PrimaCom AG Mainz, Germany

Transcription

1 PrimaCom AG Mainz, Germany Audit report Consolidated Financial Statements and Group Management Report December 31, 2007 Ernst & Young AG Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft

2 E Translation from the German language TABLE OF CONTENTS Page A. Audit Engagement 1 B. General Findings 2 C. Purpose, Nature and Scope of the Audit 5 D. Findings on Group Accounting Records and Consolidated Financial Statements 8 I. Basis of Group Accounting 8 II. Consolidated Group 8 III. Compliance of the Financial Statements Included in the Consolidated Financial Statements 8 IV. Compliance of Group Accounting Records and Consolidated Financial Statements 9 1. Prior-Year Consolidated Financial Statements 9 2. Consolidation Entries 9 3. Consolidated Financial Statements Group Management Report 11 V. Overall Picture Conveyed by the Consolidated Financial Statements Significant Valuation Bases Overall Assessment 13 E. Findings Related to the Early Warning System for the Detection of Risk 14 F. Audit Opinion 16 xxxx/0x

3 E Translation from the German language Exhibits 1 Consolidated Income Statement for Fiscal Year Consolidated Balance Sheet as of December 31, Statement of Changes in Group Equity for Fiscal Year Consolidated Cash Flow Statement for Fiscal Year Notes to the Consolidated Financial Statements for Fiscal Year Management Report and Group Management Report for Fiscal Year 2007 Engagement Terms, Liability and Conditions of Use General Engagement Terms xxxx/0x

4 e Translation from the German language A. AUDIT ENGAGEMENT In accordance with a resolution approved at the shareholders' meeting on June 6, 2007 the supervisory board of PrimaCom AG, Mainz, (hereinafter also referred to as the "Company" or "PrimaCom") engaged us to audit the Company's consolidated financial statements as of December 31, 2007, including the group management report. The General Engagement Terms for "Wirtschaftsprüfer and Wirtschaftsprüfungsgesellschaften" [German Public Auditors and Public Audit Firms] dated January 1, 2002, which are attached to this report, are applicable to this engagement and also govern our relations with third parties in the context of this engagement. In addition, we refer to the liability provisions contained there in No. 9 and to the exclusion of liability towards third parties and the other provisions of the enclosed exhibit Engagement Terms, Liability and Conditions of Use. Our reporting complies with the Generally Accepted Standards for the Issuance of Long-Form Audit Reports for the Audits of Financial Statements (IDW AuS 450) issued by the IDW ["Institut der Wirtschaftsprüfer in Deutschland e.v., Düsseldorf": Institute of Public Auditors in Germany, Düsseldorf]. xxxx/0x 1

5 e Translation from the German language B. GENERAL FINDINGS Comments on the Legal Representatives' Assessment of the Group's Situation We consider the management board's discussion and analysis of the Group's situation and its anticipated development as presented in the consolidated financial statements and in the group management report to be accurate. Situation of the Group and Development of Its Business The following aspects should be highlighted: Due to the takeover of the majority of the PrimaCom shares by the Escaline-Orion Cable Group, the situation of PrimaCom experienced fundamental changes compared with prior fiscal years. In total, Orion/PrimaCom has consolidated approx. 4.3 million customers. Following the takeover of the Company by the Escaline Group, the Company rescheduled its debts on November 22, 2007 as specified in the takeover bid by Omega I S.a.r.l., Luxemburg. For this purpose, the Company raised the 2007 senior credit facility of EUR 250,000k, the 2007 mezzanine loan of EUR 120,000k and the 2007 revolving credit facility of EUR 25,000k. The 2005 senior credit facility and the 2005 mezzanine loan were repaid in full. As of December 31, 2007, the Group disclosed a capital deficit of EUR 3,380k. The loss for the year increased from EUR 15,095k in 2006 to EUR 59,794k in In addition to other measurement factors, some of which are shown in the income statement, the Group measures its result using EBITDA, with EBITDA defined as the earnings from continuing operations (operating result) before interest, taxes, depreciation and amortization. EBITDA fell from EUR 50,353k in 2006 to EUR 40,907k in Revenues fell slightly by 0.05%, from EUR 116,408k in 2006 to EUR 116,345k in The main factor in the decrease in revenues in 2007 was the drop in subscriber numbers, which was not compensated for by increases in other areas. Revenues generated from the basic analog cable TV product fell by 5.5 %, from EUR 103,095k in 2006 to EUR 97,405k in The contribution to revenues of high-speed internet access xxxx/0x 2

6 e Translation from the German language services, increased by 75.2 % from EUR 4,544k in 2006 to EUR 7,962k in Revenues from telephony increased from EUR 1,326k in 2006 to EUR 3,548k in The exchange of debt instruments in fiscal year 2007 between an existing lender and the Company was treated as a repayment of the original financial liability and the recognition of a new liability pursuant to IAS 39 due to the significantly different contractual terms. The loss from the exchange of the debt instruments of EUR 28,613k comprise of all fees incurred, including capitalized fees as part of the refinancing in Finance costs increased by EUR 6,112k, or 20%, from EUR 30,458k in 2006 to EUR 36,570k in The main reason for the higher interest expenses is the increase in the Euribor compared with the prior year and the interest effects of the mezzanine loan. Anticipated Development of the Group The presentation of the anticipated development of the Group in the group management report is based on assumptions which leave scope for interpretation. We consider this presentation to be reasonable. The following aspects should be highlighted: PrimaCom will continue its policy of customer retention and gaining new customers through the further expansion of integrated cable networks. PrimaCom s refinancing, which was required and carried out after the takeover, accounted for and facilitated the full realization of its goals which had already been defined before the takeover. Irrespective of the disclosed loss for the year, the Company s long-term plan shows a positive development. The investments which have already been made or planned for the expansion of integrated back-channel cable networks almost completely eliminate the Company s dependence on signals from KDG and other signal providers. Investments are given priority in areas where the competitive offers by other telecommunications and cable network providers are not of the same standard as those from the Company. xxxx/0x 3

7 e Translation from the German language Risk to the Company s Development or Ability to Continue as a Going Concern In accordance with our obligation to report risks to the Company s ability to continue as a going concern or significant risks to its development (see Sec. 321 (1) Sentence 3 HGB), we particularly refer to the circumstances stated by management in Section Risks and Opportunities of the management report, according to which The operating and financial flexibility and liquidity of the Company is limited by the terms and conditions of credit agreements in place. These agreements contain financial and operating covenants. To comply with these covenants, synergies of the planned combination of PrimaCom and the affiliated companies of the Orion Group the need to be realized. These covenants were agreed by taking into consideration certain synergies. In this connection, PrimaCom Group has identified specific synergy effects. An appraisal, which identifies such synergies is part of the credit agreements. PrimaCom Group is currently in a process to execute these synergies. If the Company fails to comply with the covenants and other terms and conditions of these agreements, its debts under the facilities could be repayable before the agreed repayment date. Management believes the Company can meet the new credit conditions and payment obligations. Competition for customers from other signal transmission methods could lead to the Company being unable to expand its customer base or losing customers. The Company also faces increased competition from other methods of transmitting TV signals to households, such as: digital/terrestrial, analog and digital satellite broadcasting systems to private households ( DTH ) and shared satellite dishes, particularly in areas where cable is not popular. xxxx/0x 4

8 e Translation from the German language C. PURPOSE, NATURE AND SCOPE OF THE AUDIT Purpose of the Audit During our audit in accordance with Sec. 317 HGB ["Handelsgesetzbuch": German Commercial Code], we examined whether the consolidated group, the financial statements included in the consolidated financial statements, the consolidation entries made, the consolidated financial statements - consisting of the consolidated balance sheet, consolidated income statement, consolidated cash flow statement, statement of changes in group equity and notes to the consolidated financial statements - and the group management report comply with the relevant legal regulations and the supplementary provisions of the articles of incorporation and bylaws of the parent company. The consolidated financial statements have been prepared in accordance with IFRSs, as they are required to be applied in the EU, and the provisions of German commercial law to be applied additionally pursuant to Sec. 315a (1) HGB. Additional accounting provisions arise from the articles of incorporation and bylaws with regard to the recognition of revenue reserves. The management board and the supervisory board are authorized to allocate part or all of the net income for the year to the revenue reserves upon approval of the financial statements after the amounts to be allocated to the legal reserves have been deducted. The management board of the parent company is responsible for the consolidated financial statements, the group management report as well as the explanations and documentation provided to us. It is our responsibility to assess this documentation and information during our audit performed in accordance with professional standards. Nature and Scope of the Audit Our audit was performed in accordance with the legal requirements in Secs. 316 et seq. HGB, and in compliance with the Generally Accepted Standards for the Audit of Financial Statements as issued by the IDW. According to these standards, the audit is to be planned and carried out to provide reasonable assurance that the consolidated financial statements and group management report do not contain any significant inaccuracies or infringements. xxxx/0x 5

9 e Translation from the German language The object of our audit of the consolidated financial statements is therefore to identify such inaccuracies and infringements of IFRSs, as they are required to be applied in the EU, or the provisions of German commercial law to be applied additionally pursuant to Sec. 315a (1) HGB and the supplementary provisions of the articles of incorporation and bylaws of the parent company which might significantly influence the presentation of a true and fair view of the Group's net assets, financial position and results of operations as defined by these accounting provisions. The basis of our audit methodology, which is risk and process oriented, is the development of an audit strategy. This strategy is based on the assessment of the economic and legal environment of the Group, its goals, strategies and business risks. The audit program, which is specifically tailored to the Group, determines the key elements of the audit, the nature and scope of audit procedures as well as the audit schedule and the assignment of the audit staff. This approach is based on the principles of risk assessment and materiality. We have therefore reached our audit opinion primarily on a test basis. We performed the following standard audit procedures: Review of the reporting packages of the major consolidated companies and spot tests to examine the inclusion of items in the trial balance sheet For capital consolidation, audit of subsequent consolidations Elimination of intercompany receivables and liabilities Elimination of intercompany profits and losses Calculation of deferred taxes Recoverability of assets and goodwill Review of risks affecting the company s continue as a going concern xxxx/0x 6

10 e Translation from the German language Our audit procedures pertaining to the group management report were aimed at determining whether it is in agreement with the consolidated financial statements, gives a true and fair view of the Group's situation and whether it accurately presents the opportunities and risks of its future development. In this context, the completeness and - for forecasts - the plausibility of the disclosures had to be examined. We assessed the disclosures on the basis of the understanding we obtained during our audit of the financial statements. The legal representatives of the parent company and its subsidiaries provided us with all requested explanations and supporting documentation, as did their appointed agents. In a letter of representation submitted to us, the management board of the parent company confirmed the completeness of these explanations and supporting documentation and of the consolidated financial statements and group management report. xxxx/0x 7

11 e Translation from the German language D. FINDINGS ON GROUP ACCOUNTING RECORDS AND CONSOLIDATED FINANCIAL STATEMENTS I. Basis of Group Accounting The parent company is listed on a stock exchange, its shares are traded on the official market within the General Standard of the Deutsche Börse AG. The consolidation of the companies included in the consolidated financial statements was based on the individual financial statements of these companies as of December 31, 2007 prepared in accordance with uniform principles. II. Consolidated Group Companies Included in the Consolidated Financial Statements These consolidated financial statements include the companies listed in the notes to the consolidated financial statements in accordance with IAS et seq. as the parent company holds the majority of their voting. III. Compliance of the Financial Statements Included in the Consolidated Financial Statements Under Sec. 317 (3) HGB, the group auditor is also required to examine the individual financial statements condensed in the consolidated financial statements, particularly the adjustments made during consolidation, applying Sec. 317 (1) HGB as appropriate, unless statutory or voluntary audits have been conducted according to the regulations or principles of Secs. 316 to 324 HGB. According to Sec. 317 (3) Sentence 3 HGB, this also applies in certain circumstances to the financial statements of foreign subsidiaries. The financial statements of the PrimaCom AG were audited by us. An unqualified audit opinion was issued on the financial statements in accordance with Sec. 322 (1) HGB. xxxx/0x 8

12 e Translation from the German language The financial statements of the PrimaCom Management GmbH were also audited by us. The related reporting is outstanding. We reviewed the unaudited financial statements of the subsidiaries not subject to statutory audits as part of the audit of the consolidated financial statements in accordance with Sec. 317 (3) Sentence 1 HGB IV. Compliance of Group Accounting Records and Consolidated Financial Statements 1. Prior-Year Consolidated Financial Statements The supervisory board approved the consolidated financial statements as of December 31, 2006 on April 24, The consolidated financial statements as of December 31, 2006 were published (elektronischer Bundesanzeiger [Electronical German Federal Gazette] on July 18, Consolidation Entries a. Preparation of the Consolidated Financial Statements The preparation of the consolidated financial statements is computerized. Most consolidation entries are made automatically using the ZEUS consolidation software. The individual consolidation entries have been duly substantiated and documented. xxxx/0x 9

13 e Translation from the German language b. Consolidation Principles Capital Consolidation Capital consolidation is performed using the revaluation method. According to this method, assets and liabilities are initially recognized at their fair values within the scope of first-time consolidation. The carrying amounts of the equity investments are then offset again the parent company s share in the remeasured equity of the subsidiary, with the difference being disclosed as goodwill. Elimination of Intercompany Profits and Losses Any intercompany profits or losses from intercompany transactions included in the inventories as of the balance sheet date are eliminated from earnings. Other Consolidation Entries and Procedures To eliminate intercompany balances, receivables and liabilities between the companies included in the consolidated financial statements are eliminated. Income and expenses are disclosed in the consolidated income statement in accordance with group recognition procedures. Both intercompany sales and income are recognized with their related expenses. Intercompany expenses and income are primarily related to service agreements, financial transactions, and profit distributions. As the shares in some of the subsidiaries included in the consolidated financial statements are held by other shareholders to a small extent, an adjustment item for minority interests was defined. xxxx/0x 10

14 e Translation from the German language 3. Consolidated Financial Statements The consolidated financial statements and the consolidation, accounting and valuation methods applied are in compliance with the principles of IFRS, as required to be applied in the EU, and the provisions of German commercial law to be applied additionally pursuant to Sec. 315a (1) HGB. The consolidated financial statements as of December 31, 2007 were properly compiled from the figures contained in the individual financial statements of the consolidated companies and the additional documentation of consolidation entries. The consolidation entries have been carried over correctly. The cash flow statement complies with IAS 7 and gives a true and fair view of the cash flows of the fiscal year. The statement of changes in shareholders' equity and the segment reporting comply with IAS 1.96 ff. and IAS 14 respectively. The disclosures in the notes to the consolidated financial statements are complete and accurate. 4. Group Management Report In the absence of special provisions under IFRSs/IASs, the group management report for PrimaCom AG has been appropriately structured in accordance with the requirements of Sec. 315 HGB. The group management report, which is combined with the management report of the PrimaCom AG, is in agreement with the consolidated financial statements and our audit findings and as a whole gives a true and fair view of the Group s situation. Our audit, based on Sec. 317 (2) Sentence 2 HGB, leads to the conclusion that the significant opportunities and risks of the Group's future development are accurately disclosed in the group management report. The disclosures pursuant to Sec. 315 (2) HGB are complete and accurate. xxxx/0x 11

15 e Translation from the German language V. Overall Picture Conveyed by the Consolidated Financial Statements 1. Significant Valuation Bases The significant valuation bases are discussed in the notes to the financial statements. The following aspects should be highlighted with regard to the use of discretionary decisions: Non-Current Assets and Intangible Assets The Company recognizes write-downs on property and equipment and intangible assets if their fair value, calculated based on a discounted cash flow, falls short of the carrying amount. PrimaCom assesses on each balance sheet date whether there are any indications of impairment for non-financial assets. Goodwill and other intangible assets with indefinite useful lives are reviewed at least once a year and if impairment is indicated. Other nonfinancial assets are tested for impairment if there are indications that the carrying amount will exceed the net realizable value. Estimating the value in use requires PrimaCom to make an estimate of the expected future cash flows from the asset or cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The following are significant factors which were taken into account in the calculation of the fair values: Annual EBITDA CapEx Interest rate of 9.45% This calculation did not result in any write-downs for the fiscal year as of December 31, xxxx/0x 12

16 e Translation from the German language 2. Overall Assessment Based on our audit, which was carried out according to professional standards, and in consideration of the significant accounting and valuation bases discussed in Section E V 1 we are of the opinion that the consolidated financial statements as a whole give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with IFRSs, as required to be applied in the EU, and the provisions of German commercial law to be applied additionally pursuant to Sec. 315a (1) HGB. xxxx/0x 13

17 e Translation from the German language E. FINDINGS RELATED TO THE EARLY WARNING SYSTEM FOR THE DETECTION OF RISK According to Sec. 91 (2) AktG [ Aktiengesetz : German Stock Corporation Act], the management board is obliged to set up an early warning system for the detection of risk to identify, at an early stage, developments which endanger the Company s ability to continue as a going concern. For PrimaCom AG, as a listed company, the audit of the early warning system for the detection of risk for fiscal year 2007 represents a legal supplement to the annual financial statements since the German Transparency and Disclosures Act [ Transparenz- und Publizitätsgesetztes : TransPuG] went into effect on July 19, According to this act, during an audit, for listed companies, auditors must assess whether the management board has implemented appropriate measures as required in Sec. 91 (2) AktG and whether the early warning system for the detection of risk to be set up will be adequate for the task. In accordance with Sec. 91 (2) AktG, the management board of PrimaCom AG has implemented a monitoring system in order to identify, at an early stage, developments posing a risk to the Company s ability to continue as a going concern. The major components of this system include the systematic recording of risk, the evaluation of the scope of risk in terms of probability of occurrence and quantitative effect, and the regular monitoring of changes in risk. Another significant component is the coordination unit established for the early warning system for the detection of risk through which the Company ensures both the processes within the early warning system as well as the risk reports to the management board. The Company also prepares documentation on the early warning system for the detection of risk in a risk management manual, which includes descriptions of the contents, methods, and processes of the system. The individual components of the early warning system for the detection of risk could be improved. These include: Risk aggregation should be expanded by identifying interdependencies between different individual risks. The ad-hoc reporting process should be formalized. xxxx/0x 14

18 e Translation from the German language The reporting system to the management board should be expanded to include reports at least every quarter. An analysis should be made as to what extent the existing indicator system can be used to monitor individual risks in terms of early warning indicators. If used, the indicators should be given threshold values which trigger a report or notification if they are exceeded. The risk management manual should be updated. There should be a regular, independent audit of the early warning system for the detection of risk. We did not find any negative impact on the underlying functionality of the early warning system for the detection of risk by the potential improvements presented. Our audit has shown that the management board has taken the steps required by Sec. 91 (2) AktG, particularly those related to the implementation of a monitoring system, and that this system is capable of identifying, at an early stage, developments posing a risk to the Company s ability to continue as a going concern. xxxx/0x 15

19 e Translation from the German language F. AUDIT OPINION We have issued the following opinion on the consolidated financial statements and the group management report: "We have audited the consolidated financial statements prepared by PrimaCom AG, Mainz, comprising the balance sheet, the income statement, the notes to the consolidated financial statements, cash flow statement, and statement of changes in equity, together with the group management report for the fiscal year from January 1, 2007 to December 31, The preparation of the consolidated financial statements and the group management report in accordance with IFRSs, as they are required to be applied in the EU, and the provisions of German commercial law to be applied additionally pursuant to Sec. 315a (1) HGB and the supplementary provisions of the articles of incorporation and bylaws of the parent company is the responsibility of the Company s management. Our responsibility is to express an opinion on the consolidated financial statements and the group management report based on our audit. We conducted our audit of the consolidated financial statements in accordance with Sec. 317 HGB [ Handelsgesetzbuch : German Commercial Code] 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 applied principles of proper accounting and in the group management report 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 and the group management report 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 and the group management report. We believe that our audit provides a reasonable basis for our opinion. xxxx/0x 16

20 e Translation from the German language Our audit has not led to any reservations. In our opinion, based on the findings of our audit, the consolidated financial statements comply with IFRSs as adopted by the EU, the additional requirements of German commercial law pursuant to Sec. 315a (1) HGB and supplementary articles of incorporation and bylaws and give a true and fair view of the net assets, financial position and results of operations of the Group in accordance with these requirements. The group management report is consistent with the consolidated financial statements and as a whole provides a suitable view of the Group s position and suitably presents the opportunities and risks of future development. Without qualifying this opinion, we draw attention to the comments in the management report and the group management report. The bullet The Company s credit agreements contain restrictive covenants under Risks and Opportunities states that the operating and financial flexibility and liquidity of the Company is limited by the terms and conditions (covenants) of the credit agreements. These covenants were agreed by taking into consideration certain synergies. In this connection, PrimaCom Group has identified specific synergy effects. An appraisal, which identifies such synergies, is part of the credit agreements. PrimaCom Group is currently in a process to execute these synergies. Management believes the Company can meet the conditions and payment obligations imposed in " Eschborn/Frankfurt am Main, April 30, 2008 Ernst & Young AG Wirtschaftsprüfungsgesellschaft Steuerberatungsgesellschaft Klein Wirtschaftsprüfer [German Public Auditor] Erbacher Wirtschaftsprüfer [German Public Auditor] xxxx/0x 17

21 Translation of the German Financial Statements PrimaCom AG, Mainz, Germany Consolidated Income Statement for Fiscal Year Note EUR k EUR k Revenues Operations expenses 4 ( ) ( ) Selling, general and administrative expenses 5 ( ) ( ) Depreciation and amortization ( ) ( ) Other operating income ( ) ( ) Operating profit before (Expenses) / compensation relating to restructuring activities (Expenses) / Compensation relating to restructuring activities ( 155 ) 541 Operating profit after (Expenses) / compensation relating to restructuring activities Finance costs 7 ( ) ( ) Finance income Loss from extinguishment of debt 9 ( ) 0 (Loss) before tax ( ) ( ) Income tax income (Loss) for the year ( ) ( ) Thereof attributable to: Equity holders of the parent ( ) ( ) Minority interests 1 ( 38 ) Earnings per share - Basic, for (loss) for the year attributable to ordinary equity holders of the parent 11 -EUR EUR Diluted, (loss) for the year attributable to ordinary equity holders of the parent 11 -EUR EUR 0.76

22 Translation of the German Financial Statements PrimaCom AG, Mainz, Germany Consolidated Balance Sheet as of December 31, 2007 Dec. 31, 2007 Dec. 31, 2006 Note EUR k EUR k ASSETS Non-current assets Property and equipment Goodwill Other intangible assets Deferred tax assets Other non-current assets Current assets Trade receivables Receivables from affiliated companies Other current assets Cash and Cash Equivalents TOTAL ASSETS EQUITY AND LIABILITIES Equity attributable to the shareholders of the parent Issued capital Share premium Accumulated loss ( ) ( ) ( ) Minority interests Total equity ( ) Non-current liabilities Interest-bearing loans and borrowings from affiliated companies Other interest-bearing loans and borrowings Deferred tax liabilities Other non-current liabilities Current liabilities Trade and other payables Interest-bearing loans and borrowings Finance lease liabilities 0 28 Deferred revenue Payables due to affiliated companies 64 0 Provisions Total liabilities TOTAL EQUITY AND LIABILITIES

23 Translation of the German Financial Statements PrimaCom AG, Mainz, Germany Consolidated Statement of Changes in Equity for Fiscal Year 2007 Attributable to equity holders of the parent Issued Share Accumulated Minority Total Note capital premium loss Total interests equity EUR k EUR k EUR k EUR k EUR k EUR k As of January 1, ( ) Stock option compensation Issue of notes with warrants Management bonus Supervisory board bonus Acquisition of minority interests ( 380 ) ( 380 ) Loss for the year 0 0 ( ) ( ) ( 38 ) ( ) As of December 31, ( ) Stock option compensation Issue of notes with warrants Excercise of Management bonus ( ) Excercise of Supervisory board bonus ( 539 ) Exercise stock options Excercise of notes with warrants Loss for the year 0 0 ( ) ( ) 1 ( ) As of December 31, ( ) ( ) 12 ( )

24 PrimaCom AG, Mainz, Germany Consolidated Cash Flow Statement for Fiscal Year 2007 Translation of the German Financial Statements Note EUR k EUR k Cash flows from operating activities Loss for the year ( ) ( ) Adjustments to reconcile loss for the year to net cash provided by operating activities Depreciation and amortization Loss from extinguishment of debt (cash) Loss from extinguishment of debt (non-cash) Cash finance costs Non-cash finance costs Proceeds from derivative financial instruments 8 ( 535 ) 0 Non-cash finance income from derivative financial instruments 8 ( 205 ) 0 Stock option compensation Deferred income taxes 10 ( ) ( 880 ) Gain on fair value change of phantom options 0 ( ) Other 5 ( 31 ) Changes in assets and liabilities Trade receivables ( 629 ) ( 647 ) Trade receivables from affiliated companies ( 269 ) 0 Other assets Provisions, trade and other payables ( ) ( ) Payables due to affiliated companies 64 0 Deferred revenue ( 149 ) ( 185 ) Net cash (used in) provided by operating activities Cash flows from investing activities Purchases of property and equipment ( ) ( ) Proceeds from sale of property and equipment Acquisition of minority interests 0 ( 550 ) Net cash (used in) investing activities ( ) ( ) Cash flows from financing activities Proceeds from interest-bearing loans and borrowings from affiliated companies Excercise of stock options and notes with warrants Proceeds from interest-bearing loans and borrowings Repayments of interest-bearing loans and borrowings ( ) ( ) Interest payments ( ) ( ) Loss from extinguishment of debt (cash) ( ) 0 Repayments of finance lease liabilities ( 28 ) ( 586 ) Other 0 ( 412 ) Cash flows (used in) provided by financing activities ( ) ( ) Net decrease in cash ( ) ( ) Cash and cash equivalents as of January, Overdraft as of January, 1 ( 6 ) ( 4 ) Cash funds as of January, Cash and cash equivalents as of December, Overdraft as of December, 31 ( ) ( 6 ) Cash funds as of December, Supplemental disclosure of cash flow information Interest paid Income taxes paid

25 PrimaCom AG, Mainz Notes to the Consolidated Financial Statements All amounts are in EUR k, unless otherwise stated 1. Information on the Company PrimaCom AG ( PrimaCom or the Company ), a German stock corporation with its corporate headquarters in Mainz, An der Ochsenwiese 3, was formed on December 30, 1998, by 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. At the date of the merger, KabelMedia was renamed PrimaCom AG. KabelMedia and Süweda had been in existence since 1992 and 1983, respectively. Since KabelMedia s inception in 1992, the Company has primarily owned, operated and acquired cable television networks in Germany. On July 26, 2007, Omega I. S.à.r.l. ( Omega I ) made a voluntary public takeover bid to purchase all remaining shares of PrimaCom AG. Omega I is an indirect subsidiary of Escaline S.à. r.l. (Escaline S.à. r.l. and its subsidiaries are collectively referred to as the Escaline Group ). As of this date, the Escaline Group was the largest shareholder of PrimaCom AG, with a 25.3% shareholding. On October 22, 2007, the Company received the following notification by Escaline S.à.r.l., Luxembourg: Escaline S.à.r.l. holds since October 11, ,456,508 shares in the Company, which corresponded to an interest of % of PrimaCom s capital stock as of that date. Of these shares, 5,287,300 (corresponding to an interest of 22.35% of the Company s issued capital as of that date) are attributable to the Company s subsidiaries Escaline II S.à.r.l., Luxembourg, and Orion Cable GmbH, Augsburg, and 14,169,208 (corresponding to an interest of 59.89% of the Company's capital stock as of that date) are attributable to the Company's subsidiary Omega I S.à.r.l. On October 26, 2007, Omega I announced that as of October 23, 2007, 24:00 MESZ, the total number of shares tended for the acceptance of the bid and those already held by the Escaline Group and attributable to it amounted to 21,503,081 shares, which corresponded to an interest of 90.89% of PrimaCom s issued capital as of that date. PrimaCom AG is listed on the General Standard segment of the Frankfurt Stock Exchange. The Company s business is also described as segment reporting. On April 30, 2008, the management board approved PrimaCom AG s consolidated financial statements for presentation to the Company s supervisory board. 07_PrimaCom_IFRS a5_f_n 07_v2_en.doc 1/52 4/30/2008 6:58:30 PM

26 2. Accounting Policies 2.1 Basis of Preparation The consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments that have been measured at fair value. The consolidated financial statements are presented in euros and all values are rounded to the nearest thousand (EUR k) except when otherwise indicated. Statement of Compliance With IFRSs The consolidated financial statements of PrimaCom AG and subsidiaries ( PrimaCom Group ) have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU. Basis of Consolidation The consolidated financial statements comprise the financial statements of PrimaCom AG and its subsidiaries as of December 31, 2007 and 2006, respectively. The financial statements of the subsidiaries are prepared for the same reporting year as the parent company, using consistent accounting policies. Minority interests represent the portion of the profit or loss and net assets of a subsidiary that are not attributable to the Group. Minority interests are reported separately in the consolidated income statement and balance sheet and are reported directly in equity in the consolidated balance sheet, separately from the parent shareholders equity. Acquisitions of minority interests are accounted for using the interest theory, whereby, the difference between the consideration and the book value of the share of the net assets acquired is recognised in goodwill. All intragroup balances, transactions, income and expenses and profits and losses resulting from intragroup transactions that are recognized in assets, are eliminated in full. control. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Group obtains Going Concern The financial statements have been prepared by management 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 recorded losses for the fiscal years 2007 (EUR 59,794k) and 2006 (EUR 15,095k). 07_PrimaCom_IFRS a5_f_n 07_v2_en.doc 2/52 4/30/2008 6:58:30 PM

27 2.2 Change in Accounting Policy The accounting policies adopted are consistent with those of the prior fiscal year with the following exceptions. The following adjustments were made to disclosures in the cash flow statement to improve transparency of the Group s net assets, financial position and results of operations. The interest payments of PrimaCom Group are presented in the cash flows from financing activities. The finance costs of EUR 36,570k (prior year EUR 30,458k), comprising of cash finance costs of EUR 32,809k (prior year EUR 8,089k) and the non-cash finance cost of EUR 3,761k (prior year EUR 22,369k) are excluded from the cash flows from operating activities and the interest payments of EUR 53,444k (prior year EUR 9,684) are presented in the cash flows from financing activities. The change in the interest payables of EUR 8,243k (prior year EUR 8,137k) is excluded from the change in provisions, trade payables and other payables. The finance income from derivative financial instruments of EUR 740k (prior year EUR 936k) is not considered in the change of other assets. Borrowing costs that are capitalized within property and equipment of EUR 824k (priory year EUR 826k) are excluded from the purchases of property and equipment. In the fiscal year the Group applied the new and revised IFRSs listed below. Adoption of these revised standards and interpretations did not have any effect on the Group s net assets, financial position and results of operations, but led to additional disclosures. We also changed various disclosures in the notes to the consolidated financial statements to improve clarity. As a result, the disclosures in these consolidated financial statements may deviate from the original presentation in the prior-year consolidated financial statements. IFRS 7 Financial Instruments: Disclosures This standard requires disclosures to be made in financial statements that enable users to evaluate the significance of financial instruments for the Group s financial position and performance and the nature and extent of risks arising from financial instruments. These new disclosures are reflected in the entire set of financial statements. Adoption of this standard did not have any effect on the Group s net assets, financial position and results of operations. The relevant comparative information was adjusted. IAS 1 Presentation of financial statements ΙΑS 1.124A requires that an entity disclose information that enables users of its financial statements to evaluate the entity s objectives, policies and process for managing capital. Adoption of this standard did not have any effect on the Group s net assets, financial position and results of operations. We refer to our disclosures in the note entitled Financial Risk Management Objectives and Policies. 07_PrimaCom_IFRS a5_f_n 07_v2_en.doc 3/52 4/30/2008 6:58:30 PM

28 2.3 Significant Accounting Judgments, Estimates and Assumptions The preparation of the consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of income, expenses, assets and liabilities, and the disclosure of contingent liabilities, at the reporting date. However, uncertainty about these assumptions and estimates could result in outcomes that could require a material adjustment to the carrying amount of the asset or liability affected in the future. Judgments In applying the accounting policies, the Company has made the following judgments which have a significant effect on the amounts recognized in the consolidated financial statements. This does not consider those decisions that are based on estimates: Obligations from finance lease commitments Group as lessor: the Group has entered into lease agreements for the use of cable TV networks. When assessing these lease agreements, it was determined that the Group has substantially all of the risks and rewards incidental to ownership. Deferred tax assets are recognized to the extent that it is probable that the respective taxable income will be available. The calculation of the amount of the deferred tax assets requires the use of judgment on the part of management as regards the amount and timing of the future taxable income. As of December 31, 2007 and 2006, the Company had available in Germany a total of taxable loss carryforwards for corporate income tax of approximately EUR 586,367k and EUR 520,755k, respectively, and for trade tax of EUR 271,974k and EUR 227,773k, respectively. Under current German tax laws, these loss carryforwards have an indefinite life and may be used to offset future taxable income. Deferred tax assets have not been recognized in respect of the losses incurred, as they may not be used to offset taxable profits elsewhere in the PrimaCom Group and as they have arisen in subsidiaries that have been loss-making for some time. As a result of the restructuring of the PrimaCom Group in 2005 the Company recorded a significant gain from the extinguishment of debt including interest liabilities payable to the Company s former lenders. Because of the German regulations on minimum taxation it is not possible to immediately offset this income from earlier losses to the full extent. For this reason, a tax provision of EUR 35,241k was recognized. The Company has applied for tax exemptions for the restructuring gain. Estimates and Assumptions The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next fiscal year are discussed below. 07_PrimaCom_IFRS a5_f_n 07_v2_en.doc 4/52 4/30/2008 6:58:30 PM

29 Impairment of Non-Financial Assets The Group assesses on each balance sheet date whether there are any indications of impairment for nonfinancial assets. Goodwill and other intangible assets with indefinite useful lives are reviewed at least once a year and if impairment is indicated. Other non-financial assets are tested for impairment if there are indications that the carrying amount will exceed the net realizable value. Estimating the value in use requires management to make an estimate of the expected future cash flows from the asset or cash-generating unit and also to choose a suitable discount rate in order to calculate the present value of those cash flows. The carrying amount of goodwill was EUR 204,603k as of both December 31, 2007 and December 31, More details are given in the note entitled Impairment of Goodwill. Share-Based Payment Plan The Group measures the cost of issuing equity instruments to employees at the fair value of those instruments on the date of issue. In order to estimate fair value, an appropriate measurement approach must be determined for the issue of equity instruments; this approach must be dependent upon the conditions of issue. Furthermore, the appropriate data to be used in this measurement approach, including the anticipated option term, volatility, and dividend yield, as well as corresponding assumptions must be determined. No share-based remuneration was paid in fiscal years 2007 and Other Significant Estimation Uncertainties Further significant estimates relate to provisions, estimate of the useful lives of tangible and intangible assets, recoverability of trade receivables and deferred tax assets. 07_PrimaCom_IFRS a5_f_n 07_v2_en.doc 5/52 4/30/2008 6:58:30 PM

30 2.4 Summary of Significant Accounting Policies Property and Equipment Property and equipment is stated at cost, excluding accumulated depreciation and accumulated impairment losses. Cost includes the cost of replacing part of such property and equipment, when that cost is incurred if the recognition criteria are met. Repairs and maintenance are charged to expense during the financial period in which they are incurred. Depreciation is calculated on a straight-line basis over the useful life of the assets as follows: Level 2 cable TV networks: 8 years Level 3 cable TV networks: 20 years Level 4 cable TV networks: 12 years Equipment and fixtures: 5 to 10 years Buildings: 25 years The carrying values of property and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying value may not be recoverable. An item of property and equipment is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year the asset is derecognized. The asset s residual values, useful lives and methods are reviewed, and adjusted if appropriate, at each fiscal year-end. Borrowing Costs Borrowing costs that are directly attributable to the construction of networks are capitalized as part of cost. In 2007 and 2006, the Company capitalized EUR 824k and EUR 826k, respectively, of such borrowing costs. The capitalization rate used to determine the amount of borrowing cost was 8.90% in 2007 and 7.38% in _PrimaCom_IFRS a5_f_n 07_v2_en.doc 6/52 4/30/2008 6:58:30 PM

31 Goodwill Goodwill acquired in a business combination is initially measured at cost being the excess of the cost of the business combination over the Company s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purposes of the impairment test, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Group s cash-generating units that are expected to benefit from the synergies of the combination. This applies irrespective of whether other assets or liabilities of the Company are allocated to these cash-generating units. Each unit to which the goodwill is so allocated represents the lowest level within the Company at which the goodwill is monitored for internal management purposes and is a reportable segment determined in accordance with IAS 14 Segment Reporting. After the sale of Multikabel N.V., Alkmaar, The Netherlands on December 5, 2005, PrimaCom Group s goodwill is allocated to the cash generating unit Germany. Where goodwill forms part of a cash-generating unit and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained. Other Intangible Assets Other intangible assets acquired separately are measured on initial recognition at cost. The cost of an intangible asset acquired within the scope of a business combination is its fair value on the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and any accumulated impairment losses. The useful lives of intangible assets are assessed to be either finite or indefinite. The Company has assessed that there are no intangible assets with indefinite useful lives. Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at each fiscal year-end. Changes in the expected useful life or the expected pattern of consumption of the future economic benefits embodied in the asset are accounted for by changing the amortization period or method, as appropriate, and treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the income statement in depreciation and amortization. 07_PrimaCom_IFRS a5_f_n 07_v2_en.doc 7/52 4/30/2008 6:58:30 PM