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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
ACT OF 1934
FOR SUCH TRANSITION PERIOD FROM _______ TO _______
Commission file number: 000-30004
PRIMACOM AG
(Exact name of Registrant as specified in its charter)
FEDERAL REPUBLIC OF GERMANY
(Jurisdiction of incorporation or organization)
Hegelstrasse 61
55122 Mainz
011 49 6131 931000
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None Not Applicable
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Bearer Ordinary Shares, with no nominal value
(Title of Class)
American Depositary Shares, each representing one-half of one Ordinary Share
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
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 (or for such shorter period that the Registrant was
required to file such report) and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark which financial statement item the registrant has elected
to follow:
Item 17 / / Item 18 /X/
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TABLE OF CONTENTS
<Table>
PART I.......................................................................1
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS..........1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE........................1
ITEM 3. KEY INFORMATION................................................1
ITEM 4. INFORMATION ON THE COMPANY....................................15
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS..................48
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES....................63
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.............69
ITEM 8. FINANCIAL INFORMATION.........................................71
ITEM 9. THE OFFER AND LISTING.........................................71
ITEM 10. ADDITIONAL INFORMATION........................................73
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....81
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES........82
PART II.....................................................................82
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES...............82
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES
HOLDERS AND USE OF PROCEEDS...................................82
ITEM 15. [RESERVED]....................................................82
ITEM 16. [RESERVED]....................................................82
PART III....................................................................82
ITEM 17. FINANCIAL STATEMENTS..........................................82
ITEM 18. FINANCIAL STATEMENTS..........................................83
ITEM 19. EXHIBITS......................................................84
</Table>
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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
In addition to historical information, this annual report includes
forward-looking statements. These statements relate to our future prospects,
developments and business strategies and are based on analyses of forecasts of
future results and estimates of amounts not yet determinable. These
forward-looking statements are made only as of the date of this annual report,
and we do not undertake to publicly update or revise these statements, whether
as a result of new information, future events or otherwise.
These forward-looking statements are identified by their use of terms
and phrases such as "anticipate", "believe", "could", "estimate", "expect",
"intend", "may", "plan", "predict", "project", "will" and similar terms and
phrases, including references to assumptions. Most of these statements are
contained in sections entitled "Item 3.D Risk Factors", "Item 3.A Selected
Financial Data", "Item 4.B Business Overview" and "Item 5. Operating and
Financial Review and Prospects" and other sections of this annual report.
These forward-looking statements involve risks, uncertainties and
other factors that may cause our actual future results, performance and
achievements to be materially different from those suggested or described in
this annual report. Many of the factors that will determine these results,
performance and achievements are beyond our control. Such factors, among others,
include:
- the speed and cost at which we are able to implement our cable
television network upgrades and build broadband networks and the
response from our subscribers to the new services and products
offered to them on our broadband networks,
- our ability to extend our contracts with housing associations in
Germany under commercially acceptable terms,
- our ability to secure adequate financing,
- changes in technology,
- changes in the competitive environment for cable television
network and broadband network operators,
- changes in governmental regulation of the German, Dutch and
European Union telecommunications markets,
- our ability to successfully integrate the operations of the cable
operators we acquire, and
- our ability to manage our networks in regions where we have not
operated in the past.
The risks described above and in the other sections of this annual
report are not exhaustive. We operate in a very competitive and rapidly changing
environment. New risks, uncertainties and other factors emerge from time to time
and it is not possible for us to predict all such risks, nor can we assess the
impact of all such risks on our business or the extent to which any risk, or
combination of risks, may cause actual results to differ materially from those
contained in any forward-looking statements as a prediction or guarantee of
actual results.
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A. SELECTED FINANCIAL DATA
The selected consolidated statements of operations and cash flow data
set forth below for the years ended December 31, 1999, 2000 and 2001 and the
selected consolidated balance sheet data set forth below as of December 31,
1999, 2000 and 2001 have been derived from our consolidated financial
statements, included elsewhere in this annual report, which have been prepared
in accordance with accounting principles generally accepted in the United States
("U.S. GAAP") and audited by Ernst & Young, independent auditors. The selected
consolidated statements of operations and cash flow data set forth below for the
years ended December 31, 1997 and 1998 and the consolidated balance sheet data
set forth below as at December 31, 1997 and 1998 have been derived from the
financial statements of Suweda Elektronische Medien- und Kabelkommunikations AG,
the accounting acquirer in the merger referred to in the next paragraph, which
have been prepared in accordance with U.S. GAAP and audited by Ernst & Young.
We commenced operations as a combined entity under the name PrimaCom
AG following the merger of KabelMedia Holding AG ("KabelMedia") and Suweda, two
similarly sized German cable television operators, on December 30, 1998. In this
merger, shares of KabelMedia were issued to the shareholders of Suweda as
consideration in the merger and KabelMedia was the surviving corporate entity,
which then changed its name to PrimaCom AG. For purposes of U.S. GAAP, the
merger was accounted for under the purchase method as a reverse acquisition of
KabelMedia by Suweda and Suweda was treated as the accounting acquirer. As a
result, Suweda's historical financial statements for periods prior to the merger
are treated as our historical financial statements. The selected consolidated
data presented below should be read in conjunction with our consolidated
financial statements and notes thereto included elsewhere in this annual report.
Our consolidated financial statements for 1997 and 1998 were prepared
using the Deutsche Mark and have been restated in Euro using the Council of the
European Union's official fixed conversion rate between the Euro and the
Deutsche Mark of DM1.95583 per EURO 1.00. The Deutsche Mark and the Euro had
legal tender status through a transition period which ended February 28, 2002.
Our consolidated financial statements for 1999, 2000 and 2001 were originally
prepared in Euro. The selected consolidated financial data is not comparable to
financial data of other companies that report in Euros and that restate amounts
from currencies other than the Deutsche Mark.
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1997 1998 1999 2000 2001
------ ------ ------- ------- -------
STATEMENT OF OPERATIONS DATA (EURO '000 EXCEPT PER SHARE AND OPERATIONS DATA)
Revenues ..................................... 42,847 49,339 105,949 124,343 165,496
Operating costs and expenses:
Operations .................................. 10,238 13,062 24,543 30,794 44,195
Selling, general and administrative ......... 8,168 6,271 18,590 27,981 37,630
Corporate overhead .......................... -- 1,278 12,413 17,219 14,929
Depreciation and amortization ............... 13,564 16,072 61,277 75,530 118,360
------ ------ ------- ------- -------
Total ...................................... 31,970 36,683 116,823 151,524 215,114
------ ------ ------- ------- -------
Operating profit (loss) ...................... 10,877 12,656 (10,874) (27,181) (49,618)
Interest expense:
Related party ............................... 288 11 -- -- --
Bank debt ................................... 2,618 2,550 9,995 24,629 61,445
Sale-leaseback .............................. 5,085 5,301 2,115 1,544 1,323
Senior notes ................................ -- -- 3,764 -- --
------ ------ ------- ------- -------
Total ...................................... 7,991 7,862 15,874 26,173 62,768
Other income (expense) ....................... 12,055 (232) (767) 1,690 (5,649)
------ ------ ------- ------- -------
Income (loss) from continuing operations
before income taxes and other items ........ 14,941 4,562 (27,515) (51,664) (118,035)
Income tax (expense) benefit ................. (2,268) (827) (1,667) (4,258) 15,381
------ ------ ------- ------- -------
Income (loss) from continuing operations
before minority interest and equity
earning .................................... 12,673 3,735 (29,182) (55,922) (102,654)
</Table>
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<Table>
Minority interest in net income of
subsidiaries ................................ (2,767) (303) (70) (94) (88)
Equity loss in affiliate ..................... -- -- -- (128) (420)
------- --------- --------- --------- ---------
Income (loss) from continuing operations ..... 9,906 3,432 (29,252) (56,144) (103,162)
Loss from discontinued operations, net of
income tax benefit .......................... (6,977) (2,922) -- -- --
Extraordinary loss, net of income tax ........ -- -- -- (8,180) --
Cumulative effect of change in accounting
principle ................................... -- -- -- -- (946)
------- --------- --------- --------- ---------
Net income (loss) ............................ 2,929 510 (29,252) (64,324) (104,108)
======= ========= ========= ========= =========
NET INCOME (LOSS) PER SHARE
Basic and diluted:
Continuing operations ........................ 49.53 0.22 (1.53) (2.85) (5.21)
Net income (loss) ............................ (14.65) 0.03 (1.53) (3.26) (5.26)
BALANCE SHEET DATA (AT PERIOD END)
Total assets ................................. 132,500 609,229 586,636 1,077,845 1,081,565
Total debt ................................... 147,863 332,800 224,762 754,333 852,660
Total liabilities ............................ 158,160 368,757 257,961 808,463 911,373
Shareholders' equity (deficiency) ............ (31,748) 240,031 328,590 269,184 169,992
CASH FLOW DATA
Net cash provided by (used in) operating
activities .................................. (3,121) 28,565 44,214 11,685 15,321
Net cash provided by (used in) investing
activities .................................. 15,972 8,451 (47,858) (387,759) (80,552)
Net cash provided by (used in) financing
activities .................................. (3,309) (39,706) 4,164 372,350 63,521
Capital expenditures (excluding
acquisitions) ............................... 5 3,110 31,704 99,817 68,636
OPERATIONS DATA
Homes passed(1) ............................. 612,590 1,335,052 1,422,826 1,916,870 1,964,868
Ready for service homes(2) ................... -- -- 30,456 412,538 440,883
Number of television subscribers ............. 329,010 877,152 919,641 1,299,926 1,304,494
Number of Internet subscribers(3) ............ -- -- 150 20,489 34,078
Number of digital television subscribers ..... -- -- -- 4,570 11,875
Total revenue generating units ............... 329,000 877,152 919,791 1,325,185 1,351,235
Analog Video penetration(4) .................. 61.2% 65.7% 64.6% 67.8% 66.4%
Internet penetration(5) ...................... -- -- 0.5% 3.9% 7.0%
Digital penetration(6) ....................... -- -- -- 1.1% 2.7%
Average monthly revenue per subscriber(7) .... 10.84 11.41 9.46 9.60 9.46
EBITDA (EURO '000) (8) ....................... 24,441 28,728 50,403 48,349 68,742
EBITDA margin(9) ............................. 57.0% 58.2% 47.6% 38.9% 41.5%
Adjusted EBITDA (EURO '000) (10) ............. 24,441 28,728 53,160 51,907 72,595
Adjusted EBITDA margin (11) .................. 57.0% 58.2% 50.2% 41.8% 43.9%
</Table>
(1) At end of the period. In 2001, 1,404,049 homes were passed by coaxial
backbone and approximately 560,819 were homes passed by fiber optic cable
networks.
(2) Upgraded from the fiber node to the home (862 MHz and two-way capable).
(3) Includes 4,240 dial-up customers at December 31, 2000 and 3,203 dial-up
customers at December 31, 2001.
(4) Analog television subscribers as a percentage of homes passed.
(5) High-speed Internet subscribers as a percentage of ready for service homes.
(6) Number of digital subscribers as a percentage of ready for service homes.
(7) Historical average monthly revenue per subscriber equals (a) the quotient
of revenues for the period divided by the number of months in the period,
divided by (b) the average monthly number of subscribers for such period.
(8) We define EBITDA as earnings (loss) before discontinued operations, equity
earnings (loss) in affiliates, extraordinary items, cumulative effect of
change in accounting principle, minority interests, gain (loss) on disposal
of fixed assets, net interest expense, income taxes and depreciation and
amortization. Other participants in the cable television and broadband
industries also use EBITDA, defined in a similar but often not exactly
comparable manner, as a measure of performance. We believe that EBITDA is a
useful supplement to net income and other income statement data in
understanding cash flows generated from operations that are available for
taxes, debt service and capital expenditures and because it is the most
commonly used measure to analyze and compare cable television and broadband
companies on the basis of operating performance, leverage and liquidity.
EBITDA is not a U.S. GAAP measure of income (loss) or cash flow from
operations and should not be considered as an alternative to net income as
an indication of our financial performance or as an alternative to cash
flow from operating activities as a measure of our liquidity.
(9) EBITDA margin is EBITDA divided by revenues.
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(10) Adjusted EBITDA represents our EBITDA adjusted to add back non-cash
compensation expenses related to share options of approximately
EURO 3,853,000 in the year ended December 31, 2001, approximately
EURO 3,558,000 in the year ended December 31, 2000 and approximately
EURO 2,757,000 in the year ended December 31, 1999. For more information
about these adjustments, see "Item 5. Operating and Financial Review and
Prospects--Corporate Overhead". Other cable television and broadband
companies may also measure performance with reference to adjusted EBITDA,
but the nature of the adjustments made by these companies may differ from
those made by us, making analysis and comparison of these measures
difficult.
(11) Adjusted EBITDA margin is Adjusted EBITDA divided by revenues.
EXCHANGE RATE INFORMATION
Effective January 1, 1999, Germany and ten other members of the
European Union introduced the Euro as their official currency and established
fixed conversion rates between their existing sovereign currencies and the Euro.
Currency exchanges traded the Euro beginning January 4, 1999. Beginning on
January 1, 2002, the Euro became the official currency of all member countries.
There was a transition period which ended February 28, 2002 during which the
Deutsche Mark was used alongside the Euro.
The table below sets forth, for the periods and dates indicated,
information concerning the exchange rate for the U.S. dollar against the Euro,
based on the noon buying rate and expressed in U.S. dollar per Euro. Since the
Euro did not exist during all years listed in the table below, a portion of the
information stated has been derived from the noon buying rate in The City of New
York for cable transfers in the Deutsche Mark, as certified for customs purposes
by the Federal Reserve Bank of New York, expressed as DM per U.S. dollar and
converted to Euro at the fixed exchange rate between the Euro and the Deutsche
Mark of DM1.95583 per EURO 1.00.
<Table>
<Caption>
U.S. DOLLAR PER EURO
-------------------------------------------------------
PERIOD-END AVERAGE
CALENDAR YEAR RATE RATE(1) HIGH LOW
- ------------- ---------- ---------- ---------- ----------
1997 .......................... 0.9199 0.8894 0.9617 0.7881
1998 .......................... 0.8523 0.8979 0.9466 0.8199
1999 .......................... 0.9930 0.9445 0.9984 0.8466
2000 .......................... 1.0652 1.0881 1.2092 0.9676
2001 .......................... 0.8901 0.8993 0.9535 0.8370
</Table>
- ----------
(1) The average of the noon buying rate on the last business day of each month
during the year.
The following table sets forth, for the period indicated, information
concerning the noon buying rate of U.S. dollar per Euro.
<Table>
<Caption>
U.S. DOLLAR PER EURO
---------------------------------
PERIOD-END
MONTH RATE HIGH LOW
- ----- ---------- ---------- ---------
September 2001 .......................... 0.9099 0.9310 0.8868
October 2001 ............................ 0.8993 0.9181 0.8893
November 2001 ........................... 0.8958 0.9044 0.8770
December 2001 ........................... 0.8901 0.9044 0.8773
January 2002 ............................ 0.8594 0.9031 0.8594
February 2002 ........................... 0.8658 0.8778 0.8613
March 2002 (through March 22) ........... 0.8791 0.8836 0.8652
</Table>
On March 22, 2002, the noon buying rate of U.S. dollar per Euro was
$0.8791 = EURO 1.00.
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The rates stated above are provided solely for the convenience of the
reader and are not necessarily the exchange rates, if any, we used in the
preparation of our consolidated financial statements included elsewhere in this
annual report. No representation is made that Deutsche Mark or Euro could have
been, or could be, converted into U.S. dollars at these rates or at any other
rates, or at all.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR OFFER AND USE OF PROCEEDS
Not applicable.
D. RISK FACTORS
RISK ASSOCIATED WITH OUR BUSINESS
WE EXPECT TO INCUR INCREASING NET LOSSES IN THE NEAR TERM, AND THE
VALUE OF OUR BUSINESS AND OUR SECURITIES WILL LIKELY DECLINE IF WE ARE UNABLE TO
GENERATE NET PROFITS IN THE FUTURE
We incurred net losses of approximately EURO 104,108,000 in the year
ended December 31, 2001. We expect to continue to incur net losses in the near
term. As part of our strategy to generate net profits, we intend to continue to
upgrade our networks on a very selective basis and develop new products
including broadband services, which will give rise to additional capital
expenditure and increase our already substantial interest expense. This planned
selective upgrading and our product development efforts will allow us to provide
value-added services, which we believe will increase our revenues per subscriber
in the future. At the same time, we will seek to reduce operating expenses,
including reducing signal delivery fees by installing our own head-ends. See
"Item 5. Operating and Financial Review and Prospects" and "Item 4. Information
on the Company--Business--Strategy". However, we cannot assure you that this
strategy will be successful or that we will be able to generate net profits in
the future. Our inability to generate net profits in the future may have a
significant negative impact on the value of our business and securities.
OUR SUBSTANTIAL LEVERAGE COULD LIMIT OUR ABILITY TO OBTAIN ADDITIONAL
FINANCING AND COULD MAKE US MORE VULNERABLE TO AN ECONOMIC DOWNTURN
As of December 31, 2001, we had a debt to equity ratio of
approximately 4.9:1. You should be aware that our degree of leverage could have
important consequences to shareholders. For example, the degree of leverage
could limit our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, product development or other
general corporate purposes, making us more vulnerable to a downturn in business
or the economy generally. The significant reduction in the market values of the
securities of companies in the telecommunications and media sectors has
generally reduced the access of participants in these sectors to the capital
markets and the number of financial institutions willing to provide credit
facilities to participants in those sectors and the amount of credit the
remaining institutions are willing to extend. These developments have directly
affected us and substantially increased the risks associated with our
substantial current leverage.
WE MAY NOT BE ABLE TO GENERATE SUFFICIENT CASH FROM OPERATIONS TO FUND
OUR PLANNED SELECTIVE CAPITAL EXPENDITURES, OPERATING EXPENSES AND DEBT
REPAYMENT OBLIGATIONS
As of December 31, 2001, we had approximately EURO 852,660,000 in bank
and other debt outstanding and approximately EURO 169,992,000 in shareholders'
equity. A significant portion of our cash flow from operations will be dedicated
to servicing this debt, which will limit our cash flow that may be used for
planned selective capital expenditures and possible acquisitions. If our actual
results of operations deviate from our business plan, we may be forced to:
- reduce or delay capital expenditures;
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- sell assets on terms that would otherwise be unacceptable to us;
or
- forgo business opportunities.
Any of these actions could prevent us from obtaining some or all of
the benefits expected from our business strategy.
In addition, we may not be able to refinance existing debt (which in
virtually all cases requires substantial principal payments at maturity) and, if
we can, the terms of such refinancing might not be as favorable as the terms of
existing indebtedness. If principal payments due at maturity cannot be
refinanced, extended or paid with proceeds of other capital transactions such as
new equity capital, our cash flow may not be sufficient to repay maturing debt.
If we are unsuccessful in this regard, we could be declared in default of our
loan obligations, in which case our debts under these instruments could become
payable prior to their scheduled payment date. Additionally, our convertible
second secured term loan facility includes a conversion right after December 31,
2004 into shares of our subsidiary PrimaCom Management GmbH, which in turn owns,
directly or indirectly, all of our other operating subsidiaries or partnerships.
Accordingly, if our convertible second secured term loan facility cannot be
refinanced by that date, any conversion could result in substantial dilution of
the indirect equity interests of our existing shareholders in our operating
subsidiaries and partnerships. See "Item 5. Operating and Financial Review and
Prospectus--Liquidity and Capital Resources."
OUR DEBT INSTRUMENTS CONTAIN RESTRICTIVE COVENANTS WHICH MAY BE
BREACHED IF AMENDMENTS TO THOSE INSTRUMENTS ARE NOT APPROVED BY OUR SHAREHOLDERS
AND WHICH MAY POSE POTENTIAL FINANCIAL AND OPERATING PROBLEMS
Our operating and financial flexibility and liquidity will be limited
by restrictions imposed by our existing debt instruments. These contain
financial and operating covenants including, among other things, maintenance of
identified financial ratios, as well as limitations on our ability to sell all
or substantially all of our assets and engage in mergers, consolidations and
other acquisitions. If we fail to comply with the covenants and other provisions
of these debt instruments, our debts under these instruments could become
payable prior to their scheduled payment date.
We have agreed to amendments to our debt instruments with our lenders,
certain terms of which must be approved by our shareholders at a meeting we
intend to convene in June, 2002. If these amendments are not approved by the
vote of 75% of the shareholders represented at that meeting, our amended loan
facilities will revert to their terms prior to amendment, which would include in
respect of our EURO 375,000,000 working capital facility total interest of 18%,
of which 16% is a cash coupon. The amendments to our loan facilities provide the
lenders under our EURO 375,000,000 convertible second senior term loan facility
(which replaces our working capital facility) with conversion rights exercisable
after December 31, 2004, provided we have not previously refinanced that
facility amount, pursuant to which they could acquire up to 65% of the shares of
PrimaCom Management. In part because of the significant dilution of the indirect
equity interests of our existing shareholders in our operating subsidiaries and
partnerships, which could result from any such conversion, an affirmative vote
of the requisite majority of our shareholders to the amendments to our loan
facilities cannot be assured.
Payment of interest at the rate required by the original terms of our
loan facilities will most likely result in a breach of financial covenants in
those facilities and, unless that breach were waived by the lenders or we were
able to agree other amendments with our lenders, our payment obligations under
those loan facilities could be accelerated and become immediately payable. In
the event of such an acceleration, we would be forced to seek to refinance our
indebtedness, which we believe would be extremely difficult to achieve in light
of the restricted access to capital which we and other participants in our
industry sectors currently face and which we expect to continue to face in the
short to medium term. If our indebtedness were accelerated and we were not able
to refinance, we would be forced to seek protection under applicable insolvency
laws.
The agreements governing our existing debt also limit, but do not
prohibit, our ability to incur additional indebtedness. We anticipate that we
will incur additional debt in the future. For example, provided we meet all
conditions, we may incur up to EURO 625,000,000 in debt under our senior secured
credit facility and our current outstanding debt under that facility is
approximately EURO 375,000,000. Any new debt that we add to our current debt
levels would increase the risks described above.
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WE MAY REQUIRE ADDITIONAL FINANCING IN THE FUTURE, WHICH MAY BE
DIFFICULT TO OBTAIN ON ACCEPTABLE TERMS
We may require additional capital to achieve our business strategy and
sustain our growth. We cannot offer any assurances that our existing and
anticipated sources of capital will be sufficient for our needs, or that we will
be able to access additional capital if needed. The proceeds of any issuance of
equity or any occurrence of additional indebtedness (other than borrowings under
our senior secured credit facility) must be used to prepay our convertible
second secured term loan facility, which significantly limits our ability to
finance our business plans. Our future capital requirements will depend on the
revenue we generate, acquisitions we make, competitive conditions in our
industry, regulatory and technological developments and equipment costs and
other costs associated with the deployment of our upgraded broadband networks.
In particular, the actual amounts and timing of our capital requirements may
vary significantly from our estimates. For example, we may need to seek
additional capital sooner than we expect if:
- we are unable to achieve a sufficient subscriber base and market
penetration for broadband services within our projected
timeframe;
- our development plans (in particular our selective cable network
upgrade and expansion plans) change or our projections concerning
supply, demand, prices, customer preferences, technological or
regulatory developments or the cost of pursuing strategic
opportunities prove to be inaccurate with respect to amounts,
rates or timing;
- delays or cost overruns occur in the construction, testing or
activation of our cable networks; or
- we are unable to implement or renegotiate concession agreements
in Germany as we selectively expand or upgrade our cable
networks.
We may not be able to obtain additional capital with terms that are
favorable or acceptable to us. In addition, we will be limited by our current
financing arrangements which contain covenants that restrict, among other
things, our ability to incur additional debt. Any failure by us to raise capital
would require us to delay or abandon some or all of our plans, which could
restrict our business plans and ability to pay interest and other amounts due on
our debt.
WE HAVE NO GOVERNMENTAL FRANCHISES AND PRIMARILY SERVE OUR SUBSCRIBERS
THROUGH CONCESSION AGREEMENTS WITH HOUSING ASSOCIATIONS IN GERMANY, AND IF WE
ARE UNABLE TO SUCCESSFULLY EXTEND THESE AGREEMENTS ON COMMERCIALLY REASONABLE
TERMS, THIS FAILURE MAY NEGATIVELY IMPACT OUR BUSINESS
Unlike the cable market in the United States, German governmental
bodies do not grant franchise areas to cable operators. Instead, we serve our
German subscribers primarily under concession contracts with housing
associations that administer large housing blocks. We will face strong
competition for these concessions, which must be periodically renewed. If we are
unable to renew our concessions, or if housing associations are successful in
terminating these contracts either upon or before their expiration, the decrease
in subscribers could have a material negative impact on our operating results.
For more information about these contracts with housing associations, see "Item
4. Information on the Company".
Our Multikabel subsidiary in The Netherlands has been granted
franchise areas under the former telecommunications regulations. However, the
current regulations do not provide for exclusive franchise areas, and multiple
parties may be authorized to build cable networks in the same area. Although
this has not happened, we cannot assure you that multiple authorizations will
not be granted in the future, pursuant to which competitive services may be
offered in the areas in which we operate our network.
OUR DEBT IS AT VARIABLE RATES OF INTEREST OR AT RATES OF CASH INTEREST
WHICH INCREASE OVER TIME, SO THAT RISING INTEREST RATES COULD ADVERSELY AFFECT
OUR CASH FLOW
Our borrowings under our senior secured credit facility are at
variable rates of interest. We currently have approximately EURO 478,000,000 in
indebtedness with floating interest rates. We may also borrow additional money
with variable interest rates in the future. Increases in interest rates would
increase our interest expenses under these loans and the costs of refinancing
existing indebtedness and of issuing new debt. Accordingly, higher interest
rates would adversely affect cash flow and our ability to service our debt.
Additionally, the cash coupon of interest under our
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convertible second secured term loan facility increases over time, which will
also adversely affect cash flow and our ability to service our debt.
WE FACE SIGNIFICANT CHALLENGES IN CONTINUING OUR ACQUISITIONS
STRATEGY, PRINCIPALLY DUE TO OUR RESTRICTED ACCESS TO FINANCING AS A RESULT OF
WHICH WE WILL HAVE A LIMITED ABILITY TO CREATE EFFICIENCIES OF SCALE THROUGH
ACQUISITION, WITH THE RESULT THAT OUR GROWTH IS LIKELY TO BE LIMITED TO ORGANIC
GROWTH IN EXISTING OR EXTENDED NETWORKS
A key element of our growth strategy has been to acquire networks and,
for some of our networks, to increase the number of subscribers we serve. We
believe that implementing this strategy has enabled us to create efficiencies of
scale, strengthen our brand name and increase our market power. We have only
restricted access to financing to make acquisitions and cannot under our credit
facilities acquire cable television networks for consideration of EURO 1,000,000
or more for a single transaction or EURO 3,000,000 or more for a series of
related transactions without the prior approval of our lenders. Any refusal or
delay by our lenders to give any consent we may request could result in us being
unable to complete negotiated acquisitions. We may also encounter unanticipated
difficulties which prevent us from acquiring networks. For instance, given the
relatively small size of most cable networks in Germany, we may not be able to
locate acquisition candidates that are either near our existing networks or are
large enough to form the core of a new subscriber cluster of sufficient size.
Even if we find suitable networks to acquire, we may be unable to satisfy
closing conditions that sellers of networks may demand. There may also be
significant legal and contractual issues in connection with acquisitions, such
as change of control provisions in our licenses and agreements that could delay
or prevent completion. As a result, it is unlikely that we will be able to
continue our acquisitions strategy, so that our growth will be limited to
obtaining new subscribers in our existing cable television and broadband
networks, and any other cable and broadband networks we might construct, and
increasing our average revenue per subscriber.
WE DO NOT INTEND TO CONTINUE LARGE SCALE UPGRADING OF OUR NETWORKS IN
GERMANY AND WE MAY ENCOUNTER LONGER-TERM COMPETITIVE DISADVANTAGE IF OUR
COMPETITORS UPGRADE THEIR NETWORKS, WHICH WOULD NEGATIVELY IMPACT OUR FINANCIAL
PERFORMANCE
In order to begin offering additional value-added services, we began
to upgrade our cable television networks to broadband networks in Germany on a
large scale during 2000. Because of the financing constraints which now apply to
us and other participents in the industrial sectors in which we operate, we do
not intend in the near or medium term to continue to upgrade these cable
networks, or to construct new broadband networks.
To the extent that our competitors in Germany, some of whom have
significantly greater financial resources than us, upgrade their networks or
construct new broadband networks during this period, we could be at a
competitive disadvantage in relation to the provision of higher-value broadband
services.
BECAUSE WE DEPEND ON THIRD PARTIES FOR SOME OF THE BROADBAND SERVICES
WE OFFER, INCLUDING INTERNET AND ADVANCED DIGITAL TELEVISION SERVICES, WE MAY
NOT BE ABLE TO OBTAIN THESE SERVICES ON REASONABLE TERMS
Where we have upgraded our networks in Germany, we have begun to offer
new broadband services. We do not produce or own all of our broadband services
and we may be unable to obtain a sufficient number of those services on
favorable terms. Our competitors hold exclusive rights to programming that we
may wish to offer to our subscribers in the future and may limit the
availability of programming to us. In addition, regulatory constraints may
affect our ability to select programming we may want to provide. If we do not
succeed in obtaining a sufficient number of these new services, either
independently or with partners, on commercially reasonable terms, demand for our
services would be reduced and our revenues would be limited.
THE DIGITAL TELEVISION PRODUCT WE OFFER IN THE NETHERLANDS IS PROVIDED
BY MEDIAKABEL, A PARTNERSHIP OF CABLE COMPANIES IN WHICH WE HAVE AN INTEREST. WE
MAY NOT BE ABLE TO CONTINUE TO OBTAIN THIS PRODUCT IF ONE OR MORE OF THOSE
PARTNERS FAILS TO COOPERATE IN THE OPERATION OF MEDIAKABEL
We are currently dependent on Mediakabel for the provision of our
branded digital television product in The Netherlands. Mediakabel is a
consortium of cable companies in which we have a minority interest and in which
UPC, our largest shareholder, has a significant interest. In the event one or
more owners of Mediakabel fails to pay their operating and service
contributions, we may be required to increase our contributions in order to
ensure the continuation
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of the operations of Mediakabel. Alternatively, the current Mediakabel digital
television product may be reduced to a smaller product offering, or we may be
required to find an alternative source for our digital television product,
potentially on short notice. In addition, if one or more of the owners fails to
cooperate in the operation of Mediakabel or Mediakabel is otherwise unable to
continue to provide us with our digital television product, we will also be
required to find an alternative source for that product in The Netherlands. The
current Mediakabel operating agreement expires in June 2002. We are examining
the availability of alternative means of delivering digital television signal in
The Netherlands in the event that we or any other owner in Mediakabel were to
decide not to continue that consortium. There can be no assurance that, if
required, any such alternative source could be identified in a timely fashion or
at all. Accordingly, any loss of our digital television product may result in
loss of revenue and subscribers in The Netherlands.
WE FACE SIGNIFICANT CHALLENGES IN OPERATING BROADBAND NETWORKS IN
GERMANY ONCE THEY ARE FULLY DEPLOYED, INCLUDING TECHNICAL PROBLEMS, NETWORK
INTERRUPTIONS AND REGULATORY UNCERTAINTIES
We began providing broadband services over our networks in Leipzig and
in other portions of the Sachsen/Sachsen-Anhalt/Thuringen region in late 1999.
We believe that our success in these regions and other areas in Germany where we
selectively upgrade our networks will depend on our ability to operate, manage
and maintain our broadband networks, to generate and maintain traffic on those
networks, to attract and retain an efficient sales and marketing staff, to
establish a customer service operation to assist our subscribers 24 hours per
day and seven days per week. Our ability to meet these operating challenges is
subject to a number of uncertainties, many of which are beyond our control, such
as technical problems and regulatory uncertainties.
In addition, our broadband cable networks are subject to interruptions
from a number of causes which are outside of our control, such as:
- software and hardware damage;
- power loss;
- natural disaster;
- action of broadcasters in allowing us to transmit their signals
digitally;
- general transmission failure;
- the pricing of interconnection fees; and
- regulatory restraints.
If we have prolonged or significant system failures or our subscribers
have difficulties in accessing or maintaining connections to our broadband
network, our relationship with our subscribers could be threatened, our
reputation could be seriously damaged and we could experience subscriber
attrition and financial losses.
OUR BUSINESS PLAN ASSUMES INCREASING DEMAND FOR BANDWIDTH-INTENSIVE
APPLICATIONS, AND IF THE DEMAND FOR THESE SERVICES DOES NOT INCREASE AS EXPECTED
IT WOULD NEGATIVELY IMPACT OUR FINANCIAL PERFORMANCE
Our business plan assumes that the use of Internet, e-commerce, data
services, cable or Internet-based telephony services and other
bandwidth-intensive applications will increase substantially in Germany and in
The Netherlands in the next few years. We, also believe that there will be
increasing demand for telephony services in the future. Based on this
assumption, we have invested heavily in the past, but due to the financing
constraints which we are subject to, we intend in the future to invest only
selectively in Germany in upgrading our networks to enable them to support
broadband services. However, if the use of bandwidth-intensive applications in
those countries does not increase as anticipated, or develops more slowly than
anticipated, then demand for many of our services will be lower than we
currently anticipate, which would have a negative impact on our pricing
flexibility, results of operations and financial condition.
In addition, we have limited experience in the market for telephony
services. Although difficulties arise when entering any new market, we believe
that the market for cable telephony services and Internet protocol-based
telephony
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services, also known as voice-over IP, may be particularly difficult because of
the high degree of competition, pricing pressures and the existence of incumbent
telephony operators. In addition, we expect to face competition from wireless
telephone carriers and new entrants to the European telephone market.
If we are unable to respond to competitive pressures on a timely
basis, implement new technologies or penetrate new markets in response to
changing subscriber requirements, or if new or enhanced services offered by us
do not receive an acceptable level of market acceptance, we may not be able to
compete effectively.
WE FACE INCREASING COMPETITION FROM SATELLITE TELEVISION AND OTHER
ALTERNATIVE METHODS OF TELEVISION SIGNAL DELIVERY, WHICH MAY LIMIT OUR GROWTH
AND CAUSE US TO LOSE SUBSCRIBERS
As a result of competition for subscribers from other signal delivery
methods, we may be unable to increase our subscriber base or we may lose
subscribers. Our ability to obtain additional cable television subscribers in
areas where our networks have already been installed is limited by the
availability of traditional public over-the-air television signal from
land-based or terrestrial antennae. We also face increasing competition from
other methods of television signal delivery to the home, including:
- digital terrestrial;
- analog and digital satellite-delivered direct-to-home systems;
and
- satellite master antenna television systems, particularly in
areas of low cable penetration.
In particular, Premiere World in Germany and Canal+ in The Netherlands
offer satellite digital direct-to-home television operations. These companies
may be able to use their substantial financial resources and exclusive
entertainment and sports programming contracts to further penetrate the market
and compete with us for subscribers. In The Netherlands, licenses have been
awarded for digital terrestrial television, which will compete with our digital
television offering. In addition, we believe that we will face additional
competition from digital terrestrial television, which we expect will be
commercially launched in the Netherlands in 2002.
WE MAY NOT BE ABLE TO KEEP UP WITH THE RAPID TECHNOLOGICAL CHANGES IN
THE CABLE TELEVISION AND BROADBAND INDUSTRIES AND MAY INCUR SIGNIFICANT COSTS OF
IMPLEMENTING NEW TECHNOLOGIES
To remain competitive, we must continue to introduce new services and
enhance and improve the functionality, accessibility and features of our
networks. The cable television and broadband industries are subject to:
- rapid and significant changes in technology;
- changes in use and customer requirements and preferences;
- frequent product and service introductions embodying new
technologies; and
- the emergence of new industry standards and practices that could
render existing proprietary technology and systems obsolete.
We cannot predict the effect of technological changes on our business.
In addition, we cannot offer any assurance that we will be able to successfully
implement new technologies or adapt technologies to customer requirements in a
timely manner. Furthermore, the cost of implementing emerging technologies or to
change from one technology to another once implementation has started, could be
significant and our ability to fund implementation or change may be dependent
upon our ability to obtain additional financing.
OUR PROGRAM SUPPLIERS MAY OFFER PROGRAMMING TO OUR COMPETITORS
EXCLUSIVELY OR ON MORE FAVORABLE TERMS, AND MAY REQUIRE MINIMUM PAYMENTS FOR
SOME PROGRAMMING EVENTS, ALL OF WHICH COULD NEGATIVELY IMPACT OUR BUSINESS
Program suppliers may begin offering programming exclusively or on
more favorable terms (both as to price and availability) to our competitors.
Even if we succeed in increasing the number of subscribers served by our own
head-ends to reduce signal delivery fees payable to Kabel Deutschland
Gessellschaft mbH, a wholly owned subsidiary of
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Deutsche Telekom known as KDG, and successor private operators, we will still
face this competitive risk. This risk may intensify as satellite broadcasters
become more established in Germany.
As we begin to enter into additional contracts for digital
programming, pay-per-view movies and sports events, we have had to guarantee
some minimum payments regardless of how many subscribers actually sign up to
take the digital service. If we are not successful in marketing digital and/or
pay-per-view services, the fixed payments under these contracts could adversely
impact our cash flows and margins.
THE OPERATING MARGINS AND CASH FLOWS OF OUR GERMAN OPERATIONS MAY
DECLINE AS A RESULT OF INCREASES IN SIGNAL DELIVERY EXPENSES OR CUSTOMER
DISSATISFACTION DUE TO INADEQUATE NETWORK MAINTENANCE BY PRIVATE OPERATORS ON
WHOM WE RELY
At December 31, 2001, over 61% of our subscribers in Germany were
served by networks that received programming under signal delivery contracts we
have with KDG and successor private operators. Under some of the contracts we
pay a fixed fee, which is not dependent on the number of actual subscribers and
connection points. Over the next two years, programming signal delivery fees
under these fixed fee contracts will increase. We may also have to pay more fees
under variable rate contracts, a number of which are subject to rate increases
starting in 2002. Any fee increases under programming signal delivery contracts
which cannot be captured by increased rates for our subscribers may have an
adverse effect on our operating margins. Additionally, KDG has indicated that it
does not intend to invest heavily in its cable network in the future and
successor private operators may be or become subject to financial difficulties
as a result of which they may not properly maintain their cable networks,
through which we receive signal, resulting in our customers being dissatisfied
with and possibly terminating our services.
IF PAYMENTS ARE ASSESSED ON OUR TRANSMISSION OF ANALOG TELEVISION
PROGRAMMING IN GERMANY, OUR OPERATING MARGINS AND CASH FLOWS WILL SUFFER UNLESS
WE CAN PASS THESE ADDITIONAL COSTS ON TO SUBSCRIBERS
Historically, we have been in the business of providing analog
television programming to subscribers over our cable television networks in
Germany. Like other cable network operators in Germany, we have generally not
had to pay program providers for this analog programming. However, some or all
of our program providers could require us to pay for analog programming in the
future. If this occurs and we are unable to pass these charges on to
subscribers, our operating margins and cash flows would suffer.
WE MAY HAVE TO PAY COPYRIGHT ROYALTIES FOR RETRANSMITTING PROGRAMMING
TO OUR SUBSCRIBERS IN GERMANY, WHICH WOULD REDUCE OUR GERMAN OPERATING MARGINS
AND CASH FLOWS TO THE EXTENT THAT THEY EXCEED THE AMOUNTS WE HAVE ACCRUED FOR
THESE ROYALTIES
Like other German cable network operators, we have not paid copyright
royalties for retransmission of programming we received from sources other than
KDG and successor private operators in the past. However, GEMA, one of the
German copyright collection agencies, has stated that it wants to start
collecting royalties from cable network operators and that it may collect these
royalties retroactively from July 1, 1997. Although our strategy of building our
own head-ends will reduce retransmission of the amount of programming we receive
from KDG and successor private operators, it may not reduce our royalty payments
if we are required to pay copyright royalties on the transmission of programming
we receive through our own head-ends. We may also have to pay royalties in
connection with our digital programming and other products we offer to
subscribers over our broadband network. If these royalties exceed the amounts we
have accrued or will accrue for this purpose, our net income and cash flows will
decrease. If royalties were collected retroactively in amounts in excess of the
accruals we have been making since January 1, 2000, our net losses for the
periods for which this retroactive payment has to be made would increase.
EXTENSIVE GOVERNMENT REGULATION OF THE BROADBAND INDUSTRY COULD
RESTRICT THE WAY WE OPERATE OUR BUSINESS AND COULD HINDER OUR BUSINESS PLANS
We will be subject to extensive regulatory controls and may, from time
to time, not be in compliance with all administrative and licensing requirements
of the regulatory authorities. In addition, we may have to comply with amended
or additional regulations in the future. Problems related to all of these
regulatory matters may restrict our ability to compete effectively. Changes in
German federal or state, or Dutch regulation of the licensing, construction and
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operation of cable television or broadband networks, including the regulations
relating to licensing requirements, the operations of Deutsche Telekom and KPN
and interconnection arrangements, could restrict our business operations and
hinder our business plans.
UNDER THE RECENT ALLOCATION OF FREQUENCY BANDS IN GERMANY WE MAY BE
PREVENTED FROM TRANSMITTING OVER SOME OF THE FREQUENCY BANDS WE CURRENTLY USE,
IN WHICH CASE OUR TRANSITION TO NEW FREQUENCIES COULD PROVE TO BE DIFFICULT AND
MORE COSTLY THAN WE CURRENTLY ESTIMATE
In May 2001, three new ordinances governing the allocation, use and
assignment of frequencies took effect in Germany. The ordinance on the
allocation of frequencies addresses the "free use" of frequencies without an
individual permit, approval or other regulatory resolution. It allows the free
use of frequencies between 9 KHz and 30 MHz in and along conductors in our cable
networks under certain conditions. These conditions require that (i) the
disturbing radiation emitted by the conductors does not exceed identified limits
and (ii) the frequencies are not used for security purposes, identified by the
German regulatory authority. If the above conditions are not met, then the
German regulatory authority will decide on a case by case basis whether we may
use the given frequency. The authority may also impose on us restrictions or
conditions prior to granting permission to use frequencies. In addition, these
same conditions will apply to frequencies between 30 MHz and 3 GHz beginning on
1 July 2003. These regulations may prevent us from using some or all of the
relevant frequency bands to retransmit programming on our cable networks. Should
this occur, we may need to make investments in our German networks in order to
continue providing our current services.
IF WE ARE DEEMED TO BE "MARKET-DOMINATING" BY THE COMPETITION
AUTHORITIES IN GERMANY AND THE NETHERLANDS, WE WILL BE SUBJECT TO HEIGHTENED
REGULATION THAT COULD RESTRICT THE FEES WE CHARGE SUBSCRIBERS AND RESTRICT OUR
OPERATING FLEXIBILITY
Under German and Dutch telecommunications and competition law, we are
likely to be considered "market-dominating" in those regions in which we are the
only cable or broadband operator or, potentially, in which we provide a high
percentage of the available cable or broadband products and services. If this
occurs, the regulatory authority in those countries may have the right to review
our subscriber fees and object to any proposed increases. The authority could
also review and object to other terms of our subscriber agreements. If approvals
for fee increases or for the introduction of fee packages for new services are
delayed or refused, our operating margins, cash flow and competitive position
could suffer. In addition, if we are found to be market-dominating, the
regulatory authority could require that we provide third parties with access to
our networks on a large scale or change other aspects of our operations. This
may also negatively impact our business and financial results.
DURING OUR TRANSITION FROM ANALOG TO DIGITAL PROGRAMMING, DISPUTES
WITH MEDIA AUTHORITIES MAY RESULT IN A CONTINUATION OF DELAYS IN OUR ABILITY TO
OFFER PROGRAMMING WHICH COULD RESULT IN LOWER REVENUE GROWTH AND CUSTOMER
DISSATISFACTION
We are currently developing our digital cable television service.
However, our transition to digital format has been delayed several times
following complaints by SACHSISCHE LANDESANSTALT FUR PRIVATEN RUNDFUNK UND NEUE
MEDIEN, the media authority in Sachsen exercising regulatory oversight of these
services, which forced us to alter program offerings. We cannot assure you that
our transition from analog to digital format will not be additionally delayed or
altered by legal or regulatory disputes with media authorities relating to
allocation of analog and digital channels. We expect that delays in offering our
digital service will result in lower growth in revenues. In addition, required
alterations to our digital programming content may cause subscriber
dissatisfaction and attrition.
GERMAN MEDIA AUTHORITIES MAY REQUIRE US TO OFFER POPULAR CHANNELS IN
ANALOG MODE RATHER THAN EXCLUSIVELY IN DIGITAL MODE WHICH COULD NEGATIVELY
AFFECT THE GROWTH AND DEVELOPMENT OF OUR DIGITAL CABLE TELEVISION SERVICE
The success of our digital service will depend in large part upon our
ability to offer high quality digital programming. For instance, we may seek to
broaden our digital subscriber base by offering popular programming exclusively
through our digital service. However, we may be prevented from implementing this
strategy if German media authorities require us to offer this programming in
analog mode in addition to digital format. The availability of
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the same programs in analog format may limit our ability to attract digital
subscribers and to increase cable subscription revenues.
WE MAY BECOME SUBJECT TO INTERNET REGULATION IN GERMANY AND THE
NETHERLANDS, WHICH COULD INCREASE OUR COSTS OR LIMIT THE SERVICES WE PROVIDE TO
SUBSCRIBERS
The provision of Internet services has, to date, not been materially
restricted by regulation in Germany and The Netherlands. However, in Germany a
number of Internet services are subject to regulation with respect to licensing
and notification requirements and content. If this does occur, it could result
in our loss of cable and broadband subscribers.
In addition, the legal and regulatory framework applicable to the
Internet is uncertain and may change. In particular, new laws and regulations
may be enacted and existing laws and regulations may be applied to the Internet
and e-commerce. For example, existing pressure to liberalize high-speed Internet
access in The Netherlands may become stronger in the future. New and existing
laws may cover issues like:
- value-added sales or other taxes;
- user privacy;
- pricing controls;
- characteristics and quality of products and services;
- consumer protection;
- cross-border commerce;
- libel and defamation;
- electronic signatures;
- transmission security;
- copyright, trademark and patent infringement; and
- other claims based on the nature and content of Internet
materials.
Any new laws and regulations or the uncertainty associated with their
enactment could increase our costs and hinder the development of our business
and limit the growth of our revenues.
WE WILL BE RESTRICTED IN THE OPERATION OF OUR BUSINESS IN THE
NETHERLANDS BY THE PRIORITY SHARE OF N.V. HOUDSTERMAATSCHAPPIJ GKNH, OR GKNH,
WHICH WILL REQUIRE US, IN SOME CIRCUMSTANCES, TO OBTAIN THEIR CONSENT TO
MANAGEMENT CHANGES
GKNH, holds one priority share in the share capital of Multikabel, one
of our subsidiaries in The Netherlands. The priority share grants GKNH specified
rights until January 1, 2003. These include, among other things, the right to:
- veto decisions of the management of Multikabel on pricing and
composition of the analog basic and standard cable packages
(BASIS EN STANDAARDPAKKET) that are distributed over the network,
and on the roll-out of the so-called white areas plan (WITTE
GEBIEDENPLAN);
- veto decisions of the management of Multikabel to undertake a
legal merger (JURIDISCHE FUSIE) or spin-off (SPLITSING), to apply
for a moratorium of payments (SURSEANCE) or bankruptcy
(FAILLISSEMENT) and to relocate the activities of a substantial
part of the employees to a location outside the municipality of
Alkmaar; and
- amend provisions of the articles of association of Multikabel
that are subject to this right or allow for the liquidation of
Multikabel.
As a result of these restrictions, we may not be able to fully
implement our business plan. In addition, the interests of GKNH may differ from
our interests and those of our shareholders, and it may exercise its rights in a
manner that is adverse to us and our shareholders.
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BECAUSE WE DO NOT INSURE A SUBSTANTIAL PORTION OF OUR UNDERGROUND
CABLE NETWORKS, WE MAY HAVE TO BEAR THE FULL COSTS OF ANY DAMAGE TO THOSE
UNINSURED NETWORKS, WHICH MAY HAVE A NEGATIVE EFFECT ON OUR FINANCIAL
PERFORMANCE
Any catastrophe affecting a significant portion of our underground
cable networks could result in substantial uninsured losses and could have a
material adverse effect on our business and financial results. While we carry
general liability insurance on our properties, we do not insure a substantial
portion of our underground cable networks in Germany and we carry only minimal
insurance on the underground portion of our cable networks in The Netherlands.
We intend to continue to carry only general liability insurance on our
properties.
UNITED STATES SHAREHOLDERS MAY HAVE DIFFICULTIES IN MAKING CLAIMS FOR
ANY BREACH OF THEIR RIGHTS BECAUSE NEITHER WE NOR MOST OF THE MEMBERS OF OUR
MANAGEMENT OR SUPERVISORY BOARDS ARE IN THE UNITED STATES
It may not be possible for investors to effect service of process
within the United States upon us or on the members of our management and
supervisory boards or to enforce in United States courts against us and them
judgments obtained in United States courts based upon civil liability provisions
of the federal securities laws of the United States. We have been advised by
counsel that enforceability in Germany of civil liabilities based on the laws of
the United States, including the federal securities laws, is subject to
restrictions or may not be obtained in original actions or in actions for
enforcement of judgments of United States courts. Accordingly, civil judgments
obtained in the United States may be unenforceable in Germany. These
difficulties are significant because we are organized as a joint stock
corporation under the laws of Germany and a majority of the members of our
management and supervisory boards reside outside of the United States. In
addition, all of our assets and all or a substantial portion of the assets of
many of the members of our management and supervisory boards are also located
outside of the United States.
RISKS RELATING TO UPC'S OWNERSHIP IN US
THE INTERESTS OF UPC, OUR LARGEST SHAREHOLDER, MAY DIFFER
SIGNIFICANTLY FROM YOUR INTERESTS AND THE INTERESTS OF OUR OTHER SHAREHOLDERS
As of December 31, 2001, UPC owned approximately 25% of our shares. As
long as UPC continues to have a significant portion of our shares, and depending
on the number of shares represented by other shareholders at our shareholders'
meetings, UPC and its affiliates UnitedGlobalCom, Inc. or UGC and Liberty Media
Corporation could exercise substantial influence over decisions taken at our
shareholders' meetings. These decisions include the amendments to our loan
facilities at a meeting we intend to convene in June 2002, which if not approved
by the vote of 75% of the shareholders represented at that meeting could have
material adverse effect on our future financial viability. See "--Our debt
instruments contain restrictive covenants which may be breached if amendments to
these instruments are not approved by our shareholders and which may pose
potential financial and operating problems." Other future shareholder decisions
may relate to:
- mergers or other business combinations;
- material acquisitions or dispositions of assets;
- future issuances or shares or other securities;
- payment of dividends on our shares; and
- significant amendments to our articles of association
The interests of UPC, UGC and Liberty Media in deciding matters and the factors
each considers in exercising their influence could be different from your
interests and the interests of our other shareholders.
UPC'S OWNERSHIP AND THE RESULTING INTERESTS OF UGC AND LIBERTY MEDIA
IN US MAY DETER THIRD PARTIES FROM SEEKING TO ACQUIRE CONTROL OF US, INCLUDING
TRANSACTIONS THAT MAY BE ECONOMICALLY BENEFICIAL TO US AND OUR SHAREHOLDERS AND
ANY PERCEPTION THAT UPC'S SHAREHOLDING IN US IS AVAILABLE FOR SALE MAY CAUSE A
REDUCTION IN THE MARKET PRICE OF OUR SHARES
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UPC's ownership and the interests of its affiliates UGC and Liberty
Media in us reduce the likelihood that a third party would be able to obtain
majority control over us unless UPC sells its shares. As a result, UPC's
interest may have the effect of discouraging a third party from initiating a
takeover bid for our shares or otherwise attempting to gain control over us,
including transactions that may be economically beneficial to us and our
shareholders. Additionally, UPC is in the process of attempting to reschedule
its indebtedness and if in the context of negotiations with its creditors or
otherwise it was perceived to be a seller of its shareholding in us, the effect
could be a reduction in the market price of our shares.
THE DIRECTOR NOMINATED BY UPC TO OUR SUPERVISORY BOARD MAY ALSO BE A
DIRECTOR OR OFFICER OF UPC OR UGC, WHICH MAY RESULT IN CONFLICTS OF INTEREST
THAT COULD BE RESOLVED IN A MANNER ADVERSE TO US
Currently, one of the six current members of our supervisory board is
a nominee of UPC. This UPC nominee may also be a director or officer of UPC
and/or UGC. This person will have fiduciary duties, including duties of loyalty,
to both companies, which may result in conflicts of interest with respect to
matters including acquisitions, financings or other corporate opportunities that
may be suitable for both UPC and for us. In addition, this UPC nominee may own
substantial amounts of UPC or UGC capital stock and/or options to purchase
shares of UPC or UGC capital stock. There could be potential conflicts of
interest when this representative is faced with decisions that could have
different implications for us and UPC or UGC. There are no specific policies in
place with respect to any conflicts that may arise. We expect conflicts to be
resolved on a case-by-case basis, and in a manner consistent with applicable
law. However, conflicts could be resolved in a manner adverse to us, which could
harm our business.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Our legal and commercial name is PrimaCom AG and we were incorporated
on December 30, 1998 upon the completion of the merger of our predecessor
companies, KabelMedia and Suweda. We are a stock corporation organized under the
laws of the Federal Republic of Germany. Our principal executive offices are
located at Hegelstrasse 61, Mainz 55122, Germany. Our telephone number is
+49-6131-9310. We maintain a website at www.primacom.de. Information contained
in our website does not constitute a part of this annual report.
A description of our principal capital expenditures during the year
2001and information concerning the principal capital expenditures currently in
progress and the method of financing is included in "Item 5. B. Liquidity and
Capital Resources".
B. BUSINESS OVERVIEW
WHO WE ARE
Since KabelMedia's inception in 1992, we have primarily owned and
operated and acquired cable television networks in Germany. On September 18,
2000, with the acquisition of Multikabel, we expanded our operations from
Germany to The Netherlands. As of December 31, 2001 we owned and operated cable
television and broadband networks passing more than 1,964,868 homes and
available to approximately 1,351,235 revenue-generating customers as follows:
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<Table>
<Caption>
GERMANY THE NETHERLANDS
------- ---------------
CABLE NETWORKS (UP TO 450 MHZ)
Cable television homes passed .................. 1,404,049 --
Analog television subscribers ......... 904,452 --
BROADBAND NETWORK (862 MHZ)
Homes passed by fiber .......................... 234,819 326,000
Ready for service homes ........................ 123,883 317,000
Analog television subscribers ......... 99,190 300,852
Digital television subscribers ................. 6,773 5,102
Internet subscribers ........................... 6,391 27,687
Data communications subscribers(1) ............. 16 772
Total revenue generating subscribers ........... 1,016,822 334,413
</Table>
- ----------
(1) Includes 580 schools served by our Kennisnet product.
We believe that we are the fourth largest private cable network
operator in Germany in terms of the number of direct subscribers (excluding
Deutsche Telekom's subsidiary KDG, which is not considered to be a private
operator by the German cable television industry) and the first and one of the
largest private operators of broadband networks in Germany.
In Germany, we are currently offering our broadband subscribers
digital television, pay-per-view and high-speed Internet services to complement
our basic cable television offering. We currently offer our Dutch subscribers
digital television, near video-on-demand and high-speed Internet access, in
addition to our basic cable television offering. We also currently offer
business subscribers in The Netherlands leased lines with speeds of up to STM-4
and data communications services.
OUR STRATEGY
Our objective is to enhance the value of our business by expanding and
promoting our broadband service offering, capitalizing on acquisition
opportunities presented in the German and Dutch cable television markets and
selectively continuing to upgrade our cable television networks in Germany. Our
business strategy focuses on the following specific goals:
- GENERATE NET PROFITS BY DEFERRING CAPITAL EXPENDITURE WHILE
ENHANCING INTERNAL REVENUE GROWTH. As part of our strategy to
generate net profits, we intend to defer significant upgrades of
our existing networks in Germany while seeking to generate
increased revenues by selectively increasing subscription rates
for our basic cable television services, primarily in conjunction
with the introduction of new programs and through the continued
use of marketing programs designed to increase subscriber
penetration of both our basic cable services and of our broadband
services to those customers already passed by our broadband
networks. In particular, we intend over time to increase monthly
service rates for basic cable television in the new German states
(the former East Germany) to levels similar to those in the old
German states (the former West Germany). In The Netherlands, we
will have greater pricing flexibility when we become exempt from
pricing regulations imposed by local municipalities on our basic
level of cable television services in 2003. At that time we
intend to realign channel line-ups and add programs in order to
generate higher monthly subscription fees for our basic cable
television product. We will also focus on increasing the
efficiency of our existing operations. In the Netherlands, where
broadband services have been offered for a longer period of time
and have achieved greater customer penetration, we intend to
continue to build-out our networks to new areas and to enhance
our network to permit us to deliver more products and services.
- EXPAND AND PROMOTE OUR BROADBAND SERVICE OFFERING. We intend to
generate increased revenue by aggressively marketing our
high-speed Internet access products and our digital television
products in both
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Germany and in The Netherlands. We will seek to identify
opportunities to enhance and re-price our broadband products in
order to reach a larger customer base. We also intend to offer
telephony service in The Netherlands once the telephony product
is established in that market. We will examine the possibility of
bundling video, data and voice products into one offering as a
means of increasing sales.
- EXPLOIT CONTINUING CONSOLIDATION OPPORTUNITIES. We intend
selectively to seek opportunities in the fragmented German market
to acquire cable networks, especially in our core German regions.
We believe that, excluding the ten largest cable operators, there
are more than 5,000 private cable operators in Germany, many of
whom serve less than 1,000 subscribers each. We will continue to
pursue a clustering strategy focused on acquisitions of cable
systems in close proximity to our existing networks. We believe
this clustering strategy will continue to produce operational
efficiencies and cost synergies between our existing networks and
acquired cable systems, and will generate economies of scale in
relation to our network upgrade strategy. We will also consider
selling some of our existing networks or subscribers which are
not in our core regions or part of large clusters or we may
choose to swap them for networks or subscribers of other cable
operators which are more strategically located in relation to our
existing networks.
- STRENGTHEN SUBSCRIBER ORIENTATION. We believe that maintaining or
developing direct customer service, billing and marketing
relationships with the subscribers of our cable and broadband
services will enhance our ability to sell additional products and
services and generate incremental revenue. We plan to continue to
focus on strengthening our relationships with subscribers,
including by converting indirect subscriber relationships with
housing associations to direct relationships with subscribers and
prioritizing the acquisition of networks and subscribers where
direct end-user relationships exist. We will continue to use a
regional operating structure designed to generate a
subscriber-focused business orientation. Each of our operating
regions is managed by a regional manager who is responsible for
both subscriber and technical services and local ongoing
relationships with housing associations. We believe that this
regional operating structure enables us to be more responsive to
subscriber needs and to maintain good relationships with the
housing associations and our subscribers.
- IMPROVE EFFICIENCY AND MARGINS BY STREAMLINING OPERATIONS. We
believe clustering strategy has produced and will continue to
produce efficiencies and synergies between our existing networks
and acquired cable networks. In accordance with our past
practice, upon completion of future acquisitions we will
generally implement extensive operational and organizational
changes designed to enhance operating cash flow and operating
margins. In Germany, for example, this practice will typically
include maintaining existing subscriber services in acquired
regions, but transferring subscriber account processing and
administrative services for acquired cable networks to one
centralized location, thereby reducing overhead costs.
- INCREASE NETWORK OWNERSHIP AND REDUCE SIGNAL DELIVERY FEES. In
Germany, we continue to rely on KDG and successor private
operators to deliver programming signal to our cable networks
serving over 61% of our subscribers. We intend to reduce our
dependence on KDG and successor private operators by continuing
to construct our own head-ends and infrastructure where
appropriate. We believe that selectively installing our own
head-ends and related infrastructure will reduce our signal
delivery fees and have a positive effect on our operating results
and quality of service.
- FOCUS ON ATTRACTING NEW SUBSCRIBERS. We have passed new homes as
we have upgraded our networks and interconnected our various
systems in and around cities in Germany. The passing of these new
homes may provide us with opportunities to market our products
and services and then to connect new subscribers to our broadband
network. We also believes that this build-out and marketing
strategy complements our consolidation activities because smaller
cable operators may not have the technical or financial resources
to compete in the broadband market and, as a result, may be more
inclined to sell their networks.
- CONTINUE OUR NETWORK UPGRADE. We intend to selectively upgrade a
portion of our German networks over the next five years. This
upgrade will allow us to offer more services and products. In
addition, we intend to selectively build out networks to pass
potential new subscribers as we implement our network upgrade.
17
<Page>
Our subscribers
We have subscribers in four primary operating regions in Germany and
in one operating region in The Netherlands. At December 31, 2001, we served our
subscribers in Germany from networks operated at level 2, level 3, level 4
(non B-1), and level 4 (B-1) as well as from broadband networks. We served our
subscribers in The Netherlands almost exclusively from broadband networks. A
description of the levels referred to in the table below is set forth in the
section captioned "--Our Networks--Germany".
<Table>
<Caption>
SACHSEN/
SACHSEN-
OSNABRUCK/ WIESBADEN ANHALT/
BERLIN AACHEN MAINZ THURINGEN MULTIKABEL TOTAL
------ ------ ----- --------- ---------- -----
CABLE NETWORKS (UP TO 450 MHZ)
Cable Television homes passed.... 233,464 281,465 344,192 544,928 -- 1,404,049
Analog subscribers...............
Level 2 subscribers............. 68,768 26,276 64,478 193,581 -- 353,103
Level 3 subscribers............. 37,204 16,041 8,250 176,430 -- 237,925
Level 4 subscribers (non B-1)... 90,692 6,570 12,188 23,453 -- 132,903
Level 4 subscribers (B-1)....... -- 88,615 91,906 -- -- 180,521
BROADBAND NETWORKS (862 MHZ)
Homes passed by fiber............ -- -- 3,494 231,325 326,000 560,819
Ready for service homes.......... -- -- 3,494 120,389 317,000 440,883
Analog television subscribers.... -- -- 690 98,500 300,852 400,042
Digital television subscribers... -- -- 103 6,670 5,102 11,875
Internet subscribers............. -- -- 72 6,319 27,687 34,078
Data communication subscribers... -- -- -- 16 192 208
Kennisnet school subscribers..... -- -- -- -- 580 580
Total revenue generating
subscribers...................... 196,664 137,502 177,687 504,969 334,413 1,351,235
</Table>
GERMANY. We serve our subscribers primarily under long-term public
concession agreements with local governmental authorities and under private
concession agreements with housing associations that administer large housing
blocks. Many of our private concession agreements with housing associations
provide that we are the exclusive provider of cable services in the concession
area. We have direct billing and servicing relationships with approximately 82%,
of our subscribers. We have indirect billing and servicing relationships with
approximately 18%, of our subscribers, whereby governmental authorities and
housing associations receive broadcasting signal from us and are responsible for
billing and collecting subscription fees. Most of our indirect billing
relationships are with recently acquired subscribers and we intend to establish
direct relationships with these subscribers in the future.
THE NETHERLANDS. Our Dutch subscribers reside in 43 municipalities
across the province of Noord-Holland, which is located in the northwest region
of The Netherlands and north of Amsterdam. We provide our services under
operating agreements with local municipalities. In accordance with Dutch
regulation, these contracts may not designate us as the exclusive provider of
cable services in these regions. We believe, however, that we are the sole cable
operator in each of the local neighborhoods in which we conduct business. We
maintain direct servicing relationships with all of our cable subscribers in The
Netherlands. We outsource billing of our analog cable services to local energy
companies. Billing of our digital cable services is handled by Mediakabel, and
billing of Internet services is handled directly by us. We also manage billing
internally for our data communications and Kennisnet product offerings.
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<Page>
OUR NETWORKS
GERMANY
As described below, we operate a combination of level 2, level 3,
level 4 (non B-1) and level 4 (B-1) cable networks, as well as broadband
networks in Germany. We intend to upgrade a portion of our cable networks to
broadband networks over the next five years.
CABLE TELEVISION NETWORKS. Deutsche Telekom's historic monopoly
position in the German cable industry and the limitations it observed in laying
cable only to the outside of a subscriber's home has resulted in the development
of a dual ownership network structure serving cable subscribers, whereby
Deutsche Telekom typically owns the network from the head-end to the subscriber
connection point and private operators typically own the in-house cabling. This
dual ownership structure is distinct from the single ownership cable structure
prevalent in the United States and in most European Union countries, in which
private operators own the network in its entirety, from the head-end to the
in-house cabling. Cable networks in Germany are therefore divided into
categories, referred to as levels, depending on the function the cable network
has in the delivery of cable services to subscribers.
LEVEL 2 LEVEL 3 LEVEL 4
[GRAPHIC] [GRAPHIC] [GRAPHIC]
HEADEND BACKBONE NETWORK IN-HOUSE
LEVEL 4 NETWORKS. A network where the cable operator's role is limited
to extending the cable network from the end of Deutsche Telekom's principal
transmission line (or that of a private cable operator who has purchased a
Deutsche Telekom operating company) at the front door of the home to the
subscriber is known as a level 4 network. In a level 4 network, the operator's
role is limited to concluding and renewing subscription agreements, installing
the wiring in the home, billing, collecting and servicing subscribers. Level 4
networks are the result of the exercise by Deutsche Telekom of its historical
right of first refusal with respect to a coverage area. In these coverage areas,
KDG and successor private operators continue to own and operate the head-end and
the principal transmission lines. Cable network operators are required to pay
KDG a signal delivery fee pursuant to agreements known as signal delivery
contracts.
A variation of the level 4 network, which developed in the old German
states while Deutsche Telekom enjoyed its network monopoly prior to August 1,
1996, is the so-called level B-1. Because of its monopoly position, Deutsche
Telekom was able to grant exclusive licenses to cable television operators in
discrete geographic areas, which enabled those operators to operate a level 4
network. Under the terms of these exclusive licenses and based on the size of
the geographic area covered by the license, the cable operator committed itself
to enrolling a pre-determined number of subscribers. Licensing fees owed to
Deutsche Telekom were typically calculated on the basis of this pre-determined
number of subscribers, whether or not the cable operator actually succeeded in
enrolling the subscribers.
LEVEL 3 NETWORKS. A network where the cable network operator has
entered into a signal delivery contract with KDG and successor private operators
in lieu of owning and operating its own head-end is known as a level 3 network.
In addition to performing the tasks of an operator under a level 4 agreement,
the operator is responsible for delivering a signal from the connection point of
KDG's or successor private operator's networks to the front-door of the
subscriber. In a level 3 network, cable network operators are required to pay
KDG and successor private operators a fee for access to its network or signal,
as the case may be.
LEVEL 2 NETWORKS. A network where the cable network operator owns and
operates the entire cable network, from the head-end to the in-house connection,
is known as a level 2 network. Level 2 networks are like the networks operated
by cable network operators in the United States and the United Kingdom. Under a
level 2 network, cable
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network operators do not pay signal delivery fees to KDG and successor private
operators, but receive programming via terrestrial antenna and satellite through
their own head-ends.
Substantially all of our cable television networks are capable of
distributing more than 40 channels and are constructed using star architecture.
Our cable television networks in Germany have the following technical
characteristics:
- television signal is received by a Deutsche Telekom connection
point or the connection point of a private cable operator (level
3 and 4 networks) or by terrestrial antennae or satellite
receivers at one of our head-ends (level 2 networks);
- received signal is amplified and transmitted to the home through
coaxial cable over bandwidths of up to 450 MHz; and
- transmitting of signal is one-way for our analog cable
subscribers.
BROADBAND NETWORKS. We believe we were the first operator in Germany
to begin upgrading its cable television networks to broadband networks and we
are one of the largest cable operators of broadband networks in Germany and were
the first operator in Germany to begin upgrading our cable television networks
to broadband networks. We pass approximately 1,638,868 homes and have upgraded
approximately 124,000 homes in the city of Mainz and the
Sachsen/Sachsen-Anhalt/Thuringen region. We intend to continue to upgrade
selected portions of our German networks over the next five years and to focus
our upgrading activity on regions with higher subscriber density.
Our broadband networks are 862 MHz two-way, high-speed networks
capable of delivering analog and digital cable television, telecommunications
and high-speed Internet and data services, including interactive services. The
following diagram summarizes the technical characteristics of our broadband
network.
Interactive 862 MHz Broadband Network with 65 MHz Return Path
[GRAPHIC] [GRAPHIC] [GRAPHIC] [GRAPHIC]
HEADEND BACKBONE NETWORK IN-HOUSE ON-PREMISE
Superior high definition Fiber backbone to within Two-way Modem
television head-end, approximately 500 meters coaxial to
digital playout from the home wall outlet Set top box
facilities and
Internet server.
Platform switches
and interconnections
are planned
Our upgraded network in the city of Leipzig and other portions of the
Sachsen/Sachsen-Anhalt/Thuringen region are the model for our continuing network
upgrades with the exception of that network's digital playout facilities. We
intend to use the digital playout facilities and Internet servers located at the
Leipzig head-end to support Internet services, the tiering of digital channels
and pay-per-view services not only in the city of Mainz and the
Sachsen/Sachsen-Anhalt/Thuringen and Mainz region but also in other regions in
which we upgrade our networks. Ultimately, we intend to install switches and
interconnections at the Leipzig head-end to support our future telephone
offering. A fiber optic loop that circles the city connects our subscribers to
the head-end and allows for the delivery of our services. Within
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<Page>
this main fiber loop, smaller fiber loops are connected to the larger loop and,
in effect, create a fiber optic matrix covering the entire city. As we continue
to add more loops, the fiber optic matrix will cover increasingly more portions
of the city inside the main fiber loop.
Fiber nodes are located at various points within this fiber optic
matrix. Each fiber node contains an optical receiver and transmitter where the
optical signal received from the head-end is converted to an electrical signal
which is transmitted over coaxial cable to the home and where electrical signal
received by coaxial cable from the home is converted to an optic signal and sent
to the head-end. Coaxial cables run from the nodes to the wall outlets of homes.
Each fiber node serves an average of 500 and 1,000 subscribers. Our digital
set-top boxes, provided by Galaxis Technology AG, enable subscribers to receive
digital television and high-speed Internet services. Subscribers who do not have
a digital set-top box but purchase high-speed Internet services require a cable
modem. The network also provides a 65 MHz return path.
In those portions of a city where we do not have existing coaxial
cable, we lay coaxial cable from the fiber nodes to the homes of new
subscribers. Within the coaxial network, we have either replaced (in those cases
where we had existing coaxial networks) or installed (in those cases where we
built new coaxial networks) electronic equipment which amplifies the
capabilities of the coaxial cable so that transmission speed over the cables is
increased and signal can be sent in two directions between the head-end and the
home. As we continue our network upgrade, we intend to use the architecture
described above. As a result, there may be instances where our fiber optic
matrix covers portions of a city which are served by other cable operators and
where, prior to the upgrade, we did not pass any homes and did not have any
subscribers. We believe that passing these new homes will allow us to attract
new subscribers.
We believe that the clustering strategy which we have been pursuing
will also be beneficial in the context of our network upgrade as it will enable
us to achieve economies of scale. By focusing our upgrade on our most densely
populated clusters of network subscribers, we expect to minimize upgrade costs
per home. For example, we expect that the digital playout facilities and
Internet servers in Leipzig will serve the other regions we are planning to
upgrade, thereby reducing capital expenditure requirements in those regions. We
further believe our upgrade plans in Germany will reduce our dependence on KDG
or successor private network operators who have recently purchased cable assets
from Deutsche Telekom, for signal delivery. We believe that reducing our signal
delivery fees will have a positive effect on our operating results and that
greater control of our network will have a positive effect on our programming
flexibility, our quality of service, and our penetration among broadband
subscribers.
THE NETHERLANDS
Substantially all of our network in The Netherlands is a fully
upgraded, two-way broadband network capable of delivering a full range of
broadband services including interactive digital television, high-speed Internet
access and telecommunications services. Approximately 9,000 of our 326,000
network homes and approximately 8,000 subscribers are located in three
geographic areas that are not contiguous to the rest of our network and that
have not been upgraded. These homes receive programming signal from third-party
head-ends and we intend to sell these non-upgraded network homes over time. Our
networks in The Netherlands serve communities in the province of Noord Holland
in the northwestern part of the country, including the business areas
surrounding Schiphol airport but not including the main cities of Amsterdam, the
Hague, Utrecht, Rotterdam or Eindhoven. Unlike in Germany, where the ownership
of cable networks is frequently divided between Deutsche Telekom and private
operators, networks in The Netherlands are typically owned in their entirety by
network operators. We own substantially all of our distribution system from the
head-end to the home connection point available to our subscribers, with the
exception of approximately 92 kilometers of fiber optic cabling that we lease.
Our network in The Netherlands has the following characteristics:
- A regional head-end located in Alkmaar receives television and
radio signal, converts this signal to optical signal and
transmits it to the fiber optic backbone.
- A fiber optic backbone, which passes the network region with
1,190 km of 862 MHz fiber optic cabling, transmits optical signal
to 38 fiber hubs and 586 fiber nodes.
- Fiber nodes convert optical signal to electrical signal of up to
862 MHz and distribute this signal via coaxial cable to
subscriber homes.
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- Modems and set-top boxes are located on our subscribers' homes
premises, if the subscriber wishes to receive high-speed Internet
access or digital programming.
The fiber nodes receive additional local radio and television
channels, supplementing signal received from the head-end. Our set-top boxes,
provided by Sagem SA, enable subscribers to receive digital television.
High-speed Internet services are delivered to subscribers in cooperation with
Multikabel's Internet service subsidiary using a Docsis IP cable modem system.
Most of our network in The Netherlands has an 60 MHz return path, with the
exception of the Communikabel region, which has a 65 MHz return path.
Telecommunications services are provided to business customers using our SDH and
Ethernet-protocol network. We intend to pass additional homes in our existing
regions over time. In addition, we expect to complete installation of an
uninterruptible power supply system to support the future provision of telephony
services, which we intend to commercially launch in the Fall of 2002.
PROGRAMMING AND PRODUCT OFFERINGS
GERMANY
BASIC CABLE TELEVISION. We offer two primary packages of basic cable
television programming services: a ground package and a standard package. The
ground package consists generally of network and public terrestrial television
signal available over the air in the concession area, and typically includes
between three and eight channels, depending on the service area. The standard
package consists primarily of satellite-delivered programming, and includes an
average of 32 television channels and 29 radio channels, depending on the
service area. Additionally, in some markets, we offer either one or two
additional packages of basic cable television programming service. Approximately
95% of our subscribers subscribe to at least the standard package of service.
The following sets forth the programming of nationwide channels
typically offered in our standard analog package, with exceptions depending on
the service area.
CHANNEL DESCRIPTION
3Sat...................... ADR/ZDF, ORF and SRG news and sports
ARD....................... General interest
ARTE...................... Cultural arts
Bayern 3.................. Regional news, sports and entertainment
Bloomberg TV.............. News and information
BR-Alpha.................. Cultural and educational programming
DSF....................... German sports
DW-Tv..................... German programming broadcast abroad
Eurosport................. European sports
Home Shopping............. Teleshopping
Europe....................
HR 3...................... Regional news, sports and entertainment
Kabel 1................... Entertainment and movies
Kika...................... Programming for children
MDR 3..................... Regional news, sports and entertainment
MTV....................... Music videos
MTV2...................... Music videos
n-tv...................... News and information
Neun Live................. Entertainment
Nord 3.................... Regional news, sport and entertainment
News and information...... News and information
Onyx-tv................... Music and entertainment
ORB....................... Regional news, sports and entertainment
Phoenix................... Documentary and political events
Premiere analog........... Pay-TV
Pro Sieben................ News and entertainment
QVC German................ Teleshopping
Regional B1............... Regional news
RTL....................... 24-hour entertainment
RTL 2..................... Entertainment for young people
SAT 1..................... 24-hour entertainment
Super RTL................. Entertainment
SWR....................... Regional news, sports and entertainment
Viva...................... 24-hour music television
Viva 2.................... 24-hour music television
Vox....................... News and entertainment
WDR....................... Regional news, sports and entertainment
ZDF....................... General interest
We receive our programming either directly from broadcasters via our
own head-end or indirectly from broadcasters through signal delivery contracts
with KDG and successor private operators. Approximately 39% of our television
subscribers are served by networks that obtain their programming directly from
broadcasters via our head-ends and approximately 61% of our television
subscribers are served by networks that obtain their programming indirectly via
KDG and successor private operators.
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CURRENT BROADBAND PRODUCT OFFERING. We currently offer the following
broadband service to subscribers in Leipzig and other portions of the
Sachsen/Sachsen-Anhalt/Thuringen region who are connected to our upgraded
networks:
CURRENT BROADBAND PRODUCT OFFERING -- DIGITAL TELEVISION. We believe
we are the first German cable operator to offer digital services to our
subscribers. We launched our digital television services in the city of Leipzig
in October and November of 2000. We had to adapt our program offerings several
times following complaints by the media authorities and after the judgments of
the court of Leipzig as discussed below. Under German law, any change from
analog to digital delivery has to be filed with the media authorities prior to
its implementation. The media authority can also issue enforcement orders to
compel us to distribute certain channels for free. As of December 31, 2001, our
digital offering was available to approximately 124,000 homes which serve
approximately 99,000 analog television subscribers, and approximately 6,800
digital set-top boxes had been installed in subscriber homes and were paying
customers. We intend to continually expand and improve the range of channels
included in our digital television offering.
Our PrimaTV digital offering is currently comprised of the simulcast
of our basic analog channel offering in digital format plus an additional 18
basic digital channels and five different packages with additional digital
channels as follows:
<Table>
PRIMA TV DIGITAL SIMULCAST 3sat Kabel 1 RTL
OF ITS ANALOG PACKAGE: ARD Regional TV RTL 2
ARTE MTV SAT1
Bayern 3 MTV2 Super RTL
BR-Alpha Nord 3 SWR
DW-Tv n-tv Neun Live
DSF Onyx tv Viva
Eurosport ORB Viva 2
Home Shopping Europe Phoenix Vox
HR3 Pro Sieben WDR
Kika QVC ZDF
PrimaFUN
PRIMA TV 18 EXTRA DIGITAL ARD Online Kanal MDR VIA 1
TELEVISION CHANNELS: B1 NIK-Neues in Kabel ZDF Doku
CNN Prima TV Servicekanal ZDF Info
EinsExtra Sneak Preview ZDF Theaterkanal
EinsFestival SR Fernsehen Sudwest
Eins MusXx TV 5
Euronews TW1
PRIMA TV PACKAGES: PrimaFamily* Avante, Innergy, Muzzik Club and BBC Prime
Bet On Jazz, Extreme Sports, Fashion TV, Marcopolo and
MCM Africa
PrimaInfo* BBC World, Bloomberg TV, CNBC and EXPO
The Adult Channel The Adult Channel
MTV MTV 2, MTV Base, MTV hits!, VH-1 and VH-1 Classic
</Table>
* Subscribers can subscribe to these three packages for a combined
price which is generally lower than the sum of the individual prices.
The basic offering is currently priced at a promotional monthly
subscription rate. Set-top box rental is included in the monthly subscription
fee and a one-time installation fee is charged only in the event our service
team installs the set-top box.
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CURRENT BROADBAND PRODUCT OFFERING--PAY-PER-VIEW. Digital subscribers
also have access to up to 15 pay-per-view channels which can be ordered by
subscribers using their remote control, featuring films and other special
events.
CURRENT BROADBAND PRODUCT OFFERING--HIGH-SPEED INTERNET ACCESS. We
launched high-speed Internet services to both residential and business
subscribers in the fourth quarter of 1999. At December 31, 2001, we provided
high-speed Internet service to 3,278 subscribers and we served approximately
3,023 dial-up internet customers which we acquired in 1999 and which we intend
to migrate to our broadband product over time. Our high-speed Internet offering
includes the following broadband products:
- EASY PACKAGE. This package offers subscribers 24-hour high-speed
Internet access at up to two times the speed of ISDN, or 128 Kbps
(64 Kbps upstream), for a monthly fee including the cable modem
fee based on the amount of usage by the subscriber. Subscribers
receive 10MB of web space, 1.5 Gbps of capacity (download and
upstream) and e-mail account services with full support from our
customer service team. Subscribers may also access our Internet
portal for broadband services, such as game servers and
additional value-added services.
- PRO PACKAGE. This package offers subscribers 24-hour high-speed
Internet access at up to 16 times the speed of ISDN, or 1,024
Kbps (256 Kbps upstream), for a fixed monthly fee including the
cable modem fee. As with the Easy Package, subscribers receive
10MB web space, 1.5 Gbps capacity, (download and upstream) e-mail
account services with full support from our customer service team
and access to our Internet portal.
CURRENT BROADBAND PRODUCT OFFERING--DATA COMMUNICATIONS. We currently
offer and intend to further promote fixed data communications products to
business subscribers. These products take advantage of the fiber-rich, upgraded
portions of our network to offer leased lines and wholesale carrier services.
FUTURE BROADBAND PRODUCT OFFERINGS. We intend to expand our existing
broadband product offering to include a range of additional broadband services.
Our planned offering of additional broadband products includes the following
primary services:
- VIDEO-ON-DEMAND. We intend to develop and introduce a range of
video-on-demand services to complement our existing pay-per-view
offering. We expect to develop this offering in cooperation with
third-party providers of programming and technology, and we
intend to introduce these services to our subscribers over the
next two years.
- INTERACTIVE TELEVISION. We are currently developing and expect to
introduce interactive television services to our upgraded
subscribers over the next two to three years. Over time, we
expect our interactive television offering to include services
such as interactive games, e-commerce and television-based
Internet services and television-based email services.
- TELEPHONY. We intend to develop and introduce telephony services
to our residential and business subscribers over the next two to
three years. We expect to develop and offer these services in
cooperation with one or more strategic partners. We will evaluate
both a cable telephony platform and a voice-over-IP platform,
focusing on the costs of developing both platforms, the technical
capabilities of each and the demands of our subscribers.
- UNIFIED MESSAGING SERVICE. We are developing a service to allow
users to send and receive both text and speech-based messages
using either the Internet or telephone. With this service,
subscribers will be able to receive email, voicemail and fax
messages through the Internet, with voicemail messages being
received as sound files and faxes as image files. Subscribers
will also be able to send fax and SMS text messages via the
Internet. By telephone, subscribers will be able to receive
voicemail and email messages, with the service converting text
email messages into recorded speech which the subscriber may
choose to listen to in selected languages. Subscribers can reply
to voicemail or email messages by phone, with an email reply
being sent as a sound file. We anticipate that the service will
include additional features, such as WAP access to the user's
e-mail inbox.
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PRIMATV BASIC contains non-crypted digital channels. Access to these
channels is available by every DVB-C-compatible set-top-box. We rent a set-top
box for a monthly fee. Customers can also subscribe to PRIMATV MAXI (including
PRIMAINFO, PRIMALIFE and PRIMAFAMILY) for a bundled discount and a
stand-alone-package as offered by MTV, and a stand-alone erotic channel (THE
ADULT CHANNEL). As we introduce expanded and improved programming and as
penetration of our digital service increases, we expect to target selective rate
increases for our digital offering. Customers using a set-top box also have
access to our electronic program guide
INTERACTIVE PAY-PER-VIEW. Digital subscribers also have access to up
to 15 pay-per-view channels which can be ordered by subscribers using their
remote control, featuring films and other special events. We also offer games on
the set-top box and we plan to offer email services in the future.
DATA COMMUNICATIONS. We currently offer and intend to further promote
fixed data communications products to business subscribers. These products take
advantage of the fiber-rich, upgraded portions of our network to offer leased
lines and wholesale carrier services.
THE NETHERLANDS
CURRENT BROADBAND PRODUCT OFFERING--ANALOG TELEVISION. Our analog
television offering includes two packages of television programming: a basic
package and a standard package. The basic package consists of 15 television and
40 radio channels. The standard package consists of 38 television and 40 radio
channels. Both packages carry a one-time installation fee. Almost all of our
analog subscribers purchase the standard package.
The standard packages include the following channels, with exceptions
in some municipalities.
CHANNEL DESCRIPTION
Nederland 1................... General Interest
Nederland 2................... General Interest
Nederland 3................... General Interest
Beeldmozaiek.................. Overview of channel offerings
Lokale omroep/kabelkrant Local cable channel
VRT TV1....................... General Interest
Ketnet/Canvas................. Belgian
ARD........................... German language (Germany)
BBC 1......................... English language (UK)
TV5........................... French language (France)
RAI Uno....................... Italian language (Italy)
TVE........................... Spanish language (Spain)
TRT........................... Turkish
MBC........................... Arabic
RTL4.......................... General Interest
RTL 5 Nieuws & Weer........... News & Weather
SBS 6......................... General Interest
Yorin......................... General Interest
V8............................ General Interest
Kindernet/Net 5............... Children
Kabelkrant Nieuws TV.......... News
Regionet/ljmond TV............ General Interest (Regional)
ZDF........................... German language (Germany)
WDR........................... German language (Germany)
BBC 2......................... English language (UK)
RTL Television................ General Interest
TCM........................... Classic Movies
TV Noord-Holland.............. Local programming
Phoenix/CNE................... Chinese language
TMF........................... Music videos
CNBC/Nat. Geographic.......... News/Documentary
Eurosport..................... Sports
Euronews...................... News
Cartoon Network............... Children/General interest
Discovery Channel............. Documentary
MTV Europe.................... Music Videos
The Box....................... Music Videos
CNN........................... International News
Abonnee t.v. (Canal +1)....... Pay-per-view service
Abonnee t.v. (Canal +2)....... Pay-per-view service
Videorecorder-afstelling...... Video outlet
Decoderuitgang Canal+......... Pay-per-view service
CURRENT BROADBAND PRODUCT OFFERING - DIGITAL TELEVISION. We launched
our digital television product under the brand name Mr. Zap in May 2000. The
digital television product is widely available, and we provided digital service
to 5,102 subscribers as of December 31, 2001. We offer our digital television
product in cooperation with Mediakabel, a joint venture established by seven
Dutch cable operators, including us, for the purpose of introducing interactive
digital television to the Dutch cable market.
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The basic digital television package includes the following primary
features:
- PAY-PER-VIEW/NEAR VIDEO-ON-DEMAND. Subscribers may select from
approximately 50 films per month and a broad selection of other
events including sports and entertainment. Films are shown at
varying frequencies (E.G. every 15 minutes to every two hours)
depending on the popularity of the films.
- TELEVISION CHANNELS. Subscribers receive four basic channels and
may choose to receive a package of ten channels for an additional
monthly fee as follows:
FOUR BASIC DIGITAL CHANNELS: ANWB Weer & Verkeer
(traffic & weather)
VH-1 (music videos)
Sports 1
Sky News (24-hour UK news)
ONE PREMIUM PACKAGE: CNBC
Performance
Eurosport News
Travel Channel
Landscape
The Adult Channel
Extreme Sports
Film 1
Bloomberg Television
Fashion TV
The Playboy Channel
- MUSIC AND GAME CHANNELS. Subscribers receive five music channels
and one game channel.
In addition, subscribers may purchase the following theme channels and
product offerings individually.
CHANNEL DESCRIPTION
Music Choice............. 40 additional digital music channels
Game Channels............ Five additional game channels
Zee TV................... Hindustani television
Set Asia................. Hindustani television
Cinenova................. Movie channel
TVBS-E................... Chinese television
ART...................... Arabic television
INTERNET ACCESS. 27,687 residential subscribers and 32 business
subscribers receive always-on, high-speed Internet services as of December 31,
2001. We offer the following packages, which we have branded QuickNet, to our
residential subscribers:
- QUICKNET POWER PACKAGE. This product provides Internet access
speeds of at least 512 Kbps downstream and 128 Kbps upstream.
Subscribers also benefit from unlimited download capacity
(applying a fair use policy), e-mail services, and homepage
capability with 10 Mb capacity.
- QUICKNET POWER PLUS PACKAGE. This product provides Internet
access speeds of at least 1mbps downstream and 256 Kbps upstream.
Subscribers also benefit from unlimited download capacity
(applying a fair use policy), e-mail services, a home capability
with 10 Mb capacity and possibility of connecting a maximum of
four personal computers.
Our packages for the business market are:
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- BROADBAND OFFICE 512. This product provides Internet access
speeds of at least 512 Kbps downstream and 128 Kbps upstream,
e-mail services, possibilities for connecting web and e-mail
server.
- BROADBAND OFFICE 1024. This product provides Internet access
speeds of at least 1024 Kbps downstream and 256 Kbps upstream,
e-mail services, possibilities for connecting web and e-mail
server.
DATA COMMUNICATIONS. We offer the following data communications
products to business subscribers:
- CABLELINK. This service uses existing cable connections for
datacommunications with a choice of between 256 to 512 Kbps at a
fixed monthly price depending on the chosen speed and the
distance between the locations of the subscribers. This service
provides the security of a virtual private network.
- QUALITYLINK. This service provides a dedicated fiber connection
for data communications at a fixed monthly price depending on
whether subscribers elect to receive speeds of 2, 10, 34, 155 or
622 Mbps.
- INTERNET LINK. This service provides a dedicated fiber connection
to the Internet at a fixed monthly price depending on the elected
speed levels between 265 Kbps and STM 1 (140 Mbps).
KENNISNET INTRANET SERVICE. As of December 31, 2001, we connected 580
Dutch schools and educational institutions, libraries and museums to our
intranet service by linking our networks with other cable operators. This
intranet project provides such institutions with network access and access to
the Internet through an organization called Educatief Net B.V., or nl.tree,
which is a joint venture of several cable operators. nl.tree has obtained
funding from the Dutch government for a period of three years, and will provide
subsidies to participating institutions.
FUTURE BROADBAND PRODUCT OFFERINGS. We have been providing cable
telephony services on a pilot basis to approximately 50 subscribers in the Den
Helder municipality since 1996. Our pilot offering includes local, long distance
and international telephony services. We intend to offer full-scale telephony
services to a portion of our subscribers over the next twelve months. We expect
our telephony offering will include the basic service included in our pilot
offering, and may also include other enhanced services such as voice mail,
caller identification, call waiting, call barring, call diversion and three-way
calling. This project is currently in a technical trial stage, which will extend
through the Summer of 2002, after which we expect commercial rollout.
SALES, MARKETING AND CUSTOMER SERVICE
GERMANY
Our sales and customer service function is organized regionally in
Germany. We employ account managers to originate and service large account
relationships with housing associations and governmental authorities. In
addition, we conduct direct sales at the individual subscriber level via
telesales and door-to-door sales. We employ sales representatives both directly
and as agents, some of which are housing associations. We maintain centralized
customer call centers in each of our operating regions, which enable us to
cost-effectively service a large number of subscribers in each regional cluster.
Customer call centers are available 24-hours per day, six days per week to
handle new account and service requests. We employ network operations staff and
field technicians in each region to handle new subscriber installations and
service interruptions.
Members of our broadband group focus on product development, marketing
and sales of our broadband service offering. Marketing efforts undertaken by
this group in the Leipzig region primarily focus on the following:
- DIRECT MARKETING. Typical initiatives include sending advertising
materials with monthly bills to existing analog subscribers,
other direct mail advertising and direct telemarketing campaigns.
- ADVERTISING. We have used limited advertising campaigns in local
newspapers and magazines to promote our broadband service
offering.
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THE NETHERLANDS
Members of our sales and marketing staff focus on a specific product
offering, such as our analog television offering and our digital offering, our
Internet products, our data communications product or our Kennisnet intranet
offering. This group works with product development and technical staff to
continually improve the key features of our product offering and to determine
pricing strategies. Our marketing program includes the following primary
features:
- MULTIMEDIA MAGAZINE: This quarterly publication is provided to
all subscribers and contains general news about Multikabel and
about new product offerings. New subscribers also receive a
welcome package outlining the full range of products available to
subscribers.
- MULTIVIEW CHANNEL: This television channel is included in all our
channel offerings and broadcasts the full range of products
available to our subscribers at all times.
- MULTIKABEL AND QUICKNET WEBSITES: Our local (Dutch) websites also
outline our product offerings, and we ultimately intend to enable
our subscribers to purchase our products on-line.
- DIRECT MAIL AND ADVERTISING: We have conducted targeted direct
mail and advertising campaigns specifically promoting our analog
and digital television offerings, our Internet offerings and our
data communications product.
- OUTBOUND SALES CALLS FOR BOTH DIGITAL TELEVISION AND INTERNET.
- SPECIFIC MARKETING CAMPAIGNS SUCH AS MEMBER-GETS-MEMBER
OFFERINGS, INTRODUCTION DISCOUNTS.
- PRODUCT BUNDLING ESPECIALLY INTERNET AND DIGITAL TELEVISION. In
the future also telephone services will be bundled with the
current offerings.
Our customer call center, including the helpdesk, is open from 9:00
a.m. to 9:00 p.m. on weekdays and from 10:00 a.m. to 5:00 p.m. on weekends to
assist subscribers with inquiries such as new services and billing-related
inquiries, and detailed questions about services offered for analog and digital
television and the Internet. In addition, our customer call center cooperates
with third-party call centers to offer 24-hour assistance with service
interruptions. We employ a team of full-time service technicians, and also
contract with third-party technicians. In The Netherlands we are fully
responsible for our own marketing campaigns after the QuickNet acquisitions and
the termination of the Sonera contract for Internet and after taking over all
customer services and marketing activities from Mediakabel.
Our billing function for the analogue audio/video services is
outsourced to local utility companies. Mediakabel is still responsible for
billing for digital television services. The billing for Internet services is to
a great extent an in-house service, although collection efforts are outsourced.
Billing and collection efforts for the business offerings are carried out by the
company itself.
MATERIAL CONTRACTS
GERMANY
COPYRIGHT ROYALTIES FOR TELEVISION PROGRAMMING TRANSMITTED OVER OUR
CABLE TELEVISION NETWORKS. Until 1998, we were able to receive our analog
programming, whether directly or indirectly, at no charge from the broadcaster
and without any formal agreement or contract with the broadcasters. The
applicable provisions of the German Copyright Act (URHEBERRECHTSGESETZ)
regarding retransmission of programming were amended in 1998 to implement the EC
Directive on Cable and Satellite Broadcasting. This law provides for a so-called
compulsory license, which requires the broadcasters to permit cable and
broadband network operators to retransmit programming in return for payment of a
reasonable fee.
In 1998, the German Copyright Act was amended to require the payment
of copyright royalties for the retransmission of copyright-protected television
and radio programming by cable and broadband operators. The German Copyright Act
does not set forth the amount to be paid. GEMA, one of the German copyright
collecting societies, has been mandated by the other German copyright collecting
societies to collect these retransmission royalties. GEMA has
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publicly announced its intention to collect royalty fees for television and
radio signal received terrestrially by cable and broadband operators
retroactively to July 1, 1997. We have been informed that the license fee for
terrestrial retransmission will be assessed if such terrestrial broadcast is
received on the network operators' own head-ends, but not, however, if it is
received via KDG signal delivery points, in which case GEMA considers the
license fees payable by KDG to cover all retransmission of copyright-protected
programming.
In 1999, GEMA entered into a framework agreement with the Association
of Private Cable Operators e.V., or ANGA, which, among other things, provides
for the collection of license fees retroactively to July 1997. We believe that
under the ANGA and GEMA framework agreement, GEMA is not yet collecting license
fees for retransmission of satellite broadcasting from private cable and
broadband operators, but may choose to do so in the future. Members of ANGA who
accept this framework agreement receive a 20% reduction in the announced
standard fees, resulting in a general license fee equal to 4% of the monthly
subscription fees received by private operators from subscribers served by level
2 and 3 networks. Value-added taxes are also due on the general license fee.
We are not a member of ANGA and are in the process of negotiating a
contract with GEMA regarding the payment of royalties for retransmission of
programming. Starting in January 2000, we initiated a rate increase to cover the
possible imposition of GEMA fees and began accruing for what we believe are
appropriate royalty fees we may have to pay to GEMA. Our ability to recover any
retroactive copyright royalty fee from subscribers cannot be assured because we
may be unable to pass on copyright royalties assessed for past periods. We do
not believe any retroactive payment of copyright royalty fees will be material.
We have been informed that for a number of years KDG has been paying
copyright royalties to GEMA for the retransmission of copyright-protected
terrestrial broadcasting. KDG has advised us that it believes payment of this
royalty permits KDG to allow private cable system operators connected to KDG
signal delivery points to retransmit copyright-protected terrestrial
broadcasting on level 4 networks. KDG has indemnified us in some instances
against claims by the German copyright collecting societies for copyright
royalties for level 4 network retransmission. The copyright royalty paid by KDG
does not, however, cover retransmission of copyright-protected programming on
level 2 and level 3 networks. The signal delivery contracts between us and KDG
with respect to level 3 networks expressly provide that we will indemnify KDG in
case of claims against KDG for breaches by us.
SIGNAL DELIVERY PAYMENTS TO KDG AND SUCCESSOR PRIVATE OPERATORS FOR
TELEVISION PROGRAMMING TRANSMITTED OVER OUR CABLE TELEVISION NETWORKS. For our
level 3 networks and level 4 networks, we entered into signal delivery contracts
with KDG to receive programming signal for delivery to our subscribers prior to
KDG's sale of some of its networks. Where KDG has retained its network it
remains our contract partner but where it has sold networks, successor private
cable operators have assumed the obligations of KDG under the signal delivery
contracts and have become our contract partners under the same terms as those
contained in the original signal delivery contracts. At December 31, 2001,
approximately 61% of our television subscribers are served by level 3 and level
4 networks, which receive programming pursuant to signal delivery contracts. In
the city of Plauen, which historically had a level 3 network, we consolidated
the KDG connection points, installed a head-end, and cancelled our KDG contract.
In Leipzig, also historically a level 3 network, we consolidated KDG connection
points, upgraded the network, constructed a head-end and cancelled the existing
KDG contract. The Plauen network is now considered a level 2 network and the
upgraded portion of the network in Leipzig and portions of the
Sachsen/Sachsen-Anhalt/Thuringen region, is now considered a broadband network.
We intend to continue to consolidate connection points and insert head-ends to
reduce signed delivery fees paid to KDG and successor private operators.
The terms of our signal delivery contracts vary. Most signal delivery
contracts are for a fixed period, usually five to ten, and are subject to
negotiated renewal. We typically pay KDG and successor private operators either
a flat fee or a fee per subscriber that is determined by reference to a
published fee schedule based on the number of homes connected to one connection
point. A number of signal delivery contracts provide for an escalation of fees
during the first three to five years (BAUZEITENREGELUNG) to ease our initial
network development costs. The escalation clauses in the vast majority of these
contracts have been triggered. Rate increases by KDG and successor private
operators permitted under the fee escalation clauses in a number of these signal
delivery contracts could result in an increase in the aggregate amount of signal
delivery fees we pay to KDG and successor private operators. Historically, we
have been able to increase the monthly subscription rates paid by our
subscribers following increases in signal delivery fees by KDG and
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successor private operators. We expect that the additional costs associated with
these fee increases will be reduced as a result of our anticipated reduced
reliance on these agreements.
CONTRACTS FOR DIGITAL TELEVISION PROGRAMMING TRANSMITTED OVER OUR
BROADBAND NETWORKS. We have entered into contracts with the majority of the
program providers with whom we are required to enter into contracts to obtain
programming for our digital television packages and we are negotiating with the
remainder. In general, the terms of these contracts are from two to five years
and can be automatically extended for additional one year periods. Three of our
agreements provide for the payment of a fixed fee per subscriber per month.
Three of our agreements provides for a monthly payment of 40% to 50% of the
revenues we generate from the channels which are subject to the agreement.
In the event we wish to terminate our relationship with these program
providers, most of our contracts provide for termination by us if
- less than 30% of our subscribers are interested in subscribing;
- research conducted by us results in a finding that the delivery
of the channel does not meet market expectations;
- the content of the channel violates the statutory requirements of
the territory; or
- if the programmer breaches its obligations under the agreement.
In addition, we may terminate the agreements if the programmer
fails to deliver transmission during 15 minutes a day for a total
of 14 days during a 90 day period or if we are obliged to do so
by a governmental body.
The contracts generally provide that the programmer may terminate only
for an uncured breach of the terms of the contract and upon 30 days written
notice to us.
CONTRACT FOR PAY-PER-VIEW MOVIES, SPORTS AND OTHER EVENTS. We have
entered into contracts with program providers including Telepool Europaisches
Fernsehprogrammkontor GmbH, Helkon Media AG and Universal Studios International
B.V. for the pay-per-view movies and other events we offer our subscribers.
These contracts are generally for short periods or for specific events and have
standard terms. Most of our agreements provide for the payment of a flat fee per
program.
CONTRACT FOR SET-TOP BOXES. On April 1, 2000, we entered into an
agreement with Galaxis Technology AG, or Galaxis, for the purchase of the
set-top boxes required for our digital television offering. Pursuant to this
agreement, we agreed to purchase up to 50,000 set-top boxes from Galaxis. Orders
for additional set-top boxes will be governed by this agreement. This agreement
may be terminated by either party in the event of an uncured material breach by
the other party. We may terminate the agreement upon Galaxis' delivery of
defective set-top boxes or if the services and products delivered by Galaxis do
not meet our specifications.
CONCESSION AGREEMENTS WITH OUR SUBSCRIBERS. In order to be able to
provide service to our subscribers, we have entered into long-term public
concession agreements with local governmental authorities and private concession
agreements with housing associations that administer large housing blocks. The
agreements with governmental authorities were entered into prior to the
enactment of the German Telecommunications Act of August 1, 1996. We are
generally not obligated to make payments to local governmental authorities for
the use we make of public rights-of-way to deliver our services. Under the
German Telecommunications Act, holders of category 3 telecommunications licenses
(which includes broadband network operators like us) have the right to use
public rights-of-way free of charge for telecommunications lines serving public
purposes provided that the use does not unduly restrict the primary use of the
public spaces. Local building permits are required before new telecommunications
lines are laid or existing telecommunications lines are changed. The German
Telecommunications Act established a number of obligations related to this
free-of-charge use of public-rights-of-ways. As a result, since August 1, 1996,
it has no longer been necessary for us to enter into public concession
agreements to obtain rights-of-way on public grounds.
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Private concession agreements with housing associations provide us
with access to potential subscribers living in the housing blocks administered
by these authorities and also frequently provide us with the right to use the
respective private property owned by the housing associations. Individual
private concession agreements typically provide access to a relatively small
number of homes. As of December 31, 2001, our cable networks operated pursuant
to a few hundred public concession agreements with local governmental
authorities and more than 3,000 private concession agreements with housing
associations.
Our private concession agreements typically contain standard
conditions, such as conditions of service and limitations on commencement and
completion of construction. Additionally, most of our concession agreements
contain provisions that permit us to raise the prices for our existing level of
cable services with reference to general inflation indices and to raise prices
to cover increased costs of programming. By timing rate increases to published
cost of living increases or the introduction of new or improved programming, we
have generally been able to increase the rates for our cable services without
the objection of the relevant contracting party.
We are party to a number of concession agreements with
Wohnungsbaugesellschaft Magdeburg GmbH, or WoBau, most of which were entered
into by Funkmechanik Magdeburg GmbH, which we acquired in 1999, and by Antennen
Lindemann, which we acquired in 1996. Concession agreements covering
approximately 25,750 subscribers, expired in 2001 and the remaining concession
agreements with WoBau, covering approximately 5,000 subscribers, will expire
between 2002 and 2006. We have been notified by WoBau that it will not extend or
renew these agreements with us.
Many of our private concession agreements with housing associations
provide that we are the exclusive provider of cable services in the concession
area. Although we generally do not pay concession fees on any of our cable
networks, in some cases we pay housing associations for billing and collecting
subscription fees from homes within the applicable apartment blocks under
agreements entered into prior to our acquisition of the related cable systems.
In some limited cases, housing associations rather than the subscribers receive
the broadcasting signal as part of their agreements with us. In these cases, the
housing associations pay subscriber fees to us but are otherwise entirely
responsible for the handling of subscriber relationships.
THE NETHERLANDS
ANALOG PROGRAMMING. We are not currently required to pay programming
fees for the channels included in our basic and standard analog packages, except
for the Discovery channel and Eurosport. In some instances, we receive
programming fees from broadcasters to carry their programming on our networks.
We pay royalty fees to BUMA/SENA, the Dutch copyright collection agency, for the
retransmission of programming over our network in The Netherlands.
The agreement with Discovery was entered into on January 1, 1998 and
has been automatically extended annually since then. The agreement will extend
until January 1, 2003, subject to earlier termination with three months' notice.
The agreement with Eurosport was entered into on January 1, 2000 for a term
ending January 1, 2003.
DIGITAL PROGRAMMING. In March 2000, Multikabel acquired a 15.71% share
in Mediakabel B.V., a consortium established by a group of Dutch cable
television operators in 1997 for the purpose of developing and introducing
digital broadcasting services in The Netherlands. Mediakabel provides a full
range of operational services to the consortium, in exchange for which each
member of the consortium, including Multikabel, pays a fee to Mediakabel based
on the number of subscribers in its service area. All revenues from digital
broadcasting services are recognized directly by Multikabel and all programming
fees are paid directly by Multikabel. In May 2000, Multikabel launched digital
audio and video services through its participation in Mediakabel. The agreement
with Mediakabel does not provide us with programming contracts for our digital
television offering.
Multikabel entered into an agreement with BUMA regarding the royalty
fees for the retransmission of digital programs. The agreement term was from
January 1, 2000 until December 31, 2001. The parties have undertaken to
negotiate an amended agreement during 2002, pending which the terms of the prior
agreement will continue to apply.
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We have entered into agreements with a number of program providers for
our digital television offering. These agreements are standard and provide for
the payment of a fixed fee per subscriber per month. Most of our agreements,
with the exception of our agreement for the CineNova channel described below,
have terms ranging from one to three years, many of which may be renewed at our
option.
In February 2000, we entered into a contract with Europe MovieCo
Partners Limited for the provision of the CineNova channel. The agreement
provides for payment by us of a fixed fee for 50,000 subscribers which will
increase to cover all of our subscribers in The Netherlands by October 31, 2003,
regardless of the actual number of our subscribers which are purchasing the
CineNova channel. This agreement has a term of seven years unless earlier
terminated or extended. Either party may terminate the agreement if six months
prior to the end of the fifth year, the CineNova channel does not have at least
100,000 subscribers in the relevant distribution areas. If six months prior to
the end of the fifth year, the Cinenova channel has between 100,000 and 185,000
subscribers, Movieco may provide us with a written early termination notice,
upon receipt of which we will enter into good faith negotiations to reduce the
participation levels for the remaining years under the agreement.
PAY-PER-VIEW PROGRAMMING. With respect to films, documentaries and
events, we have entered into agreements with Columbia Tristar International
Television (CPT Holdings Inc), DreamWorks International Distribution ILC,
Twentieth Century Fox Telecommunications International, Inc., Monarchy
Enterprises B.V., Universal Studios International B.V. and Warner Bros.
International Television Distribution. The agreements have terms ranging from
two months to three years.
INTERNET SERVICES. Until July 1999, we operated an Internet service
provider, MultiWeb B.V., which provided Internet access services to our Internet
subscribers. On July 9, 1999, we sold MultiWeb to Sonera and entered into a
distribution agreement with Sonera, under which our Internet subscribers
obtained Internet access. On July 1, 2001 we bought back the broadband Internet
services from Sonera again and entered an Operating Agreement with Chello
Broadband Nederland B.V. for the provided Internet services such as transit,
e-mail and news services. This contract will extend until July 1, 2002.
CONTRACTS RELATING TO THE NETWORK. We have retained City Com B.V. to
design, implement, deliver and install a management system, using switch
multitaps, modems and related equipment for our interconnected cable networks.
This management system enables us to remotely manage our entire cable television
network in The Netherlands. This turnkey order was delivered in May 2000 with
the exception of one portion which was completed in April 2001. In addition, we
purchased a synchronous digital hierarchy network from Lucent during 2000.
In December 1999, we entered into a Cablelink Agreement with KPN
Telecom B.V. or KPN, effective as of July 1, 1999. Pursuant to this agreement,
KPN provides us with various channels and radio frequencies, which we, in turn,
provide to other networks and our subscribers. This agreement will terminate on
July 1, 2002.
Tellabs and Primacom have entered into a Memorandum of Understanding
on 1 November 2001 regarding the technical trial in Heerhugowaard for the launch
of Voice over Internet Protocol (VoIP). We have also signed a Next Generation IP
Architecture (NGA) Deployment Program Module.
At the end of 2001 Multikabel entered an agreement with SupportNet for
the purchase of Internet related equipment for setting up and ISP platform for
the business market. This contract also includes a support agreement and an
agreement for transit/peering.
In September 2001 Multikabel entered an agreement with Kannegieter
Electronica B.V. for the delivering of Extreme Networks equipment for upgrading
the Ethernet backbone regarding the IP-traffic. We also entered a support
contract.
Multikabel furthermore entered new contracts with Arris International
for the delivery of CMTS regarding the Internet product and all kind of
(smaller) contracts for improving and maintaining the network.
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TRANSFER AND OPERATING AGREEMENTS. We, along with N.V. Nutsbedrijf
Haarlemmermeer, entered into transfer and operating agreements with 43
municipalities whereby we both own and operate the central antennae
installations located on land owned by the municipalities. Many of these
agreements are standard and will expire in 2003.
COMPETITION IN GERMANY AND THE NETHERLANDS
The cable television and broadband businesses within Germany and The
Netherlands are highly competitive. We compete for subscribers and for
acquisitions of cable networks.
COMPETITION FOR SUBSCRIBERS
We will not compete with other cable television operators in our
franchise or concession areas since "overbuilding" of a second cable network
where there is an existing network does not occur in Germany, except in limited
cases. However, we will face competition for subscribers from:
- a growing number of operators who deliver the same or similar
packages of television programming and other services on delivery
platforms that are different from ours including antennae,
digital direct-to-home (which can be both analog, or analog
direct-to-home, and digital, or digital direct-to-home), such as
those offered by Kirch, Premiere World and Canal +, and satellite
master antenna television systems; and
- providers of different products and services in those areas where
we operate our broadband networks, including Deutsche Telekom and
Premiere World in Germany and UPC, Essent and Casema in The
Netherlands, which offer other digital television services and,
through Deutsche Telekom in Germany and KPN in The Netherlands,
provide high-speed Internet and telephony services.
In both Germany and The Netherlands, the ability of viewers to receive
terrestrial broadcast television signal directly through antennae or otherwise
impedes our ability to obtain additional cable television subscribers in areas
where our cable networks have already been installed. The extent to which we are
limited in obtaining additional subscribers varies depending on the quality of
the reception to the subscriber and the zoning restrictions in the subscriber's
region. In addition, in The Netherlands we face competition from providers of
terrestrial digital television.
Analog direct-to-home satellite users obtain programming from one of a
number of different satellites, including Astra and Eutelsat, in both Germany
and The Netherlands. In order to receive analog direct-to-home
satellite-delivered programming, the consumer must have an outdoor reception
dish, which generally is smaller and less expensive than the satellite dish
typically used in the United States. Analog direct-to-home satellite-delivered
services are widely available in Germany and The Netherlands, although the
current consumer base in The Netherlands is limited due to high cable
penetration. We believe that analog direct-to-home satellite-delivered services
will continue to provide significant competition in the future. However, we
believe cable television has a number of competitive advantages over analog
direct-to-home satellite-delivered services for the following reasons:
- Cable television does not involve an up-front cost for the
purchase of a dish and related equipment required for analog
direct-to-home.
- Satellite dishes are often perceived as unsightly. Planning or
zoning laws and regulations, building rules and building lease
contracts often forbid satellite dishes being fixed to buildings
where cable television services are available.
- At present, there is generally a wider range of national,
regional and local programming available on cable networks. This
is due, in part, to the inability of analog direct-to-home
reception dishes to receive programming from multiple satellites
at any given time or to switch to a further satellite without
being realigned by a technician.
- Cable service operators generally provide a local presence and
service to their subscribers.
- Consumers have expressed concerns as to the level of fees that
they will be required to pay to providers of analog
direct-to-home satellite-delivered programming if and when
digital direct-to-home satellite signal is encrypted.
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- As cable television networks are upgraded, a full range of
broadband network products and services may be offered which will
build subscriber loyalty.
We believe that, should analog direct-to-home satellite signal be
encrypted, we would benefit from an increase in the number of subscribers as
former analog direct-to-home users seek alternative sources of television
programming. We believe that analog direct-to-home satellite-delivery service
may become more competitive with cable service if digital compression technology
is implemented in the industry such that satellite services can provide more
channels and direct specific programming to particular subscribers. As we
upgrade our cable television networks in Germany, we will be able to offer
substantially more programming alternatives and pay-per-view services.
Accordingly, we do not believe that our broadband networks will be at a
competitive disadvantage to either analog direct-to-home or digital
direct-to-home even if digital compression technology is implemented in the
satellite services.
In addition, we face competition from digital direct-to-home
satellite-delivered services. In The Netherlands, licenses have been awarded for
digital direct-to-home television, which will compete with our digital
television offering. During the last two years, Premiere World has commenced
digital direct-to-home operations in the German market. We believe that digital
direct-to-home has not achieved meaningful penetration of the German market.
However, Premiere World has exclusive programming, including sports contracts.
Therefore, we believe that additional penetration will be achieved by Premiere
World and will result in a loss of subscribers to cable network operators in
Germany, including subscribers to our networks. The introduction of our digital
television and pay-per-view services will compete directly with Premiere World.
In The Netherlands, digital direct-to-home operations currently exist on an even
smaller scale than in Germany.
Cable television networks also face competition from satellite master
antennal systems that serve condominiums, apartment buildings and other private
residential developments. These delivery methods are limited and are not able to
offer a full range of broadband services on a large scale.
In addition to competition with providers of programming using
different platforms as described in the preceding paragraphs, we also compete
for subscribers with providers of different products and services in those areas
where we operate our broadband networks. Since we started offering digital
services earlier this year, we have been competing with other digital television
services. Our primary competitor in Germany is Premiere World. Premiere World
has several exclusive long-term contracts with major film studios, program
producers and sports franchises for a substantial amount of entertainment and
sports programming. Premiere World delivers its product in analog and digital
packages via Deutsche Telekom's cable television network and direct-to-home via
satellite. We believe Premiere World has a current market share of approximately
4% of the television homes in Germany. In The Netherlands, UPC, our largest
shareholder, is the largest broadband operator, followed by Essent and Casema.
We believe that these three operators account for approximately 80% of the Dutch
cable market.
Once we launch our voice-over-IP platform, we will compete with
several other providers of local telephony service, including KPN's fixed line
network in The Netherlands. We will also be competing with several wireless
telephony services, many of which have financial resources substantially in
excess of ours.
With respect to high-speed Internet access, we compete with other
access mechanisms, such as ADSL lines, standard dial-up services and dial-up
services over digital direct-to-home. We believe high-speed Internet access over
broadband networks has several competitive advantages over these alternative
Internet service access mechanisms, including convenience, access speed and
price. Our Internet service requires no dial-up time because the subscriber is
always on-line, 24 hours a day. We believe Internet access over broadband
networks can be 10 to 15 times faster than access over ISDN. Finally, our
product is priced on a flat fee basis with no additional charges for usage. From
a pricing standpoint, we believe our product becomes particularly attractive,
compared to most other alternative access mechanisms, to subscribers who use the
service for more than 20 hours in a month. We do not believe that we actively
compete with larger, more well established Internet service providers such as
T-Online (Deutsche Telekom's Internet service provider), AOL Europe in Germany,
KPN, Chello Broadband NV and World Online in The Netherlands.
The extent to which a cable service is competitive depends, in part,
on the quality of the network and the cable operator's ability to offer a
greater variety of programming at competitive prices to consumers than that
available
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through alternative delivery platforms. Advances in communications technology,
as well as changes in the marketplace and the regulatory environment, are
occurring constantly and their impact is impossible to predict.
COMPETITION FOR ACQUISITION OF CABLE NETWORKS
The cable television industry in Germany is in the process of
consolidation. We encounter competition for the acquisition of cable networks
from both existing cable television operators and financial investors. Many of
these competitors or potential competitors have significantly greater financial
resources than us, including in Germany the cable operations of Deutsche
Telekom, Robert Bosch, TeleColumbus, EWT/tss and UPC, our largest shareholder,
and in The Netherlands, UPC, Essent, and Casema. If any of the existing or
potential competitors significantly expand their acquisition activities, our
ability to continue implementing our acquisition strategy may be materially
affected.
LITIGATION
We may from time to time be involved in litigation incidental to the
conduct of our business. We are not a party to any lawsuit or legal proceeding
that, in the opinion of management, is likely to have a material adverse effect
on our business and financial condition.
LITIGATION RELATING TO OPERATIONS OF SUWEDA PRIOR TO MERGER
As a result of the merger between KabelMedia and Suweda in December
1998, we succeeded to litigation against Suweda or its affiliates. In order to
allocate the risks related to this litigation, KabelMedia and Wolfgang and
Ludwig Preuss, two major shareholders of Suweda, entered into an indemnity
agreement. Under which Wolfgang and Ludwig Preuss, jointly and severally, agreed
to indemnify KabelMedia, us and our successors, until November 20, 2003, from
any claim and damages arising out of or in connection with civil or criminal
litigation or proceedings arising out of events relating to Suweda prior to our
merger with it, including the ongoing litigation.
This indemnification excludes all litigation arising from the
planning, manufacturing, operation and distribution of broadband cable networks,
and all litigation risks arising in the ordinary course of business and which do
not exceed approximately EURO 13,000 individually or approximately EURO 511,000
in the aggregate. In the event the total claims exceed EURO 511,000, liability
under the indemnity agreement is limited to the amount of such excess. We have
the right to manage any litigation, but Wolfgang and Ludwig Preuss have the
right to object to the settlement of any claim. The agreement provides that any
dispute between us and Wolfgang and Ludwig Preuss regarding such settlement will
be determined by an independent lawyer.
The last remaining civil proceeding covered by the indemnity agreement
was settled during 2001. This litigation was instituted by the East German
Privatization Agency (BUNDESANSTALT FUR VEREINIGUNGSBEDINGTE SONDERAUFGABEN, or
BVS) against Suweda and related to Suweda's purchase of BRANDENBURGISCHE BAU AG,
or BBAG. BVS sued Suweda for payment of EURO 7,465,000 for breach of contract.
BVS alleged that Suweda, by reducing the workforce of BBAG, had acted in breach
of contract. The district court in Berlin dismissed the claim for payment. In
November 1998, BVS appealed this decision, reducing its claim to EURO 6,851,000.
We rescinded a settlement agreement which was reached at a first court hearing
on November 1, 2000, pursuant to which we would have had to pay EURO 3,553,000
to BVS. On June 25, 2001, we reached a settlement whereby we paid EURO 1,559,440
to BVS. Wolfgang and Ludwig Preuss indemnified us for the entire amount of this
settlement.
LITIGATION WITH HOUSING ASSOCIATIONS
During 1998, GGG in Chemnitz, a housing association which is party to
a concession agreement with us, brought a civil action seeking to limit our
ability to increase the subscriber fees charged by us to tenants of the housing
association without the prior consent of the housing association. This action
was dismissed on March 6, 2001 by the federal court of justice
(BUNDESGERICHTSHOF), which held that the concession agreement clause requiring
prior approval of the housing association improperly restrained competition.
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However, in December 1998, GGG notified us that it was terminating the
concession agreement as of December 31, 1999, approximately 12 years prior to
the end of its term. GGG stated that the termination was based on its allegation
that we breached the concession agreement when we increased prices without the
consent of GGG, which was the subject of the lawsuit described above. GGG also
alleged that because the concession agreement contains standard non-negotiated
terms and the duration of the contract is 20 years, it is terminable at any time
by either party. We rejected the early termination and GGG sought judicial
confirmation of its early termination, filing another civil action against us
with the regional court (LANDGERICHT) in Chemnitz. On January 7, 2000, the court
dismissed the action, acknowledging our substantial investments in Chemnitz and
ruled that the period required for building the cable network must not be taken
into account in considering the duration of a concession agreement. In effect,
the court's decision confirmed our long-term contract with GGG. The court also
ruled that, irrespective of whether consent by the GGG housing association was
required, our price increase did not constitute sufficient grounds for early
termination. In February 2000, GGG appealed the decision to the superior court
(OBERLANDESGERICHT) in Dresden. In December 2001, the superior court
(OBERLANDESGERICHT) in Dresden upheld the decision of the regional court. The
period allowed to appeal this decision terminated in January 2002.
In October 1999, WOHNUNGSBAUGENOSSENSCHAFT WENDENSCHLOSS E.G., through
which we serve 1,365 subscribers, applied to the regional court (LANDGERICHT) in
Berlin for a judgment permitting the early termination of its concession
agreement. The court held that the concession agreement is terminable after 12
years. We have appealed the decision to the court of appeal (KAMMERGERICHT) in
Berlin and a hearing has been scheduled for July 2, 2002.
In April 2001, WOHNUNGSBAUGENOSSENSCHAFT MAGDEBURG MBH applied to the
regional court (LANDGERICHT) in Magdeburg for a judgment prohibiting us from
serving customers in some of the premises of WOHNUNGSBAUGENOSSENSCHAFT MAGDEBURG
MBH. On February 15, 2002, the regional court decided this matter in favor of
WOHNUNGSBAUGENOSSENSCHAFT MAGDEBURG MBH. We have appealed this decision to the
superior court in Nuremberg, which has not yet set a date for a first hearing.
Since August 2001, customers of WOHNUNGSBAUGENOSSENSCHAFT LIPSIA EG
have sought temporary injunctions against the Company in an effort to freeze fee
increases and to terminate the contracts. The district court in Leipzig issued
several injunctions against the Company, but the Company believes that it will
eventually prevail in the main proceedings.
PROGRAMMING LITIGATION WITH HOUSING AUTHORITIES AND WITH PROGRAM
PROVIDERS
In November and December 2000, several German program providers (Kabel
1, SAT 1, Pro 7, DSF, tm3, N 24, RTL 2, Super RTL, and Vox) obtained injunctions
from the district court in Leipzig precluding the Company from carrying their
programs exclusively in digital format or carrying programs in digital format in
return for the payment of subscriber fees, in either case without the consent of
the program providers. The Company has restored its analog television offering
and are operating under the terms of the injunctions. The Company commenced
negotiations with the programmers and reached an interim agreement with RTL 2,
Super RTL and Vox expiring on March 31, 2002, and with tm3 terminating on
December 31, 2001. These agreements provide that the Company will continue to
carry RTL and tm3 programs in both analog and digital format, together with
other specified digital services. The agreements also provide that the Company
will neither pay nor receive payment for this programming and that the Company
may not offer these programs to subscribers as part of special packages. The
agreements further provide that the Company and the other parties will seek to
negotiate a definitive programming agreement and that, in the event any fees are
to be paid under that agreement, the payment will be retroactive to January 1,
2001. The Company is also negotiating with Kabel 1, Pro 7 and DSF, which have
all obtained injunctions preventing the Company from offering their programs
exclusively in either analog or digital format. The Company has committed not to
carry N24's program in digital format if we do not also carry the program in
analog format.
In the proceedings of the main action of DSF against the Company, on
May 15, 2001 the district court in Leipzig decided that the Company would not be
allowed to offer DSF programs in digital format until the parties reach an
agreement on analog distribution. The Company has decided not to appeal this
decision. Since DSF has not served the judgment on the Company, the Company is
still distributing the DSF programming in both analog and digital format. In
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the proceedings of the main action of Kabel 1 and Pro 7 against the Company, the
regional court (LANDGERICHT) dismissed the actions declaring that it lacked
jurisdiction because the parties had also instituted arbitration proceedings.
Kabel 1 and Pro 7 have appealed the decision to the court of appeal
(OBERLANDESGERICHT) in Dresden. The first hearing of the Kabel 1 action was
scheduled for October 23, 2001 and the first hearing for the Pro 7 action was
scheduled for December 4, 2001. The parties have agreed to suspend both
proceedings until August 2002.
Various additional legal matters are pending against the Company. In
the opinion of management, the ultimate resolution of such legal proceedings and
claims, including the matters described above, will not have a material effect
on the consolidated financial position or results of the Company.
REGULATION
The provision of analog and digital television, telephone,
Internet/data and broadcasting services is regulated in the countries in which
we operate. The scope of regulation varies from country to country, although in
some significant respects the regulation we are subject to is harmonized under
the regulatory structure of the European Union. Below is a summary of the
regulatory environment in the European Union, Germany and The Netherlands.
REGULATION IN GERMANY
CABLE TELEVISION LICENSES. The German Telecommunications Act came into
force on August 1, 1996. The Act is meant to foster competition, to ensure
adequate services nationwide and to establish an administration system for
bandwidth frequencies. The German Telecommunications Act ended the network
monopoly of Deutsche Telekom. Telecommunications services, including the
provision of transmission capacity, may now be provided by anybody subject to
the requirements established in the German Telecommunications Act. The German
Telecommunications Act sets forth licensing requirements for the operation of
transmission paths which extend beyond the borders of a single parcel of
property and which are used to offer telecommunications services to the public.
The establishment and operation of cable television and broadband networks falls
within the scope of the licensing requirements set forth in the German
Telecommunications Act.
The German Telecommunications Act establishes the following four
different license classes:
- licenses for the operation of transmission lines for mobile radio
services to the public by the licensee or another entity (license
class 1: mobile radio license),
- licenses for the operation of transmission lines for satellite
radio services to the public by the licensee or another entity
(license class 2: satellite radio license),
- licenses for the operation of transmission lines for
telecommunications services to the public by the licensee or
another entity, the provision of which is not covered by license
classes 1 or 2 (license class 3), and
- licenses for voice telephony services to the public based on
self-operated telecommunications networks (license class 4).
The operation of cable television networks, including those with
two-way transmission paths with reverse path capability, falls within license
class 3. We believe that we have obtained all material class 3 licenses required
to operate our business.
Transmission lines for the operation of cable networks, including
level 3 and level 4 system networks, which have been operated in accordance with
the legal provisions in effect prior to the entry into force of the German
Telecommunications Act continue to be authorized and do not need to be licensed
under the German Telecommunications Act. The operation of an in-house network
(level 4) does not require a license.
The German Telecommunications Act subjects telecommunications
enterprises that are deemed to be "market dominating" to special provisions.
These provisions cover, in particular, the regulation of tariffs, business terms
and
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conditions and the granting of open network access, including interconnection
obligations. Tariffs for telecommunications services of market-dominating
enterprises are subject to the review of the regulatory authority. These tariffs
have to be based on the costs of efficient service provision. Detailed
regulations are included in the Ordinance on Telecommunications Tariff
Regulation of October 1, 1996. The business terms and conditions for
telecommunications services subject to license and for universal services are
also subject to the regulatory authority's control. The regulatory authority has
the right to object to business terms and conditions which are not in
conformance with relevant provisions of European Union law. Public
telecommunications carriers are required to interconnect their networks with
those of other carriers. Market-dominating public telecommunications carriers
are required to allow other users to access their networks or parts thereof.
Detailed regulations are included in the Ordinance on Special Network Access of
October 23, 1996.
The Telecommunication Customer Protection Ordinance of December 11,
1997 regulates the relationship between providers of telecommunications services
and their subscribers. It sets forth several specific obligations for
market-dominating providers and various obligations for all other providers. It
specifies, for example, rules for invoicing, universal services and quality
parameters. The Ordinance also invalidates contractual clauses which attempt to
limit subscribers' rights under the Ordinance.
Under the German Telecommunications Act, a person offering
telecommunications services for which no license is required must notify the
regulatory authority within one month of the start-up, modification or
termination of operations. We believe that we have complied with this
notification obligation.
Retransmission and channel line-up provisions; media and Internet
services. The retransmission of cable television programs within Germany through
private cable television and broadband networks is regulated at the joint-state
level pursuant to The State Treaty on Broadcasting within the united Germany, or
the State Broadcasting Treaty, and at the state level pursuant to the media laws
of the various German states. The State Broadcasting Treaty describes the
various states' authority to make decisions with respect to the assignment and
use of transmission capacities to be transformed into generally binding law by
way of the states' media legislation. The State Broadcasting Treaty also
provides that the retransmission of cable television programs which may be
received nationwide and which have been produced in accordance with applicable
European legal provisions must be permitted by the federal states within the
framework of existing technical capabilities. With the most recent amendments to
the State Broadcasting Treaty, which entered into force in April 2000, cable
television networks are obligated to transmit specific programs via digital
technology ("must-carry obligation")as long as the aggregate transmission
capacity for these transmissions does not exceed the capacity of four analog
television channels. In addition, cable network operators must guarantee that
one third of the capacity available in digital technology is used to transmit a
diverse selection of programs, including special-interest channels foreign
language channels that must be programs in their choice of programs to be
retransmitted ("can-carry obligation"). State laws generally provide that the
simultaneous retransmission of an unchanged and complete cable television
program is not subject to any licensing requirement, but does subject the
operator to an obligation to report the retransmission to the relevant state
media institution. Failure to comply with this reporting obligation may result
in a maximum fine of between DM500,000 (approximately EURO 255,645) and
DM1,000,000 (approximately EURO 511,292), depending on the German state in which
the violation occurs. To date, the state media authorities have not strictly
enforced this reporting obligation.
Broadcasting activity (which is defined to exclude the simultaneous
and unchanged retransmission of programming), such as the insertion of local
commercials, subjects the cable television or broadband operator to a different
regulatory regime. Private broadcasting companies require a broadcasting license
issued in accordance with the provisions of the State Broadcasting Treaty and
the media laws of the states. While the State Broadcasting Treaty sets forth the
framework for the regulation of private broadcasting, the state media laws set
forth detailed requirements with respect to diversity of opinion, observation of
constitutional principles, child protection, professional ethics and
restrictions on advertisement.
Private cable television and broadband operators are required to
observe channel line-up priorities established by the state media institutions
under the state media laws with reference to the technical capabilities of the
cable television or broadband networks in connection with the retransmission of
cable television programs. Channel line-up refers to the order in which the
various television and radio programs are fed into the channels of, and
retransmitted through, cable television networks. Generally, the channel line-up
priority has been established as follows:
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- programs which have been legally prescribed by the state;
- programs commonly received within the federal state (i.e., those
programs which may otherwise be received without additional
antennae);
- programs which may be received locally with the use of additional
antennae; and
- all other programs.
In addition, a number of state media laws have established priorities
for programs falling within the last-mentioned category for programming produced
within the European Union. The European Commission has stated that ranking
decisions granting German programs a higher priority than programs from outside
Germany could be discriminatory and contrary to European law.
In the past, problems have existed due to the common use of some
frequencies by the receiving and distribution systems of cable operators, on the
one hand, and aeronautical radio navigation and public safety services on the
other hand. After lengthy discussions, the regulatory authority announced in
July 2000 that a compromise was reached between the regulatory authority, the
German Air Navigation Services Organization, Deutsche Telekom and the German
Association of Private Cable Operators known as ANGA. Pursuant to this
compromise, the air navigation services have relocated some of their operating
frequencies and have initiated international coordination of the operating
frequencies that are used at three German airports. In addition, Deutsche
Telekom has implemented a frequency offset. ANGA has requested its members using
extended band channel 24 for systems with their own head-end located in the
approach areas of German airports, to either implement a shift in frequency or
to check and ensure that their systems do not exceed the 20 dBpW radiation
disturbance limit that is part of this compromise.
This compromise has resulted in the adoption of three new ordinances
governing the allocation, use and assignment of frequencies. The three new
ordinances entered into force in May 2001. Pursuant to the ordinance on the
allocation of frequencies, the free use (i.e., the use without an individual
permit, approval or other regulatory resolution) of frequencies between 9 KHz
and 30 MHz in and along conductors, including the cable networks we operate, is
permitted provided that specified conditions are met. These conditions include
that (1) the disturbing radiation emitted by the conductors does not exceed
identified limits and (2) the frequencies are not used for security purposes, as
identified by the German regulatory authority. If the above conditions are not
met with respect to a frequency, the German regulatory authority will decide on
a case by case basis whether that frequency may be used and may impose
restrictions or conditions on that use. This regulation may prevent us from
using some or all of the relevant frequency bands to retransmit programming over
our cable networks. Should this occur, we may need to make further investments
in our German networks in order to continue providing our current services.
With respect to frequencies between 30 MHz and 3 GHz, the above
conditions for the free use of frequencies in and along conductors will take
effect on July 1, 2003.
The German states have signed a State Treaty on new media services, or
the State Treaty on Media Services, which came into force in August 1997,
concurrently with the Teleservices Act. The State Treaty on Media Services and
the Teleservices Act basically constitute currently effective legislation
relevant to setting up and operating various types of Internet and
video-on-demand services. The State Treaty on Media Services imposes various
obligations on providers of media services, which are defined in the State
Treaty on Media Services as information and communication services addressed to
the general public. Teleservices are defined in the Teleservices Act as
information and communication services for individual use on the basis of
telecommunication transmission. Media services include distribution services
offering direct sale or lease of objects or services, known as teleshopping,
distribution services in the form of television text, radio text or similar text
services and other call-services which offer text, sound or pictures in
electronically stored form. Providers of these media services include persons
who offer their own or third-party media services or who provide access to media
services. To the extent that we are considered a provider of media services, we
may be subject to obligations under the State Treaty on Media Services. The
State Treaty on Media Services includes, among other things, rules on
responsibility for content, advertising, data protection and protection of
children and young adults. Providers of tele services are responsible under
general laws for content which they make available to others.
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The State Treaty on Media Services and the Teleservices Act have not,
to date, materially affected our ability to make independent business decisions
with respect to the rates charged for, or other matters relating to the
provision of, the services covered. There can be no assurance that legislation
will not materially influence our business decisions on these matters in the
future.
TELEPHONY DEREGULATION. The Telecommunications Act establishes
licensing requirements for the provision of voice telephony services to the
public on the basis of self-operated transmission paths. Regulations governing
licenses for voice telephony services came into effect in January 1998. If we
offer voice telephony or voice-over-IP services over our networks, we may have
to obtain a class 4 license, depending on how those services are provided.
DATA PROTECTION. Each of the German Telecommunications Act, the Act on
Data Protection in connection with Teleservices and the State Treaty on Media
Services contain provisions relating to data protection. In addition, the
Federal Act on Data Protection also applies. These laws set forth the rules on
how and under what conditions subscribers' personal data may be collected,
processed, used and forwarded to third parties. Each of these activities
requires either the subscribers' consent or a specific authorization in the
relevant laws. Another requirement is that personal data may be collected and
processed only for specific purposes, which must be disclosed to the subscribers
including the scope and the manner of processing data.
E-COMMERCE. In December 2001, the German Parliament adopted a new act
on electronic commerce. The act consists of various amendments to the current
Teleservices Act, the Act on Data Protection in connection with Teleservices and
the Act on Civil Procedure and seeks to harmonize these acts with the provisions
of the European Union e-Commerce Directive.
REGULATION IN THE NETHERLANDS
TELECOMMUNICATIONS AND MEDIA SERVICES. The following regulatory regime
in The Netherlands applies to telecommunications and media services.
- REGULATORY FRAMEWORK. The liberalization of the Dutch
telecommunications and cable television sector has generally
proceeded at a quicker pace than required by the European Union
directives. The Dutch Telecommunications Act took effect, with
the exception of a few provisions, in December 1998 and further
liberalized these sectors. The Dutch Telecommunications Act
governs, among other things, the installation and operation of
public telecommunications networks, which include cable
television networks, and the provision of telecommunications
services, including the provision of telephone and Internet/data
services. The provision of media services through the cable
television network, and more specifically content, is regulated
primarily by the Dutch Media Act, as amended, and the Media
Decree. The most important term in the Media Act is "program",
defined as an electronic product containing images or sound,
meant to be broadcast to and designated to be received by the
general audience or a part thereof, except for data services,
services that are only available on individual demand and other
interactive services. Agreements with municipalities and the
competition laws also impose restrictions on cable television
operators.
Under the new Dutch Telecommunications Act, the regulatory
authority, known as OPTA, is charged with regulation and dispute
settlement in relation to the provision of telecommunications
networks and services. An appeal to a decision of OPTA has to be
filed exclusively at the District Court of Rotterdam. Under the
media laws, media service providers are subject to content
requirements, which are overseen by the COMMISSARIAAT VOOR DE
MEDIA.
- REGISTRATION. The Dutch Telecommunications Act does not require a
license for the installation, maintenance or operation of a cable
network. Cable network operators need only to register with OPTA.
The registration does not give an operator any exclusive right.
Any registered person may install, maintain and operate a cable
network alongside an existing one. The Dutch Telecommunications
Act gives cable network operators and providers of other public
telecommunications networks, under a number of conditions and
restrictions, rights of way to install and maintain the network
concerned, which are identical to those previously exclusively
enjoyed by KPN, the incumbent telecommunications operator in The
Netherlands.
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- OWNERSHIP ISSUES. The Dutch Telecommunications Act provides that
the ownership of cables that have been installed in public and/or
private grounds and are intended to be used for a public
telecommunications network or a cable television network is
retained by the provider of the public telecommunications network
or cable television network concerned. This provision is
necessary because, as a general rule under the Dutch Civil Code,
the cables would, by accession, become part of the grounds in
which they are installed and the owner of the grounds concerned
would own the cables.
- PROGRAMMING. Pursuant to the Dutch Telecommunications Act and the
Media Act, a cable television network provider must transmit to
all its subscribers at least 15 programs for television and at
least 25 programs for radio, called the basic package, including
approximately seven television and nine radio mandatory channels.
The Media 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. The Media Authority may
grant an exemption from the obligation to transmit specified
programs if the financial burden on the provider would be
unreasonably high.
Our Dutch operating companies often purchased their cable
television networks from the local municipalities. Pursuant to
the terms of the agreements with the municipalities, our Dutch
operating companies were obligated to continue to provide basic
tier services of between 20 and 30 television channels, including
the 15 required under the media laws.
Cable television operators are allowed to transmit their own
programs within The Netherlands upon obtaining a broadcast
license from the Media Authority. The licensee must comply with
the advertising and sponsorship rules set forth in the media
laws, which are consistent with the European Union Television
Without Frontiers Directive.
- PROGRAM COUNCIL. Each municipality has to establish a program
council, which is an independent authority and provides the cable
network operator with advice concerning the 15 television
programs and 25 radio programs in its basic package. The cable
operator is only allowed to deviate from the advice in a limited
number of onerous circumstances. The cable network operator may
ask the program council for non-binding advice concerning the
programs distributed outside the scope of the basic package. When
several cable networks are connected and, in principal, function
as one cable network, a joint program council may be established.
- MONITORING MEDIA CONCENTRATIONS. The Dutch government recently
assigned the Media Authority a monitoring task with regard to,
among other things, media concentrations. The Media Authority has
to report on an annual basis on issues like vertical
concentrations between content producers, content providers and
rights owners. Special focus will be on sports and movie rights.
The report may authorize the Dutch Independent Telecommunications
Authority and/or the Dutch Competition Authority to take
appropriate measures in this regard.
- NETWORK ACCESS SERVICE PROVIDERS. The Dutch government has
presented a policy memorandum (KABEL EN CONSUMENT: MARKTWERKING
EN DIGITALISERING) in which it is stated that the government will
encourage competition in the near future between several types of
telecommunication infrastructures and competition on existing
cable infrastructures. Existing cable operators will have to
allow third-party service providers (e.g., Internet access
providers) to offer services to end users via their existing
cable networks. This implies, when the proposals are agreed upon,
we would have to offer third parties access to our networks in
The Netherlands. Existing competition regulation and the EU Open
Network Provision directives, or ONP, will be similarly applied
to cable infrastructures. Following the presentation of the
policy memorandum, a proposed bill was presented that formalizes
the guidelines contained in the policy memorandum. In connection
with the bill, the Dutch competition authority and OPTA issued a
joint consultation on the Internet market. The preliminary
conclusion of the consultation is that there is a separate market
for broadband Internet access and/or Internet network access.
Depending on the outcome of the consultation and/or the wording
of the new bill, OPTA may be authorized to impose obligations
pursuant to the ONP regulation. However, these obligations would
not be imposed in an "emerging market".
- NETWORK ACCESS PROGRAM PROVIDERS. In addition to the guidelines
in the proposed policy memorandum, OPTA will be authorized to
require designated cable network operators to provide transport
capacity to program providers. The proposed bill also appears to
regulate services that are closely linked with the program for
which access is requested.
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- PRICE REGULATION. The Media Act authorizes the competent minister
to set maximum price levels for basic tier services. This
authority has not, however, been exercised in The Netherlands.
Furthermore, often the municipality contracts regulate the
maximum subscription price for the duration of their contracts
with Multikabel.
TELEPHONY AND INTERNET/DATA SERVICES. The following regulatory regime
applies to telephony and Internet/data services.
- REGULATION FRAMEWORK. Until recently, the fixed
telecommunications infrastructure was a statutory monopoly of
KPN. As described above, the Dutch telecommunications sector has
been liberalized in advance of and in accordance with European
Union telecommunications policy and cable television networks may
now be used for the provision of all telecommunications services.
Number portability was introduced in The Netherlands in 1999.
- INTERCONNECTION. The Dutch Telecommunications Act generally
implements European Union telecommunications policy on
interconnection.
- PRICE REGULATION. While telephony services offered by a cable
company are not currently subject to price regulation, the prices
of its competitor, KPN, are. OPTA indicated that KPN should
reduce its end-user tariffs in accordance with principles of cost
orientation as set forth by OPTA during 1999. In September 1999,
OPTA introduced its new price cap mechanism, deciding that KPN
was to reduce a basket of its nominal end user rates (not
including international rates) by 5.3% per year for the next
three years. KPN may adjust its resulting rates for inflation,
which must lead to a net decrease of at least 3.3% in the first
year. The fact that KPN's end-user tariffs for all of its basic
telephony services (with the exception of international calls,
but including ISDN) must be cost orientated may have a negative
effect on cable companies' ability to compete.
In a decision on June 29, 2001, OPTA determined the tariffs KPN
may charge for interconnection with its fixed telephony network
in the period between July 1, 2001 through June 30, 2002. Some
rates were decreased and others were increased or were further
broken down into cost components. The overall impact of these
changes on the costs for cable companies to interconnect with KPN
is uncertain.
- INTERNET/DATA SERVICES. Under the Dutch Telecommunications Act,
Internet/data services are regulated as public telecommunications
services. As such, our Dutch operating systems will have to
register with OPTA as providers of public telecommunications
services and/or networks and our prices for these services are
not regulated.
e-COMMERCE. THE FOLLOWING REGULATORY REGIME APPLIES TO E-COMMERCE IN
THE NETHERLANDS
- COPYRIGHT AND RELATED RIGHTS DIRECTIVE. The European Union
Directive on copyright and related rights in the information
society and the amended proposal of May 1999 intend to ensure and
harmonize a high level of copyright protection for creators of
copyright protected works and related entities throughout the
European Union with respect to the transferability of copyright
protected works. The Copyright Directive will have particular
importance for all e-commerce. The Copyright Directive develops
further the exclusive distribution rights of copyright owners. It
also creates some exemptions from these exclusive distribution
rights, such as by distinguishing between digital and analog as
well as temporary and permanent copies and by granting some
privileges for private use, research and scientific purposes and
public education. Further, the Copyright Directive addresses the
legal protection of technical facilities for the protection of
copyright works. The Copyright Directive envisions an
implementation into the national laws of the Member States by
December 31, 2001.
- e-COMMERCE DIRECTIVE. The recently adopted e-Commerce Directive
on legal aspects of information society services, and in
particular electronic commerce in the internal market, determines
some of the essential legal parameters for the development and
operation of e-commerce in the internal market. The Member States
have to implement the Directive into national legislation before
January 17, 2002. The e-Commerce Directive is not yet a part of
national law and the Dutch government has not yet prepared
legislation to implement the e-Commerce Directive.
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- DISTANCE CONTRACTS DIRECTIVE. The Distance Contracts Directive
sets out the legal framework for consumer protection in some
fields of e-commerce (excluding, among others, financial
services, telecommunications services, transportation services
and others). Consumer protection, as regulated by the Distance
Contracts Directive, will be of relevance for direct and indirect
e-commerce transactions, in particular business-to-consumer
transactions. Any vendor engaging in business-to-consumer
transactions in the European Union must make sure that the
Vendor's business is operated in conformity with the minimum
requirements of the Distance Contracts Directive, unless member
states set out higher legal thresholds with regard to
business-to-consumer transactions when implementing the Distance
Contracts Directive. In The Netherlands, no higher standards from
those in the Distance Contracts Directive, which was implemented
by act of December 21, 2000, were included in the Dutch Civil
Code. The Netherlands is in the process of implementing the
Distance Contracts Directive in the Dutch Civil Code. Germany did
so on June 27, 2000. The Distance Contracts Directive applies to
each contract negotiated at a distance between a professional
business and a consumer and involving the use of one or more
means of distance communication. The various means of
communication have to be used as part of an organized distance
sales or service provision scheme not involving the simultaneous
presence of the supplier and the consumer. The aim of the
Distance Contracts Directive is to ensure that the means of
distance communication are not used to reduce the amount of
information provided to the consumer. Accordingly, the Distance
Contracts Directive determines the information that is required
to be sent to the consumer prior to the conclusion of an
agreement or, ultimately, during the performance of the contract
or at the time of delivery of the goods. The Distance Contracts
Directive expressly states that the consumer may not waive the
rights conferred on him by the enactment of this directive into
national law.
REGULATION IN THE EUROPEAN UNION
All member states of the European Union, or EU, are required to enact
national legislation to implement directives issued by the EU. Regulations
issued by the EU have had, and will continue to have, a material effect on the
way in which cable operators offer services. For example, EU harmonization and
liberalization measures were responsible for cable operators being able to offer
telephony, Internet and video services.
In February 2002, the European Parliament adopted a "New Regulatory
Framework", consisting of four Directives (Framework, Access and
Interconnection, Authorization, Universal Service). This new framework, which
also applies to cable television networks, attempts to decrease national
variations in regulations and licensing systems and further increase market
competition by harmonization of licensing procedures, reduction of
administrative fees, providing for easier access and interconnection, and
reduction of regulatory burdens for telecommunications companies. The member
states will have to implement the new regulatory framework within 15 months
after the entry into force of the directives. We believe that we will benefit
from a simpler and more coherent regulatory regime for all of our services in
both The Netherlands and Germany.
VIDEO SERVICES--CONDITIONAL ACCESS. In order to enable further
competition in pay television services and accelerated development of advanced
television services, the Council of the European Union and the European
Parliament passed the Advanced Television Standards Directive in 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 conditional access systems are
required to make them available on a fair, reasonable and non-discriminatory
basis to other television service providers, such as broadcasters. This
obligation is carried forward in the new Access and Interconnection Directive
and adapted to recent technological developments.
REGULATION OF THE INTERNET AND E-COMMERCE. In June 2000, the European
Parliament and Council adopted a directive on a number of legal aspects of
information society services, in particular electronic-commerce, within the
European Union, known as the e-Commerce Directive. The purpose of the e-Commerce
Directive is to ensure the free movement of information society services within
the European Union. To achieve this purpose, the e-Commerce Directive contains
provisions regarding jurisdictional matters, authorization of information
society services, the scope of information to be provided within the framework
of information society service, the conclusion of contracts by electronic means
and the liability of service providers. As the provision of Internet access,
e-commerce, video-on-demand services, and, in particular, the selling of goods
on-line qualify as information society services, the e-Commerce Directive will
also have an impact on our business. To harmonize the member states' approach to
jurisdictional issues, the e-Commerce Directive introduced the
43
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rule of the home country of the information service provider. This means that in
the so-called coordinated field, a service provider is subject only to the rules
and regulations set by its home country. The coordinated field concerns
requirements that apply to the taking up of the activity and the pursuit of the
activity of a provider of information society services, including the service
provider's liability. However, because of the many exceptions to the rule of the
home country, we intend to continue to comply with the relevant laws and
regulations which are in force in Germany and The Netherlands. The e-Commerce
Directive also contains provisions regulating the liability of providers of
information society services, i.e., providers of mere conduit, caching and
hosting services. These provisions prohibit the member states to impose a
general obligation on the providers of mere conduit, caching and hosting
services to monitor the information that they transmit. Except for the directive
on e-commerce, no other Internet-specific regulations have been issued, to date,
at the level of the European Union.
However, more stringent data protection requirements may be imposed by
a directive on Data Protection, which was also part of the regulatory package,
but has not been adopted to date. Among the issues discussed in this directive
are unsolicited marketing communications and the extent to which a network or
service operator may use traffic data from its customers for marketing purposes
or for the provision of value-added services. As currently drafted, the
directive requires prior consent from customers before any such activity may be
undertaken.
TELEPHONE AND INTERNET/DATA SERVICES
LIBERALIZATION OF TELECOMMUNICATIONS SERVICES AND INFRASTRUCTURE. A
central aim of the liberalization process has been to reduce the monopoly power
of the incumbent telecommunications operators in order to introduce competition
in the European telecommunications market. Liberalization measures have been
adopted under the European Union Treaty's competition rules and harmonization
measures have been put in place through the adoption of Open Network Provision
directives, or ONP.
CABLE TELEVISION NETWORKS DIRECTIVE. Following the European
Commission's Services Directive of June 1990, the exclusive rights of incumbent
operators to provide telecommunications services were gradually removed so that
competing operators and service providers would be entitled to offer all
telecommunications services other than public voice telephone. The incumbent
telecommunications operators invariably owned the national networks, however,
and the lack of an alternative infrastructure to provide these liberalized
services operated as a major barrier to entry into the market by competitors. In
an effort to overcome this barrier, in October 1995, the European Union
introduced the Cable Television Networks Directive, which required member states
to remove existing restrictions on the use of cable television networks to
provide telecommunications services other than public voice telephony services.
As a result, cable television operators became able to use their networks to
provide telecommunications services except for public voice telephony. In 1996,
the European Commission issued the Full Competition Directive, which required
the European Community member states to remove all remaining exclusive rights
for the provision of telecommunications services including voice telephony by
January 1, 1998. The establishment and provision of telecommunications networks
were also liberalized under this directive. As a result of this directive, we
may establish and provide telecommunications networks and/or services, including
public voice telephone and Internet/data services, through our cable networks,
subject to obtaining the necessary licenses and authorizations.
Under the Cable Television Networks Directive, telecommunications
operators that have exclusive rights to provide cable television network
infrastructure in a given area and achieve annual revenues in the relevant
telecommunications market of more than EURO 50,000,000 must account separately
for their telecommunications services and any cable television services. In
Germany, under national law, the requirement to separate the accounting for the
various telecommunications and cable television operations applies to companies
which are, pursuant to the German Competition Act, in a dominant position on any
one sub-market within the telecommunications market, including the cable
television market. Unlike the European Union Directive, this requirement applies
independent from the level of revenues generated on these markets. We will
likely qualify as a market player having a dominant position on various cable
television markets in Germany and we will likely be required to separate our
accounting system into subsystems for each of the cable television operations
and other telecommunications operations. The German regulatory authority may
also impose guidelines on us as to the details of the accounting separation. In
The Netherlands, 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 we
achieve the requisite turnover in The Netherlands, we would become subject to
these requirements in that country as well.
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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 Interconnection
Directive in 1997, which sets forth the general framework for interconnection,
including general obligations for telecommunications operators to interconnect
with their networks. The provisions of this directive form the basis of
telecommunications licensing, including any license we might hold or seek in
either Germany or The Netherlands. The directive contains provisions on number
portability, supplementary charges to contribute to the costs of universal
service obligations and other interconnection standards. As a result, if the
principles in the directive are fully applied, we should be able to interconnect
with the public fixed network and other major telecommunications networks on
reasonable terms in order to provide these services when and if we choose to
provide them. 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.
The new Directive on Access and Interconnection will apply to all
forms of electronic communications networks, including cable television
networks. This means that, once this new directive is implemented, we will also
be subject to the obligation to negotiate and grant access to, and
interconnection with, our networks if requested by other authorized
communications network operators providing publicly available electronic
communications services. Moreover, a national regulatory authority may, under
certain conditions, impose obligations on us to grant access to, and use of,
specific network elements and associated facilities, inter alia in situations
where the national regulatory authority considers that denial of access or
unreasonable terms and conditions having a similar effect would hinder the
emergence of a sustainable competitive market at the retail level, or would not
be in the end-user's interest. In particular, it will be possible to impose
network access obligations on us to the extent that is necessary to ensure
accessibility for end-users to digital radio and television broadcasting
services.
LICENSING. European Union telecommunications policy has also attempted
to harmonize the licensing requirements for the provision of public
telecommunications services. As a result of the Licensing Directive, which
became effective on December 31, 1997, member states are required to adopt
national legislation so that providers of telecommunications service generally
require either no authorization or a general authorization which is conditional
upon essential requirements, such as the security and integrity of the network's
operation. Licensing conditions and procedures must be objective, transparent
and non-discriminatory. Member states may issue individual licenses in some
situations. For example, the provision of public voice telephony services and
the establishment or provision of public telecommunication networks may be
subject to individual licenses. In addition, telecommunications operators with
significant market power may be required by member states to hold individual
licenses carrying more burdensome conditions than the authorizations held by
other providers. Significant market power is typically determined to be 25% or
more of the relevant market. License fees can only include administrative costs,
except with respect to scarce resources where additional fees are allowed.
The new directive on the authorization of electronic communications
networks and services, or the new Authorization Directive, once implemented by
the member states, will simplify, render more transparent and less expensive the
licensing of the establishment of electronic communications networks and the
provision of electronic communications networks and services, i.e., cable
television networks and services. Individual licenses will be required only in
connection with the assignment of radio frequencies and numbers. The new
Authorization Directive replaces the Licensing Directive.
VIDEO SERVICES
- VIDEO SERVICES THROUGH TELECOMMUNICATIONS NETWORKS. In Germany,
the concept of geographic franchise areas does not exist. Most of
our operating companies in Germany are one of several operators
which may serve customers in a given geographic area. Operators
compete for long term service contracts' with Housing
Associations. In The Netherlands, geographic franchises are
awarded. As with the telecommunications sector, the cost of
building a network to provide television services is a
considerable disincentive to potential new entrants in the
television services market. Our operating companies may face
competition in the long term in their franchise areas from new
entrants providing television 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 television services through its fixed networks.
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- CONDITIONAL ACCESS. In order to enable further competition in pay
television services and accelerated development of advanced
television services, the EU Council and Parliament passed the
Advanced Television Standards Directive in 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 television service providers, such as broadcasters. This
obligation is carried forward in the new Access and
Interconnection Directive.
- BROADCASTING. The Television Without Frontiers Directive adopted
in October 1989 and amended in June 1997, is intended to
introduce freedom of broadcasting in the European Union.
Generally, broadcasts emanating from and intended for reception
within a country have to respect the laws of that country. Under
the directive, EC member states are required to allow broadcast
signal of broadcasters in other member states to be freely
transmitted within their territory so long as the broadcaster
complies with the law of the originating, member state. The
directive also establishes quotas for the transmission of
programming produced in Europe and programs made by European
producers who are independent of broadcasters. Television
advertising and sponsorship in member states must comply with
specific minimum rules and standards, although member states may
set more detailed and stricter rules for some matters.
In addition to the Television Without Frontiers Directive, the other
primary source of European regulation affecting television broadcasting is the
1989 European Convention on Transfrontier Television, or the Convention. The
Convention is effective in those countries that have ratified it. Germany has
ratified and The Netherlands has signed but not ratified the Convention. The
Convention currently provides that the country in which a broadcaster uplinks
its programming to the satellite has jurisdiction over that broadcaster.
A change to the Convention, or the Amendment, was agreed by parties to
the Convention in October 1998, but it will not enter into force until its
acceptance by France. The Amendment will bring the Convention into conformity
with the Television Without Frontiers Directive's establishment test, providing
that a broadcaster should be regulated primarily by the authorities in the
member country in which the broadcaster is established. Additionally, the
Amendment would provide that when a broadcaster's channel is wholly, or
principally, directed at a country other than where it is established, for the
purpose of evading the laws of that country in the areas covered by the
Convention, the broadcaster would become subject to the laws of the country of
reception. The Amendment allows parties to the Convention to designate that some
important events (e.g. major sporting events) cannot be broadcast exclusively by
a single television station so as to deprive a large proportion of the public of
that member country from seeing the event live or on a deferred coverage basis
on free-to-air television.
C. ORGANIZATIONAL STRUCTURE
The following is a list of our significant subsidiaries and our
proportion of ownership interest in each subsidiary:
<Table>
<Caption>
% OF
ORGANIZED UNDER THE LAWS OF GERMANY OWNERSHIP
----------------------------------- ---------
Ad-media GmbH & Co. Local TV KG ...................................... 100
Kabelcom Aachen Gesellschaft fur Kabelkommunikation mbH .............. 100
Kutz-Kabel Service GmbH .............................................. 51(1)
PrimaCom Kabelbetriebsges. mbH & Co. KG Region Berlin ................ 100
PrimaCom Kabelbetriebsges. mbH & Co. KG Region Leipzig ............... 100
PrimaCom Kabelbetriebsges. mbH & Co. KG Region Sudwest ............... 100
PrimaCom Management GmbH ............................................. 100
PrimaCom Marketing & Development GmbH ................................ 100
PrimaCom Mettlach GmbH & Co. KG ...................................... 100
PrimaCom Nettetal GmbH & Co. KG ...................................... 100
PrimaCom Network & Operations GmbH ................................... 100
PrimaCom Nord GmbH ................................................... 100
PrimaCom Osnabruck mbH & Co. KG ...................................... 100
</Table>
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<Page>
<Table>
<Caption>
% OF
ORGANIZED UNDER THE LAWS OF GERMANY OWNERSHIP
----------------------------------- ---------
PrimaCom Projektmanagement GmbH ...................................... 100
PrimaCom Projektmanagement GmbH& Co. KG .............................. 100
PrimaCom Region Angelbachtal GmbH & Co. KG ........................... 100
PrimaCom Region Berlin GmbH & Co. KG ................................. 100
PrimaCom Region Dresden GmbH & Co. KG ................................ 100
PrimaCom Region Leipzig GmbH & Co. KG ................................ 100
PrimaCom Region Magdeburg GmbH & Co. KG .............................. 100
PrimaCom Region Schwerin GmbH & Co. KG ............................... 100
PrimaCom Region Wiesbaden GmbH ....................................... 100
PrimaCom Stormarn GmbH & Co. KG ...................................... 100
PrimaCom Sudwest I GmbH & Co. KG ..................................... 100
PrimaCom Sudwest II GmbH ............................................. 100
PrimaCom Verl GmbH & Co. KG .......................................... 100
primaTV broadcasting GmbH ............................................ 100
Telekommunikations GmbH Kirchheimbolanden ............................ 100
PrimaCom Niedersachsen GmbH .......................................... 100
Telekommunikations GmbH Eisenhuttenstadt ............................. 50.5
KabelCom Halberstadt GmbH ............................................ 72.6
EBH Antennenbetriebs GmbH ............................................ 50.5(2)
ORGANIZED UNDER THE LAWS OF THE NETHERLANDS...........................
Multikabel N.V ....................................................... 99.95(3)
Communikabel N.V ..................................................... 99.95(3)
PrimaCom Netherlands Holding B.V ..................................... 100
QuickNet B.V ......................................................... 99.95
Noord-Holland Digital B.V ............................................ 99.95
</Table>
----------
(1) acquired additional 49% in first quarter 2002 for approx
EURO 3,400,000
(2) acquired additional 49.5% in first quarter of 2002 for
approximately EURO 90,000
(3) represents an approximate figure
D. PROPERTY AND EQUIPMENT
In connection with the operation of our cable networks in Germany, we
own or lease real property for signal reception sites (antennae towers and
head-ends) and business offices. Our central operation center is located in
approximately 1,657 square meters of leased space in Mainz, Germany. We operate
our Wiesbaden/Mainz regional network from another office building of
approximately 3,000 square meters that we own in Mainz.
In connection with the operation of our cable networks in The
Netherlands, we own real property for signal distribution sites.
In Germany and The Netherlands we own substantially all of our cable
and broadband networks and we lease the remaining fiber optic cable pursuant to
long-term leases. Our owned cables and those we lease generally are buried in
underground ducts or trenches. The physical components of our networks require
maintenance and periodic upgrading to keep pace with technological advances.
We believe that our properties, both owned and leased, are in good
condition and are suitable and adequate for our business operations. All of our
operating assets are pledged as collateral under the senior secured credit
facility.
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
OVERVIEW
The following discussion refers to our financial performance for the
year ended December 31, 2001 as compared to our financial performance for the
year ended December 31, 2000 and our financial performance for the year ended
December 31, 2000 as compared to the financial performance for the year ended
December 31, 1999. It also contains a discussion of our liquidity and capital
resources from January 1, 2001 and for the near future.
We measure our financial performance in large part with reference to
EBITDA and adjusted EBITDA. We define EBITDA as earnings (loss) before
discontinued operations, extraordinary items, cumulative effect of change in
accounting principle, equity earnings (loss) in affiliate minority interests,
gain (loss) on disposal of fixed assets, net interest expense, income taxes and
depreciation and amortization. We define adjusted EBITDA as EBITDA plus non-cash
compensation expense related to share options. Other participants in the cable
and broadband industries also use EBITDA and adjusted EBITDA, defined in a
similar but often not exactly comparable manner, as measures of performance. We
believe that EBITDA and adjusted EBITDA are useful supplements to net income and
other income statement data in understanding cash flows generated from
operations that are available for taxes, debt service and capital expenditures
and because they are the most commonly used measures in the cable television and
broadband industries to analyze and compare cable television and broadband
companies on the basis of operating performance, leverage and liquidity and
because the senior secured credit facility requires us to meet financial tests
measured by EBITDA and adjusted EBITDA. However, because these terms may not be
defined by these other companies in exactly the same way as defined by us or may
reflect different adjustments, analysis and comparison of these measures may be
difficult. EBITDA and adjusted EBITDA are not U.S. GAAP measures of income
(loss) or cash flow from operations and should not be considered as alternatives
to net income as an indication of its financial performance or as alternatives
to cash flow from operating activities as measures of its liquidity. While we
have historically maintained positive EBITDA and adjusted EBITDA, the capital
intensive nature of its broadband network build out and start-up-costs of our
new products and services may cause our EBITDA and adjusted EBITDA to decrease
significantly in the future until we start to recognize increased revenue from
the value-added services offered over our broadband networks.
INTRODUCTION OF THE EURO. 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
was introduced as the official currency of these countries on January 1, 2002.
The introduction of the Euro did not materially affect our cable television or
broadband operations.
SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements
are prepared in accordance with accounting principles generally accepted in the
United States, which require the Company to make estimates and assumptions (see
Note 2 of the notes to the consolidated financial statements). The Company
believes the following significant accounting policies involve the most
significant judgment and estimates used in the preparation of its consolidated
financial statements.
IMPAIRMENT OF PROPERTY AND EQUIPMENT, RELATED GOODWILL AND INTANGIBLE
ASSETS: In order to assess impairment of property and equipment, related
goodwill and intangible assets under U.S. GAAP, PrimaCom applies Statement
Financial Accounting Standards (SFAS) No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF". If management
has concluded that impairment indicators exist, PrimaCom tests for impairment by
comparing the sum of the future undiscounted cash flows derived from an asset or
a group of assets to their carrying value. If the carrying value of the asset or
the group of assets exceeds the sum of the future undiscounted cash flows,
impairment is considered to exist and an impairment charge will be measured and
recorded. An impairment charge is measured using an estimation of the assets'
fair value, typically using a discounted cash flow method. During 2001, the
Company recorded an impairment charge of EURO 7,654,000 related to two of its
networks in the German segment.
The identification of impairment indicators, the estimation of future
cash flows and the determination of fair values for assets or groups of assets
requires management to make significant judgments concerning the identification
48
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and validation of impairment indicators, expected cash flows and applicable
discount rates. If actual results differ from these estimates, or if PrimaCom
adjusts these estimates in future periods, operating results could be
significantly affected.
On January 1, 2002, SFAS No. 142, "GOODWILL AND OTHER INTANGIBLE
ASSETS" became effective and as a result, PrimaCom will no longer continue to
amortize goodwill. In lieu of amortization, PrimaCom is required in early 2002
to perform an initial impairment review of goodwill and perform an annual
impairment review thereafter. PrimaCom expects to complete its initial review
during the first half of 2002. The implementation of this Statement could result
in additional impairment of the Company's goodwill or other intangible assets
recorded at December 31, 2001. For further information regarding new accounting
standards, including SFAS No. 142, please refer to the New Accounting Standards
footnote in the consolidated financial statements.
IMPAIRMENT OF LONG-TERM INVESTMENTS: Under U.S. GAAP, if a long-term
investment's fair value declines below cost, the investor must determine whether
there is adequate evidence to overcome the presumption that the decline is other
than temporary. Such evidence may include:
a) Recoveries in fair value subsequent to the balance sheet date;
b) the investee's financial performance and near-term prospects (as
indicated by factors such as earnings trends, dividend payments,
asset quality and specific events), and
c) the financial condition and prospects for the investee's
geographic region and industry.
The evaluation of whether a decline in fair value is other than
temporary requires considerable management judgement.
DEFERRED TAXES: Under U.S. GAAP, deferred taxes are recorded for
temporary differences, including the future tax benefit of net operating loss
carryforwards. In addition, under U.S. GAAP, PrimaCom records a valuation
allowance to reduce its net deferred tax assets to the amount that will more
likely than not be realized. PrimaCom has considered, for U.S. GAAP purposes,
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for a valuation allowance. In the event PrimaCom were to
determine that it would be able to realize its deferred tax asset in the future
in excess of their recorded amounts, an adjustment to the deferred tax asset
would increase income in the period in which such determination was made.
Similarly, should PrimaCom determine that it would not be able to realize all or
part of its net deferred tax asset in the future, an adjustment to the deferred
tax asset would be charged to expense in the period such determination was made.
The evaluation of net deferred tax assets requires considerable management
judgment.
NEW ACCOUNTING STANDARDS. In June 2001, the Financial Accounting
Standards Board authorized the issuance of SFAS No. 141, BUSINESS COMBINATIONS
and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. SFAS No. 141 requires
the use of the purchase method of accounting for all business combinations
initiated after June 30, 2001. SFAS No. 141 requires intangible assets to be
recognized if they arise from contractual or legal rights or are "separable",
i.e., it is feasible that they may be sold, transferred, licensed, rented,
exchanged or pledged. As a result, it is likely that more intangible assets will
be recognized under SFAS No. 141 than its predecessor, APB Opinion No. 16,
although in some instances previously recognized intangibles will be subsumed
into goodwill.
Under SFAS No. 142, goodwill will no longer be amortized on a
straight-line basis over its estimated useful life, but will be tested for
impairment on an annual basis and whenever indicators of impairment arise. The
goodwill impairment test, which is based on fair value, is to be performed on a
reporting unit level. A reporting unit is defined as an SFAS No. 131 operating
segment or one level lower. Goodwill will no longer be allocated to other
long-lived assets for impairment testing under SFAS No. 121, "ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF."
Additionally, goodwill on equity method investments will no longer be amortized;
however, it will continue to be tested for impairment in accordance with
Accounting Principles Board Opinion No. 18, "THE EQUITY METHOD OF ACCOUNTING FOR
INVESTMENTS IN COMMON STOCK." Under SFAS No. 142, intangible assets with
indefinite lives will not be amortized. Instead they will be carried at the
lower of cost or market value and tested for
49
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impairment at least annually. All other recognized intangible assets will
continue to be amortized over their estimated useful lives.
SFAS No. 142 is effective for fiscal years beginning after December
15, 2001, although goodwill on business combinations consummated after July 1,
2001 will not be amortized. On adoption, the company may need to record a
cumulative effect adjustment to reflect the impairment of previously recognized
intangible assets. In addition, goodwill on prior business combinations will
cease to be amortized. The Company will apply the new rules for goodwill and
other intangible assets beginning in the first quarter of 2002. Application of
the non-amortization provisions is expected to result in a decrease in net loss
of approximately EURO 35,300,000 per year. During 2002, the Company will perform
the first of the required impairment tests of goodwill during the first half of
2002. However, the Company has not yet determined when the effect of these tests
will be on its earnings and financial position.
YEARS ENDED DECEMBER 31, 2001 AND 2000
REVENUES. Revenues primarily include monthly subscription fees and to
a lesser extent installation and connection fees related to our basic analog
cable television service. Revenue also includes monthly subscription fees and to
a lesser extent installation and connection fees related to our high speed
Internet access service and digital television service, which in turn includes
revenue from both near-video and video-on-demand services. We also earn monthly
subscription fees for data communication services provided to small-and
medium-sized businesses and schools in The Netherlands. Other notable sources of
revenue include signal delivery fees charged to other cable television operators
for delivery of signal to their networks, carriage fees paid by program
producers for the distribution of their programs to our customers, and other.
Revenues increased by 33.1% from EURO 124,343,000 in 2000 to EURO
165,496,000 in 2001. The primary factors which impacted revenue growth in 2001
were the acquisition of Multikabel in The Netherlands in September 2000,
QuickNet in The Netherlands in July 2001 and several small networks in Germany,
the increases of Internet and digital services and rate increases for basic
anolog cable television service.
<Table>
<Caption>
2000 2001
---- ----
Homes passed by coaxial 450 MHz networks ............... 1,393,870 1,404,049
Analog cable television subscribers served by 450 MHz .. 908,388 904,452
Homes passed by fiber .................................. 523,000 560,819
Ready-for-service homes 862 MHz networks ............... 412,538 440,883
Analog cable television subscribers served by 862 MHz .. 391,538 400,042
Digital television subscribers ......................... 4,570 11,875
Internet subscribers ................................... 20,489 34,078
Data communication subscribers ......................... 200 788
--------- ---------
Total revenue generating subscribers ................... 1,325,185 1,351,235
========= =========
</Table>
We acquired Multikabel on September 18, 2000. For the year ended
December 31, 2000, we only included three months of Multikabel's results of
operations beginning October 1, 2000. For the year ended December 31, 2000,
Multikabel contributed EURO 8,838,000 to our revenue. For the year ended
December 31, 2001, Multikabel made a full year's contribution to revenue of EURO
45,168,000. For comparative purposes, Multikabel recorded revenue for the entire
year ended December 31, 2000 of EURO 33,359,000. Increases in basic cable
television rates and customers, high-speed Internet access rates and customers,
digital television customers, data communication customers and other revenue
account for the growth in Multikabel's revenue. In Germany, we increased revenue
by 4.2% from EURO 115,505,000 in 2000 to EURO 120,328,000 in 2001. Increases in
basic cable customers through acquisitions and increases in high-speed Internet
access and digital television customers, coupled with rate increases, account
for the growth.
In relation to product segmentation, revenue contributed by our basic
analog cable television product increased by 24.0% from EURO 116,880,000 in 2000
to EURO 144,977,000 in 2001. The primary factor responsible for the growth was
the inclusion of Multikabel for a full year in 2001. Multikabel contributed EURO
31,018,000 of analog cable television revenue in 2001 compared to EURO 7,268,000
in 2000. For comparison purposes, Multikabel generated EURO 28,658,000 of basic
analog cable television revenue for the full year ended December 31, 2000. The
organic growth was derived from a small
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increase in average analog cable television subscribers of approximately 4,314
from 296,538 in 2000 to 300,852 and an increase in average revenue per
subscriber from EURO 8.20 to EURO 8.60. Revenue derived from basic analog cable
television in Germany increased by 4.0% from EURO 109,612,000 to EURO
113,959,000. An increase in average basic subscribers under management of
approximately 51,279 offset a decline in average revenue per subscriber from
EURO 9.60 in 2000 to EURO 9.46 in 2001. The increase in average subscribers
under management was primarily the result of acquisitions of small cable
television networks in Germany in 2000 and to a lesser extent in 2001. The
decline in average revenue per subscriber was the result of acquiring networks
which had lower average revenue per subscriber at the time of acquisition than
our other networks. We expect the number of subscribers taking the basic analog
cable television service to remain stable over the coming years in The
Netherlands and Germany. Significant increases would only result from
acquisitions in Germany and/or The Netherlands, which we do not anticipate due
to financial constraints. Single digit revenue growth will be achieved through
increasing rates for the service to coincide with inflation or improvements in
the product offering.
Revenue from high-speed Internet access services increased from EURO
745,000 in 2000 to EURO 6,755,000 in 2001. The primarily factors responsible for
the increase were the inclusion of Multikabel for a full year, the acquisition
of QuickNet on July 1, 2001 and increases in the number of subscribers taking
the service and rates charged for the service.
For the year ended 2000 Multikabel contributed EURO 370,000 of
high-speed Internet access revenue compared to EURO 5,732,000 in 2001. For
comparison purposes, Multikabel generated EURO 802,000 of high-speed Internet
revenue for the full year ended December 31, 2000. Strong growth in the
subscriber base for this product also made a significant contribution. Total
high-speed Internet subscribers in The Netherlands increased by 85.3% from
14,938 at December 31, 2000 to 27,687 at December 31, 2001. Penetration of
high-speed Internet access customers from ready-for-service homes increased from
5.0% in 2000 to 8.7% in 2001. The other significant contributor to revenue
growth from the high-speed Internet access service in Multikabel was the
increase in average revenue per subscriber from EURO 8.22 in 2000 to EURO 22.41
in 2001. The primary factor responsible for this increase was the acquisition of
QuickNet. Prior to July 1, 2001 QuickNet provided high-speed Internet access
services to our customers through an affiliation agreement. Under the terms of
this agreement, QuickNet directly served the high-speed Internet customers and
paid Multikabel approximately EURO 8.50 per customer for the customers QuickNet
served on our network. After our acquisition of QuickNet on July 1, 2001, the
affiliation agreement was cancelled and Multikabel began to serve these
customers directly. In addition to this structural change, we were also able to
increase the monthly rates for the high-speed service.
In Germany, revenue contributed from the high-speed Internet access
service increased by 172.8% from EURO 375,000 in 2000 to EURO 1,023,000 in 2001.
The primary factor was our increase in average customers. At December 31, 2000,
we served 5,551 customers (including 4,240 dial-up customers) compared to 6,391
(including 3,023 dial-up customers) at December 31, 2001. Penetration of
high-speed Internet access customers from ready-for-service homes increased from
1.1% at December 31, 2000 to 2.7% at December 31, 2001.
We expect high-speed Internet access subscribers and therefore
penetration to ready-for-service homes to continue to increase at strong growth
rates over the next two to five years in both The Netherlands and Germany.
Average revenue per subscriber is expected to remain close to the current level.
Revenue growth from this sector should therefore remain robust over the next two
to five years.
Digital television revenue increased from EURO 103,000 in 2000 to EURO
941,000 in 2001. The increase came primarily from a full year's contribution of
Multikabel in 2001 and significant growth in the subscriber base in The
Netherlands and Germany. Multikabel contributed digital television revenue of
EURO 87,000 for one quarter of 2000 and EURO 712,000 for the full year 2001. For
comparison purposes, Multikabel recorded full year digital television revenues
of EURO 116,000 in 2000. At December 31, 2000, Multikabel served 4,230 digital
television subscribers, compared to 5,102 at December 31, 2001. A full year's
contribution from these subscribers coupled with subscriber growth and an
increase in average revenue per subscriber from EURO 7.15 in 2000 to EURO 12.72
in 2001 account for the strong revenue growth for Multikabel's digital telephone
product. In Germany, revenue from digital television increased from EURO 16,000
in 2000 to EURO 229,000 in 2001. An increase in subscribers from 339 at December
31, 2000 to 6,773 at December 31, 2001 account for the growth. The average
revenue per digital subscriber in Germany was EURO 6.24 for 2001. At December
31, 2001 the penetration rate for digital subscribers to ready-for-service homes
was 5.47%. The growth in digital television subscribers has not met our
expectations at this point. We are constantly reviewing the product to either
make it more attractive to consumers or to reduce the cost associated with
delivering the product.
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In The Netherlands, we receive revenue for data communication services
we provide to small-and medium-sized businesses and schools. Multikabel served
approximately 90 small-and medium-sized businesses and 110 schools at the end of
2000, which contributed EURO 424,000 of revenue for the fourth quarter of the
year ended December 31, 2000. At year end 2001, Multikabel served 192 small- and
medium- sized businesses and 580 schools, which contributed EURO 3,559,000 to
revenue in 2001. We are currently serving a very small percentage of the
small-and medium-sized businesses in our franchise area. We serve 100% of the
schools. We expect this product offering to continue to grow at good rates for
the next few years as our penetration of small- and medium-sized business
increases.
Other revenue increased by EURO 3,073,000 from EURO 6,191,000 in 2000
to EURO 9,264,000 in 2001. Other revenue includes signal delivery fees which
increased from EURO 163,000 in 2000 to EURO 196,000 in 2001. Carriage fees
charged to programmers for the distribution of their programs increased to EURO
2,368,000 in 2001 from EURO 393,000 for one quarter in 2000. Miscellaneous
revenue, which is made up of several items, increased from EURO 5,635,000 in
2000 to EURO 6,700,000 in 2001. The primary factor responsible for the growth
was the inclusion of Multikabel for a full year in 2001.
OPERATIONS. Operations primarily include signal delivery fees paid to
KDG and private successor network operators in Germany, city connections,
Internet feed, copyright royalty expense, film license payments, labor and
materials relating to the repair and maintenance of our networks and other
repair and maintenance expense relating to our networks. Operations costs
increased by 43.5% from EURO 30,794,000 in 2000 to EURO 44,195,000 in 2001. The
primary factor responsible for the increase was the acquisition of Multikabel
and QuickNet, which incurred operating costs of approximately EURO 11,605,000 in
2001 compared to EURO 2,130,000 in 2000, which represented one quarter of
Multikabel's operations from October 1, 2000 to December 31, 2000. For
comparative purposes, Multikabel recorded operations costs for the entire year
ended December 31, 2000 of EURO 8,443,000. In our German operations, operating
costs increased by 13.7% from EURO 28,664,000 in 2000 to EURO 32,590,000 in
2001. The acquisition of small networks in Germany coupled with increases in
signal delivery fees, copyright royalties, labor and repair and maintenance
costs were the primary reasons for this increase.
In total, operating costs directly associated with digital television,
high-speed Internet access and data communications services were approximately
EURO 6,486,000 in 2001 compared to EURO 4,512,000 in 2000. Operating costs
associated with analog cable television were approximately EURO 37,487,000 in
2001 compared to EURO 26,282,000 in 2000. As a percentage of revenue, operating
costs increased from 24.8% in 2000 to 26.7% in 2001. We expect the cost of
operations as a percentage of revenue to increase as our revenue distribution
shifts from analog cable television services to broadband products and services,
which tend to have a lower gross profit margin than analog cable television.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses primarily include salaries and wages of personnel
directly involved in the sales, general and administrative functions of our
operating companies, expenses of maintaining our operating offices, marketing
expenses, costs of consultants used to support our operating activities,
automobile expenses, certain cash management expenses, billing expenses, office
supplies and other expenses associated with the operation of our networks and
services. Selling, general and administrative expenses increased by 34.5% from
27,981,000 in 2000 to EURO 37,630,000 in 2001. The primary factor responsible
for the increase was the inclusion of Multikabel's results for a full year in
2001 compared to one quarter in 2000, and the acquisition of QuickNet on July 1,
2001. In the year ended December 31, 2001 we recorded selling, general and
administrative expenses related to Multikabel of EURO 9,900,000 compared to EURO
2,187,000 for one quarter of 2000. For comparative purposes Multikabel recorded
selling, general and administrative expenses for the entire year ended December
31, 2000 of EURO 8,052,000. In our German operations, selling, general and
administrative expenses increased by 7.9% from EURO 25,794,000 in 2000 to EURO
27,730,000 in 2001.
Approximately EURO 13,688,000 or 39.2% of our selling, general and
administrative expenses incurred in 2001 are directly related to our digital
television and high-speed Internet access businesses. The remaining EURO
23,161,000 of selling, general and administrative expenses relate to the analog
cable television business. As a percentage of revenue, selling, general and
administrative expenses increased slightly, from 22.5% in 2000 to 22.7% in 2001.
We are working to keep the increase in selling, general and administrative costs
and expenses from growing at the same level as revenue, and, therefore, do not
expect a further increase in selling, general and administrative expenses as a
percentage of revenue.
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CORPORATE OVERHEAD. Corporate overhead consists of personnel expenses
of senior management, financial accounting, information technology, legal staff,
investor relations and product development. We also record in corporate overhead
the non-cash compensation expense related to our stock option plans. Corporate
overhead also includes the licensing fees paid for our billing, subscriber and
financial accounting systems, the cost of our corporate office and legal and
accounting expenses related to the operation of our corporate office.
Corporate overhead decreased by 13.3% from EURO 17,219,000 in 2000 to
EURO 14,929,000 in 2001. Non-cash compensation expense associated with our stock
option plan increased slightly from EURO 3,558,000 in 2000 to EURO 3,853,000 in
2001. Non-cash charges related to our current stock option plan should decline
to virtually nothing in 2002 as substantially all of the existing options have
vested. In aggregate, non-cash compensation expense accounted for 25.8% of total
corporate overhead in 2001. The cash component of corporate overhead decreased
by EURO 2,585,000 from EURO 13,661,000 in 2000 to EURO 11,076,000 in 2001. As a
percentage of revenue, corporate overhead declined from 13.8% in 2000 to 9.0% in
2001. We intend to keep the growth of corporate overhead expenses substantially
below the growth in revenue, and, therefore, we expect corporate overhead as a
percentage of revenue to continue to decline.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
by 56.7% from EURO 75,530,000 in 2000 to EURO 118,360,000 in 2001. The primary
factors responsible for the increase were the Multikabel and QuickNet
acquisitions and the recording of a full year's depreciation and amortization
expense of Multikabel, the German acquisitions and the increase depreciation
expense related to significant capital expenditures associated with the upgrade
of our networks in Germany. Of the total depreciation and amortization expense
in 2001, approximately EURO 69,722.000 relates to the depreciation of fixed
assets either acquired or constructed and EURO 48,638,000 relates to the
amortization of goodwill and other intangible assets. The Suweda merger in 1998
and the Multikabel acquisition in 2000 account for EURO 19,959,000 and EURO
15,782,000 of the amortization expense in 2001, respectively. In accordance with
SFAS 121 we wrote-down our long-lived assets to fair value by EURO 7,654,000 in
2001, which is included in amortization expense. Beginning in the first half of
2002, the Company will apply the new rules on accounting for goodwill and other
tangible assets. Under the new rules, goodwill will no longer be amortized but
will be subject to annual impairment test.
OPERATING LOSS. Operating loss increased by EURO 22,437,000 from EURO
27,181,000 in 2000 to EURO 49,618,000 in 2001. The primary factor responsible
for the increase in operating loss was the increase in non-cash depreciation and
amortization expense of EURO 42,830,000, which includes the EURO 7,654,000
write-down. The other major factor was losses associated with our digital
television, high-speed Internet access and data communication services. In
total, these business products contributed approximately EURO 11,255,000 of
revenue and approximately EURO 20,174,000 of costs and expenses in 2001. We
expect operating losses to continue to be negatively impacted by increases in
depreciation expenses, related to on-going capital expenditure related to the
maintenance of our German networks and continued investment in The Netherlands.
This negative impact should be partially offset by continued growth in analog
cable television and by improvement in the performance of the digital television
and high-speed Internet access products.
INTEREST EXPENSE. Interest expense includes the interest accrued on
our bank borrowings, capital lease obligations and other borrowings, changes in
the fair market value of our interest rate derivatives, payment of unused
facility fees and the amortization of front end finance fees paid to obtain bank
borrowings. Interest expense increased by EURO 36,595,000 from EURO 26,173,000
in 2000 to EURO 62,768,000 in 2001. The primary factor was an increase in
average bank debt outstanding from approximately EURO 428,127,000 in 2000 to
EURO 792,168,000 in 2001. The primary factors responsible for the increase in
average indebtedness were the acquisition of Multikabel, the acquisition of
QuickNet, the acquisition of several small cable television networks in Germany
and the investment in the upgrade of our networks in Germany.
Interest expense includes non-cash expense of EURO 2,906,000 due to
the decrease in the fair value of our interest rate caps and collars during
2001. Interest expense also includes non-cash amortization of finance fees of
EURO 3,556,000. We expect interest expense to continue to increase as our
indebtedness increases due to on-going capital expenditure related to our
networks and the increased cost of borrowings under the convertible second
senior term loan facility.
OTHER INCOME (EXPENSE). Other income includes the gains and losses on
the sale of certain non-core businesses in 2000 and 2001, the write-off of
capitalized costs and expenses related to the failed UPC Germany merger and the
costs and expenses related to the proposed issuance of high yield notes which
has been cancelled in light of market conditions. In 2000, we recorded other
income of EURO 1,690,000 related to the sale of 15.4% of our holdings in Mainz
Kom, a local city carrier in the City of Mainz. In 2002, we agreed to sell our
remaining investment in Mainz Kom. In
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2001, we wrote-down EURO 1,452,000 of an equity investment and related note
receivable to net realizable value based on the subsequent sale of the
investment and forgiveness of debt in 2002. The Company wrote-off capitalized
costs of EURO 4,938,000 related to the unsuccessful merger with UPC Germany and
the cancelled high-yield note offering. In addition we recorded other income of
EURO 741,000 in 2001 relating to a partial recovery on a third party note which
originated from the sale of certain non-strategic cable television subscribers
in 1998.
LOSS FROM OPERATIONS BEFORE INCOME TAXES AND OTHER ITEMS. Loss from
operations before income taxes and other items increased by EURO 66,371,000 from
EURO 51,664,000 in 2000 to EURO 118,035,000 in 2001 for the reasons discussed in
the above sections.
INCOME TAX BENEFIT (EXPENSE). Income tax benefit of EURO 15,381,000
was recorded in 2001. This compares to a tax expense of EURO 4,258,000 in 2000.
MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES. Minority interest in
net income of subsidiaries was EURO 94,000 in 2000 compared to EURO 88,000 in
2001.
EQUITY LOSS IN AFFILIATES. Equity loss in affiliates of EURO 420,000
represents our share of the 2001 losses recorded by Mainz Kom.
LOSS FROM OPERATIONS BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLES. Loss from operations before extraordinary
loss and cumulative effect of changes in accounting principle increased from
EURO 56,144,000 in 2000 to EURO 103,162,000 in 2001 for the reasons discussed in
the above sections.
EXTRAORDINARY LOSS, NET OF INCOME TAX. Extraordinary loss of EURO
8,180,000 recorded in 2000 related to the refinancing of the Company's credit
facilities to acquire Multikabel. We wrote off all unamortized fees and expenses
on the credit facilities we cancelled as part of this refinancing. No
extraordinary loss was recorded in 2001.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. In January 2001,
the Company recorded a charge of EURO 946,000 to cumulative effect of change in
accounting principle upon the adoption of SFAS 133, ACCOUNTING FOR DERIVATIVES
AND HEDGING ACTIVITIES.
NET LOSS. Net loss increased from EURO 64,324,000 in 2000 to EURO
104,108,000 in 2001. The primary factor fOR THE increase in the net loss was the
increase in non-cash depreciation and amortization coupled with the increase in
interest expense which exceeds the increase in results from operations. We
expect the next loss to decline as a result of continued improvement in our
analog cable and broadband products and services.
EBITDA/ADJUSTED EBITDA. In addition to other measurements, some of
which are reflected in its statement of operations data, we measure our
financial performance by EBITDA and adjusted EBITDA. We define EBITDA as
earnings (loss) before extraordinary items, cumulative effect of change in
accounting principle, discontinued operations, minority interests, net interest
expense, income taxes and depreciation and amortization. We define adjusted
EBITDA as EBITDA plus non-cash compensation expense related to stock options. We
believe that EBITDA and adjusted EBITDA are meaningful measures of performance
because these are the most commonly used measures in the cable television and
broadband industries to analyze and compare cable television and broadband
companies on the basis of operating performance, leverage and liquidity. EBITDA
and adjusted EBITDA are not U.S. GAAP measures of income (loss) or cash flow
from operations and should not be considered as alternatives to net income as an
indication of our financial performance or as alternatives to cash flow from
operating activities as a measure of liquidity. EBITDA increased from EURO
48,349,000 FOR 2000 to EURO 68,742,000 for 2001, primarily as a result of the
inclusion of Multikabel for a full year in 2001, which contributed EURO
23,663,000 to 2001 EBITDA, and the German acquisitions and reduced losses
related to digital television AND high-speed Internet access services. Adjusted
EBITDA increased from EURO 51,907,000 in 2000 to EURO 72,595,000 in 2001. AS a
percent of revenue, EBITDA and adjusted EBITDA improved from 38.9% and 41.8% in
2000 to 41.6% and 43.9% in 2001. It is the Company's goal to continue to grow
its EBITDA and adjusted EBITDA while obtaining its margins.
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<Page>
YEARS ENDED DECEMBER 31, 1999 AND 2000
REVENUES. Revenues primarily include monthly subscription fees and to
a lesser extent installation and connection fees related to our basic analog
cable television service. In late 1999, we launched our high-speed Internet
service in Germany and began to recognize monthly subscription fees and to a
lesser extent installation and connection fees for this service. In late 2000,
we launched our digital television service in Germany and began to recognize
monthly subscription fees and to a lesser extent installation and connection
fees for this service. We also acquired Multikabel in late 2000. Multikabel
offers a full range of broadband products and services including basic analog
cable television, high-speed Internet access, digital television and data
communication services for small businesses and schools in The Netherlands.
Revenues increased by 17.4% from EURO 105,949,000 in 1999 to
EURO 124,343,000 in 2000. The primary factors whICH impacted revenue growth were
the acquisitions of Multikabel in The Netherlands and several acquisitions in
Germany throughout 1999 and 2000, rate increases for basic analog cable
television services and the introduction in Germany of our high-speed Internet
access and digital television services. The following table reflects the revenue
contributions from the noted sources:
<Table>
<Caption>
DECEMBER 31, 1999 2000 ONGOING DECEMBER 31,
1999 MULTIKABEL ACQUISITIONS ACQUISITIONS OPERATIONS 2000
----------- ---------- ------------ ------------ ---------- -------------
Average Cable TV Subscribers ...... 907,574 73,855 17,778 30,068 (3,594) 1,025,681
Average Monthly Revenue per
Subscriber (EURO) ................ 9.46 8.20 7.18 7.88 -- 9.49
Cable TV Revenue (EURO'000) ...... 103,059 7,269 1,531 2,843 2,178 116,880
Average Internet Subscribers....... 25 3,751 -- 706 663 5,145
Average Monthly Revenue per
Subscriber (EURO) ................ 40.9 8.22 -- 4.95 38.71 12.07
Internet Revenue (EURO'000)....... 25 370 -- 42 308 745
Average Digital Subscribers -- 1,013 -- -- 85 1,098
Average Monthly Revenue per
Subscriber (EURO) ................ -- 7.15 -- -- 15.69 7.82
Digital Revenue (EURO) ............ -- 87 -- -- 16 103
Other Revenue (EURO'000) ......... 2,865 1,113 -- -- 2,637 6,615
--------- --------- --------- --------- --------- ---------
Total Revenue ..................... 105,949 8,839 1,531 2,885 5,139 124,343
</Table>
We acquired Multikabel on September 18, 2000. We have included the
results of Multikabel's operations beginning October 1, 2000. At December 31,
2000, Multikabel passed approximately 320,000 homes and served 296,538 basic
cable television subscribers, 14,938 high-speed Internet access subscribers and
4,230 digital television subscribers. Multikabel also derived revenue from data
communication services provided to small businesses and schools. Multikabel
contributed a total of approximately EURO 8,839,000 to our revenue in 2000, or
approximately 48.1% of the total revenue growth recorded during the year.
During 1999, we made six acquisitions in Germany which served
approximately 45,600 cable television subscribers at the date of acquisition. On
average approximately 17,778 of the acquired subscribers made their first
contribution to revenue during the year ended December 31, 2000. These
subscribers contributed a total of approximately EURO 1,531,000 tO our revenue
in the year 2000 or approximately 8.3% of the total revenue growth recorded
during the year.
During 2000, in addition to the Multikabel acquisition, we made 12
acquisitions which served approximately 87,770 cable television subscribers at
the date of acquisition. On average approximately 30,068 of the acquired
subscribers contributed to revenue during the year ended December 31, 2000.
These subscribers contributed a total of approximately EURO 2,843,000 to our
revenue in 2000, or approximately 15.5% of the total revenue growth recorded
during the year.
During 2000, we lost through attrition an average of approximately
3,594 subscribers. The loss of subscribers primarily occurred in the new German
states as a result of a loss of population and changes in demographics. The loss
of
55
<Page>
subscribers through attrition partially offset the revenue growth by
approximately EURO408,000. During 2000, we increased the average monthly revenue
per subscriber for cable television service by an average of EURO0.14 per month.
The primary factor responsible for the increase in revenue per subscriber was
rate increases. A portion of the rate increases implemented in 2000 was to cover
the possible increase in the cost of copyright fees which we expect will be
imposed on us by GEMA. The increase in revenue per subscriber contributed a
total of approximately EURO2,586,000 or 14.1% of the total revenue growth
recorded during the year.
During 2000, we added approximately 16,231 high-speed Internet access
subscribers and 4,240 dial-up Internet access subscribers, of which
approximately 10,427 were acquired through the acquisition of Multikabel. Since
its acquisition Multikabel connected an additional 4,511 high-speed Internet
access subscribers. At year-end 2000 Multikabel had 14,938 high-speed Internet
customers. Of these subscribers an average of 3,751 contributed EURO370,000 of
revenue to us in 2000. In addition, we acquired through the assumption of
operating obligations approximately 4,240 Internet access subscribers in Germany
from an Internet service provider which was exiting the business. These
subscribers currently access the Internet through dial up connections and we
plan to migrate these customers to high-speed access over time. For the year
ended December 31, 2000, an average of 706 of these subscribers contributed a
total of EURO42,000 of revenue to us. In Germany, we added an additional 1,293
high-speed Internet access subscribers in 2000. Of these, an average of 688
subscribers made a full year revenue contribution of EURO333,000 to revenue in
2000. In total, we recorded EURO745,000 of revenue from our high-speed Internet
access product.
During 2000, we added approximately 4,569 digital television
subscribers. Of these, approximately 2,128 were acquired through the acquisition
of Multikabel. Since its acquisition, Multikabel added another 2,102 digital
television subscribers. At year-end, Multikabel had 4,230 digital television
subscribers. On average, approximately 1,013 of these subscribers contributed
approximately EURO87,000 to revenue in 2000. During the last quarter of 2000, we
launched our digital television service in Germany. At year-end, we had
approximately 339 digital subscribers. On average, approximately 85 of the
subscribers contributed EURO16,000 to revenue in 2000. In total, we recorded
EURO103,000 of revenue from digital television services.
Other revenue consists of carriage fees, advertising fees paid to us,
the lease to third parties of capacity in our ducts, joint trenching agreements
associated with our broadband upgrade, e-commerce, data communication services
for small businesses and schools and, in 2000, the sale of excess fiber optic
cable to third parties. Other revenue was EURO6,615,000 in 2000 as compared to
EURO2,865,000 of other revenue in 1999. Multikabel generated approximately
EURO1,113,000 of other revenue in 2000. Data communication services accounted
for EURO424,000 of the total other revenue. Other operating revenue from the
German operations increased by EURO2,637,000 in 2000. The increase was primarily
related to the sale of excess fiber to third parties. We do not expect that we
will sell excess fiber to third parties in the future.
OPERATIONS. Operations primarily include signal delivery fees paid to
Deutsche Telekom in Germany and other third parties, copyright royalty expense,
film license payments, city connections, labor and materials related to the
repair and maintenance of our networks and other repairs and maintenance
expenses related to our networks.
Operations cost increased 25.5% from approximately EURO24,543,000 in
1999 to approximately EURO30,794,000 in 2000. The following table reflects the
factors which contributed to the increase:
<Table>
<Caption>
DECEMBER 1999 2000 ONGOING DECEMBER
31, 1999 MULTIKABEL ACQUISITION ACQUISITION OPERATIONS 31, 2000
-------- ---------- ----------- ----------- ---------- --------
EURO'000 EURO'000 EURO'000 EURO'000 EURO'000 EURO'000
Signal delivery fees......... 18,592 1,074 210 210 531 20,617
Copyright royalties.......... -- -- 20 33 997 1,050
Repair and maintenance....... 2,155 230 77 122 144 2,728
Labor........................ 3,472 546 33 -- 166 4,217
Materials.................... 324 5 -- 28 947 1,304
Other........................ -- 275 -- -- 603 878
-------- ---------- ----------- ----------- ---------- --------
Total........................ 24,543 2,130 340 393 3,388 30,794
======== ========== =========== =========== ========== ========
</Table>
56
<Page>
The first time inclusion of Multikabel accounts for approximately 37.7%
of the entire increase in operating costs. We believe that our operating margin
of 75.7% is indicative of the results anticipated in the future over the next
few quarters.
In Germany, the 1999 acquisitions and the 2000 acquisitions added
approximately EURO733,000 of operations cost between 1999 and 2000. Signal
delivery fees were the primary factor. Operating costs in the existing German
operations increased by EURO2,785,000 during 2000. The first time inclusion of
GEMA copyright royalty fees in 2000 accounted for 18.6% of the total increase.
Cost of materials which includes the one time sale of fiber optic cable accounts
for approximately 17.4% of the increase. Other items which contributed to the
increase in operating cost include Deutsche Telekom signal delivery fees related
to contractual rate increases and to a lesser extent increases in repair and
maintenance and labor. In total the cost of operations as a percent of revenue
increased slightly from 23.2% to 24.8%. Most of the deterioration in the margin
relates to the sale of excess fiber optic cable. We anticipate that the cost of
operations as a percent of revenue will return to historic levels over the next
few quarters.
In regard to copyright royalty fees in Germany we have not yet entered
into an agreement to pay copyright royalties to GEMA, the organization
responsible for the collection of copyright royalty fees. However, as a result
of the uncertainty regarding the payment of these royalties, we believe it is
appropriate to accrue for this probable exposure given anticipated market
developments.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses primarily include salaries and wages of personnel
directly involved in the sales, general and administrative functions of our
regional operating companies, telecommunications and billing expenses, expenses
of leasing and maintaining the regional offices, marketing expenses, costs of
consultants and temporary personnel, automobile expense and legal and accounting
expenses. It also includes travel expenses, bank expenses, office supplies and
other expenses associated with the operation of the regional offices. Selling,
general and administrative expenses increased by 50.5% from EURO18,590,000 in
1999 to EURO27,981,000 in 2000. The following table reflects the factors which
contributed to the increase:
<Table>
<Caption>
DECEMBER 31, 1999 2000 ONGOING DECEMBER
1999 MULTIKABEL ACQUISITIONS ACQUISITIONS OPERATIONS 31, 2000
------------ ---------- ------------ ----------- ---------- --------
EURO'000 EURO'000 EURO'000 EURO'000 EURO'000 EURO'000
Salaries and wages................. 8,092 426 77 40 414 9,049
Cost of services................... 917 1,163 -- 19 1,532 3,631
Cost of premises................... 2,186 -- -- 61 1,470 3,717
Automobile......................... 558 42 -- 11 7 618
Telecommunications and distribution 2,080 -- 35 6 (186) 1,935
Legal and accounting............... 661 -- -- -- 121 782
Marketing.......................... 1,506 517 -- 2,248 4,271
Other.............................. 2,590 39 -- -- 1,349 3,978
------------ ---------- ------------ ----------- ---------- --------
Total.............................. 18,590 2,187 112 137 6,955 27,981
============ ========== ============ =========== ========== ========
</Table>
The first time inclusion of Multikabel accounts for 21.9% of the total
increase in selling, general and administrative expenses. As per percent of
revenue selling, general and administrative expenses for Multikabel were
approximately 24.7%.
The 1999 acquisitions and 2000 acquisitions contributed approximately
EURO249,000 to the increase in selling, general and administrative expenses.
During 2000, our existing operations recorded an increase in selling, general
and administrative expenses of approximately EURO6,955,000 or 74.1% of the total
increase in selling, general and administrative expenses. The increase in salary
and wages primarily relate to the addition of personnel needed to manage,
operate and market our high-speed Internet access and digital television
services. Cost of services, which includes temporary personnel and consultants,
increased by EURO1,532,000 from 1999 levels. Almost the entire increase is
directly associated with the new products and services offerings. Cost of
premises increased by EURO1,470,000 in 2000. This increase primarily relates to
the expanded regional office in Leipzig where the head-end containing all the
technical aspects for the delivery of all new products and services have been
constructed and where the sales, service and construction activities for
high-speed Internet access and digital television are now centered. In total our
office space more than tripled in this regional office. In addition, the fiber
optic lines used to interconnect the five upgraded cities in the
Sachsen/Sachsen-Anhalt/Thuringen region are included in the cost of premises. In
2000, these costs were approximately EURO267,000. Expanded regional offices in
Berlin, Chemnitz and Hoyerswerda also contributed to the
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<Page>
increase in cost of premises. Other less significant items include
telecommunications and distribution expenses which decreased by EURO186,000 in
2000 and legal and accounting expenses, which increased by EURO121,000 during
2000 as compared to 1999. Marketing expenses increased by EURO2,248,000 in 2000.
The entire increase was associated with the introduction and on going marketing
efforts of high-speed Internet access and digital television services.
Miscellaneous expenses include bank fees, office supplies, travel
expenses, training and bad debt reserves. In 2000, miscellaneous expenses
increased by EURO1,388,000 or 53.6% from EURO2,590,000. Of this, EURO925,000
relates to a charge to increase the allowance for doubtful accounts.
In regard to the total increase in SG&A we believe that the
substantially all of the increase in selling, general and administrative expense
are predominantly related to the introduction of new products and services,
which began in late 1999 and continued throughout 2000.
CORPORATE OVERHEAD. Corporate overhead consists of personnel expenses
of senior management, financial accounting, information technology and legal
staff. Additionally it includes personnel expenses of the key competence centers
of the new product and services group. We also record the non-cash compensation
expense related to our stock option plans in corporate overhead. This item also
includes the licensing fees paid for our billing, subscriber and financial
accounting system, the cost of the corporate office and legal and accounting and
other costs and expenses related to the operation of our corporate office.
Corporate overhead expenses increased by 38.7% from EURO12,413,000 in
1999 to EURO17,219,000 in 2000. For 1999, we recorded non-cash compensation
expense of EURO2,757,000 related to our stock option plans, which were
implemented in February 1999. In the same period in 2000, we recorded a charge
of approximately EURO3,558,000. The increase in this non-cash charge accounted
for 16.7% of the total increase in corporate overhead. The other major component
responsible for the increase in corporate overhead was the competence centers
for the broadband group. The wages and salaries of staff, coupled with
consultants, travel and legal and accounting costs associated with these
activities, accounted for EURO1,423,000 in 2000. In 1999, we expended
approximately EURO623,000 in the new products and services group and corporate.
The increase of EURO800,000 in 2000 accounts for 16.6% of the total increase in
corporate overhead. The remaining components of corporate overhead increased by
approximately EURO3,205,000 between the two periods. The increase primarily
relates to enlarged corporate headquarters and increased legal and accounting
expenses related to due diligence and legal issues regarding our transformation
into a multiservice broadband communications company and the inclusion of
approximately EURO337,000 related to the Multikabel acquisition.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased by 23.3% from EURO61,277,000 in 1999 to EURO75,530,000 in 2000. The
primary factor responsible for the increase in depreciation and amortization
expense was the increase in our depreciable asset base related to the 1999 and
2000 acquisitions and capital expenditures.
OPERATING LOSS. Operating loss increased by EURO16,307,000 from
EURO10,874,000 in 1999 to EURO27,181,000 in 2000. The primary factors
responsible for the increase in operating loss were the increase in non-cash
compensation expense related to our stock option plans of EURO801,000, the
increase in non-cash depreciation and amortization expense of EURO14,253,000,
the first time inclusion of the GEMA copyright royalty expense of EURO1,050,000
and the costs and expenses of the broadband group of approximately
EURO10,000,000. These items were partially offset by the increase in cable
television operating income derived from both internal growth and acquisitions.
INTEREST EXPENSE. Interest expense increased by EURO10,299,000 from
EURO15,874,000 in 1999 to EURO26,173,000 in 2000. The primary factor was an
increase in the average indebtedness from EURO238,500,000 to approximately
EURO431,500,000. The increase in the average indebtedness primarily resulted
from the funding of our Multikabel acquisition and to a lesser extent
acquisitions in Germany and capital expenditures associated with the upgrade of
our German networks.
OTHER INCOME. Other income in 2000 was EURO1,690,000 and relates to the
sale of 15.4% of our holdings in MainzCom, a local city carrier in the city of
Mainz. PrimaCom continues to own 22.0% of MainzCom.
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<Page>
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND OTHER ITEMS.
Loss from continuing operations before income taxes and other items increased
from EURO27,515,000 in the 1999 to EURO51,664,000 in 2000, for the reasons
discussed above.
INCOME TAX EXPENSE. Income tax expense was EURO4,258,000 in 2000.
Income tax expense EURO1,258,000 of relates to taxes on the net income of some
subsidiaries. The remaining EURO3,000,000 relates to the write down of deferred
tax assets associated with the change in the German corporate tax rate offset by
other factors. In accordance with German tax law, we do not file a consolidated
income tax return.
MINORITY INTEREST IN NET INCOME OF SUBSIDIARIES. Minority interest in
net income of subsidiaries increased from EURO70,000 to EURO94,000 primarily
because of improved operating results in these companies.
LOSS FROM CONTINUING OPERATIONS. Loss from continuing operations
increased from EURO29,252,000 in 1999 to EURO56,144,000 in 2000 as a result of
the factors discussed above.
EXTRAORDINARY LOSS. Extraordinary loss of EURO8,180,000 was related to
the refinancing and cancellation of our bank facility in September 2000. We
wrote off the unamortized fees and expenses associated with this facility.
NET LOSS/EBITDA. In addition to other measurements, some of which are
reflected in its statement of operations data, we measure our financial
performance by EBITDA and adjusted EBITDA. We define EBITDA as earnings (loss)
before extraordinary items, discontinued operations, minority interests, net
interest expense, income taxes and depreciation and amortization. We define
adjusted EBITDA as EBITDA plus non-cash compensation expense related to stock
options and nonoperating expenses less non-operating income. We believe that
EBITDA and adjusted EBITDA are meaningful measures of performance because these
are the most commonly used measures in the cable television and broadband
industries to analyze and compare cable television and broadband companies on
the basis of operating performance, leverage and liquidity. EBITDA and adjusted
EBITDA are not U.S. GAAP measures of income (loss) or cash flow from operations
and should not be considered as alternatives to net income as an indication of
our financial performance or as alternatives to cash flow from operating
activities as a measure of liquidity. EBITDA decreased from EURO50,403,000 for
1999 to EURO48,349,000 for 2000, primarily as a result of the start-up costs of
the broadband group the first-time inclusion of GEMA copyright royalty expense,
the increase in the non-cash compensation expense related to our stock option
plans. Adjusted EBITDA decreased from EURO53,160,000 in 1999 to EURO51,907,000
in 2000, primarily because of the start-up costs of the broadband group
first-time inclusion of the GEMA copyright royalty expense.
B. LIQUIDITY AND CAPITAL RESOURCES
On September 18, 2000, PrimaCom Management entered into a EURO
1,000,000,000 reducing senior secured revolving credit facility with a number of
lenders. The senior secured facility was put in place to refinance all
outstanding debt at that time, to fund the acquisition of Multikabel, future
capital expenditures and acquisitions and for other general corporate purposes.
As required by a condition to the senior secured facility, PrimaCom AG also
entered into a EURO 375,000,000 working capital facility concurrently with
entering into the senior secured facility. The working capital facility was
intended as a means by which PrimaCom AG could access longer-term unsecured debt
financing, which would benefit the lenders under the senior secured facility, in
the event the high yield note issuance contemplated by PrimaCom AG at the time
was not completed. The working capital facility was committed until May 15,
2001. At that time, the Company or the senior secured facility lenders could
request that the working capital facility be drawn, with the proceeds being used
to repay borrowings under the senior secured facility. If the working capital
facility had been drawn, it would have converted to a loan or debt security with
a ten-year maturity. The interest rate on the working capital facility would
have been no less than 13% per annum and no greater than a cap based on current
trading yields of high yield securities issued by comparable companies. In the
event that the working capital facility remained outstanding beyond September
30, 2001, PrimaCom also agreed to issue contingent value rights which would
provide the facility holders with an economic benefit payable in cash equivalent
to that which they would have received had they exercised warrants to acquire up
to 5% of PrimaCom's equity capital at prices based on relevant market values.
We announced our proposed merger with UPC Germany on March 29, 2001 and
requested an extension of the commitment under the working capital facility
until the merger could be consummated. On May 15, 2001 the lenders
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<Page>
under our senior secured and working capital facilities agreed to an extension
of the commitment under the working capital facility until November 15, 2001. In
addition, we agreed with the lenders under the working capital facility to a cap
on cash interest of 16% and on total interest of 18%. It was also agreed that on
November 15, 2001 either the Company or the lenders under the senior facility
could request that the working capital facility be drawn. If drawn, the working
capital facility would then have converted to a ten-year security or loan.
On August 26, 2001, UPC notified us it would not vote in favor of our
merger with UPC Germany, and the merger was removed from the agenda of our
shareholders' meeting held on August 28, 2001. Between the date on which our
credit facilities were entered into in September 2000 and August 2001 when the
proposed merger failed to proceed, the market for high-yield debt had
deteriorated significantly for broadband communications companies, as a result
of which we concluded that it was not realistic for us to seek to access that
market in the near to medium term. As a result, we immediately initiated
negotiations with the lenders under our senior secured and working capital
facilities, with a view to amending certain terms of the working capital
facility which might in the future otherwise have resulted in non-compliance
with financial covenants included in those facilities if the working capital
facility were drawn in full. The lending commitment and date of any mandatory
drawing under the working capital facility were extended on three further
occasions while these negotiations progressed, upon payment by us of commitment
and other fees totaling approximately EURO25,000,000.
On March 26, 2002, the Company completed the refinancing of its senior
and working capital facilities. The amended working capital facility was
conditionally replaced by a EURO375,000,000 convertible second secured term loan
facility, which was drawn down full on March 26, 2002. Those borrowings were
used to repay an equivalent amount of outstanding borrowings under the senior
secured facility. In addition, the lending commitment under the senior secured
facility was reduced by the amount of the borrowings under the convertible
second secured term loan facility, to EURO625,000,000. The agreements with our
lenders under the convertible second senior term loan provide that certain terms
of that facility must be approved by our shareholders at a meeting we intend to
convene in June, 2002. If these amendments are not approved by the vote of 75%
of the shareholders represented at that meeting, our amended loan facilities
will revert to their prior terms, namely the terms of our senior secured and
working capital facilities prior to amendment, subject to a reduced lending
commitment under the senior facility of EURO625,000,000. Payment of interest at
the rate required by the original terms of our loan facilities would result in a
breach of financial covenants in those facilities and, unless that breach were
waived by the lenders or we were able to agree other amendments with our
lenders, our payment obligations under those loan facilities could be
accelerated and become immediately payable. If our indebtedness were accelerated
and we were unable to refinance, we would be forced to seek protection under
applicable insolvency laws. See "Item 3 Key Information, Risk Factors, Risks
associated with our business. Our debt instruments contain restrictive covenants
which may be breached if amendments to those instruments are not approved by our
shareholders and which may pose potential financial and operating problems."
The available commitment under the senior secured facility is to be
reduced in quarterly amounts beginning March 31, 2003 to the amounts reflected
below as of December 31 of the years indicated:
<Table>
<Caption>
AVAILABLE COMMITMENT (EURO)
---------------------------
- December 31, 2002 625,000,000
- December 31, 2003 594,500,000
- December 31, 2004 533,500,000
- December 31, 2005 472,500,000
- December 31, 2006 411,500,000
- December 31, 2007 335,250,000
- December 31, 2008 225,450,000
- December 31, 2009 0
</Table>
The senior secured facility contains financial covenants common for
financings of this type. Our ability to borrow under the senior secured facility
depends on our continued compliance with these covenants. Breach of these
covenants may result in an event of default. In addition to the requirement to
meet certain financial covenants, there are restrictions on, among other things:
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<Page>
- Incurring debt,
- encumbering revenues or assets,
- lending funds to third parties or assuming liabilities,
- disposing of revenues or assets, and
- paying dividends or making distributions.
The senior secured facility contains several events of default in
addition to the following:
- amendment, suspension or termination of certain contracts which
results in a material adverse change, and
- a regulatory change in the environment in which we operate, which
results in a material adverse effect.
The occurrence of an event of default could result in all amounts
outstanding under the senior secured facility becoming immediately due and
payable and the limitation of further drawings under the senior secured
facility. It could also result in the acceleration of amounts outstanding under
our other debt instruments, including the convertible second secured term loan
facility.
The senior secured facility is secured by, among other things, pledges
or assignments of receivables from subscribers, intercompany loans, partnership
interests and shares of our subsidiaries.
The interest on the senior secured facility accrues at LIBOR plus an
applicable margin of between 2.5% and 0.75%, depending on the ratio of total
debt to Adjusted EBITDA. At March 22, 2002 the applicable margin was 2.25%.
The convertible second secured term loan funded on March 26, 2002 and
is due and payable on March 31, 2010. The interest on this facility is divided
into cash and noncash components. The noncash interest is added to the principal
outstanding under the facility and will then incur further noncash interest as a
principal amount. Cash interest begins to accrue at 8% and increases to 12% over
time and accrues only on the initial principal amount of the facility,
EURO375,000,000. All-in interest is initially 18% and increases to 20% over
time. The cash, noncash and all-in interest rates are set out on the following
schedule:
<Table>
<Caption>
Cash Rate Noncash Rate All-in rate
--------- ------------ -----------
March 26, 2002 - September 30, 2002 8.0% 10% 18%
October 1, 2002 - December 31, 2002 8.5% 10.5% 19%
January 1, 2003 - March 31, 2003 9.5% 9.5% 19%
April 1, 2003 - June 30, 2003 10.5% 8.5% 19%
July 1, 2003 - September 30, 2003 11.5% 8.5% 20%
October 1, 2003 - final maturity 12% 8% 20%
</Table>
The convertible second secured term loan facility may be prepaid in
whole or in part at any time at the option of the Company and all accrued but
unpaid non-cash interest in excess of 18% for any period will be forgiven on the
indebtedness thereunder if the facility is repaid in full by December 31, 2004.
Lenders who were not party to the convertible second secured term loan when
initially funded on March 26, 2002 would receive a prepayment fee on any amount
PrimaCom prepays to that lender of 3% of that amount during the first year of
the loan, 2% during the second year of the loan and 1% during the third year of
the loan.
The outstanding but unvested contingent value rights under the original
facility have been cancelled, with the exception of rights providing the lenders
under the convertible second secured term loan facility with an economic benefit
payable in cash equivalent to that which they would have received had they
exercised warrants to acquire 2.49%
61
<Page>
of PrimaCom AG's equity capital at prices based on relevant market values. If
the facility is repaid in full prior to March 26, 2003, the lenders have agreed
to forego their rights to exercise these contingent value rights.
At any time on or after December 31, 2004, the lenders under the
convertible second secured loan term facility may convert their outstanding
loans into shares of PrimaCom Management having a nominal value determined by
computing the ratio of the amount of debt being converted to the quotient of
twelve times EBITDA (defined as earnings before interest, tax, depreciation and
amortization) for the twelve month period through the end of the most recent
calendar quarter less the amount of then outstanding consolidated debt of
PrimaCom AG at the end of the most recent calendar quarter plus the amount of
debt then being converted, divided by the total nominal value of all PrimaCom
Management shares then outstanding. However, in no case will the lenders under
the convertible second secured term loan facility be entitled to convert their
loans under that facility into shares of PrimaCom Management comprising more
than 65% of the total nominal capital of PrimaCom Management.
The convertible second secured term loan facility is guaranteed by
PrimaCom Management and is secured by second-ranking pledges (after the pledges
securing the senior facility) on the shares of the operating companies owned by
PrimaCom Management.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The following table represents the contractual cash obligations and
other commercial commitments of PrimaCom as of December 31, 2001;
<Table>
<Caption>
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------
Less than 1
Total year 1-3 years 4-5 years After 5 years
-----------------------------------------------------------------
(Euro in thousands)
Bank and other debt 832,083 554 - - 831,529
Operating Leases 10,771 3,701 2,941 975 3,154
Signal Fees 121,223 19,500 36,183 17,635 47,905
Deferred Purchase Obligations 10,984 10,984 - - -
Capital Lease Obligations 9,593 3,976 5,003 614 -
Film Contracts 4,748 763 2,365 1,620 -
-----------------------------------------------------------------
Total Contractual Cash Obligations 989,402 39,478 46,492 20,844 882,588
=================================================================
</Table>
In addition to the total cash obligations above, the Company also has
issued approximately Euro 9,960,000 in letters of credit in connection with
certain acquisitions.
INTRODUCTION OF EURO COMPLIANCE
On January 1, 1999, 11 of the 15 member countries of the EU, including
Germany and The Netherlands, adopted the Euro as their common legal currency in
addition to their existing currencies. We use licensed software for our
financial accounting system and subscriber management system. The total cost of
acquiring upgrades and achieving Euro compliance did not have a material effect
on our operations and our consolidated financial position and results of
operations. At January 1, 2002 we were fully Euro compliant and as far as we
could tell our main contracting parties were also Euro compliant. We have not
incurred any difficulties related to the Euro conversion.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
Not applicable.
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<Page>
D. TREND INFORMATION
We expect that any additional acquisitions that we may do in Germany or
in The Netherlands rate increases on our basic cable television offering and
increased subscriber levels in our new products and services will continue to
have positive impacts on revenue and EBITDA.
The potential loss of any additional contracts with housing
associations in Germany or the continued loss of population in the New German
States could result in the decline of our basic cable television subscriber
levels during the year. This would negatively impact our revenue and EBITDA.
We also intend to increase the channels we offer our the digital
television subscribers in Germany and The Netherlands. We are also in the
process of evaluating our digital television product offerings. The subscriber
acceptance has not been as strong as expected and we continue to record
significant losses. If we discontinue or reduce the offering to improve the
short term prospects the long term upside could be significantly reduced. On the
other hand if we promote and market more in the short term to ensure long term
success we may suffer larger short term losses and we expect that the addition
of channels will result in an increase in the number of subscribers who purchase
our digital services. In the medium to long-term we expect that the increase in
digital services will be positive for our operating results, but in the first
year to two years increased spending on additional channels will have a negative
impact on EBITDA. We intend to formulize our thoughts during 2002 in a
comprehensive strategy.
In general, we expect revenues to continue to grow rapidly while EBITDA
growth is expected to substantially lag revenue growth in the next one to two
years before we expect to see an increase in EBITDA growth as well.
Our capital expenditures will be reduced from previous levels as we
re-evaluate our upgrade strategy in Germany. In The Netherlands we intend to
move forward with telephone services. We expect to increase our borrowings
during the next two to three years to meet these needs coupled as well as to
finance future acquisitions. Thereafter we expect to start repaying our
outstanding indebtedness.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
We have a two-tiered board consisting of the management board and the
supervisory board.
MANAGEMENT BOARD
The standing orders for the management board provide for allocation of
areas of responsibility among the members, and, within these areas of
responsibility, the members of the management board act independently. However,
under German law and the standing orders, management board members are jointly
responsible for all management board matters, even if they fall within another
member's area of responsibility. Management board members have a responsibility
promptly to report to the chairman of the management board and the management
board on important decisions, events, risks and losses within their areas of
responsibility. Some decisions of the management board may only be taken jointly
by all members, including decisions concerning the preparation of annual
accounts, the calling of a supervisory board meeting, transactions which require
the consent of the supervisory board, guidelines and plans for individual
business areas, transactions of exceptional importance or risk and all other
matters which have not been allocated to any member's specific area of
responsibility.
The table below sets forth the names, ages, responsibilities, dates of
appointment and experience of the members of the management board. The members
of the management board can be reached at PrimaCom AG's address.
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<Table>
<Caption>
AGE POSITION ON THE MANAGEMENT BOARD DATE OF APPOINTMENT
--- --------------------------------------- -------------------
Stefan Swenkedel................. 41 Chief Strategic and Development Officer March 1, 2002
Paul Thomason.................... 46 Chief Financial Officer December 30, 1998
(FINANZVORSTAND)
Hans Wolfert..................... 40 Chief Operating Officer February 4, 2000
</Table>
PROF. DR. SCHWENKEDEL has served on our supervisory board as a vice
chairman since December 31, 1998 until his resignation on February 28, 2002 and
from 1997 until October 2000 he served as chairman of the supervisory board of
AGFB, a principal shareholder of one of our predecessor companies until it was
merged into us in October 2000. Since March 2000, he has also been the chairman
of the supervisory board of F.A.M.E Film and Music Entertainment AG in Munich
and, since September 2000, he has been a member of the supervisory board of
2Venture AG in Bonn. Since 1996, he has been professor of business
administration and finance at the FACHHOCHSCHULE WIESBADEN (University of
Applied Sciences in Wiesbaden). From 1993 to 1996, he served as executive
manager (chief financial officer) at Scholler-Budatej, the Hungarian subsidiary
of Scholler Lebensmittel GmbH & Co. KG, a company of the Sudzucker Group. During
that time period, he was also a member of the supervisory board of MIRSA AG in
Albertirsa in Hungary. Prior to 1993, amongst other employment, he worked in the
German paper and printing industry.
MR. THOMASON has more than 16 years experience in the communications
and media industries. He has been our chief financial officer since December 30,
1998. From 1996 to 1998, he was chief financial officer of KabelMedia, a
predecessor company to PrimaCom. From 1981 until February 1996, he was employed
by the First Union National Bank of North Carolina, where he served as senior
vice president in its communications and media finance group from 1986 to
January 1996.
MR. WOLFERT has more than 12 years experience in the communications and
media industries. Since March 1, 2002, he has served as Chief Operating Officer.
He was appointed to our executive management board by the supervisory board on
January 4, 2000 as our chief corporate development officer. He joined us as
executive vice president in February 1999. From 1995 to December 1998, he served
as chief executive officer of A2000, Europe's first broadband cable operator, as
well as senior vice president of corporate development and president of United
Pan-Europe NL. From 1994 to 1995, he worked as vice president & director of
international business development with Philips Media Cable Systems. Before
that, he was director of sales at KPN broadcast and satellite services from 1991
to 1994. He started his career at the Ministry of Economic Affairs of The
Netherlands, which is responsible for telecom and media policy.
SUPERVISORY BOARD
Our articles of association and the rules of procedure determined by
the supervisory board govern how the supervisory board shall conduct its
activities. Currently, the members of the supervisory board must meet at least
twice within six months. Most supervisory board resolutions are passed by
simple majority vote. However, our articles of association require that until
December 31, 2003, the management board needs the approval of 75% of the
supervisory board members in connection with one or more increases of our share
capital by issuance of new shares for contribution in kind or contribution of
cash up to a maximum of EURO15,443,026. Moreover, in certain instances when the
standing orders of the management board require that the supervisory board
approve certain actions of the management board, a 75% supervisory board vote
is required. The supervisory board elects a chairman and two vice chairmen. The
chairman of the supervisory board is authorized to represent the supervisory
board and enforce our resolutions in all legal matters.
Members of the supervisory board are currently divided into three
classes with two members in Class A, five members in Class B and two members in
Class C. The term of office of each member of Class A expires at the 2005
shareholders' meeting to approve the actions taken by the supervisory board and
the term of office of each member of Class B and Class C will expire at the 2002
and 2003 shareholders' meetings to approve the actions taken by the supervisory
board, respectively. Members of the supervisory board are elected to terms which
expire at the shareholders meeting to approve the actions taken by the
supervisory board during the fourth year subsequent to the beginning of their
term of office. Members of the supervisory board replacing members of any class
will have the term applicable to that
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class. German law provides that members of the supervisory board may be removed
prior to the expiration of their terms by 75% of the votes cast at a general
shareholders' meeting.
Masimo Prelz Otramonti, who was a member of Class C, resigned from the
supervisory board on October 17, 2001. On February 28, 2002, Prof. Dr.
Schwenkedel, who was a member of Class B, resigned from the supervisory board
and joined the management board as Chief Strategic and Development Officer
effective March 1, 2002. James S. Hoch, who was a member of Class B, resigned
from the supervisory board on March 22, 2002. To date, no successors have been
appointed to fill the vacancies on the supervisory board resulting from these
three resignations. These vacancies will be filled by action of the
shareholders' meeting, in accordance with German law.
The members of the supervising board can be reached at PrimaCom AG's
address. Set forth below is information with respect to the six current members
of our supervisory board. There are vacancies for two members of Class B and one
member of Class C.
<Table>
<Caption>
AGE PRINCIPAL OCCUPATION
--- --------------------
CLASS A
Peter Bogner........................... 41 Chief Executive Officer, The Bogner
Organization
Shane O'Neill.......................... 41 Managing Director, and Member of Board of
Management of UPC
CLASS B
Boris Augustin......................... 32 Market maker for Archelon Deutschland GmbH
Klaus von Dohnanyi..................... 71 Consultant
Christian Schwarz-Schilling............ 70 Member of German Federal Parliament;
Managing Director of Dr Schwartz-Schilling &
Partners GmbH
CLASS C
Brigitte Preuss 40 General manager of Parkschlosschen Bad
Wildstein GmbH
</Table>
MR. BOGNER, has been a member of the Supervisory Board since August 28,
2001. Mr Bogner is currently Chief Executive of The Bogner Organization, Santa
Monica, California, and is a member of the Supervisory Board of the National
Academy of Television Arts and Sciences. In December 1999, he became a
consultant to UPC. From 1993 to 1997, Mr Bogner was responsible for
international development and television strategy at Time Warner Inc. and was
involved in the establishment of free and pay television platforms. In 1997, Mr
Bogner became a member of the Global Media Counsel of the United Nations.
MR. O'NEILL joined UPC as managing director, strategy, acquisitions and
corporate development in November 1999. Prior to joining UPC, Mr. O'Neill spent
seven years at Goldman Sachs in the New York, Sydney and London offices. Most
recently, Mr. O'Neill was an executive director in the advisory group for
Goldman Sachs in London where he worked on a number of mergers and acquisitions
and corporate finance transactions for companies in the communications industry,
including UPC. Prior to joining Goldman Sachs, Mr. O'Neill spent four years at
Macquarie Bank in Sydney as well as three years at KPMG in Dublin where he
qualified as a chartered accountant.
MR. AUGUSTIN has served on our supervisory board since December 30,
1998. Since October 1, 1998, he has been employed by Archelon Deutschland GmbH,
engaged in EUREX market making operations. From 1994 to 1998, he worked in the
financial services industry, including derivatives trading with Lehman Brothers
Bankhaus AG, Banque
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National de Paris (Deutschland) OHG, and Banque Paribas (Deutschland) OHG. Mr.
Augustin is the son of a sister of Wolfgang and Ludwig Preuss, who are
significant shareholders of ours.
DR. VON DOHNANYI has served on our supervisory board, the executive
committee of KabelMedia or a predecessor body carrying out comparable functions
since January 1996. In 1998, he was chairman of the supervisory board of
KabelMedia and from December 31, 1997 until 1998 he was chairman of the
executive committee of KabelMedia. Between 1954 and 1960, he worked for Ford
Motor Company, both in the United States and Germany. From 1960 to 1968, Dr. von
Dohnanyi was a co-owner and managing director of the INSTITUT FUR MARKTFORSCHUNG
UND UNTERNEHMENSBERATUNG INFRATEST, Munich (Market and Social Research,
Infratest) and, between 1968 and 1969, he was Permanent Secretary at the German
Ministry of Economics. Dr. von Dohnanyi was a Member of Parliament in Bonn from
1969 to 1981, Parliamentary Undersecretary from 1969 to 1972, and Minister for
Science, Technology and Education from 1972 to 1974. From 1976 to 1981, he was
Deputy Foreign Minister (Staatsminister), in Bonn (in charge of European
affairs). From 1981 to 1988, he was Governor of the City State of Hamburg. From
1990 to 1994, Dr. von Dohnanyi was chairman of the board of TAKRAF Heavy
Machinery, Leipzig, and since 1994 he has been a special advisor to the board of
directors of the TREUHANDANSTALT (since January 1, 1995, BUNDESANSTALT FUR
VEREINIGUNGSBEDINGTE SONDERAUFGABEN) in Berlin. Dr. von Dohnanyi is Chairman of
Kirow AG and Wegweiser GmbH and a director of a:prico AG.
DR. SCHWARZ-SCHILLING has served on our supervisory board as its
chairman since December 31, 1998. From 1996 to 1998, he was the head of the
advisory committee of Aquila Beteiligungs GmbH. From 1993 to 1997, he was
chairman of the supervisory board of Grundig AG and since 1993 he has served as
the managing director of Dr. Schwarz-Schilling & Partner Telecommunications
Consulting GmbH. Since 1995, he has been an international mediator for the
Federation Bosnia-Herzegovina. Since 1995 Dr. Schwarz-Schilling has been a
deputy member of the Foreign Affairs Committee of the German Parliament and from
1995 to 1998, he was the chairman of the subcommittee for Human Rights and
Humanitarian Aid, and since 1998 the vice chairman of that committee. From 1994
to 1995, he was a member of the Foreign Affairs Committee of the German
Parliament and from 1993 to 1998, he has served as a deputy member of the
Committee for Economics of the German Parliament. From 1982 to 1992, he was the
Federal Minister of Post and Telecommunications of the Federal Republic of
Germany and has been serving as a Member of the German Parliament since 1976.
From 1957 to 1982, he was managing director of the family-owned SONNENSCHEIN
AKKUMULATORENFABRIK BERLIN/BUDINGEN GmbH. Since 1999, he has also been chairman
of the supervisory board of Mox Telecom AG and is a director of 2 Venture AG.
MRS. PREUSS, the wife of Wolfgang Preuss, has served on our supervisory
board since December 30, 1998 and as the general manager of KURHOTEL
PARKSCHLOSSCHEN BAD WILDSTEIN GmbH, Traben-Trabach since January 1993. From July
1984 to December 1992, she served in various positions at Suweda.
B. COMPENSATION
On a yearly basis, the chairman of the supervisory board receives
EURO41,000, the vice chairmen receive EURO20,000 and each other member of the
supervisory board receives EURO10,000. In addition, each member of the
supervisory board is entitled to reimbursement for any reasonable business
expenses incurred in the performance of his or her duties. We will reimburse the
members of the supervisory board for any value-added taxes payable on their
compensation.
For the year ending December 31, 2001, we paid an aggregate of
approximately EURO681,000 in cash compensation to Paul Thomason and Hans
Wolfert. We do not provide pension, retirement or similar benefits for the
members of our management board.
Our articles of association provide that for the benefit of the members
of the management and supervisory boards, the company bears the cost of
liability insurance coverage relating to their duties. To this end, we have
renewed the directors, officers and corporate liability insurance to cover
general risks of liability.
None of the members of our management board or supervisory board has
received any loans from us.
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C. BOARD PRACTICES
The date of expiration of the current term of office and the period
during which the members of our management and supervisory boards have served in
that office are provided in subsection 6.A above. We have not entered into
service contracts with the members of our supervisory board and the service
contracts we have entered into with the members of our management board do not
provide for benefits upon termination of employment other than payments under
non-competition clauses.
The rules of procedure for the supervisory board provide that the
supervisory board may delegate any of its powers to a committee or committees
and require the establishment of an investment committee, a compensation
committee and an audit committee. However, the committees do not have the power
to make resolutions on behalf of the supervisory board and may only act in an
advisory capacity. The members of the committees are proposed by at least one
member of the supervisory board and elected by a simple majority of votes of
supervisory board members attending the meeting, provided, however, that a
majority of the members of the audit committee shall consist of independent
members of the supervisory board.
INVESTMENT COMMITTEE
The investment committee consists of Dr. Schwarz-Schilling, Mr.
O'Neill, Mr Bogner, and Dr von Dohnanyi. The task of the investment committee is
to consider and evaluate matters submitted by our management as required by the
standing orders for management board, such as investment and financing plans by
us or any of our subsidiaries, disposition of assets or shares by us or any of
our subsidiaries, increases in capital, mergers and transactions between us or
any of our subsidiaries and any of our affiliates (other than transactions among
us and our wholly owned subsidiaries), all as proposed by our management, and to
make recommendations to the supervisory board.
COMPENSATION COMMITTEE
The compensation committee consists of Dr. Schwarz-Schilling and
Mrs. Preuss. The task of the compensation committee is to consider and evaluate
the compensation payable to members of the management board and any proposed
stock option plans for employees and/or executives and make recommendations to
the supervisory board.
AUDIT COMMITTEE
As a result of recent director resignations, the audit committee
presently consists of Mr. Augustin. Steps are being taken to identify
replacement directors who meet applicable independence tests permitting them to
serve on the audit committee. The task of the audit committee is to consider and
evaluate our financial statements and accounting policies and to make
recommendations to the supervisory board, to undertake such investigations of
our financial condition, operations, financial controls and reporting procedures
as it deems necessary and to take all other actions which are customarily
included in the responsibility of an audit committee of a public company and to
report on our investigations and actions to the supervisory board.
AGREEMENTS WITH DIRECTORS
On March 1, 2001, we entered into an agreement with Dr. von Dohnanyi,
pursuant to which he agreed to provide consulting services until September 30,
2001 in connection with disagreements between us and housing associations.
During the term of the agreement, we agreed to pay Dr. von Dohnanyi a retainer
of aproximately EURO12,782 per month, which included payment for 1.5 days of
Dr. von Dohnanyi's services. To the extent that Dr. von Dohnanyi provided
services in excess of 1.5 days per month, we agreed to pay for these additional
services at a rate of EURO3,835 per day. This agreement expired on
September 30, 2001.
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D. EMPLOYEES
At December 31, 2001, we had 683 full-time and approximately 28
part-time employees in Germany and 138 full-time and 86 part-time employees in
The Netherlands. Our employees in Germany are not covered by a collective
bargaining agreement. However, 151of our employees in Germany have voted to be
represented by works councils. Our employees in The Netherlands have also
elected a works council.
The establishment and the powers of a works council in Germany are laid
down in the German Labor Management Relations Act. The works council represents
all employees except managerial employees and participates in the
decision-making process with management. It has rights to obtain information and
of consultation and co-operation and holds co-determination and veto rights.
Although the German Labor Management Relations Act does not override the
constitutional right of entrepreneurial freedom and to make fundamental business
decisions which are reserved to the employer, rights of co-determination and
veto rights may be exercised by the works council to block certain management
decisions. Particularly in respect of social matters subject to the
co-determination right, management needs the consent of the works council (or
the favorable decision of a conciliation board) to enforce its decisions. Such
social matters cover, among others, plant regulations and behavior of employees,
work hours, the terms of payment of remuneration, vacation, monitoring devices,
safety and health, social facilities, wages and salaries. With respect to
personnel matters, the German Labor Management Relations Act covers all rights,
from access to information to co-determination. For example, personnel planning,
job posting, hiring, grouping, transferring employees and, significantly, the
dismissal of employees are covered. Prior to carrying out a change in relation
to such personnel matters, the employer must attempt to obtain the works
council's consent. The rights and functions of the works council of our
employees in The Netherlands are comparable to those of the German works
councils, except that individual hirings and dismissals are not subject to works
council approval in The Netherlands.
We consider our relations with our employees and with the works
councils in Germany and The Netherlands to be good.
E. SHARE OWNERSHIP
To the best of our knowledge, the individual share ownership of the
persons named in subsection 6.B has not previously been disclosed to
shareholders or otherwise made public. Information about the aggregate share
ownership of members of our management and supervisory boards is set forth in
Item 7 below.
In February 1999, we adopted one stock option plan for the benefit of
all of our and our subsidiaries' employees, known as the universal stock option
plan, and one stock option plan for our and our subsidiaries' executive
officers, known as the executive stock option plan. The two stock option plans
provided for the issuance of stock options allowing eligible employees and
executive officers to acquire a total of 1,000,000 shares, including 300,000
shares under the universal stock option plan and 700,000 shares under the
executive stock option plan. In July 2000, we created two new stock option
plans, a universal plan with 150,000 options and an executive plan with 350,000
options. We may not grant options under the 2000 plans until all options under
the 1999 plans have been granted. The options granted under all of our stock
option plans entitle participants to subscribe for shares at a defined purchase
price. The initial option grants under the stock option plans have a purchase
price equal to the initial public offering price of our shares (EURO29.00). The
purchase price for stock options issued under the stock option plans after the
initial public offering of our shares equal the average closing price of our
shares at the Frankfurt Stock Exchange of the quarterly period preceding the
grant of the option rights. Each option is exercisable only after a two-year
period from the date of grant and only if the average daily closing price of the
shares, calculated as the average over the five consecutive trading days on the
Frankfurt Stock Exchange immediately prior to the first option exercise, equals
at least 120% of the relevant purchase price of the option rights, adjusted to
account for any capital increases or reductions.
The options granted under the stock option plans vest over a three-year
period. One third of the options vest on the first anniversary of the grant and
the remaining options vest in equal monthly amounts over the next two years. The
vested options are exercisable after the second anniversary of the grant. If the
participant's employment agreement terminates before the options vest in full,
the participant's options will be vested only in the portion of options computed
by multiplying 1/36 times the number of full months of employment between the
date of option grant and the date of
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termination. The options granted under the universal stock option plan permit
participant employees to purchase shares having an aggregate exercise price
ranging between 50% and 100% of the participant's annual base salary at the date
of option grant, depending on his term of employment with us or one of our
subsidiaries preceding the option grant. The number of options granted to an
executive participant is dependent on that participant's position in our
organization. Each of the members of the management board is entitled to options
for 100,000 shares. The options granted to other executives are for between
5,000 and 35,000 shares. At December 31, 2001 there were a total of 821,990
options outstanding under the two plans at a weighted average exercise price of
EURO33.90.
The options under both the universal and executive stock option plans
are non-transferable, not inheritable, and expire on the termination of
employment of the participant for whatever reason if termination occurs within
six months of the date of option grant. We may require that participants not
sell the shares within a six-month period from the date when the options were
exercised. Apart from that, the participants in the universal stock option plan
are not restricted from selling the shares, subject to applicable securities
laws. However, the participants in the executive stock option plan are allowed
to exercise their option rights, to the extent that they have been accrued,
wholly or in part, and to sell shares (regardless of whether these shares have
been acquired in exercise of the option rights granted under the executive plan
or otherwise) only during an exercise period which begins one day after and ends
fifteen days after either a general meeting, the publication of a management
report or an annual report. In the event of a merger of us or a restructuring of
our capital, participants will be given replacement shares or rights of a
similar value. Options also lapse when the exercise period expires, which will
happen on the fifth anniversary of the option grant, and in the event of a levy
of execution by the participant's creditors on the participant's stock option
plan, or a bankruptcy of the participant or the termination of a participant for
cause.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of our ordinary bearer shares by: (1) each person known by
us to own beneficially 5% or more of our ordinary bearer shares; and (2) all
members of our management and supervisory boards as a group. Our major
shareholders do not have different voting rights. Based on information provided
by the Bank of New York, as Depositary, we believe that approximately 2,931,656
or 7.4% of our shares are held in the form of depositary shares in the United
States by three record owners.
Except as indicated in the footnotes to this table, to our knowledge
the persons named in the table have sole voting and investment power with
respect to the shares shown as beneficially owned by them, subject to community
property laws where applicable. Except as noted, the address of each of the
persons named in the table is c/o PrimaCom AG, Hegelstrasse 61, 55122 Mainz,
Germany.
<Table>
<Caption>
NAME NUMBER PERCENT(1)
- ---- ------------ --------------
SHAREHOLDERS
United Pan-Europe Communications N.V. (2) 4,948,039 24.99%
Wolfgang Preuss (3)............................... 2,862,410 14.46%
Gartmore Investment Limited (4)................... 1,483,558 7.49%
Morgan Stanley Dean Witter (5) ................... 1,023,985 5.17%
---------- -----
Total............................................. 10,317,992 52.11%
MANAGEMENT AND SUPERVISORY BOARDS
Management and supervisory board members:
Boris Augustin................................ 3,464 *
Peter Bogner.................................. -- --
Klaus von Dohnanyi............................ -- --
Shane O'Neill (6)............................. 4,948,039 24.99%
Brigitte Preuss (7)........................... 166,997 *
Christian Schwarz-Schilling .................. -- --
Stefan Schwenkedel ........................... -- --
Paul Thomason (8)............................. 246,969 1.25%
</Table>
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<Table>
Hans Wolfert (9).............................. 100,000 *
Management and supervisory boards, as a group(10). 5,465,469 27.61%
</Table>
- ----------
* less than 1%
(1) Based upon 19,798,552 shares outstanding as of December 31, 2001, of
which 12,500 shares are treasury shares.
(2) Represents 4,932,139 shares and 31,800 American depositary shares owned
directly by UPC, which is a majority-owned subsidiary of UGC. Although
UGC has the power to elect all of the supervisory board members of UPC,
the members of the supervisory board have a fiduciary duty to all
shareholders of UPC and are subject to other Dutch corporate law
principles in their capacities as members of the supervisory board of
UPC. Based on the information provided by UPC in its filings with the
U.S. Securities and Exchange Commission, we believe that UPC purchased
3,510,385 of its shares on December 21, 1999, and made subsequent
purchases during the remainder of December 1999, January, February and
March 2000. The address of United Pan-Europe Communications N.V. is
Boeing Avenue 53, 1119 PE Schiphol Rijk, The Netherlands.
(3) We have been informed by Mr. Preuss that this includes 2,695,413 shares
over which Mr. Preuss has voting and investment power and 166,997 shares
that he holds in trust for Brigitte Preuss and over which they have
shared voting power. The address of Mr. Preuss is Am Hemel 16, 55124
Mainz, Germany.
(4) We have been informed by Gartmore Investment Limited that this includes
shares beneficially owned by various pension funds, institutional
clients, unit trust holders and investment trust shareholders for which
by Gartmore Investment Limited, Gartmore Fund Managers Limited and
Gartmore Global Partners are discretionary investment managers who have
voting and disposal power over the shares.
(5) Represents the shares held by Morgan Stanley Capital Partners III, L.P.,
which holds 4.59% of the shares, MSCP III 892 Investors, L.P., which
holds 0.47% of the shares, and Morgan Stanley Capital Investors, L.P.,
which holds 0.13% of the shares. MSCP III, L.L.C. is the sole general
partner of Morgan Stanley Capital Partners III, L.P., MSCP III 892
Investors, L.P. and Morgan Stanley Capital Investors, L.P., and, as such,
has the power to vote or direct the vote and to dispose or direct the
disposition of all of the shares held by Morgan Stanley Capital Partners
III, L.P., MSCP III 892 Investors L.P. and Morgan Stanley Capital
Investors, L.P. Morgan Stanley Capital Partners III, Inc., as the
institutional managing member of MSCP III, L.L.C., controls the actions
of MSCP III, L.L.C. Morgan Stanley Dean Witter & Co., as the sole
shareholder of Morgan Stanley Capital Partners III, Inc., controls the
actions of Morgan Stanley Capital Partners III, Inc. Therefore, MSCP III,
L.L.C., Morgan Stanley Capital Partners III, Inc. and Morgan Stanley Dean
Witter & Co. may each be deemed to have beneficial ownership of the
1,023,985 shares held collectively by Morgan Stanley Capital Partners
III, L.P., MSCP III 892 Investors, L.P. and Morgan Stanley Capital
Investors, L.P. The general partner of each of these investment limited
partnerships is an affiliate of Morgan Stanley Dean Witter & Co., Inc.
Morgan Stanley Dean Witter & Co., Inc. disclaims beneficial ownership of
shares held by these investment limited partnerships, except to the
extent of its pecuniary interest therein. The address for each of the
above limited partnerships is c/o Morgan Stanley Capital Partners, 1221
Avenue of the Americas, New York, New York 10020.
(6) Represents the 4,948,039 shares beneficially owned by UPC over which
Mr O'Neill disclaims beneficial ownership except for his pecuniary
interests in UPC. The address for Mr O'Neill is 1 Knightsbridge,
4th Floor, London SW1X 7UP.
(7) Represents shares held in turst for Mrs Preuss by her husband, Wolfgang
Preuss, over which they have shared voting power. The address of
Mrs Preuss is Am Hemel 16, 55124 Mainz, Germany.
(8) Represents 146,969 shares beneficially owned by Mr. Thomason and options
in respect of 100,000 shares.
(9) Represents options in respect of 100,000 shares.
(10) Includes 166,997 shares in which the beneficial owner has shared voting
power and 200,000 share options granted under our executive share option
plan which are fully vested, and the shares reflected in footnote 6
above.
B. RELATED PARTY TRANSACTIONS
Jacques Hackenberg, our CEO since 1998, resigned effective October 17,
2000. We entered into an agreement with Mr. Hackenberg on that date providing
for a one time bonus payment of EURO179,000 and receipt of his salary of
EURO31,000 per month until July 2001, and EURO11,000 per month from August 2001
to December 2001. Mr. Hackenberg's stock options continued to vest until
December 31, 2000, at which time substantially all of his 100,000 stock options,
with an exercise price of EURO29 per share, became vested. Under the agreement,
Mr. Hackenberg was prohibited from competing with us until December 31, 2001.
Pursuant to an agreement effective on November 30, 2000, we purchased
all the partnership interests from Messrs. Wolfgang Preuss, one of our largest
shareholders, Bruno H. Schubert and Hans Werner Klose and Suweda
Betriebsgesellschaft fur Kabelkommunikation im Saarland Kabelprojekt
Friedrichsthal KG for a total purchase price of
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EURO 3,153,000 and the outstanding balances in the partnership's bank accounts.
The assets of this partnership networks serve approximately 3,100 subscribers.
As a result of the Suweda merger on December 30, 1998, AGFB became one
of our largest shareholders. AGFB's only asset, except for a limited amount of
cash, was 3,750,000 of our shares. In connection with the Suweda merger, we
agreed to take all actions necessary to effect a merger of AGFB with us. In this
merger, which was registered with the commercial court on October 2, 2000, the
PrimaCom shares held by AGFB and transferred to us formed the consideration for
the merger and were distributed to the AGFB shareholders who then became our
direct shareholders.
In March, 2000, Multikabel acquired a 15.71% interest in Mediakabel,
B.V., a consortium of cable television operators in The Netheralnds, organized
to provide digital cable televison services. Multikabel has a EURO1,264,000 note
receivable due after 2002 from Mediakabel and paid Mediakabel fees for digital
cable televison services of EURO1,056,000 in 2000 and EURO2,575,000 in 2001.
On February 12, 2001, we reached agreement with UPC on the key terms
of a business combination transaction involving us and UPC's EWT/tss and
Alkmaar subsidiaries. A non-binding letter of intent was signed by the parties
on March 9, 2001. On March 17, 2001, our supervisory board approved the
business combination and the final business combination agreement was signed by
the parties on March 29, 2001 and publicly announced on that day. However, on
August 26, 2001, UPC notified us it would not vote in favor of the merger at
our shareholders' meeting held on August 28, 2001. This agreement was extended
until December 15, 2001 to allow the parties to explore possible amended terms
that would be mutually acceptable, at which time the parties agreed to its
termination.
On December 31, 2000, the Company acquired the shares of Suweda
Betriebsgesellschaft fur Kabelkommunikation im Saarland Kabelprojekt
Friedrichsthal KG ("Friedrichsthal") which was partially owned by Wolfgang
Preuss, a shareholder of the Company, for EURO3,153,000. Friedrichsthal serviced
approximately 3,100 customers at the time of acquisition.
C. INTERESTS OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
The consolidated statements and other financial information are
provided in Item 18 below.
B. SIGNIFICANT CHANGES
No significant change has occurred since the date of the financial
statements provided in Item 18 below.
ITEM 9. THE OFFER AND LISTING
A. OFFER AND LISTING DETAILS
Since February 22, 1999, our ordinary bearer shares trade on the Neuer
Markt segment of the Frankfurt Stock Exchange under the symbol PRC and our
depositary shares are quoted on the National Market segment of the Nasdaq Stock
Market under the symbol PCAG. Each depositary share represents one-half ordinary
bearer share.
The table set forth below, for the periods indicated, shows the
reported high and low quoted prices for the ordinary bearer shares on the
Frankfurt Stock Exchange and for the American depositary shares on Nasdaq.
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<Table>
<Caption>
NASDAQ FRANKFURT STOCK EXCHANGE
HIGH LOW HIGH LOW
------------- ----------- ----------- ---------
(IN U.S.$) (IN EURO)
ANNUAL HIGHS AND LOWS
1999 (from February 22, 1999).......... 29.63 15.00 64.00 29.50
2000................................... 50.00 5.13 99.00 11.60
2001................................... 8.00 1.40 17.90 2.38
QUARTERLY HIGHS AND LOWS
2000
First Quarter.......................... 50.00 30.63 99.00 59.00
Second Quarter......................... 43.50 18.13 86.10 36.00
Third Quarter.......................... 23.88 3.63 50.35 31.00
Fourth Quarter......................... 13.13 5.13 32.00 11.60
2001
First Quarter.......................... 8.00 5.38 17.90 10.60
Second Quarter......................... 6.63 3.70 15.50 8.10
Third Quarter.......................... 4.70 2.00 12.45 2.38
Fourth Quarter......................... 2.40 1.40 5.60 2.68
MONTHLY HIGHS AND LOWS
2001
September.............................. 2.40 1.20 5.90 2.38
October................................ 2.40 1.74 5.60 3.30
November............................... 2.20 1.55 4.75 3.55
December............................... 1.99 1.40 4.43 2.68
2002
January................................ 1.75 1.50 3.89 2.80
February............................... 1.41 0.89 3.25 1.95
March (through March 25................ 1.03 0.65 2.35 1.37
</Table>
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
The information required by this item is set forth in 9.A above.
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
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ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
We incorporate by reference the articles of association filed as
Exhibit 3.1 to the Registration Statement on Form F-1 (Registration Number
333-9854 filed on January 29, 1999.
C. MATERIAL CONTRACTS
Our material contracts are described in Item 4.B above.
D. EXCHANGE CONTROLS
At the present time, Germany does not restrict the export or import of
capital, except for investments in areas like Iraq and Libya in accordance with
applicable resolutions adopted by the United Nations and the European Union.
However, for statistical purposes only, every individual or corporation residing
in Germany must report to the German Central Bank (DEUTSCHE BUNDESBANK), subject
only to certain immaterial exceptions, any payment received from or made to an
individual or a corporation resident outside of Germany if the payment exceeds
approximately EURO12,500 (or the equivalent in a foreign currency). In addition,
residents must report any claims against or any liabilities payable to
non-residents if such claims or liabilities, in the aggregate, exceed
approximately EURO3,000,000 (or the equivalent in a foreign currency) at the end
of a month. The treatment of remittance of dividends, interest or other payments
to nonresident holders of ordinary bearer shares or depositary shares is
described in subsection E below.
E. TAXATION
U.S. FEDERAL INCOME TAXATION
The discussion that follows describes the material United States
federal income tax consequences of the purchase, ownership, and disposition of
our shares or American Depositary Shares, or ADSs, but it does not purport to be
a comprehensive description of all of the tax considerations that may be
relevant to a decision to purchase, own, or dispose of shares or ADSs. In
particular, this discussion of United States federal income tax matters deals
only with holders that will hold shares or ADSs as capital assets and does not
address the tax treatment of the purchase, ownership, and disposition of shares
or ADSs under applicable state or local tax laws, or the laws of any
jurisdiction other than the United States. In addition, this discussion does not
address special federal income tax situations, such as the United States federal
income tax treatment of holders:
- who are securities dealers, financial institutions, insurance
companies or tax exempt organizations;
- who are holding shares or ADSs as part of a hedging or larger
integrated financial or conversion transaction;
- who are citizens or residents of a possession or territory of the
United States;
- who are United States holders (as defined below) with a currency
other than the U.S. dollar as their functional currency;
- who are holding shares or ADSs pursuant to certain retirement
plans;
- who are holding shares or ADSs pursuant to the exercise of an
employee stock option or otherwise as compensation; or
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- who own, directly or indirectly, 10% or more of our voting stock.
In addition, the discussion below does not address the tax
treatment of partnerships or persons who hold shares or ADSs
through a partnership or other pass through entity.
This discussion is based upon the federal income tax laws of the United
States as in effect on the date of this annual report, including the United
States Internal Revenue Code of 1986, as amended, or the Code, and the income
tax treaty between the United States and Germany, or the Treaty, which are
subject to change, possibly with retroactive effect. Subsequent developments
could have a material effect on this discussion.
For United States federal income tax purposes, a United States holder
of an ADS will be treated as the owner of the shares underlying the ADS.
UNITED STATES HOLDERS
As used herein, a United States holder means a beneficial owner of
shares or ADSs who is a United States person. A United States person is, for
United States federal income tax purposes, (1) a citizen or resident of the
United States; (2) a corporation, or other entity treated as a corporation
created or organized in or under the laws of the United States or any state
thereof; (3) an estate or trust, the income of which is subject to United States
federal income tax regardless of its source; (4) a trust if a court within the
United States is able to exercise primary supervision over the administration of
the trust and one or more United States persons have the authority to control
all substantial decisions of the trust; or (5) a trust if it has an election in
effect to be treated as a United States person under United States federal
income tax law.
TAXATION OF DIVIDENDS. Subject to the discussions below relating to
passive foreign investment companies, a United States holder will be required to
include in gross income as a dividend when received (or in the case of ADSs,
when received by the Depositary) the gross mount of any cash or the fair market
value of any property distributed by us in respect of our shares to the extent
of our current and accumulated earnings and profits as determined under United
States federal income tax principles, which may include certain earnings and
profits accumulated by our predecessors. Dividends paid in any currency other
than U.S. dollars will be translated into U.S. dollars at the spot rate on the
date the dividends are received (which for holders of ADSs, would be the date
such dividend is received by the Depositary), regardless of whether the
dividends are in fact converted into U.S. dollars on that date.
Gain or loss, if any, realized on a sale or other disposition of such
foreign currency will be ordinary income or loss and will generally be income
from sources within the United States for foreign tax credit limitation
purposes. If dividends paid in a foreign currency are converted into U.S.
dollars on the day such currency is received, United States holders generally
should not be required to recognize foreign currency gain or loss in respect of
the dividend income.
A distribution with respect to our shares or ADSs in excess of our
current and accumulated earnings and profits, as determined under United States
federal income tax principles, will be treated as a tax-free return of basis in
the shares to the extent of the United States holder's adjusted basis in such
shares, with the balance of the distribution, if any, treated as gain realized
by the United States holder from the sale, exchange or other disposition of the
shares.
Dividends paid by us will not be eligible for the dividends received
deduction generally allowed to domestic corporate shareholders.
THE TREATY. Under German law, German corporations were required to
withhold tax on a distribution in 2001 of profits earned prior to 2001 in an
aggregate amount equal to 26.375% of the gross amount paid to resident and
nonresident stockholders, consisting of a 25% withholding tax plus a 5% surtax
thereon. With respect to dividends from profits earned since January 1, 2001,
German corporations must withhold tax at a rate of 21.1%, consisting of 20%
withholding tax and a 5.5% surtax thereon. In the case of a United States
holder, the German withholding tax is partially refunded under the Treaty to
reduce the withholding tax to 15% of the gross amount of the dividend. In
addition, so long as the German imputation system provides German resident
individual stockholders with a tax credit for corporate taxes with respect to
dividends paid by German corporations, the Treaty provides that United States
holders are entitled to a
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further refund equal to 5% of the gross amount of the dividend. The German
imputation system was abolished in 2002 and consequently this amount will no
longer be refundable as from 2002.
Thus, for each $100 of gross dividend paid by us to a United States
holder in 2001, such holder will initially receive $73.625 ($100 less 26.375%
withholding tax). If the United States holder also applies for the available
refunds under the Treaty German withholding tax is effectively reduced to $15
and the cash received per $100 of gross dividend is $85. Thus, for each $100 of
gross dividend, the United States holder will include $100 in gross income and
will be entitled to a foreign tax credit of $15, subject to the general
limitations of United States federal income tax law.
For U.S. corporate shareholders who hold at least 10% of the shares in
a German corporation, the withholding tax rate is reduced to 5% plus a 5.5%
surtax thereon
GERMAN REFUND PROCEDURES. In order to obtain the 5% tax credit-related
refund, the refund of the German withholding tax in excess of 15%, and the
refund of the 5.5% German surtax, United States holders of shares must submit to
the German tax authorities directly (1) a claim for refund, (2) the original
bank voucher (or certified copy thereof) issued by the paying entity documenting
the tax withheld, and (3) an IRS Form 6166. The claim for refund must be filed
within four years from the end of the calendar year in which the dividend is
received.
Claims for refund are made on a special German claim for refund form,
which must be filed with the German tax authorities: BUNDESAMT FUR FINANZEN,
Friedhofstrasse 1, 53225 Bonn, Germany. The German claim for refund forms may be
obtained from the German tax authorities at the same address, or from the
Embassy of the Federal Republic of Germany, 4645 Reservoir Road, N.W. Washington
D.C. 20007-1998.
U.S. holders may obtain a Form 6166, which is a certification of the
United States holders' last filed United States federal income tax return, by
filing a request with the office of the Director of the Internal Revenue Service
Center at the following address: Internal Revenue Service Center, Philadelphia,
Pennsylvania, Foreign Certificate Request, P.O. Box 16347, Philadelphia,
PA 19114-0447. Requests for certification are to be made in writing and must
include the United States holder's name, social security number or employer
identification number, tax return form number, and tax period for which
certification is requested. The Internal Revenue Service will send the
certification (IRS Form 6166) directly to the United States holders. The issued
IRS Form 6166 will be valid for a period of three years from the date of the
last filed return to which it relates.
Refunds under the Treaty are not available in respect of shares or ADSs
held in connection with a permanent establishment or fixed base in Germany.
TAXATION OF DISPOSITION OF SHARES OR ADSS. Subject to the discussions
below relating to passive foreign investment companies, any gain or loss
realized and recognized by a United States holder on the sale or other
disposition of a share or an ADS (including upon our liquidation or dissolution
or as a result of a non-pro rata redemption of shares) will be subject to United
States federal income tax, as a capital gain or loss, on an amount equal to the
difference between such United States holder's adjusted tax basis in the share
or ADS and the amount realized on our disposition. A United States holder's
adjusted tax basis in a share or ADS (as described above) will be reduced (but
not below zero) by the amount of any distribution that is treated as a return of
basis.
Any gain or loss recognized upon the sale or other disposition of a
share or an ADS will be long-term capital gain or loss if held for more than one
year. For non-corporate United States holders, the United States income tax rate
applicable to a net long-term capital gain recognized for a year currently will
not exceed 20%. For corporate United States holders, a capital gain is currently
taxed at the same rate as ordinary income. The deductibility of a capital loss,
however, is subject to limitations for both non-corporate and corporate United
States holders.
FOREIGN TAX CREDIT CONSIDERATIONS. For United States federal income tax
purposes, United States holders, upon payment of a dividend, will be treated as
having received the amount of any German tax withheld, which is not refundable
(as described above), and as then having paid this tax over to Germany. As a
result of this rule, the amount of dividend included in a United States holder's
gross income may be greater than the amount of cash actually received (or
receivable) by the United States holder.
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Subject to the limitations and conditions set forth in the Code, United
States holders may elect to claim a credit against their United States federal
income tax liability for German tax withheld from dividends or German tax
imposed on capital gains, if any, or, if they do not elect to credit any foreign
tax for the taxable year, they may deduct such tax. For purposes of the foreign
tax credit limitation, foreign source income is classified into one of several
baskets, and the credit for foreign taxes on income in any basket is limited to
United States federal income tax allocable to that income. Dividends or capital
gains will generally constitute "passive income" or "financial services income"
for purposes of the foreign tax credit limitation. Dividends will generally
constitute foreign source income and currency gains and capital gains will
generally constitute United States source income. Capital loss will generally be
allocated against United States source income. Because capital gains will
generally constitute United States source income, as a result of the United
States foreign tax credit limitation, any German or other foreign tax imposed
upon capital gains in respect of the shares may not be currently creditable
unless a United States holder had other foreign source income for the year in
the appropriate foreign tax credit limitation basket.
PASSIVE FOREIGN INVESTMENT COMPANY RULES. Special United States federal
income tax rules apply to holders of equity interests in a corporation
classified as a passive foreign investment company, or PFIC, under the Code. We
would constitute a PFIC for United States federal income tax purposes if 75% or
more of our gross income for a taxable year were to consist of passive income,
or 50% or more of our average assets held during a taxable year were to consist
of passive assets. We do not anticipate that we have or will have sufficient
passive income or assets in any year to constitute a PFIC.
If we were to constitute a PFIC, a United States holder could be
subject to a number of materially adverse United States tax consequences.
Prospective United States holders should consult with their own tax advisors
regarding the potential application of PFIC rules to them.
NON-UNITED STATES HOLDERS
Subject to the discussion of United States backup withholding tax
below, a holder of shares or ADSs other than a United States holder will not be
subject to United States federal income or withholding tax on income derived by
us, dividends paid to a stockholder or gains realized on the sale of shares or
ADSs, provided that: (1) such income items are not effectively connected with
the conduct by the non-United States holder of a trade or business within the
United States; (2) the non-United States holder is not or was not present in, or
does not have or did not have a permanent establishment in, the United States;
(3) there has not been a present or former connection between the non-United
States holder and the United States, including, without limitation, such
non-United States holder's status as a citizen or former citizen thereof or
resident or former resident thereof; and (4) in the case of a gain from the sale
or disposition of shares or ADSs by an individual, the non-United States holder
is not present in the United States for 183 days or more during the taxable year
of the sale and certain other conditions are met.
If a dividend, gain or income with respect to a share or ADS of a
non-United States holder is effectively connected with the conduct of a United
States trade or business (or attributable to a permanent establishment in the
United States, in the case of a holder who is a resident of a country which has
an income tax treaty with the United States), the non-United States holder may
be subject to United States income taxes on such dividend, gain or income at the
statutory rates provided for United States persons after deduction of deductible
expenses allocable to such effectively connected dividend, gain or income. In
addition, if such a non-United States holder is a foreign corporation, it may be
subject to a branch profits tax equal to 30% of its effectively connected
earnings and profits for the taxable year, as adjusted for certain items, unless
a lower rate applies under a United States income tax treaty with the non-United
States holder's country of residence. For this purpose, dividends, gain or
income in respect of a share or ADS will be included in earnings and profits
subject to the branch profits tax if the dividend, gain or income is effectively
connected with the conduct of the United States trade or business of the
non-United States holder.
UNITED STATES BACKUP WITHHOLDING TAX AND INFORMATION REPORTING.
Payments made by a U.S. paying agent or other United States intermediary broker
in respect of the shares or ADSs may be subject to information reporting to the
IRS and to backup withholding tax. Backup withholding will not apply, however
(i) to a holder who furnishes a correct taxpayer identification number and makes
any other required certification or (ii) to a holder who is otherwise exempt
from backup withholding (such as a corporation).
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Any amounts withheld under the backup withholding rules from a payment
to a holder will be allowed as a refund or a credit against such holder's United
States federal income tax, provided that the holder has complied with applicable
reporting obligations.
GERMAN TAXATION
The following is a summary discussion of certain tax matters arising
under German tax law. The discussion does not purport to be a comprehensive
description of all of the tax considerations which may be relevant to a decision
to purchase and/or to sell our shares or ADSs. The discussion is based on the
tax laws of the Federal Republic of Germany as in effect on the date of this
annual report, which are subject to change, possibly with retroactive effect.
The discussion is limited to the impact of income taxes on income from
dividends, capital gains, gift and inheritance tax under German law, and does
not address all aspects of German taxation. The discussion does not consider any
specific facts or circumstances that may apply to a particular investor. In
particular, this discussion does not comprehensively treat the tax
considerations that will be relevant to prospective investors who reside outside
Germany. Any person who is in doubt as to his tax position is urged to consult a
tax adviser before purchasing or selling shares or ADSs.
A short discussion of German corporate taxation precedes the discussion
of taxes applicable to shareholders. German tax law has undergone a fundamental
change due to a major tax reform which became effective in stages on January 1,
2001 and on January 1, 2002. Further changes are to be expected in the future.
As a result, the German tax law is transitory in certain respects.
TAXATION OF PRIMACOM. From January 1, 2001 PrimaCom is subject to
corporate income tax at a rate of 25%. This tax rate applies whether or not
profits are distributed. Certain foreign-source earnings are exempted from
corporate income tax. Effective in the 2002 tax year, dividends received by a
corporation, and profits it derives from the disposal of shares in corporations,
will also be exempted from corporate income tax. This exemption does not apply,
however, to dividends a corporation received which relate to profits generated
prior to 2001. Such dividends paid in 2001 by a German resident stock
corporation were subject to withholding tax of 25% plus a 5.5% surtax
(SOLIDARITATSZUSCHLAG) thereon, creating an effective total rate of 26.375%.
In addition, German corporations are subject to a profit-related trade
tax, the exact amount of which depends on, among other things, the
municipalities in which the corporation maintains branches. Trade tax on income
is deductible as an operating expense for corporate tax assessment purposes.
Profits earned with respect to periods prior to 2001 remain subject to
corporate income tax at a rate of 40% for non-distributed profits and 30% for
distributed profits plus the 5.5% surtax (SOLIDARITATSZUSCHLAG) thereon. Certain
foreign-source profits are exempted, as are dividends received which are paid
out of tax-free foreign earnings or which are considered as capital repayments
for tax purposes.
In so far as the classification of PrimaCom's capital for corporate
income tax purposes at December 31, 2000, reduced by ordinary distributions of
profits for previous years, still includes equity components which were subject
to corporate income tax in previous tax years at a rate of 45% or 40%,
respectively, then such equity components will be carried forward in the form of
a corporate income tax credit. The tax credit amounts to one-sixth of the final
balance of the equity component taxed at a rate of 40% (EK 40-ENDBESTAND).
In the case of dividend distributions paid in the years 2002 to 2016,
which are deemed to have been paid out of the EK 40 ENDBESTAND, both the
corporate income tax and the corporate income tax credit are reduced by
one-sixth of the respective EK 40-ENDBESTAND distributed. Corporate income tax
credits which have not been realized by 2016 will lapse. If certain tax-free
profits originating prior to 2001 are distributed within this 15-year period,
they will be subject to additional taxation at the level of the corporation.
TAXATION OF DIVIDENDS--DIVIDENDS FROM PROFITS EARNED SINCE JANUARY 1,
2001. In general, only half of the dividends paid to individual shareholders
will be subject to income tax (the "half-income-method"
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(HALBEINKUNFTEVERFAHREN)) plus 5.5% surtax thereon. Correspondingly, only half
of the expenses associated with each shareholder's participation are tax
deductible. Dividends which are considered to be repayments of capital for tax
purposes are completely tax-free, provided that the individual shareholder does
not hold a substantial participation as defined below (as of January 1, 2002, a
participation of 1% or more is consider substantial; see "--Taxation of
dividends--Disposals from January 1, 2002").
However, dividend payments to individual shareholders resident in
Germany (i.e., having their domicile or habitual abode in Germany) and whose
shares are held as private assets are generally tax-exempt, provided that the
dividend payments and the shareholders' other investment income, less half the
actual income-related expenses (or blanket deduction for income-related expenses
of DM 100 or DM 200 for married couples filing jointly), do not exceed the
tax-free savers' tax allowance of DM 3,000 or DM 6,000 for married couples
filing jointly). A 5.5% surtax is levied on the assessed income tax of the
shareholder.
If the shareholder is a corporation with its statutory seat or place of
management in Germany, dividends received will not be subject to corporate
income tax. If the shareholder is a bank or financial services institution
within the meaning of Sec. 1 para. 12 of the German Banking Act, and the shares
are accounted for in the trading books (HANDELSBUCH), then dividends are fully
taxable. This is also true with respect to shares of a finance company (as
defined by the Banking Act) purchased with the aim of making short-term gains on
such company's own account. The same rules apply to banks, financial services
institutions and finance companies having their seat in a member state of the
European Community or another country that is a signatory to the Treaty on the
European Economic Area. An exemption of dividend income from trade tax is only
granted if, at the beginning of the year, the shareholder held at least 10% of
the registered share capital of the corporation distributing such dividends.
German corporations must withhold, on behalf of their shareholders, tax
(capital yield tax) at a rate of 20.0% plus a 5.5% surtax thereon, representing
a total rate of 21.1% of the amounts distributed, irrespective of whether the
dividends are fully or partially tax-exempt to the shareholders. The withholding
tax is credited or refunded upon the shareholder's tax assessment on income.
Dividends will be paid without deduction of withholding tax and surtax
to shareholders resident in Germany who have submitted to their custodial bank a
non-assessment certificate (NICHTVERANLAGUNGSBESCHEINIGUNG) issued by the tax
office of their statutory seat or domicile. In addition, no deduction for
withholding tax will be made if the shareholder has submitted a withholding
exemption certificate (FREISTELLUNGSAUFTRAG) to his bank, provided that the
exemption amount indicated in the certificate has not already been used up by
other investment income. The custodial bank may also pay dividends without
deducting withholding tax and surtax to tax-exempt corporations, provided a
non-assessment certificate has been submitted.
The half-income-method is, as a rule, applied to individual
shareholders not resident in Germany. Dividend income of corporations not
resident in Germany is, in principle, tax-exempt. It is, however, at present not
clear whether this is also true if the shares are not held as part of the assets
of a permanent establishment (including a permanent representative) or a fixed
base in Germany, or whether, in these cases, capital yield tax will be levied.
Capital yield tax will be levied, at least initially, at a rate of 20% (plus
surtax thereon) on the full amount of the dividends. It remains to be seen
whether and how capital yield tax withheld will be refunded, either fully or in
part, in so far as the refund exceeds the amount provided for in the applicable
double taxation treaty, if any. Most German double taxation treaties provide for
a reduction of capital yield tax to 15% for dividend distributions to
shareholders whose shares are not held as part of the assets of a permanent
establishment in Germany and who are resident in a country which is party to a
double taxation treaty with Germany. The withholding tax is reduced by refunding
to the shareholder the difference between the total amount withheld, including
solidarity surcharge, less the withholding tax actually owed according to the
applicable double taxation treaty upon the shareholder's application to the
Federal Tax Office (BUNDESAMT FUR FINANZEN, FRIEDHOFSTRASSE 1, 53225 BONN).
Forms for refund requests can be obtained from the German tax
authorities or from German embassies and consulates in various countries. Most
double taxation treaties provide for a further reduction of capital yield tax on
dividends distributed to corporations not resident in Germany which hold at
least 25% (in some cases at least 10%) of the shares or, under some treaties,
voting shares of the distributing corporation. The same rule applies to
dividends distributed to parent companies resident in the European Community
within the meaning of EC Directive 90/435/EEC of
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the Council of July 23, 1990 (the "Parent-Subsidiary Directive"). Where
dividends are distributed to EU parent companies, upon request and provided that
further requirements are met, either the reduced withholding tax rate can be
applied at the time of distribution or the withholding tax may not have to be
withheld at all.
If an individual shareholder holds shares as part of the business
assets of a permanent establishment in Germany, and the shareholder holds less
than one-tenth of the distributing company's share capital at the beginning of
the calendar year in which the dividend is paid, then half of such dividends
will also be subject to trade tax, regardless of whether the shareholder is
resident in Germany.
TAXATION OF DIVIDENDS--TRANSITIONAL ARRANGEMENTS FOR DISTRIBUTION OF
PROFITS EARNED PRIOR TO 2001. Dividends paid in 2001 out of profits earned prior
to 2001 will be taxed according to the so-called "imputation system". According
to this system, dividends paid to shareholders resident in Germany are, after
deduction of the expenses associated with the shareholding, as a rule subject to
income or corporate income tax plus surtax in their full amount. There may be
exceptions for dividend payments regarded as capital repayments for tax
purposes, or for dividends paid out of tax-exempt foreign earnings directly to
corporate shareholders resident in, and fully subject to taxation in Germany.
The imputation system calculates tax according to the standard scale and the tax
is levied on the dividend income after deduction of the expenses associated with
the shareholding. The dividend income (including a corporate tax credit, if any)
of individuals on shares held as private assets is tax-exempt, provided that the
savers' tax allowance referred to above is not exhausted. However, expenses
relating to this income, may be deducted in full. Dividends received by
shareholders who are not resident in Germany relating to shares which are held
as part of the assets of a permanent establishment (including a permanent
representative) or a fixed base in Germany, are fully taxable as part of the
profits of the permanent establishment or fixed base. If the shareholder is an
individual, the income tax will be assessed according to the rates for German
nationals, subject to a minimum of 25%. Income from shares that are part of the
assets of a permanent establishment maintained by a foreign legal entity in
Germany are subject to German corporate income tax at a rate of 25%. In this
case, a surtax of 5.5% of the assessed income or corporate income tax also
applies. The transfer of profits from the permanent establishment or fixed base
to the foreign parent company is not subject to German withholding tax.
Shareholders who hold their shares as part of the assets of a permanent
establishment or a fixed base in Germany will be entitled for the last time in
2001 to a credit or refund of three-sevenths of the dividend resolved by the
general shareholders' meeting (net dividend) for distribution of profits derived
prior to 2001, whether or not they are resident in Germany. This credit also
reduces the assessment basis for the surtax on the shareholders' respective
income or corporate income tax liability, provided that an appropriate tax
certificate is properly submitted. The distribution of profits which were
tax-exempt at the corporate level (e.g. due to a double taxation treaty or
profits which are treated as capital repayment for tax purposes) does not
trigger a tax credit. Shareholders not resident in Germany do not receive a
credit or refund of the corporate income tax credit in Germany unless their
shares are held as part of the assets of a permanent establishment or a fixed
base in Germany.
Dividends distributed by a corporation in the years 2002 to 2016 are
also subject to special provisions. If a corporation's income tax is reduced or
refunded as a result of its distribution of profits earned before 2001 (see
"--TAXATION OF PRIMACOM" above), then the corporate income tax, and the
corporate income tax credit of a shareholder which is subject to corporate
income tax, will be increased by the amount of the tax refunded to such
distributing corporation, but only to the extent that such tax is allocable to
the dividend paid to the shareholder. If the receiving shareholder itself
distributes a dividend in the above-mentioned period, it will generally receive
a corresponding refund. However, if the shareholder is an individual, the half
income method will be applied to the dividends paid out of profits which were
already taxed at 30% at the level of the distributing corporation. In this case,
the corporate income tax paid by the corporation is not credited.
Regardless of whether the shareholder is resident in Germany and
whether such shareholder is an individual or a corporation, the gross dividend
(the dividend resolved by the general shareholders' meeting plus imputed
corporate income tax credit) will be subject to trade tax if the shares are part
of the business assets of a permanent establishment in Germany and the
shareholder held less than 10% of the registered share capital of the
corporation at the beginning of the year.
79
<Page>
A distribution in 2001 of profits earned prior to 2001 is subject to
withholding tax at a rate of 25% plus the 5.5% surtax (creating an effective
rate of 26.375%). There will be no withholding tax if a withholding exemption
certificate or a non-assessment certificate has been submitted to the bank
paying the dividend. In these cases individuals are also entitled to recover the
imputed corporate income tax. If withholding tax is levied, it will, as in the
case of the 20% withholding tax discussed above, be credited to the tax
assessment or refunded to shareholders not resident in Germany according to the
provisions of an applicable double taxation treaty.
TAXATION OF CAPITAL GAINS--DISPOSALS UNTIL THE END OF 2001. Capital
gains derived from the disposal of shares held by a shareholder resident in
Germany as part of business assets or by a shareholder not resident in Germany
as part of the assets of a permanent establishment or a fixed base in Germany
are taxable at the standard rates.
Capital gains derived from shares held by shareholders resident in
Germany as part of their private assets are, however, only subject to tax if the
shares are sold within one year after their acquisition or after the expiration
of this period if the shareholder, at any time during the five years immediately
preceding the disposal, directly or indirectly held at least 10% of the nominal
capital in the corporation (referred to as a "substantial participation"). If
the shareholder acquired the shares gratuitously, the participations of the
previous owner as well as the time he has held the shares will also be taken
into account.
Capital gains from the disposal of shares of a non-resident shareholder
whose shares do not form part of the assets of a permanent establishment or a
fixed base in Germany are only subject to tax if, at any time during the five
years immediately preceding the disposal, the shareholder has directly or
indirectly held at least 10% of the nominal capital of the subject corporation.
Most double taxation treaties to which Germany is a party provide for a complete
exemption from German taxation in this case.
Losses resulting from the disposal of shares held by individuals as
part of their private assets may be deducted for tax purposes only if the shares
have been sold within one year after their acquisition and in a restricted way.
Special provisions apply in the case of an individual who has held at least 10%
of the company's share capital. Losses resulting from the disposal of shares
that are business assets in Germany or are held by a corporation resident in
Germany are generally fully deductible.
TAXATION OF CAPITAL GAINS--DISPOSALS FROM 2002 ONWARDS. The taxation of
capital gains from the disposal of shares in a corporation whose fiscal year
corresponds to the calendar year are subject to considerable changes beginning
in 2002.
In 2002, individuals will only be subject to income tax on half of
their capital gains, provided the gains are taxable according to the provisions
described above. However, the 10% threshold for a substantial participation has
been reduced to 1% under the tax law changes. When determining the respective
participation rate, participations held prior to the effective date of the legal
changes will also be taken into account. Capital gains of shareholders subject
to corporate income tax will, as a rule, be tax-exempt. The deductibility of
losses from the disposal of shares will be further limited or totally excluded.
If the shareholder is a bank or financial services institution within
the meaning of Sec. 1 para. 12 of the German Banking Act, and if the shares
disposed of are accounted for in the trading books (HANDELSBUCH), any capital
gains will be fully taxable. The same rule will apply if the shares disposed of
were acquired by a finance company within the meaning of the Banking Act with
the aim of realizing short-term profits for such company's own account. This is
also true for banks, financial services institutions and finance companies
having their seat in a member state of the European Community or another country
that is a signatory to the Treaty on the European Economic Area.
If the shareholder disposing of shares is an individual not resident in
Germany, then capital gains are only subject to German income tax under the
above-mentioned 1%-rule. Such gains are subject to tax if the shares are part of
the business assets of a permanent establishment or a fixed base in Germany.
With respect to non-resident shareholders, most double taxation treaties to
which Germany is a party provide for an exemption from German taxation.
GIFT AND INHERITANCE TAX. The transfer of shares to another person by
way of gift or succession is in principle only subject to German inheritance or
gift tax if:
80
<Page>
(a) the decedent or donor, or the heir, the beneficiary or other transferee
has his/her residence or habitual abode in Germany at the time of the
transfer or is a German citizen who has not lived abroad for a
continuous period of more than five years without maintaining a
residence in Germany; or
(b) the shares are held by the decedent or donor as part of business assets
for which a permanent establishment is maintained in Germany or a
permanent representative is appointed; or
(c) the decedent or donor at the time of the inheritance or gift, either
alone or together with persons close to him, directly or indirectly
holds at least 10% of the share capital of the German corporation.
The few German double taxation treaties on inheritance and gift tax that are
currently in force (e.g. the treaty with the United States) usually provide for
German gift and inheritance tax to be levied only in the cases described under
(a) and (b) above.
OTHER TAXES. There are no German transfer tax, value added tax, stamp
duty or similar taxes on the purchase, sale or other disposal of shares. Wealth
tax is no longer levied for periods after January 1, 1997.
Effective January 1, 2000, if an individual or a corporation directly
or indirectly acquires 95% or more of the shares in PrimaCom, a 3.5% land
transfer tax will be levied on the value of all land which PrimaCom or one of
its subsidiaries owns.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with these requirements, we file
reports and other information with the Securities and Exchange Commission. These
materials, including this annual report and the exhibits thereto, may be
inspected and copied at the Commission's Public Reference Room at 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the Commission's regional offices at
500 West Madison Street, Suite 1400,Chicago, Illinois 60661, and 233 Broadway
New York, New York 10279. Copies of the materials may be obtained from the
Public Reference Room of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. The public may obtain information on the
operation of the Commission's Public Reference Room by calling the Commission in
the United States at 1-800-SEC-0330. The Commission also maintains a web site at
http://www.sec.gov that contains reports, proxy statements and other information
regarding registrants that file electronically with the Commission.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We have a significant variable rate senior secured credit facility and
as a result could be significantly affected by changes in interest rates. In
this regard, changes in interest rates affect the interest paid on debt. To
mitigate the effect of changes in interest rates, we have entered into interest
rate cap agreements.
81
<Page>
The following table provides information about our derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates. For debt obligations, the table presents principal cash flows
and related applicable floating rate indices by expected maturity dates. For
interest rate caps and floors, the table presents notional amounts and
weighted-average strike rates by contractual maturity dates. Notional amounts
are used to calculate the contractual cash flows to be exchanged under the
contract.
INTEREST RATE SENSITIVITY
PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST RATE/CAP STRIKE PRICE
<Table>
<Caption>
FAIR VALUE
DECEMBER
2002 2003 2004 2005 2006 THEREAFTER TOTAL 31, 2001
---- ---- ---- ---- ---- ---------- ----- --------
Variable-Rate Revolving
Credit Facility (EURO in
thousands). Floating Rate
Index EURIBOR plus
.75% - 2.50%.................. 554 - - - - 831,529 832,083 832,083
Interest Rate Derivative
Financial Instruments
Related to Variable-Rate
Revolving Credit Facility
Interest Rate Floors/Caps
(EURO in thousands).........
Notional Amount............... 425,000 (3,621)
Average Strike Rate(1)........ 5.29%
Average Floor Rate(2)......... 3.76%
</Table>
- ----------
(1) Average strike rate of interest rate cap agreements.
(2) Average floor rate as to the EURO325,000,000 of notional account.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITIES HOLDERS
AND USE OF PROCEEDS
Not applicable.
ITEM 15. [RESERVED]
ITEM 16. [RESERVED]
PART III
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
82
<Page>
ITEM 18. FINANCIAL STATEMENTS
83
<Page>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors,
PRIMACOM AG
We have audited the accompanying consolidated balance sheets of
PrimaCom AG and subsidiaries as of December 31, 2001, 2000 and 1999 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Germany and the United States. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
PrimaCom AG and subsidiaries at December 31, 2001, 2000 and 1999 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States.
As disclosed in Note 11 to the consolidated financial statements, in
2001, the Company changed its method of accounting for financial instruments.
/s/ Ernst & Young
------------------------
ERNST & YOUNG
Deutsche Allgemeine Treuhand AG
Frankfurt, Germany
March 25, 2002
F-1
<Page>
PRIMACOM AG AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1999 2000 2001 2001
------------- ----------- ------------ ------------
EURO EURO EURO U.S.$
(UNAUDITED)
Revenues........................................ 105,949 124,343 165,496 147,304
Operating costs and expenses:
Operations................................... 24,543 30,794 44,195 39,337
Selling, general and administrative.......... 18,590 27,981 37,630 33,494
Corporate overhead........................... 12,413 17,219 14,929 13,288
Depreciation and amortization................ 61,277 75,530 118,360 105,349
------------- ----------- ------------ ------------
Total........................................... 116,823 151,524 215,114 191,468
------------- ----------- ------------ ------------
Operating loss.................................. (10,874) (27,181) (49,618) (44,164)
Interest expense:
Bank debt.................................... 9,995 24,629 61,445 54,691
Sale-leaseback............................... 2,115 1,544 1,323 1,178
Senior Notes................................. 3,764 -- -- --
------------- ----------- ------------ ------------
15,874 26,173 62,768 55,869
Other income (expense).......................... (767) 1,690 (5,649) (5,027)
------------- ----------- ------------ ------------
Loss from operations before income taxes and other
items........................................ (27,515) (51,664) (118,035) (105,060)
Income tax benefit (expense).................... (1,667) (4,258) 15,381 13,690
------------- ----------- ------------ ------------
Loss from operations before minority interest and
equity earnings.............................. (29,182) (55,922) (102,654) (91,370)
Minority interest in net income of subsidiaries (70) (94) (88) (78)
Equity loss in affiliate........................ -- (128) (420) (374)
------------- ----------- ------------ ------------
Loss from operations before extraordinary loss and
cumulative effect of change in accounting
principle.................................... (29,252) (56,144) (103,162) (91,822)
Extraordinary loss, net of income tax .......... -- (8,180) -- --
Cumulative effect of change in accounting
principle.................................... -- -- (946) (842)
------------- ----------- ------------ ------------
Net loss........................................ (29,252) (64,324) (104,108) (92,664)
============= =========== ============ ============
Loss per share:
Basic and diluted:
Loss from operations......................... (1.53) (2.85) (5.21) (4.64)
Extraordinary loss........................... -- (0.41) -- --
Cumulative effect of change in accounting principle -- -- (0.05) (0.05)
------------- ----------- ------------ ------------
Net loss........................................ (1.53) (3.26) (5.26) (4.69)
============= =========== ============ ============
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-2
<Page>
PRIMACOM AG AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<Table>
<Caption>
DECEMBER 31,
-----------------------------------------------------------
1999 2000 2001 2001
----------- ------------ ------------ ------------
EURO EURO EURO U.S.$
(UNAUDITED)
Cash................................. 8,367 4,643 2,933 2,611
Trade accounts receivable-- net...... 3,715 6,796 8,177 7,278
Other current assets................. 3,415 16,113 10,762 9,579
----------- ------------ ------------ ------------
Total current assets................. 15,497 27,552 21,872 19,468
Deferred tax asset-- net............. 47,306 48,169 61,439 54,685
Property and equipment-- net......... 276,788 559,581 576,695 513,302
Goodwill-- net....................... 238,850 357,754 320,095 284,909
Customer lists-- net................. -- 56,067 53,055 47,223
Other assets......................... 8,195 28,722 48,409 43,088
----------- ------------ ------------ ------------
TOTAL ASSETS......................... 586,636 1,077,845 1,081,565 962,675
=========== ============ ============ ============
Accounts payable..................... 5,806 26,786 25,157 22,392
Accrued expenses..................... 14,800 24,608 31,331 27,887
Deferred revenue..................... 12,593 2,736 2,225 1,980
Deferred purchase obligations........ 2,304 4,228 10,984 9,777
Sale-leaseback obligations - current. 3,481 4,341 3,976 3,539
Related party liabilities............ 245 245 -- --
Bank and other debt - current........ 251 955 554 493
----------- ------------ ------------ ------------
Total current liabilities............ 39,480 63,899 74,227 66,068
Bank and other debt.................. 207,840 735,236 831,529 740,124
Sale leaseback - obligations......... 10,641 9,328 5,617 4,999
----------- ------------ ------------ ------------
TOTAL LIABILITIES.................... 257,961 808,463 911,373 811,191
----------- ------------ ------------ ------------
Minority interest.................... 85 198 200 178
SHAREHOLDERS' EQUITY
Registered capital................... 50,435 50,582 50,582 45,022
Additional paid-in capital........... 350,067 354,838 359,754 320,208
Accumulated deficit.................. (71,912) (136,236) (240,344) (213,924)
----------- ------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY........... 328,590 269,184 169,992 151,306
----------- ------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY............................ 586,636 1,077,845 1,081,565 962,675
=========== ============ ============ ============
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<Page>
PRIMACOM AG AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<Table>
<Caption>
ADDITIONAL TOTAL
REGISTERED PAID-IN ACCUMULATED SHAREHOLDERS'
CAPITAL CAPITAL DEFICIT EQUITY
-------------- --------------- --------------- ---------------
EURO EURO EURO EURO
Balance at December 31, 1998 40,348 242,343 (42,660) 240,031
Capital contribution.................... -- 5,931 -- 5,931
Issuance of shares in initial public
offering............................. 10,087 99,036 -- 109,123
Stock option compensation............... -- 2,757 -- 2,757
Net loss................................ -- -- (29,252) (29,252)
-------------- --------------- --------------- ---------------
Balance at December 31, 1999............ 50,435 350,067 (71,912) 328,590
Issuance of shares in acquisition....... 179 1,543 -- 1,722
Merger with AGFB........................ (32) (330) -- (362)
Stock option compensation............... -- 3,558 -- 3,558
Net loss................................ -- -- (64,324) (64,324)
-------------- --------------- --------------- ---------------
Balance at December 31, 2000............ 50,582 354,838 (136,236) 269,184
Release of contingent value rights...... -- 1,063 -- 1,063
Stock option compensation............... -- 3,853 -- 3,853
Net loss................................ -- -- (104,108) (104,108)
-------------- --------------- --------------- ---------------
Balance at December 31, 2001............ 50,582 359,754 (240,344) 169,992
============== =============== =============== ===============
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<Page>
PRIMACOM AG AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------
1999 2000 2001 2001
------------ ----------- ------------- -------------
EURO EURO EURO U.S.$
(UNAUDITED)
OPERATING ACTIVITIES
Net loss........................................... (29,252) (64,324) (104,108) (92,664)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization...................... 61,277 75,530 118,360 105,349
Amortization of other assets....................... 5,719 6,064 4,072 3,624
Amortization of deferred revenue................... (16,683) (29,076) (18,018) (16,037)
Gain on sale of equity investment.................. -- (1,689) -- --
Loss on write-off of equity investment............. -- -- 1,452 1,292
Write-off of capitalized financing fees............ -- 8,180 -- --
Stock option compensation expense.................. 2,757 3,558 3,853 3,429
Deferred income taxes.............................. 3,222 3,000 (13,270) (11,811)
Other.............................................. 70 230 200 178
Changes in assets and liabilities, net of effects of
business acquisitions and disposition:
Trade accounts receivable.......................... (861) (750) (1,311) (1,167)
Other assets....................................... 2,002 (13,849) 5,113 4,552
Accounts payable................................... 828 11,988 (1,675) (1,491)
Accrued expenses................................... (9,091) (6,079) 3,512 3,126
Deferred revenue................................... 24,226 18,902 17,141 15,257
------------ ----------- ------------- -------------
Net cash provided by operating activities.......... 44,214 11,685 15,321 13,637
------------ ----------- ------------- -------------
INVESTING ACTIVITIES
Acquisitions of businesses, net of
cash acquired.................................. (14,441) (272,998) (13,244) (11,788)
Acquisitions of networks........................... (2,367) (15,340) (2,634) (2,344)
Purchases of property and equipment................ (31,704) (99,817) (68,636) (61,092)
Proceeds from sale of businesses................... -- -- 2,850 2,537
Proceeds from sale of property and equipment....... 654 396 1,112 990
------------- ----------- ------------- -------------
Net cash used in investing activities.............. (47,858) (387,759) (80,552) (71,697)
------------- ----------- ------------- -------------
FINANCING ACTIVITIES
Proceeds from credit facilities.................... 170,770 995,388 95,000 84,557
Repayments of credit facilities.................... (100,980) (475,736) -- --
Repayments of bank debt............................ (3,077) (124,615) -- --
Net proceeds from (repayments of) bank overdrafts.. (2,740) 7,726 1,265 1,126
Payments of bank financing fees.................... -- (25,753) (25,001) (22,253)
Repayments of related party liabilities............ (18) -- (245) (218)
Repayments of sale-leaseback obligations........... (30,045) (3,582) (4,382) (3,900)
Repayments of Deutsche Telekom loans............... (527) (110) (44) (39)
Payments of deferred purchase obligations.......... (2,101) (968) (3,072) (2,734)
Proceeds from initial public offering.............. 103,425 -- -- --
Repayment of Senior Notes.......................... (141,194) -- -- --
Proceeds from settlement of foreign currency forward
contracts...................................... 10,651 -- -- --
------------ ----------- ------------- -------------
Net cash provided by financing
activities..................................... 4,164 372,350 63,521 56,539
------------ ----------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents............................... 520 (3,724) (1,710) (1,521)
Cash and cash equivalents at beginning of year..... 7,847 8,367 4,643 4,132
------------ ----------- ------------- -------------
Cash and cash equivalents at end of year........... 8,367 4,643 2,933 2,611
============ =========== ============= =============
</Table>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<Page>
1 BASIS OF PRESENTATION
Prior to December 31, 1999, the Company prepared and reported its
consolidated financial statements in Deutsche Marks ("DM"). With the
introduction of the Euro ("EURO" or "Euro") on January 1, 1999, the Company has
presented the accompanying consolidated financial statements in Euro.
Accordingly, the Deutsche Mark consolidated financial statements for prior
periods have been restated into Euro using the official fixed conversion rate of
EURO1.00 = DM 1.95583. The consolidated financial statements will, however, not
be comparable to the Euro financial statements of other companies that
previously reported their financial information in a currency other than
Deutsche Marks. All amounts herein are shown in Euros and for the year ended
December 31, 2001 are also presented in U.S. dollars ("$"), the latter being
unaudited and presented solely for the convenience of the reader at the rate of
EURO1.1235 = $1.00, the Noon Buying Rate of the Federal Reserve Bank of New
York. The translations should not be construed as a representation that the
amounts shown could have been, or could be, converted into U.S. dollars at that
or any other rate.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING PRINCIPLES
The accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States ("U.S.
GAAP").
CONSOLIDATION
The consolidated financial statements include the accounts of PrimaCom
and its majority owned subsidiaries. All significant intercompany accounts
and transactions have been eliminated in consolidation.
CASH EQUIVALENTS
All highly liquid investments purchased with an original maturity of
three months or less are considered cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrated credit risks consist primarily of cash and trade receivables.
Credit risk on trade receivables is minimized as a result of the large and
diverse nature of the Company's customer base. The Company maintains most
of its cash and cash equivalents at international financial institutions in
Germany and the Netherlands.
REVENUE RECOGNITION
Revenue is comprised primarily of revenue earned from subscription fees
and to a much lesser extent charges for installation and connections.
Subscription revenue is recognized at the time services are provided to
customers. Charges for installation and connections are deferred and
amortized on a straight-line basis into income over the related service
agreements.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and are comprised principally
of assets used in the development and operation of cable television
systems.
Depreciation is provided using the straight-line method over estimated
useful lives as follows: cable television systems: 12 years; equipment and
fixtures: five to 10 years; buildings: 25 years; and purchased software:
three to five years.
F-6
<Page>
GOODWILL AND INTANGIBLE ASSETS
Goodwill consists of the excess purchase price over the fair value of
the identifiable net assets acquired in various acquisitions. Such amounts
are generally amortized using the straight-line method over 12 years.
Intangible assets consist primarily of the value assigned to customer lists
acquired by the Company in 2000 as part of the Multikabel acquisition.
Accumulated amortization for goodwill at December 31, 1999, 2000 and 2001
was EURO26,980,000, EURO53,121,000 and EURO95,739,000 respectively.
Accumulated amortization of intangible assets at December 31, 2000 and 2001
was EURO1,244,000 and EURO6,185,000, respectively.
IMPAIRMENT OF LONG LIVED AND IDENTIFIABLE INTANGIBLE ASSETS
In accordance with SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-
LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF, the Company
records impairment losses on long-lived assets used in operations when
events and circumstances indicate that the assets might be impaired and
undiscounted cash flows estimated to be generated by those assets are less
than the carrying amount of those assets.
During 2001, events and circumstances indicated that long-lived assets
of the Company might be impaired due to weak economic conditions of the
cable television market in Germany and the recent decline in the Company's
share price. As a result, management estimated the undiscounted cash flows
attributable to their long-lived assets. This initial estimate indicated
that approximately EURO28,542,000 of the Company's German segment
long-lived assets had a carrying amount in excess of their estimated
undiscounted cash flows. Accordingly, management calculated the fair value
of these assets using the discounted cash flows of these assets and
recorded a write-down of EURO7,654,000, which is recorded in depreciation
and amortization expense. The discounted cash flows technique is subjective
and requires management to use estimates of future cash flows and discount
rates, which are subject to change and revision.
ADVERTISING COSTS
Advertising costs are charged to expense as incurred. The Company
incurred advertising costs in 1999, 2000 and 2001 totaling EURO 1,933,000,
EURO4,271,000 and EURO3,667,000, respectively.
STOCK OPTIONS
The Company accounts for its stock option plans in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (FAS 123). In accordance with FAS 123
compensation expense is recognized over the vesting period based on the
fair value of all stock-based awards on the date of the grant.
BASIC AND DILUTED EARNINGS PER SHARE
The Company calculates earnings per share in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (FAS 128).
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(FAS 109). In accordance with FAS 109, deferred tax assets and liabilities
are based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse.
The effect of a change in tax rates on deferred tax assets and liabilities
is recognized in the period that includes the enactment date. Deferred tax
assets are reduced by a valuation allowance when the Company cannot make
the determination that it is more likely than not that some portion or all
of the related tax asset will be realized.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments such as cash, accounts
receivable and accounts payable approximates their fair value based on the
short-term maturities of these instruments. The carrying value of bank
F-7
<Page>
and other debt approximates fair value based on quoted market prices for
the same or similar issues as well as current rates offered to the Company.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
RECLASSIFICATIONS
Certain amounts in the prior years have been reclassified to conform
with the 2001 consolidated financial statement presentation.
3. SIGNIFICANT ACQUISITIONS
1999 ACQUISITIONS
On January 1, 1999, the Company acquired the shares of Funkmechanik
Magdeburg GmbH ("FUMA") for total consideration of EURO7,970,000. FUMA
passed approximately 25,017 homes and served 23,588 customers at the time
of the acquisition.
On October 22, 1999, the Company acquired 72.6% of the shares of
Kabelcom Halberstadt GmbH ("Halberstadt") for total cash consideration of
approximately EURO4,083,000. Halberstadt passed approximately 10,000 homes
and served 9,100 customers at the time of the acquisition.
Since January 1, 1999, the Company has been acquiring the minority
interests in its majority owned subsidiary, Kabelcom Aachen Gesellschaft
fur Kabel-Kommunikation mbH & Co. KG ("Kabelcom Aachen"). During 1999, the
Company acquired 10.2% of the minority interests of Kabelcom Aachen for
EURO1,916,000, bringing its total ownership position to 97.8%. It is
PrimaCom's intention to seek to acquire the remaining 2.2% of Kabelcom
Aachen.
All acquisitions have been accounted for under the purchase method of
accounting and accordingly the results of operations of the acquired
business have been included in the consolidated financial statements since
the respective dates of acquisition. The 1999 acquisitions resulted in
goodwill of EURO12,610,000, which is being amortized over 12 years.
The pro forma impact on revenues and income from continuing operations
from the aforementioned acquisitions is immaterial.
2000 ACQUISITIONS
On January 1, 2000, the Company purchased cable television networks
from Regionalservice Kabelfernsehen GmbH ("REKA") for total consideration
of approximately EURO3,323,000. The networks acquired from REKA passed
approximately 7,039 homes and served approximately 5,889 customers at the
time of the acquisition.
On January 1, 2000, the Company purchased cable television networks
from Ver.Di neue Medien GmbH ("Ver.Di") for total consideration of
approximately EURO1,659,000. The networks acquired from Ver.Di passed
approximately 4,682 homes and served approximately 4,682 customers at the
time of the acquisition.
On June 16, 2000, the Company acquired 26% of the shares of MAINZ-KOM
Telekommunikation GmbH ("Mainz Kom") for total consideration of
approximately EURO1,150,000. Mainz Kom is a city carrier with approximately
90 kilometers of fiber optic lines in Mainz and Wiesbaden, Germany.
F-8
<Page>
On July 1, 2000, the Company purchased cable television networks from
Antennendienst Cabel Tec GmbH ("ADCT") for total consideration of
approximately EURO5,931,000. The networks acquired from ADCT passed
approximately 9,600 homes and served approximately 7,320 customers at the
time of the acquisition.
On August 1, 2000, the Company acquired the shares of Steinert und
Kuhn GmbH & Co. KG ("S&K") for total consideration of approximately
EURO1,964,000. S&K passed approximately 5,200 homes and served
approximately 5,100 customers at the time of the acquisition.
On September 18, 2000, the Company acquired the shares of
N.V. Multikabel ("Multikabel"), a cable television operator based in the
Netherlands, for total cash consideration of approximately EURO250,600,000
(including acquisition expenses) and the assumption of approximately
EURO124,300,000 of Multikabel debt, which was refinanced by the Company.
Multikabel passed approximately 318,000 homes and served approximately
297,000 customers at the time of the acquisition.
On October 1, 2000, the Company purchased cable television networks
from Pfalzwerke AG ("Pfalzwerke") for total consideration of approximately
EURO4,581,000. The networks acquired from Pfalzwerke passed approximately
11,068 homes and served approximately 6,400 customers at the time of the
acquisition.
On October 1, 2000, the Company acquired the shares of Komco
Kommunikationstechnik GmbH ("Komco") for total consideration of
approximately EURO7,158,000. Komco passed approximately 19,573 homes and
served approximately 15,900 customers at the time of the acquisition.
On October 1, 2000, the Company acquired 51% of the shares of Kutz
Kabel-Service GmbH ("Kutz") for total consideration of approximately
EURO1,180,000. Under the terms of the purchase agreement, the Company and
Kutz both have the option at certain dates to respectively buy or sell the
remaining 49% of the shares of Kutz for total consideration of
approximately EURO3,415,000, which is recorded in deferred purchase
obligations as of December 31, 2001. In March 2002, Kutz exercised their
option to sell the remaining 49% to the Company. Kutz passed approximately
12,000 homes and served approximately 10,000 customers at the time of the
acquisition.
On October 25, 2000, the Company acquired the shares of Televis Grimma
GmbH ("Televis") for total cash consideration of approximately
EURO10,819,000 and the future issuance of 70,000 PrimaCom shares, which at
the time of the acquisition had a market value of approximately
EURO1,722,000, based on the closing price on the Neuer Markt. Televis'
passed approximately 27,000 homes and served approximately 24,000 customers
at the time of the acquisition. Upon registration of the shares in February
2001, the 70,000 PrimaCom shares were issued to Televis.
On December 31, 2000, the Company acquired the shares of Suweda
Betriebsgesellschaft fur Kabelkommunikationim Saarland Kabelprojekt
Friedrichsthal KG ("Friedrichsthal"), which was partially owned by Wolfgang
Preuss, a shareholder of the Company for total consideration of
EURO3,153,000. Friedrichstahl serviced approximately 3,100 customers at the
time of the acquisition.
All acquisitions have been accounted for under the purchase method of
accounting and accordingly the results of operations of the acquired
business have been included in the consolidated financial statements since
the respective dates of acquisition. The 2000 acquisitions resulted in
goodwill of EURO143,552,000 (EURO129,473,000 for the Multikabel
acquisition), and customer lists of EURO57,267,000 for the Multikabel
acquisition. The goodwill and customer lists are being amortized over 12
years.
The following unaudited proforma information for the years ended
December 31, 1999 and 2000 assumes the aforementioned 1999 and 2000
acquisitions occurred on January 1, 1999:
<Table>
<Caption>
1999 2000
---- ----
Revenues (EURO in thousands)...................... 134,708 152,706
Net loss (EURO in thousands)...................... (64,713) (88,253)
Net loss per share (EURO)......................... (3.38) (4.47)
</Table>
F-9
<Page>
2001 ACQUISITIONS
On January 1, 2001, the Company acquired the shares of
Grossgemeinschafts-Antennenanlangen Lizenz und Betriebs GmbH ("GGA") for
total consideration of approximately EURO 2,213,000. GGA passed
approximately 5,000 homes and served approximately 4,212 cable television
subscribers at the time of the acquisition.
On January 1, 2001, the Company acquired the shares of
Telekommunikations GmbH Kirchheimbolanden ("TKK") for total consideration
of approximately EURO 1,000,000. TKK passed approximately 4,120 homes and
served approximately 1,790 cable television subscribers at the time of the
acquisition.
On January 1, 2001, the Company signed an agreement to acquire 51% of
the shares of Telekommunikationsgesellschaft mbH Eisenhuttenstadt, ("TKE")
for total consideration of approximately EURO 26,000. After the municipal
supervisory authority had approved the transaction, a claim was filed
against the procedure of this sale. The court decided that the transaction
is valid and the Company received the written decision of the court. In
December 2001, the Company finalized the purchase of the 51% of TKE. Under
the terms of the purchase agreement, the Company and TKE both have the
option at certain dates to respectively buy or sell the remaining 49% of
the shares of TKE for total consideration of approximately EURO7,414,000.
The Company advanced approximately EURO2,045,000 to the shareholders of TKE
and the remaining purchase obligation amounting to approximately
EURO5,369,000 is recorded in deferred purchase obligations as of
December 31, 2001. TKE passed approximately 11,700 homes and served
approximately 10,300 customers at the time of the acquisition.
On April 1, 2001, the Company purchased cable television networks from
Kabelfernsehen Zwenkau GmbH ("Zwenkau") for total consideration of
approximately EURO 1,127,000. The networks acquired from Zwenkau passed
approximately 2,800 homes and served approximately 2,250 cable television
subscribers at the time of the acquisition.
On July 1, 2001, the Company purchased cable television networks from
MULTICOM GmbH ("MultiCom") for total consideration of approximately
EURO 1,024,000. The networks acquired from MultiCom passed approximately
1,335 homes and served approximately 1,335 cable television subscribers at
the time of the acquisition.
On July 1, 2001, the Company acquired the shares of QuickNet, a
subsidiary of Sonera Plaza Netherlands B.V. for approximately
EURO 8,400,000. Concurrent with the acquisition, PrimaCom sold a portion of
the business to Chello Broadband N.V. for approximately EURO 2,850,000.
QuickNet provided high speed Internet access services to approximately
40,000 subscribers in the Netherlands. Approximately 18,000 of QuickNet's
subscribers were served by PrimaCom's broadband networks. The 18,000
subscribers served by PrimaCom's networks, all modems currently used to
service these subscribers, an additional 4,000 modems, the server park and
a fully equipped call center were retained by PrimaCom.
On August 1, 2001, the Company acquired 51% of the shares of EBH
Service GmbH ("EBH") for total consideration of approximately EURO 26,000.
Under the terms of the purchase agreement, the Company and EBH both have
the option at certain dates to respectively buy or sell the remaining 49%
of the shares of EBH for total consideration of approximately EURO956,000.
The Company advanced approximately EURO865,000 to the Shareholders of EBH
and the remaining purchase obligation amounting to approximately EURO91,000
is recorded in deferred purchase obligations as of December 31, 2001. EBH
passed approximately 2,330 homes and served approximately 2,150 customers
at the time of the acquisition.
F-10
<Page>
EFFECTS OF CONSOLIDATION OF KUTZ, TKE AND EBH
Under U.S. GAAP, the Company followed the guidance in EITF 00-04
MAJORITY OWNER'S ACCOUNTING FOR A TRANSACTION IN THE SHARES OF A
CONSOLIDATED SUBSIDIARY AND A DERIVATIVE INDEXED TO MINORITY INTEREST IN
THAT SUBSIDIARY. Under this guidance, the put and the call options of Kutz,
TKE and EBH are viewed on a combined basis with the minority interest and
are accounted for as financing for the purchase by the Company. As a
result, net income attributable to the minority interest is allocated to
PrimaCom, rather than to the minority shareholder. Accordingly, the Company
consolidated 100% of these companies with an offsetting liability to
purchase the remaining minority interest owned by the remaining
shareholders of these companies.
As a result, depreciation and amortization expense in 2001 is
EURO385,000 higher, deferred purchase obligations are EURO8,875,000 higher
and long-lived assets are EURO11,820,000 higher.
The following unaudited proforma information for the years ended
December 31, 2000 and 2001 assumes the aforementioned 2000 and 2001
acquisitions occurred on January 1, 2000:
<Table>
<Caption>
2000 2001
---- ----
Revenues (EURO in thousands)........................ 137,949 172,722
Net loss (EURO in thousands)........................ (57,603) (103,694)
Net loss per share (EURO)........................... (2.92) (5.24)
</Table>
4. INVESTMENTS
Throughout 2001, the Company was actively pursuing the sale of its
Mainz Kom investment. On March 22, 2002, the Company sold its investment in
Mainz Kom for EURO562,000 to a third party. As a result, in 2001, the
Company recorded a charge to other expense of EURO1,452,000 to write-down
this investment to the agreed upon sales price.
5. UPC
On March 29, 2001, the Company entered into an agreement with United
Pan-European Communications N.V. ("UPC"), its largest shareholder, to
combine certain cable operations. On December 14, 2001, due to significant
changes in market conditions, the companies announced that they had agreed
to terminate the agreement effective December 15, 2001. Due to the
termination of the merger, the Company wrote-off approximately
EURO 4,938,000 of capitalized costs to other expense in 2001.
6. ACCOUNTS RECEIVABLE
Trade accounts receivable consists of the following:
<Table>
<Caption>
DECEMBER 31,
---------------------------------
1999 2000 2001
---- ---- ----
(EURO IN THOUSANDS)
Trade accounts receivable -- gross............ 5,337 8,376 10,281
Allowance for doubtful accounts............... (1,622) (1,580) (2,104)
------- ------ -------
Trade accounts receivable -- net.............. 3,715 6,796 8,177
======= ====== =======
</Table>
F-11
<Page>
7. PROPERTY AND EQUIPMENT
The components of property and equipment are as follows:
<Table>
<Caption>
DECEMBER 31,
----------------------------------
1999 2000 2001
---- ---- ----
(EURO IN THOUSANDS)
Cable television networks.................. 352,506 630,088 726,237
Equipment and fixtures..................... 42,716 54,658 55,838
Land and buildings......................... 2,416 4,227 4,281
Other...................................... 5,926 10,878 14,306
Construction in progress................... 19,719 52,832 37,400
-------- --------- ---------
Total...................................... 423,283 752,683 838,062
Less accumulated depreciation.............. (146,495) (193,102) (261,367)
-------- --------- ---------
Property and equipment-- net............... 276,788 559,581 576,695
======== ========= =========
</Table>
Depreciation expense on property and equipment was EURO36,318,000,
EURO46,727,000 and EURO69,722,000 for 1999, 2000 and 2001, respectively.
8. SALE-LEASEBACK
In March and October 1993, the Company entered into two master lease
agreements governing the terms of the majority of its cable network sale
and leaseback transactions. Under the March 1993 agreement, the sale and
leaseback transactions have a lease term of nine years and a monthly
leasing rate of approximately 1.6% of the original sales price. At the end
of the lease term, the Company has the option to extend leases under this
agreement for one year or to repurchase the cable networks at the higher of
10.0% of the original sales price or the recorded net book value on the
lessor's books. Under the October 1993 agreement, the sale and leaseback
transactions have a lease term of nine years and a monthly leasing rate of
approximately 1.5% of the original sales price. The lessor has the right to
require the Company to repurchase the cable networks at the end of the
lease term at an amount equal to approximately 11.5% of the original sales
price. If the purchase option is not exercised, the lease automatically
renews for an additional three years. The leases have been accounted for as
capital leases in accordance with Statement of Financial Accounting
Standards No. 98 "Accounting for Leases".
<Table>
<Caption>
DECEMBER 31,
------------------------------
1999 2000 2001
---- ---- ----
(EURO IN THOUSANDS)
Borrowings under sale-leaseback obligations......... 14,122 13,669 9,593
Current portion thereof............................. 3,481 4,341 3,976
</Table>
On February 1, 1999, the Company repurchased certain cable networks
which had previously been subject to various sale-leaseback arrangements.
The difference between the purchase price and the net book value of the
related sale-leaseback obligations was EURO5,991,000 and increased property
and equipment by an equivalent amount.
On July 1, 1999, the Company purchased certain cable networks which
had previously been subject to various sale-leaseback arrangements. The
difference between the purchase price and the net book value of the related
sale-leaseback obligations was EURO2,003,000 and increased property and
equipment by an equivalent amount.
Maturities of the sale-leaseback obligations for the next five years
consisted of the following at December 31, 2001:
F-12
<Page>
<Table>
<Caption>
(EURO IN
THOUSANDS)
-----------
2002......................................................... 3,976
2003......................................................... 2,713
2004......................................................... 1,327
2005......................................................... 963
2006......................................................... 586
Thereafter................................................... 28
-----------
Total........................................................ 9,593
===========
</Table>
Assets under capital leases are included within property and equipment
as follows:
<Table>
<Caption>
DECEMBER 31,
--------------------------------
1999 2000 2001
---- ---- ----
(EURO IN THOUSANDS)
Cable television networks....................... 24,070 27,991 29,320
Less accumulated depreciation................... (10,238) (12,329) (14,721)
-------- -------- --------
Cable television networks--net.................. 13,832 15,662 14,599
======== ======== ========
</Table>
Depreciation expense on assets recorded under capital leases
approximated, EURO2,506,000, EURO2,091,000 and EURO2,392,000 in 1999, 2000
and 2001, respectively.
9. BANK AND OTHER DEBT
Bank and other debt consists of the following:
<Table>
<Caption>
DECEMBER 31,
----------------------------------
1999 2000 2001
---- ---- ----
(EURO IN THOUSANDS)
Borrowings under credit facilities............... 207,840 727,500 822,500
Overdrafts....................................... 11 7,736 9,029
Deutsche Telekom loans........................... 196 85 41
Other............................................ 44 870 513
--------- ------- --------
Total bank and other debt........................ 208,091 736,191 832,083
Less current portion thereof..................... 251 955 554
--------- ------- --------
Bank and other debt.............................. 207,840 735,236 831,529
========= ======= ========
</Table>
Effective September 18, 2000, the Company entered into a new credit
facility (hereafter the "Facility") with a number of banks. The total
aggregate amount of the Facility was EURO1,000,000,000, comprised of a
EURO985,000,000 Revolving Credit Facility and a EURO15,000,000 Overdraft
Facility. Under the terms of the Facility, the available commitment amount
is reduced in equal quarterly amounts to the amounts reflected below as of
December 31 of the years indicated:
<Table>
<Caption>
COMMITMENT
YEAR ENDED AMOUNT
---------- ------
(EURO IN
THOUSANDS)
2002................................................... 1,000,000
2003................................................... 935,750
2004................................................... 837,223
2005................................................... 738,723
2006................................................... 640,223
2007................................................... 517,098
2008................................................... 339,798
2009................................................... --
</Table>
F-13
<Page>
Under the terms of the Revolving Credit Facility, the Company's
subsidiaries may borrow, repay and reborrow, up to the commitment amounts,
until December 31, 2009, when all amounts will become due and payable. At
December 31, 2001, the Company had issued letters of credit totaling
EURO9,960,000 in connection with acquisitions, which limits the Company's
ability to borrow by an equivalent amount. At December 31, 2001, the
Company had unused availability under the Revolving Credit Facility
EURO178,512,000. The interest rates on the Revolving Credit Facility were
5.59% - 5.91% at December 31, 2001.
Under the Overdraft Facility, the Company may borrow, repay and
reborrow, up to the commitment amounts, until December 31, 2009, when all
outstanding amounts will become due and payable. At December 31, 2001, the
Company had unused availability under the Overdraft Facility of
EURO5,971,000. The interest rate on the Overdraft Facility was 8.25% at
December 31, 2001.
Amounts outstanding under the Facility bear interest at the rate of
EURIBOR in the case of amounts owing in Euro and LIBOR in the case of
amounts owing in a currency other than Euro plus a margin of between 0.75%
and 2.5%, depending on the ratio of total indebtedness of the Company's
subsidiaries to annualized EBITDA. At December 31, 2001, the borrowings
were at floating interest rates of 5.59% - 5.91%.
The Facility is secured by, among other things, liens on receivables
from cable television subscribers, concession agreements, equipment and
interests in all shares of PrimaCom's subsidiaries. In addition, the
Facility contains certain covenants which, among other things, require the
Company to maintain specified ratios relating to cash flow and total debt.
Furthermore, there are restrictions on incurring debt, encumbering revenues
or assets, loaning funds to third parties or assuming liabilities,
disposing of properties and paying dividends or making distributions.
On September 18, 2000, the Company entered into a EURO375,000,000
senior working capital facility. The senior working capital facility has a
term of 10 years. On this date, the Company entered into a Contingent Value
Right ("CVR") Agreement which was a condition precedent to the obligations
of the lenders under the senior working capital facility. Pursuant to the
CVR Agreement, the Company is required, if requested on or before
September 18, 2010, to make a payment in either cash or the Company's
common shares to the holders of each CVR Certificate equal to the
difference between the market price of a share of common stock of PrimaCom
on the date of exercise of such CVR and 110% of the market price of a share
of such common stock on the relevant release date, being September 30,
2001, December 31, 2001, March 31, 2002 and June 30, 2002, subject to the
provisions of the CVR Agreement, in particular various provisions
protecting the holders of CVR Certificates against dilution. The total
number of CVRs to be issued under the CVR Agreement equals five percent of
the outstanding number of shares of the Company. The total amount of CVR's
to be issued under this assignment is EURO989,300. As of December 31, 2001,
the Company did not have any borrowings outstanding under this senior
working capital facility.
In connection with the release of CVR's on September 30, 2001 and
December 31, 2001, the Company recorded EURO 1,063,000 to other assets and
additional paid in capital for the fair value of the CVR's on those dates.
The amount capitalized in other assets will be amortized straight-line over
the remaining life of the senior working capital facility.
As of December 31, 2001, the Company had net capitalized bank
financing fees totaling approximately EURO40,906,000, which are included in
other assets. These capitalized bank fees are being amortized as bank debt
interest over the remaining term of the Facility and senior working capital
facility. Amortization expense for bank financing fees was EURO743,000 and
EURO3,422,000, for 2000 and 2001, respectively.
In 2000 and 2001, the Company capitalized EURO2,645,000 and
EURO3,093,000, respectively, of interest costs related to the construction
of networks.
On September 18, 2000, in conjunction with the acquisition of
Multikabel, the Company refinanced and cancelled its existing bank facility
and wrote-off the unamortized portion of the fees and expenses associated
with the canceled bank facility. The associated write-off resulted in an
extraordinary loss of EURO8,180,000 net of tax.
F-14
<Page>
The Company has obtained loans from Deutsche Telekom to finance the
construction of certain of its cable networks. The loan amounts granted are
in direct proportion to the number of subscribers connected to the
networks. Loan amounts are repayable in 96 installments each equal to
1/70th of the original loan balance plus interest.
Maturities of the bank and other debt for the next five years are:
<Table>
<Caption>
YEAR ENDED AMOUNT DUE
----------- ----------
(EURO IN
THOUSANDS)
2002............................................................ 554
2003............................................................ --
2004............................................................ --
2005............................................................ --
2006 --
Thereafter...................................................... 831,529
-------
Total bank and other debt....................................... 832,083
=======
</Table>
<Table>
<Caption>
DECEMBER 31,
------------------------------
1999 2000 2001
---- ---- ----
(EURO IN THOUSANDS)
Cash paid for interest:
Bank and other debt....................... 4,264 24,173 55,031
Sale-leaseback transaction ............... 2,115 1,544 1,323
----- ------ ------
6,379 25,717 56,354
===== ====== ======
</Table>
10. SENIOR NOTES AND FOREIGN EXCHANGE
On March 30, 1999, the Company redeemed and canceled substantially all
of its outstanding Senior Notes for cash consideration of EURO140,297,000
plus brokerage fees of approximately EURO597,000. On April 21, 1999, the
Company redeemed and canceled the remainder of its outstanding Senior Notes
for cash consideration of EURO892,000. The purchase price and fees paid
approximated the net book value of the Senior Notes at the time of the
redemption.
On March 26, 1999, in connection with the purchase of the Senior
Notes, the Company settled its foreign currency forward contracts for cash
consideration of EURO10,650,000. The sales proceeds approximated the net
book value of the contracts at the time of the disposition. Cash paid for
interest on the Senior Notes was EURO3,764,000 in 1999.
11. FINANCIAL INSTRUMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 (FAS 133), "Accounting
for Derivative Instruments and Hedging Activities," as amended by FAS 137
and FAS 138, which established new accounting and reporting standards for
derivative instruments. These rules require that all derivative instruments
be reported in the consolidated financial statements at fair value. The
fair value for all derivative contracts is included in other assets or
other liabilities and will be recorded each period in the statement of
operations or other comprehensive income, depending on whether the
derivative is designated as effective as part of a hedged item and on the
type of hedge transaction. Gains or losses on derivative instruments
reported in other comprehensive income must be classified in the statement
of operations in the period in which net earnings (loss) are affected by
the underlying hedged item and the ineffective portion of all hedges is
recognized in other income (expense) in the statements of operations in the
current period. These new standards may result in additional volatility in
reported earnings (loss), other comprehensive income and accumulated other
comprehensive income. These rules became effective for the Company on
January 1, 2001. The Company recorded the effect of the transition to these
new accounting requirements as a change in accounting principle. The
transition adjustment to adopt FAS 133 resulted in a loss of EURO 946,000,
net of tax,
F-15
<Page>
from the cumulative effect of a change in accounting principle.
The Company is exposed to market risk from changes in interest rates
which can impact its operating results and overall financial condition. The
Company manages its exposure to these market risks through its operating
and financing activities and, when deemed appropriate, through the use of
derivative financial instruments.
The Company purchased interest rate-cap and floor agreements that
limit its exposure to increasing interest rates and are economic hedges of
borrowings under its variable-rate revolving credit facility during the
next five years. An interest rate-cap entitles the Company to receive a
payment from the counter-party equal to the excess, if any, of the
hypothetical interest expense ("strike price") on a specified notional
amount at a current market interest rate over an amount specified in the
agreement. The only amount the Company is obligated to pay to the
counter-party is a contract premium. The Company has also entered into an
interest rate-cap agreement with a double strike price. The first strike
price of a double strike price is applicable until the relevant interest
rate indice exceeds the second strike price at which time the second strike
price becomes applicable. The premium of a double strike cap is typically
lower than that of a single strike cap. The premium can also be lower in
those instances where the agreement includes an interest rate floor. The
interest rate floor entitles the counter-party to receive a payment from
the Company should interest rates drop below an agreed upon limit
("floor"), effectively limiting the Company's potential benefit from
falling interest rates. The strike price of these agreements may exceed the
current market levels at the time they are entered into. The interest rate
indices specified by the agreements have been and are expected to be highly
correlated with the interest rates the Company incurs on its variable-rate
revolving credit facility. These contracts do not qualify for special hedge
accounting and are therefore marked-to-market each period through earnings
(loss) as a component of interest expense. Total interest expense relating
to these agreements was approximately EURO2,906,000 in 2001.
The following table sets forth the status of financial instruments as
of December 31, 2001:
<Table>
<Caption>
CONTRACT
NOTIONAL PREMIUM FAIR VALUE
EFFECTIVE DATE TERMINATION DATE AMOUNT (TEURO) FLOOR STRIKE PRICE (TEURO) (TEURO)
----------------------- --------------------- ---------------- -------- ----------------- ------------ -----------
June 10, 1999 June 10, 2004 25,000 2.50% 5.50% *200 26
June 22, 1999 June 24, 2004 25,000 -- 4.35% 126 (182)
July 20, 1999 July 20, 2004 25,000 -- 4.50% - 5.50% 131 (146)
September 20, 1999 September 22, 2004 25,000 2.75% 5.50% 105 (199)
December 18, 2000 December 18, 2003 62,500 4.65% 5.25% -- (1,115)
December 18, 2000 December 18, 2003 62,500 4.55% 5.50% -- (1,196)
January 16, 2001 January 16, 2004 50,000 2.50% -- -- 51
January 16, 2001 January 16, 2004 50,000 -- 5.50% -- 25
January 16, 2001 January 16, 2004 100,000 3.90% -- -- (876)
</Table>
* This contract premium represents an upfront one-time payment for the
life of the contract. All other payments are paid annually over the life
of the contract.
12. RELATED PARTY TRANSACTIONS
In October 2000, the merger of Aktiengesellschaft fur Beteiligungen an
Telekommunikationsunternehmen ("AGFB") into PrimaCom was registered with
the Commercial Register of
F-16
<Page>
the Amtsgericht (local court) of Mainz. AGFB's only significant asset was
its holding of 3,750,000 PrimaCom shares, all of which were issued to AGFB
shareholders when the merger was consummated. An equivalent number of new
PrimaCom shares were issued to AGFB shareholders in the merger, reflecting
the exchange ratio of one PrimaCom share for every four AGFB shares.
On December 31, 2000, the Company acquired the shares of
Friedrichsthal, which was partially owned by Wolfgang Preuss, a shareholder
of the Company.
The Company had a EURO245,000 loan payable to WVH Wohnungsbau- und
Wohnungsbaugenossenschaft Reidenau mbH, a minority shareholder of one of
its subsidiaries. The total amount due for this loan was paid on
January 10, 2001.
The Company has a 15.7% investment in Mediakabel B.V., a consortium of
cable television operators in the Netherlands organized to provide digital
television services. The Company has a EURO1,264,000 note receivable due
after 2002 from Mediakabel. Additionally, the Company paid Mediakabel
digital cable services fees of EURO1,056,000 and EURO2,575,000 in 2000 and
2001, respectively.
13. INCOME TAXES
For financial reporting purposes, the Company and its consolidated
subsidiaries calculate their respective tax liabilities on a separate
return basis which are combined in the accompanying consolidated financial
statements.
The provisions for income tax benefit (expense) consisted of the
following:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------
1999 2000 2001
---- ---- ----
(EURO IN THOUSANDS)
Current............................... (1,667) (1,258) 2,111
Deferred.............................. -- (3,000) 13,270
------ ------ ------
Total income tax...................... (1,667) (4,258) 15,381
====== ====== ======
</Table>
The components of loss before income taxes by jurisdiction are as
follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
-------------------------------
1999 2000 2001
---- ---- ----
(EURO IN THOUSANDS)
Germany............................... (27,515) (44,410) (72,380)
The Netherlands....................... -- (7,254) (45,655)
------- ------- ---------
(27,515) (51,664) (118,035)
======= ======= =========
</Table>
A reconciliation between the corporate statutory tax rates of 51.8%
for 1999 and 2000, and 37.13% in 2001 and the Company's effective tax rate
is as follows:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------
1999 2000 2001
---- ---- ----
(EURO IN THOUSANDS)
Computed income tax benefit at statutory rates....... 14,252 31,020 43,825
Change in valuation allowance........................ 16,666 (8,290) (16,870)
Goodwill amortization................................ (11,585) (11,280) (16,024)
Change in corporate tax rate......................... (616) (15,074) --
Finalization of prior year tax returns............... (21,414) -- --
Other................................................ 1,030 (634) 4,450
------- ------- -------
Total income tax (expense) benefit................... (1,667) (4,258) 15,381
======= ======= =======
</Table>
F-17
<Page>
In 2000, tax legislation was enacted in Germany lowering the corporate
tax rate from 40% to 25%. In accordance with FAS 109, the Company recorded
a non-cash deferred tax charge in 2000 amounting to EURO15,074,000 as a
result of this change in the tax rate.
In 1999, tax legislation was enacted in Germany lowering the corporate
tax rate from 45% to 40%. In accordance with FAS 109, the Company recorded
a non-cash deferred tax charge in 1999 amounting to EURO616,000 as a result
of this change in the tax rate.
During 1999, the Company finalized or amended corporate and trade tax
returns for certain of its subsidiaries. As a result of these revisions,
the amount of benefit attributable to cumulative tax loss carryforwards as
of December 31, 1998 was reduced by EURO21,414,000.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities as of
December 31, 1999, 2000 and 2001 are presented below:
<Table>
<Caption>
DECEMBER 31,
-------------------------------------
1999 2000 2001
---- ---- ----
(EURO IN THOUSANDS)
Deferred tax assets:.......................
Net operating loss carryforwards........ 83,792 55,109 99,997
Property and equipment.................. 1,694 60,061 55,915
Financial instruments................... -- -- 1,488
Sale-leaseback obligations.............. 150 -- --
Accrued expenses........................ 462 -- --
---------- ---------- ----------
86,098 115,170 157,400
Less-- valuation allowance.............. (1,483) (36,470) (53,340)
---------- ---------- ----------
84,615 78,700 104,060
Deferred tax liabilities:.....
Property and equipment.................. (34,588) (30,001) (30,712)
Financing fees.......................... (1,860) -- (11,909)
Other................................... (861) (530) --
----------- ---------- ----------
Net deferred tax asset..................... 47,306 48,169 61,439
========== ========== ==========
</Table>
As of December 31, 2001, the Company had available in Germany combined
cumulative tax loss carryforwards for corporate income tax of approximately
EURO107,920,000 and for trade tax of approximately EURO133,508,000. In
addition, the Company had in the Netherlands cumulative tax loss
carryforwards of approximately EURO33,102,000. Under current German and
Netherlands tax laws, these loss carryforwards have an indefinite life and
may be used to offset future taxable income. Cash paid for income taxes was
EURO1,670,000, EURO1,656,000 and EURO2,128,000 in 1999, 2000 and 2001,
respectively.
14. COMMITMENTS
The Company obtains certain programming directly from Deutsche Telekom
("Telekom"), through various signal delivery contracts. The signal delivery
contracts with Telekom are generally for a fixed period of time and are
subject to negotiated renewal. Under these contracts the Company typically
pays Telekom either a flat fee or a fee per customer that is determined by
reference to a published fee schedule. As of December 31, 2001, the Company
had a total commitment of approximately EURO121,223,000 through 2010, the
date upon which the last agreement expires. For the years ended
December 31, 1999, 2000 and 2001, total Telekom fees expensed amounted to
approximately EURO18,592,000, EURO20,617,000 and EURO20,343,000
respectively, and are included in operations expense.
The Company has entered into certain agreements with film providers to
purchase film rights through 2005. License expense relating to these film
right agreements was EURO361,000 and EURO1,041,000 in 2000 and 2001,
respectively.
F-18
<Page>
The Company leases other providers' networks, certain office equipment
and vehicles. Lease terms generally range from three to five years with the
option to renew at varying terms. Rental expense was EURO1,585,000, and
EURO1,900,000 and TEURO3,637,000 in 1999, 2000 and 2001, respectively.
Future minimum payments under Telekom commitments, film commitments
and non-cancelable operating leases with initial or remaining terms in
excess of one year consisted of the following at December 31, 2001:
<Table>
<Caption>
OPERATING
TELEKOM FILMS LEASES TOTAL
(TEURO) (TEURO) (TEURO) (TEURO)
---------- --------- ---------- ---------
2002................... 19,500 763 3,701 23,964
2003................... 18,539 981 1,654 21,174
2004................... 17,644 1,385 1,287 20,316
2005................... 17,635 1,620 975 20,230
2006................... 17,136 -- 945 18,081
Thereafter............. 30,769 -- 2,209 32,978
--------- -------- --------- --------
Total.................. 121,223 4,749 10,771 136,743
========= ======== ========= ========
</Table>
15. STOCK OPTION PLANS
On February 22, 1999, the Company adopted a stock option plan for the
benefit of all its employees and the employees of its subsidiaries (the
"1999 Universal Stock Option Plan") and a stock option plan for its
executive officers and the executive officers of the subsidiaries (the
"1999 Executive Stock Option Plan"). The two stock option plans provide for
the issuance of stock options allowing eligible employees and executive
officers to acquire shares. The Company has been authorized to issue a
total of 1,000,000 shares including 300,000 shares under the 1999 Universal
Stock Option Plan and 700,000 shares under the 1999 Executive Stock Option
Plan.
The options granted in 1999 and 2000 under both the 1999 Universal
Stock Option Plan and the 1999 Executive Stock Option Plan vest over a
three-year period. One third of the options vest on the first anniversary
of the grant and the remaining options vest in equal monthly amounts over
the next two years. The vested options are exercisable after the second
anniversary of the grant and expire on the fifth anniversary of the grant.
If the participant's employment agreement terminates before the options
vest in full, the participant's options will be vested only in the portions
of options computed by multiplying 1/36 times the number of full months of
employment between the date of the option grant and the date of
termination. Each option is exercisable only if the average daily closing
price of the shares, calculated as the average over the five consecutive
trading days on the Frankfurt Stock Exchange immediately prior to the first
option exercise, equals at least 120% of the respective exercise price of
the option.
In July 2000, the Company created two new stock option plans, the 2000
Universal Stock Option Plan with 150,000 options and the 2000 Executive
Stock Option Plan with 350,000 options. The Company may not grant options
under the 2000 plans until all the options under the 1999 plans have been
granted.
F-19
<Page>
Stock option activity as of December 31, 2001 is as follows:
<Table>
<Caption>
WEIGHTED WEIGHTED AVERAGE
AVERAGE FAIR VALUE OF
EXERCISE OPTIONS GRANTED
NUMBER OF PRICE DURING THE YEAR
SHARES (IN EURO) (in EURO)
------------ ------------- ---------------------
Outstanding at December 31, 1998............ --
Granted..................................... 913,428 31.02 12.74
Exercised................................... -- --
Expired..................................... -- --
Forfeited................................... 154,931 29.00
-------
Outstanding at December 31, 1999............ 758,497 31.44
Granted..................................... 121,000 53.81 23.25
Exercised................................... -- --
Expired..................................... -- --
Forfeited................................... 25,813 38.85
-------
Outstanding at December 31, 2000............ 853,684 34.38
Granted..................................... -- --
Exercised................................... -- --
Expired..................................... -- --
Forfeited................................... 31,694 46.89
-------
Outstanding at December 31, 2001............ 821,990 33.90
=======
Options exercisable at December 31, 2001.... -- --
</Table>
For the options outstanding at December 31, 2001, the range of
exercise price is from EURO29.00 to EURO81.87 and the weighted average
remaining contractual life is 0.4 years.
Compensation expense totaled EURO2,757,000, EURO3,558,000 and
EURO3,853,000 relating to the options issued in 1999, 2000 and 2001,
respectively. The fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions used:
<Table>
<Caption>
1999 2000
Risk free rate of interest.................... 3.2%-4.6% 4.6%-5.1%
Expected dividend yield....................... 0.0% 0.0%
Expected life................................. 3.0.years 3.0.years
Expected volatility........................... 58.0% 58.0-75.1%
</Table>
16. CONTINGENCIES
LEGAL PROCEEDINGS
LITIGATION RELATING TO OPERATIONS OF SUWEDA PRIOR TO MERGER
As a result of the merger between KabelMedia and Suweda in December
1998, the Company succeeded to certain litigation against Suweda or its
affiliates. In order to allocate the risks related to this litigation,
KabelMedia and Wolfgang and Ludwig Preuss, two major shareholders of
Suweda, entered into an indemnity agreement under which Wolfgang and Ludwig
Preuss, jointly and severally, agreed to indemnify KabelMedia, the Company
and its successors, until November 20, 2003, from any claim and damages
arising out of or in connection with civil or criminal litigation or
proceedings arising out of events relating to Suweda prior to the Company's
merger with it, whether brought against the Company or its affiliates, its
officers or former officers, or KabelMedia in its capacity as Suweda's
successor, including certain ongoing litigation.
This indemnification excludes all litigation arising from the
planning, manufacturing, operation and distribution of broadband cable
networks, and all litigation risks arising in the ordinary course of
business and which do not exceed approximately EURO13,000 individually or
approximately EURO511,000 in the aggregate. In the event the total claims
exceed EURO511,000, liability under the indemnity agreement is limited to
the amount of such excess. We have the right to manage any litigation, but
Wolfgang and Ludwig Preuss have the right to object to
F-20
<Page>
the settlement of any claim. The agreement provides that any dispute
between us and Wolfgang and Ludwig Preuss regarding such settlement will be
determined by an independent lawyer.
The last civil proceeding covered by the indemnity agreement was
instituted by the East German Privatization Agency (BUNDESANSTALT FUR
VEREINIGUNGSBEDINGTE SONDERAUFGABEN), or BVS, against Sweda and arose from
Suweda's purchase of BRANDENBURGISCHE BAU AG, or BBAG. BVS sued Suweda for
payment of EURO7,465,000 for breach of contract. BVS alleged that Suweda,
by reducing the workforce of BBAG, had acted in breach of contract. The
district court in Berlin dismissed the claim for payment. In November 1998,
BVS appealed this decision, reducing its claim to EURO 6,851,000. The
Company rescinded a settlement agreement which was reached at a first court
hearing on November 1, 2000, pursuant to which the Company would have had
to pay EURO 3,553,000 to BVS. On June 25, 2001, the Company reached a
settlement whereby the Company paid EURO1,559,400 to BVS. Wolfgang and
Ludwig Preuss indemnified the Company for the entire amount of the
settlement.
LITIGATION WITH HOUSING ASSOCIATIONS
During 1998, GGG in Chemnitz, a housing association which is party to
a concession agreement with the Company, brought a civil action seeking to
limit the Company's ability to increase the subscriber fees charged by the
Company to tenants of the housing association without the prior consent of
the housing association. This action was dismissed on March 6, 2001 by the
federal court of justice (BUNDESGERICHTSHOF), which held that the
concession agreement clause requiring prior approval of the
housing-association improperly restrained competition.
However, in December 1998, GGG gave notice of termination of the
concession agreement with effect from December 31, 1999, approximately 12
years prior to the end of its term. GGG stated that the termination was
based on its allegation that the Company breached the concession agreement
when the Company increased prices without the consent of GGG, which was the
subject of the lawsuit described above. GGG also alleged that because the
concession agreement contains standard non-negotiated terms and the
duration of the contract is 20 years, it is terminable at any time by
either party. The Company rejected the early termination and GGG sought
judicial confirmation of its early termination, filing another civil action
against the Company with the regional court (LANDGERICHT) in Chemnitz. On
January 7, 2000, the court dismissed the action, acknowledging our
substantial investments in Chemnitz and ruled that the period required for
building the cable network must not be taken into account in considering
the duration. In effect, the court's decision confirmed our long-term
contract with GGG. In February 2000, GGG appealed the decision to the
superior court (OBERLANDESGERICHT) in Dresden. This action was also
dismissed on December 20, 2001. The period allowed to appeal this decision
terminated in January 2002.
In October 1999, WOHNUNGSBAUGENOSSENSCHAFT WENDENSCHLOSS E.G., through
which the Company serves 1,365 subscribers, has applied to the regional
court (LANDGERICHT) in Berlin for a judgment permitting the early
termination of its concession agreement. The court has held that the
concession agreement is terminable after 12 years. The Company has appealed
the decision to the court of appeal (KAMMERGERICHT) in Berlin and a hearing
has been scheduled for July 2, 2002.
In April 2001, WOHNUNGSBAUGENOSSENSCHAFT MAGDEBURG MBH applied to the
regional court (LANDGERICHT) in Magdeburg for a judgment prohibiting the
Company from serving customers in certain premises of
WOHNUNGSBAUGENOSSENSCHAFT MAGDEBURG MBH. On February 15, 2002, the court
decided this matter in favor of Wohnungsbaugenossenschaft Magdeburg mbH.
The Company appealed this decision to the Superior Court in Nuremberg,
which has not yet set a date of first hearing.
LITIGATION WITH PROGRAMMING AUTHORITIES AND PROVIDERS
Since August 2001, customers of WOHNUNGSBAUGENOSSENSCHAFT LIPSIA EG
have sought temporary injunctions against the Company in an efforts to
freeze fee increases and to terminate the contracts. The district court in
Leipzig issued several injunctions against the Company, but the Company
believes that it will eventually prevail in the main proceedings.
F-21
<Page>
PROGRAMMING LITIGATION WITH HOUSING AUTHORITIES AND WITH PROGRAM PROVIDERS
In November and December 2000, several German program providers
(Kabel 1, SAT 1, Pro 7, DSF, tm3, N 24, RTL 2, Super RTL, and Vox) obtained
injunctions from the district court in Leipzig precluding the Company from
carrying their programs exclusively in digital format or carrying programs
in digital format in return for the payment of subscriber fees, in either
case without the consent of the program providers. The Company has restored
its analog television offering and are operating under the terms of the
injunctions. The Company commenced negotiations with the programmers and
reached an interim agreement with RTL 2, Super RTL and Vox expiring on
March 31, 2002, and with tm3 terminating on December 31, 2001. These
agreements provide that the Company will continue to carry RTL and tm3
programs in both analog and digital format, together with other specified
digital services. The agreements also provide that the Company will neither
pay nor receive payment for this programming and that the Company may not
offer these programs to subscribers as part of special packages. The
agreements further provide that the Company and the other parties will seek
to negotiate a definitive programming agreement and that, in the event any
fees are to be paid under that agreement, the payment will be retroactive
to January 1, 2001. The Company is also negotiating with Kabel 1, Pro 7 and
DSF, which have all obtained injunctions preventing the Company from
offering their programs exclusively in either analog or digital format. The
Company has committed not to carry N24's program in digital format if we do
not also carry the program in analog format.
In the proceedings of the main action of DSF against the Company, on
May 15, 2001 the district court in Leipzig decided that the Company would
not be allowed to offer DSF programs in digital format until the parties
reach an agreement on analog distribution. The Company has decided not to
appeal this decision. Since DSF has not served the judgment on the Company,
the Company is still distributing the DSF programming in both analog and
digital format. In the proceedings of the main action of Kabel 1 and Pro 7
against the Company, the regional court (LANDGERICHT) dismissed the actions
declaring that it lacked jurisdiction because the parties had also
instituted arbitration proceedings. Kabel 1 and Pro 7 have appealed the
decision to the court of appeal (OBERLANDESGERICHT) in Dresden. The first
hearing of the Kabel 1 action was scheduled for October 23, 2001 and the
first hearing for the Pro 7 action was scheduled for December 4, 2001. The
parties have agreed to suspend both proceedings until August 2002.
Various additional legal matters are pending against the Company. In
the opinion of management, the ultimate resolution of such legal
proceedings and claims, including the matters described above, will not
have a material effect on the consolidated financial position or results of
the Company.
17. SHAREHOLDERS' EQUITY
The Company is incorporated as an Aktiengesellschaft (hereafter "AG")
under German law. Registered capital of an AG is in the form of shares and
represents negotiable securities. The minimum capital requirement for an AG
is EURO50,000. The Company has authorized 30,128,552 shares. The Company
has issued 19,786,052 ordinary bearer shares with a pro rata share in the
registered capital of EURO2.56 per share. Each ordinary bearer share is
entitled to one vote.
On February 23, 1999, the Company concluded the initial public
offering of 3,945,710 of its shares at an offering price of EURO29.00 per
share and $16.27 per American Depositary Share ("ADS"). The Company
realized net proceeds of approximately EURO103,425,000 from the offering.
Subsequent to the offering, the Company's shares commenced trading on the
Neuer Markt, a market segment of the Frankfurt Stock Exchange, under the
symbol PRC and the Company's American Depositary Shares ("ADS"), each
representing one-half of a share, commenced trading on the Nasdaq National
Market under the symbol PCAG.
Dividends may only be declared and paid from the accumulated retained
earnings (after deduction of certain reserves) shown in the Company's
annual German statutory unconsolidated accounts. Such amounts differ from
the total of shareholders' deficiency as shown in the consolidated
financial statements as a result of the adjustments made to present the
consolidated financial statements in accordance with U.S. GAAP. As of
December 31, 2001, the Company's German statutory accounts reflect no
retained earnings available for distribution.
F-22
<Page>
18. LOSS PER SHARE
The following table sets forth the computation of basic and diluted
loss per share:
<Table>
<Caption>
YEARS ENDED DECEMBER 31,
------------------------------------------
1999 2000 2001
---- ---- ----
NUMERATOR:
Numerator for basic and diluted earnings per share-- loss from
operations (EURO in thousands).................................. (29,252) (56,144) (103,162)
DENOMINATOR:
Denominator for basic and diluted earnings per share-- weighted
average shares................................................... 19,155,613 19,726,195 19,777,805
---------- ---------- ----------
Basic and diluted loss from operations per share (EURO)................ (1.53) (2.85) (5.21)
========== ========== ==========
</Table>
Outstanding stock options and contingent value rights are excluded
from the loss per share calculation because the effort would be
antidilutive.
19. SEGMENT DISCLOSURE
Operating segments are defined as components of an enterprise about
which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision-making group,
in deciding how to allocate resources to an individual segment and in
assessing performance of the segment.
The Company has two reportable segments based on geographic location:
Germany and The Netherlands. Both segments provide analog and digital cable
programming, high-speed internet access and other network services.
Revenues from these four product categories are regularly reviewed by
the chief operating decision maker or decision making group. However, for
internal reporting purposes, the Company does not allocate operating costs
and expenses to these product categories to evaluate their performance.
The Company evaluates performance and allocates resources based on
profit or loss from operations before interest, taxes, depreciation and
amortization. All elimination amounts in the segments relate primarily to
intercompany transactions. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.
F-23
<Page>
<Table>
<Caption>
1999 2000 2001
---- ---- ----
Germany
Analog cable....................... 103,337 109,612 113,959
Digital cable...................... -- 16 229
High-speed internet................ 25 375 1,023
Other revenue...................... 2,587 5,502 5,117
--------------- -------------- ------------
105,949 115,505 120,328
The Netherlands
Analog cable....................... -- 7,268 31,018
Digital cable...................... -- 87 712
High-speed internet................ -- 370 5,732
Other revenue...................... -- 1,113 7,706
--------------- -------------- ------------
-- 8,838 45,168
--------------- -------------- ------------
TOTAL REVENUES..................... 105,949 124,343 165,496
=============== ============== ============
Germany................................ 10,874 22,424 22,702
The Netherlands........................ -- 4,757 26,916
--------------- -------------- ------------
TOTAL OPERATING LOSS............... 10,874 27,181 49,618
=============== ============== ============
Germany................................ 15,874 18,277 31,906
The Netherlands........................ -- 7,896 30,862
--------------- -------------- ------------
TOTAL INTEREST EXPENSE............. 15,874 26,173 62,768
=============== ============== ============
Germany................................ 61,277 66,588 82,825
The Netherlands........................ -- 8,942 35,535
--------------- -------------- ------------
TOTAL DEPRECIATION AND
AMORTIZATION....................... 61,277 75,530 118,360
=============== ============== ============
Germany................................ 515,638 603,692 588,763
The Netherlands........................ -- 369,710 361,082
--------------- -------------- ------------
TOTAL LONG-LIVED ASSETS............ 515,638 973,402 949,845
=============== ============== ============
Germany................................ 48,512 133,123 60,241
The Netherlands........................ -- 255,032 24,273
--------------- -------------- ------------
TOTAL CAPITAL EXPENDITURES......... 48,512 388,155 84,514
</Table>
20. EURO CONVERSION
Twelve member countries of the European Union have established fixed
conversion rates between their existing currencies ("legacy currencies")
and one common currency, the Euro. The Euro is traded on currency exchanges
and was used in only certain transactions, such as electronic payments
before December 31, 2001. Beginning in January 2002, new Euro-denominated
notes and coins were issued, and legacy currencies were withdrawn from
circulation. The conversion to the Euro has eliminated currency exchange
rate risk for transactions between the member countries, which for the
Company, primarily consists of the Netherlands.
The Company has reviewed and has made the required modifications to
their information systems based on the new currency. At December 31, 2001,
the conversion to the Euro has not resulted in any material adverse impact
on the Company's financial position on results or operations.
21. NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 141, "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets" effective
for fiscal years beginning after December 15, 2001. Under the new rules,
goodwill will no
F-24
<Page>
longer be amortized but will be subject to annual impairment tests in
accordance with the Statements. Other intangible assets will generally
continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and
other intangible assets beginning in the first quarter of 2002. Application
of the non-amortization provisions of this Statement is expected to result
in a decrease in net loss of approximately EURO 35,300,000 per year. During
2002, the Company will perform the first of the required impairment tests
of goodwill as of January 1, 2002. However, the Company has not yet
determined what the effect of these tests will be on the earnings and
financial position of the Company.
22. SUBSEQUENT EVENTS
On March 26, 2002, the Company completed the refinancing of its
Facility and senior working capital facility. The amended senior working
capital facility, which is subject to shareholder approval, was
conditionally replaced by a EURO375,000,000 convertible second secured term
loan facility, which was utilized in full and those borrowings were used to
repay an equivalent amount of outstanding borrowings under the Facility.
The convertible second secured term facility is convertible to common
shares of the Company or PrimaCom Management GmbH at the option of the
lenders based on predetermined financial ratios. If the shareholders do not
approve the new convertible second secured term facility, the terms revert
to the existing senior working capital facility. In addition, the lending
commitment under the senior secured facility was reduced by the amount of
the borrowings under the convertible second secured term loan facility, to
EURO625,000,000.
F-25
<Page>
ITEM 19. EXHIBITS
<Table>
<Caption>
Exhibit
Number Description of Exhibit
- ------- ----------------------
3.1* English translation of the Articles of Association
3.2* Standing Orders for the Management Board
3.3* Rules for Procedure of the Supervisory Board
4.1** Amendment dated March 25, 2002 to Senior secured facility agreement dated as of September 18, 2000
4.2** Intercreditor Agreement dated March 25,, 2002
4.3** Second Secured Facility Agreement dated March 25, 2002
4.4** Co-Ordination Agreement dated March 25, 2002
8.1*** List of subsidiaries
</Table>
- --------------
* Incorporated by reference to the Registration Statement on Form F-1
(Registration Number 333-9854) first filed on January 29, 1999
**To be filed by amendment
***Incorporated by reference to Item 4.C.
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.
PRIMACOM AG
/s/ Paul Thomason
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Name: Paul Thomason
Title: Member of the management board
/s/ Hans Wolfert
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Name: Hans Wolfert
Title: Member of the management board
Date: March 27, 2002