agreement of $2,800,000
was capitalized as program rights inventory, which is amortized over the
remaining term of the amended license agreement, and a like amount was recorded
as additional paid-in capital.
The Company amortizes the Paramount library agreement on a straight-line
basis commencing upon the initial broadcast date in each territory.
4. Buildings, Equipment and Improvements
Buildings, Equipment and Improvements consisted of the following:
December 31,
-------------------------
1998 1999
----------- -----------
Technical, other equipment, furniture and fixtures $57,009,000 $58,472,000
Buildings and leasehold improvements.............. 6,339,000 9,163,000
----------- -----------
63,348,000 67,635,000
Less accumulated depreciation..................... 39,168,000 42,997,000
----------- -----------
Net buildings, equipment and improvements......... $24,180,000 $24,638,000
=========== ===========
Included in technical and other equipment are $6,386,000 and $5,739,000 of
assets held under various capital leases as of December 31, 1998 and 1999,
respectively. Depreciation of these assets for the years ended December 31,
1997, 1998 and 1999 amounted to $1,233,000, $1,285,000,000 and $343,000,
respectively.
F-13
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Intangible Assets
Intangible Assets consisted of the following:
December 31,
--------------------------------
1998 1999
---- ----
Goodwill......................... $63,420,000 $62,250,000
Broadcasting licenses............ 16,593,000 18,237,000
Other intangible assets.......... 2,618,000 3,992,000
----------- -----------
82,631,000 84,479,000
Less accumulated amortization.... 22,919,000 30,484,000
----------- -----------
Net intangible assets............ $59,712,000 $53,995,000
=========== ===========
6. Notes Payable, Current
Notes Payable, Current are all due on demand and consisted of the
following:
December 31,
--------------------------------
1998 1999
---- ----
Kredietbank...................... $ 2,892,000 $ --
Generale Bank.................... 5,784,000 4,349,000
Christiania Bank og Kreditkasse.. 787,000 2,156,000
----------- -----------
$ 9,463,000 $ 6,505,000
=========== ===========
The weighted average interest rates were 4.65% and 5.80% at December 31,
1998 and 1999, respectively.
SBS Broadcasting SA has guaranteed the loans of subsidiaries from Generale
Bank and Christiana Bank og Kreditkasse.
Based upon prevailing interest rates on similar debt instruments, the
Company believes that the carrying value of its notes payable approximates fair
value.
7. Convertible Subordinated Debentures and Notes
In 1995, the Company sold an aggregate of $155,250,000 in principal amount
of 7.25% Convertible Subordinated Debentures Due 2005 (the "1995 Debentures"),
raising net proceeds to the Company of $149,644,000. The Company announced on
June 30, 1999 that it had called for redemption of all of its 1995 Debentures.
Under an agreement with UPC, UPC provided a back-up facility to enable SBS to
make the call for redemption pursuant to which UPC agreed to purchase any 1995
Debentures tendered for redemption and to immediately convert such 1995
Debentures into Common Shares at the conversion price of $28.67 per Common
Share. The Company also agreed with UPC that if UPC acquired less than
3,000,000 Common Shares through conversion of the 1995 Debentures pursuant to
the back-up facility, the Company would sell to UPC and UPC would purchase at a
purchase price of $35.25 per share, a number of Common Shares equal to the
difference between 3,000,000 and the number of Common Shares acquired by UPC
through the back-up facility. As at July 30, 1999, the final date on which the
holders of 1995 Debentures could redeem their 1995 Debentures for cash or
convert them into Common Shares, UPC had acquired $24,300,000 of 1995
Debentures, which were tendered for redemption and converted into 847,680 Common
Shares by UPC. In addition, in August 1999, SBS issued 2,152,320 new Common
Shares to UPC, at $35.25 per Common Share, which net of transaction expenses,
brought new capital to the Company of $74,837,000.
In November 1997, the Company sold an aggregate of $75,000,000 in principal
amount of 7% Convertible Subordinated Notes Due 2004, (the "1997 Notes"),
raising net proceeds to the Company of approximately $72,300,000 after the
deduction of fees and expenses of the offering paid by the Company. Interest on
the 1997 Notes is payable semi-annually in June and December each year. Holders
of the 1997 Notes are entitled to convert the 1997 Notes into Common Shares at a
conversion price of $29.13 per share. After
F-14
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
December 5, 2000, the 1997 Notes are redeemable, in whole or in part at the
option of the Company, including accrued and unpaid interest to the date of
redemption and a redemption premium.
The 1997 Notes are subordinated to all existing and future Senior Debt of
the Company, as defined in the indenture. The indenture under which the 1997
Notes were issued does not restrict the incurrence of additional senior or other
indebtedness by the Company.
Upon a change of control, each holder of the 1997 Notes has the right to
cause the Company to repurchase all of such holder's 1997 Notes at a price in
each case equal to 100% of the principal amount of the 1997 Notes plus any
accrued and unpaid interest to the date of repurchase. In addition, in the event
of certain changes in tax laws and certain other limited circumstances requiring
additional payments by the Company, the 1997 Notes are redeemable in whole, but
not in part, at the option of the Company at any time. The redemption price
under these circumstances is equal to the principal amount of the 1997 Notes
plus any accrued and unpaid interest to the date of redemption.
The fair value of the 1997 Notes at December 31, 1999 was approximately
$128,580,000 based on public market trading.
8. Other long-term Debt
Other long-term Debt consisted of the following:
December 31,
--------------------------------
1998 1999
---- ----
EBRD Loan......................... $28,444,000 $26,588,000
Christiania Bank og Kreditkassen.. 9,868,000 6,227,000
Skandinaviska Enskilda Banken..... 8,300,000 6,600,000
Advertising Service Agreement..... 4,423,000 4,478,000
Coutts & Co....................... 1,948,000 --
Obligations under capital leases.. 422,000 486,000
Other............................. 236,000 301,000
----------- -----------
53,641,000 44,680,000
Less current portion.............. 2,627,000 11,468,000
----------- -----------
$51,014,000 $33,212,000
=========== ===========
Of the total amount of the EBRD loan, $14,496,000 is denominated in US
Dollars and $12,092,000 is denominated in Deutsche Mark ("DM"). The loan is
repayable in escalating semi-annual installments commencing in June 2000 and has
a final maturity in December 2005. The loan is secured by all tangible and
intangible assets of TV2 and a pledge of all outstanding shares of TV2. Interest
is payable at a floating rate of LIBOR +1.5% for $6,700,000 and DM11,530,700 and
LIBOR +1.4% for $7,000,000 and DM12,047,000. The remaining $796,000 bears
interest at an annual rate of 15%. Interest is payable semi-annually from the
inception of the loan.
The Christiania Bank loan was obtained by TVNorge to finance operations and
is repayable in annual installments commencing in June 1999 and has a final
maturity in 2001. Interest at an average floating rate of NIBOR +0.6% is payable
quarterly from the inception of the loan. The shareholders of TVNorge have
guaranteed the loan proportionate to their shareholding.
The loan from Skandinaviska Enskilda Banken ("SE Banken") is repayable in
annual installments commencing in 1998 and has a final maturity in 2000. The
loan is secured by a pledge of the shares in Kanal 5 AB and Kanal 5 Ltd.
Interest is payable at an average floating rate of LIBOR +0.9%.
Under an Advertising Service Agreement concluded simultaneously with the
Loan Agreement with Postabank, Budapest, the principal and interest on the loan
of HUF 1 billion will be repaid primarily by providing advertising services. If
not repaid by way of advertising services the loan becomes repayable in cash in
October 2002. Interest accrues at an annual rate of 22%.
In December 1998 the Company entered into a $35,000,000 multi-currency
revolving and term facility with Chase Manhattan Bank. The borrower group is
currently comprised of the Company, Kanal 5, VT4 and the
F-15
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Radio Division. There are cross-guarantees between these companies and their
subsidiaries and Kanal 5 Limited has also entered into a fixed and floating
charge. The Company has pledged its shares in all 100% (indirectly) owned
subsidiaries within the borrower group and its interest in Broadcast
Danmark/Nordisk, which is 80% owned, except for the shares in Kanal 5 AB and
Kanal 5 Ltd., which are currently pledged in connection with the SE Banken
facility. The pledge will be transferred to Chase Manhattan Bank when SE Banken
is repaid (see below). In addition, an assignment was made over certain
intercompany loans made by the Company to its subsidiaries. The Company has not
yet made a drawdown under the facility but can do so until December 31, 2000. A
condition to drawdown is the repayment of the SE Banken $10,000,000 facility
(the Balance at December 31, 1999 was $6,600,000). The interest rate will be at
LIBOR plus a margin ranging from 1% to 1.75% depending upon the Company's
leverage ratio. The Company will repay the facility in installments over three
years beginning in December 2000.
The aggregate amount of scheduled principal maturities on long-term debt
for each of the remaining years subsequent to December 31, 1999 are as follows:
2000............................................. $11,468,000
2001............................................. 5,909,000
2002............................................. 5,131,000
2003............................................. 8,420,000
2004............................................. 9,581,000
Thereafter....................................... 4,171,000
-----------
$44,680,000
-----------
Based upon prevailing interest rates on similar debt instruments, the
Company believes that the carrying value of its long-term debt approximates fair
value. As of December 31, 1999, the Company had credit lines available amounting
to $36,988,000 including the facility with Chase Manhattan Bank, after repayment
of the SE Banken loan.
9. Stock Options
The Company adopted a 1992 Share Incentive Plan and a 1994 Share Incentive
Plan (collectively, the "Plans") under which 1,800,000 Common Shares are
reserved for issuance upon the exercise of options granted thereunder. In 1996
and 1998, the shareholders approved an increase of an aggregate of 3,000,000
Common Shares available for issuance under the Plans. In October, 1995, the
Company formalized the Company's Long-Term Employees' Stock Ownership Plan
("ESOP"), reserving 60,000 shares of the Company's Common Stock for awards to
employees, vesting over three years. As of December 31, 1999, 15,000 shares had
been awarded under the ESOP.
In April, 1997, holders of then vested in-the-money options were offered
unrestricted Common Shares and holders of unvested options or vested out-of-the-
money options were offered restricted Common Shares to vest over periods of up
to three years depending upon the remaining terms of their employment
arrangements. Holders of options to purchase an aggregate of 338,500 Common
Shares elected to exchange their options for 91,462 Common Shares. Holders of
options to purchase 105,000 Common Shares elected not to exchange their options.
Also, in April, 1997 the exercise price of all outstanding out-of-the-money
options held by members of senior management of the Company were reset with
reference to the then prevailing market price for the Company's Common Shares.
All of these options became unvested as of April 1997 and new vesting periods
for each option were recommenced.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a BlackScholes option pricing model with the following assumptions:
riskfree interest rates of 6.5%; dividend yield of 0%; volatility factor of the
expected market price of the Company's Common Stock of 0.40, 0.41 and 0.32 for
1997, 1998 and 1999, respectively; and a weighted-average expected life of the
options of ten years as of the date of grant.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The Company's
pro forma information follows (in thousands, except for per share information):
F-16
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1997 1998 1999
---- ---- ----
Pro forma net loss........................... $ (50,550) $(44,157) $(52,119)
Pro forma basic and diluted loss per share:.. $ (3.67) $ (3.01) $ (2.89)
A summary of the Company's stock option activity, and related information
for the years ended December 31 follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------------------------- --------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Options Weighted-average Options Weighted-average Options Weighted-average
(000) Exercise Price (000) Exercise Price (000) Exercise Price
----- ---------------- ----- ---------------- ----- ----------------
Outstanding-beginning of year..... 2,270 $19.08 2,711 $17.42 3,309 $19.19
Granted........................... 780 $19.56 598 $27.19 1,335 $30.68
Exercised......................... -- -- -- -- (29) $14.98
Forfeited......................... -- -- -- -- -- --
Exchanged for Common Shares....... (339) $20.14 -- -- -- --
Outstanding at end of year........ 2,711 $17.42 3,309 $19.19 4,615 $22.53
Exercisable at end of year........ 1,791 $16.26 2,861 $18.01 3,483 $19.60
Weighted-average fair value of
options granted during the year. $ 9.80 $15.34 $18.31
</TABLE>
Below is additional information related to stock options at December 31,
1999
Weighted Average
Options Remaining Weighted Average
Range of Exercise Price (000) Contractual Life Exercise Price
----------------------- ------- ---------------- ----------------
$00.00 - 10.00 235 2.35 $ 1.50
$10.01 - 20.00 1,674 5.29 $16.92
$20.01 - 30.00 2,196 4.30 $25.10
$30.01 - 40.00 510 4.78 $39.65
-----
4,615 4.61 $22.53
10. Luxembourg Capital Requirements
Luxembourg company law requires that an appropriation be made to legal
reserve of a minimum of 5% of the parent company's annual net income until this
reserve equals 10% of subscribed capital. Through December 31, 1999, no amount
has been required to be allocated to the legal reserve. the legal reserve may
not be distributed in the form of cash dividends or otherwise during the life of
the Company. The appropriation to legal reserve becomes effective upon approval
at the general meeting of shareholders. As of December 31, 1999, the Company is
not permitted to make any dividend distributions under Luxembourg law.
11. Income Taxes
The Company and each of its subsidiaries file separate tax returns in the
country of incorporation. The Company's allowance for (benefit from) income
taxes in each period reflects various taxes in certain jurisdictions in which
the Company does business. No benefit has been recorded in the financial
statements for net operating losses, as the entire carryforward has been offset
against a valuation allowance. The tax benefit related to the pretax losses in
each period has been offset against increases in the valuation allowance.
Deferred income taxes represent the tax effect of temporary differences btween
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deffered tax
F-17
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
assets as of December 31, 1998 and 1999 (there are no significant deferred tax
liabilities) are as follows:
December 31,
--------------------------
1998 1999
---- ----
(in thousands)
Net operating loss carryforwards................... $ 94,103 $ 109,361
Excess book over tax depreciation.................. 632 2,675
Accounts receivable................................ -- 228
Other.............................................. 7,667 (10,355)
Less: Valuation allowance.......................... $ (102,402) $ (101,909)
---------- ----------
Net deferred tax assets............................ $ -- $ --
========== ==========
The tax loss carryforwards available at December 31, 1999 and their expiration
years are as follows:
Expiration year Denmark Norway Finland Total
- --------------- -------- -------- ------- --------
2000.......................... $ 2,206 $ 2,206
2001.......................... 1,751 1,751
2002.......................... $ 8,726 8,726
2003.......................... $ 11,263 11,263
2004.......................... $ 6,264 $ 136 6,400
2005.......................... $ 1,542 1,027 2,569
2006.......................... 23,471 1,518 24,989
2007.......................... 16,405 775 17,180
2008.......................... 14,388 496 14,884
2009.......................... 1,307 787 2,094
-------- -------- ------- --------
Total......................... $ 30,210 $ 57,113 $ 4,739 $ 92,062
======== ======== ======= ========
Tax losses may be carried forward indefinitely in the following
territories:
Luxembourg........................................................... $ 92,342
Belgium.............................................................. 4,842
Netherlands.......................................................... 75,620
Sweden............................................................... 12,507
UK................................................................... 59,605
Hungary.............................................................. 26,878
--------
Total........................................................... $271,794
========
12. Fair value of financial instruments
The carrying amounts and fair values of the Company's financial instruments
at December 31, 1998 and 1999 are as follows:
1998 1999
----------------------- -----------------------
Carrying Fair Carrying Fair
amount value amount value
---------- ---------- ---------- ----------
(In thousands)
Cash and short-term cash
investments.......... $ 63,381 $ 63,381 $ 67,770 $ 67,770
Short-term investments... 45,525 45,525 30,929 30,929
Notes payable, current... (9,463) (9,463) (6,505) 6,505
Convertible subordinated
debentures........... (155,250) (160,839) -- --
Convertible subordinated
notes................ (75,000) (80,715) (75,000) (128,580)
Other long-term debt..... (53,641) (53,641) (44,680) (44,680)
Foreign currency
exchange contract.... -- (147) -- (2,640)
F-18
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Segment Reporting
The Company divides its operations into three categories: (i) "Scandinavian
Television operations" which includes TVNorge (in Norway), Kanal 5 (in Sweden)
and TvDanmark (in Denmark), (ii) "European Television operations" which includes
VT4 (in Flemish Belgium), SBS6 and NET5 (in the Netherlands) and TV2 (in
Hungary), and (iii) "Radio operations" which includes Voice Radio and Voice POP
(in Denmark), Radio City in Stockholm, Radio City in Malmoe, Radio City in
Gothenburg, Radio Klassiska Hits in Stockholm and Radio Easy FM in Stockholm (in
Sweden) and Radio Sata, Radio Mega, Radio KISS FM, Radio City, Radio POP and
Radio 957 ("Radio Finland"). There are no material product transfers between
segments of the Company. The segment data is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
Scandinavian Television Operations (in thousands)
<S> <C> <C> <C>
Net revenues:
TVNorge (in Norway).................................................................... $ 35,291 $ 42,068 $ 57,926
Kanal 5 (in Sweden).................................................................... 48,065 55,577 52,780
TvDanmark (in Denmark)................................................................. 20,108 32,370 34,872
Other.................................................................................. -- 107 4,197
-------- -------- --------
Total net revenues........................................................................ 103,464 130,122 149,775
-------- -------- --------
Station operating expenses............................................................. 83,632 106,706 109,555
Selling, general and administrative expenses........................................... 28,573 29,049 31,665
Depreciation........................................................................... 4,711 4,045 4,154
Amortization........................................................................... 2,625 3,205 4,595
-------- -------- --------
Total operating expense................................................................... 119,541 143,005 149,969
-------- -------- --------
Loss from operations...................................................................... $(16,077) $(12,883) $ (194)
======== ======== ========
Assets at year-end........................................................................ $110,876 $133,522 $117,849
======== ======== ========
European Television Operations
Net revenues:
VT4 (in Belgium)....................................................................... $ 43,267 $ 50,562 54,526
SBS6 and NET5 (in the Netherlands)..................................................... 72,585 96,780 123,695
TV2 (in Hungary)....................................................................... 8,787 48,566 54,752
Other.................................................................................. (976) (213) 81
-------- -------- --------
Total net revenues........................................................................ 123,663 195,695 233,054
-------- -------- --------
Station operating expenses............................................................. 115,277 147,964 176,423
Selling, general and administrative expenses........................................... 18,140 27,623 34,805
Depreciation........................................................................... 4,331 4,568 3,913
Amortization........................................................................... 1,237 4,735 4,312
-------- -------- --------
Total operating expense................................................................... 138,985 184,890 219,453
-------- -------- --------
Income (loss) from operations............................................................. $(15,322) $ 10,805 $ 13,601
======== ======== ========
Assets at year-end........................................................................ $167,520 $172,443 $189,918
======== ======== ========
Radio Operations
Net revenues:
Denmark................................................................................ $ 4,300 $ 5,444 $ 7,416
Sweden................................................................................. 3,453 8,560 9,885
Finland................................................................................ 7,958 10,714 12,427
Other.................................................................................. -- -- --
-------- -------- --------
Total net revenues........................................................................ 15,711 24,718 29,728
-------- -------- --------
Station operating expenses............................................................. 5,407 8,814 10,711
Selling, general and administrative expenses........................................... 8,477 12,107 14,735
Depreciation........................................................................... 797 871 939
Amortization........................................................................... 744 1,294 2,245
-------- -------- --------
Total operating expense................................................................... 15,425 23,086 28,630
-------- -------- --------
Income from operations.................................................................... $ 286 $ 1,632 $ 1,098
======== ======== ========
Assets at year-end........................................................................ $ 30,045 $ 35,476 $ 40,582
======== ======== ========
</TABLE>
F-19
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
1.3 Segment Reporting (Continued)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
(in thousands)
Consolidated
Net revenue............................................................................... $242,838 $350,535 $412,557
-------- -------- --------
Income (loss) from operating segments..................................................... (31,113) (446) 14,505
Corporate expenses........................................................................ (9,177) (9,576) (10,930)
Non-cash compensation..................................................................... (2,676) (1,142) (2,062)
Amortization related to unconsolidated subsidiaries....................................... (454) (556) (145)
Termination of CME Reorganization Agreement............................................... ---- -- (9,825)
-------- -------- --------
Loss from operations...................................................................... (43,420) (11,720) (8,457)
Equity in loss of unconsolidated subsidiaries............................................. (3,150) (3,536) (14,078)
Interest income........................................................................... 3,469 6,318 4,151
Interest expense.......................................................................... (14,333) (24,708) (18,628)
Foreign exchange losses, net.............................................................. (4,665) (3,202) (9,083)
Investment gains (losses)................................................................. (801) 376 423
Other income (expenses)................................................................... 7,213 (2,638) (89)
Income tax and tax benefits............................................................... (29) (636) (537)
Minority interest in losses, net.......................................................... 11,866 6,027 3,464
-------- -------- --------
Net loss.................................................................................. $(43,850) $(33,719) $(42,834)
======== ======== ========
Assets employed by segments............................................................... $308,441 $341,441 $348,349
Short-term cash investments and other corporate assets.................................... 119,119 86,380 143,209
-------- -------- --------
Total assets at year-end.................................................................. $427,560 $427,821 $491,558
======== ======== ========
</TABLE>
14. Pension Plans
The Company contributes to defined contribution plans for the management
level personnel at its subsidiaries and to a multi-employer defined contribution
pension plan for essentially all of its Swedish employees, which plans are
maintained by third party insurance companies. Contributions are determined as a
percentage of salaries with increases in relation to years of employment. During
the years ended December 31, 1997, 1998, and 1999 expenses under these plans
were $452,000, $551,000 and $912,000, respectively.
15. Commitments
As of December 31, 1999, the Company was committed to purchase broadcast
rights for programming under various agreements (excluding DreamWorks) amounting
to approximately $146,734,000. The commitment period for the Company's purchase
of programming generally ranges from twelve months to five years.
Expense under operating leases, principally for transponder and uplink,
amounted to $24,279,000, $42,686,000 and $42,240,000 in the years ended December
31, 1997, 1998 and 1999, respectively. Future minimum annual rental payments
under non-cancelable leases during each of the five years subsequent to December
31, 1999 are as follows (in thousands):
Capital Operating
Years Ended December 31, leases leases
- ------------------------ ------- ---------
2000............................. $455 $ 38,793
2001............................. 60 25,948
2002............................. -- 24,439
2003............................. -- 7,128
2004............................. -- 6,748
Thereafter....................... -- 9,648
---- --------
Minimum lease payments........... 515 $112,704
---- --------
Less executory costs............. --
----
Net minimum payments............. 515
Imputed interest................. (29)
----
Present value of minimum lease
payments..................... $486
====
F-20
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
16. Subsequent Events
United Pan-Europe Communications N. V. ("UPC")
On February 1, 2000, under the terms of a private placement agreement dated
January 27, 2000, UPC acquired from the Company 3,000,000 newly issued Common
Shares for $54.125 per share. The net proceeds to the Company were
approximately $160.5 million. As of March 29, 2000, UPC owns 6,000,000 Common
Shares, amounting to 23.3% of the Company's issued and outstanding Common
Shares.
On March 9, 2000, UPC and the Company announced that they had entered into
an agreement whereby UPC has agreed to make an exchange offer to acquire all of
the outstanding Common Shares of SBS, in exchange for cash and UPC shares. The
transaction, at the time of the announcement, valued 100% of SBS at
approximately $2.8 billion. The agreement, which has the full support of the
Boards of Directors of UPC and SBS, provides that UPC will initiate an exchange
offer to acquire all of the issued and outstanding Common Shares of SBS for (i)
$40.00 per Common Share in cash, and (ii) 0.19048 shares of UPC Ordinary Shares
A per SBS Common Share. The stock portion of the consideration in the tender
offer will be subject to a collar provision whereby SBS shareholders will
receive an aggregate amount of cash and UPC Ordinary Shares A equal to not less
than $77.50 and not more than $86.00 for each Common Share based on UPC's
average closing share price over a ten trading days period ending shortly prior
to the making of the exchange offer. Concurrent with execution of the exchange
offer agreement, certain holders of SBS Common Shares and options entered into
agreements to tender or exchange all of their equity interests in SBS to UPC.
These equity interests, together with UPC's current interest represents 27.6% of
the outstanding Common Shares. The exchange offer is currently expected to
commence in the Summer 2000 after a registration statement has been filed with
the US Securities and Exchange Commission and declared effective and offer
documents become available. The exchange offer will be conditioned upon receipt
by UPC of Common Shares which together with the approximately 23% held by UPC
represent at least 66 2/3% of the outstanding Common Shares on a diluted basis
and other customary conditions. Completion of the exchange offer is subject to
certain conditions precedent, including the obtaining of required regulatory
consents and approvals under applicable media and competition legislation in
certain of the countries in which the parties operate. The Company does not
currently foresee any material difficulties in satisfying such conditions
precedent and the parties have agreed to work together to obtain the necessary
and appropriate consents and approvals.
The Company has agreed with UPC not to enter directly or indirectly into
discussions or negotiations with any other person regarding the possible making
of an acquisition proposal for the Company, unless the board of directors of the
Company determines in good faith that failure to do so would be inconsistent
with the fiduciary duties imposed by Luxembourg law on the board of directors to
the Company's shareholders. The Company has agreed to pay UPC a termination fee
of $90.0 million in certain circumstances where the exchange offer agreement has
been terminated and a competing acquisition proposal has been accepted or
recommended by the board of directors of the Company or an acquisition proposal
was made prior to termination and within nine months thereafter an acquisition
proposal that is financially superior to the exchange offer has been
consummated.
UPC has agreed that for a period of six months after the closing of the
exchange offer it will use its reasonable best efforts, subject to applicable
law, to cause any minority shareholders in the Company remaining after the
closing to receive promptly consideration that is equal or substantially
equivalent to the offer price for the exchange offer. The means by which UPC
will conduct the purchase of shares from minority shareholders is at its
reasonable discretion and may include redemption, merger or other corporate
actions.
The exchange offer agreement was filed as an exhibit to a Form 6-K filing
on March 21, 2000, and this summary description is qualified in its entirety by
the text of that agreement.
Television
On March 29, 1999, the Company entered into a reorganization agreement with
CME, which contemplated the acquisition by the Company of all the assets,
business, properties and rights of CME in exchange for SBS Common Shares. On
September 28, 1999, the Company and CME mutually agreed to terminate the
reorganization agreement. In accordance with the terms of a termination
agreement SBS paid a cash "break-up" fee of $8.25 million to CME in October
1999. The break-up fee and other project related
F-21
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
expenses totaling $9.8 million have been expensed in 1999. The termination
agreement contemplated that SBS and CME would seek to realign their respective
operations in Hungary and Slovenia. On February 18, 2000, the Company and CME
entered into a term sheet, which set out the principal terms and conditions
agreed in connection with a contemplated transaction between the Company and CME
in Hungary, Poland and Slovenia. On February 21, 2000, the Company acquired all
of CME's broadcasting assets, including programming inventories, real estate,
and related tangible and intangible assets in Hungary (collectively, the
"Hungarian Assets") for a total consideration of $16.0 million and it was agreed
that CME would acquire the Company's interests in Slovenia for $12.0 million.
The Slovenian transaction is subject to the satisfaction, on or before June 30,
2000, of certain conditions precedent, including requisite regulatory approvals.
The Company simultaneously agreed to sell a one-half interest in the Hungarian
Assets to CLT-UFA S.A. for $9.0 million. On February 21, 2000, the Company and
CME further agreed that the Company would have a call option to acquire all of
CME's rights to a $40.0 million in aggregate principal amount of convertible
notes of ITI Holdings (the "Notes") for $37.25 million and that CME would have a
put option to require the Company to purchase the Notes for $25.0 million. The
call option and the put option are exercisable on or before June 30, 2000,
subject to extension under certain circumstances.
On March 9, 2000, the Company exercised its option to acquire, for a
nominal amount, 86% of the shares of Amerom Ltd., which owns 100% of Amerom
Television Ltd. ("Amerom") , the owner and operator of Prima TV in Romania
("Prima TV"). The Company acquired its option in conjunction with a 1998 Loan
Agreement and capital commitment arrangement for Prima TV. The Company has
agreed to acquire $29.7 million principal amount of outstanding Amerom
promissory notes from the Romanian Asset Resolution Agency for cash payments
totaling approximately $8.0 million and expects that Prima TV will require
approximately $12 million of additional capital over the next three years (the
acquisition of 86% of Ameron, the acquisition of the Ameron promissory notes and
the additional capital requirements of Prima TV over the next three years being
hereinafter collectively referred to as the "Romanian Project").. The Company
has entered into a heads of agreement with UPC whereby UPC will participate with
the Company in the Romanian Project for up to $7.5 million.
On March 15, 2000 the Company announced that it had entered into an
agreement with ITI Holdings S.A. ("ITI") to acquire from ITI a 33% indirect
interest in TVN, Poland's second largest private television station, in exchange
for consideration consisting of 666,666 SBS Common Shares, the surrender to ITI
of the Notes and $92.0 million in cash. Completion of the transaction is
subject to due diligence and the satisfaction of other conditions precedent.
Closing is currently anticipated to occur prior to May 26, 2000. According to
official AGB statistics, TVN reaches 69.4% of Polish television households,
including the ten largest urban areas in Poland, and to date in 2000 has
achieved a 17.8% all-day average audience share within its coverage area. TVN
has exclusive Polish rights to all formats of Endemol, with whom the Company has
agreed to form a joint venture in the Netherlands.
Radio
On March 6, 2000, the Company acquired a 70.0% interest in a company that
owns and operates Lampsi, a radio station located in Athens, Greece. Lampsi
reaches approximately 49% of the population of Greece and is one of the
country's leading music stations. The purchase price is approximately $6.8
million, of which 60% was paid at closing and the remaining 40% will be paid at
the earlier of the receipt of a broadcasting license by Lampsi or on the second
anniversary of the closing. Lampsi is currently operating with an authorization
to broadcast. In the event Lampsi is not issued a commercial license prior to
the end of 2004, the Company has the right to require the sellers to repurchase
the 70.0% interest.
New Media
In January 2000, the Company acquired a 16.0% equity stake in Leknet A.B.
(www.leknet.com), a leading Scandinavian online retailer of children's products,
for $7.0 million, a majority of which will be paid in the form of advertising
time. In February 2000 the Company agreed to acquire a 22.5% equity interest in
Lovesearch DP AB (www.lovesearch.se and www.lovesearch.com), a leading Swedish
dating and match-making site, for $1.1 million, substantially all of which will
be paid in the form of advertising time. In March 2000, the Company agreed to
acquire a 40% equity interest in Boomerang AB (www.boomeranger.se), a leading
Swedish portal and on-line travel agency, for $5.2 million, substantially all of
which will be paid in the form of advertising time. In March 2000, the Company
acquired a 6.8% equity interest in BETandWIN (www.betandwin.com), an Austrian
on-line sports gaming site that is versioned in multiple languages, for 4.25
F-22
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
million, a substantial majority of which will be paid in the form of advertising
time. The Company will receive fees attributable to all BETandWIN customers
that click through from the Company's various web sites consisting of a fee for
the referral of a registered user and a percentage of all revenues generated by
such users. On March 23, 2000, the Company agreed to sell its equity stake in
Bidlet to QXL, the leading UK online auction site, for shares of QXL having a
market value of approximately $67.0 million at the time of the transaction.
F-23
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Report of the statutory auditors
to the general meeting of
TV3 LTD., SCHLIEREN
As statutory auditors, we have audited the accounting records and the financial
statements (balance sheet, income statement and notes) of TV3 Ltd. for the first
business period from July 9, 1998 to December 31, 1999.
These financial statements are the responsibility of the board of directors. Our
responsibility is to express an opinion on these financial statements based on
our audit. We confirm that we meet the legal requirements concerning
professional qualification and independence.
Our audit was conducted in accordance with auditing standards promulgated by the
profession, which require that an audit be planned and performed to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. We have examined on a test basis evidence supporting the
amounts and disclosures in the financial statements. We have also assessed the
accounting principles used, significant estimates made and the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the accounting records and the financial statements comply with
the law and the company's articles of incorporation.
We recommend that the financial statements submitted to you be approved.
The financial statements show that the accumulated deficit exceeds the share
capital and we would draw your attention to the provisions of Article 725 of the
Swiss Code of Obligations. The Company's shareholders have signed a
subordination agreement subordinating their claims to the benefit of other
creditors. In view of the above, the board of directors have waived the need to
prepare interim financial statements on a liquidation basis and the obligation
to inform the judge in accordance with Art. 725 (2) of the Swiss Code of
Obligations.
Zurich, March 28, 2000 ATAG Ernst & Young Ltd
Kevin McCabe i. V. Kerstin Markisch
Chartered Accountant Dipl.-Kauffrau
(in charge of the audit)
Enclosure:
- - Financial statements (balance sheet, income statement and notes)
F-24
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
TV3 LTD, SCHLIEREN
BALANCE SHEET
AS OF DECEMBER 31, 1999
December 31,
1999
------------
CHF '000
ASSETS
Cash and short-term equivalents 396
Trade accounts receivable, net 4 983
Program rights inventory 3 931
Prepaid expenses and other assets 1 491
-------
Total Current Assets 10,801
-------
Program rights inventory 9 409
Plant and equipment 10 979
Intangible assegs 1 099
-------
Total Non-Current Assets 21 487
-------
TOTAL ASSETS 32 288
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Trade accounts payable 3 348
Other liabilities 570
Program rights payables 6 753
Accrued expenses 2 806
-------
Total Current Liabilities 13 477
-------
Subordinated loans 46 368
Program rights payables 404
-------
Total Noncurrent Liabilities 46 772
-------
Capital stock 1 000
Available earnings
Loss for the period -28 961
-------
Total Shareholders' Equity -27 961
-------
LIABILITIES AND SHAREHOLDERS' EQUITY 32 288
-------
F-25
<PAGE>
SBS BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
TV3 LTD., SCHLIEREN
STATEMENT OF INCOME
FOR THE 18 MONTH PERIOD ENDED DECEMBER 31, 1999
9.7.1998-
31.12.1999
----------------
CHF '000
INCOME
Advertising sales 8 314
Barter income 265
Other income 143
-------
TOTAL INCOME 8 722
Station operating expense 23 234
Salaries and social charges 7 256
General and administration expense 4 140
Depreciation expense 671
Amortization expense 87
Rental 342
Maintenance and office expense 1 070
Exchange loss 5
Interest expense 878
-------
TOTAL EXPENSES 37 683
-------
LOSS FOR THE PERIOD -28 961
-------
F-26
<PAGE>
SBA BROADCASTING SA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
TV3 LTD., SCHLIEREN
NOTES TO THE FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999
December 31,
1999
------------------
CHF
Fire insurance value
of plant and equipment 10 705
Lease commitments 629
F-27
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ENECO KabelTV and Telecom Group:
We have audited the accompanying combined balance sheet of the companies
identified in Note 1, collectively referred to as the ENECO KabelTV and Telecom
Group as of December 31, 1999, and the related combined statements of
operations, shareholder's equity and cash flows for the year then ended. These
combined financial statements are the responsibility of the combined companies'
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of the ENECO KabelTV and Telecom
Group as of December 31, 1999, and the results of its operations and its cash
flows for the year then ended in conformity with accounting principles generally
accepted in the United States.
Arthur Andersen
Rotterdam, The Netherlands
April 14, 2000
F-29
<PAGE>
ENECO KABELTV & TELECOM GROUP
-----------------------------
COMBINED BALANCE SHEET AT DECEMBER 31, 1999
-------------------------------------------
(Currency - thousands of Dutch guilders)
ASSETS
------
1999
------------
CURRENT ASSETS:
Inventory NLG 2,862
Trade receivables, net of allowance
for doubtful accounts of 1,309 8,356
Receivable from shareholder 15,115
Other receivables and prepayments 6,837
------------
Total current assets 33,170
Goodwill, net of accumulated amortization
of NLG 17,050 101,402
Property, plant and equipment, net of
accumulated depreciation of NLG 329,747 442,386
Investments in and advances to
equity investees 13,922
------------
557,710
------------
Total assets NLG 590,880
============
The accompanying notes to combined financial statements are an integral part of
this balance sheet.
F-30
<PAGE>
ENECO KABELTV & TELECOM GROUP
-----------------------------
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
(Currency - thousands of Dutch guilders)
1999
------------
CURRENT LIABILITIES:
Banks NLG 22,263
Accounts payable -
Trade payables 16,130
Shareholder 162,828
Accrued liabilities 25,389
Acquisition debt 69,750
------------
296,360
------------
NON-CURRENT LIABILITIES:
Bank debt 8,100
Shareholder advances 251,635
Acquisition debt, net of current portion 14,884
------------
274,619
------------
MINORITY INTEREST in subsidiaries 324
------------
COMMITMENTS AND CONTINGENCIES (see note 7)
SHAREHOLDER'S EQUITY:
Issued and paid-in capital 50,252
Retained earnings (30,675)
------------
Total shareholder's equity 19,577
Total liabilities and
shareholder's equity NLG 590,880
============
The accompanying notes to combined financial statements are an integral part of
this balance sheet.
F-31
<PAGE>
ENECO KABELTV & TELECOM GROUP
-----------------------------
COMBINED STATEMENT OF OPERATIONS
--------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1999
------------------------------------
(Currency - thousands of Dutch guilders)
1999
------------
NET SALES NLG 164,789
------------
OPERATING EXPENSES:
Cost of raw materials and supplies 6,423
Cost of services 41,897
Labor expenses 14,982
Depreciation and amortization 60,975
Other expenses 40,950
------------
165,227
------------
Net operating loss (438)
------------
Interest expense (26,372)
Equity in losses of equity investees (3,707)
------------
(30,517)
Income taxes 375
------------
Minority share (64)
------------
Net loss NLG (30,206)
============
The accompanying notes to combined financial statements is an integral part of
this statement.
F-32
<PAGE>
ENECO KABELTV & TELECOM GROUP
-----------------------------
COMBINED STATEMENT OF SHAREHOLDER'S EQUITY
------------------------------------------
FOR THE YEAR ENDED DECEMBER 31,1999
-----------------------------------
(Currency - thousands of Dutch guilders)
<TABLE>
<CAPTION>
Issued Additional
and Paid- paid-in Retained
in Capital Capital Earnings Total
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance January 1, 1999 NLG NLG NLG NLG
50,252 18,324 697 69,273
Split of signal cablenetwork - (18,324) (1,166) (19,490)
Net loss - - (30,206) (30,206)
--------------------------------------------------------------
Balance December 31, 1999
NLG NLG NLG NLG
50,252 - (30,675) 19,577
==============================================================
</TABLE>
The accompanying notes to combined financial statements are an integral part of
this statement.
F-33
<PAGE>
ENECO KABELTV & TELECOM B.V. GROUP
----------------------------------
COMBINED STATEMENT OF CASH FLOWS
--------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1999
------------------------------------
(Currency - thousands of Dutch Guilders)
1999
-----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss NLG (30,206)
-----------
Depreciation and amortization 60,975
Minority interest 64
-----------
61,039
-----------
Increase in inventory (207)
Increase in current assets other than
inventory, securities and cash (1,238)
Increase in short-term liabilities
other than loans and bank overdrafts 163,628
-----------
Change in working capital 162,183
-----------
Net cash provided by operating activities 193,016
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (122,970)
Disposals of property, plant and equipment 2,701
Investments in equity investees (6,752)
Disposition of investment 51
Issuance of subordinated loans (7,604)
Mediakabel capital contribution (5,507)
-----------
Net cash used in investing activities (140,081)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of loans and short-term bank liabilities (73,138)
-----------
Net cash used in financing activities (86,249)
-----------
Net decrease in cash NLG (20,203)
===========
The accompanying notes to combined financial statements are an integral part of
this statement.
F-34
<PAGE>
ENECO KABELTV & TELECOM B.V.
----------------------------
NOTES TO COMBINED FINANCIAL STATEMENTS
--------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1999
------------------------------------
(Currency - thousands of Dutch guilders)
1. Principles of combination, organization and nature of operations
----------------------------------------------------------------
(a) Activities
----------
Companies within the ENECO KabelTV & Telecom Group (the "Group" or the
"Company") include ENECO Kabeltv & Telecom B.V., ENECO K&T
Netwerkdiensten B.V., EnCalls B.V and Recaitel B.V. and are located in
the Netherlands. The Group companies are ultimately wholly owned
subsidiaries of N.V. ENECO ("the shareholder"), located in The
Netherlands. The financial statements of the Company are included in
the consolidated financial statements of N.V. ENECO, a Company located
in Rotterdam. Combined financial statements have been presented due to
related nature of the activities being performed as well as the common
control and management of the Group.
ENECO KabelTV & Telecom B.V., produces media and telecommunication
products and provides services to support these products at market.
ENECO K&T NETWERKDIENSTEN B.V., constructs, purchases, maintains and
operates cable networks and systems for cable television and
telecommunication and performs network services.
EnCalls B.V., provides telecommunication services including telephone
transactions, information services, voice-, fax- and response
services, account- and invoicing services and other related
activities.
Recaitel B.V. constructs and operates central antenna plants,
concluding of signal agreements and all activities that relate to the
core activities. At December 31, 1999 the Shareholder owned 81% of
Recaitel B.V.
Affiliated companies are other subsidiaries of N.V. ENECO.
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2. Accounting Policies
-------------------
(a) Property, plant and equipment
-----------------------------
Property, plant and equipment is stated at cost. Additions,
replacements, installation costs and major improvements are
capitalized, and costs for normal repair and maintenance of property,
plant and equipment are charged to expense as incurred. Constructed
assets incorporate internal direct labor expense and interest charges
incurred during the period of construction. Depreciation is calculated
using the straight-line method over the economic life of the asset,
taking into account the residual value. The economic lives of
property, plant and equipment at acquisition are as follows:
Glass fiber equipment 8 years
Glass fiber network 20 years
Other equipment 8 years
Other networks 15 years
Leased lines 10 years
(b) Goodwill
--------
The excess of investments in consolidated subsidiaries over the net
tangible asset value at acquisition is amortized on a straight-line
basis over 15 years.
(c) Recoverability of Tangible and Intangible Assets
------------------------------------------------
The Company evaluates the carrying value of all tangible and
intangible assets whenever events or circumstances indicate the
carrying value of assets may exceed their recoverable amounts. An
impairment loss is recognized when the estimated future cash flows
(undiscounted and without interest) expected to result from the use of
an asset are less than the carrying amount of the asset. Measurement
of an impairment loss is based on fair value of the asset computed
using discounted cash flows if the asset is expected to be held and
used. Measurement of an impairment loss for an asset held for sale
would be based onfair market value less estimated costs to sell.
(d) Investments in and advances to equity investees
-----------------------------------------------
For those investments in companies in which the Company's ownership
interest is 20% to 50%, the equity method of accounting is used. Under
this method, the investment, originally recorded at cost, is adjusted
to recognize the Company's proportionate share of net earnings or
losses of the affiliates, limited to the extent of the Company's
investment in and advances to the affiliates, including any debt
guarantees or other contractual funding commitments. The Company's
proportionate share of net earnings or losses of affiliates includes
the amortization of the excess of its cost over its proportionate
interest in each affiliate's net tangible assets or the excess of its
proportionate interest in each affiliate's net tangible assets in
excess of its cost.
The Company uses the the cost method of accounting when it owns less
than 20% of the underlying investee.
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<PAGE>
(e) Inventory
---------
Cables and equipment in stock are stated at the lower of cost or
market.
(f) Receivables
-----------
Receivables are stated at face value, less an allowance for possible
uncollectible accounts.
(h) Recognition of income
---------------------
Net sales are determined on the basis of the value (excluding taxes)
of services invoiced, less discounts granted to customers. Sales are
recognized as services are rendered. Cost of sales is recorded in the
same period as sales are recognized. Other revenues and expenses are
recorded in the period in which they originate.
(i) Use of estimates in the preparation of financial statements
-----------------------------------------------------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and 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.
3. Property, plant and equipment
-----------------------------
Property, plant and equipment is stated at cost.
1999
------------
Glass fiber equipment NLG 19,296
Glass fiber network 71,862
Other equipment 505,280
Other networks 151,494
Leased lines 24,201
------------
Total 772,133
Accumulated depreciation (329,747)
------------
Book value December 31, 1999 NLG 442,386
============
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4. Investments in and advances to equity investees
-----------------------------------------------
The Group has equity investments in various communications-related
companies. The Group determines the method of accounting for its
investments based on, among other things, its ownership percentage and its
ability to exercise significant influence over the investee's operations.
Investments in affiliates includes:
Equity investee Percentage of Method of
Ownership accounting
--------------------------------- --------------- --------------
Mediakabel BV 34.22% equity
Spirit interactieve diensten B.V. 40.00% equity
Edunet B.V. 11.20% cost
At December 31, 1999 NLG 13,066 of the investments in and advances to
equity investees was related to the Goups's investment in Mediakabel B.V.
("Mediakabel"). The investment in Mediakabel was included a NLG 11,674
subordinated loan. During 1999, the Group recognized losses of NLG 3,707
related to its investment in Mediakabel net of interest income of NLG 407
related to the subordinated loan. The Group expects Mediakabel to commence
operations in 2000. The shareholders of Mediakabel will fund the start-up
costs and operating losses of Mediakabel until the year 2002.
5. Debt and shareholder advances
-----------------------------
The Group has various debt outstanding with banks, the Shareholder and the
community of Rotterdam ("Acquisition debt") as well as advances from the
Shareholder. Interest rates on the bank and Shareholder advances range from
5%-9% as of December 31, 1999 and these balances mature through 2008.
The Acquisition Debt relates to the 1998 purchase of the Rotterdam cable
network exploitation rights for an aggregate undiscounted purchase price of
NLG 75,000, which is payable in four equal annual installments of NLG
18,750. At the time of purchase the discounted amount of the Acquisition
Debt was recorded. For the year ended December 31, 1999 the Group
recognized interest expense of NLG 4,167 related to the discount on the
Acquisition Debt.
In connection with the acquisition of the Group by UPC in March, 2000 (see
Note 10), all outstanding debt and shareholder advances were repaid.
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<PAGE>
6. Income Taxes
------------
Pursuant to Dutch corporate tax law, for the periods beginning after 1997,
results of the Group must be included in the consolidated income tax return
of the Shareholder. For 1997 and prior years the Shareholder was exempt
from income taxes.
For financial reporting purposes, the Shareholder allocates any income tax
provision or income tax benefit to the various Shareholder affiliates,
including the Group, on a stand-alone basis. For the year ended
December 31, 1999 an income tax benefit of NLG 375 was allocated to the
Group which was based on the ability to carry back the Group's 1999 losses
to 1998.
For purposes of the Shareholder's sale of the Group (see Note 10); Dutch
law prescribes that all tax attributes which originate within a group and
exist as of the beginning of the year in which a sale takes place, must
remain an obligation or benefit of the selling shareholder. Accordingly, no
tax assets or liabilities are reflected in the accompanying combined
balance sheet.
7. Commitments and contingencies
-----------------------------
(a) Purchase commitments
--------------------
The company has in its ordinary course of business activities entered
into purchase commitments for materials and services, which amount to
approximately NLG 522 at December 31, 1999.
Purchase commitments in connection with the acquisition of fixed
assets amount to approximately NLG 13,500 at December 31, 1999.
(b) Guarantees
----------
The guarantees provided by the company on behalf of third parties are
stated as follows:
- NLG 2,241 to Mediakabel B.V., as subordinated loan;
- NLG 6,147 to Mediakabel B.V., debts related to rental obligations;
- NLG 81,751 to Mediakabel B.V., as guarantee for HBO-filmkanaal.
(c) Lease commitments
-----------------
The group has operating lease commitments as follows:
Year ending December 31, 2000 NLG 705
Year ending December 31, 2001 633
Year ending December 31, 2002 579
Year ending December 31, 2003 369
-----------
Total NLG 2,286
===========
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(d) Taxes
-----
The Company has several disputes with the Dutch tax authorities
regarding transfer taxes. The company argues that the networks are
real estate and that the company has the economic ownership of the
networks. No liabilities are included in the financial statements for
these tax exposures, because the company expects no or no material
payments to the tax authorities.
(e) Contribution mediapolicy City of Rotterdam
------------------------------------------
ENECO K&T Netwerkdiensten B.V. has commitments until the year 2002
amounting to NLG 600 per year regarding the contribution to the
mediapolicy of the City of Rotterdam.
8. Segment information
-------------------
1999
------------
Sales distribution of CAI-signals NLG 123,050
Sales Telecom 27,422
Sales EnCalls B.V. 6,781
Other 7,536
------------
NLG 164,789
============
9. Related party transactions
---------------------------
In the normal course of business a substantial part of the products
and services are purchased from related companies.
Interest expense is comprised of the following:
1999
-----------
Interest expense to Shareholder NLG 24,142
Other Interest Expense 2,230
-----------
NLG 26,372
===========
10. Subsequent Event
----------------
On February 3, 2000, the Shareholder of the Group signed definitive
agreements for the Group to be acquired by United Pan-Europe Communications
N.V., for NLG 2,350,000 free of debt. This transaction closed in March,
2000.
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