Zesko Holding B.V. Annual Report Building the next level

Transcription

1 Zesko Holding B.V. Annual Report 2010 Building the next level

2 Content Ziggo at a glance 2 Introduction 2 Our products 3 Facts & figures 4 Highlights 6 Chairman s statement 8 CEO s statement 10 Ziggo s strategy 12 Financial statements 40 Consolidated income statement 40 Consolidated statement of comprehensive income 41 Consolidated balance sheet 42 Consolidated statement of changes in equity 43 Consolidated cash flow statement 44 Notes to the consolidated financial statements 45 Performance 16 Operating review 16 Financial review 18 Governance 26 Corporate governance 27 Risk management 28 Corporate social responsibility 31 Supervisory Board 32 Board of Management 34 Senior Management 35 Parent company financial statements 84 Parent company income statement 84 Parent company balance sheet 85 Notes to the parent company financial statements 86 Appropriation of result 89 Independent auditor s report 90 Other information 92 Contact details and address 92 Disclaimer 92

3 Ziggo at a glance Ziggo is a leading provider of entertainment, information and communication through television, broadband internet and telephony services. The Company serves approximately 3.1 million households, over 1.5 million broadband internet customers, approximately 1.8 million digital television customers and over 1.1 million telephony customers. Business-to-business customers use services such as data communication, telephony, internet and television. The Company owns a nextgeneration network capable of providing the bandwidth for all future services currently foreseen. The majority of the share capital of the Company is held (through holding companies) by two private equity firms: Cinven and Warburg Pincus. Cinven Cinven is a leading European buyout firm, founded in 1977, with offices in London, Paris, Frankfurt, Milan and Hong Kong. We acquire Europeanbased companies that require an equity investment by our funds of 100 million or more. Our European focus and expertise are complemented by an ability to capitalise on global growth opportunities through our Asian office. We focus on six sectors: Business Services, Consumer, Financial Services, Healthcare, Industrials and Technology, Media and Telecommunications (TMT). Cinven acquires successful, high-quality companies and works with them to help them grow and develop, using our proven value creation strategies. Typically, Cinven holds its investments for between four to six years. We take a responsible approach towards our portfolio companies, their employees, suppliers and local communities, the environment and society as a whole. Warburg Pincus Warburg Pincus has been a leading private equity investor since During the past 40 years, the firm has invested more than USD 35 billion in approximately 600 companies in more than 30 countries around the world. Warburg Pincus is a growth investor and an experienced partner to management teams seeking to build durable companies with sustainable value. It invests in a range of sectors, including information and communication technology, media and business services, healthcare, financial services, energy, consumer and industrial. 2 Zesko Holding B.V. Annual Report 2010 Building the next level

4 Our products Television Approximately 3.1 million households subscribe to Ziggo s standard television package, which represents 75% penetration of homes passed in our service area. This package comprises 60 digital TV channels in High Definition, 30 analogue TV channels and 60 radio channels. There is no additional subscription charge for watching the standard digital package so the threshold for switching to digital TV is low. In addition many customers subscribe to premium digital content (for example sports and movies) in SD and HD as well as Video on Demand (VoD) services. Internet Ziggo has over 1.5 million broadband internet customers, which represents 37% penetration of homes passed in our service area. The implementation of EuroDOCSIS 3.0 in 2010 enabled Ziggo to offer internet speeds up to 120Mbps throughout its entire service area. Telephony Ziggo offers three different telephony packages. Telephony Z1 Basic offers high quality telephony at a fair price and half-price calls to other Ziggo customers. Telephony Z1 Evening/Weekend adds free unlimited calls to Dutch fixed lines in the evenings and weekends and Telephony Z1 Always adds free unlimited calls to Dutch fixed lines at all times. Bundles ( Alles-in-1 ) The All-in-1 triple play bundle for Television, Broadband Internet and Telephony is very popular. In 2010 Ziggo saw the uptake of its triple play bundle grow strongly, reaching over a million customers. Ziggo at a glance Our products 3

5 Facts & figures Zesko Holding B.V. Annual Report 2010 Building the next level

6 7,000,000 Users 3,100,000 Households 1,800,000 Digital TV customers 1,500,000 Broadband Internet connections 1,100,000 Telephony customers 2,203 Employees 98% Fibre network Offering approximately 7 million individual users a variety of products and services across our service area. Serving about 3.1 million households, Ziggo is one of the largest providers of media and communication services in the Netherlands. With over 1.8 million digital TV customers, we are the largest digital television provider, offering the best digital TV quality, in Standard Definition, High Definition and On Demand. With over 1.5 million broadband internet customers, Ziggo is one of the leading companies in high speed internet connections. Over 1.1 million customers use Ziggo telephony services on a daily basis. Our dedicated employees work day-in, day-out to meet our customers expectations. The Ziggo network consists of 98% fibre, extending on average to less than 300 metres from customer homes and offices which are connected via a high-capacity coaxial cable with a peak/busy hour volume of 3-4 Gbps. Field of activity Product overview (in thousands) Homes passed 4,141 4,075 Television 3,087 3,165 Paid digital services Service area Ziggo Broadband Internet Television subscriptions (in thousands) Telephony 1,549 1,449 1, ,804 1,613 Triple play/bundles 1,283 1, ,094 1,000 2,000 3,000 4,000 Digital Analogue Ziggo at a glance Facts & figures 5

7 Highlights Financial highlights As per 31 December FY 2010 FY 2009 Change % Revenues 1, , % Cost of goods sold % Gross margin 1, , % 80.7% 79.5% Operating expenses % Adjusted EBITDA (1) % Adjusted EBITDA as a % of revenue 56.9% 54.1% Integrations costs % EBITDA (2) % Depreciation and amortisation % Operating income % Movement in provisions Change in net working capital Cash flow from operating activities % Capital expenditure % As a % of revenue 12.7% 16.6% Capital expenditure on integration % Total capital expenditure (Capex) % Other cash used in investing activities Free cash flow % As a % of revenue 40.2% 33.7% EBITDA-Capex % As a % of revenue 41.6% 30.6% 6 Zesko Holding B.V. Annual Report 2010 Building the next level

8 Operational highlights Footprint (3) as per 31 December Change % Homes passed 4,141 4, % Total TV customers 3,087 3, % Analogue TV only 1,283 1, % Analogue and Digital TV (4) 1,804 1, % With paid digital services % Broadband Internet 1,549 1, % Telephony 1, % Of which All-in-1 bundle (5) 1, % Total triple play 1, % RGUs (6) 6,699 6, % RGU per customer (7) % ARPU ( per month) (8) % Definitions/footnotes (1) Adjusted EBITDA refers to EBITDA as adjusted to remove the effects of operating expenses incurred in connection with the integration of our predecessor businesses, which were respectively 8.2 million and 47.1 million for the full years ended on 31 December 2010 and 31 December (2) EBITDA represents operating income plus depreciation and amortisation. Although EBITDA should not be considered a substitute for operating income and net cash flow from operating activities, we believe that it provides useful information regarding our ability to meet future debt service requirements. (3) Operating data related to our footprint and Revenue Generating Units (RGUs) are presented as of the end of the period indicated. (4) Digital television subscribers equals the total number of standard cable subscribers who have activated a smart card as of the periods indicated. As a result, digital television subscribers represents the number of subscribers who have access to our digital television services. In any given period, not all of these digital television subscribers will have subscribed to additional pay television services. As per 31 December 2010, 897,000 of our total digital television subscribers subscribed to one or more of our Digital Pay television services. (5) Besides the 1,074,000 customers who have taken up the All-in-1 bundle, we have approximately 20,000 other customers who have subscribed to Analogue TV and/or Digital TV, Broadband Internet and Telephony on an individual product basis instead of an All-in-1 bundle. (6) RGUs are calculated as the sum of the total TV, Digital Pay TV, Broadband Internet and Telephony subscribers. (7) RGU per customer is the total number of RGUs divided by the total number of TV customers. (8) Average Revenue per User (ARPU) is calculated as the sum of total standard TV, Digital Pay television, Broadband Internet, Telephony (including call charges), All-in-1 subscription revenue and interconnection revenues for the period divided by the number of months used and divided by the period s average monthly total standard TV RGUs. It excludes installation fees and set top box sales. Ziggo at a glance Highlights 7

9 Chairman s statement Ziggo delivered solidly in line with its aspirations to deliver best in class quality services to its customers in 2010, with virtually unmatched internet speeds, a compelling TV proposition, economical telephony and, of course, with the market leading All-in-1 bundle for all three services. The attraction of Ziggo s offer is demonstrated time and again by customers who are buying Ziggo s products and services, including additional premium digital packages. In 2010 we strengthened the management team. We were pleased to extend the contract with Bernard Dijkhuizen as CEO to 2014; he has led the Company through its successes in the last few years. In addition, Bert Groenewegen has joined as Ziggo s new CFO. His deep previous experience in this role will serve Ziggo well. Also, the Board of Management was extended to four people with the addition of Paul Hendriks, Chief Technology Officer, recognizing the pivotal role that Ziggo s technology and network play in its success. Ziggo also saw an influx of several new managers in senior positions. The Supervisory Board was pleased to see the team strengthened and grow with experienced new people. A highlight of the year was the way we were able to improve our capital structure. Firstly we continued to pay down debt significantly de-leveraging the business. Secondly, we were able to issue two new Senior Notes, both of which reduced the Company s cost of capital/debt and extended the maturity dates. The investor acceptance of these notes was encouraging, with both significantly oversubscribed. This now puts Ziggo in a more transparent disclosure mode with our results now publicly disclosed quarterly. In the course of the year the Supervisory Board and the Board of Management shifted from a focus of merging together the three former companies from which it was created, to one of looking to the future and the strategies we need to implement to drive growth. The focus is on investment in new services such as higher speed broadband, expanded digital TV offerings, mobile and increased capacity to keep up with the dramatic internet services expansion. We are confident that Ziggo is well positioned to deliver on its goals for the future. Ziggo took the difficult, but in the long run correct, decision to merge the systems of the three former companies into one integrated company. Its processes and management are now poised to deliver more for its customers, shareholders and staff. Ziggo operates in one of the most exciting arenas in the world, giving customers access to services that were only dreamed about a decade ago. It is an exciting place to work because it not only delivers services that enhance people s lives and entertains, but also does so in an economical way for customers. Through its significant investments over the last decade, Ziggo has greatly contributed to putting homes in the Netherlands in a world leadership position in broadband access and new digital TV services. The current year and the years ahead will be built on this sound foundation. Andy Sukawaty, Chairman April Zesko Holding B.V. Annual Report 2010 Building the next level

10 We are confident that Ziggo is now well positioned to deliver on its goals for the future Ziggo at a glance Chairman s statement 9

11 CEO s statement Building the next level The year 2010 was a good year for growth in all areas of importance to Ziggo. Based on EuroDOCSIS 3.0 technology, we rolled out the highest internet speeds in the market to our customers. These high speeds combined with our leading TV proposition and digital telephony, enabled us to offer very attractive bundles: we broke the 1 million bundle customers barrier. This strongly contributed and will continue to contribute to a substantial growth in subscriptions and revenue. Digital TV penetration rates continued to increase, digital TV is becoming the de facto standard. We started 3D TV, expecting this to become more important in the future. Both the digital TV penetration increase and the use of digital pay TV were drivers of continued digital TV revenue growth. The high internet speed of 120 Mbps, rolled out throughout our entire service area, also enabled us to offer the business-to-business market a highly competitive proposition. Having refocused our approach to serving small and medium-sized enterprises, business-to-business is also one of the areas in which we can realise further growth. The integration of the former three companies into one new company is complete. Investments made in creating Ziggo are now visible, resulting in very efficient operations and a solid free cash flow. Over the past years we have deleveraged substantially. We issued two Senior Notes of million in total in All this has resulted in our current, more robust financing structure. In April, Ziggo acquired mobile spectrum, together with UPC. This adds a future asset to mobile opportunities for internet, video and telephony. Implementation plans will become clear in the second half of We continued to invest in the quality of our infrastructure and our people. Overall, we have invested substantially in training our entire workforce, from call centre agents to Senior Management. Our employee satisfaction levels have made impressive, upward steps. We are proud to have people working at Ziggo with high loyalty levels, inspiration and drive; we would like to thank everyone for contributing so much to the realisation of the ambitious company goals. Our efforts to structurally improve our customer satisfaction levels paid off, but there is room for further improvement in some of our customerfacing processes. We will continue to aim at higher satisfaction levels, both by improving internally and by enriching our brand experience. We are looking forward to We have invested in innovative services, our employees, infrastructure, processes and our reputation with all our stakeholders. Millions of customers continue to put their trust in us. In 2011 we will be able to take Ziggo to the next level. Bernard Dijkhuizen, CEO April Zesko Holding B.V. Annual Report 2010 Building the next level

12 We continued to invest in the quality of our infrastructure and our people Ziggo at a glance CEO s statement 11

13 Ziggo s strategy Ziggo s strategic framework has proven to be a very solid foundation for building the Company s success. It is aimed both at optimizing current business and at building new business by matching Ziggo s core strengths to key market trends. One of Ziggo s core strengths is its fully-owned, fully EuroDOCSIS 3.0 enabled network, with fibre very close (less than 300 metres) to the customer. This network allows Ziggo to provide the best TV picture quality in the market and the highest internet speeds (up to 120 Mbps) for the largest number of people. Ziggo will continue to invest in this strategic asset to allow customers to enjoy higher internet speeds and superior TV. Ziggo s triple play bundle is appreciated by almost 1.1 million customers. We expect continued growth for bundles and we will actively promote the digitalization of our cable subscriber base and the development of our digital television offerings. We need to further enhance customer satisfaction and reduce churn rates through operational excellence. Service leadership remains a longterm goal. This is the reason why customer satisfaction is a key component in variable pay targets within the Company. In addition we invest heavily in customer service people and systems. The further development of the Ziggo brand towards customer experience and entertainment will further support customer satisfaction and growth. Ziggo opened its first two studios in 2010 in which people can buy products, obtain service or enjoy one of the many activities that are organised in the studios. For 2011, we will bring a new television package to our customers, substantially enriched with high definition channels, 3D and interactive television as part of the standard TV product. Over the medium to longer term, Ziggo has the ambition to bring its products and services to all screens used by people to enjoy content. This will also mean making a switch from household-based services to individual services. Later this year, Ziggo will make its first steps into the mobile market. The Company is currently considering how best to approach this entry and is making the necessary preparations in order to leverage its existing infrastructure. In addition to these developments in the consumer market, Ziggo intends to grow in the business-to-business market. This growth will be based on a strategic repositioning of the Company s business-tobusiness activities: a greater focus on small to medium-sized enterprises, with a view to supplying predominantly standard services across the existing network. 12 Zesko Holding B.V. Annual Report 2010 Building the next level

14 Ziggo at a glance Ziggo s strategy 13

15 Digital Television: 1.8 million customers 60 digital channels A world of choice 14 Zesko Holding B.V. Annual Report 2010 Building the next level

16 The market for digital television is growing rapidly. More than one in two households now has digital television, one in five households owns a High Definition TV receiver. Ziggo is at the forefront of bringing the most advanced and feature-rich high-quality television entertainment into the living room, offering 30 channels, both analogue and digital, plus an additional 30 digital channels, an increasing number of channels in HD, many special-interest packages, and interactive television, including Video On Demand. 15

17 Performance Operating review Ziggo saw full synergies realised in 2010, with strong growth in subscribers and revenue, primarily based on having the best triple play bundle in the market, including appealing propositions for television and high speed internet. Customer satisfaction levels continued to increase, owing both to the quality of our products and services and to improved customer processes. At the end of December 2010, total RGUs reached 6.7 million, an increase of 4.8% compared to the previous year. This growth was driven by sales of All-in-1 bundles and a lower churn level. By the end of the year, Ziggo welcomed its millionth All-in-1 bundle customer, further consolidating its position as market leader in triple play bundles in the Netherlands. Additionally, the total number of digital viewers rose 16.2% to 1,804,000, while similar growth of 15.3% was achieved in the number of customers with paid digital premium subscriptions. Network In the fourth quarter, Ziggo continued to invest in customer installations and expansion of its network capacity. Approximately 100,000 modems were successfully replaced enabling current and future high speed internet users to enjoy internet speeds at the top of the market. By the end of the year approximately 475,000 customers did have a new EuroDOCSIS 3.0 modem installed, enabling these customers to reach download speeds up to 120 Mbps. This modem swap will continue in 2011 for an additional 430,000 subscribers. The total amount invested in Ziggo s infrastructure and systems in 2010 was over 200 million, bringing the total amount invested since the merger to over 1 billion. These continuing investments in Ziggo s next generation network 16 Zesko Holding B.V. Annual Report 2010 Building the next level

18 allowed the Company to increase internet speeds in 2010 (up to 120 Mbps), further strengthening Ziggo s position as provider of high speed internet access at an excellent price to quality ratio. Ziggo is at least ten years ahead of the EU digital agenda for The number of internet subscriptions grew by 6.9% to million. Products & services Customers are increasingly convinced of the benefits of digital television, as reflected in the number of subscribers who activated their digital smartcards throughout the year, with a sharp rise in the fourth quarter. This growth was supported by various marketing campaigns in which Ziggo offered its subscribers a set top box at an attractive price. During the year, Ziggo shipped approximately 330,000 set top boxes to support the migration to digital, HD and Interactive TV. Penetration of digital television increased by 9.4% compared to December 2009, resulting in a digital penetration of 58.4% of the total television subscriber base at the end of December This base of Digital Pay TV subscribers serves as an important driver for future growth in paid digital services, which was already visible in Over the full year, the total number of subscribers to paid digital services increased by 15.3% compared to This increase supported the 34.1% growth in revenues from Digital Pay TV. Customer satisfaction levels improved further during the year and will remain a management priority for Major steps were taken to improve customer service processes and will continue in pursuit of service leadership. For the first time, Ziggo received the customers choice award for the Best Internet Provider in the Netherlands and the Website of the Year award in the Telecommunications sector. Both awards show that process improvements are paying off and leading to higher customer satisfaction. In addition, Ziggo opened a number of studios in 2010 in which people can buy products, obtain service or enjoy one of the many activities that are organised in the studios. The Company also introduced Service +, a paid service to help customers with matters that are outside Ziggo s original service scope, such as home installations and related equipment. Business-to-business During 2010, we refocused our business services strategy which is more focused on the small and medium-sized business-to-business segment, based on the strength of our infrastructure. The roll-out of EuroDOCSIS 3.0 across our entire network enables us to offer very attractive high speed internet and high quality telephony services to this market. Our extensive campaign to relaunch our business services featured several new products in the third quarter and is already producing positive results. Performance Operating review 17

19 Financial review Revenues We generated revenues of 1,375.7 million in 2010, up 7.1% from 2009 ( 1,284.4 million). Revenue growth was driven mainly by sustained growth in our subscriber base for our core residential products of digital TV, Broadband Internet and fixed-line telephony and by a higher overall ARPU per subscriber. Consumer market revenues grew 8.1% to 1,298.3 million in This was primarily due to an increased uptake of our All-in-1 bundle, driving RGUs per subscriber from 2.02 in 2009 to 2.17 in 2010, growth in paid digital television and in telephony usage. Revenues from paid digital television services rose 34.1% to million. In 2010 we achieved quarter-on-quarter revenue growth from subscriptions for each quarter. Blended ARPU for the full year 2010 was 33.28, an increase of 3.35 (11.2%) compared to the prior year. The increase in blended ARPU was attributable to the increased uptake of our All-in-1 bundle compared to the prior year, a price increase for our All-in-1 bundle as of 1 January 2010, and growth in paid digital television and telephony usage. Our business services activities realised revenues of 77.4 million in 2010, down 7.2% from the prior year revenue of 83.4 million. This was due to non-recurring revenue of 7.6 million in 2009, excluding which our business-to-business revenues increased by 2.1% in 2010 compared to Cost of goods sold Cost of goods sold includes the costs of materials and services directly related to revenues. It consists of author rights, signal costs and royalties paid to procure our content, interconnection fees that we pay to other network operators, materials and logistics costs relating to the sale of set top boxes and materials used to connect customers to our network. Cost of goods sold excluding integration expenses increased by 0.8% to million in 2010, chiefly reflecting growth in digital television and paid digital television. The gross margin for 2010 was 80.7%, a 1.2% improvement compared to 2009 (79.5%) arising from improved economies of scale for Digital Pay television and Telephony. In addition, we shipped approximately 330,000 set top boxes and CI+ modules to our customers in 2010, versus approximately 580,000 in As we ship these set top boxes and CI+ modules at a neutral gross margin, our gross margin benefits from lower volumes of these set top boxes and CI+ modules. Operating expenses Operating expenses excluding integration expenses edged up 1.4 million to million in 2010 from million in Following the limited increase in operating expenses by 0.4% and the revenue increase of 7.1%, operating expenses as a percentage of revenue decreased from 25.4% in 2009 to 23.8% in Spending on marketing & sales increased by 6.8 million, or 12.2%, to 62.1 million in The three predecessor companies of Ziggo are now fully integrated and the synergies have been fully realised. Adjusted EBITDA and operating profit We realised an adjusted EBITDA of million in 2010, an increase of 12.6% compared to The adjusted EBITDA margin improved to 56.9%, 18 Zesko Holding B.V. Annual Report 2010 Building the next level

20 from 54.1% for the prior year. The margin improvement is primarily due to higher revenues supported by operating leverage. Adjusted EBITDA excludes integration expenses. Integration expenses for the year were 8.2 million compared to 47.1 million for The integration of the three predecessor businesses has now been finalised with the completion of the last integration projects. Depreciation expenses in 2010 increased by 8.6% to million compared to million for the prior year, whereas amortisation rose 1.4% to million from million in We recognised an impairment of 10.9 million for certain assets in 2010 as the expected future benefits from these assets declined during the year. Excluding the impairment, total depreciation and amortisation in 2010 increased by 3.0% compared to last year. In 2010 the EBITA was million, an increase of 27.0% compared to million for Operating income increased by 64.4% to million in 2010, compared to million in the previous year. Net result Interest expenses excluding interest from shareholders loans decreased to million in 2010, compared to million last year. A lower average balance for interest bearing debt, the refinancing of our Mezzanine facility with unsecured Senior Notes against a lower interest rate and a lower average Euribor resulted in reduced interest expenses, although approximately two-thirds of the Company s borrowings were at fixed interest rates taking into account the effect of interest rate swaps. Following the refinancing of part of the Senior Debt through the issuance of Senior Secured Notes for an amount of 750 million on 28 October 2010, interest rates are currently locked in for approximately 99% of the Company s total borrowings. Additionally, an amount of 13.2 million was allocated as borrowing costs on work-in-process for the year resulting in an interest credit; in 2009 this amounted to 3.4 million. Interest from shareholders loans increased to million from million last year. Interest is added to the loan. Banking and financing fees increased to 17.8 million mainly due to fees of 15.0 million paid to the lenders of the Senior Debt in order to obtain consent for the issuance of the unsecured Senior Notes to refinance the Mezzanine facility. Excluding these consent fees, banking and financing fees would have decreased by 20.5%. As a result of the issuance of the unsecured Senior Notes, the floating interest position decreased by 1.2 billion. Consequently, we adjusted our hedge position by partly reducing our existing Interest Rate Swap (IRS) position to offset the over-hedged position. With the issuance of 750 million in Senior Secured Notes on 28 October 2010, Ziggo decided to maintain 99% of its debt at a fixed rate. Ziggo consequently no longer complies with the requirements for hedge accounting for interest rate swaps under IFRS. Therefore any future change in fair value must be recognised as financial income and expense. Since the issuance of the Senior Notes, we have incurred a loss of 6.9 million for value gains and losses on our IRS in the fair value of financial derivatives. This loss will reverse if interest rates rise. The amortisation of funding costs increased to 53.7 million in 2010, from 17.3 million in Due to the refinancing of the Mezzanine facility, the remaining capitalised funding costs for this facility, amounting to 11.4 million, were fully amortised in the second quarter. Similarly, the refinancing of part of our Senior Debt resulted in an additional amortisation of the funding costs of 24.6 million in the fourth quarter. We recorded an income tax credit of 75.3 million for the year 2010, a decrease compared to 84.9 million for last year due to a reduced loss before income taxes. Performance Financial review 19

21 In 2010 Ziggo reported a net loss of million, an improvement from the net loss of million for the prior year. The net loss includes an amortisation charge of million before tax on the intangible assets which resulted from the acquisition of the three predecessor businesses. Without this amortisation charge net of taxes, Ziggo would have reported a net loss of approximately 68 million. Cash flow and liquidity Cash flow provided by operating activities EBITDA including integration costs increased by 19.6%, whereas net cash flow from operating activities increased by 9.9% to million, compared to million in the prior year. This is mainly due to an increase in net working capital of 13.7 million, which negatively affected cash flow from operating activities, compared to a decrease in net working capital of 34.4 million last year. The net working capital increase results from a relatively high balance of current liabilities at 31 December 2009, following high capital expenditures in the last months of This resulted in a cash outflow from the increase in net working capital in Capital expenditure (Capex) Our capital expenditure relate primarily to extending, upgrading and maintaining our network, installation of new customers and the cost of cable modems. Capital expenditure also includes increases in intangible assets, primarily expenditures on software, which we capitalise. Decoders and set top boxes are sold to customers and therefore recognised as cost of goods sold and not capitalised. Capital expenditure in 2010 was million, including 27.5 million for the integration of the networks of the three predecessor companies. In 2009, capital expenditure was million, including 42.3 million related to integration. Excluding capital expenditure on integration, 23% of the capital expenditure in 2010 was related to customer installations and modem installations at customer premises (approximately 21% in 2009), whereas 59% was related to growth of our network capacity to accommodate our increased subscriber base for broadband internet and broadband speed requirements (approximately 59% in 2009). This implies that approximately 80% of our capital expenditure in 2010 was scalable and directly growth- or subscriber-related. The remainder represents maintenance and replacements of network equipment and recurring investments in our IT platforms and systems. Capital expenditure in 2010 was relatively low compared to previous years due to our decision to expend a portion of our budgeted 2010 capital expenditures during the latter months of 2009, the integration and harmonization of our predecessor businesses was finalized in the course of 2010 and the delay of the availability 20 Zesko Holding B.V. Annual Report 2010 Building the next level

22 of EuroDOCSIS 3.0 modems in 2010 towards the end of the year. A program to swap EuroDOCSIS 2.0 modems for EuroDOCSIS 3.0 modems at the subscriber premises, to make our highest internet speeds available for a broader group of subscribers, started in November 2010 and will continue in 2011 and Free cash flow and net cash used in financing activities Operational free cash flow (EBITDA minus Capex) increased considerably by 45.6% to million in 2010, compared to million in Free cash flow increased by 27.6% and included a cash outflow due to an increase in working capital of 13.7 million versus a cash inflow of 34.4 million in 2009 as a result of a decrease in working capital during Net cash used in financing activities for the year comprises interest costs, banking and financing fees related to our loan facilities, repayments on the Senior Credit Facilities and the refinancing of the Mezzanine facility and part of the Senior Debt by the issuance of unsecured Senior Notes and Senior Secured Notes. On 7 May 2010 we successfully completed the refinancing of our Mezzanine facility by the placement of 1,209 million unsecured Senior Notes and repaid the Mezzanine loan of 1,181 million, including PIK-interest and regular cash interest accrued until 7 May. As a result of the refinancing we incurred financing fees of 41 million, comprising fees of 15.0 million paid to the Senior Debt lenders in order to get their consent for the issuance of the unsecured Senior Notes and 25.9 million in banking and advisory fees paid in relation to the issuance of the unsecured Senior Notes, which have been capitalised and will be amortised over the term of the unsecured Senior Notes. relation to the issuance of the Senior Secured Notes, which have been capitalised and will be amortised over the maturity of the Senior Secured Notes. During 2010, we made voluntary repayments of 273 million on our Senior Debt, compared to 160 million in the previous year. Interest paid amounted to million, a decrease of 1.9% compared to million in Although the Senior Debt has decreased by 273 million and the repayment of the Mezzanine loan reduced the effective blended interest rate, cash interest has fallen by only 2.4% as the interest rate on the Mezzanine loan consisted of a non cash interest component (PIK interest) of 4.75%, which was accrued and added to the outstanding principal amount. In 2009, 53.8 million of interest costs on the Mezzanine loan was accrued and added to the principal amount compared to 21.8 million in 2010 before the Mezzanine loan was repaid on 7 May of that year. On 31 December 2010, Ziggo held 67.0 million in cash and cash equivalents, compared to 65.3 million the year before. Working capital The net working capital excluding accrued interest increased from -/ million as at 31 December 2009 to -/ million as at 31 December This increase resulted from a relatively high balance of current liabilities at 31 December 2009 following high Capex expenditures in the last months of Current liabilities excluding accrued interest decreased by 39.0 million during 2010 while current assets decreased by 25.3 million, resulting in a cash outflow from the increase in net working capital by 13.7 million. On 28 October 2010 we successfully completed the refinancing of part of our Senior Debt by the placement of 750 million in Senior Secured Notes. As a result of this refinancing we incurred 10.6 million in banking and advisory fees in Due to the price increase for standard cable subscribers as of 1 February 2011, we decided to delay the invoicing for the first quarter to January 2011, instead of December 2010, in order to ensure a correct billing process. This was only the Performance Financial review 21

23 case for customers with a quarterly subscription for standard cable TV. The delayed billing resulted in a lower balance for trade accounts receivable of approximately 8 million and lower deferred revenue of approximately 10 million as at December 31, Without this delayed billing our trade accounts receivable would have been approximately 28 million, a significant improvement from 43.6 million as at 31 December Net debt and financing structure On 31 December 2010 the outstanding balance of our Senior Credit Facilities amounted to 1,632 million, a reduction of 1,023 million compared to 2,655 million as of 31 December 2009 due to voluntary repayments on our Senior Debt of 273 million and the refinancing of part of the Senior Debt by the issuance of 750 million in Senior Secured Notes. The unsecured Senior Notes are due in May 2018, carry a coupon of 8.0% per annum and were issued at a price equal to % of their face value to yield around 8.125% per annum. The Senior Secured Notes will mature on November 2017, carry a coupon of 6.125% per annum and were issued at par. Interest on the Senior Notes is due semi-annually and as per 31 December 2010 an amount of 20.2 million has been accrued under current liabilities. The refinancing led to reduced financing costs for the Company, reduced risk related to changes in market interest rates and an extension of the debt maturity. As at 31 December 2010, the unsecured Senior Notes amount to 1,176.5 million and is stated at amortised cost, including the principal amount, capitalised funding costs and discount on issuance date. The financing fees for the Notes issuance amount to 25.8 million and will be amortised over eight years. As at 31 December 2010 an amount of 1.6 million has been amortised resulting in capitalised financing fees at 31 December 2010 of 24.2 million. At 31 December 2010 the balance for the Senior Secured Notes amounted to million and is stated at amortised cost, including the principal amount and capitalised funding costs. The financing fees for the Senior Secured Notes issuance amount to 10.6 million and will be amortised over seven years. As at 31 December 2010 an amount of 0.2 million has been amortised resulting in capitalised financing fees at 31 December 2010 of 10.4 million. Loans from financial institutions amounted to 1,581.1 million as at 31 December These loans include 50.6 million of capitalised financing fees. Exposure to the risk of changes in market interest rates relates primarily to Ziggo s long-term debt obligation with a floating interest rate. Ziggo manages its exposure to changes in interest rates and its overall cost of financing by using Interest Rate Swap (IRS) agreements. They are used to transform the interest exposure on the Senior Credit Facility loans. As a result of the repayment of our Mezzanine loan and part of the loans from financial institutions by the issuance of our unsecured bond and secured notes, the floating interest position decreased by 1.95 billion. At 31 December 2010 approximately 99% of Ziggo s floating interest borrowings have been swapped. The fair value of the IRS amounts to -/ million, compared to -/ million as at year-end Since the issuance of the Senior Secured Notes on 28 October 2010, any change in fair value must be recognised as financial income and expense as Ziggo does not comply with the requirements for hedge accounting under IFRS. In 2010, financial income and expense included an amount of 6.9 million (loss) for value gains and losses on IRS in the fair value of financial derivatives. Before the issuance of the 22 Zesko Holding B.V. Annual Report 2010 Building the next level

24 Senior Secured Notes, changes in fair value were recorded in the hedge reserve (equity). The hedge reserve as at 31 December 2010 amounted to -/ million and is amortised to the profit and loss in the period(s) when the forecast transaction occurs. As of 31 December 2010 our net debt to Adjusted EBITDA leverage ratio (as defined under our Senior Credit Facilities) was 4.5x, substantially down from 5.4x as at 31 December 2009 due to our strong EBITDA performance and strong cash generation. The average debt maturity is 5.8 years as of 31 December The summary of the loans from financial institutions and Senior Notes as at 31 December 2010 is: in million x LTM EBITDA Margin Maturity Facility A loan E % Sep-13 Facility B loan 1, E % Sep-14 Facility C loan E % Sep-15 Facility D loan E % Sep-16 Facility E loan (Senior Secured Notes) % Nov-17 Total Senior Debt 2, Unsecured Senior Notes 1, % May-18 Total debt 3, Cash Total net debt 3, Furthermore the Company has interest-bearing loans from shareholders which are repayable in full at the end of As at 31 December 2010 the shareholders loans amount to 2,065 million. The interest expense for these loans in 2010 amounted to million and is added to the loans. Financial policy The Company is financed through a combination of equity as well as subordinated shareholders loans and Senior Loans and Senior Notes. As at 31 December 2010 there was an equity deficit of million ( million). The negative equity has no influence on the operational performance of the Company and its ability to finance the operations. No changes were made in the objectives, policies or processes during the years ending 31 December 2010 and 31 December The Company made voluntary repayments on its loans of 273 million in By 31 December 2010, the Company had prepaid an amount of million in addition to the scheduled redemptions of million, underlining its strong performance as regards its ability to generate cash flows from operations. The Company is committed to further deleverage. Furthermore, we expect to be profitable in the foreseeable future. Outlook Considering our achievements in 2010, we expect further growth of our revenues and a modest increase in operating costs driven by the growth of our customer base. This will enable us to continue our strong financial performance in As data traffic is expected to increase considerably in the foreseeable future, even more than it has in recent years, capital expenditure is expected to rise as we expand the capacity of our network to stay ahead of our customers needs for high speed internet. Performance Financial review 23

25 I can t wait! 24 Zesko Holding B.V. Annual Report 2010 Building the next level

26 98% Fibre network Maximum internet speed Mbps Mbps Mbps The demand for high-speed broadband internet is rising. Customers want to be able to download quickly and have the world available at a mouse-click. The implementation of the EuroDOCSIS 3.0 technology across its network footprint will enable Ziggo to offer speeds of up to 120 Mbps in 2010 and in the future even up to 400 Mbps and beyond. 25

27 Governance 26 Zesko Holding B.V. Annual Report 2010 Building the next level

28 Corporate governance At the centre of Ziggo s corporate governance system is the statutory Board of Management comprising four members appointed by the shareholders the Chief Executive Officer, Chief Financial Officer, Chief Commercial Officer and the Chief Technology Officer. The Board of Management manages the Company and is responsible for its strategy and vision. The Board operates under the supervision of a Supervisory Board. The members of the Supervisory Board are appointed by the shareholders upon nomination by the Supervisory Board itself, in accordance with the Dutch two-tier board regime ( structuurregime ) which was adopted by Ziggo on a voluntary basis. The Supervisory Board assists the Board of Management with advice and supervises the Board of Management conduct of the general state of affairs of the Company. At the end of the financial year 2010, the Supervisory Board consisted of seven members, including the independent Chairman. The Board of Management meets on a weekly basis and Senior Management attends on a monthly basis. The Supervisory Board meets with the Board of Management on a monthly basis. Governance Corporate governance 27

29 Risk management All organizations face uncertainty and the challenge for management is to determine how much uncertainty to accept. Ziggo s Board of Management aims to continuously enhance the current risk management activities, ensuring that decision-making is facilitated and supported by transparent and accurate information and that legal and regulatory compliance objectives are achieved. Ziggo s integrated approach to risk management, internal control, integrity and compliance aids the Board of Management in developing and achieving its strategic, operational and financial objectives. This is fundamental for the day-to-day management of the Company and a critical success factor in ensuring that the execution of the strategy is delivered in a controlled, transparent and compliant manner. Key risks Understanding business, legislative, operational and financial risks is a vital element of Ziggo s management decision-making processes. The Board of Management has assessed Ziggo s risk profile and has identified the following key risks (their order below is not intended to reflect any order of importance, probability or materiality): Business and industry risks Ziggo operates in a competitive industry and faces significant competition from established and new competitors; the nature and level of the competition varies for each of the products and services we offer. Our growth prospects depend on a continuing demand for cable and telecommunications products and services and an increasing demand for bundled offerings, as well as economic developments in the Netherlands. It is difficult to predict the effect of technological innovations on our business; however, unsuccessful introductions of new products may result in customer churn and adversely affect our business. The video, broadband internet and telephony businesses in which we operate are capitalintensive. Significant capital expenditures, including expenditures for equipment and labour costs, are required to add customers to our network and to increase the capacity of our network in order to keep up with the increasing demand for broadband speed. If we are unable to pay for costs associated with adding new customers, expanding or upgrading our network or making our other planned or unplanned capital expenditures, our growth could be limited and our competitive position could be harmed. The Ziggo brand was established in mid-2008 and is accordingly still a relatively new company. To achieve our strategic ambitions we need to ensure that our customers also embrace our brand for products and services that are not currently in our product portfolio. Legislative and regulatory risks The television, broadband internet and telephony markets in which we operate are regulated more extensively than many other industries. Governmental regulation and supervision, as well as future changes in laws, regulations or government policy that affect us, our competitors or our industry, generally 28 Zesko Holding B.V. Annual Report 2010 Building the next level

30 strongly influence how we operate and will operate our business. Adverse regulatory developments could expose our business to a number of risks. Operational risks Ziggo products are at the heart of society and tightly integrated in our customers day-today lives, making customer satisfaction one of our key priorities. The continuity and quality of our (network) services is the primary condition for providing our services and subject to the highest service levels. If, however, these service levels are not met we may not be able to fulfil our customers needs, or our customers may not be satisfied by our products or services. This may lead to customer churn or additional costs to maintain our customer base. Operating in a capital-intensive business requires strong portfolio management to ensure the proper allocation of resources and funds for achieving our strategic ambitions. If we are not able to appropriate investments, our growth could be limited and our competitive position could be harmed. To support our capital expenditures we need personnel of the highest quality and with distinct expertise as this is crucial to the success of our operations. We may however not be able to attract and maintain those resources at all times, which may adversely affect our operations. Due to the nature of our business, our day-today operations are highly dependent on our IT infrastructure and applications. Disruptions affecting our infrastructure or our applications may have a negative impact on the continuity of our services to our customers and the support of our operations. The success of our products depends on, among other things, the quality and variety of the television programming delivered to our subscribers. We do not produce our own content, however, and depend upon broadcasters for programming. We have important relationships with a limited number of network equipment and software suppliers, call centres, installation and logistical partners. In many cases, we have made substantial investments in the particular supplier or partner, making it difficult for us to quickly change supply and maintenance relationships in the event that our initial supplier refuses to offer us favourable prices or ceases to provide the support that we require. Governance Risk management 29

31 Financial risks Ziggo s Board of Management manages the capital structure to safeguard the Company s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure. A downgrade in Ziggo s credit rating may negatively affect its ability to obtain funds from financial institutions, retain investors and banks and may increase its financing costs by increasing the interest rates of its outstanding debt or the interest rates at which the Company is able to refinance existing debt or incur new debt. Ziggo s capital structure includes a substantial amount of loans at floating interest rates, which exposes the Company to interest rate risk. This risk is managed by hedging at least 75% of the floating interest rate risk. Fluctuations in interest rates may, however, have a material adverse effect on Ziggo s financial results in any given reporting period due to changes in interest expenses and changes in fair value for the Interest Rate Swaps. Ziggo s agreements and instruments governing the loans contain certain restrictions, covenants and limitations that could adversely affect our ability to operate our business, to fund capital expenditure, to incur additional debt and to pay dividends. Our ability to service our debt and to finance our ongoing operations will depend on our ability to generate cash. Although we anticipate that we will generate positive cash flow after deducting interest and taxes, we are exposed to cash flow risks that can affect the level of positive cash flows. Operating in a capital-intensive business with rapidly changing technology requires careful review of life cycles for our assets and may result in additional depreciation or impairment costs. Due to the changing nature of our business, customer acceptance becomes more and more relevant, particularly when introducing new products for mobile devices. New product introductions may increase our bad debt risk. A certain portion of our purchases is executed in foreign currency, predominantly in US dollars, exposing Ziggo to exchange rate fluctuations from future commercial transactions. Although we generally enter into hedging arrangements and other contracts in order to reduce our exposure to exchange rate fluctuations, these measures may be inadequate or may subject the Company to increased operating or financing costs. In the normal course of business a company can have discussions about tax positions with the Dutch tax authorities based on its tax declarations. There is a risk that the Dutch tax authorities might take a different position on certain tax positions which can have an impact on the tax position of the Company. We refer to Note 22 of the consolidated financial statements for additional information on financial risks. 30 Zesko Holding B.V. Annual Report 2010 Building the next level

32 Corporate social responsibility Ziggo takes its responsibility as a provider of Television, Broadband Internet and Telephony services very seriously. The high-quality, reliable products and services we deliver play a very important role in millions of people s lives. Information, communication and entertainment support and enrich society and nurture social interaction. We are part of the social fabric and we want to contribute to its quality. Ziggo s direct sphere of influence includes its employees. Our employees enjoy modern, flexible benefits and are able to make choices that fit their personal priorities. Throughout the year the Company organises internal meetings and events, both formal and informal, for information exchange and social community building. Increasingly, employees are given the opportunity to do some volunteer work, or to make donations to good causes. Organised employee donation initiatives are doubled by the Company. Throughout 2010, Ziggo participated in a number of initiatives that benefit society or local communities. Some examples are: The launch of the Orion Web Box, which allows blind or partially sighted people to enjoy a wide variety of internet content; Ziggo Summer Movies, a project in association with local councils that provided an outdoor movie experience in impoverished urban areas; Sponsorship of the Leiden Film Festival to support a local and growing initiative to provide quality movies to new audiences; Employing people with challenges in the labour market to test equipment during a particularly busy period. At our 2010 Ziggo Conference, which is held annually and is set up as an independent platform for debating issues of relevance for society and the industry, we announced the launch of the Ziggo Open Society Prize. The prize will be awarded annually by an independent jury to the person, initiative or project that has made the biggest contribution to a society in which everyone is able to form and express their opinions, based on safe and full access to high quality information. In 2010, Ziggo stepped up its efforts to manage its environmental impact. In addition to measures already in place, it is currently introducing an integral waste management approach. Ziggo is also looking to reduce its carbon footprint, initially by looking at the lease cars. Governance Corporate social responsibility 31

33 Supervisory Board The Supervisory Board supervises the Company s activities and reports to shareholders. The Supervisory Board appoints the Chairman and members of the Board of Management and supervises Senior Management. Andrew (Andy) Sukawaty (Chairman) Andy Sukawaty (American national, 1955) is Chairman and CEO of the global mobile satellite communications service provider Inmarsat (LSE). He is also non-executive Chairman of Xyratex Ltd. (NASDAQ). Andy is a former Chairman of Telenet Communications NV (Belgium) and deputy chairman of O2 plc (LSE). Andy is best known for leading the fastest-growing wireless provider in the US, Sprint PCS, between 1996 and Prior to Sprint PCS, Andy was CEO of NTL (UK) Limited. In the 1980s, Andy was involved in the business development of mobile telephony and paging industries globally, serving in various senior management positions with US West Inc and AT&T. Caspar Berendsen (Cinven) Caspar Berendsen (Dutch national, 1975) joined Cinven in Since then he has worked on a number of transactions including Avolon, Partnership Assurance, Maxeda and Ziggo. He is a member of the Financial Services sector team. Prior to this, Caspar worked at JP Morgan in London, advising Dutch and Belgian clients in a variety of sectors. David Barker (Cinven) David Barker (British national, 1968) has been a member of the Technology, Media, and Telecommunications team since David has played a role at Cinven in a large number of transactions, including the buyouts of Eutelsat, Springer, Aprovia, MediMedia, IPC and Foseco. Prior to Cinven, David worked at both Morgan Crucible and Arthur Andersen. Joseph Schull (Warburg Pincus) Joseph Schull (Canadian national, 1961) joined Warburg Pincus in He is responsible for the firm s European investment activities and is a member of the firm s Executive Management Group, which coordinates the firm s activities on From left to right: Andrew Sukawaty, Caspar Berendsen, David Barker 32 Zesko Holding B.V. Annual Report 2010 Building the next level

34 a worldwide basis. He has been involved in a number of investments including Zentiva, Loyalty Management Group, Fibernet and Multikabel and is currently a director of Mach, a leading global provider of billing and settlement services to the mobile telecom industry. Technology since March He was formerly her Majesty s ambassador in China, Permanent Representative for the Netherlands to the United Nations in New York, Secretary General of the Ministry of Foreign Affairs and Deputy Director General at the Ministry of Economic Affairs. Paul Best (Warburg Pincus) Paul Best (British national, 1978), joined Warburg Pincus in 2002 and has been involved in a number of investments including Multikabel, Poundland, Premier Foods and Clondalkin. Prior to joining Warburg Pincus, Paul worked at Morgan Stanley. He is a director of Poundland. Dirk Jan van den Berg Dirk Jan van den Berg (Dutch national, 1953) was appointed as a member of the Supervisory Board in March He has been president of the Executive Board of Delft University of Anne Willem Kist Anne Willem Kist (Dutch national, 1945) joined the Supervisory Board in Anne Willem regularly advises the Ministries of Economic Affairs, Transport and Public Works, and Social Affairs and Employment. He was the first Director-General of the Dutch Competition Authority. He served as a member of the Executive Council of the Netherlands Authority for the Financial Markets and as Chairman of the Executive Board of Leiden University. Anne Willem began his career as a lawyer, and was a partner at Loeff Claeys Verbeke and Pels Rijcken & Droogleever Fortuijn. From left to right: Joseph Schull, Paul Best, Dirk Jan van den Berg, Anne Willem Kist Governance Supervisory Board 33

35 Board of Management Bernard Dijkhuizen Chief Executive Officer (Dutch national, 1949) Bernard became Chief Executive Officer in February 2007, having served as CEO of Essent Prior to October 2002, Bernard was Managing Director of Libertel Network (part of Vodafone). He has served as a member of the Board of Management of Libertel with responsibility for Marketing, Strategy and Business Development. Bernard s early career was with Fokker, in production, engineering and commerce. He was a member of the Board of Fokker Aircraft in the early 1990s with responsibility for Marketing, Sales and Services. He then became CEO of Aircraft Services at Stork and later Managing Director of Philips Projects between 1998 and Bert Groenewegen Chief Financial Officer (Dutch national, 1964) Bert Groenewegen became CFO of Ziggo on 1 March Before joining Ziggo, Bert was chairman of PCM Uitgevers, where he had previously been CFO. From 1993 to 2004 he was CFO of Exact Software (Euronext: EXACT). Prior to PCM and after Exact he worked at private equity firm General Atlantic Partners and prior to Exact he worked at Arthur Andersen. Marcel Nijhoff Chief Commercial Officer (Dutch national, 1961) Marcel became Chief Commercial Officer in February 2007, having previously been Chief Executive Officer at Multikabel during Between 1999 and 2001, Marcel worked for PrimaCom RegionMitte in Leipzig, Germany. During the late 1990s he was Vice President Marketing with A2000, the cable operator for From left to right: Bernard Dijkhuizen, Bert Groenewegen, Marcel Nijhoff, Paul Hendriks 34 Zesko Holding B.V. Annual Report 2010 Building the next level

36 Senior Management the greater Amsterdam area at the time (now merged into UPC). In previous roles, Marcel gained extensive experience in the media and communications industries at publishing, printing and advertising companies. Paul Hendriks Chief Technology Officer (Dutch national, 1968) From 1992, Paul managed a series of divisions at KPN, including Design & Development, Operations South-East, and Business Lines (Telephony and Broadband). He also managed a series of major change programs (Voice over IP and All IP). During his time with KPN, Paul served as crisis manager and managed the relationship with OPTA. Change management has been a continuing theme throughout Paul s career. He has acted as consultant, project manager and architect for a series of restructurings, reorganizations and innovations. Ziggo hired a number of new senior managers in 2010, bringing the total to date to eleven: Martine Ferment (1963), VP Customer Relations Jurriaan Pennink (1967), VP Consumer (as of 1 January 2011) Tom Verhulst (1954), VP Technology Operations John Simons (1960), VP Technology Development Milfred Hart (1966), VP Technology Regional Operations & Monitoring Peter Schrijnemaekers (1967), VP Control & Finance Hendrik de Groot (1965), Managing Director Business-to-Business Dedi Veldhuis (1952), VP Human Resources Management Arent van der Feltz (1960), VP Corporate Development, Legal & Regulatory and Public Affairs John Burger (1961), Director Corporate Communication Wouter van de Putte (1970), Director Investor Relations and Corporate Finance Governance Senior Management 35

37 Touch the Stars! 36 Zesko Holding B.V. Annual Report 2010 Building the next level

38 The most innovative concert hall in the Netherlands will open its doors early The Ziggo Dome is all about live music and entertainment. Big national and international artists will perform in the first quarter of Besides music and entertainment, the Ziggo Dome will also be the place to be for family entertainment and other events. This unique location is currently being built next to the Amsterdam Arena and will be able to house 15,600 music fans. Governance Senior Management 37

39 Financial statements 38 Zesko Holding B.V. Annual Report 2010 Building the next level

40 Content financial statements Financial statements 40 Consolidated income statement 40 Consolidated statement of comprehensive income 41 Consolidated balance sheet 42 Consolidated statement of changes in equity 43 Consolidated cash flow statement 44 Notes to the consolidated financial statements The company and its operations Basis of preparation Significant accounting policies Revenues Personnel expenses Net financial income and expense Income taxes Intangible assets Property and equipment Financial assets Inventories Trade accounts receivable Other current assets Cash and cash equivalents Equity attributable to equity holders Interest-bearing loans Interest-bearing loans from shareholders Provisions Other current liabilities Commitments and contingencies Related party disclosures Financial risks Financial instruments Adjustments of prior periods Subsidiaries Subsequent events 83 Parent company financial statements 84 Parent company income statement 84 Parent company balance sheet 85 Notes to the parent company financial statements Corporate information Significant accounting policies Shareholders equity Provision for the net capital deficit of investments Related party disclosures Subsequent events Auditor s fees 88 Appropriation of result 89 Independent auditor s report 90 Other information 92 Contact details and address 92 Disclaimer 92 Financial statements Content financial statements 39

41 Consolidated income statement For the years ended 31 December. Amounts in thousands of Note Revenues 4 1,375,742 1,284,395 Cost of goods sold 265, ,276 Personnel expenses 5 170, ,782 Contracted work 44,833 68,352 Materials & logistics 4,071 3,371 Marketing & sales 62,106 55,332 Office expenses 52,183 55,366 Other operating expenses 1,748 10,676 Amortisation and impairments 8 232, ,307 Depreciation and impairments 9 284, ,752 Total operating expenses 1,117,299 1,127,214 Operating income 258, ,181 Net financial income (expense) 6 (543,966) (490,218) Result before income taxes (285,523) (333,037) Income tax benefit (expense) 7 75,323 84,924 Net result for the year (210,200) (248,113) Net result attributable to equity holders (210,200) (248,113) The accompanying notes are an integral part of these consolidated financial statements. 40 Zesko Holding B.V. Annual Report 2010 Building the next level

42 Consolidated statement of comprehensive income For the years ended 31 December. Amounts in thousands of Net result for the year (210,200) (248,113) Cash flow hedges, net of tax 12,049 (27,149) Total comprehensive income for the year (198,151) (275,262) Total comprehensive income attributable to equity holders (198,151) (275,262) Financial statements Consolidated statement of comprehensive income 41

43 Consolidated balance sheet Amounts in thousands of Note 31 December December 2009 Assets Intangible assets 8 3,644,122 3,850,140 Property and equipment 9 1,459,945 1,549,664 Financial assets Deferred tax assets 7 308, ,056 Total non-current assets 5,412,539 5,680,228 Inventories 11 18,546 25,542 Trade accounts receivable 12 20,086 43,592 Other current assets 13 32,398 27,201 Cash and cash equivalents 14 67,003 65,297 Total current assets 138, ,632 Total assets 5,550,572 5,841,860 Equity and liabilities Issued share capital Share premium 255, ,439 Other reserves (15,100) (27,149) Retained earnings (1,112,151) (901,951) Equity attributable to equity holders 15 (871,794) (673,643) Interest-bearing loans 16 3,497,261 3,712,042 Interest-bearing loans from shareholders 17 2,065,336 1,869,979 Derivative financial instruments 23 58,447 99,599 Provisions 18 30,169 12,682 Deferred tax liabilities 7 434, ,893 Total non-current liabilities 6,085,926 6,172,195 Deferred revenues 97, ,247 Derivative financial instruments 23 34,539 2,662 Provisions 18 7,138 25,432 Trade accounts payable 80, ,951 Other current liablities , ,016 Total current liabilities 336, ,308 Total equity and liabilities 5,550,572 5,841,860 The accompanying notes are an integral part of these consolidated financial statements. 42 Zesko Holding B.V. Annual Report 2010 Building the next level

44 Consolidated statement of changes in equity Amounts in thousands of Issued capital Share premium Cash flow hedge reserve Retained earnings Total equity Balance at 31 December ,439 - (649,837) (394,380) Adjustments (4,001) (4,001) Balance at 31 December ,439 - (653,838) (398,381) Comprehensive income Net loss for the year (248,113) (248,113) other comprehensive income: cash flow hedges, net of tax - - (27,149) - (27,149) Total comprehensive income - - (27,149) (248,113) (275,262) Balance at 31 December ,439 (27,149) (901,951) (673,643) Comprehensive income Net loss for the year (210,200) (210,200) other comprehensive income: cash flow hedges, net of tax ,049-12,049 Total comprehensive income ,049 (210,200) (198,151) Balance at 31 December ,439 (15,100) (1,112,151) (871,794) Financial statements Consolidated statement of changes in equity 43

45 Consolidated cash flow statement For the years ended 31 December. Amounts in thousands of Note Operating activities Loss before income taxes (285,523) (333,037) Adjustments for: Amortisation and impairments 8 232, ,307 Depreciation and impairments 9 284, ,752 Movement in provisions 18 (5,781) 5,026 Net financial income and expense 6 543, ,218 Operating cash flow before changes in working capital 769, ,266 Changes in working capital relating to: Inventories 6,996 (11,564) Trade accounts receivable 23,506 5,127 Other current assets (5,197) 2,904 Trade accounts payable (22,786) 42,709 Deferred revenues (8,496) 8,840 Other current liabilities (7,747) (13,659) Net cash flow from operating activities 755, ,623 Investing activities Purchase of intangible assets 8 (50,814) (76,506) Purchase of property and equipment 9 (151,895) (178,602) Interest received 214 1,002 Change in financial assets (28) 531 Net cash flow used in investing activities (202,523) (253,575) Financing activities Proceeds from loans 16 1,950,147 - Financing and commitment fees (54,178) (3,577) Repayments of loans 16 (2,204,629) (160,000) Interest paid (242,656) (247,403) Repayment of financial lease liabilities - (424) Net cash flow from financing activities (551,316) (411,404) Net (decrease)/increase in cash and cash equivalents 1,706 22,644 Net cash and cash equivalents at 1 January 65,297 42,653 Net cash flow from operating, investing and financing activities 1,706 22,644 Net cash and cash equivalents at 31 December 14 67,003 65,297 The accompanying notes are an integral part of these consolidated financial statements. 44 Zesko Holding B.V. Annual Report 2010 Building the next level

46 Notes to the consolidated financial statements 1 The company and its operations The principal activities of Zesko Holding B.V. ( the Company ) are to participate in, to finance or to have any other interest in, or to conduct the management of, other companies and enterprises. The Company is the owner and operator of a broadband cable network in the Netherlands and provides analogue and digital radio and television, broadband internet and telephony services in the Netherlands to 3.1 million households under the brand name Ziggo. 2 Basis of preparation Date of authorization of issue The consolidated financial statements of Zesko Holding B.V. for the year ended 31 December 2010 were prepared by the Board of Management and adopted on 15 April The Company is a private limited company incorporated in Amsterdam (address: Winschotendiep 60, 9723 AB Groningen) in the Netherlands. The Company is wholly owned by Even Investments 2 Sàrl whose shareholders are investment funds that are ultimately managed by the private equity companies Cinven Limited and Warburg Pincus LLC. Statement of compliance The consolidated financial statements of the Company and all its subsidiaries have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union. Measurement basis The consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments that have been measured at fair value. The consolidated financial statements are presented in thousands of Euros ( ) except when otherwise indicated. Financial statements Notes to the consolidated financial statements 45

47 Foreign currency translation The consolidated financial statements are presented in Euros ( ), which is the Company s functional and presentation currency. Transactions in currencies other than the functional currency are recorded at the rates of exchange prevailing at the transaction dates. Monetary items denominated in foreign currencies are translated into the Company s functional currency at the spot rate of exchange ruling at the balance sheet date. Exchange differences arising on the settlement of monetary items and the translation of monetary items are included in net income for the period. Non-monetary items that are measured on a historical cost basis in a foreign currency are translated using the exchange rates ruling at the dates of the initial transactions. Basis of consolidation The consolidated financial statements comprise the financial statements of the Company and its subsidiaries as at 31 December The financial statements of the subsidiaries are prepared for the same reporting year as those of the parent company, using consistent accounting policies. All intra-group balances, transactions, income and expenses and unrealised gains and losses resulting from intra-group transactions are eliminated in full. Subsidiaries are fully consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date that such control ceases. The consolidated financial statements of the Company include the subsidiaries mentioned in Note 25. Comparative figures 2009 The following changes were made to the 2009 comparative figures: To improve insight into expenses, the Company reclassified items within operating expenses. These reclassifications did not impact net income. The reclassifications made are presented in Note 24. The Company in February Employees were entitled to a long-term employee benefit plan called PRES-arrangement. Upon acquisition this specific employee benefit was continued by the Company and made available under the same conditions to former Multikabel and Casema employees born before 1957 or born before 1959 with 25 years of service at the Company, to prevent discrepancies. In accordance with IFRS (IAS 19 Employee Benefits ) the Company recognises a liability in the balance sheet. As a result, the Company adjusted the balance sheet as at 1 January 2009, 31 December 2009 and net income for the year Reference is made to Note 24. Going concern The consolidated financial statements have been prepared by management on a going concern basis, which assumes the realisation of assets and the discharge of liabilities in the normal course of business for the foreseeable future. Accordingly, the financial statements do not include any adjustments to recorded asset values that might be necessary should the Company be unable to continue as a going concern. The Company has a shareholders equity deficit totalling 871,794, but anticipates that it will profitable in the foreseeable future. The Company plans to be able to generate sufficient cash flows (after financing costs) in the coming years and loans are repayable as of 2013 at the earliest with no early 46 Zesko Holding B.V. Annual Report 2010 Building the next level

48 repayments other than an excess cash clause, which makes a going concern assumption appropriate. Use of estimates and judgments The preparation of financial statements requires management to make a number of estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities, of revenues and expenses and the disclosure of contingent assets and liabilities. All assumptions, expectations and forecasts used as a basis for certain estimates within these consolidated financial statements represent good faith assessments of the Company s future performance for which management believes there is a reasonable basis. These estimates and assumptions represent the Company s view at the times they are made, and only then. They involve risks, uncertainties and other factors that could cause the Company s actual future results, performance and achievements to differ materially from those forecasted. The estimates, assumptions and judgments that management considers most critical relate to: Impairment of goodwill (Note 3); Deferred tax assets (Note 3 and Note 7); Fair value of financial instruments (Note 3, Note 22 and Note 23); Other long-term employee benefits (Note 3 and Note 18); Provisions and contingencies (Note 3 and Note 18). Change in accounting policies IFRS 2 Share-based Payment Group cash-settled share-based payment transactions The standard has been amended to clarify the accounting for group cash-settled share based payment transactions. This amendment also supersedes IFRIC 8 and IFRIC 11. The adoption of this amendment does not have an impact on the financial position or performance of the Company. IFRS 3 Business Combinations (revised standard 2008) This revised standard has been applied prospectively. As the Company did not make any acquisitions during 2010 the change in IFRS 3 does not have an impact on the Company s consolidated financial statements. IAS 27 Consolidated and Separate Financial Statements The main changes are: Changes in a parent s ownership interest in a subsidiary that do not result in a loss of control are accounted for within shareholders equity as transactions with owners acting in their capacity as owners; When a parent loses control any retained interest in the former subsidiary is recognised at its fair value at the date control is lost. The change in accounting policy has been applied prospectively and does not have an impact on the Company s consolidated financial statements. IAS 39 Financial Instruments: Recognition and Measurement Eligible hedged items The change addresses the designation of a one-sided risk in a hedged item, and the designation of inflation as a hedged risk or portion in particular situations. The change in Financial statements Notes to the consolidated financial statements 47

49 accounting policy has been applied prospectively and does not have an impact on the Company s consolidated financial statements. IFRIC 17 Distribution of Non-cash Assets to Owners This interpretation provides guidance on accounting for arrangements whereby an entity distributes non-cash assets to shareholders either as a distribution of reserves or as dividends. The interpretation does not have an impact on the Company s consolidated financial statements. IFRIC 18 Transfers of Assets from Customers This interpretation provides guidance on accounting for arrangements in which an entity receives from a customer an item of property, plant and equipment that the entity must then use either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services or to do both. The Company has arrangements with customers to which this interpretation applies, however the impact on the Company s consolidated financial statements is limited. The Company did not apply any other standard, interpretation or amendment issued but not yet effective in the consolidated financial statements as at 31 December Significant accounting policies The significant accounting policies applied in the preparation of the consolidated financial statements are presented below. These policies have been consistently applied through all years presented, unless otherwise stated. Segment reporting IFRS 8 Operating Segments defines an operating segment as a component of the Company that engages in business activities from which it may earn revenues and incur expenses. The operating segment s operating result is reviewed regularly by the Board of Management (Chief Operating Decision Maker) to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Segment results that are reported to the Board of Management include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Performance of the segments is evaluated against several measures, of which operating income excluding depreciation and amortisation (EBITDA) is the most important. Segment assets and liabilities mainly do not include corporate assets and liabilities and income tax assets and liabilities. Segment capital expenditure is the total cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill. In the assessment of operating segments the Company concluded there is only one operating segment, based on the following assumptions: Chief Operating Decision Maker (Board of Management of the Company) makes decisions on the basis of financial results for the Company as one company; The Company has only one geographic area in which it operates; 48 Zesko Holding B.V. Annual Report 2010 Building the next level

50 The Company has an integrated network for all activities; The Company s investments and related costs are not allocated to its specific business lines or products. Business combinations and goodwill Business combinations are accounted for using the acquisition accounting method. The cost of an acquisition is measured as the aggregate of the consideration transferred, measured at acquisition date fair value and the amount of any non-controlling interest in the acquiree. For each business combination, the acquirer measures the non-controlling interest in the acquiree either at fair value or at the proportionate share of the acquiree s identifiable net assets. Acquisition costs incurred are expensed and included in other operating expenses. If the business combination is achieved in stages, the acquisition date fair value of the acquirer s previously held equity interest in the acquiree is re-measured to fair value at the acquisition date through profit or loss. Acquisitions of non-controlling interests are accounted for as transactions with owners in their capacity as owners and therefore no goodwill is recognised as a result of such transactions. The adjustments to non-controlling interests are based on a proportionate amount of the net assets of the subsidiary. Any contingent consideration to be transferred by the acquirer will be recognised at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration that is classified as an asset or liability are remeasured at subsequent reporting dates in accordance with IAS 39 Financial Instruments: Recognition and Measurement or IAS 37 Provisions, Contingent Liabilities and Contingent Assets as appropriate, with the corresponding gain or loss recognised in the income statement. Contingent consideration that is classified as equity is not re-measured at subsequent reporting dates until it is finally settled within equity. Business combinations arising from transfers of interests in entities that are under the control of the shareholder that controls the Company are accounted for as if the acquisition had occurred at the beginning of the earliest comparative year presented or, if later, at the date that common control was established; for this purpose comparatives are adjusted. The assets and liabilities acquired are recognised at the carrying amounts recognised previously in the Company s controlling shareholder s consolidated financial statements. The components of equity of the acquired entities are added to the same components within equity and any gain/loss arising is recognised directly in equity. Goodwill is initially measured at cost, being the excess of the aggregate of the consideration transferred and the amount recognised for a non-controlling interest over the net identifiable assets acquired and liabilities assumed. If this consideration is lower than the fair value of the net assets of the subsidiary acquired, the difference is recognised in the consolidated income statement. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Financial statements Notes to the consolidated financial statements 49

51 For the purposes of impairment testing, goodwill is allocated to each of the Company s cash-generating units (or groups of cash-generating units) that is expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss in the consolidated income statement. An impairment loss recognised for goodwill is not reversed in subsequent periods. On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Intangible assets Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is the fair value as at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment losses. Internally generated intangible assets, excluding capitalised development costs, are not capitalised. Expenditures are reflected in the income statement in the year in which the expenditure is incurred. The useful lives of intangible assets are assessed as either finite or indefinite. Intangible assets with finite lives are amortised over the useful economic life and assessed for impairment whenever there is an indication that the economic benefits related to the intangible asset may be decreased. The amortisation period and the amortisation method for an intangible asset with a finite useful life are reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, and treated as changes in accounting estimates. Such a change in the useful life assessment is made on a prospective basis. The customer lists are initially valued at fair value and subsequently amortised in years as far as they relate to residential customers and amortised in 13 years as far as they relate to business customers, using the straight-line method over their economic useful lives. Software is amortised in 3 years using the straight-line method over its economically useful life. Intangible assets with indefinite useful lives are not amortised, but are tested for impairment annually. The assessment of indefinite life is reviewed annually to determine whether the indefinite life of the asset remains indefinite. If not, the change in useful life from indefinite to finite is made on a prospective basis. 50 Zesko Holding B.V. Annual Report 2010 Building the next level

52 Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the assets and are recognised in the income statement when the asset is derecognised. Property and equipment Property and equipment is stated at cost less accumulated depreciation and accumulated impairment, if any. The cost includes direct costs (materials, replacing parts, direct labour and contracted work) and direct attributable overhead costs. The present value of the expected cost for the decommissioning of the asset after its use is included in the cost of the respective asset if the recognition criteria for a provision are met. Borrowing costs directly attributable to the acquisition, construction or production of an asset that necessarily takes a substantial period of time to get ready for its intended use are capitalised as part of the costs of the respective assets. Borrowing costs consist of interest and other costs that an entity incurs in connection with the borrowing of funds. The interest percentage used reflects the weighted average interest expense of the Company. Depreciation is calculated on a straight-line basis over the estimated useful life of the asset, taking into account residual value. Borrowing costs are depreciated over the estimated useful life of the corresponding asset. Land is not depreciated. The useful life of the assets is as follows: Useful lives Network active (head-end, local network) Network passive (fibre) Network equipment (IP and datacom equipment) Other years years 5 years 3-20 years The asset s residual values, useful lives and methods of depreciation are reviewed and adjusted if appropriate at each financial year-end. Any change in accounting caused by this review is applied prospectively. Subsequent costs are included in the asset s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. The carrying amount of the replaced part is derecognised. An item of property and equipment is derecognised upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising from derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the income statement in the year the asset is derecognised. Repairs and maintenance are charged to expense during the financial period in which they incur. Financial statements Notes to the consolidated financial statements 51

53 Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement and requires an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset. Finance leases, which transfer to the Company substantially all the risks and benefits incidental to ownership of the leased item, are capitalised at the inception of the lease at the fair value of the leased item or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between the finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are charged directly against income. Capitalised leased assets are depreciated over the shorter of the estimated useful life of the asset and the lease term, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term. Operating lease payments are recognised as an expense in the income statement on a straight-line basis over the lease term. Impairment of non-financial assets The Company assesses at each reporting date whether there is an indication that an asset may be impaired. If any such indication exists, or when annual impairment testing for an asset is required, the Company makes an estimate of the asset s recoverable amount. An asset s recoverable amount is the higher of an asset s or cash-generating unit s fair value less costs to sell and its value in use and is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Where the carrying amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs to sell, an appropriate valuation model is used. Impairment losses of continuing operations recognised in the income statement will be recorded in a separate line item in those expense categories consistent with the classification of the impaired asset. For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognised impairment losses may no longer exist or may have decreased. If such an indication exists, the Company makes an estimate of the recoverable amount. A previously recognised impairment loss is reversed only if there has been a change in the estimates used to determine the asset s recoverable amount since the last impairment loss was recognised. If that is the case, the carrying amount of the asset is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised for the asset in prior years. Such a reversal is recognised in the income statement. Impairment losses recognised in relation to goodwill are not reversed for subsequent increases in its recoverable amount. 52 Zesko Holding B.V. Annual Report 2010 Building the next level

54 Goodwill is reviewed for impairment, annually or more frequently if events or changes in circumstances indicate that the carrying amount may be impaired. Impairment is determined for goodwill by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units) to which the goodwill relates. The recoverable amount is the higher of the cash-generating unit s fair value less cost to sell and its value in use. The value in use of the cash-generating unit is determined using the discounted cash flow method. Where the recoverable amount of the cash-generating unit (or group of cashgenerating units) is less than the carrying amount of the cash-generating unit (or group of cash-generating units) to which goodwill has been allocated, an impairment loss is recognised. Impairment losses relating to goodwill cannot be reversed in future periods. The Company performs its impairment test of goodwill annually. The key assumptions used in the impairment test are set out below: Cash flow Free cash flow consists of revenues, costs and capital expenditure levels. Revenues are estimated based on historic growth numbers and expected future market penetration levels, resulting in related costs and capital expenditures; Discount rate The discount rate is calculated taking into account the relative weights of each component of the capital structure and is used by management as a benchmark to assess operating performance and future investments; Growth rate The growth rates in the three-year financial budgets reflect historic growth numbers and current market developments. The years beyond the three-year financial budget are extrapolated using estimated growth rates that do not exceed the long-term average growth rate and are consistent with forecasts included in industry reports. With regard to the goodwill impairment test, management believes that a change in any of the key assumptions would not cause a material impact on the value in use calculation nor a subsequent adjustment of goodwill. Investments in associates The Company uses the equity method of accounting for investment in associates. An associate is an entity in which the Company has significant influence and which is neither a subsidiary nor a joint venture. After application of the equity method, the Company determines whether it is necessary to recognise an additional impairment loss of the Company s investment in its associates. The Company determines at each balance sheet date whether there is any objective evidence that the investment in the associate is impaired. If this is the case, the Company calculates the amount of impairment as being the difference between the fair value of the associate and the net equity value and recognises the amount in the income statement. Inventories Inventories are valued at cost or net realisable value, whichever is the lower. Cost consists of all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated marketing, distribution and selling expenses. Financial statements Notes to the consolidated financial statements 53

55 Most of the inventory is not sold to customers but used in the Company s network and capitalised once used. Sold inventory is included in the cost of goods sold. Provisions Provisions are recognised when a legal or constructive obligation, which can be reliably estimated, exists as a result of a past event and it is probable that an outflow of economic benefits will be required to settle the obligation. Where the Company expects some or all of a provision to be reimbursed, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain. The expense relating to any provision is presented in the income statement net of any reimbursement. A provision for restructuring is recognised when management has approved a detailed and formal restructuring plan and the restructuring has either commenced or has been announced to the parties concerned. The Company recognises a provision for asset retirement obligations related to dismantling and removing items at leased property and restoring the site on which these items are located after termination of the lease agreement. In addition the Company is exposed to costs of returning customer premise equipment upon termination of the subscription or renewals. If the effect of the time value of money is material, provisions are discounted using a current pre-tax rate that reflects, where appropriate, the risks specific to the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as finance cost. The net assets and net liabilities recognised in the consolidated balance sheet for defined benefit plans and other long term employee benefits represent the present value of the defined benefit obligations, less the fair value of plan assets, adjusted for unrecognised actuarial gains or losses and unamortised past service costs. Any net asset resulting from this calculation is limited to unrecognised actuarial losses and past service cost, plus the present value of available refunds and reductions in future contributions to the plan. No adjustment for the time value of money is made in case the Company has an unconditional right to a refund of the full amount of the surplus, even if such a refund is realisable only at a future date. Defined benefit obligations are actuarially calculated at least annually on the balance sheet date using the projected unit credit method. The present value of the defined benefit obligations is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds denominated in the currency in which the benefits will be paid, and that have an average duration similar to the expected duration of the related pension liabilities. Actuarial gains and losses are recognised using the corridor approach, which assumes that actuarial gains and losses may offset each other over the long term. Under this approach, if, for a specific plan, the net unrecognised actuarial gains and losses at the balance sheet date exceed the greater of 10% of the fair value of the plan assets or 10% of the defined benefit obligation, the excess is taken into account in determining net periodic expense for the subsequent period. The amount then recognised in the subsequent period is the excess divided by the expected remaining average working lives 54 Zesko Holding B.V. Annual Report 2010 Building the next level

56 of employees covered by that plan at the balance sheet date. Past service costs are recognised immediately to the extent that the associated benefits are already vested, and are otherwise amortised on a straight-line basis over the average period until the associated benefits become vested. Results from curtailments or settlements, including the related portion of net unrecognised actuarial gains and losses, are recognised immediately. Contributions to defined contribution plans are recognised as an expense when they are due. Post-employment benefits provided through industry multi-employer plans, managed by third parties, are generally accounted for using defined contribution criteria. Provisions are recognised for other long-term employee benefits on the basis of discount rates and other estimates that are consistent with the estimates used for the defined benefit obligations. For these provisions the corridor approach is not applied and all actuarial gains and losses are recognised in the consolidated income statement immediately. Financial instruments Financial assets The Company initially recognises loans and receivables and deposits on the date that they originated. All other financial assets (including assets designated at fair value through profit or loss) are recognised initially on the trade date, which is the date that the Company becomes a party to the contractual provisions of the instrument. The Company derecognises a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial assets that is created or retained by the Company is recognised as a separate asset or liability. The Company classifies non-derivative financial assets into the following categories: financial assets at fair value through profit or loss, held-to-maturity financial assets, loans and receivables and available-for-sale financial assets. Financial assets at fair value through profit or loss A financial asset is classified at fair value through profit or loss if it is classified as held for trading or is designated as such upon initial recognition. Financial assets are designated at fair value through profit or loss if the Company manages such investments and makes purchase and sale decisions based on their fair value in accordance with the Company s documented risk management or investment strategy. Attributable transaction costs are recognised in profit or loss as incurred. Financial assets at fair value through profit or loss are measured at fair value, and changes therein are recognised in profit or loss. Held-to-maturity financial assets If the Company has the positive intent and ability to hold securities to maturity (usually debt securities), then such financial assets are classified as held to maturity. Held-to-maturity financial assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition held-to-maturity financial assets are measured at amortised cost using the effective interest method, less any impairment losses. Financial statements Notes to the consolidated financial statements 55

57 Loans and receivables Loans and receivables are financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, loans and receivables are measured at amortised cost using the effective interest method, less any impairment losses. An impairment is recorded in operating expenses when it is probable (based on objective evidence) that the Company will not be able to collect all amounts due under the original terms. Impairments are calculated on an individual basis and on a portfolio basis for groups of receivables that are not individually identified as impaired. Impaired loans and receivables are derecognised when they are assessed as uncollectible. Loans and receivables comprise cash and cash equivalents, and trade and other receivables, including service concession receivables. Cash and cash equivalents comprise cash balances and call deposits with original maturities of three months or less. Available-for-sale financial assets Available-for-sale financial assets are non-derivative financial assets that are designated as available for sale or are not classified in any of the above categories of financial assets. Subsequent to initial recognition, they are measured at fair value and changes therein are recognised in other comprehensive income and presented in the fair value reserve in equity. When an investment is derecognised, the gain or loss accumulated in equity is reclassified to profit or loss. Financial liabilities The Company initially recognises debt securities issued and subordinated liabilities on the date that they originated. All other financial liabilities (including liabilities designated at fair value through profit or loss) are recognised initially on the trade date, which is the date that the Company becomes a party to the contractual provisions of the instrument. A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the income statement. The Company classifies non-derivative financial liabilities into the other financial liabilities category. Such financial liabilities are recognised initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, these financial liabilities are measured at amortised cost using the effective interest method. 56 Zesko Holding B.V. Annual Report 2010 Building the next level

58 Other financial liabilities comprise loans and borrowings, bank overdrafts, and trade accounts and other payables. Offsetting of financial assets and liabilities Financial assets and liabilities are offset and reported at the net amount in the consolidated balance sheet if, and only if, Zesko Holding B.V. has a legally enforceable right to set off the recognised amounts, and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously. Derivative financial instruments and hedging The Company entered into several interest rate swaps in order to mitigate its risks associated with interest rate fluctuations. These derivatives are recognised at fair value. The fair value of interest rate swaps is the estimated amount that would be received or paid to terminate the swap at balance sheet date, taking into account the current interest rates and creditworthiness of the swap counter parties. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Company documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The fair values of various derivative instruments used for hedging purposes are disclosed in Note 23. Movements on the hedging reserve in shareholders equity are shown in the consolidated statement of changes in equity. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining maturity of the hedged item is more than 12 months, and as a current asset or liability when the remaining maturity of the hedged item is less than 12 months. Trading derivatives are classified as a current asset or liability. (a) Fair value hedges Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in the income statement, together with any changes in the fair value of the hedged asset or liability that are attributable to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item is amortised to profit or loss over the period to maturity. (b) Cash flow hedges The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the income statement within other net financial income and expense. Financial statements Notes to the consolidated financial statements 57

59 Amounts accumulated in equity are reclassified to profit or loss in the periods when the hedged item affects profit or loss. The gain or loss relating to the effective portion of interest rate swaps hedging variable rate borrowings is recognised in the income statement within interest expense. The gain or loss relating to the ineffective portion is recognised in the income statement within other net financial income and expense. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is amortised to profit or loss in the period(s) when the forecast transaction occurs. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement within other net financial income and expense. Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Company and the revenue can be reliably measured. The relevant types of revenue are recognised as follows: Rendered services Revenue primarily comprises revenues earned from subscription and usage fees on the delivery of standard cable and digital pay television, broadband internet and telephony and services provided to the business market. Revenue from other sources primarily comprises revenue from the sale of goods. Subscription and usage revenues are recognised at the time services are provided to customers. Pre-invoiced revenues are deferred and allocated to the respective period they relate to. Any unearned revenue is recognised as deferred revenue within current liabilities. Revenue from the sale of goods is recognised when the significant risks and rewards of ownership of the goods have passed to the buyer, usually on delivery of the goods. The Company may provide the subscriber with installation of the connection to its network and offers connection-related services. Revenue is recognised when the installation and services have been rendered. Cost of goods sold Cost of goods sold includes the costs for purchases of materials and services directly related to revenue, such as author rights, interconnection costs, signal delivery costs, royalties, internet service provider fees and materials and logistics cost directly related to the sale of set top boxes. Income tax Current income tax is recognised in the consolidated income statement except to the extent that it relates to items recognised directly in equity. The current income tax benefit is based on the best estimate of taxable income for the year, using tax rates that have been enacted or substantively enacted at the balance sheet date, and adjustments for current taxes payable (receivable) for prior years. 58 Zesko Holding B.V. Annual Report 2010 Building the next level

60 Deferred income tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities and the corresponding tax basis used in the computation of taxable income. Deferred income tax assets are generally recognised for all temporary differences, carry forwards of unused tax credits and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences and the carry forward of unused tax credits and unused tax losses can be utilised except to the extent that a deferred income tax asset arises from the initial recognition of goodwill. Deferred income tax liabilities are generally recognised for all temporary differences. Deferred income tax assets and liabilities are based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse or are substantively enacted at the balance sheet date. The effect of a change in tax rates on deferred income tax assets and liabilities is recognised in the period that includes the enactment date. Deferred income tax assets are reduced by a valuation allowance when the Company cannot make the determination that it is more likely than not that some portion or all of the related tax assets will be realised. The carrying amount of deferred income tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred income tax asset to be utilised. Unrecognised deferred income tax assets are reassessed at each balance sheet date and are recognised to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered. Deferred tax assets and liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority. Cash flow statement The cash flow statement is prepared using the indirect method with a breakdown into cash flows from operating, investing and financing activities. The cash balances of purchased subsidiaries (cash acquired) are included in the consideration paid on acquisition (investing activities). Bank overdrafts that are repayable on demand and form an integral part of the Company s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Standards issued but not yet effective The following new standards, amendments to standards and interpretations are not yet effective for the year ended 31 December 2010 and have not been applied in preparing these consolidated financial statements: IFRS 9 Financial Instruments ; IAS 24 Related Party Disclosures (amendment); IAS 32 Financial Instruments: Presentation Classification of Rights Issues (amendment); Financial statements Notes to the consolidated financial statements 59

61 IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction Prepayments of a minimum funding requirement (amendment); IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments ; Improvements to IFRSs (issued May 2010). The Company will introduce the new standards, amendments to standards and interpretations on or after 1 January Adoption of these standards and interpretations is expected not to have an impact on the consolidated financial statements of Zesko Holding B.V. 4 Revenues The Company s revenues comprise the following: Amounts in thousands of Standard cable subscription 489, ,192 Digital pay television services 124,637 92,964 Video 614, ,156 Broadband Internet subscription 380, ,247 Telephony subscription 96,018 74,679 Telephony usage 155, ,449 Telephony 251, ,128 Revenues from other sources 51,745 47,462 Total residential market 1,298,334 1,200,993 Business services 77,408 83,402 Total revenues 1,375,742 1,284,395 Revenues generated from bundle subscriptions amount to million (2009: million) and have been allocated to the individual products Video, Broadband Internet and Telephony. The Company s revenues are generated through a large customer base, none of which generates more than 10% of total revenues. Revenues from the sale of goods as per 31 December 2010 amount to 28.5 million (2009: 16.6 million). 60 Zesko Holding B.V. Annual Report 2010 Building the next level

62 5 Personnel expenses The Company s personnel expenses comprise the following: Amounts in thousands of Wages and salaries 115, ,853 Social security costs 13,925 13,420 Pensions and other long-term employee benefits 14,965 13,736 Other 26,014 44,773 Total personnel expenses 170, ,782 The number of internal employees as at 31 December 2010 of the Company in full time equivalents (FTEs) was 2,203 (2009: 2,257). The average number of internal employees in 2010 was 2,219 FTEs (2009: 2,112). Other personnel expenses comprise costs for temporary external personnel, other personnel expenses and capitalised personnel expenses. In 2010, costs for temporary external personnel amount to 53.9 million (2009: 71.6 million). Other personnel expenses in 2010 amount to 20.4 million (2009: 25.6 million) and capitalised personnel expenses amount to -/ million (2009: -/ million). 6 Net financial income and expense Amounts in thousands of Interest on loans from financial institutions (218,618) (302,403) Interest on shareholders loans (195,247) (176,609) Interest from 8.0% Senior Notes (62,591) - Other interest expense (2,014) (2,778) Capitalisation of borrowing cost 13,191 3,380 Interest expense (465,279) (478,410) Interest income 214 1,002 Amortisation of financing fees, including write-offs of terminated facilities (53,737) (17,348) Fees related to Senior Credit Facility (15,004) - Fair value gains (losses) on derivative financial instruments (6,899) 8,115 Commitment fees (2,843) (3,577) Foreign exchange results (418) - Other net financial income and expense (78,901) (12,810) Net financial income (expense) (543,966) (490,218) Other interest expense relate mainly to the interest added to provisions and pensions and other long-term employee benefits. Other interest income is mainly attributable to the interest on cash and cash equivalents. Financial statements Notes to the consolidated financial statements 61

63 7 Income taxes The subsidiaries of the Company are incorporated in the fiscal unit of Zesko B.V. for corporate income tax purposes. Zesko Holding B.V. is taxable at the sole entity level. For financial reporting purposes, its consolidated subsidiaries calculate their respective tax assets, tax liabilities and tax benefits on a consolidated tax return basis. The Company s income tax comprises: Amounts in thousands of Deferred tax assets 32,143 45,198 Deferred tax liabilities 43,180 39,726 Income tax benefit (expense) 75,323 84,924 A reconciliation between the statutory tax rates of 25.5% and the Company s effective tax rate is as follows: Amounts in thousands of Tax rate 2010 Tax rate 2009 Loss for the period (285,523) (333,037) Notional tax income at statutory rates 25.50% 72, % 84,924 Adjustments: - Non deductable items -0.01% (17) - - Deferred income (expense) due to changes in tax rates, effective % 2,532 - Effective tax rate/income tax benefit 26.38% 75, % 84,924 Income tax recognised within other comprehensive income comprises: Amounts in thousands of Before tax Tax (expense)/ Tax (expense)/ benefit Net of tax Before tax benefit Net of tax Cash flow hedges (20,133) 5,033 (15,100) (36,441) 9,292 (27,149) 62 Zesko Holding B.V. Annual Report 2010 Building the next level

64 The tax effects of temporary differences influencing significant portions of the deferred tax assets and deferred tax liabilities as of 31 December 2010 and 2009 are presented below: Amounts in thousands of 1 January 2009 Recognised in profit or loss Recognised in other comprehensive income 31 December 2009 Recognised in profit or loss Recognised in other comprehensive income 31 December 2010 Tax loss carry forwards 206,713 47, ,980 30, ,831 Derivative financial instruments 18,853 (2,069) 9,292 26,076 1,292 (4,123) 23,245 Deferred tax assets 225,566 45,198 9, ,056 32,143 (4,123) 308,076 Intangible assets (522,013) 48,529 - (473,484) 56,279 - (417,205) Property and equipment 4,394 (8,803) - (4,409) (13,099) - (17,508) Deferred tax liabilities (517,619) 39,726 - (477,893) 43,180 - (434,713) Deferred tax assets and liabilities (292,053) 84,924 9,292 (197,837) 75,323 (4,123) (126,637) The deferred tax asset and tax liability are calculated at a tax rate of 25.0%. Recognised deferred tax assets reflect management s estimate of realisable amounts. The amounts of tax loss carry forwards are subject to assessment by local tax authorities. The expiration of the available tax loss carry forwards and recognised tax assets is as follows: Amounts in thousands of Net operating loss Deferred tax asset Net operating loss Deferred tax asset Tax losses for which no deferred tax asset is recognised 406, ,676 - Tax losses for which a deferred tax asset is recognised 1,139, , , ,980 Total 1,546, ,831 1,402, ,980 Amounts in thousands of December , December , December , December , December , December , December , December , December ,325 Total net operating loss 1,546,005 Financial statements Notes to the consolidated financial statements 63

65 8 Intangible assets The Company s intangible assets comprise: Amounts in thousands of Goodwill Customer lists Trade names Software Total Cost 1,905,218 2,470,052 19,800 85,340 4,480,410 Accumulated amortisation - (400,444) (19,800) (70,830) (491,074) Balance as of 1 January ,905,218 2,069,608-14,510 3,989,336 Additions - 1,445-75,061 76,506 Reclassifications - 5,885-7,720 13,605 Amortisation - (194,631) - (34,676) (229,307) Total changes in (187,301) - 48,105 (139,196) Cost 1,905,218 2,552,661 19, ,630 4,704,309 Accumulated amortisation - (670,354) (19,800) (164,015) (854,169) Balance as of 31 December ,905,218 1,882,307-62,615 3,850,140 Additions ,810 50,814 Reclassifications - (322) - (24,047) (24,369) Disposals - (4) - - (4) Amortisation and impairment - (194,039) - (38,420) (232,459) Total changes in (194,361) - (11,657) (206,018) Cost 1,905,218 2,552, ,312 4,695,873 Accumulated amortisation - (864,397) - (187,354) (1,051,751) Balance as of 31 December ,905,218 1,687,946-50,958 3,644,122 Goodwill In 2008 the former operating companies Multikabel, Casema merged into Ziggo. As a result of the merger one cash-generating unit, Ziggo, remains. All goodwill acquired through business combinations has been allocated for impairment testing purposes to the cash-generating unit at which management monitors the operating results. For the goodwill impairment test the Company uses the Value in use -method. Value in use -calculations are based on cash flow projections covering a maximum period of five years. Cash flow projections for Ziggo are based on three-year financial budgets approved by the Company s management and extrapolated cash flows beyond the three-year period using estimated growth rates that do not exceed the long-term average growth rate and are consistent with forecasts included in industry reports. The calculation exceeded the amount carried forward of the cash generating unit Ziggo and consequently no impairment was recognised. The discount rate used for the 2010 goodwill impairment test is 6.62% (2009: 7.00%). Software During 2010 the Company impaired capitalised development of software for an amount of 9.8 million (2009: nil) as the expected future benefits of the related projects decreased over time. 64 Zesko Holding B.V. Annual Report 2010 Building the next level

66 9 Property and equipment The Company s property and equipment comprise: Amounts in thousands of Network Land Other Assets under construction Total Cost 1,896,228 2,648 66, ,155 2,208,096 Accumulated depreciation (534,513) - (27,164) - (561,677) Balance as of 1 January ,361,715 2,648 38, ,155 1,646,419 Additions 172,298-18,279 (11,975) 178,602 Reclassifications (7,431) - (6,174) - (13,605) Depreciation (251,160) - (10,592) - (261,752) Total changes in 2009 (86,293) - 1,513 (11,975) (96,755) Cost 4,129,427 2,648 92, ,180 4,455,748 Accumulated depreciation (2,854,005) - (52,079) - (2,906,084) Balance as of 31 December ,275,422 2,648 40, ,180 1,549,664 Additions 200,692-61,812 (92,444) 170,060 Reclassification ,651-24,369 Depreciation and impairment (245,523) - (38,625) - (284,148) Total changes in 2010 (44,113) - 46,838 (92,444) (89,719) Cost 4,329,758 2, , ,736 4,654,149 Accumulated depreciation (3,098,449) - (95,755) - (3,194,204) Balance as of 31 December ,231,309 2,648 87, ,736 1,459,945 Network The additions to network include capitalised borrowing costs of 13.2 million (2009: 3.4 million). Generally, the capitalisation rate used to determine the amount of capitalised borrowing costs is a weighted average of the interest rate applicable. For 2010 an interest rate applied of 7.04% (2009: 5.89%). During 2010 the Company impaired property and equipment for an amount of 1.1 million (2009: nil) as the expected future benefits of the related projects decreased over time. Mortgages on all registered properties, related movable assets and the network-related elements have been established under the Senior Credit Facilities as explained in Note 16. Assets under construction Assets under construction relate to the integration of the Company s business support system and operational support system and the integration and expansion of the Company s network and IT infrastructure. Included in assets under construction is software, which is recognised as intangible asset once in use. At 31 December 2010 there were no contractual commitments for the acquisition of any property and equipment. Financial statements Notes to the consolidated financial statements 65

67 10 Financial assets Financial assets consist of long-term prepaid expenses (related to information technology contracts) of 345 (2009: 281) and loans to personnel of 51 (2009: 87). 11 Inventories Amounts in thousands of Equipment and cables 8,575 8,027 Set top boxes 7,858 11,089 Customer premises equipment 2,570 6,684 Allowance for obsolete stock (457) (258) Total inventories 18,546 25,542 Movement in allowance for obsolete stock is as follows: Amounts in thousands of At 1 January Additions Used (29) - Released - - At 31 December Trade accounts receivable Trade accounts receivable as at 31 December 2010 amount to 20.1 million (2009: 43.6 million). The allowance for doubtful accounts is calculated on an individual basis and on a portfolio basis for groups of receivables that are not individually identified. The doubtful debt allowance reflects probable losses in the account receivable balance based on historical experience by kind of trade debtor and other currently available evidence. Movements in the allowance for doubtful accounts are as follows: Amounts in thousands of At 1 January 14,304 5,600 Additions 6,136 11,643 Used (9,400) (2,939) Released (2,334) - At 31 December 8,706 14,304 A pledge has been given on all receivables as mentioned in Note 16. Trade accounts receivables are non-interest-bearing and are generally due on 30 days terms. Note 22 discloses the Company s credit risk related to the trade accounts receivable. 66 Zesko Holding B.V. Annual Report 2010 Building the next level

68 13 Other current assets Amounts in thousands of 31 December December 2009 Prepaid expenses 17,682 13,470 Revenues to be invoiced 14,606 13,656 Other current assets Total current assets 32,398 27, Cash and cash equivalents All cash and cash equivalents within the Company are held within bank accounts and earn interest at floating rates based on daily bank deposit rates. A pledge has been given on the accounts of the Company as mentioned in Note Equity attributable to equity holders The Company is incorporated as a private limited liability company under Dutch law. Its registered capital consists entirely of ordinary shares. The authorised capital is divided into 900 shares of 100 each. Other reserves represents the cash flow hedge reserve. 16 Interest-bearing loans Amounts in thousands of 31 December December 2009 Loans from financial institutions 2,320,731 3,712, % Senior Notes, due ,176,530 - Interest-bearing loans 3,497,261 3,712,042 Movements in total interest-bearing loans are as follows: Amounts in thousands of Balance at 1 January 3,712,042 3,800,859 Repayments on loans (2,204,629) (160,000) Issuance of Senior Notes and Facility E 1,950,037 - Financing fees (36,404) - Interest accretion Mezzanine loan 22,478 53,835 Amortisation of financing fees 53,737 17,348 Balance at 31 December 3,497,261 3,712,042 Financial statements Notes to the consolidated financial statements 67

69 Loans from financial institutions Loans from financial institutions can be broken down into the following facilities: Amounts in thousands of Interest rate Maturity 31 December December 2009 Senior Credit Facilities Facility A loan EURIBOR +2.00% , ,250 Facility B loan EURIBOR +2.75% ,091,911 1,100,000 Facility C loan EURIBOR +3.50% ,615 1,100,000 Facility D loan EURIBOR +4.75% , ,000 Facility E loan (Sr. Secured Notes) 6.125% ,000 - Total 2,381,764 2,655,250 Mezzanine loan - 1,159,360 Financing fees (61,033) (102,568) Total 2,320,731 3,712,042 Senior Credit Facilities Facility A loan The Company is required to repay the Facility A loan in several instalments. Furthermore the Company is allowed to prepay any future instalments. Any prepayments are deducted from future repayments, thus reducing short-term repayment obligations. During 2010 the Company made prepayments on the Facility A loan for an amount of million (2009: million). According to the repayment schedule the remaining facility must be repaid on 31 March 2013 and 30 September 2013 in equal instalments of 17.6 million each. Facility B loan During 2010 the Company made prepayments on the Facility B loan for an amount of 8.1 million (2009: nil). Facility C loan During 2010 the Company made prepayments on the Facility C loan for an amount of million (2009: nil). The prepayment on the Facility C loan is financed by the issuance of the 6.125% Senior Secured Notes. Facility D loan During 2010 the Company did not make any (p)repayments on the Facility D loan; hence the Facility D loan is stated at its principal amount of million (2009: million). Revolving and capital expenditure restructuring facility Under the Senior Credit Facility agreement the Company has a revolving credit facility of million and a capital expenditure restructuring facility of million. During the year 2010 there were no drawings under these facilities (2009: nil). The Company pays an annual fee for the availability of the facilities, which is recognised in financial income and expense. 68 Zesko Holding B.V. Annual Report 2010 Building the next level

70 Facility E loan In October 2010, Ziggo Finance B.V., a company managed by Deutsche Bank International Trust Company N.V., issued Senior Secured Notes of million with a nominal interest rate of 6.125%, due in Interest on the Notes is payable semi-annually on 15 May and 15 November of each year. Ziggo Finance B.V. granted the proceeds of the notes to Plinius Investments II B.V. and Serpering Investments B.V., both indirectly wholly owned subsidiaries of the Company. The Senior Secured Notes are presented under loans from financial institutions as Facility E loan. The Facility E loan is stated at amortised cost. Financing fees have been charged for an amount of 10.6 million, which are presented as a deduction from the loan. The subsequent effective interest rate is 6.37%, which is recognised as financial expense. Prepayment On certain occasions prepayment of part or all of the drawn facilities is mandatory. For example the occurrence of a change in control or the sale of all or substantially all of the assets of the Company will lead to a cancellation of the facilities. All outstanding utilisations and ancillary outstandings, together with accrued interest, become immediately due and payable. Securitisation The total Senior Credit Facility is secured over the Company s tangible assets as follows: Mortgage on all registered properties, related movable assets, the network-related elements and the claims; Pledges on all bank accounts, intellectual property rights, receivables and movable assets. The Company needs to comply on a quarterly basis with covenants set by the lenders of the senior credit facility. These covenants are the interest coverage ratio and net leverage ratio. These financial covenants were all met during the years 2010 and Mezzanine facility The Company repaid the Mezzanine facility in 2010 with an original maturity date in 2016 for an amount of 1,181.1 million including PIK interest of million of which 21.8 million relates to accrued PIK interest in Financing fees Financing fees associated with the issuance of the facilities are subtracted from the loans from financial institutions and amortised over the period of the related loan. Amortisation costs on financing fees are recognised as other net financial income and expense in financial income and expense. 8.0% Senior Notes On 27 April 2010, Ziggo Bond Company B.V., an indirect, wholly owned subsidiary of the Company, issued unsecured Senior Notes for an amount of 1,208.9 million at a price of % with a nominal interest rate of 8.0% due in Interest on the notes is payable semi-annually on 15 May and 15 November. Financial statements Notes to the consolidated financial statements 69

71 The notes are senior obligations of the Company and are guaranteed on a senior subordinated basis by all of the subsidiaries of Ziggo Bond Company B.V. Financing fees have been charged in the amount of 25.9 million, which are presented as a deduction from the loan. The effective interest rate subsequently is 8.38%, which is recognised as financial expense. 17 Interest-bearing loans from shareholders Interest-bearing loans from shareholders consist of three loans from the parent company Even Investments 2 Sàrl: A loan for an amount of million (2009: million), subject to % interest; A loan for an amount of 1,874.7 million (2009: 1,703.0 million), subject to 10.08% interest; A loan for an amount of 0.1 million (2009: 0.1 million) which is not subject to interest. All loans stated above are subordinated and repayable in full at the end of Any unpaid interest is added to the loan and is also repayable at the end of During the year 2010 interest expense on these loans amounted to million (2009: million). 18 Provisions Amounts in thousands of Other longterm employee benefits Restructuring Legal claims Other Total At 31 December ,424 5,121 11,980 2,000 32,525 Additions (including interest cost) 1,795 9, ,355 Usage (799) (3,258) (408) (541) (5,006) Released - (1,760) - - (1,760) At 31 December ,420 9,797 12,292 1,605 38,114 Current 1,738 9,797 12,292 1,605 25,432 Non-current 12, ,682 At 31 December ,420 9,797 12,292 1,605 38,114 Additions (including interest cost) 1,433 2, ,131 10,845 Usage (1,054) (7,369) - (536) (8,959) Released (1,041) (7) (710) (935) (2,693) At 31 December ,758 4,922 12,362 6,265 37,307 Current 1,166 3,806-2,166 7,138 Non-current 12,592 1,116 12,362 4,099 30,169 At 31 December ,758 4,922 12,362 6,265 37,307 Defined benefit plans The Company provides pension plans for qualifying employees. The plans are multiemployer defined benefit plans with publicly or privately administered pension insurance 70 Zesko Holding B.V. Annual Report 2010 Building the next level

72 organisations (so called bedrijfstak-pensioenfonds ). These pension insurance organisations are not able to provide the Company with sufficient information in order to account for the plans as defined benefit plans. As a result the defined benefit pension plans are treated as defined contribution plans. The Company has no obligations for deficits other than higher future pension-insurance payments. The Company pays contributions on a mandatory, contractual or voluntary basis. The Company has no further payment obligations once the contributions have been paid. The contributions are recognised as employee benefit expenses in the income statement when they are due. At 31 December 2010 the main administered pension insurance organisation had a coverage ratio of 105%. Other long-term employee benefits provision In addition to the pension plan, the Company offers eligible participants a reduction of their working time with partial continuation of income. The plan offers eligible employees born before 1 January 1957 or employees born before 1 January 1959 and in service for at least 25 years as at 31 December 2008; a working time reduction of 20% between the age of 55 and 59; and a working time reduction of up to 40% between the age of 59 and 65. According to the plan rules, 75% of the working time reduction is compensated by the Company. The employee benefit plan is wholly unfunded and consequently the Company funds the plan as claims are incurred. The present value of the defined benefit obligation and service cost were measured using the Projected Unit Credit Method. Net periodic benefit expense, which is presented in the consolidated income statement as a component of personnel expenses, was as follows: Amounts in thousands of Service cost Interest cost Actuarial (gains)/losses (1,041) 255 Net periodic benefit cost 392 1,795 Changes in the present value of the defined benefit obligation are as follows: Amounts in thousands of Defined benefit obligation at 1 January 14,420 13,424 Service cost Interest cost Actuarial (gains)/losses (1,041) 255 Benefits paid (1,054) (799) Defined benefit obligation at 31 December 13,758 14,420 Since the Company recognises all actuarial results related to other long-term employee benefits immediately as an expense, the defined benefit obligation equals the liability recognised in the balance sheet. Financial statements Notes to the consolidated financial statements 71

73 The assumptions used in the actuarial calculations of the defined benefit obligation and net periodic benefit expense require a degree of judgment. The key assumptions required to calculate the actuarial present value of benefit obligations and net periodic benefit expense are as follows: Discount rate 4.10% 3.30% Price inflation 1.00% 1.00% Future salary increase 1.00% 1.00% Turnover rates 0.50% % 0.50% % Additional turnover rate early retirement at % 10.00% Mortality table AG Generation table The Company applies defined benefit accounting for the other long-term employee benefit plan retrospectively as of 1 January 2009 (see Note 2). As a consequence the Company is not able to provide an experience table with the defined benefit obligation (since actuarial gains and losses are recognised when they occur, they do not have an impact on the plan liabilities) for the years 2008, 2007 and Restructuring provision In 2007, the Company entered into an agreement with the Works Council for a social plan with respect to the restructuring of the head office organisation resulting in a workforce reduction. Management approved a detailed formal restructuring plan and the restructuring was announced to the parties concerned. The restructuring plan was executed in 2008 and Employees were able to apply for the social plan until the end of The number of employees that applied exceeded management s initial expectation and consequently the restructuring provision was increased in both 2010 and Legal claims provision The Company recognised a provision for disputes with a limited number of municipalities on the operation of the network. The addition to the legal claims is interest expense recognised within financial income and expense. Other provisions Other provisions include asset retirement obligations and onerous contracts. 72 Zesko Holding B.V. Annual Report 2010 Building the next level

74 19 Other current liabilities The Company s other current liabilities comprise the following: Amounts in thousands of 31 December December 2009 Accrued interest 20,179 1,561 Accrued expenses 67,756 70,744 Taxes and social securities 15,129 19,613 Accrued employee benefits 12,938 12,003 Other 845 2,095 Total 116, , Commitments and contingencies Lease commitments The Company leases buildings, certain office equipment and vehicles and has entered into various maintenance and support contracts for the support for network equipment, in the main. Lease terms generally range from three to five years with the option of renewal for varying terms. Lease commitments for coming periods are shown in the following schedule: Amounts in thousands of 31 December December 2009 Buildings Other contracts Total Within 1 year 9,023 4,960 13,983 14,542 Between 1 and 5 years 25,177 9,588 34,765 45,076 After 5 years 7,891-7,891 10,349 Total 42,091 14,548 56,639 69,967 Purchase commitments The Company enters into purchase commitments in the ordinary course of business. As at 31 December 2010 it had purchase commitments for an amount of 36 million. Legal proceedings The Company is involved in a number of legal proceedings. The legal proceedings may result in a liability that is material to the Company s financial condition, results of operations, or cash flows. The Company may enter into discussions regarding settlement of these proceedings, and may enter into settlement agreements, if it believes settlement is in the best interest of the Company. In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, the Company has recognised provisions with respect to these proceedings, where appropriate, which are reflected in the consolidated balance sheet and Note 18. Financial statements Notes to the consolidated financial statements 73

75 21 Related party disclosures Identification of related parties Parties are considered to be related if one party has the ability to control or exercise significant influence over the other party s financial or operational decisions. The related parties comprise associated companies, key management personnel and close family members of related parties. Transactions and positions For details on the shareholders loans received from Even Investments 2 Sàrl, reference is made to Note 17. Furthermore, management fees of 0.5 million (2009: 0.5 million) have been charged by the ultimate shareholders to the Company. In the normal course of business, the Company and its subsidiaries maintain various types of ordinary business with related parties (mainly as a provider of internet, television and telephony services). These transactions are not considered material to the Company, either individually or in the aggregate. Remuneration of the Board of Management of the Company As of 31 December 2010, the members of the Board of Management of the Company are: Mr. B.E. Dijkhuizen (Chief Executive Officer); Mr. H.L.L. Groenewegen (Chief Financial Officer); Mr. P.J. Hendriks (Chief Technology Officer); Mr. M.J. Nijhoff (Chief Commercial Officer). The following appointments were made in 2010: Mr. H.L.L. Groenewegen succeeded Mr. W.R. Blom as Chief Financial Officer in March 2010; Mr. P.J. Hendriks was appointed Chief Technology Officer in April The aggregated remuneration of the Board of Management members B.E. Dijkhuizen, H.L.L. Groenewegen (as from March 2010), W.R. Blom (until March 2010), P.J. Hendriks and M.J. Nijhoff can be broken down as follows: Amounts in thousands of Wages and salaries 1,498 1,090 Bonus payments Social security costs Pension costs Total 2,307 1,634 Remuneration of the Supervisory Board of the Company The aggregated remuneration of four Supervisory Board members in 2010 amounts to 207 (2009: 122). 74 Zesko Holding B.V. Annual Report 2010 Building the next level

76 22 Financial risks The Company s financial risk management focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Company s financial position and performance. The Company is exposed to the following financial risks: Credit risk; Liquidity risk; and Market risk. For each of these financial risks, which are included in the Company s risk management program, the Company s exposure, objectives, policies and processes for measuring and managing risk are presented below. Credit risk The credit risk on residential trade accounts receivable is considered to be low as a result of the large residential customer base, the relatively small amount of receivables per customer and the high percentage of customers who pay by direct debit. The risk on trade accounts receivable from the Company s business customers is also considered low, but this concerns a smaller customer base with larger receivables per customer than for the Company s residential customers. The analysis of the ageing of the trade accounts receivables is as follows: Amounts in thousands of Not due Past due, but not impaired Total <30 days days days days days ,086 11,269 2,248 1,182 1,526 1,186 2, ,592 24,725 3,307 2,653 6,190 6, >365 days The Company s maximum exposure to credit risk in the event that a counterparty fails to fulfil its obligations in relation to each class of recognised financial asset, including derivatives, is the carrying amount of those assets in the balance sheet. Liquidity risk The Company manages its liquidity risk on a consolidated basis with cash provided from operating activities being a primary source of liquidity. The Company manages short-term liquidity based on projected cash flows over rolling periods of six months. Based on the current operating performance and liquidity position, the Company believes that cash generated by operating activities and available cash balances will be sufficient for working capital, capital expenditures, interest payments, dividends and scheduled debt repayment requirements for the next twelve months and the foreseeable future. Financial statements Notes to the consolidated financial statements 75

77 The table below summarises the maturity profile of the Company s financial liabilities: Amounts in thousands of 31 December 2010 Carrying amount Contractual cash flows January - March 2011 April - December After 2015 Non-derivative financial liabilities Loans from financial institutions (2,381,764) (2,965,147) (27,145) (82,942) (110,086) (1,656,328) (1,088,646) Loans from shareholders (2,065,336) (3,399,080) (3,399,080) - 8.0% Senior Notes (1,176,530) (1,921,310) (23,846) (72,862) (96,708) (290,124) (1,437,770) Trade accounts payable (80,165) (80,165) (80,165) Derivative financial liabilities Interest Rate Swaps used for hedging (92,986) (126,021) (18,908) (45,059) (27,580) (34,474) - Total (5,796,781) (8,491,723) (150,064) (200,863) (234,374) (5,380,006) (2,526,416) Amounts in thousands of 31 December 2009 Carrying amount Contractual cash flows January - March 2010 April - December After 2014 Non-derivative financial liabilities Loans from financial institutions (3,814,610) (5,155,266) (35,584) (109,791) (148,204) (1,749,101) (3,112,586) Loans from shareholders (1,869,979) (3,399,080) (3,399,080) Trade accounts payable (102,951) (102,951) (102,951) Derivative financial liabilities Interest Rate Swaps used for hedging (102,261) (219,054) (24,012) (61,368) (67,960) (65,714) - Total (5,889,801) (8,876,351) (162,547) (171,159) (216,164) (1,814,815) (6,511,666) Market risk The Company is exposed to market risks, including interest rate and foreign currency exchange rate risks, associated with underlying assets, liabilities and anticipated transactions. Based on the analysis of these exposures, the Company selectively enters into derivatives to manage the related risk exposures. 76 Zesko Holding B.V. Annual Report 2010 Building the next level

78 Interest rate risk Exposure to the risk of changes in the market interest rates relates primarily to the Company s long-term debt obligations with a (partly) floating interest rate. The Company manages its exposure to changes in interest rates and its overall cost of financing by using Interest Rate Swap (IRS) agreements. These IRS agreements are used to transform the interest rate exposure on the underlying liability from a floating interest rate into a fixed interest rate. It is the Company s policy to keep at least 50% of its borrowings at fixed rates of interest. The net interest rate risk can be analysed as follows: Amounts in thousands of 31 December December 2009 Notional amount-borrowings (floating) (1,631,764) (3,814,610) Cash (floating) & deposits (floating and/or fixed) 67,003 65,297 Notional amount IRS (fixed) 2,670,500 2,838,000 Net interest rate risk 1,105,739 (911,313) Notional amount IRS - offset 1,142,500 - Net interest rate risk - including offset IRS (36,761) (911,313) At 31 December 2010, after taking into account the effect of Interest Rate Swaps, approximately 99% of the Company s borrowings are at a fixed interest rate (2009: 84%). Sensitivity analysis for interest rate risk The following table demonstrates the sensitivity to a possible change in interest rates, with all other variables held constant, of the Company s result before tax (through the impact on floating rate borrowings). There is no impact on the Company s equity. Amounts in thousands of 31 December December 2009 Increase/decrease in basis points + 20bp (74) (1,823) + 10bp (37) (911) - 10bp bp 74 1,823 Foreign currency risk The Company has transactional currency exposures arising from purchases in US Dollars. The Company enters into foreign exchange swaps to partially mitigate this risk. As at 31 December 2010 the net foreign currency exposure of the USD amounts to USD 7.9 million (2009: USD 15.0 million) and relates to the net amount of cash & cash equivalents and trade accounts payable. Of this exposure USD 2.9 million at an average fixed rate of USD 1.35 was hedged with maturity dates between 3 January 2011 and 28 January Financial statements Notes to the consolidated financial statements 77

79 23 Financial instruments Fair values The following table presents the fair values of financial instruments, based on the Company s categories of financial instruments, including current portions, compared to the carrying amounts at which these instruments are recognised in the balance sheet: 31 december december 2009 Amounts in thousands of Carrying amount Fair value Carrying amount Fair value Financial assets Derivatives, included in other current assets Loans Trade accounts receivable 20,086 20,086 43,592 43,592 Cash and cash equivalents 67,003 67,003 65,297 65,297 Total financial assets 87,158 87, , ,976 Financial liabilities Loans from financial institutions (2,381,764) (2,380,674) (3,814,610) (3,715,849) 8% Senior Notes (1,176,530) (1,246,122) - - Interest-bearing loans from shareholders (2,065,336) (2,065,336) (1,869,979) (1,869,979) Trade accounts payable (80,165) (80,165) (102,951) (102,951) Total financial liabilities at amortised cost (5,703,795) (5,772,297) (5,787,540) (5,688,779) Derivative financial instruments (92,986) (92,986) (102,261) (102,261) Total financial liabilities (5,796,781) (5,865,283) (5,889,801) (5,791,040) The carrying amounts of receivables, other current assets, cash and cash equivalents and accounts payable approximate their fair values because of the short-term nature of these instruments and, for receivables, because of the fact that any recoverability loss is reflected in an impairment loss. The fair values of quoted borrowings are based on year-end askmarket quoted prices. The fair values of other non-derivative financial assets and liabilities that are not traded in an active market are estimated using discounted cash flow analyses based on market rates prevailing at year-end. Hedging activities At 31 December 2010, the Company has Interest Rate Swap (IRS) agreements with a total notional amount of 2,670.5 million (2009: 2,838.0 million) under which it pays a fixed rate of interest (between 3.55% and 3.84%) and receives a variable rate equal to EURIBOR on the notional amount. These IRS agreements are used to reduce the exposure to changes in the variable EURIBOR rates on the outstanding loan portfolio of 1,631.7 million (2009: 3,814.6 million). The notional amounts of the IRS agreements will be reduced in line with the repayment schedule on the loan portfolio (currently the last IRS agreement will mature in 2014). In addition the Company has basis swap agreements for a total notional amount of 1,135.0 million in order to match the EURIBOR in the Senior Credit Facility. 78 Zesko Holding B.V. Annual Report 2010 Building the next level

80 In 2010, repayments totalling 2,204.6 million on interest-bearing loans from financial institutions with floating interest rates (see Note 16) were made and changed the exposure of the Company to interest rate fluctuations. As a result existing IRS agreements in place to mitigate these fluctuations exceeded the Company s notional amount of loans to financial institutions subject to changes in the variable EURIBOR rates. To reduce this over-hedged position the Company offset IRS agreements with a notional amount of 1,142.5 million. The Company has foreign currency swap agreements to reduce its exposure on fluctuations of its purchase obligations in US Dollars. Settlement of these agreements occurs within three months. As at 31 December 2010 the notional amount of these agreements was USD 2.9 million. Hedge accounting As a consequence of the refinancing of the Company in October 2010 (discussed in Note 16), the Company no longer applies hedge accounting for IRS, as the hedges concerned became ineffective. As of October 2010 any change in fair value of IRS is reported in financial income and expense. The cash flow hedge reserve recognised within other comprehensive income will be reclassified to financial income and expense in the same periods during which the hedge forecast cash flows affect the consolidated income statement. The cash flow hedge reserve recognised up to the effectiveness amounted 16.3 million, after income tax. Fair value hierarchy Of the Company s categories of financial instruments, only derivatives are measured at fair value using the Level 2 inputs as defined in IFRS 7 Financial Instruments: Disclosures. These inputs are inputs other than quoted prices that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). The fair value of derivative instruments is estimated by discounting future cash flows at prevailing market rates or based on the rates and quotations obtained from third parties. The Company enters into derivative financial instruments with various counterparties, principally financial institutions with investment grade ratings. There were no changes in the valuation method of the financial instruments of the Company in 2010 and Derivatives The numbers and the maturities of derivative contracts, the fair values and the qualification of the instruments for accounting purposes are presented in the table below: Amounts in thousands of Number of contracts 31 december december 2009 Fair value Number of contracts Fair value Interest Rate Swaps Within 1 year 9 (34,539) 7 (99,599) Within 2-5 years 3 (58,447) 3 (2,662) Foreign currency forwards Within 1 year Total derivative financial instruments 18 (92,968) 10 (102,261) Financial statements Notes to the consolidated financial statements 79

81 24 Adjustments of prior periods Other long-term employee benefits The Company in February Employees were entitled to a long-term employee benefit plan (see Note 18 for details of the plan). Upon acquisition the plan was continued by the Company and made available under the same conditions to former Multikabel and Casema employees to prevent discrepancies. The Company did not recognise a liability for its obligations under the benefit plan however. IFRS (IAS 19 Employee Benefits ) requires the Company to recognise this liability in the balance sheet, and therefore the balance sheet as at 1 January 2009 and as at 31 December 2009 have been adjusted as well as the income statement for To improve insight into the expenses the Company reclassified items within operating expenses. These reclassifications did not impact net income. The overview below presents the income statement for 2009 as previously reported, reclassifications and adjustments made. Amounts in thousands of 2009 Previously reported Reclassifications Adjustments Adjusted Revenues 1,284, ,284,395 Cost of goods sold 255,481 7, ,276 Personnel expenses 175,868 3, ,782 Contracted work 80,980 (12,628) - 68,352 Materials & logistics 11,166 (7,795) - 3,371 Marketing & sales 36,944 18,388-55,332 Office expenses 64,405 (9,039) - 55,366 Other operating expenses 10,878 (202) - 10,676 Amortisation and impairments 229, ,307 Depreciation and imparments 261, ,752 Total operating expenses 1,126, ,127,214 Operating income 157,614 - (433) 157,181 Net financial income (expense) (489,655) - (563) (490,218) Loss before income taxes (332,041) - (996) (333,037) Income tax benefit (expense) 84, ,924 Net loss for the year (247,371) - (742) (248,113) Net loss attributable to equity holders (247,371) - (742) (248,113) 80 Zesko Holding B.V. Annual Report 2010 Building the next level

82 The overview below presents the balance sheet at year-end 2009 as previously reported and the adjustments made. Amounts in thousands of 31 December 2009 Previously reported Reclassifications Adjustments Adjusted Assets Intangible assets 3,844,140-6,000 3,850,140 Property and equipment 1,549, ,549,664 Financial assets Deferred tax assets 276,379-3, ,056 Total non-current assets 5,670,551-9,677 5,680,228 Inventories 25, ,542 Trade accounts receivable 43, ,592 Other current assets 27, ,201 Cash and cash equivalents 65, ,297 Total current assets 161, ,632 Total assets 5,832,183-9,677 5,841,860 Equity and liabilities Issued share capital Share premium 255, ,439 Other reserves (27,149) - - (27,149) Retained earnings (897,208) - (4,743) (901,951) Equity attributable to equity holders (668,900) - (4,743) (673,643) Interest-bearing loans 3,712, ,712,042 Interest-bearing loans from shareholders 1,869, ,869,979 Derivative financial instruments 99, ,599 Provisions ,682 12,682 Deferred tax liabilities 477, ,893 Total non-current liabilities 6,159,513-12,682 6,172,195 Deferred revenues 106, ,247 Derivative financial instruments 2, ,662 Provisions 23,694-1,738 25,432 Trade accounts payable 102, ,951 Other current liabilities 106, ,016 Total current liabilities 341,570-1, ,308 Total equity and liabilities 5,832,183-9,677 5,841,860 Financial statements Notes to the consolidated financial statements 81

83 The overview below presents the opening balance sheet of 2009 as previously reported and the adjustments made. Amounts in thousands of 1 January 2009 Previously reported Reclassifications Adjustments Adjusted Assets Intangible assets 3,983,336-6,000 3,989,336 Property and equipment 1,646, ,646,419 Financial assets Deferred tax assets 222,143-3, ,566 Total non-current assets 5,852,797-9,423 5,862,220 Inventories 13, ,978 Trade accounts receivable 48, ,719 Other current assets 30, ,105 Cash and cash equivalents 42, ,653 Total current assets 135, ,455 Total assets 5,988,252-9,423 5,997,675 Equity and liabilities Issued share capital Share premium 255, ,439 Other reserves Retained earnings (649,837) - (4,001) (653,838) Equity attributable to equity holders (394,380) - (4,001) (398,381) Interest bearing loans 3,801, ,801,283 Interest bearing loans from shareholders 1,693, ,693,370 Derivative financial instruments 73, ,935 Provisions 5,093-12,097 17,190 Deferred tax liability 517, ,619 Total non-current liabilities 6,091,300-12,097 6,103,397 Deferred revenues 97, ,407 Provisions 14,008-1,327 15,335 Trade accounts payable 60, ,242 Other current liabilities 119, ,675 Total current liabilities 291,332-1, ,659 Total equity and liabilities 5,988,252-9,423 5,997, Zesko Holding B.V. Annual Report 2010 Building the next level

84 25 Subsidiaries The following companies are Zesko Holding s significant subsidiaries as at 31 December Unless otherwise indicated, these are wholly owned subsidiaries. Subsidiaries that are not important to providing an insight into the group as required under Dutch law are omitted from this list. With respect to the separate financial statements of a number of legal entities included in the consolidation, the Company used the exemption laid down in section 403, subsection 1 of Book 2 of the Netherlands Civil Code. Pursuant to this section, the Company has issued declarations of assumption of liability for its subsidiaries. These companies are marked with a * in the following table. Zesko B.V., Amsterdam, the Netherlands Ziggo Bond Company Holding B.V., Amsterdam, the Netherlands Ziggo Bond Company B.V., Amsterdam, the Netherlands Amsterdamse Beheer- en Consultingmaatschappij B.V., Amsterdam, the Netherlands Christina Beheer- en Adviesmaatschappij B.V., Amsterdam, the Netherlands * Serpering Investments B.V., Amsterdam, the Netherlands * Plinius Investments II B.V., Amsterdam, the Netherlands * Torenspits II B.V., Amsterdam, the Netherlands * Ziggo Holding B.V., Groningen, the Netherlands * Ziggo B.V., Groningen, the Netherlands * Ziggo Netwerk B.V., Groningen, the Netherlands * 26 Subsequent events No material events occurred between the end of the reporting period and the date on which these financial statements were issued. Financial statements Notes to the consolidated financial statements 83

85 Parent company income statement Amounts in thousands of Note Result investments, after tax 4 (210,200) (248,113) Net result (210,200) (248,113) 84 Zesko Holding B.V. Annual Report 2010 Building the next level

86 Parent company balance sheet Amounts in thousands of Note 31 December December 2009 Assets Intangible assets 132, ,004 Total non-current assets 132, ,004 Other current assets Cash and cash equivalents - - Total current assets Total assets 132, ,070 Equity and liabilities Issued share capital Share premium 255, ,439 Other reserves (15,100) (27,149) Retained earnings (1,112,151) (901,951) Equity attributable to equity holders 3 (871,794) (673,643) Provision for the net capital deficiency of investments 4 1,003, ,713 Total non-current liabilities 1,003, ,713 Total equity and liabilities 132, ,070 Parent company financial statements Balance sheet 85

87 Notes to the parent company financial statements 1 Corporate information The principal activities of Zesko Holding B.V. ( the Company ) are to participate in, to finance or to have any other interest in, or to conduct the management of, other companies and enterprises. The Company is the owner and operator of a broadband cable network in the Netherlands and offers analogue and digital radio and television, broadband internet and telephony services in the Netherlands to 3.1 million households under the brand name Ziggo. The Company is a private limited company incorporated in Amsterdam (address: Winschotendiep 60, 9723 AB Groningen) in the Netherlands. The Company is wholly owned by Even Investments 2 Sàrl whose shareholders are investment funds that are ultimately managed by the private equity companies Cinven Limited and Warburg Pincus LLC. 2 Significant accounting policies Basis of preparation The parent company financial statements of Zesko Holding B.V. have been prepared in accordance with Part 9, Book 2 of the Netherlands Civil Code. In accordance with subsection 8 of section 362, Book 2 of the Netherlands Civil Code, the measurement principles applied in these parent company financial statements are the same as those applied in the consolidated financial statements (see Note 3 to the consolidated financial statements). This means that the principles for recognition and measurement of assets and liabilities and determination of the result of the Company are the same as those applied for the consolidated financial statements. The Company prepares its consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board and adopted by the European Union. The accounting policies applied in the parent company financial statements are the same as those applied in the consolidated financial statements. Reference is made to Note 3 of the consolidated financial statements for a description of these principles. 86 Zesko Holding B.V. Annual Report 2010 Building the next level

88 As the financial data of Zesko Holding B.V. (the parent company) are included in the consolidated financial statements, the income statement in the parent company financial statements is presented in condensed form (in accordance with section 402, Book 2 of the Netherlands Civil Code). The comparative information has been adjusted. For further details, reference is made to Note 2 of the consolidated financial statements. Investments in subsidiaries Investments in subsidiaries are accounted for using the net equity value. Zesko Holding B.V. calculates the net equity value using the accounting policies as described in Note 3 to the consolidated financial statements. The net equity value of subsidiaries comprises the cost, excluding goodwill, of Zesko Holding B.V. s share in the net assets of the subsidiary, plus the share in income or losses since acquisition, less dividends received. In case the net equity value is negative and the Company is liable for the deficit of the subsidiary the carrying amount is presented as Provision for the net capital deficit of investments. 3 Shareholders equity The Company is incorporated as a private limited liability company under Dutch law. Its authorised capital consists entirely of ordinary shares. Amounts in thousands of 31 December December 2009 Authorised capital Ordinary shares 900 of 100 each Issued and fully paid (181 shares) Share premium 255, ,439 Other reserves (15,100) (27,149) Retained earnings (1,112,151) (901,951) Equity attributable to equity holders (871,794) (673,643) Other reserves represents the cash flow hedge reserve, which is a statutory reserve. 4 Provision for the net capital deficit of investments Movements in the Company s investment in its only subsidiary, Zesko B.V., were as follows: Amounts in thousands of Balance at 1 January (805,713) (530,451) Cash flow hedge reserve 12,049 (27,149) Result subsidiary (210,200) (248,113) Balance at 31 December (1,003,864) (805,713) Parent company financial statements Notes to the parent company financial statements 87

89 5 Related party disclosures Identification of related parties Parties are considered to be related if one party has the ability to control or exercise significant influence over the other party s financial or operational decisions. The related parties comprise associated companies, key management personnel and close family members of related parties. Transactions and positions In the normal course of business, Zesko Holding B.V. maintains various types of ordinary business with related parties (mainly as a provider of internet, television and telephony services). These transactions are not considered material to Zesko Holding B.V., either individually or in the aggregate. Remuneration For the remuneration of the Board members, reference is made to Note 21 in the consolidated financial statements. 6 Subsequent events No material events occurred between the end of the reporting period and the date on which these financial statements were issued. 7 Auditor s fees The fees for services provided by the Company s independent auditor, Ernst & Young Accountants and its member firms and/or affiliates to the Company and its subsidiaries can be broken down as follows: Amounts in thousands of Audit fees Audit related fees Other non-audit fees Total Zesko Holding B.V. Annual Report 2010 Building the next level

90 Appropriation of result The articles of association of the Company state that the distributable profits are at the disposal of the General Meeting of Shareholders for distribution of dividend or in order to be added to the reserves or for such other purposes within the Company s objects as the meeting shall decide. The result for the year 2010, which is a loss of 210,200 has been added to retained earnings. Appropriation of result 89

91 Independent auditor s report To: the Shareholders of Zesko Holding B.V. Report on the financial statements We have audited the accompanying financial statements 2010 of Zesko Holding B.V., Amsterdam. The financial statements include the consolidated financial statements and the company financial statements. The consolidated financial statements comprise the consolidated statements of comprehensive income, the consolidated balance sheet as at 31 December 2010, changes in equity and cash flows for the year then ended, and notes, comprising a summary of the significant accounting policies and other explanatory information. The company financial statements comprise the company balance sheet as at 31 December 2010 the company profit and loss account for the year then ended and the notes, comprising a summary of the accounting policies and other explanatory information. Management s responsibility Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code, and for the preparation of the board report in accordance with Part 9 of Book 2 of the Dutch Civil Code. Furthermore management is responsible for such internal control as it determines is necessary to enable the preparation of the financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. This requires that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 90 Zesko Holding B.V. Annual Report 2010 Building the next level

92 Opinion with respect to the consolidated financial statements In our opinion, the consolidated financial statements give a true and fair view of the financial position of Zesko Holding B.V. as at 31 December 2010 its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union and with Part 9 of Book 2 of the Dutch Civil Code. Opinion with respect to the company financial statements In our opinion, the company financial statements give a true and fair view of the financial position of Zesko Holding B.V. as at 31 December 2010 and of its result for the year then ended in accordance with Part 9 of Book 2 of the Dutch Civil Code. Report on other legal and regulatory requirements Pursuant to the legal requirement under Section 2:393 sub 5 at e and f of the Dutch Civil Code, we have no deficiencies to report as a result of our examination whether the board report, to the extent we can assess, has been prepared in accordance with Part 9 of Book 2 of this Code, and whether the information as required under Section 2:392 sub 1 at b-h has been annexed. Further we report that the board report, to the extent we can assess, is consistent with the financial statements as required by Section 2:391 sub 4 of the Dutch Civil Code. Amsterdam, 15 April 2011 Ernst & Young Accountants LLP signed by F.J. Blenderman Independent auditor s report 91

93 Contact details and address Bert Groenewegen, CFO Zesko Holding B.V. Postal address: P.O. Box AA Utrecht The Netherlands Visiting address: Atoomweg AB Utrecht The Netherlands Telephone: +31 (0) Disclaimer This annual report and account contains certain forward-looking statements with respect to the financial condition, results, operations and businesses of Zesko Holding B.V. These statements and forecasts involve risk and uncertainty because they relate to events and depend upon circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. Nothing in this annual report and accounts should be construed as a profit forecast. The Financial statements have been audited by Ernst & Young Accountants. 92

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