MULTIMEDIA POLSKA S.A. Annual Report for the Year Ended 31 December 2006

Transcription

1 MULTIMEDIA POLSKA S.A. Annual Report for the Year Ended 31 December 2006

2 Dear Sirs, Please find enclosed Multimedia Polska S.A. s annual report for the year 2006, which we believe to have been a very successful year. In 2006, we became a public company, we delivered very good results and completed network upgrades to provide new and innovative technologies. We continue to model our business so as to meet the ever-increasing market expectations and always position ourselves a step ahead of our competitors. Listing on the Warsaw Stock Exchange On 13 November 2006, the shares of Multimedia Polska S.A. were first listed on the Warsaw Stock Exchange. The offering of our shares was the largest private offering in the history of the WSE and the largest offering in 2006 totalling PLN 804m. The share capital increase by way of issue of series F shares earned us proceeds of PLN 220m. In line with our earlier declarations, on 10 January 2007 we repaid PLN 100m of our senior credit facility. Proceeds of our global offering will be used as previously declared on investments into market consolidation. We have so far used the issue proceeds to acquire small and medium size operators adding approximately 39,000 revenue generating units (RGUs) to our subscriber base. In connection with the preparation of our issue prospectus and financial statements to be included in the prospectus, the Company resolved to switch to reporting in accordance with International Financial Reporting Standards (IFRS) endorsed by the European Union. This format of reporting is used by all companies listed on regulated markets in all EU member states. It is and has been our ambition to meet our disclosure obligations at the highest level, to comply with best practices and ensure full transparency of our company; however, it is primarily our ambition to create value for our shareholders. Dynamic Growth Despite considerable competitive pressure, Multimedia Polska S.A. continues to grow both its customer base and the number of services delivered to them (RGUs) was a record year in our history as far as the number of new contracts is concerned. We gained 104,700 net RGUs (RGU additions less resignations and disconnections) during the year, a growth of 18 percent. Part of this growth, approximately 13.5 thousand RGUs, was attributable to our merger with subsidiaries. Multimedia Polska S.A. continues to be successful in increasing the number of services delivered to the existing customer base. As at the end of 2006, we delivered approximately 685,000 services to 493,500 customers, which means that statistically ever customer took up more than one service (1.4 per customer on average). We are very proud that our customers appreciate our offering and the ratio of RGUs per subscriber is higher each year. Going forward, we expect that more and more of our customers will subscribe for bundled offerings. In 2006, we were as always focused on meeting our customers expectations and modelling our product offering according to their needs. Thanks to our customised product offering and professional customer care, we have managed to reduce our disconnection rates (churn) by 24 percent as compared to Financial Results We are pleased to present you with what we believe to be very good financial results for We would like to draw your attention to record PLN 128.9m adjusted EBITDA generated by the Company, up 39 percent from last year. Our adjusted EBITDA margin in 2006 was 43.0 percent. It is one of our key strategic targets to maintain this level of EBITDA margin in the coming years.

3 Innovation. New Technologies. New Projects It is and always has been our ambition to be among the leaders of innovative solutions and advanced technologies. We are pleased to say that, as at the date of this report, we have successfully rolled out digital television over cable networks. A number of value-added services will soon be available to digital TV subscribers, such as high definition TV, video-on-demand or electronic programme guide (EPG).We expect that soon the number of homes ready to receive digital cable television will reach ca. 480,000 households, mostly located in large Multimedia locations. We are considering co-operation with Polish mobile operators. We could then add another service to our triple play package mobile telephony thus becoming a mobile virtual network operator (MVNO). Introducing Wi-Max access technology will enable us to provide voice and data services in areas not yet covered by our networks. Market Consolidation We expect that within the next few years the Polish cable television market will be faced with the need to provide new technologies in order to be able to offer advanced services, such as digital television, for example. The process of market consolidation, in particular acquisition of local networks by larger operators, may be significantly accelerated as a result of those changes. We wish to be one of the leaders of those processes. Changes in the Group s Structure We continue to optimise the structure of Multimedia Polska Group in order to streamline management and further increase effectiveness and transparency of our global operations. The Group s structure was further modified after the publication of our prospectus and is currently composed of Multimedia Polska S.A. and four subsidiaries. We have benefited from most synergies following from the consolidation of the Group and we are currently in the process of finalising an operational and organisational merger with Automatic Serwis Sp. z o.o. acquired in February Andrzej Rogowski President of Multimedia Polska S.A.

4 TABLE OF CONTENTS Directors Report on the Operations of Multimedia Polska S.A Basic Information regarding Multimedia Polska S.A Information on any Significant Agreements Information on any Organisational and Capital Links of Multimedia Polska S.A Material Related-Party Transactions Information on any Contracted Loans, Borrowings or Received Sureties and Guarantees Information on any Advanced Loans and Sureties or Guarantees Issued Changes in the Composition of Managing or Supervisory Bodies in the Financial Year Agreements Concluded between Multimedia Polska S.A. and Managing Persons The value of Remuneration Paid to the Managing and Supervisory Persons Total Number of Shares of Multimedia Polska S.A. Held by the Managing and Supervisory Persons Shareholders Who Hold 5% or more of Total Vote at the General Shareholders Meeting of Multimedia Polska S.A Information on Agreements which May Cause Changes in the Percentages of Shares Held by the Existing Shareholders in the Future Identification of Holders of any Securities Conferring Special Control Powers with respect to Multimedia Polska S.A Information on the Supervision of Employee Stock Option Plans Limitations of the Transferability of the Securities of Multimedia Polska S.A. and Limitations concerning the Exercise of Voting Rights Information on Agreements Concluded by Multimedia Polska S.A. with a Qualified Auditor of Financial Statements Deposits and Equity Investments Made by Multimedia Group in the Financial Year Material Events after the Balance Sheet Date Material Risk Factors and Threats to the Business of Multimedia Polska S.A Discussion of the Financial Standing of Multimedia Polska S.A. and Major Events which Had a Significant Impact on its Operations Description of the Use of Proceeds from the Issue of Series F Shares Explanation of any Differences Between the Financial Results Disclosed in the Annual Report and the Financial Forecasts Published Earlier for the Year Financial Resources Management Capital Expenditure Factors and Non-Recurring Events which Had an Impact on 2006 Results Development Prospects for Multimedia Polska S.A. in Changes in the Key Principles of Managing Multimedia Polska S.A Foreign Exchange Rates Statement by the Management Board of Multimedia Polska S.A Financial Statements for the year ended 31 December 2006 with Independent Auditor s Opinion...33

5 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December 2006

6 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December Basic Information regarding Multimedia Polska S.A. Basic information regarding Multimedia Polska S.A. is given below: Headquarters: Gdynia, ul. Tadeusza Wendy 7/9 KRS: District Court for Gdańsk Północ VIII Economic Division of the National Court Register NIP: REGON: The Company was incorporated by virtue of Notarial Deed of 21 June 1991 as a limited liability company (spółka z ograniczoną odpowiedzialnością) and on 1 August 2005, pursuant to a ruling of the District Court for Gdansk- Północ, VIII Economic Division, it changed its legal form from a limited liability company (spółka z ograniczoną odpowiedzialnością) into a joint stock company (spółka akcyjna). The Company s term of operation is unlimited. The Company s main activity is the provision of a wide range of telecommunications services, particularly radio, television, Internet and telephony over cable television systems. 2. Information on any Significant Agreements 2.1. Polish Copyright Association ZAiKS The broadcasting of channels though our cable network is subject to, among other things, the Copyrights Act. Cable operators are allowed to retransmit copyrighted TV and radio channel content only after signing an agreement with specific copyright management organizations that hold copyrights on behalf of the artists that created the content. To comply with copyright law, we must pay the required fees to all the national copyright management organizations: the Polish Copyright Association ( ZAiKS ), the Actor s Studio ( ZASP ) and the Polish Filmmakers Association ( APF ). Our legal relationship with ZAiKS is currently governed by the 21 July 2006 license agreement. Under the license agreement with ZAiKS, we were granted a non-exclusive broadcast license for broadcasting content from the works managed by ZAiKS. For the broadcast license we pay to ZAiKS a fee calculated in accordance with a formula based on ZAiKS copyright fee grid. The agreement is of unlimited duration, but each party may terminate it with three months notice, and ZAiKS reserves the right of immediate termination, subject to conditions listed in the agreement. We settled a dispute with ZAiKS for broadcasting copyrighted content by reaching an agreement on 18 May Pursuant to the settlement, we paid ZAiKS a flat fee for broadcasting rights for the period from 1 August 2003 to 31 May Licence Agreements with Broadcasters In 2006, we concluded a number of licence agreements which grant us non-exclusive rights to broadcast selected channels over our cable networks in Poland. As provided in the agreements, we are entitled to broadcast the channels only in whole, in a simultaneous and integral way. The Company must pay licence fees to the broadcasters under the agreements concluded in 2006; the fees are payable as a lump sum or on a per subscriber basis Ducts Access Agreement On 20 January 2006, we finalised negotiations with TPSA regarding the final version of a template ducts access agreement. All hitherto binding multifaceted agreements covering single area networks were replaced by uniform agreements based on the template approved on 20 January 2006 where one agreement covers one town or city. As from 24 April 2006 all new agreements and annexes to agreements pertaining to the leasing of ducts from TPSA have been concluded on terms and conditions defined in the REFERENCE INFRASTRUCTURE ACCESS OFFER FOR CABLE DUCTS OF TELEKOMUNIKACJA POLSKA S.A. (ROI) approved by the President of the UKE. 6

7 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December Out of Court Settlement with TP S.A. On 3 August 2006, we signed a settlement agreement with TPSA concerning (i) obligations pursuant to the 30 July 2003 decision no DRT-WWM /02/03 of the President of the UKE regarding the conditions applicable to the interconnection of Multimedia Polska Mielec Sp. z o.o.'s network with the network of TPSA and the technical conditions and principles governing pricing of bilateral services, and (ii) final terms of interconnection agreements between companies of Multimedia Group and TPSA. Pursuant to the provisions of the settlement agreement concluded between Multimedia Polska S.A. and Telekomunikacja Polska S.A., Multimedia Polska S.A. entered into an interconnection agreement with TPSA on 8 August The agreement sets forth the terms and conditions of cooperation between the parties in respect of the interconnection of Multimedia s public switched telephone network and TPSA s public switched telephone network in order to provide telecommunications services; it also sets forth the technical details and conditions of the interconnection and maintenance of the interconnection point as well as details of charges and tariffs. 3. Information on any Organisational and Capital Links of Multimedia Polska S.A. Multimedia Polska S.A. is the parent company of Multimedia Group. It holds a 100% interest in the share capital of all its subsidiaries except Tele Top Grupa Multimedia Polska Sp. z o.o., where the Company has a 99.90% interest. There are also other organisational links between Multimedia Polska S.A. and its related entities, e.g. management agreements (does not apply to Tele Top Grupa Multimedia Polska Sp. z o.o. where there is no such agreement). The Management Board of Multimedia Polska S.A. acts as management of the subordinated entities as well. 4. Material Related-Party Transactions 4.1. Prepayment of Bond by Issuer On 11 July 2006, the Company acquired a senior bond (the Bond ) issued by one of its shareholders Tri Media Holdings Limited for a total consideration of PLN 91.9m. The face amount of the Bond was PLN 93.8m. Interest at the rate of 3 months WIBOR plus a margin of 1% per annum accrued on the face amount of the Bond. The Bond was subject to mandatory prepayment in the event of the listing of the Company s shares. When the shares were listed, Tri Media Holdings Limited prepaid the entire face amount of the Bond with interest accrued thereon in the amount of PLN 95.4m on 10 November Repayment of Advance Payment made by the Company on Account of Voluntary Redemption Consideration On 11 July 2006, the Company entered into a preliminary agreement with one of its shareholders ABN AMRO Ventures B.V. regarding the acquisition by the Company of 8,245,623 of its own shares for redemption. In connection with the Company s obligations to acquire the shares from ABN AMRO Ventures B.V., the Company paid ABN AMRO the amount of PLN 6,095,600 as an advance payment on account of any future voluntary redemption consideration. ABN AMRO Ventures B.V. agreed to return the advance payment to the Company together with interest accruing at the rate of 3 months WIBOR plus a margin of 1% per annum in the event ABN AMRO Ventures B.V. shall sell all the shares of Multimedia Polska S.A. in the Public Offering. In November 2006, ABN AMRO Ventures B.V. returned to the Company the amount of PLN 6,095,600 together with interest accrued, hence fulfilling the conditions of the agreement entered into on 11 July Agreements on Business Management and Advisory Services On 3 July 2006, Multimedia Polska S.A. concluded agreements with its subsidiaries operating in the telecommunications sector, providing for business management and business management advisory services as well as the provision of business administration services. Under each of the agreements Multimedia Polska S.A. undertook separately with respect to each subsidiary to provide against payment and on the terms detailed in the agreements services consisting in the management of a part of an enterprise as defined in Art. 7 of the Commercial Companies Code and to advise the companies with respect to business management and telecom network operation. The agreements were concluded for indefinite terms and may be terminated at a six months notice. Multimedia Polska S.A. undertook with respect to each subsidiary to bear the entire responsibility for any of its actions or omissions which constitute a breach of the agreement. Should any loss be caused to any of the subsidiaries, Multimedia Polska S.A. will be obliged to cover its full amount. 7

8 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December 2006 The monthly fees payable to Multimedia Polska S.A. for the provision of services connected with the management of a part of an enterprise, business management advisory services and telecom network operation services by each subsidiary are as follows: Subsidiary Remuneration to Multimedia Polska S.A. (PLN) Multimedia Polska Zachód Sp. z o.o. 470,000 Multimedia Polska Południe S.A. 280,000 Multimedia Polska Mielec Sp. z o.o. 238,000 Multimedia Polska Konin S.A. 103,000 Multimedia Polska Wschód S.A. 227,000 Multimedia Polska Dębica S.A. 358,000 Multimedia Polska Brzesko S.A. 270,000 * The monthly fees payable to Multimedia Polska S.A. are subject to monthly review based on actual costs incurred by Multimedia Polska S.A. in connection with the provision of the services in the period. The costs comprise only costs recorded in the books of account of Multimedia Polska S.A. attributable accordingly to each subsidiary Loan Agreements Concluded by Multimedia Polska S.A. In the reporting period, from 1 January 2006 to 31 December 2006, the Company concluded seven loan agreements for a total of PLN 17,500,000 to finance ongoing operations. Each of the loans bears interest at 1M WIBOR quoted on the first day of a given month plus a margin of 1.7% per annum. The loans were granted for the period of one year from the respective dates of the agreements, but each time the borrower has the right to prepay the loans. Parties Lender MMP Południe S.A. (before the merger MMP Dębica S.A.)* MMP Południe S.A. (before the merger MMP Konin S.A.)* MMP Południe S.A. (before the merger MMP Brzesko S.A.)* MMP Południe S.A. (before the merger MMP Wschód S.A.)* MMP Południe S.A. (before the merger MMP Dębica S.A.)* MMP Południe S.A. (before the merger MMP Wschód S.A.)* MMP Południe S.A. (before the merger MMP Brzesko S.A.)* Value Maturity Borrower Date Multimedia Polska S.A. 3,000, Multimedia Polska S.A. 2,000, Multimedia Polska S.A. 1,500, Multimedia Polska S.A. 5,000, Multimedia Polska S.A. 2,000, Multimedia Polska S.A. 2,000, Multimedia Polska S.A. 2,000, * The Companies were merged pursuant to the decision of the District Court for Gdansk-Polnoc, VIII Economic Division of the National Court Register, issued on 27 December Information on any Contracted Loans, Borrowings or Received Sureties and Guarantees 5.1. Senior Credit Facility Agreement for PLN 550,000,000 Multimedia Polska S.A. as the borrower, and Tele Top Grupa Multimedia Polska Sp. z o.o., Multimedia Polska Mielec Sp. z o.o., Multimedia Polska Zachod Sp. z. o.o. and Multimedia Polska Poludnie S.A., as guarantors, entered on 7 September 2005 into a senior credit facility agreement. The Lenders are ABN AMRO Bank and Bank BPH S.A. (as Original Lenders) together with Bank Millenium S.A., Calyon S.A. (branch in Poland) and BNP Paribas (branch in Poland). The agreement was subsequently restated and amended twice: (i) by an amendment agreement dated 27 December 2005 and (ii) by an amendment agreement dated 20 June The senior credit facility consists of three tranches: (i) tranche A of up to PLN 320,000,000; (ii) tranche B of up to PLN 130,000,000; and (iii) tranche C of up to PLN 100,000,000. The senior credit facility provides for the following security: (i) a transfer of receivables to which the Company and the guarantors are entitled under the insurance agreements as well as insurance policies issued on their basis, (ii) 8

9 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December 2006 a registered pledge over the pool of all present and future assets, rights and claims each time in the possession of both the Company and the guarantors (except for rights and claims under insurance agreements and bank account agreements); in accordance with the amendment agreements referred to above, the maximum amount of security was increased to PLN 825,000,000 and was entered into the pledge register based on court decisions announced on 10 October 2006, (iii) a registered pledge on the Company s and the guarantors rights and claims under certain bank accounts. In addition, on 22 December 2006, the Company made an appropriate declaration before notary public Hanna Warońska of the Notary Public s Office in Gdynia declaring that a joined capped mortgage on the Company s real property and rights equivalent to real property had been established for the benefit of the Lenders to secure all present and future rights and claims under the senior credit facility. On 10 January 2007, the Company repaid PLN 100,000,000 of the credit facility Overdraft Facility The Company is a party to an agreement with Bank BPH S.A., Corporate Centre in Krakow, concluded on 29 January 2002 (as amended) under which an overdraft facility was made available to the Company on 25 May 2002 in the amount of up to PLN 8,000,000. The facility bears interest at a floating rate equal to WIBOR for 1 month deposits increased by a margin of 1.5%. The Company is required to pay the bank commission charge of 0.15% per month of the amount of the unutilized facility. The overdraft is secured by (i) transfer of the ownership of the cable television network in Darlowo and Przasnysz together with certain studio equipment valued at PLN 6,700,000 (as of valuation made on 25 May 2006), (ii) capped mortgages on real property located in Malbork and identified in the Land and Mortgage Register No , maintained by the District Court of Malbork, (iii) capped mortgage on the share in perpetual usufruct and the ownership of a building constituting separate real property amounting to 6544/10,000 parts of the real estate located in Gdynia, identified in the Land and Mortgage Register No , (iv) capped mortgage on the real property located in Plock, identified in the Land and Mortgage Register No (v) assignment of rights from insurance policies relating to the encumbered real property and transferred television networks, (vi) a blank promissory note together with a declaration, (vii) a power of attorney on all accounts held at the bank, and (viii) a declaration on submission to enforcement of judgment up to the amount of PLN 16,000,000. The agreement was not renewed by the Company, and it expired on 25 May Loans Granted to Multimedia Polska S.A. In the reporting period, from 1 January 2006 to 31 December 2006, the Company concluded seven loan agreements for a total of PLN 17,500,000 to finance ongoing operations. Each of the loans bears interest at 1M WIBOR quoted on the first day of a given month plus a margin of 1.7% per annum. The loans were granted for the period of one year from the respective dates of the agreements, but each time the borrower has the right to prepay the loans. A detailed presentation of loans advanced to Multimedia Polska S.A. is given in the table in point 4.4 above. 6. Information on any Advanced Loans and Sureties or Guarantees Issued During the reporting period, the Company advanced a PLN 5, employee loan on 18 August 2006, which matures on 31 May The Company did not issue any sureties or guarantees. 7. Changes in the Composition of Managing or Supervisory Bodies in the Financial Year 7.1. Management Board of Multimedia Polska S.A Composition of the Management Board The Management Board of Multimedia Polska S.A. was composed of two persons throughout the reporting period: Name Andrzej Rogowski Arkadiusz Dorynek Position President Vice President 9

10 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December Principles Governing the Appointment and Dismissal of Management Board Members The Management Board of the Company is composed of two to four members, including the President of the Management Board, appointed and dismissed by the Supervisory Board. Management Board members are appointed for a joint two-year term of office. The mandates of the Management Board members expire on the date of the General Meeting of Shareholders convened to approve the financial statements for the last full financial year of their membership on the Management Board. It is permissible to re-appoint the same persons as members of the Management Board for further terms of office Powers of the Management Board The Management Board manages the Company s affairs and represents the Company vis-à-vis third parties. The following persons are authorised to make declarations of intent: (i) the President of the Management Board acting jointly with another member of the Management Board or with a holder of commercial proxy, or (ii) two members of the Management Board acting jointly. As set forth in the Company s Statutes, the following actions taken by the Management Board require the consent of the Supervisory Board: (i) (ii) (iii) (iv) (v) (vi) acquisition, in one or several related transactions, of an enterprise or an organized part of an enterprise, or assets of another enterprise if the value of such assets exceeds the equivalent of EUR 500,000, acquisition or sale of real property (including the right of perpetual usufruct) or an interest in such real property, sale, lease, grant for use by another person, or encumbering with rights in property or obligations of the Company's assets with the unit net book value exceeding the equivalent of EUR 500,000, except for any agreements or actions specifically provided for in the annual business plan and the budget approved by the Supervisory Board, subscription for or acquisition of shares in another company or disposal of shares owned by the Company, except for any agreements or actions specifically provided for in the annual business plan and the budget approved by the Supervisory Board, taking out a loan or credit or assuming any other financial obligation whose unit net book value exceeds the equivalent of EUR 500,000 or whose total value in the financial year exceeds the equivalent of EUR 1,000,000, except for any financial obligations specifically provided for in the annual business plan and the budget approved by the Supervisory Board, and entering into an agreement or conducting a unilateral act in law providing for the fulfilment by the Company of a pecuniary or non-pecuniary performance with the value exceeding EUR 250,000, or resulting in the Company assuming an obligation with the term of validity exceeding 2 years, except for any agreements or actions specifically provided for in the annual business plan and the budget approved by the Supervisory Board. The President of the Management Board manages the work of the Management Board and convenes its meetings. The Management Board meetings are chaired by the President of the Management Board, and in his absence by a member of the Management Board appointed by the President. Resolutions of the Management Board may be adopted if all members of the Management Board have been duly notified of the Board meeting, and at least half of the members of the Management Board are present at the meeting. Resolutions of the Management Board are passed by a simple majority of votes cast. In the event of a voting tie, the President of the Management Board has the casting vote. Resolutions of the Management Board may also be passed in written ballot without holding a meeting if all members of the Management Board express their consent to such voting. The managing persons do not have the power to adopt any decisions concerning the issue or repurchase of the Company s shares Supervisory Board of Multimedia Polska S.A. On 1 January 2006, the Supervisory Board was composed of the following persons: Name Ygal Ozechov Tomek Ulatowski Machiel Papousek Zbigniew Piotrowski Anthony Doran Position Chairman of the Supervisory Board Vice Chairman of the Supervisory Board Member of the Supervisory Board Member of the Supervisory Board Member of the Supervisory Board 10

11 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December 2006 On 22 May 2006, the shareholder ABN AMRO Ventures B.V. exercised its rights granted to it by the Statutes and recalled Mr Machiel Papousek from the Supervisory Board while appointing Mr Vikram Pant. On 30 May 2006, Member of the Supervisory Board Mr Zbigniew Piotrowski passed away. On 29 June 2006, the Extraordinary General Meeting appointed Mr Konrad Jaskóła as member of the Supervisory Board. On 28 July 2006, Mr Anthony Doran resigned from his post as Supervisory Board Member. On the same day, Mr Gabriel Wujek was appointed to the Supervisory Board by the Extraordinary General Meeting. As at the balance sheet date, 31 December 2006, the Supervisory Board was composed of the following persons: Name Ygal Ozechov Tomek Ulatowski Vikram Pant Konrad Jaskóła Gabriel Wujek Position Co-Chairman of the Supervisory Board Co-Chairman of the Supervisory Board Member of the Supervisory Board Member of the Supervisory Board Member of the Supervisory Board 8. Agreements Concluded between Multimedia Polska S.A. and Managing Persons The Management Board members represent that there are no contracts or agreements between the Company and the Management Board members other than (i) an executive service agreement between the Company and Mr Andrzej Rogowski and (ii) an employment agreement between the Company and Mr Arkadiusz Dorynek. Both the executive service agreement and the employment agreement provide for a 12 month severance pay in case of their termination by the Company. 9. The value of Remuneration Paid to the Managing and Supervisory Persons 9.1. Remuneration Paid and Payable to Managing Persons The table below presents remuneration and benefits paid to members of the Management Board in 2006: Name of Management Board Member Remuneration received from Multimedia Polska S.A. (in PLN) Andrzej Rogowski 1,749,140 Arkadiusz Dorynek 950,000 TOTAL 2,699, Remuneration Paid and Payable to Supervisory Persons Members of the Company s Supervisory Board receive monthly compensation based on a resolution of the General Meeting of 28 July The remuneration payable to each member of the Board in 2006 is presented in the table below. Name of Supervisory Board Member Remuneration payable (in PLN) Ygal Ozechov 20,000 Tomek Ulatowski 20,000 Vikram Pant 20,000 Konrad Jaskóła 20,000 Gabriel Wujek 20,000 Machiel Papousek 0 Zbigniew Piotrowski 0 Anthony Doran 0 TOTAL 100,000 The amounts shown above had not been paid out by the Company as at 31 December

12 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December 2006 Neither the managing persons nor the supervisory persons receive any additional remuneration for their membership on the governing bodies of the subsidiaries. 10. Total Number of Shares of Multimedia Polska S.A. Held by the Managing and Supervisory Persons Management Board of Multimedia Polska S.A. The information provided below regarding the number of shares held by the Management Board members is based on information provided by them in accordance with Art of the Act on trading in financial instruments. Name As at 1 January 2006 As at 31 December 2006 As at 11 June 2007 Andrzej Rogowski 1,451,270 1,485,585* 1,485,585* President Arkadiusz Dorynek Vice President * Includes 670,870 shares held indirectly through a subsidiary, Kalberri Limited. Mr Andrzej Rogowski disposed of 636,555 of the Company s shares in the Global Offering between 20 October 2006 and 8 November The Company is not aware of any other member of the Management Board holding shares of Multimedia Polska S.A. The Company has not received any information from any Management Board member regarding any acquisition of such shares in accordance with Art of the Act on trading in financial instruments Supervisory Board of Multimedia Polska S.A. The Company is not aware of any member of the Supervisory Board holding shares of Multimedia Polska S.A. or shares of any other company of Multimedia Polska Group. The Company has not received any information from any Supervisory Board member regarding any acquisition of shares in accordance with Art of the Act on trading in financial instruments. 11. Shareholders Who Hold 5% or more of Total Vote at the General Shareholders Meeting of Multimedia Polska S.A. As at 1 January 2006, the Company s share capital amounted to PLN 104,042,374 and was divided into 104,042,374 shares carrying the same amount of votes at General Shareholders Meetings. The following shareholders held 5% or more of total vote at the Company s general shareholders meeting: Shareholder Number of shares held Number of votes at the General Shareholders Meeting Percentage of votes at the General Shareholders Meeting Percentage held in share capital UNP Holdings B.V. 56,918,539 56,918, % 54.71% Tri Media Holdings Ltd 35,642,372 35,642, % 34.26% ABN AMRO Ventures B.V. 8,515,943 8,515, % 8.19% On 24 January 2006, the Company s share capital was increased to PLN 136,912,273 by way of an issue of 32,869,899 registered ordinary series E shares. The shares were acquired by a shareholder, Emerita B.V. with its registered office in the Netherlands. 12

13 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December 2006 As a result of the above-mentioned share capital increase and disposal of shares by some of the Company s shareholders as at 20 October 2006, the date of publication of the Company s prospectus, the share capital ownership structure was as follows: Shareholder Number of shares held Number of votes at the General Shareholders Meeting Percentage of votes at the General Shareholders Meeting Nominal value of shares held (in PLN) Percentage held in share capital Tri Media Holdings 63,539,031 63,539, % 63,539, % Limited (1)(2) UNP Holdings B.V. (1) 45,439,617 45,439, % 45,439, % Emerita B.V. (1) 15,781,292 15,781, % 15,781, % ABN AMRO Ventures 8,515,943 8,515, % 8,515, % B.V. Other shareholders 3,636,390 3,636, % 3,636, % TOTAL 136,912, ,912, % 136,912, % (1) Entities directly or indirectly controlled by EVL. (2) 2,765,628 shares are held indirectly through Biscoden Trading & Investments Limited, a subsidiary of Tri Media Holdings. In the Global Offering, which took place between 20 October 2006 and 8 November 2006, the selling shareholder, Tri Media Holdings Limited, disposed of 36,593,290 of the Company s shares and upon settlement of the transaction was the holder of 26,945,741 shares in Multimedia Polska S.A. Also during the Global Offering, the Company s shareholder ABN AMRO Ventures B.V. disposed of all its shares in the Company (8,515,943). On 10 November 2006, in connection with all conditions stipulated in the Company s Statutes being satisfied regarding automatic redemption of 1 series B share with a nominal value of PLN 1.00, the Management Board of Multimedia Polska S.A. adopted a resolution redeeming the share for a consideration of PLN 1.43, determined in compliance with 10.2 of the Company s Statutes, while decreasing the share capital by PLN 1.00 to PLN 136,912,272. On 10 November 2006, pursuant to a resolution adopted by the Extraordinary General Shareholders Meeting on 17 August 2006 authorising the Management Board of Multimedia Polska S.A. to increase the Company s share capital by an amount between PLN 1 and PLN 44,087,728 by way of an issue of between 1 and 44,087,728 ordinary registered series F shares with a nominal value of PLN 1.00 each and in connection with the Company s public offering, which resulted in subscriptions for 20,787,728 series F shares, the Management Board of Multimedia Polska S.A. made a declaration to increase the Company s share capital by PLN 20,787,728 by way of an issue of 20,787,728 series F shares. The issue was registered on 11 December 2006 by the District Court for Gdansk-Północ, VIII Economic Division of the National Court Register. On 14 November 2006, the Management Board of Multimedia Polska S.A. was notified by Bank BPH S.A., acting on behalf of Bank Austria Creditanstalt AG with its registered office in Vordere Zollamtstrasse 13 in Vien, Austria ( BACA ) in accordance with Art. 69 of the Act on Public Offering that 13,006,762 ordinary shares ( Shares ) of Multimedia Polska S.A. ( Company ) constituting 9.5% of the Company s share capital and carrying 13,006,762 (9.5%) of total voting rights exercisable at general meetings of the Company and 6,897,503 series F rights to shares (RTSs) were deposited in the securities account held by Bank BPH S.A. for BACA as of 10 November Following the disposal by BACA of a block of its shares in the Company and as a result of registration by the court of the Company s share capital increase made by way of an issue of series F shares and the registration of the shares by the National Depository for Securities (KDPW S.A.), the number of shares held by BACA as at the date of notification to the Company of the share disposal represented a 1.08% shareholding in the Company carrying (1.08%) of total voting rights exercisable at general meetings. 13

14 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December 2006 The Company s shareholding structure, particularly with respect to shareholders holding 5% or more votes at general meetings, as at 31 December 2006 and as at the date of this report was as follows: Shareholder Number of shares held Number of votes at the General Shareholders Meeting Percentage of votes at the General Shareholders Meeting Percentage held in share capital UNP Holdings B.V. ( 1 ) 45,439,617 45,439, % 28.81% Tri Media Holdings Ltd 26,945,741 26,945, % 17.09% ( 1 )( 2 ) Emerita B.V. ( 1 ) 15,781,292 15,781, % 10.00% Other shareholders 69,533,350 69,533, % 44.09% TOTAL 157,700, ,700, % % (1) Entities directly or indirectly controlled by EVL. (2) 2,765,628 shares are held indirectly through Biscoden Trading & Investments Limited, a subsidiary of Tri Media Holdings. Information provided above is prepared based on information provided by the Company s shareholders, as well as current reports submitted to the Warsaw Stock Exchange, which reflect all information provided by the shareholders in accordance with Art of the Act on public offering and the terms for introduction of financial instruments to organised trading and on public companies. 12. Information on Agreements which May Cause Changes in the Percentages of Shares Held by the Existing Shareholders in the Future The Company is not aware of any agreements which may cause changes in the percentages of shares held by the existing shareholders in the future. 13. Identification of Holders of any Securities Conferring Special Control Powers with respect to Multimedia Polska S.A. In accordance with the Commercial Companies Code and the Company s Statutes, the following special powers were attached to Shares held by the Company s shareholders Division of the Company's Assets in the Case of its Liquidation In compliance with 6.3 and 8 of the Statutes, series C registered shares were preference shares as regards the division of the Company's assets in the case of its liquidation; however, in compliance with 6.3 of the Statutes, the provisions of the Statutes on the preference character of series C registered shares as regards the division of assets ceased to exist on 19 September 2006, that is at the moment of exchange of series C registered shares into bearer shares pursuant to 7.2 of the Statutes at the request of ABN AMRO Ventures. The provisions discussed above were deleted from the Company s Statutes pursuant to Resolution no 5 of the Extraordinary General Meeting dated 5 February 2007 on amendments to the Company s Statutes and the decision of the District Court for Gdańsk Północ of Gdańsk, VIII Economic Division of the National Court Register registering the above-mentioned amendments, issued on 26 March Personal Rights of ABN AMRO The Company s Statutes effective until 26 March 2007 provided that during the period when ABN AMRO Ventures B.V. was the owner of the series B registered share, however not beyond the date on which the shares constituting no less than 6.22% of the total number of shares of the Company would be purchased in the public offering of the Company s shares, the prior written consent of ABN AMRO Ventures B.V. was required to adopt resolutions of the General Meeting in the following matters: a) amendments to the Statutes of the Company, b) change of the object of the Company's business; the object of the Company s business could be changed without buyout of the shares. A resolution in this respect shall require for its validity the majority of 2/3 of votes cast, with the presence of shareholders representing at least one half of the share capital, and for as long as ABN AMRO Ventures B.V. enjoyed the personal rights set out above, c) increase of the share capital of the Company, if the right of pre-emption of shares of a given issue was excluded in relation to ABN AMRO Ventures B.V. or if as a result of coverage of new issue shares by inkind contribution the financial debt of the Company were to exceed the amount of PLN 450,000,000 or 14

15 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December 2006 the amount being the product of the co-efficient 3.5 (three and a half) and the EBITDA, whichever is higher. EBITDA was computed with respect to the financial year covered by the last financial statement executed, positively opined by a certified auditor and approved by the General Meeting of Shareholders. The Company s Management Board was obliged to ensure that EBITDA was calculated each time by a certified auditor in his report from the review of the financial statements for each financial year, d) conducting issue of securities other than the shares, or redemption of shares, that could result (at the time of performance or in the future) in the reduction of the percentage share of ABN AMRO Ventures B.V. in the share capital of the Company, or the percentage of voting rights to which ABN AMRO Ventures B.V. was entitled or in the reduction of the shareholders' rights to which ABN AMRO Ventures B.V. was entitled, e) winding up and liquidation of the Company, f) sale of the enterprise of the Company or its substantial part (i.e. assets constituting at least 25% of the net balance sheet value of the assets of the Company). The same Statutes also provided that one member of the Supervisory Board was to be appointed and dismissed by ABN AMRO Ventures. If ABN AMRO Ventures did not exercise its right to appoint one member of the Supervisory Board within 45 days of the commencement of the new term of office or of the expiry, for any reason whatsoever, of the mandate of the member of the Supervisory Board appointed by ABN AMRO Ventures, the member of the Supervisory Board was to be appointed by the General Meeting of Shareholders. This special right enjoyed by ABN AMRO Ventures was to expire upon the occurrence of one of the events stipulated in 10.3 of the Statutes; however, in no case later than on the day on which the shares constituting no less than 6.22% of the total number of Shares of the Company were purchased in the Public Offering. Notwithstanding the provisions discussed above, for as long as ABN AMRO Ventures was entitled to appoint one member of the Supervisory Board, however in no case beyond the date on which the Shares constituting no less than 6.22% of the total number of Shares of the Company would be purchased in the Public Offering, the adoption of resolutions regarding the matters listed below required voting for the adoption of such resolution by a member of the Supervisory Board appointed by ABN AMRO Ventures: (i) appointment or change of an expert auditor if the expert auditor was not one of the following renown international auditors (Delloite& Touche, Ernst & Young, KPMG or PricewaterhouseCoopers), (ii) change of accounting standards applied by the Company, (iii) contracting any financial obligations exceeding the amount of PLN 450,000,000 or the product of the coefficient 3.5 and the amount of EBITDA, whichever was higher; and concluding any substantial agreements with employees, executives, direct or indirect shareholders, and their family members, as well as with entities dominant in relation to shareholders or related to shareholders, where the unit value of performance exceeded the equivalent of the amount of EUR 250,000 or where the total value of performance on an annual basis exceeded the equivalent of EUR 1,000,000. The provisions discussed above were deleted from the Company s Statutes pursuant to Resolution no 5 of the Extraordinary General Meeting dated 5 February 2007 on amendments to the Company s Statutes and the decision of the District Court for Gdańsk Północ of Gdańsk, VIII Economic Division of the National Court Register registering the above-mentioned amendments, issued on 26 March Information on the Supervision of Employee Stock Option Plans The Company does not have any employee stock option plan. 15. Limitations of the Transferability of the Securities of Multimedia Polska S.A. and Limitations concerning the Exercise of Voting Rights Obligations of the Company The Company has agreed not to directly or indirectly offer, sell, contract to sell, or exercise any option to sell, purchase any option or contract to sell, grant any option, right or warrant to purchase, pledge, lend or otherwise transfer or dispose of any shares of Multimedia Polska S.A. or any securities convertible into or exercisable or exchangeable for or representing interests in the shares during the period of 180 days from the date of the first day of trading of the shares on the Warsaw Stock Exchange, i.e. until 13 May The Company has also agreed not to issue any shares during this period, without the prior consent of CA IB Securities S.A. and UBS Limited. 15

16 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December Limitations concerning the Transfer of Registered Shares The Company s Statutes effective until 26 March 2007 provided for certain limitations concerning the transfer of registered Shares and provided rules of procedure for the transfer of shares. A shareholder holding registered Shares, who intended to transfer part or all of such shares (the Transferring Shareholder ) to any other person was obliged to file with the Company a written request for its consent (the Request ), indicating in the Request a potential purchaser of Shares, the number of Shares subject to transfer (the Transferred Shares ), the price (or the value of the Transferred Shares as agreed upon with the potential purchaser in the case of transactions other than sale) and terms of payment of the price. If the consent for transfer of the Transferred Shares was refused, the Management Board of the Company was obliged to nominate a purchaser of the Transferred Shares within 60 days of the date of receipt of the Request. The Management Board nominated, in the first place, TRI-MEDIA HOLDINGS as the purchaser of the Transferred Shares. If TRI-MEDIA HOLDINGS did not give its consent within 7 (seven) days of the receipt of the notification from the Company indicating TRI-MEDIA HOLDINGS as the purchaser of the Transferred Shares, the Company subsequently indicated ABN AMRO Ventures BV. The purchase price of the Transferred Shares was equal to the price (value) of the Transferred Shares agreed between the Transferring Shareholder and the potential purchaser as stated in the Request. The Transferring Shareholder and the person indicated by the Company were obliged to enter into an agreement on the sale of the Transferred Shares, within 30 days of the date on which the indication of the purchaser had been made. The transfer of title to the Transferred Shares was to be made on the date of the execution of the sale agreement following the payment of the price by the purchaser to the Transferring Shareholder in lump sum. If the sale of the Transferred Shares depended on the receipt of any consent or approval from governmental administrative authorities (including European Union authorities) or self-governmental authorities, the above term was in such a case extended by the time necessary to obtain such consents or approvals. If the sale agreement was not entered into or executed during the above-mentioned thirty day term for the reasons on the part of the purchaser indicated by the Company, or if the Company did not indicate the purchaser within 60 days of the receipt of the Request, the Transferring Shareholder had the right to transfer the Transferred Shares to the purchaser indicated in the Request under the terms and conditions which were not to be more favourable for such purchaser than those indicated in the Request. The transfer of the registered Shares in breach of the provisions of the Statutes were ineffective towards the Company, and the purchaser of such shares was not entitled to exercise any rights attached to the registered Shares of the given series. In addition, such event was treated as an event triggering automatic redemption of registered Shares held by ABN AMRO Ventures. The limitations concerning the transfer of registered Shares described above did not apply if series C registered Shares were transferred to the entities towards which ABN AMRO Bank was the dominant entity, provided, however, that the purchaser was not permitted to conduct, directly or indirectly, any activities competitive to the Company in or outside of Poland. However, as set forth in 10.3 (i) of the Statutes regarding automatic redemption of Shares, the establishment by UNP Holdings B.V. or related entities of usufruct rights over the Shares or utilisation by UNP Holdings B.V. or related entities of the institution of trust were among the events triggering automatic redemption of series C registered Shares held by ABN AMRO Ventures. The provisions of the Statutes pertaining to the automatic redemption of series C registered Shares ceased to be binding on 19 September 2006 when series C registered shares were converted into bearer Shares at the request of ABN AMRO Ventures in compliance with 7.2 of the Statutes. The provisions discussed above were deleted from the Company s Statutes pursuant to Resolution no 5 of the Extraordinary General Meeting dated 5 February 2007 on amendments to the Company s Statutes and the decision of the District Court for Gdańsk Północ of Gdańsk, VIII Economic Division of the National Court Register registering the above-mentioned amendments, issued on 26 March The Statutes do not set forth any limitations concerning the Shares being pledged or encumbered with usufruct rights. The Statutes do not contain any clauses preventing any pledgee or usufructary of Shares from being granted voting rights, and the granting of such rights is not subject to any consent from any of the Company s governing bodies Conversion of Registered Shares into Bearer Shares As provided for in 7.2 of the Statutes, registered Shares may be at any time converted into bearer Shares at their holder s request. Bearer shares may not be converted into registered shares. As at the balance sheet date and the date of this report, all the Company s shares are bearer shares. 16

17 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December 2006 Apart from the instances described above, the Company s corporate documents do not contain any regulations that would significantly restrict any change of control of the Company resulting from an acquisition of a significant block of shares by any third persons. Each share of Multimedia Polska S.A. carries one vote at the General Shareholders Meeting. There are no restrictions on exercising the voting rights attached to the shares. 16. Information on Agreements Concluded by Multimedia Polska S.A. with a Qualified Auditor of Financial Statements On 28 November 2006, the Management Board signed an agreement with Ernst & Young Audit Sp. z o.o. with its registered office in Warsaw under which the auditors will audit the following statements: 1) standalone financial statements for the year ended 31 December 2006; 2) consolidated financial statements for the year ended 31 December 2006; 3) standalone financial statements for the year ended 31 December 2007; 4) consolidated financial statements of the Client for the year ended 31 December 2007; and perform a limited review of the following: 5) standalone financial statements for the six months ended 30 June 2007; 6) consolidated financial statements for the six months ended 30 June The total consideration paid or payable to the certified auditors under the agreement in connection with the audit and review of the financial statements and other services is presented in the table below. Object Audit/review of standalone and consolidated annual/interim financial statements and other services Agreement regarding audit of 2006 and H statements Consideration (PLN) Agreement regarding audit of 2005 and H statements 410, ,000* * The breakdown of consideration for 2005 is provided below: PLN 290,000 audit of the standalone and consolidated financial statements for the year ended 31 December 2005; and the performance of certain agreed-upon procedures to verify the calculation of EBITDA and net value for the four quarters ended 30 September 2005 and the year ended 31 December 2005; PLN 500,000 audit of the consolidated financial statements in accordance with IFRS for the years 2003, 2004 and 2005 in accordance with the Polish and international standards on auditing; verification of the procedures applied by the Company in the preparation of pro-forma consolidated financial statements in accordance with IFRS for the year ended 31 December 2005 and issuance of an independent auditor s opinion; comparison of information included in the Company s prospectus with information contained in the financial statements published as part of the prospectus; and review of the interim consolidated financial statements for the six months ended 30 June 2006; and PLN 150,000 other work performed in connection with the preparation of issue prospectus. 17. Deposits and Equity Investments Made by Multimedia Group in the Financial Year Acquisition of a Bond On 11 July 2006, the Company acquired a senior bond (the Bond ) issued by one of its shareholders Tri Media Holdings Limited for a total consideration of PLN 91.9m. The face amount of the Bond was PLN 93.8m. Interest at the rate of 3 months WIBOR plus a margin of 1% per annum accrued on the face amount of the Bond. The interest was due and payable on the Maturity Date, 30 June 2011, or at the time of any mandatory or voluntary prepayment of the Bond. The Bond was subject to mandatory prepayment in the event of the listing of the Company s Shares. As the Shares were sold in a public offering, the condition for mandatory prepayment of the Bond by its Issuer was satisfied. The Bond was prepaid on 10 November 2006 for the total consideration of PLN 95.4m, i.e. the Bond s face amount plus interest accrued thereon Equity Investments It is and has been the Company s policy to maintain a certain level of cash flows to finance the Company s current liabilities. Any surplus cash is placed on deposit accounts. As at 31 December 2006, the Company had bank deposits totalling PLN 230,000,

18 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December Material Events after the Balance Sheet Date Information on Agreements Significant to Multimedia Polska S.A Ducts Access Agreement On 1 January 2007, all hitherto binding ducts access agreements with TPSA previously concluded between January and April 2006, were re-entered on new terms and conditions defined in the REFERENCE INFRASTRUCTURE ACCESS OFFER FOR CABLE DUCTS OF TELEKOMUNIKACJA POLSKA S.A. (ROI) Acquisition of Automatic Serwis Sp. z o.o. On 19 February 2007, Multimedia Polska S.A. acquired 100% shares of Automatic Serwis Sp. z o.o. with its registered office in Brodnica. The acquisition was a realisation of one of the purposes of the public offering and an important element of the Company s strategy set forth in the prospectus, which includes active participation in the consolidation of cable television operators through mergers and acquisitions. The cable networks acquired in the transaction with Automatic Serwis Sp. z o.o. cover approximately 40,000 homes passed, 31,000 cable television subscribers and 7,300 Internet subscribers. The networks have been largely upgraded to provide Internet services and will not require any significant capital expenditure. As the acquired networks are in the proximity of MMP s locations, their integration with the networks of Multimedia Polska S.A. may be completed in under a year Indirect Change of Control over Telewizja Kablowa Brodnica Sp. z o.o. As a result of the acquisition of Automatic Serwis Sp. z o.o., Multimedia Polska Group indirectly acquired another entity Telewizja Kablowa Brodnica Sp. z o.o. with its registered office in Brodnica in which Automatic Serwis Sp. z o.o. had a controlling interest of 94.12% and the same percentage of votes. The main business activity of Telewizja Kablowa Brodnica Sp. z o.o. is other building installation as defined in the Polish Statistical Classification of Economic Activities under no Z Related Party Transactions Business Management Agreement with Automatic Serwis Sp. z o.o. On 14 March 2007, the Management Board of Multimedia Polska S.A. entered into an Agreement on business management, business management advisory and business administration services with its 100% subsidiary Automatic Serwis Sp. z o.o. with registered office in Brodnica. Multimedia Polska S.A. is entitled to a monthly consideration for the services provided to Automatic Serwis Sp. z o.o. under the Agreement computed based on actual costs of the services incurred by the Company. The estimated monthly costs of the services were approximately PLN 200 thousand. The Agreement was concluded for an indefinite term and may be terminated by each party with a six months notice to take effect at the end of the month in which the notice expired Changes in the Composition of the Supervisory Board On 4 January 2007, Mr Vikram Pant resigned from the position of Supervisory Board Member. On 5 February 2007, Mr David C. Seidman was appointed by the General Shareholders Meeting to fill in the vacancy in the Supervisory Board. Following these changes, as at the date of publication of this report, the Supervisory Board of Multimedia Polska S.A. was composed of the following persons: Name Ygal Ozechov Tomek Ulatowski David C. Seidman Konrad Jaskóła Gabriel Wujek Position Co-Chairman of the Supervisory Board Co-Chairman of the Supervisory Board Member of the Supervisory Board Member of the Supervisory Board Member of the Supervisory Board 18

19 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December Debt Repayment In accordance with the objectives of the issue of Series F Shares, the Company transferred PLN 100,000,000 to the account of the Security Agent (ABN AMRO) on 23 November 2006 in order to repay PLN 100,000,000 representing Tranche C. In accordance with the senior credit facility agreement, the amount was delivered to the lenders by the Facility Agent on the last day of the interest period, i.e. on 10 January Choice of Independent Auditor On 22 February 2007, the Supervisory Board of Multimedia Polska S.A. acting in accordance with 25.2(g) of the Company s Statutes passed resolution no 4/02/2007 appointing Ernst & Young Sp. z o.o. with their registered office in Warsaw, at Rondo ONZ 1, registered in the register of auditors under no 130, as auditors of the standalone and consolidated financial statements of Multimedia Polska S.A. and Multimedia Polska Group, respectively, for the year On 19 April 2007, the Supervisory Board acting in accordance with 23.2(g) and 25.4 of the Company s Statutes in a written ballot passed another resolution appointing Ernst & Young Audit Sp. z o.o. to audit the standalone and consolidated financial statements of the Company for the year ended 31 December 2007 and to review the standalone and consolidated financial statements of the Company for the six months ended 30 June Ernst & Young Audit Sp. z o.o. previously provided its services to the Company in the same respect Merger with Multimedia Mielec Sp. z o.o. On 30 March 2007, the District Court for Gdańsk Północ of Gdańsk, VIII Economic Division of the National Court Register, registered the merger of Multimedia Polska S.A. (the acquirer) with Multimedia Polska Mielec Sp. z o.o. (the acquiree, a company wholly owned by Multimedia Polska S.A.). In accordance with the merger plan adopted on 29 December 2006, the merger was performed according to the simplified procedure in compliance with Art and Art of the Commercial Companies Code by transferring all assets of Multimedia Polska Mielec Sp. z o.o. to Multimedia Polska S.A Amendments to the Company s Statutes Registered by the Court On 30 March 2007, the Management Board of Multimedia Polska S.A. was informed that on 26 March 2007 the District Court for Gdańsk Północ of Gdańsk, VIII Economic Division of the National Court Register, registered amendments to the Company s Statutes introduced pursuant to a resolution of the Extraordinary General Meeting of Multimedia Polska S.A. held on 5 February Given the scope of the amendments, the General Meeting resolved to produce a consolidated text of the Statutes. The amendments to the Statutes of Multimedia Polska S.A. involved, amongst other things, a deletion of provisions granting special powers to particular shareholders and regulations regarding the restrictions pertaining to the disposal of registered shares of the Company Termination of Overdraft Facility The agreement entered into with Bank BPH S.A., Corporate Centre in Krakow, on 29 January 2002 (as amended) under which an overdraft facility was made available to the Company on 25 May 2002 in the amount of up to PLN 8,000,000 (see point 5.2 above) expired on 25 May Consequently, all assets provided to the Bank as collateral under the overdraft facility agreement will be free from encumbrance Declaration regarding Corporate Governance On 26 January 2007, the Management Board of Multimedia Polska S.A. published its annual declaration concerning observance of Best Practices in Public Companies 2005, thus fulfilling its obligations following from 29 of the Rules of the Warsaw Stock Exchange. As declared in the document, the Company complies with best practice in all areas of corporate governance referred to therein. 19. Material Risk Factors and Threats to the Business of Multimedia Polska S.A Risks Relating to the Change of Strategy of Multimedia Polska S.A. In the run-up to the IPO, which took place in 2006, the Company s management presented its strategic focus for the coming years connected with the public offering and the use of proceeds from the offering (see our International Offering Circular, p. 4). The key assumptions are as follows: 19

20 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December 2006 increasing RGUs 1 through organic growth and mergers and acquisitions of other operators or their assets; introducing innovative services and product offerings, e.g. digital television over cable networks; further product bundling; and improving operational efficiency. The primary focus of the Company, as well as the capital Group, is on the creation of shareholder value. Therefore, management may be likely to take strategic steps different from those defined in the prospectus or change the strategic assumptions with the view to achieve the primary goal. We cannot guarantee that new strategic initiatives undertaken by the Company will be successful for our business and results of operations Risks Relating to the Change of Shareholding Structure Multimedia Polska S.A. is currently controlled directly or indirectly by EVL who had a 55.9% interest in the share capital and the overall votes at AGM as at 31 December Neither Polish law nor the provisions of our corporate documents provide for any restrictions regarding the transfer or disposal of the shares of Multimedia Polska S.A. Any material changes in our shareholding structure may effect the composition of our supervisory or management boards and have a material adverse effect on our business and strategy Market-Related and Operating Risks Deterioration of Economic Trends Our financial condition and results of operations could be adversely affected if the cable television, broadband Internet or telephony markets in Poland deteriorate. The analogue cable television market already has a high penetration rate while the fixed-line telephony market continues to be characterised by a downward trend in the overall number of subscribers, primarily because of the substitution effect from mobile telephony. These market conditions may make it difficult for us to increase our current number of subscribers and to grow our business Increased Competition The Polish cable television, broadband Internet and fixed-line telephony industries are highly competitive. In some instances, we compete against companies with easier access to financing, more comprehensive product ranges, greater personnel resources, wider geographical coverage, greater brand name recognition and experience or longer-established relationships with regulatory authorities and customers. Some of our competitors have made significant capital expenditures into their networks to improve their ability to provide new services and products and extend their area of operation. Such competition can make it difficult to attract new customers and retain existing customers, thereby increasing churn levels. Increased competition and special promotions and discounts we grant to customers who subscribe for multiple services are likely to reduce our average revenue per user on a per-service basis. Cable Television We estimate that for the most part our cable television service area does not overlap with service areas of other cable operators. However, such overlap may increase in the future, negatively affecting our financial position and operating results. In addition, TPSA has recently launched digital television over DSL. As a result, TPSA may become a significant competitor to our cable television services. As digital television develops, the difference between content distributors and content providers may also become blurred. Current providers of content may decide to market packages directly to the end user and seek only to acquire network access from cable providers instead of being part of the cable provider s channel offering. Broadband Internet The broadband internet market is characterised by two trends increasing connection speeds and offering more competitive prices. In addition, we may soon be facing increased competition from mobile operators providing wireless broadband internet services. We cannot provide any assurance that the measures we introduce in response to these developments will be successful in attracting and retaining customers. 1 Revenue Generating Units 20

21 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December 2006 Fixed-Line Telephony Increasing competition among fixed-line telephony and cable television operators that provide telephony services over cable using voice over Internet protocol ( VoIP ) technology is beginning to put a downward pressure on prices. In addition, increasing numbers of users are substituting fixed-line telephone lines for mobile telephone services. This substitution, in addition to the increasing use of electronic means of communication, may negatively affect our call volumes and subscriber retention. In addition, we may be forced to respond to such developments by investing resources into our own product development initiatives, which may not be successful. There can be no assurance that we will be able to compete successfully against TPSA, or our other current or future competitors operating in the voice sector. Our failure to do so could have a material adverse effect on our financial condition and results of operations Risks Relating to the Launch of Digital Television over Cable We are in the process of implementing digital television over cable networks; the project may pose certain technical and administrative threats. Multimedia Polska S.A. is in the process of implementing an advanced digital television signal distribution system. Consequently, we may encounter some problems in integrating the components of the system or problems connected with the availability of particular elements of the system (e.g. deliveries of set-top boxes), system reliability and similar technological obstacles usually associated with the implementation of a large integrated system. We are rolling out the services in several locations simultaneously; hence, we may have some difficulties connected with logistics and the flexible adaptation of our business to this new and advanced service. We intend to implement innovative technical solutions, representing the technological vanguard of the Polish cable industry (HDTV, VOD, interactive television etc.). It may therefore prove difficult for us to find good and reliable business partners who will enable us to deliver the best quality of the service as far as the technology and content are concerned Technological Risks Our business is characterized by rapid technological change and the introduction of new products and services. If any new or enhanced technologies, products or services introduced by us, in particular those associated with the deployment of IPTV and digital television over cable, fail to achieve sufficient market acceptance or experience technical difficulties, our profits, margins and cash flows may be adversely affected. As a result, we may not recover the initial investment that we have made, or may have to make to deploy these technologies, products and services Risks Relating to Network Maintenance and Upgrades Our assumptions regarding the expenditures associated with maintenance and upgrades of the network may prove to be inaccurate for a number of reasons, for example: we may be unable to obtain compatible equipment from our existing suppliers required to maintain or upgrade the network; or network usage requirements in the network may exceed our projections and our planned investments may be insufficient to maintain capacity at the level of quality we seek to provide our customers. Our inability to maintain adequately or upgrade our network and related systems or make other network improvements essential for our operations could have a material adverse effect on our business and results of operations Risks Relating to Increased Programming Costs The success of our television services depends on access to an attractive selection of television programming from content providers. Although we do have long-term agreements with the providers of the most attractive content, we cannot guarantee that such content will be available to us in the future at commercially reasonable prices. If we are unable to purchase content at commercially reasonable prices or at all, our ability to retain and grow our customer base could be adversely affected. 21

22 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December Potential Future Mergers and Acquisitions Our primary focus is on active participation in the consolidation of the Polish telecommunications and cable television markets. The future mergers and acquisitions may have a major impact on our business and results of operations. The process of acquiring and integrating a new business with our operations may also carry some risks, e.g. discontinuation of our services by some customers of the acquired operator, the need for additional investments into the acquired network, delays connected with legal consolidation of the businesses etc. We may also become liable for any debts or obligations of acquired operators, including possible undisclosed liabilities. Although the telecommunications and the cable television markets are highly fragmented, we cannot guarantee that any of the mergers or acquisitions that we intend to make will be finalised or that the Group will succeed in increasing its RGU levels as projected Risks Relating to our Cooperation with TPSA and Other Telecoms Our success depends on our ability to provide high quality and reliable services, which is in part dependent upon the proper functioning of facilities and equipment owned and operated by third parties and is, therefore, beyond our control. Historically, our key business partner as far as the scale of our cooperation is concerned is TPSA. A large portion of the traffic generated on our networks is transmitted using interconnection points with TPSA. In addition, to expand our network organically, we rely upon TPSA to lease network infrastructure to us in various locations where TPSA has already constructed such infrastructure. We lease space in underground ducts, tunnels or piping controlled by TPSA particularly in urban areas. We expect that in the future we will offer broadband Internet services using TPSA s local loop telephone lines in accordance with agreements with TPSA. Even though providing such services is mandated by law, the cooperation of TPSA will be necessary to make such services viable. If TPSA refuses to cooperate with us or makes such cooperation difficult, this may affect our ability to expand our network or to launch new services that depend upon the unbundling of TPSA s services. Additionally, we lease infrastructure from third party service providers. If such service providers fail to maintain their networks properly, or fail to respond quickly to network failures, our customers may experience service interruptions. If interruptions adversely affect the perceived reliability of our service, we may have difficulty attracting new customers and our brand, reputation and growth will be negatively impacted Risks Relating to the Loss of Key Personnel We believe that our commercial success depends on our ability to attract and retain highly qualified management and key personnel. Competition for highly skilled individuals in Poland is presently rather intense. There can be no assurance that we will continue to be successful in attracting and retaining such individuals in the future. Loss of services and failure to attract or retain such individuals could have a material adverse effect on our business, financial condition and result of operations Risks Related to our Financial Position Risks Related to Interest and Foreign Exchange Rates The Company has significant long-term indebtedness, which may result in some exposure to interest rate fluctuations. A material increase in the interest rates on our debt may lead to increased debt services costs and may therefore adversely affect our results. A portion of our debt bears interest at a variable rate. Under the terms of our existing interest rate hedging arrangements, our effective interest rates may be higher than actual interest rates, resulting in increased costs for us. There can be no guarantee that our hedging strategies will adequately protect our operating results from the effects of interest rate fluctuations, or that these hedges will not limit any benefit that we might otherwise receive from favourable movements in exchange rates. Our business is also exposed to fluctuations in currency exchange rates. A substantial majority of our revenue is denominated in Polish zloty; however, we also have significant capital and operating expenditures (programming) that are denominated in Euro and US dollars. We do not engage in foreign exchange hedging transactions and, as a consequence, we could be adversely affected by any future unfavourable shifts in exchange rates Risks Related to our Financing Although we have significant cash from the proceeds of the Global Offering, which we intend to use as described in the prospectus, we may also attempt to acquire a large telecom or cable operator. The value of such an acquisition may require financial resources significantly larger than those currently available to the Group, which will result in a need for additional financing. We could fail to obtain such additional financing and, as a result, the Company could be forced to limit or considerably modify its development plans. 22

23 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December Risks Related to our Bank Debt We have significant bank debt and bear significant debt service costs; our debt burden may be further increased in the future. Our level of debt, both current and future, could have important consequences, including, but not limited to, the following: requiring that a substantial portion of our cash flows from operations be dedicated to servicing debt, thereby reducing the funds available to us to finance our operations, capital expenditures, research and development and other business activities, including maintaining the quality of the network; impeding our ability to obtain additional debt or equity financing, including financing for capital expenditures, and increasing the cost of any such borrowing, particularly due to the financial and other restrictive covenants contained in the agreements governing our debt; and adversely affecting public perception of us and our brand and making us more vulnerable to economic downturns and adverse developments and giving us less flexibility to react to changes in our business. Our bank debt facilities contain a number of significant covenants or other provisions that could adversely affect our ability to operate our business. These covenants, applicable to Multimedia Polska S.A. and to all our subsidiaries, are described in more detail in point 5. Our ability to comply with these provisions may be affected by events beyond our control. In addition to limiting our flexibility in operating our business, the breach of any covenants or obligations under the agreements governing our debt will result in a default and could trigger acceleration of the related debt Risks Related to Regulatory and Legal Proceedings Change of Polish Telecommunications Laws The main act that presently regulates telecommunications activities in Poland is the Telecommunications Law. Under this act, the President of the UKE may impose obligations on operators controlling access to end users so as to ensure that they are able to communicate with end users on the network of another telecommunications provider, including the obligation to interconnect networks. The following obligations may be imposed on a telecommunications provider who is deemed to have a significant position in one of the telecommunications markets listed in the decree of the competent Minister of Telecommunications (i) the obligation to grant other operators access to its network, especially with regard to its interconnection or mutual use of the local subscriber loop; (ii) the obligation to calculate costs and relate the network access tariffs to these calculations; and (iii) the obligation to maintain regulatory accounts separately for each of its telecommunications services. The Telecommunications Law does not define the size of the area in which the market position of a telecommunications provider is evaluated. As a result, the President of the UKE may name telecommunications providers as having a significant position in a small area, in which even a small telecommunications provider can have a significant market share, based on the level of market development and the instructions of the European Commission. This will serve as a basis for imposing any other regulatory obligations upon such a company, which will have to be proportional to the superior market position of the company, i.e. to the extent that it prevents effective competition on the given telecommunications market. Pursuant to the Telecommunications Law, each public telecommunications network operator is obliged to conduct negotiations concerning interconnection agreements upon another telecommunications operator s request. However, the President of the UKE is required to resolve any disputes between the parties to the negotiations by an administrative decision, which shall replace the relevant agreement only if one of the negotiating parties is a public telecommunications network operator obliged to provide the interconnection. The Telecommunications Law states that the obligation to provide universal services shall rest with the operator selected pursuant to a decision of the President of the UKE issued after a tender procedure. Should no bids for the provision of a universal service or particular sub-services be submitted, the President of the UKE shall entrust the provision of the universal service to a provider of generally available fixed-line telephony services with a significant market position. Telecommunications providers whose revenues from telecommunications activity exceed PLN 4,000,000 will have to co-finance the performance of this obligation, by co-financing the funding of universal services, if the funding has been assigned to the telecommunications provider selected on the basis of the decision of the President of the UKE. The Telecommunications Law requires that we support local number portability for our customers, which allows our customers to take their existing telephone numbers with them if they discontinue our services. If we are unable to implement local number portability or there is undue delay in transferring numbers, we may experience difficulty in acquiring new customers or we may be penalized by the UKE. In addition, any complications with number portability may make it easier for our customers to discontinue our services or may be a reason for such 23

24 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December 2006 discontinuation. If we are unable to attract a sufficient number of new customers through number portability, the cost of implementing number portability may outweigh the potential benefits that we receive Claims of Organizations for Collective Administration of Copyrights Pursuant to Polish copyright law, cable television operators may broadcast on their cable networks radio and television programs on the basis of an agreement entered into with the relevant organization for collective administration of copyright. We have entered into several agreements with the Association of Polish Filmmakers ( SFP ) which owns the copyright for various audiovisual works and the Polish Copyright Association ( ZAiKS ) which owns the copyright for various musical works, the two largest organizations for collective administration of copyright in Poland. Due to the significant number and diversity of television and radio programs we broadcast, it is possible that smaller organizations representing authors not associated with SFP and ZAiKS may submit claims against us for infringement of such authors copyrights Changes in Tax Regulations Regulations regarding VAT, income tax, real estate tax and social security contributions are subject to frequent changes. This results in there being little point of reference and few established precedents that may be followed. Current regulations contain several contradictory provisions and uncertainties which also leads to differing interpretations by state authorities and private entities. Taxes and other similar payments, such as customs duties and foreign currency payments, may be audited by authorities authorised to impose severe fines and penalties while any liabilities revealed during such audits may become payable together with considerable interest accrued. Tax returns submitted by Multimedia Polska S.A. may be audited by tax authorities for five years and some transactions with our subsidiaries may also be challenged by competent tax authorities. Therefore, the amounts disclosed in our financial statements may change after they are audited by tax authorities. 20. Discussion of the Financial Standing of Multimedia Polska S.A. and Major Events which Had a Significant Impact on its Operations The following discussion and analysis of the Company s results for the year 2006 were prepared on the basis of annual financial statements of Multimedia Polska S.A. for the twelve months ended 31 December 2006 prepared in accordance with IFRS. When analysing these data it should be noted that Multimedia Polska S.A. merged with three of its 100% subsidiaries: Lubelska Telewizja Kablowa S.A., TeleNet Polska Sp. z o.o. and Multimedia Polska Centrum S.A. on 14 June Hence, the results of those subsidiaries are also included in the comparable data for 2005 with appropriate adjustments and eliminations. Consequently, 2005 results presented herein differ from the results for the same period published in the fourth quarter of Multimedia Polska S.A. operates only in Poland and 100% of its revenues are generated in the domestic market. The Company does not have any export sales. Due to the nature of the Company s operations, there are no significant concentration risks with respect to both subscribers and suppliers. A detailed operating and financial review of Multimedia Polska Group, including all segments of operations of Multimedia Polska S.A., is provided in the consolidated annual report. Management believes that only the consolidated financial and operating data guarantee proper comparability and provide a good basis for any analysis of the Group s financial standing Key Operating Statistics As at 31 December 2006, Multimedia Polska S.A. had 684,263 revenue generating units (RGUs), including 474,807 cable TV RGUs, 130,243 broadband Internet RGUs, 55,512 voice RGUs, 23,673 premium channels RGUs, and 28 payphones. As at 31 December 2006, we had some 133,000 subscribers who have subscribed for more than one service, including nearly 31,600 Triple Play subscribers. Compared to 2005, we recorded a net increase in RGUs of 91,233 in 2006 (after churn), including: - 23,850 CATV RGUs - 42,614 broadband Internet RGUs - 23,333 VoIP telephony RGUs, and - 1,436 premium channels RGUs 24

25 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December 2006 As a result of the merger of Multimedia Polska S.A. with the telecom subsidiary Multimedia Polska Centrum S.A., which also provided telecom services to subscribers, our subscriber base also comprised the following RGUs as at the end of 2006 as a result of the acquisition: - 11,477 PSTN telephony RGUs - 1,978 broadband Internet RGUs (DSL), and - 28 payphones Going forward, we expect that more of our customers will subscribe for bundled offerings, which may help to reduce our churn rate and provide an important source of future revenue growth. While our average revenue per RGU is expected to continue to decline for our telephony services and our broadband Internet services, we expect that the effect of these decreases on our revenues may be more than offset as a result of rapid growth of the number of our broadband Internet customers and increasing popularity of bundled services. We also expect our cable television revenues to increase after we begin offering digital television to our cable customers in It has been our strategic focus in 2006 to control negative disconnection trends (churn), calculated as the ratio of disconnections to the number or RGUs for the service at the beginning of the period. In 2006, the Company succeeded in reducing the churn rate from % in 2005 (1.2% per month) to 10.75% in 2006 on an annual basis (0.9% per month). Also in line with our strategy to deliver more services to the current subscriber base, the ratio of RGUs per subscriber went up from 1.28 in 2005 to 1.39 in Consolidated Income Statement Sales Revenues Our sales revenues consist of cable television, broadband Internet, fixed-line telephony and other revenues. Our revenue mix in 2005 and 2006 is presented in the table below Cable television 68.3% 57.9% Internet 21.0% 21.6% Telephony 2.3% 9.3% Other 8.4% 11.2% Comparing the Company s results year-on-year, sales revenues increased by PLN 57.9m, or 23.9% from PLN 242.3m in 2005 to PLN 300.1m in The principal sources of the sales revenue growth were subscriber growth in the broadband Internet business (revenue growth of PLN 14.0m), VoIP telephony (revenue growth of PLN 11.0m) and the cable television business (revenue growth of PLN 8.2m, including premium channels). Some of our revenue growth is attributable to the acquisition of our subsidiary Multimedia Polska Centrum S.A. Our telephony revenues increased as a result of a larger PSTN subscriber base (revenue growth of PLN 8.4m), interoperator revenues (growth of PLN 0.2m) and a PLN 2.5m increase in wholesale interconnect revenues. Other sales revenues increased from PLN 20.3m to PLN 33.5m Operating Expenses Comparing our results year-on-year, operating expenses (excluding depreciation and amortisation) increased by PLN 21.9m, or 14.8%, from PLN 148.1m in 2005 to PLN 170.0m in The increase of total operating expenses was primarily attributable to a PLN 7.6m increase in interconnection costs, PLN 5.8m in network maintenance costs, PLN 3.8 in sales and marketing and PLN 3.0m in payroll and benefits. The Company recorded an increase in interconnection costs of PLN 7.6m from PLN 3.1m in 2005 to PLN 10.7m in The reasons for the increase were twofold: the growth of our VoIP subscriber base on the one hand and an increase in traffic generated by them on the other. Another significant increase in operating expenses was recorded in network maintenance costs, which were up by PLN 5.8m (31.1%) from PLN 18.7m in 2005 to PLN 24.5m in This was primarily attributable to increased costs of leasing fibre optic cables for our telephony services due to the growing take-up of VoIP services. In the table below, costs connected with the lease of fibre optic cables for our Internet services are presented as a separate component Bandwidth. 25

26 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December 2006 Our sales and marketing expenses increased by PLN 3.8m (28.9%) from PLN 13.1m in 2005 to PLN 16.8m in The increase in this cost category is directly related to higher costs of sales connected with commissions paid out to our sale representatives due to a considerable increase in new contracts (RGUs). Payroll and benefit expenses were up by PLN 3.0m (8.1%) from PLN 36.6m in 2005 to PLN 39.6m in 2006 due to an increase in headcount connected with the take-over by MMP of telecom network maintenance services from subcontractors in July A significant decrease (PLN 3.4m) was recorded in the costs of leasing fibre optic cables for Internet (bandwidth). Those costs were reduced as a result of our renegotiations of existing agreements finalised in April 2006 providing for more favourable tariff terms. The following table provides information on the components of our operating expenses. (PLN '000) Programming and copyrights Bandwidth Interconnect Network costs Sales and marketing Payroll and benefits Taxes and charges Professional services Energy and materials Other expenses Total Other Operating Income Other operating income was down by PLN 0.1m from PLN 2.5m in 2005 to PLN 2.4m in Other operating income in 2006 comprised primarily revenue from resale of investments (PLN 0.5m), payoff of written-off liabilities (PLN 0.5m) and VAT adjustments (PLN 0.5m) Other Operating Expenses Other operating expenses were up compared to 2005 by PLN 0.8m from PLN 5.4m in 2005 to PLN 6.1m in Other operating expenses were considerably higher in 2006 because of fixed assets impairment write-off amounting to PLN 1.5m, bad debt write-off of PLN 1.4m and inventories liquidation of PLN 0.9m Operating Profit Comparing our results year-on-year, operating profit increased by PLN 24.0m, or 56.0%, from PLN 42.9m in 2005 to PLN 66.9m in The components of the increase recorded for the twelve months of 2006 as compared to the twelve months of 2005 are presented below: + PLN 8.2m increase in cable television revenues resulting from a larger subscriber base, + PLN 14.0m increase in Internet revenues resulting from a larger subscriber base, despite price reductions, + PLN 22.4m increase in voice revenues, including PLN 8.4m attributable to the merger with Multimedia Polska Centrum S.A., + PLN 13.2m increase in other revenues, - PLN 17.3m increase in fixed costs, - PLN 7.6m increase in interconnection costs, - PLN 0.4m increase in programming costs, + PLN 3.4m decrease in variable costs connected with the lease of bandwidth for Internet, - PLN 0.8m decrease per saldo of other operating income/expenses, and - PLN 11.1m increase in depreciation and amortisation EBITDA and Adjusted EBITDA Comparing our results year-on-year, EBITDA increased by PLN 35.2m or 38.5% from PLN 91.4m in 2005 to PLN 126.5m in The increase is attributable to the same factors which contributed to the increase in operating profit, as described above, except depreciation and amortisation. 26

27 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December 2006 In the same periods, Adjusted EBITDA increased by PLN 36.1m, or 38.9%, from PLN 92.9m for the twelve months of 2005 to PLN 128.9m for the twelve months of Adjusted EBITDA margin was up from 38.3% for the twelve months of 2005 to 43.0% for the twelve months of When calculating Adjusted EBITDA, as defined and measured by us, we excluded non-recurring events. For details on our method of measuring EBITDA please refer to our International Offering Circular Operating and Financial Review and Prospects (pp ) Finance Income Comparing our results year-on-year, finance income increased by PLN 6.5m from PLN 1.6m in 2005 to PLN 8.1m in The relatively high level of finance income in 2006 was attributable to interest received of PLN 1.8m, gains on investments of PLN 1.9m, and fees and interest accrued on loans granted within the Group of PLN 4.2m Finance Costs Comparing our results year-on-year, finance costs increased by PLN3.9m from PLN 21.5m in 2005 to PLN 25.4m in The largest item of finance costs in 2006 were fees and interest accrued on bank loans, which amounted to PLN 22.5m against PLN 9.6m in This increase was directly attributable to a higher level of bank indebtedness in 2006 as compared to the previous year. Some items of finance costs decreased significantly in 2006; they were: interest on other liabilities (decrease of PLN 1.4m), foreign exchange losses (decrease of PLN 3.7m) resulting from the fact that there was no indebtedness denominated in foreign currencies, and other (decrease of PLN 4.5m) Income tax We recorded PLN 5.3m income tax in 2006, which gives an effective tax rate on gross profit of 10.8%. The same rate in 2005 amounted to 12.8%, and the total recorded income tax amounted to PLN 2.9m. This low effective tax rate was primarily attributable to a difference between tax depreciation and amortisation and accounting depreciation and amortisation disclosed in the financial statements. A detailed discussion regarding permanent and temporary differences between accounting profit before tax and gross profit is given in note 15 to the financial statements Net profit Our net profit increased by PLN 24.3m, or 121.2% from PLN 20.0m in 2005 to PLN 44.3m in The level of our net profit in 2006 was impacted by the operating events described in point above and also by a significant negative balance of finance income and costs of PLN 17.3m. Management intends to recommend to the Supervisory Board and the AGM of the Company that the total net profit should be transferred to reserves Consolidated Balance Sheet Non-Current Assets As at the balance sheet date, 31 December 2006, the value of our net non-current assets was PLN 609.4m, and accounted for 57.8% of our total assets. The value of non-current assets was up PLN 44.7m as compared to 2005 primarily due to certain investments into property, plant and equipment. Our capital expenditures into property, plant and equipment in 2006 totalled PLN 123.7m (see point 24). The increase in the value of non-current assets was negatively impacted by depreciation and amortisation of PLN 59.6m and fair value adjustments of PLN 2.0m Current Assets Our current assets as at 31 December 2006 amounted to PLN 445.5m and accounted for 42.2% of our total assets. The value of current assets increased by PLN 357.4m primarily due to an increase in cash and cash equivalents. Receivables Our receivables as at the balance sheet date, 31 December 2006, amounted to PLN 60.6m. They increased by PLN 38.3m over The increase was largely attributable to an increase in receivables from related parties, which increased by PLN 19.3m from PLN 5.5m in 2005 to PLN 24.8m in We also recorded a significant increase in our tax receivables, which increased by PLN 14.6m from PLN 5.7m in 2005 to PLN 20.2m in

28 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December 2006 Cash and Cash Equivalents Our cash as at 31 December 2006 was at the level of PLN 332.0m and increased by PLN 328.5m as compared to Cash and cash equivalents accounted for 74.5% of current assets. The increase in cash and cash equivalents was primarily attributable to the receipt of approximately PLN 220m of proceeds from the public offering of series F shares. It was also attributable to a PLN increase in our bank indebtedness in Equity Equity as at the balance sheet date, 31 December 2006, was PLN 456.9m and increased by PLN 264.7m as compared to The increase in equity was connected with a share capital increase and the issue of series F shares. The Company issued 20,787,728 series F shares with a nominal value of PLN 1.00 each, which resulted in a share capital increase of PLN 20.8m. We also recorded a share premium of PLN 228.7m. In addition, our equity in 2006 was increased by the net profit for 2006 of PLN 44.3m. A detailed table showing the changes in equity is provided in the financial statements Non-Current Liabilities Our non-current liabilities as at the balance sheet date, 31 December 2006, amounted to PLN 503.7m and were up by PLN 111.2m from The largest increase was recorded in loans and borrowings. Interest-bearing loans and borrowings and finance leases amounted to PLN 496.4m and increased by PLN 107.3m as compared to 2005 year-end. The increase was largely attributable to an increase of our senior credit facility provided to us by ABN AMRO Bank and Bank BPH S.A. discussed in more detail in point 5.1. Interestbearing loans and borrowings and finance leases accounted for 83.0% of our total liabilities in Current Liabilities Our current liabilities as at the balance sheet date, 31 December 2006, totalled PLN 94.3m and were up by PLN 26.1m as compared to The largest item of current liabilities in both 2006 and 2005 were trade payables and other payables consisting of investment related trade payables. Those items presented jointly in our financial statements under trade and other payables accounted for some 46% of total current liabilities as at 2006 yearend. Current liabilities relating to interest-bearing loans and borrowings and finance leases as at the balance sheet date, 31 December 2006, amounted to PLN 33.3m as compared to PLN 18.6m in The increase was primarily attributable to an increase in current loans and borrowings due to the accounting reclassification of a part of loans and borrowings from non-current to current liabilities Consolidated Cash Flow Statement Net cash flows from operating activities in 2006 amounted to PLN 96.2m against PLN 88.8m in 2005, representing an increase of PLN 7.4m or 8.3%. The increase in cash flows from operating activities was primarily attributable to significantly higher net profit. This increase was partly offset by negative changes in working capital, which amounted to PLN -27.6m in 2006 against PLN 0.6m in Net cash flows from investing activities in 2006 amounted to PLN -89.7m against PLN m in Cash outflows connected with the purchase of property, plant and equipment and intangible assets amounted to PLN 123.7m against PLN 74.7m in 2005, an increase of PLN 49.0m. Cash flows from investing activities in 2005 were largely impacted by the acquisition of a subsidiary: an outflow of PLN 201.8m. Moreover, in 2005, the Company extended investment loans to related parties totalling PLN 87.4m, of which PLN 26.2m was subsequently repaid in Net cash flows from financing activities in 2006 amounted to PLN 322.6m against PLN 275.6m in The recorded balance of cash flows from financing activities in 2006 was directly linked to the receipt of the issue proceeds of PLN 220.5m and an increase in our indebtedness of PLN 126.5m Employment As at 31 December 2006, Multimedia Polska S.A. had 997 employees in total. We employed 534 employees in our regions (including our network service and customer care personnel, sale managers, regional directors etc.) and 463 employees in our head offices. Employment levels were up by 152 as compared to 2005 due to the takeover of employees of three subsidiaries merged in Currently all employees of Multimedia Polska Group are employed by Multimedia Polska S.A. 28

29 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December Description of the Use of Proceeds from the Issue of Series F Shares The net proceeds from the sale of the newly issued Shares in the Global Offering amounted to approximately PLN 220m, of which PLN 100m was used to repay the existing senior credit facility on 10 January We intend to use the remaining proceeds as follows: - to upgrade our network for the launch of digital cable television and acquire digital set top boxes required in connection with the launch of digital television services (we expect to use approximately PLN 60m to 70m for such purposes); - to acquire other cable television operators or their assets, and any remaining amount for other purposes set forth in our strategy. On 19 February 2007, Multimedia Polska S.A. acquired shares in Automatic Serwis Sp. z o.o. constituting 100% of the acquiree s share capital for the total consideration of PLN 56,452, Details of the transaction are given in point 18 above. 22. Explanation of any Differences Between the Financial Results Disclosed in the Annual Report and the Financial Forecasts Published Earlier for the Year The Company did not publish forecasts of financial results. 23. Financial Resources Management As at the balance sheet date, 31 December 2006, the Company had cash and cash equivalents in the amount of PLN 332.0m and short-term investments (loans extended to subsidiaries) in the amount of PLN 36.5m. Our net current receivables amounted to PLN 60.6m while our total liabilities amounted to PLN 598.0m, including PLN 94.3m current liabilities. The current liquidity ratio, calculated as current assets divided by current liabilities, was 4.8. The quick liquidity ratio, calculated as current assets less inventories divided by current liabilities, was 4.6 and was at a comparable level to the current liquidity ratio because the value of inventories in relation to cash and cash equivalents was insignificant. Thanks to the high level of cash, both ratios are above levels generally considered safe. As at 31 December 2006, the Company had significant liabilities relating to bank loans for the total amount of PLN 529.8m, including PLN 496.4m of long-term debt. As provided for in the loan agreements, the first instalment becomes payable on 7 March As at the end of 2006, the debt to equity ratio was Taking into account the profitability of our business and results of operations, for example at the level of EBITDA, we consider this ratio to be relatively low and safe and significantly below the market average. The interest cover ratio, calculated as EBITDA divided by interest and fees on bank loans and overdrafts, was 5.6. Management believes that this level of the ratio confirms that the Company is able to make timely payments of interest accrued on bank loans and borrowings utilising only cash from operating activities. Management believes that the Company s ability to maintain payment of current liabilities is not in any way threatened. The situation may change in the future when the issue proceeds have been spent on capital expenditures. The Company exposure to such risk is, however, limited thanks to its ability to generate positive cash flows from operating activities. 24. Capital Expenditure Growth Capital Expenditure We spent approximately PLN 124m on capital expenditure in Our expenditure on growth projects, i.e. projects generating direct revenue increases in a given year or the coming years, accounted for approximately 70% of our total capital expenditure. The main growth projects comprise: - expenditures related to network upgrades for broadband Internet and VoIP telephony, - expenditures related to the purchase of network devices for our telephony and broadband Internet services, as well as IPTV services, necessitated by the growth of our subscriber base and introducing the services over a larger percentage of our networks, and - expenditures related to subscriber acquisition, including installation costs and CPE (customer premises equipment) costs. 29

30 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December 2006 As a result of the network upgrades completed in 2006, we upgraded 85,000 homes passed (HP) for broadband Internet and 128,000 HPs for voice services. Consequently, at the end of 2006, 88% of our total HPs were Internet-ready and 62% were telephony-ready. Another important component of our 2006 capital expenditure budget, accounting for 10% of the total budget, were expenditures connected with acquisitions of other cable operators and upgrading their networks to MMP standards. In a series of acquisitions in 2006 we acquired twelve cable and Internet operators, adding 13,400 new HPs, 11,500 cable television subscribers and 2,700 Internet subscribers, as well as 240 telephony subscribers. In 2006, we built 14,500 new HPs accounting for 5% of our total capital expenditure for the year. The above-mentioned acquisitions and the construction of new homes passed gave us a total of 691,000 cable television homes passed at the end of 2006, a growth of 28,000 homes passed. No capital expenditure was incurred on increasing the number of PSTN homes passed by the networks of the merged subsidiary, Multimedia Polska Centrum S.A., in Other Capital Expenditure Other capital expenditure not directly related to network expansion or subscriber activations accounted for approximately 30% of total capital expenditure and included: - expenditures related to upgrades and improvements in information technology and purchases of new systems with a view to reduce operating expenses and streamline internal processes, - expenditures related to upgrading head-end systems to number portability, and - expenditures related to the expansion of our backbone network into new areas and to carry higher volumes of Internet traffic Assessment of the Feasibility of Planned Investments As at the balance sheet date, 31 December 2006, Multimedia Polska S.A. had cash and cash equivalents of PLN 332.0m. The Company repaid PLN 100m of its long-term debt, as discussed in detail in point 21 above. We expect that our 2007 investment projects relating to the expansion of our networks and new subscriber activations will be financed with cash from operating activities. The proceeds from the issuance and sale of new shares by Multimedia Polska S.A. of PLN 220m will be used primarily to finance future acquisitions of cable operators. We also expect that cash currently available to us and the relatively low debt to EBITDA ratio will allow us to finance any emerging acquisitions of smaller operators in the cable television market in 2007 as well as an acquisition of a larger operator, should such an opportunity arise. 25. Factors and Non-Recurring Events which Had an Impact on 2006 Results Non-recurring events which had an impact on our operating profit in 2006 were the disposal of fixed assets and impairment, valuation and liquidation of fixed assets. Our operating profit was reduced by PLN 0.5m due to the disposal of fixed assets and PLN 1.5m due to assets under contruction impaiment write-off. 26. Development Prospects for Multimedia Polska S.A. in 2007 Going forward, we expect that more of our customers will subscribe for bundled offerings, which may help to reduce our churn rate and provide an important source of future revenue growth. While our average revenue per RGU is expected to continue to decline for our telephony services and our broadband Internet services, we expect that the effect of these decreases on our revenues may be more than offset as a result of rapid growth of the number of our broadband Internet customers and increasing popularity of bundled services. Management also expects that our RGU per unique subscriber, currently at the level of 1.39, will continue to increase going forward. Another factor that is expected to have a significant effect on the RGU/HC rate is digital television over cable networks which we intend to launch in Our customers will be offered digital television packages and additional services, such as video-on-demand etc. 30

31 MULTIMEDIA POLSKA S.A. Directors Report on the Operations of Multimedia Polska S.A. for the Year Ended 31 December Changes in the Key Principles of Managing Multimedia Polska S.A. The key changes in management principles in 2006 result directly from the fact that Multimedia Polska S.A. became public and its securities were listed on the Warsaw Stock Exchange on 13 November Consequently, the Company must comply with certain requirements set out by competent regulatory authorities for issuers of securities, e.g. regarding obligatory disclosures and best practices in public companies. The main legal and procedural changes involved amending the Company s corporate documents and bringing them to the standards of the public market. In addition, the Management Board of Multimedia Polska S.A. continues to streamline the structure of the group in order to exclude mutual settlements and reduce operating expenses. As a result, Multimedia Polska S.A. was merged with three of its subsidiaries in Detailed information regarding the changes in the group structure is provided in point 1 of the annual consolidated report for Multimedia Group. In mid 2006, we ceased to outsource telecom network maintenance services to third parties and incorporated those services into our structures. We also reorganised our sales department in order to increase the efficiency of each sales channel; we also focused on expanding our Call Centre. 28. Foreign Exchange Rates The table Selected Financial Information contains items of the income statement and the cash flow statement for 12 months ended 31 December 2006 and 31 December 2005, and items of the balance sheet as at 31 December 2006 and 31 December 2005 translated using the following EUR/PLN exchange rates: 31 December December 2005 Balance sheet (1) Income statement, cash flow statement (2) (1) Average exchange rate published by the National Bank of Poland for the given day. (2) Average of average daily exchange rates for the reference period. 31

32 Statement by the Management Board of Multimedia Polska S.A. In accordance with the provisions of the Regulation of the Minister of Finance dated 19 October 2005 on current and periodic information to be published by issuers of securities, the Management Board of Multimedia Polska S.A. represents as follows: - to the best of our knowledge the annual financial statements and the comparable information have been prepared in compliance with International Financial Reporting Standards and give a true, fair and clear view of the assets, financial standing and net result of Multimedia Polska S.A., and the Directors Report on the operations of Multimedia Polska S.A. truly reflects the development, achievements and situation of Multimedia Polska S.A., including the description of the key risk factors and threats; - Ernst & Young Audit Sp. z o.o. in Warsaw, the qualified auditor of financial statements who audited the annual financial statements, had been selected in compliance with the provisions of the law. The auditing firm and the qualified auditors who performed the audit met the conditions to issue an impartial and independent auditor s opinion in accordance with the applicable provisions of the national law. Warsaw, 6 June 2007 Andrzej Rogowski Arkadiusz Dorynek President Vice President

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35 MULTIMEDIA POLSKA S.A. FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31 ST 2006, AND THE AUDITOR S OPINION