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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File No. 000-25365
UNITED PAN-EUROPE COMMUNICATIONS N.V.
(Exact name of Registrant as specified in its charter)
The Netherlands 98-0191997
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Fred. Roeskestraat 123, P.O. Box 74763
1070 BT Amsterdam, The Netherlands 1070 BT
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (31) 20-778-9840
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
American Depository Shares each representing one ordinary share
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes No X
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
---
The aggregate market value of the voting stock held by nonaffiliates of
the Registrant, computed by reference to the last sales price of such stock, as
of the close of trading on March 26, 1999 was $1,764.6 billion.
The number of shares outstanding of the Registrant's common stock as of
March 26, 1999 was:
129,246,223 ordinary shares, including
shares represented by American Depository Receipts
UNITED PAN-EUROPE COMMUNICATIONS N.V.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998
Table of Contents
-----------------
Page
Number
------
PART I
Item 1. Business....................................................... 1
Item 2. Properties..................................................... 36
Item 3. Legal Proceedings.............................................. 37
Item 4. Submission of Matters to a Vote of Security Holders............ 38
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................ 39
Item 6. Selected Financial Data........................................ 40
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 42
Item 7A. Quantitative and Qualitative Disclosure About Market Risk...... 63
Item 8. Financial Statements and Supplementary Data.................... 66
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................... 105
PART III
Item 10. Directors and Executive Officers of the Registrant............. 106
Item 11. Executive Compensation......................................... 110
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................................. 114
Item 13. Certain Relationships and Related Transactions................. 115
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K....................................................... 119
PART I
Item 1. Business
--------
(a) General Development of Business
- --- -------------------------------
United Pan-Europe Communications N.V. owns and operates cable-based
communications networks in ten countries in Europe and in Israel. We provide
cable television services. Some of our systems also provide telephone and
Internet access services. Our systems together have the largest number of
subscribers of any group of broadband communications networks operated across
Europe. We have systems in The Netherlands, Austria, Norway, Belgium and France.
These systems are strategically located in the capital cities of Amsterdam,
Vienna, Oslo, Brussels and suburban Paris. We also have systems in Israel, Malta
and Eastern Europe. We are a subsidiary of United International Holdings, Inc.,
a leading international provider of video, telephone and data services.
We operated from July 1995 to December 1997 as a 50/50 joint venture between
UIH and Philips. At the formation of the joint venture in July 1995, Philips
contributed to us, among other things, its majority interests in cable
television systems in Austria and Belgium, and its minority interests in cable
television systems in France, called Citecable, Germany and The Netherlands,
called KTE. UIH contributed to us its minority interests in cable television
systems in Hungary, Ireland, Israel, Malta, Norway, Spain and Sweden, and its
majority interest in the Czech Republic and Portugese systems, and $78.2 million
in cash, including accrued interest. UIH also issued to Philips $50.0 million of
UIH common stock. In addition, Philips received convertible notes of UPC
totalling $133.6 million to make up the difference in values between the assets
contributed by UIH and the assets contributed by Philips.
On December 11, 1997, we and UIH acquired the 50% of our ordinary shares held
by Philips. As part of this acquisition, we purchased 3.17 million shares of
Class A Common Stock of UIH held by Philips and we and UIH purchased all of our
convertible notes back from Philips. Following this acquisition and until our
initial public offering in February 1999, we became essentially a wholly-owned
subsidiary of UIH, other than approximately 7.7% of our stock held by a
foundation to support our stock option plans to employees.
Since formation, we have developed largely through acquisitions. Our major
acquisitions have included:
. a 50% interest in the A2000 system in the City of Amsterdam and four
surrounding municipalities in July 1995;
. the remaining 96.2% of the KTE system located in Eindhoven, The
Netherlands, in September 1995;
. increasing our interest in Norkabel (Norway) from 8.3% to 100%, Kabelkom
(Hungary) from 3.9% to effectively 50% and the Swedish system from 2.1% to
25.9% in September 1996;
. all of the Janco cable system in Oslo in two parts in January 1997 and
November 1998;
. 100% of the Combivisie cable television systems in the region surrounding
our KTE system in The Netherlands, effective January 1, 1998;
. various interests in Hungarian cable television systems in June 1998,
resulting in a 79.25% interest in Telekabel Hungary, Hungary's largest
cable television operator;
. 100% of the Telekabel Beheer cable television system in the Netherlands in
two parts in August 1998 and February 1999;
. an additional 23.3% and 25.0% interests in our Israeli and Maltese
systems; and
. interests in various programming companies.
We have also sold our unconsolidated interests in certain cable television
systems in France (Citecable), Germany, Spain, Sweden and Ireland, and our
consolidated interest in Portugal.
1
We believe the European telecommunications market offers significant growth
opportunities. Most European Union member countries and Norway had opened their
telephone industries to competition by January 1, 1998. This liberalization
means that new providers can offer telephone and other telecommunications
services. Due to this change in regulation and technological advances, a single
cable link to the home can deliver video, telephone and Internet/data services.
We can now offer all three services as an integrated package in the markets
where we have upgraded our network. We have already begun to do so in some
markets.
We plan to offer local telephone services, called Priority Telecom in our
Austrian, Dutch, French and Norwegian systems. We use the name Nedpoint for
these services in A2000, the Amsterdam system. A2000 has offered cable telephone
services since July 1997. In November 1998, we launched cable telephone service
on a trial basis in Vienna and in March 1999 in suburban Paris and in Oslo.
We have launched in Austria, Belgium, The Netherlands and Norway a service
giving high-speed access to the Internet through cable modems. Cable modem
technology can provide Internet access at speeds up to 100 times faster than
traditional modems using telephone lines.
Since 1994, we have been upgrading our Western European cable television
infrastructure. When we upgrade, we replace parts of the coaxial cable with
fiber optic lines and upgrade the remaining coaxial cable so that it can send
signals both to and from the customer's home. By December 31, 1998, the upgraded
parts of our networks in Austria, Belgium, The Netherlands and France passed
about 60% of the 2.6 million homes passed by those networks.
(b) Financial Information About Industry Segments
We own and operate cable television, telephone, Internet/data services and
programming operations in various foreign countries. For financial information
concerning such business segments, see the footnotes to our financial statements
included in Item 8 "Financial Statements and Supplementary Data."
(c) Narrative Description of Business
We own and operate cable-based communications networks in ten countries in
Europe and in Israel. We provide cable television services. Some of our systems
also provide telephone and Internet access services. Today, our systems, taken
together, have the largest number of subscribers of any group of broadband
communications networks operated across Europe.
The diagram below summarizes our operations and equity ownership percentages
in our operating systems on December 31, 1998. In February 1999, we bought from
UIH 33.5% of IPS, a group of programming companies focusing on the Spanish- and
Portuguese-speaking markets. We also purchased the 49% that we did not own of
our Dutch holding company, United Telekabel Holding, in February 1999. We
recently agreed to buy 95.63% of the 156,000 subscriber, Slovakian system, based
in Bratislava and surrounding cities, and expect to close this purchase by the
end of the second quarter of 1999. We also recently agreed to buy the French
cable assets from Time Warner. These French systems are located in suburban
Paris and Lyon, and in Limoges. The number of homes passed and subscribers is
210,000 and 64,000 respectively. We expect to close this purchase in the third
quarter of 1999.
2
- ---------------------------------------------------------------
United Pan-Europe Communications N.V.
- ---------------------------------------------------------------
Operating Systems Business Lines
Consolidated Unconsolidated
Systems Systems
Austria The Netherlands 51% Video Distribution and
Telekabel Group 95% United Telekabel Programming Services
Holding
Belgium 100% Telephony Services
TVD A2000 50% Priority Telecom
Norway 100% CNBH Telekabel 100% Internet/Data Services
Janco Multicom Beheer chello broadband
France 99.6% Israel Tevel 46.6%
Mediareseaux
Malta Melita 50%
Cable
Eastern Europe
Hungary: Telekabel - 79.25%
Monor - 44.75%
Czech Republic - 100%
Romania - 51-100%
Slovak Republic - 75-100%
Summary Operating and Financial Data
In the tables below, we show the percentage we own of our operating systems,
as well as operating and financial information for those systems for each of the
last two years. When we refer to information as ''UPC equity in'' we mean that
we have multiplied the statistic for each operating system by our percentage
ownership of that system. Some of our percentage ownerships of operating systems
have changed since the date of this table. In February 1999 we increased our
ownership of UTH to 100% and A2000 to 50%.
3
Summary Operating Data 1998
The operating data set forth below reflects the aggregate statistics of the
operating systems in which the Company has an ownership interest.
As at December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Homes in Two way
Service Homes Homes Basic Basic
Area Passed Passed Subscribers Penetration
- -----------------------------------------------------------------------------------------------------------------------------------
Multi-channel TV:
The Netherlands (A2000)... 578,500 572,936 386,109 529,067 92.3%
The Netherlands (UTH) (1). 943,027 914,737 484,133 867,800 94.9%
Austria................... 1,073,297 900,350 516,700 454,957 50.5%
Hungary (Telekabel
Hungary) (2)............. 901,500 510,622 - 442,567 86.7%
Israel.................... 595,000 575,976 363,819 402,355 69.9%
Norway.................... 529,924 463,235 15,803 323,387 69.8%
Belgium................... 133,000 133,000 91,735 127,398 95.8%
Malta..................... 179,000 162,996 - 70,363 43.2%
Romania................... 180,000 98,174 - 61,999 63.2%
Czech Republic............ 229,531 151,716 - 54,153 35.7%
Hungary (Monor) (3)....... 85,000 68,339 - 30,623 44.8%
France.................... 150,O00 74,623 74,623 29,107 39.0%
Slovak Republic........... 67,959 37,641 - 21,044 55.9%
--------- --------- --------- ---------
Total................ 5,645,738 4,664,345 1,932,922 3,414,820
--------- --------- --------- ---------
As at December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
UPC UPC UPC
UPC Equity in Equity in Equity in
Paid-in Homes in Homes Basic
Ownership Service Area Passed Subscribers
- -----------------------------------------------------------------------------------------------------------------------------------
Multi-channel TV:
The Netherlands (A2000)... 25.5% 147,518 146,099 134,912
The Netherlands (UTH) (1). 51.0% 480,944 466,516 442,578
Austria................... 95.0% 1,019,632 855,333 432,209
Hungary (Telekabel
Hungary) (2)............. 79.3% 714,439 404,668 350,734
Israel.................... 46.6% 277,270 268,405 187,497
Norway.................... 100.0% 529,924 463,235 323,387
Belgium................... 100.0% 133,000 133,000 127,398
Malta..................... 50.0% 89,500 81,498 35,182
Romania................... 51.0-100.0% 165,300 84,209 51,282
Czech Republic............ 100.0% 229,531 151,716 54,153
Hungary (Monor) (3)....... 44.8% 38,080 30,616 13,719
France.................... 99.6% 149,400 74,325 28,991
Slovak Republic........... 75.0-100% 62,499 33,380 18,209
--------- --------- ---------
Total................ 4,037,037 3,193,000 2,200,251
--------- --------- ---------
4
Summary Operating Data 1998 (continued)
As at December 31, 1998
--------------------------------------------------------------------
Subscribers Lines Served
---------------------------- -----------------------------
Residential Businesses Residential Businesses
----------- ---------- ----------- ----------
Telephony
The Netherlands (A2000)
(4)...................... 18,111 3 19,850 830
The Netherlands (UTH) (1)
(5)...................... 20,500 72 20,500 -
Hungary (Monor) (3)....... - - 69,244 -
----------- -------- ----------- --------
Total................... 38,611 75 109,594 830
=========== ======== =========== ========
Dataservices
The Netherlands (A2000)... 8,128 253 n/a n/a
The Netherlands (UTH) (1). 3,379 - n/a n/a
Austria................... 9,054 603 n/a n/a
Norway.................... 768 - n/a n/a
Belgium................... 1,869 284 n/a n/a
----------- -------- ----------- --------
Total................... 23,198 1,140 n/a n/a
----------- -------- ----------- --------
As at December 31, 1998
-----------------------------------------------------------------------
UPC UPC UPC UPC
UPC Equity in Equity in Equity in Equity in
Paid-in Residential Business Residential Business Lines
Ownership Subscribers Subscribers Lines Served Served
--------- ----------- ----------- ------------ --------------
Telephony
The Netherlands (A2000)
(4)...................... 25.5% 4,618 1 5,062 212
The Netherlands (UTH) (1)
(5)...................... 51.0% 10,455 37 10,455 -
Hungary (Monor) (3)....... 44.8% - - 30,987 -
----------- ----------- ------------ --------------
Total................... 15,073 38 46,504 212
=========== =========== ============ ==============
Dataservices
The Netherlands (A2000)... 25.5% 2,073 65 n/a n/a
The Netherlands (UTH) (1). 51.0% 1,723 - n/a n/a
Austria................... 95.0% 8,601 573 n/a n/a
Norway.................... 100.0% 768 - n/a n/a
Belgium................... 100.0% 1,869 284 n/a n/a
----------- ----------- ------------ --------------
Total................... 15,034 922 n/a n/a
----------- ----------- ------------ --------------
5
Summary Financial Data 1998 (6)
At
For the twelve months period ending December, 31, 1998 December
------------------------------------------------------------------------------ 31,
Cash flows from 1998
Net ---------------------------- -------
Operating Net Adjusted Capital Oper- Invest- Long-
Income/ Income/ EBITDA Expend- ating ing Financing Term
Revenue (loss) (loss) (7) itures Activies Activies Activities Debt
--------- --------- ------- -------- ------- -------- -------- ---------- -------
(Dutch guilders, in thousands)
The Netherlands (A2000)... 123,622 (39,980) (64,890) 32,022 114,308 55,52 110,574 48,550 467,430
The Netherlands (UTH) (1). 99,122 (9,636) (49,374) 29,854 121,384 (1,853) 141,092 130,326 232,727
Austria................... 177,151 1,523 (9,322) 81,012 82,501 73,410 62,223 (28,924) 213,503
Hungary (Telekabel
Hungary) (2)............. 27,706 1,650 132 9,989 13,386 13,912 19,495 9,919 29,381
Israel.................... 304,533 66,715 9,416 168,238 61,107 87,595 583,660 497,953 531,427
Norway.................... 92,671 (32,291) (67,124) 33,048 51,193 9,353 51,163 21,711 134,515(8)
Belgium................... 36,782 (8,817) (15,276) 13,263 19,759 29,996 30,487 (56) -
Malta..................... 30,010 5,862 1,868 11,337 21,387 14,705 21,387 8,592 46,223
Romania................... 4,161 1,454 609 1,905 1,153 423 1,289 1,076 -
Czech Republic............ 8,909 (10,668) (6,871) (1,887) 1,041 (5,469) 1,384 7,307 -
Hungary (Monor)........... 35,647 14,659 3,939 22,551 9,892 17,121 13,117 5,350 78,540
France.................... 8,058 9,620 (13,163) (5,077) 52,394 3,377 52,486 50,245 40,334(9)
Slovak Republic........... 1,652 (3,068) (3,758) (1,736) 5,663 (709) 10,689 11,567 -
6
Summary Operating Data 1997
The operating data set forth below reflects the aggregate statistics of the
operating systems in which the Company has an ownership interest.
As at December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Homes in Two way
Service Homes Homes Basic Basic
Area Passed Passed Subscribers Penetration
- -----------------------------------------------------------------------------------------------------------------------------------
Multi-channel TV:
The Netherlands (A2000)... 572,000 565,740 125,180 518,160 91.6%
The Netherlands (KTE)..... 98,393 95,442 90,000 90,671 95.0%
Austria................... 1,064,000 890,305 339,900 435,859 49.0%
Hungary (Kabelkom)........ 300,000 290,690 - 266,775 91.8%
Israel.................... 360,000 350,392 350,392 241,874 69.0%
Norway.................... 529,924 457,551 5,171 319,654 69.9%
Ireland (Princes Holdings) 355,000 350,989 - 136,160 38.8%
Belgium................... 133,000 133,000 27,600 127,529 95.9%
Malta..................... 179,000 153,917 - 58,033 37.7%
Romania................... 150,000 69,620 - 40,188 57.7%
Czech Republic............ 271,100 145,650 - 51,571 35.4%
France.................... 86,000 28,267 28,267 6,758 23.9%
Slovak Republic........... 36,239 22,193 - 18,476 83.3%
--------- --------- --------- ---------
Total................ 4,134,656 3,553,756 966,510 2,311,708
--------- --------- --------- ---------
As at December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
UPC UPC UPC
UPC Equity in Equity in Equity in
Paid-in Homes in Homes Basic
Ownership Service Area Passed Subscribers
- -----------------------------------------------------------------------------------------------------------------------------------
Multi-channel TV:
The Netherlands (A2000)... 50.0% 286,000 282,870 259,080
The Netherlands (KTE)..... 100.0% 98,393 95,442 90,671
Austria................... 95.0% 1,010,800 845,790 414,066
Hungary (Kabelkom)........ 50.0% 150,000 145,345 133,388
Israel.................... 23.3% 83,880 81,641 56,357
Norway.................... 87.3% 462,624 399,442 279,058
Ireland (Princes Holdings) 20.0% 71,000 70,198 27,232
Belgium................... 100.0% 133,000 133,000 127,529
Malta..................... 25.0% 44,750 38,479 14,508
Romania................... 90.0-100.0% 143,000 67,498 39,428
Czech Republic............ 100.0% 271,100 145,650 51,571
France.................... 99.6% 85,656 28,154 6,731
Slovak Republic........... 75.0-100% 30,779 18,030 14,987
--------- --------- ---------
Total................ 2,870,982 2,351,539 1,514,606
--------- --------- ---------
7
Summary Operating Data 1997 (continued)
As at December 31, 1997
-------------------------------------------------------------
Subscribers Lines served UPC
----------------------- ----------------------- Paid-in
Residential Businesses Residential Businesses Ownership
----------- ---------- ----------- ---------- ---------
Telephony
The Netherlands (A2000)............ 3,222 33 3,473 56 50.0%
----------- ---------- ----------- ----------
Total............................ 3,222 33 3,473 56
=========== ========== =========== ==========
Data Services
The Netherlands (A2000).......... 450 -- n/a n/a 50.0%
Austria.......................... 1,177 21 n/a n/a 95.0%
Norway........................... 129 4 n/a n/a 87.3%
Belgium.......................... 214 42 n/a n/a 100.0%
----------- ---------- ----------- ----------
Total.......................... 1,970 67 n/a n/a
----------- ---------- ----------- ----------
As at December 31, 1997
-------------------------------------------------------------
UPC UPC UPC UPC
Equity in Equity in Equity in Equity in
Residential Business Residential Business Lines
Subscribers Subscribers Lines Served Served
----------- ----------- ------------ -------------------
Telephony
The Netherlands (A2000).......... 1,611 17 1,737 28
----------- ----------- ------------ -------------------
Total.......................... 1,611 17 1,737 28
=========== =========== ============ ===================
Data Services
The Netherlands (A2000).......... 225 -- n/a n/a
Austria.......................... 1,118 20 n/a n/a
Norway........................... 113 3 n/a n/a
Belgium.......................... 214 42 n/a n/a
----------- ----------- ------------ -------------------
Total.......................... 1,670 65 n/a n/a
----------- ----------- ------------ -------------------
8
Summary Financial Data 1997
For the twelve months period ending December 31, 1997
---------------------------------------------------------------
Net Net
Operating Income/ Adjusted Capital
Revenue Income/(loss) (loss) EDITDA(7) Expenditures
------- ------------- ------- --------- ------------
(Dutch guilders, in thousands)
The Netherlands (A2000)..................... 101,450 (17,083) (24,008) 33,763 120,242
The Netherlands (KTE)....................... 20,669 2,156 (1,549) 12,719 7,953
Austria..................................... 162,783 16,928 (10,718) 80,508 59,913
Hungary (Kabeikom).......................... 32,717 11,660 2,806 14,857 11,213
Israel...................................... 215,031 56,256 32,217 117,738 33,988
Norway...................................... 91,529 (27,885) (74,649) 37,099 20,647
Ireland (Princes Holdings).................. 70,229 7,646 (4,867) 25,527 18,903
Belgium..................................... 38,738 (3,869) (11,465) 14,596 11,584
Malta....................................... 23,099 4,363 358 9,755 6,364
Romania..................................... 2,192 1,049 595 1,359 857
Czech Republic.............................. 7,492 (13,116) (21,591) (6,730) 4,214
France...................................... 2,526 (5,933) (7,125) (4,472) 22,809
Slovak Republic............................. 1,547 (1,826) (1,366) (1,011) 2,799
For the twelve months At December 31,
peiod ending December 31, 1997 1997
-------------------------------------------------
Cash flows from
---------------------------------- Long-
Operating Investing Financing Term
Activities Activities Activities Debt
---------- ---------- ---------- ----------
(Dutch guilders, in thousands)
The Netherlands (A2000)..................... 33,304 (119,824) 60,000 426,000
The Netherlands (KTE)....................... 4,207 (8,441) 3,505 81,769
Austria..................................... 79,133 (83,070) 19,850 245,000
Hungary (Kabeikom).......................... 10,973 (11,213) (854) -
Israel...................................... 78,364 (35,276) (43,091) 13,270
Norway...................................... 12,083 (20,830) 30,703 148,948
Ireland (Princes Holdings).................. 15,321 18,894 2,960 139,243
Belgium..................................... (6,127) 26,473 (22,080) -
Malta....................................... (3,449) (6,275) 4,431 38,325
Romania..................................... 1,232 (1,012) (192) -
Czech Republic.............................. (13,608) (2,293) 14,563 -
France...................................... (4,171) 23,049 25,596 -
Slovak Republic............................. (2,594) (3,863) 6,396 -
9
(1) UTH was founded in August 1998. The 1998 financial information in the
tables covers the period from inception through December 31, 1998.
(2) Telekabel Hungary was founded on June 30, 1998. The 1998 financial
information in the tables covers the period from inception through December
31, 1998.
(3) Our Monor service offers traditional telephone service.
(4) A2000 offers cable telephony service.
(5) UTH's 80% subsidiary Uniport offers a carrier select telephony service.
(6) Financial information has been prepared in accordance with Dutch GAAP.
(7) "Adjusted EBITDA" represents earnings before net interest expense, income
tax expense, depreciation, amortisation, stock based compensation charges,
minority interest, share in results of affiliated companies (net), currency
exchange gains (losses) and other non-operating income (expense) items.
Industry analysts generally consider Adjusted EBITDA to be a helpful way to
measure the performance of cable television operations and communications
companies such as us. We believe Adjusted EBITDA helps investors to assess
the cash flow from our operations from period to period and thus to value
our business. Adjusted EBITDA should not, however, be considered a
replacement for net income, cash flows or for any other measure of
performance or liquidity under generally accepted accounting principles, or
as an indicator of a company's operating performance. We are not entirely
free to use the cash represented by our Adjusted EBITDA as we please.
Several of our consolidated operating companies are restricted by the terms
of their debt arrangements. Each company has its own operating expenses and
capital expenditure requirements, which can limit our use of cash. Our
presentation of Adjusted EBITDA may not be comparable to statistics with a
similar name reported by other companies. Not all companies and analysts
calculate EBITDA in the same manner.
(8) Excludes intercompany debt amounting to NLG234,044.
(9) Excludes intercompany debt amounting to NLG45,100.
10
UPC Video Services: Video Distribution and Programming
Video Distribution Overview
We own and operate established cable television systems and are constructing
new systems. At December 31, 1998, our operating systems had approximately 3.4
million subscribers to their basic tier video services. Video distribution
services accounted for approximately 92.7 % of our consolidated revenue in 1998.
An average of 73.2% of the homes passed by our systems subscribe to our basic
tier video services. We offer our subscribers some of the most advanced analog
video services available today and a large choice of FM radio programs. In
addition, because many of our operations are two-way capable, we have been able
to add more services. In many systems, for example, we have introduced impulse
pay-per-view services, which enable subscribers to our expanded basic tier to
select and purchase programming services, such as movies and special events,
directly by remote control.
Video Programming Overview
Popular programming is another key factor for increasing our video services
revenue. We believe it will also be a potential source of additional revenue
from sales to other cable television operators and satellite companies in
Europe. We have enhanced our existing, and are continuing to develop and acquire
new ownership interests in, programming services.
We are involved in several country-specific programming ventures including
creating channels for Israel and Malta. Together, these programming ventures
have developed channels in key genres including sports, children, documentary
and movies, which are subtitled or dubbed in the local language.
We recently acquired UIH's 75% interest in Tara and its 33.5% interest in
IPS. Tara provides Irish general entertainment programming to the U.K. markets.
IPS produces a movie channel, a documentary channel, a children's channel and a
music channel for the Spanish and Portuguese markets. As of December 31, 1998,
Tara and IPS sold programming content to non-UPC cable operators serving an
aggregate of approximately 1.7 million subscribers.
UPC Telephone Services: Priority Telecom
Overview
We believe that our existing customer base and upgraded network give us a
unique opportunity to provide telephone service in Europe. We plan to offer
local telephone services, called Priority Telecom in our Austrian, Dutch, French
and Norwegian systems. We call our local telephone services Nedpoint in the
A2000 systems. We also plan to develop national and international long distance
voice and data services. Our operating companies are licensed to provide
telephone services in Austria, France, Hungary, The Netherlands and Norway.
A2000 began offering cable telephone services in July 1997 on a trial basis
in Purmerend, a town outside Amsterdam, and since then has begun to offer these
services to its customers in Hilversum, Zaanstad and part of Amsterdam. In
November 1998, we launched Priority Telecom's cable telephone service on a trial
basis in Vienna and in March 1999 in our Mediareseaux system in suburban Paris
and in Oslo, Norway.
We are negotiating to connect our local fiber networks, primarily through
interconnections and capacity leases with other new telecommunications service
providers, to provide long-distance telephone services across several European
markets.
Interconnect Agreements
A2000 and KPN have entered into an interconnect agreement covering all of
A2000's homes and businesses passed that will be capable of receiving telephone
service. Similarly, each of Telekabel Wien, Janco Multicom, UTH and Mediareseaux
has completed an interconnect agreement with the national incumbent
telecommunications
11
service provider covering all of their homes and businesses passed by cable in
their networks. Even with interconnect arrangements secured, we may still
experience difficulty operating under them. In our A2000 system, for example,
quantity at the interconnection have lowered the quality of A2000's telephone
service. In Austria, while Telekabel Wien secured the interconnect arrangement
with the support of the Austrian telecommunications regulator, the Austrian
incumbent telecommunication operator is challenging the arrangement in the
Austrian courts.
Roll-Out and Implementation Schedule
Cable telephone service in The Netherlands to areas outside of the A2000
systems will be provided by UTH. The rollout for these areas is scheduled to
begin during the second half of 1999. Priority Telecom launched its service on
a trial basis in Vienna in November 1998, and in suburban Paris and Oslo, in
March 1999. It intends to launch service to business and residential areas in
Vienna passing approximately 100,000 homes in early 1999. Priority Telecom's
service is scheduled to be rolled out in Vienna to an additional 500,000 homes
during the first half of 1999, with plans to offer the service to the balance of
the approximately 83,000 remaining homes passed in Vienna capable of receiving
the service by the end of 1999.
Traditional Telephone System
In addition to our cable telephone operations, our recently acquired Monor
system has offered traditional telephone services since December 1994 and as of
December 31, 1998, had approximately 69,240 traditional telephone lines. UTH's
80% subsidiary Uniport offers a carrier select telephone service and had
approximately 20,500 subscribers at December 31, 1998.
Competition
Priority Telecom will face competition in its markets from incumbent
telecommunications operators and other competitive operators that have
substantially more experience in providing, and significantly greater resources
devoted to, telephone services. In addition, we will depend on interconnect
arrangements provided by incumbent telecommunications operators. We believe,
however, that our strategy for Priority Telecom will allow us to compete
effectively with incumbent telecommunications operators and any other local loop
providers who subsequently enter the market.
UPC Internet/Data Services: High Speed Access and chello broadband
Overview
We have launched a cable modem-based, high speed Internet access service in
Austria, Belgium, The Netherlands and Norway. The launch of chello broadband in
our upgraded Western European markets is scheduled to begin during the first
quarter of 1999. As of December 31, 1998, we had approximately 23,200
residential and more than 1,140 business cable modem Internet access
subscribers.
Internet Access Experience To Date
We have launched a residential and business cable modem-based, high-speed
Internet access service in Austria, Belgium, The Netherlands and Norway. We have
marketed our current Internet service as a high speed Internet access product
excluding many of the value-added services that chello broadband expects to
provide. Marketing efforts for our Internet access service have been limited to
date but we intend to implement a more substantial brand marketing program from
the launch of chello broadband's service.
Roll-Out and Implementation Schedule
The launch of chello broadband in our upgraded Western European markets is
scheduled to begin during the first quarter of 1999.
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Competition
The Internet services business in Europe is highly competitive. We believe,
however, that our strategy for chello broadband, which encompasses competitive
pricing and superior service combined with high speed access and compelling
content, will mitigate the effects of competition from other Internet service
providers in its markets. We currently compete with traditional dial-up Internet
service providers and other providers (including many incumbent
telecommunications service providers) and expect that chello broadband will face
competition from other broadband cable modem service providers, such as @Home
and Roadrunner as they move to the European market. In the future, we expect
competition from providers using other broadband technologies.
Operating Companies
We have operations in 10 countries in Europe and in Israel. While they all
offer a basic video service, their other services vary. We are also currently
upgrading the network in some countries but not in others.
Austria: Telekabel Group
Overview. We own 95% of the Telekabel Group, which provides communications
services to the Austrian cities of Vienna, Klagenfurt, Graz, Baden and Wiener
Neustadt and is the largest video distribution system in Austria with over 40%
of the market. Telekabel Group's largest subsidiary, Telekabel Wien, which
serves Vienna and represents approximately 87% of Telekabel Group's total
subscribers, owns and operates one of the larger clusters of cable systems in
the world in terms of subscriber numbers served from a single headend.
We are expanding Telekabel Group's service offerings as its network is
upgraded to full two-way capability. The upgraded network enabled Telekabel
Group to launch an expanded basic tier, impulse pay-per-view services and
Internet/data services in 1997. Telekabel Group was the first Austrian cable
television company to offer tiered and pay-per-view services when it launched
such services in Vienna.
Telekabel Group launched an Internet access service in September 1997 and had
approximately 9,050 Internet access subscribers as of December 31, 1998, with
current average additions of 1,300 customers per month. It plans to introduce
the chello broadband service in 1999. In addition, Telekabel Group launched
Priority Telecom's cable telephone service in Vienna on a trial basis in
November 1998. Following intervention of regulatory authorities on behalf of
Telekabel Group, Telekabel Group entered into an interconnect arrangement with
PTA, the incumbent telecommunications service operator, in November 1998.
Network. Telekabel Group owns the complete cable television infrastructure
for each of its systems from the headend to the home. In early 1992, Telekabel
Wien initiated the rebuild and upgrade of its existing cable network in Vienna.
The upgrade, which is expected to be 75% complete by the end of 1999, was
approximately 57% complete and passed approximately 516,700 homes as of December
31, 1998.
Programming. Telekabel Group offers basic subscribers 32 channels of cable
programming, including substantially all of the broadcast channels from Austria
and Germany, as well as CNN, Super Channel, MTV, an informational channel, Tips
and Hits, Telekino Heute and Vienna cable text. Telekabel Group launched an
expanded basic tier in May 1997 by providing subscribers, whose homes are passed
by the upgraded network, an advanced analog decoder box, the cost of which is
provided for in the monthly rate. The expanded basic tier currently provides
seven channels of additional programming. In conjunction with the launch of
this tier, Telekabel Group launched an impulse pay-per-view service with up to
ten channels of programming.
Competition. Telekabel Group's cable systems compete with a direct to home
satellite service that is available throughout Austria. Currently, direct to
home satellite service penetration of the Austrian market is approximately 35%
and is concentrated primarily in the rural areas of the country. There is less
competition from direct to home satellite service in Vienna where we estimate
that the penetration is approximately 8%. Competition in the Internet/data
business in Austria is intensifying. PTA, the national incumbent
telecommunications service provider,
13
is promoting its high speed lines and a number of other companies recently have
entered, or are expected to enter, the market. Upon launch of its telephone
service in Vienna, Telekabel Group began competing with PTA. New facilities-
based competitors in Telekabel Group's operating areas include United Telekom
Austria, Tele.ring and Citykom. In addition, there are three wireless telephone
providers in Telekabel Group's operating areas.
Belgium: Radio Public N.V./S.A.
Overview/Growth Strategy. TVD, our 100% owned subsidiary, provides cable
television and communications services in selected areas of Brussels and nearby
Leuven in Belgium. We estimate that there are currently approximately 133,000
homes under license in TVD's franchise areas. TVD, which currently has 96%
penetration, plans to grow through the introduction of new services that
currently are not subject to the price regulations applicable to basic cable
services.
TVD introduced expanded basic tier in October 1996 and an Internet access
service in September 1997. As of December 31, 1998, TVD had approximately 4,900
expanded basic subscribers and 1,869 residential and 284 business Internet
access subscribers. TVD plans to launch the chello broadband service in April
1999. As TVD upgrades additional portions of its network to full two-way
capability, it plans to introduce impulse pay-per-view in the second quarter of
1999. We are exploring the possibility of providing cable telephone services.
Network. TVD owns the complete cable television infrastructure for each of
its systems from the headend to the home, with the exception of Etterbeek, with
15,000 subscribers, where TVD has an agreement with the municipality to operate
the network until at least 2016. In late 1996, TVD began upgrading its network
through fiber optic overlay of its trunk lines and replacement of all
amplifiers. TVD's upgraded networks passed approximately 91,735 homes, or 69%
of its total network as of December 31, 1998. TVD expects to complete this
upgrade by mid-1999.
Programming. TVD offers in Brussels a basic tier consisting of 32 channels,
17 expanded basic programs in six tiers, 20 FM radio channels and 20 premium
digital radio channels. Its system in Leuven offers a basic tier consisting of
37 channels, an expanded basic tier with six channels, 20 FM radio channels and
20 premium digital radio channels. TVD also distributes five premium channels,
three in Brussels and two in Leuven, which are provided by Canal+.
Competition. TVD has approximately 96% penetration in its market. TVD faces
competition, however, from one other cable television provider, Iverlek, which
was granted a license for the provision of cable television services in Leuven
and is constructing a cable network. As of December 31, 1998, TVD had
approximately 27,480 subscribers in Leuven. To date, TVD has experienced only
limited competition from direct to home satellite service providers. In its
Internet access business, TVD competes with traditional dial-up Internet service
providers. Also, we understand that in Leuven, Telenet will offer a broadband
access and content service using Iverlek's new cable network.
The Netherlands: United Telekabel Holding (UTH)
Our Dutch operations are held through UTH, an unconsolidated subsidiary, of
which we hold 51% as of December 31, 1998. In February 1999, we acquired the
remaining 49% of UTH. UTH holds three principal operating companies: CNBH,
which holds the combined KTE and Combivisie systems, Telekabel Beheer, both of
which it wholly owns, and A2000, of which it owns 50%. MediaOne owns the other
50% of A2000. UTH does not consolidate the results of A2000. UTH owns and
operates systems in the regions of Brabant, Flevoland, Friesland and Gelderland.
Because of the large number of current subscribers located in four large
clusters in The Netherlands, UTH is constructing a fiber backbone to
interconnect its region-wide networks. In September 1998, UTH acquired 80% of
Uniport, a carrier select telephone service with approximately 20,500
subscribers at December 31, 1998.
Overview. Both KTE and Combivisie introduced an expanded basic tier in
December 1996. KTE and Combivisie were combined into CNBH in 1998, which then
launched impulse pay-per-view services in June 1998.
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UTH intends to launch chello broadband's Internet/data services in the CNBH
systems in early 1999. In addition, UTH plans to introduce the initial phase of
cable telephone services in the NV Telekabel systems in mid-1999. Telekabel
Beheer introduced an Internet access service in November 1997 in parts of its
networks and also delivers a business telephone service, including leased line
management, on-site services and telephone equipment, to its former 100%
shareholder, NUON, and several other companies. As part of the purchase
agreement with NUON for the remaining 49% of UTH, UTH and NUON have agreed to
enter into a preferred supplier arrangement through December 31, 2007, whereby
UTH will be the preferred supplier for NUON and its subsidiaries for
telecommunications and Internet services and NUON will be the preferred supplier
to UTH for energy and energy-related services.
In August, 1998, UTH acquired from Nutsbedrijf Regio Eindhoven a 16,700
subscriber cable television system in the Eindhoven region. This acquisition
enabled us to increase the cluster of operations in and around the Eindhoven
area.
In January 1999, UTH acquired the networks of Geldrop and St. Oedenrode and
sold the network of Schijndel to Palet Kabelcom. The main reason was a further
improvement of operations through clustering.
Network. Each of UTH's systems owns or has the right to use the complete
cable television infrastructure from the headend to the home. In 1997,
Combivisie and Telekabel Beheer began upgrading their networks. The upgrade is
expected to be 89% completed by year-end 1999. As of December 31, 1998,
approximately 53% of UTH's homes were passed by the upgraded network.
Programming. UTH currently offers its subscribers an average of 28 channels
of basic programming along with a music channel and 33 FM radio channels. UTH
also distributes two premium channels provided by Canal+. In addition, UTH
offers an impulse pay-per-view service, consisting of four movie channels and
one adult channel. UTH's basic service includes Dutch broadcasting channels, as
well as a variety of German, French and English channels. The eight channels in
UTH's expanded basic tier consist of sports, travel, news, science fiction,
music and general entertainment. UTH is discussing with some of its higher value
programming suppliers the migration of their channels from the basic tier to the
expanded basic tier. UTH is not certain when it will successfully conclude these
discussions.
Competition. UTH is the only cable system in its franchise area. To date, UTH
has maintained approximately 94% penetration. Competition from television
signals received by antenna, direct to home satellite services and local private
cable systems has been limited. In its Internet access business, UTH will
compete with dial-up Internet service providers such as KPN's World
Access/Planet Internet, NLNet and World Online. Upon launch of telephone
services, UTH will compete primarily with KPN.
The Netherlands: A2000 Holding N.V.
Overview. A2000, a 50/50 joint venture between UTH and MediaOne, currently
enjoys basic penetration rates of approximately 92% in its two systems that
serve Amsterdam and its surrounding communities of Landsmeer, Purmerend,
Zaanstad and Ouder-Amstel, and Hilversum.
A2000 launched a nine-channel expanded basic tier in October 1996, impulse
pay-per-view services in April 1997, cable telephone service on a trial basis in
July 1997 and an Internet/data access service in October 1997. A2000 launched
its Nedpoint-branded cable telephone service in August 1998. As of December 31,
1998, A2000 had approximately 14,250 subscribers to its expanded basic tier,
approximately 18,100 cable telephone subscribers and approximately 8,125
residential and 250 business subscribers to its Internet/data access service.
Whereas penetration of our expanded basic tier service is approximately 4%, it
increased to more than 20% if offered in combination with a telephony
subscription. The same trend shows up for internet services: if offered in
combination with a telephony subscription, penetration of internet is higher
than 10%, whereas it is 3% on a stand alone basis. We plan to use the
information gathered from our telephone experience in A2000 as we launch cable
telephone services in our other primary markets.
15
Network. A2000 owns its infrastructure from the head end to the home and is
in the process of upgrading its cable television infrastructure. As of December
31, 1998, approximately 386,100 homes, or 67% of A2000's systems, were passed by
the upgraded network, with total rebuild expected to be completed by the end of
1999.
Programming. A2000 currently offers 26 channels of cable programming and 39
FM radio channels to its basic tier subscribers in the A2000 systems. A2000
offers programming in many languages, including Dutch, English, German, Italian,
French and Turkish.
A2000's expanded basic tier carries 13 channels. Programming includes both
ethnic content, such as Asian, Chinese and Arabic, and thematic content, such as
science fiction, travel, music, adult and art. A2000 has moved some popular
channels, including MBC and the National Geographic Channel, from the basic tier
service to the expanded basic tier. A2000 also distributes two premium channels
provided by Canal+. Canal+ has recently commenced litigation against A2000
demanding direct access to A2000's network in order to introduce its own digital
decoder. We do not believe A2000 will be obliged to provide the access demanded
by Canal+ and, even if it were, we do not believe providing such access would
have a material effect on A2000's business.
Increases in the price of the basic tier service are restricted by agreements
between A2000 and Amsterdam and the other municipalities in its franchise areas.
Because these prices are kept at a low level, A2000's basic tier revenues are
limited. A2000, therefore, charges programming suppliers carriage fees for the
transmission of their channels. Some of A2000's programming suppliers have been
unwilling to pay such carriage fees and Discovery, Eurosport, CNN and MTV have
withdrawn their channels from A2000's basic tier offering. A2000 has offered to
include these channels in its expanded basic tier or in separate mini-tiers.
While A2000 has experienced typical and anticipated customer dissatisfaction
with the change of programs in the basic tier, it has not experienced additional
churn that can be directly attributed to these changes.
A2000 plans to continue to introduce new channels on its tiered services when
such programming is available. A2000's impulse pay-per-view service offers
movies from all major studios on four movie channels. This service also includes
an adult channel and one ''barker'' channel that provides previews of upcoming
pay-per-view events.
Competition. A2000 currently has a penetration rate of approximately 92% in
its service area. Its primary competition is from direct to home satellite
service providers. To date, however, A2000's programming rights, low basic cable
fees, restrictive regulations on the installation of dishes and high
installation costs have limited direct to home satellite services as a
meaningful competitor. In its Internet access service, A2000 currently is the
only high speed access provider in its operating area. A2000 expects to compete
with KPN, which is testing a high speed Internet access service, in the near
future. A2000 also competes with traditional dial-up providers, including KPN's
World Access/Planet Internet, NLNet and Euronet. In its telephone business,
A2000 currently competes with KPN, Telfort and Worldcom. A2000 is competing on
the basis of price and the ability to integrate a number of its services.
Norway: Janco Multicom
Overview. Janco Multicom is Norway's largest cable television operator with
approximately 47% of the total Norwegian cable television market as of December
31, 1998. Janco Multicom owns and operates 16 cable television systems in
Norway located primarily in the southeast and along the southwestern coast, as
well as its main network in Oslo. The well-established Norwegian cable
television market has 70% penetration, as of December 31, 1998, primarily due to
poor over-the-air reception in much of Norway and a significant demand for
television entertainment.
Janco Multicom launched an Internet access service in March 1998 and plans to
introduce the chello broadband service in the first quarter of 1999. Janco
Multiplan has secured a telephony license agreement from the Norwegian
regulator, and an interconnection agreement with TeleNor, the incumbent telecom
operator. We plan to introduce Priority Telecom's cable telephone service in
1999 in the upgraded portions of Janco Multicom's network.
Network. Janco Multicom owns the complete cable television infrastructure for
each of its systems from the headend to the home, except for cable and plant
located on housing association property, which is legally owned by
16
the housing association. Janco Multicom is currently upgrading its network to
full high capacity 860 MHz two-way capability, with the exception of 75,000
homes in western rural areas. Its networks vary in capacity from 300 MHz to 550
MHz . This varying architecture requires us to replace more of the network than
in our other primary markets, thereby increasing the costs of this upgrade. The
upgrade, which began in April 1998, is scheduled to be completed over the next
three to four years.
Programming. Janco Multicom currently offers subscribers 31 channels of
programming in four tiers:
. basic, including ''must carry'', a limited number of broadcast channels
required by the government to be carried,
. an expanded basic tier,
. a ''mini-tier'' of certain selected channels, and
. premium services.
Because English is widely understood in Norway, Janco Multicom is able to use
English-language programming to supplement the limited, but increasing, supply
of available Scandinavian-language programming.
Competition. Janco Multicom experiences limited competition from direct to
home satellite service providers. In its Internet access business, Janco
Multicom expects to compete with TeleNor, the Norwegian incumbent
telecommunications operator, which is expected to launch a broadband Internet
access service this fall; and Tele2, a subsidiary of NetCom Systems, which
operates a dial-up Internet access service and has recently launched a high
speed wireless Internet access service. With Priority Telecom telephone
services, Janco Multicom will also compete in this area with TeleNor.
Israel: Tevel Israel International Communications Ltd.
Overview/Growth Strategy. Tevel has exclusive cable television broadcasting
franchises for the entire Tel Aviv metropolitan area, the region of Ashdod-
Ashkelon, which is 30 miles south of Tel Aviv, and the Jezreel Valley, which is
80 miles northeast of Tel Aviv. We own 46.6% of Tevel. In April 1998, Tevel
acquired 100% of Gvanim Cable Television Ltd. and has since integrated fully
Gvanim's operations with its own. Gvanim and its 90%-owned subsidiary Gvanim-
Krayot operate cable television systems in the Rishon-Leziyon, Ramla-Lod,
Modiin, Haifa Bay, Karmiel, Maalot and Lower Galilee areas of Israel. There are
approximately 212,150 homes passed in the Gvanim franchises and as of December
31, 1998, Gvanim and its subsidiary had approximately 149,650 subscribers. The
Gvanim acquisition increased Tevel's total subscribers as of December 31, 1998
to more than 402,350 in franchise areas representing over 595,000 homes, or
approximately 40% of the total homes in Israel.
In addition to its cable operations, Tevel owns 50% of Globcall, a
telecommunications company that designs, installs and maintains switching
systems for businesses. As of December 31, 1998, Globcall served approximately
35,000 outlets. Tevel also owns 33% of Netvision, one of Israel's leading
Internet service providers that had over 60,000 dial-up subscribers as of
December 31, 1998.
Network. Tevel owns the complete cable television infrastructure for each of
its cable systems from the headend to the home. The systems' construction
incorporates 550 MHz capability, representing approximately 50 channels, with a
60 MHz return path providing approximately 363,800 homes passed with two-way
capability for impulse pay-per-view services only. Tevel plans to upgrade all of
its systems to 750 MHz hybrid fiber coaxial technology capable of providing
cable telephone and Internet/data services. Currently, Gvanim's network is a
one-way system with a substantial overlay of fiber optic backbone, but it is
being upgraded to full two-way capability with the installation of 750 MHz
hybrid fiber coaxial technology. Tevel expects that the upgrade of all of its
systems will be substantially complete by mid-1999.
Programming. Tevel offers basic subscribers 45 channels of programming,
including a wide range of entertainment, news, sports, performing arts and
educational channels, as well as five pay-per-view channels in all of Tevel's
areas. Currently, over 40% of Tevel's subscribers purchase at least one pay-per-
view buy per month. Tevel has applied to extend its license to provide pay-per-
view services in all of its franchise areas. Tevel has also
17
applied for a license to provide pay-per-view services in Gvanim's franchise
areas. The grant of such licenses may be conditional upon Tevel and Gvanim
obtaining their programming from independent third parties. As explained below,
their programming is currently provided by an affiliate.
Tevel and the other Israeli cable television operators own a programming
company, I.C.P. Israel Cable Programming Company Limited. ICP purchases
programming rights for subsequent sale to cable television operators in Israel
and produces two cable-exclusive channels: a general entertainment channel and a
movie channel. A children's channel, a sports channel and a channel showing
nature, science and art documentaries are produced by third parties.
Competition. Because Tevel has exclusive cable television licenses, to date
it has experienced no competition from other multi-channel television providers.
The Israeli government recently passed legislation, however, to grant licenses
to direct to home satellite service operators. In January 1999, a license has
been granted to a group led by Bezeq, the Israeli incumbent telecommunications
service provider, and another license may be granted to a second group. These
operators are expected to begin providing direct to home satellite services by
the forth quarter of 1999. ICP may be required to sell to direct to home
satellite service operators its channels that are currently offered exclusively
to cable television operators, and Tevel may be required to divest off its
ownership in ICP.
France: Mediareseaux Marne, S.A.
Overview. We have a 99.6% ownership interest and a 95% economic interest in
Mediareseaux Marne S.A., which currently holds cable television franchises for
150,000 homes in the Marne-la-Vallee area east of Paris. Mediareseaux began
construction of its network in September 1996, and as of December 31, 1998,
Mediareseaux's system passed approximately 74,620 homes and had approximately
29,100 basic subscribers, giving it a penetration rate of 39.0%. Mediareseaux
began offering pay-per-view services in May 1998, and to date, the pay-per-view
buy rate is approximately 0.5 movies per expanded basic tier subscriber per
month.
We recently agreed to buy the French cable assets from Time Warner. These
French systems are located in suburban Paris and Lyon, and in Limoges. The
number of homes passed and subscribers is 210,000 and 64,000 respectively. We
expect to close this purchase in the third quarter of 1999.
In July 1998, Mediareseaux obtained a 15 year telephone license for an area
that includes 1.5 million homes in the eastern suburbs of Paris and in September
1998, Mediareseaux began installing a telephone switch. Mediareseaux has
begun offering telephone services in February 1999 within its cable television
franchise area and has obtained frequencies for a trial offering of fixed
wireless local loop services. Mediareseaux also plans to offer chello
broadband's Internet access services in 1999. To expand its operations,
Mediareseaux is pursuing potential acquisition opportunities and plans to
develop these franchises as one clustered system offering integrated video,
cable telephone and Internet/data services.
Network. Mediareseaux owns the complete cable television infrastructure for
each of its cable systems from the headend to the home. The hybrid fiber coaxial
network was started with a 750 MHz UHF-VHF frequency band network with a 5-65
MHz return path. The systems' post-1998 construction incorporates 860 MHz hybrid
fiber coaxial capacity with a 5-65 MHz return providing full two-way capability.
As of December 31, 1998, Mediareseaux's network passed approximately 50% of
the 150,000 homes then in its franchise areas. We expect the network to pass all
150,000 homes in our current franchise areas by the end of 2000.
Programming. Mediareseaux's current programming offers:
. a basic eight-channel package containing off-air, local and promotional
programs,
. four extended basic tiers, called News & Current Events, Youth &
Discovery, International Channels and Sports & Leisure, with five to nine
channels each,
. three premium tiers containing three children's channels, three sports
channels and four movie channels, and
. ten impulse pay-per-view channels.
18
Competition. Mediareseaux competes with other video service providers in
its license areas including satellite providers such as Canal Satellite and TPS.
Mediareseaux expects to face competition mainly from France Telecom, the
French incumbent telecommunications operator and Cegetel with the launch of its
cable telephone services. Upon the launch of its Internet access service,
Mediareseaux expects to face competition from France Telecom's Wanadoo
service, Cegetel, which now includes AOL, Compuserve and HOL, and Infonie, among
others.
Malta: Melita Cable TV P.L.C.
Overview. Melita Cable TV P.L.C. operates an exclusive franchise network in
Malta. Currently, we and Melita Cable Holdings each own 50% of Melita. As of
December 31, 1998, Melita passed approximately 163,000 homes and had 70,363
basic video subscribers representing a 43.2% penetration rate. Melita's growth
strategy is to continue to market aggressively its service to homes in its
franchise areas, as well as to provide more programming to increase its appeal
to subscribers.
Network. Melita owns the complete cable television infrastructure from the
headend to the home. Currently, Melita passes over 163,000 homes, or 91% of the
network. The upgrade to high capacity 860 MHz two-way capability, which has been
initiated this year and is expected to be completed by 2000, will enable Melita
to provide Internet access and other enhanced services.
Programming. Melita currently provides 52 channels of programming, grouped in
three tiers:
. reception, which includes local and foreign off-air channels that are
received with an antenna and retransmitted over the cable network,
. basic, which includes reception service plus nine additional satellite
services that are received with a satellite dish and retransmitted over the
cable network, and
. TV Plus (reception and basic services plus nine additional satellite
services).
Because English is spoken in Malta by over 90% of the population, Melita is
able to take advantage of the abundant supply of English language programming
available for licensing. In 1996, Melita created a ''live'' sports channel
showing English Premier League Football and in 1997, introduced a second
''live'' sports channel featuring Italian soccer, as well as four other new
channels. In August 1998, Melita combined the features into a full-time sports
channel, which includes other sports events and local productions.
Competition. With the exception of a small number of home satellite receivers
and a few hotel private cable installations, competition in Malta is limited
primarily to approximately 15 Italian and Sicilian broadcast channels.
Hungary: Telekabel Hungary
Overview. In June 1998, we increased our interest in Kabelkom, Hungary's
largest operator of cable television systems, from 50% to 100%. Shortly
thereafter, Kabelkom combined operations with Kabeltel, Hungary's second largest
operator of cable television systems, creating Telekabel Hungary, in which we
retain a 79.25% interest. As of December 31, 1998, Telekabel Hungary had
approximately 442,560 subscribers. There are no current plans to launch
telephone or Internet/data services in Telekabel Hungary's systems.
Network. Telekabel Hungary, together with two local minority partners for
two systems, owns the complete cable television infrastructure for each of its
systems from the headend to the home. We are upgrading these networks. As of
December 31, 1998, approximately 86,000 customers were already served by the
rebuilt network. The upgraded network throughout Budapest will be 750 MHz hybrid
fiber coaxial technology with 65 MHz return path. As of December 31, 1998,
Telekabel Hungary's network passed approximately 105,100 homes with hybrid fiber
coaxial cable.
Programming. Telekabel Hungary offers subscribers four tiers of programming
comprising approximately 35 channels:
19
. basic tier, which includes a limited number of broadcast and satellite
channels required by the government to be carried,
. an expanded basic tier, and
. a premium service, HBO-Hungary.
Approximately 15 channels, including HBO-Hungary, are available in Hungarian. In
the Telekabel Hungary systems, 75% of all subscribers passed by the upgraded
network take the expanded basic tier package.
Competition. Telekabel Hungary currently averages over 84% penetration in its
service area and faces limited competition. We understand, however, that
potential competitors may begin to offer direct to home satellite services in
Budapest.
Hungary: Monor
Monor, our Hungarian operating company in which we own a 44.75% economic
interest, has offered traditional telephone services since December 1994. Monor
has 85,000 homes in its franchise area, with approximately 84,000 traditional
telephone homes passed and approximately 68,340 cable television homes passed.
It served approximately 69,240 traditional telephone access lines and
approximately 30,620 cable television subscribers as of December 31, 1998.
Czech Republic
Overview. We own 100% of KabelNet, its Czech Republic subsidiaries that
provide cable and ''wireless'' cable television services in the cities of Prague
and Brno, the Czech Republic's second largest city. At December 31, 1998, the
wireless cable system served approximately 44,275 subscribers in both cities and
the cable system served approximately 9,875 subscribers in Prague. KabelNet's
penetration rate was 35.7% as of December 31, 1998. There are no current plans
to launch telephone or Internet/data services in KabelNet's systems.
Network. KabelNet's systems currently offer programming over an MMDS network
and a hybrid fiber coaxial cable network. KabelNet owns the complete cable
system infrastructure for each of its systems from the headend to the home.
KabelNet has no plans to introduce two-way services to its network at this time.
Programming. The Czech wireless cable systems offer subscribers three tiers
of programming comprising approximately 16 channels:
. five "must carry" channels,
. a 15-channel basic tier, which includes the ''must carry'' channels, and
. one premium channel, HBO-Czech.
Approximately nine channels, including HBO Czech, are available in Czech/Slovak.
Currently, approximately 13% of KabelNet's cable subscribers take the expanded
basic tier package.
Competition. KabelNet faces competition in its service area. Currently, parts
of its service areas have been overbuilt by Cable Plus, a subsidiary of US WEST,
and Dattel Kabel in Prague and Cable Plus in Brno. Overbuilding is when a cable
network is installed where one already existed.
Romania
Overview. We are currently involved in the development of three cable
companies in Romania:
. our 100%-owned Control Cable Ventures, with operations in Ploiesti and
Slobozia,
. our 100%-owned Multicanal Holdings, located in Bucharest, Romania's
capital, and
. our 51%-owned Eurosat in Bacau.
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Since 1993, when we first entered the Romanian market, we have widened our
customer base through acquisition and marketing activities in conjunction with
build out. As of December 31, 1998, our combined Romania operations passed
approximately 98,175 homes and served approximately 62,000 subscribers,
representing a penetration rate of 63.2%. There are no current plans to launch
telephone or Internet/data services in the Romanian systems.
Network. In 1994, we initiated an intensive upgrade of our Romanian systems
to rebuild the network from 300 MHz to 550 MHz. In Bacau, it will be 750 MHz.
The rebuild in Ploiesti, which has 24,000 subscribers, is complete. The rebuild
in Slobozia and Bacau, which together have 30,000 subscribers, is expected to be
completed by 2000. The Romanian systems have no plans to introduce two-way
services at this time.
Programming. The Romanian systems offer subscribers one to three tiers of
programming with approximately 28-34 channels:
. basic tier,
. an expanded basic tier, and
. a premium service, HBO Romania.
HBO Romania was launched in Ploiesti and Bucharest in February and April
1998, respectively. We also launched an expanded basic tier in Ploiesti in April
1998. Approximately 12 channels, including HBO Romania, are available in
Romanian. Currently, 15.5% of the basic tier subscribers take the expanded basic
tier package.
Competition. Because there are no exclusive franchises awarded in Romania, we
face competition in all four franchise areas in which we operate. While there is
little overbuild within the cities, the homes are divided among a variety of
competitors in each city. Including our systems, there are three operators in
Ploiesti, four operators in Bacau, two operators in Slobozia and eight major
operators in Bucharest.
Slovak Republic
Overview. We entered the Slovakian market in 1995 and currently have over
67,950 homes in our franchise areas. We are developing projects in the cities of
Trnava, Zvolen, Nove Zamky and Levice. We own 75% of our projects in Trnava and
100% of our projects in Zvolen and Levice. Construction of the network in Trnava
and Nove Zamky have been completed. The cities of Zvolen and Levice are all
currently under construction, which is expected to be completed by the end of
1999. As of December 31, 1998, our Slovakian operations passed approximately
37,640 homes and served approximately 21,040 subscribers, representing a
penetration rate of 55.9%. There are no current plans to launch telephone or
Internet/data services in the Slovakian systems.
We recently agreed to buy 95.63% of the 156,000 subscriber system, that is
based in Bratislava and surrounding cities. We expect to close the purchase in
the course of the second quarter of 1999.
Network. The Slovakian systems own the hybrid fiber coaxial cable network
from the headend to the home. There are no plans to introduce two-way services
to the Slovakian systems' network at this time.
Programming. The Slovakian systems offer subscribers three tiers of
programming on approximately 34 channels:
. a basic tier,
. an expanded basic tier, and
. a premium service, HBO Czech.
Approximately 12 channels, including HBO Czech, are available in Slovak/Czech.
Currently, 90.9% of the subscribers take the expanded basic tier package.
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Competition. In the cities of Levice and Nove Zamky, there are no competitors
to our systems. In Zvolen, there are two competitors. One is an unencrypted
wireless cable service operated by Cable Plus, a subsidiary of US WEST, and the
other is a small private cable operator. Trnavatel faces no direct competition.
Employees
As of December 31, 1998, we, together with our consolidated subsidiaries, had
approximately 1,500 employees. We believe that our relations with our employees
are generally good.
Certain of our operating subsidiaries, including our Austrian, Dutch and
Norwegian systems, are parties to collective bargaining agreements with some of
their respective employees.
Corporate Ownership Structure
We own 100% of our operating systems in Norway, Belgium and the Czech
Republic. In February 1999, we increased our ownership of UTH to 100%. Below
is a description of those operating systems in which we hold less than 100%.
Austria
Telekabel Group consists of five Austrian corporations, each of which owns a
cable television operating system. We own 95% of, and manage, each Telekabel
Group company. Each of the respective cities in which the operating systems are
located owns, directly or indirectly, the remaining 5% interest in each company.
Telekabel Wien's 5% shareholder Kabel-TV-Wien Gesellschaft m.b.H is owned by
the City of Vienna. KTV has the right to appoint a member to Telekabel Wien's
supervisory board. If four to six members have been appointed by shareholder
resolution, KTV has the right to appoint two members. KTV also has the right to
appoint one member of Telekabel Wien's board of management. We have appointed
six members of the supervisory board and two members of the board of management.
KTV has appointed two members of the supervisory board and one member of the
board of management. The remaining four members of the supervisory board are
employee representatives. Under the agreements among Telekabel Wien and KTV,
decisions regarding the subscriber rates and programming content of Telekabel
Wien's basic subscription package require the unanimous approval of Telekabel
Wien's board of management. Although we believe the cooperation between KTV's
managing director and the other managing directors has been successful in the
past, there can be no assurance that the board of management will unanimously
approve decisions regarding the subscriber rates and programming content of its
basic subscription package. Should the Board not reach a unanimous decision in
respect of these matters, then pursuant to the Syndicate Agreement, a
shareholders meeting can be called. We, as a 95% shareholder, can call that
meeting and decide on the agenda. Under Austrian law, a majority shareholder
such as us may generally take a decision at a shareholders meeting rather than
through the Board of Management. However, we as a majority shareholder have
never taken this action and do not anticipate doing so in the future.
In connection with the UPC Acquisition in December 1997, KTV and Philips
agreed that Philips will continue to guarantee the capital level to be
maintained by Telekabel Wien. Philips has also agreed to guarantee the continued
fulfillment of the agreements that were originally concluded between KTV and
Philips and that were assigned by Philips to us. We have agreed to indemnify
Philips for any liability under Philips' guarantee.
Philips, KTV and ourselves have agreed that the agreements concluded between
KTV and Philips will run until December 31, 2022 with an option to extend them.
Due to its position as a guarantor, Philips has the right to appoint one
member to our Supervisory Board. This Supervisory Director has a veto right that
is limited to fundamental decisions and exceptional business matters, such as
the sale or disposition of our interests in Telekabel Wien, if certain threshold
values are met.
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The articles of association of the companies in the Telekabel Group restrict
their shareholders from divesting their interests for periods ranging from the
end of 2009 to 2022. In addition, a sale of shares requires notice of two years
and is subject to a right of first refusal of the other shareholders.
The City of Vienna's approval is required for any change of control over us,
which approval cannot be unreasonably withheld if the buyer is a reputable
telecommunications and/or cable television operator. In the absence of such
approval, the City of Vienna can require UIH to own Telekabel Wien separately
from us. See "Certain Transactions and Relationships".
We may provide Priority Telecom's services to Telekabel Group's subscribers
through a wholly-owned subsidiary, even though the services will continue to be
marketed by Telekabel Group.
The Netherlands (A2000)
UTH and MediaOne International, an international developer and manager of
cable television, telephone and wireless communications properties, each own 50%
of the ordinary share capital of A2000. A2000 owns 100% of Kabeltelevisie
Amsterdam B.V., which operates cable systems in Amsterdam, Landsmeer, Purmerend,
Zaanstad and Ouder-Amstel, and 100% of A2000 Hilversum B.V., which operates a
cable system in Hilversum. The Municipality of Amsterdam owns one priority share
in Kabeltelevisie Amsterdam, which gives the municipality the right to block the
merger, demerger, dissolution and liquidation of Kabeltelevisie Amsterdam,
certain amendments to Kabeltelevisie Amsterdam's articles of association, the
issue of Kabeltelevisie Amsterdam shares to persons other than A2000, the
appointment of a legal entity as a managing director and the granting of voting
rights to a pledgee of A2000's shares of Kabeltelevisie Amsterdam. Furthermore,
the Municipality of Amsterdam's approval is required for any change of control
over A2000. Approval cannot be withheld if the buyer is a reputable
telecommunications and/or cable television operator or financial institution.
A2000, Kabeltelevisie Amsterdam and A2000 Hilversum are each managed by a
management board, responsible for day-to-day management, under the supervision
of a non-executive supervisory board. The supervisory boards of A2000 and A2000
Hilversum consist of an even number of directors: one half are appointed upon
binding nomination from MediaOne and one half are appointed upon binding
nomination from UTH. Certain major decisions require approval by at least 75% of
the shareholders. Kabeltelevisie Amsterdam's supervisory board consists of three
directors, one appointed by each of MediaOne, UTH and the municipality. The
Kabeltelevisie Amsterdam and A2000 Hilversum management boards consist of at
least one managing director (the chief executive officer), appointed by UTH, and
a chief financial officer, appointed by MediaOne, as well as other members
appointed by both. The A2000 management board consists of an even number of
directors, currently two, one appointed by UTH and one appointed by MediaOne.
Certain major decisions affecting Kabeltelevisie Amsterdam, such as approval of
business plans and annual budgets, require approval of the majority of the
supervisory board of Kabeltelevisie Amsterdam.
A2000 is a 50/50 joint venture that requires the agreement of both owners for
certain management decisions. From time to time, there has been disagreement
between its owners as to some of the operations of A2000. We do not believe,
however, that A2000's operations or prospects have been materially affected by
these disagreements.
France
We own 99.6% of Me'diare'seaux, our French operating system. The other owner
of Me'diare'seaux is an entity controlled by Patrick Drahi, its founder and
current chairman, which holds warrants giving it the right to purchase for a
nominal amount new shares corresponding to 4.6% of Me'diare'seaux's share
capital. Accordingly, we have only a 95% economic interest in Me'diare'seaux.
Pursuant to an agreement dated June 16, 1998, we and the entity controlled by
Patrick Drahi have granted to each other options to purchase and sell, at a
price based on fair market value, the shares of Me'diare'seaux that the entity
may hold in the future.
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Israel
We currently own indirectly 46.6% of Tevel, our Israel operating system. We
acquired 23.3% of this interest in November 1998. An Israeli corporation owned
by DIC Communication and Technology Ltd. and PEC Israel Economic Corporation and
whom we call the ''Discount Group'' owns 48.4% of Tevel and a private Israeli
investor holds the remaining 5% of Tevel.
Tevel is managed by a board of directors. We have the right to designate one
of Tevel's five directors for each 17% of Tevel that we own. Currently, two
Tevel directors are our appointees. Each of Tevel's shareholders has agreed to
grant a right of first refusal to the other shareholders in the event of a
transfer of any Tevel shares. If the other shareholders do not exercise this
right, they are permitted to participate in the sale and may require the selling
shareholder to include in the transferred shares such number of shares equal to
each shareholder's pro rata amount.
In addition, any shareholder of Tevel that holds more than a 30% interest may
offer its shares to the other shareholders at a price based upon the appraised
fair market value of Tevel. If the other shareholders do not accept the offer,
the offering shareholder may require that all of the shares of Tevel be sold to
a third party at the appraised value. Any such sales would be conditioned on
receipt of appropriate regulatory and other consents. If a third party has not
agreed to purchase the Tevel shares at the appraised value within six months of
the date the appraisal is delivered to Tevel and the shareholders, the right to
exercise the forced buyout option lapses, and any shareholder that thereafter
desires to exercise the forced buyout option must first offer to sell its shares
to the other shareholder at fair market value based on a new appraisal. No
shareholder may exercise this forced buyout option more than once in any 12-
month period. Neither party has exercised the forced buyout option. We and the
Discount Group have agreed not to exercise this forced buyout option while our
loan from DIC is outstanding.
Tevel's shareholders, other than the private Israeli investor, have agreed
not to compete with Tevel in respect of certain cable telecommunications
services and complementary businesses in Israel unless the Tevel board of
directors decides that Tevel will not participate in such systems or businesses.
Malta
We currently own indirectly 50% of the ordinary share capital of Melita. The
remaining 50% is owned by Melita Cable Holdings Ltd., a Maltese company owned by
Maltese citizens, as required by Melita's franchise agreement.
The day-to-day management of Melita is vested in its board of directors.
Melita currently has nine directors of whom we appointed four, Melita Cable
Holdings appointed four and we and Melita Cable Holdings jointly appointed the
president. Certain major actions require our approval and the approval of a
majority of the directors of Melita Cable Holdings.
Neither we, Melita Cable Holdings nor our affiliates may compete with Melita
with respect to providing video signals to homes in Malta. Each of us now may
offer our interest in Melita to the other. If either of us elects not to
purchase the other's interest, we both must cooperate to sell all of Melita. If
either of us sells our interest in Melita to a third party, the one which is
selling must give the other an opportunity to sell to that third party.
Hungary
Telekabel Hungary. We and The First Hungary Fund Ltd., an investment fund,
indirectly own 79.25% and 20.75%, respectively, of the ordinary share capital of
Telekabel Hungary. Telekabel Hungary owns interests ranging from approximately
96.88% in one and 100% in seven of the eight Kabelkom systems contributed by us
and 100% in five and 99.96% in one of the Kabeltel systems contributed by The
First Hungary Fund. Our shares of Telekabel Hungary are pledged in favor of
Telekabel Hungary's DEM65.6 million bridge finance lenders.
One of our wholly-owned subsidiaries is solely responsible for day-to-day
management of Telekabel Hungary, under the supervision of Telekabel Hungary's
supervisory board. The supervisory board has four members, three of
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which are appointed by us and one by The First Hungary Fund. The parties have
agreed that the supervisory director appointed by The First Hungary Fund may
block the required supervisory board approval of any element of the business
plans and budgets of Telekabel Hungary and its subsidiaries that he reasonably
determines would decrease the shareholders' value of Telekabel Hungary to the
detriment of The First Hungary Fund while we would obtain an increase in value
other than through Telekabel Hungary or its subsidiaries. Certain major
decisions concerning Telekabel Hungary and its subsidiaries, such as the merger,
demerger, liquidation and sale of all or substantially all of the assets of
those entities, the amendment of their articles of association, and the issuance
of certain preference shares, require approval of The First Hungary Fund's
representative so long as The First Hungary Fund owns at least 10% of Telekabel
Hungary's share capital.
Moreover, we and The First Hungary Fund can dispose of our shares in
Telekabel Hungary after December 31, 1999, either to the other at fair market
value, to a third party or through a registration of such shares under the U.S.
Securities Act of 1933 or on a European exchange. The selling shareholder must
first offer its shares to the other and, if the non-selling shareholder declines
to purchase such shares, the shares may be sold to a third party on terms no
less favorable than the terms offered to the non-selling shareholder for a six-
month period after the non-selling shareholder so declines.
Monor. Monor Telefon Tarsasag Rt has the exclusive, local-loop telephone
concession for the region of Monor, Hungary. We and our partner, PenneCom B.V.,
each own about a 44.75% economic interest and about a 37.5% voting interest in
Monor. The remaining economic and voting interests are owned by several
Hungarians.
Romania
We have interests in three Romanian cable companies: indirect 100% interests
in Multicanal Holdings, SRL, located in Bucharest, and Control Cable Ventures,
SRL, with operations in Ploiesti and Slobozia, and a 51% interest in Eurosat,
with operations in Bacau. The other shareholders of Eurosat are local investors.
Slovak Republic
We operate in the Slovak Republic through two Slovak limited liability
companies: KabelTel S.R.O., and Trnavatel S.R.O. We have a 100% indirect
interest in KabelTel, and a 75% indirect interest in Trnavatel. Salko Ltd., a
Slovak corporation, owns 20% and the City of Trnava owns 5% of the remaining
interest in Trnavatel. KabelTel has operations in the cities of Zvolen, Levice
and Nove Zamky, while Trnavatel operates in Trnava.
Programming Companies
Tara. We own 80% of Tara. The remaining 20% of Tara is owned by RTE
Commercial Enterprises Ltd., an affiliate of the Irish national broadcasting
company. Tara is managed by a board of directors.
IPS. IPS is a group of three related entities, one corporation and two
partnerships, focusing on the Spanish and Portuguese markets. We hold an
approximately 33.5% interest in these entities. The other partners of IPS are a
subsidiary of The Walt Disney Corporation and entities owned by the Urbina
Group.
Regulation
The provision of video, telephone and Internet/data services in the countries
in which we operate is regulated. The scope of regulation varies from country
to country, although in some significant respects regulation in our Western
European markets is harmonized under the regulatory structure of the European
Union. Below is a summary of the regulatory environment in the European Union
and the European Economic Area member countries in which we operate and of the
regulatory environment in Israel.
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European Union
Austria, The Netherlands, Belgium and France are all member states of the EU.
As such, these countries are required to enact national legislation which
implements directives issued by the EU Commission and other EU bodies. In recent
years, the EU has led the opening of competition and the liberalization of the
telecommunications and video services sectors, which includes the use of cable
networks to provide public voice telephone and other telecommunications
services, in EU member states. Although not an EU member state, Norway is a
member of the European Economic Area and has generally implemented or is
implementing the same principles on the same timetable as EU member states. As a
result, most of the markets in which we operate have been significantly affected
by regulation initiated at the EU level. As it develops, such EU regulation will
continue to have a significant effect on these markets, including future
developments relating to the convergence of telecommunications, media and
information technology.
The EU Commission has started to review the consequences of this convergence
for the regulatory environment. This review will take place during 1999 and may
result in changes of the current regulatory framework, but the scope of such
changes cannot be predicted at this time.
Telephone and Internet/Data Services
Liberalization of Telecommunications Services and Infrastructure. A central
aim of the liberalization process has been to reduce the monopoly power of the
incumbent telecommunications operators in order to introduce competition in the
European telecommunications market. Following the EU Commission's Services
Directive (90/388/EC), dated June 28, 1990, as amended, the exclusive rights of
such incumbent operators to provide telecommunications services were gradually
removed so that competing operators and service providers would be entitled to
offer such services. The incumbent telecommunications operators invariably owned
the national networks, however, and the lack of an alternative infrastructure to
provide such liberalized services operated as a major barrier to entry into the
market by competitors. In an effort to overcome this barrier, the EU introduced
the ''Cable Television Networks Directive'' (95/51/EC), dated October 18, 1995,
which required member states to remove existing restrictions on the use of cable
television networks to provide communications services other than cable
television services. As a result, cable television operators became able to use
their networks to provide telecommunications services except for public voice
telephone. In 1996, the EU Commission issued the ''Full Competition Directive''
(96/19/EC), which required most member states to remove the exclusive rights of
incumbent public voice telephone operators by January 1, 1998. The establishment
and provision of telecommunications networks was also liberalized under this
directive. As a result of this directive, our Western European operating
companies may establish and provide telecommunications networks and/or services,
including public voice telephone and Internet/data services, through their cable
networks.
Under the Cable Television Networks Directive, telecommunications operators
that have exclusive rights to provide cable television network infrastructure in
a given area and achieve an annual turnover of more than Euro 50 million must
account separately for their telecommunications services and any cable
television services. In The Netherlands, Belgium and in certain circumstances,
Norway, this requirement applies to all telecommunications operators providing
both cable television and other telecommunications services under national law
irrespective of the above-mentioned requirements. Should any of our operating
companies in the EU with exclusive rights to cable television infrastructure
achieve the requisite turnover, they would become subject to these requirements.
A draft Directive of the EU Commission, if issued, will require member states
to enact legislation directing incumbent telecommunications operators to
separate their cable television and telecommunications operations into distinct
legal entities. This directive is likely to affect how incumbent
telecommunications operators position themselves in cable television or
broadband services by encouraging them to restructure their existing operations,
which may increase their competition with us, although the incumbent operators
do not currently compete in the cable television services market.
Interconnection. Because new telecommunications operators need to
interconnect their networks with the fixed public telephone network, the EC
Council of Ministers and the European Parliament adopted the Directive on
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Interconnection in Telecommunications (97/33/EC), which sets forth the general
framework for interconnection, including general obligations to allow other
telecommunications operators to interconnect with their networks. The directive
requires member states to impose obligations on telecommunications network
operators with significant market power (which, although it may vary, is
presumed when an operator has 25% or more of the relevant market). They must
offer interconnection without discriminating between operators, which offer
similar services, and their interconnection charges must follow the principles
of transparency and be based on the actual cost of providing the
interconnection. As a result, if the principles in the directive are fully
applied, our operating companies in the EU and Norway should be able to
interconnect with the public fixed network and other major telecommunications
networks on a cost basis in order to provide their services. There can be no
assurance, however, that we will be able to obtain from incumbent
telecommunications operators interconnection on terms and conditions or at
prices satisfactory to us without protracted negotiations or involvement in
time-consuming regulatory proceedings.
Licensing. EU telecommunications policy has also aimed to harmonize the
licensing requirements for the provision of public telecommunications services.
As a result of the ''Licensing Directive'' (97/13/EC), which became effective on
December 31, 1997, member states are required to change national legislation so
that providers of telecommunications services require either no authorization or
a general authorization which is conditional upon ''essential requirements'',
such as the security and integrity of the network's operation. Licensing
conditions must be objective, transparent and non-discriminatory. Member states
may issue individual licenses in certain situations. For example, the provision
of public voice telephone and the establishment or provision of public
telecommunication networks may be subject to individual licenses. In addition,
telecommunications operators with significant market power may be required by
member states to hold individual licenses carrying more burdensome conditions
than the authorizations held by other providers. Significant market power is
typically 25% of the relevant market.
Regulation of the Internet. Although Internet-specific regulations have not
been issued, EU policy may develop harmonized principles of ''responsibility of
content'' to apply to Internet access providers analogous to those applicable to
publishing companies. We do not expect such regulations to materially adversely
affect our Internet business plans.
Video Services
Video Services through Telecommunications Networks. Most of our operating
companies are the only cable television operators in their franchise areas. As
with the telecommunications sector, the cost of building a network to provide
video services is a considerable disincentive to potential new entrants in the
video services market. Our operating companies may face competition in the long
term in their franchise areas from new entrants providing video services through
the infrastructure of incumbent telecommunications operators and potential new
entrants. In The Netherlands, for example, where there are no restrictions on
the use of telecommunications infrastructure for the provision of cable
television services, the incumbent telecommunications operator is testing
whether it will be able to provide video services through its fixed networks.
Conditional Access. In order to enable further competition in the video
services market, the EU Commission passed the ''Advanced Television Standards
Directive'' (95/47/EC), dated October 24, 1995, which requires member states to
regulate the offering of conditional access systems, such as program decoders
used for the expanded basic tier services offered by many of our operating
companies. Providers of such conditional access systems are required to make
them available on a fair, reasonable and non-discriminatory basis to other video
service providers, such as broadcasters.
Broadcasting. The ''Television Without Frontiers Directive'' (97/36/EG),
dated June 30, 1997, is intended to introduce freedom of broadcasting in the EU.
Generally, broadcasts emanating from and intended for reception within a country
have to respect the laws of that country. Under the directive, other EU member
states will be required to allow broadcast signals to be made into their
territories so long as the broadcaster complies with the law of the originating
member state. Television advertising and sponsorship in member states will have
to comply with certain minimum rules and standards, although member states may
set more detailed and stricter rules for certain matters.
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We plan to enter into joint venture agreements with programming providers in
order to launch eight new channels in late 1999, which we intend to broadcast to
our operating companies and other cable television operators for distribution
through their networks. We understand that the Television Without Frontiers
Directive will apply to the broadcasting of these joint-venture channels to such
operating companies so that one broadcasting license within an EU member state
will permit us to broadcast such channels to cable operators throughout the EU.
Where the joint-venture partner is already a licensed broadcaster within the EU,
we believe the joint venture activities may fall within the scope of our
partner's broadcast license, and that the joint venture could operate under the
terms and conditions of that license. We also plan to apply for a broadcasting
license in an EU country to accommodate joint ventures with those partners that
do not have a broadcast license in a member state of the EU or channels created
without a partner. We are currently in discussions with the regulatory
authorities in The Netherlands and plan to obtain a broadcasting license in The
Netherlands.
Austria
Relationship with Municipalities
Each of the five municipalities in which the Telekabel Group offers services
holds, directly or indirectly, 5% of the local operating company. Each member of
the Telekabel Group has entered into an agreement with its municipality. Under
the agreement between Telekabel Wien and the City of Vienna, decisions regarding
the subscriber rates and programming content of Telekabel Wien's basic
subscription package require the unanimous approval of Telekabel Wien's board of
management, of which the city appoints one member. While the board of management
in the past has always unanimously approved these decisions there can be no
assurance that the municipality's director will continue to approve these
decisions in the future and not hinder the implementation of our strategies for
our video, telephone or Internet/data services. If the managing directors cannot
reach agreement, the parties have agreed to call a shareholders meeting to
decide the matter. Under Austrian law, a majority shareholder such as us may
generally take a decision at a shareholders meeting rather than through the
board of management. However, we as the majority shareholder have never taken
this action and do not anticipate doing so in the future. The agreements between
the other Telekabel Group members and their municipalities require each member
to consult with its municipality prior to making similar business decisions.
Video Services
Regulatory Framework. The Cable and Satellite Broadcast Radio Law governs the
provision of video services in Austria. The Regional Radio and Cable Broadcast
Authorities regulate the operation of cable television networks.
Notifications. Telekabel Group does not require a license to provide video
services. It need only notify the Regional Radio and Cable Broadcast Authority
of the services it intends to provide. The right to provide such services is not
exclusive.
Programming. Under the Cable and Satellite Broadcast Radio Law, Telekabel
Group is required to carry two ''must carry'' public Austrian channels in its
basic tier service. In July 1997, previous prohibitions on cable network
operators transmitting programming produced by them were lifted. Pursuant to the
terms of the agreement with Vienna, however, Telekabel Wien is prohibited from
producing programming.
Price Regulation. Pricing of the basic tier service is subject to price
control by the Austrian Wage and Price Commission. Approval from the Wage and
Price Commission generally must be sought where the desired increase is greater
than 50% of the consumer price index. Historically, all of Telekabel Group's
price increase applications have been approved. Pricing of services other than
the basic tier is not regulated.
Telephone and Internet/Data Services
Regulatory Framework. The Telecommunications Act which came into force August
1, 1997 liberalized the telecommunications sector in Austria as of January 1,
1998, in compliance with EU directives. As a result, cable
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television networks may be used to provide telecommunications services as
described above under "--European Union -- Telephone and Internet/Data
Services".
Licenses. A telecommunications operator or service provider must obtain a
license issued by the Austrian telecommunications regulatory agency, the Telekom
Control Commission, to provide public voice telephone services and for the
public offer of leased lines. Telekabel Wien has received a license to provide
public voice telephone services in the entire Republic of Austria and a license
for the public offer of leased lines through its cable network. The licenses are
granted for an unlimited period of time provided that the offering of each
respective service begins by February 1999 at the latest.
Interconnection. Austria's Telecommunications Act generally implements the
terms of the EU Directive on Interconnection in Telecommunications. In November
1998, the Telekabel Group entered into an interconnect agreement with PTA, the
incumbent operator. Difficulty and delay in negotiations and agreement led
Telekabel Group to seek the intervention of the Austrian telecommunications
regulator, which determined the principal terms of the agreement. PTA has
brought an action in the Austrian courts to revise the terms of the
interconnection arrangement.
Price Regulation. Although there are no voice-telephone pricing regulations,
the Telekom Control Commission must be notified of the tariff structure and any
subsequent rate increases. In addition, if the Telekabel Group were held to have
significant market power (as defined in Austria's Telecommunications Act) with
respect to the services offered, certain matters including tariffs would become
subject to the approval of the Telekom Control Commission.
Internet/Data Services. Internet/data services are regulated as
telecommunications services under the Telecommunications Act. Under Austria's
Telecommunications Act, Telekabel Group does not require licenses to provide
Internet/data services. It need only notify the Telekom Control Commission of
the services it intends to provide.
Belgium
Video Services
Regulatory Framework. The law of March 30, 1995, for Brussels, the decree of
January 25, 1995 of the Council of the Flemish Community and the decree of July
17, 1987 of the Council of the French Community govern the provision of video
services in Belgium. Only the first two regulations are relevant to TVD's
operations.
Authorizations. In Belgium, a cable operator needs to obtain a governmental
authorization from the appropriate Community to operate a cable television
system. The Belgium Communities, which are the French Community, the Flemish
Community and the German-speaking Community, have exclusive jurisdiction to
regulate cable television, including programming content, in their respective
language areas. The Flemish and French Communities, as well as the Federal
government, have overlapping jurisdiction in the bilingual area of Brussels
where TVD operates. During 1996, 1997 and 1998, all of TVD's non-exclusive
authorizations were renewed for nine years. Special authorizations are also
required for the distribution of non-EU programs, both in Flanders and in
Brussels and we have requested a special authorization in Brussels.
Programming. In all of the regions of Belgium, cable television operators are
required to transmit particular local, national and other channels as part of
their basic tier service. There are usually between 11 and 13 of these ''must-
carry'' channels.
Price Regulation. Price increases require the approval of the Ministry of
Economic Affairs and must be justified by an increase in the cost of providing
the service. Increases are generally approved as long as the increase is below
the level of inflation. Historically, all of TVD's price increases have been
approved.
29
Franchise Fees. Since 1995, cable regulations came into force, which granted
cable operators a right of way for the use of public and private property to
install and exploit cable networks. Prior to the 1995 regulations, TVD was a
party to concession agreements with the municipalities in its franchise areas,
which obliged it to pay certain franchise fees. TVD has not paid franchise fees
since 1995 when the cable regulations went into effect. In Etterbeek, however,
TVD pays the municipality an annual amount. Nonetheless, certain municipalities
have requested payment of the old franchise fees, which amount to 5% of the
operating system's annual gross revenues. TVD does not believe that it is
obliged to pay these fees because it believes that the 1995 regulations have
superseded the concession agreements.
Telephone and Internet/Data Services
Regulatory Framework. The provision of cable telephone is governed by the law
of March 21, 1991, as amended by the law of 1997, together with secondary
regulations. These provisions allow telecommunications services to be provided
through cable television networks as described above under ''-- European Union -
- - Telephone and Internet/Data Services''. In line with the liberalization
process in the EU, the Belgian Parliament adopted in December 1997 a law
amending the law of 1991 and abolishing the remaining monopoly rights of
Belgacom, the incumbent telecommunications operator. As a result, other
telecommunications operators may begin to offer public voice telephone in
Belgium.
Licenses. TVD had a provisional license to build and operate a public
telecommunications network and has applied for a permanent license to build and
operate a telecommunications network. TVD has submitted an application for a
license to offer voice telephone services and expects to receive a license
during the first half of 1999.
Internet/Data Services. The provision of Internet/data services in Belgium is
also governed by the law of March 21, 1991, as amended, pursuant to which TVD
must make certain notifications to the Institut Belge des Postes et
Telecommunications regarding the services it intends to provide. In addition,
TVD is required to hold either a provisional or a permanent license to build and
operate a telecommunications network in order to offer Internet/data services on
its own infrastructure.
The Netherlands
Video Services
Regulatory Framework. The liberalization of the Dutch telecommunications and
cable television sector has generally proceeded at a quicker pace than set by
the EU directives. The new Telecommunications Act took effect, with the
exception of a few provisions, on December 15, 1998 and further liberalizes
these sectors. The Dutch Telecommunications Act governs the installation and
operation of fixed telecommunications infrastructures, which include cable
television networks, and the provision of telecommunications services, including
the provision of telephone and Internet/data services. The provision of video
services through the cable television network, and more specifically content, is
regulated primarily by the Dutch Media Act, as amended, and the Media Decree.
Under the new Dutch Telecommunications Act, the Dutch Independent Post and
Telecommunications Authority is charged with regulating the provision of
telecommunications services. Under the Media laws, video service providers are
subject to certain content requirements, which are overseen by the Commissariaat
voor de Media.
Registration. The new Dutch Telecommunications Act does not require a license
for the installation, maintenance or operation of a cable network. Existing
network operators need only register with the Dutch Independent Post and
Telecommunications Authority within six months after December 15, 1998. The
registration of a network does not give an operator any exclusive right. Any
person may install, maintain and operate a new network alongside an existing
one. The new Dutch Telecommunications Act gives cable network operators and
providers of other public telecommunication networks rights of way to install
and maintain cable, which are identical to those currently enjoyed by KPN, our
principal competitor in The Netherlands.
30
Programming. Pursuant to the Dutch Telecommunications Act and the Media laws,
cable television network providers must transmit to all of its subscribers at
least 15 programs for television and at least 25 programs for radio, including
approximately seven television and nine radio ''must carry'' channels. The Dutch
Independent Post and Telecommunications Authority may grant a total or partial
exemption from these obligations if the provider does not have significant
market power in its area of coverage.
Our Dutch operating companies originally purchased their cable television
networks from the local municipalities. Pursuant to the terms of the agreements
with the municipalities, the Dutch operating companies are obligated to continue
to provide basic tier services of between 20 and 30 television channels,
including the 15 required under the Media laws.
Cable television operators are allowed to transmit their own programs within
The Netherlands upon obtaining a broadcast license from the Commissariaat voor
de Media. The licensee must comply with the advertising and sponsorship rules
set forth in the Media laws, which are consistent with the EU Television without
Frontiers Directive.
Price Regulation. Under several of the agreements with the municipalities
described above, for a number of years the respective municipality's consent is
required for increases of the price of the basic tier service which exceed
certain agreed levels. Such consent is not typically required for price
increases resulting from costs beyond the control of the operating companies,
such as copyright fees, consumer price index increases and municipal duties and
levies, which can be passed on to subscribers. Because the base subscription
rate for the basic tier service has been kept at a low level, particularly in
Amsterdam, the operating companies make up their revenue by charging programming
suppliers carriage fees for the transmission of their channels. As A2000's basic
tier price has been particularly restricted, A2000's carriage fees have been
higher than those of the other Dutch systems held by UTH. Some of A2000's
programming suppliers have been unwilling to pay such carriage fees and have
withdrawn their channels from A2000's offering. Some of them have brought legal
actions challenging the carriage fees, arguing that A2000's carriage fees are an
abuse of its market strength. To date, none of A2000's programming suppliers
have succeeded in their actions against A2000.
The price of the basic tier service may also be regulated by the Dutch
Ministry of Culture, but it has not yet intervened to stop price increases.
Telephone and Internet/Data Services
Regulatory Framework. Until recently, the fixed telecommunications
infrastructure was a statutory monopoly of KPN, the Dutch incumbent
telecommunications provider. As described above, the Dutch telecommunications
sector has been liberalized in advance of and in accordance with European Union
telecommunications policy and cable television networks may now be used for the
provision of all telecommunications services.
Interconnection. The Dutch Telecommunications Act generally implements EU
telecommunications policy. A2000 and UTH have entered into interconnect
agreements with KPN.
Price Regulation. While A2000's telephone service is not currently subject to
price regulation, the prices of its competitor, KPN, are. The Dutch Independent
Post and Telecommunications Authority has recently indicated that KPN should
reduce its end-user tariffs and substantially reduce its interconnection prices
to reflect costs.
Internet/Data Services. Under the Dutch Telecommunications Act, Internet/data
services are regulated as telecommunications services. As such, our Dutch
operating systems need only register with the Dutch Independent Post and
Telecommunications Authority as providers of public telecommunication services
and/or networks.
Norway
As a member state of the European Economic Area, Norway implements EU
directives in the telecommunications sector.
31
Video Services
Regulatory Framework. The provision of video services in Norway is regulated
by the Telecommunications Act of June 23, 1995 and The Broadcast Act of December
4, 1992.
Registration. Under Norway's Telecommunications Act, the installation and
operation of the cable infrastructure and equipment must be authorized by and
registered with the Norwegian Post and Telecommunications Authority on the basis
of certain necessary technical qualifications.
In Norway, the simultaneous and unchanged transmission of television signals
over a cable television network is not subject to any licensing or registration
requirements.
Programming. Cable television providers have ''must-carry'' obligations
obliging them to include three national channels and typically one local
television channel in their basic tier services. Distribution of any programming
that is not a simultaneous and unchanged retransmission requires a programming
license issued by the Ministry of Cultural Affairs. Because pay-per-view
programming and some other services are not strictly simultaneous
retransmission, Janco Multicom has obtained a three-year programming license.
Price Regulation. The provision of the basic tier service is subject to price
control. A cable operator is only allowed to increase the basic package
subscription fee in line with the Official Consumer Price Index. There are no
specific pricing restrictions on expanded basic tier services.
Telephone and Internet/Data Services
Regulatory Framework. Since January 1, 1998, alternative networks in Norway
have been permitted to offer voice telephone services in accordance with the
terms of the applicable EU directives.
Registration. For telephone operators and service providers without
significant market power, as is currently the case with Janco Multicom, no
license is required to offer voice telephone services. Such providers need only
register with the Norwegian Post and Telecommunications Authority.
Interconnection. Norway's telecommunications legislation generally implements
EU policy on interconnection. Cable network companies have the right to
interconnect with the public telecommunications network and the national
incumbent operator, TeleNor, has the duty to provide any telecommunication
company with interconnection to its network on a non-discriminatory basis.
Interconnection rates charged by TeleNor must be on a cost-basis. Janco Multicom
has entered into an interconnection agreement with TeleNor.
Pricing. Providers of public telephone without significant market power,
including Janco Multicom, are not subject to any specific pricing regulations.
Internet/Data Services. Cable television networks do not require a license or
notification to provide Internet/data services. They need only register the
service with the Norwegian Post and Telecommunications Authority.
Israel
Video Services
Regulatory Framework. As part of the liberalization policy adopted by the
Israeli Communications Ministry, the telecommunications and cable television
market in Israel is expected to undergo significant reforms in 1999. We expect
that these reforms will include opening the multi-channel television business to
competition by granting licenses to direct to home satellite operators and
opening the local telephone and Internet/data transmission markets to
competition by granting licenses to independent operators, thereby allowing
competition with Bezeq, the Israeli incumbent telecommunications operator. Upon
expiration of the existing cable television licenses, franchise
32
exclusivity will be eliminated and other operators will be permitted to apply
for cable television licenses to compete in the cable television market.
The 1987 Bezeq law, which allowed the introduction of cable television, gave
the new cable companies exclusive rights to download and rebroadcast satellite
programming until 2003. The cable television operators therefore challenged the
legal basis of the Ministry of Communications policy of introducing direct to
home satellite service before that date. In November 1998, the Israeli High
Court of Justice decided that direct to home satellite service could be
introduced before 2003. The cable television operators are seeking compensation
for the loss of exclusivity prior to 2003. This could come in the form of some
additional right or rights with respect to the content or services they provide.
Franchise Agreements. Tevel holds exclusive cable television franchise
agreements that were granted for a period of 12 years and expire in 2002. These
franchises include a four-year renewal option. Gvanim, which was recently
acquired by Tevel, holds exclusive franchises which expire in 2005 and 2002. As
with the Tevel franchises, the Communications Ministry is authorized to extend
both of these franchises for an additional four years. Tevel and Gvanim pay the
government royalties of 5% of their gross revenues. Upon the opening of the
telecommunications market to competition, exclusive cable television franchises
are expected to be replaced with long-term renewable, non-exclusive licenses
that will permit cable operators to continue providing cable television services
and to begin to offer additional telecommunications services such as voice
telephone and Internet/data services.
Programming. Pursuant to its franchise agreements, Tevel must provide within
its basic service five tape-delivered channels subtitled in Hebrew: a movie
channel, a general entertainment channel, a children's channel, a nature and
science channel, and a sports channel. The movie channel and the general
entertainment channel are produced by I.C.P. Israel Cable Programming Company
Limited, a programming company owned by Tevel, Gvanim and the other Israeli
cable television companies. The other three channels are produced by independent
parties. The ownership by the Israeli cable television operators of ICP is
considered a ''restrictive arrangement'' under Israeli Restrictive Trade
Practices law and is regulated by an arrangement approved by the Restrictive
Trade Practices Tribunal in June 1996, which expires in June 1999. Pursuant to
this arrangement, ICP may continue to produce the general entertainment and
movie channels. In addition, ICP is obligated to spend 15% of its programming
expenses on programming from local producers.
The Restrictive Trade Practices Tribunal is currently considering requiring
cable network operators either to divest their interests in content suppliers
(which may increase programming costs) or to supply the previously cable-
exclusive content they produce to the direct to home satellite service providers
once they are operational.
In addition, pursuant to the 1987 Bezeq Law, cable operators must obtain
authorization to add or remove channels from their service from the Ministry of
Communications. Further restrictions prohibit cable television operators from
carrying advertisements on their tape-delivered channels. Tevel currently is
required to provide three ''must-carry'' off-air channels. Its current
arrangement currently prohibits ''tiering'' of video services. Since its
establishment, Tevel has offered its subscribers the ''super-basic package'',
which is currently comprised of 45 channels of programming. In light of expected
future competition by the direct to home satellite service providers, including
the fact that the direct to home satellite service providers will be entitled to
provide ''tiering'' of their video services, Tevel and other cable television
providers have applied to the Ministry of Communications for approval of
''tiering'' of their respective services upon opening the multi-channel
television business to competition. The Ministry has not yet responded to this
request. It appears that the Ministry intends to delay introduction of
''tiering'' by the cable television operators to ease the entering of the direct
to home satellite service providers into the market. Tevel and the other cable
television operators have filed an appeal to the High Court of Justice
challenging the Ministry's intention. The Court has decided that it will
commence the appeal hearing if the parties do not reach an arrangement by the
end of February 1999.
Pricing. Cable television service subscription fees are subject to regulation
through the franchise agreements and through the arrangement approved by the
Restrictive Trade Practices tribunal. Currently, this arrangement is more
restrictive than the franchise agreements and permits basic service subscription
fees to be increased by a maximum of 1.9% per year above the cost of living
index.
33
Telephone and Internet/Data Services
As part of the proposed liberalization of the telecommunications market in
1999, Tevel and Gvanim expect to be permitted to supply Internet/data and local
telephone services in their franchise areas.
France. Mediareseaux is authorized to operate cable networks for audio-
visual services in the territory of Syndicat Mixte de Videocommunication de
l'Est parisien and the territory of the city of Rosny-sous-Bois pursuant to two
licenses, valid until 2026 and 2022 respectively, granted by the Conseil
Superieur de l'Audiovisuel in December 1995 and September 1997. In order to
operate its cable television infrastructure, however, Mediareseaux was
required to enter into public service delegation agreements with local
authorities. The terms of Mediareseaux's agreements with these two territories
govern, among other things, Mediareseaux's channel line-up and cable
subscription rates. The agreements also give the respective territories the
option to purchase Mediareseaux's network at the expiration of the agreements
for a price equal to its usage value as estimated under the terms and conditions
of the agreements. Mediareseaux has also entered into public domain occupancy
agreements with each city in its region giving Mediareseaux the right to
establish its cable network in the public domain. Mediareseaux did not
conclude separate public domain occupancy agreements with Rosny-sous-Bois as
such rights were contained in the public service delegation agreement.
Mediareseaux holds licenses granted by the Minister of Telecommunications
in June 1998 for the establishment and operation of a public telecommunications
network and for the provision of voice telephone in three French departments of
the Paris region. The licenses were granted for a period of 15 years, are non-
transferable and can only be revoked for a material breach of telecommunications
regulations. Mediareseaux is currently negotiating an interconnect agreement
with France Telecom. Pursuant to Article L34.8 II of the Post and
Telecommunication Code, France Telecom's interconnection rates must be cost-
oriented and offered on non-discriminatory terms. Mediareseaux has entered
into an interconnect agreement with France Telecom. Mediareseaux expects,
however, that it will seek to renegotiate some provisions of the interconnect
agreement during 1999.
Malta. In 1991, Melita was awarded an exclusive 15-year renewable license to
deliver cable television services for Malta. Rates for the basic tiers are
subject to regulation and requests for rate increases made to the government
must be accompanied by a cost analysis of the increases in cost. Premium
services, ''pay-per-view'' and other additional services are not subject to rate
regulation.
Hungary. Cable operators in Hungary are not granted franchises; however, all
cable operators must be properly registered with the appropriate government
agency. Moreover, although there is no rate regulation in Hungary, rates are
subject to consumer pricing and anti-competition reviews by the government.
Further, a single cable operator may not provide service to homes exceeding in
the aggregate one-sixth of the Hungarian population.
Czech Republic. There is no rate regulation of cable or wireless cable
services in the Czech Republic. Rate increase notifications must be sent out
ninety days in advance, however, as conditions of the franchises awarded by the
municipalities. All cable operators must have a valid establishment and
operating permit, which is issued by the Czech Telecommunications office.
Additionally, all cable operators must be registered with the council for radio
and television broadcasting.
Romania. Exclusive franchises are not awarded in Romania. We have received
non-exclusive licenses to operate cable television systems in all of its service
areas. These renewable licenses are valid for another six years. The cable
television industry is regulated by the Romanian audiovisual law, which went
into effect in June 1996, and is administered by the National Audiovisual
Council.
Slovak Republic. There is no regulatory body in the Slovak Republic that
issues cable franchises, however, an operating permit and broadcasting license
is required. Most private cable operators have their own agreements with each
city and/or large co-operative housing associations. Moreover, there is no rate
regulation on cable activities. Cable operators are subject, however, to
consumer pricing reviews and the laws on monopolistic positioning in the market
and must register with the broadcast council and submit channel line-ups as part
of the permit process.
34
Other Matters
EU directives and national consumer protection and competition laws in our
Western European markets impose limitations on the pricing and marketing of
integrated packages of services, such as video, telephone and Internet/data
services. These limitations are common in developed market economies and are
designed to protect consumers and ensure a fair competitive market. While we may
offer our services in integrated packages in our Western European markets, we
are generally not permitted to make subscription to one service, such as cable
television, conditional upon subscription to another service, such as telephone,
that a subscriber might not otherwise take. In addition, we must not abuse or
enhance a dominant market position through unfair anti-competitive behavior. For
example, cross-subsidization between our business lines that would have this
effect would be prohibited. We have to be careful, therefore, in accounting for
discounts in services provided in integrated packages. We believe we can
implement our strategy of offering integrated packages of services without
infringing any of these consumer protection and anti-competition laws. We do
not, therefore, expect any of these limitations to significantly affect our
operating strategy.
Our Israeli operating companies are not currently permitted to offer
integrated services.
35
Item 2. Properties
----------
We lease our corporate offices in Amsterdam and London. Our operating
companies and subsidiaries generally lease their offices as well. We own small
parcels of property in various countries that we use for our network equipment.
In other countries, we have been able to obtain easements for this equipment.
36
Item 3. Legal Proceedings
-----------------
We and our operating companies are not parties to any material legal
proceedings. From time to time, we and our operating companies may become
involved in litigation relating to claims arising out of its operations in the
normal course of business. See also "Business --Operating Companies -- The
Netherlands: A2000 Holding N.V. -- Programming".
37
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On November 6, 1998, by a resolution in writing, our shareholders approved
our entering into an option agreement with DIC Communication and Technology
Limited ("DIC") and PEC Israeli Economic Corporation ("PEC"). The option
agreement granted DIC and PEC the right to purchase a certain number of ordinary
shares pursuant to the agreement, as well as for the 20% option of the Holder,
as defined in the option agreement. The resolution also excluded the preemptive
rights of our shareholders in respect of the options and the shareholders agreed
to amend our articles of association at such time as required to comply with the
exercise of the options.
38
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
Our ordinary shares trade on the Amsterdam Stock Exchange ("AEX") under the
symbol "UPC" and ADSs representing ordinary shares trade on the Nasdaq National
Market under the symbol "UPCOY." Both began trading on February 12, 1999, at
the time of our initial public offering. The following table shows the range of
high and low sales prices reported on the AEX and Nasdaq:
AEX Nasdaq
---------------------- ------------------------
High Low High Low
---------- ---------- ----------- -----------
February 12 - March 26, 1999. Euro 38,25 Euro 29,45 $45 $31 1/8
As of March 26, 1999, there were approximately 39 holders of record of
our ADSs.
We generally do not know who the owners of our ordinary shares are since
they are not held in bearer form.
We have never paid cash dividends on our ordinary shares.
39
Item 6. Selected Financial Data
-----------------------
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the six months ended
December 31, 1995 and the years ended December 31, 1996, 1997 and 1998 have been
derived from our audited consolidated financial statements, as restated to
include Monor Communications Group, Inc. and Tara Television Limited for all
periods in which their operations were part of UIH's consolidated results. The
consolidated financial data for the year ended December 31, 1994 has been
derived from the audited financial statements of the European cable television
operations of Philips Electronics N.V. contributed to us upon our formation as a
joint venture. The following consolidated financial data for the six months
ended June 30, 1995 have been derived from unaudited financial statements that,
in our opinion, reflect all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial data for such periods and
as of such date. Due to the relative value of the assets contributed by UIH and
Philips, the cable television properties contributed by Philips are deemed to be
our predecessor. On December 11, 1997, UIH acquired the 50% of us that it did
not already own from Philips. As a result of this acquisition and the associated
push-down of UIH's basis on December 11, 1997, the financial information for the
year ended December 31, 1998 is presented on a ''post-acquisition'' basis. The
data set forth below for us is qualified by reference to, and should be read in
conjunction with, our audited consolidated financial statements and notes
thereto and also with ''Management's Discussion and Analysis of Financial
Condition and Results of Operations''.
UPC Predecessor Interest
---------------------------------------------------- --------------------------
Six Months Six Months Year
Year Ended December 31, Ended Ended Ended
------------------------------------- December 31, June 30, December 31,
1998 1997 1996 1995 1995 1994
----------- ----------- ----------- ------------- ----------- -------------
(Dutch guilders, in thousands except per share data)
Statement of Operations Data:
Service and other revenue................... 408,970 337,255 245,179 100,179 91,100 183,600
Operating expense........................... (138,459) (118,508) (82,439) (32,806) (23,000) (44,100)
Selling, general & administrative
expense.................................... (481,703) (119,067) (81,176) (33,617) (23,600) (44,500)
Depreciation and amortization............... (187,646) (132,888) (79,832) (33,974) (21,100) (42,200)
---------- ---------- ---------- ---------- ------- -------
Net operating income (loss)................. (398,838) (33,208) 1,732 (218) 23,400 52,800
Interest income............................. 7,397 6,512 2,757 6,403 -- --
Interest expense............................ (104,355) (70,738) (38,475) (19,873) -- --
Provision for loss on investment
related costs.............................. (6,230) (18,888) -- -- -- --
Foreign exchange gain (loss) and
other expense.............................. 2,690 (41,063) (21,200) (3,376) -- --
---------- ---------- ---------- ---------- ------- -------
Net income (loss) before income
taxes and other items...................... (499,336) (157,385) (55,186) (17,064) 23,400 52,800
Shares in result of affiliated
companies, net............................. (63,486) (20,270) (22,286) (31,095) (2,300) (2,800)
Minority interests in subsidiaries.......... 1,153 152 (2,208) (191) -- (200)
Income tax benefit (expense)................ (1,215) 1,649 (509) 155 -- --
---------- ---------- ---------- ---------- ------- -------
Net income (loss)........................... (562,884) (175,854) (80,189) (48,195) 21,100 49,800
========== ========== ========== ========== ======= =======
Basic and diluted loss per ordinary
share...................................... (7.22) (2.03) (0.92) (0.55) n/a n/a
========== ========== ========== ==========
Weighted-average number of
ordinary shares outstanding................ 77,914,081 86,578,117 87,107,325 87,107,325 n/a n/a
========== ========== ========== ==========
40
Predecessor Interest
UPC -------------------------
--------------------------------------------------- Six Months Year
Year Ended December 31, Ended Ended
--------------------------------------------------- June 30, December 31,
1998 1997 1996 1995 1995 1994
---------- ---------- ---------- ---------- ----------- -----------
Selected Balance Sheet Data:
Non-restricted cash and cash equivalents..... 29,571 100,144 43,694 123,895 400 700
Other current assets......................... 136,046 85,421 83,265 172,687 10,000 14,700
Investments in affiliated companies.......... 480,455 400,337 249,189 264,271 5,200 5,900
Property, plant and equipment................ 602,997 484,982 415,989 277,785 192,000 197,800
Intangible assets............................ 680,032 690,046 270,407 209,274 2,200 2,300
Total assets................................ 2,055,183 1,902,392 1,065,273 1,048,701 220,400 222,000
Short-term debt.............................. 351,853 257,515 449,892 443,401 -- 3,400
Other current liabilities.................... 244,514 185,442 120,649 92,574 132,300 41,100
Long-term debt............................... 1,174,749 966,100 275,802 236,140 -- --
Total liabilities........................... 2,116,019 1,467,184 858,059 777,506 132,300 165,100
Total shareholders' equity (deficit)........ (86,770) 426,493 202,659 269,795 86,700 56,900
41
Item 7. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
The following discussion contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. These forward-
looking statements may include statements concerning our plans, objectives and
future economic prospects, expectations, beliefs, anticipated events or trends
and similar expressions about matters that are not historical facts. These
forward-looking statements involve both known and unanticipated risks,
uncertainties and other factors that may cause our actual results, performance
or achievements, or industry results, to be materially different from what we
say or imply with the forward-looking statements. These factors include changes
in television viewing preferences and habits by our subscribers and potential
subscribers, their acceptance of new technology, programming alternatives and
new video services we may offer. They also include our ability to manage and
grow our newer telephone and Internet/data services. These forward-looking
statements apply only as of the time of this report and we have no obligation or
plans to provide updates or revisions to these forward-looking statements or any
other changes in events or circumstances on which these forward-looking
statements are based. Our statements in this Management's Discussion and
Analysis of Financial Condition and Results of Operations section that relate to
the Year 2000 issues are hereby denominated as "Year 2000 Statements" within the
meaning of the Year 2000 Information and Readiness Disclosure Act. The following
discussion and analysis of financial condition and results of operations covers
the years ended December 31, 1998, 1997 and 1996, as restated to include Monor
Communications Group, Inc. and Tara Television Limited for all periods in which
their operations were part of UIH's consolidated results, and should be read
together with our consolidated financial statements and related notes included
elsewhere herein. These consolidated financial statements provide additional
information regarding our financial activities and condition.
Introduction
We commenced our present business in July 1995. Our systems together have the
largest number of subscribers of any group of broadband communications networks
operated across Europe. We provide cable television services. We are further
developing and upgrading our network to provide digital video, voice and
Internet/data services in our Western European markets. We and Microsoft
recently signed a letter of intent to establish a relationship to work jointly
on Internet, telephone and video projects.
As of December 31, 1998, we consolidated the results from our systems in
Austria, Belgium, Norway, France, Hungary, the Czech Republic, Romania, the
Slovak Republic and Ireland. Unconsolidated systems included our interests in
the Dutch, Israeli and Maltese systems, and programming interests in Hungary and
the Czech Republic. We account for these unconsolidated systems using the equity
method of accounting. During the year ended December 31, 1998, we consolidated
some of our Dutch systems for a seven-month period ended July 31, 1998.
Thereafter, all of the Dutch systems were accounted for using the equity method.
On February 17, 1999, we acquired the remaining 49% interest in UTH, our Dutch
holding company, and will begin consolidating the results of UTH's systems other
than A2000.
History of UPC
Since formation, we have developed largely through acquisitions. The most
recent acquisitions have resulted in significant growth in consolidated revenues
and expenditures.
September 1996 In September 1996, we increased our ownership in Norkabel (Norway) from 8.3% to 100%,
Norkabel and Kabelkom Kabelkom (Hungary) from 3.9% to effectively 50% and the Swedish system from 2.1% to
Acquisitions 25.9%. We subsequently sold our interest in the Swedish system. Norkabel was consolidated
effective upon its acquisition. Kabelkom was accounted for using the equity method.
January 1997 In January 1997, we acquired 70.2% of Janco, a cable system in Oslo, Norway, from
Janco Acquisition Helsinki Media. In November 1997, we merged Norkabel into Janco to form Janco Multicom,
of which we held 87.3%. In November 1998, we acquired the remaining 12.7% of Janco
Multicom for approximately NLG37.2 million.
42
December 1997 On December 11, 1997, we and UIH acquired the 50% of our ordinary shares held by Philips
UPC Acquisition for NLG450.0 million. As part of this acquisition, we purchased 3.17 million shares of
Class A Common Stock of UIH held by Philips for NLG66.8 million and we and UIH purchased
all of our convertible notes back from Philips for NLG339.8 million. The acquisition of
UPC was financed with proceeds from our senior revolving credit facility and our bridge
bank facility and cash from UIH.
Miscellaneous System We sold our unconsolidated interests in our systems in France called Citecable in 1996,
Sales (1996-1998) Germany in 1997 and Spain in 1998 and our consolidated interest in Portugal in 1998.
January 1998 Effective January 1, 1998, we acquired the Combivisie cable television systems in the
CNBH Formation and region surrounding our KTE system in The Netherlands for a purchase price of NLG180.8
Combivisie Acquisition million. Effective January 1, 1998, we combined the Combivisie and KTE systems to form
CNBH and consolidated the results of CNBH through July 31, 1998 (see UTH Formation).
June 1998 On June 29, 1998, we acquired from Time Warner Entertainment Company L.P. 50% of
Eastern Europe Kabelkom, the Hungarian cable television system holding company, increasing our ownership
Transactions to 100%. The purchase price was approximately $27.5 million, $9.5 million of which was
payable in cash and $18.0 million by delivery of a non-interest bearing note. We gave
Time Warner the option, exercisable until March 26, 1999, to purchase 50% of the
Hungarian programming businesses formerly held by Kabelkom, including HBO Hungary, and
100% of TV Max, a Czech and Slovak Republic programming business, for approximately
$18.25 million. Subsequent to December 31, 1998, Time Warner executed their option.
Effective June 30, 1998, we combined our interests in Kabelkom with Kabeltel, a group of
Hungarian cable television systems located in Budapest and other large Hungarian cities,
forming Telekabel Hungary. We own 79.25% of Telekabel Hungary, Hungary's largest cable
television operator, and started consolidating its results as of such date.
August 1998 In August 1998, we and NUON combined all of our Dutch broadband cable television and
UTH Formation telecommunications businesses to form UTH. We contributed 100% of CNBH and 50% of A2000
for our 51% interest in UTH. NUON contributed 100% of Telekabel Beheer. We and NUON
agreed on the relative values of their respective assets and NUON made a small balancing
payment of approximately NLG2.0 million for its 49% interest. See ''Corporate Ownership
Structure -- The Netherlands -- UTH''. As a result of the creation of UTH, since August
1, 1998, we have not consolidated the results of CNBH and account for UTH using the
equity method of accounting. As described below, however, we have purchased the other 49%
of UTH and will consolidate the results of its systems in the future.
November 1998 We held our interest in the Israeli, Maltese and Irish operating systems through a
Increase in Israeli and partnership with a subsidiary of Tele-Communications International, Inc. In November
Maltese Systems Ownership 1998, we acquired Tele-Communications International's indirect 23.3% and 25.0% interests
in the Israeli and Maltese systems for approximately $88.5 million, net of closing
adjustments, doubling our respective interests in these systems to 46.6% and 50%. We
financed this acquisition through a loan from our primary partners in the Israeli
operating system.
November 1998 As part of the Israeli and Maltese transaction described above, in November 1998, we
Sale of Irish System purchased from Riordan Communications Ltd., an indirect 5% interest in an Irish
multi-channel television system and 5% of Tara Television Limited, a company providing
Irish programming to the U.K. markets. The purchase price was 384,531 shares of UIH we
indirectly held. In November 1998, we sold the newly-acquired 5% interest in the Irish
multi-channel television system, together with our previously-held 20% interest in this
system, to Tele-Communications International, Inc. The purchase price for this
transaction was $20.5 million, offsetting part of the purchase price payable for the
Israeli and Maltese systems.
43
December 1998 In December 1998, UIH sold to us in exchange for 6,330,340 of our ordinary shares UIH's:
Purchase of Monor and
Tara from UIH - 44.75% economic interest in Monor Communications Group Inc. ("Monor), a company that
operates a traditional telephone system in the Monor region of Hungary.
- 75% interest in Tara Television Limited ("Tara"), a company with revenues of
approximately NLG1.3 million for year ended December 31, 1998.
Accordingly, because this was an exchange between companies under common control, we have
restated our financial statements for all periods in which the operations of these
companies were part of UIH's consolidated financial statements.
February 1999 In February 1999, UIH sold to us, in exchange for 4,955,264 of our ordinary shares, UIH's
Purchase of IPS approximately 33.5% interest in IPS, a group of programming entities focusing on the
from UIH Spanish- and Portuguese-speaking markets. IPS had revenues of approximately NLG34.0
million for the year ended December 31, 1998.
February 1999 On February 17, 1999, we acquired NUON's 49% ownership interest in UTH for NLG518.1
Purchase of UTH million. In addition, we purchased from NUON a NLG33.3 million subordinated loan,
Minority Interest including interest, dated December 23, 1998 owed by UTH to NUON. We paid for the entire
purchase price and loan totaling NLG551.4 million in cash on closing. Effective February
17, 1999, we own 100% of UTH.
March 1999 In March 1999, UPC reached final agreement with Siemens Austria ("Siemens") to purchase Siemens' 95.63%
Purchase of Bratislava interest in SKT s.r.o., the company that owns and operates the cable TV system in Bratislava, Slovak
Cable TV System Republic. The completion of the purchase is subject to obtaining the approval of regulatory
authorities. The purchase price for the 95.63% interest is approximately NLG77.5 million ($41 million).
March 1999 On March 29, 1999, we reached a definitive agreement with Time Warner Entertainment for the
Agreement to purchase purchase by us of 100% of Time Warner Cable France, a company which controls and operates three
Time Warner Cable France cable TV systems in the suburbs of Paris and Lyons and the city of Limoges. Completion of the purchase,
which is subject to regulatory approval, is expected to take place in the third quarter of 1999.
Overview of Our Activities
Services
To date, our primary source of revenue has been video entertainment services.
For the year ended December 31, 1998 and the year ended December 31, 1997, our
video services accounted for approximately 92.4% and 95.1%, respectively, of our
consolidated revenues. For the same periods, our Internet/data service accounted
for about 2.3% and 0.2%, respectively, of our consolidated revenue and our
telephone services accounted for .1% and 0%, respectively.
Our operating systems generally offer a range of video service subscription
packages including a basic tier, which includes 26 to 32 channels, and an
expanded basic tier, which includes 6 to 13 additional channels. In some
systems, we also offer mini-tiers, premium programming, which typically includes
2 channels and pay-per-view programming, which includes 5 to 10 channels.
Historically, video services revenue has increased as a result of:
. acquisitions of systems, primarily in The Netherlands and Norway,
. subscriber growth from both well established and developing systems,
primarily in our Austrian and Eastern European systems, and
. increases in revenue per subscriber from basic rate increases and the
introduction of expanded basic tiers and pay-per-view services.
For a discussion of our revenue recognition policies, see note 2 of the Notes
to Consolidated Financial Statements.
We believe that an increasing percentage of our future revenues will come
from telephone and Internet/data services. Within a decade, video services could
account for half of our total revenue, as our other services increase. These are
forward-looking statements and will not be fulfilled unless our new services
grow dramatically. Our capital constraints, technological limitations,
competition, lack of programming, loss of personnel, adverse regulation and many
other factors could prevent our new services from growing as we expect.
44
Pricing
We usually charge a one-time installation fee when we connect subscribers, a
monthly subscription fee that depends on whether basic or expanded basic tier
service is offered, and incremental amounts for those subscribers purchasing
pay-per-view and premium programming, which are generally offered only to
expanded basic tier subscribers.
In our Western European markets, price controls by various local and national
governmental agencies apply to the basic tier services. Expanded basic tier,
pay-per-view and premium programming are subject to EU and national competition
laws generally but are not subject to sector-specific price controls.
Costs of Operations
Video services operating costs include the direct costs of programming,
franchise fees and operating expenses necessary to provide the service to the
subscriber. Direct costs of programming are variable, based on the number of
subscribers. The cost per subscriber is established by negotiation between us
and the program supplier or rates negotiated by cable associations. Franchise
fees, where applicable, are typically based upon a percentage of revenue and
typically range from 3% to 5% in Belgium and are approximately 13.5% in Austria.
Other direct operating expenses include operating personnel, service vehicles,
maintenance and plant electricity.
Selling, general and administrative expenses include personnel-related costs
such as stock-based compensation expenses, marketing, sales and commissions,
legal and accounting, office facilities and other overhead costs.
Stock based compensation expense results from our stock option and phantom
stock option plans, which, prior to the offering, require variable plan
accounting. Increases in the fair market value of our shares result in
compensation charges that are expensed for vested options. Decreases in fair
market value would result in compensation credits. A compensation charge is
generally a non-cash expense unless the option holder puts the vested option to
us for cash. Following our initial public offering, we have the right to settle
the option in shares upon exercise; therefore options issued pursuant to the
stock option plan will no longer require variable plan accounting, however, our
phantom stock option plans will continue to require variable plan accounting.
Results of Operations
The following table sets forth information from, or derived from, our
Consolidated Statements of Operations for the years ended December 31, 1998,
1997 and 1996. As a result of UIH's acquisition of UPC and the associated push-
down of UIH's basis on December 11, 1997, this information is presented on a
''post-acquisition'' basis. These operating results have been restated to
include Monor Communications Group and Tara for all periods for which their
operations were part of UIH's consolidated results.
45
Year Ended December 31,
--------------------------------------------
1998 1997 1996
------------- -------------- -------------
(Dutch guilders, in thousands)
Service and other revenue............................ 408,970 337,255 245,179
Operating expense.................................... (138,459) (118,508) (82,439)
Selling, general and administrative expense.......... (481,703) (119,067) (81,176)
Depreciation and amortization........................ (187,646) (132,888) (79,832)
-------- -------- -------
Net operating income (loss)........................ (398,838) (33,208) 1,732
Interest income...................................... 7,397 6,512 2,757
Interest expense..................................... (104,355) (70,738) (38,475)
Provision for loss on investment related costs....... (6,230) (18,888) --
Foreign exchange gain (loss) and other expense....... 2,690 (41,063) (21,200)
-------- -------- -------
Net loss before income taxes and other items....... (499,336) (157,385) (55,186)
Share in results of affiliated companies, net........ (63,486) (20,270) (22,286)
Minority interests in subsidiaries................... 1,153 152 (2,208)
Income tax benefit (expense)......................... (1,215) 1,649 (509)
-------- -------- -------
Net loss............................................. (562,884) (175,854) (80,189)
======== ======== =======
Other information:
Adjusted EBITDA
Net operating income (loss)........................ (398,838) (33,208) 1,732
Depreciation and amortization........................ 187,646 132,888 79,832
Stock based compensation............................. 322,627 4,818 --
-------- -------- -------
Consolidated Adjusted EBITDA......................... 111,435 104,498 81,564
As a Percentage of Revenue:
Operating expense.................................... 33.9 35.1 33.6
Selling, general and administrative expense.......... 117.8 35.3 33.1
Adjusted EBITDA...................................... 27.2 31.0 33.3
Depreciation and amortization........................ 45.9 39.4 32.6
Net operating (loss) income.......................... (97.5) (9.8) .7
Net loss............................................. (137.6) (52.1) (32.7)
Revenue
During the year ended December 31, 1998, our revenue increased NLG71.7
million to NLG409.0 million from NLG337.3 million for the year ended December
31, 1997, a 21.3 % increase. Of this increase approximately NLG57.5 million
resulted from increased cable television revenue, NLG8.7 million resulted from
increased internet revenue and the remainder, NLG5.5 million resulted from Tara
and other services. The increase in cable television revenue resulted primarily
from the acquisition of Combivisie in January 1998 which was consolidated
through July 31, 1998 and the consolidation of Telekabel Hungary effective July
1, 1998. Of the NLG57.5 million approximately 21.6% was attributable to
Combivisie and 48.2% was attributable to Telekabel Hungary. The balance of the
increase in cable television revenue came from subscriber growth and in revenue
per subscriber in Austria, and increased revenue from subscriber growth in the
systems we are developing in France and Eastern Europe.
During the year ended December 31, 1997, our revenue increased NLG92.1
million to NLG337.3 million from NLG245.2 million for the year ended December
31, 1996, a 37.6% increase. A substantial portion of this increase was
attributable to the acquisition of Norkabel in October 1996 and the acquisition
of Janco in January 1997, which together amounted to NLG77.0 million. The
remaining increase in revenue was attributable to subscriber growth in the
Austrian systems, increases in subscription fees in some systems and revenues
from developing systems in France, Romania and the Slovak Republic, which were
not included in the 1996 operating results.
Operating Expense
During the year ended December 31, 1998, our operating expense increased
NLG20.0 million to NLG138.5 million from NLG118.5 million for the year ended
December 31, 1997, an 16.9% increase. Approximately NLG9.9 million of this
46
increase was attributable to the results of Telekabel Hungary, which were
consolidated effective July 1, 1998. In addition, approximately NLG2.0 million
was attributable to the acquisition of Combivisie. The remaining increase
comprised direct costs related to subscriber growth and increased operating
costs related to the introduction of our Internet/data services. As a percentage
of revenues, operating expense declined from 35.1% for the comparable period in
1997 to 33.9%. This was due primarily to the lower operating costs in the
Combivisie system and a reduction of operating costs in Tara. We expect
operating expense as a percentage of revenue to increase as new video, telephone
and Internet/data services are introduced.
During the year ended December 31, 1997, our operating expense increased
NLG36.1 million to NLG118.5 million from NLG82.4 million the previous year, a
43.8% increase. Most of this increase was attributable to the acquisition of
Norkabel in October 1996 and of Janco in January 1997, which together amounted
to NLG27.5 million, the consolidation of Tara amounting to NLG6.6 million as
well as the inclusion of operating expenses related to developing systems in
France, Romania and the Slovak Republic that were not included in the 1996
operating results. In addition, operating expenses during 1997 included expenses
related to the introduction of expanded basic tier programming in Austria,
Belgium and The Netherlands and Internet/data services in Austria and Belgium.
Selling, General and Administrative Expense
During the year ended December 31, 1998, our SG&A expense increased NLG362.6
million to NLG481.7 million from NLG119.1 million for the year ended December
31, 1997, a 304.5% increase. A substantial portion of this increase and the
increase as a percentage of net revenue resulted from a stock-based compensation
charge of NLG322.6 million attributable to our stock option plans for the year
ended December 31, 1998. In addition, the Company incurred NLG15.9 million in
general and administrative expenses attributable to the formation and start up
of chello. A portion of this increase was also attributable to the acquisition
of Combivisie and the acquisition of Telekabel Hungary, with the remaining
increase comprising additional SG&A expenses related to the development of new
businesses, including further development of Internet/data services and
preparation for the launch of telephone services in The Netherlands, Norway and
France. We expect SG&A expense, excluding stock-based compensation expense, as a
percentage of revenue to continue to increase as new video, telephone and
Internet/data services are introduced. In the future, stock-based compensation
expense will be recognized only for our Phantom Stock Option Plans which
continues to require variable plan accounting. Therefore, we expect this expense
as a percentage of SG&A expense to decrease.
During the year ended December 31, 1997, our SG&A expense increased NLG37.9
million to NLG119.1 million from NLG81.2 million for the prior year, a 46.7%
increase. A substantial portion of this increase was attributable to the
acquisition of Norkabel in October 1996 and of Janco in January 1997, which
together amounted to NLG19.1 million, as well as the inclusion of expenses
related to the consolidation of Tara and developing systems in France, Romania
and the Slovak Republic that were not included in 1996. SG&A expense during the
year ended December 31, 1997, also included expenses related to the
introduction of expanded basic tier programming in Austria, Belgium and The
Netherlands and Internet/data services in Austria and Belgium, as well as a
stock-based compensation charge of NLG4.8 million.
Our allowance for doubtful accounts as a percentage of trade receivables for
the years ended December 31, 1998, 1997 and 1996 was 41.6%, 40.6% and 37.9%
respectively. This high allowance as a percentage of trade receivables results
primarily from our billing process, whereby subscribers receive and generally
pay their invoice before the service period begins. Therefore, most of our
outstanding receivables generally represent overdue accounts requiring
consideration for an allowance. As a percentage of revenue, our receivable
balance is less than one half of a month of revenue.
Depreciation and Amortization
During the year ended December 31, 1998, our depreciation and amortization
expense increased NLG54.8 million to NLG187.7 million from NLG132.9 million for
the year ended December 31, 1997, a 41.2% increase. NLG26.3 million of this
increase and much of the increase as a percentage of our net revenue was
attributable to the application of push-down accounting, including goodwill
created in connection with the acquisition of UPC. The remaining increase
comprised additional depreciation related to the acquisition of Combivisie and
acquisition of Telekabel Hungary, additional capital expenditures to upgrade the
network in our Western European systems and new-build for developing systems.
During the year ended December 31, 1997, our depreciation and amortization
expense increased NLG53.1 million to NLG132.9 million from NLG79.8 million in
1996, a 66.5% increase. The majority of the increase was directly attributable
to the acquisition of Norkabel in October 1996 and of Janco in January 1997,
which together amounted to NLG45.4 million. The remaining increase comprised
additional depreciation from capital expenditures to upgrade the network in our
primary systems and new-build for developing systems.
47
On January 25, 1999 we and Microsoft Corporation entered into a letter of
intent providing for the establishment of a technical services relationship. In
connection with this letter of intent, we have agreed to grant Microsoft
warrants to purchase up to 3,800,000 ADSs or ordinary shares, at Microsoft's
option, at an exercise price of $28.00 per ordinary share or ADS. Half of these
warrants will be issued at the earlier of April 25, 1999 and the signing of the
first definitive agreement. These warrants will be exercisable after one year
from issuance for a period of three years. The other half of the warrants will
be issued upon the signing of the first definitive agreement. This half of the
warrants will vest and become exercisable based on performance criteria to be
established in the definitive agreements, although they also will not be
exercisable until at least one year after the date of the closing of this
offering. The first half of the warrants are for the right to negotiate to
license technology from Microsoft under definitive agreements to be negotiated
in the future. We expect to record as contract acquisition rights approximately
NLG61.1 million associated with the first half of the warrants. Such costs are
expected to be amortized on a straight-line basis over the expected contract
life, which is yet to be determined. The accounting for the cost associated with
the second half of the warrants will depend upon the ultimate nature of the
performance criteria giving rise to the earn-out of these warrants. These
warrants will be recorded as such at fair value when it is probable the
performance criteria will be met, in accordance with EITF Issue No. 96-18.
Operating Income (Loss); Adjusted EBITDA
During the year ended December 31, 1998, operating loss increased NLG365.6
million to NLG398.8 million from NLG33.2 million, a 1,101.2% increase.
Approximately 88.2% of this increase resulted from the stock-based compensation
charge of NLG322.6 million related to our stock option plans. A substantial
portion of the remaining increase resulted from new depreciation and
amortization expense from the acquisition of UPC, the acquisition of Combivisie
and the acquisition of Telekabel Hungary. The cable television industry
generally measures the performance of a cable television company in terms of
operating income before depreciation, amortization and other non-cash charges,
which we refer to as ''Adjusted EBITDA''. Adjusted EBITDA increased NLG6.9
million to NLG111.4 million from NLG104.5 million, a 6.6% increase. As a
percentage of revenue, adjusted EDITDA decreased to 27.2% from 31.0%, a 12.3%
decrease. The decrease in Adjusted EBITDA was primarily attributable to NLG15.9
million in costs attributable to the formation and start up of Chello in
addition to additional expenses related to the further development of
internet/data services and the preparation for launch of telephony.
During the year ended December 31, 1997, operating loss increased to NLG33.2
million from operating income of NLG1.7 million for the year ended December 31,
1996. This increase was primarily related to depreciation and amortization
expense and the consolidation of Tara. Adjusted EBITDA increased NLG22.9 million
to NLG104.5 million from NLG81.6 million, a 28% increase. During the year ended
December 31, 1997, Adjusted EBITDA as a percentage of revenue dropped from 33.3%
in 1996 to 31.0%, a decrease of about 6.9%. This decrease was primarily related
to negative Adjusted EBITDA from developing systems in France and the Slovak
Republic and the consolidation of Tara.
We believe the introduction of telephone services and Internet/data services
will have a significant negative impact on operating income and Adjusted EBITDA
during 1999. Thereafter, this negative impact is expected to decline. We intend
for our new businesses to be Adjusted EBITDA positive after two to three years
following introduction of service, but there can be no assurance that this will
occur. The financial effect of the development of our video programming
businesses and the construction of our digital distribution platform will depend
upon our ability to find joint venture partners for these new investments. If we
are unable to find joint venture partners for these new investments, we will be
required to consolidate all of the losses of these new investments.
Interest Expense
During the year ended December 31, 1998, interest expense increased NLG33.7
million to NLG104.4 million from NLG70.7 million during the same period in 1997,
a 47.7% increase. This increase was due primarily to increases in indebtedness
related to the UPC Acquisition in December 1997, the acquisition of Combivisie
in January 1998 and the acquisition of Telekabel Hungary in June 1998. See "--
Liquidity and Capital Resources".
During the year ended December 31, 1997, interest expense increased NLG32.2
million to NLG70.7 million from NLG38.5 million during the same period in 1996,
an 83.6% increase. This increase was due primarily to additional indebtedness
incurred for the acquisition of Norkabel in October 1996 and, to a lesser
extent, indebtedness incurred to fund developing systems, corporate overhead and
the acquisition of UPC. See "-- Liquidity and Capital Resources".
48
Provision for Loss on Investment Related Costs
The provision for loss on investment-related costs totaled NLG6.2 million and
NLG18.9 million for the years ended December 31, 1998 and 1997, respectively.
During 1998, Tara wrote off its deferred development costs. During 1997, we made
a strategic decision to sell our interest in our Portuguese system due to
competitive pressures beyond our control. After receiving several offers for the
sale of our Portuguese system substantially less than the carrying value of our
investment, we recorded a permanent impairment on the investment. The system was
subsequently sold in January 1998.
Foreign Exchange Gain (Loss) and Other Expense
Foreign exchange gain (loss) and other expense reflected a gain of NLG2.7
million for year ended December 31, 1998 as compared to a loss of NLG41.1
million for the same period in 1997. The foreign exchange gain during 1998 was
due primarily to a more stable Dutch guilder in relation to the U.S. dollar
during 1998 as compared to 1997. Subsequent to December 31, 1998, we repaid a
significant portion of our remaining U.S. dollar-denominated indebtedness with
proceeds from our initial public offering.
Foreign exchange loss and other expense increased NLG19.9 million to a loss
of NLG41.1 million for the year ended December 31, 1997 from a loss of NLG21.2
million for the previous year. This increase in foreign exchange loss was due
primarily to the weakening of the Dutch guilder in relation to the U.S. dollar
and its related impact on our U.S. dollar-denominated indebtedness, primarily
pay-in-kind convertible notes owed to Philips.
Share in Results of Affiliated Companies, Net
The table below sets forth our share in results of affiliated companies for
the applicable periods. It shows the consolidation, following our July 1, 1998
acquisition, of our Hungarian cable television holding company, although our
Hungarian programming business continues to be accounted for using the equity
method.
Year Ended December 31,
--------------------------------------
1998 1997 1996
----------- ----------- ------------
(Dutch guilders, in thousands)
A2000................................................... (26,631) (25,458) (19,965)
UTH..................................................... (22,780) -- --
Hungary (Kabelkom, programming and
cable television)..................................... (7,970) 4,431 (262)
UII Partnership (Israel, Ireland and Malta)............. (666) 10,589 1,896
Monor................................................... (4,381) (9,633) (4,475)
Other(1)................................................ (1,058) (199) 520
------- ------- -------
Total................................................... (63,486) (20,270) (22,286)
======= ======= =======
- --------------
(1) "Other" shows in 1996, our share in results from Spain, France and
Germany, in 1997 our share in results from TV Max, a Czech and Slovak
Republic programming business and in 1998 our share in TV Max and Xtra
Music.
For the year ended December 31, 1998, our share in net losses of affiliated
companies increased to NLG63.5 million from NLG20.3 million for the year ended
December 31, 1997, a 212.8% increase, from the comparable period in 1997. A
substantial portion of the increase in share in net losses was attributable to
additional amortization of goodwill of A2000, Kabelkom, our Hungarian cable
television holding company, and the partnership through which we held our
interests in the Israeli, Irish and Maltese operating companies, in each case
related to the new basis of accounting established in the step acquisition of us
by UIH. A2000 also had increased losses as it began to introduce telephone
services during this period. The share in net losses of Kabelkom for the year
ended December 31, 1998 as compared to the net income over the comparable period
in 1997 was related to the introduction of a new programming channel, increased
programming fees, a loss of HBO subscribers due to the introduction of two
additional commercial channels by competitors, and additional overhead costs.
Effective July 1, 1998, we consolidated results from our Hungarian cable
television businesses and no longer accounted for them in share of results of
affiliated companies. The loss in the UII Partnership resulted from additional
amortization as discussed above, in addition to losses incurred by Tevel during
the last quarter of the year of which our share increased from 23.3% to 46.6%.
These losses resulted from goodwill amortization and financing expense related
to Tevel's acquisition of Guanim Cable Television Ltd.
49
For the year ended December 31, 1997, our share in net losses of affiliated
companies decreased to NLG20.3 million from NLG22.3 million for the previous
year, a 9.0% decrease, primarily as a result of improved earnings from the
partnership holding the Israeli, Irish and Maltese systems, offset by increased
losses from Monor.
Statements of Cash Flows
We had cash and cash equivalents of NLG29.6 million as of December 31, 1998,
a decrease of NLG70.5 million from NLG100.1 million as of December 31, 1997.
Cash and cash equivalents as of December 31, 1997 represented an increase of
NLG56.5 million from NLG43.6 million as of December 31, 1996.
Year Ended December 31,
-----------------------------------------
1998 1997 1996
------------- ------------ ------------
(Dutch guilers, in thousands)
Cash flows from operating activities.................. 73,000 132,433 42,530
Cash flows from investing activities.................. (613,347) (402,340) (6,394)
Cash flows from financing activities.................. 471,913 326,482 (116,756)
Effect of exchange rates on cash...................... (2,139) (72) 366
-------- -------- --------
Net increase (decrease) in cash and cash equivalents.. (70,573) 56,503 (80,254)
Cash and cash equivalents at beginning of period...... 100,144 43,641 123,895
-------- -------- --------
Cash and cash equivalents at end of period ........... 29,571 100,144 43,641
======== ======== ========
Cash Flows from Operating Activities
During the year ended December 31, 1998, net cash flow from operating
activities decreased NLG59.4 million to NLG73.0 million from NLG132.4 million
for the comparable period in 1997, a 44.9% decrease. This decrease was primarily
related to increased cash needs for working capital.
Net cash flow from operating activities totaled NLG132.4 million for the year
ended December 31, 1997, as compared to NLG42.5 million for the year ended
December 31, 1996, an increase of NLG89.9 million. This increase was primarily
related to cash generated from working capital including increased current
liabilities and a reduction of accounts receivable.
Cash Flows from Investing Activities
We used approximately NLG613.3 million of cash in investing activities during
the year ended December 31, 1998, compared to NLG402.3 million for the year
ended December 31, 1997. During the year ended December 31, 1998, cash was used
principally for new acquisitions including the acquisitions of Combivisie and
Kabelkom, which together represented NLG200.2 million, including goodwill
related to the acquisitions, and for capital expenditures for property, plant
and equipment, including other tangible assets such as system upgrade and new-
build activities, which represented NLG281.7 million. Also during 1998 we
acquired an additional 23.3% and 25% interest in Tevel and Melita, respectively,
for approximately NLG170.1 million, acquired the remaining minority interest in
Janco Multicom and sold our investment in PHL. Both the acquisition of the
minority interest in Janco Multicom, through the release of escrowed funds, and
the sale of PHL provided funds to us which offset our other investing
activities. During the year ended December 31, 1997 cash was used for new
acquisitions, primarily Janco for NLG85.1 million, an additional cash-funded
letter of credit of NLG47.0 million to acquire the remaining interest in Janco,
and capital expenditures including upgrade and new-build activities totaling
NLG145.6 million.
We used approximately NLG402.3 million of cash in investing activities during
the year ended December 31, 1997, compared to NLG6.4 million for the year ended
December 31, 1996. During the year ended December 31, 1997, cash was used
principally for (1) the acquisition of Janco and other acquisitions, which
represented NLG127.9 million including goodwill related to the acquisitions, (2)
a cash-funded letter of credit to purchase the remaining interest in Janco
Multicom, which represented NLG47.0 million, (3) the continuation of our upgrade
and new-build construction program, which represented NLG145.6 million of
capital expenditures and also including goodwill and other tangible assets, and
(4) the purchase of UIH stock, which represented NLG66.8 million. In contrast,
during the year ended December 31, 1996 cash was used principally for purchases
of property, plant and equipment and goodwill and other intangible assets, which
represented NLG106.6 million, for the continuation of our upgrade and new-build
construction and for acquisitions, which
50
represented NLG46.5 million and was primarily as a result of our acquisition of
our partner's interest in the partnership that held the Norwegian, Swedish and
Hungarian cable television systems. These investing activities were offset by
repayments from A2000 and its subsidiaries of NLG146.7 million after these
companies obtained long-term financing.
Cash Flows from Financing Activities
We had NLG471.9 million of cash flows from financing activities during the
year ended December 31, 1998, as compared to NLG326.5 million for the year ended
December 31, 1997. Principal sources of cash during that period included gross
proceeds from long-term debt, which represented NLG529.6 million, including
additional borrowings from our senior revolving credit facility and CNBH's major
facility, a loan from our primary partners in the Israeli operating system of
$90 million (NLG170.1 million) and borrowings from UIH, which represented
NLG176.1 million. We repaid long-term and short-term borrowings of approximately
NLG252.6 million during the same period, including NLG131.1 million of our
bridge bank facility and NLG65.0 million under a KTE bank facility.
Cash flows from financing activities during the year ended December 31, 1997
were NLG326.5 million, as compared to negative cash flow from financing
activities of NLG116.8 million for the year ended December 31, 1996. Principal
sources of cash from financing activities during that period included gross
proceeds of NLG1,402.1 million from short-term and long-term debt including
NLG883.9 million under our senior revolving credit facility, NLG252.5 million
under our bridge bank facility, bank loans and other obligations of NLG65.0
million in The Netherlands and other obligations primarily related to the
acquisition of Janco and the refinancing of Norkabel, which represented NLG200.7
million. During the same period, we repaid approximately NLG587.9 million of
short-term borrowings, including Dutch credit facilities of NLG384.7 million,
short-term debt assumed in the acquisition of Norkabel of NLG138.4 million,
other short-term credit arrangements of NLG22.1 million and other long-term debt
of NLG24.8 million. In December 1997, we also repaid NLG170.4 million of the
pay-in-kind convertible notes and purchased NLG292.6 million of ordinary shares
from Philips as part of the acquisition of UPC.
Cash flows from financing activities during the year ended December 31, 1996
were negative NLG116.8 million. Financing activities during the year ended
December 31, 1996 included raising gross proceeds of NLG326.1 million from
short-term and long-term loans and repayment of long-and short-term facilities
of NLG440.4 million.
51
Consolidated Capital Expenditures
The table below sets forth our consolidated capital expenditures for the last
three fiscal years and projected capital expenditure for the year ended December
31, 1999. The historical information below does not reflect capital expenditures
by A2000, UTH, Tevel or other unconsolidated systems. CNBH has been
deconsolidated as of August 1, 1998; its capital expenditures amounting to
NLG18.6 million for the first seven months of 1998, are included for the year
ended December 31, 1998. UTH's projected capital expenditures for 1999 have been
included in the table below for the full year.
Historical | Projected
---------------------------------------------------- | -------------
Year Ended Year Ended Year Ended | Year Ended
December 31, December 31, December 31, | December 31,
1998 1997 1996 | 1999
---------------- ---------------- ---------------- | -------------
(Dutch guilders, in thousands) |
|
Cable Network: |
Upgrade................................................ 87,654 48,484 61,345 | 283,100
New build.............................................. 75,293 55,042 12,581 | 124,700
------- ------- ------- | -------
Total Cable Network.................................... 162,947 103,526 73,926 | 407,800
|
Master Telecom Center: |
Video services......................................... 4,065 4,734 8,713 | 19,200
Cable telephone (Priority Telecom)..................... 17,278 -- -- | 55,700
Internet/data services................................. 629 4,480 349 | 7,800
------- ------- ------- | -------
Total Master Telecom Center.......................... 21,972 9,214 9,062 | 82,700
|
Customer Premise Equipment (CPE): |
Video services......................................... 14,268 5,833 4,179 | 20,500
Cable telephone (Priority Telecom)..................... 1,677 -- -- | 91,700
Internet/data services................................. 12,855 3,890 430 | 39,800
------- ------- ------- | -------
Total CPE............................................ 28,800 9,723 4,609 | 152,000
|
Support Systems and Equipment (SSE)...................... 15,608 9,221 8,098 | 52,800
Other.................................................... 18,795 5,629 4,347 | 14,800
------- ------- ------- | -------
Total SSE and Other.................................. 34,403 14,850 12,445 | 67,600
New Businesses: |
chello broadband....................................... 4,589 -- -- | 42,500
Digital distribution platform.......................... -- -- -- | 35,500
------- ------- ------- | -------
Total New Businesses................................. 4,589 -- -- | 78,000
Intangibles and Other.................................... 28,967 8,317 6,605 | --
------- ------- ------- | -------
Total Capital Expenditures................ 281,678 145,630 106,647 | 788,100
======= ======= ======= | =======
Cable Network
Since our formation as a joint venture, we have been aggressively upgrading
our existing cable television system infrastructure and constructing our new-
build infrastructure with two-way high capacity technology to support digital
video, telephone and Internet/data services. Capital expenditures for the
upgrade and new-build construction can be reduced at our discretion, although
such reductions require lead-time in order to complete work in progress and can
result in higher total costs of construction.
We expect that the upgrade of the cable network and related equipment will
cause us to write off some of our existing cable network and equipment. We do
not expect the write off to be significant, except in certain limited
circumstances where it will be necessary to rebuild the network. While there are
some exceptions, most of the existing cable plant and related equipment has been
in service for over ten years and the remaining book value is very low. While we
believe the upgrade will extend the life of our existing plant, we do not
anticipate extending the useful life of our existing coaxial cable and equipment
for financial reporting purposes.
During the year ended December 31, 1998, we spent approximately NLG162.9
million in cable network capital expenditures. For 1999, we have budgeted cable
network capital expenditures of approximately NLG407.8 million.
Master Telecom Center
The master telecom center includes the headend and all central network
equipment needed for services provided through the operating system. For cable
television, this includes satellite antennas, encryption devices and original
transmission facilities. For telephone service, this includes the central office
switch and synchronous digital hierarchy and other telephone-related equipment.
For Internet/data service, this includes servers and equipment for connection to
the Internet.
52
During the year ended December 31, 1998, we spent approximately NLG22.0
million for master telecom center equipment. For 1999, we have budgeted capital
expenditures for master telecom center equipment of approximately NLG82.7
million.
Customer Premise Equipment
Customer premise equipment includes television set-top converters for video
services, cable phone equipment for telephone and cable modems and network
interface cards for Internet/data services. Customer premise equipment is a
variable capital expenditure, except for inventory on hand, and generally will
not be incurred unless we need the equipment for a subscriber.
During the year ended December 31, 1998, we spent approximately NLG28.8
million on customer premise equipment.
For 1999, we have budgeted capital expenditures for customer premise
equipment of approximately NLG152.0 million. We are negotiating supply
arrangements for the development and purchase of an integrated digital set-top
box for video and Internet/data services, as well as for Internet-based
telephone. We expect these negotiations to be completed shortly for equipment
delivery in late 1999.
Support Systems and Equipment
Support systems and equipment includes ancillary systems such as operational
and business support systems, including network management, customer care,
inventory and billing. During the year ended December 31, 1998, we spent NLG15.6
million in total support systems and equipment. For 1999, we have budgeted
NLG52.8 million for support systems and equipment.
New Businesses
In addition to the network infrastructure and related equipment and capital
resources described above, development of our newer businesses, chello broadband
and our digital distribution platform, require capital expenditures for
construction and development of our pan-European distribution and programming
facilities, including our origination facility, network operating center, near
video on demand server complex and related support systems and equipment. For
the year ended December 31, 1998, we incurred capital expenditures of
approximately NLG4.6 million for chello broadband. We have budgeted for 1999
approximately NLG42.5 million and NLG35.5 million, respectively, for capital
expenditures for chello broadband and our digital distribution platform.
New Businesses - Revenue and Adjusted EBITDA
During late 1997 we introduced Internet/data service as a product offering in
our consolidated systems. During 1998 we began the development of several other
new businesses including chello broadband, Priority Telecom and UPC tv. During
1998 the Internet/data service business and telephony business were developed at
both local country operating companies and at the corporate Pan-European level.
The information provided below provides an overview of the revenues and Adjusted
EBITDA for 1998 and 1997 related to these new services in relation to our cable
television business. During these years we did not fully allocate overhead and
general and administrative expenses to these new businesses. Full allocation
will begin in 1999.
53
Revenue Adjusted EBITDA
--------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------ -------------- -----------
Cable Television................... 377,817 320,440 168,805 132,565
Telephony
Operating companies............... 531 -- (8,052) --
Priority Telecom.................. -- -- (3,516) --
Internet/data
Operating companies............... 9,465 763 (9,005) 385
Chello............................ -- -- (15,854) --
Corporate overhead, UPC tv,
TARA and other.................... 21,157 16,052 (20,943) (28,452)
------- ------- ------- -------
Total.............................. 408,970 337,255 111,435 104,498
======= ======= ======= =======
Liquidity and Capital Resources
Historically, we have financed our operations and acquisitions primarily
from:
. cash contributed by UIH upon our formation,
. debt financed at the UPC corporate level and project debt financed at the
operating company level, and
. operating cash flow.
We have both well-established and developing systems. In general, we have
used the cash contributed by UIH upon formation and debt financed at the UPC
corporate level to fund acquisitions, developing systems and corporate overhead.
We have financed our well-established systems and, when possible, our developing
systems, with project debt and operating cash flow. Also, well-established
systems generally have stable positive cash flows that, to the extent permitted
by applicable credit facilities, may be used to fund other operations.
Developing systems are at various stages of construction and development and
generally depend on us for some of the funding for their operating needs until
project financing can be secured.
In February 1999, we completed our initial public offering. Funds from the
offering will be used primarily for capital expenditures and to fund other costs
associated with our network upgrade, the build and launch of our telephone and
Internet/data services businesses, as well as our video distribution and
programming businesses.
Current Debt Facilities
We, our consolidated subsidiaries and our unconsolidated affiliates had the
following long-term and short-term debt outstanding as of December 31, 1998.
Debt denominated in currencies other than Dutch guilders has been translated to
Dutch guilders for the last column.
54
Outstanding
-----------
Final At December 31,
----- ---------------
Description (Borrower) Use of Funds Maturity Interest Rate Facility Size 1998
- ---------------------- ------------ -------- ------------- ------------- ----
(in millions)
UPC and Consolidated Subsidiaries:
Long-Term Debt
Senior Revolving Credit UIH/Philips transaction; 2006 LIBOR + 0.5% to NLG1,100.0 NLG968.0
Facility Refinancing; Acquisitions; 2.0% per annum
(UPC, Janco Multicom, Capital expenditures;
Telekabel Wien) Working capital
Mediareseaux Facility Capital expenditures; 2002 FRF LIBOR + 0.75% FRF 680.0 NLG40.3
(Mediareseaux) Acquisitions; Working to 2.0%
capital
DIC Loan (UPC) To increase interests in 2000 8.0% per annum $ 90.0 NLG170.1
Israeli and Maltese + 6.0% of principal
operating systems amount at maturity
UIH Loan (UPC) To repay indebtedness March 2001 10.75% per annum $120.0 NLG163.4
and fund new business
Short-Term Debt
Time Warner Note Acquisition of Kabelkom June 1999 Non-interest bearing $ 18.0 NLG34.0
(UPC) distribution assets
Bridge Bank Facility (UPC) UPC Acquisition June 1999 LIBOR + 4.5% $125.0 NLG113.5
to 6.0%
Telekabel Hungary Capital expenditures, April 1999 BUBOR + 2.5% DM 65.6 NLG29.3
Facility (Telekabel Hungary) Acquisitions; Working
capital
Unconsolidated Affiliates:
UTH Facility Acquisitions; Capital March 1999 Fixed rate of 8.15% NLG690 NLG614.2
(Telekabel Beheer) expenditures; Working
capital
A2000 Group Facilities Acquisition of KT 2005-2006 AIBOR + 0.7/0.75% or NLG510.0 NLG506.2
(A2000 and subsidiaries) Amsterdam and KT a fixed rate advance
Hilversum; Capital + 0.7/0.75%
expenditures; Working
capital
CNBH Facility (CNBH) Acquisition of Combivisie; 2008 AIBOR + 0.60% to NLG266.0 NLG219.0
Capital expenditures 1.6% per annum
Other (CNBH) Various Various Various Various NLG17.0
Tevel Facilities (Tevel) Acquisition of Gvanim; 2007-2010 Fixed rate ranging $250.0 NLG456.4
Working capital from 5.5%-6.0%
Melita Facility (Melita) Capital expenditures; 2007 7.44% - 7.93% Lm 14.0 NLG46.2
Refinancing
Monor Facility (Monor) To repay indebtedness 2006 LIBOR + 1.5% $ 50.0 NLG78.5
and finance capital
expenditures
- ----------------
55
Senior Revolving Credit Facility. In October 1997, we and Norkabel as
borrowers entered into a NLG1.1 billion multi-currency revolving credit facility
with a syndicate of banks led by The Toronto-Dominion Bank. Norkabel was
succeeded as a borrower by Janco Multicom after the merger of Janco and
Norkabel. In December 1997, Telekabel Wien and the other members of the
Telekabel Group also became borrowers under this facility. Although currently
not a borrower, TVD is a guarantor under this facility. As of December 31, 1998,
the amount outstanding under this facility owed by us, Telekabel Wien and Janco
Multicom was NLG620.0 million, NLG213.5 million and NLG134.5 million,
respectively. This facility is secured by a pledge of the stock and assets of
TVD, Janco Multicom and Telekabel Wien.
Our borrowings and those of our subsidiaries in Austria, Belgium and Norway
are limited by financial covenants under this facility. The principal amount of
all our borrowings and those of our subsidiaries may not exceed certain
multiples of total annualized net operating cash flow for us and our
subsidiaries. In addition, the principal amount of all our borrowings and those
of our subsidiaries may not exceed certain multiples of our cable television net
operating cash flow. This facility generally prohibits dividends and other
distributions to our shareholders unless, among other things, we achieve certain
financial ratios for at least two consecutive quarters. This facility also
includes financial covenants relating to interest and debt service coverage and
application of proceeds from asset sales and debt or equity offerings.
We have agreed with our lenders under this facility to reduce this facility
amount from NLG1.1 billion to NLG1.0 billion in February 1999. This amount will
be further reduced by 5% each quarter beginning December 31, 2001 until final
maturity. Subsequent to December 31,1998 we repaid NLG620 million, excluding
interest, of the amount outstanding by us under this facility with the proceeds
of the offering, which we plan subsequently to reborrow under this facility.
Mediareseaux Facility. In July 1998, Mediareseaux entered into an
FRF680.0 million (NLG228.8 million) term facility with Paribas to finance
capital expenditures, working capital and acquisitions. This facility is secured
by the assets of Mediareseaux and a pledge of our stock of Mediareseaux. The
availability of this facility depends on revenue generated and its debt to
equity ratios. Drawings under this facility may be made until December 31, 2002.
The repayment period runs from January 1, 2003 to final maturity in 2007.
Mediareseaux may not draw more than FRF120 million (NLG40.4 million) of this
facility for acquisitions. During the repayment period, Mediareseaux must
apply 50% of its excess cash flow in prepaying the facility. This facility
generally restricts the payment of dividends and distributions. This facility
also restricts Mediareseaux from incurring additional indebtedness, subject to
certain exceptions. In July 1998, Mediareseaux also secured a 9.5 year FRF20
million (NLG6.7 million) overdraft facility, subject to the same terms and
conditions as this facility except for the availability tests which are not
applicable. Until certain financial covenants are met, we must own more than 51%
of Mediareseaux. Generally, investments by Mediareseaux and its subsidiaries
require approval of the facility agent except for investments in cash and
certain marketable securities that are pledged to support the facility. This
facility also restricts the amount of management fees that Mediareseaux may
pay to us.
DIC Loan. In November 1998, a subsidiary of DIC loaned us $90.0 million.
The loan from DIC was subsequently assigned to an Israeli bank. We used the
proceeds to acquire interests in the Israeli and Maltese systems. The loan from
DIC matures in November 2000 and is secured by our pledge of our ownership
interest in the Israeli system. The loan from DIC bears interest at the nominal
rate of 8% per annum. This interest is payable, together with an additional 6%
of the principal amount, on maturity. The loan from DIC may be repaid on
quarterly prepayment dates with three months' prior notice by us. In connection
with the loan from DIC, we granted the Discount Group, our partner in the
Israeli system, an option to $90.0 million, plus accrued interest, ordinary
shares at a price equal to 90% of the initial public offering price. Subsequent
to December 31, 1998, we negotiated an amendment to this option, resulting in an
option to acquire $45.0 million, plus accrued interest, of ordinary shares at a
price equal to 90.0% of the initial public offering price, and, if this option
is exercised, another option to acquire $45.0 million, plus accrued interest, of
ordinary shares at a price equal to the 30 day average closing price of our
shares on the Amsterdam Stock Exchange, or the initial public offering price,
whichever is higher. At the IPO, DIC exercised the first option and acquired
1,558,654 million ordinary shares of UPC. The other option is exercisable until
September 30, 2000.
UIH Loan. We have entered into two promissory notes with UIH of $100.0
million, in March 1998, and $20.0 million, in July 1998. We have borrowed a
total of $86.5 million, excluding accrued interest, under these two notes. These
notes bear interest at 10.75% per annum and are payable on March 31, 2001. The
$100.0 million note is convertible at UIH's option into ordinary shares and the
$20.0 million note may be repaid in our ordinary shares. Any conversion into or
payment in ordinary shares will be at the initial public offering price.
Subsequent to December 31, 1998 we repaid NLG120 million of the indebtedness
outstanding under the $100.0 million note and all of the indebtedness
outstanding under the $20.0 million note with proceeds from the offering.
Time Warner Note. In connection with the Kabelkom transaction, we entered
into an $18.0 million (NLG34.0 million) promissory note with Time Warner. The
Time Warner note matures on the earlier of June 30, 1999 or 90 days after
56
written notice from Time Warner. We may, however, prepay the Time Warner note in
certain instances. Subsequent to December 31, 1998, the Time Warner note was
cancelled as Time Warner exercised its option to acquire our 50% interest in HBO
Hungary and 100% interest in TV Max in March 1999.
Bridge Bank Facility. In connection with the UPC Acquisition, we entered
into a $125.0 million term bridge bank facility with a syndicate of banks led by
The Toronto-Dominion Bank. In March 1998, we repaid $63.0 million of the bridge
bank facility with proceeds borrowed from UIH. In August 1998, we made an
additional repayment of 1,937,000 from proceeds of the sale of our interest in
Portugal. Subsequent to December 31, 1998, we repaid the remaining outstanding
balance of the bridge bank facility with proceeds from the offering.
Telekabel Hungary Facility. In October 1998, Telekabel Hungary entered into
a DM65.6 million (NLG74.0 million) six-month secured bridge facility.
Availability under this facility depends on certain financial covenants. The
DM49.2 million (NLG55.5 million) international tranche of the facility and half
of the DM16.4 million (NLG18.5 million) local tranche bear interest at LIBOR
plus 2.5% per annum plus an additional cost of funding calculation. The
remaining half of the local tranche must be drawn in Hungarian forints and bears
interest at Budapest interbank offered rates for Hungarian forints, plus 2.5%
per annum plus an additional cost of funding calculation. Telekabel Hungary is
using the facility, among other things, to finance capital expenditures and to
acquire minority shares in our Kabelkom systems. We have pledged our indirect
79.25% interest in Telekabel Hungary to secure the facility. The facility also
is secured by a pledge over certain assets of the Telekabel Hungary group and a
negative pledge. Telekabel Hungary is currently negotiating a long-term facility
with the lenders to replace this bridge facility.
UTH Facility. NUON has entered into a short-term financing arrangement with
Telekabel Beheer, with a maximum availability of NLG690.0 million. This facility
bears interest at 8.15% per annum and is payable in March 1999.
Subsequent to December 31, 1998, UTH replaced their existing NLG690.0 million
facility with a senior facility and additional shareholder loans. The senior
facility consists of a Euro 340 million (NLG750 million) revolving facility to
N.V. Telekabel that will convert to a term facility on December 31, 2001. Euro
5 million of this facility will be in the form of an overdraft facility that
will be available until December 31, 2007. This facility was used to repay a
portion of the UTH facility and for capital expenditures. The new facility will
bear interest at the Euro Interbank Offered Rate plus a margin between 0.75% and
2.00% based on leverage multiples tied to N.V. Telekabel's net operating income.
The new facility is secured, among other things, by a pledge over shares held by
the borrower and will restrict N.V. Telekabel's ability to incur additional
debt.
A2000 Facilities. In January 1996, A2000 and its wholly-owned subsidiary KT
Amsterdam entered into bank facilities of NLG90.0 million and NLG375.0 million,
respectively. In October 1996, A2000 Hilversum, a wholly-owned subsidiary of
A2000, entered into a bank facility of NLG45.0 million. These facilities have
between nine- and ten-year terms and interest rates of AIBOR + 0.75% or AIBOR +
0.7% or a fixed-rate +0.7% or 0.75% per annum and restrict the borrowers from
incurring additional indebtedness, subject to certain exceptions. The A2000
facilities are secured by mortgages and pledges, including pledges on the KT
Amsterdam and A2000 Hilversum shares and their assets.
CNBH Facility. In February 1998, CNBH entered into a secured NLG250.0
million ten-year term facility with a syndicate of banks led by Rabobank. In
August 1998, this facility was increased to NLG266.0 million. Most of the
proceeds were used to repay in full a Combivisie bridge facility entered into in
connection with the acquisition of Combivisie (NLG122.0 million) and a KTE bank
facility (NLG65.0 million). The remaining amount under this facility is
available to finance certain capital expenditures. Beginning in 2001, CNBH will
be required to apply 50% of its excess cash flow to prepayment of its facility.
The facility restricts the payment of dividends and distributions and limits the
amount of payments to us under our general services agreement. In January 1999,
this facility was increased to NLG274.0 million. In connection with this
facility, we entered into a project support agreement providing, among other
things, for us to retain majority ownership of CNBH. In connection with this
facility, CNBH also entered into a NLG5.0 million ten-year term working capital
facility with Rabobank.
Tevel Facilities. In August 1998, Tevel entered into three secured loan
agreements totaling NIS928.3 million (NLG513.7 million) to finance the
acquisition of Gvanim and working capital. These facilities bear interest at a
fixed margin of 5.5% to 6.0% over the Israeli consumer price index. The loans
mature in the years 2007 to 2010 and the repayment periods of the principal
amounts commence in the year 2000. These facilities are secured by Tevel's
pledge of its ownership interest in Gvanim and limit Tevel's ability to pay
dividends, encumber its assets and incur indebtedness.
Melita Facility. In December 1998, Melita, the Maltese system operator,
entered into two term loans and an overdraft facility, facilitating a total of
Lm 14.0 million with a maturity in 2007 to refinance the existing Lm 9.0 million
facility and
57
to finance capital expenditure and working capital. The interest rates on the
term loans and overdraft facility vary between 7.44% and 7.93%. Availability
depends on satisfaction of leverage covenants and interest coverage.
Monor Facility. In September 1997, Monor entered into a $50 million term
loan facility with a syndicate of banks led by Credit Lyonnais. The proceeds of
Monor's facility were used to repay indebtedness and for capital expenditures in
the build-out of Monor's network. Monor's facility matures on December 31, 2006
and bears interest at LIBOR plus 1.5%. Monor's facility is secured by a pledge
over the shares of Monor and its assets.
Restrictions under UIH Indenture
As a subsidiary of UIH, our activities are restricted by the covenants in
UIH's indenture dated February 5, 1998. The UIH indenture generally limits the
additional amount of debt that we or our subsidiaries or controlled affiliates
may borrow, or preferred shares that we or they may issue. Generally, additional
borrowings, when added to existing indebtedness, must satisfy, among other
conditions, at least one of the following tests:
. not exceed 7.0 times the borrower's consolidated operating cash flow,
. operating cash flow must exceed 1.75 times its consolidated interest
expense, or
. not exceed 225% of the borrower's consolidated invested equity capital.
In addition, there must be no existing default under the UIH indenture at the
time of the borrowing. The UIH indenture also restricts our ability to make
certain asset sales and certain payments. In connection with this offering, we
have agreed with UIH that we will not take any action during the term of the UIH
indenture that would result in a breach of the UIH indenture covenants. The
maturity date of the UIH indenture is February 2008 and interest becomes payable
in cash in February 2003.
Sources of Capital
We had approximately NLG29.6 milllion of unrestricted cash and cash
equivalents on hand as of December 31, 1998. In addition, we had additional
borrowing capacity at the corporate and project debt level including CNBH,
Mediareseaux and Telekabel Hungary facilities.
During February 1999, we successfully completed an initial public offering
selling 44.6 million shares on the Amsterdam Stock Exchange and Nasdaq National
Market System and raising gross and net proceeds from the offering of
approximately NLG2,850.3 million and NLG2,705.8 million, respectively.
Concurrent with the offering DIC exercised one of its two option agreements
acquiring approximately 1.6 million shares for NLG89.6 million. Proceeds from
the sale of the shares to DIC were used to replay $45.0 million of the DIC Loan
and related interest. Also concurrent with the offering, proceeds were used to
reduce the Senior Revolving Credit Facility (NLG635.8 million, including accrued
interest of NLG15.8 million), repay in its entirety the Bridge Bank Facility
(NLG110.0 million, net of the interest reserve account), acquire NUON's 49%
interest in UTH (NLG518.1 million, including accrued interest of NLG15.8
million), and assume from NUON a NLG33.0 million subordinated loan, including
accrued interest (NLG33.3 million). Subsequent to the offering, we also repaid
$80.0 million (NLG156.0 million) of the note payable to UIH.
The remaining proceeds from the initial public offering, which were
approximately NLG1.3 billion on February 25th, 1999, in addition to our ability
to re-borrow under our senior revolving credit facility, are expected to be used
primarily for capital expenditures and to fund other costs associated with our
network upgrade, the build and launch of our telephone and Internet/data
services businesses as well as our video distribution and programming
businesses.
While the remaining proceeds from our initial public offering are adequate to
meet our existing business requirements, we may need to raise additional capital
in the future to the extent we pursue new acquisition or development
opportunities or if cash flow from operations is insufficient to satisfy our
liquidity requirements.
Certain Dutch Property Tax Issues
One of our Dutch systems was recently assessed for a transfer tax on
immovable property in the amount of NLG1.8 million for the purchase of a cable
network. We have always regarded our cable networks as movable property and not
subject to such transfer tax. We are appealing this tax assessment. Should we be
unsuccessful, our Dutch systems may be assessed for taxes on similar
transactions. We cannot predict the extent to which the taxes could be assessed
retroactively or the amount of tax that our systems may be assessed for,
although it may be substantial. Because we own 100% of UTH, any
58
tax liabilities assessed against our Dutch systems, other than the A2000
systems, will be consolidated with our results. We believe that, if our appeal
is unsuccessful, most cable television companies and other utilities in The
Netherlands would become subject to similar tax liabilities. If this happens, we
expect these entities would lobby with us the Dutch tax authorities against such
tax assessments.
Inflation and Foreign Currency Exchange Rate Losses
To date, we have not been impacted materially by inflation.
The value of our monetary assets and liabilities is affected by fluctuations
in foreign currency exchange rates as accounts payable for certain equipment
purchases and certain operating expenses, such as programming expenses, are
denominated in currencies other than the functional currency of the entity
making such payments. We and some of our operating companies have notes payable
and notes receivable that are denominated in, and loans payable that are linked
to, a currency other than their own functional currency, exposing us to foreign
currency exchange risks on these monetary assets and liabilities. In general, we
and our operating companies do not execute hedge transactions to reduce our
exposure to foreign currency exchange rate risks. Accordingly, we may experience
economic loss and a negative impact on earnings and equity with respect to our
holdings solely as a result of foreign currency exchange rate fluctuations.
The functional currency for our operations generally is the applicable local
currency for each operating company. Assets and liabilities of foreign
subsidiaries are translated at the exchange rates in effect at year-end, and the
statements of operations are translated at the average exchange rates during the
period. Exchange rate fluctuations on translating foreign currency financial
statements into Dutch guilders result in unrealized gains or losses referred to
as translation adjustments. Cumulative translation adjustments are recorded as a
separate component of shareholders' equity. Transactions denominated in
currencies other than the local currency are recorded based on exchange rates at
the time such transactions arise. Subsequent changes in exchange rates result in
transaction gains and losses which are reflected in income as unrealized, based
on period-end translations, or realized upon settlement of the transactions.
Cash flows from our operations in foreign countries are translated based on
their reporting currencies. As a result, amounts related to assets and
liabilities reported on the consolidated statements of cash flows will not agree
to changes in the corresponding balances on the consolidated balance sheets. The
effects of exchange rate changes on cash balances held in foreign currencies are
reported as a separate line below cash flows from financing activities.
New Accounting Principles
The U.S. Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 131, ''Disclosures about Segments of an
Enterprise and Related Information'', which requires that a public business
enterprise report certain financial and descriptive information about its
reportable segments. We have adopted this statement for the year ended December
31, 1998.
The American Institute of Certified Public Accountants recently issued
Statement of Position 98-5, ''Reporting on the Costs of Start-Up Activities'',
which is required to be adopted by affected companies for fiscal years beginning
after December 15, 1998. This statement defines start-up and organization costs,
which must be expensed as incurred. In addition, all deferred start-up and
organization costs existing as of January 1, 1999 must be written-off and
accounted for as a cumulative effect of an accounting change. As of December 31,
1998, our deferred start-up and organization costs were insignificant. We intend
to adopt this statement for fiscal year 1999.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, ''Accounting for Derivative Instruments
and Hedging Activities'', which requires that companies recognize all
derivatives as either assets or liabilities in the balance sheet at fair value.
Under this statement, accounting for changes in fair value of a derivative
depends on its intended use and designation. This statement is effective for
fiscal years beginning after June 15, 1999. We currently are assessing the
effect of this new standard.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting For the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. SOP 98-1 identifies the characteristics of internal-use software and
provides examples to assist in determining when software is for internal use.
SOP 98-1 is effective for financial statements for fiscal years beginning after
December 15, 1998, for projects in progress and prospectively, with earlier
application encouraged. Management believes the adoption of SOP 98-1 will not
have a material effect on the financial statements.
59
Year 2000 Conversion
Our cable television, programming, telephone and Internet/data operations are
heavily dependent upon computer systems and other technological devices with
imbedded chips. Such computer systems and other technological devices may not be
capable of accurately recognizing dates beginning on January 1, 2000. The Year
2000 problem could cause miscalculations, resulting in our cable television and
telephone systems or programming services malfunctioning or failing to operate.
Year 2000 Compliance Program
In response to possible Year 2000 problems, the Board of Directors of UIH
established a task force to assess the impact that potential Year 2000 problems
may have on company-wide operations, including us and our operating companies,
and to implement necessary changes to address such problems. The task force
includes our staff, external consultants and staff from UIH, and subcommittees
at the operating company levels and reports directly to the UIH Board. We will
continue to be a part of the task force following the offering. In creating a
program to minimize Year 2000 problems, the task force identified certain
critical operations of our business. These critical operations are service
delivery systems, field and headend devices, customer service and billing
systems, and corporate management and administrative operations such as cash
flow, accounts payable and accounts receivable, operations.
The task force has established a three phase program to address potential
Year 2000 problems:
. Identification phase: identify and evaluate computer systems and other
devices (e.g. headend devices, switches and set top boxes) on a system by
system basis for Year 2000 compliance.
. Implementation phase: establish a database and evaluate the information
obtained in the identification phase, determine priorities, implement
corrective procedures, define costs and ensure adequate funding.
. Testing phase: test the corrective procedures to verify that all material
compliance problems will operate on and after January 1, 2000, and
develop, as necessary, contingency plans for material operations.
About 91% of our operating systems have completed the identification phase
and the task force is working on the implementation phase for these systems. The
remaining operating systems are expected to complete the identification phase by
March 1999. The task force has researched almost 85% of the items identified
during the identification phase as to Year 2000 compliance. Of the items
researched, approximately 69% are either compliant or can be easily remediated
without significant cost to us. Currently, the task force expects to complete
its research on substantially all of the items identified during first quarter
1999 and we will continue to research new purchased items in existing systems
and newly acquired systems. The identification phase for our corporate,
management and administrative operations has been completed, and the task force
is currently evaluating the results of that phase in order to implement any
necessary corrective procedures. Based on current data, we expect the computer
systems for all corporate operations to comply with Year 2000 by mid-1999
without needing material remediation or replacement.
The task force has targeted mid-1999 for commencement of the testing phase.
At this time, we anticipate that all material aspects of the program will be
completed before January 1, 2000. Currently, UIH is managing the program with
its internal task force. During the implementation phase, the task force has
hired external resources to complete the implementation phase and implement the
testing phase.
In addition to its program, UIH is a member of a Year 2000 working group,
which has 12 cable television companies and meets under the auspices of Cable
Labs. The dialogue with the other cable operators has assisted UIH in developing
its Year 2000 program. Part of the agenda of the working group is to develop
test procedures and contingency plans for critical components of operating
systems for the benefit of all its members. The test procedures are expected to
be available to members, including UIH, during the first quarter of 1999. Until
the test procedures are completed, the working group will not develop any
contingency plans.
Third-Party Dependence
We believe that our largest Year 2000 risk is our dependence upon third-party
products. Two significant areas in which our systems depend upon third-party
products are programming and telephone interconnects. We do not have the ability
to control such parties in their assessment and remediation procedures for
potential Year 2000 problems. Should these parties not be prepared for Year
2000, their systems may fail and we would not be able to provide our services to
our customers. We are in the process of communicating with these parties on the
status of their Year 2000 compliance programs in an effort to prevent any
possible interruptions or failures. To date, responses to such communications
have
60
been limited and the responses received state only that the party is working on
Year 2000 issues and does not have a definitive position at this time. We
expect, however, based on discussions with such parties, that more of them will
disclose the extent of their Year 2000 compliance programs during the first half
of 1999 as they focus more resources on their approaching Year 2000 issues. In
addition, the task force has been monitoring the web sites of these third
parties for information regarding their Year 2000 compliance programs and our
and UIH's purchasing department has begun to exert pressure on third-party
vendors for Year 2000 compliance information. Nonetheless, we are unable to
assess fully the risk posed by its dependence upon such third parties' systems.
The task force is considering certain limited contingency plans, including
preparing back-up programming and stand-by power generators where such back-up
power supplies do not already exist. Such contingency plans may not, however,
resolve the problem in a satisfactory manner.
With respect to other third-party systems, each of our operating systems is
responsible for inquiring of its vendors and other entities with which it does
business (e.g., utility companies, financial institutions and facility owners)
as to such entities' Year 2000 compliance programs. Each of our operating
companies has begun this process and to assist our operating companies in this
process, we have hired two Year 2000 consultants, one for Eastern Europe and one
for Western Europe, who will visit each operating company and work with them to
identify and report to us any potential Year 2000 compliance problems. These
consultants will also contact third party vendors regarding their Year 2000
compliance measures. To date, these consultants have not identified any new
third-party Year 2000 compliance problems.
The task force is working closely with the manufacturers of its headend
devices to remedy any Year 2000 problems assessed in the headend equipment.
Recent information from the two primary manufacturers of such equipment indicate
that most of the equipment used in our operating systems are not date-sensitive.
Where such equipment needs to be upgraded for Year 2000 issues, such vendors are
upgrading without charge. These upgrades are expected to be completed before
year-end 1999, but this process is not entirely within our control. With respect
to billing and customer care systems, we use standard billing and customer care
programs from several vendors. A few of our operating systems, including two in
The Netherlands, one in Romania and one in Hungary are using Custom Fox-Pro
Billing and Customer Care Systems, which have been examined for Year 2000
compliance. We are generally upgrading our billing and customer care systems for
other reasons and do not expect the Year 2000 aspect of this cost to be
significant. The task force is working with such vendors to achieve Year 2000
compliance for all of our systems.
Minority-Held Systems
We also have non-controlling interests in cable television and telephone
operations, including A2000. MediaOne International, our partner in A2000, is
undertaking and implementing a program to ensure that the operations of A2000
will be Year 2000 compliant. The task force is including other minority
investments in its program. Of these investments, about 75% have completed their
identification phase of the program and the task force is in the process of
making recommendations to these entities as to Year 2000 compliance matters. Our
remaining investments are expected to complete the identification phase by March
1999. No assurance can be given, however, that these entities will implement the
recommendations or otherwise be Year 2000 compliant. Overall, the task force
will continue to analyze the Year 2000 program and will revise the program as
necessary throughout the remainder of 1999, including procedures to ensure third
parties' Year 2000 compliance.
Cost of Compliance
The task force has not yet determined the full cost of its Year 2000 program
and its related impact on our financial condition. In the course of our
business, we have made substantial capital investments over the past few years
in improving our systems, primarily for reasons other than to anticipate Year
2000 problems. Because the systems' upgrades also result in Year 2000
compliance, however, we have not had to devote a large amount of investment
specifically to the Year 2000 issue. The task force has identified certain
replacement and remediation costs and, based on the task force review to date,
we currently estimate that these costs will not exceed NLG4.0 million, excluding
any costs associated with our interest in A2000. Although no assurance can be
made, we believe that the known Year 2000 compliance issues can be remedied
without a material financial impact on us. No assurance can be made, however, as
to the total cost for the Year 2000 program until all of the data has been
gathered. In addition, we cannot predict the financial impact we will experience
if Year 2000 problems are caused by third parties upon which our systems are
dependent or experienced by entities in which we hold investments. The failure
of any one of these parties to implement Year 2000 procedures could have a
material adverse impact on our operations and financial condition.
61
European Economic and Monetary Union
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the euro. The participating countries adopted the euro as their
common legal currency on that day. The euro trades on currency exchanges and is
available for non-cash transactions during the transition period between January
1, 1999 and January 1, 2002. During this transition period, the existing
currencies are scheduled to remain legal tender in the participating countries
as denominations of the euro and public and private parties may pay for goods
and services using either the euro or the participating countries' existing
currencies.
During the transition period, all operating companies' billing systems will
include amounts in euro as well as the respective country's existing currency.
All of our accounting and management reporting systems currently are multi-
currency.
We intend to use the euro as our reporting currency by the end of 2000. We do
not expect the introduction of the euro to affect materially our cable
television and other operations. We have not yet taken steps to confirm that the
financial institutions and other third parties with whom we have financial
relationships are prepared for the use of the euro. Thus far, we have not
experienced any material problem with third parties as a result of the
introduction of the euro. We believe the introduction of the euro will not
require us to amend any of our financial instruments or loan facilities, other
than amendments that will be made automatically by operation of law. These will
include automatic replacement of the currencies of participating countries with
the euro. They will also include automatic replacement of interest rates of
participating countries with European interest rates. We believe the
introduction of the euro will reduce our exposure to risk from foreign currency
and interest rate fluctuations.
62
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
---------------------------------------------------------
Investment Portfolio
UPC does not use derivative financial instruments in its non-trading
investment portfolio. UPC places its excess cash and cash equivalents in highly
liquid instruments that meet high credit quality standards with original
maturities at the date of purchase of less than three months. Historically, UPC
has not held any short-term investments. Subsequent to December 31, 1998, UPC
completed its initial public offering raising net proceeds of NLG2,705.8
million. The proceeds from the offering will be invested in short-term
investments that meet high credit quality standards with original maturities at
the date of purchase between one and twelve months. The Company must comply with
the restrictions placed on it by the UIH bond indenture, which limits such
investments to a risk profile of A2/P2 commercial paper. The Company will also
limit the amount of exposure to any one issue, issuer or type of instrument.
These instruments will be subject to interest rate risk and potentially to
foreign exchange fluctuations, however, the Company does not expect any material
losses with respect to its investment portfolio.
Impact of Foreign Currency Rate Changes
The Company and its operating subsidiaries are exposed to foreign exchange
rate fluctuations related to debt denominated in currencies outside of the 11
nations which joined the European Monetary Union on January 11, 1999, fixing
their currencies against the Euro. The Company's operating subsidiaries are
also exposed to foreign exchange rate fluctuations related to long-term
commitments for equipment purchases denominated in currencies other than their
functional currency.
The table below provides information about UPC's and its consolidated
subsidiaries' debt which is denominated in foreign currencies outside of the
European Monetary Union as of December 31, 1998, including cash flows based on
the expected repayment date and related weighted-average interest rates. The
information is presented in NLG equivalents, which is the Company's reporting
currency. The instruments' actual cash flows are denominated in US Dollars.
In February 1999, UPC completed its initial public offering and applied a
portion of the proceeds to the repayment of debt, which is reflected in the
expected repayments (see Item 7 - Current Debt Facilities).
Amount Outstanding Expected Repayment as of
as of December 31, 1998 December 31,
----------------------------------- --------------------------
Dollar Denominated Facilities Book Value Fair Value 1999 2000
- ------------------------------------- ----------- ----------- ------ ------
(Stated in thousands of Dutch Guilders)
DIC Loan 170,100 170,100 85,050 85,050
8.0% per annum + 6.0% of
principal at maturity, due 2000
UIH Loan 163,425 163,425 163,425 --
10.75% per annum, due 2001
Bridge Bank Facility 113,519 113,519 113,519 --
LIBOR + 4.5% to 6.0%,
average rate in 1998 of 10.8%
63
In general, the Company and its operating companies do not execute hedge
transactions to reduce the Company's exposure to foreign currency exchange rate
risk. Accordingly, the Company may experience economic loss and a negative
impact on earnings and equity with respect to its holdings solely as a result of
foreign currency exchange rate fluctuations.
Interest Rate Sensitivity
The table below provides information about the Company's financial
instruments that are sensitive to changes in interest rates as of December 31,
1998, including cash flows based on the expected repayment dates and the related
weighted-average interest rates. The information is presented in NLG
equivalents, which is the Company's reporting currency. In February 1999, UPC
completed its initial public offering and applied a portion of the proceeds to
the repayment of debt, which is reflected in the expected repayments (see Item 7
- - Current Debt Facilities).
Amount Outstanding
as of December 31, 1998 Expected Repayment as of December 31,
------------------------------- -------------------------------------------
Book Value Fair Value 1999 2000 2001 2002
-------------- ----------- ---------- -------- -------- --------
Variable Rate Facilities (Stated in thousands of Dutch Guilders)
------------------------
Senior Revolving Credit 968,018 968,018 620,000 348,018 -- --
Facility
LIBOR + 0.5% to 2.0%,
average rate in 1998 of
5.7%
Mediareseaux 40,344 40,344 -- -- -- 40,344
FRF LIBOR + 0.75% to 2.0%,
average rate in 1998 of
5.2%
Bridge Bank Facility 113,519 113,519 113,519 -- -- --
LIBOR + 4.5% to 6.0%,
average rate in 1998 of
10.8%
Telekabel Hungary Facility 29,297 29,297 29,297 -- -- --
BUBOR + 2.5%,
average rate in 1998 of
5.7%
Fixed Rate Facilities
---------------------
DIC Loan 170,100 170,100 85,050 85,050 -- --
8.0% per annum + 6.0% of
principal at maturity,
due 2000
UIH Loan 163,425 163,425 163,425 -- -- --
10.75% per annum, due 2001
Equity Prices
As of December 31, 1998, the Company is exposed to equity price fluctuations
related its investment in UIH stock, which is classified as an investment
available for sale. Changes in the price of the stock are reflected as
unrealized gains (losses) in the Company's statement of shareholders' equity
(deficit), until such time as the stock is sold and any unrealized gain (loss)
will be reflected in the statement of operations.
Fair Value as of
Number of Shares December 31, 1998
------------------------ ---------------------------
(Stated in thousands of Dutch Guilders,
except share amounts)
Investment in UIH Stock 2,784,620 101,097
As of December 31, 1998, the Company is also exposed to equity price
fluctuations related to its debt which is convertible into ordinary shares of
the Company. The table below provides information about UPC's convertible
debt, including expected cash flows and related weighted-average interest rates.
In February 1999, UPC completed its initial public offering and applied a
portion of the proceeds to the repayment of debt, which is reflected in the
expected repayments (see Item 7 - Current Debt).
64
Amount Outstanding Expected Repayment as of
as of December 31, 1998 December 31,
--------------------------------- -------------------------------
Convertible Debt Book Value Fair Value 1999 2000
- -------------------------------------- ------------- ------------ -------------- -------------
(Stated in thousands of Dutch Guilders)
DIC Loan 170,100 170,100 85,050 85,050
8.0% per annum + 6.0% of
principal at maturity, due 2000
UIH Loan 163,425 163,425 163,425 --
10.75% per annum, due 2001
In November 1998, a subsidiary of DIC loaned UPC $90.0 million. In
connection with the loan from DIC we granted the Discount Group, our partner in
the Israeli system, an option to acquire $90.0 million, plus accrued interest,
ordinary shares at a price equal to 90% of the initial public offering price.
Subsequent to December 31, 1998, the Company negotiated an amendment to this
option, resulting in an option of $45.0 million, plus accrued interest, of
ordinary shares at a price equal to 90% of the initial public offering price,
and, if this option is exercised, another option to acquire $45.0 million, plus
accrued interest, of ordinary shares at a price equal to the 30 day average
closing price of UPC's shares on the Amsterdam Stock Exchange, or the initial
public offering price, which ever is higher. At the initial public offering,
DIC exercised the first option and thus acquired 1,558,654 ordinary shares of
UPC. The other option is exercisable until September 30, 2000.
As of December 31, 1998, the UIH Loan was convertible at UIH's option into
ordinary shares of UPC at NLG12.00 to NLG18.00 per share. Subsequent to
December 31, 1998, the UIH Loan was amended to convert to UPC shares at the
initial public offering price. UPC repaid NLG156.0 million of the UIH loan
with proceeds from the offering.
65
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The financial statement schedules and separate financial statements of
significant equity investees required by regulation S-X are filed under Item 14
"Exhibits, Financial Statement Schedules and Reports on Form 8-K".
66
INDEPENDENT AUDITORS' REPORT
To United Pan-Europe Communications N.V.
We have audited the accompanying consolidated balance sheets of United Pan-
Europe Communications N.V. (a N.V. registered in The Netherlands) and
subsidiaries as of December 31, 1998 and December 31,1997 (post-acquisition --
see Note 1), and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the years ended December 31,
1998 (post-acquisition - see Note 1), December 31, 1997 and December 31, 1996
(pre-acquisition -- see Note 1). These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in The Netherlands, which are substantially the same as those generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the
Company's parent company (United International Holdings, Inc.) acquired the
remaining 50% interest in the Company effective December 11, 1997. Accordingly,
the assets, liabilities and shareholders' equity acquired have been adjusted to
reflect its parent's basis in the underlying net assets of the Company as of
December 11, 1997. The proportional assets and liabilities acquired were
recorded based upon their relative fair market values at the date of
acquisition. Accordingly, the pre-acquisition and post-acquisition consolidated
financial statements are not comparable in certain significant respects since
these consolidated financial statements report the financial position, results
of operations and cash flows on two separate accounting bases.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United Pan-
Europe Communications N.V. as of December 31, 1998 and December 31, 1997 (post-
acquisition -- see Note 1), and the results of its operations and its cash flows
for the years ended December 31, 1998 (post-acquistioin - see Note 1),
December 31, 1997 and December 31, 1996 (pre-acquisition -- see Note 1) in
conformity with accounting principles generally accepted in the United States of
America.
ARTHUR ANDERSEN
Amstelveen, The Netherlands,
March 29, 1999
67
UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONSOLIDATED BALANCE SHEETS
(Stated in thousands of Dutch guilders, except share and per share amounts)
As a result of the UPC Acquisition in December 1997 (see Note 1), the purchase
method of accounting was used to record assets acquired and liabilities assumed
by the parent company. Such accounting generally results in increased
amortization and depreciation reported in future periods. Accordingly, the
accompanying financial statements of the Company are not comparable in certain
significant respects since these financial statements report financial position,
results of operations, and cash flows on two separate accounting bases.
As of December 31,
---------------------
1998 1997
---------- ---------
ASSETS: (Post-Acquisition)
Current assets
Cash and cash equivalents................................................................................. 29,571 100,144
Restricted cash........................................................................................... 30,263 22,220
Subscriber receivables, net of allowance for doubtful accounts of 9,260 and 6,445, respectively........... 12,886 9,419
Costs to be reimbursed by affiliated companies, net of allowance for doubtful accounts
of 0 and 2,209, respectively............................................................................. 27,277 14,970
Other receivables......................................................................................... 25,845 19,103
Inventory................................................................................................. 24,121 13,040
Prepaid expenses and other current assets................................................................. 15,654 6,669
--------- ---------
Total current assets................................................................................... 165,617 185,565
Marketable equity securities of parent, at fair value...................................................... 101,097 66,809
Investments in and advances to affiliated companies, accounted for under the equity method, net............ 480,455 400,337
Property, plant and equipment, net of accumulated depreciation of 87,708 and 7,312, respectively.......... 602,997 484,982
Goodwill and other intangible assets, net of accumulated amortization of 39,109 and 1,716, respectively... 680,032 690,046
Deferred financing costs, net of accumulated amortization of 9,288 and 217, respectively................... 21,663 23,943
Non-current restricted cash and other assets............................................................... 3,322 50,710
--------- ---------
Total assets........................................................................................... 2,055,183 1,902,392
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):
Current liabilities
Accounts payable, including related party payables of 15,671 and 12,223, respectively..................... 141,917 126,178
Accrued liabilities....................................................................................... 56,840 34,731
Subscriber prepayments and deposits....................................................................... 45,757 24,533
Short-term debt........................................................................................... 63,322 1,696
Note payable to shareholder............................................................................... 175,012 --
Current portion of long-term debt......................................................................... 113,519 255,819
--------- ---------
Total current liabilities.............................................................................. 596,367 442,957
Long-term debt............................................................................................. 1,174,749 966,100
Deferred taxes............................................................................................. 8,657 44,508
Deferred compensation...................................................................................... 327,445 4,818
Other long-term liabilities................................................................................ 8,801 8,801
--------- ---------
Total liabilities...................................................................................... 2,116,019 1,467,184
--------- ---------
Commitments and contingencies (Notes 11 and 12)
Minority interests in subsidiaries......................................................................... 25,934 8,715
--------- ---------
Shareholders' equity (deficit) (As adjusted for the 3:2 stock split. Note 10)
Common stock, 0.667 par value, 200,000,000 shares authorized and 87,330,340 and 87,107,325
shares issued, respectively.............................................................................. 58,221 58,072
Additional paid-in capital................................................................................ 657,684 636,851
Treasury stock, at cost, 9,198,135 shares of common stock................................................. (110,385) (110,385)
Accumulated deficit....................................................................................... (719,575) (156,691)
Other cumulative comprehensive income (loss).............................................................. 27,285 (1,354)
--------- ---------
Total shareholders' equity (deficit)................................................................... (86,770) 426,493
--------- ---------
Total liabilities and shareholders' equity (deficit)................................................... 2,055,183 1,902,392
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
68
UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Stated in thousands of Dutch guilders, except share and per share amounts)
As a result of the UPC Acquisition in December 1997 (see Note 1), the purchase
method of accounting was used to record assets acquired and liabilities assumed
by the parent company. Such accounting generally results in increased
amortization and depreciation reported in future periods. Accordingly, the
accompanying financial statements of the Company are not comparable in certain
significant respects since these financial statements report financial position,
results of operations, and cash flows on two separate accounting bases.
For the Years Ended December 31,
--------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
(Post-Acquisition) (Pre-Acquisition) (Pre-Acquisition)
Service and other revenue......................................... 408,970 337,255 245,179
Operating expense................................................. (138,459) (118,508) (82,439)
Selling, general and administrative expense....................... (481,703) (119,067) (81,176)
Depreciation and amortization..................................... (187,646) (132,888) (79,832)
---------- ---------- ----------
Net operating (loss) income..................................... (398,838) (33,208) 1,732
Interest income................................................... 7,397 6,512 2,757
Interest expense.................................................. (92,308) (41,995) (14,263)
Interest expense, related party................................... (12,047) (28,743) (24,212)
Provision for loss on investment related costs.................... (6,230) (18,888) --
Foreign exchange (loss) gain and other expense.................... 2,690 (41,063) (21,200)
---------- ---------- ----------
Net loss before income taxes and other items.................... (499,336) (157,385) (55,186)
Share in results of affiliated companies, net..................... (63,486) (20,270) (22,286)
Minority interests in subsidiaries................................ 1,153 152 (2,208)
Income tax benefit (expense)...................................... (1,215) 1,649 (509)
---------- ---------- ----------
Net loss........................................................ (562,884) (175,854) (80,189)
========== ========== ==========
Basic and diluted net loss per ordinary share(1).................. (7.22) (2.03) (0.92)
========== ========== ==========
Weighted-average number of ordinary shares outstanding(1)......... 77,914,081 86,578,117 87,107,325
========== ========== ==========
- ---------------
(1) As adjusted for the 3:2 stock split (Note 10).
The accompanying notes are an integral part of these consolidated financial
statements.
69
UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(DEFICIT)(2)
(Stated in thousands of Dutch guilders, except share amounts)
As a result of the UPC Acquisition in December 1997 (see Note 1), the purchase
method of accounting was used to record assets acquired and liabilities assumed
by the parent company. Such accounting generally results in increased
amortization and depreciation reported in future periods. Accordingly, the
accompanying financial statements of the Company are not comparable in certain
significant respects since these financial statements report financial position,
results of operations, and cash flows on two separate accounting bases.
Other
Ordinary Stock Additional Treasury Stock Cumulative
--------------------- Paid-In ------------------- Accumulated Comprehensive
Shares(2) Amount Capital Shares(2) Amount Deficit Income (Loss)(1) Total
------------ -------- --------- --------- ------- ------------ ---------------- --------
Balances, December 31, 1995......... 87,107,325 58,072 262,669 -- -- (48,195) (2,751) 269,795
Contribution by UIH of additional
investment in affiliate............ -- -- 9,495 -- -- -- -- 9,495
Change in cumulative translation
adjustments........................ -- -- -- -- -- -- 3,558 3,558
Net loss............................ -- -- -- -- -- (80,189) (80,189)
--------
Total comprehensive income (loss)... -- -- -- -- -- -- -- (76,613)
------------ -------- --------- --------- ------- ------------ ---------------- --------
Balances, December 31, 1996.........
(Pre-Acquisition).................. 87,107,325 58,072 272,164 -- -- (128,384) 807 202,659
Contribution by UIH of additional
investment in affiliate............ -- -- 6,479 -- -- -- -- 6,479
Gain on sale of stock by subsidiary. -- -- 3,274 -- -- -- -- 3,274
Change in cumulative translation
adjustments........................ -- -- -- -- -- -- (2,161) (2,161)
Net loss for the period from January
1, 1997 to December 10, 1997....... -- -- -- -- -- (166,710) -- (166,710)
--------
Total comprehensive income (loss)... -- -- -- -- -- -- -- (168,871)
------------ -------- --------- --------- ------- ------------ ---------------- --------
Balances, December 10, 1997
(Pre-Acquisition).................. 87,107,325 58,072 281,917 -- -- (295,094) (1,354) 43,541
Buyout of shareholder's interest -- -- -- (24,378,396) (292,561) -- -- (292,561)
Reissuance of shares upon
conversion of PIK Notes............ -- -- (12,277) 15,180,261 182,176 -- -- 169,899
Application of push-down accounting
and step-up in basis............... 514,758 -- -- -- -- 514,758
Elimination of historical accumulated
deficit of UPC attributable to
Philips............................ -- -- (147,547) -- -- 147,547 -- --
Net loss for the period from
December 11, 1997 to December
31, 1997........................... -- -- -- -- -- (9,144) -- (9,144)
--------
Total comprehensive income (loss) -- -- -- -- -- -- -- (9,144)
------------ -------- --------- --------- ------- ------------ ---------------- --------
Balances, December 31, 1997
(Post-Acquisition)................. 87,107,325 58,072 636,851 (9,198,135) (110,385) (156,691) (1,354) 426,493
Issuance of shares for
acquisition of receivable.......... 223,015 149 2,439 -- -- -- -- 2,588
Contribution by UIH of additional
investment in affiliate............ -- -- 7,459 -- -- -- -- 7,459
Issuance of convertible debt........ -- -- 10,935 -- -- -- -- 10,935
Unrealized gain on investment ...... -- -- -- -- -- -- 44,223 44,223
Gain on sale of investment (1,826) (1,826)
Change in cumulative translation
adjustments........................ -- -- -- -- -- -- (13,758) (13,758)
Net loss............................ -- -- -- -- -- (562,884) -- (562,884)
--------
Total comprehensive income (loss) -- -- -- -- -- -- -- (534,245)
------------ -------- --------- --------- --------- ------------ ---------------- --------
Balances, December 31, 1998
(Post-Acquisition)................. 87,330,340 58,221 657,684 (9,198,135) (110,385) (719,575) 27,285 (86,770)
============ ======== ========= ========= ========= ============ ================ ========
(1) As of December 31, 1995, 1996 and 1997 Other Cumulative Comprehensive
Income (Loss) represents foreign currency translation adjustments. As of
December 31, 1998, Other Cumulative Comprehensive Income (Loss) represents
foreign currency translation adjustments of (15,112) and unrealized gain on
investment of 42,397
(2) As adjusted for the 3:2 stock split (Note 10).
The accompanying notes are an integral part of
these consolidated financial statements.
70
UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in thousands of Dutch guilders)
As a result of the UPC Acquisition in December 1997 (see Note 1), the purchase
method of accounting was used to record assets acquired and liabilities assumed
by the parent company. Such accounting generally results in increased
amortization and depreciation reported in future periods. Accordingly, the
accompanying financial statements of the Company are not comparable in certain
significant respects since these financial statements report financial position,
results of operations, and cash flows on two separate accounting bases.
For the Years Ended December 31,
--------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
(Post-Acquisition) (Pre-Acquisition) (Pre-Acquisition)
Cash flows from operating activities:
Net loss......................................................... (562,884) (175,854) (80,189)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization................................... 187,646 132,888 79,832
Amortization of deferred financing costs........................ 9,234 642 --
Share in results of affiliated companies, net................... 63,486 20,270 22,286
Compensation expense related to stock options................... 322,627 4,818 --
Minority interests in subsidiaries.............................. (1,153) (152) 2,208
Exchange rate differences in related party convertible loans.... (12,653) 43,441 20,544
Gain on sale of investment...................................... (1,826) -- --
Provision for loss on investment related costs.................. 6,230 18,888 --
Other........................................................... 1,739 978 1,173
Changes in assets and liabilities:
(Increase) decrease in receivables............................. (19,739) 24,102 (31,932)
Increase in inventories........................................ (8,670) (2,229) (1,611)
Increase in other non-current assets........................... (2,004) (2,544) (309)
Increase in other current liabilities.......................... 77,191 69,551 25,553
(Decrease) increase in deferred taxes and other
long-term liabilities......................................... 13,776 (2,366) 4,975
-------- --------- --------
Net cash flows from operating activities......................... 73,000 132,433 42,530
-------- --------- --------
Cash flows from investing activities:
Restricted cash (deposited) released, net........................ (8,043) (22,220) --
Purchase of parent company's stock............................... -- (66,809) --
(Investments in and advances to) repayment from
affiliated companies, net....................................... (200,324) (3,869) 146,726
Capital expenditures............................................. (281,678) (145,630) (106,647)
New acquisitions, net of cash acquired........................... (210,039) (127,882) (46,473)
Release (deposit) to acquire minority interest in subsidiary..... 47,000 (47,000) --
Sale of affiliated companies..................................... 39,737 11,070 --
-------- --------- --------
Net cash flows from investing activities......................... (613,347) (402,340) (6,394)
-------- --------- --------
Cash flows from financing activities:
Proceeds from short-term borrowings.............................. 29,390 260,560 302,959
Proceeds from long-term borrowings............................... 529,630 1,141,539 23,113
Deferred financing costs......................................... (10,023) (24,585) --
Repayments of long and short-term borrowings..................... (252,641) (587,929) (440,440)
Borrowings on note payable to shareholder........................ 176,078 -- --
Dividends paid to minority shareholders.......................... (521) (171) (2,388)
Redemption of convertible loans.................................. -- (170,371) --
Purchase shares from shareholder................................. -- (292,561) --
-------- --------- --------
Net cash flows from financing activities......................... 471,913 326,482 (116,756)
-------- --------- --------
Effect of exchange rates on cash................................. (2,139) (72) 366
-------- --------- --------
Net increase (decrease) in cash and cash equivalents............ (70,573) 56,503 (80,254)
Cash and cash equivalents at beginning of period................. 100,144 43,641 123,895
-------- --------- --------
Cash and cash equivalents at end of period....................... 29,571 100,144 43,641
======== ========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
71
UNITED PAN-EUROPE COMMUNICATIONS N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Stated in thousands of Dutch guilders)
As a result of the UPC Acquisition in December 1997 (see Note 1), the purchase
method of accounting was used to record assets acquired and liabilities assumed
by the parent company. Such accounting generally results in increased
amortization and depreciation reported in future periods. Accordingly, the
accompanying financial statements of the Company are not comparable in certain
significant respects since these financial statements report financial position,
results of operations, and cash flows on two separate accounting bases.
For the Years Ended December 31,
------------------------------------------------------------------
1998 1997 1996
---------------------- -------------------- --------------------
(Post-Acquisition) (Pre-Acquisition) (Pre-Acquisition)
Non-cash investing and financing activities:
Issuance of shares upon conversion of PIK notes........ -- 169,899 --
======== ======= =======
Contribution of net assets of Dutch cable systems
to new joint venture.................................. 259,153 -- --
======== ======= =======
Purchase money notes payable to sellers................ 36,720 -- --
======== ======= =======
Acquisition of interest in affilate for UIH stock...... 9,935 -- --
======== ======= =======
Unrealized gain on investment.......................... 42,397 -- --
======== ======= =======
Supplemental cash flow disclosures:
Cash paid for interest................................. (69,066) (80,810) (32,674)
======== ======= =======
Cash received for interest............................. 6,990 5,077 2,757
======== ======= =======
Acquisition of Dutch cable assets:
Property, plant and equipment and other assets......... (106,000) -- --
Goodwill............................................... (74,762) -- --
-------- ------- -------
Total cash paid....................................... (180,762) -- --
======== ======= =======
Acquisition of Norway cable systems:
Working capital........................................ -- 3,790 2,221
Property, plant and equipment.......................... -- (23,541) (90,413)
Goodwill and other intangible assets................... -- (69,673) (71,509)
Other assets........................................... -- (57) --
Short-term debt........................................ -- 2,854 140,619
Other liabilities...................................... -- 1,557 10,271
-------- ------- -------
Total cash paid....................................... -- (85,070) (8,811)
======== ======= =======
Acquisition of remaining interest in UPC:
Property, plant and equipment.......................... -- 18,271 --
Investments in and advances to affiliates.............. -- 129,742 --
Goodwill............................................... -- 366,745 --
-------- ------- -------
Total allocation of purchase accounting
adjustments.......................................... -- 514,758 --
======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
72
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
1. Organization and Nature of Operations
United Pan-Europe Communications N.V., formerly known as United and Philips
Communications B.V. (''UPC'' or the ''Company''), was formed for the purpose of
acquiring and developing multi-channel television and telecommunications systems
in Europe. On July 13, 1995, United International Holdings, Inc. (''UIH''), a
United States of America corporation, and Philips Electronics N.V.
(''Philips''), contributed their respective ownership interests in European and
Israeli multi-channel television systems to UPC. Philips contributed to UPC its
95% interest in cable television systems in Austria, its 100% interest in cable
television systems in Belgium, and its minority interests in multi-channel
television systems in Germany, The Netherlands (KTE) and France (Citecable). UIH
contributed its interests in multi-channel television systems in Israel,
Ireland, the Czech Republic, Malta, Norway, Hungary, Sweden and Spain. UIH also
contributed United States dollars (''$'')78.2 million in cash (including accrued
interest of $3.2 million) to UPC and issued to Philips 3,169,151 shares of its
Class A Common Stock having a value of $50.0 million (at date of closing). In
addition, UPC issued to Philips $133.6 million of convertible subordinated pay-
in-kind notes (the ''PIK Notes''). As a result of this transaction, UIH and
Philips each owned a 50% economic and voting interest in UPC.
On December 11, 1997, UIH acquired Philips' 50% interest in UPC (the ''UPC
Acquisition''), thereby making it an effectively wholly-owned subsidiary of UIH
(subject to certain employee equity incentive compensation arrangements) through
its wholly-owned subsidiary UIH Europe, Inc. (''UIHE''). The entity's name was
changed to United Pan-Europe Communications N.V., and its legal seat was
transferred from Eindhoven to Amsterdam. Through its cable-based communications
networks in 10 countries in Europe and in Israel, UPC currently offers cable
television services and is further developing and upgrading its network to
provide digital video, voice and Internet/data services in its Western European
markets.
As part of the UPC Acquisition, (i) UPC purchased the 3,169,151 shares of
Class A Common Stock of UIH held by Philips (66,800), (ii) UIH purchased 169,899
of the accreted amount of UPC's PIK Notes and redeemed them for 15,180,261
shares of UPC, (iii) UPC repaid to Philips the remaining 170,371 accreted amount
of the PIK Notes (339,800), (iv) UIH purchased 13,121,604 shares of UPC directly
from Philips, and (v) UPC repurchased Philips' remaining equity interest in UPC
(24,378,396 shares). The UPC Acquisition was financed with proceeds from a long-
term revolving credit facility through UPC with a syndicate of banks (305,200)
(the ''Senior Revolving Credit Facility''), a bridge bank facility through a
subsidiary of UPC $111,200 (224,000) (the ''Bridge Bank Facility'') and a cash
investment by UIH of 327,400. Approximately 479,000 drawn on the Senior
Revolving Credit Facility was used to repay existing debt of UPC in conjunction
with the UPC Acquisition.
UIH's acquisition of Philips' interest in UPC was accounted for as a step
acquisition under purchase accounting. As a result of UPC becoming effectively
wholly owned by UIH, such purchase accounting adjustments, along with existing
basis differences, were pushed down to the financial statements of UPC and a new
basis of accounting was established for the UPC net assets acquired by UIH. As
of December 11, 1997, the proportional net assets of UPC acquired by UIH were
recorded at fair market value based on the purchase price paid by UIH, along
with additional basis differences at the UIH level existing as of that date. The
total consideration paid to Philips for their 50% interest in UPC, the resulting
amount paid in excess of Philips' proportionate share of UPC's net assets at
that date plus UIH's existing basis in excess of their proportionate share of
UPC's net assets is summarized below. In addition, the table below presents how
such total excess was allocated to UPC's underlying assets as of December 11,
1998.
73
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
UPC's net asset value at December 10, 1997........................................... 43,541
Cash paid to Philips by UPC for 24,378,396 shares in UPC............................. (292,561)
Conversion by UIH of PIK notes acquired from Philips at cost to 15,180,261 of
UPC's shares........................................................................ 169,899
--------
UPC's net asset value prior to application of push down accounting................... (79,121)
UIH's proportionate share of UPC's net assets at December 10, 1997................... 21,770
UIH's existing basis difference related to their original interest in UPC dating
back to July 1995 formation of UPC (as adjusted through December 10, 1997).......... 86,529
Cash paid to Philips by UIH for 13,121,604 shares in UPC............................. 157,439
Conversion by UIH of PIK notes acquired from Philips at cost to 15,180,261 of
UPC's shares........................................................................ 169,899
--------
435,637
--------
Total purchase accounting adjustment 514,758
========
The total purchase accounting adjustments were allocated to UPC's underlying assets
as follows:
Property, plant and equipment........................................................ 18,271
Investment in and advances to affiliates............................................. 129,742
Goodwill............................................................................. 366,745
--------
Total............................................................................. 514,758
========
As a result of the UPC Acquisition and the associated push-down of UIH basis
on December 11, 1997, the consolidated balance sheets as of December 31, 1998
and 1997 as well as the consolidated statements of operations and cash flows
subsequent to December 31, 1998 are presented on a ''post-acquisition'' basis.
The primary difference in the consolidated statement of operations presented on
a ''post-acquisition'' basis compared to a ''pre-acquisition'' basis consists of
additional depreciation and amortization on the above purchase accounting
adjustments. The consolidated statements of operations and cash flows for the
year ended December 31, 1997 include the post-acquisition results of the Company
for the period from December 11, 1997 through December 31, 1997, which reflects
1,980 of new basis depreciation and amortization resulting from push-down
accounting as well as approximately 4,034 of interest expense from purchase
related indebtedness. Due to immateriality, the entire fiscal year ended
December 31, 1997 is presented as ''pre-acquisition'' in the accompanying
consolidated statements of operations and cash flows.
The following pro forma consolidated operating results for the years ended
December 31, 1997 and 1996 give effect to the UPC Acquisition as if it had
occurred at the beginning of the periods presented. This pro forma consolidated
financial information does not purport to represent what the Company's results
of operations would actually have been if such transaction had in fact occurred
on such dates. The pro forma adjustments are based upon currently available
information and upon certain assumptions that management believes are
reasonable.
74
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
For the Year Ended For the Year Ended
December 31, 1997 December 31, 1996
-------------------------- --------------------------
Historical Pro Forma (1) Historical Pro Forma (1)
----------- ------------- ----------- -------------
Service and other revenue................................. 337,255 337,255 245,179 245,179
Operating expense......................................... (118,508) (118,508) (82,439) (82,439)
Selling, general and administrative expense............... (119,067) (119,067) (81,176) (81,176)
Depreciation and amortization............................. (132,888) (158,920) (79,832) (105,195)
---------- ---------- ---------- ----------
Net operating income (loss)............................. (33,208) (59,240) 1,732 (23,631)
Interest income........................................... 6,512 6,512 2,757 2,757
Interest expense.......................................... (41,995) (83,221) (14,263) (55,465)
Interest expense, related party........................... (28,743) -- (24,212) --
Provision for loss on investment related costs............ (18,888) (18,888) -- --
Foreign exchange loss and other expense................... (41,063) (32,622) (21,200) (16,906)
---------- ---------- ---------- ----------
Net loss before income taxes and other items............ (157,385) (187,459) (55,186) (93,245)
Share in results of affiliated companies, net............. (20,270) (28,439) (22,286) (30,935)
Minority interests in subsidiaries........................ 152 152 (2,208) (2,208)
Income tax benefit (expense).............................. 1,649 1,649 (509) (509)
---------- ---------- ---------- ----------
Net loss................................................ (175,854) (214,097) (80,189) (126,897)
========== ========== ========== ==========
Basic and diluted net loss per ordinary share............. (2.03) (2.75) (0.92) (1.63)
========== ========== ========== ==========
Weighted-average number of ordinary shares outstanding.... 86,578,117 77,909,190 87,107,325 77,909,190
========== ========== ========== ==========
(1) Includes additional depreciation and amortization related to the step-up in
basis in tangible assets, investments in and advances to affiliated companies
and new goodwill, interest expense from the Senior Revolving Credit Facility
and the Bridge Bank Facility, net of elimination of historical interest
expense on the PIK Notes and refinanced credit facilities, and foreign
exchange loss on the U.S. dollar-denominated Bridge Bank Facility, net of
elimination of historical foreign exchange loss on the PIK Notes.
75
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
The following chart presents a summary of the Company's significant
investments in multi-channel television, programming and telephony operations as
of December 31, 1998:
UPC
Austria:
Telekabel Group (''Telekabel Group'')........................... 95.0%
Belgium:
Radio Public N.V./S.A. (''TVD'')................................ 100.0%
Czech Republic:
KabelNet........................................................ 100.0%
Ceska Programova Spolecnost SRO (''TV Max'').................... 100.0%
France:
Mediareseaux Marne S.A. (''Mediareseaux'')....................... 99.6%
Hungary:
Telekabel Hungary (''Telekabel Hungary'')....................... 79.3%
Telekabel Hungary Programming................................... 50.0%
Monor Communications Group, Inc. ("Monor")...................... 44.75%
Ireland:
Tara Television Limited ("Tara")................................ 80.0%
Israel: (through UII)
Tevel Israel International Communications Ltd. (''Tevel'')...... 46.6%
Malta: (through UII)
Melita Cable TV P.L.C. (''Melita'')............................. 50.0%
The Netherlands:
United Telekabel Holding N.V. (''UTH'') (1)..................... 51.0%
Norway:
Janco Multicom (''Janco Multicom'')............................. 100.0%
Romania:
Multicanal Holdings............................................. 100.0%
Control Cable Ventures.......................................... 100.0%
Eurosat......................................................... 51.0%
Slovak Republic:
Trnavatel....................................................... 75.0%
Kabeltel........................................................ 100.0%
(1) On August 6, 1998, UPC merged its Dutch cable television systems consisting
of its 50% interest in A2000 Holding N.V. (''A2000'') and its wholly owned
subsidiary Cable Network Brabant Holding B.V. (''CNBH'') with those of a
Dutch energy company (''NUON''), forming a new company, UTH. Following the
merger, UPC held 51% of UTH. In February 1999, UPC exercised its ability to
increase its interest to 100% (see Note 3).
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements of the Company have been
prepared in accordance with United States generally accepted accounting
principles. The preparation of financial statements in conformity with United
States generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements
76
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
In December 1998, UPC acquired telephony and programming assets from UIH
through the issuance of new shares (see Note 3). As the acquisition was between
entities under common control, the transaction was accounted for at historical
cost, similar to pooling of interests accounting. It is generally accepted that,
consistent with a pooling-of-interests accounting, prior period financial
statements of the transferee are restated for all periods in which the
transferred operations were part of parent's consolidated financial statements.
Accordingly, we have restated all periods presented as if UPC had acquired the
telephony and programming assets from UIH as of the date of UIH's initial
investment.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
UPC and all subsidiaries where it exercises a controlling financial interest
through the ownership of a majority voting interest, except for UTH, where
because of certain minority shareholders rights the Company accounts for its
investment in UTH using the equity method of accounting. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include cash and investments with original
maturities of less than three months.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based upon the Company's assessment of
probable loss related to overdue accounts receivable. Upon disconnection of the
subscriber, the account is fully reserved. The allowance is maintained on the
books until receipt of payment, the account is deemed uncollectable or a maximum
of three years.
Restricted Cash
Cash held as collateral for letters of credit and other loans is classified
based on the expected expiration of such facilities.
Costs to be Reimbursed by Affiliated Companies
The Company incurs costs on behalf of affiliated companies, such as salaries
and benefits, travel and professional services. These costs are reimbursed by
the affiliated companies.
Marketable Equity Securities of Parent
The Company classifies its investments in marketable equity securities of UIH
as available-for-sale and reports such investments at fair market value.
Unrealized gains and losses are charged or credited to equity, realized gains
and losses and other than temporary declines in market value are included in
operations.
77
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
Investments in and Advances to Affiliated Companies, Accounted for under the
Equity Method
For those investments in companies in which the Company's ownership interest
is 20% to 50%, its investments are held through a combination of voting common
stock, preferred stock, debentures or convertible debt and/or the Company exerts
significant influence through board representation and management authority, or
in which majority control is deemed to be temporary, the equity method of
accounting is used. Under this method, the investment, originally recorded at
cost, is adjusted to recognize the Company's proportionate share of net earnings
or losses of the affiliates, limited to the extent of the Company's investment
in and advances to the affiliates, including any debt guarantees or other
contractual funding commitments. The Company's proportionate share of net
earnings or losses of affiliates includes the amortization of the excess of its
cost over its proportionate interest in each affiliate's net tangible assets or
the excess of its proportionate interest in each affiliate's net tangible assets
in excess of its cost.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Additions, replacements,
installation costs and major improvements are capitalized, and costs for normal
repair and maintenance of property, plant and equipment are charged to expense
as incurred. Assets constructed by subsidiaries of UPC incorporate overhead
expense and interest charges incurred during the period of construction;
investment subsidies are deducted. Depreciation is calculated using the
straight-line method over the economic life of the asset, taking into account
the residual value. The economic lives of property, plant and equipment at
acquisition are as follows:
Cable distribution networks......................... 7-20 years
Subscriber installation costs and converters........ 5 years
MMDS distribution facilities........................ 7-20 years
Office equipment, furniture and fixtures............ 3-8 years
Buildings and leasehold improvements................ 20-33 years
Other............................................... 3-10 years
Goodwill and Other Intangible Assets
The excess of investments in consolidated subsidiaries over the net tangible
asset value at acquisition is amortized on a straight line basis over 15 years.
Licenses in newly-acquired companies are recognized at the fair market value of
those licenses at the date of acquisition. Licenses in new franchise areas
include the capitalization of direct costs incurred in obtaining the license.
The license value is amortized on a straight-line basis over the initial license
period, up to a maximum of 20 years.
Recoverability of Tangible and Intangible Assets
The Company evaluates the carrying value of all tangible and intangible
assets whenever events or circumstances indicate the carrying value of assets
may exceed their recoverable amounts. An impairment loss is recognized when the
estimated future cash flows (undiscounted and without interest) expected to
result from the use of an asset are less than the carrying amount of the asset.
Measurement of an impairment loss is based on fair value of the asset computed
using discounted cash flows if the asset is expected to be held and used.
Measurement of an impairment loss for an asset held for sale would be based on
fair market value less estimated costs to sell.
78
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
Deferred Financing Costs
Costs to obtain debt financing are capitalized and amortized over the life of
the debt facility using the effective interest method.
Other Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards No. 130,
''Reporting Comprehensive Income'' (''SFAS 130''), which requires that an
enterprise (i) classify items of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position.
Revenue Recognition
Revenue is primarily derived from the sale of cable television services to
subscribers and is recognized in the period the related services are provided.
Initial installation fees are recognized as revenue in the period in which the
installation occurs, to the extent installation fees are equal to or less than
direct selling costs, which are expensed. To the extent installation fees exceed
direct selling costs, the excess fees are deferred and amortized over the
average contract period. All installation fees and related costs with respect to
reconnections and disconnections are recognized in the period in which the
reconnection or disconnection occurs because reconnection fees are charged at a
level equal to or less than related reconnection costs.
Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations
of credit risk consist principally of trade receivables. Concentrations of
credit risk with respect to trade receivables are limited due to the Company's
large number of customers and their dispersion across many different countries
in Europe.
Stock-Based Compensation
Stock-based compensation is recognized using the intrinsic value method for
the Company's stock option plans, which results in compensation expense for the
difference between the grant price and the fair market value at each new
measurement date.
Income Taxes
The Company accounts for income taxes under the asset and liability method
which requires recognition of deferred tax assets and liabilities for the
expected future income tax consequences of transactions which have been included
in the financial statements or tax returns. Under this method, deferred tax
assets and liabilities are determined based on the difference between the
financial statement and income tax basis of assets, liabilities and loss
carryforwards using enacted tax rates in effect for the year in which the
differences are expected to reverse. Net deferred tax assets are then reduced by
a valuation allowance if management believes it is more likely than not they
will not be realized. Withholding taxes are taken into consideration in
situations where the income of subsidiaries is to be paid out as dividends in
the near future. Such withholding taxes are generally charged to income in the
year in which the dividend income is generated.
79
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
Basic and Diluted Loss Per Share
The Company has adopted Statement of Financial Accounting Standards No. 128,
''Earnings Per Share'' (''SFAS 128''). ''Basic loss per share'' is determined by
dividing net loss available to ordinary shareholders by the weighted-average
number of ordinary shares outstanding during each period. ''Diluted loss per
share'' includes the effects of potentially issuable common stock, but only if
dilutive. Therefore, the Company's stock option plans and convertible securities
are excluded from the Company's diluted loss per share for all periods presented
because their effect would be anti-dilutive.
Foreign Operations and Foreign Exchange Rate Risk
The functional currency for the Company's foreign operations is the
applicable local currency for each affiliate company. Assets and liabilities of
foreign subsidiaries for which the functional currency is the local currency are
translated at exchange rates in effect at period-end, and the statements of
operations are translated at the average exchange rates during the period.
Exchange rate fluctuations on translating foreign currency financial statements
into Dutch guilders that result in unrealized gains or losses are referred to as
translation adjustments. Cumulative translation adjustments are recorded as a
separate component of shareholders' equity included in Other Comprehensive
Income (Loss).
Transactions denominated in currencies other than the local currency are
recorded based on exchange rates at the time such transactions arise. Subsequent
changes in exchange rates result in transaction gains and losses which are
reflected in income as unrealized (based on period-end translations) or realized
upon settlement of the transactions.
Cash flows from the Company's operations in foreign countries are translated
based on their functional currencies. As a result, amounts related to assets and
liabilities reported on the consolidated statements of cash flows will not agree
to changes in the corresponding balances on the consolidated balance sheets. The
effects of exchange rate changes on cash balances held in foreign currencies are
reported as a separate line below cash flows from financing activities.
The Company and certain of its operating companies have notes payable and
notes receivable that are denominated in a currency other than their own
functional currency. In general, the Company and the operating companies do not
execute hedge transactions to reduce the Company's exposure to foreign currency
exchange rate risks. Accordingly, the Company may experience economic loss and a
negative impact on earnings and equity with respect to its holdings solely as a
result of foreign currency exchange rate fluctuations.
On January 11, 1999, eleven of the fifteen member countries of the European
Union fixed their conversion rates between their existing sovereign currencies
and the Euro, eliminating the foreign exchange rate fluctuation exposure of UPC
related to its operating subsidiaries in the eleven countries (includes UPC's
subsidiaries in The Netherlands, Austria, Belgium, France, and Spain). UPC's
investments in countries outside the eleven countries which have adopted the
Euro include Norway, Hungary, Ireland, Israel and Malta.
New Accounting Principles
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 131, ''Disclosures about Segments of an
Enterprise and Related Information'' (''SFAS 131''), which requires that a
public business enterprise report certain financial and descriptive information
about its reportable segments. The Company adopted SFAS 131 for the year ended
December 31, 1998.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, ''Accounting or the Costs of Computer Software
Developed or Obtained for Internal Use'' (''SOP 98-1''), which provides guidance
80
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
on accounting for the costs of computer software developed or obtained for
internal use. SOP 98-1 identifies the characteristics of internal-use software
and provides examples to assist in determining when computer software is for
internal use. SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998, for projects in progress and prospectively,
with earlier application encouraged. Management believes that the adoption of
SOP 98-1 will not have a material effect on the financial statements.
The American Institute of Certified Public Accountants recently issued
Statement of Position 98-5, ''Reporting on the Costs of Start-Up Activities''
(''SOP 98-5''), which is required to be adopted by affected companies for fiscal
years beginning after December 15, 1998. SOP 98-5 defines start-up and
organization costs, which must be expensed as incurred. In addition, all
deferred start-up and organization costs existing as of January 1, 1999 must be
written-off and accounted for as a cumulative effect of an accounting change.
The Company does not expect the adoption of SOP 98-5 to have a material effect
on its financial position or results of operations.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, ''Accounting for Derivative Instruments
and Hedging Activities'' (''SFAS 133''), which requires that companies recognize
all derivatives as either assets or liabilities in the balance sheet at fair
value. Under SFAS 133, accounting for changes in fair value of a derivative
depends on its intended use and designation. SFAS 133 is effective for fiscal
years beginning after June 15, 1999. The Company is currently assessing the
effect of this new standard.
3. Acquisitions and Dispositions
Norkabel
In October 1996, the Company increased its ownership in Norkabelgruppen A/S
(''Norkabel'') from 8.3% to 100% for a purchase price of Norwegian kroner
(''NKr'')32.5 million (8,811). Details of the net assets acquired were as
follows (using the exchange rate as of December 31, 1996):
Working capital.............................. (2,221)
Property, plant and equipment................ 90,413
Goodwill and other intangible assets......... 71,509
Short-term debt.............................. (140,619)
Other liabilities............................ (10,271)
--------
Total cash paid.......................... 8,811
========
The following pro forma condensed consolidated operating results for the
period ended December 31, 1996 gives effect to the acquisition of Norkabel as if
it had occurred at the beginning of the period presented. This pro forma
condensed consolidated financial information does not purport to represent what
the Company's results of operations would actually have been if such transaction
had in fact occurred on such date. The pro forma adjustments are based upon
currently available information and upon certain assumptions that management
believes are reasonable.
81
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
For the Year Ended
December 31, 1996
------------------------------
Historical Pro Forma
-------------- --------------
Service and other revenue...................................... 245,179 288,749
========== ==========
Net loss....................................................... (80,189) (112,671)
========== ==========
Basic and diluted net loss per ordinary share.................. (0.92) (1.29)
========== ==========
Weighted-average number of ordinary shares outstanding......... 87,107,325 87,107,325
========== ==========
Janco Kabel-TV
In January 1997, UPC purchased a 70.2% interest in Janco Kabel-TV A/S
(''Janco'') for NKr313.8 million (85,070). Concurrent with the transaction, UPC
deposited 47,000 with a bank as collateral for an obligation to seller to
purchase the remaining 29.8% interest. Details of the net assets acquired at
70.2% were as follows (using the exchange rate as of December 31, 1996):
Working capital.............................. (3,790)
Property, plant and equipment................ 23,541
Goodwill and other intangible assets......... 69,673
Other assets................................. 57
Short-term debt.............................. (2,854)
Other liabilities............................ (1,557)
------
Total cash paid.......................... 85,070
======
In November 1997, UPC's wholly-owned subsidiary Norkabel merged with and into
UPC's 70.2%-owned subsidiary, Janco, to give UPC an 87.3% interest in the new
entity Janco Multicom. UPC received a call option and the minority shareholder
received a put option to acquire or respectively sell all the remaining minority
shareholders interest of Janco Multicom AS. In November 1998, UPC exercised its
call option and acquired the remaining minority shareholder interest in Janco
Multicom AS for 37,200. The residual restricted funds held with a bank as
collateral were released.
The following pro forma condensed consolidated operating results for the year
ended December 31, 1996 gives effect to the acquisition of Janco as if it had
occurred at the beginning of 1996. This pro forma condensed consolidated
financial information does not purport to represent what the Company's results
of operations would actually have been if such transaction had in fact occurred
on such date. The pro forma adjustments are based upon currently available
information and upon certain assumptions that management believes are
reasonable.
For the Year Ended
December 31, 1996
------------------------------
Historical Pro Forma
-------------- --------------
Service and other revenue...................................... 245,179 270,467
========== ==========
Net loss....................................................... (80,189) (93,952)
========== ==========
Basic and diluted net loss per ordinary share.................. (0.92) (1.08)
========== ==========
Weighted-average number of ordinary shares outstanding......... 87,107,325 87,107,325
========== ==========
82
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
Combivisie
Effective January 1, 1998, UPC acquired certain assets, including The
Netherlands cable systems of Stichting Combivisie Regio (''Combivisie''), for
180,762. The purchase was funded with a 60,000 draw on the Senior Revolving
Credit Facility and 120,762 of bank financing. Details of the net assets
acquired were as follows:
Property, plant and equipment and other assets....... 106,000
Goodwill............................................. 74,762
-------
Total cash paid.................................... 180,762
=======
The following pro forma condensed consolidated operating results for the
years ended December 31, 1997 and 1996 give effect to the acquisition of
Combivisie as if it had occurred at the beginning of the periods presented. This
pro forma condensed consolidated financial information does not purport to
represent what the Company's results of operations would actually have been if
such transaction had in fact occurred on such date. The pro forma adjustments
are based upon currently available information and upon certain assumptions that
management believes are reasonable.
For the Year Ended For the Year Ended
December 31, 1997 December 31, 1996
------------------------------ ------------------------------
Historical Pro Forma Historical Pro Forma
-------------- -------------- -------------- --------------
Service and other revenue.......... 337,255 366,227 245,179 272,322
========== ========== ========== ==========
Net loss........................... (175,854) (177,142) (80,189) (82,493)
========== ========== ========== ==========
Basic and diluted net loss per
ordinary share.................... (2.03) (2.05) (0.92) (0.95)
========== ========== ========== ==========
Weighted-average number of
ordinary shares outstanding....... 86,578,117 86,578,117 87,107,325 87,107,325
========== ========== ========== ==========
Telekabel Hungary
On June 29, 1998, UPC acquired Time Warner Entertainment Company's (''TWE'')
interest in its Hungarian multi-channel television system assets for $9,500
(19,380) in cash and a non-interest bearing promissory note in the amount of
$18,000 (36,720) (the ''Time Warner Note''). UPC and TWE retained their
respective percentage interests in the programming assets in Hungary. UPC has
granted TWE an option to acquire UPC's interest in such programming assets as
well as TV Max in consideration for the cancellation of the Time Warner Note. On
June 30, 1998, UPC merged its 100%-owned Hungarian multi-channel television
systems (''Kabelkom'') with Hungary's second largest multiple system operator to
form the new joint venture Telekabel Hungary. UPC retains a 79.25% ownership
interest in the new entity. In March 1999, Time Warner exercised their option
to acquire UPC's interest in the programming assets and TV Max (See Note 16.)
A2000
In July 1995, prior to the formation of UPC, Philips Media and US WEST formed
a 50/50 joint venture (''A2000'') for the purpose of acquiring certain cable
television distribution networks in the Amsterdam, Netherlands area. In
connection with this transaction Philips and US WEST borrowed NLG680 million on
a bridge loan basis from a bank. Such funds were used to (i) purchase from
certain municipalities licenses totaling NLG360 million (ii) make initial
capital contributions to A2000 totaling NLG90 million and (iii) fund
intercompany loans to A2000 totaling NLG230 million. Upon UPC's formation,
Philips Media assigned its ownership interest in licenses and its investment and
advances in A2000 to UPC. The following table reflects the amounts recorded on
UPC's books as a result of this transaction:
83
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
Licenses 180,000
Investment and advances 160,000
Debt (340,000)
Subsequently, UPC and US WEST contributed approximately NLG45 million each to
a subsidiary of A2000 in order to increase its statutory equity for financing
purposes. During January 1996, A2000 obtained long-term financing of NLG320
million and on behalf of UPC and US WEST reduced the bridge loan. UPC and US
WEST repaid the remaining portion of the bridge loan (totaling NLG360 million)
through equal contributions of NLG180 million. UPC accounted for its 50%
ownership interest in A2000 (until it was contributed into UTH) as an equity
method investment.
UTH
On August 6, 1998, UPC merged its Dutch cable television systems with those
of NUON, forming a new company, UTH (the ''UTH Transaction''), which was
accounted for as the formation of a joint venture with NUON's and UPC's net
assets recorded at their historical carrying values. Following the merger, UPC
holds 51% of UTH. The agreement provides UPC with a call option exercisable
after August 6, 1999 to acquire 50% of NUON's 49% ownership interest in UTH. If
UPC exercises the call option, NUON can exercise the secondary put option,
requiring UPC to purchase its remaining interest in UTH. The agreement provides
NUON with a put option exercisable after August 6, 1999 to require UPC to
purchase 50% of NUON's 49% interest in UTH. If NUON exercises the put option,
UPC can exercise the secondary call option, requiring NUON to sell its remaining
interest in UTH to UPC. The UTH shareholder agreement provides for essentially
joint governance by NUON and UPC on almost all significant participating and
protective type rights until either the call or put option is exercised.
Although UPC retains a majority economic and voting interest in UTH, because of
joint governance on most significant operating decisions, UPC accounts for its
investment in UTH using the equity method of accounting.
On February 17, 1999, the Company acquired the remaining 49% of UTH from NUON
(the "NUON Transaction") for NLG518.1 million. In addition, UPC repaid NUON and
assumed from NUON a NLG33.3 million subordinated loan, including accrued
interest, dated December 31, 1998, owed by UTH to NUON. The purchase of NUON's
interest and payment of the loan were funded with proceeds from UPC's initial
public offering.
The following pro forma condensed consolidated operating results for the
years ended December 31, 1998 and 1997 give effect to the UTH Transaction and
the NUON Transaction as if they both had occurred at the beginning of the
periods presented. This pro forma condensed consolidated financial information
does not purport to represent what the Company's results of operations would
actually have been if such transactions had in fact occurred on such date. The
pro forma adjustments are based upon currently available information and upon
certain assumptions that management believes are reasonable.
For the Year Ended For the Year Ended
December 31, 1998 December 31, 1997
----------------------------- -----------------------------
Historical Pro Forma Historical Pro Forma
-------------- ------------- -------------- -------------
Service and other revenue.......... 408,970 595,011 337,255 474,488
========== ========== ========== ==========
Net loss........................... (562,884) (642,768) (175,854) (231,843)
========== ========== ========== ==========
Weighted-average number of
ordinary shares outstanding....... (7.22) (8.25) (2.03) (2.68)
========== ========== ========== ==========
Basic and diluted net loss per
ordinary share.................... 77,914,081 77,914,081 86,578,117 86,578,117
========== ========== ========== ==========
84
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
UII
In November 1998, the Company (i) acquired from TINTA its indirect 23.3% and
25% interests in the Tevel and Melita systems for $91.5 million, doubling the
Company's respective ownership in these systems to 46.6% and 50%, respectively,
(ii) purchased an additional 5% interest in Princes Holdings and 5% of Tara in
consideration for 384,531 shares of UIH held by UPC, and (iii) sold the 5%
interest in Princes Holdings, together with its existing 20% interest, to TINTA
for $20.5 million. The net payment of $71.0 million to TINTA ($68.0 million
after closing adjustments) was funded with the proceeds of a $90.0 million
promissory note made by a subsidiary of the Company to its primary partners in
the Tevel system. (see Note 9 - DIC Loan).
Purchase of Certain Telephony and Programming Assets from UIH
In December 1998, in exchange for 6,330,340 newly-issued ordinary shares of
UPC, UIH sold to us their:
. 44.75% economic interest in Monor, a traditional telephony and cable
television system in the Monor region of Hungary;
. 75% interest in Tara, a company providing Irish programming to the U.K.
markets; and
Accordingly, because this was an exchange between entities under common
control, we have restated our financial statements for all periods in which the
operations of these companies were part of UIH's consolidated financial
statements (see Note 2).
Other
The assets of Intercabo, Portugal were sold in January 1998 for 4,000. During
1997, the Company made a strategic decision to sell its interest in Intercabo
due to competitive factors which had recently emerged in Portugal. After several
offers to purchase Intercabo were received by the Company during 1997, it became
apparent that the Company's investment in Intercabo had become permanently
impaired based on its decision to sell its investment. Accordingly, an
impairment loss of 18,888 was recognized during 1997, which included the
writedown of our investment, net of expected proceeds, of 13,436 and the
writeoff of intercompany receivables of 5,452.
The operating results of Intercabo included in the Company's 1997
consolidated results included revenue of 549, a net operating loss of 4,945 and
a net loss of 5,227.
85
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
4. Investments in and Advances to Affiliated Companies, Accounted for Under the
Equity Method
As of December 31, 1998
-----------------------------------------------------------------------------------
Investments in
and Advances to Cumulative Cumulative
Affiliated Dividends Share in Results of Translation
Companies Received Affiliated Companies Adjustments Total
------------------ ----------- -------------------- ------------- -------------
UTH.......... 272,508 -- (22,780) -- 249,728
Tevel (2).... 191,716 (12,121) (777) (9,562) 169,256
Melita (2)... 28,018 -- 1,985 (141) 29,862
Telekabel
Hungary
Programming
(3).......... 24,404 -- (7,723) (787) 15,894
Monor........ 21,358 -- (4,916) (14,835) 1,607
Xtra Music... 10,598 -- (1,067) -- 9,531
Other, net... 4,568 -- 9 -- 4,577
------- ------- ------- ------- -------
Total........ 553,170 (12,121) (35,269) (25,325) 480,455
======= ======= ======= ======= =======
As of December 31, 1997
--------------------------------------------------------------------------------
Investments in
and Advances to Cumulative Cumulative
Affiliated Share in Results of Translation
Companies Affiliated Companies(1) Adjustment Total
------------------ --------------------------- ------------ -------------
A2000..................... 220,933 (571) -- 220,362
UII (2)................... 103,029 (64) -- 102,965
Kabelkom.................. 57,783 247 -- 58,030
Monor..................... 21,358 (535) (5,426) 15,397
Other, net................ 3,583 -- -- 3,583
------- ------ ------ -------
Total..................... 406,686 (923) (5,426) 400,337
======= ====== ====== =======
86
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
The Company had the following differences related to the excess of cost over
the net tangible assets acquired for its equity investments. Such differences
are being amortized over 15 years:
As of December 31, 1998 As of December 31, 1997
----------------------------- ----------------------------------
Basis Accumulated Basis Accumulated
Difference Amortization Difference Amortization(1)
------------ --------------- --------------- -----------------
A2000..................... -- 231,041 --
UTH....................... 2,781 (62) -- --
Tevel (2)................. 152,417 (6,334) -- --
Melita (2)................ 24,377 (852) -- --
UII (2)................... -- -- 64,618 --
Kabelkom.................. -- -- 38,161 --
Telekabel Hungary
Programming (3).......... 14,419 (570) -- --
Monor..................... 1,672 (131) 5,480 --
Xtra Music................ 6,776 (138) -- --
------- ------ ------- --------------
Total..................... 202,442 (8,087) 339,300 --
======= ====== ======= ==============
- --------------
(1) In connection with the UPC Acquisition, certain purchase accounting
adjustments were pushed down to the financial statements of UPC, a new basis
of accounting was established on December 11, 1997, and cumulative share in
results of affiliated companies and accumulated amortization was reset to
zero as of that date (see Note 1).
(2) In November 1998 the Company acquired from TINTA its interests in Tevel and
Melita, and sold its interest in Princes Holdings (see Note 3).
(3) Represents the Company's remaining investment in Telekabel Hungary
Programming after the transaction with TWE (see Note 3).
Summary financial information for Tevel is as follows:
As of As of
December 31, December 31,
1998 1997
------------ ------------
Cash......................................................................... 60 117
Tangible fixed assets........................................................ 118,451 133,009
Other assets................................................................. 447,057 35,895
------- -------
Total assets.............................................................. 565,568 169,021
======= =======
Current liabilities.......................................................... 42,174 45,569
Notes payable................................................................ 20,404 11,829
Long-term debt............................................................... 426,604 9,794
Other long-term liabilities.................................................. 26,659 27,884
Shareholders' value.......................................................... 49,727 73,945
------- -------
Total liabilities and shareholders' value................................. 565,568 169,021
======= =======
87
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
For the Years Ended December 31,
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
Revenue...................................................................... 203,662 187,099 154,647
Costs........................................................................ (80,418) (91,499) (79,221)
Depreciation and amortization................................................ (47,977) (30,867) (26,839)
------- ------- -------
Net operating income......................................................... 75,267 64,733 48,587
Financial charges, including interest expense from related...................
parties, and foreign exchange results....................................... (64,589) (7,948) (11,437)
Net loss before income taxes and other items................................ 16,345 (5,745) 4,671
Share in results of affiliated companies..................................... (12,414) 51 2,342
------- ------- -------
Net income.................................................................. 14,609 51,091 44,163
======= ======= =======
Summary financial information for A2000 is as follows:
As of As of
July 31, 1998(1) December 31, 1997
---------------- -----------------
Liquid assets................................................................ 2,336 6,868
Other current assets......................................................... 53,177 35,557
Financial fixed assets....................................................... 634 543
Tangible fixed assets........................................................ 341,186 309,291
Intangible fixed assets...................................................... 117,797 122,189
------- -------
Total assets............................................................. 515,130 474,448
======= =======
Current liabilities.......................................................... 88,372 67,652
Provisions................................................................... 1,508 2,154
Long-term debt............................................................... 479,000 426,000
Shareholders' value.......................................................... (53,750) (21,358)
------- -------
Total liabilities and shareholders' value................................ 515,130 474,448
======= =======
For the
Seven Months For the Years Ended
Ended December 31,
July 31, ---------------------------
1998(1) 1997 1996
------------------ -------------- -----------
Revenue.............................. 69,668 101,450 89,893
Costs................................ (52,329) (67,687) (49,064)
Depreciation and amortization........ (36,114) (50,846) (43,789)
------- ------- -------
Net operating loss.................. (18,775) (17,083) (2,960)
Financial charges and other.......... (13,617) (16,751) (12,745)
Income tax (provision) benefit....... -- 9,826 (224)
------- ------- -------
Net loss............................ (32,392) (24,008) (15,929)
======= ======= =======
- ----------------
(1) Effective August 6, 1998, A2000 was contributed to UTH as part of the UTH
Transaction.
88
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
5. Marketable Equity Securities of Parent
As a result of the UPC Acquisition, a subsidiary of UPC acquired 3,169,151
UIH Class A Common shares, valued at fair market value of 66,809 as of December
11, 1997. In November 1998, UPC used 384,531 shares to acquire an additional 5%
interest in each of Tara and PHL. Accordingly, unrealized gains recorded in
equity totaling approximately 1,826, were reversed out of equity and recorded as
a realized gain in the consolidated statement of operations. As of December 31,
1998, the fair value of the remaining 2,784,620 shares was 101,097, resulting in
an unrealized gain of 42,397 for the year ended December 31, 1998. These shares
are pledged under the Bridge Bank Facility (see Note 9).
6. Property, Plant and Equipment
As of December 31,
------------------------------
1998 1997(1)
-------------- --------------
Cable distribution networks......................... 466,087 364,655
Subscriber premises equipment and converters........ 134,527 81,301
MMDS distribution facilities........................ 13,873 12,958
Office equipment, furniture and fixtures............ 35,294 13,074
Buildings and leasehold improvements................ 12,754 3,713
Other............................................... 28,170 16,593
------- -------
690,705 492,294
Accumulated depreciation......................... (87,708) (7,312)
------- -------
Net property, plant and equipment................ 602,997 484,982
======= =======
(1) In connection with the UPC Acquisition, certain purchase accounting
adjustments were pushed down to the financial statements of UPC, a new basis
of accounting was established on December 11, 1997, and accumulated
depreciation was reset to zero as of that date (see Note 1).
7. Goodwill and Other Intangible Assets
As of December 31,
------------------------------
1998 1997(1)
--------------- -------------
Telekabel Group..................................... 389,513 389,513
Janco Multicom...................................... 165,494 152,226
CNBH(2)............................................. -- 80,491
Telekabel Hungary................................... 97,429 --
TVD................................................. 42,189 42,223
Other............................................... 24,516 27,309
------- -------
719,141 691,762
Accumulated amortization......................... (39,109) (1,716)
------- -------
Net goodwill and other intangible assets......... 680,032 690,046
======= =======
(1) In connection with the UPC Acquisition, certain purchase accounting
adjustments were pushed down to the financial statements of UPC, a new basis
of accounting was established on December 11, 1997, and accumulated
amortization was reset to zero as of that date (see Note 1).
(2) Effective August 6, 1998, CNBH was contributed to UTH as part of the UTH
Transaction.
89
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
8. Short-Term Debt
Time Warner Note
Short-term debt as of December 31, 1998 includes the $18.0 million (34,020)
non-interest bearing Time Warner Note. In December 1998, Time Warner extended
the maturity date of its note for a period of 90 days to the earlier of June 30,
1999 or 90 days after written notice from Time Warner. Subsequent to December
31, 1998, the Time Warner Note was cancelled as Time Warner exercised its option
to acquire our 50% interest in HBO Hungary and 100% interest in TV Max (see Note
16).
Telekabel Hungary Facility
In October 1998, Telekabel Hungary entered into a DM65.6 million (NLG74.0
million) six-month secured bridge facility. Availability under this facility
depends on certain financial covenants. The DM49.2 million (NLG55.5 million)
international tranche of the facility and half of the DM16.4 million (NLG18.5
million) local tranche bear interest at LIBOR plus 2.5% per annum plus an
additional cost of funding calculation. The remaining half of the local tranche
must be drawn in Hungarian forints and bears interest at Budapest interbank
offered rates for Hungarian forints, plus 2.5% per annum plus an additional cost
of funding calculation. Telekabel Hungary is using the facility, among other
things, to finance capital expenditures and to acquire minority shares in our
Kabelkom systems. We have pledged our indirect 79.25% interest in Telekabel
Hungary to secure the facility. The facility also is secured by a pledge over
certain assets of the Telekabel Hungary group and a negative pledge. Telekabel
Hungary is currently negotiating a long-term facility with the lenders to
replace this bridge facility. As of December 31, 1998, the amount outstanding
under this facility totaled DM33.1 million (NLG29.3 million).
9. Long-Term Debt
As of December 31,
-----------------------------
1998 1997
-------------- -------------
Senior Revolving Credit Facility.................... 968,018 883,948
Bridge Bank Facility................................ 113,519 252,500
Mediareseaux Facility............................... 40,344 --
Bank and other loans................................ 166,387 85,471
--------- ---------
1,288,268 1,221,919
Less current portion............................. (113,519) (255,819)
--------- ---------
Total............................................ 1,174,749 966,100
========= =========
Senior Revolving Credit Facility
In October 1997, UPC and Norkabel as borrowers entered into a 1,100,000
multi-currency revolving credit facility with a syndicate of banks. Norkabel was
succeeded as a borrower by Janco Multicom after the merger of Janco and
Norkabel. In December 1997, Telekabel Wien and the other members of the
Telekabel Group also became borrowers under the Senior Revolving Credit
Facility. Although not a borrower, TVD is a guarantor under the Senior Revolving
Credit Facility. As of December 31, 1998, the amount outstanding under the
Senior Revolving Credit Facility for UPC, Telekabel Wien and Janco Multicom was
NLG620.0 million, NLG213.5 million and NLG134.5 million, respectively. Amounts
advanced under the Senior Revolving Credit Facility bear interest at the London
interbank offered rate (''LIBOR'') plus a margin ranging from 0.5% to 2.0% per
annum. The aggregate amount available for borrowing under the facility is
reduced automatically by
90
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
5.0% per quarter beginning December 31, 2001. The borrowings of the Company
and its subsidiaries in Austria, Belgium and Norway are limited by financial
covenants under the Senior Revolving Credit Facility. The principal amount of
all borrowings by the Company and such subsidiaries may not exceed certain
multiples of total annualized net operating cash flow for the Company and such
subsidiaries. In addition, the principal amount of all borrowings of the Company
and such subsidiaries may not exceed certain multiples of their cable television
net operating cash flow. The Senior Revolving Credit Facility generally
prohibits dividends and other distributions to shareholders of the Company
unless, among other things, the Company achieves for at least two consecutive
quarters certain financial ratios. The Senior Revolving Credit Facility also
includes financial covenants relating to interest and debt service coverage and
application of proceeds from asset sales and securities offerings. Borrowings by
UPC and certain of its subsidiaries in Austria, Belgium and Norway, under the
Senior Revolving Credit Facility together with borrowings under the Bridge Bank
Facility may not exceed 1,300,000 before September 30, 2001. The Senior
Revolving Credit Facility also generally limits to 80,000 UPC's investments in,
loans to and guarantees for, certain of the Company's subsidiaries and
downstream affiliates that are not borrowers or guarantors under the Senior
Revolving Credit Facility. Subsequent to December 31, 1998, we agreed with our
lenders under this facility to reduce this facility amount from NLG1.1 billion
to NLG1.0 billion in February 1999. This amount will be further reduced by 5%
each quarter beginning December 31, 2001 until final maturity. Subsequent to
December 31,1998 we repaid NLG620.0 million, excluding interest, of the amount
outstanding by us under this facility with the proceeds of the offering, which
we plan subsequently to reborrow under this facility (see Note 16).
Bridge Bank Facility
In connection with the UPC Acquisition, the Company entered into the
consolidated $125.0 million term Bridge Bank Facility with a syndicate of banks.
The Bridge Bank Facility is a one year bridge originally due December 5, 1998
and bears interest at LIBOR plus a margin ranging from 4.5% to 6.0% per annum.
In November 1998, the lenders granted an extension of the maturity date to June
5, 1999. The Bridge Bank Facility generally prohibits dividends and
distributions and is secured by various upstream guarantees from, negative
pledges over and, in some cases, share pledges of, certain share holdings or
partnership interests of UPC in operating systems in The Netherlands, France,
Israel and Malta, as well as a first lien over approximately 2,784,620 shares of
UIH's Class A Common Stock which UPC acquired from Philips as part of the UPC
Acquisition. The Bridge Bank Facility prohibits all of the companies whose
interests are pledged from incurring additional indebtedness, subject to certain
exceptions. The Company must apply proceeds from disposals, if any, of certain
share holdings and partnership interests to prepayment of the facility, which
restricts the manner and terms on which the Company may dispose of these assets.
The Company must maintain on deposit with the bank a compensating balance,
restricted for payment of interest, until the facility matures. The balance in
this interest reserve account, including proceeds from the sale of PHL, was
30,263 as of December 31, 1998. UPC repaid $64.9 million of the Bridge Bank
Facility during the year ended December 31, 1998 resulting in an outstanding
amount of $60.1 million (113,519) as of December 31, 1998. Subsequent to
December 31, 1998, we repaid the Bridge Bank Facility with proceeds from the
offering (see Note 16).
Mediareseaux Facility
In July 1998, Mediareseaux entered into an 9.5 year term facility with a
bank for an amount of French francs (''FRF'')680 million (''Mediareseaux
Facility''). The purpose of the facility is to finance on-going capital
expenditures, working capital and acquisitions with a limit of FRF120 million.
The Me'diare'seaux Facility bears interest at LIBOR plus a margin ranging from
0.75% to 2.0%. The availability of the facility depends on revenue generated and
debt to equity ratios. The availability period ends at December 31, 2002. The
repayment period starts from January 1, 2003 to final maturity in 2007. During
the repayment period, Mediareseaux must apply 50% of its excess cash flow in
prepaying the facility. The Mediareseaux Facility generally restricts the
payment of dividends and distributions. This facility also restricts
Mediareseaux from incurring additional indebtedness, subject to certain
exceptions. In July 1998, Mediareseaux secured a
91
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
9.5 year FRF20.0 million overdraft facility, subject to the same terms and
conditions as the Mediareseaux Facility except that the availability tests are
not applicable. As of December 31, 1998 an amount of FRF13.6 million (40,344)
was outstanding under the Mediareseaux Facility.
DIC Loan
In November 1998, a subsidiary of Discount Investment Corporation (''DIC'')
loaned the Company a total of $90.0 million (the ''DIC Loan'') to acquire the
additional interests in Tevel and Melita. The DIC Loan matures in November 2000
and is secured by the Company's pledge of its ownership interest in Tevel. The
DIC Loan bears interest at 8% and is payable, together with 106% of the
principal amount, on maturity. The DIC Loan may be repaid on quarterly
prepayment dates with three months' prior notice by the Company. In connection
with the DIC Loan, UPC granted to an affiliate of DIC an option to acquire a
total of $90.0 million, plus accrued interest, of ordinary shares of UPC at a
price equal to 90% of the initial public offering price. The exercise price of
this option, which expires upon the initial public offering, is payable in cash
or delivery of the DIC Loan promissory notes. UPC allocated the $90 million in
loan proceeds between the debt instrument and the equity option element on the
basis of relative fair values. Accordingly, the effective interest rate on the
debt instrument exceeds the stated rate as set forth above. Subsequent to
December 31, 1998, the option agreement was amended, resulting in a grant of two
options of $45 million each. DIC exercised its option for $45.0 million (see
Note 16).
Debt Maturities
The maturities of the Company's long-term debt are as follows:
12 months ended December 31, 1999.............. 113,519
12 months ended December 31, 2000.............. 160,152
12 months ended December 31, 2001.............. --
12 months ended December 31, 2002.............. 88,018
12 months ended December 31, 2003.............. 224,034
Thereafter..................................... 702,545
---------
Total...................................... 1,288,268
=========
Fair Value of Financial Instruments
Fair value is based on market prices for the same or similar issues. Carrying
value is used when a market price is unavailable.
Fair
------------
Book Value Market Value
----------- ------------
As of December 31, 1998:
Senior Revolving Credit Facility......... 968,018 968,018
Bridge Bank Facility..................... 113,519 113,519
Mediareseaux Facility.................... 40,344 40,344
Bank and other loans..................... 166,387 166,387
Note payable to UIH(1)................... 163,425 163,425
Time Warner Note......................... 34,020 34,020
Telekabel Hungary Facility............... 29,297 29,297
--------- ---------
Total................................. 1,515,010 1,515,010
========= =========
(1) See Note 15 for terms of the note payable to UIH.
92
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
10. Shareholders' Equity
In February 1999, the Company's shareholders approved an amendment and
restatement of the Company's Articles of Association to effect a 3 for 2 stock
split and an increase in the number of authorized ordinary shares to
200,000,000, which was legally effected before the Company's planned initial
public offering. Therefore, all share and per share amounts in the accompanying
consolidated financial statements and notes thereto have been retroactively
restated to reflect this event.
The Company's shareholders also approved the issuance of 100 priority shares,
which have special approval and other rights, to UIH.
In addition, the Company's Articles of Association were amended and restated
to provide for the issuance of 49,999,900 Class A preference shares and
200,000,000 Class B preference shares.
General
The equity classifications and amounts as stated in these consolidated
financial statements do not necessarily reflect the statutory equity of the
Company, as the statutory equity is subject to Dutch generally accepted
accounting principles. The statutory equity is the basis for any distributions
to shareholders. As of December 31, 1998, the Company is unable to make dividend
distributions to shareholders because of its accumulated deficit.
UIH Indenture
As a subsidiary of UIH, the Company's activities are restricted by the
covenants in UIH's indenture dated February 5, 1998 (the ''UIH Indenture''). The
UIH Indenture generally limits the additional amount of debt that UPC or its
subsidiaries or controlled affiliates may borrow, or preferred shares that they
may issue. Generally, additional borrowings, when added to existing
indebtedness, must satisfy, among other conditions, at least one of the
following tests: (i) 7.0 times the borrower's consolidated operating cash flow;
(ii) 1.75 times its consolidated interest expense; or (iii) 225% of the
borrower's consolidated invested equity capital. In addition, there must be no
existing default under the UIH Indenture at the time of the borrowing. The UIH
Indenture also restricts UPC's ability to make certain asset sales and certain
payments. In connection with the initial public offering, UPC has agreed with
UIH that it will not take any action during the term of the UIH Indenture that
would result in a breach of the UIH Indenture covenants. The maturity date of
the UIH Indenture is February 2008 and interest becomes payable in cash in
February 2003.
Stock Option Plan
In June 1996, UPC adopted a stock option plan (the ''Plan'') for certain of its
employees and those of its subsidiaries. There are 6,000,000 total shares
available for the granting of options under the Plan, which are held by the
Stichting Administratiekantoor UPC (the ''Foundation''), which administers the
Plan. Each option represents the right to acquire from the Foundation a
certificate representing the economic value of one share. Following consummation
of the initial public offering, any certificates issued to employees who have
exercised their options will be convertible into UPC common stock. UIH appoints
the board members of the Foundation and thus controls the voting of the
Foundation's common stock. The options are granted at fair market value
determined by the Company's Supervisory Board at the time of the grant. The
maximum term that the options can be exercised is five years from the date of
the grant. In order to introduce the element of ''vesting'' of the options, the
Plan provides that even though the options are exercisable immediately, the
shares to be issued or options granted in 1996 vest in equal monthly increments
over a three-year period from the effective date set forth in the option grant.
In March 1998, the Plan was revised to increase the vesting period for any new
grants of options to four years, vesting in equal monthly increments. Upon
termination of an employee (except in the case of death, disability or the
like), all unvested
93
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
options previously exercised must be resold to the Foundation at the original
purchase price, or all vested options must be exercised, within 30 days of the
termination date. The Supervisory Board may alter these vesting schedules in its
discretion. An employee has the right at any time to put his certificates or
shares from exercised vested options to the Foundation at a price equal to the
fair market value. The Company can also call such certificates or shares for a
cash payment upon termination in order to avoid dilution, except for certain
awards, which can not be called by the Company until expiration of the
underlying options. The Plan also contains anti-dilution protection and provides
that, in the case of change of control, the acquiring company has the right to
require UPC to acquire all of the options outstanding at the per share value
determined in the transaction giving rise to the change of control.
A summary of stock option activity for the Plan is as follows:
For the Years Ended December 31,
--------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- --------------------------- ---------------------------
Weighted- Weighted- Weighted-
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
shares Price shares Price shares Price
-------------- ------------ ------------- ------------ ------------- ------------
Outstanding at beginning of
period....................... 2,241,552 10.49 2,300,417 10.49 -- --
Granted during period............. 2,343,000 12.10 -- -- 3,990,000 10.49
Cancelled during period........... (14,052) 10.49 (58,865) 10.49 (9,583) 10.49
Exercised during period........... (375,000) 10.49 -- -- (1,680,000) --
--------- ----- --------- ----- ---------- -----
Outstanding at end of period...... 4,195,500 11.39 2,241,552 10.49 2,300,417 10.49
========= ===== ========= ===== ========== =====
Vested at end of period(1)........ 4,340,008 10.79 3,197,331 10.49 1,786,898 10.49
========= ===== ========= ===== ========== =====
Exercisable at end of period(1)... 4,195,500 11.39 2,241,552 10.49 2,300,417 10.49
========= ===== ========= ===== ========== =====
- ---------------
(1) Includes certificate rights as well as options.
The Company granted no stock options during the year ended December 31, 1997.
The combined weighted-average fair values and weighted-average exercise prices
of options granted during the year ended December 31, 1998 and the year ended
December 31, 1996 are as follows:
For the Year Ended For the Year Ended
December 31, 1998 December 31, 1996
-------------------------------- ------------------------------
Number Fair Exercise Number Fair Exercise
Options Value Price Options Value Price
----------- --------- -------- ----------- ------- --------
Exercise price equal to market price........ 2,343,000 12.10 12.10 3,990,000 10.49 10.49
94
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
The following table summarizes information about stock options outstanding,
vested and exercisable as of December 31, 1998:
Weighted-Average
Number Remaining Number Number
of Options Contractual Life of Options of Options
Exercise Price Outstanding (Years) Vested Exercisable
- ------------------ ----------- ----------------- ----------- -----------
10.49.......... 1,852,500 2.47 3,487,118 1,852,500
12.00.......... 2,195,250 4.63 838,859 2,195,250
13.57.......... 147,750 4.71 14,031 147,750
--------- ---- --------- ---------
4,195,500 3.68 4,340,008 4,195,500
========= ==== ========= =========
The Plan is accounted for as a variable plan because, based on the Plan's
provisions, the rights conveyed to employees are the substantive equivalents to
stock appreciation type rights. Accordingly, compensation expense is recognized
at each financial statement date based on the difference between the grant price
and the estimated fair value of the Company's common stock. Compensation expense
of 268,109, 4,818 and 0 was recognized for the years ended December 31, 1998,
December 31, 1997 and December 31, 1996, respectively. The Company's estimate of
the fair value of its common stock as of December 31, 1998 utilized in recording
compensation expense under the Plan was NLG63.91, which is the initial public
offering price. Because the Company will account for the Plan as a variable plan
up until the consummation date of its initial public offering, and thereafter as
a fixed plan due to modifications to the Plan which will occur on that date, the
total compensation expense and deferred compensation expense recognized related
to options granted as of December 31, 1998 will not increase.
Phantom Stock Option Plan
As of March 1998, the Company adopted a phantom stock option plan (the
''Phantom Plan'') which permits the grant of phantom stock rights in up to
2,400,000 shares of the Company's common stock. The rights are granted at fair
market value determined by the Company's Supervisory Board at the time of grant,
and generally vest in equal monthly increments over the four-year period
following the effective date of grant and may be exercised for ten years
following the effective date of grant. The Phantom Plan gives the employee the
right to receive payment equal to the difference between the fair market value
of a share of UPC common stock and the option base price for the portion of the
rights vested. UPC, at its sole discretion, may make payment in (i) cash, (ii)
freely tradable shares of UIH Class A Common Stock or (iii) if the Company's
stock is publicly traded, freely tradable shares of its stock. If the Company
chooses to make a cash payment, even though its stock is publicly traded,
employees have the option to receive an equivalent number of freely tradeable
shares of stock instead. Concurrent with the approval of the Phantom Plan, the
Supervisory Board ratified the grant of 1,232,250 and 825,000 phantom stock
rights at base prices of 12.00 and 13.57, respectively, and specified
retroactive vesting for several of the grants. The Phantom Plan contains anti-
dilution protection and provides that, in certain cases of a change of control,
all phantom options outstanding become fully exercisable.
95
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
A summary of stock option activity for the Phantom Plan is as follows:
For the Year Ended
December 31, 1998
--------------------------
Weighted-
Number Average
of Exercise
Share Price
------------ ------------
Outstanding at beginning of period -- --
Granted during period............................. 2,057,500 12.63
Cancelled during period........................... -- --
Exercised during period........................... -- --
--------- -----
Outstanding at end of period...................... 2,057,500 12.63
========= =====
Vested and exercisable at end of period........... 470,469 12.15
========= =====
The combined weighted-average fair values and weighted-average exercise
prices of options granted during the year ended December 31, 1998 are as
follows:
Number Fair Exercise
Options Value Price
----------- --------- ---------
Exercise price equal to market price.............. 2,057,250 12.63 12.63
The following table summarizes information about stock options
outstanding, vested and exercisable as of December 31, 1998:
Weighted-
Average Number of
Number of Remaining Options
Options Contractual Life Vested and
Exercise Price Outstanding (years) Exercisable
- ------------------ --------------- ------------------- -----------------
12.00............. 1,232,250 8.54 425,469
13.57............. 825,000 9.70 45,000
--------- ---- -------
2,057,250 9.00 470,469
========= ==== =======
The Phantom Plan is accounted for as a variable plan in accordance with its
terms, resulting in compensation expense for the difference between the grant
price and the fair market value at each financial statement date. Compensation
expense of 52,374 was recognized for the year ended December 31, 1998. The
Company's estimate of the fair value of its common stock as of December 31, 1998
utilized in recording compensation expense under the Phantom Plan was NLG63.91,
which is the initial public offering price.
Subsidiary Stock Option Plan
As of June 1998, the Company adopted a phantom stock option plan (the
''chello Plan''), which permits the grant of phantom stock rights in up to
1,500,000 shares of chello, a wholly owned subsidiary of the Company. The rights
are granted at fair market value determined by chello's Supervisory Board at the
time of grant, and generally vest in equal monthly increments over the four-year
period following the effective date of grant and may be exercised for ten years
following the effective date of grant. The chello Plan gives the employee the
right to receive payment equal to the
96
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
difference between the fair market value of a share of chello and the option
base price for the portion of the rights vested. UPC, at its sole discretion,
may make payment in (i) cash, (ii) freely tradable shares of UIH Class A Common
Stock or (iii) if the Company's stock is publicly traded, freely tradable shares
of its stock. If the Company chooses to make a cash payment, even though its
stock is publicly traded, employees have the option to receive an equivalent
number of freely tradable shares of stock instead. Concurrent with the approval
of the chello Plan, the Supervisory Board ratified the grant of 570,000 options
at a base price of 10.00, and specified retroactive vesting for several of the
grants. As of December 31, 1998, the Company had recorded compensation expense
of 2,144 for options granted under the chello Plan.
A summary of stock option activity for the chello broadband Plan is as
follows:
For the Year Ended
December 31, 1998
--------------------------
Weighted-
Number Average
of Exercise
Shares Price
------------ ------------
Outstanding at beginning of period -- --
Granted during period............................ 570,000 10.00
Cancelled during period.......................... -- --
Exercised during period.......................... -- --
------- -----
Outstanding at end of period..................... 570,000 10.00
======= =====
Vested and exercisable at end of period.......... 70,625 10.00
======= =====
The weighted-average remaining contractual life for these options is 9.47 as
of December 31, 1998.
11. Commitments
The Company has entered into various operating lease agreements for office
space, office furniture and equipment, and vehicles. Rental expense under these
lease agreements totaled 8,057, 6,863 and 4,989 for the years ended December
31, 1998, December 31, 1997 and December 31, 1996 respectively.
The Company has operating lease obligations as follows:
12 months ended December 31, 1999............................ 11,054
12 months ended December 31, 2000............................ 8,770
12 months ended December 31, 2001............................ 6,848
12 months ended December 31, 2002............................ 4,854
12 months ended December 31, 2003 and thereafter............. 4,346
------
Total.................................................... 35,872
======
A2000 Funding
In September 1998, UTH entered into a subordinated loan agreement to provide
funding up to $30,000 for A2000. UTH's share of the funding is $15,000. UPC is
obligated to fund drawdowns on the loan in proportion to its 51% ownership in
UTH (representing a total funding obligation of $7,650). As of December 31,1998,
UPC had funded $3,750 of its commitment. Subsequent to year end, the Company
provided a letter of support to A2000 stating that it would continue to
97
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
provide to A2000 the funding necessary to continue operations through at least
1999.
12. Contingencies
Legal
The Company is not a party to any material legal proceedings, nor is it
currently aware of any threatened material legal proceedings. From time to time,
the Company may become involved in litigation relating to claims arising out of
its operations in the normal course of its business.
Foreign Currency Exposure
The Bridge Bank Facility, the loan payable to UIH and the DIC loan are
denominated in U.S. dollars, totaling US$236.5 million as of December 31, 1998.
The Company has not executed any foreign forward exchange contract, or used any
other financial instrument, to hedge against this foreign currency exposure. The
Bridge Bank Facility and the UIH loan have been repaid subsequent to the public
offering. Of the $90.0 million DIC loan, $45.0 million has been repaid
concurrent with the public offering.
13. Income Taxes
In general, a Dutch holding company may benefit from the so-called
participation exemption. The participation exemption is a facility in Dutch
corporate tax law which allows a Dutch company to exempt any dividend income and
capital gains in relation with its participation in subsidiaries which are legal
entities of a foreign country. Capital losses are also exempted, apart from
liquidation losses (under stringent conditions). All costs incurred at the UPC
level which relate to an investment in a foreign subsidiary are not tax
deductible, e.g. interest expense on loans used for the financing of the
investment in the foreign subsidiary. In addition, currency exchange results on
these loans are covered by the participation exemption, e.g. gains are exempted
and losses are not tax deductible. For companies which only act as pure holding
companies, only the capital tax paid is tax deductible. For UPC, the primary
difference between taxable loss and net loss for financial reporting purposes
relates to the non-consolidation of its consolidated foreign subsidiaries for
Dutch tax purposes. The consolidated financial statements have been prepared
assuming partial tax basis for license fees capitalized relating to certain
acquisitions. Deferred taxes have been provided for that portion of the licenses
which management believes no tax basis will be allowed.
98
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
The significant components of the net deferred tax liability are as follows:
As of December 31,
------------------------------
1998 1997
-------------- --------------
Deferred Tax Assets:
Tax net operating loss carryforward............ 137,033 149,802
Stock-based compensation....................... 13,636 --
Other.......................................... 805 540
-------- --------
Total deferred tax assets................... 151,474 150,342
Valuation allowance............................ (135,545) (136,580)
-------- --------
Deferred tax assets, net of valuation
allowance................................. 15,929 13,762
-------- --------
Deferred Tax Liabilities:
Intangible assets.............................. (11,061) (48,077)
Property, plant and equipment, net............. (13,525) (10,193)
-------- --------
Total deferred tax liabilities.............. (24,586) (58,270)
-------- --------
Deferred tax liabilities, net............... (8,657) (44,508)
======== ========
The difference between income tax expense provided in the financial statements
and the expected income tax benefit at statutory rates is reconciled as follows:
For the Years Ended December 31,
-------------------------------------
1998 1997 1996
----------- ----------- -----------
Expected income tax benefit at the
Dutch statutory rate of 35%.............. (174,768) (55,085) (19,315)
Tax effect of permanent and other
differences:
Change in valuation allowance.......... 51,471 27,471 14,555
Non-deductible expenses................ 117,925 19,583 3,829
International rate differences......... 3,520 3,232 1,105
Provision on investment................ 2,180 6,611 --
Other.................................. (1,543) (163) (683)
-------- ------- -------
Total income tax benefit............ (1,215) 1,649 (509)
======== ======= =======
Tax loss carry forwards arise primarily in Norway, The Netherlands, Czech
Republic and Austria. The tax loss carry forwards of Norway, aggregating to
277,929 as of December 31, 1998 will expire during the years 1999-2008. The tax
loss carry forwards of The Netherlands, Belgium and Austria of 117,115 as of
December 31, 1998 have no expiration date. The tax loss carry forwards of the
Czech Republic of 29,677 as of December 31, 1998 will expire in the years 2001-
2005.
99
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
During 1996, the Austrian tax authorities passed legislation which had the
effect of eliminating approximately 256,000 of tax basis associated with certain
amounts of goodwill recorded at Telekabel Group effective January 1, 1997. This
change in tax law is expected to be challenged on constitutional grounds.
However, there can be no assurance of a successful repeal of such legislation.
Accordingly, this change caused Telekabel Group's effective tax rate to increase
from the historical effective tax rate through December 31, 1996, due to the
non-deductibility of such goodwill amortization subsequent to January 1, 1997.
14. Segment and Geographic Information Information
On December 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 "Disclosure About Segments of an Enterprise and Related
Information" ("SFAS 131"). The new rules establish revised standards for
public companies relating to the reporting of financial information about
operating segments. The adoption of SFAS 131 did not have a material effect on
the Company's consolidated financial statements but did affect the Company's
segment information disclosure.
The Company's business has historically been derived from our video
entertainment segment. This service has been provided in various European
countries where the Company owns and operates it systems. During 1997, the
Company introduced internet/data and during 1999 the Company will be introducing
telephony in several of its systems. To date, revenues and net operating
results from these services have not been significant and therefore segment
information for these services is not provided.
The Company evaluates performance and allocates resources at the geographic
country level. The key operating performance criteria used in this evaluation
includes revenue growth, operating income before depreciation, amortization and
stock-based compensation expense ("Adjusted EBITDA"), and capital expenditures.
The Company does not view segment results below Adjusted EBITDA, therefore, net
interest expense, foreign exchange gain (loss), share in results of affiliated
companies, minority interests in subsidiaries and income tax expense are not
broken out by segment below.
A summary of the segment information by geographic area is as follows:
For the Year Ended December 31, 1998 December 31, 1998
-------------------------------------- ----------------------------------------
Depreciation Investments Long-
& Adjusted in Lived Total
Revenue Amortization EBITDA Affiliates Assets Assets Capex
--------- --------------- ---------- ----------- ------- --------- -------
The Netherlands:
- Corporate, UPC TV............. 17,762 (9,478) (12,286) 480,455 5,171 554,668 2,423
- chello........................ -- -- (15,854) -- 4,581 6,617 4,588
- Priority Telecom.............. -- (22) (3,516) -- 31 174 31
- Operating Companies........... 33,273 (13,794) 22,088 -- -- -- 18,578
Austria.......................... 177,151 (77,281) 81,012 -- 265,640 644,791 82,501
Belgium.......................... 37,634 (20,486) 13,263 -- 52,085 109,331 19,760
Czech Republic................... 8,909 (7,702) (1,887) -- 16,512 21,730 1,041
Norway........................... 92,671 (45,316) 33,048 -- 119,704 414,038 51,193
Hungary.......................... 27,706 (6,725) 9,989 -- 50,629 164,280 13,386
France........................... 8,058 (4,129) (5,077) -- 76,220 96,563 52,394
Other............................ 5,806 (2,713) (9,345) -- 12,424 42,991 6,816
------- -------- ------- ----------- ------- --------- -------
Total........................ 408,970 (187,646) 111,435 480,455 602,997 2,055,183 252,711
======= ======== ======= =========== ======= ========= =======
100
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
For the Year Ended December 31, 1997 December 31, 1997
------------------------------------- ----------------------------------------
Depreciation Investments Long-
& Adjusted in Lived Total
Revenue Amortization EBITDA Affiliates Assets Assets Capex
--------- -------------- ---------- ----------- ------- --------- -------
The Netherlands:
- Corporate, UPC TV............. 9,228 (3,271) (12,205) 400,337 1,787 495,383 6,534
- Operating Companies........... 20,669 (8,372) 12,719 -- 40,174 128,609 7,953
Austria.......................... 162,783 (50,187) 80,508 -- 233,887 653,062 59,913
Belgium.......................... 38,738 (14,252) 15,049 -- 49,542 99,392 11,584
Czech Republic................... 7,492 (5,471) (6,730) -- 17,956 30,089 4,214
Norway........................... 91,529 (47,703) 36,927 -- 103,765 435,345 20,647
Hungary.......................... -- -- -- -- -- -- --
France........................... 2,526 (1,416) (4,634) -- 28,159 36,769 22,809
Other............................ 4,290 (2,216) (17,136) -- 9,712 23,743 3,656
------- -------- ------- ----------- ------- --------- -------
Total........................ 337,255 (132,888) 104,498 400,337 484,982 1,902,392 137,310
======= ======== ======= =========== ======= ========= =======
For the Year Ended December 31, 1996
---------------------------------------------
Depreciation
& Adjusted
Revenue Amortization EBITDA
------------- -------------- --------------
The Netherlands:
- Corporate.................... 4,433 (2,873) (13,528)
- Operating companies.......... 21,633 (7,267) 11,298
Austria.......................... 156,964 (42,762) 81,618
Belgium.......................... 37,704 (13,206) 14,592
Czech Republic................... 7,746 (5,574) (7,477)
Norway........................... 14,541 (6,969) 6,347
Hungary.......................... -- -- --
France........................... 179 (281) (4,421)
Other............................ 1,979 (900) (6,865)
------- ------- -------
Total.......................... 245,179 (79,832) 81,564
======= ======= =======
15. Related Party
Agreement with UIH
In February 1999, UIH and the Company became parties to a Management
Service Agreement (the ''UIH Service Agreement''), with an initial term through
2009, pursuant to which UIH will provide services such as accounting, financial
reporting, investor relations, human resources, information technology,
equipment procurement and testing expenses, corporate offices lease payments and
costs associated with corporate finance activities. Under the UIH Service
Agreement, the Company will pay UIH a fixed amount each month (initially $0.3
million). After the first year of the UIH Service Agreement, the fixed amount
may be adjusted from time to time by UIH to allocate corporate level expenses
among UIH's operating companies, including UPC, taking into account the relative
size of the operating companies and their estimated
101
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
use of UIH resources. In addition, UPC will continue to reimburse UIH for costs
incurred by UIH which are directly attributable to UPC. The UIH Service
Agreement also specifies the basis upon which UIH may second certain of its
employees to UPC. The Company generally is responsible for all costs incurred by
UIH with respect to any seconded employee's employment and severance.
Historically, UPC has been self sufficient from a corporate operations
perspective and required nominal assistance from its shareholders, Philips and
UIH, and solely from UIH subsequent to December 11, 1997. UIH and Philips did
not allocate any indirect overhead type costs to the Company from inception
through December 11, 1997 and UIH did not allocate any such costs subsequent to
December 11, 1997 through December 31, 1998. The only costs historically charged
to UPC were direct costs incurred by Philips and UIH on UPC's behalf. Such costs
were charged at cost. In connection with the Company's initial public offering,
UIH and the Company executed the UIH Service Agreement which will provide for a
fixed allocation in addition to direct out-of-pocket reimbursements.
Related Party Payables
The Company classifies any unpaid invoices related to seconded employee
expenses or other expenses incurred by UIH on the Company's behalf as related
party payables on the balance sheet.
Loans to Employees
In 1996, UPC loaned certain employees of the Company amounts for the exercise
of the employees' stock options, taxes on options exercised, or both. These
recourse loans bear interest at 5.0% per annum. The employees' liability to the
Company is presented in the consolidated financial statements net of the
Company's obligation to the employees under the plan. As of December 31, 1998
and 1997, the receivable from employees, including accrued interest totaled
19,177 and 18,561, respectively.
Note Payable to Shareholder
UPC has entered into two promissory notes with UIH of $100.0 million (March
1998) and $20.0 million (July 1998). UPC has borrowed $70.0 million and $16.0
million, respectively, under these two notes (together, this ''UIH Loan'' totals
163,425 as of December 31, 1998). The UIH Loan bears interest at 10.75% per
annum, is due in 2001, and is convertible at UIH's option into ordinary shares
of UPC at 12.00 per share (March 1998) and 13.57 per share (July 1998). Total
accrued interest as of December 31, 1998 was $6.1 million (11,587). Subsequent
to December 31, 1998, UPC repaid $60.0 million (NLG120 million) of the
indebtedness outstanding under the $100.0 million note and all of the
indebtedness outstanding under the $20.0 million note with proceeds form the
initial public offering (see Note 16).
Acquisitions of Interest in PHL and TARA
In November 1998, we purchased from RCL, an entity owned by a discretionary
trust for the benefit of the members of the family of John Riordan, a member of
the Board of Management, (1) a 5% interest in Tara and (2) a 5% interest in our
Irish operating system. The price for these interests was 384,531 shares of UIH
Class A Common Stock that we acquired as part of the UPC Acquisition.
102
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
PIK Notes
In conjunction with the formation of UPC in July 1995, UPC issued to Philips
$133.6 million of convertible subordinated pay-in-kind notes due January 1,
2005. The PIK Notes had an interest rate of 10.0% and were convertible ordinary
shares of UPC at $5.55 per share prior to the repayment date. In conjunction
with the UPC Acquisition on December 11, 1997, 170,371 of the outstanding PIK
Notes balance was paid by UPC, and UIH acquired the remaining outstanding
balance of 169,899. UIH then converted such PIK Notes into 15,180,261 ordinary
shares of UPC at a conversion rate of 11.19 per share (see Note 1).
16. Subsequent Events
Initial Public Offering
During February 1999, the Company successfully completed an initial public
offering selling 44.6 million shares on the Amsterdam Stock Exchange and Nasdaq
National Market System and raising gross and net proceeds from the offering of
approximately NLG2,850.3 million and NLG2,705.8 million, respectively.
Concurrent with the offering, DIC exercised one of its two option agreements
acquiring approximately 1.6 million shares for NLG89.6 million. Proceeds from
the sale of the shares to DIC were used to replay $45.0 million of the DIC Loan
and related interest. Also concurrent with the offering, proceeds were used to
reduce the Senior Revolving Credit Facility (NLG635.8 million, including accrued
interest of NLG15.8 million), repay in its entirety the Bridge Bank Facility
(NLG110.0 million, net of the interest reserve account), acquire NUON's 49%
interest in UTH (NLG518.1 million), and the purchase from NUON of a NLG33.0
million subordinated loan from UTH, including accrued interest (NLG33.3
million). Subsequent to the offering, we also repaid $80.0 million (NLG156.0
million) of the note payable to UIH.
Refinancing UTH
Subsequent to December 31, 1998, UTH replaced their existing NLG690.0 million
facility with a senior facility and additional shareholder loans. The senior
facility consists of a Euro 340 million (NLG750 million) revolving facility to
N.V. Telekabel that will convert to a term facility on December 31, 2001. Euro
5 million of this facility will be in the form of an overdraft facility that
will be available until December 31, 2007. This facility was used to repay a
portion of the UTH facility and for capital expenditures. The new facility will
bear interest at the Euro Interbank Offered Rate plus a margin between 0.75% and
2.00% based on leverage multiples tied to N.V. Telekabel's net operating income.
The new facility is secured, among other things, by a pledge over shares held by
the borrower and will restrict N.V. Telekabel's ability to incur additional
debt.
Relationship with Microsoft
On January 25, 1999, UPC and Microsoft Corporation signed a letter of intent
providing for the establishment of a technical services relationship. In
connection with this letter of intent, we have agreed to grant Microsoft
warrants to purchase up to 3,800,000 shares or ADSs at Microsoft's option, at an
exercise price of $28.00. Half of these warrants will be issued at the earlier
of April 25, 1999 and the signing of the first definitive agreement. These
warrants will be exercisable after one year from issuance for a period of three
years. The other half of the warrants will be issued upon the signing of the
first definitive agreement. This half of the warrants will vest and become
exercisable based on performance criteria to be established in the definitive
agreements, although they also will not be exercisable until at least one year
after the date of the closing of UPC's initial public offering. The first half
of the warrants are for the right to negotiate to license technology from
Microsoft under definitive agreements to be negotiated in the future. UPC
expects to record as contract acquisition rights approximately NLG64.4 million
associated with the first half of the warrants. Such costs are expected to
103
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND
DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
be amortized on a straight-line basis over the expected contract life, which is
yet to be determined. The accounting for the cost associated with the second
half of the warrants will depend on the ultimate nature of the performance
criteria giving rise to the earn-out of these warrants. These warrants will be
recorded as such at fair value when it is probable the performance criteria will
be met in accordance with EITF Issue No. 96-18.
DIC Loan
In connection with the loan from DIC, we granted the Discount Group, our
partner in the Israeli system, an option to $90.0 million, plus accrued
interest, ordinary shares at a price equal to 90% of the initial public offering
price. Subsequent to December 31, 1998, we negotiated an amendment to this
option, resulting in an option to acquire $45.0 million, plus accrued interest,
of ordinary shares at a price equal to 90.0% of the initial public offering
price, and, if this option is exercised, another option to acquire $45.0
million, plus accrued interest, of ordinary shares at a price equal to the 30
day average closing price of our shares on the Amsterdam Stock Exchange, or the
initial public offering price, whichever is higher. At the IPO, DIC exercised
the first option and thus acquired 1,558,654 ordinary shares of UPC. The other
option is exercisable until September 30, 2000.
Acquisition of Bratislavia Cable TV System
In March 1999, UPC reached final agreement with Siemens Austria ("Siemens")
to purchase Siemens' 95.63% interest in SKT s.r.o., the company that owns and
operates the cable TV system in Bratislava, Slovak Republic. The completion of
the purchase is subject to obtaining the approval of regulatory authorities. The
purchase price for the 95.63% interest is approximately NLG77.5 million ($41
million).
Purchase of IPS from UIH
In February 1999, UIH sold to us, in exchange for 4,955,264 of our ordinary
shares, UIH's approximately 33.5% interest in IPS, a group of programming
entities focusing on the Spanish-and Portuguese-speaking markets. IPS had
revenues of approximately NLG34.0 million for the year ended December 31, 1998.
Exercise of Time Warner Option
Subsequent to December 31, 1998, the Time Warner Note was cancelled as Time
Warner exercised its option to acquire our 50% interest in HBO Hungary and 100%
interest in TV Max.
Agreement for the Purchase of Time Warner Cable France
In March 1999, UPC and Time Warner Entertainment reached a definitive
agreement for the purchase by UPC of 100% of Time Warner Cable France, a company
which controls and operates three cable TV systems in the suburbs of Paris and
Lyon and the city of Limoges. Completion of the purchase, which is subject to
regulatory approval, is expected to take place in the third quarter of 1999.
104
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
--------------------
None.
105
PART III
--------
Item 10. Management
- --------------------
Supervisory Board
Our general affairs and business and the board that manages us are supervised
by a Supervisory Board appointed by the general meeting of shareholders upon
proposal of UIH as the holder of our priority shares. Mr. Gene Schneider, UIH's
Chairman and Chief Executive Officer and the former Chairman of the Supervisory
Board, resigned from the Supervisory Board in February 1999. Pursuant to the
rules and procedures of the Supervisory Board, he became a non-voting advisor to
the Supervisory Board and has the right to attend and participate in the
meetings of the Supervisory Board.
Other than the Supervisory Directors that Philips or the Discount Group may
appoint directly, although it has not yet done so, the Supervisory Directors are
appointed at the general meeting of shareholders from a list proposed by UIH as
the holder of our priority shares. The proposal may be set aside by two-thirds
of the votes cast at the general meeting of shareholders representing more than
one-half of the issued nominal capital. In addition, the Discount Group, our
partner in our Israeli system, has the right to nominate a Supervisory Director.
The Supervisory Directors and Advisor are:
Name Age Position
- ------------------------------ ----------- ---------------------------------------
Michael T. Fries........... 36 Chairman of the Supervisory Board
John P. Cole, Jr........... 68 Supervisory Director
Richard De Lange........... 53 Supervisory Director
Antony P. Ressler.......... 38 Supervisory Director
Ellen P. Spangler.......... 50 Supervisory Director
Tina Wildes................ 38 Supervisory Director
Gene W. Schneider.......... 72 Advisor
Michael T. Fries has been a member of the Supervisory Board since September
1998 and the Chairman since February 1999. He is also President of UIH and
President and Chief Executive Officer of UIH Latin America, Inc., a wholly-owned
subsidiary of UIH, positions he has held since September 1998. Mr. Fries also
serves as President and Chief Executive Officer of UIH Asia/Pacific
Communications, Inc., a majority-owned subsidiary of UIH, positions he has held
since June 1995 and December 1996, respectively. Prior to becoming President of
UIH Asia/Pacific Communications, Inc., Mr. Fries served as UIH's Senior Vice
President, Development, in which capacity he was responsible for managing UIH's
acquisitions and new business development activities since March 1990, including
UIH's expansion into the Asia/Pacific, Latin American and European markets.
John P. Cole Jr. became a member of the Supervisory Board in February 1999
and has been a director of UIH since March 1998. Mr. Cole has practiced law in
Washington, D.C. since 1956 and has been counsel over the years in many landmark
proceedings before the U.S. Federal Communications Commission, reflecting the
development of the cable television industry. In 1966, he founded the law firm
of Cole, Raywid & Braverman, a 30-lawyer firm specializing in all aspects of
communications and media law. Mr. Cole is also a director of Century
Communications Corporation.
Richard De Lange has been a member of the Supervisory Board since April 1996.
Since October 1998, Mr. De Lange has been Chairman of the Dutch Philips
organization (Philips Nederland B.V. and Nederlandse Philips Bedrijven B.V.). He
also continues to serve as President and Chief Executive Officer of Philips
Media B.V., which position he assumed in February 1996. From April 1995 until
October 1998, Mr. De Lange was Chairman and Managing Director of Philips
Electronics UK Ltd. Previously, Mr. De Lange served since 1970 in various
capacities with subsidiaries of Philips, including President of Philips Lighting
Europe from December 1990 until April 1995.
Antony P. Ressler became a member of the Supervisory Board in February 1999
and has been a director of UIH since October 1993. Mr. Ressler is one of the
founding principals of Apollo Advisors, L.P. and Ares Management, L.P., which
through several funds represent institutional investors with respect to
corporate acquisitions and securities investments. Mr. Ressler is also a
director of Allied Waste Industries, Inc., Vail Resorts, Inc. and Koo Koo Roo
Enterprises, Inc.
Ellen P. Spangler became a member of the Supervisory Board in February 1999.
Ms. Spangler is the Senior Vice President of Business and Legal Affairs and
Secretary of UIH, positions she has held since December 1996. Prior to assuming
her current positions, she served as a Vice President of UIH where her
responsibilities included business and legal
106
affairs, programming and assisting on development projects. Prior to joining UIH
in January 1991, she served as Director of Business Affairs, Programming at
Tele-Communications, Inc. from 1987 to 1991 and as Acquisitions Counsel at Tele-
Communications, Inc. from 1984 to 1987.
Tina Wildes became a member of the Supervisory Board in February 1999. Ms.
Wildes is the Senior Vice President of Operations and Development Oversight of
UIH, a position she has held since May 1998. From October 1997 until May 1998,
Ms. Wildes served as Senior Vice President of Programming for UIH. From 1994 to
1997, she was Regional Vice President of UIH Latin America, Inc. From 1988 to
1994, Ms. Wildes served as either a director or vice president for development,
programming and operations for several of UIH's European operating companies,
including operations in Sweden, Norway, Malta, Israel, Spain and Portugal.
Gene W. Schneider served as a member of the Supervisory Board from July 1995
until February 1999, when he became an advisor to the Supervisory Board. Mr.
Schneider is also the Chairman of the Board of Directors of UIH, a position he
has held since its inception in May 1989. In addition to serving as UIH's
Chairman, Mr. Schneider has served as UIH's Chief Executive Officer since
October 1995. From October 1995 until September 1998, Mr. Schneider also served
as UIH's President.
The Supervisory Board has an Audit Committee and a Compensation Committee.
Both committees are comprised of Mr. Fries, Ms. Spangler and Ms. Wildes.
Family Relationships
---------------------
Tina Wildes, a member of the Supervisory Board, and Mark L. Schneider, the
Chairman of our Board of Management and our Chief Executive Officer, are sister
and brother. Gene W. Schneider is their father. No other family relationships
exist between any other members of our Supervisory Board or Board of Management.
Board of Management and Other Key Employees
The members of the Board of Management and our other key employees are:
Name Age Position
- ------------------------------ ---------- ------------------------------------------------
Board of Management
Mark L. Schneider............ 43 Chairman of Board of Management and Chief
Executive Officer
John F. Riordan.............. 55 Vice Chairman of Board of Management and
President, Advanced Communications; Chief
Executive Officer, chello broadband
J. Timothy Bryan............. 38 Board of Management Member, President and
Chief Financial Officer
Anton H.E. v. Voskuijlen..... 41 Board of Management Member, Senior Vice
President, Legal and General Counsel
Nimrod J. Kovacs............. 49 Board of Management Member and Managing
Director, Eastern Europe
Other Key Employees
Scott Bachman................ 43 Managing Director, Technology and Purchasing
Charlie Bracken.............. 32 Managing Director of Strategy, Acquisitions and
Corporate Development
107
Steven D. Butler............... 39 Managing Director, UPC Capital and Treasurer
Simon Oakes.................... 42 Managing Director, Programming
Ray D. Samuelson............... 45 Managing Director, Finance and Accounting
Joseph Webster................. 36 Managing Director, Telephony Services and
Chief Executive Officer, Priority Telecom
Mark L. Schneider has been our Chief Executive Officer and Chairman of our
Board of Management since April 1997. Since December 1996, he has served as
Executive Vice President of UIH and President and Chief Executive Officer of UIH
Europe/Middle East Communications, Inc. and from May 1996 to December 1996, Mr.
Schneider was Chief of Strategic Planning and Operational Oversight of UIH. He
served as President of UIH from July 1992 until March 1995 and was Senior Vice
President of UIH from May 1989 until July 1992. Mr. Schneider also worked as a
consultant for UIH from March 1995 to May 1996. Mr. Schneider has been a member
of the board of directors of UIH since 1993.
John F. Riordan was appointed our Executive Vice President in March 1998, and
a member of our Board of Management in September 1998. In September 1998, Mr.
Riordan was appointed Vice Chairman and President of our Advanced Communications
division, overseeing implementation of our Internet/data services and digital
distribution platform. In March 1999, Mr Riordan was also appointed as CEO of
chello broadband. From April 1997 until March 1998, he was a member of our
Supervisory Board. Mr. Riordan also has served as a director of UIH since March
1998. Mr. Riordan was Chairman and Chief Executive Officer from 1992 to November
1998 of Princes Holdings Limited, the Irish multi-channel television operating
company of which we owned 20% until its sale in November 1998. From 1987 to
1990, Mr. Riordan was chairman of the Riordan Group.
J. Timothy Bryan has been our President and Chief Financial Officer and a
member of our Board of Management since September 1998. Prior to that, he served
as a member of our Supervisory Board since December 1996. He was also Chief
Financial Officer, Treasurer and Assistant Secretary of UIH from December 1996
until September 1998. From 1993 until joining UIH, Mr. Bryan served as Treasurer
of Jones Financial Group, Inc., an affiliate of Jones International Limited,
where he was primarily responsible for corporate finance activities. Mr. Bryan
also served as Treasurer of Jones Intercable, Inc. from 1990 until 1993.
Anton H.E. v. Voskuijlen has served as our Senior Vice President and Managing
Director, Legal and General Counsel since April 1997, where he is responsible
for all of our legal affairs, and a member of our Board of Management since
September 1998. From July 1996 until April 1997, Mr. van Voskuijlen served as
our Vice President and General Counsel. From March 1994 until joining us, he
served as Vice President, Business Affairs and Legal Counsel of Philips Media in
New York, New York and prior to that time, Mr. van Voskuijlen spent 15 years as
an attorney with the Philips Group in its mergers & acquisitions and corporate
legal departments in Eindhoven, The Netherlands.
Nimrod J. Kovacs was appointed our Managing Director of Eastern Europe in
March 1998 and a member of our Board of Management in September 1998. He has
served in various positions with UIH, including President of UIH Programming,
Inc., since December 1996, President, Eastern Europe Electronic Distribution &
Global Programming Group from January to December 1996 and Senior Vice
President, Central/Eastern Europe from March 1991 until December 1995.
Scott Bachman has served as our Managing Director of Technology and
Purchasing since February 1998. From March 1996 until February 1998, Mr. Bachman
was our Vice President of Engineering and the Chief Technology Officer. From
April 1991 to March 1996, Mr. Bachman was Vice President of Operations &
Technology Projects for Cable Television Laboratories, Inc.
Charles H. R. Bracken was appointed Managing Director of Strategy,
Acquisitions and Corporate Development in March 1999, responsible for the
group's activities in these areas. From 1994 to 1999 Mr. Bracken held a number
of appointments at Goldman Sachs International in London, most recently as
Executive Director, Communications, Media and Technology. While at Goldman
Sachs, Mr. Bracken was responsible for providing merger and corporate finance
advice to a number of communications companies including UPC.
Steven D. Butler was appointed Managing Director of UPC Capital and our
Treasurer in February 1998, responsible for all corporate and project
debt/equity financing activities, as well as banking and investor relations.
From July 1995 until
108
February 1998, Mr. Butler served as our Vice President and Treasurer. Prior to
that, Mr. Butler served as Director of Finance at UIH since May 1991.
Simon Oakes was appointed our Managing Director of Programming in March 1998,
responsible for our programming operations and development activities. From 1994
until joining us, Mr. Oakes independently developed and produced feature films
including Single Girls' Diary (Granada Films), The Main of Buttermere (Tribeca
and United Artists) and Cave (Working Title and Polygram). From 1989 until 1994,
Mr. Oakes served as Co-chairman of Crossbow Films, a film production company.
Ray D. Samuelson was appointed our Managing Director of Finance and
Accounting in February 1998, responsible for all of our accounting, reporting,
budgeting, management information systems and administrative activities. From
our formation in July 1995 until February 1998, Mr. Samuelson served as Vice
President of Finance & Accounting. From 1992 to 1995, he was Vice President of
Finance and Administration of the Cable Operations Division at UIH. Prior to Mr.
Samuelson's appointment with UIH, he was seconded as a US WEST employee from
1990 to 1992 as the Chief Financial Officer of UIH's and US WEST's Norwegian,
Swedish and Hungarian cable television partnership. From 1978 to 1990, he was a
certified public accountant with Arthur Andersen & Co.
Joseph Webster has served as our Managing Director of Telephony Services
since February 1998 and is also the Chief Executive Officer of Priority Telecom.
From February 1997 until his appointment with us, Mr. Webster served as Regional
Vice President & General Manager at Time Warner Communications in Raleigh, North
Carolina. From February 1994 to January 1997, Mr. Webster served as Vice
President & General Manager at Time Warner Communications, where he was
responsible for a start-up provider of competitive telecommunications services.
From May 1993 to February 1994, Mr. Webster served as Vice President of Teleport
Communications Group in Detroit, Michigan.
109
Item 11. Executive Compensation
- --------------------------------
The following table sets forth the 1998 compensation for our current and
former chief executive officers, the four other highest compensated executive
officers at fiscal year end 1998 and two other executive officers that were not
executive officers at fiscal year end 1998.
Summary Compensation Table
Annual Compensation(1)
------------------------------------
Other Annual All Other
------------ ---------
Name and Principal Position Salary Bonus Compensation(2) Compensation(3)
- --------------------------- ------ ----- --------------- ---------------
(Dutch guilders)
Mark L. Schneider(4).......................... 738,010 -- -- 9,557
Chief Executive Officer
J. Timothy Bryan(5)........................... 597,300 210,262 1,657 9,557
President and Chief Financial Officer
Gene Musselman(6)............................. 499,663 149,325 7,403 142,442
Chief Operating Officer, Telekabel Wien
Margaret M. Houlihan(7)....................... 449,637 -- 46,310 176,205
Former Managing Director, Video Services
Nimrod Kovacs(8).............................. 547,525 -- 1,657 9,557
Managing Director, Eastern Europe
Michael Simmons(9)............................ 448,509 -- -- 76,208
Former Managing Director, Portugal
- ----------------
(1) Compensation amounts (except for automobile allowance payments and school
fees, if applicable, which were paid in Dutch guilders) for the persons
identified above were converted from U.S. dollars to Dutch guilders using
the 1998 average exchange rate.
(2) Consisted of automobile lease, operating and maintenance payments, and
health and life insurance payments for some of the executive officers listed
above.
(3) Our executive officers who are United States citizens were employed by UIH
and seconded to us during 1998. UIH compensates all United States citizens
working for us outside the United States for certain expenses and
adjustments related to non-U.S. assignments and we reimburse UIH for such
expenses. These expenses and adjustments include home leave payments for
trips back to the employee's home country, housing allowance and school
tuition fees for the employee's children. See ''-- Agreements with Executive
Officers''. Certain compensation identified in this column also consisted of
matching employer contributions under UIH's employee 401(k) plan or our
pension plan, as applicable.
(4) Mr. Schneider was appointed as our Chief Executive Officer in April 1997 but
continued to serve as a consultant for UIH until September 1998. The salary
amount shown consisted of the total salary paid to Mr. Schneider for his
duties to us and UIH. Other compensation consisted of matching employer
contributions under UIH's employee 401(k) plan.
(5) Mr. Bryan was appointed as our President and Chief Financial Officer in
September 1998, prior to which time he was the Chief Financial Officer of
UIH. The salary amount shown consisted of the total salary paid to Mr. Bryan
for his duties to us and UIH. Mr. Bryan received a performance-based bonus
for 1998. Other annual compensation consisted of health and life insurance
payments and other compensation consisted of matching employer contributions
under UIH's employee 401(k) plan.
(6) Mr. Musselman received a performance-based bonus for 1998. Other annual
compensation consisted of health and life insurance payments. Other
compensation consisted of NLG132,885 related to Mr. Musselman's non-U.S.
assignment and NLG9,557 of matching employer contributions under UIH's
employee 401(k) plan.
(7) Ms. Houlihan is no longer our employee. Other annual compensation consisted
of NLG38,657 for Ms. Houlihan's automobile allowance and NLG7,659 for health
and life insurance payments and other compensation consisted of NLG166,648
related to Ms. Houlihan's non-U.S. assignment and NLG9,557 of matching
employer contributions under UIH's employee 401(k) plan.
(8) Mr. Kovacs was appointed as our Managing Director of Eastern Europe in
President and Chief Financial Officer in March 1998. The salary amount
shown consisted of the total salary paid to Mr. Kovacs for his duties to us
and UIH. Other annual compensation consisted of health and life insurance
payments and other compensation consisted of matching employer
contributions under UIH's employee 401(k) plan.
(9) We sold our interest in our Portuguese system in February 1998. Mr. Simmons
no longer is our employee. Other annual compensation consisted of health
and life insurance payments and other compensation consisted of NLG66,651
related to Mr. Simmons' non-U.S. assignment and NLG9,557 of matching
employer contributions under UIH's employee 401(k) plan.
110
The following table sets forth information concerning options that were
granted by us to the executive officers listed in the Summary Compensation Table
above during the fiscal year ended December 31, 1998.
Option Grants in Last Fiscal Year
Individual Grants Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Option Term (1)
- ----------------------------------------------------------------------------------------------------------------------------
Number of
Securities Percentage of Total
Underlying Options Granted to
Options Granted Employees in Fiscal Exercise Price
(#) Year (NLG/Share) Expiration Date 5% (NLG) 10%(NLG)
- ----------------------------------------------------------------------------------------------------------------------------
Mark L. Schneider 975,000 41.6% NLG12.00 12/6/03 75,747,750 91,221,000
- ----------------------------------------------------------------------------------------------------------------------------
(1) The potential realizable value is based on assumed annual rates of stock
price appreciation from our initial public offering, NLG63.91, to the end of the
option term.
The following table sets forth information with respect to the executive
officers listed in the Summary Compensation Table above holding unexercised
options as of December 31, 1998. The value of unexercised in-the-money options
represents the difference between the price of the ordinary shares in our
initial public offering, NLG63.91, and the exercise price of the options, which
is NLG12.00 for Mr. Schneider's options and NLG10.43 for Ms Houlihan's options.
See ''-- Stock Option Plans'' and ''Security Ownership of Certain Beneficial
Owners and Management''.
Aggregated Fiscal Year-end Option Values
Number of Securities
Underlying
Unexercised Options Value of Unexercised
at Fiscal Year-End In-the-Money Options
------------------------------- -------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ------------------------- ------------- ---------------- ------------------ -----------------
Mark L. Schneider 406,250 568,750 NLG21,088,438 NLG29,523,812
Margaret M. Houlihan 225,000 0 12,033,000 0
Agreements with Executive Officers
- -----------------------------------
We do not have employment agreements with any of the executive officers
listed in the above table. Mr. Simmons had an employment agreements with UIH
that has been terminated. Mr. Schneider has a consulting agreement with UIH and
upon his appointment as president, Mr. Bryan entered into an employment
agreement with UIH. Mr. Musselman also has an employment agreement with UIH. We
and UIH are parties to a Secondment Agreement, pursuant to which Mr. Schneider
and Mr. Bryan, together with all of our other U.S. citizen employees, are
seconded to us. See ''Relationship with UIH and Related Transactions''. Pursuant
to the Secondment Agreement, we reimburse UIH for all expenses incurred by UIH
in connection with the seconded employees.
Mr. Schneider's consulting agreement with UIH is for a term of five years and
expires May 31, 2000. Mr. Schneider receives a fee of NLG759,000 per year. If
Mr. Schneider is terminated without cause or dies prior to the end of the term
of the agreement, he or his personal representative shall receive all payments
due under the agreement through its term.
Mr. Bryan's employment agreement with UIH is for a term expiring on March 31,
2001. Mr. Bryan's employment agreement provides for an initial base salary of
NLG607,200 which was increased to NLG667,920 on January 1, 1999, and is subject
to periodic adjustments. In addition to his base salary, Mr. Bryan is also
entitled to tax equalization payments and other amounts related to his non-U.S.
assignment. If Mr. Bryan's employment is terminated, other than for cause as
specified in the agreement, he is entitled to receive the balance of payments
due under the remaining term of the agreement.
Stock Option Plans
Equity Stock Option Plan. Under our stock option plan, the Supervisory Board
may grant incentive stock options to our employees. There are 6,000,000 total
shares available for the granting of options under our stock option plan.
Options
111
under our stock option plan must be granted at fair market value (as determined
by the Supervisory Board) at the time of grant. The ordinary shares available
under our stock option plan are held by Stichting Administratiekantoor UPC, a
stock option foundation, which administers our stock option plan. Each option
represents the right to acquire from the foundation a depositary receipt
representing the economic value of one share. Upon termination of the lock-up
period following consummation of the offering, any depositary receipts issued to
employees who have exercised their options will be convertable into ordinary
shares. UIH appoints the board members of the foundation and thus controls the
voting of the foundation's ordinary shares. Proceeds from the exercise of these
options remain in the foundation. Upon liquidation of the foundation, any
remaining assets revert to UIH.
All options are exercisable upon grant and for the next five years. In order
to introduce the element of ''vesting'' of the options, our stock option plan
provides that even though the options are exercisable immediately, the shares to
be issued or options granted in 1996 are deemed to ''vest'' 1/36th each month
for a three-year period from the date of option grant. The date of option grant
is generally the employee's employment commencement date. For options granted in
1998 and thereafter, the vesting period has been increased to four years and the
options vest 1/48th each month. No options were granted in 1997. If the
employee's employment terminates other than in the case of death, disability or
the like, all unvested options previously exercised must be resold to the
foundation at the original purchase price, or all vested options must be
exercised, within 30 days of the termination date. The Supervisory Board may
alter these vesting schedules in its discretion.
Our stock option plan contains limited anti-dilution protection in the case
of stock splits, stock dividends and the like. Our stock option plan also
provides that, in the case of change of control, the acquiring company has the
right to require us to acquire all of the options outstanding at the per share
value determined in the transaction giving rise to the change of control.
In 1996, we loaned the following officers the amounts indicated to enable
such officers either to exercise stock options to acquire our shares, to pay the
tax on such exercise or both: Scott Bachman (exercise and tax, NLG1,635,835);
Steve Butler (exercise and tax, NLG1,226,877); Ray Samuelson (exercise and tax,
NLG2,453,750); Michael Simmons (exercise and tax, NLG787,000); David D'Ottavio
(exercise and tax, NLG6,543,340); and Anton H.E. van Voskuijlen (tax only,
NLG106,245). In 1998, we loaned Mr. van Voskuijlen NLG40,500 (tax only) in
relation to an additional grant. These recourse loans, except for Mr. van
Voskuijlen's, bear interest at the Dutch statutory rate. For 1998, this rate was
6% per annum. All loans made in 1996 are due 18 months after the date of this
offering. Mr. van Voskuijlen's loans are due upon exercise of his options and do
not bear interest.
Through December 31, 1998, options to acquire a total of 6,492,000 shares
have been granted under the Plan. Of these, options representing 375,000 shares
have been exercised and resold to the foundation and, therefore, are available
for future option grants. Options representing 123,182 shares have been
cancelled. The exercise prices for the options range from NLG10.49 to NLG13.57.
In March 1998, we granted Mark Schneider options for 975,000 shares at an
exercise price of NLG12.00, the price at which shares were sold in the UPC
Acquisition in December 1997.
Phantom Stock Option Plan. Under our phantom stock option plan, the
Supervisory Board has granted certain employees the right to receive a cash
amount equal to the difference between the fair market value of the shares and
the stated grant price for a specified number of phantom options. Through
December 31, 1998, options representing 2,162,500 phantom shares remained
outstanding. The grant prices for the phantom options range from NLG12.00 to
NLG13.57. The phantom options have a four-year vesting period and vest 1/48th
each month. The phantom options may be exercised during the period specified in
the option certificate, but in no event, later than ten years following the date
of grant. 744,100 of the outstanding phantom options were fully vested on
December 31, 1998. Our phantom stock option plan contains limited anti-dilution
protection in the case of stock splits, stock dividends and the like. Our
phantom stock option plan also provides that, in certain cases of a change of
control, all phantom options outstanding become fully exercisable.
Our phantom stock option plan also provides that upon the offering, an
employee holding phantom options may convert these into options for shares under
our stock option plan. If the employee elects not to do so, upon exercise of the
phantom options we may elect to issue such number of shares equal to the value
of the cash difference in lieu of paying the cash.
Limitation of Liability and Indemnification Matters
Pursuant to Dutch law, each member of the Supervisory Board and Board of
Management is responsible to us for the proper performance of his or her
assigned duties. Our articles of association provide that the adoption by the
general meeting of shareholders of the annual accounts shall discharge the
Supervisory Board and Board of Management from liability in respect of the
exercise of their duties during the financial year concerned unless an explicit
reservation is made
112
by the general meeting of shareholders. This discharge of liability also may be
limited by mandatory provisions of Dutch law, such as in the case of bankruptcy,
and this discharge only extends to actions or omissions not disclosed in or
apparent from the adopted annual accounts. In case of such actions or omissions,
the members of the Supervisory Board or Board of Management will be jointly and
severally liable toward third parties for any loss sustained by such third
parties as a result of such actions or omissions, unless the Supervisory Board
or Board of Management member proves that he or she is not responsible for the
actions or omissions. Generally, under Dutch law, directors will not be held
personally liable for decisions made with reasonable business judgment.
Our articles of association also provide that we must indemnify any person
who:
. is or was a member of the Supervisory Board or the Board of Management,
. suffers any loss as a result of their position as a member of such boards,
and
. acted in good faith in carrying out their duties.
This indemnification does not apply if the person seeking indemnification is
found to have acted with gross negligence or wilful misconduct in the
performance of their duty to us unless the court in which the action is brought
determines that indemnification is appropriate. A majority of the members of the
Supervisory Board must approve any indemnification unless the entire Supervisory
Board is named in the lawsuit, in which case the indemnification may be approved
by independent legal counsel in a written opinion or by the general meeting of
shareholders. The Supervisory Board may extend the indemnification provisions of
our articles of association to any of our officers, employees or agents.
Compensation of Supervisory Board Members
All of the members of the Supervisory Board, other than Mr. De Lange and the
additional independent director to be nominated by the Discount Group, are
directors or employees of UIH. None of these members receive additional
compensation for serving on the Supervisory Board.
Compensation of Management Board Members
The aggregate 1999 salary compensation for the entire Board of Management is
approximately NLG3,111,000. In addition, we provide our executive officers with
automobile allowances and other benefits. Expatriates also receive housing
allowances, foreign tax equalization payments and other compensation relating to
their foreign assignments.
Compensation Committee Interlocks and Insider Participation
We and UIH have concluded a secondment arrangement, pursuant to which certain
U.S. citizens employed by UIH are seconded to us. See ''Relationship with UIH
and Related Transactions''. To date, compensation for all members of our
management who are employees of UIH has been set by the compensation committee
of UIH and compensation for all of our other employees has been determined by
the Supervisory Board. Our Supervisory Board intends to establish a compensation
committee following the completion of this offering composed of members of the
Supervisory Board. The members of our management that are employees of UIH,
however, will continue to have their compensation set by the UIH's compensation
committee. None of the members of the UIH compensation committee or our
Supervisory Board has served as a director or member of a compensation committee
of another company that had any executive officer that was also one of our
Supervisory Directors or a member of the compensation committee of UIH.
113
Item 12. Security Ownership of Certain Beneficial Owners and Management
- -------------------------------------------------------------------------
The following table sets forth certain information concerning the ownership
of all classes of securities as of February 1, 1999, by (1) each shareholder who
is known by us to own beneficially more than 5% of the outstanding ordinary
shares at such date; (2) each of our Supervisory Directors and our advisor to
the Supervisory Board; (3) each of our executive officers; and (4) all of our
Supervisory Directors, advisors and executive officers as a group. Because
Messrs. G. Schneider, Cole, Ressler, M. Schneider and Riordan are directors of
UIH, they may be deemed to own beneficially our shares held by UIH. They
disclaim any beneficial ownership of these shares and this table does not
include those shares.
Ordinary Shares
---------------------------
Beneficial Owner Number Percentage
- ----------------------------------------------------------------- ----------- --------------
United International Holdings, Inc.(1) ......................... 80,734,292 62.5%
Microsoft Corporation(2) ....................................... 10,157,750 7.9%
Gene W. Schneider .............................................. -- --
Michael T. Fries ............................................... -- --
John P. Cole, Jr. .............................................. -- --
Richard De Lange ............................................... -- --
Antony P. Ressler .............................................. -- --
Ellen P. Spangler .............................................. -- --
Tina Wildes .................................................... -- --
Mark L. Schneider(3) ........................................... 975,000 *
J. Timothy Bryan ............................................... -- --
John F. Riordan(4) ............................................. 525,000 *
Nimrod J. Kovacs ............................................... -- --
Anton H.E. v. Voskuijlen(5) .................................... 300,000 *
All directors, director nominees and executive officers as a
group (11 persons) ............................................ 1,800,000 1.4
- ---------------------------
* Less than 1%.
(1) Includes 3,646,823 ordinary shares held by the stock option foundation, the
board members of which are appointed by UIH. The address of United
International Holdings, Inc. is 4643 South Ulster Street, Suite 1300,
Denver, Colorado 80237, U.S.A.
(2) The address of Microsoft Corporation is One Microsoft Way, Redmond,
Washington 98052.
(3) Mr. M. Schneider holds currently exercisable options for 975,000 ordinary
shares of which options for 528,125 ordinary shares are subject to our
repurchase right, which expires April 1, 2001.
(4) Mr. Riordan holds currently exercisable options for 525,000 ordinary shares
of which options for 284,375 ordinary shares are subject to our repurchase
right, which expires April 1, 2001.
(5) Represents currently exercisable options for 300,000 ordinary shares of
which options for 54,687 ordinary shares are subject to our repurchase
right, which expires January 1, 2002.
114
Item 13. Certain Transactions and Relationships
- -------------------------------------------------
Relationship with Philips
We began operations as a joint venture between UIH and Philips in July 1995.
Both shareholders contributed various assets to us.
In December 1997, we and UIH acquired all of Philips' interest in us. As part
of this transaction, we purchased from Philips:
. 3.17 million shares of UIH Class A Common Stock for NLG66.8 million, the
then-current market value of such shares,
. a portion of the pay-in-kind convertible notes at their fully accreted value
for NLG170.4 million, and
. 16.252 million ordinary shares for NLG292.6 million.
We also converted the remaining pay-in-kind convertible notes purchased by UIH
into 15.18 million ordinary shares.
One of the Supervisory Board members, Mr. De Lange, continues to be a member
of the Supervisory Board pursuant to amendments to our articles of association
in connection with the acquisition of UPC. Under our articles of association,
Philips may appoint and remove one of our Supervisory Directors, so long as
Philips has any liability in respect of the agreements relating to the Telekabel
Wien system, which is expected to terminate by 2006. We have agreed to indemnify
Philips against such liability. We and UIH have agreed to use our reasonable
best efforts to obtain the release of Philips by the City of Vienna from such
liability. Philips' representative on the Supervisory Board must approve (1) the
disposition of assets aggregating more than 30% of the consolidated assets or
generating more than 30% of the consolidated revenues of the Telekabel Group, or
(2) our merger or consolidation into any other entity that is not wholly owned
by UIH.
Loans to Executive Officers
In 1996, we loaned Mr. van Voskuijlen NLG106,245 and in 1998, we loaned him
NLG40,500 to enable him to pay the tax on the stock options received in those
years. These recourse loans bear no interest. The loans are due upon exercise of
his options. We made similar loans to other employees for the purpose of
exercising and/or paying tax on options.
The Discount Group's Option
In connection with the DIC Loan, we granted an option to the Discount Group,
our partner in our Israeli system, to acquire ordinary shares at a price per
share equal to the price in this offering, discounted by a factor of 10%. The
Discount Group exercised its option and we issued 1,558,654 ordinary shares to
it at the same time as the closing of our initial public offering. The aggregate
purchase price for the shares was equal to the sum of $45 million, plus interest
thereon at the rate of 8% per annum from November 9, 1998 through the closing of
the exercise of the option. The Discount Group currently owns about 1.3% of our
outstanding ordinary shares.
In connection with the exercise of the option, we have agreed to enter into a
registration rights agreement with the Discount Group and a shareholders'
agreement with the Discount Group and UIH.
Under the shareholders' agreement, UIH has agreed to vote in favor of one
supervisory board member nominated by the Discount Group for as long as the
Discount Group and its affiliates retain at least the number of ordinary shares
originally acquired upon the exercise of the option. In addition, the Discount
Group will receive the right to participate on equal terms in connection with
sales of ordinary shares by UIH, including the right to sell the Discount
Group's entire interest in us in connection with a sale by UIH of a controlling
interest in us. The Discount Group will also receive the right to negotiate with
UIH prior to certain sales of ordinary shares by UIH. UIH will receive a right
of first refusal with respect to a sale of ordinary shares by the Discount Group
and the right to require that the Discount Group agree to a merger or sale of
all of our shares proposed by UIH. In addition, there are certain limited
restrictions on the entities or persons to whom the Discount Group may transfer
its ordinary shares.
Upon the exercise of the option, the Discount Group received an additional
option to acquire ordinary shares from us at a price per share equal to the
greater of (1) the price in our initial public offering or (2) the average sale
price of our ordinary shares on the Amsterdam Stock Exchange for the 30-day
period immediately preceding the exercise date. The
115
aggregate purchase price for the ordinary shares purchased pursuant to the
additional option would be equal to the sum of $45 million, plus interest
thereon at the rate of 8% per annum from November 9, 1998 through the closing of
the additional option. The transfer rights and restrictions set forth in the
registration rights agreement and the shareholders' agreement discussed above
will be applicable with respect to the ordinary shares acquired by the Discount
Group upon the exercise of the additional option. The additional option will
terminate if it is not exercised on or before September 30, 2000.
Relationship With UIH and Related Transactions
UIH is a leading provider of video, voice and data services outside the
United States. Together with its strategic and financial partners, UIH has
ownership interests in multi-channel television systems in operation or under
construction in over 20 countries. UIH's operations are organized in three
geographic regions: (1) Europe, consisting of UIH's interest in us; (2)
Asia/Pacific, including investments in operating systems and development
projects in Australia, New Zealand, the Philippines, Tahiti and China; and (3)
Latin America, including multi-channel television systems in Brazil, Chile,
Mexico and Peru.
Control by UIH. Immediately prior to our initial public offering, UIH held
effectively all of the voting control over us and held all of our issued and
outstanding ordinary shares, other than approximately 7.7% of such shares that
have been registered in the name of the stock option foundation to support our
stock option plan. The shares registered in the name of the foundation currently
represent 4.8% of our issued and outstanding ordinary shares. UIH appoints the
board members of the foundation and thus controls the voting of these shares as
well. See ''Management -- Stock Option Plan''. UIH currently owns approximately
62% of our outstanding ordinary shares and all of our outstanding priority
shares. Because we are a strategic holding of UIH, UIH will continue to control
us for the foreseeable future. Five members of our six-member Supervisory Board
are directors, officers or employees of UIH.
Transactions with UIH. As part of the acquisition of UPC, we acquired
approximately 3.17 million shares of UIH's Class A Common Stock. We subsequently
sold 384,531 of these shares for certain interests in the Irish system and Tara.
We currently hold approximately 2.8 million shares, which currently represents
approximately 7% of UIH's outstanding common stock. We have given UIH the right
to acquire these shares of UIH Class A Common Stock at their market value, based
on a ten-trading day average.
UIH has sold to us, in exchange for 6,330,340 of our ordinary shares, UIH's
37.5% voting and 44.75% economic interest in Monor and its interest in the Tara
programming joint venture. UIH has also sold to us its interest in the IPS
programming joint venture in exchange for 4,955,264 ordinary shares.
Agreements with UIH. Subject to certain limitations, beginning one year
after the date of our initial public offering, UIH may require us to file a
registration statement under the Securities Act of 1933 with respect to all or a
portion of UIH's ordinary shares or ADSs, and we are required to use our best
efforts to effect such registration, subject to certain conditions and
limitations. We are not obligated to effect more than three of these demand
registrations using forms other than Form S-3 or F-3, as the case may be. UIH
may demand registration of such securities an unlimited number of times on Form
S-3 or F-3, as the case may be, except that we are not required to register
UIH's ordinary shares on Form S-3 more than once in any six-month period. UIH
also has the right to have its ordinary shares included in any registration
statement we propose to file under the Act except that, among other conditions,
the underwriters of any such offering may limit the number of shares included in
such registration. We have also granted UIH rights comparable to those described
above with respect to the listing or qualification of the ordinary shares held
by UIH on the Amsterdam Stock Exchange or on any other exchange and in any other
jurisdiction where we previously have taken action to permit the public sale of
our securities.
UIH incurs certain overhead and other expenses at the corporate level on
behalf of us and its other operating companies. These include expenses not
readily allocable among the operating companies, such as accounting, financial
reporting, investor relations, human resources, information technology,
equipment procurement and testing expenses, corporate offices lease payments and
costs associated with corporate finance activities. UIH also incurs direct costs
for its operating companies such as travel and salaries for UIH employees
performing services on behalf of its respective operating companies. We and UIH
are parties to a management service agreement, with an initial term through
2009, pursuant to which UIH will continue to perform these services for us.
Under the management service agreement, we will pay UIH a fixed amount each
month as its portion of such unallocated expenses. This fixed amount is
initially $300,000 per month. After the first year of the management services
agreement, the fixed amount may be adjusted from time to time by UIH to allocate
these corporate level expenses among UIH's operating companies, including us,
taking into account the relative size of the operating companies and their
estimated use of UIH resources. In addition, we will continue to reimburse UIH
for costs incurred by UIH that are directly attributable to us.
116
We and UIH are also parties to a secondment agreement that specifies the
basis upon which UIH may second certain of its employees to us. UIH's secondment
of employees to us helps us attract and retain U.S. citizens and other employees
who want U.S. benefit plans, without creating a separate U.S. employment
subsidiary. We generally are responsible for all costs incurred by UIH with
respect to any seconded employee's employment and severance. UIH may terminate a
seconded employee's employment if the employee's conduct constitutes willful
misconduct that is materially injurious to UIH. During the year ended December
31, 1997, we incurred approximately NLG11.9 million for costs associated with
the seconded employees, reimbursable to UIH.
[REVISE TO REFLECT FINAL TERMS] We have agreed with UIH that so long as UIH
holds 50% or more of our outstanding ordinary shares, (1) UIH will not pursue
any video services, telephone or Internet access business in Europe or the
Middle East or any programming or Internet content business specifically
directed to the European or the Middle Eastern markets, unless it has first
presented such business opportunity to us and we have elected not to pursue such
business opportunity, and (2) we will not pursue any video services, telephone
or Internet access business in markets outside of Europe and the Middle East in
which UIH then operates unless we have first presented such business opportunity
to UIH and UIH has elected not to pursue such business opportunity.
We have agreed to sell to UIH, upon request, all or any portion of the UIH
Class A Common Stock held by us at a price based upon the trading price of such
stock during a specified period prior to sale. UIH and we have also agreed that
we will provide audited financial statements to UIH in such form and with
respect to such periods as shall be necessary or appropriate to permit UIH to
comply with its reporting obligations as a publicly traded company and that we
will not change our accounting principles without UIH's prior consent. We have
consented to the public disclosure by UIH of all matters deemed necessary or
appropriate by UIH in its sole discretion to satisfy the disclosure obligations
of UIH or any affiliate thereof under the United States federal securities laws
or to avoid potential liability thereunder. We have also agreed to indemnify UIH
against all liabilities UIH may incur in connection with UIH's indemnification
obligations under the underwriting agreement.
UIH Indenture. We, as a subsidiary of UIH, are subject to the provisions of
the indenture governing UIH's senior secured discount notes due 2008. This
indenture contains covenants that, among other things, limit the ability of UIH
and its subsidiaries, including us, to:
. incur indebtedness and issue certain preferred stock in amounts exceeding
that permitted based upon financial ratio and other tests,
. repurchase equity interests from third parties other than UIH,
. make investments in non-controlled entities,
. enter into agreements that would restrict the ability to make distributions,
loans or other payments to equity holders,
. create certain liens,
. sell assets or issue equity for other than cash or fail to invest the cash
proceeds of such sales within 360 days of the sale periods, and
. enter into transactions with affiliates of UIH.
We will continue to be controlled by UIH and restricted by the terms of its
debt securities. We have agreed with UIH that, for as long as we are subject to
the provisions of UIH's indenture, as amended or supplemented, or any other
indenture or agreement to which UIH is a party governing indebtedness of UIH
that replaces or refinances any indebtedness governed by UIH's indenture, as
amended or supplemented, we will not take any action that will result in a
breach of UIH's indenture.
UIH's senior secured discount notes were issued pursuant to the Indenture,
dated as of February 5, 1998, by and between UIH and Firstar Bank of Minnesota
N.A., as trustee. The foregoing description of certain covenants of this
indenture is a summary only, does not purport to be complete and is qualified in
its entirety by reference to all of the provisions of this indenture, which are
hereby incorporated by reference. A copy of UIH's indenture has been
incorporated as an exhibit to the registration statement filed with the United
States Securities and Exchange Commission in connection with our initial public
offering.
Relationship With Microsoft
We have signed a letter of intent with Microsoft Corporation to establish a
technical services relationship and, as part of this, have agreed to set up a
series of joint projects to deliver Internet, non-traditional telephone and
other interactive video and general services to digital cable set-top devices,
personal computers and other devices within and beyond our service areas. The
particular terms of each joint project will be negotiated by us and Microsoft.
As part of this relationship,
117
we plan to establish a technology board to review technology issues and develop
technology specifications and directions. This board would be chaired by Scott
Bachman, our Managing Director of Technology, and would include representatives
from Microsoft and us. In addition, we and Microsoft would be preferred
suppliers to one another, with Microsoft having the first opportunity to license
technologies to us. We would be given the opportunity to present and offer our
products to Microsoft offices in Europe. We and Microsoft would also cooperate
to advocate mutually-agreed standards and regulations to the bodies in our
service territories who set technical standards. We would also have the right to
license Microsoft software for the delivery of Internet content services over
our network.
As part of this technology relationship, we have agreed that, on the earlier
of three months from the date of the letter of intent and the signing of the
first definitive agreement with Microsoft, we will grant Microsoft warrants to
purchase up to 3,800,000 ADSs, which would currently represent approximately
3.0% of our outstanding share capital. Microsoft will have the option under
these warrants to purchase ordinary shares instead of ADSs. These warrants can
be exercised at a price of $28.00 per ordinary share or ADS. These warrants will
not be exercisable until at least February 16, 2000 and will expire February 16,
2003. In addition, half of the warrants will not vest until certain performance
standards are met. We have agreed to grant Microsoft certain registration rights
to be negotiated with respect to the ADSs or shares to be issued upon exercise
of these warrants. In addition, we will grant Microsoft a preemptive right to
purchase up to an aggregate of 10% of chello broadband in any public or private
equity offering at such offering's price and the right of first negotiation in
any private equity offering, other than to our or other cable operators in
exchange for carriage of chello broadband.
Microsoft has agreed not to dispose of the shares purchased in our initial
public offering for six months following such offering nor will it acquire more
than 15% of our total share capital without the prior written approval of our
Supervisory Board. If we enter into a definitive agreement, as expected,
Microsoft will extend its six-month lock-up period to one year
118
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Index to Financial Statements
Page
Number
---------
UNITED PAN-EUROPE COMMUNICATIONS N.V.
Independent Auditors' Report.................................................................... 67
Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997 (Post-
Acquisition................................................................................... 68
Consolidated Statements of Operations for the Years Ended December 31, 1998 (Post-
Acquisition), December 31, 1997 and December 31, 1996 (Pre-Acquisition)....................... 69
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended December 31,
1998 (Post-Acquisition), December 31, 1997 and December 31, 1996 (Pre-Acquisition)............ 70
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 (Post-
Acquisition), December 31, 1997 and December 31, 1996 (Pre-Acquisition)....................... 71
Notes to Consolidated Financial Statements...................................................... 73
UNITED TELEKABEL HOLDINGS
Report of Independent Accountants............................................................... 129
Consolidated Balance Sheet as of December 31, 1998.............................................. 131
Consolidated Statement of Operations from August 6, 1998 (commencement of operations)
until December 31, 1998....................................................................... 132
Consolidated Statement of Cash Flows from August 6, 1998 (commencement of operations)
until December 31, 1998....................................................................... 133
Notes to Consolidated Financial Statements...................................................... 134
(b) Reports on Form 8-K
None.
(c) Exhibits
3.1 Amended and Restated Articles of Association of UPC (1)
4.1 Deposit Agreement dated as of February 17, 1999, between the Company
and Citibank N.A., as depositary (2)
4.2 The Articles of Association of UPC (1)
10.1 Amended and Restated Securities Purchase and Conversion Agreement
dated as of December 1, 1997, by and among Philip Media B.V.
("Philips Media"), Philips Media Network B.V. ("Philips Networks"),
Joint Venture, Inc. ("JVI") and UPC (3)
10.2 Loan Agreement for NLG1,100,000,000 multi-currency Revolving Credit
Facility dated as of October 8, 1997, between UPC and certain of its
subsidiaries and The Toronto-Dominion Bank as Agent for the
financial institutions identified therein, as amended by a
Supplement Agreement dated December 8, 1997 (4)
10.3 Supplemental Agreement dated January 25, 1999, relating to a Loan
Agreement for a NLG1,100,000,000 Multi-currency Revolving Credit
Facility between UPC and certain of its subsidiaries and The
Dominion Bank (2)
10.4 Loan Agreement dated December 5, 1997, between Belmarken Holdings
B.V. ("Belmarken") as the Borrower, Cable Network Netherlands
Holding B.V., Binan Investments B.V. and Stipdon Investments B.V. as
Guarantors, The Toronto-Dominion Bank and Toronto-Dominion Capital
as Arrangers, the banks and financial institutions listed therein,
The Toronto-Dominion Bank as Agent and The Toronto-Dominion Bank as
Security Trustee, as amended by Waiver and amendment letter dated
December 11, 1997 (4)
119
10.5 Registration Rights Agreement dated as of December 5, 1997, by and
among UPC, Belmarken, and The Toronto-Dominion Bank as the Security
Trustee (3)
10.6 Indenture dated as of February 5, 1998, between United International
Holdings, Inc. ("UIH") and Firstar Bank of Minnesota, N.A. (the "UIH
Indenture") (4)
10.7 Credit Facility Agreement dated February 20, 1998, between Cable
Network Brabant Holding B.V. ("CNBH") and Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A. (5)
10.8 Second Amendment Agreement to Credit Facility Agreement and to
Project Support Agreement dated September 30, 1998, between CNBH and
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (5)
10.9 Third Amendment Agreement to Credit Facility Agreement dated January
22, 1999, between CNBH and Cooperative Centrale Raiffeisen-
Boerenleenbank B.A. (1)
10.10 Bank Facility Agreement dated January 31, 1996, between
Kabeltelevisie Amsterdam B.V. ("KTA") and ABN AMRO Bank N.V. in the
principal amount of up to NLG375,000,000 (6)
10.11 Amendment 1 dated July 1, 1997, to the NLG375,000,000 principal
amount Bank Facility Agreement between KTA and ABN AMRO Bank N.V.
(2)
10.12 Amendment No. 2 dated August 28, 1998, to the Bank Facility
Agreement between KTA and ABN AMRO Bank N.V. (2)
10.13 Loan Agreement dated August 31, 1998, between N.V. TeleKabel Beheer,
as borrower, and N.V. NUON Energie-Onderneming voor Gelderland,
Friesland en Flevoland, as lender (7)
10.14 Facility Agreement dated July 26, 1998, between Mediareseaux Marne
S.A., Paribas and the Banks and Financial Institutions listed in
Schedule 1 thereto (5)
10.15 Promissory Note dated November 9, 1998, made by Cable Network Zuid-
Oost Brabant Holding B.V. payable to the order of DIC Loans Ltd. in
the principal amount of $90,000,000 (7)
10.16 Option Agreement dated November 5, 1998, among UPC, DIC and PEC (5)
10.17 Amendment to Option Agreement dated February 4, 1999, between UPC,
DIC and PEC (2)
10.18 Form of Registration Rights Agreement among UPC, DIC and PEC (5)
10.19 Form of Shareholders Agreement among UPC, DIC and PEC (5)
10.20 Sales Agreement dated December 17, 1997, between Stichting
Combivisie Regio, Setelco B.V. and UPC (6)
10.21 Purchase Agreement dated November 6, 1998, between Binan Investments
B.V., UA-UII, Inc. and UA-UII Management Inc. (5)
10.22 Shareholders Agreement dated July 6, 1995, between The Municipality
of Amsterdam, A2000 Holding N.V., and Kabeltelevisie Amsterdam B.V.
(6)
10.23 Consent Agreement dated September 27, 1997, between United and
Philips Communications B.V., US West International, B.V., Philips
Media, UIH and JVI (5)
10.24 Syndicate Agreement dated June 26, 1995, concluded between the
Osterreichische Philips Industrie Ges.m.b.H. Cable-Networks Austria
Holding B.V. and Kabel-TV-Wien Ges.m.b.H. (7)
10.25 Articles of Association of Telekabel Wien Gesellschaft m.b.H. (7)
10.26 Agreement dated November 30, 1993, between Kabel-TV Wien
Gesellschaft m.b.H. and Telekabel Wien Gesellschaft m.b.H. (7)
10.27 Rules of Procedure of Telekabel Wien Gesellschaft m.b.H., as amended
on April 10, 1995 (7)
10.28 Agreement dated November 30, 1977, between Kabel-TV Wien and
Telekabel Fernsehnetz-Betriebsgesellschaft m.b.H. (8)
10.29 Policy Agreement dated November 30, 1977, between Kabel-TV Wien and
Osterreichishe Philips Industrie Gesellschaft m.b.H. (8)
10.30 Tax Liability Agreement dated October 7, 1997, between UPC, Philips
Media, Philips Coordination Center, Philips Networks, UIH, and JVI
(5)
10.31 Agreement dated April 2, 1998, for the contribution of the Dutch
Cable Assets of UPC and NUON to UTH (6)
10.32 Shareholders Agreement dated August 6, 1998, between UPC, NUON and
UTH (6)
10.33 Joint Venture Agreement dated February 13, 1996, regarding A2000
Holding N.V. between US West International B.V. and UPC (6)
10.34 United Pan-Europe Communications N.V. Phantom Stock Option Plan,
March 20, 1998 (5)
10.35 Amended Stock Option Plan dated February 8, 1999, between UPC and
Stichting Administratie Kantoor UPC
10.36 Form of Master Seconded Employee Services Agreement (2)
10.37 Form of UIH Registration Rights Agreement (1)
10.38 Form of UIH Management Services Agreement (2)
10.39 Consulting Agreement dated June 1, 1995, between UIH and Mark L.
Schneider (1)
120
10.40 Employment Agreement dated October 1, 1998, between UIH and J.
Timothy Bryan (7)
10.41 Agreement dated as of February 11, 1999 between UIH and UPC
10.42 Promissory Note dated January 25, 1999, with UPC as borrower, and
UIH Europe, Inc. as holder, in the principal amount of
US$100,000,000 (6)
10.43 Promissory Note dated January 25, 1999, with UPC Intermediates B.V.
as borrower, and with UIH Europe, Inc. as holder, in the principal
amount of US$20,000,000 (6)
10.44 Share Purchase Agreement dated January 19, 1999, by and between UPC,
Belmarken Holding B.V., NUON, N.V. Kraton and UTH, as amended (2)
10.45 Final Amendment to Share Purchase Agreement dated as of February
17, 1999 (9)
21.1 Subsidiaries of UPC
(1) Incorporated by reference from Amendment No. 6 to Form S-1/A
Registration Statement filed by UPC, dated February 4, 1999 (File No.
333-67895)
(2) Incorporated by reference from Amendment No. 8 to Form S-1/A
Registration Statement filed by UPC, dated February 10, 1999 (File
No. 333-67895).
(3) Incorporated by reference from Form 8-K filed by UIH, dated December
11, 1997 (File No. 0-21974).
(4) Incorporated by reference from Form S-4 Registration Statement filed
by UIH, dated March 3, 1998 (File No. 333-47).
(5) Incorporated by reference from Form S-1 Registration Statement filed
by UPC, dated November 24, 1998 (File No. 333-67895).
(6) Incorporated by reference from Amendment No. 4 to Form S-1/A
Registration Statement filed by UPC, dated January 25, 1999 (File No.
333-67895).
(7) Incorporated by reference from Amendment No. 2 to Form S-1/A
Registration Statement filed by UPC, dated January 13, 1999 (File No.
333-67895).
(8) Incorporated by reference from Amendment No. 9 to Form S-1/A
Registration Statement filed by UPC, dated February 11,1999 (File No.
333-67895).
(9) Incorporated by reference from Form 8-K filed by UPC, dated March 4,
1999 (File No. 000-25365).
(10) Incorporated by reference from Amendment No. 9 to Form S-1/A
Registration Statement filed by UPC, dated December 9, 1998 (File No.
333-67895).
(d) Financial Statement Schedules
Page
Number
---------
UNITED PAN-EUROPE COMMUNICATIONS N.V.
Report of Independent Public Accountants on Schedules........................................... 122
Schedule I - Condensed Financial Information of Registrant (Parent Only)........................ 123
Schedule II - Valuation and Qualifying Accounts................................................. 128
121
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
To United Pan-Europe Communications N.V.
We have audited, in accordance with auditing standards generally accepted in
The Netherlands, which are substantially the same as those generally accepted in
the United States of America, the consolidated financial statements of United
Pan-Europe Communications N.V. included in this Form 10-K and have issued our
report thereon dated March 19, 1999. Our audit was made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The following schedules are the responsibility of the Company's
management and are presented for purposes of complying with the Securities and
Exchange Commission's rules and are not part of the basic consolidated financial
statements. These schedules have been subjected to the auditing procedures
applied in the audit of the basic consolidated financial statements as indicated
in our report with respect thereto and, in our opinion, based on our audit,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic consolidated financial statements taken
as a whole.
ARTHUR ANDERSEN
Amstelveen, The Netherlands,
March 29, 1999
122
UNITED PAN-EUROPE COMMUNICATIONS N.V.
PARENT ONLY
SCHEDULE I
Condensed Information as to the Financial Condition of Registrant
(Stated in thousands of Dutch guilders, except share and per share amounts)
As of December 31,
-------------------------------------
1998 1997
---------------- -------------------
(Post-Acquisition)
ASSETS:
Current assets
Cash and cash equivalents............................................ 7,048 43,306
Related party receivables............................................ 115,633 36,364
Other receivables, net............................................... 2,330 18,690
Other current assets................................................. 7,938 2,761
--------- ---------
Total current assets.............................................. 132,949 101,121
Investments in, loans and other advances to affiliated companies,
accounted for under the equity method, net............................ 966,309 1,096,768
Property, plant and equipment, net of accumulated depreciation
of 460 and 23, respectively........................................... 982 1,022
Deferred financing costs, net of accumulated amortization
of 625 and 110, respectively.......................................... 15,617 16,813
Non-current restricted cash and other assets........................... 650 48,541
--------- ---------
Total assets...................................................... 1,116,507 1,264,265
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT):
Current liabilities
Related party accounts payable....................................... 8,719 34,402
Accrued liabilities.................................................. 56,901 12,776
Note payable to shareholder.......................................... 119,070 --
Short-term debt...................................................... 34,020 --
Short-term debt, related party....................................... 39,125 228,097
--------- ---------
Total current liabilities......................................... 257,835 275,275
Long-term debt......................................................... 620,000 490,468
Other related party debt............................................... -- 29,609
Deferred compensation.................................................. 325,302 4,818
Deferred taxes......................................................... 140 37,602
--------- ---------
Total liabilities................................................. 1,203,277 837,772
--------- ---------
Shareholders' equity (deficit)
Common stock, 0.667 par value, 200,000,000 shares authorized,
87,330,340 and 87,107,325 shares issued, respectively.............. 58,221 58,072
Additional paid-in capital........................................... 657,684 636,851
Other cumulative comprehensive income (loss)......................... 27,285 (1,354)
Accumulated deficit.................................................. (719,575) (156,691)
Treasury stock, at cost, 9,198,135 shares of common stock............ (110,385) (110,385)
--------- ---------
Total shareholders' equity (deficit).............................. (86,770) 426,493
--------- ---------
Total liabilities and shareholders' equity (deficit).............. 1,116,507 1,264,265
========= =========
123
UNITED PAN-EUROPE COMMUNICATIONS N.V.
PARENT ONLY
SCHEDULE I
Condensed Information as to the Operations of Registrant
(Stated in thousands of Dutch guilders, except share and per share amounts)
For the Years Ended December 31,
--------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
(Post-Acquisition) (Pre-Acquisition) (Pre-Acquisition)
Management fee income from related parties ....................... 10,648 3,088 4,433
Corporate general and administrative expense ..................... (323,309) (11,605) (1,679)
Depreciation and amortization .................................... (437) (736) (335)
---------- ---------- ----------
Net operating loss ............................................. (313,098) (9,253) 2,419
Interest income .................................................. 1,919 2,830 1,898
Interest income, related party ................................... 62,359 44,867 27,353
Interest expense ................................................. (1,187) (15,143) (8,418)
Interest expense, related party .................................. (58,326) (33,362) (27,511)
Foreign exchange loss, net ....................................... (14,535) (12,864) (20,236)
---------- ---------- ----------
Net loss before income taxes and other items..................... (322,868) (22,925) (24,495)
Share in results of affiliated companies, net .................... (240,016) (154,383) (55,694)
Income taxes ..................................................... -- 1,454 --
---------- ---------- ----------
Net loss ....................................................... (562,884) (175,854) (80,189)
========== ========== ==========
Basic and diluted net loss per common share ...................... (7.22) (2.03) (0.92)
========== ========== ==========
Weighted-average number of common shares outstanding............... 77,914,081 86,578,117 87,107,325
========== ========== ==========
124
UNITED PAN-EUROPE COMMUNICATIONS N.V.
PARENT ONLY
SCHEDULE I
Condensed Information as to the Cash Flows of the Registrant
(Stated in thousands of Dutch guilders)
For the Years Ended December 31,
--------------------------------------------------------
1998 1997 1996
------------------ ----------------- -----------------
(Post-Acquisition) (Pre-Acquisition) (Pre-Acquisition)
Cash flows from operating activities:
Net loss ....................................................... (562,884) (175,854) (80,189)
Adjustments to reconcile net loss to net cash flows
from operating activities:
Depreciation and amortization ................................ 437 736 335
Share in results of affiliated companies, net ................ 240,016 164,773 58,728
Foreign exchange loss, net ................................... 14,535 12,864 20,236
Compensation expense related to stock options ................ 320,484 4,818 --
Other ........................................................ (7,877) (5,444) (1,545)
Changes in assets and liabilities:
(Increase) decrease in receivables ........................... (12,308) (6,359) 86,309
Increase in other non-current assets ......................... (1,538) (1,457) (27)
Increase in other current liabilities ........................ 20,677 46,600 22,022
Increase in deferred taxes and other ......................... 1,117 2,303 --
-------- -------- --------
Net cash flows from operating activities ....................... 12,659 42,980 105,869
-------- -------- --------
Cash flows from investing activities:
Investments in, loans to and advances to affiliated
companies, net ................................................ (498,641) (294,532) (44,805)
Capital expenditures ........................................... (5,192) (1,308) (2,249)
Deposit to acquire minority interest in subsidiary ............. 47,000 (47,000) --
Sale of affiliated companies ................................... -- 11,070 --
Dividend received................................................ 8,977 -- --
Loans repaid by subsidiaries ................................... 175,692 350,250 --
-------- -------- --------
Net cash flows from investing activities ....................... (272,164) 18,480 (47,054)
-------- -------- --------
Cash flows from financing activities:
Proceeds from short-term borrowings ............................ -- 91,415 --
Proceeds from short-term borrowings, related party ............. 129,925 228,097 --
Proceeds from long-term borrowings ............................. 131,020 498,699 --
Deferred financing costs ....................................... (515) (17,139) --
Repayments long and short-term borrowings ...................... (37,183) (377,443) (150,158)
Redemption of convertible loans ................................ -- (170,171) --
Purchase shares from shareholder ............................... -- (292,561) --
-------- -------- --------
Net cash flows from financing activities ....................... 223,247 (39,103) (150,158)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents............. (36,258) 22,357 (91,343)
Cash and cash equivalents at beginning of period................. 43,306 20,949 112,292
Cash and cash equivalents at end of period ..................... 7,048 43,306 20,949
======== ======== ========
Non-cash investing and financing activities:
Issuance of shares upon conversion of PIK notes................ -- 169,899 --
======== ======== ========
Supplemental cash flow disclosures:
Cash paid for interest ....................................... (16,561) (52,447) (9,271)
======== ======== ========
Cash received for interest ................................... 27,529 25,091 26,277
======== ======== ========
125
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTE TO PARENT ONLY
SCHEDULE I
AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
1. Organization and Nature of Operations
United Pan-Europe Communications N.V., formerly known as United and Philips
Communications B.V. (''UPC'' or the ''Company'') was formed for the purpose of
acquiring and developing multi-channel television and telecommunications systems
in Europe. On July 13, 1995, United International Holdings, Inc. (''UIH''), a
United States of America corporation, and Philips Electronics N.V.
(''Philips''), contributed their respective ownership interests in European and
Israeli multi-channel television systems to UPC. Philips contributed to UPC its
95% interest in cable television systems in Austria, its 100% interest in cable
television systems in Belgium, and its minority interests in multi-channel
television systems in Germany, The Netherlands (KTE) and France (Citecable). UIH
contributed its interests in multi-channel television systems in Israel,
Ireland, the Czech Republic, Malta, Norway, Hungary, Sweden and Spain. UIH also
contributed United States dollars (''$'')78.2 million in cash (including accrued
interest of $3.2 million) to UPC and issued to Philips 3,169,151 shares of its
Class A Common Stock having a value of $50.0 million (at date of closing). In
addition, UPC issued to Philips $133.6 million of convertible subordinated pay-
in-kind notes (the ''PIK Notes''). As a result of this transaction, UIH and
Philips each owned a 50% economic and voting interest in UPC.
On December 11, 1997, UIH acquired Philips' 50% interest in UPC (the ''UPC
Acquisition''), thereby making it an effectively wholly-owned subsidiary of UIH
(subject to certain employee equity incentive compensation arrangements) through
its wholly-owned subsidiary UIH Europe, Inc. (''UIHE''). The entity's name was
changed to United Pan-Europe Communications N.V., and its legal seat was
transferred from Eindhoven to Amsterdam. Through its cable-based communications
networks in 10 countries in Europe and in Israel, UPC currently offers cable
television services and is further developing and upgrading its network to
provide digital video, voice and Internet/data services in Western European
markets.
As part of the UPC Acquisition, (i) UPC purchased the 3,169,151 shares of
Class A Common Stock of UIH held by Philips (66,800), (ii) UIH purchased 169,899
of the accreted amount of UPC's PIK Notes and redeemed them for 15,180,261
shares of UPC, (iii) UPC repaid to Philips the remaining 170,371 accreted amount
of the PIK Notes (339,800), (iv) UIH purchased 13,121,604 shares of UPC directly
from Philips, and (v) UPC repurchased Philips' remaining equity interest in UPC
(24,378,396 shares). The UPC Acquisition was financed with proceeds from a long-
term revolving credit facility through UPC with a syndicate of banks (305,200)
(the ''Senior Revolving Credit Facility''), a bridge bank facility through a
subsidiary of UPC $111,200 (224,000) and a cash investment by UIH of 327,400.
Approximately 479,000 drawn on the Senior Revolving Credit Facility was used to
repay existing debt of UPC in conjunction with the UPC Acquisition.
UIH's acquisition of Philips' interest in UPC was accounted for as a step
acquisition under purchase accounting. As a result of UPC becoming effectively
wholly owned by UIH, such purchase accounting adjustments, along with existing
basis differences, were pushed down to the financial statements of UPC and a new
basis of accounting was established for the UPC net assets acquired by UIH. As
of December 11, 1997, the proportional net assets of UPC acquired by UIH were
recorded at fair market value based on the purchase price paid by UIH, along
with additional basis differences at the UIH level existing as of that date. The
total purchase accounting adjustments of 442,688 were allocated to UPC's
underlying net assets.
As a result of the UPC Acquisition and the associated push-down of UIH
basis on December 11, 1997, the condensed information as to financial position
of registrant as of December 31, 1997 and September 30, 1998 is presented on a
''post-acquisition'' basis. The condensed information as to the operations and
the cash flows of the registrant for the year ended December 31, 1997 include
the post-acquisition results of the Company for the period from December 11,
1997 through December 31, 1997, which reflects 1,980 of new basis depreciation
and amortization resulting from push-down accounting as well as approximately
4,034 of interest expense from purchase related indebtedness which is included
in the Parent's share in result of affiliated companies, net. Due to
immateriality, the entire fiscal year ended December 31, 1997 is presented as
''pre-acquisition'' in the accompanying condensed information as to the
operations and cash flows of registrant.
126
UNITED PAN-EUROPE COMMUNICATIONS N.V.
NOTE TO PARENT ONLY
SCHEDULE I
AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition)
(Monetary amounts stated in thousands of Dutch guilders,
except share and per share amounts)
2. Basis of Presentation
In December 1998, UPC acquired telephony and programming assets from UIH
through the issuance of new shares. As the acquisition was between entities
under common control, the transaction was accounted for at historical cost,
similar to pooling of interests accounting. It is generally accepted that,
consistent with a pooling-of-interests accounting, prior period financial
statements of the transferee are restated for all periods in which the
transferred operations were part of parent's consolidated financial statements.
Accordingly, we have restated all periods presented as if UPC had acquired the
telephony and programming assets from UIH as of the date of UIH's initial
investment.
127
UNITED PAN-EUROPE COMMUNICATIONS N.V.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
(Stated in thousands of Dutch guilders)
Additions
------------------------
Balance at
Beginning of Charged to Balance at End
Period Expense Acquisitions Deductions(1) Of Period
------------------- ---------- ------------ ------------- --------------
Allowance for doubtful accounts receivable:
Year ended December 31, 1998.................. 6,445 2,021 1,128 (334) 9,260
===== ===== ===== ====== =====
Year ended December 31, 1997.................. 5,835 2,093 543 (2,026) 6,445
===== ===== ===== ====== =====
Year ended December 31, 1996.................. 5,342 907 835 (1,249) 5,835
===== ===== ===== ====== =====
Six months ended December 31, 1995............ -- -- 5,342 -- 5,342
===== ===== ===== ====== =====
Allowance for costs to be reimbursed:
Year ended December 31, 1998.................. 2,209 109 -- (2,318) --
===== ===== ===== ====== =====
Year ended December 31, 1997.................. 4,620 1,221 -- (3,632) 2,209
===== ===== ===== ====== =====
Year ended December 31, 1996.................. 5,303 794 -- (1,477) 4,620
===== ===== ===== ====== =====
Six months ended December 31, 1995............ 4,137 1,166 -- -- 5,303
===== ===== ===== ====== =====
Allowance for Investments Affiliated
Companies:
Year ended December 31, 1998.................. -- -- -- -- --
===== ===== ===== ====== =====
Year ended December 31, 1997.................. 4,186 -- -- (4,186) --
===== ===== ===== ====== =====
Year ended December 31, 1996.................. 4,946 -- -- (760) 4,186
===== ===== ===== ====== =====
Six months ended December 31, 1995............ -- 4,946 -- -- 4,946
===== ===== ===== ====== =====
(1) Represents uncollectible balances written off to the allowance account and
the effect of currency translation adjustment.
128
INDEPENDENT AUDITORS' REPORT
Introduction
We have audited the consolidated financial statements of UNITED TELEKABEL
HOLDING N.V., Amsterdam, The Netherlands, for the year 1998 for purpose of
inclusion in the Form 10-K of one of its shareholders. These financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
Scope
We conducted our audit in accordance with auditing standards generally
accepted in The Netherlands, which are substantially the same as those generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
Opinion
In our opinion, the consolidated financial statements give a true and fair
view of the financial position of the company as at December 31, 1998 and of the
result for the period from commencement of operations at August 6, 1998 then
ended in accordance with accounting principles generally accepted in The
Netherlands.
Generally accepted accounting principles in The Netherlands vary in certain
significant respects from generally accepted accounting principles in the United
States of America. Application of generally accepted accounting principles in
the United States of America would have affected total assets, statement of
operations and shareholders' equity as at and for the period from commencement
of operations at August 6, 1998 ended December 31, 1998, to the extent
summarized in Note 18. to the consolidated financial statements.
Amstelveen, The Netherlands,
March 19, 1999
129
UNITED TELEKABEL HOLDING N.V.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM COMMENCEMENT OF OPERATIONS (AUGUST 6, 1998) TO
DECEMBER 31, 1998
130
UNITED TELEKABEL HOLDING N.V.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1998
(stated in thousands of Dutch guilders)
Assets
Fixed assets:
Intangible fixed assets.............................. 564,438
Tangible fixed assets................................ 847,056
Affiliated companies................................. 206,332
---------
Total fixed assets......................................... 1,617,826
---------
Current assets:
Inventories.......................................... 3,091
Receivables.......................................... 40,638
Cash and cash equivalents............................ 10,475
---------
Total current assets....................................... 54,204
---------
Total assets............................................... 1,672,030
=========
Shareholders' Equity and Liabilities
Shareholders' Equity................................. 635,521
Minority interest.................................... 1,104
---------
636,625
Provisions........................................... 42,054
Long-term liabilities................................ 232,727
Current liabilities.................................. 760,624
---------
Total shareholders' equity and liabilities.............. 1,672,030
=========
131
UNITED TELEKABEL HOLDING N.V.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM COMMENCEMENT OF OPERATIONS
(AUGUST 6, 1998) TO DECEMBER 31, 1998
(stated in thousands of Dutch guilders)
Total revenues...................................... 99,122
Direct operating expenses........................ (33,172)
Selling, general and administrative expenses..... (36,096)
Depreciation and amortization.................... (39,490)
--------
Total operating expenses............................ (108,758)
--------
Operating loss................................... (9,636)
Financial income and expense..................... (16,699)
--------
Loss before income taxes............................ (26,335)
Income taxes..................................... 1,212
--------
Loss after taxes.................................... (25,123)
Share in results of affiliated companies......... (24,486)
--------
Group loss.......................................... (49,609)
Minority interest................................ 235
--------
Net loss............................................ (49,374)
========
132
UNITED TELEKABEL HOLDING N.V.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM COMMENCEMENT OF OPERATIONS
(AUGUST 6, 1998) TO DECEMBER 31, 1998
(stated in thousands of Dutch guilders)
Cash flows from operating activities:
Net loss.................................................... (49,374)
Adjustments to reconcile net loss to net cash flows from
operating activities:
Depreciation and amortization............................... 39,490
Share in results of affiliated companies, net............... 24,486
Minority interest in subsidiaries........................... (235)
Changes in assets and liabilities:
Decrease in current assets.................................. 40,098
(Decrease) in current liabilities........................... (55,186)
(Decrease) in deferred taxes and other provisions........... (1,132)
--------
Net cash flows from operating activities..................... (1,853)
--------
Cash flows from investing activities:
Capital expenditures........................................ (121,384)
Loan to affiliated companies................................ (7,120)
Acquisitions, net of cash acquired.......................... (12,588)
--------
Net cash flows from investing activities..................... (141,092)
--------
Cash flows from financing activities:
Proceeds from short-term borrowings......................... 120,705
Proceeds from long-term borrowings.......................... 9,621
--------
Net cash flows from financing activities..................... 130,326
--------
Net decrease in cash and cash equivalents................... (12,619)
Cash and cash equivalents at beginning of period............ 100
Cash and cash equivalents contributed....................... 22,994
--------
Cash and cash equivalents at end of period................... 10,475
========
Supplemental cash-flow disclosures:
Cash paid for interest...................................... (19,470)
========
Non-cash investing activities:
Contribution of Dutch cable systems
Working capital............................................. (73,850)
Affiliated companies........................................ 223,698
Tangible fixed assets....................................... 764,762
Intangible fixed assets..................................... 550,911
Short-term debt............................................. (544,918)
Long-term liabilities....................................... (223,106)
Provisions.................................................. (35,696)
Cash and cash equivalents................................... 22,994
--------
Equity contributed........................................... 684,795
========
133
UNITED TELEKABEL HOLDING N.V.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM COMMENCEMENT OF OPERATIONS
(AUGUST 6, 1998) TO DECEMBER 31, 1998
(Monetary amounts stated in thousands of Dutch guilders)
1. Organization and Nature of Operations
United Telekabel Holding N.V. ("UTH" or the "Company"), legally seated in
Almere, The Netherlands, was legally formed in May 1998 and commenced operations
on August 6, 1998. UTH was formed as a joint venture between United Pan-Europe
Communications N.V. ("UPC") and N.V. NUON Energie-Onderneming voor Gelderland,
Friesland en Flevoland ("NUON"). UPC became a 51% shareholder and NUON a 49%
shareholder. UTH was formed for the purpose of offering cable-based
communications through its networks in the Netherlands. UTH currently offers
cable television services and is further developing and upgrading its network to
provide digital video, voice and internet/data services in its Dutch markets.
UTH commenced operations on August 6, 1998 when both shareholders
contributed their interests in Dutch cable television operating companies to
UTH. NUON contributed its interest in N.V. Telekabel Beheer ("Telekabel") and
UPC contributed its interest in Cable Network Brabant Holding B.V. ("CNBH") and
50% of the shares in A2000 Holding N.V. ("A2000"). UTH recorded the assets
contributed at their fair market value. The table below summarizes the opening
balance sheet of UTH, based on the net assets contributed at their fair market
values by NUON and UPC as of August 6, 1998.
Cash and cash equivalents contributed................... 23,094
Other current assets.................................... 83,827
Affiliated companies.................................... 223,698
Tangible fixed assets................................... 764,762
Intangible fixed assets................................. 550,911
---------------
Total assets......................................... 1,646,292
===============
Short-term debt......................................... 544,918
Other current liabilities............................... 157,677
Provisions.............................................. 35,696
Long-term liabilities................................... 223,106
Shareholders' equity and liabilities.................... 684,895
---------------
Total shareholders' equity and liabilities........... 1,646,292
===============
Due to the fact that operations commenced at August 6, 1998, no
comparative financial statements have been presented. Proforma information
(unaudited) is presented in note 19.
2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the Netherlands for
financial statements. The accounting policies followed in the preparation for
the consolidated financial statements, differ in some respects to those
generally accepted in the United States of America (US GAAP). See note 18.
The preparation of financial statements in conformity with Dutch generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
134
during the reporting period. Actual results could differ from those estimates.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) have been made which are necessary to present fairly the financial
position of the Company as of December 31, 1998 and the results of its
operations for the period from commencement of operations (August 6, 1998) to
December 31, 1998.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
UTH and its group companies (the "UTH Group"). Group companies are companies or
other legal entities in which UTH has an ownership interest of more than 50% of
the issued share capital or that UTH otherwise controls. All significant
intercompany accounts and transactions have been eliminated in consolidation.
The following chart presents a summary of UTH's significant investments in
multi-channel television, programming and telephony operations as of December
31, 1998:
Name City Percentage Ownership
Cable Network Brabant Holding BV Eindhoven 100
N.V. Telekabel Beheer Arnhem 100
A2000 Holding N.V. Amsterdam 50 (1)
Uniport Communications B.V. Amsterdam 80
(1) Not consolidated
Foreign Currencies
Assets and liabilities denominated in foreign currencies are translated into
Dutch guilders at the yearend exchange rate. Transactions in foreign currencies
are translated at the exchange rate in effect at the time of the transaction.
The exchange results are recorded under financial income and expense in the
statement of income.
Balance Sheet
(a) General
-------
Assets and liabilities are stated at face value unless indicated otherwise.
(b) Fixed assets
------------
Intangible fixed assets
The excess of investments in consolidated subsidiaries over the net tangible
asset value at acquisition is amortized on a straight-line basis over 15 years.
Licenses in newly acquired companies are recognized at the fair market value of
those licenses at the date of acquisition and include the development costs
incurred prior to the date a new license was acquired. The license value is
amortized on a straight-line basis over the initial license period, up to a
maximum of 20 years. Deferred financing costs are amounts spent in connection
with financing the UTH Group. The amortization period is the period relating to
the term of the financing. When assets are fully amortized, the costs and
accumulated amortization are removed from the accounts.
Tangible fixed assets
Tangible fixed assets are stated at cost. Additions, replacements,
installation costs and major improvements are capitalized, and costs for normal
repair and maintenance of tangible fixed assets are charged to expense as
incurred. Assets constructed by subsidiaries of UTH incorporate overhead
expense and interest charges incurred during the period of construction;
investment subsidies are deducted. Depreciation is calculated using the
straight-line method over the economic life of the asset, taking into account
the residual value. The economic lives of tangible fixed assets at acquisition
are as follows:
135
Networks 7-20 years
Buildings and leasehold improvements 20-33 years
Machinery & Other 3-10 years
Affiliated Companies
For those investments in companies in which UTH's ownership interest is 20%
to 50%, its investments are held through a combination of voting common stock,
preferred stock, debentures or convertible debt and/or UTH exerts significant
influence through board representation and management authority, or in which
majority control is deemed to be temporary, the equity method of accounting is
used. Under this method, the investment, originally recorded at fair market
value, is adjusted to recognize UTH's proportionate share of net earnings or
losses of the affiliates, limited to the extent of UTH's investment in and
advances to the affiliates, including any debt guarantees or other contractual
funding commitments. UTH's proportionate share of net earnings or losses of
affiliates includes the amortization of the excess of its cost over its
proportionate interest in each affiliate's net tangible assets or the excess of
its proportionate interest in each affiliate's net tangible assets in excess of
its cost.
(c) Receivables
-----------
Receivables are stated at face value, less an allowance for doubtfull
accounts. The allowance for doubtful accounts is based upon specific
identification of overdue accounts receivable. An allowance for a percentage of
the account is established once the receivable is overdue. Upon disconnection
of the subscriber, the account is fully reserved. The allowance is maintained
on the books until receipt of payment or for a maximum of three years.
(d) Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include cash and investments with original
maturities of less than three months.
(e) Provisions
----------
Deferred tax liabilities arising from temporary differences between the
financial and tax bases of assets and liabilities are included in the
provisions. The principal differences arise in connection with valuation
differences of intangible fixed assets. In calculating the provision, current
tax rates are applied.
UTH accounts for income taxes under the asset and liability method, which
requires recognition of, deferred tax assets and liabilities for the expected
future income tax consequences of transactions, which have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statement and income tax basis of assets, liabilities and loss carry forwards
using enacted tax rates in effect for the year in which the differences are
expected to reverse. Net deferred tax assets are then reduced by a valuation
allowance if management believes it is more likely than not they will not be
realized.
(f) Fair value of financial instruments
-----------------------------------
SFAS Statement No. 107, "Disclosures about Fair Values of Financial
Instruments" requires the disclosure of estimated fair values for all financial
instruments, both on- and off-balance sheet, for which it is practicable to
estimate fair value. For certain instruments, including cash and cash
equivalents, receivables, current liabilities and certain provisions, it was
assumed that the carrying amount approximated fair value due to the short
maturity of those instruments. For short and long term debt, the carrying value
approximates the fair value since all debt instruments carry a variable interest
rate component except for the convertible loans which carried a fixed interest
rate. For investments in affiliated companies carried at cost, quoted market
prices for the same or similar financial instruments were used to estimate the
fair values. UTH has adopted the principles of this statement in its financial
statements. UTH did not have any material off-balance-sheet financial
instruments as of December 31, 1998.
(g) Recoverability of Tangible and Intangible fixed assets
------------------------------------------------------
UTH evaluates the carrying value of all tangible and intangible assets
whenever events or circumstances indicate the carrying value of assets may
exceed their recoverable amounts. An impairment loss is recognized when the
estimated
136
future cash flows (undiscounted and without interest) expected to result from
the use of an asset are less than the carrying amount of the asset. Measurement
of an impairment loss is based on the fair value of the asset computed using
discounted cash flows if the asset is expected to be held and used. Measurement
of an impairment loss for an asset held for sale would be based on fair market
value less estimated costs to sell.
(h) Concentration of Credit Risk
----------------------------
Financial instruments which potentially subject UTH to concentrations of
credit risk consist principally of trade receivables. Concentrations of credit
risk with respect to trade receivables are limited due to UTH's large number of
customers.
(i) Other Comprehensive Income
--------------------------
UTH has adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("SFAS 130"), which requires that an enterprise
(i) classify items of other comprehensive income by their nature in a financial
statement and (ii) display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. As of December 31, 1998, UTH had
no other comprehensive income items.
Income Statement
Revenue is primarily derived from the sale of cable television services to
subscribers and is recognized in the period the related services are provided.
Initial installation fees are recognized as revenue in the period in which the
installation occurs, to the extent installation fees are equal to or less than
direct selling costs, which are expensed. To the extent installation fees
exceed direct selling costs, the excess fees are deferred and amortized over the
average contract period. All installation fees and related costs with respect
to reconnections and disconnections are recognized in the period in which the
reconnection or disconnection occurs.
New Accounting Principles
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting For the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance
on accounting for the costs of computer software developed or obtained for
internal use. SOP 98-1 identifies the characteristics of internal-use software
and provides examples to assist in determining when computer software is for
internal use. SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998, for projects in progress and prospectively,
with earlier application encouraged. Management believes that the adoption of
SOP 98-1 will not have a material effect on the financial statements.
The American Institute of Certified Public Accountants recently issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"), which is required to be adopted by affected companies for fiscal
years beginning after December 15, 1998. SOP 98-5 defines start-up and
organization costs, which must be expensed as incurred. In addition, all
deferred start-up and organization costs existing as of January 1, 1999 must be
written-off and accounted for as a cumulative effect of an accounting change.
Management believes that the adoption of SOP 98-1 will not have a material
effect on the financial statements.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"), which requires that companies recognize
all derivatives as either assets or liabilities in the balance sheet at fair
value. Under SFAS 133, accounting for changes in fair value of a derivative
depends on its intended use and designation. SFAS 133 is effective for fiscal
years beginning after June 15, 1999. Management is currently assessing the
effect of this new standard.
137
3. Intangible fixed assets
Licenses and Deferred
Total Goodwill Financing Costs
------------- ----------------------- --------------------
Value upon contribution........................ 550,911 547,869 3,042
Investments.................................... 30,996 29,745 1,251
Amortization................................... (17,469) (17,149) (320)
------- ------- -----
Book value as of December 31,1998............. 564,438 560,465 3,973
======= ======= =====
Balance as of December 31, 1998
------------------------------------------------------------
Licenses and Deferred
Total Goodwill Financing Costs
------------- ----------------------- --------------------
Gross Value.................................... 581,907 577,614 4,293
Amortization................................... (17,469) (17,149) (320)
------- ------- -----
Book value as of December 31,1998............. 564,438 560,465 3,973
======= ======= =====
4. Tangible fixed assets
Land and Machinery
Total Buildings Network & Other
------------- ------------------ -------------- --------------
Value upon contribution...................... 764,762 6,025 745,503 13,234
Additions.................................... 104,315 130 102,023 2,162
Depreciation................................. (22,021) (182) (20,005) (1,834)
------- ----- ------- ------
Book value as of December 31,1998........... 847,056 5,973 827,521 13,562
======= ===== ======= ======
Balance as of December 31, 1998
-----------------------------------------------------------------
Land and Machinery
Total Buildings Network & Other
------------- ------------------ -------------- --------------
Cost......................................... 869,077 6,155 847,526 15,396
Depreciation................................. (22,021) (182) (20,005) (1,834)
------- ----- ------- ------
Book value as of December 31,1998........... 847,056 5,973 827,521 13,562
======= ===== ======= ======
5. Affiliated companies
Total Investments Advances
------------- ----------------------- -------------------
Balance upon contribution...................... 223,698 223,698 --
Additions...................................... 7,120 -- 7,120
Share in result................................ (24,486) (24,486) --
------- ------- -------
Balance as of December 31,1998................ 206,332 199,212 7,120
======= ======= =======
The investments in affiliated companies as of December 31, 1998 are:
Investments in and Cumulative Share
% Advances to In Results of
Ownership Affiliated Companies Affiliated Companies Total
------------- --------------------- ---------------------- -------------
A2000.................... 50 229,481 (24,449) 205,032
Interway................. 33 1,337 (37) 1,300
------- ------- -------
Total.................... 230,818 (24,486) 206,332
======= ======= =======
138
UTH had the following differences related to the excess of cost over the net
tangible assets acquired for its equity investments. Such differences are being
amortized over 12 to 15 years:
Accumulated
Basis Difference Amortization
---------------- ----------------
A2000............................................. 249,236 (8,200)
======= ======
These differences have been presented as affiliated companies and share in
result of affiliated companies respectively.
Subsequent to year end, UPC provided a letter of support to A2000 stating
that it would continue to provide to A2000 the funding necessary to continue
operations through at least 1999.
Summary financial information for A2000 based on Dutch generally accepted
accounting principles is as follows:
Balance sheet As of December 31,
1998
-----------------------
Intangible fixed assets............................. 113,361
Tangible fixed assets............................... 356,623
Financial fixed assets.............................. 770
Liquid assets....................................... 369
Other current assets................................ 37,482
-------
Total assets..................................... 508,605
=======
Provisions.......................................... 1,610
Long-term debt...................................... 467,430
Current liabilities................................. 125,813
-------
Total liabilities................................ 594,853
-------
Total shareholders' value........................... (86,248)
=======
Statement of income For the Five Months
Ended December 31,
1998
-------
Revenue............................................. 53,954
Costs............................................... (39,271)
Depreciation and amortization....................... (35,888)
Financial income/charges............................ (11,293)
-------
Net loss......................................... (32,498)
=======
6. Receivables
Receivables as presented under current assets mature within one year and are
specified as follows:
Trade accounts receivable 22,519
Receivables from affiliated companies 1,654
Prepaid expenses and accrued income 1,447
Other receivables 15,018
------
Total 40,638
======
A major item under "other receivables" is current reclaimable VAT 3,676. As
of December, 1998 the valuation allowance on trade receivables amounted to 538.
139
7. Cash and cash equivalents
Cash and cash equivalents include demand accounts held in a bank with a
maturity of less than three months.
8. Shareholders' Equity
UTH's issued share capital consists of 100,000 shares with a par value of
NLG 1 each. All issued shares are fully paid-in.
Ordinary Additional Accumulated
Capital Paid-in Capital Deficit Total
--------- ---------------- ----------------- ------------
Balance at inception...... 100 -- -- 100
Balances upon contribution
of properties to joint
venture, August 6, 1998. -- 684,795 -- 684,795
Net loss.................. -- -- (49,374) (49,374)
--------- ---------------- ----------------- ------------
100 684,795 (49,374) 635,521
========= ================ ================= ============
9. Provisions
Provisions relate mainly to deferred taxation.
10. Long-term liabilities
Average Amount
Rate of Outstanding
Range of Interest Interest December 31, 1998
----------------- ------------ ------------------
Bank loans 5-7.625% 5.2 235,947
Long-term liabilities at December 31, 1998 will be payable as follows:
Bank Loans
----------
1999 3,220
2000 2,353
2001 8,404
2002 16,948
2003 30,104
Thereafter 174,918
-------
Total 235,947
=======
On February 20, 1998 CNBH secured a 250,000 nine-year term facility, which
was amended in August 1998 to 266,000. The CNBH facility bears interest at the
applicable Amsterdam Interbank Offered Rate ("AIBOR") plus a margin ranging from
0.60% to 1.60% per annum, and is secured by, among other things, an encumbrance
over CNBH's assets and a pledge of the shares of CNBH. The facility is used to
refinance several acquisitions and will furthermore be used for the development
and exploitation of enhanced cable TV services, data services and telephony
services. As of December 31, 1998, 219,000 was outstanding on the facility.
The shares of UTH held by UPC are pledged for a certain loan of UPC.
140
11. Current Liabilities
The current liabilities relate to short-term debt and other liabilities
which are specified below:
(a) Short-term debt
Long-term debt repayable within one year 3,220
Short-term debt to shareholders 662,403
-------
Total 665,623
-------
Short term debt to shareholders as of December 31, 1998
NUON's contribution to UTH included an existing 690,000-debt facility with an
outstanding balance of approximately 543,000 (as of August 6, 1998). This
facility bears an interest rate of 6.65% over the reporting period up to
November 30, 1998. As of November 30, 1998 this rate was increased with 1.5%. As
of December 31, 1998, approximately 614,000 was outstanding on the facility. The
debt facility is due March 15, 1999, with an extension period of 15 days. As
security for repayment of the debt facility, NUON received a pledge over the
shares of N.V. Telekabel Beheer (the assets contributed by NUON). UTH has
negotiated with the lenders to refinance the debt facility (see Note 20.).
Subordinated loans
UTH entered into a subordinated loan agreement with NUON in December 1998 for
an amount of NLG 33.0 million. The interest payable is 5.5% on an annually
basis.This subordinated loan was entered into for purposes of continuing funding
of incurred losses and capital expenditures.UTH entered into a subordinated loan
agreement with UPC in December 1998 for an amount of NLG 15.2 million. The
interest payable is 5.5% on an annually basis. This subordinated loan was
entered into for purposes of continuing funding of incurred losses and capital
expenditures
(b) Other Liabilities
Accounts payable to trade creditors 47,459
Deposits by customers 197
Other short-term liabilities 39,855
Deferred income and accrued expenses 7,490
-------
Total 95,001
-------
Total current liabilities 760,624
=======
12. Information per geographical area
All operations of UTH are in The Netherlands. In addition, substantially all
operations relate to cable television services.
13. Personnel
Labour cost is specified as follows:
Salaries and wages 9,173
Pension costs 538
Social securities 1,911
------
Total 11,622
======
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The information about employees by category is as follows:
Operating 160
Other 184
---
Total 344
===
14. Financial income and expenses
Interest income 14
Interest expense (16,713)
-------
Total (16,699)
========
Under interest expense an amount of 11,348 was accounted for as interest
related parties.
15. Income taxes
In general, a Dutch holding company may benefit from the so-called
participation exemption. The participation exemption is a facility in Dutch
corporate tax law which under certain conditions allows a Dutch company to
exempt any dividend income and capital gains in relation with its participation
in subsidiaries. Capital losses are also exempted, apart from liquidation losses
(under stringent conditions).
For UTH the primary difference between taxable loss and net loss for
financial reporting purposes relates to the amortization of goodwill. The
consolidated financial statements have been prepared assuming partial tax basis
for license fees capitalized relating to certain acquisitions. Deferred taxes
have been provided for that portion of the licenses which management believes no
tax basis will be allowed.
The difference between income tax expense provided in the financial
statements and the expected income tax benefit at statutory rates is reconciled
as follows:
Expected income tax benefit at the Dutch statutory rate of 35% (9,217)
Tax effect of permanent and other differences:
Change in valuation allowance 6,541
Non- deductible expenses 1,464
-------
Total income tax benefit (1,212)
=========
The significant components of the net deferred tax liability are as follows:
Deferred Tax Assets:
Tax net operating loss carries forward.................. 20,112
Valuation allowance..................................... (20,112)
--------------
Deferred tax assets, net of valuation allowance...... 0
--------------
Deferred Tax Liabilities:
Intangible assets....................................... 33,438
Tangible fixed assets, net.............................. 962
--------------
Total deferred tax liabilities.......................... 34,400
--------------
Deferred tax liabilities, net........................ 34,000
==============
The tax loss carry forwards have no expiration date.
16. Related parties transactions
UTH signed management services agreements with both of its shareholders. In
the reporting period an amount of NLG 4,255 has been taken into account as
expenses. In addition UTH delivers service to NUON. These services are rendered
at arms' length prices and made up 8% of the revenues over the reporting period.
As mentioned under Note 11 UTH has a short-term debt payable to NUON as well as
subordinated loans to both NUON and UPC. UPC charged an amount of 988 for
salaries and related costs for employees seconded to UTH Group.
142
17. Commitments and Guarantees
The UTH Group has entered into various rent and lease agreements for office
space, cars etc. The terms of the agreements call for future minimum payments as
follows:
1999 4,000
2000 3,200
2001 2,100
2002 1,600
2003 1,400
Subsequent to December 31, 1998, UTH provided additional funding to A2000.
In total UTH's share of the funding commitment is $15,000. As of December 31,
1998, UTH had funded $3,750 of its commitment.
18. US GAAP Reconciliation
General
The accounting policies followed in the preparation for the consolidated
financial statements differ in some respects to those generally accepted in the
United States of America (US GAAP).
The differences which have a material effect on net loss and/or
shareholders'equity and/or total assets are as follows:
- The fair market value of licences, goodwill, land and buildings and
networks for US GAAP purposes should be set at historical cost of the
contributor. Consequently, no step-up in asset value is allowed for the
difference between historical cost and the fair market value of the
assets contributed by both UPC and NUON.
- Deferred taxes have been established for the difference between book and
tax basis of contributed assets, if applicable.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" which
requires recognition of deferred tax assets and liabilities for the expected
future income tax consequences of transactions which have been included in the
financial statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based upon the difference between the financial and
tax bases of assets and liabilities and carryforwards using enacted tax rates in
effect for the year in which the differences are expected to reverse. UTH has
adopted the principles of this statement in its financial statements.
143
US GAAP information
The calculation of net loss, shareholders' equity and total assets,
substantially in accordance with US GAAP, is as follows:
Net loss as per Consolidated
----------------------------
Statements of income (49,374)
--------------------
Adjustments to reported income (loss):
Amortisation of goodwill 4,082
Share in results of affiliated companies 747
---------
Approximate net loss in accordance with US
=========
GAAP (44,545)
=========
Shareholders'equity as per
--------------------------
Consolidated balance sheets 635,521
---------------------------
Adjustments to reported equity:
Goodwill (152,105)
Affiliated Companies (27,893)
---------
Approximate shareholders'equity
in accordance with US GAAP 455,523
=========
Total assets as per Consolidated
--------------------------------
Balance sheets 1,672,030
--------------
Adjustments to reported assets:
Goodwill (152,105)
Affiliated Companies (27,893)
---------
Approximate total assets in accordance with US
GAAP 1,492,032
=========
19. Proforma information (unaudited)
On August 6, 1998 both shareholders contributed their interests in the Dutch
cable market into UTH. The following pro forma condensed consolidated
information for the year ended December 31, 1997 and 1998 give effect to the UTH
Transaction as if it had occurred at the beginning of the periods presented.
This pro forma condensed consolidated information does not purport to represent
what UTH's result of operations would actually have been if such transaction had
in fact occurred on such date. The pro forma adjustments are based upon
currently available information and upon certain assumptions that management
believes are reasonable.
For the Year Ended For the Year Ended
December 31, 1997 December 31, 1998
---------------------- ----------------------
Total revenues........................ 157,836 219,314
Net loss.............................. (47,194) (90,600)
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20. Subsequent events
Subordinated loan
UTH entered into a subordinated loan agreement with UPC in March, 1999 for an
amount of 119,000 million. The interest is payable on an annually basis. This
subordinated loan was entered into for purposes of continuing funding of
incurred losses and capital expenditures.
NUON Share Purchase Agreement
On February 17, 1999, UPC acquired the remaining 49% of UTH. This
transaction completed the purchase by UPC of 100% of UTH. UPC purchased the
interest from NUON for 518,100. In addition, UPC repaid NUON and assumed from
NUON a 33,300 subordinated loan, including accrued interest dated December 31,
1998, owed by UTH to NUON.
Refinancing
Subsequent to December 31, 1998, UTH replaced their existing 690,000 facility
with a senior facility and additional shareholder loans. The senior facility
consists of a Euro 340 million (750,000) revolving facility to N.V. Telekabel
Beheer that will convert to a term facility on December 31, 2001. Euro 5
million of this facility will be in the form of an overdraft facility that will
be available until December 31, 2007. This existing facility will be used to
repay a portion of the UTH facility and for capital expenditures. The new
facility will bear interest at the Euro Interbank Offered Rate plus a margin
between 0.75% and 2.00% based on the leverage multiples tied to N.V. Telekabel
Beheer's net operating income. The new facility will be secured by, among other
things, a pledge over shares held by the borrower and will restrict N.V.
Telekabel Beheer's ability to incur additional debt.
145
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
United Pan-Europe Communications N.V.
a Dutch Public limited liability company
By: /s/ J. Timothy Bryan
____________________________________________
J. Timothy Bryan, President and Chief Financial Officer
Date: March 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Mark L. Schneider
- ------------------------------------------------
Mark L. Schneider, Chairman of Board of Management and Chief Executive Officer Date: March 29, 1999
/s/ John F. Riordan
- ------------------------------------------------
John F. Riordan, Vice-Chairman of the Board of Management Date: March 29, 1999
/s/ J. Timothy Bryan
- ------------------------------------------------
J. Timothy Bryan, President and Chief Financial Officer Date: March 29, 1999
/s/ Anton H.E. v. Voskuijlen
- ------------------------------------------------
Anton H.E. v. Voskuijlen, Senior Vice President, Legal and General Counsel Date: March 29, 1999
/s/ Nimrod J. Kovacs
- ------------------------------------------------
Nimrod J. Kovacs, Managing Director, Eastern Europe Date: March 29, 1999
/s/ Ray D. Samuelson
- ------------------------------------------------
Ray D. Samuelson, Managing Director, Finance and Accounting (Chief Accounting Officer) Date: March 29, 1999
/s/ Michael T. Fries
- ------------------------------------------------
Michael T. Fries, Chairman of Supervisory Board and Authorized U.S. Representative Date: March 29, 1999
/s/ Richard De Lange
- ------------------------------------------------
Richard De Lange, Supervisory Board Member Date: March 29, 1999
/s/ Tina M. Wildes
- ------------------------------------------------
Tina M. Wildes, Supervisory Board Member Date: March 29, 1999
/s/ Ellen P. Spangler
- ------------------------------------------------
Ellen P. Spangler, Supervisory Board Member Date: March 29, 1999
/s/ Anthony P. Ressler
- ------------------------------------------------
Anthony P. Ressler, Supervisory Board Member Date: March 29, 1999
/s/ John P. Cole, Jr.
- ------------------------------------------------
John P. Cole, Jr., Supervisory Board Member Date: March 29, 1999
146