Compared to most other regions, North Rhine-Westphalia is characterized by above average population density with more people living in cities than any other region (except the three so-called city states Berlin, Hamburg and Bremen). The high population density reduces the overall cost associated with the deployment, operation and maintenance of cable infrastructure. North Rhine-Westphalia is also characterized by an above-average proportion of multiple-dwelling units, which would support a cost effective potential upgrade of the cable network. These are typically less susceptible to competition from satellite due to restrictions in the installation of satellite dishes. North Rhine-Westphalia has a relatively diverse population, with approximately 2.0 million foreign inhabitants, approximately 10.9% of the total population. The region features the largest Turkish community in Germany, representing more than 33% of all Turkish speakers in the country, or more than 600,000 people. This and other important minorities from countries such as Russia and Poland create additional opportunities for segmented cable services, such as foreign language programming. We believe that such economic and demographic characteristics make North Rhine-Westphalia an attractive region for a cable services provider relative to other German Federal States. High population density leads to certain cost efficiencies in the implementation and operation of cable network infrastructure. Higher levels of disposable income are likely to lead to greater demand for new services offered via cable. Finally, high numbers of foreign residents indicate that a significant market exists for foreign language pay television offerings. 148 2000 2001 2002 2003 CAGR (1) Population (million) (1) 18.009 18.052 18.076 18.079 0.13% Density (population / km²) 528 530 530 530 0.13% GDP (€ billion) 448.2 458.2 466.3 469.7 1.57% GDP / Capita (€) 24,888 25,382 25,797 25,980 1.44% Population breakdown (million) German citizen 16.011 16.064 16.096 16.114 0.21% Foreign nationalities 1.998 1.998 1.980 1.965 -0.55% (1) Size of North Rhine-Westphalia as of the end of 2003 was 34,083 km 2 . Source: Landesamt für Datenverarbeitung und Statistik Nordrhein-Westfalen According to industry sources as of December 2004, North Rhine-Westphalia has about 8.4 million television homes, of which approximately 4.8 million or 57.1% use cable television, approximately 3.2 million or 38.1% use satellite, and approximately 0.4 million or 4.8% use terrestrial transmission via antenna.
BUSINESS Unless otherwise indicated, market data is presented as of December 31, 2003 while iesy’s and ish’s subscriber data is presented as of December 31, 2004. Our Company We are the largest cable television operator in the German states of Hesse and North Rhine-Westphalia, with approximately 5.3 million subscribers. The regions in which we operate are characterized by attractive demographics for providing services over cable networks. Hesse has the highest GDP per capita, and North Rhine-Westphalia has the highest population density, in each case, of the nine former DTAG cable regions in Germany. We provide basic and premium cable television, high speed Internet access and telephony services. Our network passes approximately 8.4 million homes out of approximately 11.2 million total homes in the region, representing a 75.0% coverage rate, of which approximately 5.3 million homes are connected to our network and subscribe to our services, a 63.1% penetration rate. The upgraded portion of our network passes more than 1.5 million homes. The largest part of our business is the provision of basic cable television services, which is characterized by stable revenues and cash flows. For the year ended December 31, 2004 on a pro forma basis, we generated total revenues of €560.0 million and Adjusted EBITDA (as defined herein) of €262.2 million and €560.8 million of total revenues and €265.8 million of Adjusted EBITDA for the twelve months ended March 31, 2005. The ish Acquisition On March 11, 2005, iesy Hessen entered into a definitive agreement with Kabelnetz Ltd. to acquire ish (the “ish Acquisition”). The ish Acquisition closed on June 24, 2005 and was funded by a combination of existing cash on hand and the proceeds of the Refinancing and the Financing. See “The ish Acquisition” for further details. Our increased scale and advanced infrastructure are expected to reduce costs, limit capital expenditures, decrease reliance on suppliers, and open up new strategic opportunities. Economies of scale will allow us to purchase goods and services more cheaply, deploy capital more efficiently and spread costs and investments across a larger revenue base. By the end of 2005, our network and state-of-the-art network operations center (“NOC”) should technically enable us to distribute premium cable television signals to the vast majority of our homes passed. Our increased scale together with our combined technical platform also will make us a more attractive partner for broadcasters and content providers. The combined entity will furthermore benefit from cost synergies as well as the harmonization of best practices and products across both iesy and ish. The integration of two businesses in adjacent regions will be facilitated by their similar network strategies, a shared history of ownership by and separation from DTAG and similar corporate cultures. We intend to keep customer-oriented functions localized and take a deliberate approach to integrating other areas of the combined business. Our Products and Services Our products and services include the following: • Basic cable television. Our current basic cable offering consists of 30 to 36 analog television channels (depending on the region served) and up to 39 analog radio channels. Furthermore, homes that have a set-top box installed can also receive digital programming including that of the public broadcasters ARD and ZDF. Subscription and installation fees for our basic cable television business generated €480.0 million, or 85.7%, of our total revenues for the year ended December 31, 2004 and €117.6 million or 86.2% of our total revenues for the three months ended March 31, 2005 on a pro forma basis. We also received carriage fees totalling €41.2 million (7.4% of our total revenues) for the year ended December 31, 2004 and €10.6 million or 7.8% for the three months ended March 31, 2005 on a pro forma basis from national, regional and local broadcasters for the distribution of their programming over our network. • Premium cable television. Our primary premium cable television offerings are marketed under the “ish Digital TV” brand in North Rhine-Westphalia. Packages offered under this brand include ish Music, ish Active, ish Lifestyle and ish Kino, which is a pay-per-view service provided by arrivo. Our premium cable television products also include foreign-language program packages, and an English language program package introduced in the fourth quarter of 2004 in Frankfurt and southern Hesse. We plan to extend the ish premium cable television offerings to Hesse, and the iesy tv USA UK television offerings to North Rhine-Westphalia, and we also intend to launch additional premium cable television services. This will be facilitated by the similar network strategies of iesy and ish, technically allowing the NOC in Kerpen to service the vast majority of our homes connected by the end of 2005. Our subscribers can also gain access to the premium cable television offerings of Premiere, the dominant German pay television provider. We estimate that more than 600,000 cable television homes in Hesse 149