To the Board of Directors of PrimaCom AG:

Transcription

1 The attached financial reports have been prepared according to US GAAP accounting standards and are consistent with the reports previously issued by the Company. The reports have been audited by Ernst & Young AG Wirtschaftsprüfungsgesellschaft. These reports and the unqualified audit opinion of Ernst & Young are being issued on a voluntary basis. The full statutory reports of the group will be issued in accordance with IFRS accounting standards and are currently being audited by Ernst & Young. F-1

2 REPORT OF INDEPENDENT AUDITORS To the Board of Directors of PrimaCom AG: We have audited the accompanying consolidated financial statements of PrimaCom AG, Mainz, and subsidiaries comprised of the related consolidated balance sheet, statement of operations, statement of shareholders equity / deficit, statement of cash flow and notes to the consolidated financial statements for the fiscal year from January 1, 2005 to December 31, The preparation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States is the responsibility of the Company s management. Our responsibility is to express an opinion on the financial statements based on our audit. We conducted our audit of the consolidated financial statements in accordance with Sec. 317 HGB and German generally accepted standards for the audit of financial statements promulgated by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW). Those standards require that we plan and perform the audit such that misstatements materially affecting the presentation of the net assets, financial position and results of operations in the consolidated financial statements in accordance with the applicable financial reporting framework are detected with reasonable assurance. Knowledge of the business activities and the economic and legal environment of the Group and expectations as to possible misstatements are taken into account in the determination of audit procedures. The effectiveness of the accounting-related internal control system and the evidence supporting the disclosures in the consolidated financial statements are examined primarily on a test basis within the framework of the audit. The audit includes assessing the annual financial statements of those entities included in consolidation, the determination of entities to be included in consolidation, the accounting and consolidation principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. Our audit has not led to any reservations. F-2

3 In our opinion, based on the findings of our audit, the financial statements referred to above present fairly, in all material respects, the consolidated net assets, financial position and results of operations of PrimaCom AG and subsidiaries in conformity with accounting principles generally accepted in the United States. Eschborn/Frankfurt/M., April 28, 2006 Ernst & Young AG Wirtschaftsprüfungsgesellschaft Klein Wirtschaftsprüfer [German Public Auditor] Erbacher Wirtschaftsprüfer [German Public Auditor] S iegel We were engaged by the management board of PrimaCom AG, Mainz, to audit the consolidated financial statements, which have been prepared voluntarily, and have therefore rendered our audit opinion solely for PrimaCom AG and for its internal use only. Our audit opinion is not intended to serve as a foundation for any decisions by third-parties and must not be used for other purposes. As such and in contrast to the General Engagement Terms for Wirtschaftsprüfer and Wirtschaftsprüfungsgesellschaften [German Public Auditors and Public Audit Firms] issued by the Institut der Wirtschaftsprüfer [Institute of Public Auditors in Germany] (IDW) on January 1, 2002, which apply to our relationship to the client and to third parties, Ernst & Young AG Wirtschaftsprüfungsgesellschaft assumes no responsibility, liability or other commitment towards third parties unless we have made an express agreement with the respective third party in writing to this effect or this exclusion of liability is invalid. We make express reference to the fact that we will not update this report to reflect any events or circumstances that have occurred since the audit opinion was issued. The decision as to the form and the extent to which you deem the information in this audit opinion to be useful for your purposes is your responsibility. This also applies to the form or extent to which you extend it by any of your own examinations, verifications or updates. F-3

4 PrimaCom AG and Subsidiaries Consolidated Statements of Operations (in thousands) Years ended December 31, Notes Euro Euro Revenues 121, ,296 Operating costs and expenses Operations ( 36,261 ) ( 40,578 ) Selling, general and administrative ( 14,329 ) ( 15,368 ) Corporate overhead ( 21,646 ) ( 15,205 ) Depreciation and amortization ( 45,600 ) ( 42,821 ) Total ( 117,836 ) ( 113,972 ) Operating profit 4,144 4,324 Interest expense: Convertible Second Secured Loan/non-cash interest ( 48,950 ) ( 54,743 ) Other bank interest and other interest ( 13,482 ) ( 15,555 ) Total ( 62,432 ) ( 70,298 ) Other income (+) / expense (-), net 11 ( 814 ) ( 11,916 ) Gain from extinguishment of debt 0 211,112 Income (+) / loss (-) from continuing operations before income taxes and other items ( 59,102 ) 133,222 Income tax expense 10 ( 9,031 ) ( 25,332 ) Gain (+) / Loss (-) before minority interest and discontinued operations ( 68,133 ) 107,890 Minority interest in net income of subsidiaries ( 83 ) 5 Gain (+) / Loss (-) from continuing operations ( 68,216 ) 107,895 Profit (+) / Loss (-) on discontinued operations 5 ( 41,737 ) 132,158 Net income (+) / loss (-) ( 109,953 ) 240,053 Gain (+) / Loss (-) per share: 16 F-4

5 PrimaCom AG and Subsidiaries Consolidated Balance Sheets (in thousands) December 31, Notes Euro Euro Cash and cash equivalents ,021 Trade accounts receivable, net 3 1,844 2,272 Other current assets 5,061 9,260 Assets held for sale 5 396,697 - Total current assets 404,475 21,553 Property and equipment, net 4 262, ,164 Goodwill, net 204, ,433 Other intangibles, net 1,837 1,696 Deferred income tax assets 10 26,084 18,809 Other assets 30,873 13,356 Total assets 930, ,011 Accounts payable 5,765 5,352 Accrued expenses 51,980 69,292 Deferred revenue 1,883 1,739 Deferred purchase obligations Sale-leaseback obligations - current Bank and other debt - current 7 988,200 18,827 Liabilities held for sale 5 41,981 - Total current liabilities 1,090,970 96,287 Sale-leaseback obligations Deferred income tax liability 10 33,347 25,712 Revolving credit facility and other debt 7-329,244 Total liabilities 1,124, ,271 Minority interest Shareholders' equity 15 Common stock - 2,56 par value Authorized Issued ,614 50,614 Additional paid-in-capital 361, ,367 Accumulated deficit ( 606,723 ) ( 366,670 ) Total shareholders' equity ( 194,847 ) 45,311 Total liabilities and shareholders' equity 930, ,011 F-5

6 Primacom AG and Subsidiaries Consolidated Statements of Shareholders' Equity / Deficit ( in thousands ) Additional Total Registered Paid-In Accumulated Shareholders Capital Capital Deficit Equity Euro Euro Euro Euro Balance at December 31, , ,226 ( 496,770 ) ( 84,930 ) Stock option compensation Net loss - - ( 109,953 ) ( 109,953 ) Balance at December 31, , ,262 ( 606,723 ) ( 194,847 ) Stock option compensation Net profit , ,053 Balance at December 31, , ,367 ( 366,670 ) 45,311 F-6

7 PrimaCom AG and Subsidiaries Consolidated Statements of Cash Flows (in thousands) Years ended December 31, Notes Euro Euro Operating Activities Net income (+) / loss (-) ( 109,953 ) 240,053 Adjustments to reconcile net income / loss to net cash provided by operating activities Depreciation and amortization 45,600 42,821 Amortization of prepaid bank fees and other 7,377 6,855 Write-off of capitalized financing fees - old facilities - 24,652 Amortization of deferred revenue ( 17,170 ) ( 15,226 ) Non cash interest expense - Convertible Second Secured Loan 48,950 54,743 Stock option compensation expense Deferred income taxes 1,780 ( 360 ) Gain on sale of Multikabel - ( 168,902 ) Debt forgiveness Second Secured Loans - ( 176,168 ) Other ( 87 ) 658 Changes in assets and liabilities, net off effects of business disposition Trade acounts receivable ( 452 ) ( 428 ) Other assets ( 89 ) ( 7,472 ) Accounts payable ( 458 ) ( 413 ) Accrued expenses and other liabilities 5,063 17,312 Deferred revenue 17,251 15,061 Net assets held for sale 16,947 14,488 Net cash provided by (used in) operating activities 14,795 47,779 Investing Activities Purchases of property and equipment ( 13,558 ) ( 16,395 ) Proceeds from sale of property and equipment Proceeds from sale of businesses - 509,130 Net cash provided by (used in) investing activities ( 13,455 ) 493,232 Financing Activities Proceeds from term credit facilities - 349,000 Debt issuance costs - Financing fees - ( 9,225 ) Debt issuance costs - Professional fees - ( 4,251 ) Repayments of credit facilities - ( 866,111 ) Net proceeds from overdrafts ( 3,389 ) 3 Payments for finance leases ( 1,327 ) ( 963 ) Payments of deferred purchase obligations ( 473 ) ( 316 ) Net cash provided by (used in) financing activities ( 5,189 ) ( 531,863 ) Net increase (+) / decrease (-) in cash and cash equivalents ( 3,849 ) 9,148 Cash and cash equivalents at beginning of period 4, Cash and cash equivalents at end of period ,021 F-7

8 1. GENERAL Basis of Presentation PrimaCom AG, ("PrimaCom") and subsidiaries ("the Company"), a German stock corporation, was formed on December 30, 1998, by the merger ("the Merger") of Süweda Elektronische Medien- und Kabelkommunikations-AG ("Süweda") into KabelMedia Holding AG ("KabelMedia"), two similarly sized German cable television network operators. At the date of the Merger, KabelMedia was renamed PrimaCom AG. KabelMedia and Süweda had been in existence since 1992 and 1983, respectively. Under U.S. GAAP, the Merger was accounted for under the purchase method of accounting as a reverse acquisition by Süweda of KabelMedia even though KabelMedia issued shares to Süweda s shareholders as consideration in the Merger and is the surviving legal entity. Since KabelMedia's inception in 1992, the Company has primarily owned and operated and acquired cable television networks in Germany. On September 18, 2000, with the acquisition of N.V. Multikabel ( Multikabel ), the Company expanded its operations from Germany to The Netherlands. The accompanying consolidated financial statements of PrimaCom AG have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP"). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. All amounts in the accompanying notes to the consolidated financial statements refer to continuing operations unless otherwise noted. The financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business for the foreseeable future. The Company incurred a loss of million for the year ended December 31, 2004 and a gain of million for the 12 months ended December 31, On December 9, 2004 the Company issued an Ad Hoc notice disclosing that PrimaCom AG and PrimaCom Management GmbH, a wholly owned subsidiary of the Company, had filed a law suit at the District Court of Mainz against the holders of the Second Secured Loan ( SSL ) under the Second Secured Credit Facility. The principal amount of the Second Secured Loan was 375,000,000. As part of the law suit asked, among other things, the court to determine whether PrimaCom AG was obligated to pay the accrued interest on the Second Secured Loan or whether the Second Secured Lenders were able to enforce future interest claims. The Ad Hoc notice explained that the law suit was based on expert opinions obtained from the renowned accounting partnership (Wirtschaftsprüfersozietät) LKC Kemper Czarske v. Gronau Berz functioning as independent investigator, from Prof. Dr. Armbrüster on usurious credit and additionally an expert opinion from a renowned insolvency office, which determined that the Second Secured Loan had an equity replacement character, as defined in German company law. On December 21, 2004, PrimaCom Management GmbH filed a further claim at the District Court of Frankfurt am Main against the Second Secured Lenders. In this claim, the court was asked to determine on whether the pledges of shares in certain of the Company s subsidiaries as collateral for the Second Secured Loan was invalid and/or currently not enforceable. Due to the claimed equity replacement character of the Second Secured Loan, it would not have been permissible under German insolvency law to continue to make interest payments as long as and until a solution to the Company s financial crisis for the Company was found. Accordingly, the Company did not make the scheduled interest payments on the Second Secured Loan which was due on December 31, 2004 and was served with a notice of default on January 6, This non-payment of interest also triggered a cross default of the Senior Credit Facility (under which PrimaCom Management GmbH is the borrower). On December 31, 2004, PrimaCom Management GmbH received a waiver from the Senior Lenders for a period of sixty days for the cross default under the Senior Credit F-8

9 Facility and on March 3, 2005 the Senior Lenders agreed to extend this waiver until March 7, After March 7, 2005, the Company continued not pay any of scheduled interest payments on the Second Secured Loans for the reasons previously stated. In order for PrimaCom Management GmbH to be able to make use of the Senior Credit Facility on a monthly revolving basis, it was a condition that no Event of Default (as defined in the Senior Credit Facility Agreement) was outstanding on the date of a rollover of the Senior Loans. Up to September 12, 2005, the Senior Lenders provided waivers of the cross-defaults under the Senior Credit Facility Agreement as a result of the non-payment by the Company of interest on the Second Secured Lenders and other outstanding Events of Default in order to allow PrimaCom Management GmbH to continue to be able to make use of the Senior Credit Facility. A claim was also filed by the Second Secured Lenders in London for a declaration that the provisions in the Second Secured Facility Agreement, which oblige PrimaCom to pay interest to the Second Secured Lenders, were valid and enforceable. However, this case was postponed pending the outcome of the German proceedings referred to above. Following the conclusion of the arrangement reached in the settlement agreement referred to below, this claim was removed by the Second Secured Lenders. On March 8, 2005, following expiration of the standstill period governed by the inter-creditor agreement, the Second Secured Lenders served PrimaCom AG with a notice of default and demand in which they declared of the Second Secured Loan immediately due and payable together with all accrued interest and all other sums due under the Second Secured Credit Facility Agreement. In a separate letter, PrimaCom Management GmbH, which was a guarantor of the Second Secured Loan, was notified of the above event of default. Subsequently, the Second Secured Lenders served Primacom AG with notices of default for failure to pay expenses, failure to execute pledges over the shares of one of our subsidiaries, a cross default for failure to comply with the proforma debt service covenant of the Senior Credit Facility and failure to provide documents. As governed by the inter-creditor agreement, 180 days after notice of default dated January 6, 2005, (as referred to above) the Second Secured Lenders served notices of default and demand to Primacom Management GmbH and also commenced legal proceedings against Primacom Management GmbH in which they demanded, under the guarantee and indemnity clauses of the Second Secured Facility, full repayment of the Second Secured Loan plus accrued interest due under the Second Secured Facility Agreement. In addition to the interest obligations under the Second Secured Credit Facility, the Company and PrimaCom Management GmbH were also requested to comply with specific financial covenants included in the Senior Credit Facility Agreement and the Second Secured Credit Facility Agreement. Although the Company and PrimaCom Management GmbH were able to comply with these covenants through September 30, 2005, (except that the Company was unable to comply for the pro forma debt service ratio covenant under the Senior Credit Facility Agreement for the testing periods ending December 31, 2004, March 31, 2005 and September 30, 2005), management anticipated that the Company would not be able to comply with certain of these covenants in the remainder of In addition under the amortization schedule of Senior Credit Facility Agreement, PrimaCom Management GmbH was required to make repayments of principal of approximately 57 million in The Company also did not anticipate that operating cash flows of the Company and PrimaCom Management GmbH would be sufficient to meet this schedule and therefore anticipated liquidity problems in the fourth quarter of 2005 or the first quarter of As a result of these conditions the Company embarked on a restructuring plan to sell its 100% subsidiary Multikabel, use the proceeds to repay the current Senior Facility, enter into a new senior loan agreement and a new mezzanine facility for the German business and use the proceeds to buy out the Second Secured Loan. On September 12, 2005, the Senior Lenders did not approve the roll-over of the Revolving Credit under the Senior Credit Facility and, the Senior Loan became immediately repayable in full. On September 13, 2005, the District Court of Mainz rejected PrimaCom s claim against the Second Secured Lenders due to lack of international jurisdiction. On September 16, 2005, the District Court in Frankfurt am Main indicated that it too was likely to reject the claim due to lack of international jurisdiction. F-9

10 On September 15, 2005, the Company announced that it had reached agreement in principle with the owners of the Second Secured Loan on certain conditions of a settlement. All parties agreed that the Company would pay 375 million to the owners of the SSL in compensation of all open demands due to the owners of the SSL. This amount was payable by the Company by November 30, The agreement also provided that the Company recognized a liability of 425 million due to the owners of the SSL. If the Company were unable to pay the amount of 375 million in accordance with the terms of the settlement agreement (referred to below), the owners of the SSL would be able to immediately execute their claims against the Company. The agreement provided, subject to closing in accordance with a settlement agreement with the owners of the SSL (referred to below) that they would agree to the sale of Multikabel. On October 4, 2005, the Company signed standstill agreements with the Senior Lenders under which, subject to certain conditions, the Senior Lenders agreed to withhold from any further actions provided that the Senior Loan was repaid no later than November 30, On October 6, 2005, the Company gave notice that it had entered into a a purchase agreement with Amsterdamse Beheer- en Consultingmaatschappij and B.V.Christina Beheer- en Adviesmaatschappij B.V., companies controlled by the global private equity firm Warburg Pincus, regarding the indirect sale of all shares in N.V. Multikabel as well as all debt of all Dutch subsidiaries vis-à-vis the PrimaCom Group. The agreement was made under several conditions precedent, including the merger clearance by the Dutch cartel authority NMa as well as the financing of the purchase price by the purchaser and the approval of PrimaCom's existing Senior Lenders and the Second Secured Lenders. The purchase price amounted to 515 million and was approved by the Company s Supervisory Board. On October 13, 2005, the Company entered into a Settlement Agreement with its Second Secured Lenders under the Facility Agreement dated 26 March 2002 ( SSFA ). Under this Settlement Agreement PrimaCom agreed to withdraw the litigation initiated by it in Germany against the Second Secured Lenders. Once this and certain other conditions had been satisfied on or before November 30, 2005 the Settlement Agreement provided for: the sale of PrimaCom s Dutch business, Multikabel; the refinancing and repayment in full of the existing Senior Facilities; a judgment in favour of the Second Secured Lenders to be obtained in the English courts in the amount of 425 million together with certain declaratory relief; the settlement of all amounts due and payable under the SSFA including the judgment of the English Courts referred to above by payment by PrimaCom of the amount of 375 million to the Second Secured Lenders; the resolution of all litigation outstanding between PrimaCom and the Second Secured Lenders; and the giving of mutual waivers and releases between PrimaCom and the Second Secured Lenders. On November 4, 2005, the Company announced that the Dutch cartel authority NMa had given merger clearance for the indirect sales of all shares of N.V. Multikabel as well as all debt of all Dutch subsidiaries vis-à-vis the PrimaCom group to the Amsterdamse Beheer- en Consultingmaatschappij B.V. and Christine Beheer- en Adviesmaatschappij B.V., companies which are controlled by the global private equity firm Warburg Pincus. Closing On December 5, 2005 the Company announced the successful closing of: the sale of its Dutch subsidiary; the discharge of the Second Secured Loan and all other claims of the Second Secured Lenders through payment of 375 million under the terms of the Settlement Agreement; the refinancing of the Company through a new Senior Credit Facility of 300 million and a Mezzanine Facility of 69 million and the repayment of the old Senior Loans. F-10

11 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting Principles The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("US GAAP"). Consolidation The consolidated financial statements include the accounts of PrimaCom and its majority owned subsidiaries. All significant intercompany accounts and consolidation transactions have been eliminated. The investment in Mediakabel B.V. was included in Assets Held for Sale and was consolidated at cost. Cash Equivalents All highly liquid investments purchased with an original maturity of three months or less are considered cash equivalents. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentrated credit risks consist primarily of cash and trade receivables. Credit risk on trade receivables is minimized as a result of the large and diverse nature of the Company s customer base. The Company maintains most of its cash and cash equivalents at international financial institutions in Germany and the Netherlands. Revenue Recognition Cable Network Revenue Revenues related to video, telephony and internet access are recognized in the period the related services are provided to the customers over the Company s cable networks. The majority of the subscribers are directly debited each month by the Company. Installation revenue (including reconnect fees) related to these services over the Company s cable network is recognized as revenue in the period in which the installation occurs. Subscriber Advance Payments and Deposits Payments received in advance for distribution services are deferred and recognized as revenue when the associated services are provided. Deposits are recorded as a liability upon receipt and refunded to the subscriber upon disconnection. Assets Held for Sale and Discontinued Operations Assets are considered held for sale when management has approved and committed to a formal plan to actively market a business for sale. Upon designation as an asset held for sale, each business is valued at the lower of its carrying amount or estimated fair value less cost to sell, and depreciation expense recognition is ceased. If the carrying amount of the business exceeds its estimated fair value, an impairment loss is recognized. Businesses classified as discontinued operations, the balance sheet amounts and statement of operations results are reclassified from their historical presentation to assets and liabilities held for sale in the consolidated balance sheets and to discontinued operations in the consolidated statements of operations for all periods presented. Additionally, segment F-11

12 information does not include the results of businesses classified as discontinued operations. Management does not expect any continuing involvement with these businesses following the sales. Property and Equipment Property and equipment are stated at cost and are comprised principally of assets used in the development and operation of cable television systems. Depreciation is recognized using the straight-line method over estimated useful lives as follows: cable television systems: twelve years; equipment and fixtures: five to ten years; buildings: 25 years; and purchased software: three to five years. Repairs and maintenance are charged to expense during the financial period in which they are incurred. In 2004 and 2005, the Company capitalized 1,142,000 and 1,316,000, respectively, of interest costs related to the construction of networks. Goodwill and Customer Lists Goodwill represents the excess of cost over the fair value of net assets of acquired businesses. Goodwill is tested annually for impairment or more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount of goodwill exceeds its fair value. Other intangible assets are amortized over their useful lives. In 2004 and 2005, the Company performed the required annual impairment tests. As a result of those tests, goodwill was not determined to be impaired. The Company determined fair value using the discounted cash flows technique, which is subjective and requires management to use estimates of future cash flows and discount rates. Because these estimates of future cash flows are dependent on risks, uncertainties and other factors, the Company will continue to evaluate its estimates, which could result in a need to adjust the determination of fair value. Customer lists were acquired by the Company in The changes in the carrying value of customer lists are as follows: Customer lists: Acquisition cost January 1,... 2,085 2,085 Accumulated amortization December 31,... (248) (389) Net carrying amount December 31,... 1,837 1,696 The Company expects the amortization expense for the customer lists to be as follows: F-12

13 Impairment of Long Lived and Identifiable Intangible Assets The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those assets. In calculating fair value based on discounted cash flows, the Company makes significant estimates regarding the number of years of future cash flows, discount rates, and revenues, costs, and expenses in future periods. The number of years of future cash flows were based on the remaining useful life of the underlying assets, discount rates were determined based on market discount rates, and revenues, costs and expenses were based on the Company s business plan. In 2004 and 2005, the discounted cash flow calculation did not indicate that an impairment of the longlived assets existed. Advertising Costs Advertising costs are charged to expense as incurred. The Company incurred advertising costs in 2004 and 2005 totaling 1,250,000 and 3,099,000, respectively. Stock Options The Company accounts for its stock option plans in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123). In accordance with SFAS No. 123, compensation expense is recognized over the vesting period based on the fair value of all stock-based awards on the date of the grant. Income Taxes Deferred tax assets and liabilities are based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when the Company cannot make the determination that it is more likely than not that some portion or all of the related tax asset will be realized. Fair Value of Financial Instruments The carrying value of financial instruments such as cash, accounts receivable and accounts payable approximate their fair value based on the short-term maturities of these instruments. The carrying value of the new credit facilities approximate their fair value or as these borrowings took place near year end at market interest rates. Use of Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Correction of Error In the fiscal year 2004, depreciation expense on the cable television networks was overstated by 3,577,000 caused by an erroneously made journal entry. The necessary adjustments were made to the comparative financial statements for fiscal year The depreciation and amortization expense decreased from 49,177,000 to 45,600,000. The loss for 2004 decreased from 113,530,000 to 109,953,000. In the consolidated balance sheet, property and equipment, net increased from 259,236,000 to 262,813,000 while accumulated deficit changed from 610,300,000 to 606,723,000. This prior period adjustment had no impact on the financial statements for fiscal year F-13

14 Adoption of New Accounting Rules On December 16, 2005, the FASB issued SFAS 123 (revised 2004), Share Based Payment, which is a revision of SFAS 123, Accounting for Stock-Based Compensation. SFAS 123 (R) supersedes APB Opinion 25, Accounting for Stock Issued to Employees and amends SFAS 95, Statement of Cash Flows. Generally, the approach in SFAS 123 (R) is similar to the approach described in SFAS 123. However, SFAS 123 (R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on fair values. Proforma disclosure is no longer an alternative. SFAS 123 (R) must be adopted in the first interim or annual period beginning after January 1, Early adoption will be permitted in period in which financial statements have not yet been issued. The adoption of FAS 123 (R) fair value method will not have a significant impact on the Company s result of operations and overall financial position. In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes and SFAS 3, Reporting Accounting Changes in Interim Financial Statements. SFAS 154 provides guidance on the accounting for and reporting of accounting changes, including changes in principle, accounting estimates and the reporting entity, as well as, corrections of errors in previously issued financial statements. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 with early adoption permitted for accounting changes and corrections of errors made in fiscal years beginning after the date the Statement was issued. The Company has corrected an overstatement of depreciation expense of 3,577,000 in the 2004 income statement. 3. ACCOUNTS RECEIVABLE Trade accounts receivable consists of the following: December 31, Trade accounts receivable gross... 6,312 6,560 Allowance for doubtful accounts... (4,468) (4,288) Trade accounts receivable net... 1,844 2,272 Accounts receivable are reported net of allowance for doubtful accounts. The allowance for doubtful accounts reflects management s best estimate of probable losses inherent in the account receivable balance. Management determines the allowance based on known troubled accounts, historical experience, and other currently available evidence. A summary of activity in the allowance for doubtful accounts is as follows: F-14

15 December 31, Allowance for doubtful accounts: Balance at the beginning of the year... 4,926 4,468 Charged to cost and expenses... 1, Write-offs and other... (1,673) (1,156) Balance at the end of the year... 4,468 4, PROPERTY AND EQUIPMENT The components of property and equipment are as follows: December 31, Cable television networks , ,335 Equipment and fixtures... 55,527 56,537 Land and buildings... 5,326 5,328 Other... 14,274 14,467 Construction in progress... 11,292 16,640 Total , ,307 Less accumulated depreciation... (397,577) (438,143) Property and equipment net , ,164 Depreciation expense on property and equipment was 44,456,000 and 41,533,000 for 2004 and 2005, respectively. 5. DISCONTINUED OPERATIONS On October 6, 2005 the Company gave notice that it had entered into a purchase agreement with Amsterdamse Beheeren Consultingmaatschappij and B.V.Christina Beheer- en Adviesmaatschappij B.V., companies controlled by the global private equity firm Warburg Pincus, regarding the indirect sale of all shares in N.V. Multikabel as well as all debt of all Dutch subsidiaries vis-à-vis the PrimaCom Group. The transaction was consummated by December 5, Accordingly, under Statement of Financial Accounting Standards No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144), Multikabel is now reported as a discontinued operation in the financial statements. Losses from discontinued operations were as follows: December 31, Net loss from operations of Multikabel business (41,737) The assets and liabilities of the assets held for sale were as follows: F-15

16 December 31, Cash Trade accounts receivable net... 2,236 Other current assets... 1,219 Total current assets... 3,817 Property and equipment net ,930 Goodwill net ,277 Customer lists net... 37,560 Deferred tax assets... 31,611 Other assets TOTAL ASSETS ,697 Accounts payable... 5,692 Accrued expenses... 4,485 Deferred revenue Deferred income taxes... 31,611 TOTAL LIABILITIES... 41, SALE-LEASEBACK In March and October 1993, the Company entered into two master lease agreements governing the terms of the majority of its cable network sale and leaseback transactions. Under the March 1993 agreement, the sale and leaseback transactions have a lease term of nine years and a monthly leasing rate of approximately 1.6% of the original sales price. At the end of the lease term, the Company has the option to extend leases under this agreement for one year or to repurchase the cable networks at the higher of 10.0% of the original sales price or the recorded net book value on the lessor s books. Under the October 1993 agreement, the sale and leaseback transactions have a lease term of nine years and a monthly leasing rate of approximately 1.5% of the original sales price. The lessor has the right to require the Company to repurchase the cable networks at the end of the lease term at an amount equal to approximately 11.5% of the original sales price. If the lessor sale option is not exercised, the lease automatically renews for an additional three years. December 31, Borrowings under sale-leaseback obligations... 1, Current portion thereof Non-current portion Future minimum payments under capital leases with initial or remaining terms in excess of one year consisted of the following at December 31, 2005: ( in thousands) Total minimum lease payments Less interest... (21) Present value of minimum capitalized lease payments Assets under capital leases are included within property and equipment as follows: F-16

17 December 31, Cable television networks... 29,320 29,320 Less accumulated depreciation... (22,063) (24,307) Cable television networks net... 7,257 5,013 Depreciation expense on assets recorded under capital leases approximated, 2,447,000 and 2,244,000 in 2004 and 2005, respectively. 7. BANK AND OTHER DEBT Bank and other debt consist of the following: December 31, Borrowings under Senior Facility ,111 Convertible Second Secured Loan ,089 Senior Credit Facility ,000 Mezzanine Facility... 68,068 Overdrafts... 3 Total bank and other debt , ,071 Less current portion thereof ,200 18,827 Long term debt ,244 As discussed in Section 1 Basis of Presentation, the refinancing of the Company resulted in the discharge of the existing Senior and Second Secured Loans. In their place the Company entered into a new 300 million credit agreement, of which 280 million was drawn at closing on December 5, The remaining 20 million Revolving Credit Facility consists of a 5 million Revolving Credit plus an overdraft of 15 million. The drawn Credit Facility consists of a 100 million Series A Note, a 90 million Series B Note and a 90 million Series C Note, repayable through 2012, 2013 and 2014, respectively. Amounts outstanding under the Series A Note, Series B Note and Series C Note bear interest at the rate of EURIBOR plus a margin of 2.35%, 2.85% and 3.35%, respectively. As of December 31, 2005 Series A Note, Series B Note and Series C Note bear interest at the rate of 4.76%, 5.26% and 5.76%, respectively. Amounts outstanding under the Revolving Credit Facility bear interest at the rate of EURIBOR plus a margin of between 1.65% and 2.35%, depending on the ratio of total indebtedness of the Company s subsidiaries to annualized earnings before interest, tax, depreciation and amortization ( EBITDA ). The Facility is secured by, among other things, liens on receivables from cable television subscribers, concession agreements, equipment and interests in all shares of PrimaCom s subsidiaries. In addition, the Facility contains certain covenants, which, among other things, require the Company to maintain specified ratios relating to cash flow and total debt. Furthermore, there are restrictions on incurring debt, encumbering revenues or assets, loaning funds to third parties or assuming liabilities, disposing of properties and paying dividends or making distributions. Under the terms of the Credit Facility, the available commitment amount is reduced in quarterly amounts to the amounts reflected below as of December 31 of the years indicated: F-17

18 Available commitment Year ended and overdraft , , , , ,000 At December 31, 2005, the Company had 20 million unused availability under the Credit Facility. The interest rate on this portion of the Revolving Credit Facility was 4.76% at December 31, On December 5, 2005 the Company also entered into a 69 million Mezzanine Facility. The Mezzanine Facility consists of a 50 million Series A Note, repayable together with accrued interests through 2015 and a 19 million Series B Note, repayable together with accrued interest plus a 5% premium on December 5, The mezzanine loans were paid out after deduction of a discount of 2.5% or million. The discount will be amortized over the terms of the A and B Notes, respectively. The premium related to the B Note will be accrued on a monthly basis until December The Mezzanine Loan balance bears an interest at EURIBOR plus 10.5% over the term of the loan. The 10.5% includes both a cash interest portion and a non-cash interest portion. The cash portion begins in December 2007 at 2.5% and increases in 2010 to 4%. The remaining interest obligation is capitalized to the outstanding loan amount and will be due upon repayment of the Second Secured Loan. Debt Issuance Costs sheet. The unamortized discount is deducted and the premium added back to the bank debt shown on the balance As of December 31, 2004 and 2005, the Company had capitalized bank financing and professional fees totaling approximately 27,477,000 and 11,606,000, respectively, which are included in non-current other assets. These capitalized bank fees are being amortized as bank debt interest over the remaining term of the Facility. Interest expense related to bank financing fees was 5,923,000 and 6,356,000, for 2004, and 2005, respectively. In addition, at December 5, 2005 unamortized financing and professional fees of 24,652,000 relating to the previous loans were written off and are included in the income statement in Gain on Extinguishment of Debt. December 31, Cash paid for interest: Bank and other debt... 70,172 32,225 Sale-leaseback transaction ,382 32,334 F-18

19 8. FINANCIAL INSTRUMENTS At December 31, 2005 no financial instruments were in place. Under the terms of the new credit facility the Company is required to hedge a minimum of 50% of the Loan within 90 days of closing. Those hedges will be put into place during the first quarter of RELATED PARTY TRANSACTIONS The Company uses the services of BFE Nachrichtentechnik GmbH for installation, repair and maintenance of their cable networks, which is the indirectly owned by Mr. Wolfgang Preuß. In 2005, the Company paid approximately 496,000 for these services. Mr. Wolfgang Preuß, who was a member of the Company s management board until November 30, 2005, is also a member of the management board of TEKOMAG AG, which provides certain services to the Company pursuant to the resolution of the supervisory board dated July 15, For the year ended December 31, 2005, the total payments to TEKOMAG AG were approximately 34,000. Law firm Rechtsanwälte Kleber Eble & Hock, which is owned by, among others, two members of our supervisory board, Mr. Heinz Eble and Mr. Erwin Kleber. Mr. Kleber who was a member of our supervisory board until November 30, 2005 also provides legal services to the Company. For the year ended December 31, 2005, the total payments to Rechtsanwälte Kleber Eble & Hock were approximately 319,000. Mr. Manfred Preuß, a brother of Mr. Wolfgang Preuß, provides certain services to the Company pursuant to a contract dated July 15, For the year ended December 31, 2005, the total payments to Mr. Manfred Preuß were approximately 557,000. Mr. Manfred Preuß joined the management board on November 30, INCOME TAXES For financial reporting purposes, the Company and its consolidated subsidiaries calculate their respective tax liabilities on a separate return basis which are combined in the accompanying consolidated financial statements. F-19

20 The provisions for income tax benefit (expense) consisted of the following: Years ended December 31, Current... (7,251) (25,692) Deferred... (1,780) 360 Total income tax... (9,031) (25,332) Income from continuing operations before income taxes for the year ended December 31, 2005 and 2004 amount to 133,222,000 and (59,102,000), respectively. The effective income tax rate for the years ended December 31, 2005 and 2004 was 19.0%, and 14.4% respectively. The following table reconciles the expected income taxes on income from continuing operations computed by applying the Company's combined German corporate tax rate of 39.7% (2004: 39.9%) to the actual income tax expense. The Company's 2005 combined German corporate tax rate includes a corporate income tax rate after the benefit of deductible trade tax of 20.6% (2004: 20.6%) plus a solidarity surcharge thereon of 1.1% (2004: 1.1%) and trade taxes of 18.0% (2004: 18.0%): Years ended December 31, Computed income tax benefit at statutory rates... 25,009 (52,836) Non-taxable income due to usage of loss carryforward ,911 Non-deductible interest expense on trade taxes... (13,865) (13,662) Benefit on intercompany transactions... 7,059 0 Change in valuation allowance... (29,852) 9,926 Reversal of tax accruals ,977 Optimization of tax returns... 1,736 0 Other (3,648) Total income tax (expense)... (9,031) (25,332) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2004 and 2005 are presented below: F-20

21 December 31, Deferred tax assets: Net operating loss carryforwards , ,317 Property and equipment... 45,395 35,775 Intangibles , ,492 Less valuation allowance... (189,609) (179,683) 26,084 18,809 Deferred tax liabilities: Property and equipment... (19,745) (17,544) Financing fees... (10,494) (4,872) Other... (3,108) (3,296)... (33,347) (25,712) Net deferred tax asset/(liability)... (7,263) (6,903) As of December 31, 2005, the Company had available in Germany a total of tax loss carryforwards for corporate income tax of approximately 452,215,000 and for trade tax of approximately 203,233,000. Under current German tax laws, these loss carryforwards have an indefinite life and may be used to offset future taxable income. In 2005, the Company paid income taxes of 1,097,000. In 2004, no cash was paid for income taxes. The Company considers only existing deferred tax liabilities as a source of future taxable income. Consequently, the Company has set a full valuation allowance for net deferred tax assets. 11. OTHER EXPENSE Other expenses for the year ended December 31, 2005 comprise of as follows: Bonuses ,248 Other Total other expense ,916 In connection with the refinancing and restructuring the Company granted to all officers involved a number of 1,660,000 shares which will be issue in As of December 31, 2005 the Company has expensed the amount of 11,248,000 based on the share price applicable to the fulfillment of certain conditions agreed in connection with sale of Multikabel. F-21

22 12. COMMITMENTS The Company obtains certain programming directly from other net-level 3 provider through various signal delivery contracts. The signal delivery contracts with Kabel Deutschland are generally for a fixed period of time and are subject to negotiated renewal. Under these contracts the Company typically pays to the vendors either a flat fee or a fee per customer that is determined by reference to a published fee schedule. As of December 31, 2005, the Company had a total commitment of approximately 70,815,000 through 2013, the date upon which the last agreement expires. For the years ended December 31, 2004 and 2005 total Kabel Deutschland fees expensed amounted to approximately 23,609,000 and 22,961,000, respectively, and are included in operations expense. Payments for the easy.tv signal transponder for the year ended December 31, 2005 amounted to approximately 1,362,000. The Company entered into certain agreements with film providers to purchase film rights through License expense relating to these film right agreements was approximately 276,000 and 172,000 in 2004 and 2005, respectively. The Company leases other providers networks, certain office equipment and vehicles. Lease terms generally range from three to five years with the option to renew at varying terms. Rental expense was 2,322,000 and 2,696,000 in 2004 and 2005, respectively. Future minimum payments under Kabel Deutschland commitments, film commitments and non-cancelable operating leases with initial or remaining terms in excess of one year consisted of the following at December 31, 2005: Signaldelivery (T ) Operating Leases (T ) Films (T ) Total (T ) , ,438 27, , ,663 20, ,337 1,405 15, , , Thereafter ,815 1,878 Total... 70, ,771 80, STOCK OPTION PLANS On February 22, 1999, the Company adopted a stock option plan for the benefit of all its employees and the employees of its subsidiaries (the "1999 Universal Stock Option Plan") and a stock option plan for its executive officers and the executive officers of the subsidiaries (the "1999 Executive Stock Option Plan"). The two stock option plans provide for the issuance of stock options allowing eligible employees and executive officers to acquire shares. The Company has been authorized to issue a total of 1,000,000 shares including 300,000 shares under the 1999 Universal Stock Option Plan and 700,000 shares under the 1999 Executive Stock Option Plan. The options granted in 1999 and 2000 under both the 1999 Universal Stock Option Plan and the 1999 Executive Stock Option Plan vest over a three-year period. One third of the options vest on the first anniversary of the grant and the remaining options vest in equal monthly amounts over the next two years. The vested options are exercisable after the second anniversary of the grant and expire on the fifth anniversary of the grant. If the participant s employment agreement terminates before the options vest in full, the participant s options will be vested only in the portions of options computed by multiplying 1/36 times the number of full months of employment between the date of the option grant and the date of termination. Each option is exercisable only if the average daily closing price of the shares, calculated as the average over the five consecutive trading days on the Frankfurt Stock Exchange immediately prior to the first option exercise, equals at least 120% of the respective exercise price of the option. F-22