-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P/oCn13qD4nVwQetGGFGmtedXh0ISQE/eVmoRj64WZ7jl2fxwZjMPtGdcp5ym/Wf GBaPJtWbQMiWkL7n5pfSOA== 0000927356-99-000557.txt : 19990402 0000927356-99-000557.hdr.sgml : 19990402 ACCESSION NUMBER: 0000927356-99-000557 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED PAN EUROPE COMMUNICATIONS NV CENTRAL INDEX KEY: 0001070778 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 980191997 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25365 FILM NUMBER: 99581186 BUSINESS ADDRESS: STREET 1: FREDERIK ROESKESTRAAT 123 STREET 2: 1076 EE AMSTERDORN CITY: NETHERLANDS STATE: P7 ZIP: 00000 10-K 1 UNITED PAN-EUROPE COMMUNICATIONS, N.V. FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the year ended December 31, 1998 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission File No. 000-25365 UNITED PAN-EUROPE COMMUNICATIONS N.V. (Exact name of Registrant as specified in its charter) The Netherlands 98-0191997 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Fred. Roeskestraat 123, P.O. Box 74763 1070 BT Amsterdam, The Netherlands 1070 BT (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (31) 20-778-9840 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: American Depository Shares each representing one ordinary share Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes No X --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X --- The aggregate market value of the voting stock held by nonaffiliates of the Registrant, computed by reference to the last sales price of such stock, as of the close of trading on March 26, 1999 was $1,764.6 billion. The number of shares outstanding of the Registrant's common stock as of March 26, 1999 was: 129,246,223 ordinary shares, including shares represented by American Depository Receipts UNITED PAN-EUROPE COMMUNICATIONS N.V. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998 Table of Contents ----------------- Page Number ------ PART I Item 1. Business....................................................... 1 Item 2. Properties..................................................... 36 Item 3. Legal Proceedings.............................................. 37 Item 4. Submission of Matters to a Vote of Security Holders............ 38 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters............................................ 39 Item 6. Selected Financial Data........................................ 40 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 42 Item 7A. Quantitative and Qualitative Disclosure About Market Risk...... 63 Item 8. Financial Statements and Supplementary Data.................... 66 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................................... 105 PART III Item 10. Directors and Executive Officers of the Registrant............. 106 Item 11. Executive Compensation......................................... 110 Item 12. Security Ownership of Certain Beneficial Owners and Management................................................. 114 Item 13. Certain Relationships and Related Transactions................. 115 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................................... 119 PART I Item 1. Business -------- (a) General Development of Business - --- ------------------------------- United Pan-Europe Communications N.V. owns and operates cable-based communications networks in ten countries in Europe and in Israel. We provide cable television services. Some of our systems also provide telephone and Internet access services. Our systems together have the largest number of subscribers of any group of broadband communications networks operated across Europe. We have systems in The Netherlands, Austria, Norway, Belgium and France. These systems are strategically located in the capital cities of Amsterdam, Vienna, Oslo, Brussels and suburban Paris. We also have systems in Israel, Malta and Eastern Europe. We are a subsidiary of United International Holdings, Inc., a leading international provider of video, telephone and data services. We operated from July 1995 to December 1997 as a 50/50 joint venture between UIH and Philips. At the formation of the joint venture in July 1995, Philips contributed to us, among other things, its majority interests in cable television systems in Austria and Belgium, and its minority interests in cable television systems in France, called Citecable, Germany and The Netherlands, called KTE. UIH contributed to us its minority interests in cable television systems in Hungary, Ireland, Israel, Malta, Norway, Spain and Sweden, and its majority interest in the Czech Republic and Portugese systems, and $78.2 million in cash, including accrued interest. UIH also issued to Philips $50.0 million of UIH common stock. In addition, Philips received convertible notes of UPC totalling $133.6 million to make up the difference in values between the assets contributed by UIH and the assets contributed by Philips. On December 11, 1997, we and UIH acquired the 50% of our ordinary shares held by Philips. As part of this acquisition, we purchased 3.17 million shares of Class A Common Stock of UIH held by Philips and we and UIH purchased all of our convertible notes back from Philips. Following this acquisition and until our initial public offering in February 1999, we became essentially a wholly-owned subsidiary of UIH, other than approximately 7.7% of our stock held by a foundation to support our stock option plans to employees. Since formation, we have developed largely through acquisitions. Our major acquisitions have included: . a 50% interest in the A2000 system in the City of Amsterdam and four surrounding municipalities in July 1995; . the remaining 96.2% of the KTE system located in Eindhoven, The Netherlands, in September 1995; . increasing our interest in Norkabel (Norway) from 8.3% to 100%, Kabelkom (Hungary) from 3.9% to effectively 50% and the Swedish system from 2.1% to 25.9% in September 1996; . all of the Janco cable system in Oslo in two parts in January 1997 and November 1998; . 100% of the Combivisie cable television systems in the region surrounding our KTE system in The Netherlands, effective January 1, 1998; . various interests in Hungarian cable television systems in June 1998, resulting in a 79.25% interest in Telekabel Hungary, Hungary's largest cable television operator; . 100% of the Telekabel Beheer cable television system in the Netherlands in two parts in August 1998 and February 1999; . an additional 23.3% and 25.0% interests in our Israeli and Maltese systems; and . interests in various programming companies. We have also sold our unconsolidated interests in certain cable television systems in France (Citecable), Germany, Spain, Sweden and Ireland, and our consolidated interest in Portugal. 1 We believe the European telecommunications market offers significant growth opportunities. Most European Union member countries and Norway had opened their telephone industries to competition by January 1, 1998. This liberalization means that new providers can offer telephone and other telecommunications services. Due to this change in regulation and technological advances, a single cable link to the home can deliver video, telephone and Internet/data services. We can now offer all three services as an integrated package in the markets where we have upgraded our network. We have already begun to do so in some markets. We plan to offer local telephone services, called Priority Telecom in our Austrian, Dutch, French and Norwegian systems. We use the name Nedpoint for these services in A2000, the Amsterdam system. A2000 has offered cable telephone services since July 1997. In November 1998, we launched cable telephone service on a trial basis in Vienna and in March 1999 in suburban Paris and in Oslo. We have launched in Austria, Belgium, The Netherlands and Norway a service giving high-speed access to the Internet through cable modems. Cable modem technology can provide Internet access at speeds up to 100 times faster than traditional modems using telephone lines. Since 1994, we have been upgrading our Western European cable television infrastructure. When we upgrade, we replace parts of the coaxial cable with fiber optic lines and upgrade the remaining coaxial cable so that it can send signals both to and from the customer's home. By December 31, 1998, the upgraded parts of our networks in Austria, Belgium, The Netherlands and France passed about 60% of the 2.6 million homes passed by those networks. (b) Financial Information About Industry Segments We own and operate cable television, telephone, Internet/data services and programming operations in various foreign countries. For financial information concerning such business segments, see the footnotes to our financial statements included in Item 8 "Financial Statements and Supplementary Data." (c) Narrative Description of Business We own and operate cable-based communications networks in ten countries in Europe and in Israel. We provide cable television services. Some of our systems also provide telephone and Internet access services. Today, our systems, taken together, have the largest number of subscribers of any group of broadband communications networks operated across Europe. The diagram below summarizes our operations and equity ownership percentages in our operating systems on December 31, 1998. In February 1999, we bought from UIH 33.5% of IPS, a group of programming companies focusing on the Spanish- and Portuguese-speaking markets. We also purchased the 49% that we did not own of our Dutch holding company, United Telekabel Holding, in February 1999. We recently agreed to buy 95.63% of the 156,000 subscriber, Slovakian system, based in Bratislava and surrounding cities, and expect to close this purchase by the end of the second quarter of 1999. We also recently agreed to buy the French cable assets from Time Warner. These French systems are located in suburban Paris and Lyon, and in Limoges. The number of homes passed and subscribers is 210,000 and 64,000 respectively. We expect to close this purchase in the third quarter of 1999. 2 - --------------------------------------------------------------- United Pan-Europe Communications N.V. - ---------------------------------------------------------------
Operating Systems Business Lines Consolidated Unconsolidated Systems Systems Austria The Netherlands 51% Video Distribution and Telekabel Group 95% United Telekabel Programming Services Holding Belgium 100% Telephony Services TVD A2000 50% Priority Telecom Norway 100% CNBH Telekabel 100% Internet/Data Services Janco Multicom Beheer chello broadband France 99.6% Israel Tevel 46.6% Mediareseaux Malta Melita 50% Cable Eastern Europe Hungary: Telekabel - 79.25% Monor - 44.75% Czech Republic - 100% Romania - 51-100% Slovak Republic - 75-100%
Summary Operating and Financial Data In the tables below, we show the percentage we own of our operating systems, as well as operating and financial information for those systems for each of the last two years. When we refer to information as ''UPC equity in'' we mean that we have multiplied the statistic for each operating system by our percentage ownership of that system. Some of our percentage ownerships of operating systems have changed since the date of this table. In February 1999 we increased our ownership of UTH to 100% and A2000 to 50%. 3 Summary Operating Data 1998 The operating data set forth below reflects the aggregate statistics of the operating systems in which the Company has an ownership interest.
As at December 31, 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Homes in Two way Service Homes Homes Basic Basic Area Passed Passed Subscribers Penetration - ----------------------------------------------------------------------------------------------------------------------------------- Multi-channel TV: The Netherlands (A2000)... 578,500 572,936 386,109 529,067 92.3% The Netherlands (UTH) (1). 943,027 914,737 484,133 867,800 94.9% Austria................... 1,073,297 900,350 516,700 454,957 50.5% Hungary (Telekabel Hungary) (2)............. 901,500 510,622 - 442,567 86.7% Israel.................... 595,000 575,976 363,819 402,355 69.9% Norway.................... 529,924 463,235 15,803 323,387 69.8% Belgium................... 133,000 133,000 91,735 127,398 95.8% Malta..................... 179,000 162,996 - 70,363 43.2% Romania................... 180,000 98,174 - 61,999 63.2% Czech Republic............ 229,531 151,716 - 54,153 35.7% Hungary (Monor) (3)....... 85,000 68,339 - 30,623 44.8% France.................... 150,O00 74,623 74,623 29,107 39.0% Slovak Republic........... 67,959 37,641 - 21,044 55.9% --------- --------- --------- --------- Total................ 5,645,738 4,664,345 1,932,922 3,414,820 --------- --------- --------- ---------
As at December 31, 1998 - ----------------------------------------------------------------------------------------------------------------------------------- UPC UPC UPC UPC Equity in Equity in Equity in Paid-in Homes in Homes Basic Ownership Service Area Passed Subscribers - ----------------------------------------------------------------------------------------------------------------------------------- Multi-channel TV: The Netherlands (A2000)... 25.5% 147,518 146,099 134,912 The Netherlands (UTH) (1). 51.0% 480,944 466,516 442,578 Austria................... 95.0% 1,019,632 855,333 432,209 Hungary (Telekabel Hungary) (2)............. 79.3% 714,439 404,668 350,734 Israel.................... 46.6% 277,270 268,405 187,497 Norway.................... 100.0% 529,924 463,235 323,387 Belgium................... 100.0% 133,000 133,000 127,398 Malta..................... 50.0% 89,500 81,498 35,182 Romania................... 51.0-100.0% 165,300 84,209 51,282 Czech Republic............ 100.0% 229,531 151,716 54,153 Hungary (Monor) (3)....... 44.8% 38,080 30,616 13,719 France.................... 99.6% 149,400 74,325 28,991 Slovak Republic........... 75.0-100% 62,499 33,380 18,209 --------- --------- --------- Total................ 4,037,037 3,193,000 2,200,251 --------- --------- ---------
4 Summary Operating Data 1998 (continued)
As at December 31, 1998 -------------------------------------------------------------------- Subscribers Lines Served ---------------------------- ----------------------------- Residential Businesses Residential Businesses ----------- ---------- ----------- ---------- Telephony The Netherlands (A2000) (4)...................... 18,111 3 19,850 830 The Netherlands (UTH) (1) (5)...................... 20,500 72 20,500 - Hungary (Monor) (3)....... - - 69,244 - ----------- -------- ----------- -------- Total................... 38,611 75 109,594 830 =========== ======== =========== ======== Dataservices The Netherlands (A2000)... 8,128 253 n/a n/a The Netherlands (UTH) (1). 3,379 - n/a n/a Austria................... 9,054 603 n/a n/a Norway.................... 768 - n/a n/a Belgium................... 1,869 284 n/a n/a ----------- -------- ----------- -------- Total................... 23,198 1,140 n/a n/a ----------- -------- ----------- -------- As at December 31, 1998 ----------------------------------------------------------------------- UPC UPC UPC UPC UPC Equity in Equity in Equity in Equity in Paid-in Residential Business Residential Business Lines Ownership Subscribers Subscribers Lines Served Served --------- ----------- ----------- ------------ -------------- Telephony The Netherlands (A2000) (4)...................... 25.5% 4,618 1 5,062 212 The Netherlands (UTH) (1) (5)...................... 51.0% 10,455 37 10,455 - Hungary (Monor) (3)....... 44.8% - - 30,987 - ----------- ----------- ------------ -------------- Total................... 15,073 38 46,504 212 =========== =========== ============ ============== Dataservices The Netherlands (A2000)... 25.5% 2,073 65 n/a n/a The Netherlands (UTH) (1). 51.0% 1,723 - n/a n/a Austria................... 95.0% 8,601 573 n/a n/a Norway.................... 100.0% 768 - n/a n/a Belgium................... 100.0% 1,869 284 n/a n/a ----------- ----------- ------------ -------------- Total................... 15,034 922 n/a n/a ----------- ----------- ------------ --------------
5 Summary Financial Data 1998 (6)
At For the twelve months period ending December, 31, 1998 December ------------------------------------------------------------------------------ 31, Cash flows from 1998 Net ---------------------------- ------- Operating Net Adjusted Capital Oper- Invest- Long- Income/ Income/ EBITDA Expend- ating ing Financing Term Revenue (loss) (loss) (7) itures Activies Activies Activities Debt --------- --------- ------- -------- ------- -------- -------- ---------- ------- (Dutch guilders, in thousands) The Netherlands (A2000)... 123,622 (39,980) (64,890) 32,022 114,308 55,52 110,574 48,550 467,430 The Netherlands (UTH) (1). 99,122 (9,636) (49,374) 29,854 121,384 (1,853) 141,092 130,326 232,727 Austria................... 177,151 1,523 (9,322) 81,012 82,501 73,410 62,223 (28,924) 213,503 Hungary (Telekabel Hungary) (2)............. 27,706 1,650 132 9,989 13,386 13,912 19,495 9,919 29,381 Israel.................... 304,533 66,715 9,416 168,238 61,107 87,595 583,660 497,953 531,427 Norway.................... 92,671 (32,291) (67,124) 33,048 51,193 9,353 51,163 21,711 134,515(8) Belgium................... 36,782 (8,817) (15,276) 13,263 19,759 29,996 30,487 (56) - Malta..................... 30,010 5,862 1,868 11,337 21,387 14,705 21,387 8,592 46,223 Romania................... 4,161 1,454 609 1,905 1,153 423 1,289 1,076 - Czech Republic............ 8,909 (10,668) (6,871) (1,887) 1,041 (5,469) 1,384 7,307 - Hungary (Monor)........... 35,647 14,659 3,939 22,551 9,892 17,121 13,117 5,350 78,540 France.................... 8,058 9,620 (13,163) (5,077) 52,394 3,377 52,486 50,245 40,334(9) Slovak Republic........... 1,652 (3,068) (3,758) (1,736) 5,663 (709) 10,689 11,567 -
6 Summary Operating Data 1997 The operating data set forth below reflects the aggregate statistics of the operating systems in which the Company has an ownership interest.
As at December 31, 1998 - ----------------------------------------------------------------------------------------------------------------------------------- Homes in Two way Service Homes Homes Basic Basic Area Passed Passed Subscribers Penetration - ----------------------------------------------------------------------------------------------------------------------------------- Multi-channel TV: The Netherlands (A2000)... 572,000 565,740 125,180 518,160 91.6% The Netherlands (KTE)..... 98,393 95,442 90,000 90,671 95.0% Austria................... 1,064,000 890,305 339,900 435,859 49.0% Hungary (Kabelkom)........ 300,000 290,690 - 266,775 91.8% Israel.................... 360,000 350,392 350,392 241,874 69.0% Norway.................... 529,924 457,551 5,171 319,654 69.9% Ireland (Princes Holdings) 355,000 350,989 - 136,160 38.8% Belgium................... 133,000 133,000 27,600 127,529 95.9% Malta..................... 179,000 153,917 - 58,033 37.7% Romania................... 150,000 69,620 - 40,188 57.7% Czech Republic............ 271,100 145,650 - 51,571 35.4% France.................... 86,000 28,267 28,267 6,758 23.9% Slovak Republic........... 36,239 22,193 - 18,476 83.3% --------- --------- --------- --------- Total................ 4,134,656 3,553,756 966,510 2,311,708 --------- --------- --------- ---------
As at December 31, 1998 - ----------------------------------------------------------------------------------------------------------------------------------- UPC UPC UPC UPC Equity in Equity in Equity in Paid-in Homes in Homes Basic Ownership Service Area Passed Subscribers - ----------------------------------------------------------------------------------------------------------------------------------- Multi-channel TV: The Netherlands (A2000)... 50.0% 286,000 282,870 259,080 The Netherlands (KTE)..... 100.0% 98,393 95,442 90,671 Austria................... 95.0% 1,010,800 845,790 414,066 Hungary (Kabelkom)........ 50.0% 150,000 145,345 133,388 Israel.................... 23.3% 83,880 81,641 56,357 Norway.................... 87.3% 462,624 399,442 279,058 Ireland (Princes Holdings) 20.0% 71,000 70,198 27,232 Belgium................... 100.0% 133,000 133,000 127,529 Malta..................... 25.0% 44,750 38,479 14,508 Romania................... 90.0-100.0% 143,000 67,498 39,428 Czech Republic............ 100.0% 271,100 145,650 51,571 France.................... 99.6% 85,656 28,154 6,731 Slovak Republic........... 75.0-100% 30,779 18,030 14,987 --------- --------- --------- Total................ 2,870,982 2,351,539 1,514,606 --------- --------- ---------
7 Summary Operating Data 1997 (continued)
As at December 31, 1997 ------------------------------------------------------------- Subscribers Lines served UPC ----------------------- ----------------------- Paid-in Residential Businesses Residential Businesses Ownership ----------- ---------- ----------- ---------- --------- Telephony The Netherlands (A2000)............ 3,222 33 3,473 56 50.0% ----------- ---------- ----------- ---------- Total............................ 3,222 33 3,473 56 =========== ========== =========== ========== Data Services The Netherlands (A2000).......... 450 -- n/a n/a 50.0% Austria.......................... 1,177 21 n/a n/a 95.0% Norway........................... 129 4 n/a n/a 87.3% Belgium.......................... 214 42 n/a n/a 100.0% ----------- ---------- ----------- ---------- Total.......................... 1,970 67 n/a n/a ----------- ---------- ----------- ---------- As at December 31, 1997 ------------------------------------------------------------- UPC UPC UPC UPC Equity in Equity in Equity in Equity in Residential Business Residential Business Lines Subscribers Subscribers Lines Served Served ----------- ----------- ------------ ------------------- Telephony The Netherlands (A2000).......... 1,611 17 1,737 28 ----------- ----------- ------------ ------------------- Total.......................... 1,611 17 1,737 28 =========== =========== ============ =================== Data Services The Netherlands (A2000).......... 225 -- n/a n/a Austria.......................... 1,118 20 n/a n/a Norway........................... 113 3 n/a n/a Belgium.......................... 214 42 n/a n/a ----------- ----------- ------------ ------------------- Total.......................... 1,670 65 n/a n/a ----------- ----------- ------------ -------------------
8 Summary Financial Data 1997
For the twelve months period ending December 31, 1997 --------------------------------------------------------------- Net Net Operating Income/ Adjusted Capital Revenue Income/(loss) (loss) EDITDA(7) Expenditures ------- ------------- ------- --------- ------------ (Dutch guilders, in thousands) The Netherlands (A2000)..................... 101,450 (17,083) (24,008) 33,763 120,242 The Netherlands (KTE)....................... 20,669 2,156 (1,549) 12,719 7,953 Austria..................................... 162,783 16,928 (10,718) 80,508 59,913 Hungary (Kabeikom).......................... 32,717 11,660 2,806 14,857 11,213 Israel...................................... 215,031 56,256 32,217 117,738 33,988 Norway...................................... 91,529 (27,885) (74,649) 37,099 20,647 Ireland (Princes Holdings).................. 70,229 7,646 (4,867) 25,527 18,903 Belgium..................................... 38,738 (3,869) (11,465) 14,596 11,584 Malta....................................... 23,099 4,363 358 9,755 6,364 Romania..................................... 2,192 1,049 595 1,359 857 Czech Republic.............................. 7,492 (13,116) (21,591) (6,730) 4,214 France...................................... 2,526 (5,933) (7,125) (4,472) 22,809 Slovak Republic............................. 1,547 (1,826) (1,366) (1,011) 2,799 For the twelve months At December 31, peiod ending December 31, 1997 1997 ------------------------------------------------- Cash flows from ---------------------------------- Long- Operating Investing Financing Term Activities Activities Activities Debt ---------- ---------- ---------- ---------- (Dutch guilders, in thousands) The Netherlands (A2000)..................... 33,304 (119,824) 60,000 426,000 The Netherlands (KTE)....................... 4,207 (8,441) 3,505 81,769 Austria..................................... 79,133 (83,070) 19,850 245,000 Hungary (Kabeikom).......................... 10,973 (11,213) (854) - Israel...................................... 78,364 (35,276) (43,091) 13,270 Norway...................................... 12,083 (20,830) 30,703 148,948 Ireland (Princes Holdings).................. 15,321 18,894 2,960 139,243 Belgium..................................... (6,127) 26,473 (22,080) - Malta....................................... (3,449) (6,275) 4,431 38,325 Romania..................................... 1,232 (1,012) (192) - Czech Republic.............................. (13,608) (2,293) 14,563 - France...................................... (4,171) 23,049 25,596 - Slovak Republic............................. (2,594) (3,863) 6,396 -
9 (1) UTH was founded in August 1998. The 1998 financial information in the tables covers the period from inception through December 31, 1998. (2) Telekabel Hungary was founded on June 30, 1998. The 1998 financial information in the tables covers the period from inception through December 31, 1998. (3) Our Monor service offers traditional telephone service. (4) A2000 offers cable telephony service. (5) UTH's 80% subsidiary Uniport offers a carrier select telephony service. (6) Financial information has been prepared in accordance with Dutch GAAP. (7) "Adjusted EBITDA" represents earnings before net interest expense, income tax expense, depreciation, amortisation, stock based compensation charges, minority interest, share in results of affiliated companies (net), currency exchange gains (losses) and other non-operating income (expense) items. Industry analysts generally consider Adjusted EBITDA to be a helpful way to measure the performance of cable television operations and communications companies such as us. We believe Adjusted EBITDA helps investors to assess the cash flow from our operations from period to period and thus to value our business. Adjusted EBITDA should not, however, be considered a replacement for net income, cash flows or for any other measure of performance or liquidity under generally accepted accounting principles, or as an indicator of a company's operating performance. We are not entirely free to use the cash represented by our Adjusted EBITDA as we please. Several of our consolidated operating companies are restricted by the terms of their debt arrangements. Each company has its own operating expenses and capital expenditure requirements, which can limit our use of cash. Our presentation of Adjusted EBITDA may not be comparable to statistics with a similar name reported by other companies. Not all companies and analysts calculate EBITDA in the same manner. (8) Excludes intercompany debt amounting to NLG234,044. (9) Excludes intercompany debt amounting to NLG45,100. 10 UPC Video Services: Video Distribution and Programming Video Distribution Overview We own and operate established cable television systems and are constructing new systems. At December 31, 1998, our operating systems had approximately 3.4 million subscribers to their basic tier video services. Video distribution services accounted for approximately 92.7 % of our consolidated revenue in 1998. An average of 73.2% of the homes passed by our systems subscribe to our basic tier video services. We offer our subscribers some of the most advanced analog video services available today and a large choice of FM radio programs. In addition, because many of our operations are two-way capable, we have been able to add more services. In many systems, for example, we have introduced impulse pay-per-view services, which enable subscribers to our expanded basic tier to select and purchase programming services, such as movies and special events, directly by remote control. Video Programming Overview Popular programming is another key factor for increasing our video services revenue. We believe it will also be a potential source of additional revenue from sales to other cable television operators and satellite companies in Europe. We have enhanced our existing, and are continuing to develop and acquire new ownership interests in, programming services. We are involved in several country-specific programming ventures including creating channels for Israel and Malta. Together, these programming ventures have developed channels in key genres including sports, children, documentary and movies, which are subtitled or dubbed in the local language. We recently acquired UIH's 75% interest in Tara and its 33.5% interest in IPS. Tara provides Irish general entertainment programming to the U.K. markets. IPS produces a movie channel, a documentary channel, a children's channel and a music channel for the Spanish and Portuguese markets. As of December 31, 1998, Tara and IPS sold programming content to non-UPC cable operators serving an aggregate of approximately 1.7 million subscribers. UPC Telephone Services: Priority Telecom Overview We believe that our existing customer base and upgraded network give us a unique opportunity to provide telephone service in Europe. We plan to offer local telephone services, called Priority Telecom in our Austrian, Dutch, French and Norwegian systems. We call our local telephone services Nedpoint in the A2000 systems. We also plan to develop national and international long distance voice and data services. Our operating companies are licensed to provide telephone services in Austria, France, Hungary, The Netherlands and Norway. A2000 began offering cable telephone services in July 1997 on a trial basis in Purmerend, a town outside Amsterdam, and since then has begun to offer these services to its customers in Hilversum, Zaanstad and part of Amsterdam. In November 1998, we launched Priority Telecom's cable telephone service on a trial basis in Vienna and in March 1999 in our Mediareseaux system in suburban Paris and in Oslo, Norway. We are negotiating to connect our local fiber networks, primarily through interconnections and capacity leases with other new telecommunications service providers, to provide long-distance telephone services across several European markets. Interconnect Agreements A2000 and KPN have entered into an interconnect agreement covering all of A2000's homes and businesses passed that will be capable of receiving telephone service. Similarly, each of Telekabel Wien, Janco Multicom, UTH and Mediareseaux has completed an interconnect agreement with the national incumbent telecommunications 11 service provider covering all of their homes and businesses passed by cable in their networks. Even with interconnect arrangements secured, we may still experience difficulty operating under them. In our A2000 system, for example, quantity at the interconnection have lowered the quality of A2000's telephone service. In Austria, while Telekabel Wien secured the interconnect arrangement with the support of the Austrian telecommunications regulator, the Austrian incumbent telecommunication operator is challenging the arrangement in the Austrian courts. Roll-Out and Implementation Schedule Cable telephone service in The Netherlands to areas outside of the A2000 systems will be provided by UTH. The rollout for these areas is scheduled to begin during the second half of 1999. Priority Telecom launched its service on a trial basis in Vienna in November 1998, and in suburban Paris and Oslo, in March 1999. It intends to launch service to business and residential areas in Vienna passing approximately 100,000 homes in early 1999. Priority Telecom's service is scheduled to be rolled out in Vienna to an additional 500,000 homes during the first half of 1999, with plans to offer the service to the balance of the approximately 83,000 remaining homes passed in Vienna capable of receiving the service by the end of 1999. Traditional Telephone System In addition to our cable telephone operations, our recently acquired Monor system has offered traditional telephone services since December 1994 and as of December 31, 1998, had approximately 69,240 traditional telephone lines. UTH's 80% subsidiary Uniport offers a carrier select telephone service and had approximately 20,500 subscribers at December 31, 1998. Competition Priority Telecom will face competition in its markets from incumbent telecommunications operators and other competitive operators that have substantially more experience in providing, and significantly greater resources devoted to, telephone services. In addition, we will depend on interconnect arrangements provided by incumbent telecommunications operators. We believe, however, that our strategy for Priority Telecom will allow us to compete effectively with incumbent telecommunications operators and any other local loop providers who subsequently enter the market. UPC Internet/Data Services: High Speed Access and chello broadband Overview We have launched a cable modem-based, high speed Internet access service in Austria, Belgium, The Netherlands and Norway. The launch of chello broadband in our upgraded Western European markets is scheduled to begin during the first quarter of 1999. As of December 31, 1998, we had approximately 23,200 residential and more than 1,140 business cable modem Internet access subscribers. Internet Access Experience To Date We have launched a residential and business cable modem-based, high-speed Internet access service in Austria, Belgium, The Netherlands and Norway. We have marketed our current Internet service as a high speed Internet access product excluding many of the value-added services that chello broadband expects to provide. Marketing efforts for our Internet access service have been limited to date but we intend to implement a more substantial brand marketing program from the launch of chello broadband's service. Roll-Out and Implementation Schedule The launch of chello broadband in our upgraded Western European markets is scheduled to begin during the first quarter of 1999. 12 Competition The Internet services business in Europe is highly competitive. We believe, however, that our strategy for chello broadband, which encompasses competitive pricing and superior service combined with high speed access and compelling content, will mitigate the effects of competition from other Internet service providers in its markets. We currently compete with traditional dial-up Internet service providers and other providers (including many incumbent telecommunications service providers) and expect that chello broadband will face competition from other broadband cable modem service providers, such as @Home and Roadrunner as they move to the European market. In the future, we expect competition from providers using other broadband technologies. Operating Companies We have operations in 10 countries in Europe and in Israel. While they all offer a basic video service, their other services vary. We are also currently upgrading the network in some countries but not in others. Austria: Telekabel Group Overview. We own 95% of the Telekabel Group, which provides communications services to the Austrian cities of Vienna, Klagenfurt, Graz, Baden and Wiener Neustadt and is the largest video distribution system in Austria with over 40% of the market. Telekabel Group's largest subsidiary, Telekabel Wien, which serves Vienna and represents approximately 87% of Telekabel Group's total subscribers, owns and operates one of the larger clusters of cable systems in the world in terms of subscriber numbers served from a single headend. We are expanding Telekabel Group's service offerings as its network is upgraded to full two-way capability. The upgraded network enabled Telekabel Group to launch an expanded basic tier, impulse pay-per-view services and Internet/data services in 1997. Telekabel Group was the first Austrian cable television company to offer tiered and pay-per-view services when it launched such services in Vienna. Telekabel Group launched an Internet access service in September 1997 and had approximately 9,050 Internet access subscribers as of December 31, 1998, with current average additions of 1,300 customers per month. It plans to introduce the chello broadband service in 1999. In addition, Telekabel Group launched Priority Telecom's cable telephone service in Vienna on a trial basis in November 1998. Following intervention of regulatory authorities on behalf of Telekabel Group, Telekabel Group entered into an interconnect arrangement with PTA, the incumbent telecommunications service operator, in November 1998. Network. Telekabel Group owns the complete cable television infrastructure for each of its systems from the headend to the home. In early 1992, Telekabel Wien initiated the rebuild and upgrade of its existing cable network in Vienna. The upgrade, which is expected to be 75% complete by the end of 1999, was approximately 57% complete and passed approximately 516,700 homes as of December 31, 1998. Programming. Telekabel Group offers basic subscribers 32 channels of cable programming, including substantially all of the broadcast channels from Austria and Germany, as well as CNN, Super Channel, MTV, an informational channel, Tips and Hits, Telekino Heute and Vienna cable text. Telekabel Group launched an expanded basic tier in May 1997 by providing subscribers, whose homes are passed by the upgraded network, an advanced analog decoder box, the cost of which is provided for in the monthly rate. The expanded basic tier currently provides seven channels of additional programming. In conjunction with the launch of this tier, Telekabel Group launched an impulse pay-per-view service with up to ten channels of programming. Competition. Telekabel Group's cable systems compete with a direct to home satellite service that is available throughout Austria. Currently, direct to home satellite service penetration of the Austrian market is approximately 35% and is concentrated primarily in the rural areas of the country. There is less competition from direct to home satellite service in Vienna where we estimate that the penetration is approximately 8%. Competition in the Internet/data business in Austria is intensifying. PTA, the national incumbent telecommunications service provider, 13 is promoting its high speed lines and a number of other companies recently have entered, or are expected to enter, the market. Upon launch of its telephone service in Vienna, Telekabel Group began competing with PTA. New facilities- based competitors in Telekabel Group's operating areas include United Telekom Austria, Tele.ring and Citykom. In addition, there are three wireless telephone providers in Telekabel Group's operating areas. Belgium: Radio Public N.V./S.A. Overview/Growth Strategy. TVD, our 100% owned subsidiary, provides cable television and communications services in selected areas of Brussels and nearby Leuven in Belgium. We estimate that there are currently approximately 133,000 homes under license in TVD's franchise areas. TVD, which currently has 96% penetration, plans to grow through the introduction of new services that currently are not subject to the price regulations applicable to basic cable services. TVD introduced expanded basic tier in October 1996 and an Internet access service in September 1997. As of December 31, 1998, TVD had approximately 4,900 expanded basic subscribers and 1,869 residential and 284 business Internet access subscribers. TVD plans to launch the chello broadband service in April 1999. As TVD upgrades additional portions of its network to full two-way capability, it plans to introduce impulse pay-per-view in the second quarter of 1999. We are exploring the possibility of providing cable telephone services. Network. TVD owns the complete cable television infrastructure for each of its systems from the headend to the home, with the exception of Etterbeek, with 15,000 subscribers, where TVD has an agreement with the municipality to operate the network until at least 2016. In late 1996, TVD began upgrading its network through fiber optic overlay of its trunk lines and replacement of all amplifiers. TVD's upgraded networks passed approximately 91,735 homes, or 69% of its total network as of December 31, 1998. TVD expects to complete this upgrade by mid-1999. Programming. TVD offers in Brussels a basic tier consisting of 32 channels, 17 expanded basic programs in six tiers, 20 FM radio channels and 20 premium digital radio channels. Its system in Leuven offers a basic tier consisting of 37 channels, an expanded basic tier with six channels, 20 FM radio channels and 20 premium digital radio channels. TVD also distributes five premium channels, three in Brussels and two in Leuven, which are provided by Canal+. Competition. TVD has approximately 96% penetration in its market. TVD faces competition, however, from one other cable television provider, Iverlek, which was granted a license for the provision of cable television services in Leuven and is constructing a cable network. As of December 31, 1998, TVD had approximately 27,480 subscribers in Leuven. To date, TVD has experienced only limited competition from direct to home satellite service providers. In its Internet access business, TVD competes with traditional dial-up Internet service providers. Also, we understand that in Leuven, Telenet will offer a broadband access and content service using Iverlek's new cable network. The Netherlands: United Telekabel Holding (UTH) Our Dutch operations are held through UTH, an unconsolidated subsidiary, of which we hold 51% as of December 31, 1998. In February 1999, we acquired the remaining 49% of UTH. UTH holds three principal operating companies: CNBH, which holds the combined KTE and Combivisie systems, Telekabel Beheer, both of which it wholly owns, and A2000, of which it owns 50%. MediaOne owns the other 50% of A2000. UTH does not consolidate the results of A2000. UTH owns and operates systems in the regions of Brabant, Flevoland, Friesland and Gelderland. Because of the large number of current subscribers located in four large clusters in The Netherlands, UTH is constructing a fiber backbone to interconnect its region-wide networks. In September 1998, UTH acquired 80% of Uniport, a carrier select telephone service with approximately 20,500 subscribers at December 31, 1998. Overview. Both KTE and Combivisie introduced an expanded basic tier in December 1996. KTE and Combivisie were combined into CNBH in 1998, which then launched impulse pay-per-view services in June 1998. 14 UTH intends to launch chello broadband's Internet/data services in the CNBH systems in early 1999. In addition, UTH plans to introduce the initial phase of cable telephone services in the NV Telekabel systems in mid-1999. Telekabel Beheer introduced an Internet access service in November 1997 in parts of its networks and also delivers a business telephone service, including leased line management, on-site services and telephone equipment, to its former 100% shareholder, NUON, and several other companies. As part of the purchase agreement with NUON for the remaining 49% of UTH, UTH and NUON have agreed to enter into a preferred supplier arrangement through December 31, 2007, whereby UTH will be the preferred supplier for NUON and its subsidiaries for telecommunications and Internet services and NUON will be the preferred supplier to UTH for energy and energy-related services. In August, 1998, UTH acquired from Nutsbedrijf Regio Eindhoven a 16,700 subscriber cable television system in the Eindhoven region. This acquisition enabled us to increase the cluster of operations in and around the Eindhoven area. In January 1999, UTH acquired the networks of Geldrop and St. Oedenrode and sold the network of Schijndel to Palet Kabelcom. The main reason was a further improvement of operations through clustering. Network. Each of UTH's systems owns or has the right to use the complete cable television infrastructure from the headend to the home. In 1997, Combivisie and Telekabel Beheer began upgrading their networks. The upgrade is expected to be 89% completed by year-end 1999. As of December 31, 1998, approximately 53% of UTH's homes were passed by the upgraded network. Programming. UTH currently offers its subscribers an average of 28 channels of basic programming along with a music channel and 33 FM radio channels. UTH also distributes two premium channels provided by Canal+. In addition, UTH offers an impulse pay-per-view service, consisting of four movie channels and one adult channel. UTH's basic service includes Dutch broadcasting channels, as well as a variety of German, French and English channels. The eight channels in UTH's expanded basic tier consist of sports, travel, news, science fiction, music and general entertainment. UTH is discussing with some of its higher value programming suppliers the migration of their channels from the basic tier to the expanded basic tier. UTH is not certain when it will successfully conclude these discussions. Competition. UTH is the only cable system in its franchise area. To date, UTH has maintained approximately 94% penetration. Competition from television signals received by antenna, direct to home satellite services and local private cable systems has been limited. In its Internet access business, UTH will compete with dial-up Internet service providers such as KPN's World Access/Planet Internet, NLNet and World Online. Upon launch of telephone services, UTH will compete primarily with KPN. The Netherlands: A2000 Holding N.V. Overview. A2000, a 50/50 joint venture between UTH and MediaOne, currently enjoys basic penetration rates of approximately 92% in its two systems that serve Amsterdam and its surrounding communities of Landsmeer, Purmerend, Zaanstad and Ouder-Amstel, and Hilversum. A2000 launched a nine-channel expanded basic tier in October 1996, impulse pay-per-view services in April 1997, cable telephone service on a trial basis in July 1997 and an Internet/data access service in October 1997. A2000 launched its Nedpoint-branded cable telephone service in August 1998. As of December 31, 1998, A2000 had approximately 14,250 subscribers to its expanded basic tier, approximately 18,100 cable telephone subscribers and approximately 8,125 residential and 250 business subscribers to its Internet/data access service. Whereas penetration of our expanded basic tier service is approximately 4%, it increased to more than 20% if offered in combination with a telephony subscription. The same trend shows up for internet services: if offered in combination with a telephony subscription, penetration of internet is higher than 10%, whereas it is 3% on a stand alone basis. We plan to use the information gathered from our telephone experience in A2000 as we launch cable telephone services in our other primary markets. 15 Network. A2000 owns its infrastructure from the head end to the home and is in the process of upgrading its cable television infrastructure. As of December 31, 1998, approximately 386,100 homes, or 67% of A2000's systems, were passed by the upgraded network, with total rebuild expected to be completed by the end of 1999. Programming. A2000 currently offers 26 channels of cable programming and 39 FM radio channels to its basic tier subscribers in the A2000 systems. A2000 offers programming in many languages, including Dutch, English, German, Italian, French and Turkish. A2000's expanded basic tier carries 13 channels. Programming includes both ethnic content, such as Asian, Chinese and Arabic, and thematic content, such as science fiction, travel, music, adult and art. A2000 has moved some popular channels, including MBC and the National Geographic Channel, from the basic tier service to the expanded basic tier. A2000 also distributes two premium channels provided by Canal+. Canal+ has recently commenced litigation against A2000 demanding direct access to A2000's network in order to introduce its own digital decoder. We do not believe A2000 will be obliged to provide the access demanded by Canal+ and, even if it were, we do not believe providing such access would have a material effect on A2000's business. Increases in the price of the basic tier service are restricted by agreements between A2000 and Amsterdam and the other municipalities in its franchise areas. Because these prices are kept at a low level, A2000's basic tier revenues are limited. A2000, therefore, charges programming suppliers carriage fees for the transmission of their channels. Some of A2000's programming suppliers have been unwilling to pay such carriage fees and Discovery, Eurosport, CNN and MTV have withdrawn their channels from A2000's basic tier offering. A2000 has offered to include these channels in its expanded basic tier or in separate mini-tiers. While A2000 has experienced typical and anticipated customer dissatisfaction with the change of programs in the basic tier, it has not experienced additional churn that can be directly attributed to these changes. A2000 plans to continue to introduce new channels on its tiered services when such programming is available. A2000's impulse pay-per-view service offers movies from all major studios on four movie channels. This service also includes an adult channel and one ''barker'' channel that provides previews of upcoming pay-per-view events. Competition. A2000 currently has a penetration rate of approximately 92% in its service area. Its primary competition is from direct to home satellite service providers. To date, however, A2000's programming rights, low basic cable fees, restrictive regulations on the installation of dishes and high installation costs have limited direct to home satellite services as a meaningful competitor. In its Internet access service, A2000 currently is the only high speed access provider in its operating area. A2000 expects to compete with KPN, which is testing a high speed Internet access service, in the near future. A2000 also competes with traditional dial-up providers, including KPN's World Access/Planet Internet, NLNet and Euronet. In its telephone business, A2000 currently competes with KPN, Telfort and Worldcom. A2000 is competing on the basis of price and the ability to integrate a number of its services. Norway: Janco Multicom Overview. Janco Multicom is Norway's largest cable television operator with approximately 47% of the total Norwegian cable television market as of December 31, 1998. Janco Multicom owns and operates 16 cable television systems in Norway located primarily in the southeast and along the southwestern coast, as well as its main network in Oslo. The well-established Norwegian cable television market has 70% penetration, as of December 31, 1998, primarily due to poor over-the-air reception in much of Norway and a significant demand for television entertainment. Janco Multicom launched an Internet access service in March 1998 and plans to introduce the chello broadband service in the first quarter of 1999. Janco Multiplan has secured a telephony license agreement from the Norwegian regulator, and an interconnection agreement with TeleNor, the incumbent telecom operator. We plan to introduce Priority Telecom's cable telephone service in 1999 in the upgraded portions of Janco Multicom's network. Network. Janco Multicom owns the complete cable television infrastructure for each of its systems from the headend to the home, except for cable and plant located on housing association property, which is legally owned by 16 the housing association. Janco Multicom is currently upgrading its network to full high capacity 860 MHz two-way capability, with the exception of 75,000 homes in western rural areas. Its networks vary in capacity from 300 MHz to 550 MHz . This varying architecture requires us to replace more of the network than in our other primary markets, thereby increasing the costs of this upgrade. The upgrade, which began in April 1998, is scheduled to be completed over the next three to four years. Programming. Janco Multicom currently offers subscribers 31 channels of programming in four tiers: . basic, including ''must carry'', a limited number of broadcast channels required by the government to be carried, . an expanded basic tier, . a ''mini-tier'' of certain selected channels, and . premium services. Because English is widely understood in Norway, Janco Multicom is able to use English-language programming to supplement the limited, but increasing, supply of available Scandinavian-language programming. Competition. Janco Multicom experiences limited competition from direct to home satellite service providers. In its Internet access business, Janco Multicom expects to compete with TeleNor, the Norwegian incumbent telecommunications operator, which is expected to launch a broadband Internet access service this fall; and Tele2, a subsidiary of NetCom Systems, which operates a dial-up Internet access service and has recently launched a high speed wireless Internet access service. With Priority Telecom telephone services, Janco Multicom will also compete in this area with TeleNor. Israel: Tevel Israel International Communications Ltd. Overview/Growth Strategy. Tevel has exclusive cable television broadcasting franchises for the entire Tel Aviv metropolitan area, the region of Ashdod- Ashkelon, which is 30 miles south of Tel Aviv, and the Jezreel Valley, which is 80 miles northeast of Tel Aviv. We own 46.6% of Tevel. In April 1998, Tevel acquired 100% of Gvanim Cable Television Ltd. and has since integrated fully Gvanim's operations with its own. Gvanim and its 90%-owned subsidiary Gvanim- Krayot operate cable television systems in the Rishon-Leziyon, Ramla-Lod, Modiin, Haifa Bay, Karmiel, Maalot and Lower Galilee areas of Israel. There are approximately 212,150 homes passed in the Gvanim franchises and as of December 31, 1998, Gvanim and its subsidiary had approximately 149,650 subscribers. The Gvanim acquisition increased Tevel's total subscribers as of December 31, 1998 to more than 402,350 in franchise areas representing over 595,000 homes, or approximately 40% of the total homes in Israel. In addition to its cable operations, Tevel owns 50% of Globcall, a telecommunications company that designs, installs and maintains switching systems for businesses. As of December 31, 1998, Globcall served approximately 35,000 outlets. Tevel also owns 33% of Netvision, one of Israel's leading Internet service providers that had over 60,000 dial-up subscribers as of December 31, 1998. Network. Tevel owns the complete cable television infrastructure for each of its cable systems from the headend to the home. The systems' construction incorporates 550 MHz capability, representing approximately 50 channels, with a 60 MHz return path providing approximately 363,800 homes passed with two-way capability for impulse pay-per-view services only. Tevel plans to upgrade all of its systems to 750 MHz hybrid fiber coaxial technology capable of providing cable telephone and Internet/data services. Currently, Gvanim's network is a one-way system with a substantial overlay of fiber optic backbone, but it is being upgraded to full two-way capability with the installation of 750 MHz hybrid fiber coaxial technology. Tevel expects that the upgrade of all of its systems will be substantially complete by mid-1999. Programming. Tevel offers basic subscribers 45 channels of programming, including a wide range of entertainment, news, sports, performing arts and educational channels, as well as five pay-per-view channels in all of Tevel's areas. Currently, over 40% of Tevel's subscribers purchase at least one pay-per- view buy per month. Tevel has applied to extend its license to provide pay-per- view services in all of its franchise areas. Tevel has also 17 applied for a license to provide pay-per-view services in Gvanim's franchise areas. The grant of such licenses may be conditional upon Tevel and Gvanim obtaining their programming from independent third parties. As explained below, their programming is currently provided by an affiliate. Tevel and the other Israeli cable television operators own a programming company, I.C.P. Israel Cable Programming Company Limited. ICP purchases programming rights for subsequent sale to cable television operators in Israel and produces two cable-exclusive channels: a general entertainment channel and a movie channel. A children's channel, a sports channel and a channel showing nature, science and art documentaries are produced by third parties. Competition. Because Tevel has exclusive cable television licenses, to date it has experienced no competition from other multi-channel television providers. The Israeli government recently passed legislation, however, to grant licenses to direct to home satellite service operators. In January 1999, a license has been granted to a group led by Bezeq, the Israeli incumbent telecommunications service provider, and another license may be granted to a second group. These operators are expected to begin providing direct to home satellite services by the forth quarter of 1999. ICP may be required to sell to direct to home satellite service operators its channels that are currently offered exclusively to cable television operators, and Tevel may be required to divest off its ownership in ICP. France: Mediareseaux Marne, S.A. Overview. We have a 99.6% ownership interest and a 95% economic interest in Mediareseaux Marne S.A., which currently holds cable television franchises for 150,000 homes in the Marne-la-Vallee area east of Paris. Mediareseaux began construction of its network in September 1996, and as of December 31, 1998, Mediareseaux's system passed approximately 74,620 homes and had approximately 29,100 basic subscribers, giving it a penetration rate of 39.0%. Mediareseaux began offering pay-per-view services in May 1998, and to date, the pay-per-view buy rate is approximately 0.5 movies per expanded basic tier subscriber per month. We recently agreed to buy the French cable assets from Time Warner. These French systems are located in suburban Paris and Lyon, and in Limoges. The number of homes passed and subscribers is 210,000 and 64,000 respectively. We expect to close this purchase in the third quarter of 1999. In July 1998, Mediareseaux obtained a 15 year telephone license for an area that includes 1.5 million homes in the eastern suburbs of Paris and in September 1998, Mediareseaux began installing a telephone switch. Mediareseaux has begun offering telephone services in February 1999 within its cable television franchise area and has obtained frequencies for a trial offering of fixed wireless local loop services. Mediareseaux also plans to offer chello broadband's Internet access services in 1999. To expand its operations, Mediareseaux is pursuing potential acquisition opportunities and plans to develop these franchises as one clustered system offering integrated video, cable telephone and Internet/data services. Network. Mediareseaux owns the complete cable television infrastructure for each of its cable systems from the headend to the home. The hybrid fiber coaxial network was started with a 750 MHz UHF-VHF frequency band network with a 5-65 MHz return path. The systems' post-1998 construction incorporates 860 MHz hybrid fiber coaxial capacity with a 5-65 MHz return providing full two-way capability. As of December 31, 1998, Mediareseaux's network passed approximately 50% of the 150,000 homes then in its franchise areas. We expect the network to pass all 150,000 homes in our current franchise areas by the end of 2000. Programming. Mediareseaux's current programming offers: . a basic eight-channel package containing off-air, local and promotional programs, . four extended basic tiers, called News & Current Events, Youth & Discovery, International Channels and Sports & Leisure, with five to nine channels each, . three premium tiers containing three children's channels, three sports channels and four movie channels, and . ten impulse pay-per-view channels. 18 Competition. Mediareseaux competes with other video service providers in its license areas including satellite providers such as Canal Satellite and TPS. Mediareseaux expects to face competition mainly from France Telecom, the French incumbent telecommunications operator and Cegetel with the launch of its cable telephone services. Upon the launch of its Internet access service, Mediareseaux expects to face competition from France Telecom's Wanadoo service, Cegetel, which now includes AOL, Compuserve and HOL, and Infonie, among others. Malta: Melita Cable TV P.L.C. Overview. Melita Cable TV P.L.C. operates an exclusive franchise network in Malta. Currently, we and Melita Cable Holdings each own 50% of Melita. As of December 31, 1998, Melita passed approximately 163,000 homes and had 70,363 basic video subscribers representing a 43.2% penetration rate. Melita's growth strategy is to continue to market aggressively its service to homes in its franchise areas, as well as to provide more programming to increase its appeal to subscribers. Network. Melita owns the complete cable television infrastructure from the headend to the home. Currently, Melita passes over 163,000 homes, or 91% of the network. The upgrade to high capacity 860 MHz two-way capability, which has been initiated this year and is expected to be completed by 2000, will enable Melita to provide Internet access and other enhanced services. Programming. Melita currently provides 52 channels of programming, grouped in three tiers: . reception, which includes local and foreign off-air channels that are received with an antenna and retransmitted over the cable network, . basic, which includes reception service plus nine additional satellite services that are received with a satellite dish and retransmitted over the cable network, and . TV Plus (reception and basic services plus nine additional satellite services). Because English is spoken in Malta by over 90% of the population, Melita is able to take advantage of the abundant supply of English language programming available for licensing. In 1996, Melita created a ''live'' sports channel showing English Premier League Football and in 1997, introduced a second ''live'' sports channel featuring Italian soccer, as well as four other new channels. In August 1998, Melita combined the features into a full-time sports channel, which includes other sports events and local productions. Competition. With the exception of a small number of home satellite receivers and a few hotel private cable installations, competition in Malta is limited primarily to approximately 15 Italian and Sicilian broadcast channels. Hungary: Telekabel Hungary Overview. In June 1998, we increased our interest in Kabelkom, Hungary's largest operator of cable television systems, from 50% to 100%. Shortly thereafter, Kabelkom combined operations with Kabeltel, Hungary's second largest operator of cable television systems, creating Telekabel Hungary, in which we retain a 79.25% interest. As of December 31, 1998, Telekabel Hungary had approximately 442,560 subscribers. There are no current plans to launch telephone or Internet/data services in Telekabel Hungary's systems. Network. Telekabel Hungary, together with two local minority partners for two systems, owns the complete cable television infrastructure for each of its systems from the headend to the home. We are upgrading these networks. As of December 31, 1998, approximately 86,000 customers were already served by the rebuilt network. The upgraded network throughout Budapest will be 750 MHz hybrid fiber coaxial technology with 65 MHz return path. As of December 31, 1998, Telekabel Hungary's network passed approximately 105,100 homes with hybrid fiber coaxial cable. Programming. Telekabel Hungary offers subscribers four tiers of programming comprising approximately 35 channels: 19 . basic tier, which includes a limited number of broadcast and satellite channels required by the government to be carried, . an expanded basic tier, and . a premium service, HBO-Hungary. Approximately 15 channels, including HBO-Hungary, are available in Hungarian. In the Telekabel Hungary systems, 75% of all subscribers passed by the upgraded network take the expanded basic tier package. Competition. Telekabel Hungary currently averages over 84% penetration in its service area and faces limited competition. We understand, however, that potential competitors may begin to offer direct to home satellite services in Budapest. Hungary: Monor Monor, our Hungarian operating company in which we own a 44.75% economic interest, has offered traditional telephone services since December 1994. Monor has 85,000 homes in its franchise area, with approximately 84,000 traditional telephone homes passed and approximately 68,340 cable television homes passed. It served approximately 69,240 traditional telephone access lines and approximately 30,620 cable television subscribers as of December 31, 1998. Czech Republic Overview. We own 100% of KabelNet, its Czech Republic subsidiaries that provide cable and ''wireless'' cable television services in the cities of Prague and Brno, the Czech Republic's second largest city. At December 31, 1998, the wireless cable system served approximately 44,275 subscribers in both cities and the cable system served approximately 9,875 subscribers in Prague. KabelNet's penetration rate was 35.7% as of December 31, 1998. There are no current plans to launch telephone or Internet/data services in KabelNet's systems. Network. KabelNet's systems currently offer programming over an MMDS network and a hybrid fiber coaxial cable network. KabelNet owns the complete cable system infrastructure for each of its systems from the headend to the home. KabelNet has no plans to introduce two-way services to its network at this time. Programming. The Czech wireless cable systems offer subscribers three tiers of programming comprising approximately 16 channels: . five "must carry" channels, . a 15-channel basic tier, which includes the ''must carry'' channels, and . one premium channel, HBO-Czech. Approximately nine channels, including HBO Czech, are available in Czech/Slovak. Currently, approximately 13% of KabelNet's cable subscribers take the expanded basic tier package. Competition. KabelNet faces competition in its service area. Currently, parts of its service areas have been overbuilt by Cable Plus, a subsidiary of US WEST, and Dattel Kabel in Prague and Cable Plus in Brno. Overbuilding is when a cable network is installed where one already existed. Romania Overview. We are currently involved in the development of three cable companies in Romania: . our 100%-owned Control Cable Ventures, with operations in Ploiesti and Slobozia, . our 100%-owned Multicanal Holdings, located in Bucharest, Romania's capital, and . our 51%-owned Eurosat in Bacau. 20 Since 1993, when we first entered the Romanian market, we have widened our customer base through acquisition and marketing activities in conjunction with build out. As of December 31, 1998, our combined Romania operations passed approximately 98,175 homes and served approximately 62,000 subscribers, representing a penetration rate of 63.2%. There are no current plans to launch telephone or Internet/data services in the Romanian systems. Network. In 1994, we initiated an intensive upgrade of our Romanian systems to rebuild the network from 300 MHz to 550 MHz. In Bacau, it will be 750 MHz. The rebuild in Ploiesti, which has 24,000 subscribers, is complete. The rebuild in Slobozia and Bacau, which together have 30,000 subscribers, is expected to be completed by 2000. The Romanian systems have no plans to introduce two-way services at this time. Programming. The Romanian systems offer subscribers one to three tiers of programming with approximately 28-34 channels: . basic tier, . an expanded basic tier, and . a premium service, HBO Romania. HBO Romania was launched in Ploiesti and Bucharest in February and April 1998, respectively. We also launched an expanded basic tier in Ploiesti in April 1998. Approximately 12 channels, including HBO Romania, are available in Romanian. Currently, 15.5% of the basic tier subscribers take the expanded basic tier package. Competition. Because there are no exclusive franchises awarded in Romania, we face competition in all four franchise areas in which we operate. While there is little overbuild within the cities, the homes are divided among a variety of competitors in each city. Including our systems, there are three operators in Ploiesti, four operators in Bacau, two operators in Slobozia and eight major operators in Bucharest. Slovak Republic Overview. We entered the Slovakian market in 1995 and currently have over 67,950 homes in our franchise areas. We are developing projects in the cities of Trnava, Zvolen, Nove Zamky and Levice. We own 75% of our projects in Trnava and 100% of our projects in Zvolen and Levice. Construction of the network in Trnava and Nove Zamky have been completed. The cities of Zvolen and Levice are all currently under construction, which is expected to be completed by the end of 1999. As of December 31, 1998, our Slovakian operations passed approximately 37,640 homes and served approximately 21,040 subscribers, representing a penetration rate of 55.9%. There are no current plans to launch telephone or Internet/data services in the Slovakian systems. We recently agreed to buy 95.63% of the 156,000 subscriber system, that is based in Bratislava and surrounding cities. We expect to close the purchase in the course of the second quarter of 1999. Network. The Slovakian systems own the hybrid fiber coaxial cable network from the headend to the home. There are no plans to introduce two-way services to the Slovakian systems' network at this time. Programming. The Slovakian systems offer subscribers three tiers of programming on approximately 34 channels: . a basic tier, . an expanded basic tier, and . a premium service, HBO Czech. Approximately 12 channels, including HBO Czech, are available in Slovak/Czech. Currently, 90.9% of the subscribers take the expanded basic tier package. 21 Competition. In the cities of Levice and Nove Zamky, there are no competitors to our systems. In Zvolen, there are two competitors. One is an unencrypted wireless cable service operated by Cable Plus, a subsidiary of US WEST, and the other is a small private cable operator. Trnavatel faces no direct competition. Employees As of December 31, 1998, we, together with our consolidated subsidiaries, had approximately 1,500 employees. We believe that our relations with our employees are generally good. Certain of our operating subsidiaries, including our Austrian, Dutch and Norwegian systems, are parties to collective bargaining agreements with some of their respective employees. Corporate Ownership Structure We own 100% of our operating systems in Norway, Belgium and the Czech Republic. In February 1999, we increased our ownership of UTH to 100%. Below is a description of those operating systems in which we hold less than 100%. Austria Telekabel Group consists of five Austrian corporations, each of which owns a cable television operating system. We own 95% of, and manage, each Telekabel Group company. Each of the respective cities in which the operating systems are located owns, directly or indirectly, the remaining 5% interest in each company. Telekabel Wien's 5% shareholder Kabel-TV-Wien Gesellschaft m.b.H is owned by the City of Vienna. KTV has the right to appoint a member to Telekabel Wien's supervisory board. If four to six members have been appointed by shareholder resolution, KTV has the right to appoint two members. KTV also has the right to appoint one member of Telekabel Wien's board of management. We have appointed six members of the supervisory board and two members of the board of management. KTV has appointed two members of the supervisory board and one member of the board of management. The remaining four members of the supervisory board are employee representatives. Under the agreements among Telekabel Wien and KTV, decisions regarding the subscriber rates and programming content of Telekabel Wien's basic subscription package require the unanimous approval of Telekabel Wien's board of management. Although we believe the cooperation between KTV's managing director and the other managing directors has been successful in the past, there can be no assurance that the board of management will unanimously approve decisions regarding the subscriber rates and programming content of its basic subscription package. Should the Board not reach a unanimous decision in respect of these matters, then pursuant to the Syndicate Agreement, a shareholders meeting can be called. We, as a 95% shareholder, can call that meeting and decide on the agenda. Under Austrian law, a majority shareholder such as us may generally take a decision at a shareholders meeting rather than through the Board of Management. However, we as a majority shareholder have never taken this action and do not anticipate doing so in the future. In connection with the UPC Acquisition in December 1997, KTV and Philips agreed that Philips will continue to guarantee the capital level to be maintained by Telekabel Wien. Philips has also agreed to guarantee the continued fulfillment of the agreements that were originally concluded between KTV and Philips and that were assigned by Philips to us. We have agreed to indemnify Philips for any liability under Philips' guarantee. Philips, KTV and ourselves have agreed that the agreements concluded between KTV and Philips will run until December 31, 2022 with an option to extend them. Due to its position as a guarantor, Philips has the right to appoint one member to our Supervisory Board. This Supervisory Director has a veto right that is limited to fundamental decisions and exceptional business matters, such as the sale or disposition of our interests in Telekabel Wien, if certain threshold values are met. 22 The articles of association of the companies in the Telekabel Group restrict their shareholders from divesting their interests for periods ranging from the end of 2009 to 2022. In addition, a sale of shares requires notice of two years and is subject to a right of first refusal of the other shareholders. The City of Vienna's approval is required for any change of control over us, which approval cannot be unreasonably withheld if the buyer is a reputable telecommunications and/or cable television operator. In the absence of such approval, the City of Vienna can require UIH to own Telekabel Wien separately from us. See "Certain Transactions and Relationships". We may provide Priority Telecom's services to Telekabel Group's subscribers through a wholly-owned subsidiary, even though the services will continue to be marketed by Telekabel Group. The Netherlands (A2000) UTH and MediaOne International, an international developer and manager of cable television, telephone and wireless communications properties, each own 50% of the ordinary share capital of A2000. A2000 owns 100% of Kabeltelevisie Amsterdam B.V., which operates cable systems in Amsterdam, Landsmeer, Purmerend, Zaanstad and Ouder-Amstel, and 100% of A2000 Hilversum B.V., which operates a cable system in Hilversum. The Municipality of Amsterdam owns one priority share in Kabeltelevisie Amsterdam, which gives the municipality the right to block the merger, demerger, dissolution and liquidation of Kabeltelevisie Amsterdam, certain amendments to Kabeltelevisie Amsterdam's articles of association, the issue of Kabeltelevisie Amsterdam shares to persons other than A2000, the appointment of a legal entity as a managing director and the granting of voting rights to a pledgee of A2000's shares of Kabeltelevisie Amsterdam. Furthermore, the Municipality of Amsterdam's approval is required for any change of control over A2000. Approval cannot be withheld if the buyer is a reputable telecommunications and/or cable television operator or financial institution. A2000, Kabeltelevisie Amsterdam and A2000 Hilversum are each managed by a management board, responsible for day-to-day management, under the supervision of a non-executive supervisory board. The supervisory boards of A2000 and A2000 Hilversum consist of an even number of directors: one half are appointed upon binding nomination from MediaOne and one half are appointed upon binding nomination from UTH. Certain major decisions require approval by at least 75% of the shareholders. Kabeltelevisie Amsterdam's supervisory board consists of three directors, one appointed by each of MediaOne, UTH and the municipality. The Kabeltelevisie Amsterdam and A2000 Hilversum management boards consist of at least one managing director (the chief executive officer), appointed by UTH, and a chief financial officer, appointed by MediaOne, as well as other members appointed by both. The A2000 management board consists of an even number of directors, currently two, one appointed by UTH and one appointed by MediaOne. Certain major decisions affecting Kabeltelevisie Amsterdam, such as approval of business plans and annual budgets, require approval of the majority of the supervisory board of Kabeltelevisie Amsterdam. A2000 is a 50/50 joint venture that requires the agreement of both owners for certain management decisions. From time to time, there has been disagreement between its owners as to some of the operations of A2000. We do not believe, however, that A2000's operations or prospects have been materially affected by these disagreements. France We own 99.6% of Me'diare'seaux, our French operating system. The other owner of Me'diare'seaux is an entity controlled by Patrick Drahi, its founder and current chairman, which holds warrants giving it the right to purchase for a nominal amount new shares corresponding to 4.6% of Me'diare'seaux's share capital. Accordingly, we have only a 95% economic interest in Me'diare'seaux. Pursuant to an agreement dated June 16, 1998, we and the entity controlled by Patrick Drahi have granted to each other options to purchase and sell, at a price based on fair market value, the shares of Me'diare'seaux that the entity may hold in the future. 23 Israel We currently own indirectly 46.6% of Tevel, our Israel operating system. We acquired 23.3% of this interest in November 1998. An Israeli corporation owned by DIC Communication and Technology Ltd. and PEC Israel Economic Corporation and whom we call the ''Discount Group'' owns 48.4% of Tevel and a private Israeli investor holds the remaining 5% of Tevel. Tevel is managed by a board of directors. We have the right to designate one of Tevel's five directors for each 17% of Tevel that we own. Currently, two Tevel directors are our appointees. Each of Tevel's shareholders has agreed to grant a right of first refusal to the other shareholders in the event of a transfer of any Tevel shares. If the other shareholders do not exercise this right, they are permitted to participate in the sale and may require the selling shareholder to include in the transferred shares such number of shares equal to each shareholder's pro rata amount. In addition, any shareholder of Tevel that holds more than a 30% interest may offer its shares to the other shareholders at a price based upon the appraised fair market value of Tevel. If the other shareholders do not accept the offer, the offering shareholder may require that all of the shares of Tevel be sold to a third party at the appraised value. Any such sales would be conditioned on receipt of appropriate regulatory and other consents. If a third party has not agreed to purchase the Tevel shares at the appraised value within six months of the date the appraisal is delivered to Tevel and the shareholders, the right to exercise the forced buyout option lapses, and any shareholder that thereafter desires to exercise the forced buyout option must first offer to sell its shares to the other shareholder at fair market value based on a new appraisal. No shareholder may exercise this forced buyout option more than once in any 12- month period. Neither party has exercised the forced buyout option. We and the Discount Group have agreed not to exercise this forced buyout option while our loan from DIC is outstanding. Tevel's shareholders, other than the private Israeli investor, have agreed not to compete with Tevel in respect of certain cable telecommunications services and complementary businesses in Israel unless the Tevel board of directors decides that Tevel will not participate in such systems or businesses. Malta We currently own indirectly 50% of the ordinary share capital of Melita. The remaining 50% is owned by Melita Cable Holdings Ltd., a Maltese company owned by Maltese citizens, as required by Melita's franchise agreement. The day-to-day management of Melita is vested in its board of directors. Melita currently has nine directors of whom we appointed four, Melita Cable Holdings appointed four and we and Melita Cable Holdings jointly appointed the president. Certain major actions require our approval and the approval of a majority of the directors of Melita Cable Holdings. Neither we, Melita Cable Holdings nor our affiliates may compete with Melita with respect to providing video signals to homes in Malta. Each of us now may offer our interest in Melita to the other. If either of us elects not to purchase the other's interest, we both must cooperate to sell all of Melita. If either of us sells our interest in Melita to a third party, the one which is selling must give the other an opportunity to sell to that third party. Hungary Telekabel Hungary. We and The First Hungary Fund Ltd., an investment fund, indirectly own 79.25% and 20.75%, respectively, of the ordinary share capital of Telekabel Hungary. Telekabel Hungary owns interests ranging from approximately 96.88% in one and 100% in seven of the eight Kabelkom systems contributed by us and 100% in five and 99.96% in one of the Kabeltel systems contributed by The First Hungary Fund. Our shares of Telekabel Hungary are pledged in favor of Telekabel Hungary's DEM65.6 million bridge finance lenders. One of our wholly-owned subsidiaries is solely responsible for day-to-day management of Telekabel Hungary, under the supervision of Telekabel Hungary's supervisory board. The supervisory board has four members, three of 24 which are appointed by us and one by The First Hungary Fund. The parties have agreed that the supervisory director appointed by The First Hungary Fund may block the required supervisory board approval of any element of the business plans and budgets of Telekabel Hungary and its subsidiaries that he reasonably determines would decrease the shareholders' value of Telekabel Hungary to the detriment of The First Hungary Fund while we would obtain an increase in value other than through Telekabel Hungary or its subsidiaries. Certain major decisions concerning Telekabel Hungary and its subsidiaries, such as the merger, demerger, liquidation and sale of all or substantially all of the assets of those entities, the amendment of their articles of association, and the issuance of certain preference shares, require approval of The First Hungary Fund's representative so long as The First Hungary Fund owns at least 10% of Telekabel Hungary's share capital. Moreover, we and The First Hungary Fund can dispose of our shares in Telekabel Hungary after December 31, 1999, either to the other at fair market value, to a third party or through a registration of such shares under the U.S. Securities Act of 1933 or on a European exchange. The selling shareholder must first offer its shares to the other and, if the non-selling shareholder declines to purchase such shares, the shares may be sold to a third party on terms no less favorable than the terms offered to the non-selling shareholder for a six- month period after the non-selling shareholder so declines. Monor. Monor Telefon Tarsasag Rt has the exclusive, local-loop telephone concession for the region of Monor, Hungary. We and our partner, PenneCom B.V., each own about a 44.75% economic interest and about a 37.5% voting interest in Monor. The remaining economic and voting interests are owned by several Hungarians. Romania We have interests in three Romanian cable companies: indirect 100% interests in Multicanal Holdings, SRL, located in Bucharest, and Control Cable Ventures, SRL, with operations in Ploiesti and Slobozia, and a 51% interest in Eurosat, with operations in Bacau. The other shareholders of Eurosat are local investors. Slovak Republic We operate in the Slovak Republic through two Slovak limited liability companies: KabelTel S.R.O., and Trnavatel S.R.O. We have a 100% indirect interest in KabelTel, and a 75% indirect interest in Trnavatel. Salko Ltd., a Slovak corporation, owns 20% and the City of Trnava owns 5% of the remaining interest in Trnavatel. KabelTel has operations in the cities of Zvolen, Levice and Nove Zamky, while Trnavatel operates in Trnava. Programming Companies Tara. We own 80% of Tara. The remaining 20% of Tara is owned by RTE Commercial Enterprises Ltd., an affiliate of the Irish national broadcasting company. Tara is managed by a board of directors. IPS. IPS is a group of three related entities, one corporation and two partnerships, focusing on the Spanish and Portuguese markets. We hold an approximately 33.5% interest in these entities. The other partners of IPS are a subsidiary of The Walt Disney Corporation and entities owned by the Urbina Group. Regulation The provision of video, telephone and Internet/data services in the countries in which we operate is regulated. The scope of regulation varies from country to country, although in some significant respects regulation in our Western European markets is harmonized under the regulatory structure of the European Union. Below is a summary of the regulatory environment in the European Union and the European Economic Area member countries in which we operate and of the regulatory environment in Israel. 25 European Union Austria, The Netherlands, Belgium and France are all member states of the EU. As such, these countries are required to enact national legislation which implements directives issued by the EU Commission and other EU bodies. In recent years, the EU has led the opening of competition and the liberalization of the telecommunications and video services sectors, which includes the use of cable networks to provide public voice telephone and other telecommunications services, in EU member states. Although not an EU member state, Norway is a member of the European Economic Area and has generally implemented or is implementing the same principles on the same timetable as EU member states. As a result, most of the markets in which we operate have been significantly affected by regulation initiated at the EU level. As it develops, such EU regulation will continue to have a significant effect on these markets, including future developments relating to the convergence of telecommunications, media and information technology. The EU Commission has started to review the consequences of this convergence for the regulatory environment. This review will take place during 1999 and may result in changes of the current regulatory framework, but the scope of such changes cannot be predicted at this time. Telephone and Internet/Data Services Liberalization of Telecommunications Services and Infrastructure. A central aim of the liberalization process has been to reduce the monopoly power of the incumbent telecommunications operators in order to introduce competition in the European telecommunications market. Following the EU Commission's Services Directive (90/388/EC), dated June 28, 1990, as amended, the exclusive rights of such incumbent operators to provide telecommunications services were gradually removed so that competing operators and service providers would be entitled to offer such services. The incumbent telecommunications operators invariably owned the national networks, however, and the lack of an alternative infrastructure to provide such liberalized services operated as a major barrier to entry into the market by competitors. In an effort to overcome this barrier, the EU introduced the ''Cable Television Networks Directive'' (95/51/EC), dated October 18, 1995, which required member states to remove existing restrictions on the use of cable television networks to provide communications services other than cable television services. As a result, cable television operators became able to use their networks to provide telecommunications services except for public voice telephone. In 1996, the EU Commission issued the ''Full Competition Directive'' (96/19/EC), which required most member states to remove the exclusive rights of incumbent public voice telephone operators by January 1, 1998. The establishment and provision of telecommunications networks was also liberalized under this directive. As a result of this directive, our Western European operating companies may establish and provide telecommunications networks and/or services, including public voice telephone and Internet/data services, through their cable networks. Under the Cable Television Networks Directive, telecommunications operators that have exclusive rights to provide cable television network infrastructure in a given area and achieve an annual turnover of more than Euro 50 million must account separately for their telecommunications services and any cable television services. In The Netherlands, Belgium and in certain circumstances, Norway, this requirement applies to all telecommunications operators providing both cable television and other telecommunications services under national law irrespective of the above-mentioned requirements. Should any of our operating companies in the EU with exclusive rights to cable television infrastructure achieve the requisite turnover, they would become subject to these requirements. A draft Directive of the EU Commission, if issued, will require member states to enact legislation directing incumbent telecommunications operators to separate their cable television and telecommunications operations into distinct legal entities. This directive is likely to affect how incumbent telecommunications operators position themselves in cable television or broadband services by encouraging them to restructure their existing operations, which may increase their competition with us, although the incumbent operators do not currently compete in the cable television services market. Interconnection. Because new telecommunications operators need to interconnect their networks with the fixed public telephone network, the EC Council of Ministers and the European Parliament adopted the Directive on 26 Interconnection in Telecommunications (97/33/EC), which sets forth the general framework for interconnection, including general obligations to allow other telecommunications operators to interconnect with their networks. The directive requires member states to impose obligations on telecommunications network operators with significant market power (which, although it may vary, is presumed when an operator has 25% or more of the relevant market). They must offer interconnection without discriminating between operators, which offer similar services, and their interconnection charges must follow the principles of transparency and be based on the actual cost of providing the interconnection. As a result, if the principles in the directive are fully applied, our operating companies in the EU and Norway should be able to interconnect with the public fixed network and other major telecommunications networks on a cost basis in order to provide their services. There can be no assurance, however, that we will be able to obtain from incumbent telecommunications operators interconnection on terms and conditions or at prices satisfactory to us without protracted negotiations or involvement in time-consuming regulatory proceedings. Licensing. EU telecommunications policy has also aimed to harmonize the licensing requirements for the provision of public telecommunications services. As a result of the ''Licensing Directive'' (97/13/EC), which became effective on December 31, 1997, member states are required to change national legislation so that providers of telecommunications services require either no authorization or a general authorization which is conditional upon ''essential requirements'', such as the security and integrity of the network's operation. Licensing conditions must be objective, transparent and non-discriminatory. Member states may issue individual licenses in certain situations. For example, the provision of public voice telephone and the establishment or provision of public telecommunication networks may be subject to individual licenses. In addition, telecommunications operators with significant market power may be required by member states to hold individual licenses carrying more burdensome conditions than the authorizations held by other providers. Significant market power is typically 25% of the relevant market. Regulation of the Internet. Although Internet-specific regulations have not been issued, EU policy may develop harmonized principles of ''responsibility of content'' to apply to Internet access providers analogous to those applicable to publishing companies. We do not expect such regulations to materially adversely affect our Internet business plans. Video Services Video Services through Telecommunications Networks. Most of our operating companies are the only cable television operators in their franchise areas. As with the telecommunications sector, the cost of building a network to provide video services is a considerable disincentive to potential new entrants in the video services market. Our operating companies may face competition in the long term in their franchise areas from new entrants providing video services through the infrastructure of incumbent telecommunications operators and potential new entrants. In The Netherlands, for example, where there are no restrictions on the use of telecommunications infrastructure for the provision of cable television services, the incumbent telecommunications operator is testing whether it will be able to provide video services through its fixed networks. Conditional Access. In order to enable further competition in the video services market, the EU Commission passed the ''Advanced Television Standards Directive'' (95/47/EC), dated October 24, 1995, which requires member states to regulate the offering of conditional access systems, such as program decoders used for the expanded basic tier services offered by many of our operating companies. Providers of such conditional access systems are required to make them available on a fair, reasonable and non-discriminatory basis to other video service providers, such as broadcasters. Broadcasting. The ''Television Without Frontiers Directive'' (97/36/EG), dated June 30, 1997, is intended to introduce freedom of broadcasting in the EU. Generally, broadcasts emanating from and intended for reception within a country have to respect the laws of that country. Under the directive, other EU member states will be required to allow broadcast signals to be made into their territories so long as the broadcaster complies with the law of the originating member state. Television advertising and sponsorship in member states will have to comply with certain minimum rules and standards, although member states may set more detailed and stricter rules for certain matters. 27 We plan to enter into joint venture agreements with programming providers in order to launch eight new channels in late 1999, which we intend to broadcast to our operating companies and other cable television operators for distribution through their networks. We understand that the Television Without Frontiers Directive will apply to the broadcasting of these joint-venture channels to such operating companies so that one broadcasting license within an EU member state will permit us to broadcast such channels to cable operators throughout the EU. Where the joint-venture partner is already a licensed broadcaster within the EU, we believe the joint venture activities may fall within the scope of our partner's broadcast license, and that the joint venture could operate under the terms and conditions of that license. We also plan to apply for a broadcasting license in an EU country to accommodate joint ventures with those partners that do not have a broadcast license in a member state of the EU or channels created without a partner. We are currently in discussions with the regulatory authorities in The Netherlands and plan to obtain a broadcasting license in The Netherlands. Austria Relationship with Municipalities Each of the five municipalities in which the Telekabel Group offers services holds, directly or indirectly, 5% of the local operating company. Each member of the Telekabel Group has entered into an agreement with its municipality. Under the agreement between Telekabel Wien and the City of Vienna, decisions regarding the subscriber rates and programming content of Telekabel Wien's basic subscription package require the unanimous approval of Telekabel Wien's board of management, of which the city appoints one member. While the board of management in the past has always unanimously approved these decisions there can be no assurance that the municipality's director will continue to approve these decisions in the future and not hinder the implementation of our strategies for our video, telephone or Internet/data services. If the managing directors cannot reach agreement, the parties have agreed to call a shareholders meeting to decide the matter. Under Austrian law, a majority shareholder such as us may generally take a decision at a shareholders meeting rather than through the board of management. However, we as the majority shareholder have never taken this action and do not anticipate doing so in the future. The agreements between the other Telekabel Group members and their municipalities require each member to consult with its municipality prior to making similar business decisions. Video Services Regulatory Framework. The Cable and Satellite Broadcast Radio Law governs the provision of video services in Austria. The Regional Radio and Cable Broadcast Authorities regulate the operation of cable television networks. Notifications. Telekabel Group does not require a license to provide video services. It need only notify the Regional Radio and Cable Broadcast Authority of the services it intends to provide. The right to provide such services is not exclusive. Programming. Under the Cable and Satellite Broadcast Radio Law, Telekabel Group is required to carry two ''must carry'' public Austrian channels in its basic tier service. In July 1997, previous prohibitions on cable network operators transmitting programming produced by them were lifted. Pursuant to the terms of the agreement with Vienna, however, Telekabel Wien is prohibited from producing programming. Price Regulation. Pricing of the basic tier service is subject to price control by the Austrian Wage and Price Commission. Approval from the Wage and Price Commission generally must be sought where the desired increase is greater than 50% of the consumer price index. Historically, all of Telekabel Group's price increase applications have been approved. Pricing of services other than the basic tier is not regulated. Telephone and Internet/Data Services Regulatory Framework. The Telecommunications Act which came into force August 1, 1997 liberalized the telecommunications sector in Austria as of January 1, 1998, in compliance with EU directives. As a result, cable 28 television networks may be used to provide telecommunications services as described above under "--European Union -- Telephone and Internet/Data Services". Licenses. A telecommunications operator or service provider must obtain a license issued by the Austrian telecommunications regulatory agency, the Telekom Control Commission, to provide public voice telephone services and for the public offer of leased lines. Telekabel Wien has received a license to provide public voice telephone services in the entire Republic of Austria and a license for the public offer of leased lines through its cable network. The licenses are granted for an unlimited period of time provided that the offering of each respective service begins by February 1999 at the latest. Interconnection. Austria's Telecommunications Act generally implements the terms of the EU Directive on Interconnection in Telecommunications. In November 1998, the Telekabel Group entered into an interconnect agreement with PTA, the incumbent operator. Difficulty and delay in negotiations and agreement led Telekabel Group to seek the intervention of the Austrian telecommunications regulator, which determined the principal terms of the agreement. PTA has brought an action in the Austrian courts to revise the terms of the interconnection arrangement. Price Regulation. Although there are no voice-telephone pricing regulations, the Telekom Control Commission must be notified of the tariff structure and any subsequent rate increases. In addition, if the Telekabel Group were held to have significant market power (as defined in Austria's Telecommunications Act) with respect to the services offered, certain matters including tariffs would become subject to the approval of the Telekom Control Commission. Internet/Data Services. Internet/data services are regulated as telecommunications services under the Telecommunications Act. Under Austria's Telecommunications Act, Telekabel Group does not require licenses to provide Internet/data services. It need only notify the Telekom Control Commission of the services it intends to provide. Belgium Video Services Regulatory Framework. The law of March 30, 1995, for Brussels, the decree of January 25, 1995 of the Council of the Flemish Community and the decree of July 17, 1987 of the Council of the French Community govern the provision of video services in Belgium. Only the first two regulations are relevant to TVD's operations. Authorizations. In Belgium, a cable operator needs to obtain a governmental authorization from the appropriate Community to operate a cable television system. The Belgium Communities, which are the French Community, the Flemish Community and the German-speaking Community, have exclusive jurisdiction to regulate cable television, including programming content, in their respective language areas. The Flemish and French Communities, as well as the Federal government, have overlapping jurisdiction in the bilingual area of Brussels where TVD operates. During 1996, 1997 and 1998, all of TVD's non-exclusive authorizations were renewed for nine years. Special authorizations are also required for the distribution of non-EU programs, both in Flanders and in Brussels and we have requested a special authorization in Brussels. Programming. In all of the regions of Belgium, cable television operators are required to transmit particular local, national and other channels as part of their basic tier service. There are usually between 11 and 13 of these ''must- carry'' channels. Price Regulation. Price increases require the approval of the Ministry of Economic Affairs and must be justified by an increase in the cost of providing the service. Increases are generally approved as long as the increase is below the level of inflation. Historically, all of TVD's price increases have been approved. 29 Franchise Fees. Since 1995, cable regulations came into force, which granted cable operators a right of way for the use of public and private property to install and exploit cable networks. Prior to the 1995 regulations, TVD was a party to concession agreements with the municipalities in its franchise areas, which obliged it to pay certain franchise fees. TVD has not paid franchise fees since 1995 when the cable regulations went into effect. In Etterbeek, however, TVD pays the municipality an annual amount. Nonetheless, certain municipalities have requested payment of the old franchise fees, which amount to 5% of the operating system's annual gross revenues. TVD does not believe that it is obliged to pay these fees because it believes that the 1995 regulations have superseded the concession agreements. Telephone and Internet/Data Services Regulatory Framework. The provision of cable telephone is governed by the law of March 21, 1991, as amended by the law of 1997, together with secondary regulations. These provisions allow telecommunications services to be provided through cable television networks as described above under ''-- European Union - - - Telephone and Internet/Data Services''. In line with the liberalization process in the EU, the Belgian Parliament adopted in December 1997 a law amending the law of 1991 and abolishing the remaining monopoly rights of Belgacom, the incumbent telecommunications operator. As a result, other telecommunications operators may begin to offer public voice telephone in Belgium. Licenses. TVD had a provisional license to build and operate a public telecommunications network and has applied for a permanent license to build and operate a telecommunications network. TVD has submitted an application for a license to offer voice telephone services and expects to receive a license during the first half of 1999. Internet/Data Services. The provision of Internet/data services in Belgium is also governed by the law of March 21, 1991, as amended, pursuant to which TVD must make certain notifications to the Institut Belge des Postes et Telecommunications regarding the services it intends to provide. In addition, TVD is required to hold either a provisional or a permanent license to build and operate a telecommunications network in order to offer Internet/data services on its own infrastructure. The Netherlands Video Services Regulatory Framework. The liberalization of the Dutch telecommunications and cable television sector has generally proceeded at a quicker pace than set by the EU directives. The new Telecommunications Act took effect, with the exception of a few provisions, on December 15, 1998 and further liberalizes these sectors. The Dutch Telecommunications Act governs the installation and operation of fixed telecommunications infrastructures, which include cable television networks, and the provision of telecommunications services, including the provision of telephone and Internet/data services. The provision of video services through the cable television network, and more specifically content, is regulated primarily by the Dutch Media Act, as amended, and the Media Decree. Under the new Dutch Telecommunications Act, the Dutch Independent Post and Telecommunications Authority is charged with regulating the provision of telecommunications services. Under the Media laws, video service providers are subject to certain content requirements, which are overseen by the Commissariaat voor de Media. Registration. The new Dutch Telecommunications Act does not require a license for the installation, maintenance or operation of a cable network. Existing network operators need only register with the Dutch Independent Post and Telecommunications Authority within six months after December 15, 1998. The registration of a network does not give an operator any exclusive right. Any person may install, maintain and operate a new network alongside an existing one. The new Dutch Telecommunications Act gives cable network operators and providers of other public telecommunication networks rights of way to install and maintain cable, which are identical to those currently enjoyed by KPN, our principal competitor in The Netherlands. 30 Programming. Pursuant to the Dutch Telecommunications Act and the Media laws, cable television network providers must transmit to all of its subscribers at least 15 programs for television and at least 25 programs for radio, including approximately seven television and nine radio ''must carry'' channels. The Dutch Independent Post and Telecommunications Authority may grant a total or partial exemption from these obligations if the provider does not have significant market power in its area of coverage. Our Dutch operating companies originally purchased their cable television networks from the local municipalities. Pursuant to the terms of the agreements with the municipalities, the Dutch operating companies are obligated to continue to provide basic tier services of between 20 and 30 television channels, including the 15 required under the Media laws. Cable television operators are allowed to transmit their own programs within The Netherlands upon obtaining a broadcast license from the Commissariaat voor de Media. The licensee must comply with the advertising and sponsorship rules set forth in the Media laws, which are consistent with the EU Television without Frontiers Directive. Price Regulation. Under several of the agreements with the municipalities described above, for a number of years the respective municipality's consent is required for increases of the price of the basic tier service which exceed certain agreed levels. Such consent is not typically required for price increases resulting from costs beyond the control of the operating companies, such as copyright fees, consumer price index increases and municipal duties and levies, which can be passed on to subscribers. Because the base subscription rate for the basic tier service has been kept at a low level, particularly in Amsterdam, the operating companies make up their revenue by charging programming suppliers carriage fees for the transmission of their channels. As A2000's basic tier price has been particularly restricted, A2000's carriage fees have been higher than those of the other Dutch systems held by UTH. Some of A2000's programming suppliers have been unwilling to pay such carriage fees and have withdrawn their channels from A2000's offering. Some of them have brought legal actions challenging the carriage fees, arguing that A2000's carriage fees are an abuse of its market strength. To date, none of A2000's programming suppliers have succeeded in their actions against A2000. The price of the basic tier service may also be regulated by the Dutch Ministry of Culture, but it has not yet intervened to stop price increases. Telephone and Internet/Data Services Regulatory Framework. Until recently, the fixed telecommunications infrastructure was a statutory monopoly of KPN, the Dutch incumbent telecommunications provider. As described above, the Dutch telecommunications sector has been liberalized in advance of and in accordance with European Union telecommunications policy and cable television networks may now be used for the provision of all telecommunications services. Interconnection. The Dutch Telecommunications Act generally implements EU telecommunications policy. A2000 and UTH have entered into interconnect agreements with KPN. Price Regulation. While A2000's telephone service is not currently subject to price regulation, the prices of its competitor, KPN, are. The Dutch Independent Post and Telecommunications Authority has recently indicated that KPN should reduce its end-user tariffs and substantially reduce its interconnection prices to reflect costs. Internet/Data Services. Under the Dutch Telecommunications Act, Internet/data services are regulated as telecommunications services. As such, our Dutch operating systems need only register with the Dutch Independent Post and Telecommunications Authority as providers of public telecommunication services and/or networks. Norway As a member state of the European Economic Area, Norway implements EU directives in the telecommunications sector. 31 Video Services Regulatory Framework. The provision of video services in Norway is regulated by the Telecommunications Act of June 23, 1995 and The Broadcast Act of December 4, 1992. Registration. Under Norway's Telecommunications Act, the installation and operation of the cable infrastructure and equipment must be authorized by and registered with the Norwegian Post and Telecommunications Authority on the basis of certain necessary technical qualifications. In Norway, the simultaneous and unchanged transmission of television signals over a cable television network is not subject to any licensing or registration requirements. Programming. Cable television providers have ''must-carry'' obligations obliging them to include three national channels and typically one local television channel in their basic tier services. Distribution of any programming that is not a simultaneous and unchanged retransmission requires a programming license issued by the Ministry of Cultural Affairs. Because pay-per-view programming and some other services are not strictly simultaneous retransmission, Janco Multicom has obtained a three-year programming license. Price Regulation. The provision of the basic tier service is subject to price control. A cable operator is only allowed to increase the basic package subscription fee in line with the Official Consumer Price Index. There are no specific pricing restrictions on expanded basic tier services. Telephone and Internet/Data Services Regulatory Framework. Since January 1, 1998, alternative networks in Norway have been permitted to offer voice telephone services in accordance with the terms of the applicable EU directives. Registration. For telephone operators and service providers without significant market power, as is currently the case with Janco Multicom, no license is required to offer voice telephone services. Such providers need only register with the Norwegian Post and Telecommunications Authority. Interconnection. Norway's telecommunications legislation generally implements EU policy on interconnection. Cable network companies have the right to interconnect with the public telecommunications network and the national incumbent operator, TeleNor, has the duty to provide any telecommunication company with interconnection to its network on a non-discriminatory basis. Interconnection rates charged by TeleNor must be on a cost-basis. Janco Multicom has entered into an interconnection agreement with TeleNor. Pricing. Providers of public telephone without significant market power, including Janco Multicom, are not subject to any specific pricing regulations. Internet/Data Services. Cable television networks do not require a license or notification to provide Internet/data services. They need only register the service with the Norwegian Post and Telecommunications Authority. Israel Video Services Regulatory Framework. As part of the liberalization policy adopted by the Israeli Communications Ministry, the telecommunications and cable television market in Israel is expected to undergo significant reforms in 1999. We expect that these reforms will include opening the multi-channel television business to competition by granting licenses to direct to home satellite operators and opening the local telephone and Internet/data transmission markets to competition by granting licenses to independent operators, thereby allowing competition with Bezeq, the Israeli incumbent telecommunications operator. Upon expiration of the existing cable television licenses, franchise 32 exclusivity will be eliminated and other operators will be permitted to apply for cable television licenses to compete in the cable television market. The 1987 Bezeq law, which allowed the introduction of cable television, gave the new cable companies exclusive rights to download and rebroadcast satellite programming until 2003. The cable television operators therefore challenged the legal basis of the Ministry of Communications policy of introducing direct to home satellite service before that date. In November 1998, the Israeli High Court of Justice decided that direct to home satellite service could be introduced before 2003. The cable television operators are seeking compensation for the loss of exclusivity prior to 2003. This could come in the form of some additional right or rights with respect to the content or services they provide. Franchise Agreements. Tevel holds exclusive cable television franchise agreements that were granted for a period of 12 years and expire in 2002. These franchises include a four-year renewal option. Gvanim, which was recently acquired by Tevel, holds exclusive franchises which expire in 2005 and 2002. As with the Tevel franchises, the Communications Ministry is authorized to extend both of these franchises for an additional four years. Tevel and Gvanim pay the government royalties of 5% of their gross revenues. Upon the opening of the telecommunications market to competition, exclusive cable television franchises are expected to be replaced with long-term renewable, non-exclusive licenses that will permit cable operators to continue providing cable television services and to begin to offer additional telecommunications services such as voice telephone and Internet/data services. Programming. Pursuant to its franchise agreements, Tevel must provide within its basic service five tape-delivered channels subtitled in Hebrew: a movie channel, a general entertainment channel, a children's channel, a nature and science channel, and a sports channel. The movie channel and the general entertainment channel are produced by I.C.P. Israel Cable Programming Company Limited, a programming company owned by Tevel, Gvanim and the other Israeli cable television companies. The other three channels are produced by independent parties. The ownership by the Israeli cable television operators of ICP is considered a ''restrictive arrangement'' under Israeli Restrictive Trade Practices law and is regulated by an arrangement approved by the Restrictive Trade Practices Tribunal in June 1996, which expires in June 1999. Pursuant to this arrangement, ICP may continue to produce the general entertainment and movie channels. In addition, ICP is obligated to spend 15% of its programming expenses on programming from local producers. The Restrictive Trade Practices Tribunal is currently considering requiring cable network operators either to divest their interests in content suppliers (which may increase programming costs) or to supply the previously cable- exclusive content they produce to the direct to home satellite service providers once they are operational. In addition, pursuant to the 1987 Bezeq Law, cable operators must obtain authorization to add or remove channels from their service from the Ministry of Communications. Further restrictions prohibit cable television operators from carrying advertisements on their tape-delivered channels. Tevel currently is required to provide three ''must-carry'' off-air channels. Its current arrangement currently prohibits ''tiering'' of video services. Since its establishment, Tevel has offered its subscribers the ''super-basic package'', which is currently comprised of 45 channels of programming. In light of expected future competition by the direct to home satellite service providers, including the fact that the direct to home satellite service providers will be entitled to provide ''tiering'' of their video services, Tevel and other cable television providers have applied to the Ministry of Communications for approval of ''tiering'' of their respective services upon opening the multi-channel television business to competition. The Ministry has not yet responded to this request. It appears that the Ministry intends to delay introduction of ''tiering'' by the cable television operators to ease the entering of the direct to home satellite service providers into the market. Tevel and the other cable television operators have filed an appeal to the High Court of Justice challenging the Ministry's intention. The Court has decided that it will commence the appeal hearing if the parties do not reach an arrangement by the end of February 1999. Pricing. Cable television service subscription fees are subject to regulation through the franchise agreements and through the arrangement approved by the Restrictive Trade Practices tribunal. Currently, this arrangement is more restrictive than the franchise agreements and permits basic service subscription fees to be increased by a maximum of 1.9% per year above the cost of living index. 33 Telephone and Internet/Data Services As part of the proposed liberalization of the telecommunications market in 1999, Tevel and Gvanim expect to be permitted to supply Internet/data and local telephone services in their franchise areas. France. Mediareseaux is authorized to operate cable networks for audio- visual services in the territory of Syndicat Mixte de Videocommunication de l'Est parisien and the territory of the city of Rosny-sous-Bois pursuant to two licenses, valid until 2026 and 2022 respectively, granted by the Conseil Superieur de l'Audiovisuel in December 1995 and September 1997. In order to operate its cable television infrastructure, however, Mediareseaux was required to enter into public service delegation agreements with local authorities. The terms of Mediareseaux's agreements with these two territories govern, among other things, Mediareseaux's channel line-up and cable subscription rates. The agreements also give the respective territories the option to purchase Mediareseaux's network at the expiration of the agreements for a price equal to its usage value as estimated under the terms and conditions of the agreements. Mediareseaux has also entered into public domain occupancy agreements with each city in its region giving Mediareseaux the right to establish its cable network in the public domain. Mediareseaux did not conclude separate public domain occupancy agreements with Rosny-sous-Bois as such rights were contained in the public service delegation agreement. Mediareseaux holds licenses granted by the Minister of Telecommunications in June 1998 for the establishment and operation of a public telecommunications network and for the provision of voice telephone in three French departments of the Paris region. The licenses were granted for a period of 15 years, are non- transferable and can only be revoked for a material breach of telecommunications regulations. Mediareseaux is currently negotiating an interconnect agreement with France Telecom. Pursuant to Article L34.8 II of the Post and Telecommunication Code, France Telecom's interconnection rates must be cost- oriented and offered on non-discriminatory terms. Mediareseaux has entered into an interconnect agreement with France Telecom. Mediareseaux expects, however, that it will seek to renegotiate some provisions of the interconnect agreement during 1999. Malta. In 1991, Melita was awarded an exclusive 15-year renewable license to deliver cable television services for Malta. Rates for the basic tiers are subject to regulation and requests for rate increases made to the government must be accompanied by a cost analysis of the increases in cost. Premium services, ''pay-per-view'' and other additional services are not subject to rate regulation. Hungary. Cable operators in Hungary are not granted franchises; however, all cable operators must be properly registered with the appropriate government agency. Moreover, although there is no rate regulation in Hungary, rates are subject to consumer pricing and anti-competition reviews by the government. Further, a single cable operator may not provide service to homes exceeding in the aggregate one-sixth of the Hungarian population. Czech Republic. There is no rate regulation of cable or wireless cable services in the Czech Republic. Rate increase notifications must be sent out ninety days in advance, however, as conditions of the franchises awarded by the municipalities. All cable operators must have a valid establishment and operating permit, which is issued by the Czech Telecommunications office. Additionally, all cable operators must be registered with the council for radio and television broadcasting. Romania. Exclusive franchises are not awarded in Romania. We have received non-exclusive licenses to operate cable television systems in all of its service areas. These renewable licenses are valid for another six years. The cable television industry is regulated by the Romanian audiovisual law, which went into effect in June 1996, and is administered by the National Audiovisual Council. Slovak Republic. There is no regulatory body in the Slovak Republic that issues cable franchises, however, an operating permit and broadcasting license is required. Most private cable operators have their own agreements with each city and/or large co-operative housing associations. Moreover, there is no rate regulation on cable activities. Cable operators are subject, however, to consumer pricing reviews and the laws on monopolistic positioning in the market and must register with the broadcast council and submit channel line-ups as part of the permit process. 34 Other Matters EU directives and national consumer protection and competition laws in our Western European markets impose limitations on the pricing and marketing of integrated packages of services, such as video, telephone and Internet/data services. These limitations are common in developed market economies and are designed to protect consumers and ensure a fair competitive market. While we may offer our services in integrated packages in our Western European markets, we are generally not permitted to make subscription to one service, such as cable television, conditional upon subscription to another service, such as telephone, that a subscriber might not otherwise take. In addition, we must not abuse or enhance a dominant market position through unfair anti-competitive behavior. For example, cross-subsidization between our business lines that would have this effect would be prohibited. We have to be careful, therefore, in accounting for discounts in services provided in integrated packages. We believe we can implement our strategy of offering integrated packages of services without infringing any of these consumer protection and anti-competition laws. We do not, therefore, expect any of these limitations to significantly affect our operating strategy. Our Israeli operating companies are not currently permitted to offer integrated services. 35 Item 2. Properties ---------- We lease our corporate offices in Amsterdam and London. Our operating companies and subsidiaries generally lease their offices as well. We own small parcels of property in various countries that we use for our network equipment. In other countries, we have been able to obtain easements for this equipment. 36 Item 3. Legal Proceedings ----------------- We and our operating companies are not parties to any material legal proceedings. From time to time, we and our operating companies may become involved in litigation relating to claims arising out of its operations in the normal course of business. See also "Business --Operating Companies -- The Netherlands: A2000 Holding N.V. -- Programming". 37 Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- On November 6, 1998, by a resolution in writing, our shareholders approved our entering into an option agreement with DIC Communication and Technology Limited ("DIC") and PEC Israeli Economic Corporation ("PEC"). The option agreement granted DIC and PEC the right to purchase a certain number of ordinary shares pursuant to the agreement, as well as for the 20% option of the Holder, as defined in the option agreement. The resolution also excluded the preemptive rights of our shareholders in respect of the options and the shareholders agreed to amend our articles of association at such time as required to comply with the exercise of the options. 38 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters --------------------------------------------------------------------- Our ordinary shares trade on the Amsterdam Stock Exchange ("AEX") under the symbol "UPC" and ADSs representing ordinary shares trade on the Nasdaq National Market under the symbol "UPCOY." Both began trading on February 12, 1999, at the time of our initial public offering. The following table shows the range of high and low sales prices reported on the AEX and Nasdaq:
AEX Nasdaq ---------------------- ------------------------ High Low High Low ---------- ---------- ----------- ----------- February 12 - March 26, 1999. Euro 38,25 Euro 29,45 $45 $31 1/8
As of March 26, 1999, there were approximately 39 holders of record of our ADSs. We generally do not know who the owners of our ordinary shares are since they are not held in bearer form. We have never paid cash dividends on our ordinary shares. 39 Item 6. Selected Financial Data ----------------------- SELECTED CONSOLIDATED FINANCIAL DATA The following selected consolidated financial data for the six months ended December 31, 1995 and the years ended December 31, 1996, 1997 and 1998 have been derived from our audited consolidated financial statements, as restated to include Monor Communications Group, Inc. and Tara Television Limited for all periods in which their operations were part of UIH's consolidated results. The consolidated financial data for the year ended December 31, 1994 has been derived from the audited financial statements of the European cable television operations of Philips Electronics N.V. contributed to us upon our formation as a joint venture. The following consolidated financial data for the six months ended June 30, 1995 have been derived from unaudited financial statements that, in our opinion, reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial data for such periods and as of such date. Due to the relative value of the assets contributed by UIH and Philips, the cable television properties contributed by Philips are deemed to be our predecessor. On December 11, 1997, UIH acquired the 50% of us that it did not already own from Philips. As a result of this acquisition and the associated push-down of UIH's basis on December 11, 1997, the financial information for the year ended December 31, 1998 is presented on a ''post-acquisition'' basis. The data set forth below for us is qualified by reference to, and should be read in conjunction with, our audited consolidated financial statements and notes thereto and also with ''Management's Discussion and Analysis of Financial Condition and Results of Operations''.
UPC Predecessor Interest ---------------------------------------------------- -------------------------- Six Months Six Months Year Year Ended December 31, Ended Ended Ended ------------------------------------- December 31, June 30, December 31, 1998 1997 1996 1995 1995 1994 ----------- ----------- ----------- ------------- ----------- ------------- (Dutch guilders, in thousands except per share data) Statement of Operations Data: Service and other revenue................... 408,970 337,255 245,179 100,179 91,100 183,600 Operating expense........................... (138,459) (118,508) (82,439) (32,806) (23,000) (44,100) Selling, general & administrative expense.................................... (481,703) (119,067) (81,176) (33,617) (23,600) (44,500) Depreciation and amortization............... (187,646) (132,888) (79,832) (33,974) (21,100) (42,200) ---------- ---------- ---------- ---------- ------- ------- Net operating income (loss)................. (398,838) (33,208) 1,732 (218) 23,400 52,800 Interest income............................. 7,397 6,512 2,757 6,403 -- -- Interest expense............................ (104,355) (70,738) (38,475) (19,873) -- -- Provision for loss on investment related costs.............................. (6,230) (18,888) -- -- -- -- Foreign exchange gain (loss) and other expense.............................. 2,690 (41,063) (21,200) (3,376) -- -- ---------- ---------- ---------- ---------- ------- ------- Net income (loss) before income taxes and other items...................... (499,336) (157,385) (55,186) (17,064) 23,400 52,800 Shares in result of affiliated companies, net............................. (63,486) (20,270) (22,286) (31,095) (2,300) (2,800) Minority interests in subsidiaries.......... 1,153 152 (2,208) (191) -- (200) Income tax benefit (expense)................ (1,215) 1,649 (509) 155 -- -- ---------- ---------- ---------- ---------- ------- ------- Net income (loss)........................... (562,884) (175,854) (80,189) (48,195) 21,100 49,800 ========== ========== ========== ========== ======= ======= Basic and diluted loss per ordinary share...................................... (7.22) (2.03) (0.92) (0.55) n/a n/a ========== ========== ========== ========== Weighted-average number of ordinary shares outstanding................ 77,914,081 86,578,117 87,107,325 87,107,325 n/a n/a ========== ========== ========== ==========
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Predecessor Interest UPC ------------------------- --------------------------------------------------- Six Months Year Year Ended December 31, Ended Ended --------------------------------------------------- June 30, December 31, 1998 1997 1996 1995 1995 1994 ---------- ---------- ---------- ---------- ----------- ----------- Selected Balance Sheet Data: Non-restricted cash and cash equivalents..... 29,571 100,144 43,694 123,895 400 700 Other current assets......................... 136,046 85,421 83,265 172,687 10,000 14,700 Investments in affiliated companies.......... 480,455 400,337 249,189 264,271 5,200 5,900 Property, plant and equipment................ 602,997 484,982 415,989 277,785 192,000 197,800 Intangible assets............................ 680,032 690,046 270,407 209,274 2,200 2,300 Total assets................................ 2,055,183 1,902,392 1,065,273 1,048,701 220,400 222,000 Short-term debt.............................. 351,853 257,515 449,892 443,401 -- 3,400 Other current liabilities.................... 244,514 185,442 120,649 92,574 132,300 41,100 Long-term debt............................... 1,174,749 966,100 275,802 236,140 -- -- Total liabilities........................... 2,116,019 1,467,184 858,059 777,506 132,300 165,100 Total shareholders' equity (deficit)........ (86,770) 426,493 202,659 269,795 86,700 56,900
41 Item 7. Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations ------------- The following discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. These forward- looking statements may include statements concerning our plans, objectives and future economic prospects, expectations, beliefs, anticipated events or trends and similar expressions about matters that are not historical facts. These forward-looking statements involve both known and unanticipated risks, uncertainties and other factors that may cause our actual results, performance or achievements, or industry results, to be materially different from what we say or imply with the forward-looking statements. These factors include changes in television viewing preferences and habits by our subscribers and potential subscribers, their acceptance of new technology, programming alternatives and new video services we may offer. They also include our ability to manage and grow our newer telephone and Internet/data services. These forward-looking statements apply only as of the time of this report and we have no obligation or plans to provide updates or revisions to these forward-looking statements or any other changes in events or circumstances on which these forward-looking statements are based. Our statements in this Management's Discussion and Analysis of Financial Condition and Results of Operations section that relate to the Year 2000 issues are hereby denominated as "Year 2000 Statements" within the meaning of the Year 2000 Information and Readiness Disclosure Act. The following discussion and analysis of financial condition and results of operations covers the years ended December 31, 1998, 1997 and 1996, as restated to include Monor Communications Group, Inc. and Tara Television Limited for all periods in which their operations were part of UIH's consolidated results, and should be read together with our consolidated financial statements and related notes included elsewhere herein. These consolidated financial statements provide additional information regarding our financial activities and condition. Introduction We commenced our present business in July 1995. Our systems together have the largest number of subscribers of any group of broadband communications networks operated across Europe. We provide cable television services. We are further developing and upgrading our network to provide digital video, voice and Internet/data services in our Western European markets. We and Microsoft recently signed a letter of intent to establish a relationship to work jointly on Internet, telephone and video projects. As of December 31, 1998, we consolidated the results from our systems in Austria, Belgium, Norway, France, Hungary, the Czech Republic, Romania, the Slovak Republic and Ireland. Unconsolidated systems included our interests in the Dutch, Israeli and Maltese systems, and programming interests in Hungary and the Czech Republic. We account for these unconsolidated systems using the equity method of accounting. During the year ended December 31, 1998, we consolidated some of our Dutch systems for a seven-month period ended July 31, 1998. Thereafter, all of the Dutch systems were accounted for using the equity method. On February 17, 1999, we acquired the remaining 49% interest in UTH, our Dutch holding company, and will begin consolidating the results of UTH's systems other than A2000. History of UPC Since formation, we have developed largely through acquisitions. The most recent acquisitions have resulted in significant growth in consolidated revenues and expenditures. September 1996 In September 1996, we increased our ownership in Norkabel (Norway) from 8.3% to 100%, Norkabel and Kabelkom Kabelkom (Hungary) from 3.9% to effectively 50% and the Swedish system from 2.1% to Acquisitions 25.9%. We subsequently sold our interest in the Swedish system. Norkabel was consolidated effective upon its acquisition. Kabelkom was accounted for using the equity method. January 1997 In January 1997, we acquired 70.2% of Janco, a cable system in Oslo, Norway, from Janco Acquisition Helsinki Media. In November 1997, we merged Norkabel into Janco to form Janco Multicom, of which we held 87.3%. In November 1998, we acquired the remaining 12.7% of Janco Multicom for approximately NLG37.2 million.
42 December 1997 On December 11, 1997, we and UIH acquired the 50% of our ordinary shares held by Philips UPC Acquisition for NLG450.0 million. As part of this acquisition, we purchased 3.17 million shares of Class A Common Stock of UIH held by Philips for NLG66.8 million and we and UIH purchased all of our convertible notes back from Philips for NLG339.8 million. The acquisition of UPC was financed with proceeds from our senior revolving credit facility and our bridge bank facility and cash from UIH. Miscellaneous System We sold our unconsolidated interests in our systems in France called Citecable in 1996, Sales (1996-1998) Germany in 1997 and Spain in 1998 and our consolidated interest in Portugal in 1998. January 1998 Effective January 1, 1998, we acquired the Combivisie cable television systems in the CNBH Formation and region surrounding our KTE system in The Netherlands for a purchase price of NLG180.8 Combivisie Acquisition million. Effective January 1, 1998, we combined the Combivisie and KTE systems to form CNBH and consolidated the results of CNBH through July 31, 1998 (see UTH Formation). June 1998 On June 29, 1998, we acquired from Time Warner Entertainment Company L.P. 50% of Eastern Europe Kabelkom, the Hungarian cable television system holding company, increasing our ownership Transactions to 100%. The purchase price was approximately $27.5 million, $9.5 million of which was payable in cash and $18.0 million by delivery of a non-interest bearing note. We gave Time Warner the option, exercisable until March 26, 1999, to purchase 50% of the Hungarian programming businesses formerly held by Kabelkom, including HBO Hungary, and 100% of TV Max, a Czech and Slovak Republic programming business, for approximately $18.25 million. Subsequent to December 31, 1998, Time Warner executed their option. Effective June 30, 1998, we combined our interests in Kabelkom with Kabeltel, a group of Hungarian cable television systems located in Budapest and other large Hungarian cities, forming Telekabel Hungary. We own 79.25% of Telekabel Hungary, Hungary's largest cable television operator, and started consolidating its results as of such date. August 1998 In August 1998, we and NUON combined all of our Dutch broadband cable television and UTH Formation telecommunications businesses to form UTH. We contributed 100% of CNBH and 50% of A2000 for our 51% interest in UTH. NUON contributed 100% of Telekabel Beheer. We and NUON agreed on the relative values of their respective assets and NUON made a small balancing payment of approximately NLG2.0 million for its 49% interest. See ''Corporate Ownership Structure -- The Netherlands -- UTH''. As a result of the creation of UTH, since August 1, 1998, we have not consolidated the results of CNBH and account for UTH using the equity method of accounting. As described below, however, we have purchased the other 49% of UTH and will consolidate the results of its systems in the future. November 1998 We held our interest in the Israeli, Maltese and Irish operating systems through a Increase in Israeli and partnership with a subsidiary of Tele-Communications International, Inc. In November Maltese Systems Ownership 1998, we acquired Tele-Communications International's indirect 23.3% and 25.0% interests in the Israeli and Maltese systems for approximately $88.5 million, net of closing adjustments, doubling our respective interests in these systems to 46.6% and 50%. We financed this acquisition through a loan from our primary partners in the Israeli operating system. November 1998 As part of the Israeli and Maltese transaction described above, in November 1998, we Sale of Irish System purchased from Riordan Communications Ltd., an indirect 5% interest in an Irish multi-channel television system and 5% of Tara Television Limited, a company providing Irish programming to the U.K. markets. The purchase price was 384,531 shares of UIH we indirectly held. In November 1998, we sold the newly-acquired 5% interest in the Irish multi-channel television system, together with our previously-held 20% interest in this system, to Tele-Communications International, Inc. The purchase price for this transaction was $20.5 million, offsetting part of the purchase price payable for the Israeli and Maltese systems.
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December 1998 In December 1998, UIH sold to us in exchange for 6,330,340 of our ordinary shares UIH's: Purchase of Monor and Tara from UIH - 44.75% economic interest in Monor Communications Group Inc. ("Monor), a company that operates a traditional telephone system in the Monor region of Hungary. - 75% interest in Tara Television Limited ("Tara"), a company with revenues of approximately NLG1.3 million for year ended December 31, 1998. Accordingly, because this was an exchange between companies under common control, we have restated our financial statements for all periods in which the operations of these companies were part of UIH's consolidated financial statements. February 1999 In February 1999, UIH sold to us, in exchange for 4,955,264 of our ordinary shares, UIH's Purchase of IPS approximately 33.5% interest in IPS, a group of programming entities focusing on the from UIH Spanish- and Portuguese-speaking markets. IPS had revenues of approximately NLG34.0 million for the year ended December 31, 1998. February 1999 On February 17, 1999, we acquired NUON's 49% ownership interest in UTH for NLG518.1 Purchase of UTH million. In addition, we purchased from NUON a NLG33.3 million subordinated loan, Minority Interest including interest, dated December 23, 1998 owed by UTH to NUON. We paid for the entire purchase price and loan totaling NLG551.4 million in cash on closing. Effective February 17, 1999, we own 100% of UTH. March 1999 In March 1999, UPC reached final agreement with Siemens Austria ("Siemens") to purchase Siemens' 95.63% Purchase of Bratislava interest in SKT s.r.o., the company that owns and operates the cable TV system in Bratislava, Slovak Cable TV System Republic. The completion of the purchase is subject to obtaining the approval of regulatory authorities. The purchase price for the 95.63% interest is approximately NLG77.5 million ($41 million). March 1999 On March 29, 1999, we reached a definitive agreement with Time Warner Entertainment for the Agreement to purchase purchase by us of 100% of Time Warner Cable France, a company which controls and operates three Time Warner Cable France cable TV systems in the suburbs of Paris and Lyons and the city of Limoges. Completion of the purchase, which is subject to regulatory approval, is expected to take place in the third quarter of 1999.
Overview of Our Activities Services To date, our primary source of revenue has been video entertainment services. For the year ended December 31, 1998 and the year ended December 31, 1997, our video services accounted for approximately 92.4% and 95.1%, respectively, of our consolidated revenues. For the same periods, our Internet/data service accounted for about 2.3% and 0.2%, respectively, of our consolidated revenue and our telephone services accounted for .1% and 0%, respectively. Our operating systems generally offer a range of video service subscription packages including a basic tier, which includes 26 to 32 channels, and an expanded basic tier, which includes 6 to 13 additional channels. In some systems, we also offer mini-tiers, premium programming, which typically includes 2 channels and pay-per-view programming, which includes 5 to 10 channels. Historically, video services revenue has increased as a result of: . acquisitions of systems, primarily in The Netherlands and Norway, . subscriber growth from both well established and developing systems, primarily in our Austrian and Eastern European systems, and . increases in revenue per subscriber from basic rate increases and the introduction of expanded basic tiers and pay-per-view services. For a discussion of our revenue recognition policies, see note 2 of the Notes to Consolidated Financial Statements. We believe that an increasing percentage of our future revenues will come from telephone and Internet/data services. Within a decade, video services could account for half of our total revenue, as our other services increase. These are forward-looking statements and will not be fulfilled unless our new services grow dramatically. Our capital constraints, technological limitations, competition, lack of programming, loss of personnel, adverse regulation and many other factors could prevent our new services from growing as we expect. 44 Pricing We usually charge a one-time installation fee when we connect subscribers, a monthly subscription fee that depends on whether basic or expanded basic tier service is offered, and incremental amounts for those subscribers purchasing pay-per-view and premium programming, which are generally offered only to expanded basic tier subscribers. In our Western European markets, price controls by various local and national governmental agencies apply to the basic tier services. Expanded basic tier, pay-per-view and premium programming are subject to EU and national competition laws generally but are not subject to sector-specific price controls. Costs of Operations Video services operating costs include the direct costs of programming, franchise fees and operating expenses necessary to provide the service to the subscriber. Direct costs of programming are variable, based on the number of subscribers. The cost per subscriber is established by negotiation between us and the program supplier or rates negotiated by cable associations. Franchise fees, where applicable, are typically based upon a percentage of revenue and typically range from 3% to 5% in Belgium and are approximately 13.5% in Austria. Other direct operating expenses include operating personnel, service vehicles, maintenance and plant electricity. Selling, general and administrative expenses include personnel-related costs such as stock-based compensation expenses, marketing, sales and commissions, legal and accounting, office facilities and other overhead costs. Stock based compensation expense results from our stock option and phantom stock option plans, which, prior to the offering, require variable plan accounting. Increases in the fair market value of our shares result in compensation charges that are expensed for vested options. Decreases in fair market value would result in compensation credits. A compensation charge is generally a non-cash expense unless the option holder puts the vested option to us for cash. Following our initial public offering, we have the right to settle the option in shares upon exercise; therefore options issued pursuant to the stock option plan will no longer require variable plan accounting, however, our phantom stock option plans will continue to require variable plan accounting. Results of Operations The following table sets forth information from, or derived from, our Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996. As a result of UIH's acquisition of UPC and the associated push- down of UIH's basis on December 11, 1997, this information is presented on a ''post-acquisition'' basis. These operating results have been restated to include Monor Communications Group and Tara for all periods for which their operations were part of UIH's consolidated results. 45
Year Ended December 31, -------------------------------------------- 1998 1997 1996 ------------- -------------- ------------- (Dutch guilders, in thousands) Service and other revenue............................ 408,970 337,255 245,179 Operating expense.................................... (138,459) (118,508) (82,439) Selling, general and administrative expense.......... (481,703) (119,067) (81,176) Depreciation and amortization........................ (187,646) (132,888) (79,832) -------- -------- ------- Net operating income (loss)........................ (398,838) (33,208) 1,732 Interest income...................................... 7,397 6,512 2,757 Interest expense..................................... (104,355) (70,738) (38,475) Provision for loss on investment related costs....... (6,230) (18,888) -- Foreign exchange gain (loss) and other expense....... 2,690 (41,063) (21,200) -------- -------- ------- Net loss before income taxes and other items....... (499,336) (157,385) (55,186) Share in results of affiliated companies, net........ (63,486) (20,270) (22,286) Minority interests in subsidiaries................... 1,153 152 (2,208) Income tax benefit (expense)......................... (1,215) 1,649 (509) -------- -------- ------- Net loss............................................. (562,884) (175,854) (80,189) ======== ======== ======= Other information: Adjusted EBITDA Net operating income (loss)........................ (398,838) (33,208) 1,732 Depreciation and amortization........................ 187,646 132,888 79,832 Stock based compensation............................. 322,627 4,818 -- -------- -------- ------- Consolidated Adjusted EBITDA......................... 111,435 104,498 81,564 As a Percentage of Revenue: Operating expense.................................... 33.9 35.1 33.6 Selling, general and administrative expense.......... 117.8 35.3 33.1 Adjusted EBITDA...................................... 27.2 31.0 33.3 Depreciation and amortization........................ 45.9 39.4 32.6 Net operating (loss) income.......................... (97.5) (9.8) .7 Net loss............................................. (137.6) (52.1) (32.7)
Revenue During the year ended December 31, 1998, our revenue increased NLG71.7 million to NLG409.0 million from NLG337.3 million for the year ended December 31, 1997, a 21.3 % increase. Of this increase approximately NLG57.5 million resulted from increased cable television revenue, NLG8.7 million resulted from increased internet revenue and the remainder, NLG5.5 million resulted from Tara and other services. The increase in cable television revenue resulted primarily from the acquisition of Combivisie in January 1998 which was consolidated through July 31, 1998 and the consolidation of Telekabel Hungary effective July 1, 1998. Of the NLG57.5 million approximately 21.6% was attributable to Combivisie and 48.2% was attributable to Telekabel Hungary. The balance of the increase in cable television revenue came from subscriber growth and in revenue per subscriber in Austria, and increased revenue from subscriber growth in the systems we are developing in France and Eastern Europe. During the year ended December 31, 1997, our revenue increased NLG92.1 million to NLG337.3 million from NLG245.2 million for the year ended December 31, 1996, a 37.6% increase. A substantial portion of this increase was attributable to the acquisition of Norkabel in October 1996 and the acquisition of Janco in January 1997, which together amounted to NLG77.0 million. The remaining increase in revenue was attributable to subscriber growth in the Austrian systems, increases in subscription fees in some systems and revenues from developing systems in France, Romania and the Slovak Republic, which were not included in the 1996 operating results. Operating Expense During the year ended December 31, 1998, our operating expense increased NLG20.0 million to NLG138.5 million from NLG118.5 million for the year ended December 31, 1997, an 16.9% increase. Approximately NLG9.9 million of this 46 increase was attributable to the results of Telekabel Hungary, which were consolidated effective July 1, 1998. In addition, approximately NLG2.0 million was attributable to the acquisition of Combivisie. The remaining increase comprised direct costs related to subscriber growth and increased operating costs related to the introduction of our Internet/data services. As a percentage of revenues, operating expense declined from 35.1% for the comparable period in 1997 to 33.9%. This was due primarily to the lower operating costs in the Combivisie system and a reduction of operating costs in Tara. We expect operating expense as a percentage of revenue to increase as new video, telephone and Internet/data services are introduced. During the year ended December 31, 1997, our operating expense increased NLG36.1 million to NLG118.5 million from NLG82.4 million the previous year, a 43.8% increase. Most of this increase was attributable to the acquisition of Norkabel in October 1996 and of Janco in January 1997, which together amounted to NLG27.5 million, the consolidation of Tara amounting to NLG6.6 million as well as the inclusion of operating expenses related to developing systems in France, Romania and the Slovak Republic that were not included in the 1996 operating results. In addition, operating expenses during 1997 included expenses related to the introduction of expanded basic tier programming in Austria, Belgium and The Netherlands and Internet/data services in Austria and Belgium. Selling, General and Administrative Expense During the year ended December 31, 1998, our SG&A expense increased NLG362.6 million to NLG481.7 million from NLG119.1 million for the year ended December 31, 1997, a 304.5% increase. A substantial portion of this increase and the increase as a percentage of net revenue resulted from a stock-based compensation charge of NLG322.6 million attributable to our stock option plans for the year ended December 31, 1998. In addition, the Company incurred NLG15.9 million in general and administrative expenses attributable to the formation and start up of chello. A portion of this increase was also attributable to the acquisition of Combivisie and the acquisition of Telekabel Hungary, with the remaining increase comprising additional SG&A expenses related to the development of new businesses, including further development of Internet/data services and preparation for the launch of telephone services in The Netherlands, Norway and France. We expect SG&A expense, excluding stock-based compensation expense, as a percentage of revenue to continue to increase as new video, telephone and Internet/data services are introduced. In the future, stock-based compensation expense will be recognized only for our Phantom Stock Option Plans which continues to require variable plan accounting. Therefore, we expect this expense as a percentage of SG&A expense to decrease. During the year ended December 31, 1997, our SG&A expense increased NLG37.9 million to NLG119.1 million from NLG81.2 million for the prior year, a 46.7% increase. A substantial portion of this increase was attributable to the acquisition of Norkabel in October 1996 and of Janco in January 1997, which together amounted to NLG19.1 million, as well as the inclusion of expenses related to the consolidation of Tara and developing systems in France, Romania and the Slovak Republic that were not included in 1996. SG&A expense during the year ended December 31, 1997, also included expenses related to the introduction of expanded basic tier programming in Austria, Belgium and The Netherlands and Internet/data services in Austria and Belgium, as well as a stock-based compensation charge of NLG4.8 million. Our allowance for doubtful accounts as a percentage of trade receivables for the years ended December 31, 1998, 1997 and 1996 was 41.6%, 40.6% and 37.9% respectively. This high allowance as a percentage of trade receivables results primarily from our billing process, whereby subscribers receive and generally pay their invoice before the service period begins. Therefore, most of our outstanding receivables generally represent overdue accounts requiring consideration for an allowance. As a percentage of revenue, our receivable balance is less than one half of a month of revenue. Depreciation and Amortization During the year ended December 31, 1998, our depreciation and amortization expense increased NLG54.8 million to NLG187.7 million from NLG132.9 million for the year ended December 31, 1997, a 41.2% increase. NLG26.3 million of this increase and much of the increase as a percentage of our net revenue was attributable to the application of push-down accounting, including goodwill created in connection with the acquisition of UPC. The remaining increase comprised additional depreciation related to the acquisition of Combivisie and acquisition of Telekabel Hungary, additional capital expenditures to upgrade the network in our Western European systems and new-build for developing systems. During the year ended December 31, 1997, our depreciation and amortization expense increased NLG53.1 million to NLG132.9 million from NLG79.8 million in 1996, a 66.5% increase. The majority of the increase was directly attributable to the acquisition of Norkabel in October 1996 and of Janco in January 1997, which together amounted to NLG45.4 million. The remaining increase comprised additional depreciation from capital expenditures to upgrade the network in our primary systems and new-build for developing systems. 47 On January 25, 1999 we and Microsoft Corporation entered into a letter of intent providing for the establishment of a technical services relationship. In connection with this letter of intent, we have agreed to grant Microsoft warrants to purchase up to 3,800,000 ADSs or ordinary shares, at Microsoft's option, at an exercise price of $28.00 per ordinary share or ADS. Half of these warrants will be issued at the earlier of April 25, 1999 and the signing of the first definitive agreement. These warrants will be exercisable after one year from issuance for a period of three years. The other half of the warrants will be issued upon the signing of the first definitive agreement. This half of the warrants will vest and become exercisable based on performance criteria to be established in the definitive agreements, although they also will not be exercisable until at least one year after the date of the closing of this offering. The first half of the warrants are for the right to negotiate to license technology from Microsoft under definitive agreements to be negotiated in the future. We expect to record as contract acquisition rights approximately NLG61.1 million associated with the first half of the warrants. Such costs are expected to be amortized on a straight-line basis over the expected contract life, which is yet to be determined. The accounting for the cost associated with the second half of the warrants will depend upon the ultimate nature of the performance criteria giving rise to the earn-out of these warrants. These warrants will be recorded as such at fair value when it is probable the performance criteria will be met, in accordance with EITF Issue No. 96-18. Operating Income (Loss); Adjusted EBITDA During the year ended December 31, 1998, operating loss increased NLG365.6 million to NLG398.8 million from NLG33.2 million, a 1,101.2% increase. Approximately 88.2% of this increase resulted from the stock-based compensation charge of NLG322.6 million related to our stock option plans. A substantial portion of the remaining increase resulted from new depreciation and amortization expense from the acquisition of UPC, the acquisition of Combivisie and the acquisition of Telekabel Hungary. The cable television industry generally measures the performance of a cable television company in terms of operating income before depreciation, amortization and other non-cash charges, which we refer to as ''Adjusted EBITDA''. Adjusted EBITDA increased NLG6.9 million to NLG111.4 million from NLG104.5 million, a 6.6% increase. As a percentage of revenue, adjusted EDITDA decreased to 27.2% from 31.0%, a 12.3% decrease. The decrease in Adjusted EBITDA was primarily attributable to NLG15.9 million in costs attributable to the formation and start up of Chello in addition to additional expenses related to the further development of internet/data services and the preparation for launch of telephony. During the year ended December 31, 1997, operating loss increased to NLG33.2 million from operating income of NLG1.7 million for the year ended December 31, 1996. This increase was primarily related to depreciation and amortization expense and the consolidation of Tara. Adjusted EBITDA increased NLG22.9 million to NLG104.5 million from NLG81.6 million, a 28% increase. During the year ended December 31, 1997, Adjusted EBITDA as a percentage of revenue dropped from 33.3% in 1996 to 31.0%, a decrease of about 6.9%. This decrease was primarily related to negative Adjusted EBITDA from developing systems in France and the Slovak Republic and the consolidation of Tara. We believe the introduction of telephone services and Internet/data services will have a significant negative impact on operating income and Adjusted EBITDA during 1999. Thereafter, this negative impact is expected to decline. We intend for our new businesses to be Adjusted EBITDA positive after two to three years following introduction of service, but there can be no assurance that this will occur. The financial effect of the development of our video programming businesses and the construction of our digital distribution platform will depend upon our ability to find joint venture partners for these new investments. If we are unable to find joint venture partners for these new investments, we will be required to consolidate all of the losses of these new investments. Interest Expense During the year ended December 31, 1998, interest expense increased NLG33.7 million to NLG104.4 million from NLG70.7 million during the same period in 1997, a 47.7% increase. This increase was due primarily to increases in indebtedness related to the UPC Acquisition in December 1997, the acquisition of Combivisie in January 1998 and the acquisition of Telekabel Hungary in June 1998. See "-- Liquidity and Capital Resources". During the year ended December 31, 1997, interest expense increased NLG32.2 million to NLG70.7 million from NLG38.5 million during the same period in 1996, an 83.6% increase. This increase was due primarily to additional indebtedness incurred for the acquisition of Norkabel in October 1996 and, to a lesser extent, indebtedness incurred to fund developing systems, corporate overhead and the acquisition of UPC. See "-- Liquidity and Capital Resources". 48 Provision for Loss on Investment Related Costs The provision for loss on investment-related costs totaled NLG6.2 million and NLG18.9 million for the years ended December 31, 1998 and 1997, respectively. During 1998, Tara wrote off its deferred development costs. During 1997, we made a strategic decision to sell our interest in our Portuguese system due to competitive pressures beyond our control. After receiving several offers for the sale of our Portuguese system substantially less than the carrying value of our investment, we recorded a permanent impairment on the investment. The system was subsequently sold in January 1998. Foreign Exchange Gain (Loss) and Other Expense Foreign exchange gain (loss) and other expense reflected a gain of NLG2.7 million for year ended December 31, 1998 as compared to a loss of NLG41.1 million for the same period in 1997. The foreign exchange gain during 1998 was due primarily to a more stable Dutch guilder in relation to the U.S. dollar during 1998 as compared to 1997. Subsequent to December 31, 1998, we repaid a significant portion of our remaining U.S. dollar-denominated indebtedness with proceeds from our initial public offering. Foreign exchange loss and other expense increased NLG19.9 million to a loss of NLG41.1 million for the year ended December 31, 1997 from a loss of NLG21.2 million for the previous year. This increase in foreign exchange loss was due primarily to the weakening of the Dutch guilder in relation to the U.S. dollar and its related impact on our U.S. dollar-denominated indebtedness, primarily pay-in-kind convertible notes owed to Philips. Share in Results of Affiliated Companies, Net The table below sets forth our share in results of affiliated companies for the applicable periods. It shows the consolidation, following our July 1, 1998 acquisition, of our Hungarian cable television holding company, although our Hungarian programming business continues to be accounted for using the equity method.
Year Ended December 31, -------------------------------------- 1998 1997 1996 ----------- ----------- ------------ (Dutch guilders, in thousands) A2000................................................... (26,631) (25,458) (19,965) UTH..................................................... (22,780) -- -- Hungary (Kabelkom, programming and cable television)..................................... (7,970) 4,431 (262) UII Partnership (Israel, Ireland and Malta)............. (666) 10,589 1,896 Monor................................................... (4,381) (9,633) (4,475) Other(1)................................................ (1,058) (199) 520 ------- ------- ------- Total................................................... (63,486) (20,270) (22,286) ======= ======= =======
- -------------- (1) "Other" shows in 1996, our share in results from Spain, France and Germany, in 1997 our share in results from TV Max, a Czech and Slovak Republic programming business and in 1998 our share in TV Max and Xtra Music. For the year ended December 31, 1998, our share in net losses of affiliated companies increased to NLG63.5 million from NLG20.3 million for the year ended December 31, 1997, a 212.8% increase, from the comparable period in 1997. A substantial portion of the increase in share in net losses was attributable to additional amortization of goodwill of A2000, Kabelkom, our Hungarian cable television holding company, and the partnership through which we held our interests in the Israeli, Irish and Maltese operating companies, in each case related to the new basis of accounting established in the step acquisition of us by UIH. A2000 also had increased losses as it began to introduce telephone services during this period. The share in net losses of Kabelkom for the year ended December 31, 1998 as compared to the net income over the comparable period in 1997 was related to the introduction of a new programming channel, increased programming fees, a loss of HBO subscribers due to the introduction of two additional commercial channels by competitors, and additional overhead costs. Effective July 1, 1998, we consolidated results from our Hungarian cable television businesses and no longer accounted for them in share of results of affiliated companies. The loss in the UII Partnership resulted from additional amortization as discussed above, in addition to losses incurred by Tevel during the last quarter of the year of which our share increased from 23.3% to 46.6%. These losses resulted from goodwill amortization and financing expense related to Tevel's acquisition of Guanim Cable Television Ltd. 49 For the year ended December 31, 1997, our share in net losses of affiliated companies decreased to NLG20.3 million from NLG22.3 million for the previous year, a 9.0% decrease, primarily as a result of improved earnings from the partnership holding the Israeli, Irish and Maltese systems, offset by increased losses from Monor. Statements of Cash Flows We had cash and cash equivalents of NLG29.6 million as of December 31, 1998, a decrease of NLG70.5 million from NLG100.1 million as of December 31, 1997. Cash and cash equivalents as of December 31, 1997 represented an increase of NLG56.5 million from NLG43.6 million as of December 31, 1996.
Year Ended December 31, ----------------------------------------- 1998 1997 1996 ------------- ------------ ------------ (Dutch guilers, in thousands) Cash flows from operating activities.................. 73,000 132,433 42,530 Cash flows from investing activities.................. (613,347) (402,340) (6,394) Cash flows from financing activities.................. 471,913 326,482 (116,756) Effect of exchange rates on cash...................... (2,139) (72) 366 -------- -------- -------- Net increase (decrease) in cash and cash equivalents.. (70,573) 56,503 (80,254) Cash and cash equivalents at beginning of period...... 100,144 43,641 123,895 -------- -------- -------- Cash and cash equivalents at end of period ........... 29,571 100,144 43,641 ======== ======== ========
Cash Flows from Operating Activities During the year ended December 31, 1998, net cash flow from operating activities decreased NLG59.4 million to NLG73.0 million from NLG132.4 million for the comparable period in 1997, a 44.9% decrease. This decrease was primarily related to increased cash needs for working capital. Net cash flow from operating activities totaled NLG132.4 million for the year ended December 31, 1997, as compared to NLG42.5 million for the year ended December 31, 1996, an increase of NLG89.9 million. This increase was primarily related to cash generated from working capital including increased current liabilities and a reduction of accounts receivable. Cash Flows from Investing Activities We used approximately NLG613.3 million of cash in investing activities during the year ended December 31, 1998, compared to NLG402.3 million for the year ended December 31, 1997. During the year ended December 31, 1998, cash was used principally for new acquisitions including the acquisitions of Combivisie and Kabelkom, which together represented NLG200.2 million, including goodwill related to the acquisitions, and for capital expenditures for property, plant and equipment, including other tangible assets such as system upgrade and new- build activities, which represented NLG281.7 million. Also during 1998 we acquired an additional 23.3% and 25% interest in Tevel and Melita, respectively, for approximately NLG170.1 million, acquired the remaining minority interest in Janco Multicom and sold our investment in PHL. Both the acquisition of the minority interest in Janco Multicom, through the release of escrowed funds, and the sale of PHL provided funds to us which offset our other investing activities. During the year ended December 31, 1997 cash was used for new acquisitions, primarily Janco for NLG85.1 million, an additional cash-funded letter of credit of NLG47.0 million to acquire the remaining interest in Janco, and capital expenditures including upgrade and new-build activities totaling NLG145.6 million. We used approximately NLG402.3 million of cash in investing activities during the year ended December 31, 1997, compared to NLG6.4 million for the year ended December 31, 1996. During the year ended December 31, 1997, cash was used principally for (1) the acquisition of Janco and other acquisitions, which represented NLG127.9 million including goodwill related to the acquisitions, (2) a cash-funded letter of credit to purchase the remaining interest in Janco Multicom, which represented NLG47.0 million, (3) the continuation of our upgrade and new-build construction program, which represented NLG145.6 million of capital expenditures and also including goodwill and other tangible assets, and (4) the purchase of UIH stock, which represented NLG66.8 million. In contrast, during the year ended December 31, 1996 cash was used principally for purchases of property, plant and equipment and goodwill and other intangible assets, which represented NLG106.6 million, for the continuation of our upgrade and new-build construction and for acquisitions, which 50 represented NLG46.5 million and was primarily as a result of our acquisition of our partner's interest in the partnership that held the Norwegian, Swedish and Hungarian cable television systems. These investing activities were offset by repayments from A2000 and its subsidiaries of NLG146.7 million after these companies obtained long-term financing. Cash Flows from Financing Activities We had NLG471.9 million of cash flows from financing activities during the year ended December 31, 1998, as compared to NLG326.5 million for the year ended December 31, 1997. Principal sources of cash during that period included gross proceeds from long-term debt, which represented NLG529.6 million, including additional borrowings from our senior revolving credit facility and CNBH's major facility, a loan from our primary partners in the Israeli operating system of $90 million (NLG170.1 million) and borrowings from UIH, which represented NLG176.1 million. We repaid long-term and short-term borrowings of approximately NLG252.6 million during the same period, including NLG131.1 million of our bridge bank facility and NLG65.0 million under a KTE bank facility. Cash flows from financing activities during the year ended December 31, 1997 were NLG326.5 million, as compared to negative cash flow from financing activities of NLG116.8 million for the year ended December 31, 1996. Principal sources of cash from financing activities during that period included gross proceeds of NLG1,402.1 million from short-term and long-term debt including NLG883.9 million under our senior revolving credit facility, NLG252.5 million under our bridge bank facility, bank loans and other obligations of NLG65.0 million in The Netherlands and other obligations primarily related to the acquisition of Janco and the refinancing of Norkabel, which represented NLG200.7 million. During the same period, we repaid approximately NLG587.9 million of short-term borrowings, including Dutch credit facilities of NLG384.7 million, short-term debt assumed in the acquisition of Norkabel of NLG138.4 million, other short-term credit arrangements of NLG22.1 million and other long-term debt of NLG24.8 million. In December 1997, we also repaid NLG170.4 million of the pay-in-kind convertible notes and purchased NLG292.6 million of ordinary shares from Philips as part of the acquisition of UPC. Cash flows from financing activities during the year ended December 31, 1996 were negative NLG116.8 million. Financing activities during the year ended December 31, 1996 included raising gross proceeds of NLG326.1 million from short-term and long-term loans and repayment of long-and short-term facilities of NLG440.4 million. 51 Consolidated Capital Expenditures The table below sets forth our consolidated capital expenditures for the last three fiscal years and projected capital expenditure for the year ended December 31, 1999. The historical information below does not reflect capital expenditures by A2000, UTH, Tevel or other unconsolidated systems. CNBH has been deconsolidated as of August 1, 1998; its capital expenditures amounting to NLG18.6 million for the first seven months of 1998, are included for the year ended December 31, 1998. UTH's projected capital expenditures for 1999 have been included in the table below for the full year.
Historical | Projected ---------------------------------------------------- | ------------- Year Ended Year Ended Year Ended | Year Ended December 31, December 31, December 31, | December 31, 1998 1997 1996 | 1999 ---------------- ---------------- ---------------- | ------------- (Dutch guilders, in thousands) | | Cable Network: | Upgrade................................................ 87,654 48,484 61,345 | 283,100 New build.............................................. 75,293 55,042 12,581 | 124,700 ------- ------- ------- | ------- Total Cable Network.................................... 162,947 103,526 73,926 | 407,800 | Master Telecom Center: | Video services......................................... 4,065 4,734 8,713 | 19,200 Cable telephone (Priority Telecom)..................... 17,278 -- -- | 55,700 Internet/data services................................. 629 4,480 349 | 7,800 ------- ------- ------- | ------- Total Master Telecom Center.......................... 21,972 9,214 9,062 | 82,700 | Customer Premise Equipment (CPE): | Video services......................................... 14,268 5,833 4,179 | 20,500 Cable telephone (Priority Telecom)..................... 1,677 -- -- | 91,700 Internet/data services................................. 12,855 3,890 430 | 39,800 ------- ------- ------- | ------- Total CPE............................................ 28,800 9,723 4,609 | 152,000 | Support Systems and Equipment (SSE)...................... 15,608 9,221 8,098 | 52,800 Other.................................................... 18,795 5,629 4,347 | 14,800 ------- ------- ------- | ------- Total SSE and Other.................................. 34,403 14,850 12,445 | 67,600 New Businesses: | chello broadband....................................... 4,589 -- -- | 42,500 Digital distribution platform.......................... -- -- -- | 35,500 ------- ------- ------- | ------- Total New Businesses................................. 4,589 -- -- | 78,000 Intangibles and Other.................................... 28,967 8,317 6,605 | -- ------- ------- ------- | ------- Total Capital Expenditures................ 281,678 145,630 106,647 | 788,100 ======= ======= ======= | =======
Cable Network Since our formation as a joint venture, we have been aggressively upgrading our existing cable television system infrastructure and constructing our new- build infrastructure with two-way high capacity technology to support digital video, telephone and Internet/data services. Capital expenditures for the upgrade and new-build construction can be reduced at our discretion, although such reductions require lead-time in order to complete work in progress and can result in higher total costs of construction. We expect that the upgrade of the cable network and related equipment will cause us to write off some of our existing cable network and equipment. We do not expect the write off to be significant, except in certain limited circumstances where it will be necessary to rebuild the network. While there are some exceptions, most of the existing cable plant and related equipment has been in service for over ten years and the remaining book value is very low. While we believe the upgrade will extend the life of our existing plant, we do not anticipate extending the useful life of our existing coaxial cable and equipment for financial reporting purposes. During the year ended December 31, 1998, we spent approximately NLG162.9 million in cable network capital expenditures. For 1999, we have budgeted cable network capital expenditures of approximately NLG407.8 million. Master Telecom Center The master telecom center includes the headend and all central network equipment needed for services provided through the operating system. For cable television, this includes satellite antennas, encryption devices and original transmission facilities. For telephone service, this includes the central office switch and synchronous digital hierarchy and other telephone-related equipment. For Internet/data service, this includes servers and equipment for connection to the Internet. 52 During the year ended December 31, 1998, we spent approximately NLG22.0 million for master telecom center equipment. For 1999, we have budgeted capital expenditures for master telecom center equipment of approximately NLG82.7 million. Customer Premise Equipment Customer premise equipment includes television set-top converters for video services, cable phone equipment for telephone and cable modems and network interface cards for Internet/data services. Customer premise equipment is a variable capital expenditure, except for inventory on hand, and generally will not be incurred unless we need the equipment for a subscriber. During the year ended December 31, 1998, we spent approximately NLG28.8 million on customer premise equipment. For 1999, we have budgeted capital expenditures for customer premise equipment of approximately NLG152.0 million. We are negotiating supply arrangements for the development and purchase of an integrated digital set-top box for video and Internet/data services, as well as for Internet-based telephone. We expect these negotiations to be completed shortly for equipment delivery in late 1999. Support Systems and Equipment Support systems and equipment includes ancillary systems such as operational and business support systems, including network management, customer care, inventory and billing. During the year ended December 31, 1998, we spent NLG15.6 million in total support systems and equipment. For 1999, we have budgeted NLG52.8 million for support systems and equipment. New Businesses In addition to the network infrastructure and related equipment and capital resources described above, development of our newer businesses, chello broadband and our digital distribution platform, require capital expenditures for construction and development of our pan-European distribution and programming facilities, including our origination facility, network operating center, near video on demand server complex and related support systems and equipment. For the year ended December 31, 1998, we incurred capital expenditures of approximately NLG4.6 million for chello broadband. We have budgeted for 1999 approximately NLG42.5 million and NLG35.5 million, respectively, for capital expenditures for chello broadband and our digital distribution platform. New Businesses - Revenue and Adjusted EBITDA During late 1997 we introduced Internet/data service as a product offering in our consolidated systems. During 1998 we began the development of several other new businesses including chello broadband, Priority Telecom and UPC tv. During 1998 the Internet/data service business and telephony business were developed at both local country operating companies and at the corporate Pan-European level. The information provided below provides an overview of the revenues and Adjusted EBITDA for 1998 and 1997 related to these new services in relation to our cable television business. During these years we did not fully allocate overhead and general and administrative expenses to these new businesses. Full allocation will begin in 1999. 53
Revenue Adjusted EBITDA --------------------------- --------------------------- 1998 1997 1998 1997 ------------- ------------ -------------- ----------- Cable Television................... 377,817 320,440 168,805 132,565 Telephony Operating companies............... 531 -- (8,052) -- Priority Telecom.................. -- -- (3,516) -- Internet/data Operating companies............... 9,465 763 (9,005) 385 Chello............................ -- -- (15,854) -- Corporate overhead, UPC tv, TARA and other.................... 21,157 16,052 (20,943) (28,452) ------- ------- ------- ------- Total.............................. 408,970 337,255 111,435 104,498 ======= ======= ======= =======
Liquidity and Capital Resources Historically, we have financed our operations and acquisitions primarily from: . cash contributed by UIH upon our formation, . debt financed at the UPC corporate level and project debt financed at the operating company level, and . operating cash flow. We have both well-established and developing systems. In general, we have used the cash contributed by UIH upon formation and debt financed at the UPC corporate level to fund acquisitions, developing systems and corporate overhead. We have financed our well-established systems and, when possible, our developing systems, with project debt and operating cash flow. Also, well-established systems generally have stable positive cash flows that, to the extent permitted by applicable credit facilities, may be used to fund other operations. Developing systems are at various stages of construction and development and generally depend on us for some of the funding for their operating needs until project financing can be secured. In February 1999, we completed our initial public offering. Funds from the offering will be used primarily for capital expenditures and to fund other costs associated with our network upgrade, the build and launch of our telephone and Internet/data services businesses, as well as our video distribution and programming businesses. Current Debt Facilities We, our consolidated subsidiaries and our unconsolidated affiliates had the following long-term and short-term debt outstanding as of December 31, 1998. Debt denominated in currencies other than Dutch guilders has been translated to Dutch guilders for the last column. 54
Outstanding ----------- Final At December 31, ----- --------------- Description (Borrower) Use of Funds Maturity Interest Rate Facility Size 1998 - ---------------------- ------------ -------- ------------- ------------- ---- (in millions) UPC and Consolidated Subsidiaries: Long-Term Debt Senior Revolving Credit UIH/Philips transaction; 2006 LIBOR + 0.5% to NLG1,100.0 NLG968.0 Facility Refinancing; Acquisitions; 2.0% per annum (UPC, Janco Multicom, Capital expenditures; Telekabel Wien) Working capital Mediareseaux Facility Capital expenditures; 2002 FRF LIBOR + 0.75% FRF 680.0 NLG40.3 (Mediareseaux) Acquisitions; Working to 2.0% capital DIC Loan (UPC) To increase interests in 2000 8.0% per annum $ 90.0 NLG170.1 Israeli and Maltese + 6.0% of principal operating systems amount at maturity UIH Loan (UPC) To repay indebtedness March 2001 10.75% per annum $120.0 NLG163.4 and fund new business Short-Term Debt Time Warner Note Acquisition of Kabelkom June 1999 Non-interest bearing $ 18.0 NLG34.0 (UPC) distribution assets Bridge Bank Facility (UPC) UPC Acquisition June 1999 LIBOR + 4.5% $125.0 NLG113.5 to 6.0% Telekabel Hungary Capital expenditures, April 1999 BUBOR + 2.5% DM 65.6 NLG29.3 Facility (Telekabel Hungary) Acquisitions; Working capital Unconsolidated Affiliates: UTH Facility Acquisitions; Capital March 1999 Fixed rate of 8.15% NLG690 NLG614.2 (Telekabel Beheer) expenditures; Working capital A2000 Group Facilities Acquisition of KT 2005-2006 AIBOR + 0.7/0.75% or NLG510.0 NLG506.2 (A2000 and subsidiaries) Amsterdam and KT a fixed rate advance Hilversum; Capital + 0.7/0.75% expenditures; Working capital CNBH Facility (CNBH) Acquisition of Combivisie; 2008 AIBOR + 0.60% to NLG266.0 NLG219.0 Capital expenditures 1.6% per annum Other (CNBH) Various Various Various Various NLG17.0 Tevel Facilities (Tevel) Acquisition of Gvanim; 2007-2010 Fixed rate ranging $250.0 NLG456.4 Working capital from 5.5%-6.0% Melita Facility (Melita) Capital expenditures; 2007 7.44% - 7.93% Lm 14.0 NLG46.2 Refinancing Monor Facility (Monor) To repay indebtedness 2006 LIBOR + 1.5% $ 50.0 NLG78.5 and finance capital expenditures
- ---------------- 55 Senior Revolving Credit Facility. In October 1997, we and Norkabel as borrowers entered into a NLG1.1 billion multi-currency revolving credit facility with a syndicate of banks led by The Toronto-Dominion Bank. Norkabel was succeeded as a borrower by Janco Multicom after the merger of Janco and Norkabel. In December 1997, Telekabel Wien and the other members of the Telekabel Group also became borrowers under this facility. Although currently not a borrower, TVD is a guarantor under this facility. As of December 31, 1998, the amount outstanding under this facility owed by us, Telekabel Wien and Janco Multicom was NLG620.0 million, NLG213.5 million and NLG134.5 million, respectively. This facility is secured by a pledge of the stock and assets of TVD, Janco Multicom and Telekabel Wien. Our borrowings and those of our subsidiaries in Austria, Belgium and Norway are limited by financial covenants under this facility. The principal amount of all our borrowings and those of our subsidiaries may not exceed certain multiples of total annualized net operating cash flow for us and our subsidiaries. In addition, the principal amount of all our borrowings and those of our subsidiaries may not exceed certain multiples of our cable television net operating cash flow. This facility generally prohibits dividends and other distributions to our shareholders unless, among other things, we achieve certain financial ratios for at least two consecutive quarters. This facility also includes financial covenants relating to interest and debt service coverage and application of proceeds from asset sales and debt or equity offerings. We have agreed with our lenders under this facility to reduce this facility amount from NLG1.1 billion to NLG1.0 billion in February 1999. This amount will be further reduced by 5% each quarter beginning December 31, 2001 until final maturity. Subsequent to December 31,1998 we repaid NLG620 million, excluding interest, of the amount outstanding by us under this facility with the proceeds of the offering, which we plan subsequently to reborrow under this facility. Mediareseaux Facility. In July 1998, Mediareseaux entered into an FRF680.0 million (NLG228.8 million) term facility with Paribas to finance capital expenditures, working capital and acquisitions. This facility is secured by the assets of Mediareseaux and a pledge of our stock of Mediareseaux. The availability of this facility depends on revenue generated and its debt to equity ratios. Drawings under this facility may be made until December 31, 2002. The repayment period runs from January 1, 2003 to final maturity in 2007. Mediareseaux may not draw more than FRF120 million (NLG40.4 million) of this facility for acquisitions. During the repayment period, Mediareseaux must apply 50% of its excess cash flow in prepaying the facility. This facility generally restricts the payment of dividends and distributions. This facility also restricts Mediareseaux from incurring additional indebtedness, subject to certain exceptions. In July 1998, Mediareseaux also secured a 9.5 year FRF20 million (NLG6.7 million) overdraft facility, subject to the same terms and conditions as this facility except for the availability tests which are not applicable. Until certain financial covenants are met, we must own more than 51% of Mediareseaux. Generally, investments by Mediareseaux and its subsidiaries require approval of the facility agent except for investments in cash and certain marketable securities that are pledged to support the facility. This facility also restricts the amount of management fees that Mediareseaux may pay to us. DIC Loan. In November 1998, a subsidiary of DIC loaned us $90.0 million. The loan from DIC was subsequently assigned to an Israeli bank. We used the proceeds to acquire interests in the Israeli and Maltese systems. The loan from DIC matures in November 2000 and is secured by our pledge of our ownership interest in the Israeli system. The loan from DIC bears interest at the nominal rate of 8% per annum. This interest is payable, together with an additional 6% of the principal amount, on maturity. The loan from DIC may be repaid on quarterly prepayment dates with three months' prior notice by us. In connection with the loan from DIC, we granted the Discount Group, our partner in the Israeli system, an option to $90.0 million, plus accrued interest, ordinary shares at a price equal to 90% of the initial public offering price. Subsequent to December 31, 1998, we negotiated an amendment to this option, resulting in an option to acquire $45.0 million, plus accrued interest, of ordinary shares at a price equal to 90.0% of the initial public offering price, and, if this option is exercised, another option to acquire $45.0 million, plus accrued interest, of ordinary shares at a price equal to the 30 day average closing price of our shares on the Amsterdam Stock Exchange, or the initial public offering price, whichever is higher. At the IPO, DIC exercised the first option and acquired 1,558,654 million ordinary shares of UPC. The other option is exercisable until September 30, 2000. UIH Loan. We have entered into two promissory notes with UIH of $100.0 million, in March 1998, and $20.0 million, in July 1998. We have borrowed a total of $86.5 million, excluding accrued interest, under these two notes. These notes bear interest at 10.75% per annum and are payable on March 31, 2001. The $100.0 million note is convertible at UIH's option into ordinary shares and the $20.0 million note may be repaid in our ordinary shares. Any conversion into or payment in ordinary shares will be at the initial public offering price. Subsequent to December 31, 1998 we repaid NLG120 million of the indebtedness outstanding under the $100.0 million note and all of the indebtedness outstanding under the $20.0 million note with proceeds from the offering. Time Warner Note. In connection with the Kabelkom transaction, we entered into an $18.0 million (NLG34.0 million) promissory note with Time Warner. The Time Warner note matures on the earlier of June 30, 1999 or 90 days after 56 written notice from Time Warner. We may, however, prepay the Time Warner note in certain instances. Subsequent to December 31, 1998, the Time Warner note was cancelled as Time Warner exercised its option to acquire our 50% interest in HBO Hungary and 100% interest in TV Max in March 1999. Bridge Bank Facility. In connection with the UPC Acquisition, we entered into a $125.0 million term bridge bank facility with a syndicate of banks led by The Toronto-Dominion Bank. In March 1998, we repaid $63.0 million of the bridge bank facility with proceeds borrowed from UIH. In August 1998, we made an additional repayment of 1,937,000 from proceeds of the sale of our interest in Portugal. Subsequent to December 31, 1998, we repaid the remaining outstanding balance of the bridge bank facility with proceeds from the offering. Telekabel Hungary Facility. In October 1998, Telekabel Hungary entered into a DM65.6 million (NLG74.0 million) six-month secured bridge facility. Availability under this facility depends on certain financial covenants. The DM49.2 million (NLG55.5 million) international tranche of the facility and half of the DM16.4 million (NLG18.5 million) local tranche bear interest at LIBOR plus 2.5% per annum plus an additional cost of funding calculation. The remaining half of the local tranche must be drawn in Hungarian forints and bears interest at Budapest interbank offered rates for Hungarian forints, plus 2.5% per annum plus an additional cost of funding calculation. Telekabel Hungary is using the facility, among other things, to finance capital expenditures and to acquire minority shares in our Kabelkom systems. We have pledged our indirect 79.25% interest in Telekabel Hungary to secure the facility. The facility also is secured by a pledge over certain assets of the Telekabel Hungary group and a negative pledge. Telekabel Hungary is currently negotiating a long-term facility with the lenders to replace this bridge facility. UTH Facility. NUON has entered into a short-term financing arrangement with Telekabel Beheer, with a maximum availability of NLG690.0 million. This facility bears interest at 8.15% per annum and is payable in March 1999. Subsequent to December 31, 1998, UTH replaced their existing NLG690.0 million facility with a senior facility and additional shareholder loans. The senior facility consists of a Euro 340 million (NLG750 million) revolving facility to N.V. Telekabel that will convert to a term facility on December 31, 2001. Euro 5 million of this facility will be in the form of an overdraft facility that will be available until December 31, 2007. This facility was used to repay a portion of the UTH facility and for capital expenditures. The new facility will bear interest at the Euro Interbank Offered Rate plus a margin between 0.75% and 2.00% based on leverage multiples tied to N.V. Telekabel's net operating income. The new facility is secured, among other things, by a pledge over shares held by the borrower and will restrict N.V. Telekabel's ability to incur additional debt. A2000 Facilities. In January 1996, A2000 and its wholly-owned subsidiary KT Amsterdam entered into bank facilities of NLG90.0 million and NLG375.0 million, respectively. In October 1996, A2000 Hilversum, a wholly-owned subsidiary of A2000, entered into a bank facility of NLG45.0 million. These facilities have between nine- and ten-year terms and interest rates of AIBOR + 0.75% or AIBOR + 0.7% or a fixed-rate +0.7% or 0.75% per annum and restrict the borrowers from incurring additional indebtedness, subject to certain exceptions. The A2000 facilities are secured by mortgages and pledges, including pledges on the KT Amsterdam and A2000 Hilversum shares and their assets. CNBH Facility. In February 1998, CNBH entered into a secured NLG250.0 million ten-year term facility with a syndicate of banks led by Rabobank. In August 1998, this facility was increased to NLG266.0 million. Most of the proceeds were used to repay in full a Combivisie bridge facility entered into in connection with the acquisition of Combivisie (NLG122.0 million) and a KTE bank facility (NLG65.0 million). The remaining amount under this facility is available to finance certain capital expenditures. Beginning in 2001, CNBH will be required to apply 50% of its excess cash flow to prepayment of its facility. The facility restricts the payment of dividends and distributions and limits the amount of payments to us under our general services agreement. In January 1999, this facility was increased to NLG274.0 million. In connection with this facility, we entered into a project support agreement providing, among other things, for us to retain majority ownership of CNBH. In connection with this facility, CNBH also entered into a NLG5.0 million ten-year term working capital facility with Rabobank. Tevel Facilities. In August 1998, Tevel entered into three secured loan agreements totaling NIS928.3 million (NLG513.7 million) to finance the acquisition of Gvanim and working capital. These facilities bear interest at a fixed margin of 5.5% to 6.0% over the Israeli consumer price index. The loans mature in the years 2007 to 2010 and the repayment periods of the principal amounts commence in the year 2000. These facilities are secured by Tevel's pledge of its ownership interest in Gvanim and limit Tevel's ability to pay dividends, encumber its assets and incur indebtedness. Melita Facility. In December 1998, Melita, the Maltese system operator, entered into two term loans and an overdraft facility, facilitating a total of Lm 14.0 million with a maturity in 2007 to refinance the existing Lm 9.0 million facility and 57 to finance capital expenditure and working capital. The interest rates on the term loans and overdraft facility vary between 7.44% and 7.93%. Availability depends on satisfaction of leverage covenants and interest coverage. Monor Facility. In September 1997, Monor entered into a $50 million term loan facility with a syndicate of banks led by Credit Lyonnais. The proceeds of Monor's facility were used to repay indebtedness and for capital expenditures in the build-out of Monor's network. Monor's facility matures on December 31, 2006 and bears interest at LIBOR plus 1.5%. Monor's facility is secured by a pledge over the shares of Monor and its assets. Restrictions under UIH Indenture As a subsidiary of UIH, our activities are restricted by the covenants in UIH's indenture dated February 5, 1998. The UIH indenture generally limits the additional amount of debt that we or our subsidiaries or controlled affiliates may borrow, or preferred shares that we or they may issue. Generally, additional borrowings, when added to existing indebtedness, must satisfy, among other conditions, at least one of the following tests: . not exceed 7.0 times the borrower's consolidated operating cash flow, . operating cash flow must exceed 1.75 times its consolidated interest expense, or . not exceed 225% of the borrower's consolidated invested equity capital. In addition, there must be no existing default under the UIH indenture at the time of the borrowing. The UIH indenture also restricts our ability to make certain asset sales and certain payments. In connection with this offering, we have agreed with UIH that we will not take any action during the term of the UIH indenture that would result in a breach of the UIH indenture covenants. The maturity date of the UIH indenture is February 2008 and interest becomes payable in cash in February 2003. Sources of Capital We had approximately NLG29.6 milllion of unrestricted cash and cash equivalents on hand as of December 31, 1998. In addition, we had additional borrowing capacity at the corporate and project debt level including CNBH, Mediareseaux and Telekabel Hungary facilities. During February 1999, we successfully completed an initial public offering selling 44.6 million shares on the Amsterdam Stock Exchange and Nasdaq National Market System and raising gross and net proceeds from the offering of approximately NLG2,850.3 million and NLG2,705.8 million, respectively. Concurrent with the offering DIC exercised one of its two option agreements acquiring approximately 1.6 million shares for NLG89.6 million. Proceeds from the sale of the shares to DIC were used to replay $45.0 million of the DIC Loan and related interest. Also concurrent with the offering, proceeds were used to reduce the Senior Revolving Credit Facility (NLG635.8 million, including accrued interest of NLG15.8 million), repay in its entirety the Bridge Bank Facility (NLG110.0 million, net of the interest reserve account), acquire NUON's 49% interest in UTH (NLG518.1 million, including accrued interest of NLG15.8 million), and assume from NUON a NLG33.0 million subordinated loan, including accrued interest (NLG33.3 million). Subsequent to the offering, we also repaid $80.0 million (NLG156.0 million) of the note payable to UIH. The remaining proceeds from the initial public offering, which were approximately NLG1.3 billion on February 25th, 1999, in addition to our ability to re-borrow under our senior revolving credit facility, are expected to be used primarily for capital expenditures and to fund other costs associated with our network upgrade, the build and launch of our telephone and Internet/data services businesses as well as our video distribution and programming businesses. While the remaining proceeds from our initial public offering are adequate to meet our existing business requirements, we may need to raise additional capital in the future to the extent we pursue new acquisition or development opportunities or if cash flow from operations is insufficient to satisfy our liquidity requirements. Certain Dutch Property Tax Issues One of our Dutch systems was recently assessed for a transfer tax on immovable property in the amount of NLG1.8 million for the purchase of a cable network. We have always regarded our cable networks as movable property and not subject to such transfer tax. We are appealing this tax assessment. Should we be unsuccessful, our Dutch systems may be assessed for taxes on similar transactions. We cannot predict the extent to which the taxes could be assessed retroactively or the amount of tax that our systems may be assessed for, although it may be substantial. Because we own 100% of UTH, any 58 tax liabilities assessed against our Dutch systems, other than the A2000 systems, will be consolidated with our results. We believe that, if our appeal is unsuccessful, most cable television companies and other utilities in The Netherlands would become subject to similar tax liabilities. If this happens, we expect these entities would lobby with us the Dutch tax authorities against such tax assessments. Inflation and Foreign Currency Exchange Rate Losses To date, we have not been impacted materially by inflation. The value of our monetary assets and liabilities is affected by fluctuations in foreign currency exchange rates as accounts payable for certain equipment purchases and certain operating expenses, such as programming expenses, are denominated in currencies other than the functional currency of the entity making such payments. We and some of our operating companies have notes payable and notes receivable that are denominated in, and loans payable that are linked to, a currency other than their own functional currency, exposing us to foreign currency exchange risks on these monetary assets and liabilities. In general, we and our operating companies do not execute hedge transactions to reduce our exposure to foreign currency exchange rate risks. Accordingly, we may experience economic loss and a negative impact on earnings and equity with respect to our holdings solely as a result of foreign currency exchange rate fluctuations. The functional currency for our operations generally is the applicable local currency for each operating company. Assets and liabilities of foreign subsidiaries are translated at the exchange rates in effect at year-end, and the statements of operations are translated at the average exchange rates during the period. Exchange rate fluctuations on translating foreign currency financial statements into Dutch guilders result in unrealized gains or losses referred to as translation adjustments. Cumulative translation adjustments are recorded as a separate component of shareholders' equity. Transactions denominated in currencies other than the local currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses which are reflected in income as unrealized, based on period-end translations, or realized upon settlement of the transactions. Cash flows from our operations in foreign countries are translated based on their reporting currencies. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not agree to changes in the corresponding balances on the consolidated balance sheets. The effects of exchange rate changes on cash balances held in foreign currencies are reported as a separate line below cash flows from financing activities. New Accounting Principles The U.S. Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 131, ''Disclosures about Segments of an Enterprise and Related Information'', which requires that a public business enterprise report certain financial and descriptive information about its reportable segments. We have adopted this statement for the year ended December 31, 1998. The American Institute of Certified Public Accountants recently issued Statement of Position 98-5, ''Reporting on the Costs of Start-Up Activities'', which is required to be adopted by affected companies for fiscal years beginning after December 15, 1998. This statement defines start-up and organization costs, which must be expensed as incurred. In addition, all deferred start-up and organization costs existing as of January 1, 1999 must be written-off and accounted for as a cumulative effect of an accounting change. As of December 31, 1998, our deferred start-up and organization costs were insignificant. We intend to adopt this statement for fiscal year 1999. The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 133, ''Accounting for Derivative Instruments and Hedging Activities'', which requires that companies recognize all derivatives as either assets or liabilities in the balance sheet at fair value. Under this statement, accounting for changes in fair value of a derivative depends on its intended use and designation. This statement is effective for fiscal years beginning after June 15, 1999. We currently are assessing the effect of this new standard. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting For the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance on accounting for the costs of computer software developed or obtained for internal use. SOP 98-1 identifies the characteristics of internal-use software and provides examples to assist in determining when software is for internal use. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998, for projects in progress and prospectively, with earlier application encouraged. Management believes the adoption of SOP 98-1 will not have a material effect on the financial statements. 59 Year 2000 Conversion Our cable television, programming, telephone and Internet/data operations are heavily dependent upon computer systems and other technological devices with imbedded chips. Such computer systems and other technological devices may not be capable of accurately recognizing dates beginning on January 1, 2000. The Year 2000 problem could cause miscalculations, resulting in our cable television and telephone systems or programming services malfunctioning or failing to operate. Year 2000 Compliance Program In response to possible Year 2000 problems, the Board of Directors of UIH established a task force to assess the impact that potential Year 2000 problems may have on company-wide operations, including us and our operating companies, and to implement necessary changes to address such problems. The task force includes our staff, external consultants and staff from UIH, and subcommittees at the operating company levels and reports directly to the UIH Board. We will continue to be a part of the task force following the offering. In creating a program to minimize Year 2000 problems, the task force identified certain critical operations of our business. These critical operations are service delivery systems, field and headend devices, customer service and billing systems, and corporate management and administrative operations such as cash flow, accounts payable and accounts receivable, operations. The task force has established a three phase program to address potential Year 2000 problems: . Identification phase: identify and evaluate computer systems and other devices (e.g. headend devices, switches and set top boxes) on a system by system basis for Year 2000 compliance. . Implementation phase: establish a database and evaluate the information obtained in the identification phase, determine priorities, implement corrective procedures, define costs and ensure adequate funding. . Testing phase: test the corrective procedures to verify that all material compliance problems will operate on and after January 1, 2000, and develop, as necessary, contingency plans for material operations. About 91% of our operating systems have completed the identification phase and the task force is working on the implementation phase for these systems. The remaining operating systems are expected to complete the identification phase by March 1999. The task force has researched almost 85% of the items identified during the identification phase as to Year 2000 compliance. Of the items researched, approximately 69% are either compliant or can be easily remediated without significant cost to us. Currently, the task force expects to complete its research on substantially all of the items identified during first quarter 1999 and we will continue to research new purchased items in existing systems and newly acquired systems. The identification phase for our corporate, management and administrative operations has been completed, and the task force is currently evaluating the results of that phase in order to implement any necessary corrective procedures. Based on current data, we expect the computer systems for all corporate operations to comply with Year 2000 by mid-1999 without needing material remediation or replacement. The task force has targeted mid-1999 for commencement of the testing phase. At this time, we anticipate that all material aspects of the program will be completed before January 1, 2000. Currently, UIH is managing the program with its internal task force. During the implementation phase, the task force has hired external resources to complete the implementation phase and implement the testing phase. In addition to its program, UIH is a member of a Year 2000 working group, which has 12 cable television companies and meets under the auspices of Cable Labs. The dialogue with the other cable operators has assisted UIH in developing its Year 2000 program. Part of the agenda of the working group is to develop test procedures and contingency plans for critical components of operating systems for the benefit of all its members. The test procedures are expected to be available to members, including UIH, during the first quarter of 1999. Until the test procedures are completed, the working group will not develop any contingency plans. Third-Party Dependence We believe that our largest Year 2000 risk is our dependence upon third-party products. Two significant areas in which our systems depend upon third-party products are programming and telephone interconnects. We do not have the ability to control such parties in their assessment and remediation procedures for potential Year 2000 problems. Should these parties not be prepared for Year 2000, their systems may fail and we would not be able to provide our services to our customers. We are in the process of communicating with these parties on the status of their Year 2000 compliance programs in an effort to prevent any possible interruptions or failures. To date, responses to such communications have 60 been limited and the responses received state only that the party is working on Year 2000 issues and does not have a definitive position at this time. We expect, however, based on discussions with such parties, that more of them will disclose the extent of their Year 2000 compliance programs during the first half of 1999 as they focus more resources on their approaching Year 2000 issues. In addition, the task force has been monitoring the web sites of these third parties for information regarding their Year 2000 compliance programs and our and UIH's purchasing department has begun to exert pressure on third-party vendors for Year 2000 compliance information. Nonetheless, we are unable to assess fully the risk posed by its dependence upon such third parties' systems. The task force is considering certain limited contingency plans, including preparing back-up programming and stand-by power generators where such back-up power supplies do not already exist. Such contingency plans may not, however, resolve the problem in a satisfactory manner. With respect to other third-party systems, each of our operating systems is responsible for inquiring of its vendors and other entities with which it does business (e.g., utility companies, financial institutions and facility owners) as to such entities' Year 2000 compliance programs. Each of our operating companies has begun this process and to assist our operating companies in this process, we have hired two Year 2000 consultants, one for Eastern Europe and one for Western Europe, who will visit each operating company and work with them to identify and report to us any potential Year 2000 compliance problems. These consultants will also contact third party vendors regarding their Year 2000 compliance measures. To date, these consultants have not identified any new third-party Year 2000 compliance problems. The task force is working closely with the manufacturers of its headend devices to remedy any Year 2000 problems assessed in the headend equipment. Recent information from the two primary manufacturers of such equipment indicate that most of the equipment used in our operating systems are not date-sensitive. Where such equipment needs to be upgraded for Year 2000 issues, such vendors are upgrading without charge. These upgrades are expected to be completed before year-end 1999, but this process is not entirely within our control. With respect to billing and customer care systems, we use standard billing and customer care programs from several vendors. A few of our operating systems, including two in The Netherlands, one in Romania and one in Hungary are using Custom Fox-Pro Billing and Customer Care Systems, which have been examined for Year 2000 compliance. We are generally upgrading our billing and customer care systems for other reasons and do not expect the Year 2000 aspect of this cost to be significant. The task force is working with such vendors to achieve Year 2000 compliance for all of our systems. Minority-Held Systems We also have non-controlling interests in cable television and telephone operations, including A2000. MediaOne International, our partner in A2000, is undertaking and implementing a program to ensure that the operations of A2000 will be Year 2000 compliant. The task force is including other minority investments in its program. Of these investments, about 75% have completed their identification phase of the program and the task force is in the process of making recommendations to these entities as to Year 2000 compliance matters. Our remaining investments are expected to complete the identification phase by March 1999. No assurance can be given, however, that these entities will implement the recommendations or otherwise be Year 2000 compliant. Overall, the task force will continue to analyze the Year 2000 program and will revise the program as necessary throughout the remainder of 1999, including procedures to ensure third parties' Year 2000 compliance. Cost of Compliance The task force has not yet determined the full cost of its Year 2000 program and its related impact on our financial condition. In the course of our business, we have made substantial capital investments over the past few years in improving our systems, primarily for reasons other than to anticipate Year 2000 problems. Because the systems' upgrades also result in Year 2000 compliance, however, we have not had to devote a large amount of investment specifically to the Year 2000 issue. The task force has identified certain replacement and remediation costs and, based on the task force review to date, we currently estimate that these costs will not exceed NLG4.0 million, excluding any costs associated with our interest in A2000. Although no assurance can be made, we believe that the known Year 2000 compliance issues can be remedied without a material financial impact on us. No assurance can be made, however, as to the total cost for the Year 2000 program until all of the data has been gathered. In addition, we cannot predict the financial impact we will experience if Year 2000 problems are caused by third parties upon which our systems are dependent or experienced by entities in which we hold investments. The failure of any one of these parties to implement Year 2000 procedures could have a material adverse impact on our operations and financial condition. 61 European Economic and Monetary Union On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing sovereign currencies and the euro. The participating countries adopted the euro as their common legal currency on that day. The euro trades on currency exchanges and is available for non-cash transactions during the transition period between January 1, 1999 and January 1, 2002. During this transition period, the existing currencies are scheduled to remain legal tender in the participating countries as denominations of the euro and public and private parties may pay for goods and services using either the euro or the participating countries' existing currencies. During the transition period, all operating companies' billing systems will include amounts in euro as well as the respective country's existing currency. All of our accounting and management reporting systems currently are multi- currency. We intend to use the euro as our reporting currency by the end of 2000. We do not expect the introduction of the euro to affect materially our cable television and other operations. We have not yet taken steps to confirm that the financial institutions and other third parties with whom we have financial relationships are prepared for the use of the euro. Thus far, we have not experienced any material problem with third parties as a result of the introduction of the euro. We believe the introduction of the euro will not require us to amend any of our financial instruments or loan facilities, other than amendments that will be made automatically by operation of law. These will include automatic replacement of the currencies of participating countries with the euro. They will also include automatic replacement of interest rates of participating countries with European interest rates. We believe the introduction of the euro will reduce our exposure to risk from foreign currency and interest rate fluctuations. 62 Item 7A. Quantitative and Qualitative Disclosure About Market Risk --------------------------------------------------------- Investment Portfolio UPC does not use derivative financial instruments in its non-trading investment portfolio. UPC places its excess cash and cash equivalents in highly liquid instruments that meet high credit quality standards with original maturities at the date of purchase of less than three months. Historically, UPC has not held any short-term investments. Subsequent to December 31, 1998, UPC completed its initial public offering raising net proceeds of NLG2,705.8 million. The proceeds from the offering will be invested in short-term investments that meet high credit quality standards with original maturities at the date of purchase between one and twelve months. The Company must comply with the restrictions placed on it by the UIH bond indenture, which limits such investments to a risk profile of A2/P2 commercial paper. The Company will also limit the amount of exposure to any one issue, issuer or type of instrument. These instruments will be subject to interest rate risk and potentially to foreign exchange fluctuations, however, the Company does not expect any material losses with respect to its investment portfolio. Impact of Foreign Currency Rate Changes The Company and its operating subsidiaries are exposed to foreign exchange rate fluctuations related to debt denominated in currencies outside of the 11 nations which joined the European Monetary Union on January 11, 1999, fixing their currencies against the Euro. The Company's operating subsidiaries are also exposed to foreign exchange rate fluctuations related to long-term commitments for equipment purchases denominated in currencies other than their functional currency. The table below provides information about UPC's and its consolidated subsidiaries' debt which is denominated in foreign currencies outside of the European Monetary Union as of December 31, 1998, including cash flows based on the expected repayment date and related weighted-average interest rates. The information is presented in NLG equivalents, which is the Company's reporting currency. The instruments' actual cash flows are denominated in US Dollars. In February 1999, UPC completed its initial public offering and applied a portion of the proceeds to the repayment of debt, which is reflected in the expected repayments (see Item 7 - Current Debt Facilities).
Amount Outstanding Expected Repayment as of as of December 31, 1998 December 31, ----------------------------------- -------------------------- Dollar Denominated Facilities Book Value Fair Value 1999 2000 - ------------------------------------- ----------- ----------- ------ ------ (Stated in thousands of Dutch Guilders) DIC Loan 170,100 170,100 85,050 85,050 8.0% per annum + 6.0% of principal at maturity, due 2000 UIH Loan 163,425 163,425 163,425 -- 10.75% per annum, due 2001 Bridge Bank Facility 113,519 113,519 113,519 -- LIBOR + 4.5% to 6.0%, average rate in 1998 of 10.8%
63 In general, the Company and its operating companies do not execute hedge transactions to reduce the Company's exposure to foreign currency exchange rate risk. Accordingly, the Company may experience economic loss and a negative impact on earnings and equity with respect to its holdings solely as a result of foreign currency exchange rate fluctuations. Interest Rate Sensitivity The table below provides information about the Company's financial instruments that are sensitive to changes in interest rates as of December 31, 1998, including cash flows based on the expected repayment dates and the related weighted-average interest rates. The information is presented in NLG equivalents, which is the Company's reporting currency. In February 1999, UPC completed its initial public offering and applied a portion of the proceeds to the repayment of debt, which is reflected in the expected repayments (see Item 7 - - Current Debt Facilities).
Amount Outstanding as of December 31, 1998 Expected Repayment as of December 31, ------------------------------- ------------------------------------------- Book Value Fair Value 1999 2000 2001 2002 -------------- ----------- ---------- -------- -------- -------- Variable Rate Facilities (Stated in thousands of Dutch Guilders) ------------------------ Senior Revolving Credit 968,018 968,018 620,000 348,018 -- -- Facility LIBOR + 0.5% to 2.0%, average rate in 1998 of 5.7% Mediareseaux 40,344 40,344 -- -- -- 40,344 FRF LIBOR + 0.75% to 2.0%, average rate in 1998 of 5.2% Bridge Bank Facility 113,519 113,519 113,519 -- -- -- LIBOR + 4.5% to 6.0%, average rate in 1998 of 10.8% Telekabel Hungary Facility 29,297 29,297 29,297 -- -- -- BUBOR + 2.5%, average rate in 1998 of 5.7% Fixed Rate Facilities --------------------- DIC Loan 170,100 170,100 85,050 85,050 -- -- 8.0% per annum + 6.0% of principal at maturity, due 2000 UIH Loan 163,425 163,425 163,425 -- -- -- 10.75% per annum, due 2001
Equity Prices As of December 31, 1998, the Company is exposed to equity price fluctuations related its investment in UIH stock, which is classified as an investment available for sale. Changes in the price of the stock are reflected as unrealized gains (losses) in the Company's statement of shareholders' equity (deficit), until such time as the stock is sold and any unrealized gain (loss) will be reflected in the statement of operations.
Fair Value as of Number of Shares December 31, 1998 ------------------------ --------------------------- (Stated in thousands of Dutch Guilders, except share amounts) Investment in UIH Stock 2,784,620 101,097
As of December 31, 1998, the Company is also exposed to equity price fluctuations related to its debt which is convertible into ordinary shares of the Company. The table below provides information about UPC's convertible debt, including expected cash flows and related weighted-average interest rates. In February 1999, UPC completed its initial public offering and applied a portion of the proceeds to the repayment of debt, which is reflected in the expected repayments (see Item 7 - Current Debt). 64
Amount Outstanding Expected Repayment as of as of December 31, 1998 December 31, --------------------------------- ------------------------------- Convertible Debt Book Value Fair Value 1999 2000 - -------------------------------------- ------------- ------------ -------------- ------------- (Stated in thousands of Dutch Guilders) DIC Loan 170,100 170,100 85,050 85,050 8.0% per annum + 6.0% of principal at maturity, due 2000 UIH Loan 163,425 163,425 163,425 -- 10.75% per annum, due 2001
In November 1998, a subsidiary of DIC loaned UPC $90.0 million. In connection with the loan from DIC we granted the Discount Group, our partner in the Israeli system, an option to acquire $90.0 million, plus accrued interest, ordinary shares at a price equal to 90% of the initial public offering price. Subsequent to December 31, 1998, the Company negotiated an amendment to this option, resulting in an option of $45.0 million, plus accrued interest, of ordinary shares at a price equal to 90% of the initial public offering price, and, if this option is exercised, another option to acquire $45.0 million, plus accrued interest, of ordinary shares at a price equal to the 30 day average closing price of UPC's shares on the Amsterdam Stock Exchange, or the initial public offering price, which ever is higher. At the initial public offering, DIC exercised the first option and thus acquired 1,558,654 ordinary shares of UPC. The other option is exercisable until September 30, 2000. As of December 31, 1998, the UIH Loan was convertible at UIH's option into ordinary shares of UPC at NLG12.00 to NLG18.00 per share. Subsequent to December 31, 1998, the UIH Loan was amended to convert to UPC shares at the initial public offering price. UPC repaid NLG156.0 million of the UIH loan with proceeds from the offering. 65 Item 8. Financial Statements and Supplementary Data ------------------------------------------- The financial statement schedules and separate financial statements of significant equity investees required by regulation S-X are filed under Item 14 "Exhibits, Financial Statement Schedules and Reports on Form 8-K". 66 INDEPENDENT AUDITORS' REPORT To United Pan-Europe Communications N.V. We have audited the accompanying consolidated balance sheets of United Pan- Europe Communications N.V. (a N.V. registered in The Netherlands) and subsidiaries as of December 31, 1998 and December 31,1997 (post-acquisition -- see Note 1), and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows for the years ended December 31, 1998 (post-acquisition - see Note 1), December 31, 1997 and December 31, 1996 (pre-acquisition -- see Note 1). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in The Netherlands, which are substantially the same as those generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the consolidated financial statements, the Company's parent company (United International Holdings, Inc.) acquired the remaining 50% interest in the Company effective December 11, 1997. Accordingly, the assets, liabilities and shareholders' equity acquired have been adjusted to reflect its parent's basis in the underlying net assets of the Company as of December 11, 1997. The proportional assets and liabilities acquired were recorded based upon their relative fair market values at the date of acquisition. Accordingly, the pre-acquisition and post-acquisition consolidated financial statements are not comparable in certain significant respects since these consolidated financial statements report the financial position, results of operations and cash flows on two separate accounting bases. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Pan- Europe Communications N.V. as of December 31, 1998 and December 31, 1997 (post- acquisition -- see Note 1), and the results of its operations and its cash flows for the years ended December 31, 1998 (post-acquistioin - see Note 1), December 31, 1997 and December 31, 1996 (pre-acquisition -- see Note 1) in conformity with accounting principles generally accepted in the United States of America. ARTHUR ANDERSEN Amstelveen, The Netherlands, March 29, 1999 67 UNITED PAN-EUROPE COMMUNICATIONS N.V. CONSOLIDATED BALANCE SHEETS (Stated in thousands of Dutch guilders, except share and per share amounts) As a result of the UPC Acquisition in December 1997 (see Note 1), the purchase method of accounting was used to record assets acquired and liabilities assumed by the parent company. Such accounting generally results in increased amortization and depreciation reported in future periods. Accordingly, the accompanying financial statements of the Company are not comparable in certain significant respects since these financial statements report financial position, results of operations, and cash flows on two separate accounting bases.
As of December 31, --------------------- 1998 1997 ---------- --------- ASSETS: (Post-Acquisition) Current assets Cash and cash equivalents................................................................................. 29,571 100,144 Restricted cash........................................................................................... 30,263 22,220 Subscriber receivables, net of allowance for doubtful accounts of 9,260 and 6,445, respectively........... 12,886 9,419 Costs to be reimbursed by affiliated companies, net of allowance for doubtful accounts of 0 and 2,209, respectively............................................................................. 27,277 14,970 Other receivables......................................................................................... 25,845 19,103 Inventory................................................................................................. 24,121 13,040 Prepaid expenses and other current assets................................................................. 15,654 6,669 --------- --------- Total current assets................................................................................... 165,617 185,565 Marketable equity securities of parent, at fair value...................................................... 101,097 66,809 Investments in and advances to affiliated companies, accounted for under the equity method, net............ 480,455 400,337 Property, plant and equipment, net of accumulated depreciation of 87,708 and 7,312, respectively.......... 602,997 484,982 Goodwill and other intangible assets, net of accumulated amortization of 39,109 and 1,716, respectively... 680,032 690,046 Deferred financing costs, net of accumulated amortization of 9,288 and 217, respectively................... 21,663 23,943 Non-current restricted cash and other assets............................................................... 3,322 50,710 --------- --------- Total assets........................................................................................... 2,055,183 1,902,392 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT): Current liabilities Accounts payable, including related party payables of 15,671 and 12,223, respectively..................... 141,917 126,178 Accrued liabilities....................................................................................... 56,840 34,731 Subscriber prepayments and deposits....................................................................... 45,757 24,533 Short-term debt........................................................................................... 63,322 1,696 Note payable to shareholder............................................................................... 175,012 -- Current portion of long-term debt......................................................................... 113,519 255,819 --------- --------- Total current liabilities.............................................................................. 596,367 442,957 Long-term debt............................................................................................. 1,174,749 966,100 Deferred taxes............................................................................................. 8,657 44,508 Deferred compensation...................................................................................... 327,445 4,818 Other long-term liabilities................................................................................ 8,801 8,801 --------- --------- Total liabilities...................................................................................... 2,116,019 1,467,184 --------- --------- Commitments and contingencies (Notes 11 and 12) Minority interests in subsidiaries......................................................................... 25,934 8,715 --------- --------- Shareholders' equity (deficit) (As adjusted for the 3:2 stock split. Note 10) Common stock, 0.667 par value, 200,000,000 shares authorized and 87,330,340 and 87,107,325 shares issued, respectively.............................................................................. 58,221 58,072 Additional paid-in capital................................................................................ 657,684 636,851 Treasury stock, at cost, 9,198,135 shares of common stock................................................. (110,385) (110,385) Accumulated deficit....................................................................................... (719,575) (156,691) Other cumulative comprehensive income (loss).............................................................. 27,285 (1,354) --------- --------- Total shareholders' equity (deficit)................................................................... (86,770) 426,493 --------- --------- Total liabilities and shareholders' equity (deficit)................................................... 2,055,183 1,902,392 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 68 UNITED PAN-EUROPE COMMUNICATIONS N.V. CONSOLIDATED STATEMENTS OF OPERATIONS (Stated in thousands of Dutch guilders, except share and per share amounts) As a result of the UPC Acquisition in December 1997 (see Note 1), the purchase method of accounting was used to record assets acquired and liabilities assumed by the parent company. Such accounting generally results in increased amortization and depreciation reported in future periods. Accordingly, the accompanying financial statements of the Company are not comparable in certain significant respects since these financial statements report financial position, results of operations, and cash flows on two separate accounting bases.
For the Years Ended December 31, -------------------------------------------------------- 1998 1997 1996 ------------------ ----------------- ----------------- (Post-Acquisition) (Pre-Acquisition) (Pre-Acquisition) Service and other revenue......................................... 408,970 337,255 245,179 Operating expense................................................. (138,459) (118,508) (82,439) Selling, general and administrative expense....................... (481,703) (119,067) (81,176) Depreciation and amortization..................................... (187,646) (132,888) (79,832) ---------- ---------- ---------- Net operating (loss) income..................................... (398,838) (33,208) 1,732 Interest income................................................... 7,397 6,512 2,757 Interest expense.................................................. (92,308) (41,995) (14,263) Interest expense, related party................................... (12,047) (28,743) (24,212) Provision for loss on investment related costs.................... (6,230) (18,888) -- Foreign exchange (loss) gain and other expense.................... 2,690 (41,063) (21,200) ---------- ---------- ---------- Net loss before income taxes and other items.................... (499,336) (157,385) (55,186) Share in results of affiliated companies, net..................... (63,486) (20,270) (22,286) Minority interests in subsidiaries................................ 1,153 152 (2,208) Income tax benefit (expense)...................................... (1,215) 1,649 (509) ---------- ---------- ---------- Net loss........................................................ (562,884) (175,854) (80,189) ========== ========== ========== Basic and diluted net loss per ordinary share(1).................. (7.22) (2.03) (0.92) ========== ========== ========== Weighted-average number of ordinary shares outstanding(1)......... 77,914,081 86,578,117 87,107,325 ========== ========== ==========
- --------------- (1) As adjusted for the 3:2 stock split (Note 10). The accompanying notes are an integral part of these consolidated financial statements. 69 UNITED PAN-EUROPE COMMUNICATIONS N.V. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(DEFICIT)(2) (Stated in thousands of Dutch guilders, except share amounts) As a result of the UPC Acquisition in December 1997 (see Note 1), the purchase method of accounting was used to record assets acquired and liabilities assumed by the parent company. Such accounting generally results in increased amortization and depreciation reported in future periods. Accordingly, the accompanying financial statements of the Company are not comparable in certain significant respects since these financial statements report financial position, results of operations, and cash flows on two separate accounting bases.
Other Ordinary Stock Additional Treasury Stock Cumulative --------------------- Paid-In ------------------- Accumulated Comprehensive Shares(2) Amount Capital Shares(2) Amount Deficit Income (Loss)(1) Total ------------ -------- --------- --------- ------- ------------ ---------------- -------- Balances, December 31, 1995......... 87,107,325 58,072 262,669 -- -- (48,195) (2,751) 269,795 Contribution by UIH of additional investment in affiliate............ -- -- 9,495 -- -- -- -- 9,495 Change in cumulative translation adjustments........................ -- -- -- -- -- -- 3,558 3,558 Net loss............................ -- -- -- -- -- (80,189) (80,189) -------- Total comprehensive income (loss)... -- -- -- -- -- -- -- (76,613) ------------ -------- --------- --------- ------- ------------ ---------------- -------- Balances, December 31, 1996......... (Pre-Acquisition).................. 87,107,325 58,072 272,164 -- -- (128,384) 807 202,659 Contribution by UIH of additional investment in affiliate............ -- -- 6,479 -- -- -- -- 6,479 Gain on sale of stock by subsidiary. -- -- 3,274 -- -- -- -- 3,274 Change in cumulative translation adjustments........................ -- -- -- -- -- -- (2,161) (2,161) Net loss for the period from January 1, 1997 to December 10, 1997....... -- -- -- -- -- (166,710) -- (166,710) -------- Total comprehensive income (loss)... -- -- -- -- -- -- -- (168,871) ------------ -------- --------- --------- ------- ------------ ---------------- -------- Balances, December 10, 1997 (Pre-Acquisition).................. 87,107,325 58,072 281,917 -- -- (295,094) (1,354) 43,541 Buyout of shareholder's interest -- -- -- (24,378,396) (292,561) -- -- (292,561) Reissuance of shares upon conversion of PIK Notes............ -- -- (12,277) 15,180,261 182,176 -- -- 169,899 Application of push-down accounting and step-up in basis............... 514,758 -- -- -- -- 514,758 Elimination of historical accumulated deficit of UPC attributable to Philips............................ -- -- (147,547) -- -- 147,547 -- -- Net loss for the period from December 11, 1997 to December 31, 1997........................... -- -- -- -- -- (9,144) -- (9,144) -------- Total comprehensive income (loss) -- -- -- -- -- -- -- (9,144) ------------ -------- --------- --------- ------- ------------ ---------------- -------- Balances, December 31, 1997 (Post-Acquisition)................. 87,107,325 58,072 636,851 (9,198,135) (110,385) (156,691) (1,354) 426,493 Issuance of shares for acquisition of receivable.......... 223,015 149 2,439 -- -- -- -- 2,588 Contribution by UIH of additional investment in affiliate............ -- -- 7,459 -- -- -- -- 7,459 Issuance of convertible debt........ -- -- 10,935 -- -- -- -- 10,935 Unrealized gain on investment ...... -- -- -- -- -- -- 44,223 44,223 Gain on sale of investment (1,826) (1,826) Change in cumulative translation adjustments........................ -- -- -- -- -- -- (13,758) (13,758) Net loss............................ -- -- -- -- -- (562,884) -- (562,884) -------- Total comprehensive income (loss) -- -- -- -- -- -- -- (534,245) ------------ -------- --------- --------- --------- ------------ ---------------- -------- Balances, December 31, 1998 (Post-Acquisition)................. 87,330,340 58,221 657,684 (9,198,135) (110,385) (719,575) 27,285 (86,770) ============ ======== ========= ========= ========= ============ ================ ========
(1) As of December 31, 1995, 1996 and 1997 Other Cumulative Comprehensive Income (Loss) represents foreign currency translation adjustments. As of December 31, 1998, Other Cumulative Comprehensive Income (Loss) represents foreign currency translation adjustments of (15,112) and unrealized gain on investment of 42,397 (2) As adjusted for the 3:2 stock split (Note 10). The accompanying notes are an integral part of these consolidated financial statements. 70 UNITED PAN-EUROPE COMMUNICATIONS N.V. CONSOLIDATED STATEMENTS OF CASH FLOWS (Stated in thousands of Dutch guilders) As a result of the UPC Acquisition in December 1997 (see Note 1), the purchase method of accounting was used to record assets acquired and liabilities assumed by the parent company. Such accounting generally results in increased amortization and depreciation reported in future periods. Accordingly, the accompanying financial statements of the Company are not comparable in certain significant respects since these financial statements report financial position, results of operations, and cash flows on two separate accounting bases.
For the Years Ended December 31, -------------------------------------------------------- 1998 1997 1996 ------------------ ----------------- ----------------- (Post-Acquisition) (Pre-Acquisition) (Pre-Acquisition) Cash flows from operating activities: Net loss......................................................... (562,884) (175,854) (80,189) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization................................... 187,646 132,888 79,832 Amortization of deferred financing costs........................ 9,234 642 -- Share in results of affiliated companies, net................... 63,486 20,270 22,286 Compensation expense related to stock options................... 322,627 4,818 -- Minority interests in subsidiaries.............................. (1,153) (152) 2,208 Exchange rate differences in related party convertible loans.... (12,653) 43,441 20,544 Gain on sale of investment...................................... (1,826) -- -- Provision for loss on investment related costs.................. 6,230 18,888 -- Other........................................................... 1,739 978 1,173 Changes in assets and liabilities: (Increase) decrease in receivables............................. (19,739) 24,102 (31,932) Increase in inventories........................................ (8,670) (2,229) (1,611) Increase in other non-current assets........................... (2,004) (2,544) (309) Increase in other current liabilities.......................... 77,191 69,551 25,553 (Decrease) increase in deferred taxes and other long-term liabilities......................................... 13,776 (2,366) 4,975 -------- --------- -------- Net cash flows from operating activities......................... 73,000 132,433 42,530 -------- --------- -------- Cash flows from investing activities: Restricted cash (deposited) released, net........................ (8,043) (22,220) -- Purchase of parent company's stock............................... -- (66,809) -- (Investments in and advances to) repayment from affiliated companies, net....................................... (200,324) (3,869) 146,726 Capital expenditures............................................. (281,678) (145,630) (106,647) New acquisitions, net of cash acquired........................... (210,039) (127,882) (46,473) Release (deposit) to acquire minority interest in subsidiary..... 47,000 (47,000) -- Sale of affiliated companies..................................... 39,737 11,070 -- -------- --------- -------- Net cash flows from investing activities......................... (613,347) (402,340) (6,394) -------- --------- -------- Cash flows from financing activities: Proceeds from short-term borrowings.............................. 29,390 260,560 302,959 Proceeds from long-term borrowings............................... 529,630 1,141,539 23,113 Deferred financing costs......................................... (10,023) (24,585) -- Repayments of long and short-term borrowings..................... (252,641) (587,929) (440,440) Borrowings on note payable to shareholder........................ 176,078 -- -- Dividends paid to minority shareholders.......................... (521) (171) (2,388) Redemption of convertible loans.................................. -- (170,371) -- Purchase shares from shareholder................................. -- (292,561) -- -------- --------- -------- Net cash flows from financing activities......................... 471,913 326,482 (116,756) -------- --------- -------- Effect of exchange rates on cash................................. (2,139) (72) 366 -------- --------- -------- Net increase (decrease) in cash and cash equivalents............ (70,573) 56,503 (80,254) Cash and cash equivalents at beginning of period................. 100,144 43,641 123,895 -------- --------- -------- Cash and cash equivalents at end of period....................... 29,571 100,144 43,641 ======== ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 71 UNITED PAN-EUROPE COMMUNICATIONS N.V. CONSOLIDATED STATEMENTS OF CASH FLOWS (Stated in thousands of Dutch guilders) As a result of the UPC Acquisition in December 1997 (see Note 1), the purchase method of accounting was used to record assets acquired and liabilities assumed by the parent company. Such accounting generally results in increased amortization and depreciation reported in future periods. Accordingly, the accompanying financial statements of the Company are not comparable in certain significant respects since these financial statements report financial position, results of operations, and cash flows on two separate accounting bases.
For the Years Ended December 31, ------------------------------------------------------------------ 1998 1997 1996 ---------------------- -------------------- -------------------- (Post-Acquisition) (Pre-Acquisition) (Pre-Acquisition) Non-cash investing and financing activities: Issuance of shares upon conversion of PIK notes........ -- 169,899 -- ======== ======= ======= Contribution of net assets of Dutch cable systems to new joint venture.................................. 259,153 -- -- ======== ======= ======= Purchase money notes payable to sellers................ 36,720 -- -- ======== ======= ======= Acquisition of interest in affilate for UIH stock...... 9,935 -- -- ======== ======= ======= Unrealized gain on investment.......................... 42,397 -- -- ======== ======= ======= Supplemental cash flow disclosures: Cash paid for interest................................. (69,066) (80,810) (32,674) ======== ======= ======= Cash received for interest............................. 6,990 5,077 2,757 ======== ======= ======= Acquisition of Dutch cable assets: Property, plant and equipment and other assets......... (106,000) -- -- Goodwill............................................... (74,762) -- -- -------- ------- ------- Total cash paid....................................... (180,762) -- -- ======== ======= ======= Acquisition of Norway cable systems: Working capital........................................ -- 3,790 2,221 Property, plant and equipment.......................... -- (23,541) (90,413) Goodwill and other intangible assets................... -- (69,673) (71,509) Other assets........................................... -- (57) -- Short-term debt........................................ -- 2,854 140,619 Other liabilities...................................... -- 1,557 10,271 -------- ------- ------- Total cash paid....................................... -- (85,070) (8,811) ======== ======= ======= Acquisition of remaining interest in UPC: Property, plant and equipment.......................... -- 18,271 -- Investments in and advances to affiliates.............. -- 129,742 -- Goodwill............................................... -- 366,745 -- -------- ------- ------- Total allocation of purchase accounting adjustments.......................................... -- 514,758 -- ======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 72 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) 1. Organization and Nature of Operations United Pan-Europe Communications N.V., formerly known as United and Philips Communications B.V. (''UPC'' or the ''Company''), was formed for the purpose of acquiring and developing multi-channel television and telecommunications systems in Europe. On July 13, 1995, United International Holdings, Inc. (''UIH''), a United States of America corporation, and Philips Electronics N.V. (''Philips''), contributed their respective ownership interests in European and Israeli multi-channel television systems to UPC. Philips contributed to UPC its 95% interest in cable television systems in Austria, its 100% interest in cable television systems in Belgium, and its minority interests in multi-channel television systems in Germany, The Netherlands (KTE) and France (Citecable). UIH contributed its interests in multi-channel television systems in Israel, Ireland, the Czech Republic, Malta, Norway, Hungary, Sweden and Spain. UIH also contributed United States dollars (''$'')78.2 million in cash (including accrued interest of $3.2 million) to UPC and issued to Philips 3,169,151 shares of its Class A Common Stock having a value of $50.0 million (at date of closing). In addition, UPC issued to Philips $133.6 million of convertible subordinated pay- in-kind notes (the ''PIK Notes''). As a result of this transaction, UIH and Philips each owned a 50% economic and voting interest in UPC. On December 11, 1997, UIH acquired Philips' 50% interest in UPC (the ''UPC Acquisition''), thereby making it an effectively wholly-owned subsidiary of UIH (subject to certain employee equity incentive compensation arrangements) through its wholly-owned subsidiary UIH Europe, Inc. (''UIHE''). The entity's name was changed to United Pan-Europe Communications N.V., and its legal seat was transferred from Eindhoven to Amsterdam. Through its cable-based communications networks in 10 countries in Europe and in Israel, UPC currently offers cable television services and is further developing and upgrading its network to provide digital video, voice and Internet/data services in its Western European markets. As part of the UPC Acquisition, (i) UPC purchased the 3,169,151 shares of Class A Common Stock of UIH held by Philips (66,800), (ii) UIH purchased 169,899 of the accreted amount of UPC's PIK Notes and redeemed them for 15,180,261 shares of UPC, (iii) UPC repaid to Philips the remaining 170,371 accreted amount of the PIK Notes (339,800), (iv) UIH purchased 13,121,604 shares of UPC directly from Philips, and (v) UPC repurchased Philips' remaining equity interest in UPC (24,378,396 shares). The UPC Acquisition was financed with proceeds from a long- term revolving credit facility through UPC with a syndicate of banks (305,200) (the ''Senior Revolving Credit Facility''), a bridge bank facility through a subsidiary of UPC $111,200 (224,000) (the ''Bridge Bank Facility'') and a cash investment by UIH of 327,400. Approximately 479,000 drawn on the Senior Revolving Credit Facility was used to repay existing debt of UPC in conjunction with the UPC Acquisition. UIH's acquisition of Philips' interest in UPC was accounted for as a step acquisition under purchase accounting. As a result of UPC becoming effectively wholly owned by UIH, such purchase accounting adjustments, along with existing basis differences, were pushed down to the financial statements of UPC and a new basis of accounting was established for the UPC net assets acquired by UIH. As of December 11, 1997, the proportional net assets of UPC acquired by UIH were recorded at fair market value based on the purchase price paid by UIH, along with additional basis differences at the UIH level existing as of that date. The total consideration paid to Philips for their 50% interest in UPC, the resulting amount paid in excess of Philips' proportionate share of UPC's net assets at that date plus UIH's existing basis in excess of their proportionate share of UPC's net assets is summarized below. In addition, the table below presents how such total excess was allocated to UPC's underlying assets as of December 11, 1998. 73 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) UPC's net asset value at December 10, 1997........................................... 43,541 Cash paid to Philips by UPC for 24,378,396 shares in UPC............................. (292,561) Conversion by UIH of PIK notes acquired from Philips at cost to 15,180,261 of UPC's shares........................................................................ 169,899 -------- UPC's net asset value prior to application of push down accounting................... (79,121) UIH's proportionate share of UPC's net assets at December 10, 1997................... 21,770 UIH's existing basis difference related to their original interest in UPC dating back to July 1995 formation of UPC (as adjusted through December 10, 1997).......... 86,529 Cash paid to Philips by UIH for 13,121,604 shares in UPC............................. 157,439 Conversion by UIH of PIK notes acquired from Philips at cost to 15,180,261 of UPC's shares........................................................................ 169,899 -------- 435,637 -------- Total purchase accounting adjustment 514,758 ======== The total purchase accounting adjustments were allocated to UPC's underlying assets as follows: Property, plant and equipment........................................................ 18,271 Investment in and advances to affiliates............................................. 129,742 Goodwill............................................................................. 366,745 -------- Total............................................................................. 514,758 ========
As a result of the UPC Acquisition and the associated push-down of UIH basis on December 11, 1997, the consolidated balance sheets as of December 31, 1998 and 1997 as well as the consolidated statements of operations and cash flows subsequent to December 31, 1998 are presented on a ''post-acquisition'' basis. The primary difference in the consolidated statement of operations presented on a ''post-acquisition'' basis compared to a ''pre-acquisition'' basis consists of additional depreciation and amortization on the above purchase accounting adjustments. The consolidated statements of operations and cash flows for the year ended December 31, 1997 include the post-acquisition results of the Company for the period from December 11, 1997 through December 31, 1997, which reflects 1,980 of new basis depreciation and amortization resulting from push-down accounting as well as approximately 4,034 of interest expense from purchase related indebtedness. Due to immateriality, the entire fiscal year ended December 31, 1997 is presented as ''pre-acquisition'' in the accompanying consolidated statements of operations and cash flows. The following pro forma consolidated operating results for the years ended December 31, 1997 and 1996 give effect to the UPC Acquisition as if it had occurred at the beginning of the periods presented. This pro forma consolidated financial information does not purport to represent what the Company's results of operations would actually have been if such transaction had in fact occurred on such dates. The pro forma adjustments are based upon currently available information and upon certain assumptions that management believes are reasonable. 74 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts)
For the Year Ended For the Year Ended December 31, 1997 December 31, 1996 -------------------------- -------------------------- Historical Pro Forma (1) Historical Pro Forma (1) ----------- ------------- ----------- ------------- Service and other revenue................................. 337,255 337,255 245,179 245,179 Operating expense......................................... (118,508) (118,508) (82,439) (82,439) Selling, general and administrative expense............... (119,067) (119,067) (81,176) (81,176) Depreciation and amortization............................. (132,888) (158,920) (79,832) (105,195) ---------- ---------- ---------- ---------- Net operating income (loss)............................. (33,208) (59,240) 1,732 (23,631) Interest income........................................... 6,512 6,512 2,757 2,757 Interest expense.......................................... (41,995) (83,221) (14,263) (55,465) Interest expense, related party........................... (28,743) -- (24,212) -- Provision for loss on investment related costs............ (18,888) (18,888) -- -- Foreign exchange loss and other expense................... (41,063) (32,622) (21,200) (16,906) ---------- ---------- ---------- ---------- Net loss before income taxes and other items............ (157,385) (187,459) (55,186) (93,245) Share in results of affiliated companies, net............. (20,270) (28,439) (22,286) (30,935) Minority interests in subsidiaries........................ 152 152 (2,208) (2,208) Income tax benefit (expense).............................. 1,649 1,649 (509) (509) ---------- ---------- ---------- ---------- Net loss................................................ (175,854) (214,097) (80,189) (126,897) ========== ========== ========== ========== Basic and diluted net loss per ordinary share............. (2.03) (2.75) (0.92) (1.63) ========== ========== ========== ========== Weighted-average number of ordinary shares outstanding.... 86,578,117 77,909,190 87,107,325 77,909,190 ========== ========== ========== ==========
(1) Includes additional depreciation and amortization related to the step-up in basis in tangible assets, investments in and advances to affiliated companies and new goodwill, interest expense from the Senior Revolving Credit Facility and the Bridge Bank Facility, net of elimination of historical interest expense on the PIK Notes and refinanced credit facilities, and foreign exchange loss on the U.S. dollar-denominated Bridge Bank Facility, net of elimination of historical foreign exchange loss on the PIK Notes. 75 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) The following chart presents a summary of the Company's significant investments in multi-channel television, programming and telephony operations as of December 31, 1998:
UPC Austria: Telekabel Group (''Telekabel Group'')........................... 95.0% Belgium: Radio Public N.V./S.A. (''TVD'')................................ 100.0% Czech Republic: KabelNet........................................................ 100.0% Ceska Programova Spolecnost SRO (''TV Max'').................... 100.0% France: Mediareseaux Marne S.A. (''Mediareseaux'')....................... 99.6% Hungary: Telekabel Hungary (''Telekabel Hungary'')....................... 79.3% Telekabel Hungary Programming................................... 50.0% Monor Communications Group, Inc. ("Monor")...................... 44.75% Ireland: Tara Television Limited ("Tara")................................ 80.0% Israel: (through UII) Tevel Israel International Communications Ltd. (''Tevel'')...... 46.6% Malta: (through UII) Melita Cable TV P.L.C. (''Melita'')............................. 50.0% The Netherlands: United Telekabel Holding N.V. (''UTH'') (1)..................... 51.0% Norway: Janco Multicom (''Janco Multicom'')............................. 100.0% Romania: Multicanal Holdings............................................. 100.0% Control Cable Ventures.......................................... 100.0% Eurosat......................................................... 51.0% Slovak Republic: Trnavatel....................................................... 75.0% Kabeltel........................................................ 100.0%
(1) On August 6, 1998, UPC merged its Dutch cable television systems consisting of its 50% interest in A2000 Holding N.V. (''A2000'') and its wholly owned subsidiary Cable Network Brabant Holding B.V. (''CNBH'') with those of a Dutch energy company (''NUON''), forming a new company, UTH. Following the merger, UPC held 51% of UTH. In February 1999, UPC exercised its ability to increase its interest to 100% (see Note 3). 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements of the Company have been prepared in accordance with United States generally accepted accounting principles. The preparation of financial statements in conformity with United States generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements 76 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In December 1998, UPC acquired telephony and programming assets from UIH through the issuance of new shares (see Note 3). As the acquisition was between entities under common control, the transaction was accounted for at historical cost, similar to pooling of interests accounting. It is generally accepted that, consistent with a pooling-of-interests accounting, prior period financial statements of the transferee are restated for all periods in which the transferred operations were part of parent's consolidated financial statements. Accordingly, we have restated all periods presented as if UPC had acquired the telephony and programming assets from UIH as of the date of UIH's initial investment. Principles of Consolidation The accompanying consolidated financial statements include the accounts of UPC and all subsidiaries where it exercises a controlling financial interest through the ownership of a majority voting interest, except for UTH, where because of certain minority shareholders rights the Company accounts for its investment in UTH using the equity method of accounting. All significant intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents Cash and cash equivalents include cash and investments with original maturities of less than three months. Allowance for Doubtful Accounts The allowance for doubtful accounts is based upon the Company's assessment of probable loss related to overdue accounts receivable. Upon disconnection of the subscriber, the account is fully reserved. The allowance is maintained on the books until receipt of payment, the account is deemed uncollectable or a maximum of three years. Restricted Cash Cash held as collateral for letters of credit and other loans is classified based on the expected expiration of such facilities. Costs to be Reimbursed by Affiliated Companies The Company incurs costs on behalf of affiliated companies, such as salaries and benefits, travel and professional services. These costs are reimbursed by the affiliated companies. Marketable Equity Securities of Parent The Company classifies its investments in marketable equity securities of UIH as available-for-sale and reports such investments at fair market value. Unrealized gains and losses are charged or credited to equity, realized gains and losses and other than temporary declines in market value are included in operations. 77 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) Investments in and Advances to Affiliated Companies, Accounted for under the Equity Method For those investments in companies in which the Company's ownership interest is 20% to 50%, its investments are held through a combination of voting common stock, preferred stock, debentures or convertible debt and/or the Company exerts significant influence through board representation and management authority, or in which majority control is deemed to be temporary, the equity method of accounting is used. Under this method, the investment, originally recorded at cost, is adjusted to recognize the Company's proportionate share of net earnings or losses of the affiliates, limited to the extent of the Company's investment in and advances to the affiliates, including any debt guarantees or other contractual funding commitments. The Company's proportionate share of net earnings or losses of affiliates includes the amortization of the excess of its cost over its proportionate interest in each affiliate's net tangible assets or the excess of its proportionate interest in each affiliate's net tangible assets in excess of its cost. Property, Plant and Equipment Property, plant and equipment is stated at cost. Additions, replacements, installation costs and major improvements are capitalized, and costs for normal repair and maintenance of property, plant and equipment are charged to expense as incurred. Assets constructed by subsidiaries of UPC incorporate overhead expense and interest charges incurred during the period of construction; investment subsidies are deducted. Depreciation is calculated using the straight-line method over the economic life of the asset, taking into account the residual value. The economic lives of property, plant and equipment at acquisition are as follows: Cable distribution networks......................... 7-20 years Subscriber installation costs and converters........ 5 years MMDS distribution facilities........................ 7-20 years Office equipment, furniture and fixtures............ 3-8 years Buildings and leasehold improvements................ 20-33 years Other............................................... 3-10 years Goodwill and Other Intangible Assets The excess of investments in consolidated subsidiaries over the net tangible asset value at acquisition is amortized on a straight line basis over 15 years. Licenses in newly-acquired companies are recognized at the fair market value of those licenses at the date of acquisition. Licenses in new franchise areas include the capitalization of direct costs incurred in obtaining the license. The license value is amortized on a straight-line basis over the initial license period, up to a maximum of 20 years. Recoverability of Tangible and Intangible Assets The Company evaluates the carrying value of all tangible and intangible assets whenever events or circumstances indicate the carrying value of assets may exceed their recoverable amounts. An impairment loss is recognized when the estimated future cash flows (undiscounted and without interest) expected to result from the use of an asset are less than the carrying amount of the asset. Measurement of an impairment loss is based on fair value of the asset computed using discounted cash flows if the asset is expected to be held and used. Measurement of an impairment loss for an asset held for sale would be based on fair market value less estimated costs to sell. 78 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) Deferred Financing Costs Costs to obtain debt financing are capitalized and amortized over the life of the debt facility using the effective interest method. Other Comprehensive Income The Company has adopted Statement of Financial Accounting Standards No. 130, ''Reporting Comprehensive Income'' (''SFAS 130''), which requires that an enterprise (i) classify items of other comprehensive income by their nature in a financial statement and (ii) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Revenue Recognition Revenue is primarily derived from the sale of cable television services to subscribers and is recognized in the period the related services are provided. Initial installation fees are recognized as revenue in the period in which the installation occurs, to the extent installation fees are equal to or less than direct selling costs, which are expensed. To the extent installation fees exceed direct selling costs, the excess fees are deferred and amortized over the average contract period. All installation fees and related costs with respect to reconnections and disconnections are recognized in the period in which the reconnection or disconnection occurs because reconnection fees are charged at a level equal to or less than related reconnection costs. Concentration of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables. Concentrations of credit risk with respect to trade receivables are limited due to the Company's large number of customers and their dispersion across many different countries in Europe. Stock-Based Compensation Stock-based compensation is recognized using the intrinsic value method for the Company's stock option plans, which results in compensation expense for the difference between the grant price and the fair market value at each new measurement date. Income Taxes The Company accounts for income taxes under the asset and liability method which requires recognition of deferred tax assets and liabilities for the expected future income tax consequences of transactions which have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and income tax basis of assets, liabilities and loss carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. Net deferred tax assets are then reduced by a valuation allowance if management believes it is more likely than not they will not be realized. Withholding taxes are taken into consideration in situations where the income of subsidiaries is to be paid out as dividends in the near future. Such withholding taxes are generally charged to income in the year in which the dividend income is generated. 79 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) Basic and Diluted Loss Per Share The Company has adopted Statement of Financial Accounting Standards No. 128, ''Earnings Per Share'' (''SFAS 128''). ''Basic loss per share'' is determined by dividing net loss available to ordinary shareholders by the weighted-average number of ordinary shares outstanding during each period. ''Diluted loss per share'' includes the effects of potentially issuable common stock, but only if dilutive. Therefore, the Company's stock option plans and convertible securities are excluded from the Company's diluted loss per share for all periods presented because their effect would be anti-dilutive. Foreign Operations and Foreign Exchange Rate Risk The functional currency for the Company's foreign operations is the applicable local currency for each affiliate company. Assets and liabilities of foreign subsidiaries for which the functional currency is the local currency are translated at exchange rates in effect at period-end, and the statements of operations are translated at the average exchange rates during the period. Exchange rate fluctuations on translating foreign currency financial statements into Dutch guilders that result in unrealized gains or losses are referred to as translation adjustments. Cumulative translation adjustments are recorded as a separate component of shareholders' equity included in Other Comprehensive Income (Loss). Transactions denominated in currencies other than the local currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses which are reflected in income as unrealized (based on period-end translations) or realized upon settlement of the transactions. Cash flows from the Company's operations in foreign countries are translated based on their functional currencies. As a result, amounts related to assets and liabilities reported on the consolidated statements of cash flows will not agree to changes in the corresponding balances on the consolidated balance sheets. The effects of exchange rate changes on cash balances held in foreign currencies are reported as a separate line below cash flows from financing activities. The Company and certain of its operating companies have notes payable and notes receivable that are denominated in a currency other than their own functional currency. In general, the Company and the operating companies do not execute hedge transactions to reduce the Company's exposure to foreign currency exchange rate risks. Accordingly, the Company may experience economic loss and a negative impact on earnings and equity with respect to its holdings solely as a result of foreign currency exchange rate fluctuations. On January 11, 1999, eleven of the fifteen member countries of the European Union fixed their conversion rates between their existing sovereign currencies and the Euro, eliminating the foreign exchange rate fluctuation exposure of UPC related to its operating subsidiaries in the eleven countries (includes UPC's subsidiaries in The Netherlands, Austria, Belgium, France, and Spain). UPC's investments in countries outside the eleven countries which have adopted the Euro include Norway, Hungary, Ireland, Israel and Malta. New Accounting Principles The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 131, ''Disclosures about Segments of an Enterprise and Related Information'' (''SFAS 131''), which requires that a public business enterprise report certain financial and descriptive information about its reportable segments. The Company adopted SFAS 131 for the year ended December 31, 1998. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, ''Accounting or the Costs of Computer Software Developed or Obtained for Internal Use'' (''SOP 98-1''), which provides guidance 80 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) on accounting for the costs of computer software developed or obtained for internal use. SOP 98-1 identifies the characteristics of internal-use software and provides examples to assist in determining when computer software is for internal use. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998, for projects in progress and prospectively, with earlier application encouraged. Management believes that the adoption of SOP 98-1 will not have a material effect on the financial statements. The American Institute of Certified Public Accountants recently issued Statement of Position 98-5, ''Reporting on the Costs of Start-Up Activities'' (''SOP 98-5''), which is required to be adopted by affected companies for fiscal years beginning after December 15, 1998. SOP 98-5 defines start-up and organization costs, which must be expensed as incurred. In addition, all deferred start-up and organization costs existing as of January 1, 1999 must be written-off and accounted for as a cumulative effect of an accounting change. The Company does not expect the adoption of SOP 98-5 to have a material effect on its financial position or results of operations. The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 133, ''Accounting for Derivative Instruments and Hedging Activities'' (''SFAS 133''), which requires that companies recognize all derivatives as either assets or liabilities in the balance sheet at fair value. Under SFAS 133, accounting for changes in fair value of a derivative depends on its intended use and designation. SFAS 133 is effective for fiscal years beginning after June 15, 1999. The Company is currently assessing the effect of this new standard. 3. Acquisitions and Dispositions Norkabel In October 1996, the Company increased its ownership in Norkabelgruppen A/S (''Norkabel'') from 8.3% to 100% for a purchase price of Norwegian kroner (''NKr'')32.5 million (8,811). Details of the net assets acquired were as follows (using the exchange rate as of December 31, 1996): Working capital.............................. (2,221) Property, plant and equipment................ 90,413 Goodwill and other intangible assets......... 71,509 Short-term debt.............................. (140,619) Other liabilities............................ (10,271) -------- Total cash paid.......................... 8,811 ======== The following pro forma condensed consolidated operating results for the period ended December 31, 1996 gives effect to the acquisition of Norkabel as if it had occurred at the beginning of the period presented. This pro forma condensed consolidated financial information does not purport to represent what the Company's results of operations would actually have been if such transaction had in fact occurred on such date. The pro forma adjustments are based upon currently available information and upon certain assumptions that management believes are reasonable. 81 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts)
For the Year Ended December 31, 1996 ------------------------------ Historical Pro Forma -------------- -------------- Service and other revenue...................................... 245,179 288,749 ========== ========== Net loss....................................................... (80,189) (112,671) ========== ========== Basic and diluted net loss per ordinary share.................. (0.92) (1.29) ========== ========== Weighted-average number of ordinary shares outstanding......... 87,107,325 87,107,325 ========== ==========
Janco Kabel-TV In January 1997, UPC purchased a 70.2% interest in Janco Kabel-TV A/S (''Janco'') for NKr313.8 million (85,070). Concurrent with the transaction, UPC deposited 47,000 with a bank as collateral for an obligation to seller to purchase the remaining 29.8% interest. Details of the net assets acquired at 70.2% were as follows (using the exchange rate as of December 31, 1996): Working capital.............................. (3,790) Property, plant and equipment................ 23,541 Goodwill and other intangible assets......... 69,673 Other assets................................. 57 Short-term debt.............................. (2,854) Other liabilities............................ (1,557) ------ Total cash paid.......................... 85,070 ======
In November 1997, UPC's wholly-owned subsidiary Norkabel merged with and into UPC's 70.2%-owned subsidiary, Janco, to give UPC an 87.3% interest in the new entity Janco Multicom. UPC received a call option and the minority shareholder received a put option to acquire or respectively sell all the remaining minority shareholders interest of Janco Multicom AS. In November 1998, UPC exercised its call option and acquired the remaining minority shareholder interest in Janco Multicom AS for 37,200. The residual restricted funds held with a bank as collateral were released. The following pro forma condensed consolidated operating results for the year ended December 31, 1996 gives effect to the acquisition of Janco as if it had occurred at the beginning of 1996. This pro forma condensed consolidated financial information does not purport to represent what the Company's results of operations would actually have been if such transaction had in fact occurred on such date. The pro forma adjustments are based upon currently available information and upon certain assumptions that management believes are reasonable.
For the Year Ended December 31, 1996 ------------------------------ Historical Pro Forma -------------- -------------- Service and other revenue...................................... 245,179 270,467 ========== ========== Net loss....................................................... (80,189) (93,952) ========== ========== Basic and diluted net loss per ordinary share.................. (0.92) (1.08) ========== ========== Weighted-average number of ordinary shares outstanding......... 87,107,325 87,107,325 ========== ==========
82 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) Combivisie Effective January 1, 1998, UPC acquired certain assets, including The Netherlands cable systems of Stichting Combivisie Regio (''Combivisie''), for 180,762. The purchase was funded with a 60,000 draw on the Senior Revolving Credit Facility and 120,762 of bank financing. Details of the net assets acquired were as follows: Property, plant and equipment and other assets....... 106,000 Goodwill............................................. 74,762 ------- Total cash paid.................................... 180,762 =======
The following pro forma condensed consolidated operating results for the years ended December 31, 1997 and 1996 give effect to the acquisition of Combivisie as if it had occurred at the beginning of the periods presented. This pro forma condensed consolidated financial information does not purport to represent what the Company's results of operations would actually have been if such transaction had in fact occurred on such date. The pro forma adjustments are based upon currently available information and upon certain assumptions that management believes are reasonable.
For the Year Ended For the Year Ended December 31, 1997 December 31, 1996 ------------------------------ ------------------------------ Historical Pro Forma Historical Pro Forma -------------- -------------- -------------- -------------- Service and other revenue.......... 337,255 366,227 245,179 272,322 ========== ========== ========== ========== Net loss........................... (175,854) (177,142) (80,189) (82,493) ========== ========== ========== ========== Basic and diluted net loss per ordinary share.................... (2.03) (2.05) (0.92) (0.95) ========== ========== ========== ========== Weighted-average number of ordinary shares outstanding....... 86,578,117 86,578,117 87,107,325 87,107,325 ========== ========== ========== ==========
Telekabel Hungary On June 29, 1998, UPC acquired Time Warner Entertainment Company's (''TWE'') interest in its Hungarian multi-channel television system assets for $9,500 (19,380) in cash and a non-interest bearing promissory note in the amount of $18,000 (36,720) (the ''Time Warner Note''). UPC and TWE retained their respective percentage interests in the programming assets in Hungary. UPC has granted TWE an option to acquire UPC's interest in such programming assets as well as TV Max in consideration for the cancellation of the Time Warner Note. On June 30, 1998, UPC merged its 100%-owned Hungarian multi-channel television systems (''Kabelkom'') with Hungary's second largest multiple system operator to form the new joint venture Telekabel Hungary. UPC retains a 79.25% ownership interest in the new entity. In March 1999, Time Warner exercised their option to acquire UPC's interest in the programming assets and TV Max (See Note 16.) A2000 In July 1995, prior to the formation of UPC, Philips Media and US WEST formed a 50/50 joint venture (''A2000'') for the purpose of acquiring certain cable television distribution networks in the Amsterdam, Netherlands area. In connection with this transaction Philips and US WEST borrowed NLG680 million on a bridge loan basis from a bank. Such funds were used to (i) purchase from certain municipalities licenses totaling NLG360 million (ii) make initial capital contributions to A2000 totaling NLG90 million and (iii) fund intercompany loans to A2000 totaling NLG230 million. Upon UPC's formation, Philips Media assigned its ownership interest in licenses and its investment and advances in A2000 to UPC. The following table reflects the amounts recorded on UPC's books as a result of this transaction: 83 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) Licenses 180,000 Investment and advances 160,000 Debt (340,000) Subsequently, UPC and US WEST contributed approximately NLG45 million each to a subsidiary of A2000 in order to increase its statutory equity for financing purposes. During January 1996, A2000 obtained long-term financing of NLG320 million and on behalf of UPC and US WEST reduced the bridge loan. UPC and US WEST repaid the remaining portion of the bridge loan (totaling NLG360 million) through equal contributions of NLG180 million. UPC accounted for its 50% ownership interest in A2000 (until it was contributed into UTH) as an equity method investment. UTH On August 6, 1998, UPC merged its Dutch cable television systems with those of NUON, forming a new company, UTH (the ''UTH Transaction''), which was accounted for as the formation of a joint venture with NUON's and UPC's net assets recorded at their historical carrying values. Following the merger, UPC holds 51% of UTH. The agreement provides UPC with a call option exercisable after August 6, 1999 to acquire 50% of NUON's 49% ownership interest in UTH. If UPC exercises the call option, NUON can exercise the secondary put option, requiring UPC to purchase its remaining interest in UTH. The agreement provides NUON with a put option exercisable after August 6, 1999 to require UPC to purchase 50% of NUON's 49% interest in UTH. If NUON exercises the put option, UPC can exercise the secondary call option, requiring NUON to sell its remaining interest in UTH to UPC. The UTH shareholder agreement provides for essentially joint governance by NUON and UPC on almost all significant participating and protective type rights until either the call or put option is exercised. Although UPC retains a majority economic and voting interest in UTH, because of joint governance on most significant operating decisions, UPC accounts for its investment in UTH using the equity method of accounting. On February 17, 1999, the Company acquired the remaining 49% of UTH from NUON (the "NUON Transaction") for NLG518.1 million. In addition, UPC repaid NUON and assumed from NUON a NLG33.3 million subordinated loan, including accrued interest, dated December 31, 1998, owed by UTH to NUON. The purchase of NUON's interest and payment of the loan were funded with proceeds from UPC's initial public offering. The following pro forma condensed consolidated operating results for the years ended December 31, 1998 and 1997 give effect to the UTH Transaction and the NUON Transaction as if they both had occurred at the beginning of the periods presented. This pro forma condensed consolidated financial information does not purport to represent what the Company's results of operations would actually have been if such transactions had in fact occurred on such date. The pro forma adjustments are based upon currently available information and upon certain assumptions that management believes are reasonable.
For the Year Ended For the Year Ended December 31, 1998 December 31, 1997 ----------------------------- ----------------------------- Historical Pro Forma Historical Pro Forma -------------- ------------- -------------- ------------- Service and other revenue.......... 408,970 595,011 337,255 474,488 ========== ========== ========== ========== Net loss........................... (562,884) (642,768) (175,854) (231,843) ========== ========== ========== ========== Weighted-average number of ordinary shares outstanding....... (7.22) (8.25) (2.03) (2.68) ========== ========== ========== ========== Basic and diluted net loss per ordinary share.................... 77,914,081 77,914,081 86,578,117 86,578,117 ========== ========== ========== ==========
84 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) UII In November 1998, the Company (i) acquired from TINTA its indirect 23.3% and 25% interests in the Tevel and Melita systems for $91.5 million, doubling the Company's respective ownership in these systems to 46.6% and 50%, respectively, (ii) purchased an additional 5% interest in Princes Holdings and 5% of Tara in consideration for 384,531 shares of UIH held by UPC, and (iii) sold the 5% interest in Princes Holdings, together with its existing 20% interest, to TINTA for $20.5 million. The net payment of $71.0 million to TINTA ($68.0 million after closing adjustments) was funded with the proceeds of a $90.0 million promissory note made by a subsidiary of the Company to its primary partners in the Tevel system. (see Note 9 - DIC Loan). Purchase of Certain Telephony and Programming Assets from UIH In December 1998, in exchange for 6,330,340 newly-issued ordinary shares of UPC, UIH sold to us their: . 44.75% economic interest in Monor, a traditional telephony and cable television system in the Monor region of Hungary; . 75% interest in Tara, a company providing Irish programming to the U.K. markets; and Accordingly, because this was an exchange between entities under common control, we have restated our financial statements for all periods in which the operations of these companies were part of UIH's consolidated financial statements (see Note 2). Other The assets of Intercabo, Portugal were sold in January 1998 for 4,000. During 1997, the Company made a strategic decision to sell its interest in Intercabo due to competitive factors which had recently emerged in Portugal. After several offers to purchase Intercabo were received by the Company during 1997, it became apparent that the Company's investment in Intercabo had become permanently impaired based on its decision to sell its investment. Accordingly, an impairment loss of 18,888 was recognized during 1997, which included the writedown of our investment, net of expected proceeds, of 13,436 and the writeoff of intercompany receivables of 5,452. The operating results of Intercabo included in the Company's 1997 consolidated results included revenue of 549, a net operating loss of 4,945 and a net loss of 5,227. 85 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) 4. Investments in and Advances to Affiliated Companies, Accounted for Under the Equity Method
As of December 31, 1998 ----------------------------------------------------------------------------------- Investments in and Advances to Cumulative Cumulative Affiliated Dividends Share in Results of Translation Companies Received Affiliated Companies Adjustments Total ------------------ ----------- -------------------- ------------- ------------- UTH.......... 272,508 -- (22,780) -- 249,728 Tevel (2).... 191,716 (12,121) (777) (9,562) 169,256 Melita (2)... 28,018 -- 1,985 (141) 29,862 Telekabel Hungary Programming (3).......... 24,404 -- (7,723) (787) 15,894 Monor........ 21,358 -- (4,916) (14,835) 1,607 Xtra Music... 10,598 -- (1,067) -- 9,531 Other, net... 4,568 -- 9 -- 4,577 ------- ------- ------- ------- ------- Total........ 553,170 (12,121) (35,269) (25,325) 480,455 ======= ======= ======= ======= =======
As of December 31, 1997 -------------------------------------------------------------------------------- Investments in and Advances to Cumulative Cumulative Affiliated Share in Results of Translation Companies Affiliated Companies(1) Adjustment Total ------------------ --------------------------- ------------ ------------- A2000..................... 220,933 (571) -- 220,362 UII (2)................... 103,029 (64) -- 102,965 Kabelkom.................. 57,783 247 -- 58,030 Monor..................... 21,358 (535) (5,426) 15,397 Other, net................ 3,583 -- -- 3,583 ------- ------ ------ ------- Total..................... 406,686 (923) (5,426) 400,337 ======= ====== ====== =======
86 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) The Company had the following differences related to the excess of cost over the net tangible assets acquired for its equity investments. Such differences are being amortized over 15 years:
As of December 31, 1998 As of December 31, 1997 ----------------------------- ---------------------------------- Basis Accumulated Basis Accumulated Difference Amortization Difference Amortization(1) ------------ --------------- --------------- ----------------- A2000..................... -- 231,041 -- UTH....................... 2,781 (62) -- -- Tevel (2)................. 152,417 (6,334) -- -- Melita (2)................ 24,377 (852) -- -- UII (2)................... -- -- 64,618 -- Kabelkom.................. -- -- 38,161 -- Telekabel Hungary Programming (3).......... 14,419 (570) -- -- Monor..................... 1,672 (131) 5,480 -- Xtra Music................ 6,776 (138) -- -- ------- ------ ------- -------------- Total..................... 202,442 (8,087) 339,300 -- ======= ====== ======= ==============
- -------------- (1) In connection with the UPC Acquisition, certain purchase accounting adjustments were pushed down to the financial statements of UPC, a new basis of accounting was established on December 11, 1997, and cumulative share in results of affiliated companies and accumulated amortization was reset to zero as of that date (see Note 1). (2) In November 1998 the Company acquired from TINTA its interests in Tevel and Melita, and sold its interest in Princes Holdings (see Note 3). (3) Represents the Company's remaining investment in Telekabel Hungary Programming after the transaction with TWE (see Note 3). Summary financial information for Tevel is as follows:
As of As of December 31, December 31, 1998 1997 ------------ ------------ Cash......................................................................... 60 117 Tangible fixed assets........................................................ 118,451 133,009 Other assets................................................................. 447,057 35,895 ------- ------- Total assets.............................................................. 565,568 169,021 ======= ======= Current liabilities.......................................................... 42,174 45,569 Notes payable................................................................ 20,404 11,829 Long-term debt............................................................... 426,604 9,794 Other long-term liabilities.................................................. 26,659 27,884 Shareholders' value.......................................................... 49,727 73,945 ------- ------- Total liabilities and shareholders' value................................. 565,568 169,021 ======= =======
87 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts)
For the Years Ended December 31, ---------------------------------------------- 1998 1997 1996 -------------- -------------- -------------- Revenue...................................................................... 203,662 187,099 154,647 Costs........................................................................ (80,418) (91,499) (79,221) Depreciation and amortization................................................ (47,977) (30,867) (26,839) ------- ------- ------- Net operating income......................................................... 75,267 64,733 48,587 Financial charges, including interest expense from related................... parties, and foreign exchange results....................................... (64,589) (7,948) (11,437) Net loss before income taxes and other items................................ 16,345 (5,745) 4,671 Share in results of affiliated companies..................................... (12,414) 51 2,342 ------- ------- ------- Net income.................................................................. 14,609 51,091 44,163 ======= ======= =======
Summary financial information for A2000 is as follows: As of As of July 31, 1998(1) December 31, 1997 ---------------- ----------------- Liquid assets................................................................ 2,336 6,868 Other current assets......................................................... 53,177 35,557 Financial fixed assets....................................................... 634 543 Tangible fixed assets........................................................ 341,186 309,291 Intangible fixed assets...................................................... 117,797 122,189 ------- ------- Total assets............................................................. 515,130 474,448 ======= ======= Current liabilities.......................................................... 88,372 67,652 Provisions................................................................... 1,508 2,154 Long-term debt............................................................... 479,000 426,000 Shareholders' value.......................................................... (53,750) (21,358) ------- ------- Total liabilities and shareholders' value................................ 515,130 474,448 ======= =======
For the Seven Months For the Years Ended Ended December 31, July 31, --------------------------- 1998(1) 1997 1996 ------------------ -------------- ----------- Revenue.............................. 69,668 101,450 89,893 Costs................................ (52,329) (67,687) (49,064) Depreciation and amortization........ (36,114) (50,846) (43,789) ------- ------- ------- Net operating loss.................. (18,775) (17,083) (2,960) Financial charges and other.......... (13,617) (16,751) (12,745) Income tax (provision) benefit....... -- 9,826 (224) ------- ------- ------- Net loss............................ (32,392) (24,008) (15,929) ======= ======= =======
- ---------------- (1) Effective August 6, 1998, A2000 was contributed to UTH as part of the UTH Transaction. 88 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) 5. Marketable Equity Securities of Parent As a result of the UPC Acquisition, a subsidiary of UPC acquired 3,169,151 UIH Class A Common shares, valued at fair market value of 66,809 as of December 11, 1997. In November 1998, UPC used 384,531 shares to acquire an additional 5% interest in each of Tara and PHL. Accordingly, unrealized gains recorded in equity totaling approximately 1,826, were reversed out of equity and recorded as a realized gain in the consolidated statement of operations. As of December 31, 1998, the fair value of the remaining 2,784,620 shares was 101,097, resulting in an unrealized gain of 42,397 for the year ended December 31, 1998. These shares are pledged under the Bridge Bank Facility (see Note 9). 6. Property, Plant and Equipment
As of December 31, ------------------------------ 1998 1997(1) -------------- -------------- Cable distribution networks......................... 466,087 364,655 Subscriber premises equipment and converters........ 134,527 81,301 MMDS distribution facilities........................ 13,873 12,958 Office equipment, furniture and fixtures............ 35,294 13,074 Buildings and leasehold improvements................ 12,754 3,713 Other............................................... 28,170 16,593 ------- ------- 690,705 492,294 Accumulated depreciation......................... (87,708) (7,312) ------- ------- Net property, plant and equipment................ 602,997 484,982 ======= =======
(1) In connection with the UPC Acquisition, certain purchase accounting adjustments were pushed down to the financial statements of UPC, a new basis of accounting was established on December 11, 1997, and accumulated depreciation was reset to zero as of that date (see Note 1). 7. Goodwill and Other Intangible Assets
As of December 31, ------------------------------ 1998 1997(1) --------------- ------------- Telekabel Group..................................... 389,513 389,513 Janco Multicom...................................... 165,494 152,226 CNBH(2)............................................. -- 80,491 Telekabel Hungary................................... 97,429 -- TVD................................................. 42,189 42,223 Other............................................... 24,516 27,309 ------- ------- 719,141 691,762 Accumulated amortization......................... (39,109) (1,716) ------- ------- Net goodwill and other intangible assets......... 680,032 690,046 ======= =======
(1) In connection with the UPC Acquisition, certain purchase accounting adjustments were pushed down to the financial statements of UPC, a new basis of accounting was established on December 11, 1997, and accumulated amortization was reset to zero as of that date (see Note 1). (2) Effective August 6, 1998, CNBH was contributed to UTH as part of the UTH Transaction. 89 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) 8. Short-Term Debt Time Warner Note Short-term debt as of December 31, 1998 includes the $18.0 million (34,020) non-interest bearing Time Warner Note. In December 1998, Time Warner extended the maturity date of its note for a period of 90 days to the earlier of June 30, 1999 or 90 days after written notice from Time Warner. Subsequent to December 31, 1998, the Time Warner Note was cancelled as Time Warner exercised its option to acquire our 50% interest in HBO Hungary and 100% interest in TV Max (see Note 16). Telekabel Hungary Facility In October 1998, Telekabel Hungary entered into a DM65.6 million (NLG74.0 million) six-month secured bridge facility. Availability under this facility depends on certain financial covenants. The DM49.2 million (NLG55.5 million) international tranche of the facility and half of the DM16.4 million (NLG18.5 million) local tranche bear interest at LIBOR plus 2.5% per annum plus an additional cost of funding calculation. The remaining half of the local tranche must be drawn in Hungarian forints and bears interest at Budapest interbank offered rates for Hungarian forints, plus 2.5% per annum plus an additional cost of funding calculation. Telekabel Hungary is using the facility, among other things, to finance capital expenditures and to acquire minority shares in our Kabelkom systems. We have pledged our indirect 79.25% interest in Telekabel Hungary to secure the facility. The facility also is secured by a pledge over certain assets of the Telekabel Hungary group and a negative pledge. Telekabel Hungary is currently negotiating a long-term facility with the lenders to replace this bridge facility. As of December 31, 1998, the amount outstanding under this facility totaled DM33.1 million (NLG29.3 million). 9. Long-Term Debt
As of December 31, ----------------------------- 1998 1997 -------------- ------------- Senior Revolving Credit Facility.................... 968,018 883,948 Bridge Bank Facility................................ 113,519 252,500 Mediareseaux Facility............................... 40,344 -- Bank and other loans................................ 166,387 85,471 --------- --------- 1,288,268 1,221,919 Less current portion............................. (113,519) (255,819) --------- --------- Total............................................ 1,174,749 966,100 ========= =========
Senior Revolving Credit Facility In October 1997, UPC and Norkabel as borrowers entered into a 1,100,000 multi-currency revolving credit facility with a syndicate of banks. Norkabel was succeeded as a borrower by Janco Multicom after the merger of Janco and Norkabel. In December 1997, Telekabel Wien and the other members of the Telekabel Group also became borrowers under the Senior Revolving Credit Facility. Although not a borrower, TVD is a guarantor under the Senior Revolving Credit Facility. As of December 31, 1998, the amount outstanding under the Senior Revolving Credit Facility for UPC, Telekabel Wien and Janco Multicom was NLG620.0 million, NLG213.5 million and NLG134.5 million, respectively. Amounts advanced under the Senior Revolving Credit Facility bear interest at the London interbank offered rate (''LIBOR'') plus a margin ranging from 0.5% to 2.0% per annum. The aggregate amount available for borrowing under the facility is reduced automatically by 90 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) 5.0% per quarter beginning December 31, 2001. The borrowings of the Company and its subsidiaries in Austria, Belgium and Norway are limited by financial covenants under the Senior Revolving Credit Facility. The principal amount of all borrowings by the Company and such subsidiaries may not exceed certain multiples of total annualized net operating cash flow for the Company and such subsidiaries. In addition, the principal amount of all borrowings of the Company and such subsidiaries may not exceed certain multiples of their cable television net operating cash flow. The Senior Revolving Credit Facility generally prohibits dividends and other distributions to shareholders of the Company unless, among other things, the Company achieves for at least two consecutive quarters certain financial ratios. The Senior Revolving Credit Facility also includes financial covenants relating to interest and debt service coverage and application of proceeds from asset sales and securities offerings. Borrowings by UPC and certain of its subsidiaries in Austria, Belgium and Norway, under the Senior Revolving Credit Facility together with borrowings under the Bridge Bank Facility may not exceed 1,300,000 before September 30, 2001. The Senior Revolving Credit Facility also generally limits to 80,000 UPC's investments in, loans to and guarantees for, certain of the Company's subsidiaries and downstream affiliates that are not borrowers or guarantors under the Senior Revolving Credit Facility. Subsequent to December 31, 1998, we agreed with our lenders under this facility to reduce this facility amount from NLG1.1 billion to NLG1.0 billion in February 1999. This amount will be further reduced by 5% each quarter beginning December 31, 2001 until final maturity. Subsequent to December 31,1998 we repaid NLG620.0 million, excluding interest, of the amount outstanding by us under this facility with the proceeds of the offering, which we plan subsequently to reborrow under this facility (see Note 16). Bridge Bank Facility In connection with the UPC Acquisition, the Company entered into the consolidated $125.0 million term Bridge Bank Facility with a syndicate of banks. The Bridge Bank Facility is a one year bridge originally due December 5, 1998 and bears interest at LIBOR plus a margin ranging from 4.5% to 6.0% per annum. In November 1998, the lenders granted an extension of the maturity date to June 5, 1999. The Bridge Bank Facility generally prohibits dividends and distributions and is secured by various upstream guarantees from, negative pledges over and, in some cases, share pledges of, certain share holdings or partnership interests of UPC in operating systems in The Netherlands, France, Israel and Malta, as well as a first lien over approximately 2,784,620 shares of UIH's Class A Common Stock which UPC acquired from Philips as part of the UPC Acquisition. The Bridge Bank Facility prohibits all of the companies whose interests are pledged from incurring additional indebtedness, subject to certain exceptions. The Company must apply proceeds from disposals, if any, of certain share holdings and partnership interests to prepayment of the facility, which restricts the manner and terms on which the Company may dispose of these assets. The Company must maintain on deposit with the bank a compensating balance, restricted for payment of interest, until the facility matures. The balance in this interest reserve account, including proceeds from the sale of PHL, was 30,263 as of December 31, 1998. UPC repaid $64.9 million of the Bridge Bank Facility during the year ended December 31, 1998 resulting in an outstanding amount of $60.1 million (113,519) as of December 31, 1998. Subsequent to December 31, 1998, we repaid the Bridge Bank Facility with proceeds from the offering (see Note 16). Mediareseaux Facility In July 1998, Mediareseaux entered into an 9.5 year term facility with a bank for an amount of French francs (''FRF'')680 million (''Mediareseaux Facility''). The purpose of the facility is to finance on-going capital expenditures, working capital and acquisitions with a limit of FRF120 million. The Me'diare'seaux Facility bears interest at LIBOR plus a margin ranging from 0.75% to 2.0%. The availability of the facility depends on revenue generated and debt to equity ratios. The availability period ends at December 31, 2002. The repayment period starts from January 1, 2003 to final maturity in 2007. During the repayment period, Mediareseaux must apply 50% of its excess cash flow in prepaying the facility. The Mediareseaux Facility generally restricts the payment of dividends and distributions. This facility also restricts Mediareseaux from incurring additional indebtedness, subject to certain exceptions. In July 1998, Mediareseaux secured a 91 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) 9.5 year FRF20.0 million overdraft facility, subject to the same terms and conditions as the Mediareseaux Facility except that the availability tests are not applicable. As of December 31, 1998 an amount of FRF13.6 million (40,344) was outstanding under the Mediareseaux Facility. DIC Loan In November 1998, a subsidiary of Discount Investment Corporation (''DIC'') loaned the Company a total of $90.0 million (the ''DIC Loan'') to acquire the additional interests in Tevel and Melita. The DIC Loan matures in November 2000 and is secured by the Company's pledge of its ownership interest in Tevel. The DIC Loan bears interest at 8% and is payable, together with 106% of the principal amount, on maturity. The DIC Loan may be repaid on quarterly prepayment dates with three months' prior notice by the Company. In connection with the DIC Loan, UPC granted to an affiliate of DIC an option to acquire a total of $90.0 million, plus accrued interest, of ordinary shares of UPC at a price equal to 90% of the initial public offering price. The exercise price of this option, which expires upon the initial public offering, is payable in cash or delivery of the DIC Loan promissory notes. UPC allocated the $90 million in loan proceeds between the debt instrument and the equity option element on the basis of relative fair values. Accordingly, the effective interest rate on the debt instrument exceeds the stated rate as set forth above. Subsequent to December 31, 1998, the option agreement was amended, resulting in a grant of two options of $45 million each. DIC exercised its option for $45.0 million (see Note 16). Debt Maturities The maturities of the Company's long-term debt are as follows: 12 months ended December 31, 1999.............. 113,519 12 months ended December 31, 2000.............. 160,152 12 months ended December 31, 2001.............. -- 12 months ended December 31, 2002.............. 88,018 12 months ended December 31, 2003.............. 224,034 Thereafter..................................... 702,545 --------- Total...................................... 1,288,268 =========
Fair Value of Financial Instruments Fair value is based on market prices for the same or similar issues. Carrying value is used when a market price is unavailable.
Fair ------------ Book Value Market Value ----------- ------------ As of December 31, 1998: Senior Revolving Credit Facility......... 968,018 968,018 Bridge Bank Facility..................... 113,519 113,519 Mediareseaux Facility.................... 40,344 40,344 Bank and other loans..................... 166,387 166,387 Note payable to UIH(1)................... 163,425 163,425 Time Warner Note......................... 34,020 34,020 Telekabel Hungary Facility............... 29,297 29,297 --------- --------- Total................................. 1,515,010 1,515,010 ========= =========
(1) See Note 15 for terms of the note payable to UIH. 92 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) 10. Shareholders' Equity In February 1999, the Company's shareholders approved an amendment and restatement of the Company's Articles of Association to effect a 3 for 2 stock split and an increase in the number of authorized ordinary shares to 200,000,000, which was legally effected before the Company's planned initial public offering. Therefore, all share and per share amounts in the accompanying consolidated financial statements and notes thereto have been retroactively restated to reflect this event. The Company's shareholders also approved the issuance of 100 priority shares, which have special approval and other rights, to UIH. In addition, the Company's Articles of Association were amended and restated to provide for the issuance of 49,999,900 Class A preference shares and 200,000,000 Class B preference shares. General The equity classifications and amounts as stated in these consolidated financial statements do not necessarily reflect the statutory equity of the Company, as the statutory equity is subject to Dutch generally accepted accounting principles. The statutory equity is the basis for any distributions to shareholders. As of December 31, 1998, the Company is unable to make dividend distributions to shareholders because of its accumulated deficit. UIH Indenture As a subsidiary of UIH, the Company's activities are restricted by the covenants in UIH's indenture dated February 5, 1998 (the ''UIH Indenture''). The UIH Indenture generally limits the additional amount of debt that UPC or its subsidiaries or controlled affiliates may borrow, or preferred shares that they may issue. Generally, additional borrowings, when added to existing indebtedness, must satisfy, among other conditions, at least one of the following tests: (i) 7.0 times the borrower's consolidated operating cash flow; (ii) 1.75 times its consolidated interest expense; or (iii) 225% of the borrower's consolidated invested equity capital. In addition, there must be no existing default under the UIH Indenture at the time of the borrowing. The UIH Indenture also restricts UPC's ability to make certain asset sales and certain payments. In connection with the initial public offering, UPC has agreed with UIH that it will not take any action during the term of the UIH Indenture that would result in a breach of the UIH Indenture covenants. The maturity date of the UIH Indenture is February 2008 and interest becomes payable in cash in February 2003. Stock Option Plan In June 1996, UPC adopted a stock option plan (the ''Plan'') for certain of its employees and those of its subsidiaries. There are 6,000,000 total shares available for the granting of options under the Plan, which are held by the Stichting Administratiekantoor UPC (the ''Foundation''), which administers the Plan. Each option represents the right to acquire from the Foundation a certificate representing the economic value of one share. Following consummation of the initial public offering, any certificates issued to employees who have exercised their options will be convertible into UPC common stock. UIH appoints the board members of the Foundation and thus controls the voting of the Foundation's common stock. The options are granted at fair market value determined by the Company's Supervisory Board at the time of the grant. The maximum term that the options can be exercised is five years from the date of the grant. In order to introduce the element of ''vesting'' of the options, the Plan provides that even though the options are exercisable immediately, the shares to be issued or options granted in 1996 vest in equal monthly increments over a three-year period from the effective date set forth in the option grant. In March 1998, the Plan was revised to increase the vesting period for any new grants of options to four years, vesting in equal monthly increments. Upon termination of an employee (except in the case of death, disability or the like), all unvested 93 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) options previously exercised must be resold to the Foundation at the original purchase price, or all vested options must be exercised, within 30 days of the termination date. The Supervisory Board may alter these vesting schedules in its discretion. An employee has the right at any time to put his certificates or shares from exercised vested options to the Foundation at a price equal to the fair market value. The Company can also call such certificates or shares for a cash payment upon termination in order to avoid dilution, except for certain awards, which can not be called by the Company until expiration of the underlying options. The Plan also contains anti-dilution protection and provides that, in the case of change of control, the acquiring company has the right to require UPC to acquire all of the options outstanding at the per share value determined in the transaction giving rise to the change of control. A summary of stock option activity for the Plan is as follows:
For the Years Ended December 31, -------------------------------------------------------------------------------------- 1998 1997 1996 ---------------------------- --------------------------- --------------------------- Weighted- Weighted- Weighted- Number Average Number Average Number Average of Exercise of Exercise of Exercise shares Price shares Price shares Price -------------- ------------ ------------- ------------ ------------- ------------ Outstanding at beginning of period....................... 2,241,552 10.49 2,300,417 10.49 -- -- Granted during period............. 2,343,000 12.10 -- -- 3,990,000 10.49 Cancelled during period........... (14,052) 10.49 (58,865) 10.49 (9,583) 10.49 Exercised during period........... (375,000) 10.49 -- -- (1,680,000) -- --------- ----- --------- ----- ---------- ----- Outstanding at end of period...... 4,195,500 11.39 2,241,552 10.49 2,300,417 10.49 ========= ===== ========= ===== ========== ===== Vested at end of period(1)........ 4,340,008 10.79 3,197,331 10.49 1,786,898 10.49 ========= ===== ========= ===== ========== ===== Exercisable at end of period(1)... 4,195,500 11.39 2,241,552 10.49 2,300,417 10.49 ========= ===== ========= ===== ========== =====
- --------------- (1) Includes certificate rights as well as options. The Company granted no stock options during the year ended December 31, 1997. The combined weighted-average fair values and weighted-average exercise prices of options granted during the year ended December 31, 1998 and the year ended December 31, 1996 are as follows:
For the Year Ended For the Year Ended December 31, 1998 December 31, 1996 -------------------------------- ------------------------------ Number Fair Exercise Number Fair Exercise Options Value Price Options Value Price ----------- --------- -------- ----------- ------- -------- Exercise price equal to market price........ 2,343,000 12.10 12.10 3,990,000 10.49 10.49
94 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) The following table summarizes information about stock options outstanding, vested and exercisable as of December 31, 1998:
Weighted-Average Number Remaining Number Number of Options Contractual Life of Options of Options Exercise Price Outstanding (Years) Vested Exercisable - ------------------ ----------- ----------------- ----------- ----------- 10.49.......... 1,852,500 2.47 3,487,118 1,852,500 12.00.......... 2,195,250 4.63 838,859 2,195,250 13.57.......... 147,750 4.71 14,031 147,750 --------- ---- --------- --------- 4,195,500 3.68 4,340,008 4,195,500 ========= ==== ========= =========
The Plan is accounted for as a variable plan because, based on the Plan's provisions, the rights conveyed to employees are the substantive equivalents to stock appreciation type rights. Accordingly, compensation expense is recognized at each financial statement date based on the difference between the grant price and the estimated fair value of the Company's common stock. Compensation expense of 268,109, 4,818 and 0 was recognized for the years ended December 31, 1998, December 31, 1997 and December 31, 1996, respectively. The Company's estimate of the fair value of its common stock as of December 31, 1998 utilized in recording compensation expense under the Plan was NLG63.91, which is the initial public offering price. Because the Company will account for the Plan as a variable plan up until the consummation date of its initial public offering, and thereafter as a fixed plan due to modifications to the Plan which will occur on that date, the total compensation expense and deferred compensation expense recognized related to options granted as of December 31, 1998 will not increase. Phantom Stock Option Plan As of March 1998, the Company adopted a phantom stock option plan (the ''Phantom Plan'') which permits the grant of phantom stock rights in up to 2,400,000 shares of the Company's common stock. The rights are granted at fair market value determined by the Company's Supervisory Board at the time of grant, and generally vest in equal monthly increments over the four-year period following the effective date of grant and may be exercised for ten years following the effective date of grant. The Phantom Plan gives the employee the right to receive payment equal to the difference between the fair market value of a share of UPC common stock and the option base price for the portion of the rights vested. UPC, at its sole discretion, may make payment in (i) cash, (ii) freely tradable shares of UIH Class A Common Stock or (iii) if the Company's stock is publicly traded, freely tradable shares of its stock. If the Company chooses to make a cash payment, even though its stock is publicly traded, employees have the option to receive an equivalent number of freely tradeable shares of stock instead. Concurrent with the approval of the Phantom Plan, the Supervisory Board ratified the grant of 1,232,250 and 825,000 phantom stock rights at base prices of 12.00 and 13.57, respectively, and specified retroactive vesting for several of the grants. The Phantom Plan contains anti- dilution protection and provides that, in certain cases of a change of control, all phantom options outstanding become fully exercisable. 95 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) A summary of stock option activity for the Phantom Plan is as follows:
For the Year Ended December 31, 1998 -------------------------- Weighted- Number Average of Exercise Share Price ------------ ------------ Outstanding at beginning of period -- -- Granted during period............................. 2,057,500 12.63 Cancelled during period........................... -- -- Exercised during period........................... -- -- --------- ----- Outstanding at end of period...................... 2,057,500 12.63 ========= ===== Vested and exercisable at end of period........... 470,469 12.15 ========= =====
The combined weighted-average fair values and weighted-average exercise prices of options granted during the year ended December 31, 1998 are as follows:
Number Fair Exercise Options Value Price ----------- --------- --------- Exercise price equal to market price.............. 2,057,250 12.63 12.63
The following table summarizes information about stock options outstanding, vested and exercisable as of December 31, 1998:
Weighted- Average Number of Number of Remaining Options Options Contractual Life Vested and Exercise Price Outstanding (years) Exercisable - ------------------ --------------- ------------------- ----------------- 12.00............. 1,232,250 8.54 425,469 13.57............. 825,000 9.70 45,000 --------- ---- ------- 2,057,250 9.00 470,469 ========= ==== =======
The Phantom Plan is accounted for as a variable plan in accordance with its terms, resulting in compensation expense for the difference between the grant price and the fair market value at each financial statement date. Compensation expense of 52,374 was recognized for the year ended December 31, 1998. The Company's estimate of the fair value of its common stock as of December 31, 1998 utilized in recording compensation expense under the Phantom Plan was NLG63.91, which is the initial public offering price. Subsidiary Stock Option Plan As of June 1998, the Company adopted a phantom stock option plan (the ''chello Plan''), which permits the grant of phantom stock rights in up to 1,500,000 shares of chello, a wholly owned subsidiary of the Company. The rights are granted at fair market value determined by chello's Supervisory Board at the time of grant, and generally vest in equal monthly increments over the four-year period following the effective date of grant and may be exercised for ten years following the effective date of grant. The chello Plan gives the employee the right to receive payment equal to the 96 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) difference between the fair market value of a share of chello and the option base price for the portion of the rights vested. UPC, at its sole discretion, may make payment in (i) cash, (ii) freely tradable shares of UIH Class A Common Stock or (iii) if the Company's stock is publicly traded, freely tradable shares of its stock. If the Company chooses to make a cash payment, even though its stock is publicly traded, employees have the option to receive an equivalent number of freely tradable shares of stock instead. Concurrent with the approval of the chello Plan, the Supervisory Board ratified the grant of 570,000 options at a base price of 10.00, and specified retroactive vesting for several of the grants. As of December 31, 1998, the Company had recorded compensation expense of 2,144 for options granted under the chello Plan. A summary of stock option activity for the chello broadband Plan is as follows:
For the Year Ended December 31, 1998 -------------------------- Weighted- Number Average of Exercise Shares Price ------------ ------------ Outstanding at beginning of period -- -- Granted during period............................ 570,000 10.00 Cancelled during period.......................... -- -- Exercised during period.......................... -- -- ------- ----- Outstanding at end of period..................... 570,000 10.00 ======= ===== Vested and exercisable at end of period.......... 70,625 10.00 ======= =====
The weighted-average remaining contractual life for these options is 9.47 as of December 31, 1998. 11. Commitments The Company has entered into various operating lease agreements for office space, office furniture and equipment, and vehicles. Rental expense under these lease agreements totaled 8,057, 6,863 and 4,989 for the years ended December 31, 1998, December 31, 1997 and December 31, 1996 respectively. The Company has operating lease obligations as follows: 12 months ended December 31, 1999............................ 11,054 12 months ended December 31, 2000............................ 8,770 12 months ended December 31, 2001............................ 6,848 12 months ended December 31, 2002............................ 4,854 12 months ended December 31, 2003 and thereafter............. 4,346 ------ Total.................................................... 35,872 ======
A2000 Funding In September 1998, UTH entered into a subordinated loan agreement to provide funding up to $30,000 for A2000. UTH's share of the funding is $15,000. UPC is obligated to fund drawdowns on the loan in proportion to its 51% ownership in UTH (representing a total funding obligation of $7,650). As of December 31,1998, UPC had funded $3,750 of its commitment. Subsequent to year end, the Company provided a letter of support to A2000 stating that it would continue to 97 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) provide to A2000 the funding necessary to continue operations through at least 1999. 12. Contingencies Legal The Company is not a party to any material legal proceedings, nor is it currently aware of any threatened material legal proceedings. From time to time, the Company may become involved in litigation relating to claims arising out of its operations in the normal course of its business. Foreign Currency Exposure The Bridge Bank Facility, the loan payable to UIH and the DIC loan are denominated in U.S. dollars, totaling US$236.5 million as of December 31, 1998. The Company has not executed any foreign forward exchange contract, or used any other financial instrument, to hedge against this foreign currency exposure. The Bridge Bank Facility and the UIH loan have been repaid subsequent to the public offering. Of the $90.0 million DIC loan, $45.0 million has been repaid concurrent with the public offering. 13. Income Taxes In general, a Dutch holding company may benefit from the so-called participation exemption. The participation exemption is a facility in Dutch corporate tax law which allows a Dutch company to exempt any dividend income and capital gains in relation with its participation in subsidiaries which are legal entities of a foreign country. Capital losses are also exempted, apart from liquidation losses (under stringent conditions). All costs incurred at the UPC level which relate to an investment in a foreign subsidiary are not tax deductible, e.g. interest expense on loans used for the financing of the investment in the foreign subsidiary. In addition, currency exchange results on these loans are covered by the participation exemption, e.g. gains are exempted and losses are not tax deductible. For companies which only act as pure holding companies, only the capital tax paid is tax deductible. For UPC, the primary difference between taxable loss and net loss for financial reporting purposes relates to the non-consolidation of its consolidated foreign subsidiaries for Dutch tax purposes. The consolidated financial statements have been prepared assuming partial tax basis for license fees capitalized relating to certain acquisitions. Deferred taxes have been provided for that portion of the licenses which management believes no tax basis will be allowed. 98 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) The significant components of the net deferred tax liability are as follows:
As of December 31, ------------------------------ 1998 1997 -------------- -------------- Deferred Tax Assets: Tax net operating loss carryforward............ 137,033 149,802 Stock-based compensation....................... 13,636 -- Other.......................................... 805 540 -------- -------- Total deferred tax assets................... 151,474 150,342 Valuation allowance............................ (135,545) (136,580) -------- -------- Deferred tax assets, net of valuation allowance................................. 15,929 13,762 -------- -------- Deferred Tax Liabilities: Intangible assets.............................. (11,061) (48,077) Property, plant and equipment, net............. (13,525) (10,193) -------- -------- Total deferred tax liabilities.............. (24,586) (58,270) -------- -------- Deferred tax liabilities, net............... (8,657) (44,508) ======== ========
The difference between income tax expense provided in the financial statements and the expected income tax benefit at statutory rates is reconciled as follows:
For the Years Ended December 31, ------------------------------------- 1998 1997 1996 ----------- ----------- ----------- Expected income tax benefit at the Dutch statutory rate of 35%.............. (174,768) (55,085) (19,315) Tax effect of permanent and other differences: Change in valuation allowance.......... 51,471 27,471 14,555 Non-deductible expenses................ 117,925 19,583 3,829 International rate differences......... 3,520 3,232 1,105 Provision on investment................ 2,180 6,611 -- Other.................................. (1,543) (163) (683) -------- ------- ------- Total income tax benefit............ (1,215) 1,649 (509) ======== ======= =======
Tax loss carry forwards arise primarily in Norway, The Netherlands, Czech Republic and Austria. The tax loss carry forwards of Norway, aggregating to 277,929 as of December 31, 1998 will expire during the years 1999-2008. The tax loss carry forwards of The Netherlands, Belgium and Austria of 117,115 as of December 31, 1998 have no expiration date. The tax loss carry forwards of the Czech Republic of 29,677 as of December 31, 1998 will expire in the years 2001- 2005. 99 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) During 1996, the Austrian tax authorities passed legislation which had the effect of eliminating approximately 256,000 of tax basis associated with certain amounts of goodwill recorded at Telekabel Group effective January 1, 1997. This change in tax law is expected to be challenged on constitutional grounds. However, there can be no assurance of a successful repeal of such legislation. Accordingly, this change caused Telekabel Group's effective tax rate to increase from the historical effective tax rate through December 31, 1996, due to the non-deductibility of such goodwill amortization subsequent to January 1, 1997. 14. Segment and Geographic Information Information On December 31, 1998, the Company adopted Statement of Financial Accounting Standards No. 131 "Disclosure About Segments of an Enterprise and Related Information" ("SFAS 131"). The new rules establish revised standards for public companies relating to the reporting of financial information about operating segments. The adoption of SFAS 131 did not have a material effect on the Company's consolidated financial statements but did affect the Company's segment information disclosure. The Company's business has historically been derived from our video entertainment segment. This service has been provided in various European countries where the Company owns and operates it systems. During 1997, the Company introduced internet/data and during 1999 the Company will be introducing telephony in several of its systems. To date, revenues and net operating results from these services have not been significant and therefore segment information for these services is not provided. The Company evaluates performance and allocates resources at the geographic country level. The key operating performance criteria used in this evaluation includes revenue growth, operating income before depreciation, amortization and stock-based compensation expense ("Adjusted EBITDA"), and capital expenditures. The Company does not view segment results below Adjusted EBITDA, therefore, net interest expense, foreign exchange gain (loss), share in results of affiliated companies, minority interests in subsidiaries and income tax expense are not broken out by segment below. A summary of the segment information by geographic area is as follows:
For the Year Ended December 31, 1998 December 31, 1998 -------------------------------------- ---------------------------------------- Depreciation Investments Long- & Adjusted in Lived Total Revenue Amortization EBITDA Affiliates Assets Assets Capex --------- --------------- ---------- ----------- ------- --------- ------- The Netherlands: - Corporate, UPC TV............. 17,762 (9,478) (12,286) 480,455 5,171 554,668 2,423 - chello........................ -- -- (15,854) -- 4,581 6,617 4,588 - Priority Telecom.............. -- (22) (3,516) -- 31 174 31 - Operating Companies........... 33,273 (13,794) 22,088 -- -- -- 18,578 Austria.......................... 177,151 (77,281) 81,012 -- 265,640 644,791 82,501 Belgium.......................... 37,634 (20,486) 13,263 -- 52,085 109,331 19,760 Czech Republic................... 8,909 (7,702) (1,887) -- 16,512 21,730 1,041 Norway........................... 92,671 (45,316) 33,048 -- 119,704 414,038 51,193 Hungary.......................... 27,706 (6,725) 9,989 -- 50,629 164,280 13,386 France........................... 8,058 (4,129) (5,077) -- 76,220 96,563 52,394 Other............................ 5,806 (2,713) (9,345) -- 12,424 42,991 6,816 ------- -------- ------- ----------- ------- --------- ------- Total........................ 408,970 (187,646) 111,435 480,455 602,997 2,055,183 252,711 ======= ======== ======= =========== ======= ========= =======
100 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts)
For the Year Ended December 31, 1997 December 31, 1997 ------------------------------------- ---------------------------------------- Depreciation Investments Long- & Adjusted in Lived Total Revenue Amortization EBITDA Affiliates Assets Assets Capex --------- -------------- ---------- ----------- ------- --------- ------- The Netherlands: - Corporate, UPC TV............. 9,228 (3,271) (12,205) 400,337 1,787 495,383 6,534 - Operating Companies........... 20,669 (8,372) 12,719 -- 40,174 128,609 7,953 Austria.......................... 162,783 (50,187) 80,508 -- 233,887 653,062 59,913 Belgium.......................... 38,738 (14,252) 15,049 -- 49,542 99,392 11,584 Czech Republic................... 7,492 (5,471) (6,730) -- 17,956 30,089 4,214 Norway........................... 91,529 (47,703) 36,927 -- 103,765 435,345 20,647 Hungary.......................... -- -- -- -- -- -- -- France........................... 2,526 (1,416) (4,634) -- 28,159 36,769 22,809 Other............................ 4,290 (2,216) (17,136) -- 9,712 23,743 3,656 ------- -------- ------- ----------- ------- --------- ------- Total........................ 337,255 (132,888) 104,498 400,337 484,982 1,902,392 137,310 ======= ======== ======= =========== ======= ========= =======
For the Year Ended December 31, 1996 --------------------------------------------- Depreciation & Adjusted Revenue Amortization EBITDA ------------- -------------- -------------- The Netherlands: - Corporate.................... 4,433 (2,873) (13,528) - Operating companies.......... 21,633 (7,267) 11,298 Austria.......................... 156,964 (42,762) 81,618 Belgium.......................... 37,704 (13,206) 14,592 Czech Republic................... 7,746 (5,574) (7,477) Norway........................... 14,541 (6,969) 6,347 Hungary.......................... -- -- -- France........................... 179 (281) (4,421) Other............................ 1,979 (900) (6,865) ------- ------- ------- Total.......................... 245,179 (79,832) 81,564 ======= ======= =======
15. Related Party Agreement with UIH In February 1999, UIH and the Company became parties to a Management Service Agreement (the ''UIH Service Agreement''), with an initial term through 2009, pursuant to which UIH will provide services such as accounting, financial reporting, investor relations, human resources, information technology, equipment procurement and testing expenses, corporate offices lease payments and costs associated with corporate finance activities. Under the UIH Service Agreement, the Company will pay UIH a fixed amount each month (initially $0.3 million). After the first year of the UIH Service Agreement, the fixed amount may be adjusted from time to time by UIH to allocate corporate level expenses among UIH's operating companies, including UPC, taking into account the relative size of the operating companies and their estimated 101 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) use of UIH resources. In addition, UPC will continue to reimburse UIH for costs incurred by UIH which are directly attributable to UPC. The UIH Service Agreement also specifies the basis upon which UIH may second certain of its employees to UPC. The Company generally is responsible for all costs incurred by UIH with respect to any seconded employee's employment and severance. Historically, UPC has been self sufficient from a corporate operations perspective and required nominal assistance from its shareholders, Philips and UIH, and solely from UIH subsequent to December 11, 1997. UIH and Philips did not allocate any indirect overhead type costs to the Company from inception through December 11, 1997 and UIH did not allocate any such costs subsequent to December 11, 1997 through December 31, 1998. The only costs historically charged to UPC were direct costs incurred by Philips and UIH on UPC's behalf. Such costs were charged at cost. In connection with the Company's initial public offering, UIH and the Company executed the UIH Service Agreement which will provide for a fixed allocation in addition to direct out-of-pocket reimbursements. Related Party Payables The Company classifies any unpaid invoices related to seconded employee expenses or other expenses incurred by UIH on the Company's behalf as related party payables on the balance sheet. Loans to Employees In 1996, UPC loaned certain employees of the Company amounts for the exercise of the employees' stock options, taxes on options exercised, or both. These recourse loans bear interest at 5.0% per annum. The employees' liability to the Company is presented in the consolidated financial statements net of the Company's obligation to the employees under the plan. As of December 31, 1998 and 1997, the receivable from employees, including accrued interest totaled 19,177 and 18,561, respectively. Note Payable to Shareholder UPC has entered into two promissory notes with UIH of $100.0 million (March 1998) and $20.0 million (July 1998). UPC has borrowed $70.0 million and $16.0 million, respectively, under these two notes (together, this ''UIH Loan'' totals 163,425 as of December 31, 1998). The UIH Loan bears interest at 10.75% per annum, is due in 2001, and is convertible at UIH's option into ordinary shares of UPC at 12.00 per share (March 1998) and 13.57 per share (July 1998). Total accrued interest as of December 31, 1998 was $6.1 million (11,587). Subsequent to December 31, 1998, UPC repaid $60.0 million (NLG120 million) of the indebtedness outstanding under the $100.0 million note and all of the indebtedness outstanding under the $20.0 million note with proceeds form the initial public offering (see Note 16). Acquisitions of Interest in PHL and TARA In November 1998, we purchased from RCL, an entity owned by a discretionary trust for the benefit of the members of the family of John Riordan, a member of the Board of Management, (1) a 5% interest in Tara and (2) a 5% interest in our Irish operating system. The price for these interests was 384,531 shares of UIH Class A Common Stock that we acquired as part of the UPC Acquisition. 102 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) PIK Notes In conjunction with the formation of UPC in July 1995, UPC issued to Philips $133.6 million of convertible subordinated pay-in-kind notes due January 1, 2005. The PIK Notes had an interest rate of 10.0% and were convertible ordinary shares of UPC at $5.55 per share prior to the repayment date. In conjunction with the UPC Acquisition on December 11, 1997, 170,371 of the outstanding PIK Notes balance was paid by UPC, and UIH acquired the remaining outstanding balance of 169,899. UIH then converted such PIK Notes into 15,180,261 ordinary shares of UPC at a conversion rate of 11.19 per share (see Note 1). 16. Subsequent Events Initial Public Offering During February 1999, the Company successfully completed an initial public offering selling 44.6 million shares on the Amsterdam Stock Exchange and Nasdaq National Market System and raising gross and net proceeds from the offering of approximately NLG2,850.3 million and NLG2,705.8 million, respectively. Concurrent with the offering, DIC exercised one of its two option agreements acquiring approximately 1.6 million shares for NLG89.6 million. Proceeds from the sale of the shares to DIC were used to replay $45.0 million of the DIC Loan and related interest. Also concurrent with the offering, proceeds were used to reduce the Senior Revolving Credit Facility (NLG635.8 million, including accrued interest of NLG15.8 million), repay in its entirety the Bridge Bank Facility (NLG110.0 million, net of the interest reserve account), acquire NUON's 49% interest in UTH (NLG518.1 million), and the purchase from NUON of a NLG33.0 million subordinated loan from UTH, including accrued interest (NLG33.3 million). Subsequent to the offering, we also repaid $80.0 million (NLG156.0 million) of the note payable to UIH. Refinancing UTH Subsequent to December 31, 1998, UTH replaced their existing NLG690.0 million facility with a senior facility and additional shareholder loans. The senior facility consists of a Euro 340 million (NLG750 million) revolving facility to N.V. Telekabel that will convert to a term facility on December 31, 2001. Euro 5 million of this facility will be in the form of an overdraft facility that will be available until December 31, 2007. This facility was used to repay a portion of the UTH facility and for capital expenditures. The new facility will bear interest at the Euro Interbank Offered Rate plus a margin between 0.75% and 2.00% based on leverage multiples tied to N.V. Telekabel's net operating income. The new facility is secured, among other things, by a pledge over shares held by the borrower and will restrict N.V. Telekabel's ability to incur additional debt. Relationship with Microsoft On January 25, 1999, UPC and Microsoft Corporation signed a letter of intent providing for the establishment of a technical services relationship. In connection with this letter of intent, we have agreed to grant Microsoft warrants to purchase up to 3,800,000 shares or ADSs at Microsoft's option, at an exercise price of $28.00. Half of these warrants will be issued at the earlier of April 25, 1999 and the signing of the first definitive agreement. These warrants will be exercisable after one year from issuance for a period of three years. The other half of the warrants will be issued upon the signing of the first definitive agreement. This half of the warrants will vest and become exercisable based on performance criteria to be established in the definitive agreements, although they also will not be exercisable until at least one year after the date of the closing of UPC's initial public offering. The first half of the warrants are for the right to negotiate to license technology from Microsoft under definitive agreements to be negotiated in the future. UPC expects to record as contract acquisition rights approximately NLG64.4 million associated with the first half of the warrants. Such costs are expected to 103 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) be amortized on a straight-line basis over the expected contract life, which is yet to be determined. The accounting for the cost associated with the second half of the warrants will depend on the ultimate nature of the performance criteria giving rise to the earn-out of these warrants. These warrants will be recorded as such at fair value when it is probable the performance criteria will be met in accordance with EITF Issue No. 96-18. DIC Loan In connection with the loan from DIC, we granted the Discount Group, our partner in the Israeli system, an option to $90.0 million, plus accrued interest, ordinary shares at a price equal to 90% of the initial public offering price. Subsequent to December 31, 1998, we negotiated an amendment to this option, resulting in an option to acquire $45.0 million, plus accrued interest, of ordinary shares at a price equal to 90.0% of the initial public offering price, and, if this option is exercised, another option to acquire $45.0 million, plus accrued interest, of ordinary shares at a price equal to the 30 day average closing price of our shares on the Amsterdam Stock Exchange, or the initial public offering price, whichever is higher. At the IPO, DIC exercised the first option and thus acquired 1,558,654 ordinary shares of UPC. The other option is exercisable until September 30, 2000. Acquisition of Bratislavia Cable TV System In March 1999, UPC reached final agreement with Siemens Austria ("Siemens") to purchase Siemens' 95.63% interest in SKT s.r.o., the company that owns and operates the cable TV system in Bratislava, Slovak Republic. The completion of the purchase is subject to obtaining the approval of regulatory authorities. The purchase price for the 95.63% interest is approximately NLG77.5 million ($41 million). Purchase of IPS from UIH In February 1999, UIH sold to us, in exchange for 4,955,264 of our ordinary shares, UIH's approximately 33.5% interest in IPS, a group of programming entities focusing on the Spanish-and Portuguese-speaking markets. IPS had revenues of approximately NLG34.0 million for the year ended December 31, 1998. Exercise of Time Warner Option Subsequent to December 31, 1998, the Time Warner Note was cancelled as Time Warner exercised its option to acquire our 50% interest in HBO Hungary and 100% interest in TV Max. Agreement for the Purchase of Time Warner Cable France In March 1999, UPC and Time Warner Entertainment reached a definitive agreement for the purchase by UPC of 100% of Time Warner Cable France, a company which controls and operates three cable TV systems in the suburbs of Paris and Lyon and the city of Limoges. Completion of the purchase, which is subject to regulatory approval, is expected to take place in the third quarter of 1999. 104 Item 9. Changes in and Disagreements with Accountants on Accounting and - ------- --------------------------------------------------------------- Financial Disclosure -------------------- None. 105 PART III -------- Item 10. Management - -------------------- Supervisory Board Our general affairs and business and the board that manages us are supervised by a Supervisory Board appointed by the general meeting of shareholders upon proposal of UIH as the holder of our priority shares. Mr. Gene Schneider, UIH's Chairman and Chief Executive Officer and the former Chairman of the Supervisory Board, resigned from the Supervisory Board in February 1999. Pursuant to the rules and procedures of the Supervisory Board, he became a non-voting advisor to the Supervisory Board and has the right to attend and participate in the meetings of the Supervisory Board. Other than the Supervisory Directors that Philips or the Discount Group may appoint directly, although it has not yet done so, the Supervisory Directors are appointed at the general meeting of shareholders from a list proposed by UIH as the holder of our priority shares. The proposal may be set aside by two-thirds of the votes cast at the general meeting of shareholders representing more than one-half of the issued nominal capital. In addition, the Discount Group, our partner in our Israeli system, has the right to nominate a Supervisory Director. The Supervisory Directors and Advisor are:
Name Age Position - ------------------------------ ----------- --------------------------------------- Michael T. Fries........... 36 Chairman of the Supervisory Board John P. Cole, Jr........... 68 Supervisory Director Richard De Lange........... 53 Supervisory Director Antony P. Ressler.......... 38 Supervisory Director Ellen P. Spangler.......... 50 Supervisory Director Tina Wildes................ 38 Supervisory Director Gene W. Schneider.......... 72 Advisor
Michael T. Fries has been a member of the Supervisory Board since September 1998 and the Chairman since February 1999. He is also President of UIH and President and Chief Executive Officer of UIH Latin America, Inc., a wholly-owned subsidiary of UIH, positions he has held since September 1998. Mr. Fries also serves as President and Chief Executive Officer of UIH Asia/Pacific Communications, Inc., a majority-owned subsidiary of UIH, positions he has held since June 1995 and December 1996, respectively. Prior to becoming President of UIH Asia/Pacific Communications, Inc., Mr. Fries served as UIH's Senior Vice President, Development, in which capacity he was responsible for managing UIH's acquisitions and new business development activities since March 1990, including UIH's expansion into the Asia/Pacific, Latin American and European markets. John P. Cole Jr. became a member of the Supervisory Board in February 1999 and has been a director of UIH since March 1998. Mr. Cole has practiced law in Washington, D.C. since 1956 and has been counsel over the years in many landmark proceedings before the U.S. Federal Communications Commission, reflecting the development of the cable television industry. In 1966, he founded the law firm of Cole, Raywid & Braverman, a 30-lawyer firm specializing in all aspects of communications and media law. Mr. Cole is also a director of Century Communications Corporation. Richard De Lange has been a member of the Supervisory Board since April 1996. Since October 1998, Mr. De Lange has been Chairman of the Dutch Philips organization (Philips Nederland B.V. and Nederlandse Philips Bedrijven B.V.). He also continues to serve as President and Chief Executive Officer of Philips Media B.V., which position he assumed in February 1996. From April 1995 until October 1998, Mr. De Lange was Chairman and Managing Director of Philips Electronics UK Ltd. Previously, Mr. De Lange served since 1970 in various capacities with subsidiaries of Philips, including President of Philips Lighting Europe from December 1990 until April 1995. Antony P. Ressler became a member of the Supervisory Board in February 1999 and has been a director of UIH since October 1993. Mr. Ressler is one of the founding principals of Apollo Advisors, L.P. and Ares Management, L.P., which through several funds represent institutional investors with respect to corporate acquisitions and securities investments. Mr. Ressler is also a director of Allied Waste Industries, Inc., Vail Resorts, Inc. and Koo Koo Roo Enterprises, Inc. Ellen P. Spangler became a member of the Supervisory Board in February 1999. Ms. Spangler is the Senior Vice President of Business and Legal Affairs and Secretary of UIH, positions she has held since December 1996. Prior to assuming her current positions, she served as a Vice President of UIH where her responsibilities included business and legal 106 affairs, programming and assisting on development projects. Prior to joining UIH in January 1991, she served as Director of Business Affairs, Programming at Tele-Communications, Inc. from 1987 to 1991 and as Acquisitions Counsel at Tele- Communications, Inc. from 1984 to 1987. Tina Wildes became a member of the Supervisory Board in February 1999. Ms. Wildes is the Senior Vice President of Operations and Development Oversight of UIH, a position she has held since May 1998. From October 1997 until May 1998, Ms. Wildes served as Senior Vice President of Programming for UIH. From 1994 to 1997, she was Regional Vice President of UIH Latin America, Inc. From 1988 to 1994, Ms. Wildes served as either a director or vice president for development, programming and operations for several of UIH's European operating companies, including operations in Sweden, Norway, Malta, Israel, Spain and Portugal. Gene W. Schneider served as a member of the Supervisory Board from July 1995 until February 1999, when he became an advisor to the Supervisory Board. Mr. Schneider is also the Chairman of the Board of Directors of UIH, a position he has held since its inception in May 1989. In addition to serving as UIH's Chairman, Mr. Schneider has served as UIH's Chief Executive Officer since October 1995. From October 1995 until September 1998, Mr. Schneider also served as UIH's President. The Supervisory Board has an Audit Committee and a Compensation Committee. Both committees are comprised of Mr. Fries, Ms. Spangler and Ms. Wildes. Family Relationships --------------------- Tina Wildes, a member of the Supervisory Board, and Mark L. Schneider, the Chairman of our Board of Management and our Chief Executive Officer, are sister and brother. Gene W. Schneider is their father. No other family relationships exist between any other members of our Supervisory Board or Board of Management. Board of Management and Other Key Employees The members of the Board of Management and our other key employees are:
Name Age Position - ------------------------------ ---------- ------------------------------------------------ Board of Management Mark L. Schneider............ 43 Chairman of Board of Management and Chief Executive Officer John F. Riordan.............. 55 Vice Chairman of Board of Management and President, Advanced Communications; Chief Executive Officer, chello broadband J. Timothy Bryan............. 38 Board of Management Member, President and Chief Financial Officer Anton H.E. v. Voskuijlen..... 41 Board of Management Member, Senior Vice President, Legal and General Counsel Nimrod J. Kovacs............. 49 Board of Management Member and Managing Director, Eastern Europe Other Key Employees Scott Bachman................ 43 Managing Director, Technology and Purchasing Charlie Bracken.............. 32 Managing Director of Strategy, Acquisitions and Corporate Development
107 Steven D. Butler............... 39 Managing Director, UPC Capital and Treasurer Simon Oakes.................... 42 Managing Director, Programming Ray D. Samuelson............... 45 Managing Director, Finance and Accounting Joseph Webster................. 36 Managing Director, Telephony Services and Chief Executive Officer, Priority Telecom Mark L. Schneider has been our Chief Executive Officer and Chairman of our Board of Management since April 1997. Since December 1996, he has served as Executive Vice President of UIH and President and Chief Executive Officer of UIH Europe/Middle East Communications, Inc. and from May 1996 to December 1996, Mr. Schneider was Chief of Strategic Planning and Operational Oversight of UIH. He served as President of UIH from July 1992 until March 1995 and was Senior Vice President of UIH from May 1989 until July 1992. Mr. Schneider also worked as a consultant for UIH from March 1995 to May 1996. Mr. Schneider has been a member of the board of directors of UIH since 1993. John F. Riordan was appointed our Executive Vice President in March 1998, and a member of our Board of Management in September 1998. In September 1998, Mr. Riordan was appointed Vice Chairman and President of our Advanced Communications division, overseeing implementation of our Internet/data services and digital distribution platform. In March 1999, Mr Riordan was also appointed as CEO of chello broadband. From April 1997 until March 1998, he was a member of our Supervisory Board. Mr. Riordan also has served as a director of UIH since March 1998. Mr. Riordan was Chairman and Chief Executive Officer from 1992 to November 1998 of Princes Holdings Limited, the Irish multi-channel television operating company of which we owned 20% until its sale in November 1998. From 1987 to 1990, Mr. Riordan was chairman of the Riordan Group. J. Timothy Bryan has been our President and Chief Financial Officer and a member of our Board of Management since September 1998. Prior to that, he served as a member of our Supervisory Board since December 1996. He was also Chief Financial Officer, Treasurer and Assistant Secretary of UIH from December 1996 until September 1998. From 1993 until joining UIH, Mr. Bryan served as Treasurer of Jones Financial Group, Inc., an affiliate of Jones International Limited, where he was primarily responsible for corporate finance activities. Mr. Bryan also served as Treasurer of Jones Intercable, Inc. from 1990 until 1993. Anton H.E. v. Voskuijlen has served as our Senior Vice President and Managing Director, Legal and General Counsel since April 1997, where he is responsible for all of our legal affairs, and a member of our Board of Management since September 1998. From July 1996 until April 1997, Mr. van Voskuijlen served as our Vice President and General Counsel. From March 1994 until joining us, he served as Vice President, Business Affairs and Legal Counsel of Philips Media in New York, New York and prior to that time, Mr. van Voskuijlen spent 15 years as an attorney with the Philips Group in its mergers & acquisitions and corporate legal departments in Eindhoven, The Netherlands. Nimrod J. Kovacs was appointed our Managing Director of Eastern Europe in March 1998 and a member of our Board of Management in September 1998. He has served in various positions with UIH, including President of UIH Programming, Inc., since December 1996, President, Eastern Europe Electronic Distribution & Global Programming Group from January to December 1996 and Senior Vice President, Central/Eastern Europe from March 1991 until December 1995. Scott Bachman has served as our Managing Director of Technology and Purchasing since February 1998. From March 1996 until February 1998, Mr. Bachman was our Vice President of Engineering and the Chief Technology Officer. From April 1991 to March 1996, Mr. Bachman was Vice President of Operations & Technology Projects for Cable Television Laboratories, Inc. Charles H. R. Bracken was appointed Managing Director of Strategy, Acquisitions and Corporate Development in March 1999, responsible for the group's activities in these areas. From 1994 to 1999 Mr. Bracken held a number of appointments at Goldman Sachs International in London, most recently as Executive Director, Communications, Media and Technology. While at Goldman Sachs, Mr. Bracken was responsible for providing merger and corporate finance advice to a number of communications companies including UPC. Steven D. Butler was appointed Managing Director of UPC Capital and our Treasurer in February 1998, responsible for all corporate and project debt/equity financing activities, as well as banking and investor relations. From July 1995 until 108 February 1998, Mr. Butler served as our Vice President and Treasurer. Prior to that, Mr. Butler served as Director of Finance at UIH since May 1991. Simon Oakes was appointed our Managing Director of Programming in March 1998, responsible for our programming operations and development activities. From 1994 until joining us, Mr. Oakes independently developed and produced feature films including Single Girls' Diary (Granada Films), The Main of Buttermere (Tribeca and United Artists) and Cave (Working Title and Polygram). From 1989 until 1994, Mr. Oakes served as Co-chairman of Crossbow Films, a film production company. Ray D. Samuelson was appointed our Managing Director of Finance and Accounting in February 1998, responsible for all of our accounting, reporting, budgeting, management information systems and administrative activities. From our formation in July 1995 until February 1998, Mr. Samuelson served as Vice President of Finance & Accounting. From 1992 to 1995, he was Vice President of Finance and Administration of the Cable Operations Division at UIH. Prior to Mr. Samuelson's appointment with UIH, he was seconded as a US WEST employee from 1990 to 1992 as the Chief Financial Officer of UIH's and US WEST's Norwegian, Swedish and Hungarian cable television partnership. From 1978 to 1990, he was a certified public accountant with Arthur Andersen & Co. Joseph Webster has served as our Managing Director of Telephony Services since February 1998 and is also the Chief Executive Officer of Priority Telecom. From February 1997 until his appointment with us, Mr. Webster served as Regional Vice President & General Manager at Time Warner Communications in Raleigh, North Carolina. From February 1994 to January 1997, Mr. Webster served as Vice President & General Manager at Time Warner Communications, where he was responsible for a start-up provider of competitive telecommunications services. From May 1993 to February 1994, Mr. Webster served as Vice President of Teleport Communications Group in Detroit, Michigan. 109 Item 11. Executive Compensation - -------------------------------- The following table sets forth the 1998 compensation for our current and former chief executive officers, the four other highest compensated executive officers at fiscal year end 1998 and two other executive officers that were not executive officers at fiscal year end 1998. Summary Compensation Table
Annual Compensation(1) ------------------------------------ Other Annual All Other ------------ --------- Name and Principal Position Salary Bonus Compensation(2) Compensation(3) - --------------------------- ------ ----- --------------- --------------- (Dutch guilders) Mark L. Schneider(4).......................... 738,010 -- -- 9,557 Chief Executive Officer J. Timothy Bryan(5)........................... 597,300 210,262 1,657 9,557 President and Chief Financial Officer Gene Musselman(6)............................. 499,663 149,325 7,403 142,442 Chief Operating Officer, Telekabel Wien Margaret M. Houlihan(7)....................... 449,637 -- 46,310 176,205 Former Managing Director, Video Services Nimrod Kovacs(8).............................. 547,525 -- 1,657 9,557 Managing Director, Eastern Europe Michael Simmons(9)............................ 448,509 -- -- 76,208 Former Managing Director, Portugal
- ---------------- (1) Compensation amounts (except for automobile allowance payments and school fees, if applicable, which were paid in Dutch guilders) for the persons identified above were converted from U.S. dollars to Dutch guilders using the 1998 average exchange rate. (2) Consisted of automobile lease, operating and maintenance payments, and health and life insurance payments for some of the executive officers listed above. (3) Our executive officers who are United States citizens were employed by UIH and seconded to us during 1998. UIH compensates all United States citizens working for us outside the United States for certain expenses and adjustments related to non-U.S. assignments and we reimburse UIH for such expenses. These expenses and adjustments include home leave payments for trips back to the employee's home country, housing allowance and school tuition fees for the employee's children. See ''-- Agreements with Executive Officers''. Certain compensation identified in this column also consisted of matching employer contributions under UIH's employee 401(k) plan or our pension plan, as applicable. (4) Mr. Schneider was appointed as our Chief Executive Officer in April 1997 but continued to serve as a consultant for UIH until September 1998. The salary amount shown consisted of the total salary paid to Mr. Schneider for his duties to us and UIH. Other compensation consisted of matching employer contributions under UIH's employee 401(k) plan. (5) Mr. Bryan was appointed as our President and Chief Financial Officer in September 1998, prior to which time he was the Chief Financial Officer of UIH. The salary amount shown consisted of the total salary paid to Mr. Bryan for his duties to us and UIH. Mr. Bryan received a performance-based bonus for 1998. Other annual compensation consisted of health and life insurance payments and other compensation consisted of matching employer contributions under UIH's employee 401(k) plan. (6) Mr. Musselman received a performance-based bonus for 1998. Other annual compensation consisted of health and life insurance payments. Other compensation consisted of NLG132,885 related to Mr. Musselman's non-U.S. assignment and NLG9,557 of matching employer contributions under UIH's employee 401(k) plan. (7) Ms. Houlihan is no longer our employee. Other annual compensation consisted of NLG38,657 for Ms. Houlihan's automobile allowance and NLG7,659 for health and life insurance payments and other compensation consisted of NLG166,648 related to Ms. Houlihan's non-U.S. assignment and NLG9,557 of matching employer contributions under UIH's employee 401(k) plan. (8) Mr. Kovacs was appointed as our Managing Director of Eastern Europe in President and Chief Financial Officer in March 1998. The salary amount shown consisted of the total salary paid to Mr. Kovacs for his duties to us and UIH. Other annual compensation consisted of health and life insurance payments and other compensation consisted of matching employer contributions under UIH's employee 401(k) plan. (9) We sold our interest in our Portuguese system in February 1998. Mr. Simmons no longer is our employee. Other annual compensation consisted of health and life insurance payments and other compensation consisted of NLG66,651 related to Mr. Simmons' non-U.S. assignment and NLG9,557 of matching employer contributions under UIH's employee 401(k) plan. 110 The following table sets forth information concerning options that were granted by us to the executive officers listed in the Summary Compensation Table above during the fiscal year ended December 31, 1998. Option Grants in Last Fiscal Year
Individual Grants Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option Term (1) - ---------------------------------------------------------------------------------------------------------------------------- Number of Securities Percentage of Total Underlying Options Granted to Options Granted Employees in Fiscal Exercise Price (#) Year (NLG/Share) Expiration Date 5% (NLG) 10%(NLG) - ---------------------------------------------------------------------------------------------------------------------------- Mark L. Schneider 975,000 41.6% NLG12.00 12/6/03 75,747,750 91,221,000 - ----------------------------------------------------------------------------------------------------------------------------
(1) The potential realizable value is based on assumed annual rates of stock price appreciation from our initial public offering, NLG63.91, to the end of the option term. The following table sets forth information with respect to the executive officers listed in the Summary Compensation Table above holding unexercised options as of December 31, 1998. The value of unexercised in-the-money options represents the difference between the price of the ordinary shares in our initial public offering, NLG63.91, and the exercise price of the options, which is NLG12.00 for Mr. Schneider's options and NLG10.43 for Ms Houlihan's options. See ''-- Stock Option Plans'' and ''Security Ownership of Certain Beneficial Owners and Management''. Aggregated Fiscal Year-end Option Values
Number of Securities Underlying Unexercised Options Value of Unexercised at Fiscal Year-End In-the-Money Options ------------------------------- ------------------------------------- Name Exercisable Unexercisable Exercisable Unexercisable - ------------------------- ------------- ---------------- ------------------ ----------------- Mark L. Schneider 406,250 568,750 NLG21,088,438 NLG29,523,812 Margaret M. Houlihan 225,000 0 12,033,000 0
Agreements with Executive Officers - ----------------------------------- We do not have employment agreements with any of the executive officers listed in the above table. Mr. Simmons had an employment agreements with UIH that has been terminated. Mr. Schneider has a consulting agreement with UIH and upon his appointment as president, Mr. Bryan entered into an employment agreement with UIH. Mr. Musselman also has an employment agreement with UIH. We and UIH are parties to a Secondment Agreement, pursuant to which Mr. Schneider and Mr. Bryan, together with all of our other U.S. citizen employees, are seconded to us. See ''Relationship with UIH and Related Transactions''. Pursuant to the Secondment Agreement, we reimburse UIH for all expenses incurred by UIH in connection with the seconded employees. Mr. Schneider's consulting agreement with UIH is for a term of five years and expires May 31, 2000. Mr. Schneider receives a fee of NLG759,000 per year. If Mr. Schneider is terminated without cause or dies prior to the end of the term of the agreement, he or his personal representative shall receive all payments due under the agreement through its term. Mr. Bryan's employment agreement with UIH is for a term expiring on March 31, 2001. Mr. Bryan's employment agreement provides for an initial base salary of NLG607,200 which was increased to NLG667,920 on January 1, 1999, and is subject to periodic adjustments. In addition to his base salary, Mr. Bryan is also entitled to tax equalization payments and other amounts related to his non-U.S. assignment. If Mr. Bryan's employment is terminated, other than for cause as specified in the agreement, he is entitled to receive the balance of payments due under the remaining term of the agreement. Stock Option Plans Equity Stock Option Plan. Under our stock option plan, the Supervisory Board may grant incentive stock options to our employees. There are 6,000,000 total shares available for the granting of options under our stock option plan. Options 111 under our stock option plan must be granted at fair market value (as determined by the Supervisory Board) at the time of grant. The ordinary shares available under our stock option plan are held by Stichting Administratiekantoor UPC, a stock option foundation, which administers our stock option plan. Each option represents the right to acquire from the foundation a depositary receipt representing the economic value of one share. Upon termination of the lock-up period following consummation of the offering, any depositary receipts issued to employees who have exercised their options will be convertable into ordinary shares. UIH appoints the board members of the foundation and thus controls the voting of the foundation's ordinary shares. Proceeds from the exercise of these options remain in the foundation. Upon liquidation of the foundation, any remaining assets revert to UIH. All options are exercisable upon grant and for the next five years. In order to introduce the element of ''vesting'' of the options, our stock option plan provides that even though the options are exercisable immediately, the shares to be issued or options granted in 1996 are deemed to ''vest'' 1/36th each month for a three-year period from the date of option grant. The date of option grant is generally the employee's employment commencement date. For options granted in 1998 and thereafter, the vesting period has been increased to four years and the options vest 1/48th each month. No options were granted in 1997. If the employee's employment terminates other than in the case of death, disability or the like, all unvested options previously exercised must be resold to the foundation at the original purchase price, or all vested options must be exercised, within 30 days of the termination date. The Supervisory Board may alter these vesting schedules in its discretion. Our stock option plan contains limited anti-dilution protection in the case of stock splits, stock dividends and the like. Our stock option plan also provides that, in the case of change of control, the acquiring company has the right to require us to acquire all of the options outstanding at the per share value determined in the transaction giving rise to the change of control. In 1996, we loaned the following officers the amounts indicated to enable such officers either to exercise stock options to acquire our shares, to pay the tax on such exercise or both: Scott Bachman (exercise and tax, NLG1,635,835); Steve Butler (exercise and tax, NLG1,226,877); Ray Samuelson (exercise and tax, NLG2,453,750); Michael Simmons (exercise and tax, NLG787,000); David D'Ottavio (exercise and tax, NLG6,543,340); and Anton H.E. van Voskuijlen (tax only, NLG106,245). In 1998, we loaned Mr. van Voskuijlen NLG40,500 (tax only) in relation to an additional grant. These recourse loans, except for Mr. van Voskuijlen's, bear interest at the Dutch statutory rate. For 1998, this rate was 6% per annum. All loans made in 1996 are due 18 months after the date of this offering. Mr. van Voskuijlen's loans are due upon exercise of his options and do not bear interest. Through December 31, 1998, options to acquire a total of 6,492,000 shares have been granted under the Plan. Of these, options representing 375,000 shares have been exercised and resold to the foundation and, therefore, are available for future option grants. Options representing 123,182 shares have been cancelled. The exercise prices for the options range from NLG10.49 to NLG13.57. In March 1998, we granted Mark Schneider options for 975,000 shares at an exercise price of NLG12.00, the price at which shares were sold in the UPC Acquisition in December 1997. Phantom Stock Option Plan. Under our phantom stock option plan, the Supervisory Board has granted certain employees the right to receive a cash amount equal to the difference between the fair market value of the shares and the stated grant price for a specified number of phantom options. Through December 31, 1998, options representing 2,162,500 phantom shares remained outstanding. The grant prices for the phantom options range from NLG12.00 to NLG13.57. The phantom options have a four-year vesting period and vest 1/48th each month. The phantom options may be exercised during the period specified in the option certificate, but in no event, later than ten years following the date of grant. 744,100 of the outstanding phantom options were fully vested on December 31, 1998. Our phantom stock option plan contains limited anti-dilution protection in the case of stock splits, stock dividends and the like. Our phantom stock option plan also provides that, in certain cases of a change of control, all phantom options outstanding become fully exercisable. Our phantom stock option plan also provides that upon the offering, an employee holding phantom options may convert these into options for shares under our stock option plan. If the employee elects not to do so, upon exercise of the phantom options we may elect to issue such number of shares equal to the value of the cash difference in lieu of paying the cash. Limitation of Liability and Indemnification Matters Pursuant to Dutch law, each member of the Supervisory Board and Board of Management is responsible to us for the proper performance of his or her assigned duties. Our articles of association provide that the adoption by the general meeting of shareholders of the annual accounts shall discharge the Supervisory Board and Board of Management from liability in respect of the exercise of their duties during the financial year concerned unless an explicit reservation is made 112 by the general meeting of shareholders. This discharge of liability also may be limited by mandatory provisions of Dutch law, such as in the case of bankruptcy, and this discharge only extends to actions or omissions not disclosed in or apparent from the adopted annual accounts. In case of such actions or omissions, the members of the Supervisory Board or Board of Management will be jointly and severally liable toward third parties for any loss sustained by such third parties as a result of such actions or omissions, unless the Supervisory Board or Board of Management member proves that he or she is not responsible for the actions or omissions. Generally, under Dutch law, directors will not be held personally liable for decisions made with reasonable business judgment. Our articles of association also provide that we must indemnify any person who: . is or was a member of the Supervisory Board or the Board of Management, . suffers any loss as a result of their position as a member of such boards, and . acted in good faith in carrying out their duties. This indemnification does not apply if the person seeking indemnification is found to have acted with gross negligence or wilful misconduct in the performance of their duty to us unless the court in which the action is brought determines that indemnification is appropriate. A majority of the members of the Supervisory Board must approve any indemnification unless the entire Supervisory Board is named in the lawsuit, in which case the indemnification may be approved by independent legal counsel in a written opinion or by the general meeting of shareholders. The Supervisory Board may extend the indemnification provisions of our articles of association to any of our officers, employees or agents. Compensation of Supervisory Board Members All of the members of the Supervisory Board, other than Mr. De Lange and the additional independent director to be nominated by the Discount Group, are directors or employees of UIH. None of these members receive additional compensation for serving on the Supervisory Board. Compensation of Management Board Members The aggregate 1999 salary compensation for the entire Board of Management is approximately NLG3,111,000. In addition, we provide our executive officers with automobile allowances and other benefits. Expatriates also receive housing allowances, foreign tax equalization payments and other compensation relating to their foreign assignments. Compensation Committee Interlocks and Insider Participation We and UIH have concluded a secondment arrangement, pursuant to which certain U.S. citizens employed by UIH are seconded to us. See ''Relationship with UIH and Related Transactions''. To date, compensation for all members of our management who are employees of UIH has been set by the compensation committee of UIH and compensation for all of our other employees has been determined by the Supervisory Board. Our Supervisory Board intends to establish a compensation committee following the completion of this offering composed of members of the Supervisory Board. The members of our management that are employees of UIH, however, will continue to have their compensation set by the UIH's compensation committee. None of the members of the UIH compensation committee or our Supervisory Board has served as a director or member of a compensation committee of another company that had any executive officer that was also one of our Supervisory Directors or a member of the compensation committee of UIH. 113 Item 12. Security Ownership of Certain Beneficial Owners and Management - ------------------------------------------------------------------------- The following table sets forth certain information concerning the ownership of all classes of securities as of February 1, 1999, by (1) each shareholder who is known by us to own beneficially more than 5% of the outstanding ordinary shares at such date; (2) each of our Supervisory Directors and our advisor to the Supervisory Board; (3) each of our executive officers; and (4) all of our Supervisory Directors, advisors and executive officers as a group. Because Messrs. G. Schneider, Cole, Ressler, M. Schneider and Riordan are directors of UIH, they may be deemed to own beneficially our shares held by UIH. They disclaim any beneficial ownership of these shares and this table does not include those shares.
Ordinary Shares --------------------------- Beneficial Owner Number Percentage - ----------------------------------------------------------------- ----------- -------------- United International Holdings, Inc.(1) ......................... 80,734,292 62.5% Microsoft Corporation(2) ....................................... 10,157,750 7.9% Gene W. Schneider .............................................. -- -- Michael T. Fries ............................................... -- -- John P. Cole, Jr. .............................................. -- -- Richard De Lange ............................................... -- -- Antony P. Ressler .............................................. -- -- Ellen P. Spangler .............................................. -- -- Tina Wildes .................................................... -- -- Mark L. Schneider(3) ........................................... 975,000 * J. Timothy Bryan ............................................... -- -- John F. Riordan(4) ............................................. 525,000 * Nimrod J. Kovacs ............................................... -- -- Anton H.E. v. Voskuijlen(5) .................................... 300,000 * All directors, director nominees and executive officers as a group (11 persons) ............................................ 1,800,000 1.4
- --------------------------- * Less than 1%. (1) Includes 3,646,823 ordinary shares held by the stock option foundation, the board members of which are appointed by UIH. The address of United International Holdings, Inc. is 4643 South Ulster Street, Suite 1300, Denver, Colorado 80237, U.S.A. (2) The address of Microsoft Corporation is One Microsoft Way, Redmond, Washington 98052. (3) Mr. M. Schneider holds currently exercisable options for 975,000 ordinary shares of which options for 528,125 ordinary shares are subject to our repurchase right, which expires April 1, 2001. (4) Mr. Riordan holds currently exercisable options for 525,000 ordinary shares of which options for 284,375 ordinary shares are subject to our repurchase right, which expires April 1, 2001. (5) Represents currently exercisable options for 300,000 ordinary shares of which options for 54,687 ordinary shares are subject to our repurchase right, which expires January 1, 2002. 114 Item 13. Certain Transactions and Relationships - ------------------------------------------------- Relationship with Philips We began operations as a joint venture between UIH and Philips in July 1995. Both shareholders contributed various assets to us. In December 1997, we and UIH acquired all of Philips' interest in us. As part of this transaction, we purchased from Philips: . 3.17 million shares of UIH Class A Common Stock for NLG66.8 million, the then-current market value of such shares, . a portion of the pay-in-kind convertible notes at their fully accreted value for NLG170.4 million, and . 16.252 million ordinary shares for NLG292.6 million. We also converted the remaining pay-in-kind convertible notes purchased by UIH into 15.18 million ordinary shares. One of the Supervisory Board members, Mr. De Lange, continues to be a member of the Supervisory Board pursuant to amendments to our articles of association in connection with the acquisition of UPC. Under our articles of association, Philips may appoint and remove one of our Supervisory Directors, so long as Philips has any liability in respect of the agreements relating to the Telekabel Wien system, which is expected to terminate by 2006. We have agreed to indemnify Philips against such liability. We and UIH have agreed to use our reasonable best efforts to obtain the release of Philips by the City of Vienna from such liability. Philips' representative on the Supervisory Board must approve (1) the disposition of assets aggregating more than 30% of the consolidated assets or generating more than 30% of the consolidated revenues of the Telekabel Group, or (2) our merger or consolidation into any other entity that is not wholly owned by UIH. Loans to Executive Officers In 1996, we loaned Mr. van Voskuijlen NLG106,245 and in 1998, we loaned him NLG40,500 to enable him to pay the tax on the stock options received in those years. These recourse loans bear no interest. The loans are due upon exercise of his options. We made similar loans to other employees for the purpose of exercising and/or paying tax on options. The Discount Group's Option In connection with the DIC Loan, we granted an option to the Discount Group, our partner in our Israeli system, to acquire ordinary shares at a price per share equal to the price in this offering, discounted by a factor of 10%. The Discount Group exercised its option and we issued 1,558,654 ordinary shares to it at the same time as the closing of our initial public offering. The aggregate purchase price for the shares was equal to the sum of $45 million, plus interest thereon at the rate of 8% per annum from November 9, 1998 through the closing of the exercise of the option. The Discount Group currently owns about 1.3% of our outstanding ordinary shares. In connection with the exercise of the option, we have agreed to enter into a registration rights agreement with the Discount Group and a shareholders' agreement with the Discount Group and UIH. Under the shareholders' agreement, UIH has agreed to vote in favor of one supervisory board member nominated by the Discount Group for as long as the Discount Group and its affiliates retain at least the number of ordinary shares originally acquired upon the exercise of the option. In addition, the Discount Group will receive the right to participate on equal terms in connection with sales of ordinary shares by UIH, including the right to sell the Discount Group's entire interest in us in connection with a sale by UIH of a controlling interest in us. The Discount Group will also receive the right to negotiate with UIH prior to certain sales of ordinary shares by UIH. UIH will receive a right of first refusal with respect to a sale of ordinary shares by the Discount Group and the right to require that the Discount Group agree to a merger or sale of all of our shares proposed by UIH. In addition, there are certain limited restrictions on the entities or persons to whom the Discount Group may transfer its ordinary shares. Upon the exercise of the option, the Discount Group received an additional option to acquire ordinary shares from us at a price per share equal to the greater of (1) the price in our initial public offering or (2) the average sale price of our ordinary shares on the Amsterdam Stock Exchange for the 30-day period immediately preceding the exercise date. The 115 aggregate purchase price for the ordinary shares purchased pursuant to the additional option would be equal to the sum of $45 million, plus interest thereon at the rate of 8% per annum from November 9, 1998 through the closing of the additional option. The transfer rights and restrictions set forth in the registration rights agreement and the shareholders' agreement discussed above will be applicable with respect to the ordinary shares acquired by the Discount Group upon the exercise of the additional option. The additional option will terminate if it is not exercised on or before September 30, 2000. Relationship With UIH and Related Transactions UIH is a leading provider of video, voice and data services outside the United States. Together with its strategic and financial partners, UIH has ownership interests in multi-channel television systems in operation or under construction in over 20 countries. UIH's operations are organized in three geographic regions: (1) Europe, consisting of UIH's interest in us; (2) Asia/Pacific, including investments in operating systems and development projects in Australia, New Zealand, the Philippines, Tahiti and China; and (3) Latin America, including multi-channel television systems in Brazil, Chile, Mexico and Peru. Control by UIH. Immediately prior to our initial public offering, UIH held effectively all of the voting control over us and held all of our issued and outstanding ordinary shares, other than approximately 7.7% of such shares that have been registered in the name of the stock option foundation to support our stock option plan. The shares registered in the name of the foundation currently represent 4.8% of our issued and outstanding ordinary shares. UIH appoints the board members of the foundation and thus controls the voting of these shares as well. See ''Management -- Stock Option Plan''. UIH currently owns approximately 62% of our outstanding ordinary shares and all of our outstanding priority shares. Because we are a strategic holding of UIH, UIH will continue to control us for the foreseeable future. Five members of our six-member Supervisory Board are directors, officers or employees of UIH. Transactions with UIH. As part of the acquisition of UPC, we acquired approximately 3.17 million shares of UIH's Class A Common Stock. We subsequently sold 384,531 of these shares for certain interests in the Irish system and Tara. We currently hold approximately 2.8 million shares, which currently represents approximately 7% of UIH's outstanding common stock. We have given UIH the right to acquire these shares of UIH Class A Common Stock at their market value, based on a ten-trading day average. UIH has sold to us, in exchange for 6,330,340 of our ordinary shares, UIH's 37.5% voting and 44.75% economic interest in Monor and its interest in the Tara programming joint venture. UIH has also sold to us its interest in the IPS programming joint venture in exchange for 4,955,264 ordinary shares. Agreements with UIH. Subject to certain limitations, beginning one year after the date of our initial public offering, UIH may require us to file a registration statement under the Securities Act of 1933 with respect to all or a portion of UIH's ordinary shares or ADSs, and we are required to use our best efforts to effect such registration, subject to certain conditions and limitations. We are not obligated to effect more than three of these demand registrations using forms other than Form S-3 or F-3, as the case may be. UIH may demand registration of such securities an unlimited number of times on Form S-3 or F-3, as the case may be, except that we are not required to register UIH's ordinary shares on Form S-3 more than once in any six-month period. UIH also has the right to have its ordinary shares included in any registration statement we propose to file under the Act except that, among other conditions, the underwriters of any such offering may limit the number of shares included in such registration. We have also granted UIH rights comparable to those described above with respect to the listing or qualification of the ordinary shares held by UIH on the Amsterdam Stock Exchange or on any other exchange and in any other jurisdiction where we previously have taken action to permit the public sale of our securities. UIH incurs certain overhead and other expenses at the corporate level on behalf of us and its other operating companies. These include expenses not readily allocable among the operating companies, such as accounting, financial reporting, investor relations, human resources, information technology, equipment procurement and testing expenses, corporate offices lease payments and costs associated with corporate finance activities. UIH also incurs direct costs for its operating companies such as travel and salaries for UIH employees performing services on behalf of its respective operating companies. We and UIH are parties to a management service agreement, with an initial term through 2009, pursuant to which UIH will continue to perform these services for us. Under the management service agreement, we will pay UIH a fixed amount each month as its portion of such unallocated expenses. This fixed amount is initially $300,000 per month. After the first year of the management services agreement, the fixed amount may be adjusted from time to time by UIH to allocate these corporate level expenses among UIH's operating companies, including us, taking into account the relative size of the operating companies and their estimated use of UIH resources. In addition, we will continue to reimburse UIH for costs incurred by UIH that are directly attributable to us. 116 We and UIH are also parties to a secondment agreement that specifies the basis upon which UIH may second certain of its employees to us. UIH's secondment of employees to us helps us attract and retain U.S. citizens and other employees who want U.S. benefit plans, without creating a separate U.S. employment subsidiary. We generally are responsible for all costs incurred by UIH with respect to any seconded employee's employment and severance. UIH may terminate a seconded employee's employment if the employee's conduct constitutes willful misconduct that is materially injurious to UIH. During the year ended December 31, 1997, we incurred approximately NLG11.9 million for costs associated with the seconded employees, reimbursable to UIH. [REVISE TO REFLECT FINAL TERMS] We have agreed with UIH that so long as UIH holds 50% or more of our outstanding ordinary shares, (1) UIH will not pursue any video services, telephone or Internet access business in Europe or the Middle East or any programming or Internet content business specifically directed to the European or the Middle Eastern markets, unless it has first presented such business opportunity to us and we have elected not to pursue such business opportunity, and (2) we will not pursue any video services, telephone or Internet access business in markets outside of Europe and the Middle East in which UIH then operates unless we have first presented such business opportunity to UIH and UIH has elected not to pursue such business opportunity. We have agreed to sell to UIH, upon request, all or any portion of the UIH Class A Common Stock held by us at a price based upon the trading price of such stock during a specified period prior to sale. UIH and we have also agreed that we will provide audited financial statements to UIH in such form and with respect to such periods as shall be necessary or appropriate to permit UIH to comply with its reporting obligations as a publicly traded company and that we will not change our accounting principles without UIH's prior consent. We have consented to the public disclosure by UIH of all matters deemed necessary or appropriate by UIH in its sole discretion to satisfy the disclosure obligations of UIH or any affiliate thereof under the United States federal securities laws or to avoid potential liability thereunder. We have also agreed to indemnify UIH against all liabilities UIH may incur in connection with UIH's indemnification obligations under the underwriting agreement. UIH Indenture. We, as a subsidiary of UIH, are subject to the provisions of the indenture governing UIH's senior secured discount notes due 2008. This indenture contains covenants that, among other things, limit the ability of UIH and its subsidiaries, including us, to: . incur indebtedness and issue certain preferred stock in amounts exceeding that permitted based upon financial ratio and other tests, . repurchase equity interests from third parties other than UIH, . make investments in non-controlled entities, . enter into agreements that would restrict the ability to make distributions, loans or other payments to equity holders, . create certain liens, . sell assets or issue equity for other than cash or fail to invest the cash proceeds of such sales within 360 days of the sale periods, and . enter into transactions with affiliates of UIH. We will continue to be controlled by UIH and restricted by the terms of its debt securities. We have agreed with UIH that, for as long as we are subject to the provisions of UIH's indenture, as amended or supplemented, or any other indenture or agreement to which UIH is a party governing indebtedness of UIH that replaces or refinances any indebtedness governed by UIH's indenture, as amended or supplemented, we will not take any action that will result in a breach of UIH's indenture. UIH's senior secured discount notes were issued pursuant to the Indenture, dated as of February 5, 1998, by and between UIH and Firstar Bank of Minnesota N.A., as trustee. The foregoing description of certain covenants of this indenture is a summary only, does not purport to be complete and is qualified in its entirety by reference to all of the provisions of this indenture, which are hereby incorporated by reference. A copy of UIH's indenture has been incorporated as an exhibit to the registration statement filed with the United States Securities and Exchange Commission in connection with our initial public offering. Relationship With Microsoft We have signed a letter of intent with Microsoft Corporation to establish a technical services relationship and, as part of this, have agreed to set up a series of joint projects to deliver Internet, non-traditional telephone and other interactive video and general services to digital cable set-top devices, personal computers and other devices within and beyond our service areas. The particular terms of each joint project will be negotiated by us and Microsoft. As part of this relationship, 117 we plan to establish a technology board to review technology issues and develop technology specifications and directions. This board would be chaired by Scott Bachman, our Managing Director of Technology, and would include representatives from Microsoft and us. In addition, we and Microsoft would be preferred suppliers to one another, with Microsoft having the first opportunity to license technologies to us. We would be given the opportunity to present and offer our products to Microsoft offices in Europe. We and Microsoft would also cooperate to advocate mutually-agreed standards and regulations to the bodies in our service territories who set technical standards. We would also have the right to license Microsoft software for the delivery of Internet content services over our network. As part of this technology relationship, we have agreed that, on the earlier of three months from the date of the letter of intent and the signing of the first definitive agreement with Microsoft, we will grant Microsoft warrants to purchase up to 3,800,000 ADSs, which would currently represent approximately 3.0% of our outstanding share capital. Microsoft will have the option under these warrants to purchase ordinary shares instead of ADSs. These warrants can be exercised at a price of $28.00 per ordinary share or ADS. These warrants will not be exercisable until at least February 16, 2000 and will expire February 16, 2003. In addition, half of the warrants will not vest until certain performance standards are met. We have agreed to grant Microsoft certain registration rights to be negotiated with respect to the ADSs or shares to be issued upon exercise of these warrants. In addition, we will grant Microsoft a preemptive right to purchase up to an aggregate of 10% of chello broadband in any public or private equity offering at such offering's price and the right of first negotiation in any private equity offering, other than to our or other cable operators in exchange for carriage of chello broadband. Microsoft has agreed not to dispose of the shares purchased in our initial public offering for six months following such offering nor will it acquire more than 15% of our total share capital without the prior written approval of our Supervisory Board. If we enter into a definitive agreement, as expected, Microsoft will extend its six-month lock-up period to one year 118 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Index to Financial Statements
Page Number --------- UNITED PAN-EUROPE COMMUNICATIONS N.V. Independent Auditors' Report.................................................................... 67 Consolidated Balance Sheets as of December 31, 1998 and December 31, 1997 (Post- Acquisition................................................................................... 68 Consolidated Statements of Operations for the Years Ended December 31, 1998 (Post- Acquisition), December 31, 1997 and December 31, 1996 (Pre-Acquisition)....................... 69 Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended December 31, 1998 (Post-Acquisition), December 31, 1997 and December 31, 1996 (Pre-Acquisition)............ 70 Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 (Post- Acquisition), December 31, 1997 and December 31, 1996 (Pre-Acquisition)....................... 71 Notes to Consolidated Financial Statements...................................................... 73 UNITED TELEKABEL HOLDINGS Report of Independent Accountants............................................................... 129 Consolidated Balance Sheet as of December 31, 1998.............................................. 131 Consolidated Statement of Operations from August 6, 1998 (commencement of operations) until December 31, 1998....................................................................... 132 Consolidated Statement of Cash Flows from August 6, 1998 (commencement of operations) until December 31, 1998....................................................................... 133 Notes to Consolidated Financial Statements...................................................... 134
(b) Reports on Form 8-K None. (c) Exhibits 3.1 Amended and Restated Articles of Association of UPC (1) 4.1 Deposit Agreement dated as of February 17, 1999, between the Company and Citibank N.A., as depositary (2) 4.2 The Articles of Association of UPC (1) 10.1 Amended and Restated Securities Purchase and Conversion Agreement dated as of December 1, 1997, by and among Philip Media B.V. ("Philips Media"), Philips Media Network B.V. ("Philips Networks"), Joint Venture, Inc. ("JVI") and UPC (3) 10.2 Loan Agreement for NLG1,100,000,000 multi-currency Revolving Credit Facility dated as of October 8, 1997, between UPC and certain of its subsidiaries and The Toronto-Dominion Bank as Agent for the financial institutions identified therein, as amended by a Supplement Agreement dated December 8, 1997 (4) 10.3 Supplemental Agreement dated January 25, 1999, relating to a Loan Agreement for a NLG1,100,000,000 Multi-currency Revolving Credit Facility between UPC and certain of its subsidiaries and The Dominion Bank (2) 10.4 Loan Agreement dated December 5, 1997, between Belmarken Holdings B.V. ("Belmarken") as the Borrower, Cable Network Netherlands Holding B.V., Binan Investments B.V. and Stipdon Investments B.V. as Guarantors, The Toronto-Dominion Bank and Toronto-Dominion Capital as Arrangers, the banks and financial institutions listed therein, The Toronto-Dominion Bank as Agent and The Toronto-Dominion Bank as Security Trustee, as amended by Waiver and amendment letter dated December 11, 1997 (4) 119 10.5 Registration Rights Agreement dated as of December 5, 1997, by and among UPC, Belmarken, and The Toronto-Dominion Bank as the Security Trustee (3) 10.6 Indenture dated as of February 5, 1998, between United International Holdings, Inc. ("UIH") and Firstar Bank of Minnesota, N.A. (the "UIH Indenture") (4) 10.7 Credit Facility Agreement dated February 20, 1998, between Cable Network Brabant Holding B.V. ("CNBH") and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (5) 10.8 Second Amendment Agreement to Credit Facility Agreement and to Project Support Agreement dated September 30, 1998, between CNBH and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (5) 10.9 Third Amendment Agreement to Credit Facility Agreement dated January 22, 1999, between CNBH and Cooperative Centrale Raiffeisen- Boerenleenbank B.A. (1) 10.10 Bank Facility Agreement dated January 31, 1996, between Kabeltelevisie Amsterdam B.V. ("KTA") and ABN AMRO Bank N.V. in the principal amount of up to NLG375,000,000 (6) 10.11 Amendment 1 dated July 1, 1997, to the NLG375,000,000 principal amount Bank Facility Agreement between KTA and ABN AMRO Bank N.V. (2) 10.12 Amendment No. 2 dated August 28, 1998, to the Bank Facility Agreement between KTA and ABN AMRO Bank N.V. (2) 10.13 Loan Agreement dated August 31, 1998, between N.V. TeleKabel Beheer, as borrower, and N.V. NUON Energie-Onderneming voor Gelderland, Friesland en Flevoland, as lender (7) 10.14 Facility Agreement dated July 26, 1998, between Mediareseaux Marne S.A., Paribas and the Banks and Financial Institutions listed in Schedule 1 thereto (5) 10.15 Promissory Note dated November 9, 1998, made by Cable Network Zuid- Oost Brabant Holding B.V. payable to the order of DIC Loans Ltd. in the principal amount of $90,000,000 (7) 10.16 Option Agreement dated November 5, 1998, among UPC, DIC and PEC (5) 10.17 Amendment to Option Agreement dated February 4, 1999, between UPC, DIC and PEC (2) 10.18 Form of Registration Rights Agreement among UPC, DIC and PEC (5) 10.19 Form of Shareholders Agreement among UPC, DIC and PEC (5) 10.20 Sales Agreement dated December 17, 1997, between Stichting Combivisie Regio, Setelco B.V. and UPC (6) 10.21 Purchase Agreement dated November 6, 1998, between Binan Investments B.V., UA-UII, Inc. and UA-UII Management Inc. (5) 10.22 Shareholders Agreement dated July 6, 1995, between The Municipality of Amsterdam, A2000 Holding N.V., and Kabeltelevisie Amsterdam B.V. (6) 10.23 Consent Agreement dated September 27, 1997, between United and Philips Communications B.V., US West International, B.V., Philips Media, UIH and JVI (5) 10.24 Syndicate Agreement dated June 26, 1995, concluded between the Osterreichische Philips Industrie Ges.m.b.H. Cable-Networks Austria Holding B.V. and Kabel-TV-Wien Ges.m.b.H. (7) 10.25 Articles of Association of Telekabel Wien Gesellschaft m.b.H. (7) 10.26 Agreement dated November 30, 1993, between Kabel-TV Wien Gesellschaft m.b.H. and Telekabel Wien Gesellschaft m.b.H. (7) 10.27 Rules of Procedure of Telekabel Wien Gesellschaft m.b.H., as amended on April 10, 1995 (7) 10.28 Agreement dated November 30, 1977, between Kabel-TV Wien and Telekabel Fernsehnetz-Betriebsgesellschaft m.b.H. (8) 10.29 Policy Agreement dated November 30, 1977, between Kabel-TV Wien and Osterreichishe Philips Industrie Gesellschaft m.b.H. (8) 10.30 Tax Liability Agreement dated October 7, 1997, between UPC, Philips Media, Philips Coordination Center, Philips Networks, UIH, and JVI (5) 10.31 Agreement dated April 2, 1998, for the contribution of the Dutch Cable Assets of UPC and NUON to UTH (6) 10.32 Shareholders Agreement dated August 6, 1998, between UPC, NUON and UTH (6) 10.33 Joint Venture Agreement dated February 13, 1996, regarding A2000 Holding N.V. between US West International B.V. and UPC (6) 10.34 United Pan-Europe Communications N.V. Phantom Stock Option Plan, March 20, 1998 (5) 10.35 Amended Stock Option Plan dated February 8, 1999, between UPC and Stichting Administratie Kantoor UPC 10.36 Form of Master Seconded Employee Services Agreement (2) 10.37 Form of UIH Registration Rights Agreement (1) 10.38 Form of UIH Management Services Agreement (2) 10.39 Consulting Agreement dated June 1, 1995, between UIH and Mark L. Schneider (1) 120 10.40 Employment Agreement dated October 1, 1998, between UIH and J. Timothy Bryan (7) 10.41 Agreement dated as of February 11, 1999 between UIH and UPC 10.42 Promissory Note dated January 25, 1999, with UPC as borrower, and UIH Europe, Inc. as holder, in the principal amount of US$100,000,000 (6) 10.43 Promissory Note dated January 25, 1999, with UPC Intermediates B.V. as borrower, and with UIH Europe, Inc. as holder, in the principal amount of US$20,000,000 (6) 10.44 Share Purchase Agreement dated January 19, 1999, by and between UPC, Belmarken Holding B.V., NUON, N.V. Kraton and UTH, as amended (2) 10.45 Final Amendment to Share Purchase Agreement dated as of February 17, 1999 (9) 21.1 Subsidiaries of UPC (1) Incorporated by reference from Amendment No. 6 to Form S-1/A Registration Statement filed by UPC, dated February 4, 1999 (File No. 333-67895) (2) Incorporated by reference from Amendment No. 8 to Form S-1/A Registration Statement filed by UPC, dated February 10, 1999 (File No. 333-67895). (3) Incorporated by reference from Form 8-K filed by UIH, dated December 11, 1997 (File No. 0-21974). (4) Incorporated by reference from Form S-4 Registration Statement filed by UIH, dated March 3, 1998 (File No. 333-47). (5) Incorporated by reference from Form S-1 Registration Statement filed by UPC, dated November 24, 1998 (File No. 333-67895). (6) Incorporated by reference from Amendment No. 4 to Form S-1/A Registration Statement filed by UPC, dated January 25, 1999 (File No. 333-67895). (7) Incorporated by reference from Amendment No. 2 to Form S-1/A Registration Statement filed by UPC, dated January 13, 1999 (File No. 333-67895). (8) Incorporated by reference from Amendment No. 9 to Form S-1/A Registration Statement filed by UPC, dated February 11,1999 (File No. 333-67895). (9) Incorporated by reference from Form 8-K filed by UPC, dated March 4, 1999 (File No. 000-25365). (10) Incorporated by reference from Amendment No. 9 to Form S-1/A Registration Statement filed by UPC, dated December 9, 1998 (File No. 333-67895). (d) Financial Statement Schedules
Page Number --------- UNITED PAN-EUROPE COMMUNICATIONS N.V. Report of Independent Public Accountants on Schedules........................................... 122 Schedule I - Condensed Financial Information of Registrant (Parent Only)........................ 123 Schedule II - Valuation and Qualifying Accounts................................................. 128
121 INDEPENDENT AUDITORS' REPORT ON SCHEDULES To United Pan-Europe Communications N.V. We have audited, in accordance with auditing standards generally accepted in The Netherlands, which are substantially the same as those generally accepted in the United States of America, the consolidated financial statements of United Pan-Europe Communications N.V. included in this Form 10-K and have issued our report thereon dated March 19, 1999. Our audit was made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The following schedules are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic consolidated financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements as indicated in our report with respect thereto and, in our opinion, based on our audit, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN Amstelveen, The Netherlands, March 29, 1999 122 UNITED PAN-EUROPE COMMUNICATIONS N.V. PARENT ONLY SCHEDULE I Condensed Information as to the Financial Condition of Registrant (Stated in thousands of Dutch guilders, except share and per share amounts)
As of December 31, ------------------------------------- 1998 1997 ---------------- ------------------- (Post-Acquisition) ASSETS: Current assets Cash and cash equivalents............................................ 7,048 43,306 Related party receivables............................................ 115,633 36,364 Other receivables, net............................................... 2,330 18,690 Other current assets................................................. 7,938 2,761 --------- --------- Total current assets.............................................. 132,949 101,121 Investments in, loans and other advances to affiliated companies, accounted for under the equity method, net............................ 966,309 1,096,768 Property, plant and equipment, net of accumulated depreciation of 460 and 23, respectively........................................... 982 1,022 Deferred financing costs, net of accumulated amortization of 625 and 110, respectively.......................................... 15,617 16,813 Non-current restricted cash and other assets........................... 650 48,541 --------- --------- Total assets...................................................... 1,116,507 1,264,265 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT): Current liabilities Related party accounts payable....................................... 8,719 34,402 Accrued liabilities.................................................. 56,901 12,776 Note payable to shareholder.......................................... 119,070 -- Short-term debt...................................................... 34,020 -- Short-term debt, related party....................................... 39,125 228,097 --------- --------- Total current liabilities......................................... 257,835 275,275 Long-term debt......................................................... 620,000 490,468 Other related party debt............................................... -- 29,609 Deferred compensation.................................................. 325,302 4,818 Deferred taxes......................................................... 140 37,602 --------- --------- Total liabilities................................................. 1,203,277 837,772 --------- --------- Shareholders' equity (deficit) Common stock, 0.667 par value, 200,000,000 shares authorized, 87,330,340 and 87,107,325 shares issued, respectively.............. 58,221 58,072 Additional paid-in capital........................................... 657,684 636,851 Other cumulative comprehensive income (loss)......................... 27,285 (1,354) Accumulated deficit.................................................. (719,575) (156,691) Treasury stock, at cost, 9,198,135 shares of common stock............ (110,385) (110,385) --------- --------- Total shareholders' equity (deficit).............................. (86,770) 426,493 --------- --------- Total liabilities and shareholders' equity (deficit).............. 1,116,507 1,264,265 ========= =========
123 UNITED PAN-EUROPE COMMUNICATIONS N.V. PARENT ONLY SCHEDULE I Condensed Information as to the Operations of Registrant (Stated in thousands of Dutch guilders, except share and per share amounts)
For the Years Ended December 31, -------------------------------------------------------- 1998 1997 1996 ------------------ ----------------- ----------------- (Post-Acquisition) (Pre-Acquisition) (Pre-Acquisition) Management fee income from related parties ....................... 10,648 3,088 4,433 Corporate general and administrative expense ..................... (323,309) (11,605) (1,679) Depreciation and amortization .................................... (437) (736) (335) ---------- ---------- ---------- Net operating loss ............................................. (313,098) (9,253) 2,419 Interest income .................................................. 1,919 2,830 1,898 Interest income, related party ................................... 62,359 44,867 27,353 Interest expense ................................................. (1,187) (15,143) (8,418) Interest expense, related party .................................. (58,326) (33,362) (27,511) Foreign exchange loss, net ....................................... (14,535) (12,864) (20,236) ---------- ---------- ---------- Net loss before income taxes and other items..................... (322,868) (22,925) (24,495) Share in results of affiliated companies, net .................... (240,016) (154,383) (55,694) Income taxes ..................................................... -- 1,454 -- ---------- ---------- ---------- Net loss ....................................................... (562,884) (175,854) (80,189) ========== ========== ========== Basic and diluted net loss per common share ...................... (7.22) (2.03) (0.92) ========== ========== ========== Weighted-average number of common shares outstanding............... 77,914,081 86,578,117 87,107,325 ========== ========== ==========
124 UNITED PAN-EUROPE COMMUNICATIONS N.V. PARENT ONLY SCHEDULE I Condensed Information as to the Cash Flows of the Registrant (Stated in thousands of Dutch guilders)
For the Years Ended December 31, -------------------------------------------------------- 1998 1997 1996 ------------------ ----------------- ----------------- (Post-Acquisition) (Pre-Acquisition) (Pre-Acquisition) Cash flows from operating activities: Net loss ....................................................... (562,884) (175,854) (80,189) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization ................................ 437 736 335 Share in results of affiliated companies, net ................ 240,016 164,773 58,728 Foreign exchange loss, net ................................... 14,535 12,864 20,236 Compensation expense related to stock options ................ 320,484 4,818 -- Other ........................................................ (7,877) (5,444) (1,545) Changes in assets and liabilities: (Increase) decrease in receivables ........................... (12,308) (6,359) 86,309 Increase in other non-current assets ......................... (1,538) (1,457) (27) Increase in other current liabilities ........................ 20,677 46,600 22,022 Increase in deferred taxes and other ......................... 1,117 2,303 -- -------- -------- -------- Net cash flows from operating activities ....................... 12,659 42,980 105,869 -------- -------- -------- Cash flows from investing activities: Investments in, loans to and advances to affiliated companies, net ................................................ (498,641) (294,532) (44,805) Capital expenditures ........................................... (5,192) (1,308) (2,249) Deposit to acquire minority interest in subsidiary ............. 47,000 (47,000) -- Sale of affiliated companies ................................... -- 11,070 -- Dividend received................................................ 8,977 -- -- Loans repaid by subsidiaries ................................... 175,692 350,250 -- -------- -------- -------- Net cash flows from investing activities ....................... (272,164) 18,480 (47,054) -------- -------- -------- Cash flows from financing activities: Proceeds from short-term borrowings ............................ -- 91,415 -- Proceeds from short-term borrowings, related party ............. 129,925 228,097 -- Proceeds from long-term borrowings ............................. 131,020 498,699 -- Deferred financing costs ....................................... (515) (17,139) -- Repayments long and short-term borrowings ...................... (37,183) (377,443) (150,158) Redemption of convertible loans ................................ -- (170,171) -- Purchase shares from shareholder ............................... -- (292,561) -- -------- -------- -------- Net cash flows from financing activities ....................... 223,247 (39,103) (150,158) -------- -------- -------- Net (decrease) increase in cash and cash equivalents............. (36,258) 22,357 (91,343) Cash and cash equivalents at beginning of period................. 43,306 20,949 112,292 Cash and cash equivalents at end of period ..................... 7,048 43,306 20,949 ======== ======== ======== Non-cash investing and financing activities: Issuance of shares upon conversion of PIK notes................ -- 169,899 -- ======== ======== ======== Supplemental cash flow disclosures: Cash paid for interest ....................................... (16,561) (52,447) (9,271) ======== ======== ======== Cash received for interest ................................... 27,529 25,091 26,277 ======== ======== ========
125 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTE TO PARENT ONLY SCHEDULE I AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) 1. Organization and Nature of Operations United Pan-Europe Communications N.V., formerly known as United and Philips Communications B.V. (''UPC'' or the ''Company'') was formed for the purpose of acquiring and developing multi-channel television and telecommunications systems in Europe. On July 13, 1995, United International Holdings, Inc. (''UIH''), a United States of America corporation, and Philips Electronics N.V. (''Philips''), contributed their respective ownership interests in European and Israeli multi-channel television systems to UPC. Philips contributed to UPC its 95% interest in cable television systems in Austria, its 100% interest in cable television systems in Belgium, and its minority interests in multi-channel television systems in Germany, The Netherlands (KTE) and France (Citecable). UIH contributed its interests in multi-channel television systems in Israel, Ireland, the Czech Republic, Malta, Norway, Hungary, Sweden and Spain. UIH also contributed United States dollars (''$'')78.2 million in cash (including accrued interest of $3.2 million) to UPC and issued to Philips 3,169,151 shares of its Class A Common Stock having a value of $50.0 million (at date of closing). In addition, UPC issued to Philips $133.6 million of convertible subordinated pay- in-kind notes (the ''PIK Notes''). As a result of this transaction, UIH and Philips each owned a 50% economic and voting interest in UPC. On December 11, 1997, UIH acquired Philips' 50% interest in UPC (the ''UPC Acquisition''), thereby making it an effectively wholly-owned subsidiary of UIH (subject to certain employee equity incentive compensation arrangements) through its wholly-owned subsidiary UIH Europe, Inc. (''UIHE''). The entity's name was changed to United Pan-Europe Communications N.V., and its legal seat was transferred from Eindhoven to Amsterdam. Through its cable-based communications networks in 10 countries in Europe and in Israel, UPC currently offers cable television services and is further developing and upgrading its network to provide digital video, voice and Internet/data services in Western European markets. As part of the UPC Acquisition, (i) UPC purchased the 3,169,151 shares of Class A Common Stock of UIH held by Philips (66,800), (ii) UIH purchased 169,899 of the accreted amount of UPC's PIK Notes and redeemed them for 15,180,261 shares of UPC, (iii) UPC repaid to Philips the remaining 170,371 accreted amount of the PIK Notes (339,800), (iv) UIH purchased 13,121,604 shares of UPC directly from Philips, and (v) UPC repurchased Philips' remaining equity interest in UPC (24,378,396 shares). The UPC Acquisition was financed with proceeds from a long- term revolving credit facility through UPC with a syndicate of banks (305,200) (the ''Senior Revolving Credit Facility''), a bridge bank facility through a subsidiary of UPC $111,200 (224,000) and a cash investment by UIH of 327,400. Approximately 479,000 drawn on the Senior Revolving Credit Facility was used to repay existing debt of UPC in conjunction with the UPC Acquisition. UIH's acquisition of Philips' interest in UPC was accounted for as a step acquisition under purchase accounting. As a result of UPC becoming effectively wholly owned by UIH, such purchase accounting adjustments, along with existing basis differences, were pushed down to the financial statements of UPC and a new basis of accounting was established for the UPC net assets acquired by UIH. As of December 11, 1997, the proportional net assets of UPC acquired by UIH were recorded at fair market value based on the purchase price paid by UIH, along with additional basis differences at the UIH level existing as of that date. The total purchase accounting adjustments of 442,688 were allocated to UPC's underlying net assets. As a result of the UPC Acquisition and the associated push-down of UIH basis on December 11, 1997, the condensed information as to financial position of registrant as of December 31, 1997 and September 30, 1998 is presented on a ''post-acquisition'' basis. The condensed information as to the operations and the cash flows of the registrant for the year ended December 31, 1997 include the post-acquisition results of the Company for the period from December 11, 1997 through December 31, 1997, which reflects 1,980 of new basis depreciation and amortization resulting from push-down accounting as well as approximately 4,034 of interest expense from purchase related indebtedness which is included in the Parent's share in result of affiliated companies, net. Due to immateriality, the entire fiscal year ended December 31, 1997 is presented as ''pre-acquisition'' in the accompanying condensed information as to the operations and cash flows of registrant. 126 UNITED PAN-EUROPE COMMUNICATIONS N.V. NOTE TO PARENT ONLY SCHEDULE I AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 (Post-Acquisition) (Monetary amounts stated in thousands of Dutch guilders, except share and per share amounts) 2. Basis of Presentation In December 1998, UPC acquired telephony and programming assets from UIH through the issuance of new shares. As the acquisition was between entities under common control, the transaction was accounted for at historical cost, similar to pooling of interests accounting. It is generally accepted that, consistent with a pooling-of-interests accounting, prior period financial statements of the transferee are restated for all periods in which the transferred operations were part of parent's consolidated financial statements. Accordingly, we have restated all periods presented as if UPC had acquired the telephony and programming assets from UIH as of the date of UIH's initial investment. 127 UNITED PAN-EUROPE COMMUNICATIONS N.V. VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II (Stated in thousands of Dutch guilders)
Additions ------------------------ Balance at Beginning of Charged to Balance at End Period Expense Acquisitions Deductions(1) Of Period ------------------- ---------- ------------ ------------- -------------- Allowance for doubtful accounts receivable: Year ended December 31, 1998.................. 6,445 2,021 1,128 (334) 9,260 ===== ===== ===== ====== ===== Year ended December 31, 1997.................. 5,835 2,093 543 (2,026) 6,445 ===== ===== ===== ====== ===== Year ended December 31, 1996.................. 5,342 907 835 (1,249) 5,835 ===== ===== ===== ====== ===== Six months ended December 31, 1995............ -- -- 5,342 -- 5,342 ===== ===== ===== ====== ===== Allowance for costs to be reimbursed: Year ended December 31, 1998.................. 2,209 109 -- (2,318) -- ===== ===== ===== ====== ===== Year ended December 31, 1997.................. 4,620 1,221 -- (3,632) 2,209 ===== ===== ===== ====== ===== Year ended December 31, 1996.................. 5,303 794 -- (1,477) 4,620 ===== ===== ===== ====== ===== Six months ended December 31, 1995............ 4,137 1,166 -- -- 5,303 ===== ===== ===== ====== ===== Allowance for Investments Affiliated Companies: Year ended December 31, 1998.................. -- -- -- -- -- ===== ===== ===== ====== ===== Year ended December 31, 1997.................. 4,186 -- -- (4,186) -- ===== ===== ===== ====== ===== Year ended December 31, 1996.................. 4,946 -- -- (760) 4,186 ===== ===== ===== ====== ===== Six months ended December 31, 1995............ -- 4,946 -- -- 4,946 ===== ===== ===== ====== =====
(1) Represents uncollectible balances written off to the allowance account and the effect of currency translation adjustment. 128 INDEPENDENT AUDITORS' REPORT Introduction We have audited the consolidated financial statements of UNITED TELEKABEL HOLDING N.V., Amsterdam, The Netherlands, for the year 1998 for purpose of inclusion in the Form 10-K of one of its shareholders. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. Scope We conducted our audit in accordance with auditing standards generally accepted in The Netherlands, which are substantially the same as those generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. Opinion In our opinion, the consolidated financial statements give a true and fair view of the financial position of the company as at December 31, 1998 and of the result for the period from commencement of operations at August 6, 1998 then ended in accordance with accounting principles generally accepted in The Netherlands. Generally accepted accounting principles in The Netherlands vary in certain significant respects from generally accepted accounting principles in the United States of America. Application of generally accepted accounting principles in the United States of America would have affected total assets, statement of operations and shareholders' equity as at and for the period from commencement of operations at August 6, 1998 ended December 31, 1998, to the extent summarized in Note 18. to the consolidated financial statements. Amstelveen, The Netherlands, March 19, 1999 129 UNITED TELEKABEL HOLDING N.V. CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM COMMENCEMENT OF OPERATIONS (AUGUST 6, 1998) TO DECEMBER 31, 1998 130 UNITED TELEKABEL HOLDING N.V. CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 (stated in thousands of Dutch guilders)
Assets Fixed assets: Intangible fixed assets.............................. 564,438 Tangible fixed assets................................ 847,056 Affiliated companies................................. 206,332 --------- Total fixed assets......................................... 1,617,826 --------- Current assets: Inventories.......................................... 3,091 Receivables.......................................... 40,638 Cash and cash equivalents............................ 10,475 --------- Total current assets....................................... 54,204 --------- Total assets............................................... 1,672,030 =========
Shareholders' Equity and Liabilities Shareholders' Equity................................. 635,521 Minority interest.................................... 1,104 --------- 636,625 Provisions........................................... 42,054 Long-term liabilities................................ 232,727 Current liabilities.................................. 760,624 --------- Total shareholders' equity and liabilities.............. 1,672,030 =========
131 UNITED TELEKABEL HOLDING N.V. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE PERIOD FROM COMMENCEMENT OF OPERATIONS (AUGUST 6, 1998) TO DECEMBER 31, 1998 (stated in thousands of Dutch guilders) Total revenues...................................... 99,122 Direct operating expenses........................ (33,172) Selling, general and administrative expenses..... (36,096) Depreciation and amortization.................... (39,490) -------- Total operating expenses............................ (108,758) -------- Operating loss................................... (9,636) Financial income and expense..................... (16,699) -------- Loss before income taxes............................ (26,335) Income taxes..................................... 1,212 -------- Loss after taxes.................................... (25,123) Share in results of affiliated companies......... (24,486) -------- Group loss.......................................... (49,609) Minority interest................................ 235 -------- Net loss............................................ (49,374) ========
132 UNITED TELEKABEL HOLDING N.V. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE PERIOD FROM COMMENCEMENT OF OPERATIONS (AUGUST 6, 1998) TO DECEMBER 31, 1998 (stated in thousands of Dutch guilders)
Cash flows from operating activities: Net loss.................................................... (49,374) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortization............................... 39,490 Share in results of affiliated companies, net............... 24,486 Minority interest in subsidiaries........................... (235) Changes in assets and liabilities: Decrease in current assets.................................. 40,098 (Decrease) in current liabilities........................... (55,186) (Decrease) in deferred taxes and other provisions........... (1,132) -------- Net cash flows from operating activities..................... (1,853) -------- Cash flows from investing activities: Capital expenditures........................................ (121,384) Loan to affiliated companies................................ (7,120) Acquisitions, net of cash acquired.......................... (12,588) -------- Net cash flows from investing activities..................... (141,092) -------- Cash flows from financing activities: Proceeds from short-term borrowings......................... 120,705 Proceeds from long-term borrowings.......................... 9,621 -------- Net cash flows from financing activities..................... 130,326 -------- Net decrease in cash and cash equivalents................... (12,619) Cash and cash equivalents at beginning of period............ 100 Cash and cash equivalents contributed....................... 22,994 -------- Cash and cash equivalents at end of period................... 10,475 ========
Supplemental cash-flow disclosures: Cash paid for interest...................................... (19,470) ======== Non-cash investing activities: Contribution of Dutch cable systems Working capital............................................. (73,850) Affiliated companies........................................ 223,698 Tangible fixed assets....................................... 764,762 Intangible fixed assets..................................... 550,911 Short-term debt............................................. (544,918) Long-term liabilities....................................... (223,106) Provisions.................................................. (35,696) Cash and cash equivalents................................... 22,994 -------- Equity contributed........................................... 684,795 ========
133 UNITED TELEKABEL HOLDING N.V. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD FROM COMMENCEMENT OF OPERATIONS (AUGUST 6, 1998) TO DECEMBER 31, 1998 (Monetary amounts stated in thousands of Dutch guilders) 1. Organization and Nature of Operations United Telekabel Holding N.V. ("UTH" or the "Company"), legally seated in Almere, The Netherlands, was legally formed in May 1998 and commenced operations on August 6, 1998. UTH was formed as a joint venture between United Pan-Europe Communications N.V. ("UPC") and N.V. NUON Energie-Onderneming voor Gelderland, Friesland en Flevoland ("NUON"). UPC became a 51% shareholder and NUON a 49% shareholder. UTH was formed for the purpose of offering cable-based communications through its networks in the Netherlands. UTH currently offers cable television services and is further developing and upgrading its network to provide digital video, voice and internet/data services in its Dutch markets. UTH commenced operations on August 6, 1998 when both shareholders contributed their interests in Dutch cable television operating companies to UTH. NUON contributed its interest in N.V. Telekabel Beheer ("Telekabel") and UPC contributed its interest in Cable Network Brabant Holding B.V. ("CNBH") and 50% of the shares in A2000 Holding N.V. ("A2000"). UTH recorded the assets contributed at their fair market value. The table below summarizes the opening balance sheet of UTH, based on the net assets contributed at their fair market values by NUON and UPC as of August 6, 1998. Cash and cash equivalents contributed................... 23,094 Other current assets.................................... 83,827 Affiliated companies.................................... 223,698 Tangible fixed assets................................... 764,762 Intangible fixed assets................................. 550,911 --------------- Total assets......................................... 1,646,292 =============== Short-term debt......................................... 544,918 Other current liabilities............................... 157,677 Provisions.............................................. 35,696 Long-term liabilities................................... 223,106 Shareholders' equity and liabilities.................... 684,895 --------------- Total shareholders' equity and liabilities........... 1,646,292 ===============
Due to the fact that operations commenced at August 6, 1998, no comparative financial statements have been presented. Proforma information (unaudited) is presented in note 19. 2. Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the Netherlands for financial statements. The accounting policies followed in the preparation for the consolidated financial statements, differ in some respects to those generally accepted in the United States of America (US GAAP). See note 18. The preparation of financial statements in conformity with Dutch generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses 134 during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring accruals) have been made which are necessary to present fairly the financial position of the Company as of December 31, 1998 and the results of its operations for the period from commencement of operations (August 6, 1998) to December 31, 1998. Principles of Consolidation The accompanying consolidated financial statements include the accounts of UTH and its group companies (the "UTH Group"). Group companies are companies or other legal entities in which UTH has an ownership interest of more than 50% of the issued share capital or that UTH otherwise controls. All significant intercompany accounts and transactions have been eliminated in consolidation. The following chart presents a summary of UTH's significant investments in multi-channel television, programming and telephony operations as of December 31, 1998:
Name City Percentage Ownership Cable Network Brabant Holding BV Eindhoven 100 N.V. Telekabel Beheer Arnhem 100 A2000 Holding N.V. Amsterdam 50 (1) Uniport Communications B.V. Amsterdam 80
(1) Not consolidated Foreign Currencies Assets and liabilities denominated in foreign currencies are translated into Dutch guilders at the yearend exchange rate. Transactions in foreign currencies are translated at the exchange rate in effect at the time of the transaction. The exchange results are recorded under financial income and expense in the statement of income. Balance Sheet (a) General ------- Assets and liabilities are stated at face value unless indicated otherwise. (b) Fixed assets ------------ Intangible fixed assets The excess of investments in consolidated subsidiaries over the net tangible asset value at acquisition is amortized on a straight-line basis over 15 years. Licenses in newly acquired companies are recognized at the fair market value of those licenses at the date of acquisition and include the development costs incurred prior to the date a new license was acquired. The license value is amortized on a straight-line basis over the initial license period, up to a maximum of 20 years. Deferred financing costs are amounts spent in connection with financing the UTH Group. The amortization period is the period relating to the term of the financing. When assets are fully amortized, the costs and accumulated amortization are removed from the accounts. Tangible fixed assets Tangible fixed assets are stated at cost. Additions, replacements, installation costs and major improvements are capitalized, and costs for normal repair and maintenance of tangible fixed assets are charged to expense as incurred. Assets constructed by subsidiaries of UTH incorporate overhead expense and interest charges incurred during the period of construction; investment subsidies are deducted. Depreciation is calculated using the straight-line method over the economic life of the asset, taking into account the residual value. The economic lives of tangible fixed assets at acquisition are as follows: 135 Networks 7-20 years Buildings and leasehold improvements 20-33 years Machinery & Other 3-10 years Affiliated Companies For those investments in companies in which UTH's ownership interest is 20% to 50%, its investments are held through a combination of voting common stock, preferred stock, debentures or convertible debt and/or UTH exerts significant influence through board representation and management authority, or in which majority control is deemed to be temporary, the equity method of accounting is used. Under this method, the investment, originally recorded at fair market value, is adjusted to recognize UTH's proportionate share of net earnings or losses of the affiliates, limited to the extent of UTH's investment in and advances to the affiliates, including any debt guarantees or other contractual funding commitments. UTH's proportionate share of net earnings or losses of affiliates includes the amortization of the excess of its cost over its proportionate interest in each affiliate's net tangible assets or the excess of its proportionate interest in each affiliate's net tangible assets in excess of its cost. (c) Receivables ----------- Receivables are stated at face value, less an allowance for doubtfull accounts. The allowance for doubtful accounts is based upon specific identification of overdue accounts receivable. An allowance for a percentage of the account is established once the receivable is overdue. Upon disconnection of the subscriber, the account is fully reserved. The allowance is maintained on the books until receipt of payment or for a maximum of three years. (d) Cash and Cash Equivalents ------------------------- Cash and cash equivalents include cash and investments with original maturities of less than three months. (e) Provisions ---------- Deferred tax liabilities arising from temporary differences between the financial and tax bases of assets and liabilities are included in the provisions. The principal differences arise in connection with valuation differences of intangible fixed assets. In calculating the provision, current tax rates are applied. UTH accounts for income taxes under the asset and liability method, which requires recognition of, deferred tax assets and liabilities for the expected future income tax consequences of transactions, which have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and income tax basis of assets, liabilities and loss carry forwards using enacted tax rates in effect for the year in which the differences are expected to reverse. Net deferred tax assets are then reduced by a valuation allowance if management believes it is more likely than not they will not be realized. (f) Fair value of financial instruments ----------------------------------- SFAS Statement No. 107, "Disclosures about Fair Values of Financial Instruments" requires the disclosure of estimated fair values for all financial instruments, both on- and off-balance sheet, for which it is practicable to estimate fair value. For certain instruments, including cash and cash equivalents, receivables, current liabilities and certain provisions, it was assumed that the carrying amount approximated fair value due to the short maturity of those instruments. For short and long term debt, the carrying value approximates the fair value since all debt instruments carry a variable interest rate component except for the convertible loans which carried a fixed interest rate. For investments in affiliated companies carried at cost, quoted market prices for the same or similar financial instruments were used to estimate the fair values. UTH has adopted the principles of this statement in its financial statements. UTH did not have any material off-balance-sheet financial instruments as of December 31, 1998. (g) Recoverability of Tangible and Intangible fixed assets ------------------------------------------------------ UTH evaluates the carrying value of all tangible and intangible assets whenever events or circumstances indicate the carrying value of assets may exceed their recoverable amounts. An impairment loss is recognized when the estimated 136 future cash flows (undiscounted and without interest) expected to result from the use of an asset are less than the carrying amount of the asset. Measurement of an impairment loss is based on the fair value of the asset computed using discounted cash flows if the asset is expected to be held and used. Measurement of an impairment loss for an asset held for sale would be based on fair market value less estimated costs to sell. (h) Concentration of Credit Risk ---------------------------- Financial instruments which potentially subject UTH to concentrations of credit risk consist principally of trade receivables. Concentrations of credit risk with respect to trade receivables are limited due to UTH's large number of customers. (i) Other Comprehensive Income -------------------------- UTH has adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which requires that an enterprise (i) classify items of other comprehensive income by their nature in a financial statement and (ii) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. As of December 31, 1998, UTH had no other comprehensive income items. Income Statement Revenue is primarily derived from the sale of cable television services to subscribers and is recognized in the period the related services are provided. Initial installation fees are recognized as revenue in the period in which the installation occurs, to the extent installation fees are equal to or less than direct selling costs, which are expensed. To the extent installation fees exceed direct selling costs, the excess fees are deferred and amortized over the average contract period. All installation fees and related costs with respect to reconnections and disconnections are recognized in the period in which the reconnection or disconnection occurs. New Accounting Principles In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting For the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"), which provides guidance on accounting for the costs of computer software developed or obtained for internal use. SOP 98-1 identifies the characteristics of internal-use software and provides examples to assist in determining when computer software is for internal use. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998, for projects in progress and prospectively, with earlier application encouraged. Management believes that the adoption of SOP 98-1 will not have a material effect on the financial statements. The American Institute of Certified Public Accountants recently issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" ("SOP 98-5"), which is required to be adopted by affected companies for fiscal years beginning after December 15, 1998. SOP 98-5 defines start-up and organization costs, which must be expensed as incurred. In addition, all deferred start-up and organization costs existing as of January 1, 1999 must be written-off and accounted for as a cumulative effect of an accounting change. Management believes that the adoption of SOP 98-1 will not have a material effect on the financial statements. The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), which requires that companies recognize all derivatives as either assets or liabilities in the balance sheet at fair value. Under SFAS 133, accounting for changes in fair value of a derivative depends on its intended use and designation. SFAS 133 is effective for fiscal years beginning after June 15, 1999. Management is currently assessing the effect of this new standard. 137 3. Intangible fixed assets
Licenses and Deferred Total Goodwill Financing Costs ------------- ----------------------- -------------------- Value upon contribution........................ 550,911 547,869 3,042 Investments.................................... 30,996 29,745 1,251 Amortization................................... (17,469) (17,149) (320) ------- ------- ----- Book value as of December 31,1998............. 564,438 560,465 3,973 ======= ======= =====
Balance as of December 31, 1998 ------------------------------------------------------------ Licenses and Deferred Total Goodwill Financing Costs ------------- ----------------------- -------------------- Gross Value.................................... 581,907 577,614 4,293 Amortization................................... (17,469) (17,149) (320) ------- ------- ----- Book value as of December 31,1998............. 564,438 560,465 3,973 ======= ======= =====
4. Tangible fixed assets
Land and Machinery Total Buildings Network & Other ------------- ------------------ -------------- -------------- Value upon contribution...................... 764,762 6,025 745,503 13,234 Additions.................................... 104,315 130 102,023 2,162 Depreciation................................. (22,021) (182) (20,005) (1,834) ------- ----- ------- ------ Book value as of December 31,1998........... 847,056 5,973 827,521 13,562 ======= ===== ======= ======
Balance as of December 31, 1998 ----------------------------------------------------------------- Land and Machinery Total Buildings Network & Other ------------- ------------------ -------------- -------------- Cost......................................... 869,077 6,155 847,526 15,396 Depreciation................................. (22,021) (182) (20,005) (1,834) ------- ----- ------- ------ Book value as of December 31,1998........... 847,056 5,973 827,521 13,562 ======= ===== ======= ======
5. Affiliated companies
Total Investments Advances ------------- ----------------------- ------------------- Balance upon contribution...................... 223,698 223,698 -- Additions...................................... 7,120 -- 7,120 Share in result................................ (24,486) (24,486) -- ------- ------- ------- Balance as of December 31,1998................ 206,332 199,212 7,120 ======= ======= =======
The investments in affiliated companies as of December 31, 1998 are:
Investments in and Cumulative Share % Advances to In Results of Ownership Affiliated Companies Affiliated Companies Total ------------- --------------------- ---------------------- ------------- A2000.................... 50 229,481 (24,449) 205,032 Interway................. 33 1,337 (37) 1,300 ------- ------- ------- Total.................... 230,818 (24,486) 206,332 ======= ======= =======
138 UTH had the following differences related to the excess of cost over the net tangible assets acquired for its equity investments. Such differences are being amortized over 12 to 15 years:
Accumulated Basis Difference Amortization ---------------- ---------------- A2000............................................. 249,236 (8,200) ======= ======
These differences have been presented as affiliated companies and share in result of affiliated companies respectively. Subsequent to year end, UPC provided a letter of support to A2000 stating that it would continue to provide to A2000 the funding necessary to continue operations through at least 1999. Summary financial information for A2000 based on Dutch generally accepted accounting principles is as follows:
Balance sheet As of December 31, 1998 ----------------------- Intangible fixed assets............................. 113,361 Tangible fixed assets............................... 356,623 Financial fixed assets.............................. 770 Liquid assets....................................... 369 Other current assets................................ 37,482 ------- Total assets..................................... 508,605 ======= Provisions.......................................... 1,610 Long-term debt...................................... 467,430 Current liabilities................................. 125,813 ------- Total liabilities................................ 594,853 ------- Total shareholders' value........................... (86,248) ======= Statement of income For the Five Months Ended December 31, 1998 ------- Revenue............................................. 53,954 Costs............................................... (39,271) Depreciation and amortization....................... (35,888) Financial income/charges............................ (11,293) ------- Net loss......................................... (32,498) =======
6. Receivables Receivables as presented under current assets mature within one year and are specified as follows: Trade accounts receivable 22,519 Receivables from affiliated companies 1,654 Prepaid expenses and accrued income 1,447 Other receivables 15,018 ------ Total 40,638 ====== A major item under "other receivables" is current reclaimable VAT 3,676. As of December, 1998 the valuation allowance on trade receivables amounted to 538. 139 7. Cash and cash equivalents Cash and cash equivalents include demand accounts held in a bank with a maturity of less than three months. 8. Shareholders' Equity UTH's issued share capital consists of 100,000 shares with a par value of NLG 1 each. All issued shares are fully paid-in.
Ordinary Additional Accumulated Capital Paid-in Capital Deficit Total --------- ---------------- ----------------- ------------ Balance at inception...... 100 -- -- 100 Balances upon contribution of properties to joint venture, August 6, 1998. -- 684,795 -- 684,795 Net loss.................. -- -- (49,374) (49,374) --------- ---------------- ----------------- ------------ 100 684,795 (49,374) 635,521 ========= ================ ================= ============
9. Provisions Provisions relate mainly to deferred taxation. 10. Long-term liabilities Average Amount Rate of Outstanding Range of Interest Interest December 31, 1998 ----------------- ------------ ------------------ Bank loans 5-7.625% 5.2 235,947 Long-term liabilities at December 31, 1998 will be payable as follows: Bank Loans ---------- 1999 3,220 2000 2,353 2001 8,404 2002 16,948 2003 30,104 Thereafter 174,918 ------- Total 235,947 ======= On February 20, 1998 CNBH secured a 250,000 nine-year term facility, which was amended in August 1998 to 266,000. The CNBH facility bears interest at the applicable Amsterdam Interbank Offered Rate ("AIBOR") plus a margin ranging from 0.60% to 1.60% per annum, and is secured by, among other things, an encumbrance over CNBH's assets and a pledge of the shares of CNBH. The facility is used to refinance several acquisitions and will furthermore be used for the development and exploitation of enhanced cable TV services, data services and telephony services. As of December 31, 1998, 219,000 was outstanding on the facility. The shares of UTH held by UPC are pledged for a certain loan of UPC. 140 11. Current Liabilities The current liabilities relate to short-term debt and other liabilities which are specified below: (a) Short-term debt Long-term debt repayable within one year 3,220 Short-term debt to shareholders 662,403 ------- Total 665,623 ------- Short term debt to shareholders as of December 31, 1998 NUON's contribution to UTH included an existing 690,000-debt facility with an outstanding balance of approximately 543,000 (as of August 6, 1998). This facility bears an interest rate of 6.65% over the reporting period up to November 30, 1998. As of November 30, 1998 this rate was increased with 1.5%. As of December 31, 1998, approximately 614,000 was outstanding on the facility. The debt facility is due March 15, 1999, with an extension period of 15 days. As security for repayment of the debt facility, NUON received a pledge over the shares of N.V. Telekabel Beheer (the assets contributed by NUON). UTH has negotiated with the lenders to refinance the debt facility (see Note 20.). Subordinated loans UTH entered into a subordinated loan agreement with NUON in December 1998 for an amount of NLG 33.0 million. The interest payable is 5.5% on an annually basis.This subordinated loan was entered into for purposes of continuing funding of incurred losses and capital expenditures.UTH entered into a subordinated loan agreement with UPC in December 1998 for an amount of NLG 15.2 million. The interest payable is 5.5% on an annually basis. This subordinated loan was entered into for purposes of continuing funding of incurred losses and capital expenditures (b) Other Liabilities Accounts payable to trade creditors 47,459 Deposits by customers 197 Other short-term liabilities 39,855 Deferred income and accrued expenses 7,490 ------- Total 95,001 ------- Total current liabilities 760,624 ======= 12. Information per geographical area All operations of UTH are in The Netherlands. In addition, substantially all operations relate to cable television services. 13. Personnel Labour cost is specified as follows: Salaries and wages 9,173 Pension costs 538 Social securities 1,911 ------ Total 11,622 ====== 141 The information about employees by category is as follows: Operating 160 Other 184 --- Total 344 === 14. Financial income and expenses Interest income 14 Interest expense (16,713) ------- Total (16,699) ======== Under interest expense an amount of 11,348 was accounted for as interest related parties. 15. Income taxes In general, a Dutch holding company may benefit from the so-called participation exemption. The participation exemption is a facility in Dutch corporate tax law which under certain conditions allows a Dutch company to exempt any dividend income and capital gains in relation with its participation in subsidiaries. Capital losses are also exempted, apart from liquidation losses (under stringent conditions). For UTH the primary difference between taxable loss and net loss for financial reporting purposes relates to the amortization of goodwill. The consolidated financial statements have been prepared assuming partial tax basis for license fees capitalized relating to certain acquisitions. Deferred taxes have been provided for that portion of the licenses which management believes no tax basis will be allowed. The difference between income tax expense provided in the financial statements and the expected income tax benefit at statutory rates is reconciled as follows: Expected income tax benefit at the Dutch statutory rate of 35% (9,217) Tax effect of permanent and other differences: Change in valuation allowance 6,541 Non- deductible expenses 1,464 ------- Total income tax benefit (1,212) ========= The significant components of the net deferred tax liability are as follows: Deferred Tax Assets: Tax net operating loss carries forward.................. 20,112 Valuation allowance..................................... (20,112) -------------- Deferred tax assets, net of valuation allowance...... 0 -------------- Deferred Tax Liabilities: Intangible assets....................................... 33,438 Tangible fixed assets, net.............................. 962 -------------- Total deferred tax liabilities.......................... 34,400 -------------- Deferred tax liabilities, net........................ 34,000 ==============
The tax loss carry forwards have no expiration date. 16. Related parties transactions UTH signed management services agreements with both of its shareholders. In the reporting period an amount of NLG 4,255 has been taken into account as expenses. In addition UTH delivers service to NUON. These services are rendered at arms' length prices and made up 8% of the revenues over the reporting period. As mentioned under Note 11 UTH has a short-term debt payable to NUON as well as subordinated loans to both NUON and UPC. UPC charged an amount of 988 for salaries and related costs for employees seconded to UTH Group. 142 17. Commitments and Guarantees The UTH Group has entered into various rent and lease agreements for office space, cars etc. The terms of the agreements call for future minimum payments as follows: 1999 4,000 2000 3,200 2001 2,100 2002 1,600 2003 1,400 Subsequent to December 31, 1998, UTH provided additional funding to A2000. In total UTH's share of the funding commitment is $15,000. As of December 31, 1998, UTH had funded $3,750 of its commitment. 18. US GAAP Reconciliation General The accounting policies followed in the preparation for the consolidated financial statements differ in some respects to those generally accepted in the United States of America (US GAAP). The differences which have a material effect on net loss and/or shareholders'equity and/or total assets are as follows: - The fair market value of licences, goodwill, land and buildings and networks for US GAAP purposes should be set at historical cost of the contributor. Consequently, no step-up in asset value is allowed for the difference between historical cost and the fair market value of the assets contributed by both UPC and NUON. - Deferred taxes have been established for the difference between book and tax basis of contributed assets, if applicable. Income Taxes The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" which requires recognition of deferred tax assets and liabilities for the expected future income tax consequences of transactions which have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based upon the difference between the financial and tax bases of assets and liabilities and carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse. UTH has adopted the principles of this statement in its financial statements. 143 US GAAP information The calculation of net loss, shareholders' equity and total assets, substantially in accordance with US GAAP, is as follows: Net loss as per Consolidated ---------------------------- Statements of income (49,374) -------------------- Adjustments to reported income (loss): Amortisation of goodwill 4,082 Share in results of affiliated companies 747 --------- Approximate net loss in accordance with US ========= GAAP (44,545) ========= Shareholders'equity as per -------------------------- Consolidated balance sheets 635,521 --------------------------- Adjustments to reported equity: Goodwill (152,105) Affiliated Companies (27,893) --------- Approximate shareholders'equity in accordance with US GAAP 455,523 ========= Total assets as per Consolidated -------------------------------- Balance sheets 1,672,030 -------------- Adjustments to reported assets: Goodwill (152,105) Affiliated Companies (27,893) --------- Approximate total assets in accordance with US GAAP 1,492,032 ========= 19. Proforma information (unaudited) On August 6, 1998 both shareholders contributed their interests in the Dutch cable market into UTH. The following pro forma condensed consolidated information for the year ended December 31, 1997 and 1998 give effect to the UTH Transaction as if it had occurred at the beginning of the periods presented. This pro forma condensed consolidated information does not purport to represent what UTH's result of operations would actually have been if such transaction had in fact occurred on such date. The pro forma adjustments are based upon currently available information and upon certain assumptions that management believes are reasonable.
For the Year Ended For the Year Ended December 31, 1997 December 31, 1998 ---------------------- ---------------------- Total revenues........................ 157,836 219,314 Net loss.............................. (47,194) (90,600)
144 20. Subsequent events Subordinated loan UTH entered into a subordinated loan agreement with UPC in March, 1999 for an amount of 119,000 million. The interest is payable on an annually basis. This subordinated loan was entered into for purposes of continuing funding of incurred losses and capital expenditures. NUON Share Purchase Agreement On February 17, 1999, UPC acquired the remaining 49% of UTH. This transaction completed the purchase by UPC of 100% of UTH. UPC purchased the interest from NUON for 518,100. In addition, UPC repaid NUON and assumed from NUON a 33,300 subordinated loan, including accrued interest dated December 31, 1998, owed by UTH to NUON. Refinancing Subsequent to December 31, 1998, UTH replaced their existing 690,000 facility with a senior facility and additional shareholder loans. The senior facility consists of a Euro 340 million (750,000) revolving facility to N.V. Telekabel Beheer that will convert to a term facility on December 31, 2001. Euro 5 million of this facility will be in the form of an overdraft facility that will be available until December 31, 2007. This existing facility will be used to repay a portion of the UTH facility and for capital expenditures. The new facility will bear interest at the Euro Interbank Offered Rate plus a margin between 0.75% and 2.00% based on the leverage multiples tied to N.V. Telekabel Beheer's net operating income. The new facility will be secured by, among other things, a pledge over shares held by the borrower and will restrict N.V. Telekabel Beheer's ability to incur additional debt. 145 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. United Pan-Europe Communications N.V. a Dutch Public limited liability company By: /s/ J. Timothy Bryan ____________________________________________ J. Timothy Bryan, President and Chief Financial Officer Date: March 29, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Mark L. Schneider - ------------------------------------------------ Mark L. Schneider, Chairman of Board of Management and Chief Executive Officer Date: March 29, 1999 /s/ John F. Riordan - ------------------------------------------------ John F. Riordan, Vice-Chairman of the Board of Management Date: March 29, 1999 /s/ J. Timothy Bryan - ------------------------------------------------ J. Timothy Bryan, President and Chief Financial Officer Date: March 29, 1999 /s/ Anton H.E. v. Voskuijlen - ------------------------------------------------ Anton H.E. v. Voskuijlen, Senior Vice President, Legal and General Counsel Date: March 29, 1999 /s/ Nimrod J. Kovacs - ------------------------------------------------ Nimrod J. Kovacs, Managing Director, Eastern Europe Date: March 29, 1999 /s/ Ray D. Samuelson - ------------------------------------------------ Ray D. Samuelson, Managing Director, Finance and Accounting (Chief Accounting Officer) Date: March 29, 1999 /s/ Michael T. Fries - ------------------------------------------------ Michael T. Fries, Chairman of Supervisory Board and Authorized U.S. Representative Date: March 29, 1999 /s/ Richard De Lange - ------------------------------------------------ Richard De Lange, Supervisory Board Member Date: March 29, 1999 /s/ Tina M. Wildes - ------------------------------------------------ Tina M. Wildes, Supervisory Board Member Date: March 29, 1999 /s/ Ellen P. Spangler - ------------------------------------------------ Ellen P. Spangler, Supervisory Board Member Date: March 29, 1999 /s/ Anthony P. Ressler - ------------------------------------------------ Anthony P. Ressler, Supervisory Board Member Date: March 29, 1999 /s/ John P. Cole, Jr. - ------------------------------------------------ John P. Cole, Jr., Supervisory Board Member Date: March 29, 1999
146 EX-4.1 2 DEPOSIT AGREEMENT BETWEEN UPC AND CITIBANK, N.A. EXHIBIT 4.1 - -------------------------------------------------------------------------------- DEPOSIT AGREEMENT by and among - -------------------------------------------------------------------------------- UNITED PAN-EUROPE COMMUNICATIONS N.V. AND CITIBANK, N.A., as Depositary, AND THE HOLDERS AND BENEFICIAL OWNERS OF AMERICAN DEPOSITARY SHARES EVIDENCED BY AMERICAN DEPOSITARY RECEIPTS ISSUED HEREUNDER - -------------------------------------------------------------------------------- Dated as of February 16, 1999 - --------------------------------------------------------------------------------
ARTICLE I DEFINITIONS....................................................................................... 2 SECTION 1.1. "Affiliate"....................................................................................... 2 SECTION 1.2. "American Depositary Share(s)" and "ADS(s)"....................................................... 2 SECTION 1.3. "ADS Record Date"................................................................................. 2 SECTION 1.4. "Beneficial Owner"................................................................................ 2 SECTION 1.5. "Business Day".................................................................................... 2 SECTION 1.6. "Commission"...................................................................................... 2 SECTION 1.7. "Company"......................................................................................... 2 SECTION 1.8. "Custodian"....................................................................................... 2 SECTION 1.9. "Deliver" and "Delivery".......................................................................... 3 SECTION 1.10. "Deposit Agreement"............................................................................... 3 SECTION 1.11. "Depositary"...................................................................................... 3 SECTION 1.12. "Deposited Securities"............................................................................ 3 SECTION 1.13. "Dollars" and "................................................................................... 3 SECTION 1.14. "DTC"............................................................................................. 3 SECTION 1.15. "DTC Participant"................................................................................. 3 SECTION 1.16. "Euros" and " "................................................................................... 3 SECTION 1.17. "Exchange Act".................................................................................... 3 SECTION 1.18. "Foreign Currency"................................................................................ 3 SECTION 1.19. "Holder".......................................................................................... 3 SECTION 1.20. "NECIGEF"......................................................................................... 4 SECTION 1.21. "NECIGEF Participant"............................................................................. 4 SECTION 1.22. "Pre-Release Transaction"......................................................................... 4 SECTION 1.23. "Principal Office"................................................................................ 4 SECTION 1.24. "Receipt(s)"; "American Depositary Receipt(s)" and "ADR(s)"....................................... 4 SECTION 1.25. "Registrar"....................................................................................... 4 SECTION 1.26. "Restricted Securities"........................................................................... 4 SECTION 1.27. "Securities Act".................................................................................. 4 SECTION 1.28. "Securities Giro Transfer Act".................................................................... 5 SECTION 1.29. "Share Registrar"................................................................................. 5 SECTION 1.30. "Shares".......................................................................................... 5 SECTION 1.31. "United States"................................................................................... 5
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ARTICLE II APPOINTMENT OF DEPOSITARY; FORM OF RECEIPTS; DEPOSIT OF SHARES; EXECUTION AND DELIVERY, TRANSFER AND SURRENDER OF RECEIPTS......................................................................... 5 SECTION 2.1. Appointment of Depositary......................................................................... 5 SECTION 2.2. Form and Transferability of Receipts.............................................................. 5 SECTION 2.3. Deposit with Custodian............................................................................ 7 SECTION 2.4. Registration of Shares............................................................................ 8 SECTION 2.5. Execution and Delivery of Receipts................................................................ 8 SECTION 2.6. Transfer of Receipts; Combination and Split-up of Receipts........................................ 8 SECTION 2.7. Surrender of ADSs and Withdrawal of Deposited Securities.......................................... 9 SECTION 2.8. Limitations on Execution and Delivery, Transfer, etc. of Receipts; Suspension of Delivery, Transfer, etc..................................................................................... 11 SECTION 2.9. Lost Receipts, etc................................................................................ 11 SECTION 2.10. Cancellation and Destruction of Surrendered Receipts; Maintenance of Records...................... 12 SECTION 2.11. Partial Entitlement ADSs.......................................................................... 12 ARTICLE III CERTAIN OBLIGATIONS OF HOLDERS AND BENEFICIAL OWNERS OF RECEIPTS.................................. 12 SECTION 3.1. Proofs, Certificates and Other Information........................................................ 12 SECTION 3.2. Liability for Taxes and Other Charges............................................................. 13 SECTION 3.3. Representations and Warranties on Deposit of Shares............................................... 13 SECTION 3.4. Compliance with Information Requests.............................................................. 14 SECTION 3.5. Ownership Restrictions............................................................................ 14 ARTICLE IV THE DEPOSITED SECURITIES.......................................................................... 14 SECTION 4.1. Cash Distributions................................................................................ 15 SECTION 4.2. Distribution in Shares............................................................................ 15 SECTION 4.3. Elective Distributions in Cash or Shares.......................................................... 16 SECTION 4.4. Distribution of Rights to Purchase Shares......................................................... 17 SECTION 4.5. Distributions Other Than Cash, Shares or Rights to Purchase Shares................................ 18 SECTION 4.6. [Intentionally deleted]........................................................................... 19 SECTION 4.7. Redemption........................................................................................ 19 SECTION 4.8. Conversion of Foreign Currency.................................................................... 19 SECTION 4.9. Fixing of ADS Record Date......................................................................... 20
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SECTION 4.10. Voting of Deposited Securities.................................................................... 21 SECTION 4.11. Changes Affecting Deposited Securities............................................................ 21 SECTION 4.12. Available Information............................................................................. 22 SECTION 4.13. Reports........................................................................................... 22 SECTION 4.14. List of Holders................................................................................... 22 SECTION 4.15. Taxation.......................................................................................... 23 ARTICLE V THE DEPOSITARY, THE CUSTODIAN AND THE COMPANY..................................................... 24 SECTION 5.1. Maintenance of Office and Transfer Books by the Registrar......................................... 24 SECTION 5.2. Exoneration....................................................................................... 24 SECTION 5.3. Standard of Care.................................................................................. 25 SECTION 5.4. Resignation and Removal of the Depositary; Appointment of Successor Depositary.................... 26 SECTION 5.5. The Custodian..................................................................................... 26 SECTION 5.6. Notices and Reports............................................................................... 27 SECTION 5.7. Issuance of Additional Shares, ADSs etc........................................................... 28 SECTION 5.8. Indemnification................................................................................... 28 SECTION 5.9. Fees and Charges of Depositary.................................................................... 29 SECTION 5.10. Pre-Release....................................................................................... 30 ARTICLE VI AMENDMENT AND TERMINATION......................................................................... 31 SECTION 6.1. Amendment/Supplement.............................................................................. 31 SECTION 6.2. Termination....................................................................................... 31 ARTICLE VII MISCELLANEOUS..................................................................................... 32 SECTION 7.1. Counterparts...................................................................................... 32 SECTION 7.2. No Third-Party Beneficiaries...................................................................... 33 SECTION 7.3. Severability...................................................................................... 33 SECTION 7.4. Holders and Beneficial Owners as Parties; Binding Effect.......................................... 33 SECTION 7.5. Notices........................................................................................... 33 SECTION 7.6. Governing Law and Jurisdiction.................................................................... 34 SECTION 7.7. Assignment........................................................................................ 35 SECTION 7.8. Compliance with U.S. Securities Laws.............................................................. 35 SECTION 7.9. Titles............................................................................................ 35 Form of Receipt A-1
-iii- Fee Schedule B-1 -iv- DEPOSIT AGREEMENT DEPOSIT AGREEMENT, dated as of February 16, 1999, by and among (i) UNITED PAN- EUROPE COMMUNICATIONS N.V., a company organized under the laws of The Netherlands, and its successors (the "Company"), (ii) CITIBANK, N.A., a national banking association organized under the laws of the United States of America acting in its capacity as depositary, and any successor depositary hereunder (the "Depositary"), and (iii) all Holders and Beneficial Owners of American Depositary Shares evidenced by American Depositary Receipts issued hereunder (all such capitalized terms as hereinafter defined). W I T N E S S E T H T H A T: WHEREAS, the Company has duly authorized and has outstanding Ordinary Shares, nominal value 0.30 each (the "Shares"), which are deposited with NECIGEF (as defined below) and listed for trading on the Amsterdam Stock Exchange; and WHEREAS, the Company desires to establish with the Depositary an ADR facility to provide for the deposit of the Shares and the creation of American Depositary Shares representing the Shares so deposited and for the execution and delivery of American Depositary Receipts evidencing such American Depositary Shares; and WHEREAS, the Depositary is willing to act as the depositary for such facility and the Company is willing to engage the Depository upon the terms set forth in this Deposit Agreement; and WHEREAS, the American Depositary Receipts evidencing the American Depositary Shares issued pursuant to the terms of this Deposit Agreement are to be substantially in the form of Exhibit A attached hereto, with appropriate insertions, modifications and omissions, as hereinafter provided in this Deposit Agreement; and WHEREAS, the American Depositary Shares to be issued pursuant to the terms of this Deposit Agreement are to be quoted on the NASDAQ National Market System under the symbol "UPCOY"; and WHEREAS, the Board of Management of the Company (or an authorized committee thereof) has duly approved the establishment of an ADR facility upon the terms set forth in this Deposit Agreement, the execution and delivery of this Deposit Agreement on behalf of the Company, and the actions of the Company and the transactions contemplated herein. NOW, THEREFORE, in consideration of the premises, the parties hereto agree as follows: 1 ARTICLE I DEFINITIONS All capitalized terms used, but not otherwise defined, herein shall have the meanings set forth below, unless otherwise clearly indicated: SECTION 1.1. "Affiliate" shall have the meaning assigned to such term by the --------- Commission (as hereinafter defined) under Regulation C promulgated under the Securities Act (as hereinafter defined). SECTION 1.2. "American Depositary Share(s)" and "ADS(s)" American Depositary ----------------------------------------- Shares(s) shall mean with respect to any American Depositary Receipt, the rights and interests in the Deposited Securities granted to the Holders and Beneficial Owners pursuant to the terms and conditions of this Deposit Agreement and the American Depositary Receipts issued hereunder. Each American Depositary Share shall represent one Share, until there shall occur a distribution upon Deposited Securities referred to in Section 4.2 or a change in Deposited Securities referred to in Section 4.11 with respect to which additional American Depositary Shares are not issued, and thereafter each American Depositary Share shall represent the Shares or Deposited Securities specified in such Sections. SECTION 1.3. "ADS Record Date" shall have the meaning given to such term in --------------- Section 4.9. SECTION 1.4. "Beneficial Owner" shall mean as to any ADS, any person or entity ---------------- having a beneficial interest deriving from the ownership of such ADS. A Beneficial Owner may or may not be the Holder of the ADR(s) evidencing such ADSs. A Beneficial Owner shall be able to exercise any right or receive any benefit hereunder solely through the person who is the Holder of the ADR(s) evidencing the ADSs owned by such Beneficial Owner. SECTION 1.5. "Business Day" shall mean any day on which both the banks in ------------ Amsterdam, The Netherlands and the banks in New York are open for business. SECTION 1.6. "Commission" shall mean the Securities and Exchange Commission of ---------- the United States or any successor governmental agency in the United States. SECTION 1.7. "Company" shall mean United Pan-Europe Communications N.V., a ------- company incorporated and existing under the laws of The Netherlands, and its successors. SECTION 1.8. "Custodian" shall mean, as of the date hereof, Citibank N.A., --------- Amsterdam, having its principal office at Europlaza, Hoogoordreef 54B, 1101 B.E., Amsterdam Z.O., The Netherlands, as the custodian for the purposes of this Deposit Agreement, and any other entity that may be appointed by the Depositary pursuant to the terms of Section 5.5 as successor, substitute or additional custodian hereunder, as the context shall require. The term "Custodians" shall mean all custodians, collectively. 2 SECTION 1.9. "Deliver" and "Delivery" shall mean, when used in respect of ------- -------- American Depositary Shares, Receipts, Deposited Securities and Shares, the physical delivery of the certificate representing such security, if any, or the electronic delivery of such security by means of book-entry transfer, if available; in the case of Shares, delivery shall take place only electronically by means of book-entry transfer recorded in the books of NECIGEF or a NECIGEF participant in accordance with the provisions of the Securities Giro Transfer Act. SECTION 1.10. "Deposit Agreement" shall mean this Deposit Agreement and all ----------------- exhibits hereto, as the same may from time to time be amended and supplemented in accordance with the terms hereof. SECTION 1.11. "Depositary" shall mean Citibank, N.A., a national banking ---------- association organized under the laws of the United States of America, in its capacity as depositary under the terms of this Deposit Agreement, and any successor depositary hereunder. SECTION 1.12. "Deposited Securities" shall mean Shares at any time deposited -------------------- under this Deposit Agreement and any and all other securities, property and cash held by the Depositary or the Custodian in respect thereof, subject, in the case of cash, to the provisions of Section 4.8. The collateral delivered in connection with Pre-Release Transactions described in Section 5.10 hereof shall not constitute Deposited Securities. SECTION 1.13. "Dollars" and "$" shall refer to the lawful currency of the ------- - United States. SECTION 1.14. "DTC" shall mean The Depository Trust Company, a national --- clearinghouse and the central book-entry settlement system for securities traded in the United States and, as such, the custodian for the securities of DTC Participants (as hereinafter defined) maintained in DTC, and any successor thereto. SECTION 1.15. "DTC Participant" shall mean any financial institution (or any --------------- nominee of such institution) having one or more participant accounts with DTC for receiving, holding and delivering the securities and cash held in DTC. SECTION 1.16. "Euros" and " " shall refer to the single currency of the ------------- participating member states from time to time of the European Union described in legislation of the European Council for the operation of a single unified European currency (whether known as the Euro or otherwise). SECTION 1.17. "Exchange Act" shall mean the United States Securities Exchange ------------ Act of 1934, as from time to time amended. SECTION 1.18. "Foreign Currency" shall mean currency other than Dollars. ---------------- SECTION 1.19. "Holder" shall mean the person in whose name a Receipt is ------ registered on the books of the Depositary (or the Registrar, if any) maintained for such purpose. A Holder may or may not be a Beneficial Owner. If a Holder is not the Beneficial Owner of the ADSs 3 evidenced by the Receipt registered in its name, such person shall be deemed to have all requisite authority to act on behalf of the Beneficial Owners of such ADSs. SECTION 1.20. "NECIGEF" shall mean The Netherlands Central Institute for Giro ------- Securities (Nederlands Centraal Instituut voor Giraal ffectenverkeer B.V.), the central securities depositary in The Netherlands, or any successor entity thereto. SECTION 1.21. "NECIGEF Participant" shall mean any financial institution which ------------------- is a participant having an account at NECIGEF. SECTION 1.22. "Pre-Release Transaction" shall have the meaning set forth in ----------------------- Section 5.10 hereof. SECTION 1.23. "Principal Office" when used with respect to the Depositary, ---------------- shall mean the principal office of the Depositary at which at any particular time its depositary receipts business shall be administered, which, at the date of this Deposit Agreement, is located at 111 Wall Street, New York, New York 10043, U.S.A. SECTION 1.24. "Receipt(s)"; "American Depositary Receipt(s)" and "ADR(s)" shall --------------------------------------------------------- mean the certificate(s) issued by the Depositary to evidence the American Depositary Shares issued under the terms of this Deposit Agreement, as such Receipts may be amended from time to time in accordance with the provisions of this Deposit Agreement. A Receipt may evidence any number of American Depositary Shares and may, in the case of American Depositary Shares held through a central depository such as DTC, be in the form of a "Balance Certificate." SECTION 1.25. "Registrar" shall mean the Depositary or any bank or trust --------- company having an office in the Borough of Manhattan, The City of New York, which shall be appointed by the Depositary to register issuances and transfers of Receipts as herein provided, and shall include any co-registrar appointed by the Depositary for such purposes. Registrars (other than the Depositary) may be removed and substitutes appointed by the Depositary. Each Registrar (other than the Depositary) appointed pursuant to this Deposit Agreement shall be required to give notice in writing to the Depositary accepting such appointment and agreeing to be bound by the applicable terms of this Deposit Agreement. SECTION 1.26. "Restricted Securities" shall mean Shares, or American Depositary --------------------- Shares representing such Shares, which (i) have been acquired directly or indirectly from the Company or any of its Affiliates in a transaction or chain of transactions not involving any public offering and subject to resale limitations under the Securities Act or the rules issued thereunder, or (ii) are held by an officer or director (or persons performing similar functions) or other Affiliate of the Company, or (iii) are subject to other restrictions on sale or deposit under the laws of the United States, The Netherlands, or under a shareholder agreement or the Articles of Association of the Company or under the regulations of an applicable securities exchange unless, in each case, such Shares are being sold to persons other than an Affiliate of the Company in a transaction (i) covered by an effective resale registration statement or (ii) exempt from the registration requirements of the Securities Act (as hereinafter defined), and the Shares are not, when held by such person, Restricted Securities. 4 SECTION 1.27. "Securities Act" shall mean the United States Securities Act of -------------- 1933, as from time to time amended. SECTION 1.28. "Securities Giro Transfer Act" shall mean the Dutch Wet Giraal ---------------------------- Effectenverkeer. SECTION 1.29. "Share Registrar" shall mean the Company or a depository --------------- institution organized under the laws of the Netherlands, which carries out the duties of registrar for the Shares or any successor as Share Registrar for such Shares appointed by the Company. SECTION 1.30. "Shares" shall mean the Company's Ordinary Shares, nominal value ------ 0.30 per share, validly issued and outstanding and fully paid and may, if the Depositary so agrees after consultation with the Company, include evidence of the right to receive Shares; provided that in no event shall Shares include evidence of the right to receive Shares with respect to which the full purchase price has not been paid or Shares as to which preemptive rights have theretofore not been validly waived or exercised; provided further, however, that, if there shall occur any change in nominal value, split-up, consolidation, reclassification, conversion or any other event described in Section 4.11 in respect of the Shares of the Company, the term "Shares" shall thereafter, to the extent permitted by law, represent the successor securities resulting from such change in nominal value, split-up, consolidation, exchange, conversion, reclassification or event. SECTION 1.31. "United States" shall have the meaning assigned to it in ------------- Regulation S as promulgated by the Commission under the Securities Act. ARTICLE II APPOINTMENT OF DEPOSITARY; FORM OF RECEIPTS; DEPOSIT OF SHARES; EXECUTION AND DELIVERY, TRANSFER AND SURRENDER OF RECEIPTS SECTION 2.1. Appointment of Depositary. The Company hereby appoints the ------------------------- Depositary as depositary for the Deposited Securities and hereby authorizes and directs the Depositary to act in accordance with the terms set forth in this Deposit Agreement. Each Holder and each Beneficial Owner, upon acceptance of any ADSs (or any interest therein) issued in accordance with the terms of this Deposit Agreement, shall be deemed for all purposes to (a) be a party to and bound by the terms of this Deposit Agreement and (b) appoint the Depositary its attorney-in-fact, with full power to delegate, to act on its behalf and to take any and all actions contemplated in this Deposit Agreement, to adopt any and all procedures necessary to comply with applicable law and to take such action as the Depositary in its sole discretion may deem necessary or appropriate to carry out the purposes of this Deposit Agreement (the taking of such actions to be the conclusive determinant of the necessity and appropriateness thereof). SECTION 2.2. Form and Transferability of Receipts. ------------------------------------ (a) Form. American Depositary Shares shall be evidenced by definitive Receipts ---- which shall be engraved, printed, lithographed or produced in such other manner as may be agreed upon by the 5 Company and the Depositary. The Receipts shall be substantially in the form set forth in Exhibit A to this Deposit Agreement, with any appropriate --------- insertions, modifications and omissions, in each case, as otherwise contemplated in the Deposit Agreement. Receipts shall be (i) dated, (ii) signed by the manual or facsimile signature of a duly authorized signatory of the Depositary, (iii) countersigned by the manual or facsimile signature of a duly authorized signatory of the Registrar, and (iv) registered in the books maintained by the Registrar for the registration of the issuance and transfer of Receipts. No Receipt and no American Depositary Share evidenced thereby shall be entitled to any benefits under this Deposit Agreement or be valid or enforceable for any purpose against the Depositary or the Company, unless such Receipt shall have been so dated, signed, countersigned and registered. Receipts bearing the facsimile signature of a duly-authorized signatory of the Depositary or the Registrar, who at the time of signature was a duly authorized signatory of the Depositary or the Registrar, as the case may be, shall bind the Depositary, notwithstanding the fact that such signatory has ceased to be so authorized prior to the delivery of such Receipt by the Depositary. The Receipts shall bear a CUSIP number that is different from any CUSIP number that was, is or may be assigned to any depositary receipts previously or subsequently issued pursuant to any other arrangement between the Depositary (or any other depositary) and the Company which are not Receipts issued hereunder. (b) Legends. The Receipts may be endorsed with or have incorporated in ------- the text thereof such legends or recitals or changes not inconsistent with the provisions of this Deposit Agreement (i) as may be necessary to enable the Depositary to perform its obligations hereunder, (ii) as may be required to comply with any applicable law or regulations, or with the rules and regulations of any securities exchange or market upon which American Depositary Shares may be traded, listed or quoted or to conform with any usage with respect thereto, (iii) as may be necessary to indicate any special limitations or restrictions to which any particular Receipts or ADSs are subject by reason of the date of issuance of the Deposited Securities or otherwise, or (iv) as may be required by any book-entry system in which the ADSs are held. (c) Title. Subject to the limitations contained herein and in the ----- Receipt, title to a Receipt (and to each ADS evidenced thereby) shall be transferable by delivery of the Receipt with the same effect as a certificated security under the laws of the State of New York, provided that such Receipt has been properly endorsed or is accompanied by proper instruments of transfer. Notwithstanding any notice to the contrary, the Depositary may deem and treat the Holder of a Receipt (that is, the person in whose name a Receipt is registered on the books of the Depositary) as the absolute owner thereof for all purposes. The Depositary shall have no obligation nor be subject to any liability under this Deposit Agreement or any Receipt to any holder of a Receipt or any Beneficial Owner unless such holder is the Holder of such Receipt registered on the books of the Depositary or, in the case of a Beneficial Owner, such Beneficial Owner or the Beneficial Owner's representative is the Holder registered on the books of the Depositary. (d) Book-Entry Systems. The Depositary shall make arrangements for the ------------------ acceptance of the American Depositary Shares into DTC. A single ADR in the form of a "Balance Certificate" will evidence all ADSs held through DTC and will be registered in the name of the nominee for DTC (currently "Cede & Co."). As such, the nominee for DTC will be the only "Holder" of the ADR evidencing all ADSs held through DTC. Each Beneficial Owner of ADSs held through 6 DTC must rely upon the procedures of DTC and the DTC Participants to exercise or be entitled to any rights attributable to such ADSs. The DTC Participants shall for all purposes be deemed to have all requisite power and authority to act on behalf of the Beneficial Owners of the ADSs held in the DTC Participants' respective accounts in DTC and the Depositary shall for all purposes be authorized to rely upon any instructions and information given to it by DTC Participants on behalf of Beneficial Owners of ADSs. So long as ADSs are held through DTC or unless otherwise required by law, ownership of beneficial interests in the ADR registered in the name of the nominee for DTC will be shown on, and transfers of such ownership will be effected only through, records maintained by (i) DTC (or its nominee), or (ii) DTC Participants (or their nominees). SECTION 2.3. Deposit with Custodian. Subject to the terms and conditions of ---------------------- this Deposit Agreement and applicable law, Shares or evidence of rights to receive Shares (other than Restricted Securities) may be deposited by a NECIGEF Participant (including the Depositary in its individual capacity but subject, however, in the case of the Company or any Affiliate of the Company, to Section 5.7 hereof) at any time, whether or not the transfer books of the Company or the Share Registrar, if any, are closed, by Delivery of the Shares to the Custodian, and (A) such certifications and payments (including, without limitation, the Depositary's fees and related charges) and evidence of such payments (including, without limitation, stamping or otherwise marking such Shares by way of receipt) as may be required by the Depositary or the Custodian in accordance with the provisions of this Deposit Agreement and applicable law, (B) if the Depositary so requires, a written order directing the Depositary to execute and deliver to, or upon the written order of, the person(s) stated in such order a Receipt or Receipts for the number of American Depositary Shares representing the Shares so deposited, (C) evidence satisfactory to the Depositary (which may be an opinion of counsel) that all necessary approvals have been granted by, or there has been compliance with the rules and regulations of, any applicable governmental agency in The Netherlands, and (D) if the Depositary so requires, (i) an agreement, assignment or instrument satisfactory to the Depositary or the Custodian which provides for the prompt transfer by any NECIGEF Participant who Delivers the Shares to the Custodian of any distribution, or right to subscribe for additional Shares or to receive other property in respect of any such deposited Shares or, in lieu thereof, such indemnity or other agreement as shall be satisfactory to the Depositary or the Custodian and (ii) if the Shares are recorded in the name of the NECIGEF Participant on whose behalf they are presented for deposit, a proxy or proxies entitling the Custodian to exercise voting rights in respect of the Shares for any and all purposes until the Shares so deposited are recorded in the name of the Custodian. Without limiting any other provision of this Deposit Agreement, the Depositary shall instruct the Custodian not to, and the Depositary shall not knowingly, accept for deposit (a) any Restricted Securities nor (b) any fractional Shares or fractional Deposited Securities nor (c) a number of Shares or Deposited Securities which upon application of the ADS to Shares ratio would give rise to fractional ADSs. No Share shall be accepted for deposit unless accompanied by evidence, if any is required by the Depositary, that is reasonably satisfactory to the Depositary or the Custodian that all conditions to such deposit have been satisfied by the NECIGEF Participant depositing such Shares under the laws and regulations of The Netherlands and any necessary approval has been granted by any governmental body in The Netherlands, if any, which is then performing the function of the regulator of currency exchange. The Depositary may issue Receipts against evidence of rights to 7 receive Shares from the Company, any agent of the Company or any custodian, registrar, transfer agent, clearing agency or other entity involved in ownership or transaction records in respect of the Shares. Such evidence of rights shall consist of written blanket or specific guarantees of ownership of Shares furnished by the Company or any such custodian, registrar, transfer agent, clearing agency or other entity involved in ownership or transaction records in respect of the Shares. SECTION 2.4. Registration of Shares. Upon each electronic Delivery of Shares ---------------------- being deposited hereunder with the Custodian (or other Deposited Securities pursuant to Article IV hereof), NECIGEF shall by electronic transfer recorded in the books of NECIGEF transfer the Shares (as soon as transfer and registration can be accomplished and at the expense of the NECIGEF Participant for whom the deposit is made) in the name of the Custodian. Deposited Securities shall be held by the Custodian for the account and to the order of the Depositary or a nominee in each case on behalf of the Holders and Beneficial Owners. Without limitation of the foregoing, the Depositary shall not knowingly accept for deposit under this Deposit Agreement any Shares or other Deposited Securities required to be registered under the provisions of the Securities Act, unless a registration statement is in effect as to such Shares or other Deposited Securities, or any Shares or Deposited Securities the deposit of which would violate any provisions of the Articles of Association of the Company. SECTION 2.5. Execution and Delivery of Receipts. The Depositary has made ---------------------------------- arrangements with the Custodian to confirm to the Depositary (i) that a deposit of Shares has been made pursuant to Section 2.3 hereof, (ii) that any such Deposited Securities have been recorded in the name of the Custodian in the books of NECIGEF, (iii) that all required documents have been received, and (iv) the person or persons to whom or upon whose order American Depositary Shares are deliverable in respect thereof and the number of American Depositary Shares to be so delivered thereby. Such notification may be made by letter, cable, telex, SWIFT message or, at the risk and expense of the person making the deposit, by facsimile or other means of electronic transmission. Upon receiving such notice from the Custodian and subject to the terms and conditions of this Deposit Agreement the Depositary shall issue the American Depositary Shares representing the Shares so deposited to or upon the order of the person(s) named in the notice delivered to the Depositary and shall execute and deliver at its Principal Office Receipt(s) registered in the name or names requested by such person(s) and evidencing the aggregate number of American Depositary Shares to which such person(s) are entitled, but only upon payment to the Depositary of the charges of the Depositary for accepting a deposit, issuing American Depositary Shares and executing and delivering such Receipt(s) (as set forth in Section 5.9 and Exhibit B hereto) and all taxes and governmental charges and fees payable in connection with such deposit and the transfer of the Shares and the issuance of the Receipt(s). The Depositary shall only issue American Depositary Shares in whole numbers and deliver American Depositary Receipts evidencing whole numbers of American Depositary Shares. Nothing herein shall prohibit any Pre-Release Transaction upon the terms set forth in this Deposit Agreement. 8 SECTION 2.6. Transfer of Receipts; Combination and Split-up of Receipts. ---------------------------------------------------------- (a) Transfer. Subject to the terms and conditions of the applicable Receipts, -------- this Deposit Agreement and the U.S. securities laws, the Depositary shall register as promptly as practicable transfers of Receipts on its books, upon surrender at the Principal Office of the Depositary of a Receipt by the Holder thereof in person or by duly authorized attorney, properly endorsed or accompanied by proper instruments of transfer (including signature guarantees in accordance with standard industry practice) and duly stamped as may be required by the laws of the State of New York and of the United States of America. Subject to the terms and conditions of this Deposit Agreement, including payment of the applicable fees and charges of the Depositary set forth in Section 5.9 and Exhibit B hereto, the Depositary shall execute and, if the Depositary's signature is by facsimile, the Registrar shall manually countersign, new Receipt(s) and deliver the same to or upon the order of the person entitled thereto evidencing the same aggregate number of American Depositary Shares as those evidenced by the Receipt(s) surrendered. (b) Combination & Split Up. Subject to the terms and conditions of the ---------------------- applicable Receipt, this Deposit Agreement and the U.S. securities laws, the Depositary shall, upon surrender of a Receipt or Receipts for the purpose of effecting a split-up or combination of such Receipt or Receipts and upon payment to the Depositary of the applicable fees and charges set forth in Section 5.9 and Exhibit B hereto, (i) execute and, if the Depositary's signature is by facsimile, the Registrar shall manually countersign, a new Receipt or Receipts for any number of American Depositary Shares requested, but evidencing the same aggregate number of American Depositary Shares as the Receipt or Receipts surrendered, and (ii) deliver the same to or upon the order of the person entitled thereto as promptly as practicable. (c) Co-Transfer Agents. The Depositary, after consultation with the Company, ------------------ may appoint one or more co-transfer agents for the purpose of effecting transfers, combinations and split-ups of Receipts at designated transfer offices on behalf of the Depositary. In carrying out its functions, a co-transfer agent may require evidence of authority and compliance with applicable laws and other requirements by Holders or persons entitled to such Receipts and will be entitled to protection and indemnity to the same extent as the Depositary. Such co-transfer agents may be removed and substitutes appointed by the Depositary. Each co-transfer agent appointed under this Section 2.6 (other than the Depositary) shall give notice in writing to the Depositary accepting such appointment and agreeing to be bound by the applicable terms of this Deposit Agreement. SECTION 2.7. Surrender of ADSs and Withdrawal of Deposited Securities. Upon -------------------------------------------------------- surrender, at the Principal Office of the Depositary, of ADSs for the purpose of withdrawal of the Deposited Securities represented thereby, and upon payment of (i) the fees and charges of the Depositary for the making of withdrawals of Deposited Securities and cancellation of Receipts (as set forth in Section 5.9 and Exhibit B hereof) and (ii) all applicable taxes and governmental charges payable in connection with such surrender and withdrawal, and subject to the terms and conditions of this Deposit Agreement, the Receipt(s) evidencing such ADSs, the Company's Articles of Association, Section 7.8 hereof and any other provisions of or governing the Deposited Securities, other applicable laws now or hereafter in effect and the rules of NECIGEF, 9 the Holder of such ADSs shall be entitled to Delivery, by electronic transfer recorded on the transfer books of NECIGEF to the NECIGEF Participant designated in such Holder's order, of the Deposited Securities at the time represented by the ADSs so surrendered and delivery of any other securities, property and cash to which such Holder is then entitled in respect of such ADSs. ADSs may be surrendered for the purpose of withdrawing Deposited Securities by delivery of a Receipt evidencing such ADSs (if held in registered form) or by book-entry delivery of such ADSs to the Depositary. A Receipt surrendered for such purposes shall, if so required by the Depositary, be properly endorsed in blank or accompanied by proper instruments of transfer in blank. If the Depositary so requires, the Holder of any ADSs surrendered for the purpose of withdrawing the Deposited Securities represented thereby shall execute and deliver to the Depositary a written order directing the Depositary to cause the Deposited Securities being withdrawn to be Delivered to the NECIGEF Participant designated in such order. Upon receipt by the Depositary of ADSs surrendered for the purpose of withdrawal of Deposited Securities, the Depositary shall direct the Custodian to Deliver as promptly as practicable by electronic transfer recorded in the books of NECIGEF, subject to Sections 2.8, 3.1, 3.2, 5.9, and to the other terms and conditions of this Deposit Agreement, the Receipt(s) evidencing such ADSs, the Articles of Association of the Company, and the provisions of or governing the Deposited Securities, applicable laws and the rules of NECIGEF, now or hereafter in effect, to the NECIGEF Participant designated in the written order delivered to the Depositary for such purpose, the Deposited Securities represented by such American Depositary Shares together with any evidence of the electronic transfer of the Deposited Securities. The Depositary may make delivery at the Principal Office of the Depositary of any dividends or cash distributions with respect to the Deposited Securities represented by such American Depositary Shares, or of any proceeds of sale of any dividends, distributions or rights, which may at the time be held by the Depositary. The Depositary shall not accept for surrender ADSs representing less than one Share. In the case of the surrender of ADSs representing a number other than a whole number of Shares, the Depositary shall cause ownership of the appropriate whole number of Shares to be Delivered in accordance with the terms hereof, and shall, at the discretion of the Depositary, either (i) return to the person surrendering such ADSs the number of ADSs representing any remaining fractional Share, or (ii) sell or cause to be sold the fractional Shares represented by the ADSs surrendered and remit the proceeds of such sale (net of (a) applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes withheld) to the person surrendering the ADSs. At the request, risk and expense of any Holder so surrendering ADSs, and for the account of such Holder, the Depositary shall direct the Custodian to forward (to the extent permitted by law) any cash or other property (other than securities) held in respect of the Deposited Securities and forward any document of or relating to title to the Deposited Securities represented by such ADSs to the Depositary for delivery at the Principal Office of the Depositary. Such direction shall be given by letter or, at the request, risk and expense of such Holder, by cable, telex or facsimile transmission. 10 SECTION 2.8. Limitations on Execution and Delivery, Transfer, etc. of Receipts; ------------------------------------------------------------------ Suspension of Delivery, Transfer, etc. - ------------------------------------- (a) Additional Requirements. As a condition precedent to the execution and ----------------------- delivery, registration, registration of transfer, split-up, combination or surrender of any Receipt, the delivery of any distribution thereon or withdrawal of any Deposited Securities, the Depositary or the Custodian may require (i) payment from the depositor of Shares or presenter of ADSs or of a Receipt of a sum sufficient to reimburse it for any tax or other governmental charge and any stock transfer or registration fee with respect thereto (including any such tax or charge and fee with respect to Shares being deposited or withdrawn) and payment of any applicable fees and charges of the Depositary as provided in Section 5.9 and Exhibit B hereof, (ii) the production of proof satisfactory to it as to the identity and genuineness of any signature or any other matter contemplated by Section 3.1 hereof and (iii) compliance with (A) any laws or governmental regulations relating to the execution and delivery of Receipts or American Depositary Shares or to the withdrawal of Deposited Securities and (B) such reasonable regulations as the Depositary and the Company may establish consistent with the provisions of this Deposit Agreement and applicable law. (b) Additional Limitations. The issuance of ADSs against deposits of Shares ---------------------- generally or against deposits of particular Shares may be suspended, or the issuance of ADSs against the deposit of particular Shares may be withheld, or the registration of transfer of Receipts in particular instances may be refused, or the registration of transfers of Receipts generally may be suspended, during any period when the transfer books of the Company, the Depositary, a Registrar or the Share Registrar are closed or if any such action is deemed necessary or advisable by the Depositary or the Company, in good faith, at any time or from time to time because of any requirement of law, any government or governmental body or commission or any securities exchange on which the ADSs or Shares are listed, or under any provision of this Deposit Agreement or provisions of, or governing, the Deposited Securities, or any meeting of shareholders of the Company or for any other reason, subject, in all cases, to Section 7.8 hereof. (c) Regulatory Restrictions. Notwithstanding any provision of this Deposit ----------------------- Agreement or any Receipt to the contrary, Holders are entitled to surrender outstanding ADSs to withdraw the Deposited Securities at any time subject only to (i) temporary delays caused by closing the transfer books of the Depositary or the Company or the deposit of Shares in connection with voting at a shareholders' meeting or the payment of dividends, (ii) the payment of fees, taxes and similar charges, (iii) compliance with any U.S. or foreign laws or governmental regulations relating to the Receipts or to the withdrawal of the Deposited Securities, and (iv) other circumstances specifically contemplated by Section I.A.(l) of the General Instructions to Form F-6 (as such General Instructions may be amended from time to time). SECTION 2.9. Lost Receipts, etc. In case any Receipt shall be mutilated, ------------------ destroyed, lost, or stolen, the Depositary shall execute and deliver a new Receipt of like tenor at the expense of the Holder (a) in the case of a mutilated Receipt, in exchange of and substitution for such mutilated Receipt upon cancellation thereof, or (b) in lieu of and in substitution for such destroyed, lost, or 11 stolen Receipt, after the Holder thereof (i) has submitted to the Depositary a written request for such exchange and substitution before the Depositary has notice that the Receipt has been acquired by a bona fide purchaser, (ii) has provided such security or indemnity (including an indemnity bond) as may be required by the Depositary to save it and any of its agents harmless, and (iii) has satisfied any other reasonable requirements imposed by the Depositary, including, without limitation, evidence satisfactory to the Depositary of such destruction, loss or theft of such Receipt, the authenticity thereof and the Holder's ownership thereof. SECTION 2.10. Cancellation and Destruction of Surrendered Receipts; Maintenance ----------------------------------------------------------------- of Records. All Receipts surrendered to the Depositary shall be canceled by the - ---------- Depositary. Cancelled Receipts shall not be entitled to any benefits under this Deposit Agreement or be valid or enforceable against the Depositary for any purpose. The Depositary is authorized to destroy Receipts so canceled, provided the Depositary maintains a record of all destroyed Receipts. SECTION 2.11. Partial Entitlement ADSs. In the event any Shares are deposited ------------------------ which entitle the holders thereof to receive a per-share distribution or other entitlement in an amount different from the Shares then on deposit (the Shares then on deposit collectively, "Full Entitlement Shares" and the Shares with different entitlement, "Partial Entitlement Shares"), the Depositary shall (i) cause the Custodian to hold Partial Entitlement Shares separate and distinct from Full Entitlement Shares, and (ii) subject to the terms of this Agreement, issue ADSs and deliver ADRs representing Partial Entitlement Shares which are separate and distinct from the ADSs and ADRs representing Full Entitlement Shares, by means of separate CUSIP numbering and legending (if necessary) ("Partial Entitlement ADSs/ADRs" and "Full Entitlement ADSs/ADRs", respectively). If and when Partial Entitlement Shares become Full Entitlement Shares, the Depositary shall (a) give notice thereof to Holders of Partial Entitlement ADSs and give Holders of Partial Entitlement ADRs the opportunity to exchange such Partial Entitlement ADRs for Full Entitlement ADRs, (b) cause the Custodian to transfer the Partial Entitlement Shares into the account of the Full Entitlement Shares, and (c) take such actions as are necessary to remove the distinctions between (i) the Partial Entitlement ADRs and ADSs, on the one hand, and (ii) the Full Entitlement ADRs and ADSs on the other. Holders and Beneficial Owners of Partial Entitlement ADSs shall only be entitled to the entitlements of Partial Entitlement Shares. Holders and Beneficial Owners of Full Entitlement ADSs shall be entitled only to the entitlements of Full Entitlement Shares. All provisions and conditions of this Agreement shall apply to Partial Entitlement ADRs and ADSs to the same extent as Full Entitlement ADRs and ADSs, except as contemplated by this Section 2.11. The Depositary is authorized to take any and all other actions as may be necessary (including, without limitation, making the necessary notations on Receipts) to give effect to the terms of this Section 2.11. The Company agrees to give timely written notice to the Depositary if any Shares issued or to be issued are Partial Entitlement Shares and shall assist the Depositary with the establishment of procedures enabling the identification of Partial Entitlement Shares upon Delivery to the Custodian. 12 ARTICLE III CERTAIN OBLIGATIONS OF HOLDERS AND BENEFICIAL OWNERS OF RECEIPTS SECTION 3.1. Proofs, Certificates and Other Information. Any person presenting ------------------------------------------ Shares for deposit, any Holder and any Beneficial Owner may be required, and every Holder and Beneficial Owner agrees, from time to time to provide to the Depositary and the Custodian such proof of citizenship or residence, taxpayer status, payment of all applicable taxes or other governmental charges, exchange control approval, legal or beneficial ownership of ADSs and Deposited Securities, compliance with applicable laws and the terms of this Deposit Agreement and the provisions of, or governing, the Deposited Securities, to execute such certifications and to make such representations and warranties, and to provide such other information and documentation (or, in the case of Shares in registered form presented for deposit, such information relating to the registration on the books of the Company or of the appointed agent of the Company for the registration and transfer of Shares) as the Depositary or the Custodian may deem reasonably necessary or proper or as the Company may reasonably require by written request to the Depositary consistent with its obligations hereunder. The Depositary and the Registrar, as applicable, may withhold the execution or delivery or registration of transfer of any Receipt or the distribution or sale of any dividend or distribution of rights or of the proceeds thereof or, to the extent not limited by the terms of Section 7.8 hereof, the delivery of any Deposited Securities until such proof or other information is filed or such certifications are executed, or such representations are made, or such other documentation or information provided, in each case to the Depositary's, the Registrar's and the Company's satisfaction. The Depositary shall provide the Company, in a timely manner, with copies or originals if necessary and appropriate of (i) any such proofs of citizenship or residence, taxpayer status, or exchange control approval which it receives from Holders and Beneficial Owners, and (ii) any other information or documents which the Company may reasonably request and which the Depositary shall request and receive from any Holder or Beneficial Owner or any person presenting Shares for deposit or ADSs for cancellation and withdrawal. Nothing herein shall obligate the Depositary to (i) obtain any information for the Company if not provided by the Holders or Beneficial Owners or (ii) verify or vouch for the accuracy of the information so provided by the Holders or Beneficial Owners. SECTION 3.2. Liability for Taxes and Other Charges. If any tax or other ------------------------------------- governmental charge shall become payable with respect to any ADR or any Deposited Securities or American Depositary Shares, such tax or other governmental charge shall be payable by the Holders and Beneficial Owners to the Depositary. The Company, the Custodian and/or the Depositary may withhold or deduct from any distributions made in respect of Deposited Securities and may sell for the account of a Holder and/or Beneficial Owner any or all of the Deposited Securities and apply such distributions and sale proceeds in payment of such taxes (including applicable interest and penalties) or charges, the Holder and the Beneficial Owner remaining liable for any deficiency. The Custodian may refuse the deposit of Shares and the Depositary may refuse to issue ADSs, to deliver ADRs, register the transfer, split-up or combination of ADRs and (subject to Section 7.8) the withdrawal of Deposited Securities until payment in full of such tax, charge, penalty or interest is received. Every Holder and Beneficial Owner agrees to indemnify the 13 Depositary, the Company, the Custodian, and any of their agents, officers, employees and Affiliates for, and to hold each of them harmless from, any claims with respect to taxes (including applicable interest and penalties thereon) arising from any tax benefit obtained for such Holder and/or Beneficial Owner. SECTION 3.3. Representations and Warranties on Deposit of Shares. Each person --------------------------------------------------- depositing Shares under the Deposit Agreement shall be deemed thereby to represent and warrant that (i) such Shares are duly authorized, validly issued, fully paid, non-assessable and legally obtained by such person, (ii) all preemptive (and similar) rights, if any, with respect to such Shares have been validly waived or exercised, (iii) the person making such deposit is duly authorized so to do and (iv) the Shares presented for deposit are free and clear of any lien, encumbrance, security interest, charge, mortgage or adverse claim, and are not, and the American Depositary Shares issuable upon such deposit will not be, Restricted Securities and the Shares presented for deposit have not been stripped of any rights or entitlements. Such representations and warranties shall survive the deposit and withdrawal of Shares, the issuance and cancellation of American Depositary Shares in respect thereof and the transfer of such American Depositary Shares. If any such representations or warranties are false in any way, the Company and the Depositary shall be authorized, at the cost and expense of the person depositing Shares, to take any and all actions necessary to correct the consequences thereof. SECTION 3.4. Compliance with Information Requests. Notwithstanding any other ------------------------------------ provision of this Deposit Agreement, each Holder and Beneficial Owner agrees to comply with requests from the Company pursuant to Dutch law (including, without limitation, the Dutch Act of Disclosure of Holdings 1996), the rules and requirements of the Amsterdam Stock Exchange, and any other stock exchange or automated quotation system on which the Shares are, or will be, registered, traded or listed or the Articles of Association of the Company, which are made to provide information, inter alia, as to the capacity in which such Holder or Beneficial Owner owns American Depositary Shares (and Shares as the case may be) and regarding the identity of any other person(s) interested in such American Depositary Shares and the nature of such interest and various other matters, whether or not they are Holders and/or Beneficial Owners at the time of such request. The Depositary agrees to use its reasonable efforts to forward, upon the request of the Company, and at the Company's expense, any such request from the Company to the Holders and to forward to the Company any such responses to such requests received by the Depositary. SECTION 3.5. Ownership Restrictions. Notwithstanding any other provision in ---------------------- this Deposit Agreement, the Company may restrict transfers of the Shares where such transfer might result in ownership of Shares exceeding limits imposed by applicable law or the Articles of Association of the Company. The Company may also restrict, in such manner as it deems appropriate, transfers of the American Depositary Shares where such transfer may result in the total number of Shares represented by the American Depositary Shares owned by a single Holder or Beneficial Owner to exceed any such limits. The Company may, in its sole discretion but subject to applicable law, instruct the Depositary to take action with respect to the ownership interest of any Holder or Beneficial Owner in excess of the limits set forth in the preceding sentence, including, but not limited to, the imposition of restrictions on the transfer of American Depositary Shares, the removal or limitation of voting rights, the mandatory sale or disposition on behalf of a Holder or 14 Beneficial Owner of the Shares represented by the American Depositary Shares held by such Holder or Beneficial Owner in excess of such limitations and the cancellation of such American Depositary Shares, in each case, if and to the extent permitted by applicable law and the Articles of Association of the Company. Holders and Beneficial Owners acknowledge that under the Dutch Act on Disclosure of Holdings in Listed Companies 1996, shareholders must promptly notify the Company and the Securities Board of the Netherlands if they have 5% or more capital interest or voting rights in the Company, and if by obtaining or divesting shares in the Company their capital interest or voting rights come under a different percentage range. These ranges are 0 to 5%, 5 to 10%, 10 to 25%, 25 to 50%, 50 to 66 2/3% and 66 2/3 % or more. Holders and Beneficial Owners agree to comply with such requirements. ARTICLE IV THE DEPOSITED SECURITIES SECTION 4.1. Cash Distributions. Whenever the Depositary receives confirmation ------------------ from the Custodian of receipt of any cash dividend or other cash distribution on any Deposited Securities, or receives proceeds from the sale of any Shares, rights, securities or other entitlements under the terms hereof, the Depositary will, if at the time of receipt thereof any amounts received in a Foreign Currency can in the judgment of the Depositary (pursuant to Section 4.8 hereof) be converted on a practicable basis into Dollars transferable to the United States, convert or cause to be converted such cash dividend, distribution or proceeds into Dollars (on the terms described in Section 4.8) and will distribute as promptly as practicable the amount thus received (net of (a) the applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes withheld) to the Holders entitled thereto as of the ADS Record Date in proportion to the number of American Depositary Shares held as of the ADS Record Date. The Depositary shall distribute only such amount, however, as can be distributed without attributing to any Holder a fraction of one cent, and any balance not so distributed shall be held by the Depositary (without liability for interest thereon) and shall be added to and become part of the next sum received by the Depositary for distribution to Holders of ADSs outstanding at the time of the next distribution. If the Company, the Custodian or the Depositary is required to withhold and does withhold from any cash dividend or other cash distribution in respect of any Deposited Securities an amount on account of taxes, duties or other governmental charges, the amount distributed to Holders on the American Depositary Shares representing such Deposited Securities shall be reduced accordingly. Such withheld amounts shall be forwarded by the Company, the Custodian or the Depositary to the relevant governmental authority. Evidence of payment thereof by the Company shall be forwarded by the Company to the Depositary upon request. SECTION 4.2. Distribution in Shares. If any distribution upon any Deposited ---------------------- Securities consists of a dividend in, or free distribution of, Shares, the Company shall cause such Shares to be deposited with the Custodian. The Depositary shall establish the ADS Record Date and shall, subject to Section 5.9 hereof and upon receipt of confirmation of such deposit from the Custodian, either (i) distribute to the Holders as of the ADS Record Date in proportion to the 15 number of American Depositary Shares held as of the ADS Record Date, additional American Depositary Shares, which represent in the aggregate the number of Shares received as such dividend, or free distribution, subject to the other terms of this Deposit Agreement (including, without limitation, (a) the applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes), or (ii) if additional American Depositary Shares are not so distributed, each American Depositary Share issued and outstanding after the ADS Record Date shall, to the extent permissible by law, thenceforth also represent rights and interests in the additional integral number of Shares distributed upon the Deposited Securities represented thereby (net of (a) the applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes). In lieu of delivering fractional American Depositary Shares, the Depositary shall sell the number of Shares or American Depositary Shares, as the case may be, represented by the aggregate of such fractions and distribute the net proceeds upon the terms described in Section 4.1. In the event that the Depositary determines that any distribution in property (including Shares) is subject to any tax or other governmental charges which the Depositary is obligated to withhold, or, if the Company, in the fulfillment of its obligation under Section 5.7 hereof, has furnished an opinion of U.S. counsel determining that Shares must be registered under the Securities Act or other laws in order to be distributed to Holders (and no such registration statement has been declared effective) or that no exemption from registration exists, the Depositary may dispose of all or a portion of such property (including Shares and rights to subscribe therefor) in such amounts and in such manner, including by public or private sale, as the Depositary deems necessary and practicable, and the Depositary shall distribute the net proceeds of any such sale (after deduction of such (a) taxes and (b) fees and charges of, and expenses incurred by, the Depositary) to Holders entitled thereto upon the terms described in Section 4.1. The Depositary shall hold and/or distribute any unsold balance of such property in accordance with the provisions of this Deposit Agreement. SECTION 4.3. Elective Distributions in Cash or Shares. Whenever the Company ---------------------------------------- intends to distribute a dividend payable at the election of the holders of Shares in cash or in additional Shares, the Company shall give notice thereof to the Depositary at least 60 days prior to the proposed distribution stating whether or not it wishes such elective distribution to be made available to Holders of ADSs. Upon receipt of notice indicating that the Company wishes such elective distribution to be made available to Holders of ADSs, the Depositary shall consult with the Company to determine, and the Company shall assist the Depositary in its determination, whether it is lawful and reasonably practicable to make such elective distribution available to the Holders of ADSs. The Depositary shall make such elective distribution available to Holders only if (i) the Depositary shall have determined that such distribution is reasonably practicable and (ii) the Depositary shall have received satisfactory documentation within the terms of Section 5.7. If the above conditions are not satisfied, the Depositary shall, to the extent permitted by law, distribute to the Holders, on the basis of the same determination as is made in the local market in respect of the Shares for which no election is made, either (X) cash upon the terms described in Section 4.1 or (Y) additional ADSs representing such additional Shares upon the terms described in Section 4.2. If the above conditions are satisfied, the Depositary shall establish an ADS Record Date and establish procedures to enable Holders to elect the receipt of the proposed dividend in cash or in additional ADSs. The Company shall assist the Depositary in establishing such procedures to the extent necessary. If a Holder elects to receive the proposed dividend (X) 16 in cash, the dividend shall be distributed upon the terms described in Section 4.1, or (Y) in ADSs, the dividend shall be distributed upon the terms described in Section 4.2. Nothing herein shall obligate the Depositary to make available to Holders a method to receive the elective dividend in Shares (rather than ADSs). There can be no assurance that Holders generally, or any Holder in particular, will be given the opportunity to receive elective distributions on the same terms and conditions as the holders of Shares. SECTION 4.4. Distribution of Rights to Purchase Shares. ----------------------------------------- (a) Distribution to ADS Holders. Whenever the Company intends to distribute to --------------------------- the holders of the Deposited Securities rights to subscribe for additional Shares, the Company shall give notice thereof to the Depositary at least 60 days prior to the proposed distribution stating whether or not it wishes such rights to be made available to Holders of ADSs. Upon receipt of a notice indicating that the Company wishes such rights to be made available to Holders of ADSs, the Depositary shall consult with the Company to determine, and the Company shall assist the Depositary in its determination, whether it is lawful and reasonably practicable to make such rights available to the Holders. The Depositary shall make such rights available to Holders only if (i) the Company shall have requested that such rights be made available to Holders, (ii) the Depositary shall have received satisfactory documentation within the terms of Section 5.7, and (iii) the Depositary shall have determined that such distribution of rights is reasonably practicable. In the event any of the conditions set forth above are not satisfied, the Depositary shall proceed with the sale of the rights as contemplated in Section 4.4(b) below. In the event all conditions set forth above are satisfied, the Depositary shall establish an ADS Record Date and establish procedures to distribute rights to purchase additional ADSs (by means of warrants or otherwise) and to enable the Holders to exercise such rights (upon payment of applicable (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes). The Company shall assist the Depositary to the extent necessary in establishing such procedures. Nothing herein shall obligate the Depositary to make available to the Holders a method to exercise rights to subscribe for Shares (rather than ADSs). (b) Sale of Rights. If (i) the Company does not request the Depositary to make -------------- the rights available to Holders or requests that the rights not be made available to Holders, (ii) the Depositary fails to receive satisfactory documentation within the terms of Section 5.7 or determines it is not reasonably practicable to make the rights available to Holders, or (iii) any rights made available are not exercised and appear to be about to lapse, the Depositary shall, determine whether it is lawful and reasonably practicable to sell such rights, in a riskless principal capacity, at such place and upon such terms (including public or private sale) as it may deem proper. The Company shall assist the Depositary to the extent necessary to determine such legality and practicability. The Depositary shall, upon such sale, convert into Dollars and distribute proceeds of such sale (net of applicable (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes) upon the terms set forth in Section 4.1. (c) Lapse of Rights. If the Depositary is unable to make any rights available --------------- to Holders upon the terms described in Section 4.4(a) or to arrange for the sale of the rights upon the terms described in Section 4.4(b), the Depositary shall allow such rights to lapse. 17 The Depositary shall not be responsible for (i) any failure to determine that it may be lawful or practicable to make such rights available to Holders in general or any Holders in particular, (ii) any foreign exchange exposure or loss incurred in connection with such sale, or exercise, or (iii) the content of any materials forwarded to the Holders on behalf of the Company in connection with the rights distribution. Notwithstanding anything to the contrary in this Section 4.4, if registration (under the Securities Act or any other applicable law) of the rights or the securities to which any rights relate may be required in order for the Company to offer such rights or such securities to Holders and to sell the securities represented by such rights, the Depositary will not distribute such rights to the Holders unless and until a registration statement under the Securities Act (or other applicable law) covering such offering is in effect. In the event that the Company, the Depositary or the Custodian shall be required to withhold and does withhold from any distribution of property (including rights) an amount on account of taxes or other governmental charges, the amount distributed to the Holders of American Depositary Shares representing such Deposited Securities shall be reduced accordingly. In the event that the Depositary determines that any distribution in property (including Shares and rights to subscribe therefor) is subject to any tax or other governmental charges which the Depositary is obligated to withhold, the Depositary may dispose of all or a portion of such property (including Shares and rights to subscribe therefor) in such amounts and in such manner, including by public or private sale, as the Depositary deems necessary and practicable to pay any such taxes or charges. There can be no assurance that Holders generally, or any Holder in particular, will be given the opportunity to receive or exercise rights on the same terms and conditions as the holders of Shares or be able to exercise such rights. Nothing herein shall obligate the Company to file any registration statement in respect of any rights or Shares or other securities to be acquired upon the exercise of such rights. SECTION 4.5. Distributions Other Than Cash, Shares or Rights to Purchase ----------------------------------------------------------- Shares. (a) Whenever the Company intends to distribute to the holders of Deposited Securities property other than cash, Shares or rights to purchase additional Shares and such distribution is permissible under Dutch law, the Company shall give timely notice thereof to the Depositary and shall indicate whether or not it wishes such distribution to be made to Holders of ADSs. Upon receipt of a notice indicating that the Company wishes such distribution be made to Holders of ADSs, the Depositary shall consult with the Company, and the Company shall assist the Depositary, to determine whether such distribution to Holders is lawful and reasonably equitable and practicable. The Depositary shall not make such distribution unless such distribution is permissible under Dutch law and (i) the Company shall have requested the Depositary to make such distribution to Holders, (ii) the Depositary shall have received satisfactory documentation within the terms of Section 5.7, and (iii) the Depositary shall have determined that such distribution is reasonably practicable. (b) Upon receipt of satisfactory documentation and the request of the Company to distribute property to Holders of ADSs and after making the requisite determinations set forth in (a) above, 18 the Depositary shall distribute the property so received to the Holders of record, as of the ADS Record Date, in proportion to the number of ADSs held by them respectively and in such manner as the Depositary may deem practicable for accomplishing such distribution (i) upon receipt of payment or net of the applicable fees and charges of, and expenses incurred by, the Depositary, and (ii) net of any taxes withheld. The Depositary may dispose of all or a portion of the property so distributed and deposited, in such amounts and in such manner (including public or private sale) as the Depositary may deem practicable or necessary to satisfy any taxes (including applicable interest and penalties) or other governmental charges applicable to the distribution. (c) If (i) the Company does not request the Depositary to make such distribution to Holders or requests not to make such distribution to Holders, (ii) the Depositary does not receive satisfactory documentation within the terms of Section 5.7, or (iii) the Depositary determines that all or a portion of such distribution is not reasonably practicable, the Depositary shall sell or cause such property to be sold in a public or private sale, at such place or places and upon such terms as it may deem proper and shall (i) cause the proceeds of such sale, if any, to be converted into Dollars and (ii) distribute the proceeds of such conversion received by the Depositary (net of applicable (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes) to the Holders as of the ADS Record Date upon the terms of Section 4.1. If the Depositary is unable to sell such property, the Depositary may dispose of such property in any way it deems reasonably practicable under the circumstances. SECTION 4.6. [Intentionally deleted] SECTION 4.7. Redemption. If the Company intends to exercise any right of ---------- redemption in respect of any of the Deposited Securities, the Company shall give notice thereof to the Depositary at least 60 days prior to the intended date of redemption which notice shall set forth the particulars of the proposed redemption. Upon receipt of such notice and satisfactory documentation given by the Company to the Depositary within the terms of Section 5.7, and only if the Depositary shall have determined that such proposed redemption is reasonably practicable, after consultation with the Company, the Depositary shall mail to each Holder a notice setting forth the intended exercise by the Company of the redemption rights and any other particulars set forth in the Company's notice to the Depositary. The Depositary shall instruct the Custodian to present to the Company the Deposited Securities in respect of which redemption rights are being exercised against payment of the applicable redemption price. Upon receipt of confirmation from the Custodian that the redemption has taken place and that funds representing the redemption price have been received, the Depositary shall convert, transfer, and distribute the proceeds (net of applicable (a) fees and charges of, and the expenses incurred by, the Depositary, and (b) taxes), retire ADSs and cancel ADRs upon delivery of such ADSs by Holders thereof and the terms set forth in Sections 4.1 and 6.2 hereof. If less than all outstanding Deposited Securities are redeemed, the ADSs to be retired will be selected by lot or on a pro rata basis, as may be determined by the Depositary. The redemption price per ADS shall be the per share amount received by the Depositary upon the redemption of the Deposited Securities represented by American Depositary Shares (subject to the terms of Section 4.8 hereof and the applicable fees and charges of, and expenses incurred by, the Depositary, and taxes) multiplied by the number of Deposited Securities represented by each ADS redeemed. 19 SECTION 4.8. Conversion of Foreign Currency. Whenever the Depositary or the ------------------------------ Custodian shall receive Foreign Currency, by way of dividends or other distributions or the net proceeds from the sale of securities, property or rights, which in the reasonable judgment of the Depositary can at such time be converted on a practicable basis, by sale or in any other manner that it may determine in accordance with applicable law, into Dollars transferable to the United States and distributable to the Holders entitled thereto, the Depositary shall convert or cause to be converted, by sale or in any other manner that it may determine, such Foreign Currency into Dollars, and shall distribute as promptly as practicable such Dollars (net of any applicable fees, any reasonable and customary expenses incurred in such conversion and any expenses incurred on behalf of the Holders in complying with currency exchange control or other governmental requirements) in accordance with the terms of the applicable sections of this Deposit Agreement. If the Depositary shall have distributed warrants or other instruments that entitle the holders thereof to such Dollars, the Depositary shall distribute such Dollars to the holders of such warrants and/or instruments upon surrender thereof for cancellation, in either case without liability for interest thereon. Such distribution may be made upon an averaged or other practicable basis without regard to any distinctions among Holders on account of any application of exchange restrictions or otherwise. If such conversion or distribution generally or with regard to a particular Holder can be effected only with the approval or license of any government or agency thereof, the Depositary shall have authority to file such application for approval or license, if any, as it may deem desirable. In no event, however, shall the Depositary be obligated to make such a filing. If at any time the Depositary shall determine that in its judgment the conversion of any Foreign Currency and the transfer and distribution of proceeds of such conversion received by the Depositary is not practical or lawful, or if any approval or license of any governmental authority or agency thereof that is required for such conversion, transfer and distribution is denied or, in the opinion of the Depositary, not obtainable at a reasonable cost or within a reasonable period, the Depositary may, in its discretion, (i) make such conversion and distribution in Dollars to the Holders for whom such conversion, transfer and distribution is lawful and practicable, (ii) distribute the Foreign Currency (or an appropriate document evidencing the right to receive such Foreign Currency) to Holders for whom this is lawful and practicable or (iii) hold (or cause the Custodian to hold) such Foreign Currency (without liability for interest thereon) for the respective accounts of the Holders entitled to receive the same. SECTION 4.9. Fixing of ADS Record Date. Whenever the Depositary shall receive ------------------------- notice of the fixing of a record date by the Company for the determination of holders of Deposited Securities entitled to receive any distribution (whether in cash, Shares, rights, or other distribution), or whenever for any reason the Depositary causes a change in the number of Shares that are represented by each American Depositary Share, or whenever the Depositary shall receive notice of any meeting of, or solicitation of consents or of proxies, of holders of Shares or other Deposited Securities, or whenever the Depositary shall find it necessary or convenient in connection with the giving of any notice, solicitation of any consent or any other matter, the Depositary shall fix a record date (the "ADS Record Date") for the determination of the Holders of Receipts who shall be entitled to receive such distribution, to give instructions for the exercise 20 of voting rights at any such meeting, to give or withhold such consent, to receive such notice or solicitation or to otherwise take action, or to exercise the rights of Holders with respect to such changed number of Shares represented by each American Depositary Share. The Depositary shall make reasonable efforts to establish the ADS Record Date as closely as possible to the applicable record date for the Deposited Securities (if any). Subject to applicable law and the provisions of Section 4.1 through 4.8 and to the other terms and conditions of this Deposit Agreement, only the Holders of Receipts at the close of business in New York on such ADS Record Date shall be entitled to receive such distribution, to give such voting instructions, to receive such notice or solicitation, or otherwise take action. SECTION 4.10. Voting of Deposited Securities. As soon as practicable after ------------------------------ receipt of notice of any meeting at which the holders of Shares are entitled to vote, or of solicitation of consents or proxies from holders of Shares or other Deposited Securities, the Depositary shall fix the ADS Record Date in respect of such meeting or solicitation of consent or proxy. The Depositary shall, if requested by the Company in writing in a timely manner (the Depositary having no obligation to take any further action if the request shall not have been received by the Depositary at least 30 days prior to the date of such vote or meeting) mail to registered Holders: (a) such notice of meeting or solicitation of consent or proxy, (b) a statement that the Holders at the close of business on the ADS Record Date will be entitled, subject to any applicable law, the Articles of Association of the Company and the provisions of or governing the Deposited Securities (which provisions, if any, shall be summarized in pertinent part by the Company), to instruct the Depositary as to the exercise of the voting rights, if any, pertaining to the Shares or other Deposited Securities represented by such Holder's American Depositary Shares, and (c) a brief statement as to the manner in which such instructions may be given. Voting instructions may be given only in respect of a number of American Depositary Shares representing a whole number of Shares or other Deposited Securities. Upon the timely receipt of written instructions of a Holder of American Depositary Shares on the ADS Record Date, the Depositary shall endeavor, insofar as practicable and permitted under applicable law and the provisions of the Articles of Association of the Company and the provisions of the Deposited Securities, to vote or cause the Custodian to vote the Shares and/or other Deposited Securities (in person or by proxy) represented by such Holder's American Depositary Shares in accordance with such instructions. Neither the Depositary, the Custodian nor their respective nominees, if any, shall, under any circumstances, exercise any discretion as to voting and neither the Depositary nor the Custodian shall vote, attempt to exercise the right to vote, or in any way make use of the Shares or other Deposited Securities represented by American Depositary Shares except pursuant to and in accordance with such written instructions from Holders. If voting instructions are received by the Depositary from any Holder on or before the date established by the Depositary for the receipt of such instructions, which are signed but without further indication as to specific instructions, the Depositary will deem such Holder to have instructed the Depositary to vote in favor of the items set forth in such instructions. Shares or other Deposited Securities represented by American Depositary Shares for which no specific voting instructions are received by the Depositary from the Holder shall not be voted. 21 There can be no assurance that Holders generally or any Holder in particular will receive the notice described above with sufficient time to enable the Holder to return voting instructions to the Depositary in a timely manner. SECTION 4.11. Changes Affecting Deposited Securities. Upon any change in -------------------------------------- nominal or par value, split-up, cancellation, consolidation or any other reclassification of, Deposited Securities, or upon any recapitalization, reorganization, merger or consolidation or sale of assets affecting the Company or to which it is a party, any securities which shall be received by the Depositary or the Custodian in exchange for, or in conversion of or replacement of or otherwise in respect of, such Deposited Securities shall, to the extent permitted by law, be treated as new Deposited Securities under this Deposit Agreement, and the Receipts shall, subject to the provisions of this Deposit Agreement and applicable law, evidence American Depositary Shares representing the right to receive such new securities. The Depositary may, with the Company's approval, and shall, if the Company shall so request, subject to the terms of the Deposit Agreement and receipt of an opinion of counsel to the Company satisfactory to the Depositary that such distributions are not in violation of any applicable laws or regulations, execute and deliver additional Receipts as in the case of a stock dividend on the Shares, or call for the surrender of outstanding Receipts to be exchanged for new Receipts, in either case, as well as in the event of newly deposited Shares, with necessary modifications to the form of Receipt contained in Exhibit A hereto, specifically describing such new Deposited Securities or corporate change. The Company agrees to, jointly with the Depositary, amend the Registration Statement on Form F-6 as filed with the Commission to permit the issuance of such new form of Receipts. Notwithstanding the foregoing, in the event that any security so received may not be lawfully distributed to some or all Holders, the Depositary may, with the Company's approval, and shall, if the Company requests, subject to receipt of an opinion of Company's counsel satisfactory to the Depositary that such action is not in violation of any applicable laws or regulations, sell such securities at public or private sale, at such place or places and upon such terms as it may deem proper and may allocate the net proceeds of such sales (net of (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes) for the account of the Holders otherwise entitled to such securities upon an averaged or other practicable basis without regard to any distinctions among such Holders and distribute the net proceeds so allocated to the extent practicable as in the case of a distribution received in cash pursuant to Section 4.1. The Depositary shall not be responsible for (i) any failure to determine that it may be lawful or feasible to make such securities available to Holders in general or to any Holder in particular, (ii) any foreign exchange exposure or loss incurred in connection with such sale, or (iii) any liability to the purchaser of such securities. SECTION 4.12. Available Information. The Company is subject to the periodic --------------------- reporting requirements of the Exchange Act and accordingly files certain information with the Commission. These reports and documents can be inspected and copied at the public reference facilities maintained by the Commission located at Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549 and at the Commission's New York City office located at Seven World Trade Center, 13th Floor, New York, New York 10048. 22 SECTION 4.13. Reports. The Depositary shall make available for inspection by ------- Holders at its Principal Office any reports and communications, including any proxy soliciting materials, received from the Company which are both (a) received by the Depositary, the Custodian, or the nominee of either of them as the holder of the Deposited Securities and (b) made generally available to the holders of such Deposited Securities by the Company. The Depositary shall also mail to Holders copies of such reports when furnished by the Company pursuant to Section 5.6. SECTION 4.14. List of Holders. Promptly upon written request by the Company, --------------- the Depositary shall furnish to it a list, as of a recent date, of the names, addresses and holdings of American Depositary Shares of all Holders. SECTION 4.15. Taxation. The Depositary will, and will instruct the Custodian -------- to, forward to the Company or its agents such information from its records as the Company may reasonably request to enable the Company or its agents to file the necessary tax reports with governmental authorities or agencies. The Depositary, the Custodian or the Company and its agents may file such reports as are necessary to reduce or eliminate applicable taxes on dividends and on other distributions in respect of Deposited Securities under applicable tax treaties or laws for the Holders and Beneficial Owners. In accordance with instructions from the Company and to the extent practicable, the Depositary or the Custodian will take reasonable administrative actions to obtain tax refunds, reduced withholding of tax at source on dividends and other benefits under applicable tax treaties or laws with respect to dividends and other distributions on the Deposited Securities. Holders and Beneficial Owners of American Depositary Shares may be required from time to time, and in a timely manner, to file such proof of taxpayer status, residence and beneficial ownership (as applicable), to execute such certificates and to make such representations and warranties, or to provide any other information or documents, as the Depositary or the Custodian may deem necessary or proper to fulfill the Depositary's or the Custodian's obligations under applicable law. The Holders and Beneficial Owners shall indemnify the Depositary, the Company, the Custodian and any of their respective directors, employees, agents and Affiliates against, and hold each of them harmless from, any claims by any governmental authority with respect to taxes, additions to tax, penalties or interest arising out of any refund of taxes, reduced rate of withholding at source or other tax benefit obtained. If the Company (or any of its agents) withholds from any distribution any amount on account of taxes or governmental charges, or pays any other tax in respect of such distribution (i.e. stamp duty tax, capital gains or other similar tax), the Company shall (and shall cause such agent to) remit as promptly as practicable to the Depositary information about such taxes or governmental charges withheld or paid in a form satisfactory to the Depositary and, if so requested, the tax receipt (or other proof of payment to the applicable governmental authority) therefor. The Depositary shall, to the extent required by U.S. law, report to Holders any taxes withheld by it or the Custodian, and, if such information is provided to it by the Company, any taxes withheld by the Company. The Depositary and the Custodian shall not be required to provide the Holders with any evidence of the remittance by the Company (or its agents) of any taxes withheld, or of the payment of taxes by the Company, except to the extent the evidence is provided by the Company to the Depositary. Neither the Depositary nor the Custodian shall be liable for the 23 failure by any Holder or Beneficial Owner to obtain the benefits of credits on the basis of non-U.S. tax paid against such Holder's or Beneficial Owner's income tax liability. The Depositary is under no obligation to provide the Holders and Beneficial Owners with any information about the tax status of the Company. The Depositary shall not incur any liability for any tax consequences that may be incurred by Holders and Beneficial Owners on account of their ownership of the American Depositary Shares, including without limitation, tax consequences resulting from the Company (or any of its subsidiaries) being treated as a "Foreign Personal Holding Company," or as a "Passive Foreign Investment Company" (in each case as defined in the U.S. Internal Revenue Code and the regulations issued thereunder) or otherwise. ARTICLE V THE DEPOSITARY, THE CUSTODIAN AND THE COMPANY SECTION 5.1. Maintenance of Office and Transfer Books by the Registrar. Until --------------------------------------------------------- termination of this Deposit Agreement in accordance with its terms, the Registrar shall maintain in the Borough of Manhattan, the City of New York, an office and facilities for the execution and delivery, registration, registration of transfers, combination and split-up of Receipts, the surrender of Receipts for the purpose of withdrawal of Deposited Securities in accordance with the provisions of this Deposit Agreement. The Registrar shall keep books for the registration of issuances and transfers of Receipts which at all reasonable times shall be open for inspection by the Company and by the Holders of such Receipts, provided that such inspection shall not be, to the Registrar's knowledge, for the purpose of communicating with Holders of such Receipts in the interest of a business or object other than the business of the Company or other than a matter related to this Deposit Agreement or the Receipts. The Registrar may close the transfer books with respect to the Receipts, at any time or from time to time, when deemed necessary or advisable by it in good faith in connection with the performance of its duties hereunder, or at the reasonable written request of the Company subject, in all cases, to Section 7.8 hereof. If any Receipts or the American Depositary Shares evidenced thereby are listed on one or more stock exchanges or automated quotation systems in the United States, the Depositary shall act as Registrar or appoint a Registrar or one or more co-registrars for registration of Receipts and transfers, combinations and split-ups, and to countersign such Receipts in accordance with any requirements of such exchanges or systems. Such Registrar or co-registrars may be removed and a substitute or substitutes appointed by the Depositary. SECTION 5.2. Exoneration. Neither the Depositary nor the Company shall be ----------- obligated to do or perform any act which is inconsistent with the provisions of this Deposit Agreement or incur any liability (i) if the Depositary or the Company shall be prevented or forbidden from, or delayed in, doing or performing any act or thing required by the terms of this Deposit Agreement, by reason 24 of any provision of any present or future law or regulation of the United States, The Netherlands or any other country, or of any other governmental authority or regulatory authority or stock exchange, or on account of the possible criminal or civil penalties or restraint, or by reason of any provision, present or future of the Articles of Association of the Company or any provision of or governing any Deposited Securities, or by reason of any act of God or war or other circumstances beyond its control (including, without limitation, nationalization, expropriation, currency restrictions, work stoppage, strikes, civil unrest, revolutions, rebellions, explosions and computer failure), (ii) by reason of any exercise of, or failure to exercise, any discretion provided for in this Deposit Agreement or in the Articles of Association of the Company or provisions of or governing Deposited Securities, (iii) for any action or inaction in reliance upon the advice of or information from legal counsel, accountants, any person presenting Shares for deposit, any Holder, any Beneficial Owner or authorized representative thereof, or any other person believed by it in good faith to be competent to give such advice or information, (iv) for the inability by a Holder or Beneficial Owner to benefit from any distribution, offering, right or other benefit which is made available to holders of Deposited Securities but is not, under the terms of this Deposit Agreement, made available to Holders of American Depositary Shares or (v) for any consequential or punitive damages for any breach of the terms of this Deposit Agreement. The Depositary, its controlling persons, its agents, any Custodian and the Company, its controlling persons and its agents may rely and shall be protected in acting upon any written notice, request or other document believed by it to be genuine and to have been signed or presented by the proper party or parties. No disclaimer of liability under the Securities Act is intended by any provision of this Deposit Agreement. SECTION 5.3. Standard of Care. The Company and its agents assume no obligation ---------------- and shall not be subject to any liability under this Deposit Agreement or the Receipts to Holders or Beneficial Owners or other persons, except that the Company and its agents agree to perform their obligations specifically set forth in this Deposit Agreement without negligence or bad faith. The Depositary and its agents assume no obligation and shall not be subject to any liability under this Deposit Agreement or the Receipts to Holders or Beneficial Owners or other persons, except that the Depositary and its agents agree to perform their obligations specifically set forth in this Deposit Agreement without negligence or bad faith. Without limitation of the foregoing, neither the Depositary, nor the Company, nor any of their respective controlling persons, or agents, shall be under any obligation to appear in, prosecute or defend any action, suit or other proceeding in respect of any Deposited Securities or in respect of the Receipts, which in its opinion may involve it in expense or liability, unless indemnity satisfactory to it against all expense (including fees and disbursements of counsel) and liability be furnished as often as may be required (and no Custodian shall be under any obligation whatsoever with respect to such proceedings, the responsibility of the Custodian being solely to the Depositary). 25 The Depositary and its agents shall not be liable for any failure to carry out any instructions to vote any of the Deposited Securities, or for the manner in which any vote is cast or the effect of any vote, provided that any such action or omission is in good faith and in accordance with the terms of this Deposit Agreement. The Depositary shall not incur any liability for any failure to determine that any distribution or action may be lawful or reasonably practicable, for the content of any information submitted to it by the Company for distribution to the Holders or for any inaccuracy of any translation thereof, for any investment risk associated with acquiring an interest in the Deposited Securities, for the validity or worth of the Deposited Securities or for any tax consequences that may result from the ownership of ADSs, Shares or Deposited Securities, for the credit-worthiness of any third party, for allowing any rights to lapse upon the terms of this Deposit Agreement or for the failure or timeliness of any notice from the Company. SECTION 5.4. Resignation and Removal of the Depositary; Appointment of --------------------------------------------------------- Successor Depositary. The Depositary may at any time resign as Depositary - -------------------- hereunder by written notice of resignation delivered to the Company, such resignation to be effective on the earlier of (i) the 60th day after delivery thereof to the Company (whereupon the Depositary shall be entitled to take the actions contemplated in Section 6.2 hereof), or (ii) upon the appointment by the Company of a successor depositary and its acceptance of such appointment as hereinafter provided. The Depositary may at any time be removed by the Company by written notice of such removal, which removal shall be effective on the earlier of (i) the 60th day after delivery thereof to the Depositary (whereupon the Depositary shall be entitled to take the actions contemplated in Section 6.2 hereof), or (ii) upon the appointment by the Company of a successor depositary and its acceptance of such appointment as hereinafter provided. In case at any time the Depositary acting hereunder shall resign or be removed, the Company shall use its best efforts to appoint a successor depositary, which shall be a bank or trust company having an office in the Borough of Manhattan, the City of New York. Every successor depositary shall be required by the Company to execute and deliver to its predecessor and to the Company an instrument in writing accepting its appointment hereunder, and thereupon such successor depositary, without any further act or deed (except as required by applicable law), shall become fully vested with all the rights, powers, duties and obligations of its predecessor. The predecessor depositary, upon payment of all sums due it and on the written request of the Company shall, (i) execute and deliver an instrument transferring to such successor all rights and powers of such predecessor hereunder (other than as contemplated in Sections 5.08 and 5.09), (ii) duly assign, transfer and deliver all right, title and interest to the Deposited Securities to such successor, and (iii) deliver to such successor a list of the Holders of all outstanding Receipts and such other information relating to Receipts and Holders thereof as the successor may reasonably request. Any such successor depositary shall promptly mail notice of its appointment to such Holders. Any corporation into or with which the Depositary may be merged or consolidated shall be the successor of the Depositary without the execution or filing of any document or any further act. 26 SECTION 5.5. The Custodian. The Depositary has initially appointed Citibank ------------- N.A., Amsterdam as Custodian for the purpose of this Deposit Agreement. The Custodian or its successors in acting hereunder shall be subject at all times and in all respects to the direction of the Depositary for the Deposited Securities for which the Custodian acts as custodian and shall be responsible solely to it. If any Custodian resigns or is discharged from its duties hereunder with respect to any Deposited Securities and no other Custodian has previously been appointed hereunder, the Depositary shall promptly appoint a substitute custodian that is organized under the laws of The Netherlands. The Depositary shall require such resigning or discharged Custodian to deliver the Deposited Securities held by it, together with all such records maintained by it as Custodian with respect to such Deposited Securities as the Depositary may request, to the Custodian designated by the Depositary. Whenever the Depositary determines, in its discretion, that it is appropriate to do so, it may appoint an additional custodian with respect to any Deposited Securities, or discharge the Custodian with respect to any Deposited Securities and appoint a substitute custodian, which shall thereafter be Custodian hereunder with respect to the Deposited Securities. Immediately upon any such change, the Depositary shall give notice thereof in writing to all Holders of Receipts, each other Custodian and the Company. Upon the appointment of any successor depositary, any Custodian then acting hereunder shall, unless otherwise instructed by the Depositary, continue to be the Custodian of the Deposited Securities without any further act or writing, and shall be subject to the direction of the successor depositary. The successor depositary so appointed shall, nevertheless, on the written request of any Custodian, execute and deliver to such Custodian all such instruments as may be proper to give to such Custodian full and complete power and authority to act on the direction of such successor depositary. SECTION 5.6. Notices and Reports. On or before the first date on which the ------------------- Company gives notice, by publication or otherwise, of any meeting of holders of Shares or other Deposited Securities, or of any adjourned meeting of such holders, or of the taking of any action by such holders other than at a meeting, or of the taking of any action in respect of any cash or other distributions or the offering of any rights in respect of Deposited Securities, the Company shall transmit to the Depositary and the Custodian a copy of the notice thereof in the English language but otherwise in the form given or to be given to holders of Shares or other Deposited Securities. The Company shall also furnish to the Custodian and the Depositary a summary, in English, of any applicable provisions or proposed provisions of the Articles of Association of the Company that may be relevant or pertain to such notice of meeting or be the subject of a vote thereat. The Company will also transmit to the Depositary (a) an English language version of the other notices, reports and communications which are made generally available by the Company to holders of its Shares or other Deposited Securities and (b) the English language versions of the Company's annual and semi-annual reports prepared in accordance with the applicable requirements of the Commission. The Depositary shall arrange, at the request of the Company, for the mailing of copies thereof to all registered Holders or make such notices, reports and other communications available to all registered Holders on a basis similar to that for holders of Shares or other Deposited Securities or on such other basis as the Company may advise the Depositary or as may be required by any applicable law, regulation or stock exchange requirement. The 27 Company has delivered to the Depositary and the Custodian a copy of the Company's Articles of Association along with the provisions of or governing the Shares and any other Deposited Securities issued by the Company or any Affiliate of the Company in connection with such Shares, and promptly upon any amendment thereto or change therein, the Company shall deliver to the Depositary and the Custodian a copy of such amendment thereto or change therein. The Depositary may rely upon such copy for all purposes of this Deposit Agreement. The Depositary will make available a copy of any such notices, reports or communications issued by the Company and delivered to the Depositary for inspection by the registered Holders of the Receipts evidencing the American Depositary Shares representing such Shares governed by such provisions at the Depositary's Principal Office, at the office of the Custodian and at any other designated transfer office. SECTION 5.7. Issuance of Additional Shares, ADSs etc. The Company agrees that --------------------------------------- in the event it or any of its Affiliates proposes (i) an issuance, sale or distribution of additional Shares, (ii) an offering of rights to subscribe for Shares or other Deposited Securities, (iii) an issuance of securities convertible into or exchangeable for Shares, (iv) an issuance of rights to subscribe for securities convertible into or exchangeable for Shares, (v) an elective dividend of cash or Shares, (vi) a redemption of Deposited Securities, (vii) a meeting of holders of Deposited Securities, or solicitation of consents or proxies, relating to any reclassification of securities, merger or consolidation or transfer of assets, or (viii) any reclassification, recapitalization, reorganization, merger, consolidation or sale of assets which affects the Deposited Securities, it will obtain U.S. legal advice and take all steps necessary to ensure that the application of the proposed transaction to Holders and Beneficial Owners does not violate the registration provisions of the Securities Act, or any other applicable laws (including, without limitation, the Investment Company Act of 1940, as amended, the Exchange Act or the securities laws of the states of the United States). In support of the foregoing, the Company will furnish to the Depositary (a) a written opinion of U.S. counsel (reasonably satisfactory to the Depositary) stating whether or not application of such transaction to Holders and Beneficial Owners (1) requires a registration statement under the Securities Act to be in effect or (2) is exempt from the registration requirements of the Securities Act and (b) an opinion of Dutch counsel stating that (1) making the transaction available to Holders and Beneficial Owners does not violate the laws or regulations of The Netherlands and (2) all requisite regulatory consents and approvals have been obtained in The Netherlands. If the filing of a registration statement is required, the Depositary shall not have any obligation to proceed with the transaction unless it shall have received evidence reasonably satisfactory to it that such registration statement has been declared effective. If, being advised by counsel, the Company determines that a transaction is required to be registered under the Securities Act, the Company will either (i) register such transaction to the extent necessary, (ii) alter the terms of the transaction to avoid the registration requirements of the Securities Act or (iii) direct the Depositary to take specific measures, in each case as contemplated in this Deposit Agreement, to prevent such transaction from violating the registration requirements of the Securities Act. The Company agrees with the Depositary that neither the Company nor any of its Affiliates will at any time (i) deposit any Shares or other Deposited Securities, either upon original issuance or upon a sale of Shares or other Deposited Securities previously issued and reacquired by the 28 Company or by any such Affiliate, or (ii) issue additional Shares, rights to subscribe for such Shares, securities convertible into or exchangeable for Shares or rights to subscribe for such securities, unless such transaction and the securities issuable in such transaction are exempt from registration under the Securities Act or have been registered under the Securities Act (and such registration statement has been declared effective). Notwithstanding anything else contained in this Deposit Agreement, nothing in this Deposit Agreement shall be deemed to obligate the Company to file any registration statement in respect of any proposed transaction. SECTION 5.8. Indemnification. The Depositary agrees to indemnify the Company --------------- and its directors, officers, employees, agents and Affiliates against, and hold each of them harmless from, any direct loss, liability, tax, charge or expense of any kind whatsoever (including, but not limited to, the reasonable fees and expenses of counsel) which may arise out of acts performed or omitted by the Depositary under the terms hereof due to the negligence or bad faith of the Depositary. The Company agrees to indemnify the Depositary, the Custodian and any of their respective directors, officers, employees, agents and Affiliates against, and hold each of them harmless from, any direct loss, liability, tax, charge or expense of any kind whatsoever (including, but not limited to, the reasonable fees and expenses of counsel) that may arise (a) out of or in connection with any offer, issuance, sale, resale, transfer, deposit or withdrawal of Receipts, American Depositary Shares, the Shares, or other Deposited Securities, as the case may be, (b) out of or as a result of any offering documents in respect thereof or (c) out of acts performed or omitted, including, but not limited to, any delivery by the Depositary on behalf of the Company of information regarding the Company in connection with this Deposit Agreement, the Receipts, the American Depositary Shares, the Shares, or any Deposited Securities, in any such case (i) by the Depositary, the Custodian or any of their respective directors, officers, employees, agents and Affiliates, except to the extent such loss, liability, tax, charge or expense is due to the negligence or bad faith of any of them, or (ii) by the Company or any of its directors, officers, employees, agents and Affiliates. The obligations set forth in this Section shall survive the termination of this Deposit Agreement and the succession or substitution of any party hereto. Any person seeking indemnification hereunder (an "indemnified person") shall notify the person from whom it is seeking indemnification (the "indemnifying person") of the commencement of any indemnifiable action or claim promptly after such indemnified person becomes aware of such commencement (provided that the failure to make such notification shall not affect such indemnified person's rights to indemnification hereunder except to the extent the indemnifying person is materially prejudiced by such failure) and shall consult in good faith with the indemnifying person as to the conduct of the defense of such action or claim that may give rise to an indemnity hereunder, which defense shall be reasonable in the circumstances. No indemnified person shall compromise or settle any action or claim that may give rise to an indemnity 29 hereunder without the consent of the indemnifying person, which consent shall not be unreasonably withheld. SECTION 5.9. Fees and Charges of Depositary. The Company, the Holders, the ------------------------------ Beneficial Owners, and persons depositing Shares or surrendering ADSs for cancellation and withdrawal of Deposited Securities shall be required to pay to the Depositary the Depositary's fees and related charges identified as payable by them respectively in the Fee Schedule attached hereto as Exhibit B. All fees and charges so payable may, at any time and from time to time, be changed by agreement between the Depositary and the Company, but, in the case of fees and charges payable by Holders and Beneficial Owners, only in the manner contemplated in Section 6.1. The Depositary shall provide, without charge, a copy of its latest fee schedule to anyone upon request. The Company agrees to pay to the Depositary as promptly as practicable such other fees and charges and to reimburse the Depositary for such out-of-pocket expenses as the Depositary and the Company may agree to in writing from time to time. Responsibility for payment of such charges may at any time and from time to time be changed by agreement between the Company and the Depositary. Unless otherwise agreed, the Depositary shall present its statement for such expenses and fees or charges to the Company once every three months. The charges and expenses of the Custodian are for the sole account of the Depositary. The right of the Depositary to receive payment of fees, charges and expenses as provided above shall survive the termination of this Deposit Agreement. As to any Depositary, upon the resignation or removal of such Depositary as described in Section 5.4 hereof, such right shall extend for those fees, charges and expenses incurred prior to the effectiveness of such resignation or removal. SECTION 5.10. Pre-Release. Subject to the further terms and provisions of ----------- this Section 5.10, the Depositary, its Affiliates and their agents, on their own behalf, may own and deal in any class of securities of the Company and its Affiliates and in ADSs. In its capacity as Depositary, the Depositary shall not lend Shares or ADSs; provided, however, that the Depositary may (i) issue ADSs prior to the receipt of Shares pursuant to Section 2.3 and (ii) deliver Shares prior to the receipt of ADSs for withdrawal of Deposited Securities pursuant to Section 2.7, including ADSs which were issued under (i) above but for which Shares may not have been received (each such transaction a "Pre-Release Transaction"). The Depositary may receive ADSs in lieu of Shares under (i) above and receive Shares in lieu of ADSs under (ii) above. Each such Pre-Release Transaction will be (a) subject to a written agreement whereby the person or entity (the "Applicant") to whom ADSs or Shares are to be delivered (w) represents that at the time of the Pre-Release Transaction the Applicant or its customer owns the Shares or ADSs that are to be delivered by the Applicant under such Pre-Release Transaction, (x) agrees to indicate the Depositary as owner of such Shares or ADSs in its records and to hold such Shares or ADSs in trust for the Depositary until such Shares or ADSs are delivered to the Depositary or the Custodian, (y) unconditionally guarantees to deliver to the Depositary or the Custodian, as applicable, such Shares or ADSs, and (z) agrees to any additional restrictions or requirements that the Depositary deems reasonably appropriate, (b) at all times fully collateralized with cash, 30 United States government securities or such other collateral as the Depositary deems appropriate, (c) terminable by the Depositary on not more than five (5) business days' notice and (d) subject to such further indemnities and credit regulations as the Depositary deems appropriate. The Depositary will normally limit the number of ADSs and Shares involved in such Pre-Release Transactions at any one time to thirty percent (30%) of the ADSs outstanding (without giving effect to ADSs outstanding under (i) above), provided, however, that the Depositary reserves the right to change or disregard such limit from time to time as it deems appropriate. The Depositary may also set limits with respect to the number of ADSs and Shares involved in Pre-Release Transactions with any one person on a case by case basis as it deems reasonably appropriate. The Depositary may retain for its own account any compensation received by it in conjunction with the foregoing. Collateral provided pursuant to (b) above, but not the earnings thereon, shall be held for the benefit of the Holders (other than the Applicant). ARTICLE VI AMENDMENT AND TERMINATION SECTION 6.1. Amendment/Supplement. The Receipts outstanding at any time, the -------------------- provisions of this Deposit Agreement and the form of Receipt attached thereto and to be issued under the terms thereof may at any time and from time to time be amended or supplemented by written agreement between the Company and the Depositary in any respect which they may deem necessary or desirable without the prior written consent of the Holders or Beneficial Owners. Any amendment or supplement which shall impose or increase any fees or charges (other than charges in connection with foreign exchange control regulations, and taxes and other governmental charges, delivery and other such expenses), or which shall otherwise materially prejudice any substantial existing right of Holders or Beneficial Owners, shall not, however, become effective as to outstanding Receipts until the expiration of 30 days after notice of such amendment or supplement shall have been given to the Holders of outstanding Receipts. The parties hereto agree that any amendments or supplements which (i) are reasonably necessary (as agreed by the Company and the Depositary) in order for (a) the American Depositary Shares to be registered on Form F-6 under the Securities Act or (b) the American Depositary Share(s) to be traded solely in electronic book- entry form and (ii) do not in either such case impose or increase any fees or charges to be borne by Holders, shall be deemed not to materially prejudice any substantial rights of Holders or Beneficial Owners. Every Holder and Beneficial Owner at the time any amendment or supplement so becomes effective shall be deemed, by continuing to hold such American Depositary Share(s), to consent and agree to such amendment or supplement and to be bound by the Deposit Agreement as amended and supplemented thereby. In no event shall any amendment or supplement impair the right of the Holder to surrender such Receipt and receive therefor the Deposited Securities represented thereby, except in order to comply with mandatory provisions of applicable law. Notwithstanding the foregoing, if any governmental body should adopt new laws, rules or regulations which would require amendment or supplement of the Deposit Agreement to ensure compliance therewith, the Company and the Depositary may amend or supplement the Deposit Agreement and the Receipt at any time in accordance with such changed laws, rules or regulations. Such amendment or supplement to the Deposit 31 Agreement in such circumstances may become effective before a notice of such amendment or supplement is given to Holders or within any other period of time as required for compliance with such laws, rules or regulations. SECTION 6.2. Termination. The Depositary shall, at any time at the written ----------- direction of the Company, terminate this Deposit Agreement by mailing notice of such termination to the Holders of all Receipts then outstanding at least 30 days prior to the date fixed in such notice for such termination. This Deposit Agreement shall also terminate at any time upon the mandatory conversion, exchange or redemption of Deposited Securities for which this Deposit Agreement is not amended by agreement between the Company and the Depositary (the date of termination in such case being the effective date of such conversion, exchange or redemption), in which case the Depositary shall provide written notice thereof to the Holders as soon as reasonably practicable. If 60 days shall have expired after (i) the Depositary shall have delivered to the Company a written notice of its election to resign, or (ii) the Company shall have delivered to the Depositary a written notice of the removal of the Depositary, and in either case a successor depositary shall not have been appointed and accepted its appointment as provided in Section 5.4, the Depositary may terminate this Deposit Agreement by mailing notice of such termination to the Holders of all Receipts then outstanding at least 30 days prior to the date fixed for such termination. On and after the date of termination of this Deposit Agreement, the Holder will, upon surrender of such Receipt at the Principal Office of the Depositary, upon the payment of the charges of the Depositary for the surrender of Receipts referred to in Section 2.7 and subject to the conditions and restrictions therein set forth, and upon payment of any applicable taxes or governmental charges, be entitled to delivery, to a designated NECIGEF Participant, of the amount of Deposited Securities represented by such Receipt. If any Receipts shall remain outstanding after the date of termination of this Deposit Agreement, the Registrar thereafter shall discontinue the registration of transfers of Receipts, and the Depositary shall suspend the distribution of dividends to the Holders thereof, and shall not give any further notices or perform any further acts under this Deposit Agreement, except that the Depositary shall continue to collect dividends and other distributions pertaining to Deposited Securities, shall sell rights as provided in this Deposit Agreement, and shall continue to deliver Deposited Securities, subject to the conditions and restrictions set forth in Section 2.7, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of any rights or other property, in exchange for Receipts surrendered to the Depositary (after deducting, or charging, as the case may be, in each case, the charges of the Depositary for the surrender of a Receipt, any expenses for the account of the Holder in accordance with the terms and conditions of this Deposit Agreement and any applicable taxes or governmental charges or assessments). At any time after the expiration of six months from the date of termination of this Deposit Agreement, the Depositary may sell the Deposited Securities then held hereunder and may thereafter hold uninvested the net proceeds of any such sale, together with any other cash then held by it hereunder, in an unsegregated account, without liability for interest for the pro rata benefit of the Holders of Receipts whose Receipts have not theretofore been surrendered. After making such sale, the Depositary shall be discharged from all obligations under this Deposit Agreement with respect to the Receipts, the Deposited Securities and the American Depositary Shares, except to account for such net proceeds and other cash (after deducting, or charging, as the case may be, in each case, the charges of the Depositary for the surrender of a Receipt, any expenses for the 32 account of the Holder in accordance with the terms and conditions of this Deposit Agreement and any applicable taxes or governmental charges or assessments). Upon the termination of this Deposit Agreement, the Company shall be discharged from all obligations under this Deposit Agreement except for its obligations to the Depositary under Sections 5.8, 5.9 and 7.6 hereof. ARTICLE VII MISCELLANEOUS SECTION 7.1. Counterparts. This Deposit Agreement may be executed in any ------------ number of counterparts, each of which shall be deemed an original and all of such counterparts together shall constitute one and the same agreement. Copies of this Deposit Agreement shall be maintained with the Depositary and shall be open to inspection by any Holder during business hours. SECTION 7.2. No Third-Party Beneficiaries. This Deposit Agreement is for the ---------------------------- exclusive benefit of the parties hereto (and their successors) and shall not be deemed to give any legal or equitable right, remedy or claim whatsoever to any other person, except to the extent specifically set forth in this Deposit Agreement. Nothing in this Deposit Agreement shall be deemed to give rise to a partnership or joint venture among the parties nor establish a fiduciary or similar relationship among the parties. The parties hereto acknowledge and agree that (i) the Depositary and its Affiliates may at any time have multiple banking relationships with the Company and its Affiliates, (ii) the Depositary and its Affiliates may be engaged at any time in transactions in which parties adverse to the Company or the Holders or Beneficial Owners may have interests and (iii) nothing contained in this Agreement shall (a) preclude the Depositary or any of its Affiliates from engaging in such transactions or establishing or maintaining such relationships, (b) obligate the Depositary or any of its Affiliates to disclose such transactions or relationships or to account for any profit made or payment received in such transactions or relationships. SECTION 7.3. Severability. In case any one or more of the provisions contained ------------ in this Deposit Agreement or in the Receipts should be or become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein or therein shall in no way be affected, prejudiced or disturbed thereby. SECTION 7.4. Holders and Beneficial Owners as Parties; Binding Effect. The -------------------------------------------------------- Holders and Beneficial Owners from time to time of American Depositary Shares shall be parties to the Deposit Agreement and shall be deemed to have knowledge of and be bound by all of the terms and conditions thereof and of any Receipt by acceptance thereof or any beneficial interest therein. SECTION 7.5. Notices. Any and all notices to be given to the Company shall be ------- deemed to have been duly given if personally delivered or sent by mail, air courier or cable, telex or facsimile transmission, confirmed by letter, addressed to Fred. Roeskestraat 123, P.O. Box 74763, 1070 B.T., Amsterdam, The Netherlands, Attention: General Counsel, with a copy to Holme, Roberts & Owen LLP, 1700 Lincoln Street, Suite 4100, Denver, CO 80203-4541, Attention: W. Dean Salter, Esq. or to any other address which the Company may specify in writing to the Depositary. 33 Any and all notices to be given to the Depositary shall be deemed to have been duly given if personally delivered or sent by mail, air courier or cable, telex or facsimile transmission, confirmed by letter, addressed to Citibank, N.A., 111 Wall Street, New York, New York 10043, U.S.A. Attention: ADR Department, or to any other address which the Depositary may specify in writing to the Company. Any and all notices to be given to the Custodian shall be deemed to have been duly given if personally delivered or sent by mail, air courier or cable, telex or facsimile transmission, confirmed by letter, addressed to Europlaza, Hoogoordeef 54B, 1101 B.E., Amsterdam, The Netherlands or to any other address which the Custodian may specify in writing to the Company. Any and all notices to be given to any Holder shall be deemed to have been duly given if personally delivered or sent by mail or cable, telex or facsimile transmission, confirmed by letter, addressed to such Holder at the address of such Holder as it appears on the transfer books for Receipts of the Depositary, or, if such Holder shall have filed with the Depositary a written request that notices intended for such Holder be mailed to some other address, at the address specified in such request. Notice to Holders shall be deemed to be notice to Beneficial Owners for all purposes of this Deposit Agreement. Delivery of a notice sent by mail, air courier or cable, telex or facsimile transmission shall be deemed to be effective at the time when a duly addressed letter containing the same (or a confirmation thereof in the case of a cable, telex or facsimile transmission) is deposited, postage prepaid, in a post-office letter box or delivered to an air courier service. The Depositary or the Company may, however, act upon any cable, telex or facsimile transmission received by it from the other or from any Holder, notwithstanding that such cable, telex or facsimile transmission shall not subsequently be confirmed by letter as aforesaid. SECTION 7.6. Governing Law and Jurisdiction. This Deposit Agreement and the ------------------------------ Receipts shall be interpreted in accordance with, and all rights hereunder and thereunder and provisions hereof and thereof shall be governed by, the laws of the State of New York without reference to the principles of choice of law thereof. Notwithstanding anything contained in this Deposit Agreement, any Receipt or any present or future provisions of the laws of the State of New York, the rights of holders of Shares and of any other Deposited Securities and the obligations and duties of the Company in respect of the holders of Shares and other Deposited Securities, as such, shall be governed by the laws of The Netherlands (or, if applicable, such other laws as may govern the Deposited Securities). Except as set forth in the following paragraph of this Section 7.6, the Company and the Depositary agree that the federal or state courts in the City of New York shall have jurisdiction to hear and determine any suit, action or proceeding and to settle any dispute between them that may arise out of or in connection with this Deposit Agreement and, for such purposes, each irrevocably submits to the non-exclusive jurisdiction of such courts. The Company hereby irrevocably designates, appoints and empowers CT Corporation System (the "Agent") now at 1633 Broadway, New York, New York, 10019 as its authorized agent to receive and accept for and on its behalf, and on behalf of its properties, assets and revenues, service by mail of any and all legal process, summons, notices and documents that may be served in any suit, action or proceeding brought against the Company in any federal or state court as described 34 in the preceding sentence or in the next paragraph of this Section 7.6. If for any reason the Agent shall cease to be available to act as such, the Company agrees to designate a new agent in New York or Colorado on the terms and for the purposes of this Section 7.6 reasonably satisfactory to the Depositary. The Company further hereby irrevocably consents and agrees to the service of any and all legal process, summons, notices and documents in any suit, action or proceeding against the Company, by service, by registered or certified airmail, postage prepaid, of a copy thereof upon the Agent (whether or not the appointment of such Agent shall for any reason prove to be ineffective or such Agent shall fail to accept or acknowledge such service), with a copy mailed to the Company by registered or certified air mail, postage prepaid, to its address provided in Section 7.5 hereof. The Company agrees that the failure of the Agent to give any notice of such service to it shall not impair or affect in any way the validity of such service or any judgment rendered in any action or proceeding based thereon. Notwithstanding the foregoing, the Depositary and the Company unconditionally agree that in the event that a Holder or Beneficial Owner brings a suit, action or proceeding against (a) the Company, (b) the Depositary in its capacity as Depositary under this Deposit Agreement or (c) against both the Company and the Depositary, in any such case, in any state or federal court of the United States, and the Depositary or the Company have any claim, for indemnification or otherwise, against each other arising out of the subject matter of such suit, action or proceeding, then the Company and the Depositary may pursue such claim against each other in the state or federal court in the United States in which such suit, action, or proceeding is pending and, for such purposes, the Company and the Depositary irrevocably submit to the non-exclusive jurisdiction of such courts. The Company agrees that service of process upon the Agent in the manner set forth in the preceding paragraph shall be effective service upon it for any suit, action or proceeding brought against it as described in this paragraph. The Company irrevocably and unconditionally waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of venue of any actions, suits or proceedings brought in any court as provided in this Section 7.6, and hereby further irrevocably and unconditionally waives and agrees not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum. No disclaimer of liability under the Securities Act is intended by any provision of the Deposit Agreement. The provisions of this Section 7.6 shall survive any termination of this Deposit Agreement, in whole or in part. SECTION 7.7. Assignment. Subject to the provisions of Section 5.4 hereof, this ---------- Deposit Agreement may not be assigned by either the Company or the Depositary without the prior written consent of the non-assigning party. SECTION 7.8. Compliance with U.S. Securities Laws. Notwithstanding anything in ------------------------------------ this Deposit Agreement to the contrary, the withdrawal or delivery of Deposited Securities will not be suspended by the Company or the Depositary except as would be permitted by Instruction I.A.(1) 35 of the General Instructions to Form F-6 Registration Statement, as amended from time to time, under the Securities Act. SECTION 7.9. Titles. All references in this Deposit Agreement to exhibits, ------ articles, sections, subsections, and other subdivisions refer to the exhibits, articles, sections, subsections and other subdivisions of this Deposit Agreement unless expressly provided otherwise. The words "this Deposit Agreement", "herein", "hereof", "hereby", "hereunder", and words of similar import refer to the Deposit Agreement as a whole as in effect between the Company, the Depositary and the Holders and Beneficial Owners of ADSs and not to any particular subdivision unless expressly so limited. Pronouns in masculine, feminine and neuter gender shall be construed to include any other gender, and words in the singular form shall be construed to include the plural and vice versa unless the context otherwise requires. Titles to sections of this Deposit Agreement are included for convenience only and shall be disregarded in construing the language contained in this Deposit Agreement. 36 IN WITNESS WHEREOF, UNITED PAN-EUROPE COMMUNICATIONS N.V. and CITIBANK, N.A. have duly executed this Deposit Agreement as of the day and year first above set forth and all Holders and Beneficial Owners shall become parties hereto upon acceptance by them of American Depositary Shares evidenced by Receipts issued in accordance with the terms hereof, or upon acquisition of any beneficial interest therein. UNITED PAN-EUROPE COMMUNICATIONS N.V By: /S/ Anton H.E. v. Voskuijlen ----------------------------- Name: Anton H.E. v. Voskuijlen Title: Attorney-in-fact CITIBANK, N.A. By: /S/ Susan A. McFarland ----------------------- Name: Susan A. McFarland Title: Vice President 37 Number __________ CUSIP American Depositary Shares (Each American Depositary Share representing one fully paid ordinary share, nominal value 0.30 each) EXHIBIT A [FORM OF FACE OF RECEIPT] AMERICAN DEPOSITARY RECEIPT FOR AMERICAN DEPOSITARY SHARES representing DEPOSITED ORDINARY SHARES of UNITED PAN-EUROPE COMMUNICATIONS N.V. (Organized under the laws of The Netherlands) CITIBANK, N.A., a national banking association organized and existing under the laws of the United States of America, as depositary (herein called the "Depositary"), hereby certifies that _____________is the owner of ______________ American Depositary Shares (hereinafter "ADS"), representing deposited ordinary shares, nominal value 0.30 each, including evidence of rights to receive such ordinary shares (the "Shares") of United Pan-Europe Communications N.V, a corporation incorporated under the laws of The Netherlands (the "Company"). As of the date of the Deposit Agreement (as hereinafter defined), each ADS represents one Share deposited under the Deposit Agreement with the Custodian which at the date of execution of the Deposit Agreement is Citibank N.A., Amsterdam (the "Custodian"). The ratio of American Depositary Shares to shares of stock is subject to subsequent amendment as provided in Article IV of the Deposit Agreement. The Depositary's Principal Office is located at 111 Wall Street, New York, New York 10043, U.S.A. (1) The Deposit Agreement. This American Depositary Receipt is one of an issue --------------------- of American Depositary Receipts ("Receipts"), all issued and to be issued upon the terms and conditions set forth in the Deposit Agreement, dated as of February 16, 1999 (as amended from time to time, the "Deposit Agreement"), by and among the Company, the Depositary, and all Holders and Beneficial Owners from time to time of American Depositary Shares ("ADSs") evidenced by Receipts issued thereunder, each of whom by accepting an ADS (or an interest therein) agrees to become a party thereto and will be deemed to have knowledge thereof and becomes bound by all the terms and conditions thereof. The Deposit Agreement sets forth the rights and obligations of Holders and Beneficial Owners of Receipts and the rights and duties of the Depositary in respect of the Shares deposited thereunder and any and all other securities, property and cash from time to time, received in respect of such Shares and held thereunder (such A-1 Shares, securities, property and cash are herein called "Deposited Securities"). Copies of the Deposit Agreement are on file at the Principal Office of the Depositary and the Custodian. The statements made on the face and reverse of this Receipt are summaries of certain provisions of the Deposit Agreement and the Articles of Association of the Company (as in effect on the date of the Deposit Agreement) and are qualified by and subject to the detailed provisions of the Deposit Agreement, to which reference is hereby made. All capitalized terms used herein which are not otherwise defined herein shall have the meanings ascribed thereto in the Deposit Agreement. The Depositary makes no representation or warranty as to the validity or worth of the Deposited Securities. The Depositary has made arrangements for the acceptance of the American Depositary Shares into DTC. Each Beneficial Owner of American Depositary Shares held through DTC must rely on the procedures of DTC and the DTC Participants to exercise and be entitled to any rights attributable to such American Depositary Shares. (2) Surrender of Receipts and Withdrawal of Deposited Securities. Upon ------------------------------------------------------------ surrender, at the Principal Office of the Depositary, of ADS evidenced by this Receipt for the purpose of withdrawal of the Deposited Securities represented thereby, and upon payment of (i) the charges of the Depositary for the making of withdrawals and cancellation of Receipts (as set forth in Article (10) hereof and in Section 5.9 and Exhibit B of the Deposit Agreement) and (ii) all fees, taxes and governmental charges payable in connection with such surrender and withdrawal, and, subject to the terms and conditions of this Receipt, the Deposit Agreement, the Company's Articles of Association, and the provisions of or governing the Deposited Securities and other applicable laws, the Holder of the American Depositary Shares evidenced hereby is entitled to Delivery by electronic transfer recorded on the transfer books of The Netherlands Central Institute for Giro Securities (Nederlands Centraal Instituut voor Giraal Effectenverkeer B.V.) ("NECIGEF"), to the participant having an account at NECIGEF ("NECIGEF Participant") designated in such Holder's order, of the Deposited Securities represented by the ADS so surrendered and delivery of any other securities, property and cash to which such Holder is then entitled in respect to such ADS. A Receipt surrendered for such purposes shall, if so required by the Depositary, be properly endorsed in blank or accompanied by proper instruments of transfer in blank. If the Depositary so requires, the Holder hereof shall execute and deliver to the Depositary a written order directing the Depositary to cause the Deposited Securities being withdrawn to be Delivered to the NECIGEF Participant designated in such order. Thereupon, the Depositary shall direct the Custodian to Deliver (as promptly as practicable) by electronic transfer recorded on the transfer books of NECIGEF, subject to the terms and conditions of the Receipts, the Deposit Agreement, the Articles of Association of the Company, and the provisions of or governing the Deposited Securities, applicable laws and the rules of NECIGEF now or hereafter in effect, to the NECIGEF Participant designated in the written order of the person or persons designated in the order delivered to the Depositary as provided above, the Deposited Securities represented by such ADSs together with any evidence of the elecronic transfer of the Deposited Securities. The Depositary may make delivery to such person or persons at the Principal Office of the Depositary of any dividends or distributions with respect to the Deposited Securities represented by the A-2 ADSs evidenced by this Receipt, or of any proceeds of sale of any dividends, distributions or rights, which may at the time be held by the Depositary. The Depositary shall not accept for surrender a Receipt evidencing ADSs representing less than one Share. In the case of surrender of a Receipt evidencing a number of ADS representing other than a whole number of Shares, the Depositary shall cause ownership of the appropriate whole number of Shares to be Delivered in accordance with the terms hereof, and shall, at the discretion of the Depositary, either (i) return to the person surrendering such ADSs the number of ADSs representing any remaining fractional Share, or (ii) sell or cause to be sold the fractional Shares represented by the ADSs so surrendered and remit the proceeds thereof (net of (a) applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes withheld) to the person surrendering the ADSs. At the request, risk and expense of any Holder so surrendering ADSs, and for the account of such Holder, the Depositary shall direct the Custodian to forward (to the extent permitted by law) any cash or other property (other than securities) held in respect of the Deposited Securities represented by such ADSs to the Depositary for delivery at the Principal Office of the Depositary. Such direction shall be given by letter or, at the request, risk and expense of such Holder, by cable, telex or facsimile transmission. (3) Transfers, Split-Ups and Combinations of Receipts. Subject to the terms ------------------------------------------------- and conditions of the applicable Receipt(s), the Deposit Agreement and the U.S. securities laws, the Registrar shall register transfers of Receipts on its book upon surrender at the Principal Office of the Depositary of a Receipt by the Holder thereof in person or by duly authorized attorney, properly endorsed or accompanied by proper instruments of transfer (including signature guarantees in accordance with standard industry practice) and duly stamped as may be required by the laws of the State of New York and of the United States of America. Subject to the terms and conditions of the Deposit Agreement including payment of the applicable fees and charges of the Depositary, the Depositary shall execute and deliver a new Receipt(s) (and if necessary cause the Registrar to countersign such Receipt(s)) and deliver the same to or upon the order of the person entitled thereto evidencing the same aggregate number of ADSs as those evidenced by the Receipt(s) surrendered. Upon surrender of a Receipt or Receipts for the purpose of effecting a split-up or combination of such Receipt or Receipts and upon payment of the applicable fees and charges of the Depositary and subject to the terms and conditions of the applicable Receipt(s), the Deposit Agreement and the U.S. securities laws, the Depositary shall execute and deliver new Receipt(s) evidencing the same aggregate number of ADSs as the Receipt(s) surrendered. (4) Pre-Conditions to Registration, Transfer, Etc. As a condition precedent to --------------------------------------------- the execution and delivery, registration of transfer, split-up, combination or surrender of any Receipt or withdrawal of any Deposited Securities, the Depositary or the Custodian may require (i) payment from the depositor of Shares or presenter of ADSs or of a Receipt of a sum sufficient to reimburse it for any tax or other governmental charge and any stock transfer or registration fee with respect thereto (including any such tax or charge and fee with respect to Shares being deposited or withdrawn) and payment of any applicable fees and charges of the Depositary as provided in the Deposit Agreement and in this Receipt, (ii) the production of proof satisfactory to it as to the identity and genuineness of any signature or any other matters and (iii) compliance with (A) any laws or governmental regulations relating to the execution and delivery of Receipts 40 and ADSs or to the withdrawal of Deposited Securities and (B) such reasonable regulations of the Depositary or the Company consistent with the Deposit Agreement and applicable law. The issuance of ADSs against deposits of Shares generally or against deposits of particular Shares may be suspended, or the delivery of ADSs against the deposit of particular Shares may be withheld, or the registration of transfer of Receipts in particular instances may be refused, or the registration of transfer of outstanding Receipts generally may be suspended, during any period when the transfer books of the Company, Depositary, a Registrar or the Share Registrar are closed or if any such action is deemed necessary or advisable by the Depositary or the Company, in good faith, at any time or from time to time because of any requirement of law, any government or governmental body or commission or any securities exchange upon which the Receipts or Share are listed, or under any provision of the Deposit Agreement or provisions of, or governing, the Deposited Securities or any meeting of shareholders of the Company or for any other reason, subject in all cases to Article (24) hereof. Notwithstanding any provision of the Deposit Agreement or this Receipt to the contrary, Holders are entitled to surrender outstanding ADSs to withdraw the Deposited Securities at any time subject only to (i) temporary delays caused by closing the transfer books of the Depositary or the Company or the deposit of Shares in connection with voting at a shareholders' meeting or the payment of dividends, (ii) the payment of fees, taxes and similar charges, (iii) compliance with any U.S. or foreign laws or governmental regulations relating to the Receipts or to the withdrawal of the Deposited Securities, and (iv) other circumstances specifically contemplated by Section I.A.(l) of the General Instructions to Form F-6 (as such General Instructions may be amended from time to time). (5) Compliance With Information Requests. Notwithstanding any other provision ------------------------------------ of the Deposit Agreement or this Receipt, each Holder and Beneficial Owner of the ADSs represented hereby agrees to comply with requests from the Company pursuant to Dutch law, the rules and requirements of the Amsterdam Stock Exchange, and of any stock exchange or automated quotation system on which Shares or ADSs are or will be registered, traded or listed, the Articles of Association of the Company, which are made to provide information as to the capacity in which such Holder or Beneficial Owner owns ADSs (and Shares, as the case may be) and regarding the identity of any other persons then or previously interested in such ADSs and the nature of such interest and various other matters, whether or not they are Holders and/or Beneficial Owners at the time of such request. The Depositary agrees to use reasonable efforts to forward, upon the request of the Company and at the Company's expense, any such requests to the Holders and to forward to the Company any such responses to such requests received by the Depositary. (6) Ownership Restrictions. The Company may restrict transfers of the Shares ---------------------- where such transfer might result in ownership of Shares exceeding limits under applicable law or the Articles of Association of the Company. The Company may also restrict, in such manner as it deems appropriate, transfers of ADSs where such transfer may result in the total number of Shares represented by the ADSs owned by a single Holder or Beneficial Owner to exceed any such limits. The Company may, in its sole discretion but subject to applicable law, instruct the Depositary to take action with respect to the ownership interest of any Holder or Beneficial A-4 Owner in excess of the limits set forth in the preceding sentence, including but not limited to the imposition of restrictions on the transfer of ADSs, the removal or limitation of voting rights or a mandatory sale or disposition on behalf of a Holder or Beneficial Owner of the Shares represented by the ADSs held by such Holder or Beneficial Owner in excess of such limitations, if and to the extent such disposition is permitted by applicable law and the Articles of Association of the Company. (7) Liability of Holder for Taxes, Duties and Other Charges. If any tax or ------------------------------------------------------- other governmental charge shall become payable with respect to any Receipt or any Deposited Securities or ADSs, such tax, or other governmental charge shall be payable by the Holders and Beneficial Owners to the Depositary. The Company, the Custodian and/or Depositary may withhold or deduct from any distributions made in respect of Deposited Securities and may sell for the account of the Holder and/or Beneficial Owner any or all of the Deposited Securities and apply such distributions and sale proceeds in payment of such taxes (including applicable interest and penalties) or charges, the Holder and the Beneficial Owner hereof remaining liable for any deficiency. The Custodian may refuse the deposit of Shares and the Depositary may refuse to issue ADSs, to deliver Receipts, register the transfer, split-up or combination of ADRs and (subject to Article (24) hereof) the withdrawal of Deposited Securities until payment in full of such tax, charge, penalty or interest is received. Every Holder and Beneficial Owner agrees to indemnify the Depositary, the Company, the Custodian and any of their agents, employees and Affiliates for, and hold each of then harmless from, any claims with respect to taxes (including applicable interest and penalties thereon) arising from any tax benefit obtained for such Holder and/or Beneficial Owner. (8) Representations and Warranties of Depositors. Each person depositing -------------------------------------------- Shares under the Deposit Agreement shall be deemed thereby to represent and warrant that (i) such Shares are duly authorized, validly issued, fully paid, non-assessable and legally obtained by such person, (ii) all preemptive (and similar) rights, if any, with respect to such Shares, have been validly waived or exercised, (iii) the person making such deposit is duly authorized so to do and (iv) the Shares presented for deposit are free and clear of any lien, encumbrance, security interest, charge, mortgage or adverse claim and are not, and the ADSs issuable upon such deposit will not be, Restricted Securities and the Share presented for deposit have not been stripped of any rights or entitlements. Such representations and warranties shall survive the deposit and withdrawal of Shares, the issuance and cancellation of ADSs in respect thereof and the transfer of such ADSs. If any such representations or warranties are false in any way, the Company and Depositary shall be authorized, at the cost and expense of the person depositing Shares, to take any and all actions necessary to correct the consequences thereof. (9) Filing Proofs, Certificates and Other Information. Any NECIGEF Participant ------------------------------------------------- presenting Shares for deposit by electronic transfer recorded in the books of NECIGEF, any Holder and any Beneficial Owner may be required, and every Holder and Beneficial Owner agrees, from time to time to provide to the Depositary and the Custodian such proof of citizenship or residence, taxpayer status, payment of all applicable taxes or other governmental charges, exchange control approval, legal or beneficial ownership of ADSs and Deposited Securities, compliance with applicable laws and the terms of the Deposit Agreement and the provisions of, or governing, the A-5 Deposited Securities, to execute such certifications and to make such representations and warranties and to provide such other information or documentation as the Depositary or the Custodian may deem necessary or proper or as the Company may reasonably require by written request to the Depositary consistent with its obligations under the Deposit Agreement. Subject to Article (24) hereof and the terms of the Deposit Agreement, the Depositary and the Registrar, as applicable, may withhold the delivery or registration of transfer of any Receipt or the distribution or sale of any dividend or other distribution of rights or of the proceeds thereof or the delivery of any Deposited Securities until such proof or other information is filed or such certificates are executed, or such representations and warranties made or such information and documentation are provided, in each case to the Depositary's, the Registrar's and the Company's satisfaction. Holders and Beneficial Owners acknowledge that under the Dutch Act on Disclosure of Holdings in Listed Companies 1996, shareholders must promptly notify the Company and the Securities Board of the Netherlands if they have 5% or more capital interest or voting rights in the Company, and if by obtaining or divesting shares in the Company their capital interest or voting rights come under a different percentage range. These ranges are 0 to 5%, 5 to 10%, 10 to 25%, 25 to 50%, 50 to 66 2/3% and 66 2/3 % or more. Holders and Beneficial Owners agree to comply with such requirements. (10) Charges of Depositary. The Depositary shall charge the following fees for --------------------- the services performed under the terms of the Deposit Agreement: (i) to any person to whom ADSs are issued upon the deposit of Shares, a fee not in excess of U.S. $ 5.00 per 100 ADSs (or portion thereof) so issued under the terms of the Deposit Agreement (excluding issuances pursuant to paragraph (iii) and (iv) below); (ii) to any person surrendering ADSs for cancellation and withdrawal of Deposited Securities, a fee not in excess of U.S. $ 5.00 per 100 ADSs (or portion thereof) so surrendered; (iii) to any Holder of ADRs, a fee not in excess of U.S. $ 2.00 per 100 ADSs (or portion thereof) held for the distribution of cash proceeds (i.e. upon the sale of rights and other entitlements); no fee shall be payable for the distribution of cash dividends or the distribution of ADSs pursuant to stock dividends. (iv) to any Holder of ADRs, a fee not in the excess of U.S. $ 5.00 per 100 ADSs (or portion thereof) for the distribution of ADSs pursuant to free share distributions or the exercise of rights. In addition, Holders, Beneficial Owners, any person depositing Shares for deposit and any person surrendering ADSs for cancellation and withdrawal of Deposited Securities will be required to pay the following charges: A-6 (i) taxes (including applicable interest and penalties) and other governmental charges; (ii) such fees as may from time to time be in effect for the transfer of Shares or other Deposited Securities to or from the name of the Custodian, upon the making of deposits and withdrawals, (iii) such cable, telex and facsimile transmission and delivery expenses as are expressly provided in the Deposit Agreement to be at the expense of the person depositing or withdrawing Shares or Holders and Beneficial Owners of ADSs; (iv) the expenses and charges incurred by the Depositary in the conversion of foreign currency; (v) such fees and expenses as are incurred by the Depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to Shares, Deposited Securities, ADSs and ADRs; and (vi) the fees and expenses incurred by the Depositary in connection with the delivery of Deposited Securities. The Company agrees to pay to the Depositary, as promptly as practicable, such other charges and expenses of the Depositary as the Depositary and the Company may agree to from time to time. Fees and charges may, at any time and from time to time, be changed by agreement between the Depositary and Company but, in the case of fees and charges payable by Holders or Beneficial Owners, only in the manner contemplated by Article (22) of this Receipt. The Depositary will provide, without charge, a copy of its latest fee schedule to anyone upon request. The charges and expenses of the Custodian are for the sole account of the Depositary. (11) Title to Receipts. Subject to the limitations contained herein and in the ----------------- Deposit Agreement, title to this Receipt (and to each ADS evidenced hereby) is transferable by delivery of this Receipt with the same effect as a certificated security under the laws of the State of New York, provided this Receipt has been properly endorsed or is accompanied by proper instruments of transfer. Notwithstanding any notice to the contrary, the Depositary may deem and treat the person in whose name this Receipt is registered on the books of the Depositary as the absolute owner hereof for all purposes. The Depositary shall have no obligation nor be subject to any liability hereunder or under the Deposit Agreement to any holder of a Receipt unless such holder is the Holder of such Receipt registered on the books of the Depositary, or, in the case of a Beneficial Owner, such Beneficial Owner or the Beneficial Owner's representative is the Holder registered on the books of the Depositary. (12) Validity of Receipt. This Receipt (and the American Depositary Shares ------------------- represented hereby) shall not be entitled to any benefits under the Deposit Agreement or be valid or enforceable for any purpose against the Depositary or the Company unless this Receipt has been (i) dated, (ii) signed by the manual or facsimile signature of a duly authorized signatory of the A-7 Depositary, (iii) countersigned by the manual or facsimile signature of a duly authorized signatory of the Registrar, and (iv) registered by the Registrar in the books maintained by the Registrar for the purpose of registration of the issuance and transfer of Receipts. (13) Available Information; Reports; Inspection of Transfer Books. The Company ------------------------------------------------------------ is subject to the periodic reporting requirements of the Exchange Act and accordingly files certain information with the Commission. These reports and documents can be inspected and copied at the public reference facilities maintained by the Commission located at Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549 and at the Commission's New York City office located at Seven World Trade Center, 13th Floor, New York, New York 10048. The Depositary shall make available for inspection by Holders at its Principal Office any reports and communications, including any proxy soliciting materials, received from the Company which are both (a) received by the Depositary, the Custodian, or the nominee of either of them as the holder of the Deposited Securities and (b) made generally available to the holders of such Deposited Securities by the Company. The Registrar shall keep books for the registration of issuances and transfers of Receipts which at all reasonable times shall be open for inspection by the Company and by the Holders of such Receipts, provided that such inspection shall not be, to the Registrar's knowledge, for the purpose of communicating with Holders of such Receipts in the interest of a business or object other than the business of the Company or other than a matter related to the Deposit Agreement or the Receipts. The Registrar may close the transfer books with respect to the Receipts, at any time or from time to time, when deemed necessary or advisable by it in good faith in connection with the performance of its duties hereunder, or at the reasonable written request of the Company subject, in all cases, to Article (24) hereof. Dated: CITIBANK, N.A., as Depositary Countersigned By: ____________________________ By: ____________________________ Authorized Representative Vice President The address of the Principal Office of the Depositary is 111 Wall Street, New York, New York 10043, U.S.A. A-8 [FORM OF REVERSE OF RECEIPT] SUMMARY OF CERTAIN ADDITIONAL PROVISIONS OF THE DEPOSIT AGREEMENT (14) Dividends and Distributions in Cash, Shares, etc. Whenever the Depositary ------------------------------------------------ receives confirmation from the Custodian of receipt of any cash dividend or other cash distribution on any Deposited Securities, or receives proceeds from the sale of any Shares, rights securities or other entitlements under the Deposit Agreement, the Depositary will, if at the time of receipt thereof any amounts received in a Foreign Currency can, in the judgment of the Depositary (upon the terms of the Deposit Agreement), be converted on a practicable basis into Dollars transferable to the United States, convert or cause to be converted such dividend, distribution or proceeds into Dollars (upon the terms of the Deposit Agreement) and will distribute as promptly as practicable the amount thus received (net of (a) applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes withheld) to the Holders entitled thereto as of the ADS Record Date in proportion to the number of ADS held as of the ADS Record Date. The Depositary shall distribute only such amount, however, as can be distributed without attributing to any Holder a fraction of one cent, and any balance not so distributed shall be held by the Depositary (without liability for interest thereon) and shall be added to and become part of the next sum received by the Depositary for distribution to Holders of ADSs then outstanding. If the Company, the Custodian or the Depositary is required to withhold and does withhold from any cash dividend or other cash distribution in respect of any Deposited Securities an amount on account of taxes, duties or other governmental charges, the amount distributed to Holders on the ADSs representing such Deposited Securities shall be reduced accordingly. Such withheld amounts shall be forwarded by the Company to the relevant governmental authority. If any distribution upon any Deposited Securities consists of a dividend in, or free distribution of, Shares, the Company shall or cause such Shares to be deposited with the Custodian and registered, as the case may be, in the name of the Depositary, the Custodian or their nominees. The Depositary shall, subject to and in accordance with the Deposit Agreement and upon receipt of confirmation of such deposit from the Custodian, (i) distribute to the Holders as of the ADS Record Date previously established by the Depositary in proportion to the number of ADSs held as of the ADS Record Date, additional ADSs, which represent in aggregate the number of Shares received as such dividend, or free distribution, subject to the terms of the Deposit Agreement (including, without limitation, (a) the applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes), or (ii) if additional ADSs are not so distributed, each ADS issued and outstanding after the ADS Record Date shall, to the extent permissible by law, thenceforth also represent rights and interest in the additional integral number of Shares distributed upon the Deposited Securities represented thereby (net (a) of the applicable fees and charges of, and the expenses incurred by, the Depositary, and (b) taxes). In lieu of delivering fractional ADSs, the Depositary shall sell the number of Shares or ADSs, as the case may be, represented by the aggregate of such fractions and distribute the net proceeds upon the terms set forth in the Deposit Agreement. A-9 In the event that the Depositary determines that any distribution in property (including Shares) is subject to any tax or other governmental charges which the Depositary is obligated to withhold, or, if the Company, in the fulfillment of its obligations under the Deposit Agreement, has furnished an opinion of U.S. counsel determining that Shares must be registered under the Securities Act or other laws in order to be distributed to Holders (and no such registration statement has been declared effective), the Depositary may dispose of all or a portion of such property (including Shares and rights to subscribe therefor) in such amounts and in such manner, including by public or private sale, as the Depositary deems necessary and practicable and the Depositary shall distribute the net proceeds of any such sale (after deduction of (a) taxes and fees and (b) charges of, and expenses incurred by, the Depositary) to Holders entitled thereto upon the terms of the Deposit Agreement. The Depositary shall hold and/or distribute any unsold balance of such property in accordance with the provisions of the Deposit Agreement. Upon timely receipt of a notice indicating that the Company wishes an elective distribution to be made available to Holders upon the terms described in the Deposit Agreement, the Company and the Depositary shall determine whether such distribution is lawful and reasonably practicable. If so, the Depositary shall, to the extent permitted by law and subject to the terms and conditions of the Deposit Agreement, distribute either (x) cash as in the case of a cash distribution or (y) additional ADSs representing such additional Shares as in the case of a distribution of Shares. In either case, the Depositary shall, subject to the terms and conditions of the Deposit Agreement, establish and ADS Record Date and establish procedures to enable the Holder hereof to elect to receive the proposed distribution in cash or in additional ADSs. If a Holder elects to receive the distribution in cash, the dividend shall be distributed as in the case of a distribution in cash. If the Holder hereof elects to receive the distribution in additional ADSs, the distribution shall be distributed as in the case of a distribution in Shares. Nothing herein or in the Deposit Agreement shall obligate the Depositary to make available to the Holder hereof a method to receive the elective distribution in Shares (rather than ADSs). There can be no assurance that the Holder hereof will be given the opportunity to receive elective distributions on the same terms and conditions as the holders of Shares. Upon timely receipt by the Depositary of a notice indicating that the Company wishes rights to subscribe for additional Shares (or any rights of any other nature) to be made available to Holders of ADSs, the Company and the Depositary shall determine whether it is lawful and reasonably practicable to make such rights available to the Holders. The Depositary shall make such rights available to any Holders only if (i) the Company shall have requested that such rights be made available to Holders, (ii) the Depositary shall have received the documentation contemplated in the Deposit Agreement, and (iii) the Depositary shall have determined that such distribution of rights is reasonably practicable. If such conditions are not satisfied, the Depositary shall sell the rights as described below. In the event all conditions set forth above are satisfied, the Depositary shall establish an ADS Record Date (upon the terms described in the Deposit Agreement) and establish procedures to distribute rights to purchase additional ADSs (by means of warrants or otherwise) and to enable the Holders to exercise the rights (upon payment of applicable (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes). Nothing herein or in the Deposit Agreement shall obligate the Depositary to make available to the Holders a method to exercise rights to subscribe for Shares (rather than ADSs). A-10 If (i) the Company does not request the Depositary to make the rights available to Holders or if the Company requests that the rights not be made available to Holders, (ii) the Depositary fails to receive the documentation required by the Deposit Agreement or determines it is not reasonably practicable to make the rights available to Holders, or (iii) any rights made available are not exercised and appear to be about to lapse, the Depositary shall, upon consultation with the Company, determine whether it is lawful and reasonably practicable to sell such rights, in a riskless principal capacity, at such place and upon such terms (including public and private sale) as it may deem proper. The Depositary shall, upon such sale, convert and distribute proceeds of such sale (net of applicable fees and charges of, and expenses incurred by, the Depositary and taxes) upon the terms hereof and of the Deposit Agreement. If the Depositary is unable to make any rights available to Holders or to arrange for the sale of the rights upon the terms described above, the Depositary shall allow such rights to lapse. The Depositary shall not be responsible for (i) any failure to determine that it may be lawful or feasible to make such rights available to Holders in general or any Holders in particular, (ii) any foreign exchange exposure or loss incurred in connection with such sale or exercise, or (iii) the content of any materials forwarded to the ADR Holders on behalf of the Company in connection with the rights distribution. Notwithstanding anything herein or in the Deposit Agreement to the contrary, if registration (under the Securities Act or any other applicable law) of the rights or the securities to which any rights relate may be required in order for the Company to offer such rights or such securities to Holders and to sell the securities represented by such rights, the Depositary will not distribute such rights to the Holders unless and until a registration statement under the Securities Act (or other applicable law) covering such offering is in effect. In the event that the Company, the Depositary or the Custodian shall be required to withhold and does withhold from any distribution of property (including rights) an amount on account of taxes or other governmental charges, the amount distributed to the Holders of ADSs representing such Deposited Securities shall be reduced accordingly. In the event that the Depositary determines that any distribution in property (including Shares and rights to subscribe therefor) is subject to any tax or other governmental charges which the Depositary is obligated to withhold, the Depositary may dispose of all or a portion of such property (including Shares and rights to subscribe therefor) in such amounts and in such manner, including by public or private sale, as the Depositary deems necessary and practicable to pay any such taxes or charges. There can be no assurance that Holders generally, or any Holder in particular, will be given the opportunity to exercise rights on the same terms and conditions as the holders of Shares or to exercise such rights. Nothing herein or in the Deposit Agreement shall obligate the Company to file any registration statement in respect of any rights or Shares or other securities to be acquired upon the exercise of such rights. Upon receipt of a notice indicating that the Company wishes property other than cash, Shares or rights to purchase additional Shares, to be made to Holders of ADSs, the Depositary and the Company shall determine whether such distribution to Holders is lawful and reasonably practicable. The Depositary shall not make such distribution unless such distribution is permission under Dutch law and (i) the Company shall have requested the Depositary to make such distribution to Holders, (ii) the Depositary shall have received the documentation A-11 contemplated in the Deposit Agreement, and (iii) the Depositary shall have determined that such distribution is reasonably practicable. Upon satisfaction of such conditions, the Depositary shall distribute the property so received to the Holders of record, as of the ADS Record Date, in proportion to the number of ADSs held by them respectively and in such manner as the Depositary may deem practicable for accomplishing such distribution (i) upon receipt of payment or net of the applicable fees and charges of, and expenses incurred by, the Depositary, and (ii) net of any taxes withheld. The Depositary may dispose of all or a portion of the property so distributed and deposited, in such amounts and in such manner (including public or private sale) as the Depositary may deem practicable or necessary to satisfy any taxes (including applicable interest and penalties) or other governmental charges applicable to the distribution. If the conditions above are not satisfied, the Depositary shall sell or cause such property to be sold in a public or private sale, at such place or places and upon such terms as it may deem proper and shall (i) cause the proceeds of such sale, if any, to be converted into Dollars and (ii) distribute the proceeds of such conversion received by the Depositary (net of (a) applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes) to the Holders upon the terms hereof and of the Deposit Agreement. If the Depositary is unable to sell such property, the Depositary may dispose of such property in any way it deems reasonably practicable under the circumstances. (15) Redemption. Upon timely receipt of notice from the Company that it intends ---------- to exercise its right of redemption in respect of any of the Deposited Securities, and a satisfactory opinion of counsel, and upon determining that such proposed redemption is practicable, the Depositary shall (to the extent practicable) mail to each Holder a notice setting forth the Company's intention to exercise the redemption rights and any other particulars set forth in the Company's notice to the Depositary. Upon receipt of confirmation that the redemption has taken place and that funds representing the redemption price have been received, the Depositary shall convert, transfer, distribute the proceeds (net of applicable (a) fees and charges of, and expenses incurred by, the Depositary, and (b) taxes), retire ADSs and cancel ADRs upon delivery of such ADSs by Holders thereof upon the terms of the Deposit Agreement. If less than all outstanding Deposited Securities are redeemed, the ADSs to be retired will be selected by lot or on a pro rata basis, as may be determined by the Depositary. The redemption price per ADS shall be the dollar equivalent of per share amount received by the Depositary upon the redemption of the Deposited Securities represented by American Depositary Shares (subject to the terms of the Deposit Agreement and the applicable fees and charges of, and expenses incurred by, the Depositary, and taxes) multiplied by the number of Units or Deposited Securities represented by each ADS redeemed. (16) Fixing of Record Date. Whenever the Depositary shall receive notice of the --------------------- fixing of a record date by the Company for the determination of holders of Deposited Securities entitled to receive any distribution (whether in cash, Shares, rights or other distribution), or whenever for any reason the Depositary causes a change in the number of Shares that are represented by each ADS, or whenever the Depositary shall receive notice of any meeting of, or solicitation of consents or proxies of, holders of Shares or other Deposited Securities, or whenever the Depositary shall find it necessary or convenient in connection with the giving of any notice, or A-12 any other matter, the Depositary shall fix a record date ("ADS Record Date") for the determination of the Holders of Receipts who shall be entitled to receive such distribution, to give instructions for the exercise of voting rights at any such meeting, or to give or withhold such consent, or to receive such notice or solicitation or to otherwise take action, or to exercise the rights of Holders with respect to such changed number of Shares represented by each ADS. Subject to applicable law and the terms and conditions of this Receipt and the Deposit Agreement, only the Holders of Receipts at the close of business in New York on such ADS Record Date shall be entitled to receive such distributions, to give such instructions, to receive such notice or solicitation, or otherwise take action. (17) Voting of Deposited Securities. As soon as practicable after receipt of ------------------------------ notice of any meeting at which the holders of Shares are entitled to vote, or of solicitation of consents or proxies from holders of Shares or other Deposited Securities, the Depositary shall fix the ADS Record Date in respect of such meeting or solicitation of such consent or proxy. The Depositary shall (if requested in writing in a timely manner by the Company) mail to Holders: (a) such notice of meeting or solicitation of consent or proxies, (b) a statement that the Holders as of the ADS Record Date will be entitled, subject to any applicable law, the Company's Articles of Association and the provisions of or governing Deposited Securities (which provisions, if any, shall be summarized in pertinent part by the Company), to instruct the Depositary as to the exercise of the voting rights, if any, pertaining to the Shares or other Deposited Securities represented by such Holder's ADS and (c) a brief statement as to the manner in which such instructions may be given. Upon the timely receipt of written instructions of a Holder of ADSs on the ADS Record Date, the Depositary shall endeavor, insofar as practicable and permitted under applicable law and the provisions of the Articles of Association of the Company and the provisions of the Deposited Securities, to vote or cause the Custodian to vote the Shares and/or other Deposited Securities represented by ADSs held by such Holder in accordance with such instructions. Neither the Depositary nor the Custodian nor their respective nominees, if any, shall under any circumstances exercise any discretion as to voting and neither the Depositary nor the Custodian shall vote, attempt to exercise the right to vote, or in any way make use of, for the purposes of establishing a quorum or otherwise, the Shares or other Deposited Securities represented by ADS except pursuant to and in accordance with such written instructions from Holders. If voting instructions are received by the Depositary from any Holder on or before the date established by the Depositary for the receipt of such instructions, which are signed but without further indication as to specific instructions, the Depositary will deem such Holder to have instructed the Depositary to vote in favor of the items set forth in such instructions. Shares or other Deposited Securities represented by ADS for which no specific voting instructions are received by the Depositary from the Holder shall not be voted. There can be no assurance that Holders generally or any Holder in particular will receive the notice described above with sufficient time to enable the Holder to return voting instructions to the Depositary in a timely manner. (18) Changes Affecting Deposited Securities. Upon any change in nominal or par -------------------------------------- value, split-up, cancellation, consolidation or any other reclassification of Deposited Securities, or upon any recapitalization, reorganization, merger or consolidation or sale of assets affecting the Company A-13 or to which it is a party, any securities which shall be received by the Depositary or the Custodian in exchange for, or in conversion of or replacement of or otherwise in respect of, such Deposited Securities shall, to the extent permitted by law, be treated as new Deposited Securities under the Deposit Agreement, and the Receipts shall, subject to the provisions of the Deposit Agreement and applicable law, evidence ADSs representing the right to receive such new securities. The Depositary may, with the Company's approval, and shall, if the Company shall so request, subject to the terms of the Deposit Agreement and receipt of satisfactory documentation contemplated by the Deposit Agreement, execute and deliver additional Receipts as in the case of a stock dividend on the Shares, or call for the surrender of outstanding Receipts to be exchanged for new Receipts, in either case, as well as in the event of newly deposited Shares, with necessary modifications to the form of Receipt contained in this Exhibit A to the Deposit Agreement, specifically describing such new Deposited Securities or corporate change. Notwithstanding the foregoing, in the event that any security so received may not be lawfully distributed to some or all Holders, the Depositary may, with the Company's approval, and shall if the Company requests, subject to receipt of satisfactory legal documentation contemplated in the Deposit Agreement, sell such securities at public or private sale, at such place or places and upon such terms as it may deem proper and may allocate the net proceeds of such sales (net of (a) fees and charges of, and expenses incurred by, the Depositary and (b) taxes) for the account of the Holders otherwise entitled to such securities and distribute the net proceeds so allocated to the extent practicable as in the case of a distribution received in cash pursuant to the Deposit Agreement. The Depositary shall not be responsible for (i) any failure to determine that it may be lawful or feasible to make such securities available to Holders in general or any Holder in particular, (ii) any foreign exchange exposure or loss incurred in connection with such sale, or (iii) any liability to the purchaser of such securities. (19) Exoneration. Neither the Depositary nor the Company shall be obligated to ----------- do or perform any act which is inconsistent with the provisions of the Deposit Agreement or incur any liability (i) if the Depositary or the Company shall be prevented or forbidden from, or subjected to any civil or criminal penalty or restraint on account of, or delayed in, doing or performing any act or thing required by the terms of the Deposit Agreement and this Receipt, by reason of any provision of any present or future law or regulation of the United States, The Netherlands or any other country, or of any other governmental authority or regulatory authority or stock exchange, or by reason of any provision, present or future of the Articles of Association of the Company or any provision of or governing any Deposited Securities, or by reason of any act of God or war or other circumstances beyond its control (including, without limitation, nationalization, expropriation, currency restrictions, work stoppage, strikes, civil unrest, revolutions, rebellions, explosions and computer failure), (ii) by reason of any exercise of, or failure to exercise, any discretion provided for in this Deposit Agreement or in the Articles of Association of the Company or provisions of or governing Deposited Securities, (iii) for any action or inaction in reliance upon the advice of or information from legal counsel, accountants, any person presenting Shares for deposit, any Holder, any Beneficial Owner or authorized representative thereof, or any other person believed by it in good faith to be competent to give such advice or information, (iv) for any inability by a Holder or Beneficial Owner to benefit from any distribution, offering, right or other benefit which is made available to holders of Deposited Securities but is not, under the terms of this Deposit Agreement, made available to Holders of ADS or (v) for any consequential A-14 or punitive damages for any breach of the terms of this Deposit Agreement. The Depositary, its controlling persons, its agents, any Custodian and the Company, its controlling persons and its agents may rely and shall be protected in acting upon any written notice, request or other document believed by it to be genuine and to have been signed or presented by the proper party or parties. No disclaimer of liability under the Securities Act is intended by any provision of the Deposit Agreement. (20) Standard of Care. The Company and its agents assume no obligation and ---------------- shall not be subject to any liability under this Deposit Agreement or the Receipts to Holders or Beneficial Owners or other persons, except that the Company and its agents agree to perform their obligations specifically set forth in this Deposit Agreement without negligence or bad faith. The Depositary and its agents assume no obligation and shall not be subject to any liability under this Deposit Agreement or the Receipts to Holders or Beneficial Owners or other persons, except that the Depositary and its agents agree to perform their obligations specifically set forth in this Deposit Agreement without negligence or bad faith. The Depositary and its agents shall not be liable for any failure to carry out any instructions to vote any of the Deposited Securities, or for the manner in which any vote is cast or the effect of any vote, provided that any such action or omission is in good faith and in accordance with the terms of this Deposit Agreement. The Depositary shall not incur any liability for any failure to determine that any distribution or action may be lawful or reasonably practicable, for the content of any information submitted to it by the Company for distribution to the Holders or for any inaccuracy of any translation thereof, for any investment risk associated with acquiring an interest in the Deposited Securities, for the validity or worth of the Deposited Securities or for any tax consequences that may result from the ownership of ADSs, Shares or Deposited Securities, for the credit-worthiness of any third party, for allowing any rights to lapse upon the terms of this Deposit Agreement or for the failure or timeliness of any notice from the Company. (21) Resignation and Removal of the Depositary; Appointment of Successor ------------------------------------------------------------------- Depositary. The Depositary may at any time resign as Depositary under the Deposit Agreement by written notice of resignation delivered to the Company, such resignation to be effective on the earlier of (i) the 60th day after delivery thereof to the Company, or (ii) upon the appointment of a successor depositary by the Company and its acceptance of such appointment as provided in the Deposit Agreement. The Depositary may at any time be removed by the Company by written notice of such removal which notice shall be effective on the earlier of (i) the 60th day after delivery thereof to the Depositary, or (ii) upon the appointment of a successor depositary by the Company and its acceptance of such appointment as provided in the Deposit Agreement. In case at any time the Depositary acting hereunder shall resign or be removed, the Company shall use its best efforts to appoint a successor depositary which shall be a bank or trust company having an office in the Borough of Manhattan, the City of New York. Every successor depositary shall execute and deliver to its predecessor and to the Company an instrument in writing accepting its appointment hereunder, and thereupon such successor depositary, without any further act or deed, shall become fully vested with all the rights, powers, duties and obligations of its predecessor. The predecessor depositary, upon payment of all sums due it and on the written request of the Company, shall (i) execute and deliver an instrument transferring to such successor all rights and powers of such predecessor hereunder (other than as contemplated in the Deposit A-15 Agreement), (ii) duly assign, transfer and deliver all right, title and interest to the Deposited Securities to such successor, and (iii) deliver to such successor a list of the Holders of all outstanding Receipts and such other information relating to Receipts and Holders thereof as the successor may reasonably request. Any such successor depositary shall promptly mail notice of its appointment to such Holders. Any corporation into or with which the Depositary may be merged or consolidated shall be the successor of the Depositary without the execution or filing of any document or any further act. (22) Amendment/Supplement. This Receipt and any provisions of the Deposit -------------------- Agreement may at any time and from time to time be amended or supplemented by written agreement between the Company and the Depositary in any respect which they may deem necessary or desirable without the prior written consent of the Holders or Beneficial Owners. Any amendment or supplement which shall impose or increase any fees or charges (other than the charges in connection with foreign exchange control regulations, and taxes and other governmental charges, delivery and other such expenses), or which shall otherwise prejudice any substantial existing right of Holders or Beneficial Owners, shall not, however, become effective as to outstanding Receipts until the expiration of 30 days after notice of such amendment or supplement shall have been given to the Holders of outstanding Receipts. The parties hereto agree that any amendments or supplements which (i) are reasonably necessary (as agreed by the Company and the Depositary) in order for (a) the ADSs to be registered on Form F-6 under the Securities Act or (b) the ADSs to be traded solely in electronic book-entry form and (ii) do not in either such case impose or increase any fees or charges to be borne by Holders, shall be deemed not to materially prejudice any substantial rights of Holders or Beneficial Owners. Every Holder and Beneficial Owner at the time any amendment or supplement so becomes effective shall be deemed, by continuing to hold such ADS(s), to consent and agree to such amendment or supplement and to be bound by the Deposit Agreement as amended or supplemented thereby. In no event shall any amendment or supplement impair the right of the Holder to surrender such Receipt and receive therefor the Deposited Securities represented thereby, except in order to comply with mandatory provisions of applicable law. Notwithstanding the foregoing, if any governmental body should adopt new laws, rules or regulations which would require amendment or supplement of the Deposit Agreement to ensure compliance therewith, the Company and the Depositary may amend or supplement the Deposit Agreement and the Receipt at any time in accordance with such changed laws, rules or regulations. Such amendment or supplement to the Deposit Agreement in such circumstances may become effective before a notice of such amendment or supplement is given to Holders or within any other period of time as required for compliance with such laws, or rules or regulations. (23) Termination. The Depositary shall, at any time at the written direction of ----------- the Company, terminate the Deposit Agreement by mailing notice of such termination to the Holders of all Receipts then outstanding at least 30 days prior to the date fixed in such notice for such termination. If 60 days shall have expired after (i) the Depositary shall have delivered to the Company a written notice of its election to resign, or (ii) the Company shall have delivered to the Depositary a written notice of the removal of the Depositary, and in either case a successor depositary shall not have been appointed and accepted its appointment as provided in herein and in the Deposit Agreement, the Depositary may terminate the Deposit Agreement by mailing A-16 notice of such termination to the Holders of all Receipts then outstanding at least 30 days prior to the date fixed for such termination. On and after the date of termination of the Deposit Agreement, the Holder will, upon surrender of such Holders' Receipt(s) at the Principal Office of the Depositary, upon the payment of the charges of the Depositary for the surrender of ADSs referred to in Article (2) hereof and in the Deposit Agreement and subject to the conditions and restrictions therein set forth, and upon payment of any applicable taxes or governmental charges, be entitled to delivery, to a designated NECIGEF Participant, of the amount of Deposited Securities represented by such Receipt. If any Receipts shall remain outstanding after the date of termination of the Deposit Agreement, the Registrar thereafter shall discontinue the registration of transfers of Receipts, and the Depositary shall suspend the distribution of dividends to the Holders thereof, and shall not give any further notices or perform any further acts under the Deposit Agreement, except that the Depositary shall continue to collect dividends and other distributions pertaining to Deposited Securities, shall sell rights as provided in the Deposit Agreement, and shall continue to deliver Deposited Securities, subject to the conditions and restrictions set forth in the Deposit Agreement, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of any rights or other property, in exchange for Receipts surrendered to the Depositary (after deducting, or charging, as the case may be, in each case the charges of the Depositary for the surrender of a Receipt, any expenses for the account of the Holder in accordance with the terms and conditions of the Deposit Agreement and any applicable taxes or governmental charges or assessments). At any time after the expiration of six months from the date of termination of the Deposit Agreement, the Depositary may sell the Deposited Securities then held hereunder and may thereafter hold uninvested the net proceeds of any such sale, together with any other cash then held by it hereunder, in an unsegregated account, without liability for interest for the pro rata benefit of the Holders of Receipts whose Receipts have not theretofore been surrendered. After making such sale, the Depositary shall be discharged from all obligations under the Deposit Agreement with respect to the Receipts and the Shares, the Deposited Securities and the ADSs, except to account for such net proceeds and other cash (after deducting, or charging, as the case may be, in each case the charges of the Depositary for the surrender of a Receipt, any expenses for the account of the Holder in accordance with the terms and conditions of the Deposit Agreement and any applicable taxes or governmental charges or assessments). Upon the termination of the Deposit Agreement, the Company shall be discharged from all obligations under the Deposit Agreement except as set forth in the Deposit Agreement. (24) Compliance with U.S. Securities Laws. Notwithstanding any provisions in ------------------------------------ this Receipt or the Deposit Agreement to the contrary, the withdrawal or delivery of Deposited Securities will not be suspended by the Company or the Depositary except as would be permitted by Section I.A.(1) of the General Instructions to the Form F-6 Registration Statement, as amended from time to time, under the Securities Act of 1933. (25) Certain Rights of the Depositary; Limitations. Subject to the further --------------------------------------------- terms and provisions of this Article (25), the Depositary, its Affiliates and their agents, on their own behalf, may own and deal in any class of securities of the Company and its Affiliates and in ADSs. The Depositary may issue ADSs against evidence of rights to receive Shares from the Company, any agent of the Company or any custodian, registrar, transfer agent, clearing agency or other entity involved in A-17 ownership or transaction records in respect of the Shares. Such evidence of rights shall consist of written blanket or specific guarantees of ownership of Shares. In its capacity as Depositary, the Depositary shall not lend Shares or ADSs; provided, however, that the Depositary may (i) issue ADSs prior to the receipt of Shares pursuant to Section 2.3 of the Deposit Agreement and (ii) deliver Shares prior to the receipt of ADSs for withdrawal of Deposited Securities pursuant to Section 2.7 of the Deposit Agreement, including ADSs which were issued under (i) above but for which Shares may not have been received (each such transaction a "Pre-Release Transaction"). The Depositary may receive ADSs in lieu of Shares under (i) above and receive Shares in lieu of ADSs under (ii) above. Each such Pre-Release Transaction will be (a) accompanied by or subject to a written agreement whereby the person or entity (the "Applicant") to whom ADSs or Shares are to be delivered (w) represents that at the time of the Pre-Release Transaction the Applicant or its customer owns the Shares or ADSs that are to be delivered by the Applicant under such Pre-Release Transaction, (x) agrees to indicate the Depositary as owner of such Shares or ADSs in its records and to hold such Shares or ADSs in trust for the Depositary until such Shares or ADSs are delivered to the Depositary or the Custodian, (y) unconditionally guarantees to deliver to the Depositary or the Custodian, as applicable, such Shares or ADSs and (z) agrees to any additional restrictions or requirements that the Depositary deems appropriate, (b) at all times fully collateralized with cash, U.S. government securities or such other collateral as the Depositary deems appropriate, (c) terminable by the Depositary on not more than five (5) business days notice and (d) subject to such further indemnities and credit regulations as the Depositary deems appropriate. The Depositary will normally limit the number of ADSs and Shares involved in such Pre-Release Transactions at any one time to thirty percent (30%) of the ADSs outstanding (without giving effect to ADSs outstanding under (i) above), provided, however, that the Depositary reserves the right to change or disregard such limit from time to time as it deems appropriate. The Depositary may also set limits with respect to the number of ADSs and Shares involved in Pre-Release Transactions with any one person on a case by case basis as it deems appropriate. The Depositary may retain for its own account any compensation received by it in conjunction with the foregoing. Collateral provided pursuant to (b) above, but not earnings thereon, shall be held for the benefit of the Holders (other than the Applicant). A-18 (ASSIGNMENT AND TRANSFER SIGNATURE LINES) FOR VALUE RECEIVED, the undersigned Holder hereby sell(s), assign(s) and transfer(s) unto ______________________________ whose taxpayer identification number is _______________________ and whose address including postal zip code is ____________________________, the within Receipt and all rights thereunder, hereby irrevocably constituting and appointing ________________________ attorney-in-fact to transfer said Receipt on the books of the Depositary with full power of substitution in the premises. Dated: Name:________________________________ By: Title: NOTICE: The signature of the Holder to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatsoever. If the endorsement be executed by an attorney, executor, administrator, trustee or guardian, the person executing the endorsement must give his/her full title in such capacity and proper evidence of authority to act in such capacity, if not on file with the Depositary, must be forwarded with this Receipt. All endorsements or assignments of Receipts must be guaranteed by a member of a Medallion Signature Program approved by the Securities Transfer Association, Inc. SIGNATURE GUARANTEED ____________________________ A-19 EXHIBIT B FEE SCHEDULE DEPOSITARY FEES AND RELATED CHARGES All capitalized terms used but not otherwise defined herein shall have the meaning given to such terms in the Deposit Agreement. I. Depositary Fees The Holders, the Beneficial Owners and the persons depositing Shares or surrendering ADSs for cancellation agree to pay the following fees of the Depositary:
Service Rate By Whom Paid - ------------------------------------------------------------------------------------------------ (1) Issuance of ADSs upon Up to $5.00 per 100 ADSs (or Person for whom deposits are deposit of Shares (excluding fraction thereof) issued made or party receiving ADSs issuances contemplated by paragraphs (3)(b) and (5) below). - ------------------------------------------------------------------------------------------------ (2) Delivery of Deposited Up to $5.00 per 100 ADSs (or Person surrendering ADSs or Securities, property and fraction thereof) surrendered. making withdrawal. cash against surrender of ADSs. - ------------------------------------------------------------------------------------------------ (3) Distribution of (a) cash No fee. Person to whom distribution is dividend or (b) ADSs made. pursuant to stock dividends. - ------------------------------------------------------------------------------------------------ (4) Distribution of cash Up to $2.00 per 100 ADSs held. Person to whom distribution is proceeds (i.e. upon sale of made. rights and other entitlements). - ------------------------------------------------------------------------------------------------ (5) Distribution of ADSs Up to $5.00 per 100 ADSs Person to whom distribution is pursuant to free share issued. made. distributions or exercise of rights. - ------------------------------------------------------------------------------------------------
II. Charges Holders, Beneficial Owners, persons depositing Shares for deposit and persons surrendering ADSs for cancellation and for the purpose of withdrawing Deposited Securities shall be responsible for the following charges: (i) taxes (including applicable interest and penalties) and other governmental charges; (ii) such fees as may from time to time be in effect for the transfer of Shares or other Deposited Securities to or from the name of the Custodian, upon the making of deposits and withdrawals; (iii) such cable, telex and facsimile transmission and delivery expenses as are expressly provided in the Deposit Agreement to be at the expense of the person depositing Shares or Holders and Beneficial Owners of ADSs; B-1 (iv) the expenses and charges incurred by the Depositary in the conversion of foreign currency; (v) such fees and expenses as are incurred by the Depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to Shares, Deposited Securities, ADSs and ADRs; and (vi) the fees and expenses incurred by the Depositary in connection with the deliver of Deposited Securities. B-2 EX-10.35 3 AMENDED STOCK OPTION PLAN Exhibit 10.35 AMENDED STOCK OPTION PLAN The following represents the amended stock option plan (the "Plan") of United Pan-Europe Communications N.V., a company incorporated under the laws of the Netherlands, having its corporate seat at Fred. Roeskestraat 123, Amsterdam, the Netherlands (the "Company"), as it was adopted on June 13, 1996; amended on March 18, 1998 for grants as from that date; and amended on February 8, 1999 in order to provide for the Company's Initial Public Offering ("IPO") and the consequences thereof. Article 1. - Definitions ----------- For the purposes of this Plan, (i) "Affiliated Company" means a company in which the Company directly or indirectly owns an at least one third of the shares of stock or other capital interest of that company. (ii) "Board of Management" means the board of management of the Company. (iii) "Certificate" means a right to be issued by the Foundation representing the economic ownership of one Share ("certificaat van aandeel"). (iv) "Employee" means any member of the Board of Management in their capacity as beneficiaries under the Plan and any employee of a Group Company. (v) "Foundation" means the Foundation for the Administration of the UPC Stock Option Plan, the current Articles of Association and conditions of administration are attached hereto as Appendix A. (vi) "Group Company" means the Company or one of its Affiliated Companies. (vii) "Option" means a right to subscribe for Certificates and/or Shares, as the case may be, pursuant to this Plan. (viii) "Option Date" means in relation to any Options, the date on which the Options are, were or are to be granted. (ix) "Right" means one Share or one Certificate, as the case may be, issued or to be issued under an Option. (x) "Shares" means the ordinary shares in the capital of the Company. (xi) "Supervisory Board" means the supervisory board of the Company. Article 2. - Granting of Options ------------------- -2- 2.1 The Options to be granted to an Employee will be approved by the Supervisory Board, on the recommendation of the Board of Management. 2.2 The total number of Rights with respect to which Options may be granted pursuant to this Plan shall be determined by the Supervisory Board. Rights issued or issuable upon exercise of Options shall be applied to reduce the maximum number of Rights available for use under the Plan. Rights underlying expired or terminated and unexercised Options are available for reissue for grant of Options under this Plan. 2.3 In case any of the events mentioned in Article 4.2 occurs, the Supervisory Board will adjust the maximum number of Rights accordingly. Article 3. - Modification of Option Terms ---------------------------- The Supervisory Board shall have the discretion and authority to grant Options with such modified terms as the Board of Management recommends as necessary or appropriate in order to comply with the laws of the country in which the Employee resides or is employed or for whatever reason. Article 4. - Option price ------------ 4.1 With respect to grants of Options determined after the effective date of the IPO, the price to be paid to acquire the Rights ("the Option Price") will equal the closing price of the Shares on the Amsterdam Stock Exchange on the date of the grant concerned. 4.2 If after the Option date one of the following events occurs: * a split of the Shares in Shares with a lower par value; * a repayment of capital on the Shares; * the issue of shares in the capital of the Company with a preference right; * the issue of shares in the capital of the Company out of the retained earnings or the capital surplus account then the Option Price and/or the number of the Rights with respect to which Options have been granted will be adjusted if reasonably necessary, in such a way that the fair market value of the Options immediately after the above-mentioned occasions is equal to the fair market value of the Options immediately before such occasion. The Company will inform the Employee in writing of any adjustment of the Option Price and/or the number of the Shares with respect to which Options have been granted. Article 5. - Exercise and non-transferability -------------------------------- 5.1 Options may only be exercised by the Employee, or in the event that the Employee shall become permanently disabled or has deceased, by the administrator of the Employee's estate or his or her heirs (hereinafter jointly and severally referred to as the "Legal Successors"). 5.2 Options may be exercised in full or in part. -3- 5.3 Options will be exercised via written notice from the Employee or the Legal Successors to the Company to the address as instructed by the Company. Any such notice will state the number of Rights to be acquired pursuant to such exercise. 5.4 An Option granted to an Employee shall not be transferable by the Employee other than by will or the laws of descent and distribution. An Option granted to an Employee shall not be assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process. 5.5 Options are granted unconditionally and may be exercised immediately after they have been granted. The right to exercise Options remains valid for a period of five years after the Option Date. Article 6. - Delivery of Rights and related matters -------------------------------------- 6.1 Subject to Articles 7 and 8 below, within seven days after the exercise of an Option, the Company shall itself, or cause the Foundation to transfer the number of Rights in respect of which the Option is exercised against payment in full of the Option Price. 6.2 The Employee and the Legal Successors shall not bear any transaction costs related to the obtaining of Certificates, nor the obtaining of Shares in exchange for Certificates, nor the obtaining of Shares. Article 7. - Consequences of termination of employment ----------------------------------------- 7.1 If the Employee is no longer employed by a Group Company because of retirement, early retirement, permanent disability or death, the unexercised Options (if any) will expire one year after the date of such termination, or 5 years after the Option Date concerned, whichever is earlier; it being understood that in the case of the death of an employee, the expiration shall never be earlier than 6 months after the date of death. 7.2 In the event the Employee is dismissed by the Company because of a so- called "urgent reason" ("dringende redenen") under Dutch law, or because of documented and material non-performance by the Employee, then all Options shall expire immediately and without notice. Furthermore, any Certificates Rights ------------ acquired by the Employee by the exercise of Options that would, if not exercised, have expired pursuant to the first sentence of this Article 7.2. shall immediately be sold and transferred to the Foundation in consideration of the original Option Price as determined in Article 4.1. Upon the grant of an Option, the Employee concerned will irrevocably authorise the Company to execute the required (notarial) deed in his or her name. Any costs relating to the sale and transfer of Rights to be so transferred shall be for the account of the Company. 7.3 In the event the Employee is no longer employed within a Group Company for a reason other than those referred to in article 7.1 or 7.2 (or in case in a dispute it is determined that the Company's claim on the application of Article 7.2 was not justified), the following shall apply: (i) the following parts of the total number (including Options already exercised) of Options granted to such Employee shall (if not exercised already) automatically expire without notice or compensation: a) during the first month as from the Option Date in which such event occurs: 100 per cent of the Options granted; -4- b) during the second month as from the Option Date in which such event occurs; 47/48th of the Options granted; c) for each following month the number under b) will be reduced with 1/48th. (ii) any Rights acquired by the Employee by the exercise of Options that would, if not exercised, have expired pursuant to Article 7.3.(i) shall immediately be sold and transferred to the Foundation in consideration of the original Option Price as determined in Article 4.1. Upon the grant of an Option, the Employee concerned will irrevocably authorise the Company to execute the required (notarial) deed in his or her name. Any costs relating to the sale and transfer of Rights to be so transferred shall be for the account of the Company. (iii) any Options, not expired pursuant to Article 7.3.(i), if any, will expire 30 days after the termination of the employment, or 5 years after the Option Date, whichever is earlier. 7.4 For the benefit of the Employee concerned, upon the recommendation of the Board of Management, the Supervisory Board may decide to deviate from the provisions under Article 7. Article 8. - Sale of Rights by the Employee ------------------------------ 8.1 All sections of Article 8 will only apply after one or more Options have been exercised. 8.2 If an Employee exercises part or all of his or her Option(s), then the Company shall itself (or cause the Foundation to) transfer only such number of Shares to the Employee concerned as at the time of the exercise are no longer subject to an obligation under Article 7.3(ii). Should the Employee have exercised his or her Option for a number of Rights in excess of the number of Shares referred to in the first sentence of this Article 8.2, then the remainder shall be issued to the Employee in the form of Certificates. 8.3 Certificates obtained by an Employee, can not be sold or encumbered by the Employee as long as Article 7.3 would remain applicable in respect of those Certificates. 8.4 Upon written notice to that effect from the Employee to the Foundation at the address as instructed by the Company, the Foundation shall exchange such number of Certificates for Shares as included in the Employee's notice, but never in excess of the number of Certificates which are no longer subject to Article 7.3. 8.5 Following the transfer of Shares to the Employee concerned, the Company shall have no further liabilities or obligations with respect to the (part of the) Option exercised by the Employee. Article 9. - Taxes and social security premiums ---------------------------------- 9.1 Any tax or social security premiums payable by the Employee or his Legal Successors with respect to the granting, maintaining or the exercising of the Options or the sale of the Shares is for the account of the Employee or his Legal Successors, respectively. 9.2 If (part of) the Options are not exercised, any tax and/or social security premiums paid will not be refunded or compensated by the Company. Article 10. - Merger and take-over -------------------- -5- 10.1 In case of change of control (or ownership) of 50 percent or more of the Shares of the Company or merger of the Company with another enterprise to which the Shares in the Company have to be surrendered in exchange for the issue of other shares or in case of 50 percent or more of the Shares in the Company are taken over, the Options granted or Rights held pursuant to Options granted will, if the Company so chooses, be acquired by the Foundation immediately for the same value per Right as that sale, merger or exchange. Furthermore, should an Employee be dismissed after the event of such a change of control, other than for "urgent reasons" ("dringende redenen"), Articles 7.2 and 7.3 shall not be applicable to such Employee for any Options still held by such Employee, it also being understood that the Employee concerned shall have a one year period from the effective date of termination of the employment (or five years from the Option Date, whichever comes earlier) to exercise the Options concerned. 10.2 In the case of a merger in which the Company is not the surviving entity, the Foundation may require holders of Options and/or Rights to exchange their Options and/or Rights for new options and/or certificates in a foundation for the administration of the new merged entity's stock option plan, provided always that such new rights will be at least equivalent in value to the Options and/or Rights. Article 11. - Employment ---------- Neither the grant of the Options nor this Plan itself or any provision therein can be interpreted as an obligation of the Company or an Affiliated Company to employ the Employee for a certain period of time or to guarantee him a certain salary or position. Article 12. - Insider trading rules --------------------- By accepting the Options, the Employee agrees to adhere to the Insider Trading rules of Netherlands "Modelcode Voorkoming Misbruik van Voorwetenschap" (The Netherlands Model Code for Avoidance of Insider Trading) or similar regulations to be issued by the Company, which will be based on these rules. Article 13. - Notices ------- 13.1 Notices pursuant to this Plan to be submitted by the Company to the Employee, shall be deemed to be addressed correctly if they have been sent to the address of the Employee as known by the personnel department of the Group Company concerned. 13.2 Notices pursuant to this Plan to be submitted by the Employee to the Company, shall be deemed to be addressed correctly if they have been sent to the address of the Company at Fred. Roeskestraat 123, 1076 EE Amsterdam, The Netherlands, except to the extent the Company has provided written notice to the Employee containing different instructions. Article 14. - Choice of law and jurisdiction ------------------------------ This Plan will be governed by Dutch law. With the exception of disputes referred to in Article 8.4., all disputes arising in connection with this Plan shall be brought before the competent court in the district of Amsterdam. EX-10.41 4 AGREEMENT BETWEEN UIH AND UPC Exhibit 10.41 AGREEMENT THIS AGREEMENT, dated effective as of February __, 1999 (the "Agreement"), is by and between UNITED INTERNATIONAL HOLDINGS, INC. ("UIH"), a corporation organized under the laws of the State of Delaware, U.S.A., and UNITED PAN-EUROPE COMMUNICATIONS N.V. ("UPC"), a company organized under the laws of The Netherlands. RECITALS -------- A. UIH is the majority shareholder of UPC. UIH currently consolidates the financial results of UPC in UIH's financial statements. As a subsidiary of UIH, UPC is subject to the covenants and restrictions of the indenture governing UIH's debt securities. B. In connection with this shareholder relationship, UIH and UPC have agreed to take certain actions and restrict certain activities with respect to one another, all as more particularly set forth in this Agreement. AGREEMENT --------- 1. Covenant Not to Compete. For so long as UIH holds 50% or more of the ----------------------- outstanding ordinary shares of UPC on a fully diluted basis: (a) UIH shall not, and shall not permit its majority-owned affiliates to, pursue any video services, telephone or Internet access or content business opportunities specifically directed to the Europe (as defined below) or Israel markets unless: (i) UIH has first presented such opportunity in writing to the Supervisory Board of UPC and (ii) the members of the Supervisory Board of UPC who are not directors or officers of UIH or UPC have declined to pursue such opportunity in writing to UIH. UPC will respond with reasonable promptness after the presentation of the opportunity. (b) UPC shall not, and shall not permit to its majority-owned affiliates to, pursue any video services, telephone or Internet access or content business opportunities in Saudi Arabia or in other markets outside of Europe or the Middle East as defined below unless: (i) UPC has first presented such opportunity in writing to the Board of Directors of UIH and (ii) the members of the Board of Directors of UIH who are not officers or directors of UPC have declined to pursue such opportunity in writing to UPC. UIH will respond with reasonable promptness after the presentation of the opportunity. (c) Either party may pursue any business in the United States and its territories and possessions without regard to activities of the other. For purposes of this section 1, "Europe" shall include Albania, Austria, Belarus, Belgium, Bosnia, Bulgaria, Croatia, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Moldova, The Netherlands, Norway, Poland, Portugal, Romania, Russia, Slovak Republic, Spain, Sweden, Switzerland, Ukraine and the United Kingdom and the "Middle East" shall include Armenia, Azerbaijan, Bahrain, Cyprus, Egypt, Georgia, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Oman, Palestine, Qatar, Syria, Turkey, United Arab Emirates and Yemen, as such territories are currently constituted or as they may be constituted in the future. 2. Sale of UIH Class A Common Stock Held by UPC. (a) UPC shall sell to -------------------------------------------- UIH or any designee of UIH all or any portion of UIH's Class A Common Stock (the "Class A Stock") held by UPC or any of its subsidiaries, free and clear of any liens, pledges or other encumbrances, upon receipt by the Supervisory Board of UPC of a written request by UIH (the "Sale Notice") that UPC do so. UIH shall set a closing date for the sale of the Class A Stock specified in the Sale Notice, which shall be a business day in the United States and The Netherlands and which is at least ten days and no more than 30 days after receipt of the Sale Notice by UPC. The selling price of the Class A Stock shall be the average closing price of the Class A Stock as reported on the Nasdaq National Market for the ten trading days preceding the closing date. (b) UPC shall not sell directly or indirectly, nor permit any of its subsidiaries to sell, any shares of Class A Stock unless UPC has first offered in writing (the "Offer Notice") to sell to UIH the shares of Class A Stock that it proposes to sell. UIH shall have 45 days following receipt of the Offer Notice in which to advise UPC whether it intends to purchase the Class A Stock so offered. If UIH elects to purchase the Class A Stock, it shall notify UPC in writing and shall designate a closing date that is a business day in The Netherlands and the United States that is not less than five business days or more than ten business days after the date of UIH's notice of acceptance. The price for each share of Class A Stock shall be the average closing price of the Class A Stock as reported on the Nasdaq National Market for the ten trading days preceding the date of the Offer Notice. At the closing, UPC shall deliver the Class A Stock free and clear of liens and encumbrances and with appropriate signature guarantee against delivery of the purchase price by wire transfer. If UIH elects not to purchase the Class A Stock or does not respond to UPC within 45 days after receipt of the Offer Notice, UPC may sell the Class A Stock that was offered pursuant to the Offer Notice in a manner approved by UIH to assure that any disposition of the Class A Stock into the public market is conducted in an orderly manner and so as not to disrupt the orderly trading market for UIH shares. UIH may insist that the sale be through an underwritten offering and will assist UPC as is reasonably practicable in effecting a registration statement covering such shares. UIH may require UPC to defer the sale at any time such sale would interfere with a pending transaction of UIH. If UPC does not sell the shares within 60 days after the end of the 45 days specified in the Offer Notice, it shall again offer the shares to UIH before selling them. (Such 60 days to be increased by any period that UIH has requested UPC to not sell shares.) All certificates evidencing the Class A Stock held by UPC or any of its subsidiaries shall be marked with a legend to show that it is subject to the terms of this Agreement. UIH may designate a purchaser for the Class A Stock who will purchase the shares in lieu of UIH. 3. Compliance with UIH's Reporting Requirements. In order to assist UIH -------------------------------------------- in complying with its reporting obligations under the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and all other U.S. federal and state securities laws (collectively, the "U.S. 2 Securities Laws") or to avoid potential liability by UIH thereunder, UPC shall (a) timely provide UIH with audited financial statements of UPC in such form and with respect to such periods as UIH shall reasonably request, until UIH is no longer required to include financial statements of UPC in UIH's filings under the U.S. Securities Laws, and (b) not alter or amend its accounting principles without the prior written consent of UIH, until such time as UIH no longer consolidates UPC's financial results. UPC hereby consents to the public disclosure by UIH of all matters deemed necessary or appropriate by UIH in its sole discretion in order to comply with or satisfy its public disclosure obligations o UIH or any affiliate of UIH under the U.S. Securities Laws. 4. Indemnification by UPC. (a) As additional consideration for UIH to ---------------------- execute the underwriting agreement in connection with UPC's initial public offering of securities (the "Underwriting Agreement"), UPC shall defend, indemnify and hold UIH harmless from and against any and all losses, claims, damages, obligations, liens, assessments, judgments, fines, liabilities, and other costs and expenses (including without limitation interest, penalties and any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, as the same are incurred (collectively, "Liabilities")) that UIH may sustain or suffer based upon, arising out of, by reason of or otherwise in respect of or in connection with the Underwriting Agreement; provided, however, -------- ------- that UPC will not be liable to UIH (i) to the extent that in finally judicially determined that such Liabilities resulted from the willful misconduct or gross negligence of UIH; or (ii) to the extent that it is finally judicially determined that such Liabilities resulted solely from the material breach by UIH of any representation, warranty, covenant or other agreement of UIH contained in the Underwriting Agreement; provided, further, that if and to the extent that -------- ------- such indemnification is unenforceable for any reason, UPC shall make the maximum contribution to the payment and satisfaction of such indemnified liability which shall be permissible under applicable laws. The indemnification and contribution provided for in this Section 4 will remain in full force and effect regardless of any investigation made by or on behalf of UIH. (b) Indemnification Procedure; Notice; Defense. Promptly after ------------------------------------------ becoming aware of any Liabilities or the making of any claim or demand by any third party that may result in the incurrence of any Liabilities, UIH shall notify UPC of such incurrence, claim or demand; provided, that the failure of -------- UIH to so notify UPC shall not relieve UPC of any liability under Section 4(a) hereof, except if UPC has been materially prejudiced by such failure to be so notified. In case of any notice to UPC, UPC shall be entitled to participate in, and, if it wishes, to assume, the defense of any such claim or demand and, after notice of its intent to assume such defense, UPC will not be liable for any attorney's fees or other expenses subsequently incurred by UIH in connection with such claim; provided that UIH shall have the right to employ counsel to -------- represent it if, in the reasonable judgment of UIH's counsel, there is reasonably likely to be a conflict of interest such that representation of UIH and UPC by the same counsel would violate the Code of Professional Responsibility or similar rules, in which event the reasonable fees and expenses of appropriate separate counsel shall be borne by UPC. If UPC does not elect within a reasonable time after receipt of notice to assume the defense of any suit brought to enforce a claim or demand referred to above, UIH shall be entitled to assume the control of such defense, in which case the reasonable fees and expenses incurred by UIH in the conduct of such defense, including the reasonable fees and expenses of counsel, shall be reimbursed by UPC as the same are incurred from time to time by UIH (in 3 addition to local counsel) in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. UPC shall not, without the prior written consent of UIH, effect any settlement of any pending or threatened claim or action in respect of which UIH is or could have been a party and indemnity could have been sought hereunder by UIH unless such settlement includes an unconditional release of UIH from all liability on any claims that are the subject matter of such action. 5. Compliance by UPC with UIH Indenture. UPC shall take no action or ------------------------------------ inaction that will or reasonably could result in a breach of the Indenture, dated as of February 5, 1998, by and between UIH and Firstar Bank of Minnesota, N.A., as trustee, as the same may be amended or supplemented (the "Indenture") or any other indenture or agreement to which UIH is a party governing indebtedness of UIH that replaces or refinances any indebtedness governed by the Indenture, provided that UIH shall use reasonable efforts to assure that any such replacement or refinancing indentures or agreements do not contain covenants that are materially more restrictive on actions of UPC by reason of this paragraph, taken as a whole, than the Indenture. UPC shall assure that its subsidiaries and controlled affiliates comply with this paragraph 5. 6. Term; Termination. This Agreement shall be effect from the date set ----------------- forth above until this Agreement is terminated pursuant to this Section 6. This Agreement shall terminate, except with respect to any claims for breach of this Agreement arising before such termination, (i) for purposes of Section 1, when UIH ceases to hold 50% or more of the outstanding ordinary shares of UPC on a fully diluted basis, (ii) for purposes of Section 2, at such time as UPC or its subsidiaries no longer holds any Class A Stock, (iii) for purposes of Section 3, when UIH or its affiliates are no longer subject to periodic reporting requirements under the U.S. Securities Laws or financial information about UPC is no longer required to be reported by UIH under the U.S. Securities Laws, (iv) for purposes of Section 4, when UIH no longer has any obligations or liabilities under the Underwriting Agreement and (v) for purposes of Section 5, when UPC no longer can affect compliance by UIH with the terms of the UIH Indenture or any replacement indenture or agreement. 7. Assignment Successors. Except as otherwise provided herein, neither --------------------- party hereto may assign or transfer any of its interests, or delegate any of its obligations, hereunder without the prior written consent of the other party. UIH, upon written notice to UPC, may assign its interests in this Agreement to any affiliate of UIH. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective successor and assigns. 8. Miscellaneous. ------------- (a) Amendment; Waiver. The Agreement may not be amended nor may any ----------------- rights hereunder be waived except by an instrument in writing signed by the parties hereto. The waiver of any breach of any term or condition hereof shall not be deemed a waiver of any other or subsequent breach. No failure to exercise and no delay in exercising, on the part of either party hereto, any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided are cumulative and not exclusive of any rights or remedies at law. 4 (b) Further Assurances. Each party hereto shall execute, acknowledge, ------------------ deliver, file and record such further certificates, amendments, instruments, agreements and documents, and do all such other acts and things, as may be required by law or as, in the reasonable opinion of either party hereto, may be necessary or advisable to carry out the intents and purposes hereof. (c) Headings. Titles and headings of the sections of this Agreement -------- are for convenience of reference only and do not form a part of this Agreement and shall not in any way affect the interpretation of this Agreement. (d) Entire Agreement. This Agreement is the entire agreement and ---------------- understanding between the parties hereto concerning the subject matter hereof and supersedes and replaces all prior agreements and understandings between the parties hereto with respect thereto. (e) Severability. If any provision of this Agreement or the ------------ application thereof to any person or circumstance is held by a court of competent jurisdiction to be invalid, void or unenforceable, the remaining provisions hereof, or the application of such provisions to such persons or circumstances other than those to which it has been invalid or unenforceable, shall remain in full force and effect and shall in no way be affected, impaired or invalidated thereby. (f) Governing Law. This Agreement shall be governed by and construed ------------- in accordance with the laws of the State of Colorado, USA, other than its rules of conflicts of laws to the extent that the application of the laws of another jurisdiction would be required thereby. (g) Notices. All notices, demands or other communications to be given ------- under or by reason of this Agreement shall be in writing and shall be deemed to have been received when delivered personally, by facsimile or mailed by certified or registered mail, return receipt requested and postage prepaid, as follows: (i) If to UIH, to it at: United International Holdings, Inc. 4643 South Ulster Street, Suite 1300 Denver, Colorado 80237, U.S.A. Facsimile: + 1 (303) 770-4207 Attention: President Copy to: Legal Department (ii) If to UPC, to it at: United Pan-Europe Communications N.V. Fred. Roeskestraat 123 1076 EE Amsterdam The Netherlands Facsimile: + 31 (20) 778-9881 Attention: President 5 Copy to: General Counsel Either party hereto may change its address for notices, demands and other communications hereunder by giving notice of such change to the other party in accordance with this Section 8(g). (h) No Third-Party Beneficiaries. Notwithstanding anything to the ---------------------------- contrary herein, no person shall be a third-party beneficiary to this Agreement. (i) Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which, when executed, shall constitute an original of this Agreement, and all of which together shall constitute one instrument. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement to be effective in accordance with Section 6 hereof. UNITED INTERNATIONAL HOLDINGS, INC. By: /s/ Michael T. Fries --------------------------- Michael T. Fries, President UNITED PAN-EUROPE COMMUNICATIONS N.V. By: /s/ J. Timothy Bryan --------------------------- J. Timothy Bryan, President By: /s/ Anton H.E. v. Voskuijlen ----------------------------------------------- Anton H.E. v. Voskuijlen, Senior Vice President, Legal 6 EX-21.1 5 SUBSIDIARIES OF UPC EXHIBIT 21.1 UPC Subsidiaries ---------------- Entity Jurisdiction Cable-Networks Austria Holding B.V The Netherlands chello broadband N.V The Netherlands chello broadband B.V The Netherlands UPC Intermediates B.V The Netherlands Cable Network Zuid-Oost Brabant Holding B.V The Netherlands Cable Network Holding B.V The Netherlands Priority Telecom N.V The Netherlands Priority Telecom Netherlands B.V The Netherlands United TeleKabel Holding N.V The Netherlands A2000 Holding N.V The Netherlands Kabeltelevisie Amsterdam B.V The Netherlands A2000 Hilversum B.V The Netherlands Media Groep West B.V The Netherlands Cable Network Brabant Holding B.V The Netherlands N.V. TeleKabel Beheer The Netherlands N.V. TeleKabel The Netherlands Maxinetwerken B.V The Netherlands TeleKabel Omroep Facilitair Bedrijf B.V The Netherlands Algemene Kabel Exploitatie Maatschappij B.V The Netherlands CAI Geldermalsen B.V The Netherlands CAI Wijchen B.V The Netherlands CAI Tiel B.V The Netherlands CAI Buren B.V The Netherlands CAI Dodewaard B.V The Netherlands CAI Neerijnen-West B.V The Netherlands CAI Midden Betuwe B.V The Netherlands CAI Renkum B.V The Netherlands CAI Wageningen B.V The Netherlands Belmarken Holding B.V The Netherlands CAI Over Betuwe B.V The Netherlands CAI Heteren B.V The Netherlands CAI Elst B.V The Netherlands CAI Bemmel B.V The Netherlands CAI Valburg B.V The Netherlands CAI Gendt B.V The Netherlands CAI Almere B.V The Netherlands CAI Lingewaal B.V The Netherlands CAI Dronten B.V The Netherlands CAI Lelystad B.V The Netherlands CAI Druten B.V The Netherlands CAI NKM-Nijmegen B.V The Netherlands Interway Holding B.V The Netherlands Binan Investments B.V The Netherlands U.C.T. - Netherlands B.V The Netherlands Stipdon Investments B.V The Netherlands Entity Jurisdiction Zeblas B.V The Netherlands Selasa Holding B.V The Netherlands Paruse B.V The Netherlands Bicatobe Investments B.V The Netherlands TeleKabel Hungary N.V The Netherlands Zomerwind Holding B.V The Netherlands Uniport Communications B.V The Netherlands Cable Network Netherlands Holding B.V The Netherlands Kabeltelevisie Eindhoven N.V The Netherlands UPC Programming B.V The Netherlands United Telekabel Holding II B.V The Netherlands Telekabel Fernsehnetz Klagenfurt Betriebsgesellschaft mbH Austria Telekabel-Fernsehnetz Wiener Neustadt/Neunkirchen Betriebsgesellschaft mbH Austria Telekabel Wien GmbH Austria Telekabel-Fernsehnetz Graz Betriebsgesellschaft mbH Austria Telekabel-Fernsehnetz Region Baden Betriebsgesellschaft mbH Austria chello broadband GmbH Austria Janco Multicom A.S Norway chello broadband A.S Norway Priority Telecom A.S Norway Radio Public S.A Belgium Trnavatel S.R.O Slovak Republic KabelTel S.R.O Slovak Republic Burgos Sistemas de Cable S.A Spain UII Management Delaware UIH Romania Ventures Inc. Delaware Magyar Programming Holding Co. Delaware Kabelkom Management Co. Delaware Kabelkom Holding Co. Delaware Kabel Net Holding A.S Czech Republic Kabel Net Brno A.S Czech Republic chello broadband Limited United Kingdom Tara Television Global Limited United Kingdom Tara Television UK United Kingdom UPC Services Ltd. United Kingdom Xtra Music Limited United Kingdom United International Holdings, Inc. Colorado UIH Turkey Inc. Colorado UCI Enterprises Inc. Colorado UIH Romania Inc. Colorado United International Investments Colorado Melita Partnership Colorado Multicanal Televisao por Cabo, SGPS, Lda Portugal Intercabo - Televisao por Cabo, SGPS, Lda Portugal Intercabo Centro - Televisao por Cabo, S.A Portugal Intercabo Atlantico - Comunicacoes por Cabo, S.A Portugal Intercabo Norte - Comunicacoes por Cabo, S.A Portugal Intercabo Capital - Comunicacoes por Cabo, S.A Portugal Entity Jurisdiction Intercabo Sul - Comunicacoes por Cabo, S.A Portugal Bragatel - Companhia de Televisao por Cabo de Braga S.A Portugal MediaReseaux S.A France MediaReseaux Marne S.A France chello broadband S.A.R.L France Eurosat S.R.L Romania Multicanal Holdings S.R.L Romania Control Cable Ventures S.R.L Romania Tara Television Ltd. Ireland Tishdoret Achzakot Ltd. Israel Tevel Israel International Communications Ltd. Israel Israel Cable Programming Company Ltd. Israel Gvanim Cable Television Ltd. Israel Gvanim Krayot Cable Television Ltd. Israel Melita Cable TV P.L.C Malta Hungary Holding Co. New York Miskolci Kabel-TV Kereskedelmi es Szolgaltato Kft Hungary Anfel-Kabelkom Kabelkommunikacios Kft Hungary Hajdu Kabelkom Kabelkommunikacios Kft Hungary Kabelkom-Dunaujvaros Kabelkommunikacios Kft Hungary Telestar-Kabelkom Kabelkommunikacios Kft Hungary Kabelkom-Szolnok Kabelkommunikacios Kft Hungary Kabelkom Nyiregyhaza Kabelkommunikacios Kft Hungary Kabelkom Pecsi Kabeltelevizio Kft Hungary Kabeltel Kabeltelevizio Szolgaltato Kft Hungary Global Kabeltelevizio Kft Hungary Kabelkom Szekesfehervar Kabelkommunikacios Kft Hungary Kabelkom Veszprem Kabelkommunikacios Kft Hungary L.N.C.I. Kabelrendszer Uzemelteto Szolgaltato Kft Hungary Kabeltel Budapest Kabeltelevizios Szolgaltato Kft Hungary Kabel TV Szervezo es Szolgaltato Kft Hungary Kabeltel Kanizsa Kabeltelevizios Kft Hungary Kabeltel Sopron Kabeltelevizios Szolgaltato Kft Hungary Sopron Varosi Onallo Kozsolgalati Televizio Kft Hungary Kabeltel-Elektra Kabeltelevizios Szolgaltato Kft Hungary Megasat Gyarto Szolgaltato es Kereskedelmi Kft Hungary Kabelkom Kabeltelevizios Kft Hungary CEU Kozep-Europai Tavkozlesi Kommunikacios Kft Hungary] [UPC Kft. EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNITED PAN-EUROPE COMMUNICATIONS N.V.'S FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 DUTCH GUILDERS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1.89 29,571 0 12,886 (9,260) 24,121 165,617 602,997 (87,708) 2,055,183 596,367 0 0 0 58,221 (61,891) 2,055,183 0 408,970 0 138,459 187,646 6,230 104,355 (499,336) (1,215) (562,884) 0 0 0 (562,884) (7.22) (7.22)
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