STRICTLY PRIVATE & CONFIDENTIAL Cablecom Luxembourg SCA
STRICTLY PRIVATE & CONFIDENTIAL Cablecom Luxembourg SCA
STRICTLY PRIVATE & CONFIDENTIAL Cablecom Luxembourg SCA
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<strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A.<br />
Annual Report for the<br />
Year Ended December 31, 2005<br />
<strong>STRICTLY</strong> <strong>PRIVATE</strong> & <strong>CONFIDENTIAL</strong>
TABLE OF CONTENTS<br />
BUSINESS ....................................................................................................................................................................1<br />
RISK FACTORS .........................................................................................................................................................18<br />
CAPITALIZATION ....................................................................................................................................................30<br />
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA ......................................................................31<br />
KEY OPERATING STATISTICS ..............................................................................................................................33<br />
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS<br />
OF OPERATIONS ......................................................................................................................................................35<br />
MANAGEMENT AND GOVERNANCE ..................................................................................................................47<br />
DESCRIPTION OF CERTAIN FINANCING ARRANGEMENTS ..........................................................................52<br />
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS ..........................................................59<br />
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................................................ F-1<br />
Page
General Development of Business<br />
BUSINESS<br />
<strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. (Issuer) is a holding company incorporated in <strong>Luxembourg</strong> and its<br />
subsidiary, <strong>Cablecom</strong> GmbH, Zurich (collectively referred to as <strong>Cablecom</strong> 1 ) operates cable communications<br />
services primarily in Switzerland, and to a lesser extent in the Austrian market. <strong>Cablecom</strong> provides a wide<br />
range of services, including television, telephony and Internet access to its residential customers, as well as<br />
data services to business customers in Switzerland. <strong>Cablecom</strong> began to offer telephony services, initially as<br />
an extension of its broadband Internet product in February 2003.<br />
<strong>Cablecom</strong>’s analog cable television service represents the most significant contributor to <strong>Cablecom</strong>’s<br />
revenue. Additionally, <strong>Cablecom</strong> utilizes its existing infrastructure and network capacity to develop its<br />
broadband Internet access, digital television service, and fixed-line telephone services to residential<br />
customers while providing advanced data services and wholesale activities to business customers and third<br />
party network operators, respectively.<br />
The Issuer was incorporated in <strong>Luxembourg</strong> on March 19, 2004 in order to perform holding activities of<br />
<strong>Cablecom</strong> GmbH and facilitated the refinancing of <strong>Cablecom</strong> GmbH in April 2004. <strong>Cablecom</strong> GmbH was<br />
acquired by the Issuer through its subsidiary CCom Financing (Gibraltar) Limited through a non-cash<br />
issuance of shares as a result of the subsequent refinancing.<br />
<strong>Cablecom</strong>’s ultimate parent changed on October 24, 2005 when Liberty Global Switzerland, Inc. (Liberty<br />
Global Switzerland) acquired 100% of the outstanding shares of <strong>Cablecom</strong> Holdings AG from Glacier<br />
Holdings S.C.A. See Note 1 to the consolidated financial statements.<br />
Unless indicated otherwise, amounts are denominated in Swiss Francs (CHF). In addition to CHF, other<br />
foreign currencies will be described throughout this document. These other currencies include the European<br />
monetary unit (EUR) and the U.S. Dollar (USD).<br />
Recent Development of Business<br />
Change in ultimate parent company<br />
On September 30, 2005, Liberty Global Switzerland, formerly United ACM Holdings Inc., a subsidiary of<br />
Liberty Global, Inc. (Liberty Global), entered into a share purchase agreement with Glacier Holdings S.C.A.<br />
to acquire 100% of the issued share capital of <strong>Cablecom</strong> Holdings AG, for cash consideration of<br />
CHF 2.826 billion, from a group of selling shareholders. The acquisition was completed on October 24,<br />
2005.<br />
Liberty Global is the leading international cable operator offering advanced video, voice, and Internetaccess<br />
services to connect our customers to the world of entertainment, communications and information. At<br />
December 31, 2005, Liberty Global operated state-of-the-art broadband communications networks that<br />
served approximately 15 million customers in 19 countries principally located in Europe, Japan, Chile, and<br />
Australia. Liberty Global’s operations also include significant media and programming businesses such as<br />
Jupiter TV in Japan and chellomedia in Europe.<br />
1 “we,” “us” and “our” refer to the <strong>Cablecom</strong>.<br />
1
Financing<br />
The Issuer had outstanding senior fixed rate notes (Senior Notes) and senior secured floating rate notes<br />
(Senior Secured Notes) at the time of its acquisition by Liberty Global Switzerland. Pursuant to the<br />
indentures governing the Senior Notes and Senior Secured Notes, the Issuer was required to make an offer<br />
to purchase the Senior Notes and Senior Secured Notes at 101% of their principal amount as a result of the<br />
change of control. On December 8, 2005, the Issuer purchased the tendered Senior and Senior Secured<br />
Notes.<br />
On January 20, 2006, the Issuer redeemed the balance of the Senior Secured Notes not tendered in the<br />
“change of control” offer for 102% of their principal amount. The purchase of Senior Secured Notes<br />
pursuant to the change of control offer and the optional redemption was funded by borrowings of term loans<br />
under a facilities agreement (Bank Facility) entered into by the Issuer and its subsidiary, <strong>Cablecom</strong> GmbH,<br />
dated December 5, 2005. The Bank Facility provides for two term loan facilities to the Issuer with<br />
maximum aggregate borrowings of CHF 1.33 billion. The Bank Facility was fully drawn to finance the<br />
change of control tender offer and the redemption of the remaining Senior Secured Notes. In addition,<br />
<strong>Cablecom</strong> GmbH has a CHF 150.0 million revolving credit facility (Existing Revolving Credit Facility).<br />
Narrative Description of Business<br />
We are the largest cable operator offering broadband communications services in Switzerland, providing our<br />
customers with quadruple-play products in cable television, broadband Internet, fixed-line and mobile<br />
telephone services. We have a major presence in 14 of the 16 largest Swiss cities.<br />
Based on our consolidated operating statistics as at December 31, 2005, our network passed approximately<br />
1.8 million homes and provided cable television services to 1.4 million analog cable television subscribers.<br />
In addition, we serviced 106,300 digital cable television subscribers, 340,500 broadband Internet subscribers<br />
and 186,200 telephony subscribers over both our network and our partner networks, as of December 31,<br />
2005. Included in these subscriber numbers are 25,000 digital cable television, 35,800 broadband Internet<br />
and 19,300 telephony subscribers serviced over partner networks. 70% of our nationwide network is<br />
upgraded to two-way capability 2 .<br />
We market analog cable television services to 100% of our homes passed. For 70% of our analog cable<br />
television subscribers, we maintain billing relationships with landlords or housing associations, which<br />
typically provide analog cable television service for an entire building and do not terminate service each<br />
time there is a change of tenant in the landlord’s or housing association’s premises. 81% of our homes<br />
passed are capable of receiving digital cable television service. We offer our digital cable television<br />
subscribers a digital entry package consisting of 50 television and 30 radio channels and a range of<br />
additional pay television programming in a variety of foreign language program packages. We also offer<br />
NVOD services, which provide movies and other programs available on demand to all of our digital cable<br />
television customers. In January 2006, we announced the introduction of a DVR, enabling users to create a<br />
personalized television experience. Our digital cable television service is sold directly to the end user as an<br />
add-on to our analog cable television services.<br />
2 Two-way capable homes are homes passed by our networks where customers can request and receive the<br />
installation of a two-way addressable set-top converter, cable modem, transceiver and/or voice port which, in most<br />
cases, allows for the provision of analog cable television services, digital cable television services, broadband<br />
Internet services and telephony services.<br />
2
We offer five tiers of broadband Internet access service with download speeds ranging from 300 kbps to<br />
6 mbps. 70% of our homes passed are capable of receiving broadband Internet. Approximately 20% of our<br />
analog cable television subscribers also receive our Internet access service. In addition, we continue to offer<br />
dial-up Internet services on a limited basis.<br />
Telephony services are available to 70% of our homes passed. Approximately 11% of our analog cable<br />
television subscribers also receive our telephony services. In June 2005, we launched “Unlimited 24”, the<br />
first flat rate telephone plan in Switzerland.<br />
We offer managed wireless area networks and voice services as well as value-added services such as<br />
security, messaging and hosting to the business market in Switzerland. The acquisition of Unified Business<br />
Solutions in May 2005 provided us with a suite of converged voice and data products and an established<br />
customer base.<br />
We provide full or partial analog television signal delivery, network maintenance services and engineering<br />
and construction services to other cable operators in Switzerland, which we refer to as our “partner<br />
networks”. We also offer digital television, broadband Internet and telephony service to the analog cable<br />
subscribers of those partner networks that enter into service operating contracts with <strong>Cablecom</strong>. We have<br />
the direct customer billing relations with the subscribers who subscribe to these services on the partner<br />
networks. These service operating contracts permit us to offer some or all of our digital television,<br />
broadband Internet and fixed-line telephony products directly to those partner network subscribers and, as a<br />
result, have expanded the addressable markets for our digital products. In exchange for our right to provide<br />
digital products directly to the partner network subscribers, we pay to each partner network a share of the<br />
revenue we generate from those subscribers.<br />
With the launch of a mobile pre-paid offer in December 2005, we became the first telecommunications<br />
provider in Switzerland to offer television, Internet, fixed-line and mobile telephony — also known as<br />
“quadruple play”.<br />
Integration<br />
Our integration process into UPC Broadband, Liberty Global’s European broadband group, started after the<br />
closing of the transaction on October 24, 2005. As a first priority we focused on procurement synergies<br />
(e.g. modem prices, voice license fees, set-top boxes, etc.) as well as the reduction of overhead in corporate<br />
shared functions. In November 2005, we began with an announced program to reduce headcount by 80 full<br />
time equivalents by year end and an additional 170 full time equivalents throughout 2006. In addition, we<br />
began integrating other areas of <strong>Cablecom</strong> such as our Network and Information Technology departments.<br />
We migrated network monitoring as well as 2nd and 3rd level support to UPC Broadband’s Amsterdam<br />
location and started the migration to UPC Broadband’s Pan European IT platform for provisioning, billing<br />
and customer web interface.<br />
In addition, we will incur operational costs recharged by UPC Broadband for usage of shared platforms,<br />
backbone and services as well as for corporate functions and support.<br />
3
Our Products and Services<br />
Cable television<br />
We are the leading Swiss cable television service provider with approximately 1.4 million analog cable<br />
television subscribers as of December 31, 2005, representing a 78% penetration 3 in our network coverage<br />
areas. In addition, through our partner networks, we deliver analog cable television signals to approximately<br />
0.5 million subscribers, and, in many cases, we have the exclusive rights to market our digital products to<br />
these partner network subscribers. As of December 31, 2005, we serviced approximately 106,300 digital<br />
cable television customers over both our network and our partner networks. Our analog television offering<br />
consists of up to 53 analog television channels and up to 45 analog radio channels. To complement our<br />
analog television offering, we offer up to 130 digital television channels, 30 digital radio channels as well as<br />
pay-per-view and premium packages, NVOD and DVR services.<br />
Analog cable television<br />
We currently provide up to 53 analog television channels to approximately 1.4 million analog cable<br />
television subscribers. Our service includes a variety of public and private channels from Switzerland,<br />
Germany, France, Italy and Austria, as well as special interest channels such as information, sport, music<br />
and home shopping and public channels from non-neighboring countries. We offer our services through<br />
direct connections to subscribers’ televisions. We derive revenues from subscription fees and also receive a<br />
small amount of carriage fees paid by certain of the content providers to carry their programs over our<br />
network.<br />
In 2005, we charged our subscribers a maximum monthly fee of CHF 19.50, excluding VAT, for our analog<br />
services and a monthly fee of CHF 2.00 for regulatory and copyright. In 2004, we reached an agreement<br />
with the Swiss Price Regulator of the Federal Department of the Economy of Switzerland, governing the<br />
basic analog television rate for 2005 and 2006. According to the agreement, prices for our analog cable<br />
television service remained unchanged for 2005 and were increased by CHF 1.50 to CHF 21.00 effective<br />
January 1, 2006.<br />
In addition to the delivery of analog cable television, we offer our subscribers a Service Plus contract,<br />
providing for maintenance of in-building cable wiring and permission to upgrade the in-building installation<br />
if necessary, for bi-directional services (specifically, broadband Internet and fixed-line telephony). As of<br />
December 31, 2005, approximately 69% of our subscriber base had opted for this service, which costs each<br />
subscriber CHF 2.00 per month.<br />
Digital television<br />
We launched our digital television platform in November 1999 for the German language region of<br />
Switzerland. In mid 2001, we added the first two German language pay-TV packages. Since June 2002, we<br />
had a competitive offering tailored to each of the three regions of Switzerland. This consists of a basic<br />
offering of 50 television and 30 radio channels, several packages targeted to specific customer segments and<br />
stand alone pay-television channels. The digital television product is an ancillary service to analog cable<br />
television. As of December 31, 2005, we serviced approximately 106,300 digital subscribers over both our<br />
3 Penetration measures the number of Revenue Generating Units (RGU) for our service divided by the number of<br />
homes serviceable for our service. RGU is separately an analog cable television subscriber, digital cable television<br />
subscriber, broadband Internet subscriber or telephony subscriber. A home may contain one or more RGUs.<br />
4
network and our partner networks. Our services are available to approximately 1.7 million homes within<br />
both our network and our partner networks.<br />
Reception of our digital cable television services requires a digital set-top box that the customer either rents<br />
together with the digital basic package for a monthly fee of CHF 25.00 from our direct channels or from<br />
retail outlets or buys outright from our direct channels. The customer can choose from three categories of<br />
programming:<br />
• basic programming bundle or stand alone plus an interactive television service at no additional<br />
cost (beyond the set-top box rental or purchase cost);<br />
• pay packages, including minority group programming and specialty programming, for which the<br />
customer pays a monthly fee, varying by package; and<br />
• pay-per-view programming comprised of a fee for a single viewing of a specific program,<br />
predominantly hit movies from six of the major Hollywood studios and adult programming.<br />
In 2005 we introduced full simulcasting of our analog channels on our digital platform and subsequently<br />
introduced the first DVR in the Swiss market. Throughout 2006, we plan to implement a variety of<br />
measures to further improve the television experience of our customers. We plan to continue to expand our<br />
digital line-up with a selection of new programming as it becomes available. Our electronic program guide<br />
will be expanded to provide detailed information on scheduling and content for all of our channels on an<br />
expanded time basis. This will assist customers to easily sort through our expanded collection of channels.<br />
Broadband Internet<br />
In 1999, we expanded our existing dial-up Internet services by launching our broadband offering, “hispeed,”<br />
which provides “always on” high-speed Internet access via cable modem at a variety of downstream speeds<br />
from 300 kbps to 6 mbps. As of December 31, 2005, we had approximately 340,500 residential hispeed<br />
subscribers and a 23% penetration rate of broadband Internet homes serviceable within both our network<br />
and our partner networks.<br />
We currently offer five different residential packages:<br />
Product Speed (Download/Upload in kbps) Cost per month (CHF)<br />
Hispeed Light 300/100 10 plus Volume (max. 80)<br />
Hispeed 300 300/100 30<br />
Hispeed 3,000 3,000/300 45<br />
Hispeed 4,000 4,000/400 60<br />
Hispeed 6,000 6,000/600 95<br />
Switzerland is well positioned for continued broadband Internet growth based on key demographics,<br />
including computer and Internet penetration rates and average income, as well as the early success of the<br />
broadband Internet product across the country. Broadband Internet is a high margin business with the<br />
majority of our costs relating to Internet peering.<br />
Our residential broadband Internet strategy is to provide a superior product at a superior price by<br />
outperforming our competitors in terms of upstream and downstream speed, product features and service<br />
quality. We are well positioned to be the broadband Internet market leader in those parts of Switzerland<br />
where our service is available. We expect to continue this strategy, and expect that most product capital<br />
expenditures will be incremental going forward, either in terms of subscribers or capacity.<br />
5
In 1998, we launched our Internet services by acquiring Swiss Online AG, a leading Swiss dial-up Internet<br />
service provider with service availability across Switzerland. As of December 31, 2005, Swiss Online had<br />
approximately 93,500 dial-up users, of which about 24,700 were subscription-based users. From 2001 to<br />
2005, we targeted our dial-up Internet customers for conversion to broadband Internet services. For many of<br />
the remaining customers who reside off of our footprint area, <strong>Cablecom</strong> broadband Internet is not available.<br />
However the dial-up business continues to generate steady revenues with minimal cost. Much of the dial-up<br />
infrastructure, including the Internet platform, web site and maintenance costs, are shared with our business<br />
and consumer broadband Internet services.<br />
Telephony<br />
We started offering fixed-line telephone services under the name of “digital phone” on a limited basis in<br />
February 2003. On June 8, 2004, we officially launched the telephony product with the announcement of a<br />
new tariff structure including free evening and weekend national calls for all subscribers. As of December<br />
31, 2005, we had approximately 186,200 residential telephony subscribers and a 13% penetration rate of<br />
telephony homes serviceable within both our network and our partner networks.<br />
We are uniquely positioned in the telephony market as the only alternative local loop provider of fixed-line<br />
telecommunications services. We intend to attract subscribers to our fixed-line telephone services based on<br />
the wider offering of value-added services over a hybrid VoIP platform, product bundling with our existing<br />
broadband Internet subscriber base and offering attractive tariff pricing which attracts a high usage profile<br />
user which, in turn, generates higher average revenue per user (ARPU).<br />
In 2005, we signed a mobile reseller contract with Sunrise, which enabled us to become the first quadruple<br />
provider in Switzerland and strategically open the opportunities to develop and offer fixed-mobile<br />
converged telephone services. On December 16, 2005 we launched our prepaid offer and announced the<br />
launch of a post-paid offer for the first half of 2006.<br />
Business Solutions<br />
We offer advanced data services including Internet access, multi-site data connectivity, VPN, security and<br />
other value-added services to the Swiss business market. For large businesses, customized data and voice<br />
solutions are offered, and for the small and medium enterprise (SME) market we offer standardized service<br />
packages. Current corporate customers include Migros, Swiss Life, Basler Insurance, Sun and over 1,500<br />
medium-sized customers.<br />
Business Solutions’ services are modular and can be tailored to specific customer requirements such as<br />
bandwidth and service level. Our product offerings include:<br />
• cablecom connect VPN, which offers a reliable and high-performance private corporate network;<br />
• cablecom connect ethernet, which offers level 2 point to point connectivity<br />
• cablecom connect Internet, which offers lnternet connectivity<br />
• cablecom managed firewall, which offers reliable security<br />
Our network includes the second most extensive local loop infrastructure in Switzerland. The network is<br />
close to or within proximity of the majority of Swiss businesses which provides a basis for further growth in<br />
this segment.<br />
6
The acquisition of Unified Business Solutions in May 2005 provided us with a suite of converged voice and<br />
data (including VoIP) products and an established customer base. These capabilities enable us to support<br />
our customers in the transition from traditional ISDN to converged IP-based data and voice services by<br />
providing integrated solutions.<br />
Partner Group<br />
<strong>Cablecom</strong> provides wholesale delivery of analogue television signals, engineering and operating services to<br />
numerous partner networks in Switzerland.<br />
We provided full or partial analogue television signals to networks that redistributed the signals to more than<br />
0.7 million of their subscribers. Of these networks, partner networks under service operating contracts<br />
redistributed our signal to approximately 0.5 million partner network subscribers. These service operating<br />
contracts also permit us to offer some or all of our digital television, broadband Internet, fixed-line<br />
telephony and other services directly to those partner network subscribers and, as a result, have expanded<br />
the addressable market our digital products. In exchange for the right to provide digital products directly to<br />
the partner network subscribers, we pay each partner network a share of the revenue generated from those<br />
subscribers. Revenue for residential digital cable television, broadband Internet and telephony services<br />
provided to subscribers of the partner networks as well as the commissions paid to the partner networks are<br />
recognized within our consumer business.<br />
In addition to analogue signal delivery, we provide cable television engineering and construction services to<br />
partner networks and third party networks, including the upgrade and maintenance of cable networks, and<br />
sale of hardware such as amplifiers and routers. We also upgrade cable networks to enable them to deliver<br />
digital television, broadband Internet or fixed-line telephony on a stand alone basis or as provided through<br />
our consumer business.<br />
<strong>Cablecom</strong> provides technical services covering all infrastructures and operating aspects of cable networks,<br />
including:<br />
• Planning of cable television systems and network infrastructure<br />
• Design and construction of turn-key systems and project management as a general contractor<br />
• Provision of IP-transit services (Internet feed)<br />
• Operation and maintenance of infrastructure, 24-hour on call services, fault clearing services and<br />
installation of information channels for cable television operators, hotel chains and public<br />
transport groups<br />
We believe that partner network relationships also give us an advantage to acquire and integrate partner<br />
networks should the opportunity arise.<br />
Since the first quarter of 2005, <strong>Cablecom</strong> no longer actively markets its carrier services as part of business<br />
activities. While we continue to provide these services to existing customers, the revenue generated from<br />
these services will decline over time as the carrier services contracts expire.<br />
7
Sales and Marketing<br />
We use a combination of direct and indirect sales channels, direct marketing and brand advertising to attract<br />
new customers and to cross- and up-sell our digital products. We also support sales and marketing with<br />
innovative tariffs.<br />
Our sales and marketing organization is currently divided into four customer-oriented groups:<br />
• Analog cable television sales are managed through a key-account organization. Analog cable<br />
television connections and Service Plus contracts are sold through local account managers,<br />
mainly targeted at larger housing associations, private landlords and construction companies.<br />
• Digital product sales are based on a centrally managed channel strategy, which includes reactive<br />
sales channels, such as web and inbound telesales, and proactive sales channels, such as retail,<br />
door-to-door sales and outbound telesales. With some of our retailers, we have established ‘‘shop<br />
in shop’ display units to promote our brand. We estimate we generated approximately 60% of our<br />
digital product sales through reactive sales channels and the remainder through proactive sales<br />
channels.<br />
• Our Business Solutions sales team markets our products to large and SME accounts. Sales<br />
activities for large accounts are based on requests for proposal and referrals. We target SMEs<br />
through our key account management and outbound telesales. While we plan for our own sales<br />
force to continue focusing on large accounts and SMEs, we have expanded our indirect sales<br />
channels to target the SME market by working more closely with solutions integrators, industrybased<br />
partners and resellers.<br />
• Wholesale sales and marketing activities, as well as sales activities to partner networks, are based<br />
on relationship management with designated account managers and direct marketing events.<br />
Customer care<br />
We channel all billing and product inquiries through three call centers, which support all consumer products.<br />
The largest call center in Zurich is responsible for all German language calls and all escalated issues. The<br />
two call centers in Yverdon and Manno cover French and Italian language inquiries, respectively, but<br />
transfer all escalated matters to Zurich where a multi‑lingual team is available.<br />
Our call centers cover the technical help desk, administration and billing and all related customer care<br />
support. We continue to focus on ways to improve performance in terms of call and answer times while<br />
leveraging our capability across product offerings. The call centers also take incoming calls for new digital<br />
product sales.<br />
Billing<br />
We collect over 80% of our analog cable television subscriptions on an annual basis in advance. Subscribers<br />
receive their annual bill late in the fourth quarter of each calendar year and generally pay their annual bill<br />
over the following two months. We receive an additional 7% of our analog cable television subscriptions on<br />
a semi-annual basis in advance and the remaining subscriptions on a quarterly basis in advance. Upon<br />
billing, we defer the revenue and each month we recognize a pro rata portion of our annual cable television<br />
subscription fees as revenue. Furthermore, for approximately 70% of the analog cable television subscribers<br />
to our cable network, we maintain billing relationships with landlords, as opposed to end users. For<br />
providing the billing and collection services, we pay these landlords a commission of between 3% and 5%<br />
8
of the revenue we generate from their tenants. For all remaining cable television subscriptions and other<br />
products, we maintain a direct billing relationship with the end customer.<br />
We have several billing systems tailored to the needs of different customer requirements. For cable<br />
television and digital television, we use “Open Service.” For the more detailed billing requirements of<br />
hispeed and digital phone we use an integrated Keenan-Arbor billing system. We also have developed an<br />
electronic payment and collections process to drive accuracy and productivity. Business Solutions and<br />
Partner Group leverage our Ergon/Taifun and SAP systems for billing to and collection from our customers.<br />
Our Network<br />
Consumer network<br />
We have a state-of-the-art, fully redundant backbone network which can provide analog and digital<br />
television, broadband Internet and fixed-line telephone services. Apart from Swisscom, we are the only<br />
company with a nationwide footprint and a local loop infrastructure throughout Switzerland.<br />
Our network consists of the following interconnected segments: fiber optic (backbone), HFC network and<br />
DPoPs serving a copper local loop, direct fiber connections, and leased lines as well as in-building wiring.<br />
Our network upgrade program comprises installing new backbone connections, installing new HFC nodes<br />
and connecting them to the backbone, installing a return path in the HFC amplifiers and replacing the inbuilding<br />
wiring or installing filters. Moreover, as HFC networks in each area are upgraded, we upgrade inbuilding<br />
wiring at the request of subscribers wishing to subscribe to new services, including digital cable<br />
television, broadband Internet and fixed-line telephone services.<br />
HFC network<br />
As of December 31, 2005, 70% of our network is upgraded to 606 MHz or more. We plan to focus our<br />
efforts on marketing to our existing upgraded homes, with limited investment planned for expansion of the<br />
upgraded homes base.<br />
In-building wiring<br />
As in most European and U.S. cable markets, once our network is upgraded, in-building installation capital<br />
expenditure is required to extend the capacity and bi-directionality of the HFC network to the end user’s<br />
premises, thereby enabling broadband Internet access and telephony. Depending on the quality of the<br />
existing in-building wiring, this requires the installation of coaxial cabling, electronics and wall plates.<br />
Historically, an in-building wiring upgrade was performed as a full rewiring of the home. We developed a<br />
procedure to perform the in-building wiring upgrade via a simplified procedure, whereby an amplifier is<br />
changed and a filter is removed to allow for bi-directionality. This simplified procedure is used if the<br />
existing in-building wiring is of sufficient quality. As of December 31, 2005, approximately 0.8 million<br />
homes have been upgraded for in-building wiring.<br />
Telephony network<br />
We deploy a hybrid telephony solution using our HFC network and IP backbone to reach an IP gateway<br />
which is connected to a Time-Division Multiplexing (TDM) switch. We intend to convert our hybrid<br />
telephony solution to a full VoIP solution with the introduction of a soft switch. We expect the introduction<br />
of the soft switch to reduce licensing related customer acquisition and maintenance costs.<br />
9
Business services network<br />
We have over 6,900 kilometers of fiber cable laid in Switzerland, passing 50% of all Swiss business<br />
premises. We are able to provide up to 8,000 mbps of Internet connectivity, including first class transit and<br />
peering arrangements. We access this network capacity when a corporate or wholesale customer wishes to<br />
have bandwidth intensive services such as IP/VPN, leased lines and Internet feed. The average distance<br />
from our backbone fibers to the majority of enterprise customers is 300 meters. We have a number of<br />
available access options:<br />
• building (direct fiber access) local loop;<br />
• leased lines;<br />
• copper local loop (SDSL); and<br />
• utilizing existing HFC network where applicable.<br />
In cases where the existing HFC network does not pass the business premises or the potential contract does<br />
not warrant direct fiber access construction, we use either leased lines or the copper local loop from the<br />
incumbent, Swisscom. Through our existing fiber and alternative access methodologies, we pass over 90%<br />
of business in Switzerland.<br />
Material Contracts<br />
Set forth below is a summary of certain material agreements to which we are a party.<br />
Interconnection agreements<br />
We have entered into interconnection agreements with an indefinite term with Swisscom as well as with<br />
other telecommunications services providers in Switzerland such as Calltrade Carrier Services AG and T-<br />
Systems Schweiz AG.<br />
Content agreements<br />
We are party to several contracts with content providers. For distribution of digital channels, different<br />
models apply, including revenue sharing models, or the remuneration based upon numbers of subscribers.<br />
For analog channels, we are permitted to distribute and redistribute those radio and television programs<br />
which are also broadcast by wireless terrestrial signals or satellite in unencrypted form, without having to<br />
enter into a contractual relationship.<br />
Infrastructure/network agreements<br />
Although we own the vast majority of our network, we entered into several agreements in connection with<br />
the extension and upgrade of our network, including fiber lease agreements, use and joint use agreements of<br />
cable channels, use of dark fiber link agreements, as well as others. Such agreements have been established<br />
mainly with other network owners in Switzerland including SBB, BLS, AEW Energie AG, Colt Telecom<br />
AG and TDC. Most of these agreements have a duration of 20 years or longer.<br />
Furthermore, <strong>Cablecom</strong> has entered into agreements with various suppliers for receipt of hardware and<br />
software in order to upgrade and modify our cable network constantly.<br />
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Supply and installation agreements<br />
We purchase equipment components necessary to operate its business from a range of suppliers. Key supply<br />
and installation contracts relate to critical elements of its network equipment, including the telephony<br />
platform, data and voice modems and set-top-boxes. <strong>Cablecom</strong> uses a limited number of suppliers for such<br />
components and is in the process of evaluating alternative sources.<br />
Service and maintenance agreements<br />
We entered into various agreements in regards to the maintenance of its network and infrastructure. Most of<br />
the maintenance agreements have a term of one year and are being renewed year by year.<br />
Operating Lease and Rental Agreements<br />
We have entered into commercial leases on certain motor vehicles. These leases have an average life<br />
between 3 and 4 years with no explicit renewal terms or restrictions included in the contracts.<br />
We have rented several buildings with a remaining contract life between 3 months and 16 years including<br />
the headquarters in Zurich.<br />
Partner agreements<br />
We have agreements with more than 255 other cable network operators or telecommunications services<br />
providers in Switzerland. These agreements include television signal feed agreements, operating agreements<br />
in order to sell our products (hispeed Internet, digital phone and digital television) to households located<br />
within our partner networks, fiber lease agreements, joint-use agreements and maintenance agreements.<br />
Competition<br />
The industry in which we operate is highly competitive. We face competition from a number of established<br />
and new competitors in Switzerland. It is likely that we will continue to face significant competition in some<br />
or all of our target markets in the future. As existing technology develops and new technologies emerge, we<br />
believe that competition will intensify in each of our business areas. See “Risk Factors—Risks Related to<br />
Our Business—The Swiss Internet, data and telephony industries are highly competitive, and the television<br />
industry may become more competitive in the future, which could result in lower prices and the loss of<br />
subscribers. If we are unable to compete successfully, our financial condition and results of operations could<br />
be adversely affected.”<br />
Cable television<br />
We are the largest operator in the Swiss cable market, providing cable television services to approximately<br />
1.5 million subscribers through our own network and cable television signal to approximately 0.5 million<br />
subscribers through partner networks as of December 31, 2005. We estimate that the next largest operator,<br />
Télégenève, had approximately 87,000 subscribers as of December 31, 2005; Télégenève operates in<br />
Geneva, where we do not provide coverage. The remainder of the Swiss cable television market is highly<br />
fragmented among approximately 450 cable operators.<br />
There is limited terrestrial television in Switzerland. Furthermore, Direct-To-Home (DTH) satellite services<br />
in Switzerland remain low due to the historically high cable television penetration, topography and<br />
restrictive zoning regulations which prohibit satellite dishes from being used in some areas of Switzerland.<br />
11
Our cable television service does not currently compete with other television and video services on a<br />
significant scale, due in part to the historically high penetration rate of cable in Switzerland. In 1999, we<br />
launched our digital television offering to maintain our leadership position in television distribution. We<br />
plan to continue the opportunistic rollout of the digital television product as an add on to analog television,<br />
with increasing penetration and ARPU driven by simulcasting analog channels, enhanced content, PVR,<br />
pay-per-view and video-on-demand. This strategy has proved successful to date and we believe it will<br />
continue to provide a further source of growth.<br />
Swisscom has announced its intention to introduce a streaming video on demand product over its<br />
established telephone network later in 2006. Until its streaming video on demand product is ready for<br />
commercial application, Swisscom has begun offering a digital recorder service which allows users who<br />
receive analog cable television to record broadcasted programs. In addition, Swisscom has also announced<br />
the launch of a broadcasting service (IPTV) via VDSL (very high bit-rate digital subscriber line) technology<br />
with an expected 100 to 200 digital channels. The deployment and commercialization of VDSL or digital<br />
video broadcasting as methods for delivering television services will increase the level of competition we<br />
face today from satellite, and as a result could lead to a decline in our sales and an increase in our costs.<br />
SRG, the Swiss radio and television broadcaster, has started to roll out DTT in Ticino in 2003. SRG expects<br />
full national coverage by 2008. Currently only SRG programs are broadcasted through DTT.<br />
Broadband Internet<br />
The market for residential broadband Internet access services in Switzerland is highly competitive in terms<br />
of pricing, product and service quality, promotions, advertising and new product development and<br />
introduction time.<br />
As fully unbundled, shared or bitstream access to Swisscom’s network has not yet been implemented in<br />
Switzerland, alternative DSL services providers are currently reliant on Swisscom’s wholesale offering or<br />
are required to construct their own access network to provide Internet access services. The main Swiss<br />
Internet service providers other than Swisscom’s ISP Bluewin and <strong>Cablecom</strong> are Sunrise (also known as<br />
TDC Switzerland) and Tele2 Switzerland. Since Swisscom will become subject to an obligation to offer full<br />
access and bitstream access as of 2007, the competitive environment might change. See” —Regulations”.<br />
Telephony<br />
Switzerland’s fixed-line telephony market opened to competition at the beginning of 1998. Since<br />
liberalization, fixed telecommunications operators, such as Sunrise and Tele2, entered the Swiss market as<br />
resellers and successfully began to erode Swisscom’s market share through aggressive pricing supported by<br />
intensive marketing campaigns focused on carrier pre-select services.<br />
Our strategy relies in part on the continued growth of our digital telephone service. The Swiss telephony<br />
market continues to be dominated by Swisscom, which benefits from a highly reliable product and a deeply<br />
entrenched customer base. Our competitors have expanded their bundled carrier pre-select based voice and<br />
broadband offerings. In addition, the market trend towards substituting fixed-line telephony with mobile<br />
telephony has been and may continue to be substantial. Even though we continue to see our digital<br />
telephone service erode Swisscom’s leadership in the market, we may be confronted with increased<br />
competition challenges that could make our growth strategy unsuccessful.<br />
In the Swiss mobile telephony market there are currently four principal service providers. Each of<br />
Swisscom Mobile, Orange and Sunrise operates its own network, whereas Tele2 provides its services on a<br />
12
eselling basis and limited to the Zurich area. Recently, Switzerland’s largest retailers Migros, Coop and<br />
Mobilezone began providing mobile services on a reseller basis.<br />
Business services<br />
Competition in the provision of Internet, data and voice products to business customers is intense, with<br />
Swisscom, which dominates the market, and major international companies with established market<br />
presence, such as Sunrise, COLT and MCI, being our primary competitors. Given their significant financial<br />
and other resources, such large scale competitors may be able to launch products with superior capabilities<br />
or at lower prices, to integrate systems and products more effectively than we do, to secure long term<br />
agreements with some of our customers. In addition, they may be better able to fund investment in product<br />
development. Although we believe we are well positioned to compete in this market due to our nationwide<br />
backbone, local loop footprint and integrated network infrastructure, we may experience unanticipated<br />
difficulties in establishing and maintaining a nationwide market presence in light of the substantial<br />
competition we face.<br />
Intellectual Property<br />
We do not possess any material patents or copyrights, nor do we believe that patents play a material role in<br />
our business. We have registered several trademarks with the Swiss Federal Institute of Intellectual Property<br />
(Eidgenössisches Institut für Geistiges Eigentum) including our brand name, logo and service offerings.<br />
Employees<br />
The following chart details the number of full time equivalent employees that were on our payroll<br />
(excluding temporary employees) as of the dates indicated:<br />
As of December 31,<br />
2005 2004<br />
Total FTEs................................................................................. 1,623 1,573<br />
We believe that Switzerland remains one of the most flexible labor markets in Europe. We provide our<br />
employees with health and life insurance benefits, as well as a pension plan. For a description of our pension<br />
plans, see “Management and Governance—Pension Plans.” In addition, to state requirements, we offer<br />
income to cover extended sickness and life insurance and sometimes even private medical care. We believe<br />
that our relationships with our employees are good.<br />
Properties<br />
We conduct our business at owned as well as at leased real estates. Our major owned properties are located<br />
in Basel, Bern, Zurich, Neuchâtel, Biel, Chur, Thun and in the Italian speaking part of Switzerland. In<br />
addition, we own various technical locations, including head ends, storage space, point of presence and<br />
antenna sites. Furthermore, we have entered into approximately 280 lease agreements in various regions of<br />
Switzerland. These agreements include the lease of offices, archives, storage space and parking spaces. Our<br />
main leased properties are located in Zurich, Yverdon and Manno. In addition, we have entered into various<br />
infrastructure and network lease agreements with other network owners in Switzerland (such as SBB, BLS,<br />
AEW Energie AG, Colt Telecom AG, TDC), such as fiber lease agreements, duct lease agreements and<br />
other agreements related to our cable network.<br />
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Environmental Matters<br />
We believe that we are in compliance with the laws and regulations relating to land use and environmental<br />
protection that are applicable to us. We are not aware of any claims being made or potential liabilities<br />
arising in connection with such laws and regulations.<br />
Regulations<br />
The federal government regulates the provision of broadcast and telephony services, as well as the<br />
distribution over cable networks of radio and television channels.<br />
The current regulatory framework governing telecommunications services in Switzerland was established<br />
on January 1, 1998 with the Telecommunications Act and a concurrent restatement of the Radio and<br />
Television Act (RTVG). The new regulatory regime opened both the telecommunications and cable<br />
television markets to enhanced competition.<br />
Radio and Television Act<br />
The Radio and Television Act regulates the operation, distribution and redistribution, and receipt of radio<br />
and television programs. A distinction is made between the provision of content (“programs” in the<br />
terminology of the Act) and the distribution and redistribution of content. A distributor who creates a<br />
program and aims to broadcast such program requires a programming license. The Federal Council has the<br />
discretion to issue such a license. We hold redistribution licenses for all areas in which we operate. We also<br />
hold two programming licenses under which we provide the Info Channel and the C-More film channel.<br />
According to Swiss law, the transfer of 20% or more of shares of the holder of a license is regarded as an<br />
economic transfer of the license requiring regulatory approval. While the necessary approvals for the<br />
transfer of the redistribution (as well as the telecommunications) licenses have been obtained, the approval<br />
of the transfer of the programming licenses is still pending. There can be no assurance that such approval<br />
will be granted. But we do not anticipate that failure to obtain such approval would have a material adverse<br />
effect. Based on the blanket redistribution license the licensee, in principle, may freely choose the programs<br />
that it redistributes. However, the must-carry rules of the Act require any licensee to redistribute unencoded<br />
television and radio programs that are broadcast by wireless terrestrial signals in the territory in which it<br />
operates, as well as the channels of the Swiss Broadcasting Corporation.<br />
Under the must-carry regulations currently in force, <strong>Cablecom</strong> is required to carry without charge certain<br />
radio and television channels on the cable system which we would not necessarily carry voluntarily or at<br />
least not without receiving any compensation. Furthermore, the Office for Communications (OfCom) may<br />
oblige us to distribute additional channels of any broadcaster which so requests, provided we have sufficient<br />
capacity or if the broadcaster’s program contributes to the achievement of the objectives of the RTVG (e.g.,<br />
the free formation of public opinion). The authorities are allowed to set the “appropriate remuneration” to<br />
cover the costs we incur as a result of carrying these channels. The compensation received for providing<br />
such channels may not cover actual costs or provide the return that we would otherwise receive if they were<br />
allowed to freely choose the programming offered on their system. Increasing the number of channels that<br />
we must carry on our network may use valuable network capacity that could otherwise be used to deliver<br />
alternative channels or services which may be more profitable.<br />
The RTVG furthermore states that a licensee may neither compel customers to receive nor refuse customers<br />
the right to receive its broadcasting services. Landlords of properties must grant access if a lessee so<br />
requests and it is willing to cover any related costs.<br />
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The RTVG has undergone a comprehensive restatement in order to keep up with technological and market<br />
developments (i.e., digitalization and convergence). The restated Act is expected to enter into force in the<br />
first quarter of 2007. It will include the following changes affecting our business:<br />
• The programming license system will be replaced by a notification system which will mean that<br />
we were no longer be required to hold a programming license and the redistribution licenses will<br />
be regulated under the Telecommunications law and also be replaced by a notification system<br />
• The terms of carriage of other than must carry programs can be commercially negotiated subject<br />
to non discrimination<br />
• The rules obliging us to carry certain programs will be expanded, but at the same time the<br />
maximum number of such channels will be fixed<br />
• Broadcasters will have to use the digital platform of the distributor as long as such platform<br />
allows the provision of state of the art services, indicating that broadcasters in principle cannot<br />
request unbundled access to a digital platform; however, the authorities may impose technical<br />
standards to ensure interoperability or if necessary to maintain freedom of information<br />
Telecommunications Act<br />
The Telecommunications Act sets forth the general framework for the transmission of voice and data<br />
information through telecommunications devices for third parties. According to the Telecommunications<br />
Act, any operator that provides telecommunications services and independently operates a significant<br />
portion of a network must obtain a license. Special rules apply to the use of the radio frequency spectrum<br />
and the provision of universal service. Fixed-line carriers and cable television operators have a legal right to<br />
lay cables on public property in order to build their networks. Under the Telecommunications Act, the<br />
Swiss telephony market is regulated by two principal regulatory bodies: The Commission for<br />
Communication (ComCom), and the Office for Communication (OfCom, also known as BAKOM).<br />
ComCom is an independent regulatory agency that is vested with decision-making authority in the<br />
telecommunications sector. OfCom is responsible for day-to-day oversight of the telecommunications<br />
sector.<br />
A revised Telecommunications Act has been adopted by Swiss parliament in March 2006, aiming to<br />
strengthen competition in the telecommunications market, in particular by introducing the unbundling of the<br />
local loop by a formal act and to increase transparency for customers. The new Act is expected to enter into<br />
force in the first quarter of 2007. As both chambers of parliament have refused to implement technology<br />
neutral unbundling, local loop obligations only apply to Swisscom.<br />
Swisscom, as the incumbent operator, will be subject to unbundling obligations, i.e. full line access as well<br />
as bitstream access on a transparent, non-discriminatory and cost-based basis. The obligation to offer<br />
bitstream access will be limited to a period of four years.<br />
In addition all operators will become obliged to take action against spamming. The licensing system will be<br />
replaced by a notification system. Universal services would be imposed and all operators would be obliged<br />
to contribute to the costs for the provision of universal services if the licensee were not able to provide such<br />
services in a cost efficient manner.<br />
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Licenses<br />
We hold redistribution licenses for all areas in which we operate, a programming license to provide our<br />
Info-Channel and the C-more Film channel and a license to provide telecommunications services in<br />
Switzerland.<br />
Legal Proceedings<br />
We are involved in a number of legal proceedings that have arisen in the ordinary course of our business.<br />
Other than as described below, we do not expect the outcome of such proceedings to have a material<br />
adverse effect on our operations, financial condition or cash flows. However, there can be no assurance that<br />
such claims will not, either individually or in the aggregate, have such effect.<br />
Teleclub litigation<br />
We are involved in a number of proceedings with Teleclub AG (Teleclub), which has exclusive rights to a<br />
significant portion of the premium and sports content distributed in Switzerland. Swisscom AG (Swisscom),<br />
the incumbent telecommunications operator, holds an indirect controlling interest in Teleclub. In<br />
proceedings before the Competition Commission initiated by Teleclub, based on a preliminary fact finding<br />
and legal assessment process, we were determined to be dominant in the market for distribution of television<br />
signals via cable television networks in the areas in which we operate. Interim measures were granted in<br />
September 2002 ordering us, among other things, to transmit the digital television signals of Teleclub and<br />
allow the installation of Teleclub’s proprietary set-top boxes on our network. In September 2003, the Swiss<br />
Federal Court, while assuming that we hold a dominant position, reversed the Competition Commission’s<br />
decision on the interim measures related to installing set-top boxes of Teleclub’s choosing on the basis that<br />
our objection to doing so may be justified by legitimate business reasons. The Competition Commission is<br />
continuing its investigation of whether our application of our digital standards or digital platform to the<br />
distribution of Teleclub’s digital television signals may constitute an abuse of a dominant position. Given<br />
the finding of dominance, which the Competition Commission confirmed on October 2004 in a legal<br />
opinion prepared for the Swiss Price Regulator, if we are found to have abused its dominant position,<br />
Teleclub may be granted the relief requested, we may be found to have violated the Federal Act on Cartels<br />
and other restrictions of Competition (the Cartels Act), and we may be subject to administrative fines and<br />
additional civil litigation.<br />
In October 2002, the Competition Commission also investigated whether the encryption of the digital<br />
channels offered by us as part of our basic digital package constitutes an abuse of a dominant position as<br />
such encryption would prevent reception of these channels through any alternative set-top box. Until a final<br />
determination has been made in the pending proceedings between Teleclub and us, the Competition<br />
Commission has suspended its investigation. Should this proceeding be resumed and have an adverse<br />
outcome, we may be subject to fines and sanctions under the Cartels Act and may be required to make our<br />
digital service available through alternate set-top boxes. For the same reason described above, the<br />
Competition Commission has not acted on the request of the Swiss Price Regulator to intervene against us<br />
to cease encrypting the digital signal and allow use of third-party set-top boxes on our network and to<br />
prohibit bundling of set-top box rental and content subscription.<br />
An unfavorable outcome from the Teleclub legal proceedings could result in an adverse effect on our<br />
business. We expect that these proceedings may continue for several years until a non-appealable decision<br />
has been made. We cannot currently predict the outcome of these proceedings.<br />
16
Indemnity claim dispute<br />
In 2000, we acquired a company which was subsequently merged into its existing operating companies. As<br />
a result of these mergers, the respective tax authorities ruled that the capital gain realized by the former<br />
shareholders will be taxed, assuming an indirect liquidation. We and the former shareholders have appealed<br />
against this decision. Based on the current practice of the Supreme Court, it is probable that the amount of<br />
CHF 2.8 million, included in current liabilities in the consolidated balance sheets, will become due.<br />
17
RISK FACTORS<br />
In addition to the other information contained in this Annual Report, you should consider the following risk<br />
factors in evaluating our results of operations, financial conditions, business and operations.<br />
The risk factors described in this section have been separated into four groups:<br />
• risks that relate to the technology used in our business and the competition we face;<br />
• risks that relate to the legislation and regulation of the market where we operate;<br />
• risks that relate to legal proceedings;<br />
• risks that relate to our financial matters; and<br />
• risks that relate to our principal shareholder.<br />
Risk Factors Relating to Technology and Competition<br />
The Swiss Internet, data and telephony industries are highly competitive, and the television industry<br />
may become more competitive in the future, which could result in lower prices and the loss of<br />
subscribers. If we are unable to compete successfully, our financial condition and results of operations<br />
could be adversely affected.<br />
We face significant competition from established and new competitors in each of our businesses. As<br />
existing technology develops and new technologies emerge, we believe that competition will intensify in<br />
each of our business areas, particularly cable television, Internet, telephony and Business Solutions services.<br />
Some of our competitors have substantially greater financial and technical resources than we do. In<br />
particular, Swisscom, our principal competitor in the Internet, telephony and Business Markets segments,<br />
has substantially superior financial and marketing resources compared to ours. Swisscom is experimenting<br />
with television over DSL and may therefore become a potential competitor of our cable television business<br />
in the future. We may be required to increase content costs for cable television. We may be required to<br />
reduce prices if our competitors reduce prices, or as a result of any other downward pressure on prices for<br />
telecommunications services, which could result in a decrease of our average revenue per user, as well as a<br />
loss of subscribers.<br />
Cable Television. Our cable television service currently does not face significant competition with other<br />
television and video services on a significant scale, due in part to the high penetration rate of cable in<br />
Switzerland. Such favorable competitive outlook may change. For example, Swisscom has announced the<br />
launch of a television service via DSL offering an expected 100 to 200 digital channels. The launch has been<br />
announced for 2006. Swisscom intends to invest heavily in its network in order to be able to offer its DSL<br />
broadcasting product throughout Switzerland. We may also face increased competition from other<br />
providers of DSL, multi-channel satellite, digital terrestrial and other means of delivering multiple<br />
programming. Although none of these options has been deployed on a commercial scale in Switzerland to<br />
date, Swisscom is running trials and many of these technologies have been effectively deployed elsewhere<br />
in Europe and may allow better-capitalized competitors to enter the market and offer a greater variety of<br />
channel packages and programming than we currently provide on our network on more competitive terms.<br />
Furthermore, future legislation or regulation or a change in interpretation of existing legislation or regulation<br />
may require us to provide competitors access to our network for purposes of providing broadcasting services<br />
at regulated prices, which would strengthen our competitors by granting them access and lowering their<br />
costs to enter into the cable television business. See also “—Risks Related to Regulatory and Legislative<br />
18
Matters—We may become subject to more extensive regulation if we are deemed to possess a dominant<br />
position in any of the markets in which we operate.”<br />
Internet. The market for residential broadband Internet access services in Switzerland is highly competitive<br />
in terms of pricing, product and service quality, promotions, advertising and new product development and<br />
introduction time. Our competitors may be able to gain further market recognition by offering products at<br />
lower prices, or may be better positioned to develop superior product features, technological innovations or<br />
capacity management. We may lose business if we do not match the prices, technologies or quality offered<br />
by our competitors. We may need to further upgrade our network to match the speed and quality of our<br />
competitors. In addition, new technologies, including access technologies like Wi-Fi and WiMAX, could<br />
significantly alter the competitive landscape and necessitate additional investment in our network or similar<br />
access technologies to remain competitive.<br />
Telephony. Our strategy relies in part on the growth of our digital telephone service. The Swiss telephony<br />
market is currently dominated by Swisscom, which benefits from a highly reliable product and a deeply<br />
entrenched customer base. Our other competitors are a variety of carrier pre-select and mobile operators.<br />
While we believe that the regulatory environment is favorable to us, we expect competition in the market to<br />
intensify as we further scale up our digital telephone service. For example, our competitors are likely to<br />
expand their bundled voice and broadband offerings. In addition, the market trend towards substituting<br />
fixed-line telephony with mobile telephony has been and may continue to be substantial. Even though we<br />
believe that our digital telephone service offering is potentially capable of eroding Swisscom’s leadership in<br />
the market, we may be confronted with increased competitive challenges that could make our growth<br />
strategy unsuccessful. It is also likely that new competitors, such as pure VoIP players, will continue their<br />
efforts to increase their market share in the future.<br />
Business services. Competition in providing Internet, data and voice products to business customers is<br />
intense. Our competitors may be able to launch products with superior capabilities or at lower prices, to<br />
integrate systems and products more effectively than we do, and to secure long term agreements with some<br />
of our customers. In addition, they may be better able to fund investment in product development. Although<br />
we believe we are well positioned to compete in this market due to our nationwide backbone, local loop<br />
footprint and integrated network infrastructure, we may experience unanticipated difficulties in establishing<br />
and maintaining a nationwide market presence in light of the substantial competition we face.<br />
Any increase in competition in our markets, or any activities by our competitors, including those mentioned<br />
above and others, could lead to a decline in our sales and/or increase in our costs, which could have an<br />
adverse effect on our business, financial condition, results of operations and cash flows.<br />
We do not have complete control over the prices that we charge or the programming that we provide,<br />
which exposes us to third-party risks and may adversely affect our business and results of operations.<br />
As long as we are deemed to be in a dominant position in what the Swiss authorities have identified as the<br />
market for access to cable television, the Swiss Price Regulator has assumed the right to review the prices<br />
that we charge and to determine whether our subscription rates for providing cable television are excessively<br />
high. In November 2004, we agreed with the Swiss Price Regulator to maintain the maximum analog<br />
monthly subscription fee of CHF 19.50 in 2005 excluding regulatory and copyright fees. The agreement<br />
allowed us to increase the analog monthly subscription fee to CHF 21.00 in 2006. This arrangement also<br />
defines a basic service to be offered for the regulated price mentioned before, including a number of<br />
programs to be broadcasted. Because of this price regulation, we are not permitted to set our rates freely in<br />
line with the cost of inflation and general price increases and are maybe exposed to a price reduction in case<br />
the current prices are deemed abusive when a new agreement is negotiated for the period as of 2007. There<br />
19
may be the risk that our revenues may decline, and our business operations could experience a significant<br />
decline in profitability.<br />
Under current regulations, we are required to carry certain radio and television channels on our cable system<br />
that we would not necessarily carry voluntarily. With respect to television services, these “must-carry”<br />
obligations currently apply to three television channels that we deliver to end users in the German speaking<br />
part of Switzerland and two television channels each in the Italian and French speaking parts of Switzerland.<br />
In addition, the authorities may, under certain conditions, compel us to carry additional channels. The<br />
authorities have the right to set the “appropriate remuneration” to cover the costs we incur as a result of<br />
carrying these channels. The remuneration that we receive may not cover our actual costs of broadcasting<br />
such channels, or provide the return that we would otherwise receive if we were allowed to freely choose the<br />
programming we offer. Due to the must-carry regulations, it is possible that we may be required to carry<br />
additional channels in the future. Increasing the number of channels that we must carry on our network<br />
would use valuable network capacity that we could otherwise use to deliver alternative channels or services<br />
that may be more profitable.<br />
We do not have full access to content due to exclusive agreements by other parties which may adversely<br />
affect our business and results of operations.<br />
In the light of increasing competition between infrastructures, access to attractive content might become a<br />
key issue for operators to compete successfully for customers in the future. In particular, the supply of payper-view<br />
programs can add value and enhance an existing offer. Furthermore, such offers increase the<br />
willingness of customers to purchase programming services.<br />
In September 2004, our biggest competitor, Swisscom, has acquired 49% of the shares of CT Cinetrade AG<br />
(Cinetrade) with the option to buy the remaining 51% of the shares later. The Cinetrade group arranges and<br />
distributes Pay TV (Teleclub AG), is present in the cinema market in various Swiss cities (KITAG Kino-<br />
Theater AG) and also holds exclusive rights for a substantive part of premium content for Pay TV in<br />
Switzerland (PlazaVista Entertainment AG).<br />
After having approved the acquisition of the 49% stake in Cinetrade by Swisscom, the Swiss Competition<br />
Commission is currently investigating the anti-competitive effects of exclusivity contracts for premium<br />
content. An appeal against the Competitor Commission’s approval of the acquisition is pending before the<br />
Federal Court. If we are unable to acquire attractive content at affordable prices, our results of operations<br />
could be adversely affected as competition increases.<br />
The functionality of our encryption system could be compromised by illegal piracy, leading to a<br />
material adverse effect on our business.<br />
We use a conditional access system to transmit encrypted pay television programs that form part of our<br />
digital offerings. Billing and revenue generation for these services rely on the proper functioning of the<br />
conditional access system. Although we believe we have a secure conditional access system, the<br />
functionality of this system could be compromised by illegal piracy. Such illegal piracy could have a<br />
material adverse effect on our results of operations and business.<br />
If we fail to successfully market broadband Internet and telephony services, our business and revenues<br />
may be adversely affected.<br />
A significant component of our strategy is to successfully market broadband Internet and digital telephone<br />
services to our existing residential customers. We believe that our offering of digital television, broadband<br />
Internet access and fixed-line and mobile telephony will prove attractive to our existing customer base and<br />
20
allow us to increase our average revenue per user, or ARPU. However, broadband Internet and telephony<br />
usage by residential customers still remains an underdeveloped market. As of December 31, 2005, out of<br />
approximately 1.5 million homes currently able to receive broadband Internet and approximately 1.4 million<br />
homes currently able to receive digital phone services from us over both our network and our partner<br />
networks, we had approximately 340,500 customers receiving broadband Internet and approximately<br />
186,200 customers receiving telephony services. In addition, we face significant competition in these<br />
markets. In general, if our competitors offer a better product to our customers, our ARPU and churn rate<br />
could suffer. If we are unable to charge the prices for broadband Internet and digital telephone services that<br />
we anticipate or if our competition delivers better services to our customers, our results of operations may be<br />
adversely affected.<br />
If we fail to successfully introduce new services or respond to technological developments, our business<br />
and revenues may be adversely affected.<br />
The industry in which we operate is subject to rapid and significant changes in technology and is<br />
characterized by the introduction of new products and services. The effect of such new technologies or<br />
services on our businesses or operations cannot be predicted. Our core offerings may become outdated due<br />
to technological breakthroughs rendering our products obsolete. If any new or enhanced technologies,<br />
products or services that we plan to introduce prove premature or otherwise fail to achieve market<br />
acceptance or experience technical difficulties, our revenue growth, margins and cash flows may be<br />
adversely affected. Scalability, network compatibility or other technical problems may arise that could<br />
interfere with or delay our development of telephony services. We may not recover investments that we<br />
have made or will make in order to deploy new technologies and services, or realize anticipated returns on<br />
such services and products. In addition, our competitors’ products may be more appealing to customers. See<br />
“—Risks Related to Our Business—The Swiss Internet, data and telephony industries are highly<br />
competitive, and the television industry may become more competitive in the future, which could result in<br />
lower prices and the loss of subscribers. If we are unable to compete successfully, our financial condition<br />
and results of operations could be adversely affected.”<br />
Furthermore, the cost of implementation for emerging and future technologies could be significant, and the<br />
ability to fund such implementation may depend on the ability to obtain additional financing. There can be<br />
no certainty that we would be successful in obtaining any additional financing required, or if we obtain<br />
financing, that the terms of such financing will be favorable to us. We may not be able to fund the capital<br />
expenditures necessary to keep pace with technological developments. Our inability to obtain the funding or<br />
other resources necessary to expand or further upgrade our systems and provide advanced services in a<br />
timely manner, or successfully anticipate the demands of the marketplace, could adversely affect our ability<br />
to attract and retain customers and generate revenue.<br />
We may pursue acquisitions that, if consummated, could decrease the availability of cash to repay our<br />
indebtedness and may adversely affect our business if we cannot effectively integrate these new<br />
operations.<br />
We regularly engage in discussions regarding potential acquisitions of businesses that we believe will<br />
present opportunities to realize synergies and strengthen our market position. Any acquisition we may<br />
undertake in the future could result in the incurrence of debt and contingent liabilities and an increase in<br />
interest expense and amortization expense related to intangible assets or in the use by us of available cash on<br />
hand to finance any such acquisitions. If we experience any difficulties in integrating acquired operations<br />
into our business, we may incur higher than expected costs and not realize all the benefits of these<br />
acquisitions. In addition, our management may be distracted by such acquisitions and the integration of the<br />
acquired businesses. In addition, any additional indebtedness incurred to fund acquisitions or the use of<br />
21
available cash on hand to finance acquisitions would reduce the amount of our cash flow available to make<br />
payments on the Senior Notes or the Bank Facility.<br />
The lack of direct billing relationships with our analog cable television customers and the dependence<br />
on landlords and housing associations for, among other things, the collection of payments for our<br />
services may have an adverse effect on our business strategy and our results of operations.<br />
As of December 31, 2005, we did not maintain direct billing relationships with, and did not control access<br />
to, over 70% of our analog cable television subscribers. In each case, we maintain billing relationships with<br />
the landlords of these homes and local housing associations. The lack of a direct relationship with the end<br />
users causes us to be dependent on the bill payers for access to our customer base. For example, should a<br />
landlord decide to terminate the relationship with us, we would have to enter into new direct contracts with<br />
our customers. This may prove difficult and may increase our levels of bad debt, billing and payment and<br />
collections expenses and may have an adverse effect on our business strategy and our results of operations.<br />
A change in our cable television billing and collection process may have a material adverse effect on<br />
our working capital dynamics and our results of operations.<br />
In the event the landlords with whom we have billing relationships successfully demand that we invoice and<br />
collect payments for subscription fees on a basis other than annually, semi-annually or quarterly in advance,<br />
as is the case today, this could have a one-time negative effect on our cash flow, and materially adversely<br />
affect our working capital dynamics.<br />
Our operating performance will depend, in part, on our ability to control customer churn and<br />
operating costs.<br />
Customer churn is a measure of customers who stop subscribing to our services and is a key element of our<br />
operational performance. Our customer churn may increase if we are unable to deliver our services over our<br />
network without interruption, if new or better quality services are being offered in the market by our<br />
competitors or if we fail to deliver a satisfactory level of customer service.<br />
We may decide to migrate our customers from analog to digital service. The migration process could also<br />
increase churn levels, which would adversely impact our results of operations. We rely on technology to<br />
deliver our services, and may need to invest in our network to maintain or increase required service levels.<br />
In order to counter a potential or incurred increase in customer churn, higher marketing, call center or other<br />
costs might be required. Increased customer churn or operating cost would negatively affect our<br />
profitability.<br />
Any significant disruption in our supply of equipment and services from key vendors may adversely<br />
affect our business and profitability.<br />
We have important relationships with certain suppliers of equipment and services that are critical to<br />
conducting our business. Should any of our suppliers cease to operate, discontinue their products or seek to<br />
charge us prices that are not competitive, we may have to find alternate suppliers. Even though in most<br />
cases our suppliers can be replaced, switching to alternative suppliers could cause us to experience<br />
difficulties or delays in providing our services, or to incur significant costs, either of which could harm our<br />
financial condition and results of operations. Although we permanently evaluate ways to reduce our reliance<br />
on any particular supplier, we cannot assure you that significant disruptions or difficulties we may encounter<br />
with suppliers would not adversely affect our services, reputation and profitability.<br />
22
Our broadcast services business is dependent on various regulations, namely our distribution license,<br />
and content agreements and various other contracts.<br />
As a holder of a distribution license, we are free to distribute and redistribute any radio and television<br />
programs which are broadcast by wireless terrestrial signals without an agreement with the respective<br />
broadcaster. For the provision of any other programs, we enter into contracts with several content providers,<br />
including but not limited to UPC Programming BV, Hurst International Company, MTV Europe, NGC<br />
International (UK) Limited, Fox Kids Italy S.r.l., Canal Plus, Lagardère Networks International and BBC-<br />
Prime. Although historically the content providers have renewed their contracts with us, we cannot assure<br />
you that they will do so upon expiration of the current contracts, that they will not negotiate terms for<br />
provision of transmission services by us on a basis less favorable to us or that they will not seek to obtain<br />
from third parties a portion of the transmission services that we currently provide. We cannot assure you that<br />
content providers or the competent national collecting society respectively will allow us to distribute and<br />
redistribute their signals on a digital platform, based on the existing contracts.<br />
The loss of our distribution license or any one of these contracts could have a material adverse effect on our<br />
financial condition and results of operations.<br />
Failure to maintain and upgrade our network or make other network improvements could have a<br />
material adverse effect on our operations and impair our financial condition.<br />
A significant part of our network has been upgraded to a HFC standard with bi-directional digital<br />
capabilities. Our assumptions regarding the costs associated with maintenance and continued upgrades of<br />
the network may prove to be inaccurate, including if we are unable in the future to effectively reduce the<br />
number of homes served by each node in our network, which would enable us to relieve local network<br />
capacity constraints. If capital expenditure exceeds our projections or our operating cash flow is lower than<br />
expected, we may be required to seek additional financing for future maintenance and upgrades.<br />
A catastrophe at one or more of the locations where our critical cable network systems are housed<br />
could have a material adverse effect on our business.<br />
Our business is dependent on many sophisticated critical systems, which support all of the various aspects of<br />
our cable network operations. The hardware supporting a large number of critical systems for our cable<br />
network is housed in a relatively small number of locations. If one or more of these locations were to be<br />
subject to fire, natural disaster, terrorism, power loss, vandalism or other catastrophe, we would not be able<br />
to pass transmission signals over our cable network. This would cause serious harm to our business. We are<br />
currently developing ways to improve our disaster recovery plan to prevent or mitigate a potential failure.<br />
However, we cannot assure you that any disaster recovery, security and service continuity protection<br />
measures we have, or may take, in the future will be sufficient. In addition, although we build our fiber<br />
network mostly based on redundant rings to ensure the continuity of network availability in the event of any<br />
damage to our underground fibers, it is likely that no transmission signals will be able to pass if any ring is<br />
cut twice.<br />
Failure in our technology or telecommunications systems could significantly disrupt our operations,<br />
which could reduce our customer base and result in lost revenues.<br />
Our success depends, in part, on the continued and uninterrupted performance of our IT systems as well as<br />
our customer service centers. Our computer systems are vulnerable to damage from a variety of sources,<br />
including telecommunications failures, malicious human acts and natural disasters. Moreover, despite<br />
security measures, our servers are potentially vulnerable to physical or electronic break-ins, computer<br />
viruses and similar disruptive problems. Despite the precautions we have taken, unanticipated problems<br />
23
affecting our systems could cause failures in our IT systems, including systems that are critical for timely<br />
and accurate customer billing, or our customer service centers. Sustained or repeated system failures that<br />
interrupt our ability to provide service to our customers or otherwise meet our business obligations in a<br />
timely manner would adversely affect our reputation and result in a loss of customers and revenues.<br />
We do not insure the underground portion of our cable network and various pavement-based<br />
electronics associated with our cable network.<br />
We obtain insurance of the type and in the amounts that we believe are customary for similar companies in<br />
our industry. Consistent with this practice, we do not insure the underground portion of our cable network or<br />
various pavement-based electronics associated with our cable network. Substantially all of our cable<br />
network is constructed underground. As a result, any catastrophe that affects our underground cable network<br />
or our pavement-based electronics could prevent us from providing services to our customers and result in<br />
substantial uninsured losses.<br />
Risk Factors Relating to Regulatory and Legislative Matters<br />
We are subject to significant government regulation, which could require us to make additional<br />
expenditures or limit our revenues.<br />
Our activities as a cable television and telephony operator in Switzerland are subject to extensive regulation<br />
and supervision by various Swiss national authorities, in particular the Communications Commission<br />
(ComCom), the Swiss Federal Office of Communications (OfCom/BAKOM), the Swiss Price Regulator<br />
and the Competition Commission. These regulations may increase our administrative and operational<br />
expenses and limit our revenues. Our Internet and data businesses are not currently subject to extensive<br />
regulation, but could be in the future.<br />
We are subject to, among other things:<br />
• price regulation for certain services that we provide;<br />
• rules governing the interconnection between different telephone networks and which, due to<br />
existing obligations to charge reciprocal rates, indirectly regulate the interconnection rates that we<br />
can charge and that we pay;<br />
• requirements that we carry certain broadcast stations over our network (must-carry);<br />
• rules for license renewals and transfers;<br />
• rules and regulations relating to subscriber privacy; and<br />
• other requirements covering a variety of operational areas such as land use and environmental<br />
protection, equal employment opportunity, technical standards and subscriber service<br />
requirements.<br />
Changes in laws, regulations or governmental policy or the interpretation or application of those laws or<br />
regulations affecting our activities and those of our competitors could greatly influence our viability and<br />
how we operate our business and introduce new products and services. Our business could be materially and<br />
adversely affected by any changes in relevant laws or regulations (or in their interpretation) regarding, for<br />
example, unbundling of the local loop, licensing requirements, access and price regulation, interconnection<br />
arrangements or the imposition of universal service obligations, or any change in policy allowing more<br />
24
favorable conditions for other operators. Our ability to introduce new products and services may also be<br />
affected if we cannot predict how existing or future laws, regulations or policies would apply to such<br />
product or service.<br />
Pending legislation may significantly alter the regulatory regime applicable to us, which could<br />
adversely affect our competitive position and profitability.<br />
In March 2006, Swiss Parliament has introduced significant changes to the regulatory regime applicable to<br />
operators providing telephony, Internet and broadcasting services. See “Business—Regulation.” The<br />
changes to the Radio and Television Act and the Telecommunications Act are expected to enter into force in<br />
the first quarter of 2007. Market dominant telecommunications operator Swisscom will become obliged to<br />
unbundle its local loop. The unbundling obligations will comprise the offer of full line access as well as<br />
bitstream access, the latter only being available to competitors for a limited period of four years.<br />
Furthermore our current telephony licenses will be replaced with general authorizations. Although the<br />
number of conditions with which we must currently comply under our licenses would be reduced, other<br />
aspects of the new law or their future interpretation may adversely affect us.<br />
The revised Radio and Television Act will expand our obligation to carry certain programs, but at the same<br />
time the maximum number of such channels will be fixed in an ordinance which will enter into force in<br />
parallel to the new law. The terms of carriage of other than must carry programs can be commercially<br />
negotiated subject to non discrimination, and the new Act will clarify that broadcasters have to use the<br />
digital platform of the distributor as long as such platform allows the provision of state of the art services,<br />
indicating that broadcasters in principle cannot request unbundled access to a digital platform; however, the<br />
authorities may impose technical standards to ensure interoperability or if necessary to maintain freedom of<br />
information. Should such standards result in us being required to replace or materially alter the existing settop<br />
boxes of our customers, our costs would increase and, as a result, our results of operations could suffer.<br />
Furthermore, as a provider of a digital platform, we may in the future be compelled to allow broadcasters<br />
the use of our digital platform on a non-discriminatory basis.<br />
We may become subject to more extensive regulation if we are deemed to possess a dominant position<br />
in any of the markets in which we operate.<br />
Based on a preliminary fact finding and legal assessment process in an on-going litigation procedure, we<br />
have been considered dominant in the market for the distribution of television signals via cable television<br />
networks in the German-speaking part of Switzerland by the Competition Commission, the Recourse<br />
Commission and the Federal Supreme Court. Any past, present or future anti-competitive conduct on our<br />
part (e.g. unilateral refusal to deal, exclusive dealing, tying, predatory pricing, price squeezing,<br />
discriminatory pricing, imposing other unfair terms or other discriminatory practices) and as it relates to<br />
providing analog cable television services may, therefore, be considered an abuse of a dominant position<br />
under the Federal Act on Cartels. Harmed third parties may claim damages that result from such conduct in<br />
civil lawsuits. Since April 1, 2004, such conduct may also be subject to potentially significant direct<br />
sanctions imposed by the Competition Commission.<br />
Under the revised legislation there are pricing and service restrictions on entities deemed to have a dominant<br />
position in any of the markets in which they operate. There is a risk that we could be found to hold a<br />
dominant position in certain other segments of our business (other than transmission of analog television<br />
signals via cable television network) if the Swiss authorities identify these areas as relevant markets in<br />
which there is not sufficient competition. In the past, the Swiss Competition Commission has taken the<br />
position that broadcasting of television channels over cable networks for the German speaking population in<br />
Switzerland constitutes a distinct relevant market. Given our strong market position in that area, we could be<br />
25
equired to provide access to our network to other service providers who provide competing broadcasting<br />
services at regulated prices. Granting such access would limit the bandwidth available for us to provide<br />
products and services to the customers served by our network. Other restrictions may be imposed on how<br />
we operate our network and market our services. Such regulation could:<br />
• impair our ability to use our network in ways that would generate maximum revenue;<br />
• create a shortage of capacity on our network, which could limit the types and variety of services<br />
we seek to provide our customers;<br />
• strengthen our competitors by granting them access and lowering their costs to enter into our<br />
markets;<br />
• force us to create a separate wholesale division making the management of our operations more<br />
complex; and<br />
• as a result, have a significant adverse impact on our financial performance.<br />
Risk Factors Relating to Litigation Risks<br />
We are currently involved in significant disputes and face various litigation risks that could have a<br />
material adverse effect on our results of operations.<br />
Any legal proceedings may harm our reputation and adversely affect our business, financial condition,<br />
results of operations and cash flows. See “Business—Legal Proceedings” for information about our legal<br />
proceedings.<br />
Risk Factors Relating to Certain Financial Matters<br />
Our substantial leverage and debt service obligations could materially adversely affect our business,<br />
financial condition and results of operations and prevent us from fulfilling our obligations under the<br />
Senior Notes and the Bank Facility.<br />
We have significant debt and debt service requirements and may incur additional debt. As of December 31,<br />
2005, our total debt was CHF 1.772 billion as compared to shareholders’ equity of approximately CHF<br />
350.5 million, and we are therefore considered highly leveraged. In addition, we have a further CHF 150.0<br />
million of undrawn availability under our Existing Revolving Credit Facility, which we may draw in the<br />
future. See “—Capitalization” and “—Description of Certain Financing Arrangements”. Our high level of<br />
debt could have important consequences for you. For example, it could:<br />
• make it more difficult for us to satisfy our debt obligations;<br />
• require us to dedicate a substantial portion of our cash flows from operations to payments on our<br />
debt, thereby reducing the funds available to us to finance our operations, capital expenditures,<br />
working capital, research and development and other general corporate purposes, including<br />
maintaining the quality of our network and product performance;<br />
• place us at a competitive disadvantage compared to other providers of cable television, Internet or<br />
data and telephony services in Switzerland that have less debt than we do;<br />
• limit our flexibility in planning for, or reacting to, changes in our industry;<br />
26
• adversely affect public perception of us and our brand and reduce our flexibility to respond to<br />
general and industry-specific adverse economic conditions; and<br />
• impede our ability to obtain additional debt or equity financing, and increase the cost of any such<br />
borrowing, particularly due to the financial and other restrictive covenants contained in the<br />
agreements governing our debt.<br />
Any of these or other consequences or events could have a material adverse effect on our ability to satisfy<br />
our debt obligations. The terms of our debt agreements restrict, but do not prohibit, us from incurring<br />
additional debt. If we were to incur additional debt, the related risks that we now face will intensify.<br />
We require a significant amount of cash to make payments on our debt obligations and to service our<br />
other debt. Our ability to generate sufficient cash flow depends on a number of factors, many of which<br />
are out of our control.<br />
Our ability to service our debt as well as to fund our ongoing operations will depend on our future operating<br />
performance and ability to generate cash. This depends to some extent on general economic, financial,<br />
competitive, market, legislative, regulatory and other factors, many of which are out of our control, as well<br />
as other factors discussed in these “Risk Factors.”<br />
We cannot assure you that our business will generate sufficient cash flow from operating activities, or that<br />
future debt or equity financing will be available to us in an amount sufficient to enable us to pay our debt<br />
obligations when due, or to fund our liquidity needs. See “—Management’s Discussion and Analysis of<br />
Financial Condition and Results of Operations.”<br />
If our future cash flows from operations and other capital resources are insufficient to pay our obligations as<br />
they mature or to fund liquidity needs, we may be forced to sell assets, attempt to restructure or refinance<br />
our existing indebtedness or seek additional funding in the form of debt or equity capital. We cannot assure<br />
you that we would be able to accomplish any of these alternatives on a timely basis or on satisfactory terms,<br />
if at all. In addition, the terms of the indenture governing the Senior Notes and the agreement of the Bank<br />
Facility will limit our ability to pursue any of these alternatives. If we obtain additional debt financing or<br />
equity capital, the related risks we now face would increase.<br />
We are subject to restrictive debt covenants that could adversely affect our ability to operate our<br />
business and repay the Senior Notes and the Bank Facility.<br />
The terms of the indenture governing the Senior Notes and the agreement of the Bank Facility contain<br />
certain provisions that, among other things, could restrict our ability, and the ability of our subsidiaries, to<br />
do any of the following:<br />
• make certain payments, including dividends or other distributions;<br />
• incur or guarantee additional debt and issue preferred stock;<br />
• make certain investments or acquisitions, including participating in joint ventures;<br />
• prepay or redeem subordinated debt or equity;<br />
• make capital expenditures;<br />
• engage in certain transactions with affiliates and other related parties;<br />
27
• sell assets, consolidate or merge with other companies;<br />
• issue or sell share capital of certain subsidiaries; and<br />
• create liens.<br />
All of these limitations will be subject to exceptions and qualifications that may be important. Our ability to<br />
comply with these provisions may be affected by events beyond our control. In addition, we may not be able<br />
to borrow under the Existing Revolving Credit Facility, which could have a material adverse effect on our<br />
ability to operate our business and to make payments under our debt instruments. The Bank Facility also<br />
requires us to maintain certain ratios of total debt to EBITDA, senior debt to EBITDA, EBITDA to total<br />
cash interest and EBITDA to debt service.<br />
In addition to limiting our flexibility in operating our business, the breach of any covenants or obligations<br />
under the agreements and instruments governing our debt will result in a default under the applicable debt<br />
agreement or instrument and could trigger acceleration of the related debt, which in turn could trigger<br />
defaults under other agreements governing our debt. A default under the agreements governing our other<br />
debt could materially adversely affect our growth, our financial condition and results of operations and<br />
result in our not having sufficient assets to make payments on the Senior Notes, Bank Facility and other<br />
debt. See “—Description of Certain Financing Arrangements.”<br />
As our business is capital intensive, our cash flows from operating activities have been largely applied<br />
to fund capital expenditures and other investing activities during 2005 and 2004. We cannot assure you<br />
that we will have sufficient liquidity to meet our obligations under our existing debt obligations in the<br />
future.<br />
Our business is capital intensive and has always required significant amounts of cash. Operating costs and<br />
capital expenditures have resulted in negative cash flows before financing expenses in the past. The amount<br />
and timing of our future capital requirements may materially differ from our current estimates due to various<br />
factors, many of which are beyond our control. Failure to generate sufficient cash flow could diminish our<br />
ability to sustain operations, meet financial covenants, obtain additional required funds and make required<br />
payments on any indebtedness we have incurred or may incur.<br />
Although we believe that our expected cash flows from operating activities, together with cash equivalents<br />
and available borrowings, will be adequate to meet our anticipated liquidity needs, we cannot assure you<br />
that these sources of cash will be sufficient or that we will be able to raise additional funds for liquidity,<br />
should the need arise. See “Management Discussion and Analysis—Liquidity and Capital Resources”.<br />
We may not report net earnings.<br />
Our net loss amounted to CHF 350.7 million for the year ended December 31, 2005. In light of our<br />
historical financial performance, we cannot assure you that we will report net earnings in the near future or<br />
at all.<br />
We are exposed to interest rate and currency exchange rate risks. Shifts in such rates may have a<br />
material adverse effect on our ability to make payments on the Senior Notes and Bank Facility.<br />
Some of our debt bears interest at variable rates. An increase in the interest rates on our debt will reduce the<br />
funds available to repay the Senior Notes, the Bank Facility and our other debt and to finance our<br />
operations, capital expenditures and future business opportunities. Under the terms of our existing interest<br />
rate hedging arrangements, our effective interest rates may be higher than actual interest rates, resulting in<br />
28
increased costs for us. Furthermore, we are exposed to currency exchange rate risks because we generate<br />
revenues and incur operating and other expenses in CHF, while we pay interest and principal obligations<br />
with respect to a part of our indebtedness in EUR. We cannot assure you that the hedging transactions we<br />
have entered into or that we may enter into will be successful or that shifts in currency exchange rates will<br />
not have a material adverse effect on our business. Any appreciation or depreciation in the CHF relative to<br />
the EUR could have a material adverse effect on our ability to make payments on the Senior Notes or the<br />
Bank Facility. See “—Management’s Discussion and Analysis of Financial Condition and Results of<br />
Operations—Disclosures about Market Risk.”<br />
While almost all of our revenues are denominated in CHF, a portion of our operating expenses and capital<br />
expenditures are denominated in currencies other than CHF. Therefore, we are exposed to the adverse effect<br />
of a weaker CHF against other currencies. Our primary exchange rate exposure was against EUR and USD.<br />
Risk Factors Relating to our Principal Shareholder<br />
The interst s of Liberty Global, our indirect parent company, may conflict the interests of <strong>Cablecom</strong>.<br />
Liberty Global is an indirect parent of the Issuer indirectly owning 100% of the voting interests in the Issuer.<br />
It operates in substantially the same businesses as <strong>Cablecom</strong> does. When business opportunities, or risks and<br />
risk allocation, arise, the interest of Liberty Global may be different, or in conflict with, the interst of<br />
<strong>Cablecom</strong> on a stand-alone basis. Because we are indirectly controlled by Liberty Global, we cannot assure<br />
you that Liberty Global will permit us to pursue business opportunities if it is seeking to capitalize on such<br />
opportunities itself.<br />
29
CAPITALIZATION<br />
The following table sets forth (i) our actual consolidated capitalization as of December 31, 2005, and (ii) our<br />
consolidated capitalization on an adjusted basis, after giving effect to the January 2006 refinancing. The<br />
adjustments to reflect the January 2006 refinancing include:<br />
• the draw down (on January 20, 2006) under the Bank Facility agreement dated December 5,<br />
2005 of CHF 349,769,000 aggregate principal amount under the Term Loan A and CHF<br />
355,760,000 and EUR 229,079,000 aggregate principal amount under the Term Loan B; and<br />
• the early repayment of CHF 259,000,000, EUR 157,900,000 and EUR 335,700,000 of Senior<br />
Secured Notes at 102% of par value.<br />
You should read this table in conjunction with “Selected Consolidated Financial Data,” “Management’s<br />
Discussion and Analysis of Financial Condition and Results of Operations,” “Description of Certain<br />
Financing Arrangements” and our consolidated financial statements and the notes thereto included<br />
elsewhere in this Annual Report. The capitalization table presented below does not reflect any purchase<br />
accounting adjustments related to Liberty Global Switzerland’s acquisition of <strong>Cablecom</strong> on October 24,<br />
2005.<br />
Except as set forth above, there have not been material changes to our capitalization since December 31,<br />
2005.<br />
As of December 31, 2005<br />
Actual As adjusted<br />
(CHF in millions)<br />
Cash and cash equivalents.......................................................................... 124 124<br />
Debt:<br />
Senior Secured Notes (1) ............................................................................. 1,019 —<br />
Facility A Term Loan................................................................................ 269 618<br />
Facility B Term Loan (2) ........................................................................... — 712<br />
Other secured debt (3) ................................................................................ 32 32<br />
Senior Notes (1) ......................................................................................... 452 452<br />
Total debt (4) ................................................................................................ 1,772 1,814<br />
Equity:<br />
Common stock .......................................................................................... 68 68<br />
Other ......................................................................................................... 282 282<br />
Total shareholders’ equity......................................................................... 350 350<br />
Total capitalization ..................................................................................... 2,122 2,164<br />
(1) Existing Senior Secured Notes and Senior Notes are converted into CHF, where applicable, at CHF 1.5579<br />
= EUR 1.00<br />
(2) The EUR Term Loan B at par value is converted into CHF, where applicable, at CHF 1.5530 = EUR 1.00.<br />
(3) Includes capital leases, mortgages and other short- and long-term debt.<br />
(4) In addition, we have CHF 150 million of undrawn availability under the Existing Revolving Credit Facility.<br />
30
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA<br />
The table below sets out selected consolidated financial data of the Issuer as at and for the year ended<br />
December 31, 2004 and 2005. The data relating to the years ended December 31, 2004 and 2005 have been<br />
prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and<br />
have been derived from the audited consolidated financial statements of the Issuer which are included<br />
elsewhere in this Annual Report. The selected consolidated data presented below does not reflect any<br />
purchase accounting adjustments related to Liberty Global Switzerlands’s acquisition of <strong>Cablecom</strong> on<br />
October 24, 2005. You should read such data in conjunction with our consolidated financial statements and<br />
the notes thereto which are contained elsewhere in this Annual Report and “Management’s Discussion and<br />
Analysis of Financial Condition and Results of Operations.”<br />
Year ended December 31,<br />
2005 2004<br />
(CHF in thousands)<br />
Consolidated Statements of Operations<br />
Revenue:<br />
Cable television ........................................................................... 458,074 444,037<br />
Internet......................................................................................... 173,810 147,409<br />
Telephony .................................................................................... 103,880 42,424<br />
Business Solutions....................................................................... 46,396 28,169<br />
Partner Group and other............................................................ 49,658 47,109<br />
Operating revenue, net.................................................................<br />
Operating costs and expenses:<br />
831,818 709,148<br />
Cost of goods and services .......................................................... (247,946) (209,532)<br />
Selling, general and administration ............................................. (275,423) (215,496)<br />
Stock-based compensation........................................................... (144,033) (23,675)<br />
Depreciation and amortization..................................................... (324,123) (296,475)<br />
Restructuring costs and related charges....................................... (12,204) (2,089)<br />
Net gain on disposal of long-lived assets..................................... 5,710 1,745<br />
Operating loss ...............................................................................<br />
Other income (expense):<br />
(166,201) (36,374)<br />
Equity in earnings of affiliates..................................................... 634 821<br />
Net (loss) gain on derivative instruments .................................... (21,559) 16,452<br />
Interest expense, net..................................................................... (101,500) (90,665)<br />
Loss on debt modifications.......................................................... (31,878) (53,812)<br />
Foreign currency (losses) gains, net ............................................ (20,810) 373<br />
Other non-operating (expense) income........................................ (1,595) 2,036<br />
Minority interest .......................................................................... (2,725) (2,142)<br />
Loss before income taxes.............................................................. (345,634) (163,311)<br />
Income tax expense...................................................................... (5,041) (4,310)<br />
Net loss........................................................................................... (350,675) (167,621)<br />
31
Year ended December 31,<br />
2005 2004<br />
(CHF in thousands)<br />
Balance Sheet data<br />
Cash and cash equivalents............................................................. 123,703 64,037<br />
Total assets.................................................................................... 2,931,802 2,893,057<br />
Total current liabilities .................................................................. 641,156 573,141<br />
Total non-current liabilities........................................................... 1,924,456 1,793,617<br />
Minority interest............................................................................ 15,716 13,630<br />
Total shareholders’ equity............................................................. 350,474 512,669<br />
32
KEY OPERATING STATISTICS (1)<br />
Year ended December 31, 2005<br />
Partner<br />
<strong>Cablecom</strong> Networks Total<br />
Homes Passed (2) ................................................................ 1,802,200 n/a 1,802,200<br />
Two-way Homes Passed (3) ............................................... 1,254,500 455,600 1,710,100<br />
Customer Relationships (4) ................................................<br />
RGUs<br />
1,491,200 80,100 1,571,300<br />
(5)<br />
Analog cable television (6) .................................................... 1,410,900 n/a 1,410,900<br />
Digital cable television (7) .................................................... 81,300 25,000 106,300<br />
Broadband Internet (8) ........................................................... 304,700 35,800 340,500<br />
Telephony (9) ......................................................................... 166,900 19,300 186,200<br />
Total RGUs ........................................................................<br />
Homes Serviceable<br />
1,963,800 80,100 2,043,900<br />
(10)<br />
Analog cable television........................................................ 1,802,200 n/a 1,802,200<br />
Digital cable television ........................................................ 1,457,500 266,000 1,723,500<br />
Broadband Internet............................................................... 1,254,500 212,900 1,467,400<br />
Telephony.............................................................................<br />
Penetration<br />
1,254,500 163,100 1,417,600<br />
(11)<br />
Analog cable television........................................................ 78.3% n/a 78.3%<br />
Digital cable television ........................................................ 5.6% 9.4% 6.2%<br />
Broadband Internet............................................................... 24.3% 16.8% 23.2%<br />
Telephony............................................................................. 13.3% 11.8% 13.1%<br />
Dec 31,<br />
2004<br />
33<br />
March 31,<br />
2005<br />
June 30,<br />
2005<br />
Sept 30,<br />
2005<br />
Dec 31,<br />
2005<br />
RGUs (5)<br />
Analog cable television (6) .................... 1,411,500 1,411,000 1,411,300 1,415,600 1,410,900<br />
Digital cable television (7) .................... 84,000 89,100 98,100 100,300 106,300<br />
Broadband Internet (8) .......................... 268,900 292,600 310,600 323,700 340,500<br />
Telephony (9) ........................................ 103,000 128,200 148,000 162,000 186,200<br />
Total RGUs....................................... 1,867,400 1,920,900 1,967,900 2,001,700 2,043,900
(1) The subscriber statistics have been calculated in accordance with the methods used by Liberty Global.<br />
Previously the subscriber statistics were presented in accordance with <strong>Cablecom</strong>’s policy. The changes in<br />
the methodology mainly affect the number of RGUs in our analog and digital cable television services.<br />
Consistent with Liberty Global’s single count methodology, a digital cable television subscriber is no<br />
longer counted as both an analog and a digital cable television RGU, but as a single digital cable television<br />
RGU. As a consequence the number of analog cable television RGUs will be lower than <strong>Cablecom</strong>’s<br />
previous reporting by approximately the number of reported digital cable television RGUs. Furthermore,<br />
customers that purchased a set-top box but do not generate recurring revenue for digital cable television is<br />
no longer counted as a digital cable television RGU. Consequently, penetration, ARPU and churn were<br />
affected due to the changed customer base. The methodology for the calculation of the other subscriber<br />
statistics presented in the Annual Report remains the same.<br />
(2) Homes Passed are homes that can be connected to our networks without further extending the distribution<br />
plant. Our Homes Passed counts are based on census data that can change based on either revisions to the<br />
data or from new census results. We do not report Homes Passed for our partner networks.<br />
(3) Two-way Homes Passed are homes passed by our networks where customers can request and receive the<br />
installation of a two-way addressable set-top converter, cable modem, transceiver and/or voice port which,<br />
in most cases, allows for the provision of analog cable television services, digital cable television services,<br />
broadband Internet services and telephony services.<br />
(4) Customer Relationships are the number of customers who receive at least one level of service without<br />
regard to which service(s) they subscribe. We exclude mobile customers from customer relationships but<br />
include customers from our partner networks subscribing to digital cable television, broadband Internet and<br />
telephony services.<br />
(5) Revenue Generating Unit (RGU) is separately an analog cable television subscriber, digital cable television<br />
subscriber, broadband Internet subscriber or telephony subscriber. A home may contain one or more RGUs.<br />
For example, a subscriber to our digital cable television service, broadband Internet service and telephony<br />
service would constitute three RGUs. In some cases, non-paying subscribers are counted as subscribers<br />
during their free promotional service period. Some of these subscribers choose to disconnect after their free<br />
service period. Digital cable television, broadband Internet and telephony RGUs include partner network<br />
subscribers.<br />
(6) Analog cable television subscriber is comprised of analog cable television customers that are counted on a<br />
per connection basis. An analog cable television subscriber is not counted as a digital cable television<br />
subscriber. An analog cable television subscriber who also has digital cable television service is counted as<br />
a digital television RGU.<br />
(7) Digital cable television subscriber is a customer with one or more digital converter boxes that receives our<br />
digital cable television service. We count a subscriber with one or more digital converter boxes that<br />
receives our digital cable television service as just one subscriber. A digital cable television subscriber is<br />
not counted as an analog cable television subscriber.<br />
(8) Broadband Internet subscriber is a home or commercial unit or equivalent bulk unit (EBU) with one or<br />
more cable modems connected to our broadband networks, where a customer has requested and is receiving<br />
high-speed Internet access services.<br />
(9) Telephony subscriber is a home or commercial unit or EBU connected to our networks, where a customer<br />
has requested and is receiving voice services. Telephone subscribers as of December 31, 2005, exclude an<br />
aggregate of 958 mobile telephone subscribers.<br />
(10) Homes Serviceable are homes that can be connected to our networks, where customers can request and<br />
receive analog cable television services, digital cable television services, broadband Internet services or<br />
telephony services, respectively.<br />
(11) Penetration measures the number of RGUs for our service divided by the number of homes serviceable for<br />
our service.<br />
34
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION<br />
AND RESULTS OF OPERATIONS<br />
The following discussion and analysis is intended to assist in providing an understanding of our financial<br />
condition, changes in financial condition and results of operations and should be read in conjunction with<br />
our consolidated financial statements. This discussion is organized as follows:<br />
• Forward Looking Statements. This section provides a description of certain of the factors that could<br />
cause actual results or events to differ materially from anticipated results or events.<br />
• Overview. This section provides a general description of our business and recent events.<br />
• Results of Operations. This section provides an analysis of our results of operations for the years ended<br />
December 31, 2005 and 2004.<br />
• Liquidity and Capital Resources. This section provides an analysis of our corporate and subsidiary<br />
liquidity, consolidated cash flow statements, and our off balance sheet arrangements and contractual<br />
commitments.<br />
The following is a discussion and analysis of our results of operations and financial condition in the periods<br />
set forth below. It is based on data that are derived from the audited consolidated financial statements of the<br />
Issuer as of and for the years ended December 31, 2005 and 2004. The consolidated financial statements<br />
have been prepared in accordance with U.S. GAAP. The capitalized terms used below have been defined in<br />
the notes to the consolidated financial statements. In the following text, <strong>Cablecom</strong>, we, us, our and our<br />
company may refer, as the context requires, to <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A and its consolidated<br />
subsidiaries, <strong>Cablecom</strong> GmbH. The financial information discussed in “Management’s Discussion and<br />
Analysis” does not reflect any purchase accounting adjustments related to Liberty Global Switzerland’s<br />
acquisition of <strong>Cablecom</strong> on October 24, 2005.<br />
You should read this section in conjunction with the consolidated financial statements, including the notes<br />
thereto, as well as the other financial information contained elsewhere in this Annual Report.<br />
In accordance with the indenture of the Senior Notes and the Bank Facility agreement and the notification to<br />
the Facility Agent on April 26, 2006, the Issuer has elected to apply U.S. GAAP in lieu of Swiss GAAP<br />
FER in the preparation of its accounts. Therefore, this Annual Report as well as any future financial<br />
statements and reports will be provided in accordance with U.S. GAAP. All ratios, computations, and other<br />
determinations based on generally accepted accounting principles have been retroactively calculated in<br />
conformity with U.S. GAAP.<br />
Forward Looking Statements<br />
The following discussion and analysis of our financial condition and results of operations contains<br />
forward-looking statements. Those statements are subject to risks, uncertainties and other factors that could<br />
cause our future results of operations or cash flow to differ materially from those expressed or implied in<br />
such forward-looking statements. Factors that could cause or contribute to such differences include, but are<br />
not limited to, those discussed below and elsewhere in this Annual Report, particularly under “Risk<br />
Factors.” The following includes some but not all of the factors that could cause actual results or events to<br />
differ materially from anticipated results or events:<br />
35
Effect of competition and pricing<br />
We operate in a number of competitive markets, including data and voice services. Maintaining a<br />
competitive stance in the market may require repositioning our products which could materially impact the<br />
amount of revenue per customer. In 2005, we introduced “hispeed light”, a 300 kbps version of our<br />
broadband Internet product exclusively for entry-level customers also taking telephony as a bundle. We may<br />
introduce similar entry-level or bundled products across our different product offerings. While introducing<br />
customers to our products through lower-priced subscriptions has been a key customer acquisition strategy,<br />
if we do not succeed in upgrading customers to higher value products, we may experience a reduced average<br />
revenue per customer.<br />
Continued growth of our television, broadband Internet, telephony and business products<br />
We expect continued subscriber, penetration and revenue growth from our cable television, broadband<br />
Internet and telephony businesses. In addition, we expect to continue growing our business to business<br />
segment through current and future offerings. Reduced growth in these markets could have a material effect<br />
on our financial results.<br />
Effect of restrictions on price increases<br />
In November 2004, we reached an agreement with the Swiss Price Regulator which foresaw a price freeze<br />
for the analog television subscription at CHF 19.50 in 2005 and allowed us to increase prices to CHF 21.00<br />
in 2006. This agreement, as well as discussions with the Swiss Price Regulator regarding future price<br />
increases, could have a material impact on our results of operations and financial condition.<br />
Effect of discounts<br />
We have introduced product discounts in the past and may continue to do so in the future. Such discounts,<br />
such as granting the first month free of charge for telephony, could have an effect on our results of<br />
operations.<br />
Effect of shift from fixed to growth-related capital expenditure<br />
We have significantly reduced the fixed portion of our capital expenditures as most of our network is fully<br />
upgraded, and we therefore expect, that going forward, our capital expenditure will be driven by the growth<br />
of our digital products. If the fixed portion of our expenditure was to increase, or market conditions forced<br />
further upgrade of our network, this would have a material impact on our cash flow and financial results.<br />
Future product developments<br />
In March 2006, <strong>Cablecom</strong> announced the bandwidth increase for Internet access of up to five times for the<br />
same price. We expect to continue making capital expenditures for future bandwidth increases. As leaders in<br />
our market, we may be required to make additional expenditures in our network to address customer growth<br />
and demand-driven requirements for bandwidth capacity or the introduction of other product technologies.<br />
You should be aware that the cable television, Internet and telephony services industries are changing<br />
rapidly, and, therefore, the forward looking statements of expectations, plans and intent in this Annual<br />
Report are subject to a greater degree of risk than similar statements regarding certain other industries.<br />
These forward looking statements and such risks, uncertainties and other factors speak only as of the date of<br />
this Annual Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or<br />
revisions to any forward looking statement contained herein, to reflect any change in our expectations with<br />
36
egard thereto, or any other change in events, conditions or circumstances on which any such statement is<br />
based.<br />
Overview<br />
We are the largest Swiss broadband communications provider of cable television, Internet access and fixedline<br />
and mobile telephone services with consolidated operations in 14 of the 16 largest Swiss cities.<br />
<strong>Cablecom</strong>’s ultimate parent changed on October 24, 2005 when Liberty Global Switzerland, an indirect<br />
subsidiary of Liberty Global, acquired 100% of the outstanding shares of <strong>Cablecom</strong> Holdings AG from<br />
Glacier Holdings S.C.A. In connection with the change in our ultimate parent company, <strong>Cablecom</strong> was<br />
required to effect a change of control offer for all outstanding Senior Notes and Senior Secured Notes. In<br />
order to fund this offer, we entered into a refinancing transaction in December 2005 and terminated all<br />
hedging positions related to the Senior Secured Notes thereafter. In January 2006, <strong>Cablecom</strong> decided to<br />
refinance all outstanding Senior Secured Notes which were not tendered during the change of control offer.<br />
See ”—Liquidity and Capital resources.”<br />
We have completed a number of acquisitions during 2005 and 2004 that have expanded our footprint and<br />
the scope of our business. In 2005, we purchased two small, fully upgraded cable networks with<br />
approximately 4,300 subscribers and sold two minor cable assets with an aggregated subscriber base of less<br />
than 200 subscribers.<br />
Through our subsidiaries we are the largest broadband cable operator in Switzerland in terms of<br />
subscribers. At December 31, 2005, our consolidated subsidiaries owned and operated networks that passed<br />
approximately 1.8 million homes and served approximately 2.0 million revenue generating units (RGUs)<br />
over both our network and our partner networks, consisting of approximately 1.5 million cable television<br />
subscribers, 340,500 broadband Internet subscribers and 186,200 telephony subscribers.<br />
In general, we are focused on growing our subscriber base and average total monthly revenue from all<br />
sources (including non-subscription revenue such as installation fees or advertising revenue) per average<br />
RGU (ARPU) by launching bundled entertainment, information and communications services, upgrading<br />
the quality of our networks where appropriate, leveraging the reach of our broadband distribution systems to<br />
create new content opportunities and entering into strategic alliances and acquisitions in order to increase<br />
our distribution presence and maximize operating efficiencies.<br />
Current Developments<br />
In March, 2006, we announced the bandwidth increase for Internet access of up to five times for the same<br />
price. Hispeed 600, our most popular subscription, was upgraded to hispeed 3,000. The upload speed was<br />
also increased to meet a 1:10 upload/download ratio. New customers benefit from the higher speed<br />
immediately, existing customers will be upgraded automatically through June 2006. We expect to continue<br />
making capital expenditures for future bandwidth increases. We may be required to make additional<br />
expenditures in our network to address customer growth and demand-driven bandwidth capacity<br />
requirements.<br />
In March 2006 Swiss parliament has adopted a revised Telecommunications Act and a revised Radio and<br />
Television Act which both are expected to enter into force on January 1, 2007. See “Business—Regulation”.<br />
37
Results of Operations for the Years Ended December 31, 2005 and December 31, 2004<br />
Year ended December 31,<br />
2005 2004 Variance<br />
(CHF in thousands) %<br />
Consolidated Statements of<br />
Operations<br />
Revenue:<br />
Cable television..................................... 458,074 444,037 14,037 3.2<br />
Internet .................................................. 173,810 147,409 26,401 17.9<br />
Telephony.............................................. 103,880 42,424 61,456 144.9<br />
Business Solutions................................. 46,396 28,169 18,227 64.7<br />
Partner Group and other ........................ 49,658 47,109 2,549 5.4<br />
Operating revenue, net ...........................<br />
Operating costs and expenses:<br />
831,818 709,148 122,670 17.3<br />
Cost of goods and services .................... (247,946) (209,532) (38,414) 18.3<br />
Selling, general and administration....... (275,423) (215,496) (59,927) 27.8<br />
Stock-based compensation .................... (144,033) (23,675) (120,358) 508.4<br />
Depreciation and amortization .............. (324,123) (296,475) (27,648) 9.3<br />
Restructuring costs and related<br />
charges...................................................<br />
(12,204) (2,089)<br />
(10,115) 484.2<br />
Net gain on disposal of long-lived<br />
assets .....................................................<br />
5,710 1,745 3,965 227.2<br />
Operating loss..........................................<br />
Other income (expense):<br />
(166,201) (36,374) (129,827) 356.9<br />
Equity in earnings of affiliates .............. 634 821 (187) (22.8)<br />
Net (loss) gain on derivative<br />
instruments ............................................<br />
(21,559) 16,452 (38,011) (231.0)<br />
Interest expense, net .............................. (101,500) (90,665) (10,835) 12.0<br />
Loss on debt modifications.................... (31,878) (53,812) 21,934 (40.8)<br />
Foreign currency (losses) gains,<br />
net..........................................................<br />
(20,810) 373 (21,183) (5,679.1)<br />
Other non-operating (expense)<br />
income ...................................................<br />
(1,595) 2,036 (3,631) (178.3)<br />
Minority interest.................................... (2,725) (2,142) (583) 27.2<br />
Loss before income taxes ........................ (345,634) (163,311) (182,323) 111.6<br />
Income tax expense ............................... (5,041) (4,310) (731) 17.0<br />
Net loss ..................................................... (350,675) (167,621) (183,054) 109.2<br />
The comparability of our operating results during 2005 and 2004 are affected by acquisitions and<br />
dispositions. Acquisitions, net of dispositions, accounted for CHF 22 million of the overall increase in<br />
revenue from 2004 to 2005. Due to the insignificance of these acquisitions and dispositions on our results of<br />
operations we do not quantify their impact in our explanations of each individual line item.<br />
Revenues<br />
Our revenues consist of analog cable television revenue, digital cable television revenue, broadband Internet<br />
revenue, dial-up Internet revenue, fixed-line and mobile telephony revenue, business services revenue and<br />
Partner Group revenue. Revenues increased by CHF 122.7 million, or 17.3%, from CHF 709.1 million for<br />
38
the year ended December 31, 2004 to CHF 831.8 million for the year ended December 31, 2005. The<br />
increase in revenue is primarily due to increasing broadband Internet and telephony subscribers as well as<br />
the effects of acquisitions, net of dispositions. Our cable television business generated CHF 458.1 million,<br />
or 55%, of our consolidated revenues for the year ended December 31, 2005. Our residential Internet<br />
(including dial-up and broadband Internet services) and telephony businesses generated CHF 173.8 million<br />
and CHF 103.9 million, or 21% and 12% respectively, of our consolidated revenues for the year ended<br />
December 31, 2005. Sales from Business Solutions and Partner Group were CHF 46.4 million and CHF<br />
49.7 million, respectively, or both about 6% of our consolidated revenues, for the year ended December 31,<br />
2005.<br />
Cable television<br />
Revenues generated by our cable television business increased by 3.2%, from CHF 444.0 million for the<br />
year ended December 31, 2004, to CHF 458.1 million for the year ended December 31, 2005. This increase<br />
was mainly due to organic and acquisition related subscriber growth in digital television as well as increased<br />
advertising revenue.<br />
Internet<br />
Revenues generated by our Internet business increased by 17.9%, from CHF 147.4 million for the year<br />
ended December 31, 2004 to CHF 173.8 million for the year ended December 31, 2005. Net additions of<br />
broadband Internet subscribers were the main driver for increase in revenue partially offset by lower ARPU<br />
and decreasing revenue from our dial-up Internet business.<br />
Telephony<br />
We officially launched our telephony business in June 2004. Our telephony business generates revenue from<br />
a combination of fixed monthly line rental and usage fees (consisting of fixed call set-up fees and perminute<br />
tariffs) and interconnection fees. Revenues generated by our telephony business increased by<br />
144.9%, from CHF 42.4 million for the year ended December 31, 2004 to CHF 103.9 million for the year<br />
ended December 31, 2005. The increase in revenue was primarily driven by the growth of the subscriber<br />
base, generating revenue from monthly line rental charge and usage fees.<br />
Business Solutions and Partner Group<br />
Business Solutions and Partner Group revenues increased by 27.6%, from an aggregate of CHF 75.3 million<br />
for the year ended December 31, 2004, to CHF 96.1 million for the year ended December 31, 2005.<br />
Business Solutions revenues increased by 64.7% from CHF 28.2 million in 2004 to CHF 46.4 million in<br />
2005 driven by an acquisition and growth in the number of business customers taking our existing data<br />
connectivity services. We generate revenue from these services primarily from fees paid by customers for<br />
data services, pursuant to standard conditions with smaller businesses (with fees typically generated on a<br />
usage basis) and individually negotiated contracts with larger businesses.<br />
Partner Group revenues increased by 5.4% from CHF 47.1 million in 2004 to CHF 49.7 million in 2005.<br />
The increase was mainly attributable to an acquisition partially offset by the fact that we have stopped<br />
growing the wholesale data transport services over our backbone to better leverage our competitive network<br />
asset in the retail business market.<br />
39
Costs<br />
Costs of goods and services<br />
Our costs of goods and services consist of copyright and license fees, direct service costs, programming<br />
costs, network maintenance, interconnection fees, Internet peering costs, leased lines, and sold network<br />
materials (including partner network sales and digital set-top boxes). We present depreciation and<br />
amortization separately from our direct costs. See "—Depreciation and amortization expenses."<br />
Costs of goods sold increased by 18.3% from CHF 209.5 million in 2004 to CHF 247.9 million in 2005.<br />
Cost of goods sold as a percentage of revenue increased from 29.5% in 2004 to 29.8% in 2005. The increase<br />
was in line with the growth of our business.<br />
Selling, general and administrative expenses<br />
Our selling, general and administrative expenses consist of customer acquisition costs (advertising),<br />
administrative costs, facility costs, utilities, travel expense, insurance and personnel expenses. Personnel<br />
expenses consist primarily of salary, social charges, pension contribution, bonuses and holiday accruals.<br />
Selling, general and administrative expenses increased by 27.8% from CHF 215.5 million in 2004 to CHF<br />
275.4 million in 2005 mainly driven by the increase in indirect labor, particularly for customer care,<br />
administration and overhead functions, and by the increase of rental, insurance and utilities expenses.<br />
Stock based compensation<br />
Stock based compensation is related to the Management Equity Participation Plan ("MEPP") that was<br />
established in November 2004, by Glacier Holding S.C.A and one of its shareholders together with Glacier<br />
Holdings S.C.A.'s principal shareholders, for the benefit of certain employees of <strong>Cablecom</strong>. This plan no<br />
longer exists following Liberty Global’s acquisition of <strong>Cablecom</strong>.<br />
Stock based compensation increased from CHF 23.7 million in 2004 to CHF 144.0 million in 2005. The<br />
increase in the stock compensation expense is due to increases in our value combined with accelerated<br />
vesting due to the acquisition of <strong>Cablecom</strong> by Liberty Global Switzerland.<br />
Depreciation and amortization expenses<br />
Depreciation and amortization expense is related to the depreciation of our communication equipment and<br />
amortization of intangible assets. Depreciation and amortization expense increased by 9.3% from CHF<br />
296.5 million in 2004 to CHF 324.1 million in 2005 primarily driven by a higher carrying value of<br />
communication equipment as a result of increased growth related capital expenditures, thus resulting in<br />
higher depreciation on communication equipment during 2005 over 2004.<br />
Restructuring and related charges<br />
Restructuring and related charges are costs related to reorganization activities and plans to reduce the work<br />
force of <strong>Cablecom</strong>. Restructuring and related charges increased from CHF 2.1 million for the year ended<br />
December 31, 2004 to CHF 12.2 million for the year ended December 31, 2005. Our 2005 restructuring and<br />
related charges mainly consist of attrition, early retirements and termination expenses. See Note 14 to the<br />
consolidated financial statements.<br />
40
Net gain on disposal of long-lived assets<br />
Net gain on disposal of long-lived assets increased from CHF 1.7 million in 2004 to CHF 5.7 million in<br />
2005 as a result of the sale of certain real estate assets. See Note 4 to the consolidated financial statements.<br />
Equity in earnings of affiliates<br />
Equity in earnings of affiliates is related to the pro rata share of profit or (loss) from investments in affiliates<br />
that we account for using the equity method. Equity in earnings of affiliates decreased from CHF 0.8 million<br />
in 2004 to CHF 0.6 million in 2005.<br />
Net (loss) gain on derivative instruments<br />
Net loss on derivative instruments relate to (i) the reclassification into earnings of the unrealized gains and<br />
losses on derivative instruments that were previously in accumulated other comprehensive (loss) income.<br />
These unrealized gains and losses are reclassified when the underlying cash flows that were previously<br />
hedged are no longer probably of occurring, mainly due to refinancing and (ii) the change in fair market<br />
value of derivative when not recognized in other comprehensive income.<br />
Net loss on derivative instruments was CHF 21.6 million in the year ended December 31, 2005, as<br />
compared to a net gain on derivative instruments of CHF 16.5 million in the year ended December 31, 2004.<br />
In 2005, we reclassified previously recognized losses from accumulated other comprehensive (loss) income<br />
to the statement of operations, including (i) CHF 17.8 million losses on interest rate swaps, (ii) CHF 14.7<br />
million losses on USD to CHF cross-currency swaps, and (iii) CHF 2.5 million gain on EUR to CHF crosscurrency<br />
swaps, when the underlying cash flows associated with these hedging instruments became no<br />
longer probable of occurring following the April 2005 and December 2005 refinancing. These losses were<br />
offset by changes in fair market values of derivative instruments in 2005. See Note 7 to the consolidated<br />
financial statements.<br />
Interest expense<br />
Interest expense represents amounts payable on our various debt obligations including interest payments<br />
under our existing Senior Secured Notes, Senior Notes and Bank Facility, the interest portion of hedging<br />
agreements and discount/premium amortization on debt instrument.<br />
Interest expense increased by 12.0% from CHF 90.7 million in 2004 to CHF 101.5 million in 2005. The<br />
increase was mainly driven by higher principal outstanding and higher interest expense on our derivative<br />
instruments.<br />
Loss on debt modifications<br />
Loss on debt modification is related to expensing deferred financing fees that were capitalized in<br />
conjunction with certain previous long-term debt agreements. Loss on debt modifications decreased from<br />
CHF 53.8 million in 2004 to CHF 31.9 million in 2005. The loss on debt modifications in 2004 was related<br />
to previously capitalized refinancing fees which have been expensed as a consequence of the April 2004<br />
refinancing. In addition, following April and December 2005 refinancing, certain capitalized cost have been<br />
expensed.<br />
41
Foreign currency (losses) gains, net<br />
Foreign currency (losses) gains, net are primarily related to foreign currency transaction gains and losses<br />
recorded with respect to long-term debt that is denominated in currencies other than our or our subsidiary’s<br />
functional currency. Subsequent changes in exchange rates result in foreign currency (losses) gains which<br />
are either unrealized or realized upon settlement of the transaction.<br />
Net foreign currency (losses) gains were a net gain of CHF 0.4 million in the year ended December 31,<br />
2004, as compared to a net loss of CHF 20.8 million in the year ended December 31, 2005. The loss in 2005<br />
was mainly related to the strengthening of the EUR and USD against the Swiss Franc.<br />
Income taxes<br />
Income taxes relate to the movements in the consolidated tax liability or asset position, including income tax<br />
for majority owned companies. We recognized income tax expense of CHF 5.0 million and CHF 4.3 million<br />
during 2005 and 2004, respectively. The tax expense for 2005 differs from the expected tax benefit of CHF<br />
76.4 million (based on the Swiss Federal and Cantonal 22.1% income tax rate) due primarily to (i) net<br />
operating loss carry forwards that cannot be recognized for financial reporting purposes, as we have not yet<br />
concluded that it is more-likely-than-not that we will utilize these loss carry forwards in future periods and<br />
to (ii) various expenses not deductible for income tax purposes. See Note 8 to our consolidated financial<br />
statements.<br />
Liquidity and Capital Resources<br />
Sources and Uses of Cash<br />
At December 31, 2005, we held cash and cash equivalents of CHF 123.7 million. In addition to our cash and<br />
cash equivalents, our sources of liquidity include borrowings availability subject to satisfaction of certain<br />
conditions under our Existing Revolving Credit Facility, and our operating cash flow.<br />
At December 31, 2005, <strong>Cablecom</strong>’s debt included outstanding floating rate Senior Secured Notes (Senior<br />
Secured Notes) of CHF 1.019 billion, 9.375% EUR 290 million bonds (Senior Notes) of CHF 451.6 million<br />
and Bank Facility of CHF 268.7 million. In addition, a CHF 150.0 million undrawn Existing Revolving<br />
Credit Facility is available to us subject to our being in compliance with certain financial covenants and<br />
other conditions.<br />
We maintain cash and cash equivalents to fund the day-to-day cash requirements of our business and for<br />
acquisitions.<br />
We refinanced the Senior Credit Facility on April 8, 2005, by issuing floating rate Senior Secured Notes<br />
(Series A CHF 390.0 million and EUR 200.0 million and Series B EUR 375.0 million) with net proceeds of<br />
CHF 1.252 billion and maturities in the years 2010 and 2012.<br />
In December, 2005, in connection with the Liberty Global Switzerland’s acquisition of <strong>Cablecom</strong> Holdings<br />
AG and subsidiaries, the Issuer was required to effect a change of control offer (Change of Control Offer)<br />
for the existing Senior Secured Notes, Senior Notes at 101% of their respective principal amounts, and for<br />
the Existing Revolving Credit Facility. In order to fund the Change of Control Offer, <strong>Cablecom</strong><br />
<strong>Luxembourg</strong> S.C.A. entered into a bank facility agreement (Bank Facility) with certain banks and financial<br />
institutions as lenders on December 5, 2005. The Bank Facility provides the terms and conditions upon<br />
which (i) the lenders made available to <strong>Cablecom</strong> two term loans (Facility A Term Loan and Facility B<br />
Term Loan) in an aggregate principal amount not to exceed CHF 1.33 billion and (ii) the revolving lenders<br />
42
under <strong>Cablecom</strong>'s CHF 150.0 million Existing Revolving Credit Facility have agreed to make available to<br />
<strong>Cablecom</strong> and certain of its subsidiaries a new revolving credit facility (New Revolving Credit Facility) in<br />
an aggregate principal amount not to exceed CHF 150.0 million to replace the Existing Revolving Credit<br />
Facility. To date, the Existing Revolving Credit Facility remains in place and the New Revolving Credit<br />
Facility will not be available for borrowing until the Existing Revolving Credit Facility is cancelled.<br />
Pursuant to the Change of Control Offer, on December 8, 2005 <strong>Cablecom</strong> used CHF 268.7 million of<br />
proceeds from the Facility A Term Loan under the Bank Facility to (i) purchase CHF 131.0 million of the<br />
Series A CHF Senior Secured Notes, (ii) EUR 81.4 million of Series A and B EUR Senior Secured Notes,<br />
(iii) EUR 0.1 million of the Senior Notes and (iv) fund the costs and expenses of the Change of Control<br />
Offer. In addition, the lenders under the Existing Revolving Credit Facility waived their prepayment right<br />
resulting from the change of control. See Note 6 to the consolidated financial statements.<br />
On December 15, 2005, we notified the remaining bondholders to redeem all the remaining outstanding<br />
Senior Secured Notes not tendered in the Change of Control Offer (the Redemption), at a redemption price<br />
of 102% of their respective principal amounts, plus accrued and unpaid interest. On January 20, 2006, we<br />
used CHF 349.3 million and CHF 335.8 million from Facility A and Facility B CHF Term Loans,<br />
respectively and EUR 229.1 million from Facility B EUR Term Loan to fund the Redemption. Following<br />
the Redemption, all amounts available under Facility A and Facility B had been drawn. See Note 6 to the<br />
consolidated financial statements.<br />
Our principal uses of cash following the 2006 refinancing will be for capital expenditures and for debt<br />
service. We expect to fund these requirements with cash flows from our operating activities, cash on hand,<br />
and, subject to satisfaction of certain conditions to borrowing, from borrowings under our Existing<br />
Revolving Credit Facility.<br />
The principal risks to our sources of liquidity are operational risks, including risks associated with decreased<br />
pricing, reduced subscriber growth, increased technology and marketing costs and other consequences of<br />
increased competition.<br />
Our ability to service our debt and to fund our ongoing operations will depend on our future operating<br />
performance and ability to generate cash. These depend to some extent on general economic, financial,<br />
competitive, market, legislative, regulatory and other factors, many of which are beyond our control, as well<br />
as other factors discussed under “Risk Factors” or elsewhere in this Annual Report.<br />
We currently believe that our operating cash flows and available cash, together with available borrowings<br />
under the Existing Revolving Credit Facility will be sufficient to fund our working capital needs, anticipated<br />
capital expenditure and debt service requirements for at least the next several years, although we cannot<br />
assure you that this will be the case.<br />
43
Consolidated Cash Flow Statement<br />
The following table sets out the components of our cash flows for each of the periods presented.<br />
Year ended December 31,<br />
2005 2004<br />
(CHF in thousands)<br />
Net cash provided by (used in) operating activities ................. 249,106 252,765<br />
Net cash provided by (used in) investing activities.................. (235,322) (189,701)<br />
Net cash provided by (used in) financing activities ................. 45,882 (143,002)<br />
Effect of exchange rates on cash .............................................. - (28)<br />
Net increase/ (decrease) in cash and cash equivalents ........ 59,666 (79,966)<br />
During 2005, we used net cash provided by our operating activities of CHF 249.1 million, net cash provided<br />
by financing activities of CHF 45.9 million to fund net cash used in our investing activities of CHF 235.3<br />
million and increased our existing cash and cash equivalents balance by CHF 59.7 million.<br />
The net cash used by our investing activities during 2005 includes cash paid for acquisitions of CHF 6.0<br />
million capital expenditures of CHF 248.1 million, cash received from disposition of property and<br />
equipment of CHF 41.4 million and the net effect of other less significant sources and uses of cash.<br />
We have incurred, and may continue to incur, significant capital expenditure to fund the construction,<br />
maintenance and insurance of our network and the development, marketing and distribution of our services.<br />
The following table summarizes our capital expenditure for the periods set out below.<br />
Year ended December 31,<br />
2005 2004<br />
(CHF in thousands)<br />
Real estate ............................................................................ 732 46<br />
Communications equipment................................................. 174,837 140,902<br />
Other tangible assets / Construction in progress .................. 72,576 54,577<br />
Capital expenditures/fixed asset increases........................ 248,145 195,525<br />
We incurred capital expenditures of CHF 248.1 million and of CHF 195.5 million in 2005 and 2004,<br />
respectively. The increase in capital expenditures is mainly related to our subscriber growth and generally<br />
increasing capacity requirements that accompany subscriber growth. In future periods, we expect to<br />
continue to focus on increasing the penetration of services in our existing upgraded footprint and efficiently<br />
deploying capital aimed at services that result in positive net cash flows. During 2005, the cash provided by<br />
our financing activities was CHF 45.9 million. Such amount includes primarily net borrowings of CHF 93.3<br />
million, payment on financing costs of CHF 28.9 million, CHF 15.0 million cash paid to Glacier Holding<br />
S.C.A, our previous ultimate parent company.<br />
During 2004, we used net cash provided by operating activities of CHF 252.8 million as well as CHF 80.0<br />
million of our cash and cash equivalents balances to fund net cash used in our investing activities of CHF<br />
189.7 million and net cash used in our financing activities of CHF 143.0 million. The net cash used by our<br />
investing activities was CHF 189.7 million. Such amount includes capital expenditures of CHF 195.5<br />
million, and cash received from disposition of property and equipment of CHF 5.3 million. The net cash<br />
44
used by our financing activities was CHF 143.0 million. Such amount includes the net repayment of debt of<br />
CHF 93.0 million, including the impact of the 2004 debt refinancing, capital contribution received of CHF<br />
20.0 million and payment on financing costs of CHF 69.7 million.<br />
Off Balance Sheet Arrangements and Aggregate Contractual Obligations<br />
Off Balance Sheet Arrangements<br />
In the ordinary course of business, we have provided indemnifications to (i) purchasers of certain of our<br />
assets, (ii) our lenders, (iii) our vendors, and (iv) other parties. In addition, we have provided performance<br />
and/or financial guarantees to local municipalities, our customers and vendors. Historically, these<br />
arrangements have not resulted in making any material payments and we do not believe that they will result<br />
in material payments in the future.<br />
Commitments and Contingencies<br />
Our determination of the treatment of contingent liabilities in the financial statements is based on a view of<br />
the expected outcome of the applicable contingency. We consult legal counsel on matters related to<br />
litigation. We also consult with experts both within and outside <strong>Cablecom</strong> with respect to other matters that<br />
arise in the ordinary course of business. Examples of such matters that are based on assumptions, judgments<br />
and estimates are amounts to be paid to terminate certain agreements included in restructuring charges and<br />
amounts to be paid to settle certain other liabilities. A liability is accrued if the likelihood of an adverse<br />
outcome is probable of occurrence and the amount can be estimated. See Note 15 to our consolidated<br />
financial statements.<br />
Television distribution, Internet, telephony and content businesses are regulated in Switzerland. Adverse<br />
regulatory developments could subject our businesses to a number of risks. Regulation could limit growth,<br />
revenue and the number and types of services offered. In addition, regulation may restrict our operations and<br />
subject them to further competitive pressure, including pricing restrictions, interconnect and other access<br />
obligations, and restrictions or controls on content, including content provided by third parties. Failure to<br />
comply with current or future regulation could expose our businesses to various penalties.<br />
In addition to the foregoing items, we have contingent liabilities related to legal proceedings and other<br />
matters arising in the ordinary course of business. In our opinion, it is expected that amounts, if any, which<br />
may be required to satisfy such contingencies will not be material in relation to our consolidated financial<br />
statements.<br />
Contractual Obligations<br />
The following table summarizes contractual obligations, commercial commitments and payments under<br />
property leases.<br />
Payments due by period from December 31, 2005<br />
Less than 1-3 3-5 More than<br />
Total 1 year years years 5 years<br />
Operating leases................................... 81.4 15.7<br />
(CHF in millions)<br />
24.7 15.9 25.0<br />
Other commitments.............................. 10.2 7.3 2.7 0.2 -<br />
Total contractual obligations................ 91.6 23.0 27.4 16.2 25.0<br />
See Note 13 and 15 to our consolidated financial statements.<br />
45
In addition to the commitments set forth in the table above, we have commitments under agreements with<br />
programming vendors, franchise authorities and municipalities, and other third parties pursuant to which we<br />
expect to make payments in future periods. Such amounts are not included in the above table because they<br />
are not fixed or determinable due to various factors.<br />
The following table sets forth our contractual long- and other short-term debt obligations after giving effect<br />
to the 2006 Refinancing, as they fall due for payment.<br />
Payments due by period following the Refinancing<br />
Less than 1-3 3-5 More than<br />
Total 1 year years years 5 years<br />
(CHF in millions)<br />
Long-term and other short-term debt... 1,786.1 7.4 14.6 633.1 1,131.0<br />
See Note 6 to our consolidated financial statements.<br />
Financial Derivatives<br />
See Note 7 to our consolidated financial statements.<br />
46
Management of <strong>Cablecom</strong><br />
Board of Directors of <strong>Cablecom</strong> Holdings AG<br />
MANAGEMENT AND GOVERNANCE<br />
The Board of Directors of <strong>Cablecom</strong> Holdings AG, the direct parent company of the Issuer, currently<br />
consists of seven directors. The table below sets out their names, their ages and their current positions.<br />
Name Age Position<br />
Gene Musselman.................................... 62 President and COO of UPC Broadband<br />
Robert Dunn........................................... 39 Chief Financial Officer of UPC Broadband<br />
Anton Tuijten......................................... 44 SVP and General Counsel of Liberty Global Europe<br />
Bernd Kleinsteuber ................................ 40 Vice President Legal & Regulatory of <strong>Cablecom</strong><br />
Rolf Watter............................................. 47 Chairman<br />
Walter Bosch.......................................... 61 Independent Director<br />
Klaus Hug .............................................. 65 Independent Director<br />
Rolf Watter has been a partner in the law firm Bär & Karrer in Zurich since 1994 and is a member of its<br />
executive board; he further serves as a part-time professor at the University of Zurich. He is a Director of<br />
Zurich Financial Services AG (and its subsidiary Zurich Insurance AG), Syngenta AG, Forbo Holding AG<br />
(and its subsidiary Forbo Finanz AG), Feldschlösschen Getränke Holding AG, UBS Alternative Portfolio<br />
AG and A.W. Faber-Castell (Holding) AG, in addition to being a Board member of the Swiss Lawyers’<br />
Association and a member of the SWX admission board and of the Commission of Experts on Disclosure of<br />
Shareholdings. From 2002 until September 2003 he was a non-executive Director of Centerpulse AG. Mr.<br />
Watter graduated from the University of Zurich with a doctorate in law and holds a LLM degree from<br />
Georgetown University.<br />
Gene W. Musselman became President and Chief Operating Officer of the UPC Broadband division in<br />
September 2003. He serves as a Director or Supervisory Board member for a number of Liberty Global’s<br />
European subsidiary cable operations, including Austria, Belgium, France, Hungary, Ireland, the<br />
Netherlands, Poland, Sweden and Switzerland. He became Chief Operating Officer of the UPC<br />
Broadband division in April 2000 and was a member of its Board of Management from June 2000 to<br />
September 2003. In September 1997, he became Chief Operating Officer and shortly thereafter Chief<br />
Executive Officer of Telekabel Wien, an Austrian subsidiary, where he was awarded the “Silver Medal<br />
for Services to the Province of Vienna” in recognition of his contribution and extraordinary services in<br />
2004. He has been actively involved in the cable industry for more than 25 years. Mr. Musselman<br />
attended Loyola University of Chicago where he obtained his Masters degree in Industrial Relations.<br />
Robert Dunn became Chief Financial Officer of the UPC Broadband division in February 2001. He<br />
serves as a Director or Supervisory Board member for a number of Liberty Global’s European subsidiary<br />
cable operations, including Austria, Belgium, France and Poland. Before joining UPC NV as a Managing<br />
Director of Finance and Accounting in May 2000, he was Group Financial Controller of a Pan European<br />
metal packaging company. Furthermore, he was part of Price Waterhouse’s Transaction Sevices Group<br />
and started his career as an audit manager. Mr. Dunn graduated from City University Business School in<br />
London and is a Chartered Accountant in England and Wales.<br />
Anton M. Tuijten, as General Counsel and Senior Vice President of Liberty Global Europe, Ton oversees<br />
legal strategy, regulatory issues and public policy for Liberty Global Europe’s European country<br />
operations. His focus areas include mergers and acquisitions and competition law.<br />
47
Mr. Tuijten joined the company in September 1998 as UPC’s Vice President of Legal Services. In May<br />
1999, he was promoted to UPC’s General Counsel. Before joining UPC, Ton served as General Counsel and<br />
Company Secretary at Unisource, an international telecommunications company. Prior to this, he served as<br />
Senior Corporate Lawyer at KPN. Ton is a member of the International Bar Association and the Dutch<br />
Association of Business Lawyers. In 2003, Ton was named “European General Counsel of the Year” by<br />
Legal Week Magazine. Ton received a Law degree specializing in business and competition law from<br />
Leiden University in the Netherlands in 1986.<br />
Bernd Kleinsteuber joined <strong>Cablecom</strong> in July 2002 as Legal Counsel Regulatory Affairs. Since April<br />
2004, as Vice President Legal & Regulatory, he is responsible for regulatory affairs and the legal<br />
department. Prior to joining <strong>Cablecom</strong>, Bernd Kleinsteuber was responsible for legal and regulatory<br />
affairs of Energis (Switzerland) AG and its subsidiaries in various European countries and the US.<br />
Previously he worked for o.tel.o, the alternative German carrier in Düsseldorf and as an attorney-at-law at<br />
Rittershaus, Wissmann & von Rosenstiel, a law firm in Mannheim and Frankfurt/Germany. Bernd<br />
Kleinsteuber holds a decree in law and is admitted to the bar in Germany and a registered foreign lawyer in<br />
Switzerland.<br />
Walter Bosch was appointed to the board of <strong>Cablecom</strong> in March 2004. Mr. Bosch is an entrepreneur and a<br />
consultant. Mr. Bosch serves as Vice-Chairman on the Board of Swiss International Airlines, is a Delegate<br />
of the Board of Euphonix Inc., and a board member of Business Development Partners AG, STAR TV, as<br />
well as the Swissaid and FIS charities in Switzerland. Mr. Bosch was the founder of the advertising agency<br />
“Bosch & Butz.” Previously, Mr. Bosch was the President of Ringier, the largest publishing house in<br />
Switzerland, and Chief Editor of several Swiss publications. Mr. Bosch is a graduate of the University of St.<br />
Gallen and Berlin in economics and management.<br />
Klaus Hug has been a member of the board of <strong>Cablecom</strong> since July 2005. Mr. Hug is an attorney-at-law<br />
and member of the board of Affichage Holding SA in Geneva and serves a board member of several other<br />
Swiss companies. He is member of the Competition Commission. Previously he acted as secretary to the<br />
minister of justice and as the director of the Federal Office for Industry and Labour. Formerly he also was<br />
President of the Federal Institute of Intellectual Property. Klaus Hug graduated from the University of<br />
Zurich with a doctorate in law.<br />
Management of <strong>Cablecom</strong><br />
The table below sets out the names of the members of management team, their ages and their current<br />
principal positions.<br />
Name Age Position<br />
Herbert Hribar.................. 54 Executive Vice President, Managing Director ad interim<br />
Rudolf Fischer.................. 49 Executive Vice President, Managing Director<br />
Guido Winkelman............ 35 Executive Vice President, Chief Financial Officer<br />
Herbert Hribar was appointed Managing Director ad interim after the acquisition of <strong>Cablecom</strong> by Liberty<br />
Global in October 2005. He will leave <strong>Cablecom</strong> at the end of June 2006. Mr. Hribar joined <strong>Cablecom</strong> as<br />
Chief Operating Officer in January 2005. In this position he is responsible for the network, IT, and customer<br />
care business. Prior to joining <strong>Cablecom</strong>, Mr. Hribar was managing director of the Wholesale and Network<br />
division of eircom, the former Irish PTT, where he led the turn-around of that division and was instrumental<br />
in bringing eircom back to the market in 2004. He has a wide range of experience in telecommunications<br />
including President of Ameritech Cellular, managing director of Ameritech Europe and President and Chief<br />
Operating Officer of Verio, an industry leading ISP acquired by NTT in 2001. Mr. Hribar graduated from<br />
48
the U.S. Naval Academy in 1974 and holds advanced degrees in engineering, business, and computer<br />
science.<br />
Rudolf Fischer joined <strong>Cablecom</strong> in September 2001 and was appointed to the Board of Directors in<br />
November 2003. From January 2005 until March 2006, he has been the Managing Director for the<br />
operational business and is the contact person for representatives from the public, politics, authorities and<br />
associations. Effective April 1, 2006, he was appointed Managing Director of <strong>Cablecom</strong>. Prior to joining<br />
<strong>Cablecom</strong>, Mr. Fischer held various positions with Arthur D. Little, most recently as Global Leader of the<br />
Telecoms Consulting Practice (c-quential, a 100% subsidiary of Arthur D. Little). Previously, he was CEO<br />
of Ascom Ericsson Transmission AG, a joint venture between Ascom and Ericsson, a manufacturer of<br />
transmission systems. Mr. Fischer received an MSc. in electrical engineering from the Swiss Federal<br />
Institute of Technology in Zurich (ETH Zurich), and an MBA from the Graduate School of Business<br />
Administration in Zurich.<br />
Guido Winkelman joined <strong>Cablecom</strong> in January 2006 as Chief Financial Officer. Previously, he held several<br />
positions at the UPC Broadband Group for more than seven years. Most recently, he was Director of<br />
Acquisition and Financial Integration at UPC NV responsible for the financial and operational due diligence<br />
on all potential acquisitions and for the post-acquisition financial integration. Before that, he was CFO of<br />
UPC Sverige AB and Vice President Fiscal Affairs at UPC NV. Prior to joining UPC Broadband, he was a<br />
tax consultant at Arthur Andersen. Guido Winkelman graduated in tax law at the University of Leiden.<br />
Compensation<br />
Members of our management team are compensated on the basis of a fixed salary plus a bonus based on<br />
economic and qualitative performance objectives. During the year ended December 31, 2005, the aggregate<br />
compensation paid to our management team was approximately CHF 6.6 million, including bonuses relating<br />
to 2004 performance but excluding other employee benefits. We maintain directors’ and officers’ liability<br />
insurance.<br />
Pension Plans<br />
See Note 12 to our consolidated financial statements.<br />
Management and Corporate Governance of the Issuer<br />
The Issuer is a société en commandite par actions, governed by <strong>Luxembourg</strong> law and its articles of<br />
association (statuts). All matters not governed by the articles of association are determined in accordance<br />
with <strong>Luxembourg</strong> law. The articles of association also determine which decisions require collective<br />
shareholder approval, in addition to those decisions that <strong>Luxembourg</strong> law reserves to the general<br />
shareholders’ meeting.<br />
Pursuant to Article 3 of its articles of association, the purpose of the Issuer is the holding of interests, in any<br />
form whatsoever, in <strong>Luxembourg</strong> and foreign companies and any other form of investment, the acquisition<br />
by purchase, subscription or in any other manner as well as the transfer by sale, exchange or otherwise of<br />
securities of any kind and the administration, control and development of its portfolio. Pursuant to Article 3,<br />
the Issuer may obtain financing through the issuance of bonds or notes of any type, through private<br />
placement or public offering, and may further guarantee, grant loans or otherwise assist the companies in<br />
which it holds a direct or indirect participation or which form part of the same group of companies as the<br />
Issuer. Under Article 3, the Issuer may carry out any commercial, industrial or financial activities which it<br />
may deem useful in accomplishment of its purpose.<br />
49
Manager of the Issuer<br />
In accordance with <strong>Luxembourg</strong> law governing sociétés en commandite par action, the Issuer’s business is<br />
managed by its general partner acting as manager. The general partner, <strong>Cablecom</strong> <strong>Luxembourg</strong> GP S.à r.l., a<br />
company incorporated and existing under the laws of <strong>Luxembourg</strong>, has full executive authority to manage<br />
the Issuer’s business.<br />
The general partner is appointed as manager by the shareholders in the articles of association. The general<br />
partner may only be removed from its position as manager by the shareholders if it consents to such<br />
removal.<br />
The company is validly bound vis-à-vis third parties by the signatures of any duly appointed representatives<br />
of its general partner, or by the signature (s) of any other person (s) to whom authority has been delegated<br />
by the general partner for specific transactions.<br />
Under <strong>Luxembourg</strong> law, the general partner acting as manager of the Issuer convenes shareholders meetings<br />
and presents the company’s financial statements to the shareholders for their approval.<br />
Managers of the general partner of the Issuer<br />
The general partner is managed by one or more managers, who are appointed by the shareholder (s) of the<br />
general partner and who serve until their death, resignation or removal, with or without cause, by the<br />
shareholders of the general partner or until the winding up of the general partner.<br />
The general partner currently has four managers elected for an unlimited period of time. There is no<br />
limitation on the duration of a term of a manager of the general partner.<br />
The current managers of the general partner are the following persons:<br />
a) Jeremy Evans, <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A., 398, route d’Esch, Alter Domus Business Centre, 3e<br />
étage, L-1417 <strong>Luxembourg</strong><br />
b) Dennis Okhuijsen, <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A., route d’Esch, Alter Domus Business Centre, 3e<br />
étage, L-1417 <strong>Luxembourg</strong><br />
c) Robert Dunn, <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A., 398, route d’Esch, Alter Domus Business Centre, 3e<br />
étage, L-1417 <strong>Luxembourg</strong><br />
d) Anton Tuijten, <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A., 398, route d’Esch, Alter Domus Business Centre, 3e<br />
étage, L-1417 <strong>Luxembourg</strong><br />
The general partner may be bound in all circumstances by the sole signature of any manager.<br />
Meetings of the managers of the general partner, which are held as often as required, are normally convened<br />
and presided over by the chairman of the board of managers. A quorum consists of two of the managers of<br />
the general partner. Decisions of the managers of the general partner are taken by a vote of the majority of<br />
the managers present or represented by another manager. A manager can give a proxy to another manager<br />
and a manager may represent more than one manager at any particular meeting. Managers represented by<br />
another manager at meetings count for purposes of determining the existence of a quorum. The board of<br />
managers may grant special powers by authentic proxy or power of attorney by private instrument.<br />
50
Managers’ power to vote on agreements in which they are interested<br />
<strong>Luxembourg</strong> law does not provide for any express rules regarding agreements between the Issuer and its<br />
general partner acting as manager, between the Issuer and a manager of its general partner or between the<br />
general partner and one of its managers.<br />
Compensation of the managers of the general partner<br />
In consideration for their services as manager of the Issuer or as managers of the general partner, managers<br />
are entitled to receive managers’ fees (jetons de présence). Managers’ fees are fixed by the general<br />
shareholders’ meeting of the Issuer or of the general partner respectively.<br />
Borrowing powers exercisable by the managers<br />
Under <strong>Luxembourg</strong> law, the general partner, through a board resolution taken by its managers, must give<br />
prior authorization for any security, pledge or guarantee by the Issuer. If the security, pledge or guarantee<br />
has not been previously authorized by the general partner, the security, pledge or guarantee is nevertheless<br />
enforceable against the Issuer if it has been signed by persons authorized to bind the Issuer or by persons<br />
whom third parties of good faith could reasonably believe to be authorized to bind the Issuer.<br />
Summary of terms of the shares issued by the Issuer<br />
The Issuer has issued only one class of shares granting identical rights to all the shareholders. In addition to<br />
the voting rights conferred by law or the articles of association, each share gives a right to a portion of the<br />
Issuer’s net assets on winding-up, in proportion to the number and nominal value of shares outstanding.<br />
The general partner of the Issuer is liable for all liabilities which cannot be paid out of the assets of the<br />
Issuer. The liability of the limited shareholders is limited to their contributions to the company.<br />
General meetings<br />
Annual general meetings and extraordinary general meetings are usually called by the general partner of the<br />
Issuer with 8 days notice. In specific circumstances, annual general meetings and extraordinary general<br />
meetings can be called by the statutory auditors of the company, by an agent designated in court or<br />
indirectly by shareholders holding one fifth of the shares of the company.<br />
Any shareholder can attend the general meetings, upon providing proof of identity and share ownership.<br />
51
DESCRIPTION OF CERTAIN FINANCING ARRANGEMENTS<br />
The following is a summary of the material terms of certain financing arrangements to which we are a party.<br />
The following summaries are not complete and are qualified by reference to the agreements described<br />
below.<br />
Senior Notes<br />
General<br />
On April 14, 2004, the Issuer issued EUR 290.0 million of 9 3⁄8% Senior Notes that mature on April 15,<br />
2014 (The Senior Notes). Following the acquisition of <strong>Cablecom</strong> Holdings AG by Liberty Global<br />
Switzerland Ltd., the Issuer was required to make an offer to purchase the Senior Notes at 101% of their<br />
principal amount as a result of the change of control, whereof EUR 100,000 was redeemed.<br />
Interest Rate<br />
The Senior Notes bear interest at a rate equal to 9 3⁄8% per year. Interest is payable semi-annually on April<br />
15 and October 15 of each year.<br />
Ranking<br />
The Senior Notes are the Issuer’s senior obligations and rank equally in right of payment with all future<br />
unsecured indebtedness of the Issuer that is not subordinated to the Senior Notes, and rank senior in right of<br />
payment to all of the Issuer’s existing and future subordinated indebtedness. The Bank Facility and the<br />
Senior Secured Notes rank senior to the Senior Notes. All of the Senior Secured Notes were redeemed in<br />
December 2005 and January 2006. The Senior Notes are structurally subordinated to all obligations of<br />
<strong>Cablecom</strong>.<br />
Covenants<br />
The indenture for the Senior Notes includes certain covenants which, among other things, restrict the ability<br />
of the Issuer and certain of its subsidiaries to:<br />
• make certain payments, including dividends or make other distributions;<br />
• incur or guarantee debt and issue preferred stock;<br />
• make certain investments or acquisitions, including participating in joint ventures;<br />
• prepay or redeem subordinated debt or equity;<br />
• engage in certain transactions with affiliates and other related parties;<br />
• sell assets, consolidate, merge with or into other companies;<br />
• issue or sell share capital of certain subsidiaries; and<br />
• create certain liens.<br />
52
Security<br />
The Senior Notes are secured by the Subordinated Intercompany Loan Note Assignment on a<br />
second-ranking basis. Pursuant to the Intercreditor Deed, the security interest granted for the benefit of the<br />
holders of the Senior Notes is subject to limitations on enforcement and is subordinated to the first-ranking<br />
security in favor of the Senior Secured Notes as well as the new Bank Facility. All of the Senior Secured<br />
Notes were redeemed in December 2005 and January 2006.<br />
Change of Control<br />
Upon the occurrence of a change of control (which is defined in the indenture governing the Senior Notes),<br />
each holder of the Senior Notes has the right, subject to certain exceptions, to require the Issuer to<br />
repurchase such holder’s Notes at a purchase price in cash equal to 101% of the principal amount thereof,<br />
plus accrued and unpaid interest, if any, to the repurchase date.<br />
Optional Redemption<br />
On and after April 15, 2007, the Issuer will be entitled, at its option, to redeem all or a part of the Senior<br />
Notes upon not less than 30 nor more than 60 days’ notice at the following redemption prices, plus accrued<br />
and unpaid interest to the redemption date, if redeemed during the twelve-month period beginning on April<br />
15 of the years indicated below:<br />
Year<br />
Redemption<br />
Price<br />
2007 ................................................................................................................................................. 109.375%<br />
2008 ................................................................................................................................................. 107.031%<br />
2009 ................................................................................................................................................. 104.688%<br />
2010 ................................................................................................................................................. 103.125%<br />
2011 ................................................................................................................................................. 101.563%<br />
2012 and thereafter.......................................................................................................................... 100.000%<br />
Prior to April 15, 2007, the Issuer may on any one or more occasions redeem up to 40% of the original<br />
principal amount of the Senior Notes with the net cash proceeds of one or more equity offerings at a<br />
redemption price of 109.375% of the principal amount thereof, plus accrued and unpaid interest, if any, to<br />
the redemption date; provided that<br />
(1) at least 60% of the original principal amount of the Senior Notes remains outstanding after each such<br />
redemption; and<br />
(2) the redemption occurs within 120 days after the closing of such equity offering.<br />
In the case of definitive notes, if the optional redemption date is on or after an interest record date and on or<br />
before the related interest payment date, the accrued and unpaid interest, if any, will be paid to the Person in<br />
whose name the Note is registered at the close of business on such record date and no additional interest will<br />
be payable to holders whose Notes will be subject to redemption by the Issuer.<br />
In addition, the Issuer may redeem all, but not less than all, of the Senior Notes in the event of specified<br />
developments affecting taxation at a price equal to 100% of the principal amount thereof with accrued and<br />
unpaid interest.<br />
53
Events of Default<br />
The indenture for the Senior Notes provides for events of default which, if any of them occurs, would permit<br />
or require the principal of and accrued interest on the Senior Notes to become or to be declared due and<br />
payable.<br />
Senior Secured Notes<br />
General<br />
On April 8, 2005, <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. issued CHF 390.0 million of floating rate Senior Secured<br />
Notes that mature on April 15, 2010 (the “Series A CHF Notes”), EUR 200.0 million of floating rate senior<br />
secured notes that mature on April 15, 2010 (the “Series A Euro Notes” and, together with the Series A<br />
CHF Notes, the “Series A Notes”) and EUR 375.0 million of floating rate senior secured notes that mature<br />
on April 15, 2012 (the “Series B Notes” and, together with the Series A Notes, the “Senior Secured Notes”).<br />
All of the Senior Secured Notes were redeemed in December 2005 and January 2006.<br />
Existing Revolving Credit Facility<br />
General<br />
On April 8, 2005, <strong>Cablecom</strong> GmbH and <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. entered into a credit agreement (the<br />
‘‘Existing Revolving Credit Facility’’) with, among others, Goldman Sachs International, Deutsche Bank<br />
AG London and Credit Suisse First Boston as arrangers. The credit agreement provides for a revolving<br />
credit facility of up to CHF 150 million), which is available for drawing in Swiss francs by <strong>Cablecom</strong><br />
GmbH and certain of its subsidiaries (subject to its terms and conditions).<br />
Interest rates and fees<br />
Advances under the Existing Revolving Credit Facilty bears interest for each interest period at a rate per<br />
annum equal to LIBOR, plus a margin of 2.25% per annum, plus mandatory costs (if any). The margin is<br />
not subject to adjustment. In addition to paying interest on advances under the Exisiting Revolving Credit<br />
Facilty, <strong>Cablecom</strong> GmbH is required to pay a commitment fee to the lenders under the Existing Revolving<br />
Credit Facilty in respect of the unutilized commitments thereunder at a rate of 0.75% per annum. It has also<br />
agreed to pay certain agency fees to the facility agent and the security agent.<br />
Guarantees and security<br />
The Exisiting Revolving Credit Facilty requires the provision of the following security in favor of the<br />
lenders to secure the obligations of <strong>Cablecom</strong> GmbH and <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A.:<br />
• a first-ranking pledge by <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. of its shares in <strong>Cablecom</strong> GmbH;<br />
• a first-ranking security assignment by <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. of certain inter-company<br />
loan notes; and<br />
• a first-ranking security assignment by <strong>Cablecom</strong> GmbH and certain other members of the<br />
<strong>Cablecom</strong> group of their bank accounts (subject to certain exceptions).<br />
<strong>Cablecom</strong> GmbH, any other borrowers of the Exisiting Revolving Credit Facility and <strong>Cablecom</strong><br />
<strong>Luxembourg</strong> S.C.A. are required to provide a guarantee of each of the other borrowers’ obligations under<br />
the Existing Revolving Credit Facilty in favor of the lenders.<br />
54
Maturity<br />
Each advance made under the Existing Revolving Credit Facilty are repayable on the last day of the interest<br />
period relating thereto and amounts repaid may be redrawn during the availability period (subject to certain<br />
conditions), provided that all amounts outstanding under the Existing Revolving Credit Facilty will be<br />
repayable in full on April 8, 2010 (the ‘‘Final Maturity Date’’).<br />
Availability of the Existing Revolving Credit Facility and use of proceeds<br />
The proceeds of the Existing Revolving Credit Facility are, subject to the satisfaction of conditions<br />
precedent, available for the period from (and including) the signing date to the date falling one month prior<br />
to the Final Maturity Date. The Existing Revolving Credit Facility may be used to finance working capital<br />
and for the general corporate purposes of the borrowers (including capital expenditure and acquisitions).<br />
Voluntary and mandatory prepayment<br />
Subject to the giving of notice and certain minimum amounts, the Existing Revolving Credit Facility<br />
agreement allows for voluntary prepayments of outstanding advances (in whole or in part) at any time. The<br />
Existing Revolving Credit Facilty requires mandatory prepayment of all amounts outstanding thereunder<br />
following the occurrence of any event or circumstance in which the Senior Secured Notes are required by<br />
their terms to be redeemed in full (or in which an offer to purchase all of the Senior Secured Notes is<br />
required to be made), or in certain circumstances, after application of funds to make an offer to purchase the<br />
notes, and following the expiry of any grace period or notice period applicable thereto. In addition, the<br />
Existing Revolving Credit Facilty requires mandatory repayment in part of all amounts outstanding<br />
thereunder following the occurrence of any event or circumstance in which the Senior Secured Notes are<br />
required by their terms to be redeemed in part (or in which an offer to purchase part only of the Senior<br />
Secured Notes is required to be made). All amounts required to be applied in partial prepayment will be<br />
applied, first, to the Senior Secured Notes and, second, in the event of any remaining amounts, towards<br />
prepayment of the Existing Revolving Credit Facility (and any amounts so prepaid will result in a<br />
permanent reduction of the lenders’ commitments thereunder). In addition, the Existing Revolving Credit<br />
Facilty requires mandatory repayment of all amounts outstanding thereunder following the occurrence of a<br />
change in control. As defined in the Exisitng Revolving Credit Facilty, a change of control includes, among<br />
other things: (1) any ‘‘person’’ or ‘‘group’’ of related persons (as such terms are used in Sections 13(d) and<br />
14(d) of the Exchange Act), other than one or more specified permitted holders, is or becomes the beneficial<br />
owner, directly or indirectly, of more than 50% of the total voting power of the voting stock of <strong>Cablecom</strong><br />
<strong>Luxembourg</strong> S.C.A. (or its successor) (for the purposes of this clause, such person or group shall be deemed<br />
to beneficially own any voting stock of <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. held by a parent entity, if such<br />
person or group beneficially owns, directly or indirectly, more than 50% of the voting power of the voting<br />
stock of such parent entity); and (2) the first day on which a majority of the members of the board of<br />
directors of <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. are not nominated for election or elected to the board of<br />
directors with the approval of a majority of the then members of its board of directors. All prepayments<br />
under the Existing Revolving Credit Facility shall be made in full, without penalty or premium, but subject<br />
to payment of broken funding costs if not made on the last day of an interest period. The lenders under the<br />
Existing Revolving Credit Facility waived their prepayment right resulting from the change of control.<br />
Representations, warranties, undertakings and events of default<br />
The Existing Revolving Credit Facilty contains various customary representations and warranties. In<br />
addition, it contains various affirmative and negative undertakings similar to those contained in the<br />
indenture governing the Senior Secured Notes. The Existing Revolving Credit Facilty does not contain any<br />
financial maintenance covenants. The Existing Revolving Credit Facilty provides for events of default<br />
55
which, if any of them occurs, would permit or, if instructed by the lenders, require the facility agent to<br />
terminate the availability of the Existing Revolving Credit Facility, declare any outstanding advances due<br />
and payable, require the borrowers to repay their outstanding liabilities and/or enforce any security.<br />
Bank Facility<br />
General<br />
On December 5, 2005, <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. entered into a new facilities agreement (the “Bank<br />
Facility”) with certain banks and financial institutions. The Bank Facility provides the terms and conditions<br />
upon which (i) the lenders have made available to <strong>Cablecom</strong> <strong>Luxembourg</strong> two term loans (Facility A and<br />
Facility B) in an aggregate principal amount not to exceed CHF 1.330 billion and (ii) the existing revolving<br />
lenders under <strong>Cablecom</strong> GmbH's CHF 150.0 million Existing Revolving Credit Facility have agreed to<br />
make available to <strong>Cablecom</strong> GmbH and certain of its subsidiaries a New Revolving Credit Facility in an<br />
aggregate principal amount not to exceed CHF 150.0 million in replacement of the Existing Revolving<br />
Credit Facility. To date, the Existing Revolving Credit Facility remains in place and the New Revolving<br />
Credit Facility will not be available for borrowing until the Existing Revolving Credit Facility is cancelled.<br />
Facility A is a CHF facility of CHF 618.48 million that matures on December 31, 2010 (“Facility A”),<br />
Facility B was split into a CHF 355.76 million facility (the “CHF Facility B”) and a EUR 229.08 million<br />
facility (“EUR Facility B”) that matures in accordance with the following installments (1% on a yearly<br />
basis, starting December 31, 2006 up to December 31, 2011 with final repayment on September 31, 2012).<br />
As discussed below, Facility A was partly drawn in December 2005 and both Facility A and Facility B were<br />
fully drawn on January 20, 2006.<br />
The Bank Facility includes an accession mechanism under which the term loan lenders agree to roll their<br />
participations in the term loans into UPC Broadband Holding B.V.’s existing senior secured credit facility,<br />
originally dated 16 January 2004, as amended from time to time (the “UPCB Facility”), at the election of<br />
<strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. at any time, subject to there being no actual event of default (as defined<br />
therein) under the Bank Facility or actual or potential event of default (as defined therein) under the UPCB<br />
Facility and provided that any amendments or waivers granted by the lenders under the UPCB Facility have<br />
been approved by applicable <strong>Cablecom</strong> term loan lenders.<br />
Interest Rate<br />
Interest periods can be chosen by the borrower: 1, 2, 3, 6 months or any other period agreed. The interest<br />
varies per Facility. Facility A bears interest at a rate per annum equal to CHF Libor + 2.50%. The CHF<br />
Facility B bears interest at a rate per annum equal to CHF LIBOR + 2.75% for the first nine months<br />
following drawdown and then decreasing to CHF LIBOR + 2.50%. The EUR Facility B bears interest at a<br />
rate per annum equal to EURIBOR + 2.50%.<br />
Ranking<br />
The Bank Facility ranks pari passu to the Senior Secured Notes and the Existing Revolving Credit Facility.<br />
On April 15, 2004, <strong>Cablecom</strong> GmbH and <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. entered into an intercreditor deed<br />
with, among others, Deutsche Bank AG, London and Deutsche Bank Trustee Company Limited as amended<br />
by a supplemental deed dated April 8, 2005 as well as a second supplemental deed dated December 6, 2005<br />
pursuant to which the Bank Facility effectively rank pari passu with the Senior Secured Notes and the<br />
CHF 150.0 million Existing Revolving Credit Facility of <strong>Cablecom</strong> GmbH and rank senior to the Senior<br />
Notes. The intercreditor deed contains customary undertakings by, among others, <strong>Cablecom</strong> GmbH and<br />
<strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. to give effect to the ranking of the Bank Facility, the Senior Secured Notes,<br />
the Existing Revolving Credit Facility and the Senior Notes.<br />
56
Covenants<br />
The Bank Facility includes covenants which, among other things, restrict the ability of <strong>Cablecom</strong><br />
<strong>Luxembourg</strong> S.C.A. and certain of its subsidiaries to:<br />
• pay dividends or make other distributions<br />
• make certain other restricted payments and investments<br />
• incur additional indebtedness<br />
• create or permit to exist liens<br />
• dispose of assets<br />
• merge or consolidate with other entities; and<br />
• enter into transactions with affiliates<br />
It also contain following financial covenants:<br />
• maximum leverage (total, Senior)<br />
• minimum total interest coverage; and<br />
• minimum debt services coverage<br />
Security<br />
The Bank Facility is secured by certain inter-company loan notes as well as all shares in <strong>Cablecom</strong> GmbH,<br />
all on a first-ranking basis.<br />
Change of Control<br />
Upon delivery of notice regarding the occurrence of a change of control, the Borrowers will if the Majority<br />
Lenders so require, be required to repay all outstanding loans under the Bank Facility together with accrued<br />
and unpaid interest immediately. As defined in the Bank Facility, a change of control will occur if (1) UGC<br />
and the Permitted Holders (as defined therein) cease to (i) directly or indirectly own more than 50% of the<br />
issued share capital of UGCE Inc.; and (ii) to control UGCE Inc; or (2) UGCE Inc. does not or ceases to<br />
own directly or indirectly through one or more of its subsidiaries or other persons controlled by it, the legal<br />
and beneficial interest in more than 50% of the voting and economic rights attaching to the issued share<br />
capital of, or otherwise ceases to control, <strong>Cablecom</strong> Holdings AG (except as a result of a merger or<br />
consolidation of <strong>Cablecom</strong> Holdings AG with or into a shareholder); or (3) <strong>Cablecom</strong> Holdings AG does<br />
not or ceases to own, directly or indirectly through one or more of its subsidiaries or other persons<br />
controlled by it, the legal and beneficial interest in 100% of the voting and economic rights attaching to the<br />
issued share capital of, or otherwise ceases to control, each of <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. and <strong>Cablecom</strong><br />
GmbH..<br />
57
Voluntary Prepayment<br />
The Bank Facility and the New Revolving Credit Facility may be voluntarily prepaid, in whole or in part<br />
(subject to certain de minimus thresholds), but subject to break funding costs.<br />
Events of Default<br />
The Bank Facility provides for events of default which would permit or require the principal of and accrued<br />
interest on the Bank Facility to become or to be declared immediately due and payable.<br />
58
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS<br />
Since January 1, 2004, material transactions between us and related parties, excluding intercompany<br />
indebtedness, included the following arrangements.<br />
• Costs totaling CHF 5.2 million have been allocated to <strong>Cablecom</strong> by Liberty Global Switzerland<br />
and related companies after October 24, 2005.<br />
All of the arrangements listed below were terminated or are no longer applicable as a result of Liberty<br />
Global Switzerland’s acquisition of <strong>Cablecom</strong> on October 24, 2005:<br />
• The Shareholders’ Agreement by and among Glacier Holdings S.C.A., Glacier Holdings GP S.A.,<br />
and each of the Company’s and Manager’s shareholders, dated November 12, 2003. This<br />
agreement, among other things, provided the terms and conditions of the governance and<br />
management of the various parties.<br />
• Implementation of a management equity participation plan as of November 11, 2004 for senior<br />
management of <strong>Cablecom</strong>.<br />
• Costs totaling CHF 4.3 million and CHF 8.6 million have been incurred by Glacier on behalf of<br />
<strong>Cablecom</strong> and have been recorded as a component of SG&A during the period from January 1,<br />
2005 to October 24, 2005 and the year ended December 31, 2004, respectively.<br />
• <strong>Cablecom</strong> agreed to pay a special distribution of CHF 15.0 million to Glacier which has been<br />
recorded as a transfer to Glacier Holdings S.C.A. in the consolidated statement of shareholders’<br />
equity and in accrued expenses in the balance sheet at December 31, 2004.<br />
59
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS<br />
Report of Independent Auditors.............................................................................................................F-2<br />
Financial Statements<br />
Consolidated Balance Sheets .....................................................................................................................F-3<br />
Consolidated Statements of Operations and Comprehensive Loss............................................................F-4<br />
Consolidated Statements of Shareholders’ Equity.....................................................................................F-5<br />
Consolidated Statements of Cash Flows....................................................................................................F-6<br />
Notes to Consolidated Financial Statements..............................................................................................F-8<br />
F- 1
Report of Independent Auditors<br />
The Board of Directors and Shareholders of <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. and subsidiaries<br />
We have audited the accompanying consolidated balance sheets of <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. and<br />
subsidiaries (the “Company”) as of December 31, 2005 and 2004, and the related consolidated statements of<br />
operations and comprehensive loss, shareholders’ equity and cash flows for the years then ended. These<br />
financial statements are the responsibility of the Company’s management. Our responsibility is to express<br />
an opinion on these financial statements based on our audits.<br />
We conducted our audits in accordance with auditing standards generally accepted in the United States.<br />
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the<br />
financial statements are free of material misstatement. We were not engaged to perform an audit of the<br />
Company’s internal control over financial reporting. Our audits included consideration of internal control<br />
over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,<br />
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over<br />
financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test<br />
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting<br />
principles used and significant estimates made by management, and evaluating the overall financial<br />
statement presentation. We believe that our audits provide a reasonable basis for our opinion.<br />
In our opinion, the financial statements referred to above present fairly, in all material respects, the<br />
consolidated financial position of <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. and subsidiaries at December 31, 2005 and<br />
2004, and the consolidated results of their operations and their cash flows for the years then ended in<br />
conformity with accounting principles generally accepted in the United States.<br />
Ernst & Young AG<br />
/s/ Yves Vontobel /s/ Michael Fischer<br />
Yves Vontobel Michael Fischer<br />
Swiss Certified Accountant Certified Public Accountant<br />
(in charge of the audit)<br />
Zurich, Switzerland<br />
March 20, 2006<br />
F- 2
(CHF in thousands, except share amounts)<br />
December 31, December 31,<br />
2005 2004<br />
Assets<br />
Current assets<br />
Cash and cash equivalents<br />
Accounts receivable — trade, less allowance for doubtful accounts of<br />
123'703 64'037<br />
CHF 24,215 in 2005 and CHF 14,115 in 2004 291'703 245'323<br />
Other accounts receivable 6'274 1'914<br />
Unbilled receivables 21'498 21'874<br />
Inventories 11'610 14'238<br />
Financial derivatives 13'996 -<br />
Other current assets 15'078 20'765<br />
Total current assets 483'862 368'151<br />
Non-current assets<br />
Property and equipment, net 1'425'850 1'505'017<br />
Intangible assets, net 198'556 209'450<br />
Investment in affiliates 7'423 6'790<br />
Deferred financing costs 10'254 13'281<br />
Financial derivatives 974 2'479<br />
Other non-current assets 16'783 2'812<br />
Goodwill 788'100 785'077<br />
Total assets 2'931'802 2'893'057<br />
Liabilities and Shareholders' Equity<br />
Current liabilities<br />
Accounts payable 73'791 60'829<br />
Accrued expenses 101'896 58'434<br />
Income taxes payable 2'695 2'087<br />
Financial derivatives 10'528 14'658<br />
Interest payable 19'760 13'606<br />
Current portion of deferred revenue 385'946 358'859<br />
Other current liabilities 43'482 38'855<br />
Current portion of long-term debt and capital leases 3'058 25'813<br />
Total current liabilities 641'156 573'141<br />
Non-current liabilities<br />
Long-term debt and capital leases 1'769'311 1'645'568<br />
Financial derivatives 7'022 21'255<br />
Non-current deferred revenue 40'795 23'083<br />
Pension liability 80'235 90'683<br />
Other non-current liabilities 27'093 13'028<br />
Total liabilities 2'565'612 2'366'758<br />
Commitments and contingent liabilities - -<br />
Minority interest 15'716 13'630<br />
Shareholders' equity<br />
Common stock - Euro 10 par value; authorized 4,384,401 shares;<br />
issued and outstanding 4,384,401 shares in 2005 and in 2004 68'375 68'375<br />
Additional paid-in capital 818'524 670'295<br />
Accumulated other comprehensive income (loss) 15'196 (25'055)<br />
Accumulated deficit (551'621) (200'946)<br />
Total shareholders' equity 350'474 512'669<br />
Total liabilities and shareholders' equity 2'931'802 2'893'057<br />
F- 3
(CHF in thousands)<br />
F- 4<br />
Year Ended Year Ended<br />
December 31, December 31,<br />
2005 2004<br />
Revenues<br />
Operating revenue, net<br />
Operating costs and expenses<br />
831'818 709'148<br />
Cost of goods and services (247'946) (209'532)<br />
Selling, general and administrative (SG&A) (275'423) (215'496)<br />
Stock-based compensation (144'033) (23'675)<br />
Depreciation and amortization (324'123) (296'475)<br />
Restructuring and related charges (12'204) (2'089)<br />
Net gain on disposal of long-lived assets 5'710 1'745<br />
(998'019) (745'522)<br />
Operating loss<br />
Other income (expense)<br />
(166'201) (36'374)<br />
Equity in earnings of affiliates 634 821<br />
Net (loss) gain on derivative instruments (21'559) 16'452<br />
Interest expense, net (101'500) (90'665)<br />
Loss on debt modifications (31'878) (53'812)<br />
Foreign currency (loss) gains, net (20'810) 373<br />
Other non-operating (expense) income (1'595) 2'036<br />
Minority interest (2'725) (2'142)<br />
Loss before income taxes (345'634) (163'311)<br />
Income tax expense (5'041) (4'310)<br />
Net loss (350'675) (167'621)<br />
Foreign currency translation adjustments 10'216 6'488<br />
Unrealized loss on cash flow hedges (423) (31'683)<br />
De-designation of financial hedge instruments 30'458 -<br />
Comprehensive loss (310'424) (192'816)
(CHF in thousands, except share amounts)<br />
Accumulated Other Comprehensive<br />
Income (Loss)<br />
Total<br />
Net Accumulated<br />
Additional Foreign Unrealized Other Total<br />
Common Stock Paid-In Currency Losses on Comprehensive Accumulated Shareholders'<br />
Shares Par Capital Translation Derivatives Income (Loss) Deficit Equity<br />
Contribution of <strong>Cablecom</strong> GmbH 4'384'401 68'375 633'013 140 - 140 (33'325) 668'203<br />
Capital contribution from <strong>Cablecom</strong> Holdings AG - - 20'000 - - - - 20'000<br />
Stock-based compensation - - 23'675 - - - - 23'675<br />
Transfer to Glacier Holdings S.C.A.<br />
Push down of Glacier Holdings S.C.A. expenses<br />
- - (15'000) - - - - (15'000)<br />
(see Note 10) - - 8'607 - - - - 8'607<br />
Net loss<br />
Foreign currency translation<br />
- - - - - - (167'621) (167'621)<br />
adjustments - - - 6'488 - 6'488 - 6'488<br />
Unrealized loss on cash flow hedges - - - - (31'683) (31'683) - (31'683)<br />
Balance, December 31, 2004 4'384'401 68'375 670'295 6'628 (31'683) (25'055) (200'946) 512'669<br />
Stock-based compensation - - 144'033 - - - - 144'033<br />
Push down of Glacier Holdings S.C.A. expenses<br />
(see Note 10)<br />
- - 4'196 - - - - 4'196<br />
Net loss - - - - - - (350'675) (350'675)<br />
Foreign currency translation adjustments - - - 10'216 - 10'216 - 10'216<br />
Unrealized loss on cash flow hedges - - - - (423) (423) - (423)<br />
De-designation of financial hedge instruments - - - - 30'458 30'458 - 30'458<br />
Balance, December 31, 2005 4'384'401 68'375 818'524 16'844 (1'648) 15'196 (551'621) 350'474<br />
F- 5
(CHF in thousands)<br />
December 31, December 31,<br />
2005 2004<br />
Operating activities<br />
Net loss<br />
Adjustment to reconcile net loss to net cash<br />
provided by operating activities<br />
(350'675) (167'621)<br />
Depreciation and amortization 324'123 296'475<br />
Provision for doubtful accounts 10'100 1'749<br />
Stock-based compensation 144'033 23'675<br />
Push down of expenses by Glacier Holdings S.C.A. 4'196 8'607<br />
Equity in earnings of affiliates (634) (821)<br />
Net gain on disposal of assets (5'710) (1'745)<br />
Loss on debt modification 31'878 53'812<br />
Net loss (gain) on derivative instruments 21'559 (16'452)<br />
Minority interest 2'725 2'142<br />
Foreign currency loss (gains), net<br />
Effect of changes in operating<br />
assets and liabilities<br />
20'810 (373)<br />
Accounts receivable trade (54'725) 6'369<br />
Other accounts receivable (4'360) 3'027<br />
Unbilled receivables and other assets (7'852) (18'574)<br />
Inventories 2'628 1'630<br />
Accounts payable 10'610 36'422<br />
Interest payable 6'154 (6'283)<br />
Accrued expenses and other liabilities 48'839 11'439<br />
Income taxes payable 608 (3'561)<br />
Deferred revenue<br />
Net cash provided by<br />
44'799 22'848<br />
operating activities<br />
Inves ting activities<br />
249'106 252'765<br />
Purchase of property and equipment (248'145) (195'525)<br />
Disposition of property and equipment 41'352 5'286<br />
Acquisitions, net of cash acquired (6'010) -<br />
Net cash paid to settle financial derivatives (22'378) -<br />
Other (141) 538<br />
Net cash used in investing activities<br />
Financing activities<br />
(235'322) (189'701)<br />
Capital lease payments (2'921) (1'765)<br />
Payment of financing costs (28'851) (67'571)<br />
Repayment of debt (1'448'338) (1'725'827)<br />
Issuance of debt 1'541'631 1'632'779<br />
Capital contribution from <strong>Cablecom</strong> Holdings AG - 20'000<br />
Transfer to Glacier Holdings S.C.A. (15'000) -<br />
Dividends paid to minority interest<br />
Net cash provided by (used in)<br />
(639) (618)<br />
financing activities<br />
Effect of exchange rate fluctuations on<br />
45'882 (143'002)<br />
cash and cash equivalents - (28)<br />
Increase (decrease) in cash and cash equivalents<br />
Cash and cash equivalents<br />
59'666 (79'966)<br />
Beginning of period 64'037 144'003<br />
End of period 123'703 64'037<br />
F- 6
December 31, December 31,<br />
2005 2004<br />
Supplemental disclosure of cash flow information<br />
Cash paid during the year for interest exclusive<br />
of amounts capitalized (90'811) (141'710)<br />
Additions to property and equipment for capital leases 1'379 2'891<br />
Income taxes paid (1'067) (3'338)<br />
F- 7
1. Organization and Business<br />
<strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. is a holding company incorporated in <strong>Luxembourg</strong> operating cable<br />
communications services primarily in Switzerland through its subsidiary <strong>Cablecom</strong> GmbH, Zurich<br />
(collectively referred to as “<strong>Cablecom</strong>” or the “Company”). Cable communications services, although to a<br />
lesser extent, are also provided to the Austrian market. The Company provides a wide range of services,<br />
including television, telephony and Internet access to its residential customers, as well as data services to<br />
business customers in Switzerland. <strong>Cablecom</strong> began to offer telephony services initially as an extension of<br />
its broadband Internet product in February 2003.<br />
<strong>Cablecom</strong>’s analog cable television service represents the Company’s most significant contributor to<br />
revenue. Additionally, the Company utilized its existing infrastructure and network capacity to develop its<br />
high growth broadband Internet access, digital television service, and fixed-line telephony services to<br />
residential customers while providing advanced data services and wholesale activities to business customers<br />
and third party network operators, respectively.<br />
<strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. was incorporated in <strong>Luxembourg</strong> on March 19, 2004 in order to perform<br />
holding activities of <strong>Cablecom</strong> GmbH and facilitated the financial restructuring of <strong>Cablecom</strong> GmbH in<br />
April 2004. <strong>Cablecom</strong> GmbH was acquired by <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. through its subsidiary CCom<br />
Financing (Gibraltar) Limited through a non-cash issuance of shares as a result of the financial restructuring<br />
and subsequent refinancing. The acquisition of <strong>Cablecom</strong> GmbH was accounted for by <strong>Cablecom</strong><br />
Luxemburg S.C.A. at its historical basis as the transfer occurred between entities under common control. As<br />
the transfer of rights, obligations and risks are substantively in place during 2004, these financial statements<br />
include the results of operations and cash flows of <strong>Cablecom</strong> GmbH for the full period from January 1, 2004<br />
to December 31, 2004.<br />
The Company’s ultimate parent changed on October 24, 2005 when Liberty Global Switzerland Inc.<br />
acquired 100% of the outstanding shares of <strong>Cablecom</strong> Holdings AG from Glacier Holdings S.C.A.,<br />
(“Glacier”). Any adjustments to apply the purchase method of accounting resulting from this transaction<br />
have not been reflected in these consolidated financial statements.<br />
2. Significant Accounting Policies<br />
Basis of Presentation and Use of Estimates<br />
The accompanying consolidated financial statements have been prepared in accordance with accounting<br />
principles generally accepted in the United States and are presented in Swiss Francs (“CHF”), except as<br />
noted.<br />
The preparation of financial statements in conformity with accounting principles generally accepted in the<br />
United States requires management to make estimates and assumptions that affect the amounts reported in<br />
the financial statements and accompanying notes.<br />
The Company uses specialists who have applied certain methods and assumptions in estimating the fair<br />
value of financial instruments, including derivatives, stock compensation and actuarial liabilities associated<br />
with certain benefit plans. In addition, goodwill and long-lived asset impairment tests are assessed using<br />
fair value estimation techniques.<br />
Actual results may differ significantly from those estimates and such differences may be material to the<br />
financial statements. On an ongoing basis, management reviews its estimates based on currently available<br />
information. Changes in facts and circumstances may result in revised estimates.<br />
F- 8
Principles of Consolidation<br />
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries<br />
and entities where the Company’s voting interest is greater than 50%. Significant intercompany accounts<br />
and transactions have been eliminated in consolidation. In those cases where the subsidiaries are not<br />
wholly-owned, the minority interests are separately presented in the consolidated statements of operations<br />
and comprehensive loss and consolidated balance sheets. The Company does not have any significant<br />
variable interests in variable interest entities as contemplated by Interpretation 46(R) “Consolidation of<br />
Variable Interest Entities an Interpretation of ARB No. 51” of the Financial Accounting Standards Board.<br />
Foreign Currency Translation<br />
The financial statements of foreign subsidiaries have been translated into CHF in accordance with Statement<br />
of Financial Accounting Standards (“SFAS”) No. 52, “Foreign Currency Translation.” Balance sheet<br />
accounts have been translated using the current exchange rates at the respective balance sheet dates.<br />
Statement of operations amounts have been translated using the average exchange rates for the respective<br />
periods. The translation gains or losses resulting from the change in exchange rates have been reported as a<br />
component of accumulated other comprehensive income or loss. Foreign currency transaction gains and<br />
losses are included in the statements of operations as incurred.<br />
To the extent that the Company obtains financing in CHF and incurs capital and operating costs in various<br />
other currencies, it will encounter currency exchange rate risks. In addition, the Company’s revenues are<br />
generated in CHF while a portion of its interest and principal obligations are payable in foreign currencies.<br />
These foreign currencies include the European monetary unit (“EUR”) and the U.S. Dollar (“USD”).<br />
Cash Equivalents<br />
Cash equivalents are short-term highly liquid investments purchased with original maturities of three<br />
months or less. Cash equivalents were CHF 15.9 million and CHF 0.9 million at December 31, 2005 and<br />
2004, respectively, which consisted primarily of bank time deposits.<br />
Accounts Receivable Trade and Unbilled Receivables<br />
Trade receivables, which generally have 30-90 day terms, are recognized and carried at original invoice<br />
amount less an allowance for any estimated uncollectible amounts. An allowance for doubtful accounts is<br />
recorded when collection of the full invoice amount is no longer probable. Bad debts are written off when<br />
identified. As discussed under “Revenue Recognition” below, unbilled receivables represent amounts to be<br />
billed for services performed as of the balance sheet date.<br />
Inventory<br />
Inventories are valued at the lower of cost or market value. Raw materials are stated at purchase price on a<br />
weighted average cost basis.<br />
Property and Equipment<br />
Property and equipment are stated at cost less accumulated depreciation which includes amounts capitalized<br />
for labor and overhead incurred in connection with the design and installation of operating equipment.<br />
Installation activities that are capitalized include (i) the initial connection (or “drop”) from the Company’s<br />
cable system to a customer location and (ii) the replacement or the installation for additional services such<br />
as digital cable, telephone or broadband Internet service. Costs of reconnecting customer locations where a<br />
drop already exists and disconnecting customer locations are expensed as incurred. The cost of repair and<br />
maintenance activities are expensed as incurred, while improvements are capitalized and depreciated.<br />
F- 9
Internal costs directly related to the construction of facilities, including payroll and related costs of certain<br />
employees are capitalized.<br />
Depreciation is computed using the straight-line method over the estimated useful lives of the assets.<br />
Estimated useful lives are as follows:<br />
Buildings 33-50 years<br />
Communication network 16 years<br />
Backbone 6-20 years<br />
Other communication equipment 2-6 years<br />
Other equipment 3-6 years<br />
Leasehold improvements are depreciated over the shorter of the asset’s estimated useful life or the lease<br />
term. Depreciation expense was CHF 313.1 million and CHF 285.8 million for the years ended<br />
December 31, 2005 and 2004, respectively.<br />
Goodwill and Intangible Assets<br />
Goodwill is the excess of the purchase price over the fair value of net assets (including identifiable<br />
intangible assets) acquired in business combinations accounted for as purchases. Goodwill is not amortized.<br />
Instead, goodwill is reviewed annually at year-end (or more frequently under certain conditions) for<br />
impairment in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” Intangible assets<br />
consist of customer relationships which represent the portion of the purchase price allocated to the value of<br />
the customer base. Customer relationships are amortized on a straight-line basis over the estimated life of<br />
the customer relationships (22 years).<br />
Impairment of Long-Lived Assets<br />
Long-lived assets, including property and equipment and finite-lived intangible assets, are reviewed for<br />
impairment whenever events or changes in circumstances indicate that the carrying amount may not be<br />
recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of<br />
the asset, a loss is recognized for the difference between the fair value and the carrying value of the asset.<br />
Investment in Affiliates<br />
Investments in which the Company has the ability to exercise significant influence over the investee, but<br />
less than a controlling voting interest, are accounted for using the equity method. Equity method<br />
investments are recorded at original cost and adjusted periodically to recognize the Company’s<br />
proportionate share of the investees’ net income or loss after the date of investment, additional contributions<br />
made and dividends received. The Company periodically evaluates the carrying value of its equity method<br />
investments and performs impairment tests whenever declines in the value of these investments are<br />
considered to be other than temporary.<br />
Deferred Financing Costs<br />
Deferred financing costs are capitalized costs incurred in connection with the issuance of debt and are<br />
amortized using the effective interest method over the term of the related debt as a component of interest<br />
expense. In accordance with Emerging Issues Task Force (“EITF”) Issue 96-19, “Debtor’s Accounting for a<br />
Modification or Exchange of Debt Instruments,” certain financing costs incurred in conjunction with the<br />
refinancing of long-term debt were expensed as incurred and reflected as loss on debt modification in the<br />
statements of operations. Additional direct financing costs associated with the refinancing were capitalized<br />
F- 10
and are being amortized using the effective interest method and reflected as amortization expense in the<br />
statements of operations.<br />
Long-Term Debt<br />
At December 31, 2005 and 2004, long-term debt was recorded and is carried at amortized cost. Long-term<br />
debt is accreted to the face amount of the borrowings using the effective interest method with accretion<br />
included as a component of interest expense in the consolidated statements of operations and comprehensive<br />
loss.<br />
Equity-Based Compensation<br />
As more fully described in Note 10 and 11, the Company accounts for equity-based compensation provided<br />
by Glacier Holdings S.C.A. and principal shareholders to its employees in accordance with the provisions of<br />
Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB<br />
25”), and related interpretations, which allows a company to measure compensation expense based on the<br />
intrinsic value of an award at date of grant for a fixed award or at each balance sheet date for a variable<br />
award. The Company measures the intrinsic value as the difference between the fair value of the relevant<br />
equity based securities provided to employees less any amount paid by the employee. For those awards<br />
subject to graded vesting, the intrinsic value of each vesting tranche is amortized separately over the<br />
relevant vesting period.<br />
The Company has adopted the disclosure only requirements of SFAS No. 123, “Accounting for Stock-<br />
Based Compensation” (“SFAS No. 123”) which allows entities to continue to apply the provisions of APB<br />
25 for transactions with employees and to provide pro forma net income disclosures as if the fair value<br />
based method of accounting described in SFAS No. 123 had been applied to equity-based transactions with<br />
employees. As disclosed in Note 11, there would not have been any impact on net loss had the Company<br />
accounted for its equity compensation awards in accordance with SFAS No. 123 during all the periods<br />
presented in the accompanying consolidated financial statements.<br />
Defined Benefit Plans<br />
The Company maintains various pension plans for its employees. The Company’s plans represent a benefit<br />
for its employees and a cost to the Company. In accordance with SFAS No. 87, “Employers’ Accounting<br />
for Pensions,” certain assumptions and estimates must be made to determine the costs and future benefits<br />
that will be associated with these plans. These assumptions include the estimated long-term rate of return to<br />
be earned by plan assets, the estimated discount rate used to value the projected benefit obligations and<br />
estimated wage increases. The Company uses a model portfolio of high quality bonds whose expected rate<br />
of return is estimated to match the plan’s expected cash flows as a basis to determine the most appropriate<br />
discount rate. For the long-term rate of return, the Company uses a model portfolio based on the<br />
Company’s targeted asset allocation.<br />
Leases<br />
The Company enters into agreements to lease certain operating assets such as cars and buildings. In<br />
addition, the Company enters into contracts with counter parties to provide cable network capacity, and<br />
grants rights to capacity on the basis of an indefeasible right of use (“IRU”). An IRU is a right to use a<br />
specified amount of capacity for a specified time period. The indefeasible right is one that cannot be<br />
revoked or voided. An acquirer of an IRU has the exclusive right to use the capacity represented by the<br />
IRU. It may use the capacity of dark fibre pairs or use duct space to lay fibre. Upon entering into a<br />
contract, the Company assesses whether or not the contract is for the use of specified equipment or for<br />
F- 11
services rendered, and if certain criteria are met, the contract is accounted for as a lease in accordance with<br />
SFAS No. 13, “Accounting for Leases.”<br />
Capital leases are accounted for as if the Company had acquired the assets and are recorded at the inception<br />
of the lease at the fair value of the leased property or, if lower, at the present value of the minimum lease<br />
payments. Lease payments are apportioned between the finance charges and reduction of the lease liability<br />
so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are<br />
charged to interest expense. Capitalized leased assets are depreciated over the shorter of the estimated<br />
useful life of the asset or the lease term. Depreciation expense associated with assets under capital leases is<br />
recognized as depreciation and amortization in the consolidated statements of operations and comprehensive<br />
loss. Operating lease payments are recognized as an expense in the consolidated statement of operations on<br />
a straight-line basis over the lease term.<br />
Income Taxes<br />
The provision for income taxes, income taxes payable and deferred income taxes are determined using the<br />
liability method. Deferred income tax assets and liabilities are determined based on differences between the<br />
financial reporting and tax basis of assets and liabilities and are measured by applying enacted tax rates and<br />
laws to taxable years in which such differences are expected to reverse. This process requires our<br />
management to make assessments regarding the timing and probability of the ultimate tax impact of such<br />
items. A valuation allowance is provided when the Company determines that it is more likely than not that<br />
a portion of the deferred tax asset balance will not be realized. Establishing a tax valuation allowance<br />
requires us to make assessments about the timing of future events including the probability of expected<br />
future taxable income and available tax planning opportunities. Actual income taxes could vary from these<br />
estimates due to changes in income tax law in the jurisdictions in which we operate, differences between<br />
estimated and actual results or unpredicted results from the final determination of each year's liability by<br />
taxing authorities. Any of these factors could have a material effect on our current and deferred tax position<br />
as reported in the accompanying financial statements. A high degree of judgment is required to assess the<br />
impact of possible future outcomes on our current and deferred tax positions.<br />
Asset Retirement Obligations<br />
The Company maintains certain rights of way and leases that require it to restore facilities or remove<br />
equipment in the event that the agreement is not renewed. The possibility is remote that the Company<br />
would be required to incur significant restoration or removal costs in the foreseeable future. In March 2005,<br />
the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” (“FIN<br />
47”), an interpretation of FASB Statement No. 143, “Accounting for Asset Retirement Obligations.” FIN<br />
47 generally applies to long-lived assets and requires a liability to be recognized for a conditional asset<br />
retirement obligation if the fair value of that liability can be reasonably estimated. A conditional asset<br />
retirement obligation is defined as a legal obligation to perform an activity associated with an asset<br />
retirement in which the timing and/or method of settlement are conditional on a future event that may or<br />
may not occur or be within the control of the company. A liability should be recognized when incurred<br />
(based on its fair value at that date), which generally would be upon acquisition or construction of the<br />
related asset. Upon recognition, the offset to the liability would be capitalized as part of the cost of the asset<br />
and depreciated over the estimated useful life of that asset. FIN 47 was effective no later than December 31,<br />
2005. The adoption of FIN 47 did not have a material impact on the consolidated financial statements.<br />
F- 12
Revenue Recognition<br />
Operating revenue, net contain all revenues from ordinary business activities. Revenues are recorded net of<br />
value-added tax (VAT) and sales-related reductions.<br />
Revenue consists primarily of monthly subscription fees as well as usage fees for providing access services<br />
to analog or digital cable television, Internet and telephony. Revenue by service is presented in the<br />
following table:<br />
(CHF in thousands)<br />
F- 13<br />
Year Ended Year Ended<br />
December 31, December 31,<br />
2005 2004<br />
Cable television 458'074 444'037<br />
Internet 173'810 147'409<br />
Telephony 103'880 42'424<br />
Business solutions 46'396 28'169<br />
Wholesale and other 49'658 47'109<br />
Total 831'818 709'148<br />
Revenues are recognized at the time the service is rendered to the customer, when persuasive evidence of an<br />
arrangement exists, the price to the customer is fixed and determinable, and when collectibility is reasonably<br />
assured. Charges for services that are billed in advance are deferred and recognized when earned. Rental<br />
revenues are recognized when earned. Maintenance service revenues are recognized when the performance<br />
of the service has been completed. Unbilled receivables are primarily related to services performed but not<br />
yet billed.<br />
Installation revenue related to services over the cable network is recognized as revenue in the period in<br />
which the installation occurs to the extent these revenues are less than direct selling costs, which are<br />
expensed as incurred. To the extent that installation revenue exceeds direct selling costs, the excess fees are<br />
deferred and amortized over the expected subscriber life.<br />
Multiple Element Arrangements<br />
The Company enters into transactions that include multiple deliverables, which may include any<br />
combination of services, installation and hardware. A deliverable is considered a separate element for<br />
accounting purposes when there is objective and reliable evidence of fair value of the undelivered elements<br />
and the delivered item has stand alone value to the customer. If there is objective and reliable evidence of<br />
fair value for all elements of accounting in an arrangement, the arrangement consideration is allocated to the<br />
separate units of accounting based on their relative fair values. In cases where objective reliable evidence<br />
only exists for the undelivered elements of accounting in an arrangement, the residual value method is used<br />
to determine the revenue to be recognized for the delivered elements.<br />
Barter Transactions<br />
From time to time the Company enters into arrangements for the exchange of fiber and ducts. Certain of<br />
these arrangements include cash payments in addition to the exchange. Exchanges of similar assets are<br />
recorded at cost. Exchanges of dissimilar assets are recorded at fair values, where the fair value of the asset<br />
has been determined using the replacement cost. Gains or losses on these exchanges are recognized in the<br />
consolidated statements of operations and comprehensive loss at the date of the exchange.
Advertising Expense<br />
The Company charges the cost of advertising to selling, general and administrative expense as incurred.<br />
Advertising costs were CHF 34.6 million and CHF 26.3 million during the years ended December 31, 2005<br />
and 2004, respectively.<br />
Derivative Financial Instruments<br />
The Company accounts for derivative financial instruments pursuant to the guidance in SFAS No. 133,<br />
“Accounting for Derivative Instruments and Hedging Activities,” as amended (together “SFAS 133”).<br />
SFAS 133 requires that all such instruments be recorded on the balance sheet at fair value. Changes in the<br />
fair value of derivatives not qualifying for hedge accounting treatment under SFAS 133 are recorded each<br />
period in the consolidated statements of operations and comprehensive loss. To the extent the derivative is<br />
designated as a hedge for accounting purposes and qualifies for hedge accounting treatment under SFAS<br />
133, changes in the fair value of derivatives are recorded each period in the results of operations or in<br />
accumulated other comprehensive loss depending on its hedge designation. The ineffective portion of<br />
hedges is recognized in the consolidated statements of operations and comprehensive loss. The Company<br />
has recorded the change in the fair value of certain qualifying cash flow hedges each period in accumulated<br />
other comprehensive loss (“OCI”). Changes in the fair value of other derivative and embedded derivative<br />
instruments are recorded as other income or expense in the consolidated statements of operations and<br />
comprehensive loss.<br />
The Company uses derivative financial instruments such as foreign currency contracts, interest rate and<br />
cross currency swaps to hedge its risks associated with interest rate and foreign currency fluctuations. Such<br />
derivative financial instruments are stated at fair value.<br />
Derivative instruments that are deemed to be hedges for accounting purposes are classified as either fair<br />
value hedges when they hedge the exposure to changes in the fair value of a recognized asset or liability; or<br />
cash flow hedges where they hedge exposure to variability in cash flows that is either attributable to a<br />
particular risk associated with a recognized asset or liability or a forecasted transaction.<br />
Gains and losses for each hedge type are recorded as follows:<br />
• Fair value hedges — Unrealized and realized gains and losses are recorded immediately in the<br />
consolidated statements of operations and comprehensive loss in the period incurred in other income<br />
and expense.<br />
• Cash flows hedges — Unrealized gains and losses are recognized in OCI in the period incurred and<br />
any ineffective portion is recognized in earnings. Gains and losses recognized in OCI are transferred<br />
to the consolidated statements of operations and comprehensive loss during the period in which the<br />
hedged item affects the net profit and loss.<br />
Unrealized gains or losses on derivatives that do not qualify for hedge accounting are included in other<br />
income or expense for the period. If a hedged forecasted transaction is no longer expected to occur, the net<br />
cumulative unrealized gain or loss recognized in OCI is transferred to the consolidated statements of<br />
operations.<br />
Hedge accounting is discontinued when the hedging instrument expires or is sold, the underlying risk is<br />
recognized, terminated or exercised, or no longer qualifies for hedge accounting.<br />
F- 14
Instruments that are embedded in contracts but whose terms are not considered clearly and closely related to<br />
the contract terms are separated and recorded at fair value. Changes in fair value of the instruments are<br />
recorded as a component of other income or expense in the consolidated statements of operations and<br />
comprehensive loss.<br />
Recently Issued Accounting Standards<br />
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets an Amendment of<br />
APB Opinion No. 29” (“SFAS No. 153”), which eliminates the exception for nonmonetary exchanges of<br />
similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that<br />
do not have commercial substance. SFAS No. 153 will be effective for nonmonetary asset exchanges<br />
occurring in fiscal periods beginning after June 15, 2005. The Company does not believe the adoption of<br />
SFAS No. 153 will have a material impact on its consolidated financial statements.<br />
In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No.<br />
123R”). SFAS No. 123R, which is a revision of SFAS No. 123 and supersedes APB Opinion No. 25,<br />
establishes standards for the accounting for transactions in which an entity exchanges its equity instruments<br />
for goods or services, primarily focusing on transactions in which an entity obtains employee services.<br />
SFAS No. 123R generally requires companies to measure the cost of employee services received in<br />
exchange for an award of equity instruments (such as stock options and restricted stock) based on the grantdate<br />
fair value of the award, and to recognize that cost over the period during which the employee is<br />
required to provide service (usually the vesting period of the award). SFAS No. 123R also requires<br />
companies to measure the cost of employee services received in exchange for an award of liability<br />
instruments (such as stock appreciation rights) based on the current fair value of the award, and to remeasure<br />
the fair value of the award at each reporting date.<br />
SFAS 123R applies to awards that are granted, modified, or settled in fiscal years beginning after<br />
December 15, 2005. Early adoption is encouraged for periods in which financial statements have not been<br />
issued. The provisions of SFAS 123R allow companies to adopt the standard on a prospective basis or to<br />
restate all periods for which SFAS 123 was effective. The Company does not believe the adoption of SFAS<br />
123R will have a material impact on its consolidated financial statements.<br />
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement<br />
of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 provides guidance<br />
on the accounting for and reporting of accounting changes and error corrections. SFAS No. 154 requires<br />
retrospective application to prior period financial statements for changes in accounting principle, unless it is<br />
impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS<br />
No. 154 also requires that retrospective application of a change in accounting principle be limited to the<br />
direct effects of the change. Indirect effects of a change in accounting principle should be recognized in the<br />
period of the accounting change. SFAS No. 154 further requires a change in depreciation, amortization, or<br />
depletion method for long-lived, non-financial assets to be accounted for as a change in accounting estimate<br />
affected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and<br />
corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No.<br />
154 did not have a material impact on the Company's financial condition or results of operations.<br />
In June 2005, the FASB ratified the EITF consensus on Issue 05-6, “Determining the Amortization Period<br />
for Leasehold Improvements” (“EITF 05-6”), which provides guidance on the determination of the<br />
amortization period for leasehold improvements that are purchased subsequent to the inception of the lease.<br />
EITF 05-6 states that leasehold improvements acquired in a business combination or purchased subsequent<br />
to the inception of the lease should be amortized over the lesser of the useful life of the asset or the lease<br />
term that includes reasonably assured lease renewals as determined on the date of acquisition of the<br />
F- 15
leasehold improvement. The guidance should be applied prospectively. The adoption of EITF 05-6 did not<br />
have a material impact on the Company’s financial condition or results of operations.<br />
In October 2005, the FASB issued FASB Staff Position No. 13-1, “Accounting for Rental Costs Incurred<br />
during a Construction Period” (“FSP 13-1”). The FSP addresses the accounting for rental costs associated<br />
with operating leases that are incurred during a construction period and requires rental costs associated with<br />
ground or building operating leases that are incurred during a construction period to be recognized as rental<br />
expense. The provisions of this FSP are required to be applied to the first reporting period beginning after<br />
December 15, 2005. The Company does not believe the application of FSP 13-1 will have a material impact<br />
on its consolidated financial statements.<br />
3. Acquisitions<br />
During 2005, the Company entered into four business combination transactions and acquired the following<br />
interests:<br />
(a) the remaining 41.5% of the voting shares of KASAG on January 3, 2005 (cable network);<br />
(b) 100% of the voting shares of Unified Business Solutions AG on May 24, 2005 (Internet voice<br />
information technology);<br />
(c) 100% of the voting shares of Radio TV Riedo AG (cable network) on June 30, 2005; and<br />
(d) 100% of the voting shares of Medicom AG (cable network) on June 27, 2005.<br />
In the aggregate, the total cost of the above listed acquisitions amounted to CHF 7.3 million including<br />
acquisition costs of approximately CHF 0.2 million. The fair value of the net assets acquired is CHF 4.3<br />
million, and the excess of the cost over the fair value of net assets recognized as goodwill is CHF 3.0<br />
million.<br />
4. Property and Equipment<br />
(CHF in thousands)<br />
F- 16<br />
December 31, December 31,<br />
2005 2004<br />
Communications equipment 1'782'035 1'594'302<br />
Land and buildings<br />
Other equipment and<br />
21'962 47'969<br />
construction-in-progress 250'707 246'399<br />
Subtotal 2'054'704 1'888'670<br />
Accumulated depreciation (628'854) (383'653)<br />
1'425'850 1'505'017<br />
The carrying value of communication equipment held under capital lease is CHF 45.7 million and CHF 48.2<br />
million at December 31, 2005 and 2004, respectively. Depreciation expense recognized includes the<br />
depreciation of the assets under capital lease.
Disposal of Real Estate<br />
During 2005, the Company completed the sale and leaseback of the headquarters’ office building in Zurich.<br />
Net cash proceeds of CHF 32.6 million were received. Upon execution of the sale and leaseback transaction,<br />
property costs of CHF 24.3 million and accumulated depreciation of CHF 4.1 million were removed from<br />
the Company’s books resulting in a gain of CHF 12.4 million being amortized over the term of the operating<br />
lease until March 2020. No gain was recorded at the time of the transaction. Total future minimum lease<br />
payments under the operating lease amount to CHF 26.3 million.<br />
5. Intangible Assets<br />
Finite-lived intangible assets consist of:<br />
(CHF in thousands)<br />
F- 17<br />
December 31, December 31,<br />
2005 2004<br />
Customer lists 221'942 221'998<br />
Accumulated amortization (23'386) (12'548)<br />
198'556 209'450<br />
Estimated aggregate amortization expense for customer relationships for each of the five succeeding years<br />
from December 31, 2005, is as follows: CHF 10.1 million in 2006, CHF 10.1 million is 2007, CHF 10.1<br />
million in 2008, CHF 10.1 million in 2009, CHF 10.1 million in 2010 and CHF 148.1 million thereafter.<br />
6. Long-Term Debt and Capital Leases<br />
Long-term debt and capital leases consist of:<br />
(CHF in thousands)<br />
December 31, December 31,<br />
2005 2004<br />
Senior Secured Notes<br />
Series A CHF 390 million (due 2010) 256'777 -<br />
Series A EUR 200 million (due 2010) 243'878 -<br />
Series B EUR 375 million (due 2012) 518'280 -<br />
Senior Credit Facility - 1'202'222<br />
Bank Facility (Facility A Term Loan) 268'711 -<br />
9.375% EUR 290 million bonds (Senior Notes) 451'629 437'051<br />
Capital lease obligations 27'276 28'617<br />
Mortgages and other long-term debt 5'818 3'491<br />
Total debt and capital leases 1'772'369 1'671'381<br />
Less: Current portion of debt and capital leases (3'058) (25'813)<br />
Long-term debt and capital leases 1'769'311 1'645'568<br />
The Company has a revolving credit facility (the “Existing Revolving Credit Facility”) of CHF 150.0<br />
million available, which matures in 2010. At December 31, 2005, no amount had been drawn under the<br />
Existing Revolving Credit Facility. The interest rate applicable to the Existing Revolving Credit Facility is
CHF LIBOR plus a margin of 2.25%, and there is an annual commitment fee of 0.75% payable on the<br />
undrawn amount of the facility.<br />
The current portion of long-term debt in the amount of CHF 23.2 million was reclassified to long-term debt<br />
at December 31, 2004 in accordance with SFAS No. 6, “Classification of Short-Term Obligations Expected<br />
To Be Refinanced,” as the Company refinanced this obligation during 2005 with long-term senior credit<br />
facilities.<br />
Refinancing of Debt<br />
April 2004 Refinancing<br />
In April 2004, the Company entered into a refinancing of its senior bank debt, most of which was held by<br />
debt holders who received equity interests in Glacier Holdings S.C.A. on November 12, 2003. The<br />
refinancing agreement provided for credit facilities (“Senior Credit Facility”) of up to the equivalent of CHF<br />
1.4 billion (including CHF 150.0 million revolving credit facility) which matures from April 2011 through<br />
April 2014. As described in Note 2 under the caption “Deferred Financing Costs,” a loss on modification of<br />
debt of CHF 53.8 million was recognized as part of the April 2004 refinancing related to substantial<br />
modification of terms with certain creditors.<br />
Advances under the Senior Credit Facility bore interest for each interest period at a rate per annum equal to<br />
LIBOR or EURIBOR, as applicable, plus margins ranging from 2.25% to 3.60% on the Term Loans and<br />
2.25% for the revolving credit facility plus commitment fees.<br />
The margins on the Senior Credit Facility were subject to a margin adjustment mechanism, pursuant to<br />
which the margin was adjusted downwards at specified increments if certain ratios of total net debt to<br />
earnings before income taxes, depreciation and amortization (“EBITDA”) were achieved and maintained,<br />
subject to a minimum margin of 1.25% per year.<br />
In addition, as part of the refinancing, the Company issued 9.375% EUR 290.0 million bonds (Senior<br />
Notes) which mature on April 15, 2014, bearing a coupon interest rate of 9.375% per year, payable semiannually.<br />
April 2005 Refinancing<br />
As part of its strategic finance plan, the Company refinanced the Senior Credit Facility on April 8, 2005, by<br />
issuing floating rate Senior Secured Notes (Series A CHF 390.0 million and EUR 200.0 million and Series<br />
B EUR 375.0 million) with net proceeds of CHF 1.252 billion and maturities in the years 2010 and 2012<br />
and replaced the revolving credit facility with a new CHF 150.0 million Existing Revolving Credit Facility.<br />
As described in Note 2 under the caption “Deferred Financing Costs”, a loss on modification of debt of<br />
approximately CHF 15.4 million was recognized as part of the April 2005 refinancing related to substantial<br />
modification of terms with certain creditors.<br />
These Senior Secured Notes are subject to certain covenants which will limit, among other things, the<br />
Company’s ability to: incur additional indebtedness, pay dividends or make other distributions, make certain<br />
other restricted payments and investments, create or permit to exist liens, impose restrictions on the ability<br />
of the subsidiaries to pay dividends or make other payments, transfer or sell assets, merge or consolidate<br />
with other entities, and enter into transactions with affiliates. Each of the covenants is subject to a number<br />
of exceptions and qualifications.<br />
The Senior Secured Notes benefit from credit support in the form of a first-ranking security on certain<br />
intercompany loans and the shares in <strong>Cablecom</strong> GmbH (share pledge).<br />
F- 18
December 2005 Refinancing<br />
In connection with the Liberty Global Switzerland Inc.’s acquisition of <strong>Cablecom</strong> Holdings AG and<br />
subsidiaries, <strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. was required to effect a change of control offer (the Change of<br />
Control Offer) for the existing Senior Secured Notes at 101% of their respective principal amounts, and for<br />
the Existing Revolving Credit Facility. In order to fund the Change of Control Offer, on December 5, 2005,<br />
<strong>Cablecom</strong> <strong>Luxembourg</strong> S.C.A. entered into a bank facility agreement (the ”Bank Facility”) with certain<br />
banks and financial institutions as lenders. The Bank Facility provides the terms and conditions upon which<br />
(i) the lenders have made available to the Company two term loans (“Facility A Term Loan” and “Facility B<br />
Term Loan”) in an aggregate principal amount not to exceed CHF 1.33 billion and (ii) the revolving lenders<br />
under the Company's CHF 150.0 million Existing Revolving Credit Facility have agreed to make available<br />
to the Company and certain of its subsidiaries a new revolving credit facility (the “New Revolving Credit<br />
Facility”) in an aggregate principal amount not to exceed CHF 150.0 million in replacement of the Existing<br />
Revolving Credit Facility. To date, the Existing Revolving Credit Facility remains in place and the New<br />
Revolving Credit Facility will not be available for borrowing until the Existing Revolving Credit Facility is<br />
cancelled.<br />
The Bank Facility is subject to certain covenants which will limit, among other things, the Company’s<br />
ability to: incur additional indebtedness, pay dividends or make other distributions, make certain other<br />
restricted payments and investments, create or permit to exist liens, impose restrictions on the ability of the<br />
subsidiaries to pay dividends or make other payments, transfer or sell assets, merge or consolidate with other<br />
entities, and enter into transactions with affiliates. Each of the covenants is subject to a number of<br />
exceptions and qualifications. The Bank Facility also requires the Company to maintain certain ratios of<br />
total debt to EBITDA, senior debt to EBITDA, EBITDA to total cash interest and EBITDA to debt service.<br />
These covenants take affect beginning on March 31, 2006.<br />
The Bank Facility benefits from credit support in the form of a first-ranking security on certain<br />
intercompany loans and the shares in <strong>Cablecom</strong> GmbH (share pledge).<br />
Pursuant to the Change of Control Offer, on December 8, 2005 the Company used CHF 268.7 million of<br />
proceeds from the Facility A Term Loan under the Bank Facility to (i) purchase CHF 131.0 million of the<br />
Series A CHF Senior Secured Notes, (ii) EUR 81.4 million of Series A and B EUR Senior Secured Notes,<br />
(iii) EUR 0.1 million of the Senior Notes and (iv) fund the costs and expenses of the Change of Control<br />
Offer. In addition, the lenders under the Existing Revolving Credit Facility waived their prepayment right<br />
resulting from the change of control.<br />
The Facility A Term loan is a CHF 618.0 million facility, maturing December 31, 2010 bearing interest rate<br />
equal to CHF LIBOR plus 2.50% through June 5, 2007 (and thereafter the margin adjusts based on a<br />
leverage ratio).<br />
F- 19
The following is an overview of the refinancing as of December 8, 2005:<br />
(CHF in thousands)<br />
Senior Secured Original Original Amount<br />
Notes and Bonds Interest Rate Maturity Par Amount Refinanced<br />
Series A CHF Notes LIBOR +2.625% 2010 CHF 390'000 CHF 131'000<br />
Series A EUR Notes EURIBOR +2.5% 2010 EUR 200'000 EUR 42'100<br />
Series B EUR Notes EURIBOR +2.75% 2012 EUR 375'000 EUR 39'300<br />
EUR 290 million bonds 9 3/8% 2014 EUR 290'000 EUR 100<br />
As a result of this refinancing, the Company incurred charges relating to fees paid and amortization of<br />
financing fees. As described in Note 2 under the caption “Deferred Financing Costs,” a loss on modification<br />
of debt of approximately CHF 16.4 million was recognized as part of the December 2005 refinancing<br />
related to substantial modification of terms with certain creditors.<br />
At December 31, 2005, principal debt repayments, excluding capital leases (see Note 13 for maturity of<br />
capital leases), mortgages and other long term debt, of approximately CHF 773.0 million are due in 2010,<br />
and CHF 975.0 million are due after January 1, 2011, respectively. These amounts represent the<br />
undiscounted principal amounts due by the respective dates.<br />
January 2006 Refinancing<br />
On December 15, 2005, the Company notified the remaining bondholders to redeem all outstanding Senior<br />
Secured Notes not tendered in the Change of Control Offer (the Redemption), at a redemption price of<br />
102% of their respective principal amounts, plus accrued and unpaid interest. On January 20, 2006, the<br />
Company used CHF 349.8 million and CHF 355.8 million from Facility A and Facility B CHF Term Loans,<br />
respectively and EUR 229.1 million from Facility B EUR Term Loan to fund the Redemption.<br />
The Facility B Term Loan, which matures September 30, 2012, includes a CHF 335.8 million facility and a<br />
EUR 229.1 million facility. The interest rate applicable to principal denominated in Swiss Francs under the<br />
Facility B Term Loan is equal to CHF LIBOR plus a margin of 2.75% for the first nine months following<br />
draw-down and thereafter 2.50%. The interest rate applicable to principal denominated in EUR under the<br />
Facility B Term Loan is equal to EURIBOR plus a margin of 2.50%.<br />
7. Financial Derivatives<br />
Interest Rate Swaps<br />
In connection with the April 2004 refinancing, the Company terminated its previous derivative instruments<br />
and entered into three 5-year interest rate swaps effective July 15, 2004 to hedge the interest rate risk related<br />
to the new, floating-rate debt under the Senior Credit Facility. The swaps, known as interest rate step-up<br />
swaps, effectively converted floating-rate debt to fixed-rate debt at a series of fixed rates which adjust or<br />
“step up” quarterly throughout the 5-year hedge period, ranging from 0.6% to 3.33%. These instruments<br />
provided 90% coverage of the outstanding principal amount of the Senior Credit Facility as of December<br />
31, 2004.<br />
As a result of the April 2005 refinancing the original underlying hedged cash flows of the Senior Credit<br />
Facility were no longer probable to occur. As a result, the Company reclassified a loss of CHF 17.8 million<br />
F- 20
from accumulated other comprehensive loss into the consolidated statements of operations. These interest<br />
rate swaps have been terminated in connection with the December 2005 refinancing.<br />
On April 15, 2005, the Company entered into three 3-year interest rate swaps, effective July 15, 2005 to<br />
hedge the interest rate risk related to the Senior Secured Notes over and above the interest rate risk hedged<br />
by the step-up swaps. The new swaps, known as interest rate top-up swaps, effectively converted floatingrate<br />
CHF debt to fixed-rate CHF debt. These swaps were designated as cash flow hedges at the inception of<br />
the swaps and have been terminated in connection with the December 2005 refinancing.<br />
In December 2005, the Company entered into two interest rate swaps effective January 20, 2006 to hedge<br />
the interest rate risk related to the new Bank Facility. The swaps convert floating rate debt to fixed rate debt<br />
ranging from 2.1875% and 2.3415%.<br />
Interest rate swaps related to the Senior Credit Facility, Senior Secured Notes and Bank Facility amount to:<br />
(CHF in thousands)<br />
Notional amount (aggregate) 1'330'000<br />
Fair value, net (7'022)<br />
Cross-Currency Swaps<br />
F- 21<br />
December 31, December 31,<br />
2005 2004<br />
1'080'000<br />
(19'586)<br />
On April 15, 2004 the Company entered into two cross-currency swap transactions to mitigate exposure to<br />
fluctuations in foreign exchange rates in respect of the Senior Notes. Such instruments provide a EUR to<br />
CHF swap of the full principal amount, EUR 290.0 million, of the Senior Notes and related interest<br />
payments during the period from April 2004 until April 2007. The Company discontinued the hedge<br />
accounting of these two swaps through de-designation as of October 31, 2005. The gains and losses that are<br />
recorded in accumulated other comprehensive income (loss) as of October 31, 2005 will remain in<br />
accumulated other comprehensive income (loss) until the forecasted transactions that give rise to the<br />
variability in future cash flows occur. Future changes in the derivative’s fair value subsequent to the<br />
discontinuance of hedge accounting will be reported in the consolidated statements of operations.<br />
Cross-currency swaps related to the Senior Notes amount to:<br />
(CHF in thousands)<br />
December 31, December 31,<br />
2005 2004<br />
Notional amount (aggregate) 451'629 437'051<br />
Fair value, net 974 (1'668)<br />
The Senior Credit Facility included both EUR and USD denominated tranches. The USD tranche of the<br />
Senior Credit Facility was converted from USD into CHF by entering into two 5-year cross currency swaps,<br />
effective July 8, 2004, with aggregate notional amounts of USD 115.0 million. These currency swap<br />
transactions hedged exposure to fluctuations in foreign exchange rates in respect of the foreign currency<br />
portion of the Senior Credit Facility. In April 2005, the Company repaid the USD tranche of the Senior<br />
Credit Facility. As a result of the April 2005 refinancing, the cash flows associated with these swaps were
no longer probable to occur and the Company reclassified a loss of CHF 14.7 million from accumulated<br />
other comprehensive income (loss) into the consolidated statements of operations. In addition, the Company<br />
entered into two off-setting USD to CHF cross currency swaps, resulting in a net zero notional amount on<br />
the four swap transactions. These swaps were terminated in the first quarter of 2006.<br />
The EUR tranche Senior Credit Facility was converted from EUR into CHF by entering into two 5-year<br />
cross currency swaps, effective July 8, 2004, with aggregate notional amounts of EUR 124.5 million. These<br />
currency swap transactions hedge exposure to fluctuations in foreign exchange rates in respect of the foreign<br />
currency portion of the Senior Credit Facility. As the result of the April 2005 refinancing, the cash flows<br />
associated with these swaps were no longer probable to occur. As a result, the Company reclassified a gain<br />
of CHF 2.5 million from accumulated other comprehensive income (loss) into the consolidated statements<br />
of operations.<br />
Effective April 28, 2005 six cross currency swaps were put in place in order to hedge the foreign exchange<br />
risk of the Senior Secured Notes for a period of three years. These swaps were not designated as hedges<br />
under hedge accounting even though together with the two existing EUR to CHF currency swaps mentioned<br />
above (with an effective date of July 8, 2004), they provided a EUR to CHF swap of the full principal<br />
amount of the Senior Secured Notes and related interest payments. In connection with the December 2005<br />
refinancing, all eight cross currency swaps have been terminated.<br />
Cross-currency swaps related to the Senior Credit Facility amount to:<br />
(CHF in thousands)<br />
Notional amount (aggregate) -<br />
Fair value, net (2'468)<br />
Forward Contracts<br />
F- 22<br />
December 31, December 31,<br />
2005 2004<br />
323'098<br />
(12'180)<br />
Following the December 2005 refinancing, the Company entered into two forward contracts in order to<br />
hedge for the EUR to CHF exposure in relation to the next interest payment as well as the announced<br />
repayment of the Senior Secured Notes taking place in January 2006.<br />
Forward contracts related to the Senior Secured Notes amount to:<br />
(CHF in thousands)<br />
Notional amount (aggregate) 787'097<br />
Fair value, net 5'936<br />
December 31, December 31,<br />
2005 2004<br />
-<br />
-
8. Income Taxes<br />
(CHF in thousands)<br />
Current expense 1'675<br />
Deferred expense 3'366<br />
Income tax expense 5'041<br />
F- 23<br />
Year Ended Year Ended<br />
December 31, December 31,<br />
2005 2004<br />
4'310<br />
-<br />
4'310<br />
Major operations are located in Switzerland and, consequently, the taxes payable are mainly owed to Swiss<br />
tax authorities. Taxes in Switzerland are not based on consolidated accounts but, rather are levied on a<br />
cantonal basis on the level of each legal entity.<br />
Taxable income in Switzerland is allocated among the 26 cantons. Cantons have different income tax rates.<br />
The Company’s weighted average statutory tax rate for Federal and Cantonal taxes is 22.10% for the year<br />
ended December 31, 2005 and 23.50% for the year ended December 31, 2004. The primary differences<br />
between the statutory tax rate and the effective tax rate is attributable to various expenses that are not<br />
deductible for income tax purposes and net operating loss carryforwards that cannot be recognized for<br />
financial reporting purposes as the Company cannot conclude it is more likely than not that the<br />
carryforwards will be utilized in future years.<br />
(CHF in thousands)<br />
Year Ended Year Ended<br />
December 31, December 31,<br />
2005 2004<br />
Loss before taxes<br />
Weighted-average Swiss<br />
345'634 163'311<br />
statutory income tax rate<br />
Income tax benefit at the<br />
weighted-average statutory<br />
22.10 % 23.50 %<br />
tax rate 76'385 38'378<br />
Permanent differences (32'759) (7'586)<br />
Change in valuation allowance (52'354) (31'766)<br />
Income not taxed at statutory rate 3'487 -<br />
Other 200 (3'336)<br />
Income tax expense (5'041) (4'310)<br />
Permanent differences are primarily comprised of stock based compensation and the push down of Glacier<br />
Holdings S.C.A. expenses which are not deductible for tax purposes.<br />
Due to a change in the tax law in the Canton of Zurich, the Company’s weighted average Swiss statutory<br />
income tax rate decreased from 23.50% in 2004 to 22.10% in 2005. The change in the valuation allowance<br />
of CHF 1.4 million is the result of the tax rate change of CHF 50.9 offset by the change in the net deferred<br />
taxes before valuation allowance of CHF 52.4 million.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of<br />
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.<br />
Significant components of the deferred tax assets and (liabilities) are as follows:<br />
(CHF in thousands)<br />
F- 24<br />
December 31, December 31,<br />
2005 2004<br />
Net operating loss carryforwards 924'679 981'767<br />
Investments (80'866) (84'713)<br />
Post-employment benefits 16'737 16'098<br />
Deferred subscriber revenue 10'578 15'313<br />
Property, plant and equipment<br />
Accrued expenses and<br />
(23'923) (47'360)<br />
other non-current liabilities 2'960 (22'364)<br />
Other 2'514 (4'132)<br />
Deferred tax assets, net 852'679 854'609<br />
Valuation allowance (856'045) (854'609)<br />
Net deferred tax liability (3'366) -<br />
The Company establishes a valuation allowance against its deferred tax assets that it deems more likely than<br />
not will not be recovered in whole or in part in the future.<br />
Tax net operating loss carryforwards expire in the following years:<br />
(CHF in thousands)<br />
2006 4'084<br />
2007 53'146<br />
2008 1'577'343<br />
2009 1'847'158<br />
2010 264'351<br />
2011 431'300<br />
2012 2'602<br />
Taxable net operating losses 4'179'984<br />
9. Fair Values of Financial Instruments<br />
Carrying amounts of the Company’s financial instruments including cash and cash equivalents, accounts<br />
receivable, accounts payable and accrued expenses reported in the consolidated balance sheets approximate<br />
fair value. The carrying amount of the Senior Secured Notes and Bank Facility approximate fair value as<br />
the debt does not have a fixed interest rate. The EUR 290.0 million bonds (Senior Notes) have an estimated<br />
fair value and carrying value of CHF 516.0 million and CHF 451.6 million at December 31, 2005<br />
respectively, and an estimated fair value and carrying value of CHF 499.8 million and CHF 437.1 million,<br />
respectively, at December 31, 2004.
10. Related Party Transactions<br />
Material transactions between the Company and related parties included:<br />
(CHF in thousands)<br />
F- 25<br />
Rendering of<br />
Service by/ Amounts Amounts<br />
Sales Purchases Owed by Owed to<br />
Related from Related Related Related<br />
Parties Parties Parties Parties<br />
Year ended December 31, 2005<br />
Liberty Global Switzerland Inc. and related companies (2)<br />
- 5'151 17'650 4'875<br />
Glacier - 4'252 (1)<br />
- -<br />
Total entities with control over the Company - 9'403 17'650 4'875<br />
Other related parties<br />
Key management personnel of the Company<br />
1'572 1'913 691 4<br />
Director - 1'749 - 312<br />
Former Director - 1'942 - -<br />
Total key management control<br />
Year ended December 31, 2004<br />
- 3'691 - 312<br />
Glacier 461 8'607 (1)<br />
2'295 15'067 (3)<br />
Glacier Consortium 4'445<br />
Total entities with control over the Group 461 13'052 2'295 15'067<br />
Other related parties<br />
Key management personnel of the Company<br />
3'050 1'936 400 2<br />
Director - 630 - 27<br />
Former director - 1'875 - -<br />
Total key management personnel - 2'505 - 27<br />
(1) Costs totaling CHF 4.3 million and CHF 8.6 million have been incurred by Glacier on behalf of the<br />
Company and have been recorded as a component of SG&A during the period from January 1, 2005<br />
to October 24, 2005 and the year ended December 31, 2004, respectively.<br />
(2) Costs have been incurred since October 24, 2005.<br />
(3) <strong>Cablecom</strong> agreed to pay a special distribution of CHF 15.0 million to Glacier which has been<br />
recorded as a transfer to Parent in the consolidated statement of shareholders’ equity and in accrued<br />
expenses in the balance sheet at December 31, 2004<br />
11. Management Equity Participation Plan<br />
Glacier Holding S.C.A. and one of its shareholders (collectively, “Investees”) together with Glacier<br />
Holdings S.C.A.’s principal shareholders (collectively, the “Principal Shareholders”) implemented a<br />
Management Equity Participation Plan (the “MEPP”) in November 2004 for the benefit of certain<br />
employees of the Company and one non-employee consultant. The MEPP allowed these individuals<br />
(“Participants”) to purchase interests in newly created entities (“Investment Vehicles”) which in turn<br />
acquired shares and convertible securities of Investees representing approximately 8% of Investees’<br />
outstanding equity on a fully-converted basis.
Through the Investment Vehicles, the Participants vest, in tranches of 20% per year beginning retroactively<br />
as of June 2003, in the right to receive the increase in fair value of Investees’ shares and convertible<br />
securities above a series of defined thresholds. Vesting is accelerated upon certain events such as a change<br />
of control or public offering. Any distributions or proceeds up to such thresholds otherwise payable to the<br />
Investment Vehicles must be remitted to the Principal Shareholders. Participants paid cash of<br />
approximately CHF 3.0 million to participate in the MEPP and certain Participants also provided a personal<br />
guarantee to the Principal Shareholders that such remittance up to and including a final liquidation of<br />
Investees’ would not be less than a defined amount, approximately CHF 14.5 million in aggregate.<br />
Many of the terms of the MEPP, including the Investment Vehicles’ acquisition price of Investees’ shares<br />
and convertible securities, were determined in 2003 as part of the negotiations among the Company’s<br />
creditors to establish the terms of the November 12, 2003 change of control and debt modification<br />
transactions. The Principal Shareholders’ intent was to enable Participants to benefit from increases in fair<br />
value of the Company subsequent to the November 12, 2003 transactions, and not to provide equity<br />
participation at a discount. However, certain legal and administrative terms were not finalized until<br />
November 2004, at which time the fair value of the Company, and therefore the Investees, had increased,<br />
resulting in a positive intrinsic value as of the November 2004 accounting date of grant. Based on a<br />
valuation of <strong>Cablecom</strong> AG performed by a third-party expert as of December 31, 2004, the intrinsic value<br />
of securities sold to employee Participants via the Investment Vehicles was estimated to be approximately<br />
CHF 35.0 million on the date of grant and as of December 31, 2004, of which CHF 20.4 million been<br />
recorded in 2004 by the Company as compensation expense and an increase in share capital in accordance<br />
with AIN-APB 25, “Accounting for Stock Issued to Employees: Accounting Interpretations of APB<br />
Opinion No. 25.” This interpretation requires that an equity-based plan or transaction that is established or<br />
financed by a principal stockholder who has the ability, directly or indirectly, to control the Company should<br />
be treated as a contribution to capital by the principal stockholder and accounted for as an expense of the<br />
Company, if the economic substance is to provide compensation to individuals for goods or services<br />
provided to the Company, to the extent that such an expense would be recorded under APB Opinion No. 25<br />
if the plan had been awarded by the Company itself. Based on sale of the former parent on October 24,<br />
2005, the intrinsic value of securities sold to employee participants via the Investment Vehicles was<br />
estimated to be approximately CHF 140.0 million of which CHF 119.6 million has been recorded in 2005 as<br />
compensation expense and an increase in share capital. Also, associated with the MEPP are CHF 3.6<br />
million of Social Security taxes which are payable by the Company and recorded in SG&A in 2005.<br />
As the plan is similar to a stock appreciation right provided the Principal Shareholders, the Company has<br />
accounted for employee compensation costs associated with the MEPP as a variable plan in accordance with<br />
FASB Interpretation No. 28 “Accounting for Stock Appreciation Rights and Other Variable Stock Option or<br />
Award Plans” under which compensation expense for each vesting tranche is measured based on the<br />
intrinsic value of the award at each balance sheet date. As the plan would be treated as a liability award<br />
under SFAS No. 123, the measurement of compensation expense that would have been recorded by the<br />
Company, had it elected to adopt the measurement and recognition provisions of SFAS 123, would not have<br />
differed, since the Company would have recorded the intrinsic value of each tranche based on its respective<br />
vesting percentage at December 31, 2004. As of December 31, 2005 the Company has recognized the<br />
intrinsic value of each tranche assuming 100% vesting. As a result of the sale of the Company to Liberty<br />
Global Switzerland, Inc. on October 24, 2005, the sale was deemed to be an accelerated vesting event under<br />
the terms of the MEPP.<br />
F- 26
For the awards provided to the nonemployee consultant, the Company recorded 100% of the fair value, or<br />
approximately CHF 3.3 million and CHF 7.3 million, as expense during 2004 and 2005, respectively, as the<br />
fair value of services provided by the consultant. The consultant agreement terminated on October 24, 2005.<br />
The Company provided options to a former executive in 2005. The option granted the former executive the<br />
right to purchase shares and convertible securities similar to those of the MEPP. These options fully vested<br />
due to the sale of the Company on October 24, 2005 and were exercised during 2005. As a result, the<br />
Company recognized compensation expense of approximately CHF 17.1 million in 2005 related to that<br />
award.<br />
12. Employee Benefit Plans<br />
Annual service cost for the employee benefit plans is determined using the projected unit credit actuarial<br />
method, and prior service cost is amortized on a straight-line basis over the average remaining service<br />
period of the employees.<br />
The board of trustees of the pension fund has established and maintains an investment policy for assets. The<br />
investment strategies are long-term in nature and designed to meet the following objectives:<br />
• Ensure that funds are available to pay benefits as they become due;<br />
• Maximize the trusts total returns subject to prudent risk taking; and<br />
• Preserve and/or improve the funded status of the trusts over time.<br />
Allocations to real estate will occur over multiple time periods. Assets targeted to real estate, but not yet<br />
allocated, will be invested in fixed income securities with corresponding adjustments to fixed income<br />
rebalancing guidelines.<br />
The Company reviews the asset mix of the funds on a regular basis. Generally, each fund’s asset mix will<br />
be rebalanced to the target mix as individual portfolios approach their minimum or maximum levels.<br />
F- 27
The following is a summary of the funded status of the pension plans:<br />
(CHF in thousands)<br />
F- 28<br />
December 31, December 31,<br />
2005 2004<br />
Projected benefit obligation<br />
at beginning of year 298'164 282'574<br />
Service cost 10'191 8'507<br />
Interest cost 11'057 10'469<br />
Actuarial losses (gains) 6'089 (4'907)<br />
Plan participants' contributions 9'655 8'311<br />
Benefits paid (6'608) (6'790)<br />
Plan amendments (48'384) -<br />
Settlement (101'014) -<br />
Projected benefit obligation<br />
at end of year<br />
Fair value of plan assets<br />
179'150 298'164<br />
at beginning of year 202'832 190'663<br />
Actual return on plan assets 9'868 (128)<br />
Company contributions 13'054 10'776<br />
Plan participants' contributions 9'655 8'311<br />
Benefits paid (6'608) (6'790)<br />
Settlement (91'854) -<br />
Fair value of plan assets at end of year<br />
Funded status of the plan<br />
136'947 202'832<br />
Funded status of the plan (42'203) (95'332)<br />
Unrecognized net actuarial losses 5'072 4'649<br />
Unrecognized Prior Service Benefit (43'104) -<br />
Net liability in the balance sheet (80'235) (90'683)<br />
The accumulated benefit obligation at December 31, 2005 and 2004 is CHF 133.9 million and CHF 211.0<br />
million, respectively. Total expected contributions to be made by the Company in 2006 are expected to be<br />
CHF 16.1 million.<br />
Actuarial Assumptions<br />
The measurement date used to determine pension plans is December 31. The actuarial assumptions used to<br />
compute the net periodic pension cost are based upon information available as of the beginning of each year,<br />
specifically, market interest rates, past experience and management’s best estimate of future economic<br />
conditions. Changes in these assumptions may impact future benefit costs and obligations. In computing<br />
future costs and obligations, the Company must make assumptions about such items as employee mortality<br />
and turnover, expected salary and wage increases, discount rate, an expected long-term rate of return on plan<br />
assets.<br />
Annually, the Company sets its discount rate based upon the yields on high-quality fixed-income<br />
investments available at the measurement date and expected to be available during the period to maturity of<br />
the pension benefits.
The expected rate of return on plan assets is the long-term rate of return the Company expects to earn on<br />
trust assets. The rate of return is determined by the investment composition of the plan assets and the longterm<br />
risk and return forecast for each asset category. The forecasts for each asset class are generated using<br />
historical information as well as an analysis of current and expected market conditions. The expected risk<br />
and return characteristics for each asset class are reviewed annually and revised, as necessary, to reflect<br />
changes in the financial markets. To compute the expected return on plan assets, the Company applies an<br />
expected rate of return to the fair value of the plan assets.<br />
The weighted average assumptions used in determining benefit obligations were as follows:<br />
(CHF in thousands)<br />
Expected rate of salary increase 2.00 %<br />
Discount rate 3.25 %<br />
Return on plan assets 4.50 %<br />
F- 29<br />
December 31, December 31,<br />
2005 2004<br />
2.00 %<br />
3.75 %<br />
4.50 %<br />
The net periodic benefit cost recorded in the consolidated statement of operations consisted of the following<br />
components:<br />
(CHF in thousands)<br />
Year Ended Year Ended<br />
December 31, December 31,<br />
2005 2004<br />
Service cost, net 10'191 8'507<br />
Interest cost 11'057 10'469<br />
Expected return on plan assets (9'511) (8'860)<br />
Settlement<br />
Net periodic<br />
(9'152) -<br />
pension cost 2'585 10'116<br />
Plan assets were comprised of the following instruments:<br />
(CHF in thousands)<br />
Year Ended Year Ended<br />
Long Term December 31, December 31,<br />
Target 2005 2004<br />
Cash 2% 35 %<br />
Equity securities 31% 30 %<br />
Real estate 10% 18 %<br />
Debt securities 50% 14 %<br />
Other 7% 3 %<br />
100 %<br />
35 %<br />
31 %<br />
20 %<br />
10 %<br />
4 %<br />
100 %<br />
Strategic pension plan asset allocations are determined by the objective to achieve an investment return<br />
which, together with the contributions paid, is sufficient to maintain reasonable control over the various<br />
funding risks of the plans. Based upon current market and economic environments, actual asset allocation<br />
may periodically deviate from policy targets as determined by the plan trustees and by the pension board.
The expected future cash flows to be paid by the Company in respect of pensions at December 31, 2005<br />
were as follows:<br />
(CHF in thousands)<br />
Pension Plan<br />
Expected future benefit payments<br />
2006 3'379<br />
2007 3'534<br />
2008 3'688<br />
2009 4'170<br />
2010 4'781<br />
2011 to 2015 33'515<br />
Pension Plan Change<br />
The Company cancelled their contract with its pension fund and introduced a new pension fund on<br />
January 1, 2006 resulting in a net settlement.<br />
In addition the Company amended its existing pension plan resulting in a reduction of the projected benefit<br />
obligation by CHF 48.4 million. The decision was taken by management with the consent of the Employee<br />
Committee and was the result of the pension fund changing from a defined benefit plan to a defined<br />
contribution plan according to Swiss Law (which is accounted for as a defined benefit plan under generally<br />
accepted accounting principles in the United States). The Company’s management guarantees to all insured<br />
parties at least equivalent coverage as if they had remained in the pension fund.<br />
13. Leases<br />
The Company accounts for the use of a communication network as a capital lease and is obliged to maintain<br />
and to make semi-annual minimum payments which will be adjusted according to a schedule and to the<br />
variation of the Swiss consumer price index. The ownership of the cable network will be transferred<br />
automatically to the Company on December 31, 2027.<br />
F- 30
Pursuant to the Company’s contractual obligations, future minimum annual payments at December 31, 2005<br />
are as follows:<br />
(CHF in thousands)<br />
F- 31<br />
Capital Operating<br />
Leases Leases<br />
Year ending December 31,<br />
2006 2'997 15'722<br />
2007 2'973 13'714<br />
2008 2'978 10'946<br />
2009 2'979 8'744<br />
2010 2'961 7'177<br />
Thereafter 37'118 25'047<br />
Total minimum lease payments 52'006 81'350<br />
Less: Amount representing interest 24'730<br />
Present value of net minimum lease payments 27'276<br />
Less: Current maturities 2'416<br />
Long-term capital lease obligations 24'860<br />
The Company has entered into operating leases for certain motor vehicles. These leases have an average<br />
life between 3 and 4 years with no explicit renewal terms included in the contracts or restrictions.<br />
The Company has one rental contract which gives them the right to build on land not owned by the<br />
Company for the remaining contract life of 71 years. The Company has other rental contracts for buildings<br />
and parking lots which have remaining lives between 1 month to 15 years and fiber optic cable, cable<br />
conduit and other telecommunication or office infrastructure with a remaining contract lives between 2<br />
months to 25 years. Some contracts include a clause to enable upward revision of the rental charge on an<br />
annual basis on prevailing market conditions. Charges related to these operating leases are charged to the<br />
consolidated statement of operations on a straight-line basis with any offset recorded as a component of<br />
other current or non-current liabilities based upon the timing of the expected cash flows.<br />
Leases for buildings, office space and equipment extend through 2016 and most contain renewal options for<br />
varying periods. Total rental expense for the years ended December 31, 2005 and 2004, under operating<br />
leases was CHF 11.3 million and CHF 8.0 million, respectively.
14. Accrued Restructuring<br />
The following accruals are included in accrued expenses in the consolidated balance sheets:<br />
(CHF in thousands)<br />
Restructuring 2 Restructuring 1 Total<br />
Employee Employee<br />
Severance Severance<br />
At January 1, 2003 - 4'264 4'264<br />
Expense - 2'089 2'089<br />
Paid - (3'120) (3'120)<br />
Released - - -<br />
Other - - -<br />
At December 31, 2004 - 3'233 3'233<br />
Expense 6'749 272 7'021<br />
Paid (389) (2'721) (3'110)<br />
Released - (143) (143)<br />
Other - - -<br />
At December 31, 2005 6'360 641 7'001<br />
Restructuring<br />
November 2005 Restructuring (Restructuring 2)<br />
On November 8, 2005, the Company announced a plan to reduce its workforce by approximately 15% by<br />
the end of 2006. Out of the total of 1,750 current employees, approximately 80 were terminated before the<br />
end of 2005. These reductions represent an adjustment to current market conditions and are a consequence<br />
of the recent acquisition by Liberty Global Switzerland Inc. This reduction in workforce will come about by<br />
a combination of attrition, early retirements and layoffs. The planned reorganization will primarily affect<br />
Network Management and Technology personnel, as well as support functions and upper management. In<br />
addition to the costs incurred in 2005, the Company anticipates future restructuring costs of approximately<br />
CHF 13.6 million.<br />
In addition, the Company terminated certain individuals with existing employment contracts. As a result, the<br />
Company incurred approximately CHF 5.5 million of expenses during 2005 under the terms of these<br />
contracts.<br />
2002 through 2004 Restructurings (Restructuring 1)<br />
The Company implemented several restructurings from 2002 through 2004. A restructuring liability was<br />
recognized in connection with termination of employees in conjunction with the restructuring of the<br />
business in the year 2001 and in relation with various additional restructurings in the years 2002 to 2004.<br />
The expense associated with these liabilities has been recognized in the consolidated statements of<br />
operations and comprehensive loss. As a result of various termination agreements, the Company is obliged<br />
to pay monthly severance payments and other personnel benefits to 36 former employees up to the year<br />
2007. All employees that were expected to be terminated were terminated at each year end.<br />
F- 32
15. Commitments and Contingencies<br />
Legal Claims<br />
The Company is involved with employment claims and other legal proceedings in the normal course of its<br />
business activities. In the opinion of management, the ultimate outcome of these matters will not have a<br />
material effect on the Company’s consolidated financial statements beyond what is described in the<br />
following paragraphs:<br />
Teleclub Litigation<br />
The Company is involved in a number of proceedings with Teleclub AG (Teleclub), which has exclusive<br />
rights to a significant portion of the premium and sports content distributed in Switzerland. Swisscom AG<br />
(Swisscom), the incumbent telecommunications operator, holds an indirect controlling interest in Teleclub.<br />
In proceedings before the Competition Commission initiated by Teleclub, based on a preliminary fact<br />
finding and legal assessment process, the Company was determined to be dominant in the market for<br />
distribution of television signals via cable television networks in the areas in which it operates. Interim<br />
measures were granted in September 2002 ordering the Company, among other things, to transmit the<br />
digital television signals of Teleclub and allow the installation of Teleclub’s proprietary set-top boxes on the<br />
Company’s network. In September 2003, the Swiss Federal Court, while assuming that the Company holds<br />
a dominant position, reversed the Competition Commission’s decision on the interim measures related to<br />
installing set-top boxes of Teleclub’s choosing on the basis that the Company’s objection to doing so may<br />
be justified by legitimate business reasons. The Competition Commission is continuing its investigation of<br />
whether the Company’s application of its digital standards or digital platform to the distribution of<br />
Teleclub’s digital television signals may constitute an abuse of a dominant position. Given the finding of<br />
dominance, which the Competition Commission confirmed on October 2004 in a legal opinion prepared for<br />
the Swiss Price Regulator, if the Company is found to have abused its dominant position, Teleclub may be<br />
granted the relief requested, the Company may be found to have violated the Federal Act on Cartels and<br />
other restrictions of Competition (the Cartels Act), and the Company may be subject to administrative fines<br />
and additional civil litigation.<br />
In October 2002, the Competition Commission also investigated whether the encryption of the digital<br />
channels offered by the Company as part of its basic digital package constitutes an abuse of a dominant<br />
position as such encryption would prevent reception of these channels through any alternative set-top box.<br />
Until a final determination has been made in the pending proceedings between Teleclub and the Company,<br />
the Competition Commission has suspended its investigation. Should this proceeding be resumed and have<br />
an adverse outcome, the Company may be subject to fines and sanctions under the Cartels Act and may be<br />
required to make its digital service available through alternate set-top boxes. For the same reason described<br />
above, the Competition Commission has not acted on the request of the Swiss Price Regulator to intervene<br />
against the Company to cease encrypting the digital signal and allow use of third-party set-top boxes on the<br />
Company’s network and to prohibit bundling of set-top box rental and content subscription.<br />
An unfavorable outcome from the Teleclub legal proceedings could result in an adverse effect on the<br />
Company’s business. We expect that these proceedings may continue for several years until a nonappealable<br />
decision has been made. We cannot currently predict the outcome of these proceedings.<br />
Capital Gains of Former Shareholders in Acquired Businesses<br />
In 2000, the Company acquired a company which was subsequently merged into its existing operating<br />
companies. As a result of these mergers, the respective Cantonal tax authorities ruled that the capital gain<br />
realized by the former shareholders will be taxed, assuming an indirect liquidation. The Company and the<br />
F- 33
former shareholders have appealed against this decision. Based on the current practice of the Supreme<br />
Court, it is probable that the amount of CHF 2.8 million, included in current liabilities in the consolidated<br />
balance sheets, will become due.<br />
Other Commitments<br />
At December 31, 2005, the Company was committed to pay approximately CHF 10.2 million for equipment<br />
and services from January 1, 2006 to 2009. The aggregate amount of the fixed and determinable portion of<br />
these obligations for the succeeding fiscal years is as follows:<br />
(CHF in thousands)<br />
Year ending December 31,<br />
2006 7'269<br />
2007 1'737<br />
2008 995<br />
2009 238<br />
2010 -<br />
Assets Pledged as Collateral for Own Commitments<br />
10'239<br />
In relation to the Senior Credit Facility agreement dated April 15, 2004, certain cash balances and trade<br />
accounts receivable were pledged as collateral by the Company. As of April 15, 2005 this agreement was<br />
revised and as a consequence as of December 31, 2005 there are no longer any pledges.<br />
The mortgage loans are secured with public deeds on the respective property.<br />
16. Investment in Affiliates<br />
The consolidated financial statements include investments in affiliates listed in the following table:<br />
Name<br />
Capital<br />
owned %<br />
Regionalantenne Ermatingen AG 32.5%<br />
TELEBE Kabelfernsehen Berlingen AG 20.0%<br />
Télécarouge SA 49.0%<br />
Téléonex SA 48.9%<br />
Télélancy SA 45.0%<br />
Télé-Prégny-Chambésy SA 25.0%<br />
DigiTV SA 41.7%<br />
Boisy TV SA 48.6%<br />
Linth Signal AG 21.9%<br />
Regas Spiez AG 30.0%<br />
All subsidiaries have a fiscal year end of December 31.<br />
F- 34
The following presents combined financial information of the Company’s investments in affiliates (amounts<br />
do not reflect any elimination of activities with the Company):<br />
(CHF in thousands)<br />
F- 35<br />
Year Ended Year Ended<br />
December 31, December 31,<br />
2005 2004<br />
Operating results<br />
Revenue 11'131 10'672<br />
Net income 1'370 1'926<br />
(CHF in thousands)<br />
December 31, December 31,<br />
2005 2004<br />
Balance Sheets<br />
Current assets 20'701 19'335<br />
Non-current assets 5'427 5'927<br />
Total assets 26'128 25'262<br />
Current liabilities 9'241 9'059<br />
Non-current liabilities 745 960<br />
Total liabilities<br />
Total shareholders' equity<br />
9'986 10'019<br />
or partners' capital 16'142 15'243<br />
17. Subsequent Events<br />
Increase in Investment<br />
During January 2006, the Company increased their investment in Télé Grand-Saconnex SA from 19% to<br />
70% at a cost of approximately CHF 1.1 million, and in March 2006, the Company acquired the remaining<br />
30% at a cost of approximately CHF 0.6 million.