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REGISTRATION NO. 333 -- 29869
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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AMENDMENT NO. 3
TO
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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@ENTERTAINMENT, INC.
(Exact Name of Registrant as Specified in its Charter)
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<S> <C> <C>
DELAWARE 4841 06--1487156
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
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ONE COMMERCIAL PLAZA
HARTFORD, CT 06103-3585
(860) 549-1674
(Address, including Zip Code and Telephone Number, including
Area Code, of Registrant's Principal Executive Offices)
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ROBERT E. FOWLER, III
@ENTERTAINMENT, INC.
ONE COMMERCIAL PLAZA
HARTFORD, CT 06103-3585
(860) 549-1674
(Address, including Zip Code and Telephone Number,
including Area Code, of Agent for Service)
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COPIES TO:
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<S> <C>
MARC R. PAUL, ESQ. PAMELA M. GIBSON, ESQ.
BAKER & MCKENZIE SHEARMAN & STERLING
815 CONNECTICUT AVENUE, N.W. 199 BISHOPSGATE
WASHINGTON, DC 20006 LONDON EC2M 3TY
ENGLAND
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED JULY 29, 1997
9,500,000 SHARES
@ENTERTAINMENT, INC.
[ENTERTAINMENT LOGO] COMMON STOCK
(PAR VALUE $.01 PER SHARE)
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Of the 9,500,000 shares of Common Stock offered, 6,175,000 shares of Common
Stock are being offered hereby in the United States and 3,325,000 shares of
Common Stock are being offered in a concurrent International Offering outside
the United States (of which are being sold to Handlowy Investments
S.ar.l.). The initial public offering price and the aggregate underwriting
discount per share of Common Stock are identical for both Offerings. See
"Underwriting".
All the shares of Common Stock offered hereby are being sold by
@Entertainment, Inc. Prior to the Offerings, there has been no public market for
the Common Stock. It is currently estimated that the initial public offering
price of the Common Stock will be between $18.50 and $22.00 per share. For
factors to be considered in determining the initial public offering price, see
"Underwriting".
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "ATEN".
SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN
FACTORS RELEVANT TO AN INVESTMENT IN THE COMMON STOCK.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<CAPTION>
PROCEEDS TO
INITIAL PUBLIC UNDERWRITING @ENTERTAINMENT,
OFFERING PRICE DISCOUNT(2) INC. (1)(3)
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<S> <C> <C> <C>
Per Share of Common Stock............... $ $ $
Total (4)............................... $ $ $
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(1) @Entertainment, Inc. has entered into an Advisory Services Agreement with
Handlowy Investments S.ar.l., pursuant to which @Entertainment, Inc. has
agreed to pay Handlowy Investments S.ar.l. a fee of $750,000 for certain
financial and banking advisory services to be rendered by Handlowy
Investments S.ar.l. or its affiliates to @Entertainment, Inc. See
"Underwriting."
(2) @Entertainment, Inc. has agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
(3) Before deducting estimated expenses of approximately $1.5 million payable by
@Entertainment, Inc.
(4) @Entertainment, Inc. has granted the U.S. Underwriters an option for 30 days
to purchase up to an additional 926,250 shares of Common Stock at the
initial public offering price per share, less the underwriting discount,
solely to cover over-allotments. Additionally, @Entertainment, Inc. has
granted the International Underwriters a similar option with respect to an
additional 498,750 shares as part of the concurrent International Offering.
If such options are exercised in full, the total initial public offering
price, underwriting discount and proceeds to @Entertainment, Inc. will be
$ , $ and $ , respectively. See "Underwriting".
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The shares of Common Stock offered hereby are offered severally by the U.S.
Underwriters, as specified herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part. It is expected
that certificates for the shares will be ready for delivery in New York, New
York on or about , 1997, against payment therefor in immediately
available funds.
GOLDMAN, SACHS & CO. MERRILL LYNCH & CO.
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The date of this Prospectus is July , 1997.
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[MAP OF POLAND]
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CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID, IN CONNECTION WITH THE
OFFERING. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING".
------------------------
NO ACTION HAS BEEN OR WILL BE TAKEN IN ANY JURISDICTION BY @ENTERTAINMENT,
INC. OR BY ANY UNDERWRITER THAT WOULD PERMIT A PUBLIC OFFERING OF THE COMMON
STOCK, PAR VALUE $.01 PER SHARE (THE "COMMON STOCK"), OF @ENTERTAINMENT, INC.,
OR POSSESSION OR DISTRIBUTION OF A PROSPECTUS IN ANY JURISDICTION WHERE ACTION
FOR THAT PURPOSE IS REQUIRED OTHER THAN IN THE UNITED STATES. PERSONS INTO WHOSE
POSSESSION THIS PROSPECTUS COMES ARE ADVISED BY @ENTERTAINMENT, INC. AND THE
UNDERWRITERS TO INFORM THEMSELVES ABOUT, AND TO OBSERVE ANY RESTRICTIONS AS TO,
THE OFFERINGS AND DISTRIBUTION OF THIS PROSPECTUS.
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PROSPECTUS SUMMARY
The following summary is qualified by, and should be read in conjunction
with, the more detailed information and consolidated financial statements and
notes thereto appearing elsewhere in this Prospectus. Except as otherwise noted,
all information in this Prospectus (i) reflects the completion of the
Reorganization (as defined in "The Reorganization") as of June 22, 1997, whereby
@Entertainment, Inc. ("@Entertainment") became the new parent holding company of
Poland Communications, Inc. ("PCI"), which through its subsidiaries conducts the
Company's existing cable television and programming businesses, and of At
Entertainment Limited ("@EL"), a new company formed to develop the Company's
digital satellite direct-to-home business, (ii) gives effect to the capital
stock adjustment which occurred as part of the Reorganization, whereby each
outstanding share of common stock of PCI was exchanged for 1,000 shares of
Common Stock of @Entertainment (the "Capital Adjustment"), (iii) assumes no
exercise of the Underwriters' over-allotment options, and (iv) gives effect to
the automatic conversion, upon the closing of the Offerings, of 2,500 shares of
Series B Preferred Stock, par value $.01 per share, of @Entertainment (the
"Series B Preferred Stock") into 4,862,000 shares of Common Stock. See "The
Reorganization" and "Description of Capital Stock". As used in this Prospectus,
references to "@Entertainment" mean @Entertainment, Inc. and to the "Company"
mean @Entertainment and its consolidated subsidiaries, including PCI, @EL and
two 49% owned subsidiaries, Poltelkab Sp. z o.o. ("Poltelkab") and Polska
Telewizja Kablowa-Ryntronik S.A. ("PTK-Ryntronik"). @Entertainment prepares its
consolidated financial statements in accordance with generally accepted
accounting principles in the United States ("U.S. GAAP") in U.S. Dollars. For
the convenience of the reader, amounts in this Prospectus are expressed
principally in U.S. Dollars. Data regarding the Company's cable television
subscribers are at May 31, 1997 and include approximately 98,000 cable
television subscribers and approximately 163,000 homes passed attributable to
cable systems acquired by the Company after May 31, 1997, unless otherwise
noted. Certain terms used in this Prospectus are defined in the Glossary
included herein as Annex A.
THE COMPANY
GENERAL
The Company operates the largest multichannel pay television business in
Poland. Through the Company's cable television networks, the most extensive in
Poland, the Company serves the largest base of subscribers of any cable operator
in Poland, totaling approximately 688,000 subscribers at May 31, 1997 (of whom
approximately 79% subscribe to the Company's package with the largest number of
channels (the "Basic Tier")). The Company believes that it has established a
favorable reputation in the Polish market for providing modern, reliable
technology, a broad selection of quality programming and professional customer
service. The Company intends to expand its distribution capacity in Poland
through the expansion of its cable television business and the development of a
complementary digital satellite direct-to-home ("D-DTH") broadcasting service.
The Company currently creates, produces, develops and acquires programming,
including programming for its two proprietary Polish-language channels, for
distribution across its cable networks. The Company intends to expand these
activities to develop a branded digital encrypted platform of proprietary
Polish-language programming (the "Programming Platform") under the brand name
@TV. This Programming Platform will be distributed on a subscription basis
across the Company's cable television and D-DTH systems and sold on a wholesale
basis to other cable networks in Poland.
Since it began the construction of its first cable network in Gdansk in
1990, the Company has grown aggressively through acquisitions (generally of
smaller, poorly capitalized cable operators) and through the build-out of its
own cable networks. Over the last three years, the Company has experienced
average annual growth of approximately 60% in revenue, 130% in EBITDA (as
defined in "Summary Consolidated Financial Data") and 96% in cable television
subscribers. The Company believes that EBITDA and related measures of cash flow
from operating activities serve as important financial indicators in measuring
and comparing the operating performance of cable television compa-
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nies. EBITDA is not intended to represent cash flow from operations under U.S.
GAAP and should not be considered as an alternative to net income (loss) as an
indicator of the Company's operating performance or to cash flows from
operations as a measure of liquidity. The Company incurred operating losses of
$4.6 million and $1.2 million in 1992 and 1993, respectively. The Company
generated operating income of $0.4 million and $3.5 million in 1994 and 1995,
respectively, but had operating losses of $1.3 million and $1.0 million for 1996
and the first three months of 1997, respectively. Net losses were $4.5 million,
$2.3 million, $2.4 million, $1.3 million and $6.6 million in 1992, 1993, 1994,
1995 and 1996, respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations". The Company is developing its
business in the following three areas.
CABLE TELEVISION. With over 1,292,000 homes passed and approximately
688,000 cable television subscribers at May 31, 1997, the Company estimates it
has approximately twice as many subscribers as the next two largest cable
operators in Poland combined. The Company believes that additional cable
television subscriber growth can be achieved through a combination of
acquisitions, increased penetration and new network build-out. All of the
Company's cable television subscribers are located in eight regional clusters
encompassing eight of the ten largest cities in Poland, including those cities
which the Company believes provide the most favorable demographics for cable
television in the country. The Company has invested more than $85 million to
construct fibre-optic cable networks, which it believes are among the most
technologically-advanced in Poland and are comparable to modern cable networks
in the United States. The networks constructed by the Company provide excess
channel capacity and are designed to maximize reliability. It is the Company's
policy to upgrade substandard networks that it has acquired as rapidly as
practicable.
DIGITAL SATELLITE DIRECT-TO-HOME BROADCASTING. The Company intends to
expand its distribution capacity by developing a complementary satellite D-DTH
broadcasting service for Poland under the brand name @TV. The Company expects to
launch its D-DTH service in the first half of 1998 with an initial package of
approximately 14 basic Polish-language channels and one optional premium Polish-
language movie channel. It believes @TV will be the first Polish-language D-DTH
service available to the Polish market. The Company has entered into contracts
to lease three transponders on the Astra 1E and 1F satellites which would
provide the capacity to transmit up to 21 channels. The Company will initially
transmit via satellite uplink to the Polish market from a location in the United
Kingdom. The Company has applied for and has been granted a license for the
first of its proposed D-DTH broadcast channels from the Independent Television
Commission ("ITC") in the United Kingdom and intends to apply for additional
licenses for each of its channels broadcast from the United Kingdom, to the
extent such a license has not been obtained by the program provider of the
channel. The Company is currently studying the feasibility of locating its
uplink and production facilities in Poland and of applying for the Polish
broadcasting licenses necessary to engage in such activities. The Company is
currently negotiating agreements with Philips Business Electronics B.V.
("Philips"), which are expected to be concluded shortly, for the supply of an
end-to-end package of products and services which will be distributed, installed
and serviced through over 1,000 Philips authorized electronics retailers across
Poland. The Company intends to use a portion of the net proceeds from the
Offerings to acquire from Philips approximately 500,000 D-DTH reception systems
("D-DTH Reception Systems") consisting of a digital integrated receiver decoder
("IRD"), a smartcard-based proprietary conditional access system based on
Philips' CryptoWorks(R) technology and a satellite dish and related equipment
(which together form the outdoor unit or "ODU"). The Company intends to
distribute the D-DTH Reception Systems at a significantly subsidized cost to
initial subscribers in Poland (the "Initial Subscribers") to the Company's D-DTH
service. See "-- Financing Growth; Substantial Leverage".
The Company expects that its D-DTH business will incur substantial
operating losses for its first several years of operation while it is developed
and expanded. Although certain of the Company's executives have experience in
the analog satellite direct-to-home ("A-DTH") market in Poland, the Company will
have no experience delivering D-DTH services prior to the launch of its D-DTH
pilot project expected in the beginning of 1998 and of its full service expected
in the first half of 1998. In addition, under the Company's current plans,
certain critical components and services used in the Com-
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pany's D-DTH satellite transmission system, including the IRDs, the
CryptoWorks(R) proprietary conditional access system and associated smartcards
and the ODU, as well as retail, installation and support services, will be
provided exclusively by Philips. Although the Company is currently negotiating
agreements with Philips for the provision of products and services, there can be
no guarantee that the Company will be successful in negotiating such agreements
with Philips on mutually acceptable terms, if at all. See "Risk Factors -- Risks
Related to the Company -- Limited D-DTH Experience and Uncertainties Associated
with the D-DTH Market" and "-- Dependence on Philips as Principal Supplier".
PROGRAMMING. The Company currently creates, produces, develops and acquires
programming, including programming for its two proprietary Polish-language
channels, for distribution across its cable networks. ProCable Sp. z o.o.
("ProCable"), a 33%-owned subsidiary, was formed to develop proprietary
programming and currently broadcasts two self-branded Polish-language channels
across the Company's cable networks. The Company has also set up a wholly-owned
subsidiary, Mozaic Entertainment, Inc. ("Mozaic"), to develop proprietary
programming, either directly or through joint ventures. Through a joint venture,
Mozaic currently produces Atomic TV, a Polish-language music channel. In
addition to ProCable, Mozaic and its existing joint ventures, the Company
intends to form a variety of joint ventures or subsidiaries to own and develop
proprietary Polish-language programming for its Programming Platform. Towards
this end, the Company is currently negotiating with a number of Polish and
international programming providers to form joint ventures which will be
responsible for the creation of thematic programs and channels, such as action
and adventure, science fiction, sports and family entertainment channels. The
Company intends to either have equity ownership in, and/or exclusive agreements
with a number of such programming providers, thus allowing it to create an
attractive branded package of proprietary high-quality programming designed
specifically for the Polish market. To date, the Company has concluded letters
of intent regarding the World Shopping Network, Knowledge TV, BET on Jazz and
Twoj Styl, a Polish lifestyle magazine. The Company is also negotiating a
partnership with Telewizja Polska S.A. ("TVP"), the Polish state-owned
broadcaster, which is subject to certain Polish regulatory and other approvals,
to transmit TVP's popular channels on the Company's Programming Platform and
provide the Company with exclusive pay television access to TVP's extensive
Polish-language television library. There can be no assurances that the Company
can enter into agreements on satisfactory terms with TVP or any of these program
providers. The Company intends not only to distribute its Programming Platform
on a subscription basis across its own cable television and D-DTH systems, but
also to sell the Programming Platform on a wholesale basis to other cable
networks in Poland.
STRATEGY AND OPERATING STRENGTHS
The Company's principal objective is to enhance its position as the leading
provider of multichannel pay television in Poland by capitalizing on the
favorable market opportunities that it believes exist in Poland for high quality
Polish-language programming carried over sophisticated cable television and
D-DTH systems. The Company's business strategy is designed to increase its
market share and subscriber base, maximize revenue per subscriber and minimize
churn by emphasizing branding, advanced and expanded distribution technology,
superior Polish-language programming and customer service. The Company believes
that it is well-positioned to execute its business strategy in the Polish
multichannel pay television market based on the following operating strengths.
LEADING MARKET POSITION. The Company is currently the largest cable
television operator in Poland, and estimates that it has approximately twice as
many subscribers as the next two largest operators in Poland combined. Upon
completion of the Acquisitions described herein (see "-- Acquisitions"), the
Company estimates that it will have approximately 708,000 cable television
subscribers, representing approximately 28% of all cable television subscribers
in Poland and approximately 47% of all cable television subscribers in Poland to
systems offering approximately 20 or more channels. The Company believes that it
is well-positioned to grow its cable television business, as it estimates that
at May 31, 1997, approximately 8.8 million Polish homes remained unpassed by
cable television networks and, of the approximately 3.5 million homes passed by
cable in Poland, it estimates approximately 29%
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were not cable subscribers. Many cable subscribers in Poland are served by
small, often poorly capitalized, cable operators, which generally feature poor
quality and limited channel offerings, but at low rates and with relatively high
penetration. The Company believes that there are opportunities for large,
professional companies, such as the Company, to acquire at attractive prices or
displace these smaller cable operators in Poland, due to the burden on such
operators of attempting to comply with recently enacted regulations that, among
other things, set minimum technical standards for television networks, and the
frequent lack of exclusivity of cable operators' agreements with co-operative
housing authorities ("co-op authorities"), which facilitates overbuilding of
smaller, poor quality cable operators. The Company's D-DTH strategy is to
distribute at a significantly subsidized cost D-DTH Reception Systems to the
approximately 500,000 Initial Subscribers, which is designed to achieve rapid
and high penetration of the Polish market. The Company believes that it will be
the first Polish-language D-DTH service available to the Polish market which,
when combined with the continued expansion of its cable television and
programming businesses, will enhance the Company's position as the leading
provider of multichannel pay television in Poland.
PROPRIETARY POLISH-LANGUAGE PROGRAMMING. The Company believes that there is
significant unsatisfied demand in its market for a variety of high-quality
Polish-language programming. The Company intends to develop its Programming
Platform for distribution across its cable television and D-DTH systems, as well
as for sale on a wholesale basis to other cable networks in Poland. The Company
intends to expand its current proprietary Polish-language programming for its
Programming Platform by establishing equity ownership in, and/or exclusive
programming arrangements with, a wide variety of channels designed to provide
the Polish market with an offering of first-run films, live local sports and
multiple thematic channels in Polish, which the Company believes will be
attractive to its customer base and advertisers.
ADVANCED DISTRIBUTION TECHNOLOGY. The Company's cable television networks
(other than those it has acquired and is in the process of rebuilding to its
standards) have bandwidths of at least 550MHz and, in most cases, have the
capacity to be cost-effectively reconfigured to provide additional services such
as voice and data transmission. The Company's cable television networks
constructed by it also provide excess channel capacity. The Company expects that
its D-DTH service will be among the first digital television platforms launched
in Europe, and the Company believes it will be the first Polish-language D-DTH
service available to the Polish market. The Company is currently negotiating
with Philips for an end-to-end package of products and services, which the
Company expects will enable it to provide a wide range of sophisticated services
to its D-DTH customers.
ABILITY TO REALIZE OPERATING EFFICIENCIES AND ADDITIONAL REVENUE
SOURCES. The Company believes it can achieve substantial operating efficiencies
and higher margins through centralized billing systems and other subscriber
management functions, as well as through the sale of its Programming Platform to
other cable television networks in Poland. Continued expansion of the Company's
subscriber base should provide increasing economies of scale by, among other
things, permitting the Company to spread its fixed costs over an increasing
subscriber base. In addition, the Company believes that there are opportunities
to develop a variety of new value-added services, including (i) new television
services, such as premium channels, additional advertising and pay-per-view
("PPV"), (ii) new network services, such as internet access and voice telephony,
and (iii) ancillary services, such as database marketing, branded financial
services and a subscriber magazine.
HIGH PENETRATION AND LOW CHURN. The Company is currently achieving premise
penetration of approximately 53% of homes passed. In certain areas where the
Company has operated its networks for an extended period of time, such as
portions of the Gdansk regional cluster, the penetration rate is approximately
63%. The Company believes that it can improve its penetration by expanding its
current program offering, which includes only ten Polish-language channels not
available on terrestrial frequencies, through the addition of its Programming
Platform. In addition, the Company has experienced annual churn of less than 10%
historically. Churn rates for 1994, 1995 and 1996 were 9.1%, 9.2% and 7.8%,
respectively. The Company expects, however, that it may experience increases in
its churn rate above historical levels during the implementation across its
cable networks of its new pricing strategy,
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designed to maximize revenue per subscriber and achieve real profit margin
increases in U.S. Dollar terms, which commenced in January 1997.
ATTRACTIVE OPERATING AND REGULATORY ENVIRONMENT. Poland is the
fifth-largest television market in Europe, with approximately 12.3 million
television homes at May 31, 1997 as estimated by the Company. Levels of
television viewing in Poland are among the highest in Europe, at an average of
279 minutes per day (over 4 1/2 hours) in 1995. The Company estimates that there
are approximately 1.6 million satellite homes (able to currently receive largely
unencrypted anolog foreign-language programming) and nearly 2.5 million cable
television subscribers in Poland. Current law does not permit the Polish
authorities to regulate cable television or DTH rates, and Poland is a party to
the 1989 Council of Europe's Convention on Transfrontier Television (the
"Convention"), which requires the Polish authorities to guarantee freedom of
reception and retransmission of program services which meet the requirements of
the Convention.
EXPERIENCED AND MOTIVATED MANAGEMENT. The Company has established a
management team of senior executives who have significant experience in the
cable television and DTH businesses, and are familiar with the Polish television
market, business practices, language and customs. The team is led by Robert E.
Fowler, III, Chief Executive Officer of @Entertainment, who has significant
cable, programming and broadcasting experience, having managed operations in
Poland and the United States, and George Z. Makowski, Chief Operating
Officer-Cable Television of PCI, who has significant cable and
telecommunications experience, having managed operations in Poland and Western
Europe. The management team also includes several key local executives and
managers who have significant experience in the Polish television market. The
Company's D-DTH business will be managed by David Warner, Chief Operating
Officer-DTH of @EL, who has significant experience in A-DTH services for Poland
and other countries in Europe. Mr. Warner will lead a team of local managers
experienced in the Polish A-DTH market. The Company believes that many of the
policies and procedures developed for its cable business will be applicable to
its D-DTH business, and that this management team will contribute local
expertise which the Company believes will be essential in expanding its cable
television and programming businesses and developing its D-DTH broadcasting
business. The Company has established management and employee stock option plans
which it believes will improve its ability to retain its qualified management
and employees.
ACQUISITIONS
Since March 31, 1997, the Company has completed the acquisition of all or a
substantial portion of the capital stock or assets of three cable television
systems in Poland, and intends to acquire a fourth such system, as well as a 50%
equity interest in a Polish publishing company with which it intends to develop
programming and ancillary services (the "Acquisitions"). The aggregate
consideration paid or to be paid by the Company in connection with the
Acquisitions (including amounts for stockholder loans) is expected to be
approximately $35.0 million. The three cable systems already acquired in the
Acquisitions serve approximately 113,000 subscribers and pass approximately
189,000 homes, while the cable system expected to be acquired serves
approximately 20,500 subscribers, representing all of the homes passed by that
system. The consummation of the Acquisitions has or will result in the expansion
of the Company's cable operations within its existing regional clusters and the
establishment of one new regional cluster. PCI has or intends to use a portion
of the net proceeds of the offering of its 9 7/8% Senior Notes Due 2003 (the
"Old Notes") in October 1996 to consummate the Acquisitions. The Company has
obtained the approval of the Polish Office for Protection of Competition and
Consumers (the "Anti-Monopoly Office") for the Acquisitions which have been
consummated, and the Company intends to apply for approval of the remaining
Acquisitions. The Company believes that it will be required to obtain the
Anti-Monopoly Office's approval for certain future acquisitions as well. The
Company continually evaluates acquisition candidates and expects that it will
continue to acquire attractive cable television operators and programmers. There
can be no assurance as to the timing of the closing of the
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Acquisitions that are currently pending or as to whether or on what terms the
pending Acquisitions will actually be consummated. See "Business -- Cable --
Acquisitions".
FINANCING GROWTH; SUBSTANTIAL LEVERAGE
Cable television operators typically experience losses and negative cash
flow in their initial years of operation due to large capital investments
required for the construction or acquisition of their cable networks and the
administrative costs incurred in connection with commencing operations. The
Company currently expects to finance the initial roll-out cost of its D-DTH
business primarily with the net proceeds from the Offerings. However, ongoing
development and expansion of the D-DTH business and the development and
expansion of its Programming Platform will require significant additional
financing, and such businesses are expected to incur operating losses and
negative cash flow for the first several years of operations.
The Company expects that an aggregate of approximately $315 million in 1997
and 1998 will be required to fund (i) the commencement and development of its
D-DTH business, which will include capital expenditures and expenditures for
operating expenses, working capital and other general corporate purposes
(approximately $200 million, including up to approximately $190 million to
subsidize the cost of the D-DTH Reception Systems to the Initial Subscribers in
an amount of up to approximately $380 per subscriber), (ii) the expansion of its
programming business (approximately $25 million), (iii) the consummation of the
Acquisitions and future acquisitions (approximately $60 million) and (iv) the
building out and rebuilding of its cable television networks (approximately $30
million). The Company believes that, in addition to the net proceeds from the
Offerings, remaining funds from the offering of the Notes and cash from
operations, it will need additional funding of approximately $100 million to
fulfill its current business development plans through the end of 1998. The
Company expects that it will also require additional external funding for its
business development plans in years subsequent to 1998 if the Company continues
to subsidize the cost to subscribers of the D-DTH Reception Systems and to
refinance all or a portion of the Notes (as hereinafter defined) at maturity.
There can be no assurance that the Company will be able to borrow funds under
any credit facilities or that suitable debt or equity financing will be
available to the Company or, if available, that the terms thereof will be
attractive to the Company. However, the pace and amount of the Company's
expenditures for its business development plans are largely discretionary. To
the extent that the Company is unable to raise additional financing, it intends
to concentrate its available funds on, in order of priority, the development of
its D-DTH business and its Programming Platform, build out of its cable networks
and acquisition of additional cable systems. See "Risk Factors -- Risks Related
to the Company -- Need for Additional Financing" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources".
The Company has incurred substantial indebtedness. On October 31, 1996,
PCI, a subsidiary of @Entertainment, issued $130 million aggregate principal
amount of its Old Notes. At March 31, 1997, the Company had approximately $129.5
million aggregate principal amount of indebtedness outstanding. The Company
expects to seek additional debt financing in the next 12 to 18 months to finance
the development of its new D-DTH business, potential acquisitions and the
expansion of its cable and programming businesses. The Company anticipates that,
in light of the amount of its existing indebtedness and the expected incurrence
of additional indebtedness to finance the development of its new D-DTH business,
potential acquisitions and the expansion of its cable and programming
businesses, it will continue to have substantial leverage for the foreseeable
future.
REGULATION
The operation of the Company's cable television and D-DTH businesses is
highly regulated and dependent upon obtaining and maintaining required approvals
and licenses. In Poland, the operation of these businesses is regulated by
various governmental bodies, which apply a permitting system for cable
television operators and limitations on foreign ownership. In addition, the
Company's D-DTH broadcasting service will be regulated by the U.K. authorities
as a satellite television service and will be
6
<PAGE> 10
required to obtain a license for each of its channels broadcast from the United
Kingdom, to the extent such a license has not been obtained by the program
provider of that channel. See "Risk Factors -- Risks Related to Regulation" and
"Regulation".
HISTORY; PRINCIPAL STOCKHOLDERS; REORGANIZATION
The Company was founded in 1990 by David T. Chase, a Polish-born investor
who has successfully operated a variety of businesses, including cable
television and broadcasting interests in the United States, since leaving Poland
in 1946. Since it began the construction of its first cable network in Gdansk in
1990, the Company has grown aggressively through acquisitions (approximately 40
acquisitions since 1992, generally of smaller, poorly capitalized cable
operators) and through the build-out of its own cable networks. The Company's
total number of cable television subscribers has grown from approximately 43,000
at December 31, 1992 to approximately 688,000 at May 31, 1997. Approximately 50%
of this increase has been achieved through the build-out of the Company's
existing cable networks. In March 1996, ECO Holdings III Limited Partnership
("ECO"), of which the general partner is an entity controlled by Advent
International Corporation ("Advent"), acquired an interest in the Company. At
March 31, 1997, Mr. Chase and certain members of his family and family trusts
(the "Chase Family", and together with ECO, the "Principal Stockholders") and
ECO had invested approximately $86 million in PCI. In October 1996, PCI issued
$130 million aggregate principal amounts of Old Notes to fund its continued
expansion program and had approximately $84 million in cash and investment
securities at March 31, 1997. The Chase Family provided the Company with
significant management resources and technical support in the early stages of
its operations, and the Principal Stockholders provide the Company with ongoing
access to their extensive television and media expertise. Mr. Chase is the
chairman of @Entertainment. See "Management".
In June 1997, the Company effected the Reorganization to facilitate the
development of its D-DTH business and the expansion of its cable television and
programming businesses. @Entertainment is a Delaware corporation formed in June
1997 as the new parent company of PCI and @EL. PCI, a New York corporation
established in November 1989, conducts, through its subsidiaries, the Company's
existing cable television and programming businesses. @EL, a corporation
incorporated under the laws of England and Wales in June 1997, will develop the
Company's D-DTH business. As a result of the Reorganization, @Entertainment owns
100% of the outstanding shares of voting stock of PCI and @EL, which are the
principal assets of @Entertainment. See "The Reorganization". After giving
effect to the Reorganization but prior to completion of the Offerings, the Chase
Family and ECO own approximately 42% and 39%, respectively, of the outstanding
voting stock of @Entertainment. Upon completion of the Offerings, the Chase
Family and ECO will beneficially own approximately 28% and 26%, respectively, of
the outstanding shares of Common Stock of @Entertainment. As a result, the
Principal Stockholders, acting together, will be able to elect all of
@Entertainment's directors and otherwise control the Company's operations. See
"Risk Factors -- Risks Related to the Company -- Control by Existing
Stockholders; Potential Anti-Takeover Provisions" and "Principal Stockholders".
@Entertainment's principal executive office is located at One Commercial
Plaza, Hartford Connecticut 06103-3585 and its telephone number is (860)
549-1674.
CORPORATE ORGANIZATIONAL STRUCTURE
The chart on the following page outlines the current organizational
structure and minority ownership interest structure of the Company, after giving
effect to the Reorganization and the Acquisitions (other than the pending
Acquisition):
7
<PAGE> 11
[CHART DEPICTING OWNERSHIP PERCENTAGES]
8
<PAGE> 12
[Chart shows @Entertainment, Inc. ("@Entertainment") owns 100% of At
Entertainment Limited ("@EL") and Poland Communications, Inc. ("PCI'). PCI owns
92.3% (see note (a)) of Poland Cablevision (Netherlands) B.V., 49.0% of
Poltelkab Sp. z o.o. ("Poltelkab") (see note (f)), 48.7% of Polska Telewizja
Kablowa-Ryntronik S.A. ("PTK-Ryntronik") (see note (d)), 100.0% of Mozaic
Entertainment Inc. ("Mozaic") (see note (b)), 33.0% of ProCable Sp. z o.o.
("ProCable") (see note (b) and (g)), 49.0% of TV KABEL Sp. z o.o. ("TV KABEL")
(see note (k)), 49.0% of Polska Telewizja Kablowa -- Szczecin Sp. z o.o.
("PTK-Szczecin"), 40.0% of Telkat Sp. z o.o. ("Telkat"), and 48.9% of Gosat-
Service Sp. z o.o. ("GOSAT") (see note (n)). PCBV owns 100.0% of Polska
Telewizja Kablowa S.A. ("PTK, S.A.") (see note (c)), 100.0% of Polska Telewizja
Kablowa-Warszawa S.A. ("PTK-Warsaw") (see note (e)), 100.0% of Polska Telewizja
Kablowa-Krakow S.A. ("PTK-Krakow") (see note (e)) and 46.8% of PTK-Ryntronik
(see note (d)).]
[Poltelkab owns 100% of Polska Telewizja Kablowa-Lublin S.A.
("PTK-Lublin"), 100.0% of TV-SAT Ursus Sp. z o.o., 2.0% of TV KABEL, 51.0% of
PTK-Szczecin, 60% of Telkat and 11.7% of GOSAT. PTK-Szczecin owns 1.4% of
Szczecinska TK Sp. z o.o. (see note (l)) and 50.0% of Otwocka TK Sp. z o.o. (see
note (m)) PTK-Warsaw owns 100.0% of ETV Sp. z o.o. ("ETV"). PTK-Ryntronik owns
75.1% of Opolskie TT S.A. (see note (h)), 100% of KOLOR-SAT Sp. z o.o.
("Kolor-Sat"), and 100% of Czestochowska TK Sp. z o.o. Mozaic owns 100% of
Mozaic Entertainment Sp. z o.o. and 45.0% of Ground Zero Media Sp. z o.o.
("GZM") (see note (i)). ProCable owns 22.0% of Polskie Media S.A. ("Polskie
Media") (see note (j)).]
9
<PAGE> 13
- ---------------
(a) The minority shareholders of PCBV have a claim against 7.7% of the profits
and equity of PCI's subsidiaries that compete with PCBV and PCI has agreed
to share the profits of such subsidiaries with the minority PCBV
shareholders on a pro rata basis. In addition, PCI has made an offer to buy
the outstanding shares of PCBV held by the minority PCBV shareholders. See
"Certain Relationships and Related Transactions -- PCBV Shareholders'
Agreement". Reece Communications Inc. owns 6.0%, Rutler-Dunn Communications,
Inc. owns 1.0%, Frank N. Cooper owns 0.4%, and Poland Cablevision U.S.A.
Inc. owns 0.3% of the shares of PCBV.
(b) Represents companies that are not subject to the restrictive covenants in
the Indenture.
(c) Currently, PCBV owns 97.9% of the shares of PTK, S.A. PCI has entered into
an agreement to purchase the remaining shares of PTK, S.A. held by
Poltelkab.
(d) Currently PCBV owns 46.8% and Poltelkab owns 4.5% of the shares of
PTK-Ryntronik and PCBV holds convertible debt that, if converted, would
bring its total ownership of PTK-Ryntronik to approximately 72% as of
December 31, 1996. The Company has signed agreements to purchase the
remaining shares of capital stock of PTK-Ryntronik which sale agreements are
subject to certain conditions. See "Certain Relationships and Related
Transactions -- Ryntronik".
(e) PTK-Krakow has transferred, and PTK-Warsaw intends to transfer, their cable
television assets to PTK, S.A.
(f) Andrzej Muras owns 14.0%, Leszek Ekiert owns 10.0%, Ryszard Pospeszynski
owns 10.0%, Marek Sowa owns 8.5%, and Waclaw Czepinski owns 8.5% of the
shares of Poltelkab.
(g) Jacek Skurtys owns 47.0% and Fundacja Przyjaciele Szpitala Dzieciecego przy
Litewskiej owns 20.0% of the shares of ProCable.
(h) Ryszard Baginski owns 20.0% of the preferred shares A and 504 individuals
(subscribers) each own one common share B of Opolskie Towarzystwo
Telewizyjno Telegraficzne S.A.
(i) Polygram International Holdings B.V. owns 21.0%, Planet 24 Productions
Limited owns 14.0%, Stephen R. Groth owns 7.0%, Marc A. Bushala owns 6.0%,
and Todd Stump owns 7.0% of the shares of GZM.
(j) Wincenty Zeszuta owns 0.3%, "El Trade" Sp. z o.o. owns 0.3%, "Ambresa" Sp.
z o.o. owns 5.3%, Zdzislaw Bialy owns 40.3%, and founding shareholders
(including Iwona Buchner, Henryk Chodysz, Januariusz Goscimski, Lech
Jaworowicz, Leonard Prasniewski, Janusz Wojcik, and Tadeusz Przezdziecki)
own 31.8% of the shares of Polskie Media.
(k) Miroslaw Knocinski owns 49.0% of the shares of TV Kabel.
(l) SM "Srodmiescie" owns 37.4% and SM "Dab" owns 61.2% of the shares of
Szczecinska Telewizja Kablowa Sp. z o.o.
(m) Otwocka Spoldzielnia Mieszkaniowa owns 50.0% of the shares of Otwocka TK Sp.
z o.o.
(n) Stanislaw Pracajffio owns 14.9%, Henryk Szuber owns 0.9%, Zdzisffiaw
Boguszynski owns 1.1%, Leszek Brzozowski owns 3.4%, Witold Fiaffikowski owns
3.9% and Ryszard Wojtaszek owns 15.3% of the shares of GOSAT.
10
<PAGE> 14
THE OFFERINGS
<TABLE>
<S> <C>
U.S. Offering................................ 6,175,000 shares
International Offering....................... 3,325,000 shares
Total...................................... 9,500,000 shares
Common Stock to be outstanding after the
Offerings (1).............................. 33,310,000 shares
</TABLE>
Use of Proceeds..................... Assuming an offering price of $20.25
per share (the midpoint of the
estimated range specified on the cover
page of the Prospectus), the net
proceeds of the Offerings are expected
to be approximately $177.4 million. The
Company plans to use $60.0 million to
purchase all of the PCI Series A
Preferred Stock and Series C Preferred
Stock held by certain of the Principal
Stockholders and approximately $1.23
million for the payment of bonuses to
certain executives of the Company. The
Company intends to use substantially
all of the remaining net proceeds to
finance the commencement and
development of its D-DTH business. Any
remaining net proceeds will be used for
general corporate purposes, including,
without limitation, development of its
cable television and programming
businesses and future acquisitions. See
"Risk Factors -- Risks Related to the
Offerings -- Benefits of the Offerings
to Insiders", "Use of Proceeds",
"Business -- Strategy and Operating
Strengths", "Business -- D-DTH -- D-DTH
Operating Strategy" and "Certain
Relationships and Related
Transactions".
Proposed Trading Symbol............. Application has been made for quotation
of the Common Stock on the Nasdaq
National Market under the symbol
"ATEN".
The 6,175,000 shares of Common Stock initially being offered in the United
States (the "U.S. Offering") and the 3,325,000 shares of Common Stock
concurrently being offered outside the United States (the "International
Offering") collectively are referred to in this Prospectus as the "Offerings".
- ----------------
(1) Does not include 2,436,000 shares of Common Stock reserved for issuance in
connection with options granted to certain employees of the Company. See
"Executive Compensation".
RISK FACTORS
Prospective investors should consider all the information contained in this
Prospectus in connection with the Offerings. In particular, prospective
investors should consider the factors set forth herein under "Risk Factors"
beginning on page 14.
11
<PAGE> 15
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------ ------------------
1994 1995 1996 1996 1997
-------- -------- -------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Cable television revenue................ $ 8,776 $ 18,557 $ 24,923 $ 5,621 $ 7,508
Depreciation and amortization........... (3,459) (5,199) (9,788) (1,729) (3,450)
Operating income (loss)................. 380 3,545 (1,347) 745 (1,016)
Interest expense........................ (2,327) (4,373) (4,687) (1,604) (3,205)
Net loss................................ (2,383) (1,289) (6,617) (1,464) (3,571)
Net loss applicable to holders of Common
Stock................................ (4,194) (1,289) (4,806) (3,202) (3,571)
Pro forma net loss per share of Common
Stock(1)............................. -- -- (2.20) (2.66) (1.85)
OTHER FINANCIAL DATA:
EBITDA (2).............................. $ 3,839 $ 8,744 $ 8,441 $ 2,474 $ 2,434
Expenditures for construction of cable
television systems (3)............... 11,695 16,014 25,372 7,408 4,471
Net cash provided (used) by operating
activities........................... 1,599 3,839 6,112 2,794 (1,656)
Net cash used by investing activities... (12,341) (21,985) (74,861) (7,800) (7,662)
Net cash provided (used) by financing
activities........................... 12,686 17,996 134,889 22,947 (657)
BALANCE SHEET DATA (AT PERIOD END):
Total assets............................ $ 47,376 $ 68,058 $217,537 $96,529 $212,937
Total debt.............................. 35,988 59,405 130,074 11,181 129,542
Total stockholders' equity.............. 1,479 190 31,048 39,747 26,497
</TABLE>
- ---------------
(1) The pro forma net loss per share has been calculated on the assumption that
the outstanding shares of PCI Series A Preferred Stock and PCI Series C
Preferred Stock were repurchased on January 1, 1996. The pro forma weighted
average number of shares of Common Stock outstanding includes the number of
shares of Common Stock required to be sold at $20.25 per share (the
mid-point of the estimated range specified on the cover page of the
Prospectus) to pay the difference between the liquidation values of the PCI
Series A Preferred Stock and PCI Series C Preferred Stock and their
historical carrying values. Such difference of $35,614,000 will be shown as
an increase in the net loss applicable to common stockholders in the period
of redemption. See "The Reorganization".
(2) EBITDA consists of net income (loss) as measured by U.S. GAAP adjusted for
interest and investment income, depreciation and amortization, interest
expense, foreign currency translation gains and losses, income taxes,
extraordinary items, non-recurring items, gains and losses from the sale of
assets other than in the normal course of business and minority interest in
subsidiary income and loss. The Company believes that EBITDA and related
measures of cash flow from operating activities serve as important financial
indicators in measuring and comparing the operating performance of cable
television companies. EBITDA is not intended to represent cash flow from
operations under U.S. GAAP and should not be considered as an alternative to
net income (loss) as an indicator of the Company's operating performance or
to cash flows from operations as a measure of liquidity. EBITDA does not
include full year results for 1996 from TV Kabel Sp. z o.o. ("TV KABEL") in
the Bydgoszcz regional cluster which was acquired in December 1996 and does
not include results from the Acquisitions.
(3) Expenditures for the construction of cable television systems represent
payments made by the Company during the period for construction of its cable
television systems in Poland, and excludes costs of acquiring cable systems.
12
<PAGE> 16
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MARCH 31,
------------------------------- --------------------
1994 1995 1996 1996 1997 (1)
------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Homes passed by cable (2)..... 298,316 711,545 1,088,540 742,578 1,101,662
Basic cable subscribers (3)... 112,534 262,077 460,625 290,874 484,426
Basic cable penetration
(3)(4)...................... 37.7% 36.8% 42.32% 39.17% 43.97%
EBITDA margin (5)............. 43.7% 47.1% 33.87% 44.01% 32.42%
Cable churn rates (6)......... 9.1% 9.2% 7.8% 7.4% 6.9%
</TABLE>
- ---------------
(1) At May 31, 1997, the Company had approximately 1,292,000 homes passed by
cable, approximately 578,000 basic cable subscribers and approximately 45%
basic cable penetration.
(2) The Company counts as homes passed only those homes for which it has an
active signal and, in the case of multiple dwelling unit ("MDU") homes, only
those homes for which the Company has an agreement with the cooperative
authority.
(3) Includes subscribers to the Company's Basic Tier and Intermediate Tier. See
"Business -- Cable -- Services and Fees".
(4) Basic cable subscribers as a percentage of homes passed by cable at period
end.
(5) Represents EBITDA as a percentage of revenue. The Company believes that
EBITDA and related measures of cash flow from operating activities serve as
important financial indicators in measuring and comparing the operating
performance of cable television companies. EBITDA is not intended to
represent cash flow from operations under U.S. GAAP and should not be
considered as an alternative to net income (loss) as an indicator of the
Company's operating performance or to cash flows from operations as a
measure of liquidity.
(6) Calculated by dividing the number of disconnected basic cable subscribers
during a period by the number of basic cable subscribers (including basic
cable subscribers in cable networks acquired by the Company) at the end of
that period.
13
<PAGE> 17
RISK FACTORS
Prospective investors should consider carefully all the information
contained in this Prospectus (including the financial statements and notes
thereto) prior to purchasing Common Stock in the Offerings and in particular the
factors set forth below under "-- Risks Related to the Company", "-- Risks
Related to Regulation", "-- Risks Related to Investments in Poland and Emerging
Markets" and "-- Risks Related to the Offerings". Such investors should
consider, among other things, the lack of a public market for the Common Stock
and the high leverage of the Company. Many of the statements in this Prospectus
are forward-looking in nature and, accordingly, whether they prove to be
accurate is subject to many risks and uncertainties. The actual results that the
Company achieves may differ materially from any forward-looking statements in
this Prospectus. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed below and those contained
elsewhere in this Prospectus.
RISKS RELATED TO THE COMPANY
HISTORICAL AND ANTICIPATED FUTURE OPERATING LOSSES AND NEGATIVE CASH FLOW
Cable television operators typically experience losses and negative cash
flow in their initial years of operation due to large capital investments
required for the construction or acquisition of their cable networks and the
administrative costs incurred in connection with commencing operations.
Consistent with this pattern, the Company incurred operating losses of $4.6
million and $1.2 million in 1992 and 1993, respectively. The Company generated
operating income of $0.4 million and $3.5 million in 1994 and 1995,
respectively, but had operating losses of $1.3 million and $1.0 million for 1996
and the first three months of 1997, respectively.
The Company expects to experience substantial operating losses and negative
cash flow over the next several years due to (i) the large capital investments
required for the acquisition of equipment and facilities for its D-DTH business,
including subsidizing a significant portion of the cost of the D-DTH Reception
Systems to the Initial Subscribers, pursuant to the Company's business strategy,
and the administrative costs incurred in connection with commencing operations
and (ii) the large capital investments required to develop and produce its
Programming Platform and the depreciation and amortization of such investments
over several years. There can be no assurance that the Company will be able to
generate operating income or positive cash flow in the future or that its
operating losses and negative cash flow will not increase. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company has incurred substantial indebtedness. On October 31, 1996,
PCI, a subsidiary of @Entertainment, issued $130 million aggregate principal
amount of its Old Notes pursuant to the Indenture between PCI and State Street
Bank and Trust Company, as trustee (the "Indenture"), and in June 1997 exchanged
substantially all of such outstanding Old Notes for an equal aggregate principal
amount of publicly-registered 9 7/8% Series B Senior Notes Due 2003
(collectively, with the Old Notes, the "Notes") which were also issued pursuant
to the Indenture. At March 31, 1997, the Company had approximately $129.5
million aggregate principal amount of indebtedness outstanding. The Company
expects to seek additional debt financing in the next 12 to 18 months to finance
the development of its new D-DTH business, potential acquisitions and the
expansion of its cable and programming businesses. The Indenture limits, but
does not prohibit, the incurrence of additional indebtedness by PCI and PCI's
subsidiaries. The Indenture does not limit the ability of @Entertainment or @EL
to incur additional indebtedness.
The Company's ratio of earnings to fixed charges were 0.37x, 0.86x, 0.21x
and 0.33x in 1994, 1995, 1996 and the first three months of 1997, respectively.
The Company anticipates that, in light of the amount of its existing
indebtedness and the expected incurrence of additional indebtedness to finance
the development of its new D-DTH business, potential acquisitions and the
expansion of its
14
<PAGE> 18
cable and programming businesses, it will continue to have substantial leverage
for the foreseeable future. Such leverage poses the risks that (i) a significant
portion of the Company's cash flow from operations must be dedicated to
servicing the Company's indebtedness, (ii) the Company may not be able to
generate sufficient cash flow or access sufficient additional financing to
service the Notes and its other outstanding indebtedness and to adequately fund
its planned capital expenditures and operations, (iii) the Company could be more
vulnerable to changes in general economic conditions, (iv) the Company's ability
to obtain additional financing for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired, (v)
the Company's operating and financial flexibility may be impaired by
restrictions imposed by various debt instruments on the payment of dividends and
on operations, and (vi) because all or part of certain of the Company's future
borrowings (if any) may be at variable rates of interest, higher interest
expenses could result in the event of increases in interest rates.
The ability of the Company to meet its debt service obligations will depend
on the future operating performance and financial results of the Company as well
as its ability to obtain additional financing, each of which will be subject in
part to factors beyond the control of the Company, such as prevailing economic
conditions, and financial, business and other factors. There can be no
assurance, however, that the Company's business will generate cash flow at the
necessary levels that, together with available additional financing, will allow
the Company to meet its anticipated requirements for working capital, capital
expenditures, interest payments and scheduled principal payments.
A failure to comply with the covenants and other provisions of financing
documents to which the Company is a party, or other debt instruments to which it
may become a party in the future, could permit acceleration of the debt under
such instruments and, in some cases, acceleration of debt under other
instruments that contain cross-default or cross-acceleration provisions.
NEED FOR ADDITIONAL FINANCING
The Company has met its cash requirements in recent years primarily with
(i) capital contributions and loans from the Principal Stockholders, (ii)
borrowings under available credit facilities and (iii) cash flow from
operations. The Company expects that an aggregate of approximately $315 million
through the end of 1998 will be required to fund (a) the commencement and
development of its D-DTH business, which will include capital expenditures and
expenditures for operating expenses, working capital and other general corporate
purposes, (b) the expansion of its programming business, (c) the consummation of
the Acquisitions and future acquisitions and (d) the building out of its
existing, and the rebuilding of new, cable television networks. The Company
believes that, in addition to the net proceeds from the Offerings, remaining
funds from the offering of the Notes and cash from operations, it will need
additional funding of approximately $100 million to fulfill its current business
development plans through the end of 1998. The Company currently expects to
finance the initial roll-out cost of its D-DTH business primarily with the net
proceeds from the Offerings. However, ongoing development and expansion of the
D-DTH business and the development and expansion of its Programming Platform
will require significant additional financing, and such businesses are expected
to incur operating losses and negative cash flow for the first several years of
operations. The Company expects that it will also require additional external
funding for its business development plans in years subsequent to 1998 if the
Company continues to subsidize the cost to subscribers of the D-DTH Reception
Systems and to refinance all or a portion of the Notes at maturity. See "--
Limited D-DTH Experience and Uncertainties Associated with the D-DTH Market".
The Company does not expect that its Principal Stockholders will continue to
make capital contributions or loans to the Company. Accordingly, the Company
expects to be required to seek additional sources of financing. PCI maintains a
credit facility of approximately $6.5 million, under which no amount is
currently outstanding. Other future sources of financing for the Company could
include public and/or private debt and/or equity financings and/or bank
financings.
While it is the Company's intention to enter only into new financings or
refinancings that it considers advantageous, there can be no assurance that such
sources of financing would be available to the Company in the future, or, if
available, that they could be obtained on terms acceptable to the Company.
15
<PAGE> 19
In the event the Company obtains any future financing or refinancing on less
than favorable terms, the Company might be forced to operate under terms that
would restrict its operations and reduce its cash flow. While the pace and
amount of the Company's expenditures for the above purposes is largely
discretionary, if for any reason additional financing is not available to the
Company when required, or is only available on less than favorable terms, it may
be required to reduce the scope of its presently anticipated expansion of its
operations, reduce capital expenditures (including expenditures related to
acquisitions), slow the development of its D-DTH business and/or refinance all
or a portion of its existing indebtedness (including the Notes), and as a result
the business, results of operations and prospects of the Company could be
adversely affected. To the extent that the Company is unable to raise additional
financing, it intends to concentrate its available funds on, in order of
priority, the development of its D-DTH business and Programming Platform, build
out of its cable networks and acquisition of additional cable systems. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources".
RESTRICTIVE COVENANTS LIMITING PCI'S ABILITY TO PROVIDE FINANCIAL SUPPORT
TO @ENTERTAINMENT AND COVENANTS RESTRICTING PCI'S OPERATIONS
The Indenture relating to the Notes contains certain restrictive covenants
which will affect, and in many respects will significantly limit or prohibit,
among other things, the ability of PCI to (i) incur indebtedness, (ii) make
prepayments of certain indebtedness, (iii) pay dividends, (iv) make investments,
(v) engage in transactions with stockholders and affiliates, (vi) issue capital
stock of subsidiaries, (vii) create liens, (viii) sell assets and (ix) engage in
mergers and consolidations. Currently, PCI holds almost all of the assets and
operations of the Company. Restrictions on PCI's payments of dividends or
repayments of loans to @Entertainment and restrictions on related party
transactions may limit the Company's ability to optimally apply its resources to
its various businesses, which may adversely affect the business, results of
operations and prospects of the Company.
HOLDING COMPANY STRUCTURE AND RESTRICTIONS ON PAYMENT OF DIVIDENDS
@Entertainment and PCI are each holding companies with limited assets of
their own that conduct substantially all of their business through subsidiaries.
Certain of PCI's operating subsidiaries are held through a further holding
company, Poland Cablevision (Netherlands) B.V., a Netherlands company which is
92.3% owned by PCI ("PCBV"). The ability of @Entertainment to pay dividends on
the Common Stock will be dependent upon either the cash flows and earnings of
its subsidiaries and the payment of funds by those subsidiaries to
@Entertainment in the form of repayment of loans, dividends or otherwise or
@Entertainment's ability to otherwise realize economic benefits from its equity
interests in its subsidiaries. @Entertainment's subsidiaries have no obligation,
contingent or otherwise, to pay dividends to @Entertainment. The ability of
these subsidiaries to make payments to @Entertainment will be subject to, among
other things, the availability of funds and the terms of such subsidiaries'
indebtedness, as well as various business considerations. The Indenture limits,
but does not prohibit, the payment of dividends by PCI to @Entertainment.
Further, @Entertainment currently does not own, directly or indirectly, a
majority interest in certain subsidiaries, and may not have operating control of
entities in which it may in the future acquire direct or indirect interests. In
such cases, @Entertainment may be unable, without the consent of the relevant
partners, to cause such entities to pay dividends or implement business
strategies that @Entertainment may favor.
PCI is a corporation formed under the laws of the State of New York. Under
the New York Business Corporation Law (the "BCL"), PCI may declare or pay
dividends only out of the Company's surplus account. Under the BCL, a
corporation is deemed to have a surplus for purposes of dividend declaration or
payment when its net assets (which is defined as a corporation's total assets
less its total liabilities) exceed the corporation's stated capital (which is
defined as the sum of the par value of all of the shares of the corporation's
stock which have been issued with a par value). The BCL further stipulates that
PCI may only declare or pay dividends to the extent that its net assets
remaining after such declaration or payment at least equal the amount of its
stated capital.
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Provisions of applicable Polish law limit the amount of dividends which may
be paid by Polish companies to the extent they do not have profits available for
distribution (of which @Entertainment's Polish subsidiaries had no material
amounts at March 31, 1997), and other statutory and general law obligations may
affect the ability of @Entertainment's Polish subsidiaries to declare or pay
dividends or the ability of such subsidiaries to make payments to @Entertainment
on account of intercompany loans. For example, Polish companies known as
spoffika akcyjna ("S.A".) are required by law to establish reserve funds (in an
amount equal to one-third of their share capital) out of which they cannot pay
dividends. In addition, the statutes of any type of Polish company can contain
provisions requiring that the company establish other reserve funds out of which
dividends may not be paid. None of the statutes of @Entertainment's Polish
subsidiaries currently contain such a provision; however, most of
@Entertainment's Polish subsidiaries' statutes contain a provision allowing the
creation of such reserve funds if the subsidiary's General Assembly votes to do
so. Furthermore, in the event that the foreign exchange laws or laws on foreign
investment in Poland change, Polish companies may also become subject to
additional limitations on their ability to distribute profits to non-Polish
stockholders.
Under English company law, @EL may only make distributions to
@Entertainment from its accumulated, realized profits which have not previously
been distributed or capitalized, less any accumulated realized losses which have
not previously been written off either in a reduction or reorganization of
capital. For these purposes, realized profits and losses are determined in
accordance with applicable accounting principles and reflect both revenue and
capital profits and losses.
Under the Netherlands' corporate law and PCBV's articles of incorporation,
PCBV may only distribute profits to its stockholders insofar as PCBV's equity
exceeds the paid-up and called-up capital increased by the statutory reserves.
Such statutory reserves may include reserves arising upon the revaluation of the
company's assets, the capitalization of costs (including research and
development, intellectual property and goodwill) in connection with the issuance
of capital stock and reserves which may arise in connection with loans to
stockholders with respect to their purchase of the company's stock. A
stockholders' agreement among PCBV's stockholders includes certain limitations
on payments that can be paid by PCBV to its stockholders, including PCI. If the
managing board of PCBV solicits and receives loans from any of the PCBV
stockholders, the loans cannot bear interest at a rate exceeding 10% per annum.
The transfer of equity interests in subsidiaries of @Entertainment may be
limited, due in part to regulatory and contractual restrictions. There can thus
be no assurance of @Entertainment's ability to realize economic benefits through
the sale of these equity interests. Accordingly, there can be no assurance that
@Entertainment will receive timely payments from its subsidiaries, if at all, or
other economic benefits from its equity interests in its subsidiaries.
LIMITED D-DTH EXPERIENCE AND UNCERTAINTIES ASSOCIATED WITH THE D-DTH MARKET
Limited D-DTH Experience. Although certain of the Company's executives
have experience in the A-DTH market in Poland, the Company will have no
experience delivering D-DTH services prior to the launch of its D-DTH pilot
project expected in the beginning of 1998 and of its full service expected in
the first half of 1998. The Polish A-DTH market developed rapidly from its
inception in the late 1980s through the mid 1990s, but the rate of growth has
declined in recent years because programmers have begun compressing and
encrypting the signals transmitted over European satellites and moving their
programming to a variety of satellites. The Polish A-DTH market today is
characterized by (i) poor signal quality relative to cable television, (ii)
limited channel offerings, (iii) a large number of small, poorly-capitalized
satellite master antenna television ("SMATV") operators, (iv) high set-up costs
of reception equipment and short satellite dish life, and (v) the increasing
reluctance of co-op authorities to permit the use of satellite dishes. While the
Company expects that its D-DTH service will offer Polish consumers significant
advantages over the current A-DTH services, due to, among other factors (i)
wider range of programming available due to the compression ability of digital
technology, (ii) less expensive non-motorized reception equipment, (iii) the
improved signal quality of D-DTH, and (iv) the increasing availability of
premium services, there can be no assurance that the market for D-DTH services
will
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develop, or if it does develop, that the Company will be successful in launching
its D-DTH business. In view of these challenges, the prospects for the Company's
proposed D-DTH business should be considered in light of the uncertainties
associated with the launch on a large scale of a new business in a market with
no comparable competitor experience and under a developing regulatory framework
which may change as the Polish D-DTH market develops. See "-- Risks Related to
Regulation -- Polish Regulation of the DTH Market".
Expected Losses. The Company expects that its D-DTH business will incur
substantial operating losses for its first several years of operation while it
is developed and expanded. In addition to the costs associated with providing
the approximately 500,000 Initial Subscribers with D-DTH Reception Systems on a
significantly subsidized basis, the Company is liable for charges associated
with each of its three transponders on the Astra satellites, which can amount to
a maximum of $6.75 million per year and up to $200 million for all three
transponders for the term of their leases (each lease expires in 2007 or 2008).
The Company will also incur capital and operating expenses related to its new
production and uplink facilities. The magnitude and duration of the losses to be
incurred on its D-DTH business will depend on, among other factors, the ability
of the Company's D-DTH service to attract and retain subscribers, the total cost
of providing affordable reception equipment to subscribers, the Company's
ability to develop a successful Programming Platform for the Polish market and
its ability to control other costs which do not vary with the number of
subscribers. Prospective investors should be aware of the difficulties
encountered by enterprises in the early stages of development, particularly in
light of the high roll-out costs involved in the D-DTH business obtaining the
targeted 500,000 Initial Subscribers, and the intense competition characteristic
of the pay television industry in Poland. There can be no assurance that the
roll-out of the D-DTH business will proceed as planned, or that if achieved, the
increase in the number of subscribers will result in profitability or positive
cash flow for the Company in future years.
Factors Beyond the Company's Control. The success of the Company's D-DTH
business is subject to factors that are beyond its control and impossible to
predict, including (i) the size of the D-DTH market, (ii) the rates of
penetration of such market, (iii) the acceptance of D-DTH services by
subscribers and commercial advertisers, (iv) the sensitivity of potential
subscribers to the price of installation and subscription fees, (v) the
technical challenges of providing long-term D-DTH services, (vi) the extent and
nature of the development of multichannel alternatives, including the continued
expansion of cable television, and (vii) the immediate and long-term viability
of D-DTH television services in Poland.
Competing Standards. Although the Company believes that the Astra
satellites, Philips' CryptoWorks(R) proprietary conditional access system and
the Philips IRDs together constitute a reliable cost-effective solution, certain
other large European providers of D-DTH services have selected different
satellites, encryption technology and decoders. If another satellite, encryption
technology or decoder becomes the preferred standard in Poland, or if Poland
enacts regulations regarding such technology or decoders, such a development
could adversely impact the Company's ability to attract and retain subscribers.
Such a development could force the Company to switch its suppliers and replace
IRDs and conditional access systems previously provided to subscribers on a
subsidized basis, thus causing confusion for existing and potential subscribers,
delays in providing subscribers with IRDs and conditional access systems and
significant unexpected costs.
Ability to Attract Subscribers. The Initial Subscribers will be required
to make a substantial up-front investment to subscribe to the Company's D-DTH
service. The Company's strategy is to significantly subsidize the cost of the
D-DTH Reception System in an amount of up to approximately $380 per subscriber
or an aggregate of up to approximately $190 million for the Initial Subscribers.
Although the Company believes that as a result of this subsidy the price at
which the Initial Subscribers will acquire the basic subscription package
(including the D-DTH Reception Systems and accompanying services), which the
Company expects to be up to approximately $150 per Initial Subscriber, should be
low enough to attract a significant number of subscribers, there can be no
assurance that the Company will be able to establish a substantial subscriber
base. In addition, the investment for subsequent subscribers may increase unless
the Company decides to continue to subsidize the cost to subscribers of the
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D-DTH Reception Systems. Accordingly, there can be no assurance that the Company
will attract subscribers if it ceases to subsidize the cost of the D-DTH
Reception System. Such continued subsidization would require significant
additional funding. There can be no assurances that the Company could obtain
such funding on satisfactory terms or at all. See "-- Need for Additional
Financing".
DEPENDENCE ON PHILIPS AS PRINCIPAL SUPPLIER
Under the Company's current plans, certain critical components and services
used in the Company's D-DTH satellite transmission system, including the IRDs,
the CryptoWorks(R) proprietary conditional access system and associated
smartcards and the ODU, as well as retail, installation and support services,
will be provided exclusively by Philips. The Company is currently negotiating,
and expects shortly to conclude, agreements with Philips providing for Philips
to be the exclusive supplier to the Company of the first 500,000 D-DTH Reception
Systems in connection with the launch of the Company's D-DTH business in Poland,
and that Philips will not distribute any other digital integrated receiver
decoders in Poland until March 1, 1999 or any earlier date on which the Company
has secured 500,000 Initial Subscribers to its D-DTH service in Poland. The
Company expects its agreements with Philips to provide that after such period of
exclusivity, a second supplier of IRDs in addition to Philips may be licensed by
Philips to supply the Polish market. Although the agreements being negotiated by
the Company with Philips may, if successfully concluded, provide a means by
which the Company could obtain a second supplier for all or part of its future
requirements for D-DTH Reception Systems, the Company does not have any sources
for obtaining conditional access systems compatible with the IRDs other than
Philips and future licensees of Philips.
The failure of Philips to deliver D-DTH Reception Systems on schedule, or
at all, would delay or interrupt the commencement of the Company's D-DTH
business and thereby could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business -- D-DTH
- -- Technology and Infrastructure".
The Company expects its agreements with Philips to provide for full
distribution and installation service through approximately 1,000 of Philips'
3,000 authorized electronics retailers across Poland. It is currently expected
that Philips will distribute a complete subscription package, comprising the
D-DTH Reception System (the IRD, CryptoWorks(R) proprietary conditional access
system and associated smartcard, and ODU), as well as the necessary installation
and support services, and will therefore be the primary point of contact for
subscribers to the Company's D-DTH service. Failure by Philips' retail network
to provide the desired levels of service, quality and expertise (which are
outside the control of the Company) could have a material adverse impact on the
Company's operations and financial condition.
Although the Company is currently negotiating agreements with Philips for
the provision of products and services, there can be no guarantee that the
Company will be successful in negotiating such agreements with Philips on
mutually acceptable terms, if at all.
DEPENDENCE UPON SATELLITES
The Company's D-DTH business will depend on its ability to broadcast using
transponders on the Astra 1E and 1F satellites, both of which have been
successfully launched and are located at 19.2 degrees east. While two
transponders leased by the Company on the Astra 1F satellite are currently
available to the Company, the Company's access to its third leased transponder
on the Astra 1E satellite is dependent upon the successful launch of the Astra
1G satellite, which is expected to occur in October 1997, and it becoming
operational, which is expected in early 1998. Satellites are subject to
significant risks that may prevent or impair proper commercial operations,
including satellite defects, launch failure, incorrect orbital placement,
destruction and damage. To date, the Company is not aware of significant
disruption of transmissions on the Astra 1E or 1F satellites. The Company is not
a "protected customer" under its satellite transponder leases and, in the event
of a failure of one or more of its transponders, would not be able to pre-empt
any other transponder customer. Due to the high cost of insurance policies
relating to satellite operations, the Company does not insure against possible
interruption of access to its transponders. The operation of the
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Astra satellites is outside the control of the Company and a disruption of
transmissions on those satellites could have a material adverse effect on the
Company, depending upon the duration of the disruption. While the Company has
sufficient channel capacity to initiate its planned D-DTH service on the two
transponders to which it currently has access, the ability of the Company to add
channels to its Programming Platform will depend on the ability of the Company
to obtain access to the third transponder leased by it or other transponder
capacity on the Astra satellites or other favorably positioned satellites or
improvements in image compression technology. The ability of the Company to
transmit its programming following the expiration of the expected useful lives
of the Astra 1E and 1F satellites in approximately 2015 (the Company's leases
terminate in 2007 and 2008) will depend upon the ability of the Company to
extend its existing leases and/or to obtain rights to utilize additional
transponders on future Astra or other satellites. See "Business --
D-DTH -- Technology and Infrastructure".
RISK OF SIGNAL THEFT
The delivery of subscription programming requires the use of encryption
technology to prevent signal theft or "piracy". Historically, piracy in the
cable television and European A-DTH industries has been widely reported. The
Company's IRDs will incorporate Philips' CryptoWorks(R) proprietary encryption
technology as part of its conditional access system. These IRDs use smartcard
technology, making it possible to change the conditional access system in the
event of a security breach through over-the-air methods by issuing new
electronic decryption "keys" over-the-air as part of the Company's regular D-DTH
broadcasts or by issuing new smartcards. The Company intends to purchase piracy
insurance from Philips. As part of this insurance, Philips would replace the
smartcards of the Company's then-subscribers with new smartcards incorporating
Philips' latest anti-piracy technology at no cost to the Company except delivery
costs, in the event piracy reaches a proportion of the Company's D-DTH service
to be determined in the definitive agreement with Philips. Although the Company
expects its conditional access system, subscriber management system and
smartcard to adequately prevent unauthorized access to programming, there can be
no assurance that the encryption technology to be utilized in connection with
the Company's D-DTH system will be, or remain, effective. If the encryption
technology is compromised in a manner which is not promptly corrected, the
Company's revenue and its ability to contract for programming services from
unrelated third parties would be adversely affected. See
"Business -- D-DTH -- Technology and Infrastructure".
AGREEMENTS WITH TPSA
The Company's ability to build out its existing cable television networks
and to integrate acquired systems into its cable television networks will depend
on, among other things, the Company's continued ability to design and obtain
access to network routes, and secure other construction resources, all at
reasonable costs and on satisfactory terms and conditions. Many of such factors
are beyond the control of the Company. In addition, at May 31, 1997,
approximately 62.5% of the Company's cable plant had been constructed utilizing
pre-existing conduits of the Polish national telephone company ("TPSA"). A
substantial portion of the Company's contracts with TPSA for the use of such
conduits permits termination by TPSA without penalty at any time either
immediately upon the occurrence of certain conditions or upon provision of three
to six months' notice without cause. Generally speaking, TPSA may terminate a
conduit agreement immediately if: (i) the Company does not have a valid permit
("Permit") from the Polish State Agency of Radio Communications ("PAR")
authorizing the construction and operation of a cable television network in a
specified geographic area covering the subscribers to which the conduit delivers
the signal; (ii) the Company's cable network serviced by the conduit does not
meet the technical specifications required by the Communications Act of 1990, as
amended (the "Communications Act"); (iii) the Company does not have a contract
with the co-op authority allowing for the installation of the cable network; or
(iv) the Company fails to pay the rent required under the conduit agreement. At
May 31, 1997, approximately 113,000, or 16%, of the Company's total subscribers
were serviced by conduits leased from TPSA for which one or more of these
provisions were applicable, so TPSA was legally entitled to terminate the
conduit agreements covering these subscribers immediately. Any termination by
TPSA of such contracts could result in the Company losing its Permits, the
termination of agreements with co-op authorities and programmers, and an
inability to
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service customers with respect to the areas where its networks utilize the
conduits that were the subject of such TPSA contracts. Any such terminations by
TPSA would have a material adverse effect on the Company unless the Company
could on commercially reasonable terms find an alternative to the TPSA conduits
or build its own conduits. In addition, the Company would be forced to incur
significant costs if it were forced to build its own conduits. There can be no
assurance that the Company would be able to replace, or locate a substitute for,
such conduits. See "Business -- Cable -- Technology and Infrastructure" and
"Business -- Properties".
AVAILABILITY OF PROGRAMMING AND DEPENDENCE ON THIRD PARTY PROGRAMMERS;
PROGRAM DEVELOPMENT RISK
The success of the Company's business is and will continue to be, to a
large degree, dependent on its ability to obtain, at commercially reasonable
costs, programming that is appealing to subscribers. In particular, the Company
believes there is a strong demand for high quality Polish-language television
programming in Poland. To the extent that (i) the Company's competitors are able
to produce or obtain Polish-language programming at commercially reasonable cost
and the Company is not able to do so, (ii) the Company's programming is less
popular than that of its competitors, or (iii) the Company's programming is
non-exclusive to the Company, the viability or competitiveness of the Company's
networks or services could be adversely affected. At present, the majority of
the Company's cable television programming is in English or German and is
non-exclusive to the Company.
The Company currently creates, produces, develops and acquires programming,
including programming for its two proprietary Polish language channels, for
distribution across its cable networks. In addition to ProCable and its existing
joint ventures, the Company intends to form a variety of joint ventures or
subsidiaries to own and develop proprietary Polish-language programming for its
Programming Platform. In addition to producing programming itself or through
joint ventures, the Company intends to acquire certain programming for its
Programming Platform from third-parties, generally on an exclusive basis.
The Company currently obtains or is negotiating agreements under which it
expects to obtain significant programming on an exclusive basis from several
sources on whom it depends or will depend to provide it with additional
high-quality programming that appeals to mass audiences in Poland. Although the
Company has no reason to believe that it will be unable to successfully conclude
any of the programming agreements it is now negotiating or that any of its
existing programming agreements will be cancelled or will not be renewed upon
expiration, if such agreements are not successfully concluded or are cancelled
or not renewed, the Company will have to seek programming material from other
sources. There can be no assurance that high-quality program services will be
available to the Company either from the Company directly or from third parties
on acceptable terms, including any required expenditures or investments in
respect of such program services, or at all or, if so available, that such
program services will be acceptable to the Company's subscribers.
As part of its strategy to create more programming content, and in
particular to develop high-quality Polish-language programming, the Company
recently established Mozaic which will create programming for the Company's
Programming Platform and for distribution on the Company's cable television and
D-DTH systems. The development and production of television programs involve a
high degree of risk associated with the creative content of programs and their
acceptance by the viewing audience, as well as the general economic climate,
public tastes generally and other intangible factors, all of which could change
rapidly and cannot be predicted with certainty. Therefore, there is a risk that
some or all of the Company's programming projects will not be successful or that
the Company's programming library will lose its audience appeal more quickly
than anticipated, possibly resulting in a portion of costs not being recovered
or expected profits not being realized. In addition, part of the Company's
programming strategy depends on its ability to create premium channels based on
specific thematic content. There can be no assurance that the Company will be
successful in introducing such channels into the Polish market.
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To date, the Company has entered into letters of intent regarding the World
Shopping Network, Knowledge TV, BET on Jazz and Twoj Styl, a Polish lifestyle
magazine, to provide programming for the Company's Programming Platform. In
addition, the Company is negotiating a partnership with TVP, which is subject to
various Polish regulatory and other approvals, to broadcast TVP's popular
channels on its Programming Platform and provide the Company with exclusive pay
television access to TVP's extensive Polish-language television library.
Although these letters of intent and the discussions with TVP contemplate the
negotiation of definitive agreements, there can be no assurance that definitive
agreements to acquire such programming, or that programming for the remaining
channels on the Company's Programming Platform, will be obtained on acceptable
terms or at all. Moreover, there can be no assurance that required Polish
regulatory and other approvals of the proposed partnership with TVP will be
obtained on acceptable terms or at all. Failure to obtain a wide selection of
exclusive popular Polish language programming for its Programming Platform,
whether produced by the Company, joint ventures or third parties, would have a
material adverse effect on the Company's business and results of operations.
Certain programming for the Polish market is subject to regulation by the
Polish authorities. See "-- Risks Related to Regulation -- Limitations on
Foreign Ownership of Multi-Channel Television Operators and Broadcasters".
COMPETITION IN THE MULTICHANNEL TELEVISION INDUSTRY
The multichannel television industry in Poland has been, and is expected to
remain, highly competitive. The Company competes with other cable television
operators, as well as with companies employing numerous other methods of
delivering television signals to the home. The success of the Company's
multichannel television services in competing with alternative delivery systems
will depend, in part, upon the Company's ability to provide a greater variety of
Polish-language programming at a reasonable price than the programming and
prices available through such alternative delivery systems. In addition,
advances in communications technology, as well as changes in the marketplace and
the regulatory environment, are constantly occurring. It is not possible to
predict the effect that ongoing or future developments might have on the
multichannel television industry in Poland. See "The Industry -- The Polish
Multichannel Television Industry" and "Regulation".
CABLE. The Company believes that competition in the cable television
industry is primarily based upon price, program offerings, customer service and
quality and reliability of cable networks. Small SMATV operators are active
throughout Poland, and they pose a competitive threat to the Company because
they often incur lower capital expenditure and operating costs and therefore
have the ability to charge lower fees to subscribers than does the Company.
While such operators often do not attempt to meet the technical standards for
cable systems under Polish law, enforcement of regulations governing such
technical standards has historically been poor. Although Polish regulatory
authorities have recently attempted to improve the enforcement of such laws and
regulations, there can be no assurance that they will be enforced. If such laws
and regulations are not enforced, these SMATV operators will be able to continue
operating with a lower cost structure than that of the Company and thus charge
lower fees to subscribers, which may have an adverse effect on the Company's
business, results of operations and financial condition. Certain of the
Company's competitors or their affiliates have greater experience in the cable
television industry and have significantly greater resources (including
financial resources and access to international programming sources) than the
Company. The Company's cable television systems also compete with companies
employing other methods of delivering television signals to the home, such as
terrestrial broadcast television signals and A-DTH television services, and may
in the future compete with multichannel multipoint distribution systems ("MMDS")
and D-DTH television services (including the Company's @TV D-DTH service).
D-DTH. The Company's proposed D-DTH business will compete with traditional
cable systems, including its own, and current A-DTH services as well as other
potential D-DTH services. Canal+ currently offers a single channel A-DTH service
and has announced plans to introduce a limited number
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of digital channels in Poland, and the Company expects that Canal+ may launch a
full D-DTH service in Poland in the near future. The Company cannot predict
whether other European or Polish broadcasters, such as BSkyB, Bertelsmann, Kirch
or Polsat, will choose to enter the Polish D-DTH market. Certain of the
Company's current and potential competitors, either alone or in joint ventures
with other competitors, have either launched or announced plans to launch D-DTH
systems for other European countries. Many of the Company's current and
potential competitors have significantly greater financial, managerial and
operational resources and more experience in DTH than the Company. If competing
D-DTH services are successfully launched in Poland, they could have a material
adverse impact on the Company.
CHANGES IN TECHNOLOGY
The multichannel pay television services industry as a whole has
traditionally been, and is likely to continue to be, subject to rapid and
significant changes in technology. In particular, the impact of digital
compression technology on the Polish multichannel television industry is
uncertain. The Company will use digital compression technology in its D-DTH
business. This technology is under development for other transmission media,
including cable and MMDS. Because digital compression technology allows
transmission of multiple channels on the same frequency, it could result in the
emergence of lower cost delivery systems and increased competition in the Polish
multichannel television industry. Although the Company believes that, for the
foreseeable future, existing and developing alternative technologies will not
materially adversely affect the viability or competitiveness of its D-DTH
business, there can be no assurance as to the effect of such technological
changes on the Company or that the Company will not be required to expend
substantial financial resources in the development or implementation of new
competitive technologies. In addition, the Company from time to time may explore
alternative technologies for delivering its programming and alternative methods
for allowing subscribers to receive signals from multiple satellites.
ACQUISITION STRATEGY
A significant element of the Company's growth strategy is expansion by
acquisition of cable television systems that either are located in reasonable
proximity to the Company's existing systems or are large enough to serve as the
basis for new regional clusters. There can be no assurance that the Company will
be able to identify and acquire such systems on satisfactory terms, if at all,
or that it will be able to finance significant acquisitions in the future. The
Company encounters competition for the acquisition of cable systems from
existing cable television operators and also from financial investors. See
"Business -- Cable -- Competition".
The Company searches for appropriate cable television networks for
acquisition on an ongoing basis. Since March 31, 1997, the Company has
consummated three of the Acquisitions and has continued to negotiate the terms
of the remaining two Acquisitions. The aggregate consideration paid or to be
paid by the Company in connection with the Acquisitions (including amounts for
stockholder loans) is expected to be approximately $35.0 million. See
"Business -- Cable -- Acquisitions". The Company has obtained the approval of
the Anti-Monopoly Office for the three Acquisitions which have been consummated
and the Company intends to apply for approval of the remaining Acquisitions. The
Company believes that it will be required to obtain the Anti-Monopoly Office's
approval for certain future acquisitions as well. There can be no assurance as
to the timing of closing of the Acquisitions that are currently pending or as to
whether or on what terms the pending Acquisitions will actually be consummated.
Failure to obtain the Anti-Monopoly Office's approval for the pending
Acquisitions or for future acquisitions could have an adverse effect on the
Company's business and results of operations. See "-- Risks Related to
Regulation".
MANAGEMENT OF GROWTH; INTEGRATION OF ACQUIRED BUSINESSES AND D-DTH
The Company has experienced rapid growth and development in a relatively
short period of time and intends to continue to do so to meet its strategic
objectives. The management of such growth will
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require, among other things, continued development of the Company's financial
and management controls and management information systems, stringent control of
construction and other costs, increased marketing activities, ability to attract
and retain qualified management personnel and the training of new personnel. In
particular, the Company's expansion into the D-DTH business will require
substantial attention of senior management. The Company intends to hire
additional personnel in order to manage its growth and expansion, particularly
in the new D-DTH business. Failure to successfully manage its rapid growth and
development and difficulties in managing the expansion into the D-DTH business
and in integrating such business with the Company's cable and programming
operations could have a material adverse effect on the Company's business,
results of operations and financial condition.
Since its inception, the Company has acquired numerous cable television
networks. The Company's recent acquisitions have involved, and the Acquisitions,
to the extent consummated, and other possible future acquisitions by the Company
will involve, risks, including successful integration with the Company's
existing systems and operations and, possibly, lower relative operating margins
associated with such acquisitions before the economic benefits of integration,
if successful, are fully realized. Furthermore, the Company may experience
increased capital expenditure costs as the acquired systems are rebuilt if
necessary to upgrade the networks to the Company's standards. In the event that
the Company underestimates the costs of integrating and upgrading acquired
networks, such activities could have a material adverse effect on the Company's
financial condition and operating results. The integration of acquired systems
may also lead to diversion of management attention from other ongoing business
concerns. The costs of integration for certain acquisitions have had an adverse
impact on the Company's short-term operating results. Any or all of these risks
related to integration may have a material adverse effect on the Company's
operations in the future.
In addition, the Company is evaluating the viability and financial returns
associated with entering into certain businesses, some of which may be
capital-intensive and in which it has limited experience, such as telephony.
There can be no assurance that the Company can profitably exploit these new
areas of endeavor.
DEPENDENCE ON KEY PERSONNEL
The Company's future success depends in large part on the continued service
of its key management personnel. The Company is particularly dependent upon the
skills and contributions of several key individuals, including Robert E. Fowler,
III, Chief Executive Officer of @Entertainment; John S. Frelas, Chief Financial
Officer, Vice President and Treasurer of @Entertainment; George Z. Makowski,
Vice President of @Entertainment and Chief Operating Officer--Cable Television
of PCI; Przemysffiaw Szmyt, Vice President, General Counsel and Secretary of
@Entertainment; David Warner, Vice President of @Entertainment and Chief
Operating Officer -- DTH of @EL; Andrzej Muras, Executive Vice President of
Polska Telewizja Kablowa-Warszawa S.A. ("PTK-Warsaw"); and Marek Sowa, Director
of Corporate Development of PCI. The departure of any of these persons could
have a material adverse effect on the Company's business. In addition, given the
Company's stage of development, the Company's success will depend in part on its
ability to hire, train, and retain high-quality personnel. The Company has
entered into employment agreements with Messrs. Fowler, Frelas, Makowski, Szmyt,
Warner, Muras and Sowa. Mr. Fowler's employment agreement with @Entertainment
expires December 31, 1999, and is terminable without cause upon three months'
written notice by Mr. Fowler or upon one month's written notice by the Company.
Mr. Frelas' employment agreement with @Entertainment expires on September 1,
2001, and is terminable without cause upon six months' written notice by either
party. Mr. Makowski's employment agreement with @Entertainment expires January
21, 2002, and is terminable without cause upon six months' written notice by
either party. Mr. Szmyt's employment agreement with @Entertainment expires on
February 7, 2000, and is terminable without cause upon two months' written
notice by Mr. Szmyt, or upon four months' written notice by @Entertainment. Mr.
Warner's employment agreement with @Entertainment expires April 7, 2002 and may
be terminated without cause upon six months' written notice by either party. Mr.
Muras's employment agreement with PTK-Warsaw expires on January 1, 1998, and is
terminable without cause upon three months' written
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notice by Mr. Muras. Mr. Sowa's employment agreement with PCI expires on January
1, 2000, and is terminable without cause upon two months' written notice by Mr.
Sowa, or upon four months' written notice by PCI.
CONTROL BY EXISTING STOCKHOLDERS; POTENTIAL ANTI-TAKEOVER PROVISIONS
After completion of the Offerings, the Principal Stockholders will own
beneficially in the aggregate approximately 54% of the outstanding Common Stock.
As a result, the Principal Stockholders, acting together, will be able to elect
all of @Entertainment's directors and otherwise control the Company's
operations. In addition, such concentration of ownership may have the effect of
delaying or preventing transactions involving an actual or potential change in
control of @Entertainment, including transactions in which holders of Common
Stock might receive a premium for their Common Stock over prevailing market
prices. See "Principal Stockholders" and "Description of Capital Stock".
Certain provisions of Delaware law applicable to @Entertainment and
@Entertainment's Certificate of Incorporation (the "Certificate") and Bylaws
(the "Bylaws") could delay or make more difficult a merger, tender offer or
proxy contest involving @Entertainment, including Section 203 of the Delaware
General Corporation Law, which prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years from the date the person became an interested stockholder unless certain
conditions are met. The Certificate authorizes the issuance of 20.0 million
shares of preferred stock, par value $.01 per share, on terms which may be fixed
by @Entertainment's Board of Directors without further stockholder action
("Blank Check Preferred Stock"). The terms of any series of Blank Check
Preferred Stock, which may include, among other things, priority claims to
assets and dividends and special voting rights, could adversely affect the
rights of holders of the Common Stock. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of the holders
of any Blank Check Preferred Stock that may be issued in the future.
@Entertainment has no present plans to issue shares of Blank Check Preferred
Stock. In addition, @Entertainment's Certificate and Bylaws provide for a
classified board of directors, eliminate the right of stockholders to act by
written consent without a meeting, (unless they have obtained the approval of a
two-thirds vote of the directors), require advanced stockholder notice to
nominate directors and raise matters at the annual stockholders' meeting, do not
provide for cumulative voting in the election of directors and allow for the
removal of directors only for cause and with a two-thirds vote of
@Entertainment's outstanding Common Stock. In addition, acquisition of more than
10% of the outstanding voting stock of @Entertainment could require the approval
of the Anti-Monopoly Office. See "-- Risks Related to Regulation -- The Polish
Multi-Channel Television Industry" and "Regulation -- Poland -- Anti-Monopoly
Act". All of the foregoing could have the effect of delaying, deferring or
preventing a change in control of @Entertainment and could limit the price that
certain investors might be willing to pay in the future for shares of
@Entertainment's Common Stock. See "Description of Capital Stock".
LIMITED INSURANCE COVERAGE
While the Company carries general liability insurance on its properties,
like many other operators of cable television systems it does not insure the
underground portion of its cable television networks. Due to the high cost of
insurance policies relating to satellite operations, the Company does not insure
against possible interruption of access to the transponders leased by it for
satellite transmission of its broadcasting. See "-- Dependence Upon Satellites".
Accordingly, any catastrophe affecting a significant portion of the Company's
cable television networks or disrupting its access to its leased satellite
transponders could result in substantial uninsured losses and could have a
material adverse effect on the Company.
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<PAGE> 29
RISKS RELATED TO REGULATION
THE POLISH MULTICHANNEL TELEVISION INDUSTRY
The operation of a cable and DTH television system in Poland is regulated
by various governmental bodies, including the Minister of Communications ("MOC")
and PAR under the Communications Act, and the National Radio and Television
Council (the "Council") under the Radio and Television Act of 1992, as amended
(the "Television Act"). Cable television and DTH operators in Poland also are
subject to the intellectual property rights protections contained in the Law on
Copyright and Neighboring Rights of 1994 (the "Copyright Act"). Cable television
services in Poland may be offered only by cable television operators that have
received Permits from PAR to operate and construct cable television networks in
specified areas in Poland. The Communications Act and the Permits set forth the
terms and conditions for providing cable television services, including the term
of the Permits, the area covered by the Permits, technological requirements for
cable television networks and the restrictions on foreign ownership of cable
television operators. See "-- Limitations on Foreign Ownership of Multichannel
Television Operators and Broadcasters" and "Regulation -- Poland -- The
Communications Act -- Foreign Ownership Restrictions". If a cable television
operator breaches the terms of its Permits or the Communications Act, or fails
to acquire Permits covering areas serviced by its networks, PAR can impose
penalties on such operator, including fines, the revocation of all Permits
covering the cable networks where such breach occurred or the forfeiture of the
operator's cable networks.
Although subsidiaries of PCI have received approximately 93 Permits from
PAR, certain subsidiaries of PCI do not have valid Permits covering certain of
the areas in which they operate cable networks. Of the approximately 95,000
basic subscribers at May 31, 1997 located in the areas for which subsidiaries of
PCI do not currently have valid Permits, approximately 21% are located in areas
serviced by recently acquired cable networks for which Permit applications
cannot be made until all Permit requirements are satisfied (including obtaining
agreements with the co-op authorities, upgrading of the acquired networks to
meet technical standards where necessary and satisfying foreign ownership
limitations), approximately 60% are located in areas serviced by recently
acquired or constructed networks in Warsaw, Krakow and the areas surrounding
these cities, which PCI plans to transfer to Polska Telewizja Kablowa S.A. ("PTK
S.A.") in order to comply with foreign ownership restrictions, and approximately
19% are located in areas serviced by networks for which certain subsidiaries of
PCI have Permit applications pending. These subsidiaries of PCI have 18 Permit
applications pending. There can be no assurance that PAR will issue any or all
of the Permits to such subsidiaries or that PAR will not take action against
such subsidiaries for operating cable television networks in areas not covered
by valid Permits, including assessing fines on such subsidiaries, revoking
Permits held by the such subsidiaries and seizing the cable networks operated by
such subsidiaries. Furthermore, there can be no assurance that such subsidiaries
will be able to receive Permits in the future permitting them to operate any
other networks that they may acquire. Any action by PAR to restrict or revoke
the Permits of such subsidiaries, or similar action by PAR, would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Regulation -- Poland -- The Communications Act".
Under the Television Act, cable television operators must register each
channel and the programs to be transmitted thereon ("programming") with the
Chairman of the Council prior to transmitting it over their cable networks. The
Chairman of the Council has the authority to reject applications to register
programming if the programming violates any provision of the Television Act. See
"Regulation -- Poland -- Television Act". The relevant subsidiaries of PCI have
registered most of the programming that they transmit on their cable networks,
except programming transmitted on networks for which they do not have Permits.
There can be no assurance that the Council will not revoke the registration of
any of the Company's programming, or that the Chairman of the Council will
register all additional programming that the Company desires to transmit over
its networks, or that the Council will not take action regarding unregistered
programming the Company transmits over its cable networks which do not have
Permits. Such actions could include the levy of monetary fines against the
Company and the seizure of Company equipment involved in transmitting such
unregistered programming, as well as criminal
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<PAGE> 30
sanctions against Company management. Any such action could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Cable television operators in Poland are also subject to the provisions of
the Copyright Act, which governs enforcement of intellectual property rights of
Polish authors and producers of programming and requires that the Company reach
agreements with, and make payments to, such authors and producers of programming
that is transmitted over the Company's networks. The Communications Act requires
that operators of cable television systems comply with Polish laws, including
copyright laws. The rights of copyright holders are generally enforced by rights
organizations for collective copyright administration and protection. In
addition, Poland has adopted the Agreement on Trade Related Aspects of
Intellectual Property Rights ("TRIPS"), which possibly may provide some
copyright protection to foreign producers of programming, and Poland has
recently adopted the Rome Convention, which will result in the intellectual
property rights of non-Polish programming producers being protected in Poland to
the same extent that such rights of Polish producers are protected. The Company
is not able to predict the effect of TRIPS or of the adoption of the Rome
Convention on the Polish cable television industry, and there can be no
assurance that either will not result in the Company paying additional fees to
broadcasters for programming or being unable to obtain certain commercially
desirable programming. See "Regulation -- Poland -- Copyright Protection".
In addition, the Communications Act, the Television Act and the Copyright
Act are relatively new statutes, and thus have not been fully interpreted by
applicable regulatory authorities. There can be no assurance that changes in
laws or regulations, in the interpretation of existing laws or regulations or in
the enforcement activities of the applicable regulatory authorities affecting
the Company, its competitors or the cable television industry in Poland
generally will not occur that could have a material adverse effect on the
Company's business, financial condition or results of operations. See
"Regulation -- Poland".
Competition in Poland is governed by the Anti-Monopoly Act, which
established the Anti-Monopoly Office to regulate monopolistic and other
anti-competitive practices. The current Polish anti-monopoly body of law with
respect to the cable television industry is not well-established, and the
Anti-Monopoly Office has not articulated comprehensive standards that may be
applied in an antitrust review in the cable television industry. In particular,
the relevant markets for cable television services have not been defined by the
Anti-Monopoly Office.
As a general rule, companies that obtain control of 40% or more of their
market face greater scrutiny from the Anti-Monopoly Office. Additionally,
several types of concentrations between undertakings, including acquisitions of
stock, under circumstances specified in the Anti-Monopoly Act require a prior
notification to the Anti-Monopoly Office. Sanctions for failure to notify
include fines imposed on parties to the transaction and members of their
governing bodies. The Company believes that it is required to obtain, and it has
applied for, or is in the process of preparing applications for, approval of the
Anti-Monopoly Office for the pending Acquisitions, and it will be required to
obtain the Anti-Monopoly Office's approval for certain other future acquisitions
as well. In addition, the Anti-Monopoly Office can review a company's past and
present activities for potential anti-competitive behavior. Pursuant to the
current interpretation of the Anti-Monopoly Office, transactions between
non-Polish parties affecting market conditions in Poland may also require a
notification to the Anti-Monopoly Office. According to the Anti-Monopoly Act,
transactions made on a stock exchange do not require notification, but the Act
does not stipulate whether this is applicable to stock exchanges outside Poland
or only to those inside Poland. Furthermore, the proposed draft Law on Public
Trading in Securities, currently being debated by the Polish Parliament,
provides for the amendment to the Anti-Monopoly Act to repeal the exemption of
notification of transactions made on a stock exchange. There can be no assurance
that the Anti-Monopoly Office will approve the pending Acquisitions or the
Company's future acquisitions and dispositions or that a review of the Company's
past, present or future operations, if undertaken by the Anti-Monopoly Office,
will not otherwise adversely impact the Company's business, strategy, financial
condition or results of operations. The Company has not obtained clearances from
the Anti-Monopoly Office in connection with certain past acquisitions. The
Company does not believe that sanctions by the Anti-Monopoly Office for any such
missing clearances would be material, although there can be no
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<PAGE> 31
assurance as to the severity of such future sanctions, if any. See
"Regulation -- Poland -- Anti-Monopoly Act".
The Television Act authorizes the Council to adopt regulations specifying
requirements for Polish or European content of programs of non-Polish
broadcasters to be distributed through cable networks in Poland. The adoption of
such regulations could influence the ability of Polish cable television
operators to register programs with the Council. Such a registration is required
for a lawful cable distribution of programs. The Council has not issued any
regulations concerning this matter, but there can be no assurance that it will
not do so in the future or that the Company would be able to comply with any
such future regulations. The burden of complying with any such future
regulations or any failure to so comply could have a material adverse effect on
the Company. See "Regulation -- Poland -- Television Act".
POLISH REGULATION OF THE DTH MARKET
The Television Act does not include regulations directly applicable to the
broadcasting of programs being broadcast from abroad and received in Poland.
Specifically, there are no regulations in force concerning satellite
broadcasting of a program dedicated to a Polish audience if the uplink for the
broadcasting of such a program is made by a foreign broadcaster from outside of
Poland. The Company believes that the Television Act does not apply to such
broadcasting from outside of Poland and that such activity is not subject to
Polish broadcasting requirements. The Council has not officially adopted an
interpretation of this issue. As different interpretations of this issue have
been made, including by some members of the Council, there can be no assurance
that this interpretation will not be challenged or that the Company will not be
required to comply, and, if so, that it will be able to comply, with such
requirements. In addition, in certain situations, including, but not limited to,
where a program is produced or assembled entirely in Poland and only provided to
a third party for transmission from abroad, there may be a risk of the producer
of such a program being deemed to be a broadcaster under the Television Act, and
being obligated to obtain a license to be issued by the Chairman of the Council,
which would be subject to certain conditions, including foreign ownership
restrictions. While the Company believes that its activities in producing
programs in and outside of Poland, transmitting the programs to the Company's
uplink facility in the United Kingdom and distributing the programs in Poland
via satellite are not subject to regulation in Poland, there can be no assurance
that the Council will not seek to require the Company to apply for a license in
Poland for its broadcasting business. The Company is currently studying the
feasibility of locating its uplink and production facilities in Poland and
applying for the Polish broadcasting licenses necessary to engage in such
activities. There can be no assurance that such licenses would be granted if
applied for. See "-- Limitation on Foreign Ownership of Multichannel Television
Operations and Broadcasters".
Currently Poland has not sought to regulate foreign DTH broadcasters who
uplink outside of Poland. However, there can be no assurances that Poland will
not seek to regulate the DTH industry by, for example, imposing standards for
encryption technology or IRDs. If the Company's encryption technology, IRDs or
other activities were not to meet such standards, the Company's business,
results of operations and financial condition could be materially adversely
affected as the Company seeks to comply with such standards.
As Poland is a party to the Convention, the Polish authorities are
obligated to guarantee freedom of reception and may not restrict the
retransmission on Polish territory of program services which comply with the
terms of the Convention. The Company believes that the content of its
Programming Platform will comply with the terms of the Convention. However, the
Council has recently submitted a proposal to amend the Convention to waive the
protection for freedom of reception in the case of foreign broadcasters
broadcasting from outside Poland in order to evade Polish broadcasting
regulations. Any amendment to the Convention would require the approval of all
state signatories to the Convention. Parties can withdraw from the Convention on
six months notice. There can be no assurance that the Convention will not be so
amended or that Poland will not withdraw from the Convention.
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LIMITATIONS ON FOREIGN OWNERSHIP OF MULTICHANNEL TELEVISION OPERATORS AND
BROADCASTERS
Under the Communications Act and applicable Polish regulatory restrictions,
Permits may only be issued to and held by Polish individuals or companies in
which foreign persons hold no more than 49% of the share capital. These
restrictions do not apply to any Permits issued prior to July 7, 1995 or, in the
Company's view, based on the MOC's written explanations, to Permits issued at
any time pursuant to certain licenses obtained under prior regulations or to
renewals of any such Permits (collectively "Grandfathered Permits"). See
"Regulation -- Poland -- The Communications Act". At March 31, 1997,
approximately 38.6% of the Company's basic subscribers were covered by Permits
that are not subject to foreign ownership restrictions. Prior to the creation of
PAR and the Permit system, the stockholders of PTK, S.A. received a license to
establish PTK, S.A. to operate cable television systems in Warsaw, Krakow and
the areas surrounding these cities (as described in the license) under the
Commercial Activity with Participation of Foreign Parties Act of 1988, as
amended (the "Foreign Commercial Activity Act"). The Company plans to transfer
cable networks that it acquired or constructed after July 7, 1995 in the Warsaw
and Krakow license areas to PTK, S.A., which will apply for Permits covering
such systems. Although the Foreign Commercial Activity Act has been repealed,
the MOC has confirmed to PTK, S.A. that the PTK, S.A. license enables PTK, S.A.
to acquire Permits covering areas in Warsaw, Krakow and the surrounding areas
without regard to the regulatory restrictions on foreign ownership described
above. In Poland, the interpretation of the law is vested in the Constitutional
Court, which has not considered the issue. The MOC's interpretation of the law
is therefore not binding. There can be no assurance that the MOC has correctly
interpreted the law or that it will not change its interpretation in a manner
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
To comply with foreign ownership requirements for areas not covered by
Grandfathered Permits, the Company has entered into contractual arrangements
with the Polish entity Poltelkab. The Company owns 49% of Poltelkab and five
Polish executives and former executives of the Company own the remaining 51%. In
the case of the acquisition or construction of cable networks not covered by
Grandfathered Permits, either (i) the Company will own all of the cable network
assets and will lease the assets to Poltelkab which will operate the networks,
or (ii) Poltelkab will own and operate the networks. In the Company's current
leasing arrangements with Poltelkab, Poltelkab holds the Permits to operate the
cable networks, receives all of the revenue from subscribers, pays all operating
expenses relating to the operation of the networks, and through the lease
arrangements pays the Company rent equal to substantially all of the cash flow
generated by the networks. The Company believes that this ownership and
operating structure are not contrary to the requirements of Polish law. PAR has
granted Poltelkab two Permits for networks using the ownership and operating
structure described above. There can be no assurance that Polish regulatory
authorities will not determine that all or part of this ownership and operating
structure, or any other ownership and operating structure that may be utilized
by the Company, violates Polish regulatory restrictions on foreign ownership or
that such restrictions, including the restrictions applicable to Grandfathered
Permits, will not be amended or interpreted in a different manner in the future.
Any such adverse determination or any such amendment or interpretation could
adversely affect the Company's ability to acquire Permits to operate cable
television systems and could result in the loss of Permits held by Poltelkab,
which could have a material adverse effect on the Company's business, results of
operations and financial condition. See "Regulation -- Poland -- The
Communications Act" and "Regulation -- Poland -- The Communications
Act -- Foreign Ownership Restrictions".
The Television Act provides that programming may be broadcast in Poland
only by Polish entities in which foreign persons hold no more than 33% of the
share capital. In addition, the Television Act and applicable Polish regulatory
restrictions provide that the majority of the management and supervisory boards
of any company holding a Polish broadcasting license must be comprised of Polish
citizens residing in Poland. The Company owns a 33% interest in a programming
company, ProCable, which was formed to develop Polish-language programming for
the Company. ProCable currently holds broadcast licenses to distribute PTK1 and
PTK2, ProCable's current proprietary Polish-language pro-
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<PAGE> 33
grams, over all of the Company's networks that carry these programs, except for
eleven small cable networks for which ProCable currently does not have broadcast
licenses but for which it will seek to obtain broadcast licenses in the near
future.
The Company has established Mozaic as a wholly owned U.S. subsidiary
engaged in the development and production of Polish-language thematic television
programming outside of Poland. The Company plans to distribute its Programming
Platform and other programming produced by Mozaic throughout Poland via
satellite systems from outside of Poland. @Entertainment has established @EL and
intends to establish other subsidiaries and joint ventures to develop and
produce Polish-language programming as part of its Programming Platform. The
Company believes that the ownership structure of ProCable, @EL and Mozaic
satisfies Poland's regulatory restrictions on foreign ownership. However, there
can be no assurance that Polish regulatory authorities will not determine that
all or part of this ownership or distribution structure, or the distribution
structure to be established for such future subsidiaries or joint ventures,
violates Polish regulatory restrictions on foreign ownership. If the ownership
of ProCable, @EL or Mozaic or such future subsidiaries or joint ventures is
found not to be in compliance with Poland's regulatory restrictions on foreign
ownership, the Company could be forced to incur significant costs to bring its
ownership structure or distribution system into compliance with the regulations;
it might be forced to dispose of its ownership interests in ProCable, @EL,
Mozaic or such future subsidiaries or joint ventures; or ProCable could lose its
broadcasting licenses. These regulatory restrictions may materially adversely
affect the Company's ability to enter into relationships with ProCable, Mozaic
or such future subsidiaries or joint ventures, as well as any other entity that
produces, broadcasts and distributes programming in Poland, which would have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Regulation -- Poland -- Communications Act".
UNITED KINGDOM REGULATION OF D-DTH BUSINESS
The Company currently anticipates establishing production facilities in the
United Kingdom through @EL for the production, post-production and packaging of
programming from which it will transmit via uplink to the Astra satellites for
onward transmission to D-DTH subscribers and cable operators in Poland. The
Company's D-DTH broadcasting service will be regulated by the U.K. authorities
(primarily the ITC) as a satellite television service ("STS"). Under the U.K.
Broadcasting Act 1990, as amended (the "Broadcasting Act"), satellite
broadcasters established in the U.K. are required to obtain a STS license. STS
licenses are granted by the ITC assuming that certain criteria are satisfied.
The Company has applied, or intends to apply, for STS licenses for each of its
proposed D-DTH broadcast channels which are not otherwise licensed. The ITC has
wide discretion to vary the conditions of licenses issued under the Broadcasting
Act. There is no assurance that the Company will be able to secure the necessary
STS licenses it requires, or if obtained, that the Company will be able to meet
the ongoing requirements of such STS licenses. Failure to obtain in a timely
manner and maintain such licenses would have a material adverse effect on the
Company's ability to rollout its D-DTH service or to add channels in the future,
and as a result, would have a material adverse affect on the Company's business,
results of operations and financial condition. See "Regulation -- United Kingdom
- -- Broadcasting Regulation".
EUROPEAN UNION REGULATION OF D-DTH BUSINESS
The Television Without Frontiers Directive (the "Directive") provides that
each European Union ("EU") broadcaster should be regulated by the authorities in
the member state where it is established, without regard to the country within
the EU in which its broadcast signal is received. Currently, the Convention
provides that the country in which a broadcaster uplinks its programming to the
satellite has jurisdiction over that broadcaster, but the Convention is likely
to be amended to bring it into conformity with the Directive's establishment
test. The Company can give no assurance that either the Directive or the
Convention or both will not be amended in the future, either legislatively or
judicially, to give authorities in a receiving state the power to regulate a
broadcaster whose services are intended to be
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received in such state. This may have an impact on the Company's ability to
broadcast into Poland programming uplinked from the United Kingdom.
The Company can give no assurance that regulations will not be imposed in
the future which would impose stricter European or independent production quotas
on European broadcasters, impose foreign (non-EU) ownership restrictions on
broadcasters or regulate digital television services in a way which may be
detrimental to the Company (such as requiring all conditional access providers
to allow simulcrypt of their programming) or that any such regulations, if
imposed, would not have a materially adverse effect on the Company's business,
results of operations and financial condition.
RISKS RELATED TO INVESTMENTS IN POLAND AND EMERGING MARKETS
POLITICAL AND ECONOMIC RISKS; ENFORCEMENT OF FOREIGN JUDGMENTS
Poland has undergone significant political and economic change since 1989.
Political, economic, social and other developments in Poland may in the future
have a material adverse effect on the Company's business. In particular, changes
in laws or regulations (or in the interpretation of existing laws or
regulations), whether caused by changes in the government of Poland or
otherwise, could materially adversely affect the Company's operations and
business. Currently there are no limitations on the repatriation of profits from
Poland, but there can be no assurance that foreign exchange control
restrictions, taxes or limitations will not be imposed or increased in the
future with regard to repatriation of earnings and investments from Poland. If
such exchange control restrictions, taxes or limitations are imposed, the
ability of @Entertainment to receive dividends or other payments from its Polish
subsidiaries could be reduced, which may have a material adverse effect on the
Company.
Due to the many formalities required for compliance with the laws in
Poland's regulated economy, the rapid changes that Polish laws and regulations
have undergone in the 1990s or otherwise, and numerous uncertainties regarding
the interpretation of such laws and regulations, the Company may from time to
time have violated, may be violating and may in the future violate, the
requirements of certain Polish laws, including provisions of labor, foreign
exchange, customs, tax and corporate laws and regulatory approvals. The Company
does not believe that any such violations will have a material adverse effect
upon the Company's business, results of operations or financial condition, but
there can be no assurance that such will be the case.
Poland is generally considered by international investors to be an emerging
market. There can be no assurance that political, economic, social and other
developments in other emerging markets will not have an adverse effect on the
market value and liquidity of the Common Stock. In general, investing in the
securities of issuers with substantial operations in markets such as Poland
involves a higher degree of risk than investing in the securities of issuers
with substantial operations in the United States and other similar
jurisdictions.
@Entertainment is organized under the laws of the State of Delaware.
Although investors in the Common Stock will be able to effect service of process
in the United States upon @Entertainment and may be able to effect service of
process upon its directors, due to the fact that @Entertainment is primarily a
holding company which holds direct or indirect equity interests in various
entities in Poland, the United Kingdom and the Netherlands, all or a substantial
portion of the assets of the Company are located outside the United States. As a
result, it may not be possible for investors to enforce against the Company's
assets judgments of United States courts predicated upon the civil liability
provisions of United States laws.
@Entertainment has been advised by its Polish counsel that there is doubt
as to the enforceability in Poland, in original actions or in actions for
enforcement of judgments of U.S. courts, of civil liabilities predicated solely
upon the laws of the United States. In addition, awards of punitive damages in
actions brought in the United States or elsewhere may be unenforceable in
Poland.
@Entertainment has been advised by its English solicitors that there is
doubt as to the enforceability in the United Kingdom, in original actions or in
actions for the enforcement of judgments of United
31
<PAGE> 35
States courts, of certain civil liabilities predicated upon the United States
federal and state securities laws.
@Entertainment also has been advised by its Netherlands counsel that a
final and conclusive judgment duly obtained in actions brought in the United
States will not be recognized and enforced by a Netherlands court and that it
would be necessary to bring the matter before the competent Netherlands court.
The claimants may, in the course of these proceedings, submit the judgment
rendered by the court in the United States. If and to the extent that the
Netherlands court is of the opinion that fairness and good faith so require, it
will give binding effect to such foreign judgment, unless such foreign judgment
contravenes Netherlands principles of public policy.
INFLATION; CURRENCY RISK
Since the fall of Communist rule in 1989, Poland has experienced high
levels of inflation and significant fluctuations in the exchange rate for the
zffioty. The Polish government has adopted policies that slowed the annual rate
of inflation from approximately 250% in 1990 to approximately 27% in 1995 and to
approximately 20% in 1996. The exchange rate for the zffioty has stabilized and
the rate of devaluation of the zffioty has decreased since 1991. However, the
zffioty exchange rate and rate of devaluation have increased in 1997. Inflation
and currency exchange fluctuations have had, and may continue to have, an
adverse effect on the financial condition and results of operations of the
Company.
Substantially all of the Company's debt obligations and certain of the
Company's operating expenses and capital expenditures are, and are expected to
continue to be, denominated in or indexed to U.S. Dollars. By contrast,
substantially all of the Company's revenue is denominated in zffioty. Any
devaluation of the zffioty against the U.S. Dollar that the Company is unable to
offset through price adjustments will require the Company to use a larger
portion of its revenue to service its U.S. Dollar-denominated obligations. While
the Company may consider entering into transactions to hedge the risk of
exchange rate fluctuations, it is unlikely that the Company will be able to
obtain hedging arrangements on commercially satisfactory terms. Accordingly,
shifts in currency exchange rates may have an adverse effect on the ability of
the Company to service its U.S. Dollar denominated obligations and, thus, on the
Company's financial condition and results of operations.
RISKS RELATED TO THE OFFERINGS
BENEFITS OF THE OFFERINGS TO INSIDERS
The Company intends to use $40 million and $20 million of the net proceeds
of the Offerings to purchase all of the outstanding shares of PCI Series A
Preferred Stock and PCI Series C Preferred Stock, respectively. The holder of
the PCI Series A Preferred Stock is ECO, which purchased such stock, together
with all outstanding shares of PCI Series B Preferred Stock and 4,662 shares of
PCI common stock, for an aggregate purchase price of $65 million. Upon the
completion of the Offerings, ECO's shares of Series B Preferred Stock will
automatically be converted into 4,862,000 shares of Common Stock, leaving ECO
with a total of 9,524,000 shares of Common Stock with a value (based on $20.25,
the midpoint of the estimated range specified on the cover page of the
Prospectus) of approximately $193 million. The holder of the PCI Series C
Preferred Stock is an entity owned by certain of the beneficial owners of PIHLP
(as herinafter defined) and members of their families (the "Chase Entity"),
which acquired such stock for approximately $19.8 million from Polish
Investments Holding L.P. ("PIHLP"), an entity owned by certain members of the
Chase Family, which purchased such stock from PCI for approximately $17 million.
Upon the completion of the Offerings, the stockholders owning more than five
percent of the Common Stock (other than ECO) will, together with the officers
and directors of the Company, hold an aggregate of 12,953,000 shares of Common
Stock (excluding any outstanding options to purchase Common Stock), with an
aggregate cost of approximately $4.1 million and with an aggregate value (based
on $20.25, the midpoint of the estimated range specified on the cover page of
the Prospectus) of approximately $262 million. In addition, such investors
benefit from the Offerings in obtaining liquidity for their investments in
Common Stock.
Certain of the Company's management are entitled under their respective
employment agreements to receive bonus payments upon the successful completion
of the Offerings. Such bonus payments to,
32
<PAGE> 36
among others, Messrs. Makowski, Frelas, Szmyt and Warner, and additional
discretionary Offering-related bonus payments to Messrs. Muras and Sowa and
certain other employees will aggregate approximately $1.23 million. See "Use of
Proceeds", "Management" and "Certain Relationships and Related Transactions".
NO INTENTION TO PAY DIVIDENDS
Neither @Entertainment nor PCI has ever declared or paid a cash dividend on
its common stock. @Entertainment intends to retain its earnings, if any, for use
in its business and does not anticipate paying cash dividends in the foreseeable
future. See "-- Risks Related to the Company -- Holding Company Structure and
Restrictions on Payment of Dividends", "Dividend Policy" and "Description of
Capital Stock".
USE OF PROCEEDS
Because of the number and variability of factors that determine the
Company's use of proceeds from the Offerings, management will retain a
significant amount of discretion over the application of the net proceeds.
NO PUBLIC MARKET FOR SECURITIES
Prior to the Offerings, there has not been any market for @Entertainment's
Common Stock, and there can be no assurance that an active trading market will
develop or be sustained after the Offerings.
ARBITRARY DETERMINATION OF OFFERING PRICE; POSSIBLE VOLATILITY OF STOCK
PRICE
The initial public offering price of the Common Stock will be determined by
negotiation between @Entertainment and representatives of the Underwriters and
is not necessarily related to the Company's asset value, net worth, results of
operations or any other criteria of value and may not be indicative of the
prices of the Common Stock that may prevail in the public market after the
Offerings. Subsequent to the Offerings, prices for the Common Stock will be
determined by the market and may be influenced by a number of factors, including
the depth and liquidity of the market for the Common Stock, investor perception
of the Company and other comparable companies and general economic and other
conditions.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of Common Stock by existing stockholders pursuant to Rule 144
("Rule 144") under the Securities Act of 1933 could have an adverse effect on
the price of the Common Stock. Upon completion of the Offerings, up to
approximately 3,983,000 shares of Common Stock, which are beneficially held by
certain existing stockholders of @Entertainment, may be eligible for sale under
Rule 144. @Entertainment and stockholders who own in the aggregate 23,810,000
shares of Common Stock have agreed that, during the period beginning from the
date of this Prospectus and continuing to and including the date 180 days after
the date of the Prospectus, they will not offer, sell, contract to sell or
otherwise dispose of any securities of @Entertainment which are substantially
similar to shares of Common Stock or which are convertible into or exchangeable
for securities which are substantially similar to shares of Common Stock without
the prior written consent of Goldman, Sachs & Co., except for the shares of
Common Stock offered by @Entertainment in connection with the concurrent U.S.
and International Offerings. Messrs. Robert E. Fowler, III, John S. Frelas,
George Makowski, Przemyslaw Szmyt and David Warner, each of whom holds options
to purchase shares of Common Stock, has agreed that, during the period beginning
on the date of this Prospectus and continuing to any including the date 728 days
(two years) after the date of this Prospectus they will not offer, sell,
contract to sell or otherwise dispose of any securities of @Entertainment which
are substantially similar to shares of Common Stock or which are convertible
into or exchangeable for securities which are substantially similar to shares of
Common Stock without the prior written consent of Goldman, Sachs & Co. See
"Shares Eligible for Future Sale".
33
<PAGE> 37
THE REORGANIZATION
Before the Offerings, all the holders of shares of PCI's common stock and
@Entertainment entered into a Contribution Agreement dated as of June 22, 1997
(the "Contribution Agreement"). Pursuant to the Contribution Agreement, each
holder of shares of PCI's common stock transferred all shares of PCI common
stock owned by it to @Entertainment. In addition, ECO transferred all of the
outstanding shares of PCI's voting Series B Preferred Stock (the "PCI Series B
Preferred Stock") to @Entertainment. All of these transfers (the "Share
Exchange") were designed to qualify as a tax-free exchange under section 351 of
the Internal Revenue Code of 1986, as amended (the "Code"). Each holder of PCI's
common stock received 1,000 shares of Common Stock of @Entertainment in exchange
for each share of PCI's common stock transferred by it (the "Capital
Adjustment"). ECO also received an equivalent number of shares of
@Entertainment's Series B Preferred Stock in exchange for its shares of PCI
Series B Preferred Stock. The Series B Preferred Stock has identical rights and
preferences to those of the PCI Series B Preferred Stock, except that the ratio
for conversion of such shares into common stock increased from 1:1.9448 to
1:1,944.80 in order to reflect the Capital Adjustment. The 2,500 outstanding
shares of Series B Preferred Stock will automatically convert into 4,862,000
shares of Common Stock of @Entertainment upon the closing of the Offerings (the
"Automatic Conversion").
On June 20, 1997, PIHLP transferred all of the outstanding shares of PCI's
Series C Preferred Stock to the Chase Entity, an entity owned by certain of the
beneficial owners of PIHLP and members of their families. The Chase Entity, ECO
and @Entertainment entered into a Purchase Agreement dated as of June 22, 1997
(the "Purchase Agreement"). Among other matters, the Purchase Agreement
obligates @Entertainment to purchase all of the outstanding shares of PCI's
Series A Preferred Stock and Series C Preferred Stock for cash from ECO and the
Chase Entity, respectively, at the closing of the Offerings (the "Cash
Purchases"). The aggregate purchase price of $60.0 million for PCI's Series A
Preferred Stock and Series C Preferred Stock equals the aggregate redemption
price of such shares as set forth in PCI's certificate of incorporation. The
Cash Purchases will be funded with a portion of the net proceeds of the
Offerings. See "Risk Factors -- Risks Related to the Offerings -- Benefits of
the Offerings to Insiders" and "Use of Proceeds".
In June 1997, @Entertainment acquired all of the outstanding stock of @EL,
a new corporation organized under the laws of England and Wales (the "@EL
Incorporation"). @EL will be responsible for the Company's D-DTH business.
In June 1997, certain employment agreements for the executive officers of
@Entertainment who were employed by PCI and their employee stock option
agreements were assigned to @Entertainment by PCI (the "Assignment"). As part of
the Assignment and the Capital Adjustment, the employment agreements were
amended to provide that each option to purchase a share of PCI's common stock
was exchanged for an option to purchase 1,000 shares of Common Stock, with a
proportionate reduction in the per share exercise price.
The Share Exchange, Capital Adjustment, @EL Incorporation and the
Assignment are collectively referred to as the "Reorganization". As a result of
the Reorganization, @Entertainment owns all of the outstanding shares of voting
stock of PCI and all of the outstanding shares of common stock of @EL. The
Automatic Conversion and Cash Purchases will occur upon the closing of the
Offerings.
34
<PAGE> 38
USE OF PROCEEDS
Assuming an offering price of $20.25 per share (the midpoint of the
estimated range specified on the cover page of the Prospectus), the net proceeds
from the sale of the Common Stock is expected to be approximately $177.4 million
(after deducting the underwriting discount and estimated expenses of the
Offerings). The Company plans to use $60.0 million to purchase all of the PCI
Series A Preferred Stock and Series C Preferred Stock held by certain of the
Principal Stockholders, approximately $1.23 million for the payment of bonuses
to certain executives of the Company and substantially all of the remaining net
proceeds to finance the commencement and development of its D-DTH business.
There can be no assurance that the Company will be able to successfully enter
the D-DTH market. See "Risk Factors -- Risks Related to the Company -- Limited
D-DTH Experience and Uncertainties Associated with the D-DTH Market" and "Risk
Factors -- Risks Related to the Company -- Benefits of the Offerings to
Insiders". The Company intends to use any remaining net proceeds for general
corporate purposes, including, without limitation, development of its cable
television and programming businesses and future acquisitions. The Company
believes that it has sufficient net proceeds from the sale of the Notes to
consummate the Acquisitions and does not intend to use any of the net proceeds
from the Offerings for such purpose. Because of the number and variability of
factors that will determine the Company's use of proceeds from the Offerings,
management will retain a significant amount of discretion over the application
of the net proceeds. Pending utilization of the net proceeds of the Offerings,
the Company intends to invest such proceeds in short-term investment grade
securities.
The Company expects that an aggregate of approximately $315 million in 1997
and 1998 will be required to fund (i) the commencement and development of its
D-DTH business, which will include capital expenditures and expenditures for
operating expenses, working capital and other general corporate purposes
(approximately $200 million, including up to approximately $190 million to
subsidize the cost of D-DTH Reception Systems to the Initial Subscribers in an
amount of up to approximately $380 per subscriber), (ii) the expansion of its
programming business (approximately $25 million), (iii) the consummation of the
Acquisitions and future acquisitions (approximately $60 million) and (iv) the
building out and rebuilding of its cable television networks (approximately $30
million). The Company believes that, in addition to the net proceeds from the
Offerings, remaining funds from the offering of the Notes and cash from
operations, it will need additional funding of approximately $100 million to
fulfill its current business development plans through the end of 1998. There
can be no assurance that the Company will be able to borrow funds under any
credit facilities or that suitable debt or equity financing will be available to
the Company or, if available, that the terms thereof will be attractive to the
Company. However, the pace and amount of the Company's expenditures for its
business development plans are largely discretionary. See "Risk Factors -- Risks
Related to the Company -- Need for Additional Financing" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources".
DIVIDEND POLICY
Neither @Entertainment nor PCI has ever paid cash dividends on its common
stock. @Entertainment does not anticipate or intend to pay cash dividends in the
foreseeable future on the Common Stock. The payment of dividends in the future
will be subject to the discretion of the Board of Directors of @Entertainment
and will depend on @Entertainment's results of operations, financial position,
capital requirements, general business conditions, restrictions imposed by
financing arrangements, if any, legal and regulatory restrictions on the payment
of dividends and other factors the Board of Directors deems relevant.
@Entertainment is a holding company with no business operations of its own.
@Entertainment is therefore dependent upon payments, dividends and distributions
from PCI, @EL and its other subsidiaries for funds to pay dividends to the
stockholders of @Entertainment. PCI and @EL currently intend to retain any
earnings for support of their working capital, repayments of indebtedness,
capital expenditure and other general corporate purposes. PCI and @EL have no
current intention of paying dividends or making other distributions to
@Entertainment in excess of amounts necessary to pay @Entertainment's operating
expenses and taxes. The Indenture relating to the Notes contains restrictions on
PCI's ability to pay dividends and make payments or other distributions to
@Entertainment. See "Risk Factors --
35
<PAGE> 39
Risks Related to the Company -- Holding Company Structure and Restrictions on
Payment on Dividends" and "-- No Intention to Pay Dividends".
DILUTION
After giving effect to the Reorganization (including the Capital
Adjustment), the Automatic Conversion and the Cash Purchases (see "The
Reorganization"), the tangible book value deficit of the Company at March 31,
1997 would have been $(15,967,000), or $(.67) per share. Tangible book value
deficit per share represents the amount of total tangible assets less total
liabilities divided by 23,810,000 shares of Common Stock outstanding. As the
following table demonstrates, after giving effect to the Reorganization
(including the Capital Adjustment), the Automatic Conversion, the Cash Purchase
and the sale of shares of Common Stock by the Company in the Offerings at an
initial public offering price of $20.25 per share (the midpoint of the estimated
range specified on the cover page of this Prospectus), and after deducting
anticipated expenses of the Offerings, the pro forma net tangible book value of
the Company at March 31, 1997, would have been $160,221,000, or $4.81 per share,
representing an immediate $15.44 per share dilution to new investors purchasing
shares of Common Stock in the Offerings.
<TABLE>
<S> <C> <C>
Initial public offering price per share............................... $20.25
Net tangible book value deficit per share before the Offerings
(1).............................................................. $ (.67)
Increase per share attributable to new investors.................... $ 5.48
Pro forma net tangible book value per share after the Offerings....... $ 4.81
------
Net tangible book value dilution per share to new investors (2)....... $15.44
======
</TABLE>
- ---------------
(1) After giving effect to the Reorganization (including the Capital
Adjustment), the Automatic Conversion and the Cash Purchases (see "The
Reorganization").
(2) Dilution is determined by subtracting pro forma net tangible book value per
share after the Offerings from the initial public offering price per share
of Common Stock.
The following table sets forth on a proforma basis at March 31, 1997 the
number of shares of Common Stock purchased from @Entertainment, the total
consideration paid to @Entertainment and the average price paid per share of
Common Stock based on an initial public offering price of $20.25 per share (the
midpoint of the estimated range as specified on the cover page of this
Prospectus).
<TABLE>
<CAPTION>
CONSIDERATION AVERAGE
COMMON SHARES PAID TO @ENTERTAINMENT PRICE PER
PURCHASED -------------------------- SHARE OF
---------------------- AMOUNT COMMON
NUMBER PERCENT (IN THOUSANDS) PERCENT STOCK
---------- ------- -------------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 23,810,000 71.5% $ 53,343 21.7% $ 2.24
New Investors...................... 9,500,000 28.5% 192,375 78.3% 20.25
---------- ----- -------- ----- ------
Total.............................. 33,310,000 100.0% $245,718 100.0% $ 7.38
========== ===== ======== ===== ======
</TABLE>
36
<PAGE> 40
EXCHANGE RATE DATA
In this Prospectus, references to "U.S. Dollars" or "$" are to the lawful
currency of the United States, and references to "zffioty" or "PLN" are to the
lawful currency of the Republic of Poland. @Entertainment prepares its
consolidated financial statements in accordance with U.S. GAAP in U.S. Dollars.
Amounts originally measured in zffioty for all periods presented have been
translated into U.S. Dollars in accordance with the methodology set forth in
Statement of Financial Accounting Standards No. 52 ("SFAS No. 52"). For the
convenience of the reader, this Prospectus contains translations of certain
zffioty amounts into U.S. Dollars which should not be construed as a
representation that such zffioty amounts actually represent such U.S. Dollar
amounts or could be, or could have been, converted into U.S. Dollars at the
rates indicated or at any other rate. Unless otherwise stated, such U.S. Dollar
amounts have been derived by converting from zffioty to U.S. Dollars at the rate
of PLN 3.076 = $1.00, the exchange rate quoted by the National Bank of Poland
("NBP") at noon on March 31, 1997. This rate may differ from the actual rates in
effect during the periods covered by the financial information discussed herein.
The Federal Reserve Bank of New York does not certify for customs purposes a
noon buying rate for zffioty.
The following table sets forth, for the periods indicated, the noon
exchange rate quoted by the NBP. Such rates are set forth as zffioty per U.S.
Dollar. At December 31, 1996, such rate was PLN 2.875 = $1.00, at March 31,
1997, such rate was PLN 3.076 = $1.00, and at July 25, 1997, such rate was PLN
3.438 = $1.00.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------- ---------------
1992 1993 1994 1995 1996 1996 1997
------ ------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Exchange rate at end of period.......... 1.58 2.13 2.44 2.47 2.88 2.59 3.08
Average exchange rate during
period(1)............................. 1.39 1.84 2.27 2.43 2.71 2.57 3.04
Highest exchange rate during period..... 1.58 2.13 2.45 2.54 2.89 2.59 3.09
Lowest exchange rate during period...... 1.15 1.58 2.14 2.32 2.47 2.47 2.86
</TABLE>
- ---------------
(1) The average of the exchange rates on the last day of each month during the
applicable period.
37
<PAGE> 41
CAPITALIZATION
The following table sets forth the cash and cash equivalents, investment
securities and capitalization of the Company at March 31, 1997, as adjusted to
give effect to the Reorganization (including the Capital Adjustment) and as
further adjusted to give effect to (i) the Automatic Conversion of
@Entertainment's Series B Preferred Stock into 4,862,000 shares of Common Stock
upon the closing of the Offerings and (ii) the sale of the Common Stock offered
hereby (assuming no exercise of the Underwriters' over-allotment options) at an
initial public offering price of $20.25 per share (the mid-point of the
estimated range as specified on the cover page of this Prospectus) and the
application of the net proceeds thereof as described under "Use of Proceeds".
<TABLE>
<CAPTION>
MARCH 31, 1997
---------------------------------
ADJUSTED ADJUSTED FOR
HISTORICAL (1) THE OFFERINGS
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents (2).......................... $ 58,508 $174,687
Investment securities (2).............................. $ 25,115 $ 25,115
======== ========
Long-term debt:
Notes payable........................................ $129,542 $129,542
Redeemable preferred stock (3)......................... 35,935 --
Stockholders' equity:
Preferred stock, par value $.01 per share; 20,000,000
shares authorized; no shares issued and
outstanding....................................... -- --
Common stock, par value $.01 per share; 50,000,000
shares authorized; 18,948,000 shares outstanding
(33,310,000 shares outstanding as adjusted for the
Offerings) (4).................................... 189 333
Paid-in capital...................................... 53,154 206,354
Cumulative translation adjustment.................... (467) (467)
Accumulated deficit (5).............................. (26,379) (27,609)
-------- --------
Total stockholders' equity........................ 26,497 178,611
Total capitalization......................... $191,974 $308,153
======== ========
</TABLE>
- ---------------
(1) Adjusted to give effect to the Reorganization (including the Capital
Adjustment). See "The Reorganization" and "Description of Capital Stock".
(2) A portion of the net proceeds from the offering of the Notes was, and a
portion of the net proceeds from the Offerings will be, in cash and cash
equivalents and in investment securities pending application of the
respective net proceeds therefrom.
(3) Upon closing of the Offerings, all of the outstanding shares of Series B
Preferred Stock will automatically convert into 4,862,000 shares of Common
Stock, and @Entertainment will use $60.0 million of the net proceeds from
the Offerings to purchase all of the PCI Series A Preferred Stock and Series
C Preferred Stock held by certain of the Principal Stockholders, which
amount represents the full accreted redemption value of such stock. See
"Risk Factors -- Risks Related to the Offerings -- Benefits of the Offerings
to Insiders" and "Use of Proceeds".
(4) Does not include 2,436,000 shares of Common Stock reserved for issuance in
connection with options granted to certain employees of the Company. See
"Executive Compensation".
(5) The increase in accumulated deficit reflects the payment of approximately
$1.23 million of bonuses to certain executives of the Company payable upon
successful completion of the Offerings.
38
<PAGE> 42
SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below are selected consolidated financial data of the Company for
each of the years in the five-year period ended December 31, 1996 and the three
months ended March 31, 1996 and 1997. The selected consolidated financial data
set forth below for each of the years in the three-year period ended December
31, 1996 and at December 31, 1995 and 1996 have been derived from the
consolidated financial statements of the Company included elsewhere in this
Prospectus, which have been audited by KPMG Peat Marwick LLP, independent
auditors. The selected consolidated financial data set forth below as of and for
the years ended December 31, 1993 and at December 31, 1994 have been derived
from the consolidated financial statements of the Company, which were audited by
KPMG Peat Marwick LLP. The consolidated financial data as of and for the year
ended December 31, 1992, and the three months ended March 31, 1996 and 1997 have
been derived from unaudited consolidated financial statements of the Company. In
the opinion of management, such unaudited financial statements have been
prepared on the same basis as the audited consolidated financial statements and
include all adjustments, which in the case of the interim periods consist only
of normal recurring adjustments, necessary for a fair presentation of the
financial position of the Company as of such dates and the results of operations
for such periods. The results for the interim periods presented are not
necessarily indicative of the results for a full year. The selected consolidated
financial data should be read in conjunction with the Company's consolidated
financial statements and notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1992 1993 1994 1995
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Cable television revenue................................... $ 4,490 $ 6,562 $ 8,776 $ 18,557
Operating expenses:
Direct operating expenses................................. (1,099) (1,481) (2,119) (5,129)
Selling, general and administrative....................... (6,418) (4,029) (2,818) (4,684)
Depreciation and amortization............................. (1,618) (2,257) (3,459) (5,199)
----------- ----------- ----------- -----------
Operating income (loss)................................. (4,645) (1,205) 380 3,545
Interest and investment income............................ 7 65 78 174
Interest expense.......................................... -- (116) (2,327) (4,373)
Foreign currency translation (loss) gain.................. 406 (315) (27) (17)
----------- ----------- ----------- -----------
Loss before income taxes, minority interest and
extraordinary item...................................... (4,232) (1,571) (1,896) (671)
Income tax expense........................................ (920) (976) (803) (600)
Minority interest in subsidiary (income) loss............. 650 205 316 (18)
----------- ----------- ----------- -----------
Loss before extraordinary item.......................... $ (4,502) $ (2,342) $ (2,383) $ (1,289)
Extraordinary loss on early extinguishment of debt........ -- -- -- --
----------- ----------- ----------- -----------
Net loss................................................ (4,502) (2,342) (2,383) (1,289)
Preferred stock dividend.................................. -- -- (1,811) --
Excess of carrying amount of preferred stock over fair
value of consideration transferred...................... -- -- -- --
----------- ----------- ----------- -----------
Net loss applicable to holders of Common Stock............ (4,502) (2,342) (4,194) (1,289)
=========== =========== =========== ===========
Pro forma loss per share of Common Stock before
extraordinary item...................................... -- -- -- --
Extraordinary loss per share of Common Stock.............. -- -- -- --
----------- ----------- ----------- -----------
Pro forma net loss per share of Common Stock(1)........... -- -- -- --
=========== =========== =========== ===========
Weighted average number of shares of Common Stock
outstanding(1).......................................... -- -- -- --
=========== =========== =========== ===========
<CAPTION>
THREE MONTHS ENDED MARCH
31,
--------------------------
1996 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Cable television revenue................................... $ 24,923 $ 5,621 $ 7,508
Operating expenses:
Direct operating expenses................................. (7,193) (1,514) (2,100)
Selling, general and administrative....................... (9,289) (1,633) (2,974)
Depreciation and amortization............................. (9,788) (1,729) (3,450)
----------- ----------- -----------
Operating income (loss)................................. (1,347) 745 (1,016)
Interest and investment income............................ 1,274 43 750
Interest expense.......................................... (4,687) (1,604) (3,205)
Foreign currency translation (loss) gain.................. (761) (94) (305)
----------- ----------- -----------
Loss before income taxes, minority interest and
extraordinary item...................................... (5,521) (910) (3,776)
Income tax expense........................................ (1,273) (505) (271)
Minority interest in subsidiary (income) loss............. 1,890 (49) 476
----------- ----------- -----------
Loss before extraordinary item.......................... $ (4,904) (1,464) (3,571)
Extraordinary loss on early extinguishment of debt........ (1,713) -- --
----------- ----------- -----------
Net loss................................................ (6,617) (1,464) (3,571)
Preferred stock dividend.................................. (1,738) (1,738) --
Excess of carrying amount of preferred stock over fair
value of consideration transferred...................... 3,549 -- --
----------- ----------- -----------
Net loss applicable to holders of Common Stock............ (4,806) (3,202) (3,571)
=========== =========== ===========
Pro forma loss per share of Common Stock before
extraordinary item...................................... (2.11) (2.66) (1.85)
Extraordinary loss per share of Common Stock.............. (.09) -- --
----------- ----------- -----------
Pro forma net loss per share of Common Stock(1)........... (2.20) (2.66) (1.85)
=========== =========== ===========
Weighted average number of shares of Common Stock
outstanding(1).......................................... 19,542,294 14,486,294 21,185,121
=========== =========== ===========
</TABLE>
39
<PAGE> 43
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1992 1993 1994 1995
----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(2)................................................. $ (3,027) $ 1,052 $ 3,839 $ 8,744
Expenditures for construction of cable television
systems(3).............................................. 3,476 5,490 11,695 16,014
Net cash provided (used) by operating activities.......... (4,129) 2,709 1,599 3,839
Net cash used by investing activities..................... (3,860) (5,817) (12,341) (21,985)
Net cash provided (used) by financing activities.......... 7,390 3,332 12,686 17,996
BALANCE SHEET DATA (AT PERIOD END):
Total assets.............................................. $ 28,857 $ 34,165 $ 47,376 $ 68,058
Total debt................................................ 13,832 20,073 35,988 59,405
Redeemable preferred stock................................ -- -- -- --
Total stockholders' equity................................ 5,592 3,250 1,479 190
<CAPTION>
THREE MONTHS ENDED MARCH
31,
--------------------------
1996 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(2)................................................. $ 8,441 $ 2,474 $ 2,434
Expenditures for construction of cable television
systems(3).............................................. 25,372 7,408 4,471
Net cash provided (used) by operating activities.......... 6,112 2,794 (1,656)
Net cash used by investing activities..................... (74,861) (7,800) (7,662)
Net cash provided (used) by financing activities.......... 134,889 22,947 (657)
BALANCE SHEET DATA (AT PERIOD END):
Total assets.............................................. $ 217,537 96,529 $ 212,937
Total debt................................................ 130,074 11,181 129,542
Redeemable preferred stock................................ 34,955 32,085 35,935
Total stockholders' equity................................ 31,048 39,747 26,497
</TABLE>
- ---------------
(1) The pro forma net loss per share has been calculated on the assumption that
the outstanding shares of PCI Series A Preferred Stock and PCI Series C
Preferred Stock were repurchased on January 1, 1996. The pro forma weighted
average number of shares of Common Stock outstanding includes the number of
shares of Common Stock required to be sold at $20.25 per share (the
mid-point of the estimated range specified on the cover page of the
Prospectus) to pay the difference between the liquidation values of the PCI
Series A Preferred Stock and PCI Series C Preferred Stock and their
historical carrying values. Such difference of $35,614,000 will be shown as
an increase in the net loss applicable to common stockholders in the period
of redemption. See "The Reorganization".
(2) EBITDA consists of net income (loss) as measured by U.S. GAAP adjusted for
interest and investment income, depreciation and amortization, interest
expense, foreign currency translation gains and losses, income taxes,
extraordinary items, non-recurring items, gains and losses from the sale of
assets other than in the normal course of business and minority interest in
subsidiary income and loss. The Company believes that EBITDA and related
measures of cash flow from operating activities serve as important financial
indicators in measuring and comparing the operating performance of cable
television companies. EBITDA is not intended to represent cash flow from
operations under U.S. GAAP and should not be considered as an alternative to
net income (loss) as an indicator of the Company's operating performance or
to cash flows from operations as a measure of liquidity. EBITDA does not
include full year results for 1996 from TV KABEL in the Bydgoszcz regional
cluster which was acquired in December 1996 and does not include results
from the Acquisitions.
(3) Expenditures for the construction of cable television systems represent
payments made by the Company during the period for construction of its cable
television systems in Poland, and excludes costs of acquiring cable systems.
40
<PAGE> 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated financial statements of the Company, including the notes
thereto, included elsewhere in this Prospectus. This Prospectus contains
statements which constitute forward looking statements regarding the intent,
belief or current expectations of the Company or its officers with respect to,
among other things, (i) the Company's financing plans, (ii) trends affecting the
Company's financial condition or results of operations, (iii) the impact of
competition, (iv) the start up of certain operations, and (v) acquisition
opportunities. The Company's actual future results could differ materially from
those discussed herein. Prospective investors are cautioned that any such
forward looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those in the forward looking statements as a result of various factors. The
accompanying information contained in this Prospectus, including, without
limitation, the information under "Risk Factors", "Management's Discussion and
Analysis of Financial Condition and Results of Operations", "The Industry" and
"Business", identifies important factors that could cause such differences.
OVERVIEW
Substantially all of the Company's revenue is currently derived from
monthly subscription fees for cable television services and one-time
installation fees for connection to its cable television networks. The Company
charges cable subscribers fixed monthly fees for their choice of service tiers
and for other services, such as premium channels, tuner rentals and additional
outlets, all of which are included in monthly subscription fees. The Company
currently offers broadcast, intermediate (in limited areas) and basic tiers of
cable service. At May 31, 1997, approximately 79% of the Company's subscribers
received Basic Tier service. In 1996, approximately 87% of the Company's revenue
was derived from monthly subscription fees. Revenue from installation fees is
deferred to the extent it exceeds direct selling costs and the deferred revenue
is amortized to income over the estimated average period that new subscribers
are expected to remain connected to the Company's cable system.
When the Company began operations in 1990, revenue from installation fees
exceeded revenue from monthly subscription fees because of the significant
number of new installations and the high amount of the installation fees
relative to the small existing subscriber base. As the Company's cable
subscriber base has grown, aggregate monthly subscription revenue has increased
and installation fees, while currently increasing on an aggregate basis, have
declined as a percentage of total revenue. The Company expects that installation
fees will continue to constitute a declining portion of the Company's revenue.
The Company has experienced low churn rates since its inception. The
Company's annual churn rates have historically averaged less than 10%. The
Company's annual churn rates for 1994, 1995 and 1996 were 9.1%, 9.2% and 7.8%,
respectively. The Company believes that its churn rates are low because of the
Company's customer care program, the high technical quality of its networks and
desirable program offerings. In addition, the Company benefits from a shortage
of housing in Poland that results in low move-related churn. These churn rates
also reflect a pricing strategy that was designed to keep the Company's profit
margin relatively constant in U.S. Dollar terms in more mature cable systems and
to increase rates in more recently acquired or rebuilt cable systems. Since the
beginning of 1997, the Company has adopted a new cable television pricing
strategy designed to maximize revenue per subscriber and achieve real profit
margin increases in U.S. Dollar terms. As a result, the Company expects that it
may experience increases in its churn rate above historical levels during the
implementation of its new pricing strategy across its cable networks. See
"Business -- Cable -- Services and Fees -- Pricing Strategy".
The Company divides operating expenses into (i) direct operating expenses,
(ii) selling, general and administrative expenses and (iii) depreciation and
amortization expenses. Direct operating expenses consist of programming
expenses, maintenance and related expenses necessary to service, maintain
41
<PAGE> 45
and operate the Company's cable systems, billing and collection expenses and
customer service expenses. Selling, general and administrative expenses consist
principally of administrative costs, including office related expenses,
professional fees and salaries, wages and benefits of non-technical employees;
advertising and marketing expenses; bank fees and bad debt expense. Depreciation
and amortization expenses consist of depreciation of property, plant and
equipment and amortization of intangible assets.
Cable television operators typically experience losses and negative cash
flow in their initial years of operation due to the large capital investments
required for the construction or acquisition of their cable networks and the
administrative costs incurred in connection with commencing operations.
Consistent with this pattern, the Company incurred operating losses of $4.6
million and $1.2 million in 1992 and 1993, respectively. The Company generated
operating income of $0.4 million and $3.5 million in 1994 and 1995,
respectively, but had operating losses of $1.3 million and $1.0 million for 1996
and the first three months of 1997, respectively, primarily due to the increased
levels of acquisitions and related costs.
In addition to other operating statistics, the Company measures its
financial performance by EBITDA. The Company defines EBITDA to be net income
(loss) as measured by U.S. GAAP adjusted for interest and investment income,
depreciation and amortization, interest expense, foreign currency translation
gains and losses, income taxes, extraordinary items, non-recurring items, and
gains and losses from the sale of assets other than in the normal course of
business and minority interest in subsidiary income and loss. The Company
believes that EBITDA and related measures of cash flow from operating activities
serve as important financial indicators in measuring and comparing the operating
performance of cable television companies. EBITDA is not a U.S. GAAP measure of
income (loss) or cash flow from operations and should not be considered as an
alternative to net income as an indication of the Company's financial
performance or as an alternative to cash flows from operations as a measure of
liquidity.
Historically, the cable networks the Company has acquired have had lower
EBITDA margins than the Company's existing operations. Upon consummation of an
acquisition, the Company seeks to achieve operating efficiencies and reduce
operating costs by rationalizing the number of headends and reducing head count,
among other things. The Company generally has been able to manage its acquired
cable television networks with experienced personnel from one of its existing
regional clusters and reduce the technical personnel necessary to operate
acquired networks after connecting the networks to the Company's existing
headends, or, if required, rebuilding the acquired networks to the required
technical standards. In part due to these efforts, the Company has generally
been able to increase the operating margins in its acquired systems, although
there can be no assurance that it will be able to continue to do so.
EBITDA for 1993, 1994, 1995 and 1996 and for the first three months of 1997
was $1.1 million, $3.8 million, $8.7 million, $8.4 million and $2.4 million,
respectively. The Company expects EBITDA to increase as it fully integrates
acquired networks into its regional clusters and consummates the Acquisitions.
In addition, the operating results of several recent acquisitions consummated
during 1996 are not yet fully reflected in the Company's operating results, and
the operating results of the Acquisitions will not be reflected in the Company's
results of operations until their respective dates of acquisition. There can be
no assurance, however, that the Company will continue to generate positive
EBITDA in the future.
ACQUISITIONS
Since March 31, 1997, the Company has completed the acquisition of all or a
substantial portion of the capital stock or assets of three cable television
systems in Poland, and intends to acquire a fourth such system, as well as a 50%
equity position in a Polish publishing company with which it intends to develop
programming and ancillary services. The aggregate consideration paid or to be
paid by the Company in connection with the Acquisitions (including amounts for
stockholder loans) is expected to
42
<PAGE> 46
be approximately $35.0 million. The three cable systems already acquired in the
Acquisitions serve approximately 113,000 subscribers and pass approximately
189,000 homes, while the cable system expected to be acquired serves
approximately 20,500 subscribers, representing all of the homes passed by the
system. The consummation of the Acquisitions has or will result in the expansion
of the Company's cable operations within its existing regional clusters and the
establishment of one new regional cluster. PCI has or intends to use a portion
of the net proceeds of the offering of the Old Notes in October 1996 to
consummate certain of the Acquisitions, although there can be no assurance as to
the timing of closing of the Acquisitions that are currently pending or as to
whether or on what terms such Acquisitions will actually be consummated. If all
of the Acquisitions are consummated, the Company estimates that it will spend
approximately $3.6 million (which includes an approximately $2.2 million portion
of the stockholder loans referred to above) within 12 months of the consummation
of the Acquisitions to upgrade the acquired networks to meet the Company's
technical standards. Such upgrading would enable the Company to increase the
number of programs offered, the quality of the transmissions and the operating
cost effectiveness of the acquired networks. However, the Company believes that
the networks acquired or expected to be acquired in the Acquisitions currently
meet PAR standards and, accordingly, that the timing and extent of such upgrades
would be subject to the Company's discretion. See
"Business -- Cable -- Acquisitions".
FIRST THREE MONTHS 1997 COMPARED TO FIRST THREE MONTHS 1996
Cable Television Revenue. Revenue increased $1.9 million, or 33.6%, from
$5.6 million in the first three months of 1996 to $7.5 million in the first
three months of 1997. This increase was primarily attributable to a 66.5%
increase in the number of basic subscribers from approximately 291,000 at March
31, 1996 to approximately 484,000 at March 31, 1997. Approximately 39% of this
increase in basic subscribers was due to build-out of the Company's existing
cable networks and the remainder was the result of acquisitions. Revenue from
monthly subscription fees represented approximately 85.4% of cable television
revenue for the first three months of 1997 and 84.5% in the first three months
of 1996. Installation fee revenue decreased by 5.4% from $818,600 in the first
three months of 1996 to approximately $776,400 in the first three months of
1997.
Direct Operating Expenses. Direct operating expenses increased $0.6
million, or 38.7%, from $1.5 million in the first three months of 1996 to $2.1
million in the first three months of 1997, principally as a result of higher
levels of technical personnel and increased maintenance expenses associated with
recently acquired networks as well as the increased size of the Company's cable
television system. Direct operating expenses increased from 26.9% of revenue for
the first three months of 1996 to 28.0% of revenue for the first three months of
1997.
Selling, General and Administrative. Selling, general and administrative
expenses increased $1.3 million, or 82.1%, from $1.6 million in the first three
months of 1996 to $3.0 million in the first three months of 1997 as a result of
an increase in sales and marketing expenses incurred in newly acquired networks
and the introduction of several remarketing campaigns throughout the areas
covered by the Company's networks. As a percentage of revenue, selling, general
and administrative expenses increased from 29.1% for the first three months of
1996 to approximately 39.6% for the first three months of 1997.
Depreciation and Amortization. Depreciation and amortization expenses rose
$1.7 million, or 99.5%, from $1.7 million in the first three months of 1996 to
$3.5 million in the first three months of 1997, principally as a result of
depreciation of additional cable television assets acquired in connection with
the build-out of the Company networks and acquisitions. Depreciation and
amortization expenses as a percentage of revenue increased from 30.8% in the
first three months of 1996 to 46.0% in the first three months of 1997.
Interest Expense. Interest expense increased $1.6 million, or 99.8%, from
$1.6 million in the first three months of 1996 to $3.2 million in the first
three months in 1997, primarily due to the issuance of $130 million aggregate
principal amount of Old Notes in October 1996.
43
<PAGE> 47
Interest and Investment Income. Interest and investment income increased
$0.7 million, or 1,644%, from $43,000 in the first three months of 1996 to
$750,000 in the first three months in 1997, primarily due to the interest and
investment income derived from the investment of a portion of the proceeds from
the issuance of Old Notes in October 1996.
Foreign Currency Translation Loss. Foreign currency translation loss
increased $211,000, or 224%, from $94,000 in the first three months of 1996 to
$305,000 in the first three months of 1997, primarily due to increased assets
subject to translation during the period resulting from the growth of the
Company and less favorable exchange rate fluctuations.
Minority Interest in Subsidiary (Income) Loss. Minority interest in
subsidiary loss was $476,000 for the first three months of 1997, resulting from
losses incurred in two minority-owned subsidiaries compared to minority interest
in subsidiary income of $49,000 for the first three months of 1996.
Net Loss. Net loss increased from a loss of $(1.5) million in the first
three months of 1996 to a loss of $(3.6) million in the first three months of
1997, as a result of the factors discussed above.
EBITDA. EBITDA decreased $40,000, or 1.6%, from $2.5 million for the first
three months of 1996 to $2.4 million for the first three months of 1997. The
Company's EBITDA margin decreased from 44.0% to 32.4% over such period. The
Company believes that EBITDA and related measures of cash flow from operating
activities serve as important financial indicators in measuring and comparing
the operating performance of cable television companies. EBITDA is not intended
to represent cash flow from operations under U.S. GAAP and should not be
considered as an alternative to net income (loss) as an indicator of the
Company's operating performance or to cash flows from operations as a measure of
liquidity.
1996 COMPARED TO 1995
Cable Television Revenue. Revenue increased $6.4 million, or 34.3%, from
$18.6 million in 1995 to $24.9 million in 1996. This increase was primarily
attributable to a 70% increase in the number of basic subscribers from
approximately 262,000 at December 31, 1995 to approximately 446,000 at December
31, 1996. (Such subscriber numbers do not include approximately 15,000
subscribers served by a cable system the Company acquired on January 1, 1997.)
Approximately 44.6% of this increase in basic subscribers was due to build-out
of the Company's existing cable networks and the remainder was the result of
acquisitions. Revenue from monthly subscription fees represented approximately
87.2% of cable television revenue in 1996. Installation fee revenue increased by
37.0% from $2.3 million in 1995 to approximately $3.2 million in 1996, primarily
as a result of several remarketing campaigns implemented throughout 1996, which
led to increased penetration. In addition, the Company experienced an increase
in subscriber installations as a result of the continued build-out of the
Company's networks.
Direct Operating Expenses. Direct operating expenses increased $2.1
million, or 40.2%, from $5.1 million in 1995 to $7.2 million in 1996,
principally as a result of higher levels of technical personnel and increased
maintenance expenses associated with recently acquired networks as well as the
increased size of the Company's cable television systems. Programming expense
grew from $2.2 million in 1995 to $2.8 million in 1996, primarily reflecting the
increased number of subscribers partially offset by more favorable per
subscriber programming rates. Direct operating expenses increased from 27.6% of
revenue in 1995 to 28.9% of revenue in 1996.
Selling, General and Administrative. Selling, general and administrative
expenses increased $4.6 million, or 98.3%, from $4.7 million in 1995 to $9.3
million in 1996, primarily as a result of an increase in sales and marketing
expenses incurred in newly acquired networks, the introduction of several
remarketing campaigns throughout the areas covered by the Company's networks,
and increased compensation and 1996 bonuses. Selling, general and administrative
expenses increased from 25.2% of revenue in 1995 to 37.3% of revenue in 1996.
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<PAGE> 48
Depreciation and Amortization. Depreciation and amortization expenses rose
$4.6 million, or 88.3%, from $5.2 million in 1995 to $9.8 million in 1996,
principally as a result of depreciation of additional cable television assets
acquired in connection with the build-out of the Company's network. Also, during
1996, all of the prematurity periods expired and therefore the entire balance of
investment in cable television system assets was subject to depreciation.
Depreciation and amortization expenses as a percentage of revenue increased from
28.0% in 1995 to 39.3% in 1996.
Interest Expense. Interest expense increased $0.3 million, or 7.2%, from
$4.4 million in 1995 to $4.7 million in 1996, primarily due to increased
interest expense resulting from the issuance of $130 million of Notes partially
offset by a reduction in interest expense as a result of the repayment of $55
million of indebtedness with a portion of the proceeds from PCI's sale of equity
securities in March 1996.
Interest and Investment Income. Interest and investment income increased
by $1.1 million from $0.2 million in 1995 to $1.3 million in 1996. This increase
is primarily attributable to a positive cash position in 1996 resulting from the
issuance of PCI shares and the Notes.
Foreign Currency Translation Loss. Foreign currency translation loss
increased from $17,000 in 1995 to $761,000 in 1996, primarily due to increased
assets subject to translation during the year resulting from the growth of the
Company.
Minority Interest in Subsidiary Loss. Minority interest in subsidiary loss
was $1.9 million in 1996 resulting from losses incurred in two minority owned
subsidiaries compared to minority interest in subsidiary income of $18,000 in
1995. During 1996 the Company completed partial acquisitions which gave rise to
the increase in minority interest in subsidiary losses.
Extraordinary Loss. During 1996 the Company prepaid a loan from the
Overseas Private Investment Corporation ("OPIC"), resulting in an extraordinary
loss of $1.7 million, consisting of a prepayment penalty of $147,000 and
write-off of $1,566,000 of deferred financing costs.
Net Loss. Net loss increased from a loss of $(1.3) million in 1995 to a
loss of $(6.6) million in 1996 as a result of the factors discussed above.
Net Loss Applicable to Common Stockholders. Net loss applicable to common
stockholders increased from a loss of $(1.3) million in 1995 to a loss of $(5.9)
million in 1996 due to the accretion of redeemable preferred stock, which was
more than offset by the excess of the carrying amount of preferred stock over
the consideration transferred for such stock, as well as a result of the factors
discussed above.
EBITDA. EBITDA decreased $0.3 million, or 3.5%, from $8.7 million in 1995
to $8.4 million in 1996. EBITDA does not include full year results for 1996 from
TV Kabel in the Bydgoszcz regional cluster which was acquired in December 1996
and does not include results from the Acquisitions. The Company's EBITDA margin
decreased from 47.1% to 33.9% over such period. The Company believes that EBITDA
and related measures of cash flow from operating activities serve as important
financial indicators in measuring and comparing the operating performance of
cable television companies. EBITDA is not intended to represent cash flow from
operations under U.S. GAAP and should not be considered as an alternative to net
income (loss) as an indicator of the Company's operating performance or to cash
flows from operations as a measure of liquidity.
1995 COMPARED TO 1994
Cable Television Revenue. Revenue increased $9.8 million, or 111.5%, from
$8.8 million in 1994 to $18.6 million in 1995. This increase was primarily
attributable to a 132.9% increase in the number of basic subscribers from
approximately 113,000 as of December 31, 1994 to approximately 262,000 as of
December 31, 1995. Approximately 67.8% of this increase in basic subscribers was
due to acquisitions and the remainder resulted from build-out of the Company's
existing cable networks. Primarily as a result of this increase in subscribers,
monthly subscription revenue increased approximately $8.8
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<PAGE> 49
million, or 117.8%, from $7.5 million in 1994 to $16.2 million in 1995. Revenue
from monthly subscription fees represented approximately 87.5% of cable
television revenue in 1995. Installation fee revenue increased approximately
$1.0 million, or 76.0%, from $1.3 million in 1994 to $2.3 million in 1995,
primarily as a result of continued build-out of the Company's networks.
Direct Operating Expenses. Direct operating expenses increased $3.0
million, or 142.0%, from $2.1 million in 1994 to $5.1 million in 1995,
principally as a result of higher levels of technical personnel and increased
maintenance expenses associated with certain of the acquired systems and the
growth of the Company's cable television system. Programming expenses accounted
for $1.0 million of direct operating expenses in 1994 and $2.2 million in 1995.
The increase in programming expenses in 1995 over 1994 was primarily due to the
increase in the number of subscribers. As a result of these expense increases,
direct operating expenses as a percentage of revenue increased from 24.1% to
27.6% over this period.
Selling, General and Administrative. Selling, general and administrative
expenses increased $1.9 million, or 66.2%, from $2.8 million in 1994 to $4.7
million in 1995, principally as a result of an increase in administrative costs
resulting from the addition of acquired systems, and an increase in sales and
marketing expenses. As a percentage of revenue, selling, general and
administrative expenses declined from 32.1% to 25.2%, primarily reflecting
economies of scale from the Company's increased subscriber levels and the
elimination by the Company of duplicative personnel, office locations and
administrative functions as part of the Company's acquisition integration
strategy.
Depreciation and Amortization. Depreciation and amortization expenses
increased $1.7 million, or 50.3%, from $3.5 million in 1994 to $5.2 million in
1995, primarily as a result of depreciation of additional cable television
assets obtained in connection with the build-out of the Company's networks and
acquisitions. Depreciation and amortization expenses as a percentage of revenue
decreased from 39.4% in 1994 to 28.0% in 1995.
Interest Expense. Interest expense increased $2.0 million, or 87.9%, from
$2.3 million in 1994 to $4.4 million in 1995. This change primarily resulted
from an increase in the Company's indebtedness during 1995.
Interest and Investment Income. Interest and investment income increased
$0.1 million from $0.1 million in 1994 to $0.2 million in 1995 due to increased
cash balances.
Minority Interest in Subsidiary Loss. Minority interest in subsidiary
income of $18,000 in 1995 compared to minority interest in subsidiary loss of
$0.3 million in 1994.
Net Loss. The Company's net loss decreased from $(2.4) million for 1994 to
$(1.3) million for 1995 as a result of the factors discussed above.
EBITDA. EBITDA increased $4.9 million, or 127.8%, from $3.8 million in
1994 to $8.7 million in 1995. The Company's EBITDA margin improved from 43.7% to
47.1% over such period. The Company believes that EBITDA and related measures of
cash flow from operating activities serve as important financial indicators in
measuring and comparing the operating performance of cable television companies.
EBITDA is not intended to represent cash flow from operations under U.S. GAAP
and should not be considered as an alternative to net income (loss) as an
indicator of the Company's operating performance or to cash flows from
operations as a measure of liquidity.
LIQUIDITY AND CAPITAL RESOURCES
The Company has met its cash requirements in recent years primarily with
(i) capital contributions and loans from certain of the Principal Stockholders,
(ii) borrowings under available credit facilities and (iii) cash flow from
operations. In addition, in October 1996 PCI sold the Old Notes. The Company had
positive cash flow from operating activities in 1994, 1995 and 1996 of $1.6
million, $3.8 million and $6.1 million, respectively, primarily due to the
increase of cash received from subscribers and the deferral of the payment
46
<PAGE> 50
of interest expense. The Company had negative cash flow from operating
activities for the first three months of 1997 of $1.7 million, due to the
increase of cash used for settlement of current trade and tax liabilities.
During 1996, PCI issued common and preferred stock to certain of the
Principal Stockholders of approximately $82 million. On March 29, 1996, PCI
consummated a transaction in which ECO purchased shares of common and preferred
stock of PCI for a price of $65 million. See "Certain Relationships and Related
Transactions -- Capital Contributions and Stockholder Loans". On March 29, 1996,
the Chase Family purchased additional shares of preferred and common stock of
PCI for an aggregate purchase price of approximately $17 million. PCI applied
approximately $55 million of the proceeds of these transactions to repay
indebtedness owed to Chase American Corporation, which is beneficially owned by
the Chase Family, and approximately $8.5 million to redeem preferred stock held
by PIHLP, which is beneficially owned by the Chase Family.
In January 1994, PTK, S.A. entered into a financing agreement with OPIC
providing for a loan facility which permitted PTK, S.A. to draw down funds
through December 31, 1995. PTK, S.A. requested and received three loan
disbursements under such loan facility, totaling $8.6 million in aggregate
principal amount. Loans under the facility bore interest at the floating 91-day
U.S. Treasury bill yield (compounded annually). The OPIC loan facility was
secured by the pledge of all PTK, S.A. shares owned by PCBV and Poltelkab, an
escrow of approximately $1 million and springing liens on certain agreements
with PTK, S.A., including PTK, S.A. agreements with certain program providers.
Certain affiliates of PTK, S.A. also entered into a share retention agreement
with OPIC. The Company used approximately $7.6 million of the proceeds of the
offering of the Old Notes to repay the outstanding balance of the loans under
such financing agreement, including a prepayment penalty of approximately
$147,000, and terminated such financing agreement.
PCI has entered into an agreement with AmerBank which provides for a credit
facility of approximately $6.5 million. Funds are available under the credit
agreement through December 31, 1998 and interest, based on LIBOR plus 3%, is due
quarterly. All advances under the loan must be repaid by August 20, 1999. As of
the date hereof, there is no amount outstanding under this facility. PCI will be
able to utilize this facility for future borrowings.
On October 31, 1996, $130 million aggregate principal amount of Old Notes
were sold by PCI to the initial purchaser pursuant to a purchase agreement. The
initial purchaser subsequently completed a private placement of the Old Notes.
In June 1997 substantially all of the outstanding Old Notes were exchanged for
an equal aggregate principal amount of publicly-registered Notes. The Notes were
issued pursuant to the Indenture.
Pursuant to the Indenture, PCI is subject to certain covenants, including,
without limitation, covenants with respect to the following matters: (i)
limitation on additional indebtedness; (ii) limitation on restricted payments;
(iii) limitation on issuances and sales of capital stock of subsidiaries; (iv)
limitation on transactions with affiliates; (v) limitation on liens; (vi)
limitation on guarantees of indebtedness by subsidiaries; (vii) purchase of
Notes upon a change of control; (viii) limitation on sale of assets; (ix)
limitation on dividends and other payment restrictions affecting subsidiaries;
(x) limitation on investments in unrestricted subsidiaries; (xi) limitation on
lines of business; and (xii) provision of financial statements and reports.
Pursuant to the AmerBank credit facility, PCI is subject to certain
informational and notice requirements but is not subject to restrictive
covenants. PCI is in compliance with all covenants in the Indenture and the
AmerBank credit facility.
As a result of the offering of the Old Notes, the Company incurred
substantial debt. At March 31, 1997, the Company had, on a consolidated basis,
approximately $129.5 million in principal amount of indebtedness outstanding.
Since the commencement of its operations in 1990, the Company has required
external funds to finance the build-out of its existing networks and to finance
acquisitions of new cable television networks. The Company has relied on the
equity investments described above, as well as loans, from certain of the
Principal Stockholders and borrowings under available credit facilities to
provide the
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<PAGE> 51
funding for these activities. The Company does not expect that its Principal
Stockholders will continue to make capital contributions and loans to the
Company.
The Company expects that an aggregate of approximately $315 million through
the end of 1998 will be required to fund (i) the commencement and development of
its D-DTH business, which will include capital expenditures and expenditures for
operating expenses, working capital and other general corporate purposes
(approximately $200 million, including up to approximately $190 million to
subsidize the cost of the D-DTH Reception Systems to the Initial Subscribers in
an amount of up to approximately $380 per subscriber), (ii) the expansion of its
programming business (approximately $25 million), (iii) the consummation of the
Acquisitions and future acquisitions (approximately $60 million) and (iv) the
building out of its existing, and the rebuilding of new, cable television
networks (approximately $30 million).
Cash used for the build-out of the Company's cable television networks was
$11.7 million, $16.0 million, $25.4 million and $4.5 million in 1994, 1995, 1996
and the first three months of 1997, respectively. In 1997, the Company also
expects to spend an additional approximately $27.5 million building out and
upgrading existing cable television networks. Approximately $7.5 million of such
expenditure relates to the upgrading of the networks in the Katowice regional
cluster to meet PAR and Company standards. The rest of such expenditures for new
construction and upgrading is discretionary. The Company expects that the
rebuild program for the Katowice regional cluster will be completed in 1997 at a
total cost of approximately $10 million. Aside from the Katowice upgrade, the
Company is not obligated to make any system upgrades in 1997 or in 1998.
However, the Company intends to continue to acquire additional cable systems,
upgrade its cable networks and increase its programming capacity.
Cash used for the acquisition of cable networks, net of cash received, was
$4.1 million and $13.8 million in 1995 and 1996, respectively. The Company did
not use any cash for the acquisition of cable networks during the first three
months of 1997. Since March 31, 1997, the Company has acquired all or a
substantial portion of the capital stock or assets of three cable television
systems in Poland and intends to acquire a fourth such system, as well as a 50%
equity stake in a Polish printing company with which it intends to develop
programming and ancillary services. See "-- Acquisitions" and "Business --
Cable -- Acquisitions". The aggregate consideration paid or to be paid by the
Company in connection with the Acquisitions (including amounts for stockholder
loans) is expected to be approximately $35.0 million. If all of the Acquisitions
are consummated, the Company estimates that it will spend approximately $3.6
million (which includes an approximately $2.2 million portion of the stockholder
loans referred to above) within 12 months of the consummation of the
Acquisitions upgrading the networks of such cable televisions systems to meet
the Company's technical standards. Such upgrading would enable the Company to
increase the number of programs offered, the quality of the transmissions and
the operating cost effectiveness of the acquired networks. However, the Company
believes that the cable systems acquired or expected to be acquired in the
Acquisitions currently meet PAR standards and, accordingly, that the timing and
extent of such upgrades would be subject to the Company's discretion.
The Company believes that, in addition to the net proceeds from the
Offerings, remaining funds from the offering of the Notes and cash from
operations, it will need additional funding of approximately $100 million to
fulfill its current business development plans through the end of 1998. There
can be no assurance that the Company will be able to borrow funds under any
credit facilities or that suitable debt or equity financing will be available to
the Company or, if available, that the terms thereof will be attractive to the
Company. While the pace and amount of the Company's expenditures for the above
purposes are largely discretionary, if for any reason additional financing is
not available to the Company when required, or is only available on less than
favorable terms, it may be required to reduce the scope of its presently
anticipated expansion of its operations, reduce capital expenditures (including
expenditures related to acquisitions), slow the development of its D-DTH
business and/or refinance all or a portion of its existing indebtedness
(including the Notes), and as a result the business, results of operations and
prospects of the Company could be adversely affected. To the extent that the
Company is unable to raise additional financing, it intends to concentrate its
available funds on, in order of priority,
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<PAGE> 52
the development of its D-DTH business and its Programming Platform, the building
out of its cable networks and the acquisition of additional cable systems. See
"Risk Factors -- Risks Related to the Company -- Need for Additional Financing".
INFLATION AND CURRENCY EXCHANGE FLUCTUATIONS
Since the fall of Communist rule in 1989, Poland has experienced high
levels of inflation and significant fluctuation in the exchange rate for the
zffioty. The Polish government has adopted policies that slowed the annual rate
of inflation from approximately 250% in 1990 to approximately 20% in 1996. A
substantial portion of the Company's operating expenses and capital expenditures
is, and is expected to be, denominated in zffioty and the proportion tends to
increase with inflation. In addition, the exchange rate for the zffioty has
stabilized and the rate of devaluation of the zffioty has decreased since 1991.
However, inflation and currency exchange fluctuations have had, and may continue
to have, an adverse effect on the financial condition and results of operations
of the Company.
Substantially all of the Company's debt obligations and certain of the
Company's operating expenses and capital expenditures are, and are expected to
continue to be, denominated in or indexed to U.S. Dollars. By contrast,
substantially all of the Company's revenues are denominated in zffioty. Any
devaluation of the zffioty against the U.S. Dollar that the Company is unable to
offset through price adjustments will require the Company to use a larger
portion of its revenues to service its U.S. Dollar-denominated obligations.
While the Company may consider entering into transactions to hedge the risk of
exchange rate fluctuations, it is unlikely that the Company will be able to
obtain hedging arrangements on commercially satisfactory terms. Accordingly,
shifts in currency exchange rates may have an adverse effect on the ability of
the Company to service its U.S. Dollar-denominated obligations and, thus, on the
Company's financial condition and results of operations.
IMPACT OF NEW ACCOUNTING STANDARD NOT YET ADOPTED
In February 1997, the Financial Accounting Standards Board issued its
Statement No. 128, "Earnings per Share." Among other provisions, SFAS No. 128
simplifies the standards for computing earnings per share. The Company does not
expect the adoption of SFAS No. 128 to have a material impact on its financial
statements.
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THE INDUSTRY
GENERAL
The Company serves multichannel pay television customers exclusively in
Poland, where it is the largest such operator. With approximately 39 million
people and 12.3 million television households (as estimated by the Company at
May 31, 1997), the Company believes that Poland represents a highly attractive,
dynamic market for multichannel pay television providers such as itself.
THE POLISH ECONOMY
Poland has experienced significant growth in its economy in recent years.
Poland's real gross domestic product grew at annual rates of 5.2%, 7.0% and 5.5%
in 1994, 1995 and 1996, respectively, which were the highest growth rates in
Europe for 1994 and 1995 and one of the highest in Europe for 1996. In recent
years, the government has encouraged foreign private investment, which has risen
from approximately $0.1 billion in 1990 to approximately $2.8 billion in 1995
and was approximately $6.1 billion for 1996. Poland has also successfully
reduced its annual inflation rate from approximately 250% in 1990 to
approximately 27% in 1995 and approximately 20% in 1996, and following a period
of rising unemployment, unemployment in Poland has declined to 13.6% at December
31, 1996. In part due to these factors, the sovereign credit rating of the
country was upgraded in early 1996 to investment grade by Moody's Investors
Service (Baa3) and Standard & Poor's Corporation (BBB-). The Company believes
that the growth and stability in the economy have led to recent increases in
disposable income levels in Poland, which grew at average annual rates of 9% and
7% in 1995 and 1996, respectively. Furthermore, in certain urban markets where
the Company operates, including Warsaw, Krakow, Wrocffiaw and Katowice,
disposable income levels are significantly higher and unemployment is
significantly lower than the national average. For example, unemployment in
Warsaw was approximately 4.6% at September 1996.
THE POLISH MULTICHANNEL TELEVISION INDUSTRY
POLISH CABLE MARKET
Poland is Europe's fifth largest television market with approximately 12.3
million television households as estimated by the Company at May 31, 1997.
Poland is also the largest single-language market in Central Europe. The Company
believes that there are several primary factors which are highly favorable for
the provision of multichannel services, and which distinguish the Polish cable
market from other cable markets, as outlined below.
VIEWER DEMAND. Television viewing is a significant leisure activity in
Poland, and in 1995 Poland had one of the highest television viewing rates in
Europe, despite generally poor quality reception and limited programming
alternatives available over broadcast television channels. In 1995, Polish
families watched an average of approximately 279 minutes (over 4 1/2 hours) of
television per day per household, as compared with averages of 263 minutes and
177 minutes of television viewing per day per household for the United States
and western Germany, respectively. The Company believes that several factors
contribute to such high television viewing and indicate Polish consumers'
willingness to allocate disposable income for multichannel pay television. These
factors include limited entertainment alternatives, strong demand for
high-quality programming, a long generally cold winter season and a low
telephone penetration rate of approximately 15 telephones per 100 persons.
The Company also believes that, as the largest cable operator in Poland,
its subscriber penetration rates and relatively low churn rates are further
indicators of the potential demand for cable television services in Poland.
There is a relatively low percentage of television homes for which cable service
is available in Poland (based on Company estimates only 28% of television
households were passed by cable at May 31, 1997), which the Company believes
provides a substantial market opportunity for cable operators. Once homes are
passed by cable, the Company has generally experienced strong take-up rates,
with an average basic penetration rate at May 31, 1997 of approximately 42% for
the Company as
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a whole. In certain areas where the Company has operated its networks for an
extended period of time, such as portions of Gdansk, the Company's basic
penetration rate is 63%.
In addition, the Company has experienced historical annual churn rates of
approximately 10% or less, which compares favorably to the United States and the
United Kingdom average churn rates of approximately 20% and 30%, respectively.
The Company expects, however, that it may experience increases in its churn rate
above historical levels during the implementation across its cable networks of
its new pricing strategy, designed to maximize revenue per subscriber and
achieve real profit margin increases in U.S. Dollar terms, commenced in January
1997. See "Business -- Cable -- Services and Fees -- Pricing Strategy".
The following table compares a number of cable market characteristics in
Poland with certain industrialized countries and certain developing countries in
Central Europe. All data in the following table are at December 31, 1995.
<TABLE>
<CAPTION>
CABLE
HOMES
NUMBER OF AVERAGE TV PASSED BY
TELEVISION VIEWING AS A % OF
HOUSEHOLDS MINUTES COLOR TV VCR TELEVISION ANNUALIZED
(IN MILLIONS) PER DAY PENETRATION PENETRATION(1) HOUSEHOLDS CHURN
------------- ---------- ----------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Poland.................. 11.8 279 83% 48% 20% 10%(2)
United States........... 95.4 263 98 83 96 20
United Kingdom.......... 22.5 215 97 84 26 30
Germany................. 32.5 177 98 60 73 NA
Czech Republic.......... 3.7 203 87 33 55 NA
Hungary................. 3.8 172 76 35 45 NA
</TABLE>
- ---------------
(1) VCR households as a percentage of TV households.
(2) Represents the Company's historical annual average, as published churn data
is unavailable for Poland.
Sources: Baskerville Communications Corp., TV International Sourcebook 1997 and
Zenith Media, European Market and Media Fact (1996). At May 31, 1997, the 1997
edition of these sources did not include 1996 or 1997 figures for all of the
countries indicated.
HOUSING DENSITIES. Poland is one of the most densely populated countries
in Central Europe. The housing market in Poland's urban areas is characterized
by MDUs which are typically owned or controlled by co-op authorities. These
co-op authorities often control more than 2,000 apartments each, and in the
Company's experience, individual apartments often house multiple generations of
families and multiple wage earners. In many of the Company's markets, housing
densities exceed 400 homes per kilometer of cable plant, which results in
extremely low build costs per subscriber, and significantly exceeds the average
in the United States of 48 homes per kilometer of cable plant. Such densities
provide significant advantages for cable operators, including extremely low
build-out costs per subscriber. From its existing cable network infrastructure
base, the Company's incremental build costs to add an adjacent MDU or additional
MDU subscribers to existing networks average approximately $200 per MDU
subscriber. (MDU subscribers represent more than 95% of the Company's total
subscribers.) In addition, the number and density of MDUs offer marketing and
other cost benefits in terms of targeting, attracting and servicing customers.
CO-OPERATIVE HOUSING FRANCHISE PROCESS. The franchise process in Poland is
unique in that the right to build a cable system is typically secured by
reaching an agreement with individual co-op authorities and is not dependent
upon issuance of a franchise for a particular region by a governmental
authority. Reaching an agreement with the co-op authority provides the cable
operator with the right to connect its system to dwellings within the co-op
authority's jurisdiction. The Company's agreements with co-op authorities
generally have terms ranging from ten to 20 years and have optional renewal
periods of five years, though certain of the contracts may be terminated by
either party on relatively short notice. Co-ops are legal entities created under
Polish law which resemble corporations. Co-ops
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<PAGE> 55
are run by Management Boards which are appointed, pursuant to their statutes, by
either the co-op's Supervisory Board or its General Assembly of Members. There
is no requirement that a member of the Management Board be a resident of the
co-op. Members of the Management Boards of co-ops are generally university
graduates and have some managerial experience.
Although contracts with co-op authorities usually do not provide
exclusivity for the cable operator, the access granted to every dwelling unit
does provide significant benefit to the first cable operator reaching an
agreement with the co-op authority. The Company owns all of its network plant in
the ground and, in almost all cases, in the buildings of the co-op authorities
with which it has contracts. Therefore, any potential competitor would be
required to build an entire network parallel to the Company's in order to
compete with it during or after the term of such contracts. Accordingly, the
Company believes that it would be difficult for competitors to successfully
overbuild in MDUs with which it has contracts due to the cost of parallel
construction, pricing discounts likely to be necessary to attract the Company's
subscribers and the low likelihood of achieving significant penetration levels.
Although the financial costs and subscription rates generally do not favor
overbuilding large cable operators, the lack of contractual exclusivity provides
an opportunity for well-capitalized operators to overbuild weaker competitors.
In situations where a smaller, poor-quality operator has a contract with a co-op
authority, the co-op authority will often encourage a large, professional
operator such as the Company to overbuild in order to improve the quality of
service to its residents. In these circumstances, overbuilding can be a
cost-effective means of achieving growth because of the high probability of
attracting a significant number of subscribers from the existing operator.
POLISH CABLE MARKET CONSOLIDATION. The cable industry in Poland has
experienced significant consolidation in recent years. The Company believes that
this consolidation will continue as small SMATV operators face the burden of
compliance with the recently enacted regulations that set minimum technical
standards for cable television networks and require payment for programming
produced by others. As Poland's economy has grown and become more stable,
certain well-capitalized cable television operators have acquired numerous cable
television operators in Poland in order to build systems and acquire a critical
mass of subscribers. The Company also has actively pursued acquisitions,
acquiring approximately 40 cable television operators since 1992. These
acquisitions have added approximately 326,000 of the Company's present total
subscribers.
DEVELOPMENT OF THE POLISH CABLE INDUSTRY. Prior to 1989, during the
Communist political regime, the Polish government controlled and regulated the
television industry and all frequency usage. Channel offerings were limited
primarily to government broadcast programs. During this period, MDUs were
required by law to provide master antenna systems to all of their residents to
ensure reception of such government programs. In the early years of the
post-Communist era, there was no effective regulatory authority, which the
Company believes led to the proliferation of small cable operators that often
capitalized on the lack of viewing alternatives and the unregulated market.
These operators built low-cost, poorly constructed cable systems in densely
populated urban areas of Poland, often by modifying the existing master antenna
systems in MDUs to deliver satellite programs. Primarily targeting MDUs in order
to secure access to a significant number of potential subscribers with minimal
capital commitment, these operators often charged relatively high installation
fees which were used to finance the build-out of their systems. Currently, there
are over 400 small cable operators in Poland, and they are generally
characterized by small subscriber bases, poor quality signals, failure to comply
with technical standards, lack of customer service and limited channel capacity
and programming offerings that are often obtained from satellites without paying
full copyright fees to the program producers.
As part of the Polish government's efforts to encourage rapid
infrastructure and economic development, it has begun to establish a regulatory
framework for the cable television industry that is similar, in many respects,
to that of the United States and other Western countries, but without any
regulation of prices charged to subscribers. In 1993, to improve the quality of
the country's cable television systems, Poland began to implement technical and
licensing standards for cable operators that established requirements for such
items as signal quality and radio frequency leakage. In the same year, the
Polish
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<PAGE> 56
government began to monitor compliance with regulations requiring all cable
operators to obtain government permits and, more recently, has begun to enforce
such regulations. Poland ratified the Rome Convention, which extends copyright
protection to programs of foreign producers on December 31, 1996, and became
bound by its terms on June 13, 1997. See "Regulation -- Poland -- Copyright
Protection". The Company believes that the enforcement of technical standards
and copyright laws in Poland will require cable television operators to rebuild
or upgrade their systems as necessary to comply with technical standards and to
pay for programming that is currently being obtained free of charge. The Company
believes that this will improve its competitive position by forcing poorly
capitalized competitors to either sell their systems to better capitalized
operators which have the resources to comply with such standards and laws or to
cease operations altogether.
Since 1990, the Polish cable industry has developed rapidly, due in part to
the growth in the economy and to the development of cable industry regulations.
This development has included the entry of well capitalized Western-style cable
operators such as the Company that have constructed high-quality cable systems
with numerous channel offerings. The following chart illustrates the growth of
the Polish cable market in terms of homes passed and basic subscribers since
1990.
[Chart shows number of basic subscribers plotted against the number of homes
passed demonstrating growth in the Polish cable television industry from 1990
to 1996 from approximately 100,000 basic subscribers and 500,000 homes passed
in 1990 to approximately 1,500,000 basic subscribers and 2,700,000 homes passed
in 1996.]
- ---------------
Source: Baskerville Communications Corp., TV International Sourcebook 1997.
Despite the strong recent growth in the cable television industry, the
Company estimates only 28% of the television households in Poland were passed by
cable at May 31, 1997, which the Company believes provides a substantial market
opportunity for cable operators. The Company believes that there are a
considerable number of homes remaining in Poland, particularly in urban areas,
that would be suitable for the construction of cable television systems and the
provision of cable television services.
THE POLISH DTH MARKET
A-DTH
The only multichannel distribution method currently widely available in
Poland other than cable television is A-DTH satellite services. The A-DTH market
in Poland developed rapidly following the repeal in 1989 of legislation that
required residents of Poland to acquire special permits in order to own
satellite dishes. Subsequent to this repeal, demand for A-DTH satellite services
was driven primarily by
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<PAGE> 57
the widespread availability of high-quality, unencrypted programming that could
be obtained without charge from various European satellites, including the Astra
and Eutelsat satellites.
In the mid 1990s, programmers began compressing and encrypting the signals
transmitted over European satellites and moving their programming to a variety
of satellites. These actions had the effects of (i) limiting access to satellite
programming to paying subscribers, and (ii) reducing the quality of reception
due to the location of the new satellites. In order to receive a similar number
of channel offerings and clear reception, Polish consumers were forced to
subscribe to an A-DTH service and purchase more expensive, motorized satellite
dishes and related equipment.
During this same time period, the Polish market also experienced the
introduction and growth, predominantly in urban areas, of Western-style cable
operators that offered the Polish consumer a high-quality multichannel
television alternative to A-DTH at an attractive price. As the cable market has
grown, A-DTH has continued to lose market share. The Company believes that this
trend will continue particularly in urban markets because of A-DTH's poor signal
quality relative to cable television, limited channel offerings, expensive
equipment and short life of motorized dishes as well as an increasing reluctance
by co-op authorities to permit the use of satellite dishes. While the Company
believes that A-DTH (and new D-DTH) satellite service will be favored in certain
rural areas of Poland where cable television is not available, it also believes
that cable provides a more attractive option than A-DTH (and to a far lesser
extent D-DTH) services in those markets where it is available.
The following chart outlines the relative market shares of A-DTH and cable
in Poland as measured by the number of subscribers for the years 1991 through
1995.
[MARKET SHARE CHART]
<TABLE>
<CAPTION> % OF MARKET
CABLE A-DTH ----------------
SUBSCRIBERS SUBSCRIBERS CABLE A-DTH
----------- ----------- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1991 100 400 20% 80%
1992 200 760 21 79
1993 600 1000 38 62
1994 1000 1200 45 55
1995 1320 1320 50 50
</TABLE>
- ---------------
Source: Baskerville Communications Corp. TV International Sourcebook 1997. At
March 31, 1997, the latest edition of this source did not include 1996 or 1997
figures.
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<PAGE> 58
D-DTH
The Company believes that a D-DTH service will offer Polish consumers
significant advantages over the current A-DTH offerings, due to, among other
factors (i) wider range of Polish-language programming available due to the
compression ability of digital technology, (ii) less-expensive, non-motorized
dishes, (iii) the improved signal quality of D-DTH, and (iv) the increasing
availability of premium services.
The Company intends to expand its distribution capacity by developing a
complementary satellite D-DTH broadcasting service for Poland under a new brand
name @TV. The Company believes @TV will be the first Polish-language D-DTH
service available in the Polish market and among the first in Europe. The
Company expects to launch its D-DTH service in the first half of 1998 with an
initial package of approximately 14 basic Polish-language channels and one
optional premium Polish-language movie channel. The Company believes that the
satellite D-DTH pay television industry in Poland offers substantial
opportunities for growth due to the large potential market size of 8.8 million
television homes which it estimates are not currently passed by cable, the
availability of a low-cost D-DTH reception system, the existing demand for
high-quality Polish-language programming, and the improved characteristics of
D-DTH compared with A-DTH. The Company believes that its D-DTH system, when
combined with the continued expansion of its cable television and programming
businesses, will enhance its position as the leading provider of multichannel
pay television in Poland. There can be no assurance, however, that the market
for D-DTH services will develop, or if it does develop, that the Company will be
successful in launching its D-DTH services. See "Risk Factors -- Risks Related
to the Company -- Limited D-DTH Experience and Uncertainties Associated with the
D-DTH Market".
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<PAGE> 59
BUSINESS
The Company operates the largest multichannel pay television business in
Poland, and is developing its business in cable television, D-DTH and
programming. Through the Company's cable television networks, the most extensive
in Poland, the Company serves the largest base of subscribers of any cable
operator in Poland, totaling approximately 688,000 subscribers at May 31, 1997
(of whom approximately 79% subscribe to the Company's Basic Tier). The Company
believes that it has established a favorable reputation in the Polish market for
providing modern, reliable technology, a broad selection of quality programming
and professional customer service. The Company intends to expand its
distribution capacity in Poland through the expansion of its cable television
business and the development of a complementary D-DTH broadcasting service. The
Company currently creates, produces, develops and acquires programming,
including programming for its two proprietary Polish-language channels, for
distribution across its cable networks. The Company intends to expand these
activities to develop a branded digital encrypted platform of proprietary
Polish-language programming under the brand name @TV. This Programming Platform
will be distributed across its cable television and D-DTH systems and sold on a
wholesale basis to other cable networks in Poland.
Since it began the construction of its first cable network in Gdansk in
1990, the Company has grown aggressively through acquisitions (generally of
smaller, poorly capitalized cable operators) and through the build-out of its
own cable networks. Over the last three years, the Company has experienced
average annual growth of approximately 60% in revenue, 130% in EBITDA and 96% in
cable television subscribers. The Company believes that EBITDA and related
measures of cash flow from operating activities serve as important financial
indicators in measuring and comparing the operating performance of cable
television companies. EBITDA is not intended to represent cash flow from
operations under U.S. GAAP and should not be considered as an alternative to net
income (loss) as an indicator of the Company's operating performance or to cash
flows from operations as a measure of liquidity.
STRATEGY AND OPERATING STRENGTHS
The Company's principal objective is to enhance its position as the leading
provider of multi-channel pay television in Poland by capitalizing on the
favorable market opportunities that it believes exist in Poland for high-quality
Polish-language programming carried over sophisticated cable television and
D-DTH broadcasting systems. The Company's business strategy is designed to
increase its market share and subscriber base, maximize revenue per subscriber
and minimize churn by emphasizing branding, advanced and expanded distribution
technology, superior Polish-language programming and customer service. The
Company believes that it is well-positioned to execute its business strategy in
the Polish multichannel pay television market based on the following operating
strengths.
LEADING MARKET POSITION. The Company is currently the largest cable
television operator in Poland, and estimates that it has approximately twice as
many subscribers as the next two largest operators in Poland combined. Upon the
completion of the Acquisitions, the Company estimates that it will have
approximately 708,000 cable television subscribers, representing approximately
28% of all cable television subscribers in Poland and approximately 47% of all
cable television subscribers in Poland to systems offering approximately 20 or
more channels. The Company believes that it is well-positioned to grow its cable
television business, as it estimates that at May 31, 1997, approximately 8.8
million Polish homes remained unpassed by cable television networks and, of the
approximately 3.5 million homes passed by cable in Poland, that approximately
29% were not subscribers. Many cable subscribers in Poland are served by small,
often poorly capitalized, cable operators, which generally feature poor quality
and limited channel offerings, but at low rates and with relatively high
penetration. The Company believes that there are opportunities for large,
professional companies such as the Company, to acquire at attractive prices or
displace these smaller cable operators in Poland, due to the burden on such
operators of attempting to comply with recently enacted regulations that, among
other things, set minimum technical standards for television networks, and the
frequent lack of exclusivity with co-operative authorities which facilitates
overbuilding of smaller, poor quality cable operators. The
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<PAGE> 60
Company's D-DTH strategy is to distribute at a significantly subsidized cost
D-DTH Reception Systems to the approximately 500,000 Initial Subscribers, which
is designed to achieve rapid and high penetration of the Polish market. The
Company believes that it will be the first Polish-language D-DTH service
available to the Polish market which, when combined with the continued expansion
of its cable television and programming businesses, will enhance the Company's
position as the leading provider of multi-channel pay television in Poland.
PROPRIETARY POLISH-LANGUAGE PROGRAMMING. The Company believes that there is
significant unsatisfied demand in its market for a variety of high-quality
Polish-language programming. The Company intends to develop its Programming
Platform for distribution across its cable television and D-DTH systems, as well
as for sale on a wholesale basis to other cable networks in Poland. The Company
intends to expand its current proprietary Polish-language programming for its
Programming Platform by establishing equity ownership in, and/or exclusive
programming arrangements with, a wide variety of channels designed to provide
the Polish market with an offering of first-run films, live local sports and
multiple thematic channels in Polish, which the Company believes will be
attractive to its customer base and advertisers.
ADVANCED DISTRIBUTION TECHNOLOGY. The Company's cable television networks
(other than those it has acquired and is in the process of rebuilding to its
standards) have bandwidths of at least 550MHz and, in most cases, have the
capacity to be cost-effectively reconfigured to provide additional services such
as voice and data transmission. The Company's cable television networks
constructed by it also provide excess channel capacity. The Company expects that
its D-DTH service will be among the first digital television platforms launched
in Europe, and the Company believes it will be the first Polish-language D-DTH
service available to the Polish market. The Company is currently negotiating
with Philips for an end-to-end package of products and services, which the
Company expects will enable it to provide a wide range of sophisticated services
to its D-DTH customers.
ABILITY TO REALIZE OPERATING EFFICIENCIES AND ADDITIONAL REVENUE
SOURCES. The Company believes it can achieve substantial operating efficiencies
and higher margins through centralized billing systems and other subscriber
management functions, as well as through the sale of its Programming Platform to
other cable television networks in Poland. Continued expansion of the Company's
subscriber base should provide increasing economies of scale by, among other
things, permitting the Company to spread its fixed costs over an increasing
subscriber base. In addition, the Company believes that there are opportunities
to develop a variety of new value-added services, including (i) new television
services, such as premium channels, additional advertising and PPV, (ii) new
network services, such as internet access and voice telephony, and (iii)
ancillary services, such as database marketing, branded financial services and a
subscriber magazine.
HIGH PENETRATION AND LOW CHURN. The Company is currently achieving premise
penetration of approximately 53% of homes passed. In certain areas where the
Company has operated its network for an extended period of time, such as
portions of the Gdansk regional cluster, the penetration rate is approximately
63%. The Company believes that it can improve its penetration by expanding its
current program offering, which includes only ten Polish-language channels not
available on terrestrial frequencies, through the addition of its Programming
Platform. In addition, the Company has experienced annual churn of less than 10%
historically. Churn rates for 1994, 1995 and 1996 were 9.1%, 9.2% and 7.8%,
respectively. The Company expects, however, that it may experience increases in
its churn rate above historical levels during the implementation across its
cable networks if its new pricing strategy designed to maximize revenue per
subscriber and achieve real profit margin increases in U.S. Dollar terms, which
commenced in January 1997.
ATTRACTIVE OPERATING AND REGULATORY ENVIRONMENT. Poland is the
fifth-largest television market in Europe, with approximately 12.3 million
television homes at May 31, 1997 as estimated by the Company. Levels of
television viewing in Poland are among the highest in Europe, at an average of
279 minutes per day (over 4 1/2 hours) in 1995. The Company estimates that there
are approximately 1.6 million satellite homes (able to currently receive largely
unencrypted analog foreign-language program-
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<PAGE> 61
ming) and nearly 2.5 million cable television subscribers in Poland. Current law
does not permit the Polish authorities to regulate cable television or DTH
rates, and Poland is a party to the Convention which requires the Polish
authorities to guarantee freedom of reception and retransmission of program
services which meet the requirements of the Convention.
EXPERIENCED AND MOTIVATED MANAGEMENT. The Company has established a
management team of senior executives who have significant experience in the
cable television and DTH businesses, and are familiar with the Polish television
market, business practices, language and customs. The team is led by Robert E.
Fowler, III, Chief Executive Officer of @Entertainment, who has significant
cable, programming and broadcasting experience, having managed operations in
Poland and the United States, and George Z. Makowski, Chief Operating
Officer-Cable Television of PCI, who has significant cable and
telecommunications experience, having managed operations in Poland and Western
Europe. The management team also includes several key local executives and
managers who have significant experience in the Polish television market. The
Company's D-DTH business will be managed by David Warner, Chief Operating
Officer-DTH of @EL, who has significant experience in A-DTH services for Poland
and other countries in Europe. Mr. Warner will lead a team of local managers
experienced in the Polish A-DTH market. The Company believes that many of the
policies and procedures developed for its cable business will be applicable to
its D-DTH business, and that this management team will contribute local
expertise which the Company believes will be essential in expanding its cable
television and programming businesses and in developing its D-DTH broadcasting
business. The Company has established management and employee stock option plans
which it believes will improve its ability to retain its qualified management
and employees.
CABLE
Through the largest cable network in Poland, the Company serves the largest
base of subscribers of any cable operator in Poland, totaling approximately
688,000 subscribers, over approximately 1,292,000 homes passed at May 31, 1997.
The Company estimates that it has more than twice as many subscribers as the
next two largest cable operators in Poland combined. The Company believes that
it is well-positioned to grow its cable television business, as it estimates
that at May 31, 1997 approximately 8.8 million Polish homes remained unpassed by
cable television networks and, of the approximately 3.5 million homes passed by
cable in Poland, it estimates approximately 29% were not cable subscribers. Many
cable subscribers in Poland are served by small, often poorly capitalized, cable
operators, which generally feature poor quality and limited channel offerings,
but at low rates and with relatively high penetration. The Company believes that
there are opportunities for large, professional companies, such as the Company,
to acquire at attractive prices or displace these smaller cable operators in
Poland, due to the burden on such operators of attempting to comply with
recently enacted regulations that, among other things, set minimum technical
standards for television networks, and the frequent lack of exclusivity of cable
operators' agreements with co-op authorities, which facilitates overbuilding of
smaller, poor quality cable operators. The Company believes that the development
of its Programming Platform will increase its basic subscriber penetration and
will allow it to increase cable television subscription rates and maximize
revenue per cable television subscriber.
All of the Company's cable television subscribers are located in eight
regional clusters encompassing eight of the ten largest cities in Poland,
including those cities which the Company believes provide the most favorable
demographics for cable in the country. The Company has invested more than $85
million to construct fibre-optic cable networks which it believes are among the
most technologically-advanced in Poland and are comparable to modern cable
networks in the United States. The networks constructed by the Company provide
excess channel capacity and are designed to maximize reliability. It is the
Company's policy to upgrade substandard networks that it has acquired as rapidly
as practicable.
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<PAGE> 62
CABLE OPERATING STRATEGY
With the fall of Communist rule in 1989, the Company believed that
significant market advantages could be gained by becoming one of the first cable
operators to establish a high-quality cable television system in Poland. The
Company believes that it has achieved its initial goals of rapidly increasing
its coverage areas, establishing its business reputation, and providing a
high-quality signal, wide channel offerings and quality of service comparable to
that provided by world-class cable operators.
Having established itself as the leading cable television services provider
in Poland, the Company's current strategic objective is to increase cash flow
and enhance the value of its cable networks. To accomplish this objective, the
Company's business and operating strategy in the cable television business is to
(i) maximize revenue per cable subscriber, (ii) continue to expand its regional
clusters, (iii) increase subscriber penetration, and (iv) realize additional
operating efficiencies.
MAXIMIZE REVENUE PER CABLE SUBSCRIBER. Since the beginning of 1997, the
Company has adopted a new cable television pricing strategy designed to maximize
revenue per subscriber and to achieve real profit margin increases in U.S.
Dollar terms. In connection with this new pricing strategy, the Company intends
to introduce new program offerings and to continuously improve its services. As
a result, the Company expects that it may experience increases in churn rate
above historical levels during the implementation of its new pricing strategy
across its cable networks. The Company generally receives a premium for its
cable television services over the prices charged by its competitors,
particularly poor-quality SMATV operators. Despite its generally higher price
levels, the Company has achieved significant growth in penetration and market
share while maintaining relatively low annual cable television churn rates. The
Company believes its ability to successfully command higher prices reflects its
higher levels of customer service, broader selection of quality programming and
the greater technical quality of its cable television networks.
EXPAND AND CONSOLIDATE REGIONAL CLUSTERS. The Company's strategy is to
continue to expand the coverage areas of its regional clusters, both through
selected build-out and acquisitions. The Company intends to expand primarily in
areas where it can fill-in existing regional clusters and into cities and towns
adjacent to its regional clusters through the continued build-out of its
existing networks. The Company also plans to expand its regional clusters
through the continued acquisition of smaller cable television operators. In
addition, in markets where the Company has established operations, it intends to
selectively overbuild certain weaker competitors in an effort to consolidate the
market. By implementing this strategy for expanding its regional clusters, the
Company believes it can limit its per-subscriber build-out costs and realize
significant synergies from leveraging its existing infrastructure and asset
base, both in terms of personnel and in terms of capital costs. Because the
Company has a management structure and operating systems in place in each of its
regional clusters, it is able to realize significant cash flow margins from each
dollar of incremental MDU subscriber revenue generated through the addition of
subscribers to its existing regional clusters.
INCREASE SUBSCRIBER PENETRATION. The Company believes the most profitable
means of expanding its business is to leverage its investment in its cable
networks by increasing subscriber penetration in its regional clusters. Once an
MDU building is passed by the Company's networks, the Company can add
subscribers who generate average annual subscription fees of approximately $65
in return for an average capital investment of approximately $18 per MDU
subscriber. The Company plans to increase subscriber penetration by (i)
executing an aggressive sales, marketing and promotional strategy using the
Company's highly trained and commissioned Polish sales force, with particular
emphasis on Company-wide quarterly remarketing campaigns, (ii) continuing to
enhance the Company's program offerings, particularly through the development of
its Programming Platform for distribution, at a competitive price, across its
cable system, and (iii) applying prompt, courteous and professional customer
service standards.
REALIZE ADDITIONAL OPERATING EFFICIENCIES. The Company aggressively seeks
to realize operating efficiencies. Upon consummation of an acquisition by the
Company, the operating costs of most acquired cable television systems are
significantly reduced by, among other things, rationalizing
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<PAGE> 63
headends, combining customer service offices and reducing administrative
personnel. For example, following the recent acquisition of several cable
systems in Katowice, the Company has been able to reduce the number of employees
by approximately 365 and the number of headends from 69 to 46 and expects to
further reduce personnel and headends. The Company generally has been able to
eliminate personnel in its acquired cable television systems by managing the
systems with experienced personnel from one of its existing regional clusters.
The Company can also generally reduce the technical personnel necessary to
operate acquired systems after connecting them to the Company's existing
headends or, if required, rebuilding them to the Company's standards. The
Company also uses Western management techniques and training to improve employee
productivity and reduce operating expenses. The Company believes that relatively
simple techniques, including monthly generation of detailed management financial
information, a budgeting process, employee productivity standards and employee
bonus plans, have reduced the number of employees per subscriber necessary to
operate its networks. In 1997, the Company plans to install an integrated
management information system for both its billing and accounting systems, which
is designed to further improve employee productivity and customer service. The
Company believes that it can reduce costs and improve customer services by
centralizing services. For example, the Company is establishing a central
telephone customer service center to service both cable and D-DTH customers.
This center will be located in a low cost area of Poland and will consolidate
the functions of its existing regional centers. The Company also believes that
its size and market share give it a competitive advantage by creating economies
of scale, including reduced build-out and operating costs per subscriber and
volume price discounts for programming and construction expenditures. The
Company's size also provides it with the operating leverage to spread certain
expenses (such as promotional materials, advertisements, local programming and
sales materials) over its large number of subscribers, which economies of scale
should continue to improve as its subscriber base increases.
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REGIONAL CLUSTERS
The Company has established eight regional clusters for its cable
television business encompassing eight of the ten largest cities in Poland,
including cities which the Company believes are among those with the strongest
economies and most favorable demographics for cable television in the country.
The following table illustrates certain operating data of each of the Company's
existing regional clusters.
OVERVIEW OF THE COMPANY'S EXISTING CABLE SYSTEMS(1)
<TABLE>
<CAPTION>
AVERAGE
MONTHLY
SUBSCRIPTION
REVENUE PER
TOTAL HOMES TOTAL BASIC BASIC BASIC
REGION HOMES PASSED SUBSCRIBERS SUBSCRIBERS(2) PENETRATION(2) SUBSCRIBER(2)(3)
- -------------------- --------- --------- ----------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Gdansk.............. 250,000 213,331 119,590 101,547 47.60% $7.21
Katowice............ 1,200,000 410,151 174,054 167,078 40.74% 5.37
Warsaw.............. 800,000 194,498 103,826 86,133 44.28% 4.73
Krakow.............. 300,000 143,458 73,998 65,912 45.95% 5.47
Lublin.............. 120,000 62,937 55,851 27,385 43.51% 6.81
Szczecin............ 160,000 26,705 19,838 9,862 36.93% 7.58
Bydgoszcz........... 134,000 78,048 42,235 40,614 52.04% 4.32(4)
Wrocffiaw........... 624,000 162,907 98,191 79,637 48.88% 4.01(5)
--------- --------- ------- ------- ----- -----
Total...... 3,588,000 1,292,035 687,583 578,168 44.75% 5.44(6)
========= ========= ======= ======= ===== =====
</TABLE>
- ---------------
<TABLE>
<S> <C>
(1) All data at, or for the five months ended, May 31, 1997. Includes approximately 163,000 homes passed and
approximately 98,000 total cable subscribers attributable to cable systems recently acquired by the Company,
of which the Company took control after May 31, 1997 and prior to the date hereof, except where otherwise
indicated.
(2) Includes Basic and Intermediate Tiers. See "-- Services and Fees".
(3) Includes revenue from additional sources such as additional outlets, stereo, converters and premium channels.
(4) The Bydgoszcz regional cluster was acquired in December 1996. Average monthly subscription revenue per basic
subscriber calculated based on the revenue for the cluster for the three months ended May 31, 1997.
(5) The Wrocffiaw regional cluster was acquired in June 1997. Average monthly subscription revenue per basic
subscriber calculated based on the revenue for the cluster for the five months ended May 31, 1997.
(6) Represents a weighted average for the Company based on the total number of basic subscribers for the five
months ended May 31, 1997. Includes revenue from additional sources referenced in note (3) above, but does not
include results for the Bydgoszcz and Wrocffiaw regional clusters.
</TABLE>
The following provides certain information regarding the regional clusters
in which the Company's cable television business operates. Population figures
presented herein are for the primary counties in each of the Company's eight
regional clusters. The Company's regional clusters may extend into more than one
county or may not cover all of the population in the primary county. Population
figures are provided for illustrative purposes only and may not be
representative of the actual population the Company intends to service with its
cable networks.
GDANSK. The Gdansk regional cluster is located primarily in the county of
Gdansk on the north coast of Poland. The population of the county of Gdansk is
approximately 1.45 million. The Gdansk regional cluster has historically been
the primary revenue generator for the Company, and accounted for approximately
38% and 33% of the Company's revenue in 1995 and 1996, respectively. The Gdansk
regional cluster is characterized by small, highly fragmented SMATV systems,
many of which the Company expects to either acquire or overbuild in time. The
Company believes that the Gdansk system, which was first constructed in 1990 and
is the oldest and most mature of the Company's systems, illustrates the
significant operating margins available in clustered operating systems in
Poland.
The Company is expanding in the Gdansk regional cluster primarily through
the continued build-out of MDUs and single family households, and into
contiguous areas. The Company is focusing its marketing efforts in the Gdansk
regional cluster on increasing penetration through remarketing cam-
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paigns. The Gdansk system possesses a number of exclusive agreements with co-op
authorities, and the Company expects to expand the number of such agreements
through the development of its Broadcast Tier, which the Company often offers on
favorable terms in exchange for an exclusive agreement with co-op authorities to
provide cable services to their residents.
KATOWICE. The Katowice regional cluster is located primarily in the county
of Katowice in the south of Poland. The population of the county of Katowice is
approximately 3.9 million. The Katowice regional cluster accounted for
approximately 35% of the Company's revenue in both 1995 and 1996. The Katowice
regional cluster is characterized by numerous cities and towns with significant
populations and high density housing. There are many small and medium size
operators throughout the region, creating an opportunity to expand by
acquisition. The Company began operations in Katowice in 1991, and in January
1995 tripled its number of basic subscribers in the region by merging its
operations with those of a competitor, PPHEI-Ryntronik.
The Katowice regional cluster, with a housing density of over 500 homes per
kilometer of cable plant in some areas, is the most densely populated region of
Poland. The Company believes that, as one of the largest potential multichannel
television markets in Poland, the Katowice regional cluster offers the Company
significant growth prospects. A desire to access this large potential market was
the motivation behind the merger that created PTK-Ryntronik.
In March 1996, the Company commenced a comprehensive training and
rationalization program to integrate acquired networks into its operations and
to rebuild a considerable portion of such networks to meet the Company's
standards. The Company expects that this rebuild program will be completed in
1997 and will cost approximately $10 million.
WARSAW. The Warsaw regional cluster is located primarily in the county of
Warsaw in the center of Poland. The population of the county of Warsaw is
approximately 2.4 million. The Warsaw regional cluster accounted for
approximately 15% of the Company's revenue in both 1995 and 1996. The Company
began operations in the Warsaw regional cluster in 1991.
Warsaw is the most competitive operating environment in Poland because of
its size and population density. The Warsaw market is characterized by several
large cable television operators and several small operators. The Company, which
currently is one of the three largest cable television operators in Warsaw based
on number of subscribers, has operating clusters in Warsaw that are located in
what the Company believes are the most demographically desirable parts of the
city (the southeast and the northwest sectors). The Company intends to grow its
Warsaw system by building-out single family housing areas in Warsaw, extending
its network into the suburbs and surrounding towns and by continuing to
overbuild a weaker competitor's system in several MDU areas that are adjacent to
the Company's operating areas.
KRAKOW. The Krakow regional cluster is located primarily in the county of
Krakow in the south of Poland. The population of the county of Krakow is
approximately 1.2 million. The Company commenced operations in Krakow in late
1993. The Krakow market currently contains only one significant competitor which
the Company believes has technical deficiencies and is experiencing problems in
its relationships with co-op authorities.
The Company believes that the majority of the MDUs in the city of Krakow
have been built-out by the Company and other cable system operators.
Accordingly, the Company believes that future expansion in the Krakow regional
cluster will consist of build-out of (i) newly constructed, single family homes,
(ii) historical preservation areas (which are subject to a more extensive permit
process), (iii) towns surrounding the city of Krakow, and (iv) over-building the
systems of competitors.
LUBLIN. The Lublin regional cluster is primarily located in the county of
Lublin in the east of Poland. The population of the county of Lublin is
approximately 1.0 million. The Lublin regional cluster is characterized by a few
small, cooperative-owned SMATV systems. The Company commenced operations in the
Lublin regional cluster in mid-1995 with the acquisition of several agreements
with co-op
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<PAGE> 66
authorities related to approximately 50,000 homes passed. In the Lublin regional
cluster, the Company has constructed a cable network that has a bandwidth of
1GHz, and will allow the Company to experiment with offering telephony services.
In its agreements with co-op authorities in the Lublin regional cluster the
Company is obligated to provide its Broadcast Tier service to every home in an
MDU in exchange for the MDU paying a fixed monthly fee of approximately $.40 to
the Company for each apartment. The customer relationships created by nearly all
homes in the market receiving Broadcast Tier service from the Company provide a
marketing opportunity to encourage customers to upgrade their service. In
addition, although the agreements with co-op authorities in Lublin generally do
not provide for exclusivity, the Company believes that the customer
relationships created by its Broadcast Tier arrangements will discourage
competitors from entering the Lublin regional cluster.
SZCZECIN. The Szczecin regional cluster is primarily located in the county
of Szczecin in the northwest corner of Poland. The population of the county of
Szczecin is approximately 1.0 million. There is currently no significant
competition in the Szczecin market other than several co-op authority owned
systems. The Company commenced operations in the Szczecin regional cluster in
1995 with the acquisition of a cable system with approximately 4,500 subscribers
and the exclusive right to build-out approximately 55,000 apartments in MDUs
owned by the Szczecin municipal authorities.
BYDGOSZCZ. The Bydgoszcz regional cluster is located primarily in the
county of Bydgoszcz, northwest of the center of Poland. The population of the
county of Bydgoszcz is approximately 1.1 million. The Company commenced
operations in the Bydgoszcz regional cluster in December 1996 with the
acquisition of a 51% interest in a cable system with approximately 37,000
subscribers. There are currently only a few competitors in the Bydgoszcz market,
including several co-op authority owned systems and a local operator.
By acquiring a controlling interest in the market's largest cable operator,
the Company has gained access to an additional market which has a number of
build-out and acquisition opportunities. The Company believes that through the
implementation of its operating procedures and programming agreements it may be
able to further strengthen its position in the Bydgoszcz market.
WROCFFIAW. The Wrocffiaw regional cluster is located primarily in and
around the county of Wrocffiaw in the south-west of Poland. The population of
the county of Wrocffiaw is approximately 1.1 million. The Company commenced
operations in the Wrocffiaw regional cluster in May 1997 with an acquisition of
a small local operator, followed in June 1997 with the acquisition of a 61%
interest in a cable system with approximately 98,000 total subscribers in
approximately twenty locations throughout the region.
The Company believes that Wrocffiaw offers considerable build-out
opportunities, as it has remained largely undeveloped in terms of professional
cable television service, with competition limited to smaller local operators.
In addition to gaining access to the city of Wrocffiaw, the acquisitions
provided the Company with a number of locations in southwest and central Poland,
with combined potential of approximately 624,000 television homes.
ACQUISITIONS
Since March 31, 1997, the Company has completed the acquisition of all or a
substantial portion of the capital stock or assets of three cable television
systems in Poland, and intends to acquire a fourth such system, as well as a 50%
equity interest in a Polish publishing company with which it intends to develop
programming and ancillary services. The aggregate consideration paid or to be
paid by the Company in connection with the Acquisitions (including amounts for
stockholder loans) is expected to be approximately $35.0 million. The three
cable systems already acquired in the Acquisitions serve approximately 113,000
subscribers and pass approximately 189,000 homes, while the cable system
expected to be acquired serves approximately 20,500 subscribers, representing
all of the homes passed by that system. The consummation of the Acquisitions has
or will result in the expansion of the Company's cable operations within its
existing regional clusters and the establishment of one new
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<PAGE> 67
regional cluster in Wrocffiaw. PCI has or intends to use a portion of the net
proceeds of the offering of the Old Notes in October 1996 to consummate the
Acquisitions. The Company has obtained the approval of the Anti-Monopoly Office
for the Acquisitions which have been consummated and the Company intends to
apply for approval of the remaining Acquisitions. The Company believes that it
will be required to obtain the Anti-Monopoly Office's approval for certain
future acquisitions as well. The Company continually evaluates acquisition
candidates and expects that it will continue to acquire attractive cable
television operators and programmers. There can be no assurance as to the timing
of the closing of the Acquisitions that are currently pending or as to whether
or on what terms the pending Acquisitions will actually be consummated.
In particular, PTK-Ryntronik entered into separate share purchase
agreements with each of the two 50% stockholders of KOLOR-SAT Sp. z o.o.
("Kolor-Sat") on December 20, 1996. Kolor-Sat's networks, which are located in
Opole (in southwest Poland), serve approximately 12,300 subscribers and pass
approximately 22,000 homes. Pursuant to the share purchase agreement,
PTK-Ryntronik acquired 100% of the shares of Kolor-Sat. The two individual
stockholders agreed not to compete with the Company in areas where cable
networks are operated by Kolor-Sat for a three year period following the closing
date. In addition to the purchase price, PTK-Ryntronik agreed to assume
responsibility for the two individuals' personal taxes up to a specified amount.
The Company also agreed to employ the two stockholders for 48 months following
the signing date. The share purchase agreements became effective once the
Anti-Monopoly Office granted consent to the transactions. The purchase price of
approximately $1.4 million was put into escrow on December 31, 1996, pending
receipt of the approval of the Anti-Monopoly Office which was received on May
26, 1997, and verification of the number of subscribers. Pursuant to the
purchase agreements, PTK-Ryntronik has been operating Kolor-Sat's cable network
since January 1, 1997.
The Company has also entered into a purchase agreement with Telewizja
Kablowa Vega Sp. z o.o. ("Vega"), pursuant to which it acquired all of the cable
television assets of Vega for approximately $530,000. Vega's networks, which are
located in Wrocffiaw (in southwest Poland), serve approximately 2,500
subscribers and pass approximately 5,000 homes. The former owners of Vega agreed
not to compete with the Company for a period of two years in all areas where PCI
operates cable systems, except for the towns of Czestochowa and Blachownia. The
Vega purchase agreement provided for the payment of the purchase price in three
equal installments. Such payments were made and title to the assets passed to
PTK-Ryntronik in May 1997.
PCI and Poltelkab have signed a commitment agreement with Telewizja Kablowa
GOSAT-Service Sp. z o.o. ("GOSAT") and its stockholders which provides for the
purchase (by March 31, 1998) of approximately 66% of the issued shares of a
company that operates cable television networks located in several cities and
towns in western Poland, serving approximately 98,000 total subscribers (70,000
basic subscribers) and passing approximately 163,000 homes. The consummation of
this acquisition occurred on June 11, 1997. At closing, PCI purchased
approximately 49% of shares in GOSAT and Poltelkab subscribed to approximately
11.7% of GOSAT's enlarged share capital. In connection with this transaction
Poltelkab will subscribe for additional newly issued shares of GOSAT and will
make stockholder loans to GOSAT. The total purchase price for the GOSAT
acquisition was approximately $10.8 million. In addition, the Company is
obligated to loan $7.0 million to GOSAT, of which $400,000 had been loaned as of
June 13, 1997. Until December 31, 1999, current stockholders in GOSAT can
exercise options to sell their remaining shares in GOSAT using the same pricing
formula. The Company has the right to appoint a majority of the GOSAT management
board members. GOSAT entered into employment agreements with the stockholders of
GOSAT and those stockholders entered into non-compete agreements, in each case
for a period of five years following the signing date. Upon consummation of the
acquisition, the Company established the new Wrocffiaw regional cluster centered
in southwest Poland.
The Company is negotiating to purchase from two co-op authorities
approximately 94% of the shares in a company operating cable television networks
that serve approximately 20,500 subscribers, representing all of the homes
passed by those networks, in a city in which the Company currently
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operates cable networks. The preliminary terms of this transaction have been
approved by members of the supervisory board of each of the co-op authorities,
and the Company expects the transaction to close in 1997. The consummation of
this acquisition will increase the Company's ownership interest in the target
company from 1.4% to approximately 95%. The Company intends to integrate the
acquired networks into its existing Szczecin regional cluster.
SERVICES AND FEES
The Company charges cable television subscribers an initial installation
fee and fixed monthly fees for their choice of service tiers and for other
services such as premium channels and rental of remote control devices. The
Company currently offers three tiers of cable television service: a Basic Tier
throughout the Company's cable television systems, and Broadcast and
Intermediary Tiers in selected areas of Poland. At May 31, 1997, approximately
79% of the Company's subscribers received the Basic Tier, approximately 5%
received the Intermediate Tier and approximately 16% received the Broadcast Tier
of service.
BASIC TIER. The Company currently delivers approximately 18 to 45 channels
to its cable television subscribers on its Basic Tier, which generally include
all Polish terrestrial broadcast channels, most major European satellite
programming legally available in Poland, regional and local programming and, on
most of its cable networks, its two proprietary Polish-language channels, PTK1
and PTK2. The Basic Tier costs approximately $2.59 to $5.89 per month (excluding
charges for premium channels) depending on location. The channels currently
offered by the Company to its Basic Tier subscribers vary by location and in
most of the Company's major markets include ten Polish-language channels
(including PTK1, PTK2 and Atomic), ten English-language channels, nine
German-language channels, two French-language channels, two Spanish-language
channels, one Italian-language channel and one Russian-language channel, as
follows:
<TABLE>
<CAPTION>
CHANNEL DESCRIPTION LANGUAGE
- -------------------- ------------------------------------------------ -----------------
<S> <C> <C>
Polonia 1 Satellite general entertainment Polish
PTK1(1) Cable information Polish
PTK2(1) Cable general entertainment Polish
TVP1 State-owned terrestrial general entertainment Polish
TVP2 State-owned terrestrial general entertainment Polish
Formula 11 Regional state-owned terrestrial general
entertainment Polish
TV POLONIA State-owned satellite general entertainment Polish
Polsat Terrestrial and satellite general entertainment Polish
Atomic(2) Cable music Polish
RTL7 Satellite general entertainment Polish
Eurosport Satellite sports English/Polish(3)
Discovery(4) Satellite documentaries English/Polish(5)
TNT/Cartoon Network Satellite general entertainment and cartoons English
MTV(4) Satellite music English
NBC/Super channel Satellite news and entertainment English
CNN Satellite news and information English
CMT-Europe(4) Satellite country music English
Euronews Satellite news English
BBC World Satellite news and information English
BBC Prime(4) Satellite general entertainment English
ARD 1 Satellite general entertainment German
SAT 1 Satellite general entertainment German
RTL 2 Satellite general entertainment German
</TABLE>
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<TABLE>
<CAPTION>
CHANNEL DESCRIPTION LANGUAGE
- -------------------- ------------------------------------------------ -----------------
<S> <C> <C>
3SAT Satellite general entertainment German
PRO 7 Satellite general entertainment German
n-TV Satellite news and information German
Deutsche Welle Satellite news and information German
DSF Satellite sports German
VIVA Satellite general entertainment German
M6 Satellite general entertainment French
TV 5 Satellite general entertainment French
Galavision Satellite general entertainment Spanish
TVE Satellite general entertainment Spanish
RAI UNO Satellite general entertainment Italian
Ostankino Satellite general entertainment Russian
</TABLE>
- ---------------
(1) Proprietary channels produced by ProCable.
(2) Atomic became available as a separate digitally delivered satellite channel
during the second quarter of 1997.
(3) Limited amount (at least three hours per day) of Polish-language commentary,
with audio encryptions.
(4) Encrypted signal.
(5) Limited amounts of Polish subtitles.
INTERMEDIATE TIER. The Intermediate Tier offers approximately 17 to 24
channels for monthly fees of approximately $1.32 to $3.40. The Intermediate Tier
is designed to compete with SMATV operators on a basis of price, using a limited
programming offering. The channels currently offered by the Company to its
intermediate subscribers vary by location.
BROADCAST TIER. The Broadcast Tier offers four to six terrestrial
broadcast channels with clear reception for monthly fees of up to approximately
$0.86. Receiving a high-quality signal over the air can be a problem in Poland
and many cable television subscribers would otherwise have to depend on antenna
broadcast reception, which tends to have poor signal quality and considerable
outages caused by neglect and equipment age. The Broadcast Tier is often used by
the Company to establish a relationship with co-op authorities. In some cases,
the Company will offer the Broadcast Tier at a nominal monthly charge to all
residents within a co-op authority's jurisdiction in return for a long-term
exclusive contract to provide cable services. In such cases, the Broadcast Tier
is utilized as a marketing vehicle to attract subscribers to the Company's cable
systems and subsequently to convert them to higher-tier subscribers. Polish
regulations regarding the order in which channels can be added to cable systems
mean that most Broadcast Tiers only broadcast public television programs, which
are required by Polish law to be the first channels carried on any Polish cable
television system.
PREMIUM AND OTHER SERVICES. For an additional monthly charge, certain of
the Company's cable systems currently offer two premium television channels
- -- HBO and Canal+ -- to customers on a monthly pay-per-channel basis. See
"-- Programming -- Premium Television Channels". In addition, the Company
intends to make the channels on its D-DTH service that are not currently offered
on its Basic Tier cable service available to its cable subscribers for an
additional monthly charge. Other optional services include additional outlets
and stereo service, which enables a subscriber to receive 12 or more radio
channels in stereo. Cable television subscribers who require the use of a tuner
to receive certain of the Company's cable services are charged an additional fee
of approximately $1.10 per month. Installation fees vary according to the type
of connection required by a cable television subscriber. The standard initial
installation fee is approximately $28 to $46 in MDUs and approximately $91 to
$132 for single family dwellings.
PRICING STRATEGY. Prior to December 1996, the Company's cable television
pricing strategy was designed to keep its profit margin relatively constant in
U.S. Dollar terms in more mature systems and to increase rates in more recently
acquired or rebuilt systems. The Company has historically achieved low annual
cable television churn rates of less than 10%, and has been able to pass on the
effects of
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inflation through price increases. In January 1997, the Company commenced a new
cable television pricing strategy designed to maximize revenue per subscriber
and to achieve real profit margin increases in U.S. Dollar terms. In connection
with this new pricing strategy, the Company intends to introduce new program
offerings and to continuously improve its services. As a result, the Company
expects that it may experience increases in churn rate above historical levels
during the implementation of its new pricing strategy across its cable networks.
The Company generally receives a premium for its cable television services
over the prices charged by its competitors, particularly poor-quality SMATV
operators. Despite its generally higher price levels, the Company has achieved
significant growth in penetration and market share while maintaining relatively
low annual cable television churn rates. The Company believes its ability to
successfully command higher prices reflects its higher levels of customer
service, broader selection of quality programming and the greater technical
quality of its cable television networks. Although poor-quality SMATV operators
often offer services at lower prices than the Company, the Company believes that
the enforcement of technical standards and of copyright laws in Poland will
require such operators to rebuild or upgrade their systems as necessary to
comply with technical standards and pay for programming that is currently being
obtained free of charge. The Company believes that these trends will improve its
competitive position by forcing poorly capitalized competitors to sell their
networks to better capitalized competitors such as the Company or cease
operations altogether.
Cable television subscribers are billed in advance and, as is customary in
Poland, most of the Company's customers pay their bills monthly through their
local post office or bank. The Company has strict enforcement policies to
encourage timely payment. Such policies include notices of late payment, visits
from service personnel, and ultimately, disconnection for nonpaying customers 60
days after a bill becomes past due. The Company's system architecture enables it
to promptly shut off service to nonpaying customers and is designed to reduce
fraudulent use its cable systems. The Company does not consider bad debt to be
material to its operations. While the Company's bad debt expense was 2.2% of
revenue in 1996, the Company's bad debt expense has historically averaged 1.3%
of revenue.
SALES AND MARKETING
As an early entrant in the post-Communist market in Poland, the Company has
had over six years of experience in introducing, developing and refining
marketing, sales and customer service practices in the diverse and rapidly
developing Polish economy, which it believes is a competitive advantage in
attracting and retaining cable subscribers. The Company's sales and marketing
process is divided into four segments: operating area development, new market
sales, remarketing sales and customer service.
OPERATING AREA DEVELOPMENT. The operating area development process in
Poland is very different from that in Western cable television markets, because
a Polish cable operator's geographic build is dependent on reaching agreements
with individual co-op authorities rather than upon the issuance of an operating
area development permit for a region by the government. The co-op authorities
make decisions on behalf of the residents, including decisions as to the
carriers of cable television. The Company's operating area development process
begins with targeting an MDU, is followed by negotiations with the relevant
co-op authority, and ultimately involves reaching an agreement with the co-op
authority to allow construction and installation of the cable television
network. The Company's strategy is to identify those geographic areas and
housing estates with the most favorable demographic characteristics, highest
population densities and lowest levels of competition from other cable
operators.
NEW MARKET SALES. After an agreement with a co-op authority has been
reached and construction of the cable network infrastructure has been completed,
the Company focuses its efforts on direct, door-to-door sales to individual
households. While the Company utilizes advertising in a variety of media
(including television, radio, newspapers, magazines, co-op and association
publications, billboards, bus shelter posters and taxi placards) to build
general awareness and recognition of the advantages of its cable television
services, direct sales is the primary focus of the Company's marketing efforts.
The
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distribution of promotional materials (via direct mail, leaflets and door
hangers) begins several days in advance of the arrival of the Company's sales
force. The materials provide for telephone and mail response, but are designed
so that the potential customer expects a direct sales visit. The Company's sales
force consists of native Poles who are trained in professional sales skills,
personal interaction, product knowledge and appearance. All sales persons are
compensated by direct sales commissions and incentive bonuses. Such employees
are hired, trained and managed by Company managers whose incentive compensation
is tied directly to sales results. New market sales tend to be highly seasonal,
with the fourth calendar quarter being the most active sales period.
REMARKETING SALES. After new areas have been marketed, Company remarketing
efforts focus on attracting new subscribers and selling additional products and
services, such as premium channels and stereo services, to existing subscribers.
Direct door-to-door remarketing sales are enhanced through advertising on PTK1
and PTK2, the Company's proprietary cable channels, bill inserts, door hangers,
coupons, prizes and contests, as well as advertising in other media accessible
to the general public. Company-wide remarketing campaigns are conducted
quarterly and seasonal promotions coincide with holidays and cultural events.
Sales persons are entitled to additional incentive commissions for remarketing
sales.
CUSTOMER SERVICE. By implementing a Western-style customer care program
that includes such features as courteous customer service representatives,
prompt responses to service calls and overall reliability, the Company has
introduced a quality of service generally not found in Polish consumer markets.
Customer service representatives are assigned to most cable systems at a
location easily accessible to subscribers in order to manage installation and
service calls and to provide telephone sales service support. The Company
generally guarantees service within 24 hours of a subscriber request. The
Company believes that its customer care program gives it a distinct competitive
advantage over other cable providers in the Polish market, has contributed to
the Company's low churn rate and has been a primary motivation for consumers to
select the Company as their cable television provider when provided with a
choice.
TECHNOLOGY AND INFRASTRUCTURE
The Company believes the fiber-optic cable television networks that it has
constructed, which serve approximately 60% of its homes passed, are among the
most technologically-advanced in Poland and are comparable to modern cable
television networks in the United States. All of the Company's networks that
have been constructed by the Company have bandwidths of at least 550 MHZ, with
one network as high as 1 GHz. New portions of the networks which are currently
being constructed are being designed to have minimum bandwidths of 750 MHZ. The
Company's goal is to upgrade any portions of its cable television networks that
have bandwidths below 550 MHZ (generally acquired from other entities) to at
least 750 MHZ in an effort to reduce the number of headends and parts inventory
required in the networks. The Company uses fiber-optic and coaxial cables,
electronic components and connectors supplied by leading Western firms in its
cable television networks.
The Company's cable television networks, in most cases, use a
fiber-to-the-feeder, 2,000 home node design. The Company uses a switched-star
configuration for its cable television networks by installing a discreet drop
cable which runs from a secure lockbox to each home (as opposed to a loop system
which feeds multiple homes from a single cable), allowing the Company to more
efficiently disconnect non-paying customers, add or remove service options to
individual homes and audit its systems to detect theft of signal. Where
required, high-quality tuners are used in cable television subscriber homes.
The Company's cable television networks were constructed with the
flexibility and capacity to be cost-effectively reconfigured to offer an array
of interactive and integrated entertainment, telecommunications and information
services, including combined telephone and cable television services and digital
data transmission, if the Company decides to pursue such ancillary sources of
revenue in the future. The Company's systems provide excess channel capacity and
are designed to maximize reliability. The
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Company operates its systems at approximately 49% to 69% of channel/bandwidth
capacity. Two-way capability can be added to most of the Company's systems at
limited cost to provide addressable and interactive services in the future. The
cable television networks constructed by the Company meet or exceed the
technical standards established by Polish regulatory authorities, and the
Company's policy is to upgrade sub-standard cable television networks obtained
in acquisitions as rapidly as practicable.
Because the Company has entered into a series of agreements with regional
and local TPSA branches which permit the Company to use TPSA's conduit
infrastructure for periods up to 20 years, it has been able to avoid
constructing its own underground conduit in certain areas. The Company also has
agreements to undertake joint construction with TPSA and other utilities for new
conduits in certain areas. These agreements represent a major advantage to the
Company since they permit the Company to minimize the costly and time-consuming
process of building new conduit infrastructure where TPSA conduit infrastructure
exists and provide for joint construction with TPSA and other utilities of
conduit infrastructure where none currently exists. At May 31, 1997,
approximately 62.5% of the Company's cable television plant had been constructed
utilizing pre-existing conduits of TPSA. A substantial portion of the Company's
contracts with TPSA for the use of such conduits permit termination by TPSA
without penalty at any time either immediately upon the occurrence of certain
conditions or upon provision of three to six months' notice without cause.
Generally speaking, TPSA may terminate a conduit agreement immediately if: (i)
the Company does not have a valid Permit covering the subscribers to which the
conduit delivers the signal; (ii) the Company's cable television network
serviced by the conduit does not meet the technical specifications required by
the Communications Act; (iii) the Company does not have a contract with the
co-op authority allowing for the installation of the cable network; or (iv) the
Company fails to pay the rent required under the conduit agreement. At May 31,
1997, approximately 113,000, or 16%, of the Company's total subscribers were
serviced by conduits leased from TPSA for which one or more of these provisions
were applicable, so TPSA was legally entitled to terminate the conduit
agreements covering these subscribers immediately. Any termination by TPSA of
such contracts could result in the Company losing its Permits, the termination
of agreements with co-op authorities and programmers, and an inability to
service customers with respect to the areas where its networks utilize the
conduits that were the subject of such contracts. See "Risk Factors -- Risks
Related to the Company -- Agreements with TPSA" and "Business -- Properties".
The Company estimates that at the end of May 1997 it had over 2,838
kilometers of cable television plant constructed and that the fiber-optic
backbone of its networks was substantially complete. Other than a rebuild of one
of the Company's acquired cable systems in the Katowice region for a remaining
cost of approximately $10 million, of which $7.5 million relates to upgrades to
meet PAR and Company standards, the Company estimates that its future capital
expenditures will consist primarily of capital needed for the incremental
addition of new MDUs and cable television subscribers to its existing networks
and for the build-out or rebuilding associated with the acquisition of new cable
television systems. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources". From
its existing infrastructure base, the Company's incremental build cost to add an
adjacent MDU or additional MDU subscribers to existing networks averages
approximately $200 per MDU subscriber. (MDU subscribers represent more than 95%
of the Company's total subscribers.) The Company believes that several primary
factors contribute to its favorable cost structure. The significant density of
homes per kilometer of cable plant in the Company's core markets and the
Company's conduit agreements substantially reduce its build costs. Moreover, the
Company believes that the size of its construction program allows it to
negotiate attractive construction labor contracts and discounts on materials.
COMPETITION
The multichannel television industry in Poland has been, and is expected to
remain, highly competitive. The Company competes with other cable television
operators as well as with companies employing numerous other methods of
delivering television signals to the home. The extent to which the Company's
multichannel television services are competitive with alternative delivery
systems depends, in
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part, upon the Company's ability to provide a greater variety of programming at
a reasonable price than the programming and prices available through alternative
delivery systems. In addition, advances in communications technology as well as
changes in the marketplace and the regulatory environment are constantly
occurring. It is not possible to predict the effect that ongoing or future
developments might have on the multichannel television industry in Poland. See
"The Industry -- The Polish Multichannel Television Industry" and "Regulation".
The Company believes that competition in the cable television industry is
primarily based upon price, program offerings, customer service, quality and
reliability of cable networks. Small SMATV operators are active throughout
Poland, and they pose a competitive threat to the Company because they often
incur lower capital expenditures and operating costs and therefore have the
ability to charge lower fees to subscribers than does the Company. While such
operators often do not meet the technical standards for cable systems under
Polish law, enforcement of regulations governing technical standards has
historically been poor. Although Polish regulatory authorities have recently
attempted to improve the enforcement of such laws and regulations, there can be
no assurance that they will be enforced. If such laws and regulations are not
enforced, these SMATV operators will be able to continue operating with a lower
cost structure than that of the Company and thus charge lower fees to
subscribers, which may have an adverse effect on the Company's business, results
of operations and financial condition. See "Regulation". Regardless of the
enforcement of these laws and regulations, the Company expects that SMATV
operators will continue to remain a competitive force in Poland. Certain of the
Company's competitors or their affiliates have greater experience in the cable
television industry and have significantly greater resources (including
financial resources and access to international programming sources) than the
Company. The largest competitors of the Company in Poland include Aster City, a
joint venture between, among others, certain Polish persons, Bresnan
Communications, TCI Communications Inc. and certain financial investors, with an
estimated 140,000 subscribers, Vectra, a Polish entity, with an estimated
130,000 subscribers, and Porion, a Polish entity, with an estimated 80,000
subscribers. Aster City and Porion have recently announced their plan to merge
to form a single cable television system in Warsaw.
The Company's cable television systems also compete with companies
employing other methods of delivering television signals to the home, such as
terrestrial broadcast television signals and A-DTH satellite-delivered
television services, and may in the future compete with MMDS systems and D-DTH
systems, including the Company's @TV D-DTH service.
Cable television systems also face competition from a variety of other
sources of news, information and entertainment such as newspapers, cinemas, live
sporting events, interactive computer programs and home video products such as
video cassette recorders. The extent of such competition depends upon, among
other things, the price, variety and quality of programming offered by cable
television, and the popularity of television itself.
D-DTH
The Company intends to increase its distribution capacity beyond that
provided by the expansion of its cable television business by developing a
complementary satellite D-DTH broadcast service for Poland under the brand name
@TV. The Company believes @TV will be the first Polish language service
available in the Polish market and among the first in Europe. The Company
expects to launch its D-DTH service in the first half of 1998 with an initial
package of approximately 14 basic Polish-language channels and one optional
premium Polish-language movie channel. The Company believes that its D-DTH
system, when combined with the continued expansion of its cable television
system and the development of its Programming Platform, will enhance its
position as the leading provider of multichannel pay television in Poland.
The Company believes that the satellite D-DTH pay television industry in
Poland offers substantial opportunities for growth due to the large potential
market size of 8.8 million television homes which it estimates are not currently
passed by cable, the availability of low cost D-DTH Reception Systems to
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the Initial Subscribers, the existing demand for high-quality Polish-language
programming, and the improved characteristics of D-DTH compared with A-DTH.
There can be no assurance, however, that the market for D-DTH services will
develop, or if it does develop, that the Company will be successful in launching
its D-DTH service. See "Risk Factors -- Risks Related to the Company -- Limited
D-DTH Experience and Uncertainties Associated with the D-DTH Market".
D-DTH OPERATING STRATEGY
The Company's D-DTH strategy is to distribute D-DTH Reception Systems at a
significantly subsidized cost to approximately 500,000 Initial Subscribers,
which is designed to achieve rapid and high penetration of the Polish market.
The launch of the D-DTH service will be supported by the Company's development
of its Programming Platform, which the Company believes will satisfy the strong
demand for high-quality Polish-language programming in Poland.
The Company is currently negotiating agreements with Philips, which are
expected to be concluded shortly, for the supply of an end-to-end package of
products and services, including IRDs, ODUs and Philips' CryptoWorks(R)
proprietary conditional access system and associated smartcards, which will be
distributed through over 1,000 Philips authorized electronics retailers across
Poland, and the provision by Philips of installation and support services
through its retail network in Poland. The Company will use a portion of the net
proceeds from the Offerings to acquire approximately 500,000 D-DTH Reception
Systems for distribution at a significantly subsidized cost to Initial
Subscribers in Poland to the Company's D-DTH service. The Company is considering
entering into a preliminary agreement with Philips to permit Philips to initiate
preparations for its performance of the proposed agreements pending negotiation
and the anticipated finalization of those agreements. This preliminary agreement
would require certain phased payments by the Company of amounts of up to $9
million, which would be non-recoverable in the event definitive agreements are
not entered into between the Company and Philips. There can be no assurance that
the Company will be successful in negotiating such definitive agreements with
Philips on mutually acceptable terms, if at all. See "Risk Factors -- Risks
Related to the Company -- Dependence on Philips as Principal Supplier".
The Company plans to broadcast digital programming from its U.K. production
facility through the Company's uplink facilities to one of three transponders
leased by it on the Astra 1E and 1F satellites, which will then reflect the
signals back to the D-DTH decoder systems of the Polish subscribers. Towards
this end, the Company has applied, or intends to apply for, licenses from the
ITC in the United Kingdom for each of its proposed D-DTH channels and expects to
receive the first of such licenses shortly. The Company is currently studying
the feasibility of locating its uplink and production facilities in Poland and
applying for Polish broadcasting licenses necessary to engage in such
activities.
All of the Company's D-DTH broadcasts will be digital. The Company expects
that its D-DTH system will be among the first in Europe and will be the first
Polish-language D-DTH service available to the Polish market. D-DTH systems use
medium or high-power satellites to deliver signals to satellite dish antennae at
homes, hotels and apartment buildings. In contrast to MMDS signals which are
locally transmitted, a D-DTH satellite footprint can cover large land areas.
Among the advantages of D-DTH systems are: (i) the additional capacity available
from digital compression enables the Company to offer a much wider range of
programming, including dedicated thematic, sports and film channels; this extra
capacity is expected to lead to increased demand for Polish-language
programming, (ii) digital technology also provides enhanced picture and sound
quality and allows interactive features, such as an electronic program guide
("EPG"), which are not available using analog technology, and (iii) digital
technology allows the Company to reach the SMATV and A-DTH segments, as well as
the section of the Polish market which is not passed by cable. The disadvantages
of D-DTH systems presently include (i) limited ability to tailor local
programming packages to serve different geographic markets in Poland, (ii)
line-of-sight restrictions (although less than for MMDS systems), and (iii)
intermittent interference from atmospheric conditions and terrestrially
generated radio frequency noise.
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Prior to the launch of its D-DTH service, the Company expects to conduct a
pilot scheme for 4,000 subscribers throughout Poland, which the Company intends
to commence by the beginning of 1998.
DTH SERVICES AND FEES
With the introduction of its D-DTH service, the Company aims to provide
Polish viewers with a wider selection of high-quality Polish-language
programming. The Company expects its D-DTH service to provide potential
subscribers with an attractive alternative to A-DTH services and cable offerings
at competitive subscription prices.
The Company expects to launch its D-DTH service in the first half of 1998
with an initial package of approximately 14 basic Polish-language channels and
one optional premium Polish-language movie channel, which it believes will be
the first Polish-language D-DTH service available to the Polish market (the
"Initial Digital Programming Platform"). The Company expects to expand its basic
package to include additional premium channels, and eventually, to introduce
tiered packages consisting of a variety of combinations of up to 21 basic and
premium channels. This expansion is dependent on a number of factors, some of
which are outside the Company's ability to control or predict, including the
market acceptance of D-DTH services, the Company's ability to secure rights to
high-quality, high-demand programming (either internally produced or from third
parties), the availability of digital transmission satellite capacity, as well
as the introduction of competing service offerings by its present or future
competitors. See "Risk Factors -- Risks Related to the Company -- Limited D-DTH
Experience and Uncertainties Associated with the D-DTH Market", "-- Dependence
on Philips as Principal Supplier", "-- Dependence Upon Satellites" and "--
Availability of Programming and Dependence on Third Party Programmers; Program
Development Risk".
The Company has recently signed a letter of intent with World Shopping
Network plc (the "Shopping Network") in connection with the establishment of a
joint venture for the purposes of developing and distributing an electronic
retailing service to the cable television and DTH markets in Poland. The Company
expects a definitive agreement to be signed by the end of June 1997 and for a
shopping television channel to be included in its Initial Digital Programming
Platform. In addition, to date the Company has entered into letters of intent
with Knowledge TV, BET on Jazz and Twoj Styl, a Polish lifestyle magazine, to
provide programming for the Company's Initial Digital Programming Platform for
distribution over its D-DTH and cable television systems. The Company expects to
enter into definitive agreements with respect to such channels by the end of
September 1997. The Company has also entered into negotiations with certain
international program providers regarding the creation of a branded
Polish-language premium movie channel. The Company is concurrently negotiating
with HBO for the exclusive distribution of the HBO service as a premium channel
to the Polish D-DTH market. These premium channels are expected to be priced at
a rate of $4.00 each per month. Although these letters of intent contemplate the
negotiation of definitive agreements, there can be no assurance that such
agreements will be completed, that the Company's other negotiations for premium
channels will lead to agreement or that the Company will be successful in
obtaining the desired programming for its Programming Platform.
The Company is currently negotiating with a number of international and
Polish program providers for the right to distribute the Polish language version
of a variety of programs in Poland. The Company is currently negotiating a
partnership with TVP, the Polish state-owned broadcaster, to transmit TVP's
popular channels, TVP1 and TVP2, and to transmit TVP's new music channel on its
Initial Digital Programming Platform, and to provide the Company with exclusive
pay television access to TVP's extensive Polish-language television library.
Such a partnership is subject to certain Polish regulatory and other approvals,
and there can be no assurance that the Company can enter into an agreement on
satisfactory terms with TVP.
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The Company expects to be able to offer a PPV service to its D-DTH
subscribers by the middle of 1999. The Company expects to offer certain premier
movies and sports and other live events on such a service.
The Company expects that its D-DTH services will also include EPG, an
interactive service which will allow the Company to communicate with subscribers
with respect to movie, sports event and channel promotions and subscriptions. In
addition, the EPG will be linked to the Company's proposed DTH subscriber
magazine. The digital nature of the Company's D-DTH signals will also allow the
Company to offer stereo audio channels to its subscribers in the future.
PRICING STRATEGY. The Company expects to charge D-DTH subscribers fixed
monthly fees for their choice of service tiers and for other services, such as
premium channels. Initially, the Company expects to offer to subscribers one
level of service together with an optional premium movie channel. Further
premium channels are expected to become available later on a per-channel basis.
The Company expects that its Initial Digital Programming Platform package will
offer approximately 14 Polish-language basic channels for a monthly fee of
approximately $7.50 and an optional premium Polish-language movie channel for a
monthly fee of approximately $4.00. When available, the Company currently
expects to offer additional premium Polish-language channels for monthly fees of
approximately $4.00 each. The Company expects that new subscribers to its D-DTH
service during the launch period will be charged one package price which, in
addition to the first year of subscription (excluding premium channel
subscription) to the D-DTH service, will also include the lease and installation
of the D-DTH Reception Systems at a subscriber's home. If the subscriber
subscribes for a second year, he will own the D-DTH Reception Systems. See
"-- Sales and Marketing". From the commencement of its D-DTH service, the
Company intends to make the channels on its D-DTH service that are not present
on its Basic Tier cable service available to its cable subscribers for an
additional monthly fee and to sell the Programming Platform on a wholesale basis
to other cable networks in Poland.
The Company is in the process of formulating a detailed pricing strategy
for its D-DTH business based upon parameters existing within the Polish
television market and synergies with its existing cable television business. The
Company believes that certain of the factors applicable to its cable television
business, such as those giving the Company the ability to successfully command
higher prices, will be equally applicable to the D-DTH business. The Company
also believes that the availability of D-DTH channels on its cable television
service will be one factor contributing to the maintenance of a relatively low
annual churn rate on its cable television service.
The Company intends to contract with its D-DTH subscribers for annual
periods and bill such subscribers in advance. After the initial one year initial
subscription period, such subscribers will be required to pay their bills
quarterly in advance. See "-- Cable -- Services and Fees".
SALES AND MARKETING
The Company plans to begin marketing and distributing its D-DTH service in
the first half of 1998, with an aim to establishing a base of approximately
500,000 Initial Subscribers within the first year of operation. The Company
believes that it will be able to draw upon its extensive internal experience in
the Polish cable television business to support the introduction, development
and marketing of its D-DTH service. In addition, the Company's continuing
negotiations with Philips contemplate the establishing of a comprehensive
relationship which will give the Company access to Philips' well developed and
established network of authorized electronics retailers throughout Poland.
In order to receive @TV's D-DTH service, subscribers will need to obtain
certain reception equipment, including an IRD with a smartcard-based conditional
access system and an ODU. Additionally, subscribers will require installation
and support services. The Company is negotiating with Philips for an end-to-end
package of products and services which will include digital compression,
multiplexing, conditional access system, an EPG, smartcards, up to 500,000 IRDs
and up to 500,000 ODUs. The Company expects the agreements to be negotiated with
Philips to provide an option for the Company to purchase in excess of 500,000
IRDs and ODUs from Philips, that a second supplier of IRDs in addition
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to Philips may be licensed after the first 500,000 IRDs are purchased by the
Company, and that the Company and Philips will establish a distribution, sales,
marketing and service relationship. The Company believes that it has selected a
D-DTH reception system for its subscribers which will be relatively simple to
use and available at a low cost.
Under the proposed agreements with Philips, a complete package comprising
of the D-DTH Reception System, a one-year subscription to the Initial Digital
Programming Platform (not including the premium channel), as well as
installation and support services, would be offered exclusively through
approximately 1,000 of Philips over 3,000 authorized electronics retailers in
Poland (the "Introductory Digital Package"). The Company believes that in each
of the last two years Philips was the largest retailer of electronics goods by
volume in Poland. The Company believes that, if successful, this relationship
with Philips gives it access to a well-known and established retail network in
Poland, with knowledgeable and trained staff capable of supporting and promoting
the @TV brand.
The Company currently anticipates distributing the Introductory Digital
Package at a significantly subsidized cost to the Initial Subscribers. Premium
channels are expected to be offered at an additional monthly charge per channel.
Upon completion of the first year of subscription, a D-DTH subscriber will have
the option of renewing the subscription for a further one-year period and
retaining the D-DTH Reception System or cancelling the subscription and
returning the D-DTH Reception System. The Company will continuously review the
subscription rate and other package features during the launch period and will
determine whether the Introductory Digital Package should be modified and, if
so, on what terms.
The Company expects to establish a dedicated D-DTH customer service
facility within a centralized customer service center. The Company believes this
will allow it to offer a high level of customer service at low cost to its new
D-DTH subscribers.
The Company intends to develop a comprehensive marketing strategy for its
D-DTH service and plans to advertise the service primarily through terrestrial
television, press, radio and outdoor poster sites. The Company will also rely on
Philips as the point-of-sale intermediary between the Company and its
subscribers.
TECHNOLOGY AND INFRASTRUCTURE
Through the Company's D-DTH service, digital video, audio and data will be
encoded, processed, compressed, encrypted, multiplexed (i.e., combined with
other channels), modulated (i.e., applied to the designated carrier frequency
for transmission to satellite) and transmitted from its uplink facilities to
geosynchronous satellites which receive, convert and amplify the digital signals
and retransmit them to earth in a manner that allows individual subscribers to
receive and be billed for the particular program services to which they
subscribe.
BROADCASTING AND UPLINK FACILITIES. The channels available on the
Company's D-DTH service will include the Company's own proprietary programming
and programming from third parties which will have originated from a number of
sources in Poland, the United Kingdom and elsewhere. All of such programming
will be backhauled (i.e., transmitted via satellite or other medium) to the
Company's production facility, which will initially be located in the United
Kingdom, for transmission on its D-DTH system. Prior to transmission, editorial
control and program packaging will occur at the Company's facility in the form
of, among other things, program localization, principally adding subtitles or
dubbing in Polish, or post-production work, including the insertion of
commercials. Once the Company's D-DTH programming is ready for transmission it
will be uplinked to the Company's transponders on Astra satellites 1E and 1F.
The Company's D-DTH signal will be beamed by such satellites back to the earth
and may be received in Poland by those who have the appropriate dedicated
satellite reception equipment and who have been connected by the Company to its
D-DTH service as subscribers. The Company will determine the optimum mix of
leasing and owning the necessary broadcasting and uplinking equipment and
facilities.
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ENCRYPTION. The ability to receive encrypted pay-television channels
broadcast for DTH reception is controlled through the use of proprietary
conditional access technologies. The Company's negotiations with Philips
contemplate the grant to it of a non-exclusive license from Philips to use the
CryptoWorks(R) proprietary conditional access system in Poland, and for Philips
to distribute the associated smartcards in Poland. The Company does not intend
to acquire any license to manufacture either encoders or decoders.
CryptoWorks(R) is a new generation conditional access system developed and
marketed by Philips. CryptoWorks(R) is currently being utilized by a broadcaster
serving Malaysia.
Any new D-DTH broadcaster wishing to commence the operation of an encrypted
pay-TV service within Poland would need to obtain a license from Philips to use
CryptoWorks(R) or acquire an alternative encryption and conditional access
technology and build its own decoder base capable of receiving transmissions
encrypted using such technology. If a competitor obtained a licence from
Philips, it could contract with the Company for access to the installed
encryption decoder base utilized by the Company.
Transmissions using conditional access technology are encrypted prior to
being uplinked to satellites. The signal from the satellite is received by a
subscriber through a satellite dish and IRD, and is decrypted via a smartcard
inserted into a decoder, which is usually integrated with a receiver into the
IRD connected to a viewer's television set. A smartcard is a plastic card, the
size of a credit card, carrying an embedded computer chip that implements the
secure management and delivery of decryption keys necessary to descramble
pay-television channels and thereby enable and disable viewing according to
whether the subscriber is authorized to receive a particular service. The
smartcard receives instructions as to whether to enable, disable, upgrade or
downgrade a subscriber's level of service via the datastream sent to the decoder
within the broadcast signal. Smartcards can be easily updated or replaced
periodically.
The delivery of subscription programming requires the use of encryption
technology to prevent signal theft or "piracy". Historically, piracy in the
cable television and European A-DTH industries has been widely reported. The
Company's IRDs use smartcard technology making it possible to change the
conditional access system in the event of a security breach through the use of
over-the-air methods or by issuing new smartcards. The Company intends to
purchase piracy insurance from Philips. As part of this insurance, Philips will
replace the smartcards of the Company's then-existing subscribers with new
smartcards incorporating Philips' latest anti-piracy technology at no cost to
the Company except delivery costs in the event piracy reaches a proportion of
the Company's D-DTH service to be determined in the definitive agreement with
Philips. Although the Company expects its conditional access system, subscriber
management system and smartcard to adequately prevent unauthorized access to
programming, there can be no assurance that the encryption technology to be
utilized in connection with the Company's D-DTH system will be, or remain,
effective. If the encryption technology is compromised in a manner which is not
promptly corrected, the Company's revenue and its ability to contract for
programming services would be adversely affected. See "Risk Factors -- Risks
Related to the Company -- Risk of Signal Theft".
Although the Company believes that the Astra satellites, CryptoWorks(R)
encryption technology and the IRDs together constitute a reliable, end-to-end
cost-effective solution, certain other large European providers of D-DTH
services have selected different satellites, encryption technology and decoders.
If another satellite, encryption technology or decoder becomes the preferred
standard in Poland, or if Poland enacts regulations regarding such technology or
decoders, such a development could adversely impact the Company's ability to
attract subscribers. Such a development could force the Company to switch its
suppliers, thus causing confusion for existing and potential subscribers, delays
in providing subscribers with decoders and significant unexpected costs.
SATELLITES. The Company expects to transmit all of its proprietary
programming and that of third party programmers from its production facility in
the United Kingdom by cable to an earth station transmitting antenna (an
"uplink"). The uplink facility will transmit the Company's programming signal
over an orbiting satellite transponder to cable system headend receiving
antennae and D-DTH subscribers' reception equipment throughout Poland. The
Company expects that its production facility will be located in the United
Kingdom. The Company is currently considering whether it will perform the
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uplinking of its own programming or contract such uplinking to a third-party
service provider. The Company is currently studying the feasibility of locating
its uplink and production facilities in Poland and applying for Polish
broadcasting licenses necessary to engage in such activities.
In March 1997, the Company entered into a contract with Societe Europeanne
des Satellites S.A. ("SES"), a Luxembourg company in which the Government of
Luxembourg controls a significant interest, for the lease of three transponders
on two satellites, Astra 1E and 1F, under leases that expire in 2007 and 2008.
The Company currently has access to two transponders on the Astra 1F satellite.
The Company's access to a third transponder on the Astra 1E satellite is
dependent upon the successful launch of the Astra 1G satellite, which is
expected to occur in October 1997. Aggregate charges for each transponder are
capped at $6.75 million per year and $200 million for all three transponders for
the term of the contract, but either party may terminate any or all of the
transponder leases on six months' prior notice if the Company has not Targeted
the Polish DTH Market prior to January 1, 1999. "Targeted the Polish DTH Market"
means the Company has a license or permit for its D-DTH activity and is actively
promoting D-DTH reception by ensuring availability in Poland of IRDs. If all of
the leases were so terminated by such date, the aggregate charges under the
leases would be up to $8.6 million. The Company's transponder leases provide
that the Company's rights are subject to termination in the event that SES's
franchise is withdrawn by the Luxembourg Government.
The Company has been designated a "non-pre-emptible customer" under each of
its relevant transponder leases. As a result, in the event of satellite or
transponder malfunction, the Company's use of its transponders cannot be
suspended or terminated by another broadcaster which has pre-emption rights
permitting it to gain access to additional transponders in preference to other
customers. The Company is not, however, a "protected customer" under the
relevant transponder leases and, in the event of a failure of one or more of the
transponders leased by it, the Company would not be able to pre-empt any other
transponder customer. The operation of the Astra satellites is outside the
control of the Company, and a disruption of the transmissions could have a
material adverse effect on the Company, depending upon its duration. While the
Company has sufficient channel capacity to initiate its planned D-DTH service on
the two transponders to which it currently has access, the ability of the
Company to add channels to its Programming Platform will depend upon its ability
to obtain access to the third transponder leased by it or other transponder
capacity on the Astra satellites or other favorably positioned satellites. See
"Risk Factors -- Risks Related to the Company -- Dependence Upon Satellites".
Due to the high cost of insurance policies relating to satellite operations, the
Company does not insure against possible interruption of access to the
transponders leased by it for satellite transmission of its broadcasting.
PROGRAMMING
The Company believes that the quality and variety of programming is a
critical component in building successful multichannel television systems in
both its cable television and D-DTH businesses. The Company's programming
strategy is focused on the development of a Programming Platform of high-quality
Polish-language programming which will be distributed over its cable television
and D-DTH businesses. The Company currently creates, produces, develops and
acquires programming, including programming for its two proprietary
Polish-language channels (PTK1 and PTK2), for distribution across its cable
networks. The Company currently obtains its programming content from third party
providers, as well as in-house through its ProCable and Mozaic subsidiaries. In
order to expand its offering selection and establish its branded proprietary
Programming Platform, @TV, the Company intends to form a variety of joint
ventures or subsidiaries to own and develop proprietary Polish-language
programming. The Company believes that the establishment of its Programming
Platform will increase the basic penetration rate for its cable television
networks, will support the expansion of the cable networks and the launch of the
D-DTH service, and will allow the Company to increase its subscription rates and
maximize revenue per subscriber.
PROGRAMMING PLATFORM
The Company believes that the provision of Polish-language programming,
with local cultural content and theme, as well as localized versions of
high-quality non-Polish programmes tailored to
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appeal to mass audiences in Poland, will be a key factor in the success of the
Company's cable television and D-DTH businesses. The Company intends to combine
its current Polish-language programming offering with a variety of new
high-quality Polish-language offerings, including branded and premium channels,
to form the basis of a proprietary Programming Platform under the brand name
@TV. This Programming Platform will be distributed on a subscription basis
across the Company's cable television and D-DTH systems and sold on a wholesale
basis to other cable networks in Poland.
Like many of those in other emerging markets, the Polish television
industry currently depends primarily on programming from foreign sources
(translated into Polish) and limited local broadcasting alternatives. The
Company believes that there is strong demand for local-language (content)
programming in Poland, as evidenced by the market share of TVP1 and TVP2, the
Polish government-owned channels. The Company expects that copyright laws and
regulations will be increasingly enforced and that program providers will
increasingly encrypt their channels, which combined with the breadth of the
Company's channel offerings on both its cable television and D-DTH systems, will
become an increasing competitive advantage.
The Company sources its cable programming through government, local and
foreign program providers. The Company broadcasts all state-owned channels
available in its service areas, and these channels and other local terrestrial
channels are generally received over-the-air. For a number of popular foreign
programs, the Company has contracts of up to five years in length and pricing is
often based on the number of the cable television subscribers serviced by the
Company's networks. As the Company's cable television subscriber base has grown,
it has generally been able to achieve volume pricing discounts under these
contracts. The Company generally makes payments to programmers requiring such
payments, unlike many of the SMATV competitors operating in its markets.
Recently, a number of channels that are transmitted via satellite have been
encrypted, and thus are available only to legal operators who have entered into
contracts with the program providers.
The Company currently owns a 33% interest in ProCable, which was formed to
develop proprietary Polish-language programming. ProCable currently holds
broadcast licenses to distribute PTK1 and PTK2 over all of the Company's cable
networks that carry these channels, except for eleven small cable networks for
which ProCable does not currently have broadcast licenses but for which it will
seek to obtain broadcast licenses in the near future. PTK1, which was introduced
in 1994, offers general local information, program scheduling, and local
advertising and in some areas began offering more expansive local news, weather
and other information in the fall of 1996. PTK2, which was introduced in the
spring of 1995, offers general entertainment in Polish (or with voice-overs in
Polish), including full-length feature films, music, childrens' programs and
documentaries.
ProCable also owns 22% of Polskie Media, which was granted a terrestrial
television license for central Poland in March 1997. Polskie Media is in process
of developing a new advertising supported television channel, Nasza Telewizja,
which Polskie Media expects to introduce to the market in late 1997.
The Company has established Mozaic as a wholly owned U.S. subsidiary
engaged in the development and production outside of Poland of Polish-language
thematic television channels. Mozaic plans to develop programming designed to
generate both advertising revenue and subscription fees from PTK and other cable
operators. In December 1996, Mozaic acquired 45% of Ground Zero Media Sp. z o.o.
("GZM"), a joint venture with Polygram, the recording company, Atomic
Entertainment LLP, and Planet 24 Production Limited, an independent production
company. GZM's only business is the development and production of Atomic TV, a
Polish-language music television channel aimed at the 15-29 year old audience.
In April 1997, the Company reached an agreement in principle with GZM whereby
the Company will assume responsibility for selling all advertising to be shown
on Atomic TV for a period of one year, and will gain the right to retain all of
the revenue from such advertising. Atomic TV began satellite broadcasting on
April 7, 1997. In exchange for such rights the Company will pay GZM $4.95
million over the one-year period. The Company expects such agreement in
principle to be formalized in a written contract shortly.
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The Company has entered into letters of intent regarding the World Shopping
Network, Knowledge TV, BET on Jazz and Twoj Styl, a Polish lifestyle magazine,
to provide programming for its Programming Platform. In addition, the Company
intends to develop @TV 1 as the anchor channel for its Programming Platform. @TV
1 will offer a wide-range of Polish-language programming, including full-length
feature films, music, sports events and childrens' programs. As opportunities
arise in the rapidly developing pay television market in Poland, management
intends to consider adding thematic channels to its package. In particular, the
Company currently intends to create thematic channels, such as sports, movies,
news, weather, lifestyle, gameshows and childrens' programming. Thematic
channels permit subscribers to choose easily the theme of the programming to be
viewed at any particular time. Programs which generate significant consumer and
advertising appeal may eventually be expanded into thematic channels. For
example, Atomic TV, which debuted on PTK2 in the spring of 1996, has generated
substantial cable television viewer and advertising interest, and it began to be
offered as a separate channel in April 1997.
The Company expects to significantly expand and enhance the quality of
programming on PTK1 and PTK2, and on @TV 1 once it has been established, and
also to increase the number of proprietary channels on both its cable television
and D-DTH systems. Additional programs and channels under consideration by the
Company for development include family entertainment, sports and childrens'
channels, among others. Towards this end, the Company is currently negotiating
with a number of Polish and international programming providers to form joint
ventures which will be responsible for the creation of thematic programs and
channels, such as action and adventure, science fiction, sports and family
entertainment channels. The Company intends to either have equity ownership in,
and/or exclusive agreements with, a number of such programming providers, thus
allowing it to create an attractive branded package of proprietary high-quality
programming designed specifically for the Polish market.
The Company is in the process of negotiating a partnership with TVP, the
state-owned Polish national broadcaster, to transmit TVP's popular channels,
TVP1 and TVP2, and to transmit TVP's new music channel on its Programming
Platform. In addition, this partnership is expected to provide the Company with
exclusive pay television access to TVP's extensive television library of
high-quality Polish-language programs. The Company believes that such access
would provide a significant source of classic Polish content programming for use
on @TV 1 and throughout the Company's Programming Platform, through the
repackaging of TVP's programming library into particular program formats. The
Company expects that the partnership will also allow the Company access to TVP's
state-of-the-art production facilities, which the Company believes are currently
under-utilized, for the development and production of programming for the D-DTH
Programming Platform. The Company also believes that such a partnership would
provide the Company with certain other technical facilities, such as backhauling
and program packaging, and would offer opportunities for the marketing and
promotion of the Company's D-DTH Programming Platform on TVP's television
service. The proposed partnership with TVP would be subject to certain Polish
regulatory and other approvals. There can be no assurance that agreement in
respect of such a partnership will be concluded with TVP or if concluded that
such approvals will be obtained on acceptable terms or at all. See "Risk Factors
- -- Risks Related to the Company -- Availability of Programming and Dependence on
Third Party Programmers; Program Development Risk".
PREMIUM TELEVISION CHANNELS
The Company is in the process of introducing Polish-language versions of
premium movie channels to its cable subscribers for an additional monthly fee.
Currently, two movie channels are available in Poland, Canal+ and HBO. Both
feature movies and also carry, or will carry, live sports and other
entertainment. The Company has distributed Canal+ on a non-exclusive basis on
its cable networks since entering into a preliminary distribution agreement with
Canal+ in October 1995. The Company currently has approximately 4,800
subscribers to the Canal+ services.
On March 13, 1997, the Company entered into an agreement with Polska
Programming, B.V., a subsidiary of HBO, to distribute the Polish language
version of HBO, on a non-exclusive basis, throughout its cable networks. HBO
launched its Polish-language service in September 1996. The HBO service
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is priced at a promotional rate of $5.00 per month for a period of six months
from the inception of the service in a given market. Thereafter, the service is
priced at $6.00 per month. The Company believes that the service will generate
significant subscriber interest at this price level. The Company began
distribution of the HBO service in Warsaw in April and in Gdansk and Krakow in
May 1997, and expects to roll out such service to the Company's remaining cable
systems by the end of 1997. The Company is negotiating with HBO for the
exclusive distribution of the HBO service to the D-DTH market in Poland.
The Company has also entered into negotiations with certain international
programmers regarding the creation of a branded Polish-language premium movie
channel. Although these letters of intent and negotiations contemplate the
negotiation of definitive agreements, there can be no assurance that the Company
will be successful in establishing the relationships necessary to produce the
high-quality Polish-language programming which the Company's Programming
Platform is dependent upon. See "Risk Factors -- Risks Related to the Company --
Availability of Programming and Dependence on Third Party Programmers; Program
Development Risk".
ADVERTISING
The Company expects to attract significant advertising to its channels as
part of the developing Polish television advertising market, which the Company
believes is still relatively underdeveloped, with television advertising
constituting a lower per capita spend than in comparable markets. The Company
estimates that the current size of the Polish television advertising market is
approximately $320 million per year and believes that the market is dominated by
TVP and Polsat. The Company expects that its channels will increase the size of
the Polish television advertising market by giving advertisers new and better
targeted outlets in Polish television. In particular, the Company believes that
its channels will be attractive to advertisers because of the relatively
affluent demographic profile of the Company's subscribers and the focus of the
Company on large, high economic growth, urban areas. Furthermore, the Company's
channels will give advertisers local customer access that cannot easily be
replicated through any other advertising media.
PTK1 and PTK2 also serve, and once established @TV 1 is expected to serve,
as a means to create additional revenue sources for the Company from advertising
and potentially from the distribution of such channels via satellite to other
cable operators' networks and potentially to other DTH operators. ProCable began
selling local and national advertising on its channels in 1996 and the Company
expects that as the demand for its proprietary channels increases and Poland's
advertising market for cable and satellite television matures, advertising may
become a significant source of revenue for the Company.
PROPERTIES
At May 31, 1997, the Company owned equipment used for its cable television
business, including 119 headends, and approximately 2,838 kilometers of cable
plant. The Company has approximately 83 lease agreements for offices, storage
spaces and land adjacent to the buildings. The total area leased amounts to
approximately 28,800 square meters (most of which is land adjacent to
buildings). The areas leased by the Company range from approximately 10 square
meters up to more than 12,500 square meters. The agreements are for specified
and unspecified periods of time and those for an unspecified period may be
terminated with relatively short notice periods by either party, usually three
months. The Company recently purchased two parcels of land for which it procured
the required permits of the Polish Minister of the Interior.
The Company has entered into conduit leases with TPSA (and, in certain
cases, with other entities). The majority of the TPSA leases require the Company
to bear the costs of the maintenance of the cable. The Company may not sublease
the conduit or cables or allow a third party to use the conduits or cables free
of charge without TPSA's consent. The rental charge for the conduit is usually
determined on each 100 meters of conduit occupied. The agreements also contain
indexation clauses for rent adjustment purposes (based on the change of U.S.
Dollar exchange rates or on the increase of real maintenance costs). A
substantial portion of the Company's contracts with TPSA for the use of such
conduits permit termination by TPSA without penalty at any time either
immediately upon the occurrence of certain conditions or upon provision of three
to six months' notice without cause. Any
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termination by TPSA of such contracts could result in the Company losing its
Permits, the termination of agreements with co-op authorities and programmers,
and an inability to service customers with respect to the areas where its
networks utilize the conduits that were the subject of such TPSA contracts. See
"Risk Factors -- Risks Related to the Company -- Agreements with TPSA".
The Company believes that its existing owned properties, lease agreements
and conduit agreements are adequate for purposes of the Company's cable
television operations, although additional space and conduits will be needed in
the future if the Company consummates further acquisitions of cable television
networks.
In connection with the development of its programming business and the
establishment of a D-DTH service, the Company expects to lease additional office
space and premises providing backhauling, production, post-production and
program packaging facilities. The Company is currently considering whether it
will perform the uplinking of its own programming or contract such uplinking to
a third party service provider. This additional space is expected to aggregate
approximately 6,500 square meters and will initially be located in the United
Kingdom. The Company is currently studying the feasibility of locating its
uplink and production facilities in Poland and applying for Polish broadcasting
licenses necessary to engage in such activities.
TRADEMARKS
The Company has not registered the PTK trademark used in its cable
television and programming businesses. In 1992, the Polish patent office
rejected the Company's application for registration of the PTK trademark because
PTK was deemed to be generic rather than descriptive. The Company reapplied for
registration of the PTK trademark in August 1996. There can be no assurance as
to when the PTK trademark will be accepted for registration, if at all. If the
PTK trademark is not accepted for registration, the Company will consider
applying for registration of a different trademark. The Company has filed for
registration of its @TV trademark and intends to file for registration of
related trademarks in Poland.
EMPLOYEES
At May 31, 1997, the Company had approximately 825 permanent full-time
employees and approximately 82 part-time employees. In addition, as of such date
the Company employed approximately 75 salesmen who received both commissions and
a nominal salary, and from time to time the Company employs additional salesmen
on an as needed, commission only basis. These numbers do not include
approximately 33 permanent full-time employees of ProCable. In connection with
the development of its programming business and the establishment of a D-DTH
business the Company has hired an additional 19 permanent full-time employees
and expects to hire a further 120 employees by the end of 1997, the majority of
whom will be administrative, post-production and technical personnel located at
the Company's facility in the United Kingdom. Certain personnel are expected to
be hired in Poland to staff the Company's new customer service center and engage
in related activities. The Company expects that certain functions, such as
uplinking and program production, will be performed by employees of third
parties pursuant to medium- and long-term service agreements with the Company.
None of the Company's employees are unionized. The Company believes that its
relations with its employees are good.
LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary
course of business. In management's opinion, the litigation in which the Company
is currently involved, individually and in the aggregate, is not material to the
Company's financial condition or results of operations.
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REGULATION
GENERAL
The operation of cable and DTH television systems in Poland is regulated
under the Communications Act by the MOC and PAR and under the Television Act by
the Council. Cable television operators in Poland are required to obtain Permits
from PAR to operate cable television systems and must register certain
programming that they transmit over their networks with the Council. Poland is a
party to the provisions of the Convention which regulates international
transmission and retransmission of television programs. The operation of a D-DTH
service in Poland uplinked from facilities in the United Kingdom will also be
subject to regulation in the United Kingdom and the European Union (the "EU").
In contrast to cable television regulatory schemes in the United States and
in certain other Western nations, neither the MOC nor PAR currently has the
authority to regulate the rates charged by operators for cable television
services; however, excessive rates could be challenged by the Anti-Monopoly
Office should they be deemed to constitute monopolistic or other
anti-competitive practices. Cable television operators in Poland also are
subject to the Copyright Act, which provides intellectual property rights
protection to Polish authors and producers of programming. Broadcasters in
Poland are regulated by the Council under the Television Act and must obtain a
broadcasting license from the Council.
POLAND
COMMUNICATIONS ACT
GENERAL. From the fall of the Communist government in 1989 through 1992,
the Polish cable television industry was essentially unregulated. Although the
Communications Act was enacted in 1990, the MOC and PAR did not begin
promulgating and enforcing regulations implementing the Communications Act until
1992. In 1993, to improve the quality of Poland's cable television systems, the
MOC and PAR began to implement technical and licensing standards for cable
operators that established requirements for such items as signal quality and
radio frequency leakage. In the same year, the MOC and PAR began to monitor
compliance with regulations requiring all cable operators to obtain Permits and,
more recently, has begun to enforce such requirements. In 1995, the
Communications Act was amended to create restrictions on foreign ownership
within the cable television industry.
PERMITS. The Communications Act and the Permits set forth the terms and
conditions for providing cable television services. A Permit authorizes the
construction and operation of a cable television network in a specified
geographic area. Permits do not give exclusive rights to construct and operate a
cable network within an area, and usually do not include build-out milestone
requirements.
To obtain a Permit, an operator must file an application with PAR. A Permit
application must be accompanied by evidence demonstrating that the applicant's
network will be constructed of components approved by, and meeting the technical
specifications set forth by, PAR and the MOC, and that co-op authorities or
other property owners in the area that the Permit will cover have agreed to
allow the applicant access to their property to install the cable network. PAR
will refuse to grant a Permit if, among other things, the applicant fails to
submit the evidence described above or if the applicant's cable network fails to
comply with the technical requirements established by PAR and the MOC including
minimum standards for signal quality and radio frequency leakage.
Permits have an initial term of one year and if renewed are generally
renewed for up to five years. Renewal applications must be submitted to PAR at
least one month prior to the end of a Permit's term. If a renewal decision from
PAR is pending at the expiration of a Permit's term, as is usually the case, the
term is deemed to be extended until the renewal decision is made. PAR generally
renews Permits as a matter of course if the terms and conditions of the Permit
and the requirements of the Communications Act, including the technical
requirements for cable networks established by PAR and the MOC, have been met by
the holder of the Permit. The Communications Act also requires that operators of
cable television systems comply with Polish laws, including copyright laws. See
"-- Copyright Protection".
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If a cable television operator breaches the terms or conditions of its
Permits or the Communications Act, or fails to acquire Permits covering areas
serviced by its networks, PAR can impose penalties on such operator, including
fines, the revocation of all Permits covering the cable networks where the
breach occurred or the forfeiture of the operator's cable networks. In addition,
the Communications Act provides that PAR may not grant a new Permit to, or renew
an expiring Permit held by, any applicant that has had, or that is controlled by
an entity that has had, a Permit revoked within the previous five years. In many
instances, where a violation of the terms or conditions of a Permit or the
Communications Act have occurred, PAR is required by law to give the cable
television operator an opportunity to rectify the violation.
NON-TRANSFERABILITY OF PERMITS. A cable television operator who acquires a
cable network from another operator must apply for a Permit covering the area in
which the acquired network is located, unless the acquiring operator already has
a valid Permit covering the area. However, subject to the restrictions on
foreign ownership of cable television operators described below and to any
restrictions contained in a specific Permit or related to the foreign ownership
of real estate, shares of cable television operators holding Permits are freely
transferrable.
FOREIGN OWNERSHIP RESTRICTIONS. The Communications Act and applicable
Polish regulatory restrictions provide that Permits may only be issued to and
held by Polish individuals, corporations that have their registered offices in
Poland or other companies formed under the laws of Poland in which foreign
persons hold no more than 49% of the share capital, ownership interests and
voting rights. In addition, the Communications Act and applicable Polish
regulatory restrictions provide that the majority of the management and
supervisory board of any cable television operator holding Permits be comprised
of Polish citizens residing in Poland. These restrictions do not apply to any
Permits issued prior to July 7, 1995. In the Company's view, based on the MOC's
written explanations, these restrictions also do not apply to Permits issued at
any time pursuant to certain licenses obtained under the Foreign Commercial
Activity Act described below or to renewals of any such Permits. As of February
27, 1997, approximately 45% of the Company's basic subscribers were covered by
Grandfathered Permits that are not subject to foreign ownership restrictions.
Enforcement of Poland's regulatory restrictions on foreign ownership of
cable television operators is the responsibility of PAR. Applications for
Permits, and for renewals thereof, require disclosure of the applicant's
ownership structure, stockholders and management and supervisory boards. A
violation of these regulatory restrictions constitutes a violation of the
Communications Act, and can lead to revocation of all Permits held by the entity
committing the violation. See "-- Permits".
Prior to the creation of PAR and the Permit system, the stockholders of
PTK, S.A. received a license to establish PTK, S.A. to operate cable television
systems in Warsaw, Krakow and the areas surrounding these cities (as described
in the license) under the Foreign Commercial Activity Act. The Company plans to
transfer cable networks that it acquired or constructed after July 7, 1995 in
the Warsaw and Krakow license areas to PTK, S.A., which will apply for Permits
covering such systems. Although the Foreign Commercial Activity Act has been
repealed, the MOC has confirmed to PTK, S.A. that this license enables PTK, S.A.
to acquire Permits covering areas in Warsaw, Krakow and the surrounding areas
without regard to the regulatory restrictions on foreign ownership described
above. There can be no assurance that the MOC correctly interpreted the law and
will not change its views. In Poland, however, interpretation of the law is
vested in the Constitutional Court which has not considered the issue. The MOC's
interpretation of the law is therefore not binding. Any such adverse
determination could have a material adverse effect on the Company's business,
financial condition and results of operations.
To comply with foreign ownership requirements for Permits for networks not
covered by Grandfathered Permits, the Company has entered into contractual
arrangements with the Polish entity Poltelkab. The Company owns 49% of Poltelkab
and five Polish executives and former executives of the Company own the
remaining 51%. In the case of the acquisition or construction of cable networks
not covered by Grandfathered Permits, either the Company will own all of the
cable network assets and will
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lease the assets to Poltelkab who will operate the network, or Poltelkab will
own and operate the networks. In the Company's current leasing arrangements with
Poltelkab, Poltelkab holds the Permits to operate the new cable networks,
receives all of the revenues from subscribers, pays all operating expenses
relating to the operation of the networks, and through the lease arrangements
pays the Company rent equal to substantially all of the cash flow generated by
the networks. The Company believes that this ownership and operating structure
do not contradict the requirements of Polish law. PAR has granted Poltelkab two
Permits for networks using the ownership and operating structure described
above. There can be no assurance that Polish regulatory authorities will not
determine that all or part of this ownership and operating structure, or any
other ownership and operating structure that may be utilized by the Company,
violates Polish regulatory restrictions on foreign ownership or that such
restrictions will not be amended or interpreted in a different manner in the
future, including the restrictions applicable to Grandfathered Permits. Any such
adverse determination or any such amendment or interpretation could adversely
affect the ability of the Company's subsidiaries to acquire Permits to operate
cable television systems and could result in the loss of Permits held by certain
subsidiaries of the Company, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
THE COMPANY'S PERMITS. Subsidiaries of the Company had received
approximately 93 Permits from PAR, covering approximately 450,000 of the
Company's approximately 544,000 basic subscribers as of May 31, 1997 (excluding
subscribers of networks which the Company has contracted to purchase, but which
the Company had not taken control of as of such date), including approximately
128,000 subscribers for whom the Company's Permits are deemed extended under
Polish law pending PAR's response to the Company's Permit renewal applications
(collectively, "Valid Permits"). However, certain subsidiaries of the Company do
not have Valid Permits covering certain of the areas in which it operates cable
networks. Of the approximately 95,000 basic subscribers as of May 31, 1997
located in areas for which subsidiaries of the Company do not currently have
Valid Permits, approximately 21% are located in areas serviced by recently
acquired cable networks for which Permit applications cannot be made until all
Permit requirements are satisfied (including obtaining agreements with co-op
authorities and the upgrade of the acquired network to meet technical standards
where necessary), approximately 60% are located in areas serviced by recently
acquired or constructed networks in Warsaw, Krakow and the areas surrounding
these cities, which PCI plans to transfer to PTK, S.A. in order to comply with
foreign ownership restrictions, and approximately 19% are located in areas
serviced by networks for which subsidiaries of the Company have Permit
applications pending. These subsidiaries of the Company have 18 Permit
applications pending. There can be no assurance that PAR will issue any or all
of the Permits for which such subsidiaries have applied.
There can be no assurance that PAR will not take action against the Company
for operating cable television networks in areas not covered by valid Permits,
including assessing fines, revoking Permits held by the Company or seizing the
Company's cable networks. Furthermore, there can be no assurance that the
Company's subsidiaries will be able to receive Permits in the future permitting
it to operate any other networks that they may acquire. Any such action would
have a material adverse effect on the Company's business, financial condition
and results of operations.
TELEVISION ACT
THE COUNCIL. The Council, an independent agency of the Polish government,
was created under the Television Act to regulate broadcasting in Poland. The
Council has regulatory authority over both the programming that cable television
operators transmit over their networks and the broadcasting operations of
broadcasters. Cable television operators generally are not considered
broadcasters under the Television Act unless they meet certain criteria
specified therein, including but not limited to, making modifications, such as
inserting commercials, to programming transmitted over their networks or failing
to retransmit programming simultaneously with their receipt thereof.
REGISTRATION OF PROGRAMMING. Under the Television Act, cable television
operators must register each channel and the programming with the Chairman of
the Council prior to transmitting it over their
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cable networks. An exception to this registration requirement exists for
programming that is broadcast by public broadcasters and programming that is
broadcast by other domestic broadcasters and is generally available over the air
for receipt by the public in the area where the network is located.
The application to register programming with the Chairman of the Council
must include specification of the programming to be transmitted and the
broadcaster of the programming, and evidence that the applicant has a Permit
covering the cable networks on which the programming will be transmitted.
Registration of programming occurs automatically if the Chairman of the Council
does not reject an application within two months of its submission.
In general, the Chairman of the Council will refuse registration of
programming if (i) the applicant is not legally entitled to use the cable
network over which the programming will be distributed (i.e., does not have a
Permit covering the network), (ii) the broadcasting of the programming in Poland
would violate Polish law, including provisions of the Television Act governing
sponsorship, advertising and minimum Polish content requirements for programming
broadcast by Polish broadcasters or (iii) the transmission of the programming
over the cable network would violate Polish law, including the Television Act.
Once programming is registered with the Chairman of the Council by a cable
television operator, it remains registered with respect to such operator until
the term, if any, requested in the application for registration expires or until
the Chairman of the Council revokes the registration. Applications to renew the
registration of programming are usually filed two months prior to the end of the
term of the registration thereof and will usually only be rejected for the
reasons described above. The Chairman of the Council is authorized to revoke
registration if a program for any of the same reasons for which it is entitled
to refuse to register programming, or if the cable television operator violates
the "must carry" provisions of the Television Act that require cable operators
to transmit programming broadcast by public broadcasters nationwide or
regionally.
Certain subsidiaries of the Company have registered with the Chairman of
the Council most of the programming that they transmit on their cable networks,
except programming distributed on networks for which they do not have Permits.
There can be no assurance that the Chairman of the Council will not revoke the
registration of any of the Company's programming, or that the Chairman of the
Council will register all additional programming that the Company desires to
transmit over its networks, or that the Council will not take action regarding
unregistered programming the Company transmits over its cable networks which do
not have Permits. Such actions could include the levy of monetary fines against
the Company and the seizure of Company equipment involved in transmitting such
unregistered programming as well as criminal sanctions against the Company's
management.
BROADCASTING LICENSES. Companies that engage in broadcasting in Poland
must receive a broadcasting license from the Chairman of the Council under the
Television Act. Broadcasting is defined under the Television Act to include the
wireless emission of a program for the purpose of simultaneous and general
reception and the introduction of a program or channel into a cable television
network. In determining whether to grant a broadcasting license, the Council
considers factors including, but not limited to, whether the planned
broadcasting activity by the applicant will serve to provide information,
facilitate access to culture and art or provide entertainment, minimum Polish
content, and whether the applicant will be able to secure the required
investments and financing for the planned broadcasting operations.
Broadcasting licenses, unless revoked by the Council, have a term of
between three and ten years. The Television Act is silent as to the possibility
of the license renewal and, to the extent applicable, upon termination of a
license, a new application or submission of a tender might be required. The
Council may revoke a broadcasting license for, among other things, violations of
the Television Act, of the terms the broadcasting license or of the restrictions
on foreign ownership of broadcasters described below. See "-- Restrictions on
Foreign Ownership of Broadcasters".
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RESTRICTIONS ON FOREIGN OWNERSHIP OF BROADCASTERS. Under the Television
Act and applicable regulations, a broadcasting license may be granted only to
Polish citizens domiciled in Poland or to Polish companies in which foreign
persons hold no more than 33% of the issued capital stock and no more than 33%
of the votes at general meetings of their stockholders. In addition, the
Television Act and applicable Polish regulatory restrictions provide that the
majority of the management and supervisory boards of any broadcaster company
holding a broadcasting license must be comprised of Polish citizens residing in
Poland.
While PCI is not a broadcaster under the Television Act, it owns a 33%
interest in a programming company, ProCable, which holds broadcast licenses to
distribute PTK1 and PTK2 over all of the Company's networks that carry these
channels, except for eleven small cable networks for which ProCable currently
does not have broadcast licenses but for which it will seek to obtain broadcast
licenses in the near future. The other stockholders of ProCable are its
president, a Polish citizen who owns a 40% interest, and a Polish children's
charitable trust. The Company has established Mozaic as a wholly-owned U.S.
subsidiary engaged in the development and production of Polish language thematic
television programming outside of Poland. The Company plans to distribute its
branded digital encrypted DTH platform of proprietary Polish-language
programming and other programming produced by Mozaic throughout Poland via
satellite systems from outside of Poland. The Company believes that the
ownership structure of ProCable, @EL and/or Mozaic satisfy Poland's regulatory
restrictions on foreign ownership. However, there can be no assurance that
Polish regulatory authorities will not determine that all or part of this
ownership or distribution structure, or the distribution structure to be
established for such future subsidiaries or joint ventures, violates Polish
regulatory restrictions on foreign ownership. Further, there can be no assurance
that Polish regulators will not revoke any of ProCable's licenses for
broadcasting over a cable network for which it does not have a valid license or
otherwise. Any such action could have a material adverse effect on the Company's
business, financial condition and results of operations.
REQUIREMENTS CONCERNING PROGRAMS BROADCAST OUTSIDE OF POLAND. The
Television Act does not include regulations directly applicable to the
broadcasting of programs being broadcast from abroad by foreign broadcasters and
received in Poland. Specifically, there are no regulations in force concerning
satellite broadcasting of a program directed at a Polish audience if the uplink
for the broadcasting of such program is made by a foreign broadcaster outside
Poland. The Company believes that the Television Act does not apply to such
broadcasting and that such activity is not affected by Polish broadcasting
requirements. The Council has not officially adopted an interpretation of this
issue. As different interpretations of this issue have been made, including by
some members of the Council, there can be no assurance that this interpretation
will not be challenged or that the Company will not be required to comply, and,
if so, that it will be able to comply, with such requirements. In addition, in
certain situations, including, but not limited to, where a program is produced
or assembled entirely in Poland and only provided to a third-party for
transmission from abroad, there may be a risk of considering the producer of
such a program a broadcaster under the Television Act. This would result in the
obligation to obtain a license from the Chairman of the Council, which would
require meeting certain conditions (including foreign ownership restrictions).
Currently Poland has not sought to regulate foreign DTH broadcasters who
uplink outside of Poland. However, there can be no assurances that Poland will
not seek to regulate the DTH industry by, for example, imposing standards for
encryption technology or DTH decoders. If the Company's encryption technology,
DTH decoders or other activities did not meet such standards, the Company's
business, financial condition and results of operations could be materially
adversely affected as the Company seeks to comply with such standards.
As Poland is a party to the Convention, Polish authorities are obligated to
guarantee freedom of reception and shall not restrict the retransmission on
Polish territory of program services which comply with the terms of the
Convention. However, the Council has recently submitted a proposal to amend the
Convention to waive the protection for freedom of reception in the case of
foreign broadcasters broadcasting from outside Poland in order to evade Polish
broadcasting regulations. Any amendment to the
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Convention would require the approval of all state signatories to the
Convention. Parties can withdraw from the Convention on six months notice. There
can be no assurance that the Convention will not be so amended or that Poland
will not withdraw from the Convention.
The Television Act authorizes the Council to specify the requirements
regarding the Polish and European content of programs of foreign broadcasters to
be distributed through cable networks in Poland. The adoption of such a
regulation may influence the ability of Polish cable television operators to
register programs with the Council. Such registration is required for lawful
cable distribution of programs. The Council has not so far issued any
regulations concerning this matter.
COPYRIGHT PROTECTION
PROTECTION OF RIGHTS OF POLISH AUTHORS AND PRODUCERS OF PROGRAMMING. Cable
television operators in Poland are subject to the provisions of the Copyright
Act, which governs enforcement of intellectual property rights of Polish
citizens and companies in programming. Polish copyright law distinguishes
between authors, who are the creators of programming, and producers, who acquire
intellectual property rights in programs created by others. In general, the
holder of a Polish copyright for a program transmitted over the cable networks
of a cable television operator has a right to receive compensation from such
operator or to prevent transmission of the program.
The rights of Polish copyright holders are generally enforced by
organizations for collective copyright administration and protection such as
Zwiazek Autorow i Kompozytorow Scenicznych ("ZAIKS") and Zwiazek Artystow Scen
Polskich ("ZASP") (collectively, "Rights Organizations"), and can be enforced by
the holders themselves. In practice, the compensation paid to the holder of a
Polish copyright on programming that is transmitted over a cable television
system is usually set by contract between a Rights Organization and the
individual cable television operator. Most of the Company's subsidiaries operate
under a contract with ZASP and all of them under a contract with ZAIKS. In the
event that a cable television operator transmits programming in violation of a
Polish copyright, the Rights Organization or the copyright holder may sue the
operator for an injunction preventing further violations or an accounting for
profits or damages, which may include, in certain circumstances, a sum equal to
three times the amount of compensation the copyright holder could have obtained
if it had entered into a contract with the operator. In addition, a violation of
the Copyright Act by a cable television operator also constitutes a violation of
the Communications Act and the operator's Permits. See "-- The Communications
Act -- Permits".
PROTECTION OF RIGHTS OF FOREIGN AUTHORS AND PRODUCERS OF
PROGRAMMING. Except as described below, the Copyright Act protects only Polish
citizens and Polish companies. Foreign authors of programming, however, may
receive protection under the Copyright Act for programing that is either
originally published in Poland or is originally published simultaneously in
Poland and abroad or originally published in Polish-language form. In addition,
foreign authors of programming receive Polish copyright protection under the
terms of the Berne Convention of 1886 as amended in Paris in 1971 (the "Berne
Convention"), which was adopted by Poland in 1994. Foreign producers of
programming who satisfy certain criteria may receive some form of copyright
protection under TRIPS, which was recently adopted by Poland. In addition,
foreign programming producers will receive Polish copyright protection under the
Rome Convention.
Under the Berne Convention, authors of programming located in other
signatory countries must be extended the same copyright protection over their
programming that Polish authors receive under the Copyright Act. Polish cable
television operators must thus make copyright payments to foreign authors
holding copyrights in programming that is transmitted over the cable networks of
such operators. See "-- Protection of Rights of Polish Authors and Producers of
Programming". The Berne Convention, however, does not grant any protection to
foreign producers of programming.
Poland has taken steps toward adopting the Rome Convention, which will
extend copyright protection to programs of foreign producers. Poland ratified
the Rome Convention on December 31, 1996, and became bound by its terms on June
13, 1997. The Company currently makes copyright payments to the
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foreign programmers requiring such payments, such as CNN, Eurosport and the
Cartoon Network, even though such payments are not mandated by Polish copyright
law. The Company is not able to predict the effect of TRIPS or of the recent
adoption of the Rome Convention on the Polish cable television industry, and
there can be no assurance that either will not result in the Company paying
additional fees to broadcasters for programming or being unable to obtain
certain commercially desirable programming.
ANTI-MONOPOLY ACT
Competition in Poland is governed by the Anti-Monopoly Act which
established the Anti-Monopoly Office to regulate monopolistic and other
anti-competitive practices. The current Polish anti-monopoly body of law with
respect to the cable television industry is not well-established, and the
Anti-Monopoly Office has not articulated comprehensive standards that may be
applied in an antitrust review in the cable television industry. In particular,
the relevant markets for cable television services have not been defined by the
Anti-Monopoly Office.
As a general rule, companies that obtain control of 40% or more of their
market face greater scrutiny from the Anti-Monopoly Office. Additionally,
several types of concentrations between undertakings, including acquisitions of
stock, under circumstances specified in the Anti-Monopoly Act require prior
notification to the Anti-Monopoly Office. Sanctions for failure to notify
include fines imposed on parties to the transaction and members of their
governing bodies. The Company believes that it is required to obtain, and it
intends to apply for, the Anti-Monopoly Office's approval of certain of the
pending Acquisitions, and it may be required to obtain the Anti-Monopoly
Office's approval for certain future acquisitions as well. In addition, the
Anti-Monopoly Office can review a company's past and present activities for
potential anti-competitive behavior. Pursuant to the current interpretation of
the Anti-Monopoly Office, transactions between non-Polish parties affecting
market conditions in Poland may also require notification to the Anti-Monopoly
Office. According to the Anti-Monopoly Act, transactions made on a stock
exchange do not require such notification, but the Act does not stipulate
whether this is applicable to stock exchanges outside Poland or only to those
inside Poland. Furthermore, the proposed Law on Public Trading in Securities,
which is currently being debated by the Polish Parliament provides for the
amendment of the Anti-Monopoly Act to repeal the exemption for notification of
transactions made on a stock exchange. There can be no assurance that the
Anti-Monopoly Office will approve the pending Acquisitions or the Company's
future acquisitions and dispositions or that a review of the Company's past,
present or future operations, if undertaken by the Anti-Monopoly Office, will
not otherwise adversely impact the Company's business, strategy, financial
condition or results of operations. The Company has not obtained clearances from
the Anti-Monopoly Office in connection with certain past acquisitions. The
Company does not believe that sanctions by the Anti-Monopoly Office for any such
missing clearances would be material, although there can be no assurance as to
the severity of such sanctions, if any.
UNITED KINGDOM
BROADCASTING REGULATION
The D-DTH services to be launched by the Company's wholly owned subsidiary
@EL will be regulated by the Independent Television Commission (the "ITC") as a
satellite television service ("STS"). The ITC is the body responsible for
regulation of substantially all commercial television in the UK. Under the
Broadcasting Act, as amended by the recently enacted Satellite Television
Service Regulations, a satellite television broadcaster will be licensed as an
STS if certain criteria are satisfied. The principal criteria is that the
broadcaster is established in the United Kingdom or, if the broadcaster is not
established in the United Kingdom, it makes use of a frequency or satellite
capacity granted by the ITC or its signal is transmitted from the United
Kingdom. On July 18, 1997, @EL was granted an STS license for the Atomic TV
service. This STS license is one of the first such licenses issued by the ITC.
The terms of the STS license issued to @EL are broadly similar to the
non-domestic satellite licenses (NDS licenses) which were issued previously by
the ITC to satellite broadcasters operating from the UK.
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All existing NDS licenses have now been reclassified as STS licenses and varied
to bring them into line with the new regulatory regime.
The Company understands that the ITC has and will continue to follow the
"establishment" test set out in the recently adopted revision to the Television
Without Frontiers Directive (the "New Directive") to determine whether a
broadcaster falls within its jurisdiction.
The New Directive has recently been agreed upon between the European
Commission, the Council of Ministers and the European Parliament and became
effective in June 1997. The New Directive states that broadcasters fall within
the jurisdiction of an EU member state where they are established in that state
and provides that a broadcaster is deemed to be established in an EU member
state if, among other things, its head office is in that state and editorial
decisions about program schedules are taken there. If this test is not
satisfied, there are other tests which are set out in the New Directive to
determine where a broadcaster is established. The Company intends to apply for
an STS license for each of the channels it intends to broadcast at the
commencement of its D-DTH service in accordance with the Broadcasting Act which
are not otherwise licensed.
When issued by the ITC, the STS license will permit the operation of an STS
service but does not confer on an STS licensee the right to use any specific
satellite, transponder or frequency to deliver the service. STS licenses will be
granted for a period of ten years and are renewable for one or more further 10
year periods. The ITC will continue to have authority to impose fines, shorten
the license period or revoke licenses if the licensee fails to remedy a breach
of any license condition or to comply with any direction which the ITC lawfully
gives to the STS licensee. The ITC may also revoke a license if any change in
the nature or characteristics of the licensee, or any change in the persons
having control over or interests in it, is such that, had the change occurred
before the granting of the license, such change would have induced the ITC to
refrain from granting the license. In addition, the ITC may revoke a license in
order to enforce the restrictions contained in the Broadcasting Act on the
ownership of media companies. The ITC has wide discretion to vary the conditions
of licenses issued under the Broadcasting Act.
In common with all television licenses issued by the ITC, any licenses
awarded to the Company or @EL would impose on the Company or @EL an obligation
to comply with the Codes and directions issued by the ITC from time to time.
These Codes include the Program Code (including the guidance notes on PPV
services), the Code of Advertising and Sponsorship, the Code on Sports and Other
Listed Events, the ITC Code of Conduct on Electronic Program Guides and the
Rules on Advertising Breaks. These Codes include requirements as to impartiality
and accuracy of news programming, requirements as to taste and decency in the
portrayal of sex and violence and restrictions on the quantity and content of
advertisements. The Codes currently apply less rigorous criteria to STS
licensees in certain respects, such as permitting more advertising per hour than
commercial terrestrial channels and greater flexibility in respect of
sponsorship credits. Penalties for non-compliance with the Codes principally
include fines of up to the greater of L50,000 (approximately $84,000 based on
the approximate exchange rate of L1.00 = $1.68 at July 10, 1997) or 3% of a
licensee's annual qualifying revenue (or 5% of annual qualifying revenue for
further offences) per violation and, in certain circumstances, revocation of the
license.
The Broadcasting Act classifies some persons as "disqualified persons" who
are not permitted to hold STS licenses. Disqualified persons include any bodies
whose objects are wholly or mainly of a political or religious nature and
advertising agencies. The Broadcasting Act also precludes a person from holding
an STS license if it is owned as to more than 5% by a disqualified person or if
it is otherwise associated with a disqualified person in any manner specified in
the relevant provisions of the Broadcasting Act.
The Broadcasting Act lays down rules to prevent certain media companies
from accumulating interests in persons licensed under the Broadcasting Act and
other media companies. Among other things, the ITC has the power to revoke an
STS license where the STS licensee (or a connected person) holds or has a 20%
interest in the holder of one or more licenses to provide regional or national
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Channel 3 services, Channel 5 services, licensable program services or digital
program services where the audience time for those services exceeds 15% of the
total audience time for television program services capable of being received in
the United Kingdom.
If any person with an interest in excess of 5% of the Company's issued
share capital is or becomes a disqualified person or is or becomes associated
(in any manner specified in the relevant provisions of the Broadcasting Act)
with such a person (ie. a disqualified person), or if the Company or any person
with an interest in shares of the Company (or any person associated or connected
with any of them) does or were to fall within the scope of the restrictions
imposed from time to time by the Broadcasting Act in respect of accumulations of
interests in license-holders, then that would affect the Company's entitlement
to hold STS licenses.
REGULATION OF COMPETITION
U.K. law controls agreements which affect competition through the
Restrictive Trade Practices Act 1976 (the "RTPA"), monopolies and mergers
through the Fair Trading Act 1973 and unilateral anti-competitive practices
through the Competition Act 1980.
The RTPA provides that restrictions will exist where parties to an
agreement accept some limitation on their freedom to make their own decisions
about matters relating to the supply or receipt of goods or services, and sets
out a number of categories of restrictions relating, for example, to prices and
other charges, the terms and conditions of supply, and the persons or places in
relation to which supply is to be made.
A broad range of commercial agreements fall within the provisions of the
RTPA and are required to be filed with the Office of Fair Trading (the "OFT")
for review under the RTPA. If an agreement that requires filing is not filed in
a timely fashion, the relevant restrictions which it contains are void and
unenforceable and the parties are at risk of claims for damages by affected
third parties and of court action aimed at preventing a repetition of the
breach.
Where an agreement has been duly filed, the OFT considers whether the
restrictions which it contains are significant. Significant restrictions are
referred to the Restrictive Practices Court ("RPC") for consideration. On
reference to the RPC, the restrictions in the agreement are presumed to be
against the public interest unless they fall within certain exceptions. In
addition, the restrictions must be reasonable, balancing the interests of the
public against those of the parties to the agreement. Where agreements do not
contain significant restrictions, the Secretary of State will release the
Director General of Fair Trading (the "DGFT") from any obligation under the RTPA
to refer them to the RPC.
The monopoly provisions of the Fair Trading Act 1973 provide for the review
of markets by the DGFT to identify enterprises which alone, or together with
others, supply or acquire over 25% of the goods or services of any description
in the United Kingdom, or in any part of the United Kingdom. The Competition Act
1980 provides for the DGFT to examine a course of conduct by an individual
enterprise which may be anti-competitive. The DGFT also has a duty to keep under
review mergers and minority holdings which confer control over an enterprise for
the purposes of the mergers provisions of the Fair Trading Act 1973 and which
qualify for investigation under those provisions.
In relation to the mergers provisions of the Fair Trading Act 1973, the
Secretary of State may either take certain undertakings or assurances from the
enterprises concerned or refer them to the Monopolies and Mergers Commission
(the "MMC") for investigation and consideration against a broad public interest
test laid down in the Fair Trading Act 1973. Monopolies and anti-competitive
practices are considered by the MMC against the same test. Monopolies and
anti-competitive practices references to the MMC are made by the DGFT, although,
in the latter case, he may accept undertakings or assurances instead of making a
reference. In all three cases, the MMC may recommend action where they find that
there are matters operating, or which can be expected to operate, against the
public interest. Ultimately, the Secretary of State has extensive powers to
impose remedial action (including divestment
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and the imposition of conditions on the contracts, pricing policies and other
conduct of the enterprises) either through undertakings negotiated by the DGFT
or by secondary legislation.
There are no current proceedings involving the Company before the RPC, nor
are any investigations which involve the Company underway before the OFT or the
MMC.
EUROPEAN UNION
BROADCASTING REGULATION
The Directive lays down basic principles for the regulation of broadcasting
activity in the EU. In essence, it provides that each EU broadcasting service
should be regulated by the authorities of one member state (the "home member
state") and that certain minimum standards should be required by each member
state of all broadcasting services which the state's authorities regulate. The
United Kingdom, which will be regarded as the Company's "home member state" for
the purposes of its D-DTH services if the Company's license holding subsidiary,
@EL, were established in the United Kingdom has, since then, adopted a variety
of statutory and administrative measures based on the Directive to give effect
to the requirements of the Directive. The European Commission is responsible for
monitoring compliance and can initiate infringement proceedings against member
states who fail properly to implement the Directive.
The Directive requires member states to ensure "where practicable and by
appropriate means" that broadcasters reserve "a majority proportion of their
transmission time" for European works. In applying this rule, broadcast time
covering news, games, advertisements, sports events and teletext services are
excluded. The Directive recognizes that member states are to move progressively
towards requiring their broadcasters to devote a majority of relevant
transmission time to European works, having regard to the broadcaster's
informational, educational, cultural and entertainment responsibilities to its
viewing public. The term "where practicable and by appropriate means" has not
been defined in the Directive and there is uncertainty about its proper
application and whether the United Kingdom has properly implemented this
provision into U.K. law as it applies to satellite television services.
The Directive also requires that member states should ensure "where
practicable and by appropriate means" that broadcasters reserve at least 10% of
their transmission time (excluding time covering news, sports events, games,
advertising and teletext services) or, at the option of the member state, 10% of
their programming budget, for European works created by producers who are
independent of broadcasters. An adequate proportion of the relevant works should
be recent works (that is, works produced within the five years preceding their
transmission). Polish programming produced or commissioned by the Company will
almost certainly be counted for the purposes of determining whether any service
broadcast by the Company complies with these quotas.
Certain other amendments are made to the Directive by the New Directive. In
particular, the New Directive establishes a system to require certain sporting
events to be made available on free-to-air television. These rules have been
largely implemented in the United Kingdom by virtue of the Broadcasting Act
1996. The New Directive also clarifies and liberalizes the rules on home
shopping.
Following on from the 1992 EU Green Paper on plurality and concentration in
the media, the European Commission announced, in its Communication of 1994, that
it would proceed to a second phase of consultation and would then decide whether
or not to propose EU legislation to govern media concentration and, if so, the
nature of any such legislative proposal.
In late 1996 and early 1997, the European Commission was considering a
draft Directive on media concentration which would provide that any organisation
reaching more than 30% of a country's television or radio audience would be
prevented from increasing its audience share. This proposal has met with
considerable opposition and is unlikely to be adopted.
Apart from the Directive, the other primary source of European regulation
affecting television broadcasting is the Convention. Both the United Kingdom and
Poland are members of the Council of
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Europe which typically regulates through international conventions. In order for
the convention to be binding on a particular member state, the national
parliament of that country must ratify the convention and a specific quorum
(which varies from convention to convention) of other member states' parliaments
must also ratify the Convention. The contents of a convention binding in a
particular country are dependent upon the ratification and implementation
procedures of that country.
The Convention contains provisions that are substantially similar to the
Directive. The Convention is effective in those countries which have ratified
it. Both the United Kingdom and Poland have ratified the Convention. The Company
believes that the Convention is likely to be amended now that the New Directive
has been approved.
The Directive on the use of standards in transmission of television signals
(Directive 95/47/EC) has been implemented into U.K. law by the Advanced
Television Services Regulations 1996 and also the Conditional Access Class
Licence which are enforced by the U.K. Office of Telecommunications ("Oftel").
Although the Directive will not apply to the DTH broadcasting services to be
established by the Company as they are not to be transmitted to viewers in the
European Union, Poland would be required to implement the provisions of that
Directive if it joined the European Union. In addition, as the Company's licence
holding company will be subject to the jurisdiction of the ITC and will be
established in the United Kingdom it is possible that, in the future, Oftel may
seek to take jurisdiction over the activities of the Company in these areas
including in relation to conditional access services.
REGULATION OF COMPETITION
EU competition law governs agreements which prevent, restrict or distort
competition and prohibits the abuse of dominant market positions through
Articles 85 and 86 of the EU Treaty. In addition, the European Council
Regulation (EEC) No. 4064/89 (the "Regulation") contains a mandatory regime
regulating certain large scale mergers and minority holdings which confer
control over an enterprise for the purposes of the Regulation and which meet the
turnover thresholds specified in the Regulation. The EU Commission reviews such
mergers and minority holdings under the Regulation to determine whether they are
"compatible with the common market" and may attach conditions and obligations to
its decisions.
Article 85(1) renders unlawful agreements and concerted practices which may
affect trade between member states and which have as their object or effect the
prevention, restriction or distortion of competition within the Common Market
(that is, the member states of the EU/EEA collectively). Article 85(2) makes
offending provisions, if severable from the main agreement, void. Article 85(3)
allows for exemption from the provisions of Articles 85(1) and 85(2) for
agreements whose beneficial effects in improving production or distribution or
promoting technical or economic progress outweigh their restrictive effects,
provided that consumers receive a fair share of the benefit, that competition
will not be eliminated and that no unnecessary restrictions are accepted. The
word "agreement" in this context is not confined to legally binding agreements
and agreements may be written or oral and can consist in an informal continuing
business relationship. In addition, the so-called Europe Agreement between the
EU and Poland has a provision broadly compatible with Articles 85 and 86,
infringement of which would be considered incompatible with the proper
functioning of the Agreement. Practices contrary to this provision are assessed
on the basis of the criteria arising from the application of Articles 85 and 86
of the EU Treaty.
The EU Commission is entrusted with the principal enforcement powers, and
the exclusive right to grant exemptions under Article 85(3). It has power to
impose heavy fines (up to 10% of a group's annual revenue) in respect of
breaches of Article 85(1). A prohibited agreement will also be unenforceable
before the national courts. In most cases, notification of potentially
infringing agreements to the EU Commission under Article 85 with a request for
an exemption under Article 85(3) protects against the risk of fines from the
date of notification.
The published exemption decisions of the EU Commission and judgments of the
European Court of Justice (which has powers to review EU Commission decisions),
together with the so-called block
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exemptions covering certain common types of agreements, give broad indications
of the EU Commission's attitude to certain types of agreement and to some common
contractual provisions. These sources demonstrate that, in assessing whether an
agreement infringes Article 85(1), the EU Commission will examine the effect of
the agreement in its legal and economic context. For example, an agreement by
one company not to compete with another will infringe Article 85(1) and will be
unlikely to merit exemption under Article 85(3) unless, in its context, it is
necessary to protect a legitimate interest of the parties to the agreement. In
addition, the EU Commission will examine whether the agreement under scrutiny is
part of a pattern of similar agreements which individually or cumulatively have
the effect of foreclosing access to a particular market. For example, an
individual agreement may infringe Article 85(1) if it confers on a single
distributor an exclusive right to distribute goods or services of a particular
kind, thereby making it more difficult for other companies to distribute such
goods or services in the contract territory. A network of similar agreements may
together achieve a similar anti-competitive effect. The EU Commission may regard
such contracts as being more objectionable if they are of long duration, thereby
causing barriers to entry to be created and competitors to be foreclosed from
this market for longer. The EU Commission is, however, aware that new entrants
to a market may require the protection of exclusive rights to provide them with
the necessary incentives to invest in the development of their new businesses,
and to enable them to establish themselves. In such cases, the EU Commission is
often willing to grant an exemption for agreements which infringe Article 85(1)
to enable them to be enforced for a finite period of time. The EU Commission may
require an agreement to be amended (including as to scope, exclusivity and/or
duration) as a condition of granting an exemption.
Article 86 prohibits undertakings from abuse of a dominant market position
in the EU or a substantial part of it, in so far as the abuse may affect trade
between member states. A company may be dominant in several member states or
part of a single member state. A company enjoys a dominant position whenever it
possesses such market strength that it can act to an appreciable extent
independently of its competitors and customers. Determining whether an
undertaking occupies a dominant position is a complex question of law and
economics, but broadly a market share of as little as 40% may confer dominance
in a market for a product. However dominance is not unlawful per se; only the
abuse of a dominant position is prohibited by Article 86. An enterprise may
abuse a dominant position under Article 86 by, for example, engaging in
excessive pricing of its products or services, or by denying other enterprises
access to an essential facility or asset which it controls. Any action that is
designed to, or could, seriously injure competitors, suppliers, or distributors
is likely to raise issues under Article 86. The EU Commission has the same
powers to fine in relation to abusive conduct as in relation to breach of
Article 85, but there is no procedure for obtaining exemption.
It is possible that a third party who suffers loss as a result of the
performance by an entity of an agreement which infringes Article 85(1) could
claim damages against such entity to compensate it for its quantifiable loss or
an injunction. The position in relation to infringement of Article 86 is
similar.
The Company is expected to review those agreements which potentially fall
within Article 85(1) (including transponder leases and film and sports rights
agreements) to determine whether they should be notified to the EU Commission.
The Company will decide whether to notify specific agreements by taking account
of a number of factors, including the importance to the Company of the agreement
and the likelihood that adverse consequences to the Company would result from
any failure to notify. The EU Commission would review each notified agreement
for compliance with Article 85 and may conclude that some of the Company's
agreements need to be amended to qualify for exemption under Article 85(3).
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The current directors and executive officers of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------- ---- -------------------------------------------
<S> <C> <C>
David T. Chase(1)............................ 68 Chairman of the Board of Directors
Robert E. Fowler, III(1)(2).................. 38 Chief Executive Officer and Director
Arnold L. Chase(1)........................... 45 Director
Scott A. Lanphere(3)......................... 31 Director
Jerzy Z. Swirski(3).......................... 40 Director
John S. Frelas............................... 46 Chief Financial Officer, Vice President and
Treasurer
George Makowski.............................. 42 Vice President; Chief Operating Officer --
Cable Operations of PCI
Andrzej Muras................................ 58 Executive Vice President of Corporate
Development of PTK, S.A.
Marek Sowa................................... 34 Director of Corporate Development of PCI
Przemysffiaw Szmyt........................... 34 Vice President, General Counsel and
Secretary
David Warner................................. 50 Vice President; Chief Operating Officer --
DTH Operations of @EL
</TABLE>
- ---------------
(1) Appointed as a director by the Chase Group (as hereinafter defined) under
the Stockholders' Agreement (as hereinafter defined). See "Certain
Relationships and Related Transactions -- Stockholders' Agreement".
(2) Appointed as Chief Executive Officer by the Chase Group and accepted as such
by the ECO Group (as hereinafter defined) under the Stockholders' Agreement
pursuant to which the Chief Executive Officer is also appointed as a
director. See "Certain Relationships and Related Transactions --
Stockholders' Agreement".
(3) Appointed as a director by the ECO Group under the Stockholders' Agreement.
See "Certain Relationships and Related Transactions -- Stockholders'
Agreement".
CERTAIN INFORMATION CONCERNING DIRECTORS AND EXECUTIVE OFFICERS
Information with respect to the business experience and affiliations for
the past five years of the current directors and executive officers of the
Company is set forth below.
DAVID T. CHASE has served as Chairman of the Board of Directors of
@Entertainment since its inception and PCI since March 1996. Since January 1990,
Mr. Chase has been a director and President of D. T. Chase Enterprises, Inc. and
David T. Chase Enterprises, Inc., a diversified conglomerate with extensive
holdings in real estate and previously in media. Mr. Chase has also been on the
Supervisory Boards of PTK, S.A., PTK-Warsaw and PTK-Krakow since December 1992,
October 1993, and October 1993, respectively. Mr. Chase also serves as a
director and President of DNI Corp. ("DNI"), a general partner in Chase
Financial Limited Partnership. He is also a director of ACCEL International
Corporation ("ACCEL"), an insurance holding company.
ROBERT E. FOWLER, III has served as Chief Executive Officer of
@Entertainment since its inception and PCI since December 1996 and has served as
a director of @Entertainment since its inception and PCI since March 1996. Mr.
Fowler served as Vice President of PCI from August 1993 to December 1996 and its
Treasurer from April 1991 to December 1996. From December 1993 to February 1997,
he served as Vice President of D.T. Chase Enterprises, Inc. Mr. Fowler has
served as director of Mozaic (formerly PCI Programming) since July 1996. From
July 1996 to December 1996, Mr. Fowler also served as Vice President and
Treasurer of Mozaic. From March 1995 to late 1996, Mr. Fowler served as a
director of ACCEL. Since December 1996, he has served as Chairman of the Board
of Directors of Mozaic. Mr. Fowler has been a Managing Director of PCBV since
1997. During the period of 1994 to
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<PAGE> 97
1996, Mr. Fowler devoted approximately 35% of his working time to PCI and
approximately 65% of his working time to companies that are affiliated with PCI.
ARNOLD L. CHASE has served as a director of @Entertainment since its
inception and of PCI since December 1996. Mr. Chase has also served as President
of the Managing Board of PTK-Warsaw, from October, 1993 to September, 1996. Mr.
Chase served as President of the Management Board of PTK-Krakow and
PTK-Ryntronik from October 1993 to May 1995, and from October 1993 to December
1994, respectively. Mr. Chase has also served as director and Executive Vice
President and as Treasurer of D.T. Chase Enterprises, Inc. since December 1990
and October 1992, respectively. Mr. Chase served PCI as Co-Chairman of the Board
of Directors from April 1991 to March 1996 and as its President from October
1992 to March 1996. Mr. Chase was Managing Director of PCBV from March 1990 to
May 1996 and President of the Management Board of PTK, S.A., from December 1992
to August 1996. He previously served as Chairman of the Supervisory Board of
PTK, S.A. from August 1990 to December 1992. From April 1991 to October 1992,
Mr. Chase served as Executive Vice President of PCI. Mr. Chase has been a
director, Executive Vice President and Treasurer of DNI, since June 1994 and has
been a director of First National Bank of New England since 1972. During the
period of 1994 to 1996, Mr. Chase devoted approximately 10% of his working time
to PCI and approximately 90% of his working time to companies that are
affiliated with PCI.
SCOTT A. LANPHERE has served as a director of @Entertainment since its
inception and of PCI since March 1996 and as a Managing Director of PCBV since
May 1996. Mr. Lanphere has been a Director of Investments for Advent
International plc since December 1994, and from May 1991 to December 1994 served
as an Investment Manager of Advent International plc.
JERZY Z. SWIRSKI has served as a director of @Entertainment since its
inception and of PCI since October 1996. Mr. Swirski has served as an Investment
Director for Advent International plc since July 1995. From January 1995 to July
1995, Mr. Swirski was a consultant to Enterprise Investors, a Polish equity
firm. From 1991 to 1994, he was an officer of E. Wedel S.A., a Polish subsidiary
of PepsiCo Foods, International ("Wedel"), and General Manager of Frito-Lay,
Poland.
JOHN S. FRELAS has been the Chief Financial Officer of @Entertainment since
its inception and of PCI since September 1996 and the Treasurer of
@Entertainment since its inception and of PCI since December 1996, and a Vice
President of @Entertainment since its inception. Mr. Frelas has been the
Treasurer of Mozaic since December 1996. From 1995 to 1996, Mr. Frelas was the
Chief Financial Officer of Eurofund Management Polska. During 1995, he served as
a consultant to the Polish-American Enterprise Fund. From 1972 to 1994, Mr.
Frelas worked for PepsiCo Foods International and certain of its subsidiaries,
most recently as a Corporate Planning Manager for Hostess Frito-Lay Canada
during 1994 and as a Corporate Controller for Wedel from 1992 to 1993.
GEORGE MAKOWSKI has been a Vice President of @Entertainment since its
inception and the Chief Operating Officer -- Cable Operations of PCI since
January 1997. From August 1993 to January 1997, Mr. Makowski was Vice President
of Marketing for Ameritech International, Inc. ("Ameritech"). During this time
Mr. Makowski also served as Sales and Marketing Director of Centertel, S.A., a
division of Ameritech. From 1986 to 1993, Mr. Makowski held various senior
management roles within Groupe Bull, S.A.
ANDRZEJ MURAS has been Executive Vice President of Corporate Development
for PTK, S.A. since September 1989 and an Executive Vice President of PTK-Warsaw
since January 1996. Prior to January 1990, Mr. Muras was Chief Executive Officer
of POLTEL, a programming source for state-owned Polish television channels TVP 1
and TVP 2. From 1961 to 1989, Mr. Muras served as Managing Director and also
held other positions at the Polish State Television and Radio Department.
MAREK SOWA has served as Director of Corporate Development of PCI since
January 1997 and has also served as Vice President of Poltelkab since March
1996. From August 1994 until May 1996, Mr. Sowa served as Corporate Development
Manager of PTK, S.A. Mr. Sowa also served on the Supervisory Board of ETV Sp. z
o.o ("ETV") since June 1996 and on the Management Boards of PTK, S.A. from April
1995 to August 1996, PTK-Warsaw from April 1995 to September 1996 and PTK-Lublin
from April 1995 to May 1996. Mr. Sowa served as Vice President of PTK-Szczecin
from May 1995 to
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June 1996, Chairman of PTK-Szczecin's Supervisory Board from June 1996 through
August 1996 and as Vice President of the Management Board of ETV from July 1995
to June 1996. From 1991 to 1992 Mr. Sowa served as International Acquisitions
Manager at the Los Angeles office of Artfilm-Plus, an independent Polish film
distribution company. From 1987 to 1990, Mr. Sowa served as an associate
producer for the CBS News Warsaw Bureau.
PRZEMYSFFIAW A. SZMYT has served as Vice President, General Counsel and
Secretary of @Entertainment since its inception and Vice President and General
Counsel of PCI since February 1997. From September 1995 to February 1997, Mr.
Szmyt was Director for Poland of MeesPierson EurAmerica, an investment banking
firm and affiliate of MeesPierson N.V., a Dutch merchant bank. From early 1992
to August 1995, Mr. Szmyt was a senior associate at Soffitysinski, Kawecki &
Szlezak, a law firm in Warsaw. From October 1994 to late 1996, Mr. Szmyt served
on the Management Board of Telewizyjna Korporacja Partycypacyjna S.A., a holding
company of Canal+ Polska. From November 1995 to July 1996, Mr. Szmyt served as
Director of the Management Board of MeesPierson EurAmerica Sp. z o.o.
DAVID WARNER has served as a Vice President of @Entertainment since its
inception and the Chief Operating Officer -- DTH Operations of @EL since April
7, 1997. From August 1996 to April 1997, Mr. Warner was General Manager for
FilmNet Central Europe of the NetHold Group. From October 1995 to August 1996,
Mr. Warner served as a television operations consultant to Rapture Channel. From
May 1993 to October 1995, Mr. Warner worked as Operations Director of the Family
Channel UK of the International Family Entertainment Group. From 1983 to May
1993, Mr. Warner served as the general manager of TVS Main ITV Terrestrial
Broadcaster. Mr. Warner is also an advisor and a board member of the
Ravensbourne Communication College.
BOARD OF DIRECTORS
@Entertainment's Bylaws provide that the Board of Directors shall consist
of at least one and no more than nine directors and shall be subject to change
pursuant to resolutions duly adopted by a majority of the Board of Directors.
The current number of directors is five. All of the current members of the Board
of Directors were elected pursuant to the Stockholders' Agreement. Under the
Stockholders' Agreement, the ECO Group (as hereinafter defined) has the right to
designate two directors and the Chase Group (as hereinafter defined) has the
right to designate the remaining three directors, one of whom shall be selected,
if approved by the ECO Group, to serve as the Chief Executive Officer of
@Entertainment. Pursuant to the Stockholders' Agreement, the ECO Group consists
of ECO, any limited partner of ECO to whom ECO permissibly transfers shares of
stock of @Entertainment and any Affiliate (as hereinafter defined). Pursuant to
the Stockholders' Agreement, the Chase Group consists of PIHLP, Mr. Freedman,
the Cheryl Anne Chase Marital Trust ("CACMT") and Steele LLC. Pursuant to a
voting agreement dated at June 22, 1997 among the members of the Chase Group
(the "Voting Agreement"), all designations to be made by the Chase Group are
made by David T. Chase. David T. Chase, Arnold L. Chase and Robert E. Fowler,
III have been designated as directors by the Chase Group, Mr. Fowler was
designated as Chief Executive Officer by the Chase Group and was accepted as
such by the ECO Group, and Messrs. Lanphere and Swirski have been designated as
directors by the ECO Group. The Stockholders' Agreement will automatically
terminate upon the successful completion of the Offerings. See "Certain
Relationships and Related Transactions -- Stockholders' Agreement" and "Certain
Relationships and Related Transactions -- Voting Agreement".
The Certificate and Bylaws provide that the directors shall be classified,
with respect to the time for which they severally hold office, into three
classes, as nearly equal in number as possible. Upon the effective date of the
U.S. Offering (the "Effective Date"), the first class of directors shall
initially consist of two directors (Messrs. Swirski and A. Chase) whose term
shall expire at the annual meeting of stockholders to be held in the first year
following the Effective Date; the second class shall initially consist of two
directors (Messrs. D. Chase and Lanphere) whose term shall expire at the annual
meeting of stockholders to be held in the second year following the Effective
Date; and the third class shall initially consist of one director, Mr. Fowler
(and shall be increased to three directors by the appointment of two Independent
Directors (as hereinafter defined) at a later date), whose term shall
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expire at the annual meeting of stockholders to be held in the third year
following the Effective Date. Each class of directors will hold office until its
respective successors are duly elected and qualified. At each annual meeting of
the stockholders, the successors of the class of directors whose term expires at
that meeting shall be elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the year of their
elections. Any decrease in the authorized number of directors shall not be
effective until the expiration of the terms of the directors then in office,
unless at the time of such decrease there shall be vacancies on the Board of
Directors which are being eliminated by such decrease.
The Certificate and Bylaws provide that any director may resign at any time
by giving written notice to the Chairman of the Board of Directors, the Chief
Executive Officer or the Board of Directors. If, at any other time than the
annual meeting of the stockholders, any vacancy occurs in @Entertainment's Board
of Directors caused by resignation, death, retirement, disqualification or
removal from office of any director or otherwise, or any new directorship is
created by an increase in the authorized number of directors, a majority of the
Directors then in office, although less than a quorum, may choose a successor,
or fill the newly created directorship, and the director so chosen shall hold
office until the next election for that class of directors by the stockholders
and until his successor shall be duly elected and qualified, unless sooner
displaced. The Certificate and Bylaws provide that any director may be removed
from office only with cause and only by the affirmative vote of the holders of
at least two-thirds of the voting power of all shares entitled to vote, unless
two-thirds of the Continuing Directors (as hereinafter defined) vote to
recommend the removal of a director with or without cause to the stockholders
and such recommendation is approved by the affirmative vote of the holders of at
least a majority of the outstanding shares entitled to vote.
The Bylaws provide that a majority of the total number of directors then in
office constitutes a quorum of the Board of Directors. The Bylaws further
provide that the act of a majority of all of the directors present at a meeting
for which there is a quorum shall be the act of the Board of Directors, except
as otherwise provided by statute or in the Certificate. The Certificate provides
that the Board of Directors or stockholders shall have the power to amend the
Bylaws by majority vote, except for certain provisions of the Bylaws for which
the affirmative vote of two-thirds of the continuing directors or of the holders
of at least two-thirds of the voting power of all shares entitled to vote is
required.
The Bylaws provide that regular meetings of the Board of Directors may be
held without notice immediately following the annual meeting of the stockholders
of @Entertainment. Special meetings of the Board of Directors may be called by
the Chairman of the Board, the Chief Executive Officer or any two directors.
The Board of Directors of @Entertainment has determined that, within 90
days of the closing of the Offerings, it will elect two directors who are not
affiliated with or employed by the Company and who, in the opinion of the Board
of Directors, do not have a relationship which would interfere with the exercise
of independent judgment in carrying out the responsibilities of a director (the
"Independent Directors"). The Independent Directors will be in the class of
directors whose term shall expire at the annual meeting of stockholders to be
held in the third year following the Effective Date.
@Entertainment intends to establish an Audit Committee, a Compensation
Committee and a Stock Option Committee. Upon the election of the Independent
Directors, it is expected that the Independent Directors will be the members of
the Compensation Committee with Mr. Fowler and the sole members of the Audit and
Stock Option Committees.
REMUNERATION OF DIRECTORS
Each non-employee director may receive such fees and other compensation,
along with reimbursement of expenses incurred on behalf of the Company or in
connection with attendance at meetings, as the Board of Directors may from time
to time determine.
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EXECUTIVE COMPENSATION
The following table sets forth certain information regarding all
compensation awarded to, earned by or paid to the Company's Chief Executive
Officer and each of the other four most highly compensated executive officers at
the Company for services rendered in all capacities to the Company for the last
three fiscal years, to the extent that those officers were in the employ of the
Company. No disclosure has been provided for any executive officer whose total
annual salary and bonus did not exceed $100,000 per annum. Columns relating to
long-term compensation have been omitted from the table as the Company did not
have capital stock-related award plans and there has been no compensation
arising from long-term incentive plans during the years reflected in the table.
SUMMARY COMPENSATION TABLE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
ALL OTHER
SALARY BONUS OTHER ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) COMPENSATION ($)
- ------------------------------------ ---- ------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert E. Fowler, III............... 1996 66,000(1) 66,000(1) -- --
Chief Executive Officer and
Director 1995 66,000(1) 66,000(1) -- --
1994 66,000(1) 66,000(1) -- --
Richard B. Steele(2)................ 1996 356,000(1) 250,000(1) 5,000(4) --
1995 356,000(1) -- 7,500(4) --
1994 358,000(1)(3) -- 7,500(3)(4) --
Arnold L. Chase(5).................. 1996 300,000(1)
Director 1995 250,000(1) -- -- 110,000(6)
1994 250,000(1) -- -- 86,000(6)
Gilbert L. Tash(7).................. 1996 120,000 -- 25,200(8) 6,790(6)
1995 120,000 45,000 25,200(8) --
1994 120,000 43,400 25,200(8) --
Michael J. Houlehan(9).............. 1996 150,000 25,000 24,000(8) --
1995 150,000 25,000 24,000(8) --
1994 31,731(10) -- -- --
John S. Frelas...................... 1996 46,153(11) -- 6,000(8) --
Chief Financial Officer 1995 -- -- -- --
1994 -- -- -- --
</TABLE>
- ---------------
(1) Represents only that portion of annual compensation attributable to
services performed on behalf of the Company. Additional compensation may
have been provided by companies that are affiliated with @Entertainment and
beneficially owned by the Chase Family for services rendered to those
companies. See "Management -- Certain Information Concerning Directors and
Executive Officers".
(2) Mr. Steele was the President of PCI. He resigned on June 23, 1997. During
the period of 1994 to 1996, Mr. Steele devoted approximately 90% of his
working time to PCI and approximately 10% of his working time to companies
that are affiliated with PCI.
(3) Represents amounts paid by David T. Chase Enterprises, Inc., an affiliate
of @Entertainment.
(4) Represents portion of 401k plan paid pursuant to a matching contribution.
(5) Prior to being named to the Board of Directors of PCI in December 1996, Mr.
A. Chase was Co-Chairman of the Board of Directors of PCI from April 1991
to March 1996 and President of PCI from October 1992 to March 1996.
(6) Represents interest on accumulated deferred compensation.
(7) Mr. Tash was a Vice President of PCI. He retired on June 20, 1997.
(8) Represents housing allowance.
(9) Mr. Houlehan was the Chief Executive Officer of Mozaic from December 1996
to June 1997.
(10) Represents compensation for partial year of service beginning in October
1994.
(11) Represents compensation for partial year of service beginning in September
1996.
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COMPENSATION PLANS
1997 STOCK OPTION PLAN
@Entertainment's 1997 Stock Option Plan (the "1997 Plan") was adopted on
June 22, 1997 and approved by stockholders as of June 22, 1997. The 1997 Plan
provides for the grant to employees of the Company (including officers and
employee directors) of incentive stock options within the meaning of Section 422
of the Code, and for the grant of qualified stock options to employees and
consultants of the Company (collectively the "Options"). The 1997 Plan is to be
administered by a Stock Option Committee appointed by the Board of Directors
(the "Stock Option Committee"), which selects the optionees (from among those
eligible), determines the number or shares to be subject to each Option and
determines the exercise price of each Option. It is presently anticipated that
approximately 15 to 25 individuals (including Messrs. Fowler, Frelas and
Makowski whose option agreements with PCI became subject to the 1997 Plan
pursuant to Assignment and Assumption Agreements with @Entertainment, and
Messrs. Szmyt and Warner whose option agreements became subject to the 1997 Plan
pursuant to a resolution of the Board of Directors of @Entertainment) will
initially participate in the 1997 Plan.
In addition, the Stock Option Committee has the authority to interpret the
1997 Plan and to prescribe, amend and rescind rules and regulations relating to
the 1997 Plan. The Stock Option Committee's interpretation of the 1997 Plan and
determinations pursuant to the 1997 Plan will be final and binding on all
parties claiming an interest under the 1997 Plan. The maximum number of shares
of Common Stock that may be subject to Options under the 1997 Plan is 2,436,000
shares, subject to adjustment in accordance with the terms of the 1997 Plan. As
of June 23, 1997 options for 2,174,000 shares were outstanding and 262,000
shares remained available for future grants. The exercise price of all incentive
stock options granted under the 1997 Plan must be at least equal to the fair
market value of the Common Stock on the date of grant. With respect to any
participant who owns stock possessing more than 10% of the voting power of all
classes of stock of @Entertainment, the exercise price of any incentive stock
option granted must equal at least 110% of the fair market value on the grant
date and the maximum term of an incentive stock option must not exceed five
years.
The term of all other options granted under the 1997 Plan may not exceed
ten years. Options become exercisable at such times as determined by the Stock
Option Committee and as set forth in the individual stock option agreements.
Payment of the purchase price of each Option will be payable in full in cash
upon the exercise of the Option. In the discretion of the Stock Option
Committee, payment may also be made by surrendering shares owned by the optionee
which have a fair market value on the date of exercise equal to the purchase
price, by delivery of a full recourse promissory note meeting certain
requirements or in some combination of the above payment methods.
In the event of a merger of @Entertainment with or into another
corporation, as a result of which @Entertainment is not the surviving
corporation, the 1997 Plan requires that each outstanding option be assumed or
an equivalent option substituted by the successor corporation or a parent or
subsidiary of such successor corporation. If the successor corporation does not
assume or substitute for the options, the optionee will have the right to
exercise the option as to those shares which are vested for a period beginning
not less than fifteen days prior to the proposed consummation of such
transaction and ending immediately prior to the consummation of such
transaction, at which time the Options will terminate.
The number of shares covered by the 1997 Plan and the number of shares for
which each Option is exercisable shall be proportionately adjusted for any
change in the number of issued shares resulting from any reorganization of
@Entertainment. In the event of dissolution or liquidation of @Entertainment,
each Option shall terminate immediately prior to the consummation of such
action.
No Options may be granted under the 1997 Plan after ten years from its
effective date. The Board of Directors has authority to amend or terminate the
1997 Plan subject to certain limitations set forth in the 1997 Plan.
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EMPLOYMENT AGREEMENTS
@Entertainment has employment agreements with each of Messrs. Fowler,
Frelas, Makowski, Muras, Sowa, Szmyt and Warner.
Mr. Fowler entered into a three year employment agreement with PCI
effective as of January 1, 1997. The employment agreement was assigned to
@Entertainment in June 1997 in connection with the Reorganization. Pursuant to
such agreement, Mr. Fowler serves as the Chief Executive Officer of
@Entertainment. Mr. Fowler receives a base salary of $325,000, allowances for
relocation and living expenses for a one-time cost of approximately $100,000,
plus a travel allowance of approximately $30,000 per annum and a guaranteed
annual bonus of $175,000 in the first year of his employment and unspecified
incentive bonuses thereafter. He received an additional bonus of $250,000 upon
the signing of the employment agreement. Pursuant to Mr. Fowler's employment
contract, and in part to induce Mr. Fowler to move closer to the Company's
operations in Europe, @Entertainment purchased Mr. Fowler's house in Connecticut
for approximately $354,000 in June 1997 (including payments of $295,000 to
extinguish the mortgages relating to the house), and sold the house shortly
thereafter to a third party for approximately $267,000. @Entertainment is
obligated to pay Mr. Fowler the difference between the mortgage amounts of
$295,000 and the purchase price of $354,000. Mr. Fowler may terminate the
employment agreement at any time upon three months' written notice, and
@Entertainment may terminate the agreement at any time upon one month written
notice (with an obligation to pay Mr. Fowler an additional two months' salary).
In addition, @Entertainment may terminate the agreement immediately without
further obligation to Mr. Fowler for cause (as defined in the employment
agreement). Pursuant to the employment agreement also provides that Mr. Fowler
has been granted a non-transferable option to purchase 1,286,000 shares of
Common Stock at a price of $3.707 per share, subject to the terms and conditions
of a stock option agreement. Options to purchase 515,000 shares of Common Stock
vested upon the execution of the stock option agreement and options to purchase
257,000 shares of Common Stock vest on December 31 of each of the following
three years, beginning on December 31, 1997. However, the options vest
immediately upon the successful completion of the Offerings or upon a change of
control (as defined in the Indenture). @Entertainment has a right of first
refusal with respect to the shares underlying the options, under certain
circumstances, Mr. Fowler has certain registration rights for the underlying
shares if @Entertainment makes certain filings under the Securities Act of 1933.
Mr. Frelas entered into a five-year employment agreement with PCI
commencing on September 1, 1996. The employment agreement was assigned to
@Entertainment in June 1997 in connection with the Reorganization. Pursuant to
such agreement, Mr. Frelas serves as the Chief Financial Officer, Vice President
and Treasurer of @Entertainment. Mr. Frelas receives a base salary of $150,000,
allowances for living and travel of approximately $40,000 per annum and annual
incentive bonuses of up to $50,000 if certain mutually agreed objectives are
met. He is also eligible for additional bonuses of $350,000 upon the successful
completion of the Offerings and $50,000 for the successful completion of a bank
line of credit of $75 million or more. Mr. Frelas or @Entertainment may
terminate the agreement at any time upon six month's written notice. In
addition, @Entertainment may terminate the agreement immediately without further
obligation to Mr. Frelas for cause (as defined in the employment agreement).
Pursuant to the employment agreement, Mr. Frelas has been granted a
non-transferable option to purchase 241,000 shares of Common Stock at a price of
$1.99170 per share, subject to the terms and conditions of a stock option
agreement, which options vest ratably over a five-year period. @Entertainment
has a right of first refusal with respect to shares underlying the options,
under certain circumstances. Subject to certain conditions, @Entertainment has a
right to repurchase the options and, if exercised, the Common Stock, upon
termination of the agreement at the greater of (i) 85% of the fair market value
thereof (as defined in the agreement) or (ii) prices mutually established in the
agreement.
Mr. Makowski entered into a five-year employment agreement with PCI
commencing on January 21, 1997. The employment agreement was assigned to
@Entertainment in June 1997 in connection with the Reorganization. Pursuant to
such agreement, Mr. Makowski serves as the Chief Operating Officer -- Cable
Operations of PCI and a Vice President of @Entertainment. Mr. Makowski
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<PAGE> 103
receives a base salary of $156,000, allowances for living, family travel and
education for his children of approximately $105,000 per annum and annual
incentive bonuses of up to $60,000 if certain mutually agreed objectives are
met. Mr. Makowski's initial year bonus of $60,000 is guaranteed. He is also
eligible for an additional bonus of $175,000 upon the successful completion of
the Offerings. Mr. Makowski or PCI may terminate the agreement at any time upon
six month's written notice. In addition, @Entertainment may terminate the
agreement immediately without further obligation to Mr. Makowski for cause (as
defined in the employment agreement). Pursuant to the employment agreement Mr.
Makowski has been granted a non-transferable option to purchase 385,000 shares
of the Common Stock at a price of $3.70808 per share, subject to the terms and
conditions of a stock option agreement, which options vest ratably over a
three-year period. However, the options vest immediately upon the successful
completion of the Offerings or upon a change of control (as defined in the
Indenture). @Entertainment has a right of first refusal with respect to the
shares underlying the option under certain circumstances. Subject to certain
conditions, @Entertainment has a right to repurchase the options and, if
exercised, the Common Stock, upon termination of the agreement at the greater of
(i) 85% of the fair market value thereof (as defined in the agreement) or (ii)
prices mutually established in the agreement.
Mr. Muras entered into a two-year employment agreement with PTK-Warsaw
commencing on January 1, 1996. Pursuant to that agreement, he became an
Executive Vice President of Corporate Development of PTK-Warsaw. Mr. Muras
receives an annual salary of $88,800 and is eligible to receive a
performance-based bonus of up to $60,000 per year based on his achievements as
established by the Chairman of the General Assembly of Stockholders of
PTK-Warsaw. PTK-Warsaw may terminate the contract at any time upon six month's
written notice. Mr. Muras may terminate the contract at any time upon three
months written notice. Notwithstanding such right, PTK-Warsaw may terminate the
contract effective immediately without further obligation for cause (as defined
in the agreement). PTK-Warsaw also may terminate the contract immediately upon
written notice in the case of an acquisition and/or merger resulting in a change
of the ultimate ownership exercising control (direct or indirect) to other than
those controlling PTK-Warsaw as of January 1, 1996, in which event Mr. Muras
will be entitled to a severance of six months' salary payable over a six month
period. In addition, in the event that the contract is not renewed, PTK-Warsaw
has agreed to pay Mr. Muras a severance of six months' salary payable over a six
month period as compensation for his role in organizing PTK-Warsaw.
Mr. Sowa entered into a three year agreement with PCI effective as of
January 1, 1997. Pursuant to such agreement, Mr. Sowa serves as Director of
Corporate Development of PCI. Under an employment agreement with Poltelkab and a
services agreement with PCI, Mr. Sowa receives an annual remuneration totalling
$64,000, and is eligible to receive an annual performance-based bonus of up to
$32,000. Mr. Sowa may terminate his contracts with PCI at any time upon two
months' written notice and PCI may terminate the contracts at any time upon four
months' written notice. Notwithstanding such right, PCI may terminate the
contracts without further obligation for cause (as defined in the agreements).
Mr. Sowa's employment agreement with Poltelkab may be terminated by either party
upon one month's written notice.
Mr. Szmyt entered into a three year agreement with PCI effective at
February 7, 1997, which was assigned to @Entertainment in June 1997 in
connection with the Reorganization. Pursuant to such agreement, Mr. Szmyt serves
as Vice President, General Counsel and Secretary of @Entertainment. Pursuant
also to an employment agreement with PTK-Warsaw and a services agreement with
PCI, Mr. Szmyt receives an annual remuneration totalling $160,000. He is
eligible to receive an annual performance-based bonus of $40,000 per year, which
bonus is guaranteed in 1997. Mr. Szmyt is eligible for an additional bonus of
$70,000 upon the successful completion of the Offerings. Mr. Szmyt may terminate
his contract with @Entertainment at any time upon two months' written notice and
@Entertainment may terminate the contract at any time upon four months' written
notice. Notwithstanding such right, @Entertainment may terminate the contract
without further obligation for cause (as defined in the agreement). Mr. Szmyt's
employment agreement with PTK-Warsaw may be terminated by either party upon one
month's written notice. Mr. Szmyt may terminate his services agreement with PCI
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at any time upon two months' written notice and PCI may terminate the services
agreement at any time upon four months' written notice. Mr. Szmyt has been
granted a non-transferable option to purchase 131,000 shares of Common Stock at
a price of $15.24 per share, subject to the terms and conditions of a stock
option agreement dated June 1997, which options vest ratably over a three year
period. @Entertainment has a right of first refusal with respect to shares
underlying the options, under certain circumstances. Mr. Szmyt has certain
registration rights for the underlying shares if @Entertainment makes certain
filings under the Act.
Mr. Warner entered into a five year employment agreement with PCI effective
at April 7, 1997, which was assigned to @Entertainment in June 1997 in
connection with the Reorganization. Pursuant to such agreement, Mr. Warner
serves as Vice President of @Entertainment and Chief Operating
Officer - DTH Operations of @EL. Mr. Warner receives an annual salary of L95,000
(approximately $159,600, based on the exchange rate of L1.00 = $1.68 at July 10,
1997), and is eligible to receive an annual performance-based bonus of up to
L45,000 (approximately $75,600, based on the approximate exchange rate of L1.00
= $1.68 at June 20, 1997). Mr. Warner is eligible for an additional bonus of
L155,000 (approximately $260,400, based on the exchange rate of L1.00 = $1.68 on
July 10, 1997) upon successful completion of the Offerings. Mr. Warner and
@Entertainment may terminate the contract at any time with six months' written
notice. Notwithstanding such right, @Entertainment may terminate the contract
without further obligation for cause (as defined in the agreement). Mr. Warner
has been granted a non-transferable option to purchase 131,000 shares of Common
Stock at a price of $15.24 per share, subject to the terms and conditions of a
stock option agreement, which options vest ratably over a five year period.
@Entertainment has a right of first refusal with respect to shares underlying
the options, under certain circumstances. Mr. Warner has certain registration
rights for the underlying shares if @Entertainment makes certain filings under
the Act.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of @Entertainment's capital stock at June 23, 1997 and as it will be
immediately following the consummation of the Offerings by (i) each person known
by @Entertainment to own beneficially 5% or more of any class of
@Entertainment's voting stock, (ii) each director and executive officer of the
Company, and (iii) all directors and executive officers of the Company as a
group. All percentages in this section were calculated on the basis of
outstanding securities plus securities deemed outstanding under Rule 13d-3 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act").
After completion of the Offerings, the Principal Stockholders will own
beneficially in the aggregate approximately 54% of the outstanding Common Stock.
As a result, the Principal Stockholders, acting together, will be able to elect
all of @Entertainment's directors and otherwise control the Company's
operations. See "Risk Factors -- Risks Related to the Company -- Control by
Existing Stockholders; Potential Anti-Takeover Provisions".
<TABLE>
<CAPTION>
JUNE 23, 1997
-------------------------------------------------------------- AFTER THE OFFERINGS
SHARES OF PERCENTAGE -----------------------
SHARES OF PERCENTAGE SERIES B OF SERIES B PERCENTAGE SHARES OF PERCENTAGE
COMMON OF COMMON PREFERRED PREFERRED OF VOTING COMMON OF VOTING
NAME OF BENEFICIAL OWNER STOCK STOCK STOCK STOCK POWER STOCK POWER
- ----------------------------- ---------- ---------- --------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
FIVE PERCENT STOCKHOLDERS:
Polish Investments Holding
L.P.
One Commercial Plaza
Hartford, CT 06103(1)...... 10,303,000 52.81% -- -- 42.27% 10,303,000 28.26%
ECO Holdings III Limited
Partnership(2)
c/o Advent International
Corp.
101 Federal Street
Boston, MA 02110........... 4,662,000 23.89 2,500(3) 100.00 39.07(4) 9,524,000 26.13
Steele LLC
19 Warren Terrace
Longmeadow, MA 01106....... 1,429,000 7.32 -- -- 5.86 1,429,000 3.92
Roger M. Freedman
67 Prospect Avenue
West Hartford, CT 06106.... 1,221,000 6.26 -- -- 5.00 1,221,000 3.35
DIRECTORS AND EXECUTIVE
OFFICERS:
David T. Chase............... 13,686,000(5) 70.15 -- -- 56.15 10,303,000(6) 28.26
Robert E. Fowler, III(7)..... 515,000 2.64 -- -- 2.11 1,286,000 3.53
Arnold L. Chase(8)........... 10,303,000 52.81 -- -- -- 10,303,000 28.26
Scott A. Lanphere(9)......... -- -- -- -- -- --
Jerzy Z. Swirski(10)......... -- -- -- -- -- --
George Makowski(11).......... -- -- -- -- -- 385,000 1.06
John S. Frelas(12)........... 48,000 * -- -- -- 48,000 *
Andrzej Muras................ -- -- -- -- -- --
Marek Sowa................... -- -- -- -- -- --
Przemysffiaw Szmyt(13)....... -- -- -- -- -- --
David Warner(14)............. -- -- -- -- -- --
---------- ----- ----- ------ ----- ---------- -----
ALL DIRECTORS AND OFFICERS AS
A GROUP (11 PERSONS):...... 14,203,880 72.79% -- -- 58.26% 12,024,880 32.98%
</TABLE>
- ---------------
*less than 1%.
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(1) All shares of Common Stock owned by PIHLP may be deemed to be beneficially
owned by the Chase Family which includes David T. Chase, Rhoda L. Chase,
Arnold L. Chase and Cheryl Anne Chase. The general partner of PIHLP is a
corporation that is owned 50% by Arnold L. Chase and 50% by Cheryl Anne
Chase. PIHLP has granted David T. Chase an irrevocable proxy to vote its
10,303,000 shares of Common Stock in his sole discretion pursuant to the
Voting Agreement which will terminate upon the successful consummation of
the Offerings.
(2) The general partner of ECO is Advent ECO III LLC. Certain members of Advent
ECO III LLC are venture capital funds managed by Advent International
Corporation. In its capacity as manager of these funds, Advent
International Corporation exercises sole voting and investment power with
respect to all shares of Common Stock held on behalf of these funds.
(3) All shares of Series B Preferred Stock will automatically convert into
4,862,000 shares of Common Stock upon the successful completion of the
Offerings.
(4) Such shares of Series B Preferred Stock are currently convertible into
4,862,000 shares of Common Stock and vote with the Common Stock on an as if
converted basis.
(5) Includes (i) 10,303,000 shares of Common Stock owned by PIHLP which may be
deemed to be beneficially owned by the Chase Family, which includes David
T. Chase, and David T. Chase has an irrevocable proxy to vote such shares
in his sole discretion pursuant to the Voting Agreement; (ii) 1,221,000
shares of Common Stock owned by Mr. Freedman with respect to which David T.
Chase has an irrevocable proxy to vote in his sole discretion with respect
to all the shares of Common Stock held of record by Mr. Freedman pursuant
to the Voting Agreement; (iii) 733,000 shares of Common Stock owned by
CACMT with respect to which David T. Chase has an irrevocable proxy to vote
in his sole discretion with respect to all the shares of Common Stock held
of record by CACMT pursuant to the Voting Agreement; and (iv) 1,429,000
shares of Common Stock owned by Steele LLC with respect to which David T.
Chase has an irrevocable proxy to vote in his sole discretion pursuant to
the Voting Agreement (the shares of Common Stock owned by PIHLP, Mr.
Freedman and Steele LLC voted by Mr. David T. Chase pursuant to the Voting
Agreement are collectively referred to as the "Voting Agreement Shares").
By its terms, the Voting Agreement will terminate upon the successful
consummation of the Offerings.
(6) Includes 10,303,000 shares of Common Stock owned by PIHLP which may be
deemed to be beneficially owned by the Chase Family, which includes David
T. Chase. Mr. Chase's beneficial ownership of shares of Common Stock will
decrease after the Offerings due to the termination of the Voting Agreement
upon the successful completion of the Offerings.
(7) During 1997, Mr. Fowler was granted options to purchase 1,286,000 shares of
Common Stock, of which 515,000 are exercisable within 60 days of the date
of this Prospectus, but all such shares shall become exercisable upon the
successful consummation of the Offerings.
(8) Includes 10,303,000 shares of Common Stock owned by PIHLP which may be
deemed to be beneficially owned by the Chase Family, which includes Arnold
L. Chase.
(9) Mr. Lanphere disclaims beneficial ownership of the shares held by ECO.
(10) Mr. Swirski disclaims beneficial ownership of the shares held by ECO.
(11) During 1997, Mr. Makowski was granted options to purchase 385,000 shares of
Common Stock, none of which are exercisable within 60 days of the date of
this Prospectus, but all such shares shall become exercisable upon the
successful completion of the Offerings.
(12) Mr. Frelas has been granted options to purchase 241,000 shares of Common
Stock, 48,000 of which shall vest on September 1, 1997.
(13) Mr. Szmyt has been granted options to purchase 131,000 shares of Common
Stock, none of which are exerciseable within 60 days of the date of this
Prospectus.
(14) Mr. Warner has been granted options to purchase 131,000 shares of Common
Stock, none of which are exerciseable within 60 days of the date of this
Prospectus.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS
David T. Chase, the Chairman of the Board of Directors of @ Entertainment,
is the father of Arnold L. Chase, a director of @Entertainment. No other family
relationship exists between any of the directors and executive officers of
@Entertainment.
CAPITAL CONTRIBUTIONS AND STOCKHOLDER LOANS
On March 29, 1996, PCI, a wholly owned subsidiary of @Entertainment,
consummated a Stock Purchase Agreement (the "ECO Stock Purchase Agreement") with
ECO, a Principal Stockholder, pursuant to which ECO contributed an aggregate of
$65 million to PCI in exchange for 4,662 shares of common stock of PCI, 4,000
shares of Series A Preferred Stock of PCI and 2,500 shares of Series B Preferred
Stock of PCI. Simultaneously, PIHLP, a Principal Stockholder, purchased 2,000
shares of Series C Preferred Stock of PCI and 812 shares of common stock of PCI
for aggregate consideration of approximately $17 million. A portion of the
proceeds from these transactions were loaned by PCI to a subsidiary of PCI which
used such funds to repay approximately $55 million of debt that such subsidiary
owed to Chase American Corporation, which is owned by the Chase Family. The
Chase Family includes David T. Chase, the Chairman of the Board of Directors of
@Entertainment, and Arnold L. Chase, a director of @Entertainment.
On June 20, 1997, PIHLP sold the Series C Preferred Stock to the Chase
Entity.
As part of the ECO Stock Purchase Agreement, D.T. Chase Enterprises, Inc.,
a corporation beneficially owned by members of the Chase Family ("D.T. Chase"),
ECO, PIHLP and PCI entered into an Option Agreement giving PCI the right to
purchase all of D.T. Chase's interest in ProCable. On March 29, 1996, PCI
exercised the option and entered into a Share Purchase Agreement with D.T. Chase
pursuant to which PCI purchased D.T. Chase's 33% interest in ProCable for
approximately $5,900.
THE REORGANIZATION
Before the Offerings, all the holders of shares of PCI common stock and
@Entertainment entered into the Contribution Agreement. Pursuant to the
Contribution Agreement, each holder of shares of PCI common stock transferred
all shares of its common stock to @Entertainment. In addition, ECO transferred
all of the outstanding shares of voting PCI Series B Preferred Stock to
@Entertainment. All of these transfers were designed to qualify as a tax-free
exchange under section 351 of the Code, as amended. Each holder of PCI common
stock received 1,000 shares of Common Stock in exchange for each share of PCI
common stock transferred. ECO also received an equivalent number of shares of
@Entertainment's Series B Preferred Stock in exchange for its shares of PCI
Series B Preferred Stock. The @Entertainment Series B Preferred Stock has
identical rights and preferences to those of the PCI Series B Preferred Stock,
except that the ratio for conversion of such shares into common stock increased
from 1:1.9448 to 1:1,944.80 in order to reflect the Capital Adjustment. The
2,500 outstanding shares of @Entertainment Series B Preferred Stock will
automatically convert into 4,862,000 shares of @Entertainment Common Stock upon
the completion of the Offerings.
On June 20, 1997, PIHLP transferred all the outstanding shares of PCI's
Series C Preferred Stock to the Chase Entity, an entity owned by certain of the
beneficial owners of PIHLP and members of their families. The Chase Entity, ECO
and @Entertainment entered into the Purchase Agreement. Among other matters, the
Purchase Agreement obligates @Entertainment to purchase all of the outstanding
shares of PCI's Series A Preferred Stock and Series C Preferred Stock for cash
from ECO and the Chase Entity, respectively, at the closing of the Offerings.
The aggregate purchase price of $60.0 million ($40.0 million to ECO and $20.0
million to the Chase Entity) for PCI's Series A Preferred Stock and Series C
Preferred Stock equals the aggregate redemption price of such shares as set
forth in PCI's certificate of incorporation. The Cash Purchases will be funded
with a portion of the net proceeds of the Offerings. See "Risk Factors -- Risks
Associated With the Offering -- Benefits of the Offerings to Insiders" and "Use
of Proceeds".
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In June 1997, @Entertainment acquired all of the outstanding stock of @EL,
a new corporation organized under the laws of England and Wales. @EL will be
responsible for the Company's D-DTH business.
In June 1997, certain employment agreements for the executive officers of
@Entertainment who were employed by PCI and their employee stock option
agreement were assigned to @Entertainment. As part of the Assignment and the
Capital Adjustment, the agreements were amended to provide that each option for
a share of PCI's common stock was exchanged for an option for 1,000 shares of
Common Stock with a proportionate reduction in the exercise price. See
"Executive Compensation -- Employment Agreements."
As a result of the Reorganization, @Entertainment owns all of the
outstanding shares of voting stock of PCI and all of the outstanding shares of
common stock of @EL. The Automatic Conversion and the Cash Purchases will occur
upon the closing of the Offerings.
RYNTRONIK
In December 1995, PCBV, a subsidiary of PCI, entered into an agreement with
the sole proprietor of PPHEI-Ryntronik, a Polish corporation previously
unrelated to the Company, whereby the sole proprietor agreed to contribute
in-kind all of his cable television assets into PTK-Ryntronik, and PCI agreed to
contribute additional capital into PTK-Ryntronik. In exchange for their
contributions, the sole proprietor received 51% of the share capital of
PTK-Ryntronik and PCBV received 49% of the share capital. The sole proprietor's
in-kind contribution of cable television assets to PTK-Ryntronik was consummated
in February 1996. The Company also owns convertible debt that, if converted,
would bring its ownership of PTK-Ryntronik to approximately 72% as of December
31, 1996. In October 1996, PCI and the sole proprietor entered into a stock sale
agreement by virtue of which PCI agreed to purchase all remaining shares (which
at that time represented 51%) of PTK-Ryntronik for $9 million. Pursuant to the
agreement, the Company advanced $6 million of the purchase price as of December
31, 1996. The closing of the sale was postponed due to certain legal constraints
limiting the transferability of shares which were acquired in exchange for
in-kind contributions. On March 4, 1997, the Company and the sole proprietor
entered into an addendum and two annexes to the addendum to the share sale
agreement. The addendum, as amended, provides for an acceleration of the
Company's acquisition of the sole proprietor's interest in PTK-Ryntronik. In the
addendum and annex, the Company and the sole proprietor agreed to transform
PTK-Ryntronik into a limited liability company, at which time the sole
proprietor has agreed to transfer all shares of PTK-Ryntronik to PCI or its
nominee. The Company agreed to pay the sole proprietor $700,000 within three
days of the signing of the addendum, $1,000,000 on March 28, 1997, $600,000 on
June 6, 1997, and $1,150,000 upon the transfer of his shares to the Company or
its nominee. The Company has advanced the sole proprietor $400,000 of the
remaining purchase price. A portion of the proceeds of the offering of the Notes
may be used to pay for the acquisition of such shares. In addition, Poltelkab, a
subsidiary of PCI, subscribed and became the owner of 4.5% of the capital stock
of PTK-Ryntronik.
STOCKHOLDERS' AGREEMENT
The following is a summary of the stockholders' agreement entered into by
and among ECO, PIHLP, Mr. Freedman, Steele LLC, The AESOP Fund L.P. ("AESOP"),
CACMT and @Entertainment on June 22, 1997 (the "Stockholders' Agreement"). ECO,
PIHLP, Mr. Freedman, Steele LLC, AESOP and CACMT are the holders of all of the
outstanding shares of capital stock of @Entertainment prior to the Offerings.
The following summary does not purport to be complete, and it is qualified in
its entirety by reference to the Stockholders' Agreement, which is filed as an
exhibit to the Registration Statement of which this Prospectus is a part, copies
of which are available upon request from @Entertainment. Parties to the
Stockholders' Agreement, other than @Entertainment, are hereinafter referred to
as the "Stockholders".
In connection with the Reorganization, at June 22, 1997, the Stockholders
and @Entertainment entered into the Stockholders' Agreement to govern the
conduct of the business of @Entertainment and
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<PAGE> 109
relations among the Stockholders. The Stockholders' Agreement will terminate
upon the successful completion of the Offerings.
@Entertainment currently has a five-member Board of Directors. Pursuant to
the Stockholders' Agreement, the ECO Group has the right to designate two
directors, and the Chase Group has the right to designate two directors in
addition to a Chief Executive Officer acceptable to the ECO Group, who is also a
member of the Board of Directors. The ECO Group consists of ECO, any limited
partner of ECO to whom ECO premissibly transfers shares of stock of
@Entertainment and any Affiliate (as defined below). The Chase Group consists of
PIHLP, Mr. Freedman, the Cheryl Anne Chase Marital Trust and Steele LLC. The ECO
Group has chosen Scott Lanphere, a director of @Entertainment, as the ECO Group
Representative. Pursuant to the Stockholders' Agreement and the Voting
Agreement, the Chase Group has chosen David T. Chase, @Entertainment's Chairman,
as the Chase Group Representative. See "-- Voting Agreement".
The Stockholders' Agreement also contains several restrictions on the
Stockholders' ability to transfer their shares. Any Stockholder may transfer
shares to an Affiliate; members of the Chase Group may transfer shares to other
members of the Chase Group; and ECO may transfer shares to its limited partners.
Under the Stockholders' Agreement, "Affiliate" means a person or entity that is
any one or more of the following: (a) in relation to any person or entity,
another person or entity that controls, is controlled by or is under common
control with such person or entity; (b) in relation to any partnership, any of
its partners who control the partnership; (c) in relation to any Stockholder
which holds shares as trustee, the beneficial owner of those shares or a trustee
for the same beneficial owner; (d) in relation to any Stockholder, a person
which holds shares as trustee pursuant to a grantor trust in which that
Stockholder is the sole beneficiary; (e) in relation to any individual, certain
family members; and (f) in relation to ECO, any company, partnership or fund
which is under the management of the Advent network or any Affiliate of any such
company, partnership or fund. Prior to an initial public offering of at least
20% of @Entertainment's Common Stock, Stockholders may only transfer shares to
Qualified Persons (as hereinafter defined) and only under certain restrictions.
The term "Qualified Person" means any person or entity (i) that does not engage
in any of the businesses of telephony, telecommunications, digital satellite
broadcasting, programming or cable television in any city in Poland or the
United Kingdom where @Entertainment or any subsidiary of @Entertainment engages
in that line of business, and (ii) whose ownership of shares would not cause
@Entertainment to lose, or fail to obtain, or result in a limitation of, a
license, permit, certificate, deed or approval material to the operations of
@Entertainment and its subsidiaries, and (iii) the transfer of shares to whom
would not require @Entertainment to become a reporting company pursuant to
Section 12 of the Exchange Act. If any Stockholder other than AESOP wishes to
sell less than 21% of its shares of any class (but in no event more than 21% of
its shares of any class), or if CACMT, Mr. Freedman or Steele LLC wish to sell
all or any portion of their shares of any class, then certain other Stockholders
have rights of first negotiation with respect to the shares offered by the
Stockholder wishing to sell. If ECO or PIHLP wishes to sell 21% or more of its
shares of any class to a Qualified Person, the Stockholder wishing to sell must
procure an offer from that Qualified Person to purchase on the same terms all
the outstanding shares of the Applicable Stock (as hereinafter defined); and
certain other Stockholders have a right of first refusal on all such shares
before the Qualified Person may purchase them. If AESOP wishes to transfer all
or any portion of its shares of any class to a Qualified Person, then certain
other Stockholders have rights of first negotiation with respect to such shares.
The term "Applicable Stock" means, with respect to an offer for the Common Stock
and/or Series B Preferred Stock, the Common Stock and the Series B Preferred
Stock.
In the event that a third-party offers to purchase all of the outstanding
stock of @Entertainment and holders of 65% of voting securities of
@Entertainment vote to accept the offer to sell their shares to the third party,
all of the Stockholders are required to accept the offer. If a third-party
purchaser offers to purchase all or substantially all of the assets of
@Entertainment and the Board of Directors approves said sale, the Stockholders
are required to consummate the sale.
Pursuant to the Stockholders' Agreement, the following actions require (i)
the affirmative vote of at least four directors, followed by the affirmative
vote of the percentage of issued and outstanding capital
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stock entitled to vote thereon at a meeting of the stockholders as required
under the Delaware General Corporation Law ("GCL"), if such action is required
to be submitted to the stockholders under the GCL, or (ii) if any such action is
not approved by at least four directors, then any such action will require the
affirmative vote of at least 61% of the total voting power of the capital stock
issued and outstanding and entitled to vote thereon, provided however that if
board approval of such action is required under the GCL, the action will also
require the approval of the Board of Directors at a special meeting of the Board
of Directors (and for no purposes other than the approval of actions taken
pursuant to this subsection (ii)) for which two-fifths of the total number of
directors constitutes a quorum.
A. A fundamental change in the business of @Entertainment or any
subsidiary;
B. The adoption of, and approval of any modification to, the annual
budget of @Entertainment for each fiscal year;
C. An expenditure, not accounted for in the budget during any fiscal
year, in excess of $5 million;
D. A merger or other business combination or the sale, lease, transfer
or other disposition of all or any material portion of the assets;
E. Certain encumbrances;
F. Related-party transactions;
G. The issuance by @Entertainment of third-party debt which causes the
aggregate of all third party debt to exceed $25 million;
H. Certain issuances of capital stock;
I. The declaration of dividends or other distributions;
J. The repurchase or optional redemption of any capital;
K. The dissolution or liquidation of @Entertainment;
L. Amending the @Entertainment Certificate or Bylaws;
M. The giving of certain guarantees or indemnities;
N. The election or removal of the Chief Executive Officer or the
Chairman of the Board;
O. Entering into or modifying a material employment contract;
P. A change in the auditors, fiscal year-end or registered office of
@Entertainment;
Q. Settling or resolving tax claims in excess of $250,000;
R. Commencement, prosecution or compromise of material litigation or
arbitration proceedings; and
S. Taking steps to wind-up or voluntarily seek the protection of
bankruptcy laws.
The Stockholders' Agreement also contains a buy-sell provision which is
available to the ECO Group and the Chase Group if (i) an item requiring
supermajority vote under the Stockholders' Agreement is voted against by the
Board of Directors upon submission and re-submission by the same group, (ii)
there is no quorum at two successive meetings of the Board of Directors and the
absence of quorum is caused by the directors of the same group, (iii)
@Entertainment fails to redeem any series of preferred stock on the date set for
mandatory redemption under the Certificate, (iv) PCI fails to comply with
certain obligations under, or waives certain rights or refuses to accept certain
benefits under, the ECO Stock Purchase Agreement, (v) @Entertainment fails to
comply with certain of its obligations under the Purchase Agreement, or (vi)
either stockholder group fails to use its best efforts to ensure that the
drag-down provisions described below become effective. Subject to the
satisfaction of certain procedural requirements, the buy-sell provision allows
the group entitled to exercise the buy-sell option
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(the "Initiating Group") to place a valuation on @Entertainment and value all
classes of securities held by the responding group (the "Responding Group").
Then, the Responding Group may elect either to sell all of its shares to the
Initiating Group at a price derived from the Initiating Group's valuation of
@Entertainment, or to purchase all of the Initiating Group's shares at the price
derived from the Initiating Group's valuation of @Entertainment.
The Stockholders' Agreement also contains restrictions on the rights of
Stockholders to pledge, hypothecate or otherwise encumber their shares.
The Stockholders' Agreement, which terminates upon the successful
completion of the Offerings, also provides that on or about March 29, 2001, the
Stockholders will retain an investment bank to evaluate the sale, refinancing,
public offering or other alternative to maximizing the value of the Common
Stock. If an investment bank is not retained by @Entertainment or @Entertainment
has not otherwise adopted a plan for maximizing the value of the Common Stock by
March 29, 2002, the Stockholders Agreement requires the Stockholders to hire an
investment bank to secure a purchaser for @Entertainment.
In the drag-down provisions of the Stockholders' Agreement, the
Stockholders agreed that they would take all actions necessary or desirable,
including the use of their voting power, to cause certain changes to the
constituent documents, management structures, and decision-making processes of
PCI and PCBV.
In addition, the Stockholders' Agreement requires that any transferee of
shares held by any of the parties to the Stockholders' Agreement sign an
accession agreement pursuant to which the transferee shall be bound to the terms
of the Stockholders' Agreement.
Pursuant to the Stockholders' Agreement, the Stockholders agreed to cause
@Entertainment not to issue any shares of capital stock, or options or warrants
to acquire capital stock, or securities convertible into capital stock, to a
person who has not executed and delivered an accession agreement, provided that
@Entertainment may issue such shares as may be required to honor any options for
shares that are issued by @Entertainment in exchange for outstanding
@Entertainment common stock options.
The Stockholders' Agreement contains covenants against competition that
limit the ability of the Stockholders and of certain other persons and entities
connected with the Stockholders to engage in certain kinds of business in
Poland. Such covenants shall terminate on the earlier of seven years from the
date of the Stockholders' Agreement or upon the sale of substantially all of the
capital stock or assets of @Entertainment to a third-party purchaser or
purchasers.
The Stockholders' Agreement remains effective until the earlier of the
following events: (i) Stockholders holding at least 65% of the total voting
power agree to terminate the Stockholders' Agreement, (ii) an initial public
offering of at least 20% of @Entertainment's Common Stock, or (iii) the date on
which no party to the Stockholders' Agreement holds any shares.
@ENTERTAINMENT REGISTRATION RIGHTS AGREEMENT
Also in connection with the Reorganization, @Entertainment entered into a
registration rights agreement (the "Stockholder Registration Rights Agreement")
with PIHLP, ECO, Mr. Freedman, Steele LLC, AESOP and CACMT (collectively, the
"Rightsholders") as of June 22, 1997. ECO, PIHLP, Mr. Freedman, Steele LLC,
AESOP and CACMT are the holders of all of the outstanding shares of capital
stock of @Entertainment prior to the Offerings. Pursuant to the Stockholder
Registration Rights Agreement, PIHLP and ECO will after March 29, 1999, have the
right under certain circumstances to demand that @Entertainment register their
shares of Common Stock under the Securities Act of 1933. After March 29, 2001,
PIHLP and ECO will have the right to demand that @Entertainment register their
shares of Common Stock in a shelf registration under Rule 415 of the Securities
Act of 1933. In addition, if @Entertainment proposes to register any of its
securities under the Act (other than registrations in connection with employee
stock ownership plans, offerings of debt securities and certain shelf
registrations), all of the Rightsholders will have the right to have their
shares of Common Stock be included in
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such registration. The registration rights described above expire on March 29,
2004, and are subject to certain limitations, including limitations on the
number of shares of Common Stock to be included by the Rightsholders in
particular registrations and on the number of registrations that can be demanded
by PIHLP and ECO.
PCBV STOCKHOLDERS' AGREEMENT
PCI, a wholly owned subsidiary of @Entertainment, holds 92.3% of the issued
and outstanding capital stock of PCBV which owns 100% of the issued and
outstanding capital stock of each of PTK-Krakow, PTK-Warsaw, and 49% of the
issued and outstanding capital stock of PTK-Ryntronik, as well as approximately
98% of the issued and outstanding capital stock of PTK, S.A.
The following is a summary of the stockholders' agreement (the "PCBV
Stockholders' Agreement") entered into by and among Frank N. Cooper, Reece
Communications, Inc., Rutter-Dunn Communications, Inc., and Poland Cablevision
U.S.A., Inc. (collectively, the "Minority Stockholders"), PCI, and PCBV on March
8, 1990, as amended. The Minority Stockholders own the 7.7% of outstanding PCBV
capital stock that is not owned by PCI. The following summary does not purport
to be complete, and it is qualified in its entirety by reference to the PCBV
Stockholders' Agreement. The parties to the PCBV Stockholders' Agreement other
than PCBV are hereinafter referred to as the "PCBV Stockholders". Shares of the
capital stock of PCBV are hereinafter referred to as "PCBV shares".
The PCBV Stockholders' Agreement protects shareholdings of each Minority
Stockholder from dilution, by requiring that the PCBV shares of each Minority
Stockholder must continue to represent a constant percentage of the total equity
in PCBV and of the total votes to be cast by the PCBV Stockholders on any
subject, regardless of changes to the capital structure of PCBV and regardless
of any additional equity funds that may be contributed to PCBV by PCI.
The PCBV Stockholders' Agreement contains restrictions on the PCBV
Stockholders' ability to sell, pledge, hypothecate or otherwise transfer or
encumber their PCBV shares. In addition, PCBV Stockholders have the right of
first refusal to purchase PCBV shares upon the death of an individual PCBV
Stockholder, and upon the liquidation, dissolution or other termination of a
corporate PCBV Stockholder. Furthermore, PCI has the right of first refusal to
purchase PCBV shares from Minority Stockholders, and the Minority Stockholders
have the right of first refusal to purchase PCBV shares from PCI, before such
shares can be sold to a third party.
The PCBV Stockholders' Agreement includes certain limitations on payments
that can be paid by PCBV to the PCBV Stockholders. If the managing board of PCBV
solicits and receives loans from any of the PCBV Stockholders, the loans cannot
bear interest at a rate exceeding 10% per annum.
Under the PCBV Stockholders' Agreement, PCI has the option to purchase the
PCBV shares owned by the Minority Stockholders upon the satisfaction of certain
conditions. These conditions involve the number of subscribers obtained by PTK,
S.A. in nine specified cities in Poland. On each occasion when the subscriber
count in one of these specified cities reaches the number prescribed in the PCBV
Stockholders' Agreement, one-ninth of the Minority Stockholders' PCBV shares
become available for purchase by PCI for a period of approximately 60 to 90
days. The option periods have expired with respect to a number of the specified
cities.
The PCBV Stockholders' Agreement also includes covenants against
competition that limit the ability of each PCBV Stockholder to engage directly
or indirectly in any aspect of the cable television business in Poland for a
period ending ten years after such PCBV Stockholder ceases to be a PCBV
Stockholder. PCI has direct or indirect ownership interests in a number of
entities that engage in certain aspects of the cable television business in
Poland. Under the PCBV Stockholders' Agreement, the Minority Stockholders have a
claim against 7.7% of the profits and equity of such entities and, under a
supplemental agreement, PCI has agreed to share the profits of these entities
with the Minority Stockholders on a pro rata basis. In addition, PCI is
negotiating to buy, and has made an offer to buy, the outstanding PCBV shares
held by the Minority Stockholders.
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On April 11, 1997 PCBV elected to be treated as a partnership for United
States Federal income tax purposes instead of a corporation. The deemed
conversion from the status of corporation to partnership was effective as of
January 29, 1997. Although PCBV has made this election, it will continue in
existence in its present legal form under Dutch Company Law, and will not make
any actual liquidating distributions to its stockholders. PCBV has received
inquiries from certain of its shareholders regarding the legal basis for such
deemed conversion, and one shareholder has intimated that it is considering
legal action, but PCBV has not received any formal claims as at the date of this
Prospectus.
VOTING AGREEMENT
Pursuant to the Voting Agreement among PIHLP, Mr. Freedman, Steele LLC and
CACMT dated at June 22, 1997, David T. Chase, the Chairman of the Board of
Directors of @Entertainment, received an irrevocable proxy to vote all of the
Voting Agreement Shares on all corporate actions. Pursuant to the Voting
Agreement, Mr. Chase was appointed as the Chase Group Representative (as defined
in the Stockholders' Agreement). The Voting Agreement also contains restrictions
on the transferability of Voting Agreement Shares during the term of the Voting
Agreement, except as permitted by the Stockholders Agreement. The Voting
Agreement will terminate upon (i) the successful completion of the Offerings
(which will cause the Stockholders' Agreement to terminate); (ii) the written
consent of all the parties; (iii) the termination of the Stockholders' Agreement
in accordance with its terms; or (iv) the failure of the parties to the Voting
Agreement to appoint a successor to the Chase Group Representative within a
specified period. The Chase Group Representative will not receive any
compensation and may be removed at any time by written consent of holders of
more than 50% of the Voting Agreement Shares.
SERVICE AGREEMENTS
PCI, a wholly owned subsidiary of @Entertainment, has entered into service
agreements with PCBV and other of its direct and indirect subsidiaries (the
"Service Agreements"), including Poltelkab, PTK-Telkat, PTK-Szczecin,
PTK-Lublin, ETV, PTK, S.A., PTK-Ryntronik, PTK-Warsaw, and PTK-Krakow pursuant
to which PCI provides various services, including administrative, technical,
managerial, financial, operational and marketing services to each of the
subsidiaries and PCBV serves as PCI's agent. PCI also entered into a service
agreement, dated August 31, 1995, with PCBV and ETV, whereby PCBV is the
principal service provider and PCI acts as agent to PCBV (the "ETV Service
Agreement"). The services provided under these agreements are intended to enable
the subsidiaries to construct, develop, operate and manage cable television
systems throughout Poland. Except for the ETV Service Agreement, which requires
ETV to pay $18,740 per calendar quarter to PCBV, the Service Agreements provide
that the subsidiaries will each pay to PCI or PCBV, as the case may be, a fee of
$10,000 per calendar quarter for performing general administrative services, and
a commercially reasonable rate for legal, financial and other specific
professional services. With the exception of the ETV Service Agreement, if a
subsidiary is obligated to pay fees to PCI pursuant to a management agreement
(described below), any fee payable under the Service Agreements is waived. The
Service Agreements also typically require the subsidiaries to reimburse PCBV for
any reasonable out-of-pocket expenses incurred by PCBV or PCI, acting as agent
for PCBV, including salaries and benefits, housing allowances, travel expenses,
and equipment supply or other goods costs. The agreements expire on December 31,
1998, but will automatically be extended for successive one-year periods unless
a party gives notice on or before January 31, in which case the agreement will
terminate at the end of the calendar year during which such notice was provided.
MANAGEMENT AGREEMENTS
PCI, a wholly owned subsidiary of @Entertainment, entered into management
agreements with certain of its direct or indirect subsidiaries, namely
Poltelkab, PTK-Telkat, PTK-Szczecin, PTK-Lublin, ETV, PTK, S.A., PTK-Ryntronik,
PTK-Warsaw, and PTK-Krakow. The agreements typically provide that the subsidiary
will pay to PCI an annual consulting fee of $320,000 when and to the extent that
the
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subsidiary's net income exceeds zero and in exchange for organizational and
consulting services rendered by PCI. Telkat pays to PCI an annual consulting fee
of only $160,000. The management agreements also provide for an initial term
ending as of the end of the calendar year during which they became effective,
and provide for successive renewals for one-year periods unless the agreement is
terminated in writing with at least thirty days notice by either party.
CORPORATE OVERHEAD ALLOCATION AGREEMENT
PCI, a wholly owned subsidiary of @Entertainment, entered into a Corporate
Overhead Allocation Agreement, dated January 1, 1996 (the "Allocation
Agreement"), with certain of its direct or indirect subsidiaries, namely PTK,
S.A., PTK-Warsaw, PTK-Ryntronik, PTK-Krakow, PTK-Szczecin, PTK-Lublin, ETV,
PTK-Telkat and Poltelkab (collectively the "PTK Companies"), and PCBV. The
Allocation Agreement provides that costs incurred by PCI or PCBV, acting as
PCI's agent, with regard to the Service Agreements and as otherwise requested by
the PTK Companies shall be allocated and charged to particular PTK Companies in
the event they are directly attributable to such subsidiaries, and shall
otherwise be allocated equally among each of the PTK Companies. With regard to
services rendered and costs incurred by subsidiaries for the benefit of some or
all of the PTK Companies, which include costs associated with maintaining a
central office in Warsaw, legal expenses, expenses relating to governmental
relationships and approvals, programming services, accounting, management
information systems services, and salaries associated with personnel whose
duties clearly benefit other PTK Companies, the Allocation Agreement provides
that such expenses shall be allocated between by the PTK Companies. The
Allocation Agreement terminates on December 31, 1998, but is automatically
renewed for successive one-year periods unless at least thirty days written
notice of termination is provided by PCI or PCBV or any subsidiary, with respect
to itself.
PURCHASE OF HOUSE
Pursuant to Mr. Fowler's employment contract, and in part to induce Mr.
Fowler, the Chief Executive Officer and a director of @Entertainment, to move
closer to the Company's operations in Europe, @Entertainment purchased Mr.
Fowler's house in Connecticut for approximately $354,000 in June 1997 (including
payments of $295,000 to extinguish the mortgages relating to the house), and
sold the house shortly thereafter to a third party for approximately $267,000.
@Entertainment is obligated to pay Mr. Fowler the difference between the
mortgage amounts of $295,000 and the purchase price of $354,000.
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DESCRIPTION OF CAPITAL STOCK
Set forth below is certain information concerning @Entertainment's capital
stock and a brief summary of the material provisions of @Entertainment's capital
stock, Certificate and Bylaws. This description does not purport to be complete
and is qualified in its entirety by reference to @Entertainment's Certificate
and Bylaws.
@Entertainment is authorized to issue 90,002,500 shares of capital stock,
of which 70,000,000 shares are Common Stock, and 20,002,500 shares of preferred
stock of which 2,500 shares have been designated Series B Preferred Stock, par
value of $0.01 per share.
At July 11, 1997, there were (i) 18,948,000 shares of Common Stock, and
(ii) 2,500 shares of Series B Preferred Stock, outstanding and fully paid. The
Series B Preferred Stock will be converted into 4,862,000 shares of Common Stock
upon the completion of the Offerings.
COMMON STOCK
DIVIDENDS. Holders of Common Stock are entitled to dividends when, as and
if declared by the Board of Directors.
VOTING RIGHTS. Holders of Common Stock are entitled to one vote per share
on all matters submitted to the stockholders of the Company.
Under Delaware law, the affirmative vote of a majority of the outstanding
shares of Common Stock are required to approve, among other things, a change in
the designations, preferences or limitations of the shares of Common Stock.
LIQUIDATION RIGHTS. Upon liquidation, dissolution or winding-up of the
Company, the holders of Common Stock are entitled to share ratably all assets
available for distribution after payment in full of creditors and distributions
to preferred stockholders.
PREFERRED STOCK
The Board of Directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series and
to designate the rights, preferences and privileges of each series ("Blank Check
Preferred Stock"), any or all of which may be greater than the rights of the
Common Stock. It is not possible to state the actual effect of the issuance of
any shares of Blank Check Preferred Stock upon the rights of holders of the
Common Stock until the Board of Directors determines the specific rights of the
holders of such Blank Check Preferred Stock. However, the effects might include,
among other things, restricting dividends on the Common Stock, diluting the
voting power of the Common Stock, impairing the liquidation rights of the Common
Stock and delaying or preventing a change in control of @Entertainment without
further action by the stockholders. @Entertainment has no present plans to issue
any shares of preferred stock in addition to the series described below. See
"Risk Factors -- Risks Related to the Company -- Control by Existing
Stockholders; Potential Anti-Takeover Provisions".
SERIES B PREFERRED STOCK
DIVIDENDS. The holders of Series B Preferred Stock are not entitled to
receive dividends.
VOTING RIGHTS. Except as otherwise required by law, the shares of Series B
Preferred Stock are entitled to vote on an equal basis together with the shares
of Common Stock at any annual or special meeting of the stockholders of
@Entertainment, or may act by written consent in the same manner as the Common
Stock. The number of votes which a holder of the Series B Preferred Stock is
entitled to vote is the number of shares of Common Stock into which all shares
of Series B Preferred Stock held by such holder are convertible on the record
date fixed for such a meeting or action by written consent.
REDEMPTION. On March 31, 2004, @Entertainment is required to redeem the
Series B Preferred Stock (the "Series B Redemption Date"). At the option of
@Entertainment, the Series B Preferred Stock
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may be redeemed at any time, in whole or in part. The redemption price per share
of Series B Preferred Stock is $10,000. From and after the close of business on
the Series B Redemption Date, unless there has been a default in the payment of
the redemption price, all rights of holders of shares of Series B Preferred
Stock which have been redeemed cease and thereafter such shares will not be
deemed to be outstanding for any purposes whatsoever. Any shares of Series B
Preferred Stock that have at any time been redeemed or repurchased by
@Entertainment will, after such redemption or repurchase, be cancelled by
@Entertainment and will not be available for reissuance.
CONVERSION. At any time, or from time to time, prior to March 31, 2004, the
holders of Series B Preferred Stock may convert shares thereof into shares of
Common Stock equal to the then applicable Conversion Ratio multiplied by the
number of shares of Series B Preferred Stock to be converted. The Conversion
Ratio per share of Series B Preferred Stock is 1,944.80 shares of Common Stock
for each share of Series B Preferred Stock and is subject to adjustment to
protect holders of Series B Preferred Stock from dilution in the event of a
subdivision or combination of Common Stock. Holders of Series B Preferred Stock,
when converting, must convert at least 25% of the total number of authorized
shares of Series B Preferred Stock into shares of Common Stock, provided,
however, that a holder of less than 25% of the total number of authorized shares
of Series B Preferred Stock, when converting, must convert all of such holder's
shares of Series B Preferred Stock into shares of Common Stock. Each share of
Series B Preferred Stock will automatically be converted into shares of Common
Stock simultaneously with the closing of the Offerings. Upon conversion of any
shares of Series B Preferred Stock into Common Stock, such shares of Series B
Preferred Stock so converted will be cancelled and will not be available for
reissuance.
LIQUIDATION. Upon the event of any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of @Entertainment, after payment or
provisions for the payment of the debts and other liabilities of @Entertainment,
the assets then available for distribution to the stockholders will be
distributed first to to the holders of the Series B Preferred Stock, to the
extent available, in an amount equal to $10,000.00 per share, but if the funds
available therefor are insufficient, then to the holders of Series B Preferred
Stock on a pro-rata basis in accordance with the number of shares held by each
holder.
CERTAIN VOTING PROVISIONS
Stockholders' rights and related matters are governed by the CGL, the
Certificate and the Bylaws. Certain provisions of the Certificate and the Bylaws
which are summarized below may affect potential changes in control of
@Entertainment, may make it more difficult to acquire and exercise control of
@Entertainment and may make changes in management more difficult to accomplish.
See "Risk Factors -- Risks Related to the Company -- Control by Existing
Stockholders; Potential Anti-Takeover Provisions".
Article VIII of the Certificate contains provisions (the "Fair Price
Provisions") which require the approval (an "Unaffiliated 66 2/3% Vote") of the
holders of 66 2/3% of those shares that are not beneficially owned or controlled
by a stockholder who owns directly or indirectly 10% or more of the outstanding
voting shares of @Entertainment (a "Related Person") as a condition to specified
business combinations (the "Business Combinations") with or proposed by any
Related Person, except where the transaction (i) has been approved by two-thirds
of the directors who are not affiliated with the Related Person (the "Continuing
Directors") or (ii) meets certain minimum price criteria and procedural
conditions. The term Related Person is defined to exclude (i) @Entertainment or
any subsidiary or any other ownership interest which is directly or indirectly
owned by @Entertainment; (ii) any person whose acquisition of stock was approved
by not less than a two-thirds vote of the Continuing Directors; or (iii) any
pension, profit-sharing, employee stock ownership or other employee benefit plan
of @Entertainment or any subsidiary. If the Business Combination satisfies any
of these three criteria, the usual requirements of applicable law, regulations
and other provisions of the Certificate would apply.
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A Business Combination includes the following: (i) merger or consolidation
of @Entertainment or a subsidiary with or into a Related Person or any other
corporation which is, or after such merger or consolidation would be, an
affiliate or associate of a Related Person; (ii) sale, lease, exchange,
mortgage, pledge, transfer or other disposition (in one transaction or a series
of transactions) to or with any Related Person or any affiliate or associate of
any Related Person, of all or any substantial amount of the assets of
@Entertainment, one or more subsidiaries, or @Entertainment and one or more
subsidiaries, other than in the ordinary course of business; (iii) adoption of
any plan or proposal for the liquidation or dissolution of @Entertainment
proposed by or on behalf of a Related Person or any affiliate or associate of
any Related Person; (iv) sale, lease, exchange, mortgage, pledge, transfer or
other disposition (in one transaction or a series of transactions) to
@Entertainment, one or more subsidiaries, or @Entertainment and one or more
subsidiaries (in one transaction or a series of transactions) of all or any
substantial amount of the assets of a Related Person or any affiliate or
associate of any Related Person, other than in the ordinary course of business;
(v) issuance, pledge or transfer of securities of @Entertainment, one or more
subsidiaries, or @Entertainment and one or more subsidiaries (in one transaction
or a series of transactions) to or with a Related Person or any affiliate or
associate of any Related Person in exchange for a substantial amount of cash,
securities or other property (or a combination thereof), except any issuance,
pledge or transfer of such securities to any such person if such person is
acting as an underwriter with respect to such securities; (vi) reclassification
of securities (including any reverse stock split) or recapitalization of
@Entertainment, any merger or consolidation of @Entertainment with or into one
or more subsidiaries, or any other transaction that would have the effect,
either directly or indirectly, of increasing the voting power or the
proportionate share of any class of equity or convertible securities of
@Entertainment or any subsidiary which is directly or indirectly beneficially
owned by any Related Person or any affiliate or associate of any Related Person;
(vii) agreement, contract or other arrangement providing for any of the
transactions described in this definition of Business Combination; and (viii)
any series of transactions that not less than two-thirds ( 2/3) of the
Continuing Directors determine are related and, if taken together, would
constitute a Business Combination.
The Fair Price Provisions require the consideration to be paid to
@Entertainment's stockholders in a Business Combination not approved by either
two-thirds of the Continuing Directors or an Unaffiliated 66 2/3% Vote to be
either cash or the same type of consideration paid by the Related Person in
acquiring @Entertainment's voting stock that it previously acquired. The fair
market value of any consideration other than cash or publicly traded securities
would be determined by a majority of the Continuing Directors. The Fair Price
Provisions require the Related Person to meet the minimum price criteria with
respect to each class or series of Common Stock or preferred stock, whether or
not the Related Person owned shares of that class or series prior to proposing
the Business Combination.
The Bylaws provide that candidates for directors shall be nominated only by
the Board of Directors, by a proxy committee appointed by the Board of Directors
or by a stockholder who gives written notice to @Entertainment at least 120 days
prior to the anniversary date of @Entertainment's notice of annual meeting
provided with respect to the previous year's annual meeting. The Bylaws further
provide that stockholder action must be taken at a meeting of stockholders and
may not be effected by any consent in writing unless approved by a vote of
two-thirds of the Continuing Directors. Special meetings of stockholders may be
called only by the Chairman of the Board, the Chief Executive Officer or any two
directors. If a stockholder wishes to propose an agenda item for consideration,
he must give a brief description of each item and notice to @Entertainment not
less than 120 days prior to the anniversary date of @Entertainment's notice of
annual meeting provided with respect to the previous year's annual meeting.
Stockholders will in most cases need to present their proposals or director
nominations in advance of the time they receive notice of the meeting since the
Bylaws provide that notice of a stockholders' meeting must be given not less
than ten or more than 60 days prior to the meeting date.
The Certificate in most cases provides that the foregoing provisions of the
Certificate and Bylaws may be amended or repealed by the stockholders only with
the affirmative vote of at least 66 2/3% of the shares entitled to vote
generally in the election of directors voting together as a single class. These
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provisions exceed the usual majority vote requirement of the GCL and are
intended to prevent the holders of less than 66 2/3% of the voting power from
circumventing the foregoing terms by amending the Certificate or Bylaws. These
provisions, however, enable the holders of more than 33 1/3% of the voting power
to prevent amendments to the Certificate or Bylaws even if they are approved by
the holders of a majority of the voting power.
The effect of such provisions of @Entertainment's Certificate and Bylaws
may be to delay or make more difficult the accomplishment of a merger or other
takeover or change in control of @Entertainment. To the extent that these
provisions have this effect, removal of @Entertainment's incumbent Board of
Directors and management may be rendered more difficult. Furthermore, these
provisions may make it more difficult for stockholders to participate in a
tender or exchange offer for Common Stock and in so doing may diminish the
market value of Common Stock. @Entertainment is not aware of any proposed
takeover attempt or any proposed attempt to acquire a large block of Common
Stock. See "Risk Factors -- Risks Related to the Company -- Control by Existing
Stockholders -- Potential Anti-Takeover Provisions."
CERTAIN CHANGE OF CONTROL PROVISIONS
In addition to the above provisions, as a Delaware corporation the Company
is subject to Section 203 of the GCL, an anti-takeover law. In general, Section
203 prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date that the person became an interested stockholder, unless
(with certain exceptions) the "business combination" or the transaction in which
the person became an interested stockholder is approved in a prescribed manner.
Generally, a "business combination" includes a merger, asset or stock sale, or
other transaction resulting in a financial benefit to the interested
stockholder. Generally, an "interested stockholder" is a person who, together
with affiliates and associates, owns (or within three years prior to the
determination of interested stockholder status, did own) 15% or more of a
corporation's voting stock. The existence of this provision would be expected to
have anti-takeover effects with respect to transactions not approved in advance
by the Board of Directors, such as discouraging takeover attempts that might
result in a premium over the market price of the Common Stock.
The Company's Certificate provides that the Board of Directors will be
divided into three classes of directors, with each class serving a staggered
three-year term. The classification system of electing directors may tend to
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company and may maintain the incumbency of the Board of
Directors, as a classified board of directors generally increases the difficulty
of replacing a majority of the directors. The Certificate and Bylaws do not
provide for cumulative voting in the election of directors and allow for the
removal of directors only for cause and with a two-thirds vote of
@Entertainment's outstanding shares unless such removal is approved by
two-thirds of the Continuing Directors, in which case directors can be removed
with or without cause by vote of the majority of outstanding shares. In
addition, the Certificate and Bylaws eliminate the right of stockholders to act
by written consent without a meeting (unless approved by two-thirds of the
Continuing Directors) and require advanced stockholder notice to nominate
directors and raise matters at the annual stockholders meeting. Furthermore, the
authorization of undesignated Blank Check Preferred Stock makes it possible for
the Board of Directors to issue preferred stock with voting or other rights or
preferences that could impede the success of any attempt to change control of
@Entertainment. These and other provisions may have the effect of deferring
hostile takeovers or delaying changes in control or management of @Entertainment
and could limit the price that certain investors might be willing to pay in the
future for shares of @Entertainment's Common Stock. The amendment of any of
these provisions would require approval by holders of at least two-thirds of the
outstanding shares of @Entertainment's Common Stock (unless approved by
two-thirds of the Continuing Directors). See "Risk Factors -- Risks Related to
the Company -- Control by Existing Stockholders; Potential Anti-Takeover
Provisions".
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U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material United States federal income
tax consequences of the purchase, ownership and disposition of shares of Common
Stock to be issued pursuant to the Offerings, but it does not purport to be a
comprehensive description of all of the tax considerations that may be relevant
to a decision to purchase, own or dispose of shares. In particular, this summary
of United States federal income tax matters deals only with holders that will
hold shares as capital assets and does not address special tax situations, such
as the United States tax treatment of holders who are securities dealers, who
are holding shares as part of a hedging or larger integrated financial or
conversion transaction, who are citizens or residents of a possession or
territory of the United States, who are United States holders with a currency
other than the U.S. dollar as their functional currency or who own, directly or
indirectly, 10 percent or more of the voting stock of @Entertainment. The shares
will constitute voting stock of @Entertainment.
This summary is based upon the income tax laws of the United States as in
effect on the date of this Prospectus, including the Code, which are subject to
change, possibly with retroactive effect. Subsequent developments could have a
material effect on this summary. Prospective purchasers of shares should consult
their own tax advisers as to the United States federal income tax consequences
of the purchase, ownership and disposition of shares, including the effect of
any proposed legislation before Congress, in addition to the effect of any state
or local tax laws or the laws of any jurisdiction other than the United States.
@ENTERTAINMENT
The shares will be properly characterized as equity interests in
@Entertainment, and @Entertainment will so characterize all such shares for all
United States federal income tax purposes. @Entertainment will be classified as
a "corporation" for all United States federal income tax purposes.
TAXATION OF INVESTORS -- UNITED STATES HOLDERS
As used herein, a "United States holder" means a beneficial owner of shares
who is a citizen or resident of the United States; a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any State thereof; or an estate or trust, the income of which is subject to
United States federal income tax regardless of its source. A "resident" of the
United States includes an individual that (i) is lawfully admitted for permanent
residence in the United States, (ii) is present in the United States for 183
days or more during a calendar year; or (iii)(a) is present in the United States
for 31 days or more during a calendar year, (b) is present in the United States
for an aggregate of 183 days or more, on a weighted basis, over a 3-year period
ending in such calendar year, and (c) does not have a closer connection to a
"tax home" that is located outside the United States.
TAXATION OF DIVIDENDS
To the extent provided below, a United States holder will be required to
include in gross income when received by the holder as a dividend any cash or
the fair market value of any property distributed by @Entertainment.
A distribution by @Entertainment with respect to the shares, including a
pro rata redemption of shares, will be treated first as a dividend includible in
gross income to the extent of the current and accumulated earnings and profits
of @Entertainment as determined under United States federal income tax
principles, then as a tax-free return of basis in the shares to the extent of
the United States holder's adjusted tax basis in such shares, with the balance
of the distribution, if any, treated as a gain realized by the United States
holder from the sale or disposition of the shares that is includible in gross
income. Dividends paid by @Entertainment may be eligible for the dividends
received deduction generally allowed to corporations under the Code.
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TAXATION OF DISPOSITIONS OF SHARES
A gain or loss realized by a United States holder on the sale or other
disposition of a share (including upon the liquidation or dissolution of
@Entertainment or as a result of a non-pro rata redemption of shares) will be
subject to United States federal income tax, as a capital gain or loss, in an
amount equal to the difference between such United States holder's adjusted tax
basis in the share and the amount realized on its disposition. The United States
holder's adjusted tax basis in a share will generally be equal to the cost of
acquiring the share reduced (but not below zero) by the amount of any
distribution that is treated as a tax-free return of basis.
Any capital gain or loss recognized upon the sale or other disposition of a
share will be either short-term or, if held for more than one year, long-term.
For non-corporate United States holders, the United States income tax rate
applicable to the net long-term capital gain recognized for a year currently
will not exceed 28 percent. For corporate United States holders, a capital gain
is currently taxed at the same rate as ordinary income. The deductibility of a
capital loss is subject to limitations. For non-corporate United States holders,
net capital losses not in excess of $3,000 ($1,500 in the case of a married
individual filing a separate return) are deductible in the year incurred, with
any excess carried forward indefinitely to offset capital gains in future years,
with a limited allowance for deduction of net capital losses in each of such
years as in the year incurred. For corporate United States holders, capital
losses can only be used to offset capital gains recognized during the year
incurred or during the permitted carry back and carry forward period.
TAXATION OF INVESTORS -- NON-UNITED STATES HOLDERS
UNITED STATES WITHHOLDING TAX
Under United States federal income tax laws now in effect, and subject to
the discussions of United States income tax (see "-- United States Income Tax")
and backup withholding (see "United States Backup Withholding Tax and
Information Reporting"), dividends paid by @Entertainment to a holder other than
a United States holder (a "non-United States holder") with respect to shares
will be subject to United States withholding tax on the gross amount of the
dividends. Dividends will be subject to United States withholding tax at the
statutory rate of 30 percent, unless the non-United States holder is entitled to
a reduced rate of withholding tax under a United States income tax treaty with
the holder's country of residence.
UNITED STATES INCOME TAX
Subject to the discussion of United States withholding tax (see "-- United
States Withholding Tax") and backup withholding tax (see "-- United States
Backup Withholding Tax and Information Reporting"), a non-United States holder
will not be subject to United States federal income tax on income derived by
@Entertainment, dividends paid to a holder by @Entertainment or gains realized
on the sale, redemption or other disposition of shares, provided that:
(1) The holder (or the fiduciary, settlor, or beneficiary of, or a
person holding a power over, such holder, if such holder is an estate or
trust; or a partner of such holder, if such holder is a partnership) shall
not be or have been engaged in a trade or business, or be or have been
present in, or have or have had a permanent establishment in the United
States;
(2) There shall not have been a present or former connection between
such holder (or between the fiduciary, settlor, or beneficiary of, or a
person holding a power over, such holder, if such holder is an estate or
trust; or a partner of such holder, if such holder is a partnership) and
the United States, including, without limitation, such holder's status as a
citizen or former citizen thereof or resident or former resident thereof;
(3) The holder (or the fiduciary, settlor, or beneficiary of, or a
person holding a power over, such holder, if such holder is an estate or
trust; or a partner of such holder, if such holder is a partnership) is not
and has not been, for United States tax purposes, (i) a personal holding
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company, (ii) a foreign personal holding company, or (iii) a corporation
that accumulates earnings to avoid United States federal income tax; and
(4) In the case of a gain from the sale or disposition of shares by an
individual, the non-United States holder is not present in the United
States for 183 days or more during the taxable year of the sale and certain
other conditions are met.
If a non-United States holder is engaged in a trade or business in the
United States and dividends, gain or income in respect of a share of such holder
is effectively connected with the conduct of such trade or business, the holder,
although exempt from the withholding tax discussed in the preceding paragraphs,
may be subject to United States income tax on such dividends, gain or income at
the statutory rates provided for United States holders after deduction of
deductible expenses allocable to such effectively connected dividends, gain or
income. In addition, if such a holder is a foreign corporation, it may be
subject to a branch profits tax equal to 30% of its effectively connected
earnings and profits for the taxable year, as adjusted for certain items, unless
a lower rate applies under a United States income tax treaty with the holder's
country of residence. For this purpose, dividends, gain or income in respect of
a share will be included in earnings and profits subject to the branch tax if
the dividends, gain or income is effectively connected with the conduct of the
United States trade or business of the holder.
UNITED STATES BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
Generally, a 31% "backup" withholding tax and information reporting
requirements apply to dividends paid on shares, and to proceeds from the sale of
the shares, to a noncorporate United States holder, if such a holder fails to
provide a correct taxpayer identification number and other information or fails
to comply with certain other requirements.
In the case of dividends paid on shares, and proceeds from the sale of the
shares, to a non-United States holder, backup withholding tax and information
reporting will not apply if the holder has provided the required certification
of its non-United States status under penalties of perjury or has otherwise
established an exemption. In addition, if payment is collected by a foreign
office of a foreign custodian, nominee or other agent acting on behalf of the
holder, such custodian, nominee or other agent will not be required to apply
backup withholding tax to its payments to such a holder. However, in such case
if the foreign custodian, nominee or other agent is a United States-related
person, such a foreign custodian, nominee or other agent will be subject to
certain information reporting requirements with respect to such payment unless
the foreign custodian, nominee or other agent has evidence in its records that
the holder is not a United States holder or the holder otherwise establishes an
exemption or is an exempt recipient.
A United States holder can establish an exemption from the imposition of
backup withholding tax either by providing a duly completed Internal Revenue
Service Form W-9 to his broker or paying agent, reporting his taxpayer
identification number, or by establishing its corporate or exempt status. A non-
United States holder can establish an exemption from the imposition of backup
withholding tax and information reporting by providing a duly completed Internal
Revenue Service Form W-8 to his broker or paying agent, or by otherwise
establishing his non-United States status.
Any amounts withheld under the backup withholding tax rules from a payment
to a holder will be allowed as a refund or a credit against such holder's United
States federal income tax, provided that the required information is furnished
to the United States Internal Revenue Service.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings, @Entertainment will have 33,310,000
shares of Common Stock outstanding (assuming no exercise of the Underwriters'
over-allotment option). Of these shares, the 9,500,000 shares of Common Stock
sold in the Offerings will be freely transferable and tradeable without
restriction or further registration under the Securities Act of 1933 except for
any shares purchased by any "affiliate", as defined below, of @Entertainment
which will be subject to the resale limitations of Rule 144 adopted under the
Securities Act of 1933. All the remaining shares of Common Stock held by
existing stockholders are "restricted" securities within the meaning of Rule 144
and may only be sold in the public market pursuant to an effective registration
statement under the Securities Act of 1933 or pursuant to an applicable
exemption from registration, including Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are required to be aggregated) who has been deemed to have
beneficially owned shares for at least one year, including an "affiliate", is
entitled to sell, within any three-month period, a number of shares that does
not exceed the greater of 1% of the then outstanding number of shares of Common
Stock of @Entertainment or the average weekly trading volume in @Entertainment's
shares of Common Stock during the four calendar weeks preceding the filing of
the required notice of such sale. Sales under Rule 144 may also be subject to
certain manner of sale provisions, notice requirements and the availability of
current public information about @Entertainment. A person (or persons whose
shares are required to be aggregated) who is not deemed to have been an
affiliate of @Entertainment during the three months preceding a sale, and who
has beneficially owned shares within the definition of "restricted securities"
under Rule 144 for at least two years is entitled to sell such shares under Rule
144 without regard to the volume limitation, manner of sale provisions, notice
requirements or public information requirements of Rule 144. Affiliates continue
to be subject to such limitations. As defined in Rule 144, an "affiliate" of an
issuer is a person that directly or indirectly, through one of more
intermediaries, controls, or is controlled by, or is under common control with,
such issuer.
Upon completion of the Offerings, up to approximately 3,983,000 shares of
Common Stock, which are beneficially held by certain existing stockholders of
@Entertainment, may be eligible for sale under Rule 144. @Entertainment and
stockholders who own in the aggregate 23,810,000 shares of Common Stock have
agreed that, during the period beginning from the date of this Prospectus and
continuing to and including the date 180 days after the date of the Prospectus,
they will not offer, sell, contract to sell or otherwise dispose of any
securities of @Entertainment which are substantially similar to the Common Stock
or which are convertible into or exchangeable for securities which are
substantially similar to the Common Stock without the prior written consent of
Goldman, Sachs & Co., except for the shares of Common Stock offered in
connection with the concurrent U.S. and International Offerings. Robert E.
Fowler, III, John S. Frelas, George Makowski, Przemyslaw Szmyt and David Warner,
each of whom holds options to purchase shares of Common Stock, has agreed that,
during the period beginning on the date of this Prospectus and continuing to any
including the date 728 days (two years) after the date of this Prospectus they
will not offer, sell, contract to sell or otherwise dispose of any securities of
@Entertainment which are substantially similar to shares of Common Stock or
which are convertible into or exchangeable for securities which are
substantially similar to shares of Common Stock without the prior written
consent of Goldman, Sachs & Co. See "Underwriting".
No prediction can be made as to the effect, if any, that future sales of
Common Stock, or the availability of shares of Common Stock for future sale,
will have on the market price of the Common Stock prevailing from time to time.
Sales of substantial numbers of shares of Common Stock, pursuant to a
registration statement, Rule 144 or otherwise, or the perception that such sales
may occur, could adversely affect the prevailing market price of the Common
Stock.
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@ENTERTAINMENT REGISTRATION RIGHTS AGREEMENT
In connection with the Reorganization, @Entertainment entered into a
registration rights agreement (the "Stockholder Registration Rights Agreement")
with PIHLP, ECO, Mr. Freedman, Steele LLC, AESOP and CACMT (collectively, the
"Rightsholders") on June 22, 1997. Pursuant to the Stockholder Registration
Rights Agreement, PIHLP and ECO will, after March 29, 1999, have the right under
certain circumstances to demand that @Entertainment register their shares of
Common Stock under the Securities Act of 1933. After March 29, 1999, PIHLP and
ECO will have the right to demand that @Entertainment register their shares of
Common Stock in a shelf registration under Rule 415 of the Securities Act of
1933. In addition, if @Entertainment proposes to register any of its securities
under the Securities Act of 1933 (other than registrations in connection with
employee stock ownership plans, offerings of debt securities and certain shelf
registrations), all of the Rightsholders will have the right to have their
shares of Common Stock be included in such registration. The registration rights
described above expire on March 29, 2004, and are subject to certain
limitations, including limitations on the number of shares of Common Stock to be
included by the Rightsholders in particular registrations and on the number of
demand registrations that can be required by PIHLP and ECO.
Pursuant to their stock option agreements, Messrs. Fowler, Szmyt and Warner
will, if @Entertainment proposes to register any of its securities under the Act
(other than registrations in connection with employee benefit plans, offerings
of debt securities and offerings relating to certain business combinations),
have the right to have their shares of Common Stock be included in such
registration, subject to certain limitations.
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LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for @Entertainment by Baker & McKenzie, Washington, District of Columbia and New
York, New York and for the Underwriters by Shearman & Sterling, New York, New
York. Certain matters of Polish law will be passed upon for the company by Baker
& McKenzie, Warsaw, Poland and for the Underwriters by Salans Hertzfeld &
Heilbronn, Warsaw, Poland.
EXPERTS
The consolidated financial statements and schedules of @Entertainment,
Inc., and Poland Cablevision (Netherlands) B.V. as of December 31, 1996 and 1995
and for each of the years in the three-year period ended December 31, 1996, have
been included herein in reliance upon the reports of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
With respect to the unaudited interim financial information for the periods
ended March 31, 1997 and 1996, included herein, the independent certified public
accountants have reported that they applied limited procedures in accordance
with professional standards for a review of such information. However, their
separate reports included herein state that they did not audit and they do not
express an opinion on that interim financial information. Accordingly, the
degree of reliance on their reports on such information should be restricted in
light of the limited nature of the review procedures applied. The accountants
are not subject to the liability provisions of section 11 of the Act for their
reports on the unaudited interim financial information because those reports are
not reports or a "part" of the registration statement prepared or certified by
the accountants within the meaning of sections 7 and 11 of the Securities Act of
1933.
ENFORCEABILITY OF CERTAIN CIVIL LIABILITIES
@Entertainment is organized under the laws of the State of Delaware.
Although investors in the Common Stock will be able to effect service of process
in the United States upon @Entertainment and may be able to effect service of
process upon its directors, due to the fact that @Entertainment is primarily a
holding company which holds stock in various entities in Poland, the United
Kingdom, and the Netherlands, all or a substantial portion of the assets of
@Entertainment are located outside the United States. As a result, it may not be
possible for investors to enforce against @Entertainment's assets judgments of
U.S. courts predicated upon the civil liability provisions of U.S. laws.
@Entertainment has been advised by its counsel, Baker & McKenzie, that
there is doubt as to the enforceability in Poland, in original actions or in
actions for enforcement of judgments of U.S. courts, of civil liabilities
predicated solely upon the laws of the United States. In addition, awards of
punitive damages in actions brought in the United States or elsewhere may be
unenforceable in Poland.
@Entertainment has been advised by its English solicitors, Baker &
McKenzie, that there is doubt as to the enforceability in England, in original
actions or in actions for the enforcement of judgments of United States courts,
of certain civil liabilities predicated upon the United States federal and state
securities laws.
@Entertainment also has been advised by its counsel, Baker & McKenzie, that
a final and conclusive judgment duly obtained in actions brought in the United
States will not be recognized and enforced by a Netherlands court and it will be
necessary to bring the matter before the competent Netherlands court. The
claimants may, in the course of these proceedings, submit the judgment rendered
by the court in the United States. If and to the extent that the Netherlands
court is of the opinion that fairness and good faith so require, it will give
binding effect to such foreign judgment, unless such foreign judgment
contravenes Netherlands principles of public policy.
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ADDITIONAL INFORMATION
@Entertainment has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act of
1933 with respect to the shares of Common Stock being offered by this
Prospectus. This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement, certain items of which are contained in exhibits and schedules to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to @Entertainment and the
Common Stock offered hereby, reference is made to the Registration Statement,
including the exhibits thereto, and the financial statements and notes filed as
a part thereof. Statements made in this Prospectus concerning the contents of
any contract, agreement or other document filed with the Commission as an
exhibit are not necessarily complete. With respect to each such contract,
agreement or other document filed with the Commission as an exhibit, reference
is made to the exhibit for a more complete description of the matter involved,
and each such statement shall be deemed qualified in its entirety by such
reference. The Registration Statement and the exhibits may be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at 7 World Trade Center, New York, New York 10048
and the Northwestern Atrium Center, 500 West Madison Street, Room 1400, Chicago,
Illinois 60661. Copies of such material can be obtained at prescribed rates from
the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549. The Commission maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding issuers that file electronically with the
Commission.
As a result of the Offerings, @Entertainment will become subject to the
information and reporting requirements of the Exchange Act, and in accordance
therewith will file periodic reports, proxy statements and other information
with the Commission. @Entertainment intends to furnish to its stockholders
annual reports containing audited financial statements and to make available to
its stockholders quarterly reports containing unaudited financial information
for the first three quarters of each fiscal year of the Company.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
@ENTERTAINMENT, INC.
Unaudited Interim Consolidated Financial Statements
Independent Accountants' Review Report........................................... F-2
Consolidated Balance Sheet....................................................... F-3
Consolidated Statements of Operations............................................ F-5
Consolidated Statements of Cash Flows............................................ F-6
Notes to Consolidated Financial Statements....................................... F-7
Audited Consolidated Financial Statements
Independent Auditors' Report..................................................... F-10
Consolidated Balance Sheets...................................................... F-11
Consolidated Statements of Operations............................................ F-13
Consolidated Statements of Changes in Stockholders' Equity....................... F-14
Consolidated Statements of Cash Flows............................................ F-15
Notes to Consolidated Financial Statements....................................... F-16
POLAND CABLEVISION (NETHERLANDS) B.V.
Unaudited Interim Consolidated Financial Statements
Independent Accountants' Review Report........................................... F-29
Consolidated Balance Sheet....................................................... F-30
Consolidated Statements of Operations............................................ F-32
Consolidated Statements of Cash Flows............................................ F-33
Notes to Consolidated Financial Statements....................................... F-34
Audited Consolidated Financial Statements
Independent Auditors' Report..................................................... F-35
Consolidated Balance Sheets...................................................... F-36
Consolidated Statements of Operations............................................ F-38
Consolidated Statements of Changes in Stockholders' Deficiency................... F-39
Consolidated Statements of Cash Flows............................................ F-40
Notes to Consolidated Financial Statements....................................... F-41
</TABLE>
F-1
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
@Entertainment, Inc.:
We have reviewed the accompanying consolidated balance sheet of
@Entertainment, Inc. and subsidiaries as of March 31, 1997, and the related
consolidated statements of operations and cash flows for the three-month periods
ended March 31, 1997 and 1996. These consolidated financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Hartford, Connecticut
June 23, 1997
F-2
<PAGE> 128
@ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 58,508
Investment securities.......................................................... 25,115
Accounts receivable, net of allowances of $489................................. 1,130
Other current assets........................................................... 2,943
--------
Total current assets................................................... 87,696
--------
Investment in cable television systems, at cost:
Property, plant and equipment:
Cable television system assets.............................................. 102,996
Construction in progress.................................................... 552
Vehicles.................................................................... 1,263
Other....................................................................... 2,821
--------
Total property, plant and equipment....................................... 107,632
Less accumulated depreciation............................................. (21,773)
--------
Net property, plant and equipment......................................... 85,859
Inventories for construction................................................... 7,866
Intangibles, net............................................................... 12,163
--------
Net investment in cable television systems............................. 105,888
--------
Notes receivable from affiliates................................................. 10,964
Other investments................................................................ 2,162
Other intangibles, net........................................................... 6,227
--------
Total assets........................................................... $ 212,937
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 129
@ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEET, CONTINUED
MARCH 31, 1997
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO
FORMA
ACTUAL (NOTE 6)
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 3,783 $ 3,783
Accrued interest................................................ 5,384 5,384
Deferred revenue................................................ 1,137 1,137
Accrued income taxes............................................ 3,723 3,723
Other current liabilities....................................... 2,156 62,156
-------- --------
Total current liabilities............................... 16,183 76,183
Notes payable..................................................... 129,542 129,542
-------- --------
Total liabilities....................................... 145,725 205,725
-------- --------
Minority interest................................................. 4,780 4,780
Redeemable preferred stock (liquidation value $85,000) (8,500
shares authorized, issued and outstanding)...................... 35,935 10,569
Stockholders' equity:
Common stock ($.01 par value, 50,000,000 shares authorized,
18,948,000 shares issued and outstanding).................... 189 189
Paid-in capital................................................. 53,154 18,520
Cumulative translation adjustment............................... (467) (467)
Accumulated deficit............................................. (26,379) (26,379)
-------- --------
Total stockholders' equity.............................. 26,497 (8,137)
-------- --------
Total liabilities and stockholders' equity.............. $212,937 $212,937
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 130
@ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Cable television revenue.......................................... $ 7,508 $ 5,621
---------- ----------
Operating expenses:
Direct operating expenses....................................... 2,100 1,514
Selling, general and administrative............................. 2,974 1,633
Depreciation and amortization................................... 3,450 1,729
---------- ----------
Total operating expenses................................ 8,524 4,876
---------- ----------
Operating income (loss)................................. (1,016) 745
Interest and investment income.................................... 750 43
Interest expense.................................................. (3,205) (1,604)
Foreign currency translation loss................................. (305) (94)
---------- ----------
Loss before income taxes and minority interest............... (3,776) (910)
Income tax expense................................................ (271) (505)
Minority interest in subsidiary (income) loss..................... 476 (49)
---------- ----------
Net loss..................................................... (3,571) (1,464)
Preferred stock dividends......................................... -- (1,738)
---------- ----------
Net loss applicable to holders of common stock............... $ (3,571) $ (3,202)
========== ==========
Pro forma net loss per share (note 6)........................ $ (1.85) $ (2.66)
========== ==========
Pro forma weighted average number of shares of common stock
outstanding (note 6)............................................ 21,185,121 14,486,294
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 131
@ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................. $(3,571) $(1,464)
Adjustments to reconcile net loss to net cash provided (used) by
operating activities:
Minority interest in subsidiary income (loss)..................... (476) 49
Depreciation and amortization..................................... 3,450 1,729
Other............................................................. 204 26
Changes in operating assets and liabilities:
Accounts receivable............................................. (15) 309
Other current assets............................................ (696) 2,139
Accounts payable................................................ (2,498) (25)
Income taxes payable............................................ (749) 505
Accrued interest................................................ 3,209 --
Deferred revenue................................................ 35 (68)
Other current liabilities....................................... (549) (406)
------- -------
Net cash provided (used) by operating activities............. (1,656) 2,794
------- -------
Cash flows from investing activities:
Construction of cable television systems............................. (4,471) (7,408)
Purchase of other capital assets..................................... (396) (241)
Notes receivable from affiliate...................................... (2,412) --
Other investments.................................................... (383) (111)
Purchase of subsidiaries, net of cash received....................... -- (40)
------- -------
Net cash used by investing activities........................ (7,662) (7,800)
------- -------
Cash flows from financing activities:
Net proceeds from issuance of stock.................................. -- 82,028
Redemption of preferred stock........................................ -- (8,500)
Costs to obtain loans................................................ (107) (80)
Repayment of notes payable........................................... (550) (10,642)
Repayments to affiliates............................................. -- (39,859)
------- -------
Net cash (used) provided by financing activities............. (657) 22,947
------- -------
Net (decrease) increase in cash and cash equivalents......... (9,975) 17,941
Cash and cash equivalents at beginning of period....................... 68,483 2,343
------- -------
Cash and cash equivalents at end of period............................. $58,508 $20,284
======== ========
Supplemental cash flow information:
Cash paid for interest............................................ $ 3 $ 1,485
Cash paid for income taxes........................................ $ 1,005 $ 445
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 132
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
The information furnished by @Entertainment ("the Company") in the
accompanying unaudited Consolidated Balance Sheet, Statements of Operations, and
Statements of Cash Flows reflect all adjustments (consisting only of items of a
normal recurring nature) which are, in the opinion of management, necessary for
a fair statement of the Company's results of operations and financial position
for the interim periods. The financial statements should be read in conjunction
with the audited financial statements and notes for the year ended December 31,
1996. The interim financial results are not necessarily indicative of results
for the full year.
1. THE REORGANIZATION
The Company is in the process of an initial public offering of stock in the
United States and internationally (the "Offerings"). Before the Offerings, all
the holders of shares of Poland Communications, Inc.'s ("PCI's") common stock
and @Entertainment, Inc. entered into a Contribution Agreement dated as of June
22, 1997 (the "Contribution Agreement"). Pursuant to the Contribution Agreement,
each holder of shares of PCI's common stock transferred all shares of PCI common
stock owned by it to @Entertainment, Inc. In addition, ECO Holdings III Limited
Partnership ("ECO") transferred all of the outstanding shares of PCI's voting
Series B Preferred Stock (the "PCI Series B Preferred Stock") to @Entertainment,
Inc. All of these transfers (the "Share Exchange") were designed to qualify as a
tax-free exchange under section 351 of the Internal Revenue Code of 1986, as
amended (the "Code"). Each holder of PCI's common stock received 1,000 shares of
Common Stock of @Entertainment, Inc. in exchange for each share of PCI's common
stock transferred by it (the "Capital Adjustment"). ECO also received an
equivalent number of shares of @Entertainment, Inc.'s Series B Preferred Stock
("@Entertainment, Inc. Series B Preferred Stock") in exchange for its shares of
PCI Series B Preferred Stock. The @Entertainment, Inc. Series B Preferred Stock
has identical rights and preferences to those of the PCI Series B Preferred
Stock, except that the ratio for conversion of such shares into common stock
increased from 1:1.9448 to 1:1,944.80 in order to reflect the Capital
Adjustment. The 2,500 outstanding shares of @Entertainment, Inc. Series B
Preferred Stock will automatically convert into 4,862,000 shares of common stock
of @Entertainment, Inc. upon the closing of the Offerings (the "Automatic
Conversion").
On June 20, 1997, Polish Investments Holding L.P. ("PIHLP") transferred all
of the outstanding shares of PCI's Series C Preferred Stock to an entity owned
by certain of the beneficial owners of PIHLP and members of their families (the
"Chase Entity"). The Chase Entity, ECO and @Entertainment, Inc. entered into a
Purchase Agreement dated as of June 22, 1997 (the "Purchase Agreement"). Among
other matters, the Purchase Agreement obligates @Entertainment, Inc. to purchase
all of the outstanding shares of PCI's Series A Preferred Stock and Series C
Preferred Stock for cash from ECO and the Chase Entity, respectively, at the
closing of the Offerings (the "Cash Purchases"). The aggregate purchase price of
$60.0 million for PCI's Series A Preferred Stock and Series C Preferred Stock
equals the aggregate redemption price of such shares as set forth in PCI's
certificate of incorporation. The Cash Purchases will be funded with a portion
of the net proceeds of the Offerings.
In June 1997, @Entertainment, Inc. acquired all of the outstanding stock of
@EL, a new corporation organized under the laws of England and Wales (the "@EL
Incorporation"). @EL will be responsible for the Company's D-DTH business.
In June 1997, certain employment agreements for the executive officers of
the Company who were employed by PCI and their employee stock option agreements
were assigned to the Company by PCI (the "Assignment"). As part of the
Assignment and the Capital Adjustment, the employment agreements were amended to
provide that each option to purchase a share of PCI's common stock was exchanged
F-7
<PAGE> 133
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for an option to purchase 1,000 shares of @Entertainment, Inc. Common Stock,
with a proportionate reduction in the per share exercise price.
The Share Exchange, Capital Adjustment, @EL Incorporation and the
Assignment are collectively referred to as the "Reorganization". As a result of
the Reorganization, the Company owns all of the outstanding shares of voting
stock of PCI and all of the outstanding shares of common stock of @EL. The
Automatic Conversion and Cash Purchases will occur upon the closing of the
Offerings.
PCI's consolidated assets and liabilities were transferred to
@Entertainment, Inc. using PCI's historical cost.
2. PER SHARE INFORMATION
The Company has presented historical loss per common share information
assuming the common stock exchange of 1 to 1,000 shares outlined in Note 1
occurred on January 1, 1995. Pursuant to Securities and Exchange Commission
Staff Accounting Bulletin Topic 4:D stock and stock options granted during the
12-month period preceding the date of the Company's initial public offering
(IPO) have been included in the calculation of weighted average common shares
outstanding for periods prior to the IPO including where the impact is
anti-dilutive. The computation of weighted average common shares and equivalent
outstanding as of March 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Weighted average common shares outstanding exclusive of
issuances within 12 months of IPO............................ 18,948,000 12,215,000
Incremental shares assumed to be outstanding related to stock
options granted within 12 months prior to IPO................ 526,800 526,800
----------- -----------
Weighted average common shares and equivalents outstanding..... 19,474,800 12,741,800
========== ==========
</TABLE>
3. ACQUISITION
On March 31, 1997, the Company acquired a cable television system located
in Wroclaw for $530,000.
4. STOCK OPTION AGREEMENTS
Effective January 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS
123"), which gives companies the option to adopt the fair value based method for
expense recognition of employee stock options and other stock-based awards or to
account for such items using the intrinsic value method as outlined under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25") with pro forma disclosure of net income (loss) and earnings
(loss) per share as if the fair value method had been applied. The Company has
elected to apply APB 25 and related interpretations for stock options and other
stock-based awards.
The Company has entered into Stock Option Agreements with certain executive
officers. The Stock Option Agreements in place on March 31, 1997 would provide
for the issuance of an additional 1,912,000 shares of common stock at a price in
excess of $6.7 million over various vesting periods through the year 2002.
However, 1,671,000 shares become fully vested and available upon the Company
filing of an initial public offering.
F-8
<PAGE> 134
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
SHARES UNDER OPTION
-------------------------------
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at January 1, 1997.............................. 241,000 1.99
Granted..................................................... 1,671,000 3.71
Outstanding at March 31, 1997............................... 1,912,000 3.49
Options exercisable at March 31, 1997....................... 515,000 3.71
</TABLE>
The exercise prices range from $1.99 to $3.71 per share and the weighted
average remaining contractual life is 3 years.
Had compensation cost been recognized consistent with SFAS 123, the
Company's pro forma net loss applicable to common stockholders for the quarter
ended March 31, 1997 would have been increased to $(4,726) from the reported
amount of $(4,551), and pro forma net loss per share for this period would have
increased from $(.23) to $(.24). The per share weighted-average value of stock
options issued by the Company through March 31, 1997 was $1.39 on the grant date
using a Black-Scholes calculation. The Company used the following
weighted-average assumptions to determine the fair value of stock options
granted: expected term of four years, risk-free interest rate of 6.1%, expected
volatility of 40%, and no dividend yield.
The Company granted options in January 1997 at a price substantially below
the mid-point of the estimated range of the prices specified on the cover page
of the Prospectus. Such options vest in full upon the completion of the
Offerings. In accordance with generally accepted accounting principles, the
Company will recognize approximately $16 million of compensation expense for
these options in the period the Offerings are completed. The compensation
expense represents the difference between the exercise price of the options and
their fair market value on date of grant.
5. SUBSEQUENT EVENTS
On April 11, 1997 Poland Cablevision B.V. ("PCBV"), a subsidiary of the
Company elected to be treated as a partnership for United States Federal income
tax purposes instead of a corporation. The deemed conversion from the status of
corporation to partnership was effective as of January 29, 1997. Although PCBV
has made this election, it will continue in existence in its present legal form
under Dutch Company Law, and will not make any actual liquidating distributions
to its stockholders.
On April 1, 1997, the Company contracted to buy all of the remaining
advertising inventory for the Term of the Agreement defined as a period of 12
months for a total price of $4,950,000 from Ground Zero Media, a limited
liability company, organized and existing under the laws of the Republic of
Poland and in which the Company through its wholly owned subsidiary, Mozaic,
Inc. owns 45% of the outstanding common stock. The Agreement will have the
Company assume the responsibility for selling advertising to be shown on and
marketing of Atomic TV, a music program aired in Poland.
On June 11, 1997, the Company purchased 66% of a cable television system
company that services approximately 65,000 subscribers in several cities and
towns in western Poland for approximately $10.8 million. In addition, the
Company is obligated to loan an additional $7.0 million to the newly acquired
company.
6. PRO FORMA INFORMATION
The pro forma balance sheet assumes the purchase of the PCI Series A
Preferred Stock and the PCI Series C Preferred Stock occurred on January 1,
1996. The aggregate liquidation value of $60 million has been shown in other
current liabilities and the excess of the liquidation value over the historical
carrying value has been shown as a reduction of paid-in capital.
F-9
<PAGE> 135
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The pro forma net loss per share has been calculated on the assumption that
the outstanding shares of PCI Series A Preferred Stock and PCI Series C
Preferred Stock were repurchased on January 1, 1996. The pro forma weighted
average number of shares of Common Stock outstanding includes the number of
shares of Common Stock required to be sold at $20.25 per share (the mid-point of
the estimated range specified on the cover page of the Prospectus) to pay the
difference between the liquidation values of the PCI Series A Preferred Stock
and PCI Series C Preferred Stock and their historical carrying values. Such
difference of $35,614,000 will be shown as an increase in the net loss
applicable to common stockholders in the period of redemption.
F-10
<PAGE> 136
INDEPENDENT AUDITORS' REPORT
The Board of Directors
@Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of @Entertainment,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of @Entertainment, Inc.
and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1996, in conformity with U.S. generally accepted accounting
principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
March 26, 1997, except as to
Notes 1, 15 and 16 which are as of
June 23, 1997
F-11
<PAGE> 137
@ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 7)................................. $ 68,483 $ 2,343
Investment securities (note 2)..................................... 25,115 --
Accounts receivable, net of allowances of $545 in 1996 and $510 in
1995 ........................................................... 1,215 842
Due from affiliate (note 12)....................................... -- 1,699
Other current assets (note 5)...................................... 2,247 1,367
-------- --------
Total current assets....................................... 97,060 6,251
-------- --------
Investment in cable television systems, at cost (note 4):
Property, plant and equipment:
Cable television system assets.................................. 98,291 54,441
Construction in progress........................................ 410 6,758
Vehicles........................................................ 1,199 896
Other........................................................... 2,667 1,806
-------- --------
Total property, plant and equipment........................... 102,567 63,901
Less accumulated depreciation................................. (19,143) (11,581)
-------- --------
Net property, plant and equipment............................. 83,424 52,320
Inventories for construction....................................... 7,913 4,609
Intangibles, net................................................... 12,133 1,976
-------- --------
Net investment in cable television systems................. 103,470 58,905
-------- --------
Notes receivable from affiliates (note 12)........................... 8,491 --
Other investments (notes 3 and 14)................................... 2,157 1,034
Other intangibles, net (note 4)...................................... 6,359 1,868
-------- --------
Total assets............................................... $217,537 $ 68,058
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-12
<PAGE> 138
@ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS, CONTINUED
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 6,281 $ 1,675
Accrued interest (note 7).......................................... 2,175 --
Notes payable (note 7)............................................. -- 13,006
Deferred revenue................................................... 1,102 1,233
Income taxes payable (note 6)...................................... 4,472 4,138
Other current liabilities (notes 5 and 8).......................... 2,175 3,382
-------- --------
Total current liabilities.................................. 16,205 23,434
Notes payable to affiliates (note 12)................................ -- 37,512
Notes payable (note 7)............................................... 130,074 8,887
-------- --------
Total liabilities.......................................... 146,279 69,833
-------- --------
Minority interest.................................................... 5,255 (1,965)
Redeemable preferred stock (liquidation value $85,000; 8,500 shares
authorized, issued and outstanding) (note 10)...................... 34,955 --
Stockholders' equity (note 9):
Preferred stock (2,000 shares authorized, 985 shares
outstanding).................................................... -- 10,311
Common stock:
Common stock ($.01 par, 50,000,000 shares authorized, 18,948,000
shares issued and outstanding)................................. 189 --
Class A (no par value, 20,000 shares authorized, 10,037 shares
issued and outstanding)........................................ -- 4,992
Class B (no par value, 10,000 shares authorized, 1,000 shares
issued and outstanding)........................................ -- 1
Paid-in capital.................................................... 54,134 1,544
Cumulative translation adjustment.................................. (162) 599
Accumulated deficit................................................ (23,113) (17,257)
-------- --------
Total stockholders' equity................................. 31,048 190
-------- --------
Commitments and contingencies (notes 12 and 13)...................... -- --
-------- --------
Total liabilities, minority interest, redeemable preferred
stock and stockholders' equity........................... $217,537 $ 68,058
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-13
<PAGE> 139
@ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF U.S. DOLLARS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cable television revenue............................ $ 24,923 $ 18,557 $ 8,776
----------- ----------- -----------
Operating expenses:
Direct operating expenses......................... 7,193 5,129 2,119
Selling, general and administrative............... 9,289 4,684 2,818
Depreciation and amortization..................... 9,788 5,199 3,459
----------- ----------- -----------
Total operating expenses.................. 26,270 15,012 8,396
----------- ----------- -----------
Operating income (loss)................... (1,347) 3,545 380
Interest and investment income...................... 1,274 174 78
Interest expense.................................... (4,687) (4,373) (2,327)
Foreign currency translation loss................... (761) (17) (27)
----------- ----------- -----------
Loss before income taxes, minority interest and
extraordinary item........................... (5,521) (671) (1,896)
Income tax expense (note 6)......................... (1,273) (600) (803)
Minority interest in subsidiary (income) loss....... 1,890 (18) 316
----------- ----------- -----------
Loss before extraordinary loss on early
extinguishment of debt....................... (4,904) (1,289) (2,383)
Extraordinary loss on early extinguishment of debt
(Note 7).......................................... (1,713) -- --
----------- ----------- -----------
Net loss....................................... (6,617) (1,289) (2,383)
Preferred stock dividends........................... (1,738) -- (1,811)
Excess of carrying amount of preferred stock over
fair value of consideration transferred........... 3,549 -- --
----------- ----------- -----------
Net loss applicable to holders of common stock...... (4,806) (1,289) (4,194)
=========== =========== ===========
Pro forma loss per share of common stock before
extraordinary item........................... (2.11)
Extraordinary loss per share................... (.09)
-----------
Pro forma net loss per share of common
stock (note 17)......................... (2.20)
Pro forma weighted average number of shares of
common stock outstanding (note 17)........... 19,542,294
</TABLE>
See accompanying notes to consolidated financial statements.
F-14
<PAGE> 140
@ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK CUMULATIVE
----------------- -------------------- PAID-IN TRANSLATION ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT TOTAL
------ -------- ---------- ------- ------- ----------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 1, 1994...... 812 $ 8,500 9,188 $4,381 $ 3,355 $ 643 $ (13,629) $ 3,250
Translation adjustment..... -- -- -- -- -- (27) 27 --
Net loss................... -- -- -- -- -- -- (2,383) (2,383)
Stock dividend............. 173 1,811 -- -- (1,811) -- -- --
Issuance of stock.......... -- -- 1,849 612 -- -- -- 612
------ ------- ---------- ------ ------- ----- -------- -------
Balance December 31, 1994.... 985 10,311 11,037 4,993 1,544 616 (15,985) 1,479
Translation adjustment..... -- -- -- -- -- (17) 17 --
Net loss................... -- -- -- -- -- (1,289) (1,289)
------ ------- ---------- ------ ------- ----- -------- -------
Balance December 31, 1995.... 985 10,311 11,037 4,993 1,544 599 (17,257) 190
Translation adjustment..... -- -- -- -- -- (761) 761 --
Net loss................... -- -- -- -- -- -- (6,617) (6,617)
Stock dividend............. 166 1,738 -- -- (1,738) -- -- --
Issuance of stock............ -- -- -- -- -- -- -- --
Proceeds................... -- -- 7,911 (4,992) 82,021 -- -- 82,029
Cost of issuance........... -- -- -- -- (1,028) -- -- (1,028)
Amount of preferred........ -- -- -- -- (32,156) -- -- (32,156)
Preferred stock
redemption............... (1,151) (12,049) -- -- 3,549 -- -- (8,500)
Accretion of redeemable
preferred stock.......... -- -- -- -- (2,870) -- -- (2,870)
Reorganization............. -- -- 18,929,052 188 (188) -- -- --
------ ------- ---------- ------ ------- ----- -------- -------
Balance December 31, 1996.... -- $ -- 18,948,000 $ 189 $54,134 $(162) $ (23,113) $31,048
====== ======= ========== ====== ======= ===== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-15
<PAGE> 141
@ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (6,617) (1,289) (2,383)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Minority interest in subsidiary income (loss).......... (1,890) 18 (316)
Depreciation and amortization.......................... 9,788 5,199 3,459
Write-off of deferred financing costs.................. 1,566 -- --
Other.................................................. 341 349 107
Interest expense added to notes payable to
affiliates........................................... -- 2,379 2,085
Changes in operating assets and liabilities:
Accounts receivable.................................. (796) (785) 49
Other current assets................................. (2,037) (343) (634)
Accounts payable..................................... 3,186 1,003 470
Income taxes payable................................. 334 600 780
Accrued interest..................................... 2,175 -- --
Deferred revenue..................................... (131) 152 458
Other current liabilities............................ 193 (3,444) (2,476)
-------- ------- -------
Net cash provided by operating activities......... 6,112 3,839 1,599
-------- ------- -------
Cash flows from investing activities:
Construction of cable television systems.................. (25,372) (16,014) (11,695)
Purchase of other capital assets.......................... (1,209) (701) (244)
Notes receivable from affiliate........................... (8,491) -- --
Other investments......................................... (25,940) (1,207) (402)
Purchase of subsidiaries, net of cash received............ (13,849) (4,063) --
-------- ------- -------
Net cash used by investing activities.................. (74,861) (21,985) (12,341)
-------- ------- -------
Cash flows from financing activities:
Net proceeds from issuance of stock....................... 81,001 -- --
Redemption of preferred stock............................. (8,500) -- --
Costs to obtain loans..................................... (6,513) (1,036) (1,144)
Proceeds from notes payable............................... 136,074 14,533 7,000
Repayment of notes payable................................ (27,893) -- --
Borrowings from (repayments to) affiliates................ (39,280) 4,499 6,830
-------- ------- -------
Net cash provided by financing activities......... 134,889 17,996 12,686
-------- ------- -------
Net increase (decrease) in cash and cash
equivalents..................................... 66,140 (150) 1,944
Cash and cash equivalents at beginning of year.............. 2,343 2,493 549
-------- ------- -------
Cash and cash equivalents at end of year.................... $ 68,483 2,343 2,493
========= ======= =======
Supplemental cash flow information:
Cash paid for interest................................. $ 2,338 1,992 209
Cash paid for income taxes............................. 1,184 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-16
<PAGE> 142
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Reporting Entity
@Entertainment, Inc. was formed in May 1997. On June 22, 1997 the common
stockholders of Poland Communications, Inc. ("PCI") exchanged each of their
shares in PCI for 1,000 shares of @Entertainment, Inc. in a transaction
accounted for in a manner similar to a pooling of interests. @Entertainment,
Inc. had no prior operations. All share and per share data have been revised to
reflect the new capital structure.
@Entertainment, Inc. (the "Company") wholly owns PCI and Mozaic, Inc. All
are U.S. corporations. PCI owns 92.3% of the capital stock of Poland Cablevision
(Netherlands) B.V. ("PCBV"), a Netherlands corporation and first-tier subsidiary
of PCI. The Company, PCI and PCBV are holding companies that hold controlling
interest in a number of Polish cable television companies, collectively referred
to as the "PTK Companies". Mozaic, Inc. was established during 1996 to develop
and invest in programming for the PTK Companies. All significant assets and
operating activities of the Company are located in Poland.
Principles of Consolidation
The consolidated financial statements include the financial statements of
the Company and its wholly owned and majority owned subsidiaries. Also
consolidated are two 49% owned subsidiaries for which PCI maintains control of
operating activities and has the ability to influence the appointment of members
to the Managing Boards. As discussed in Note 14, PCI has entered into an
agreement in 1997 with one of these subsidiaries (PTK-Ryntronik) to purchase the
remaining 51% ownership. PCI also owns a 33% ownership interest in ProCable Sp.
z o.o. which is accounted for using the equity method. All significant
intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principals. Actual results could
differ from those estimates.
Revenue
Revenue is primarily derived from the sale of cable television services to
retail customers in Poland. Revenue from subscription fees is recognized on a
monthly basis as the service is provided. Installation fee revenue, for
connection to the Company's cable television systems, is recognized to the
extent of direct selling costs and the balance is deferred and amortized to
income over the estimated average period that new subscribers are expected to
remain connected to the systems.
Taxation
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
F-17
<PAGE> 143
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Foreign:
The PTK Companies are subject to corporate income taxes, value added tax
(VAT) and various local taxes within Poland, as well as import duties on
materials imported by them into Poland. Under Polish law, the PTK Companies are
exempt from import duties on certain in-kind capital contributions.
The PTK Companies' income tax is calculated in accordance with Polish tax
regulations. Due to differences between accounting practices under Polish tax
regulations and those required by U.S. GAAP, certain income and expense items
are recognized in different periods for financial reporting purposes and income
tax reporting purposes which may result in deferred income tax assets and
liabilities.
U.S.:
The Company and PCI are subject to U.S. Federal taxation of their worldwide
income. The PTK Companies and PCBV are foreign corporations which are not
expected to be engaged in a trade or business within the U.S. or to derive
income from U.S. sources and accordingly, are not subject to U.S. income tax.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and other short term investments
with original maturities of less than three months.
Investment Securities
Investment securities consist of short term investments with original
maturities ranging from four to six months. In accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," ("SFAS No. 115"), the Company has classified all
securities as held to maturity. Securities held to maturity are limited to
securities for which the Company has the positive intent and the ability to hold
to maturity. Held to maturity securities are carried at amortized cost on the
balance sheet.
Investment in Cable Television Systems
The investment in the Company's cable television systems includes property,
plant and equipment used in the development and operation of the various cable
television systems. During the period of construction, plant costs and a portion
of design, development and related overhead costs are capitalized as a component
of the Company's investment in cable television systems. The Company capitalizes
interest costs incurred during the period of construction in accordance with
Statement of Financial Accounting Standards No. 34, "Capitalization of Interest
Cost". Interest is not capitalized for short-term construction projects.
Subscriber related costs and general and administrative expenses are charged to
operations when incurred. Depreciation is computed for financial reporting
purposes using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Cable television system assets......................... 10 years
Vehicles............................................... 5 years
Other property, plant and equipment.................... 5 - 40 years
</TABLE>
F-18
<PAGE> 144
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories for Construction
Inventories for construction are stated at the lower of cost, determined by
the average cost method, or net realizable value. Inventories are principally
related to work-in-progress in the various cable television systems.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally eight to ten years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The
assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
Intangibles
The Company has entered into agreements with the Polish telephone company
("TPSA"), for the use of underground telephone conduits for cable wiring. Costs
related to obtaining conduit and franchise agreements with housing cooperatives
and governmental authorities are capitalized and amortized generally over a
period of ten years. In the event the Company does not proceed to develop cable
systems within designated cities, costs previously capitalized will be charged
to expense.
Organization costs are capitalized and amortized over a one-year period.
Costs incurred to obtain financing have been deferred and amortized over the
life of the loan using the straight-line method.
Foreign Currency Translation
Translation of the Polish foreign currency accounts into U.S. dollars has
been performed in accordance with SFAS No. 52 (Foreign Currency Translation).
This standard requires that entities operating in countries with economies
deemed to be highly inflationary translate all monetary assets and liabilities
into U.S. dollars at the exchange rate in effect at year end and non-monetary
assets and liabilities at historical or transaction date rates. Revenues and
expenses are translated at the average exchange rate over the reporting period.
For 1996, 1995 and 1994 inflation was 19.9%, 26.8% and 33.3%, respectively
yielding a three year cumulative inflation rate of 102.7%.
Effective January 1, 1995, the Polish monetary denomination (old zffioty)
was redenominated at a rate of 10,000 old zffioty to one new zffioty and one
hundred old zffioty to one groszy. The new and old Polish zffioty had an
exchange rate of 2.875 PLN, 2.468 PLN and 24,372zl to one U.S. dollar at
December 31, 1996, 1995 and 1994, respectively.
Computation of Net Loss per Common Share
The computation of net loss per common share is based on the weighted
average number of shares of common stock outstanding determined in accordance
with Securities and Exchange Commission Staff Accounting Bulletin Topic 4:D.
Fair Value of Financial Instruments
SFAS No. 107 (Disclosures about Fair Value of Financial Instruments)
requires the Company to make disclosures of fair value information of all
financial instruments, whether or not recognized on the consolidated balance
sheets for which it is practicable to estimate fair value.
F-19
<PAGE> 145
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's financial instruments include cash, cash equivalents,
investment securities, accounts receivable, notes receivable from affiliates,
other current assets, other investments, accounts payable, other liabilities,
notes payable and redeemable preferred stock.
The carrying value of cash, cash equivalents, investment securities,
accounts receivable, other current assets, other investments, accounts payable,
and other liabilities on the accompanying consolidated balance sheets
approximates fair value due to the short maturity of these instruments.
The carrying value of the redeemable preferred stock has been determined
based upon the amount of future cash flows required discounted using the
Company's estimated borrowing rate for similar instruments.
The recorded balance of the Company's notes payable approximates their fair
values which have been estimated based on the current rates offered for debt of
the same type and maturity. It was not practicable to estimate the fair value of
notes receivable from affiliates due to the nature of these instruments, the
circumstances surrounding their issuance, and the absence of quoted market
prices for similar financial instruments.
Impairment of Long-Lived Assets
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" on January 1, 1996. This statement requires
that long-lived assets and certain identifiable intangibles be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Adoption of this statement did not have an impact on the Company's
financial position, results of operations, or liquidity.
Advertising Costs
All advertising costs of the Company are expensed as incurred.
Reclassifications
Certain 1994 and 1995 amounts have been reclassified to conform to the 1996
presentation.
2. INVESTMENT SECURITIES
Investment securities consist of short-term corporate bonds with original
maturities ranging from four to six months. The Company has the ability and the
intent to hold these securities to maturity. As of December 31, 1996, the
aggregate securities balance consists of securities with an amortized cost of
$25,115,000, unrealized holding gains of $227,000, and a fair value of
$25,342,000. There were no investments securities as of December 31, 1995.
F-20
<PAGE> 146
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS
During 1995, the Company acquired four cable television companies for
aggregate consideration of $4,075,000. The acquisitions have been accounted for
as purchases with the purchase price allocated among the assets acquired based
upon their fair values at date of acquisition. The results of the acquired
companies have been included in the Company results since January 1, 1995. Had
the 1995 acquisitions occurred on January 1, 1994, the Company's pro forma
consolidated results for the year ended December 31, 1994 would have been as
follows:
<TABLE>
<CAPTION>
(UNAUDITED)
<S> <C>
Revenue................................................... $15,653
Loss before income taxes and minority interest............ (2,111)
Net loss.................................................. (2,598)
Net loss per share........................................ $ (0.24)
</TABLE>
During 1996, the Company acquired substantially all of the cable television
system assets of twenty-six cable television companies for aggregate
consideration of approximately $15,600,000. The acquisitions have been accounted
for as purchases with the purchase price allocated among the assets acquired and
liabilities assumed based upon their fair values at date of acquisition and any
excess as goodwill. The results of the acquired companies have been included
with the Company's results since their dates of acquisition. Had the 1996
acquisitions occurred on January 1, 1996 and January 1, 1995, the Company's pro
forma consolidated results for the years ended December 31, 1996 and 1995 would
have been as follows:
<TABLE>
<CAPTION>
1996 1995
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Revenue............................................. $ 31,667 $ 26,247
Loss before income taxes and minority interest...... (6,720) (12)
Net loss............................................ (5,951) (522)
Net loss per share.................................. $ (0.34) $ (0.05)
</TABLE>
During December 1996, the Company entered into a preliminary purchase
agreement for a cable television system operating in the Opole area and prepaid
the $1,400,000 purchase price, which is included in other investments in the
accompanying consolidated balance sheet at December 31, 1996. The agreement
provides that it becomes legally effective on the date of regulatory approval by
the Polish Office for Protection of Competition and Consumers ("Anti-Monopoly
Office").
Included in minority interest at December 31, 1996 is approximately $9.1
million relating to the acquisition of two subsidiaries.
F-21
<PAGE> 147
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. INTANGIBLES
Intangible assets at December 31, 1996 and 1995 are carried at cost and
consist of the following (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Conduit and franchise agreements........................ $ 5,391 $ 1,230
Goodwill................................................ 6,730 929
Deferred financing costs................................ 8,658 2,131
Organization costs...................................... 988 864
Other................................................... 120 318
------- ------
21,887 5,472
Less accumulated amortization........................... (3,395) (1,628)
------- ------
Net intangible assets................................... $18,492 $ 3,844
======= ======
</TABLE>
5. OTHER CURRENT ASSETS AND LIABILITIES
Included in other current assets is $1,203,000 and $593,000 of VAT
receivables as of December 31, 1996 and 1995, respectively.
Included in other current liabilities at December 31, 1996 and 1995 is a
liability of $352,000 and $89,000 for income taxes payable, respectively and
approximately $726,000 and $767,000 related to accrued programming fees.
6. INCOME TAXES
The components of the provision for income taxes for the years ended
December 31, 1996, 1995 and 1994 are as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
------ ---- ----
<S> <C> <C> <C>
U.S. Federal income taxes.......................... $ 714 $587 $629
State income taxes................................. 531 13 151
Foreign jurisdictions.............................. 28 -- 23
------ ---- ----
Total current income taxes.................... 1,273 600 803
U.S. deferred income taxes......................... -- -- --
------ ---- ----
Total income tax expense...................... $1,273 $600 $803
====== ==== ====
</TABLE>
Sources of loss before income taxes and minority interest from domestic and
foreign sources for the years ended December 31, 1996, 1995 and 1994 are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Domestic (loss).............................. (2,602) (1,115) (1,117)
Foreign income (loss)........................ (4,632) 444 (779)
------ ------ ------
Total................................... (7,234) (671) (1,896)
====== ====== ======
</TABLE>
F-22
<PAGE> 148
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of income tax expense from continuing operations for the
years ended December 31, 1996, 1995 and 1994 differed from the amounts computed
by applying the U.S. Federal statutory tax rates to pretax income from
continuing operations as a result of the following (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
------- ----- ------
<S> <C> <C> <C>
Computed "expected" Federal income tax
(benefit)..................................... $(2,460) $(228) $ (645)
State income taxes, net of Federal benefit...... 184 65 32
Permanent differences........................... 17 69 76
Change in valuation allowance................... 3,504 667 1,317
Other........................................... 28 27 23
------- ----- ------
$ 1,273 $ 600 $ 803
======= ===== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996, 1995 and 1994 are presented below (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Deferred tax assets:
Deferred compensation........................ $ 377 $ 213 $ 744
Polish net operating loss carryforward....... 2,015 977 492
Interest income.............................. 1,867 1,164 792
Service revenue.............................. 2,368 2,155 2,024
Accrued liabilities.......................... 1,935 524 163
Other items.................................. 104 72 223
------- ------- -------
Total gross deferred tax assets.............. 8,666 5,105 4,438
Less valuation allowance..................... (8,609) (5,105) (4,438)
------- ------- -------
Net deferred tax assets...................... $ 57 $ -- $ --
======= ======= =======
Deferred tax liabilities:
Prepaid expenses............................. $ (57) $ -- $
======= ======= =======
Total gross deferred tax liabilities......... $ (57) $ -- $
======= ======= =======
</TABLE>
The effective income tax rate differs from the statutory U.S. Federal
income tax rate for 1996, 1995 and 1994 principally due to future deductible
items and losses from which U.S. or foreign tax benefits are currently not
expected to be realized. Due to uncertainties regarding their recoverability the
effect of these losses has been eliminated through the recording of a valuation
allowance. The valuation allowance for deferred tax assets as of January 1, 1994
was $3,121,000. The net changes in the valuation allowance for the years ended
December 31, 1996, 1995 and 1994 were increases of $3,504,000, $667,000, and
$1,116,000, respectively.
F-23
<PAGE> 149
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company had net operating loss carryforwards from foreign jurisdictions
of approximately $3,717,000, which will expire as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
FOREIGN
YEARS ENDING DECEMBER 31, JURISDICTIONS
---------------------------------------- -------------
<S> <C>
1997.................................... $ 1,824
1998.................................... 1,341
1999 and thereafter..................... 552
------
$ 3,717
======
</TABLE>
7. NOTES PAYABLE
The Company signed a $13,500,000 financing agreement with Overseas Private
Investment Corporation ("OPIC") of which $8,600,000 was outstanding at December
31, 1995. The loan was repaid in full during 1996. Accordingly, the Company
recorded an extraordinary loss of $1,713,000 related to the early retirement of
debt. The extraordinary loss was comprised of a $147,000 prepayment penalty and
$1,566,000 relating to the write-off of deferred financing costs. There was no
tax effect of this transaction due to foreign jurisdiction net operating loss
carryforwards. Under terms of the financing agreement, the Company maintained a
restricted compensating cash balance of $983,000 at December 31, 1995.
In October 1995, the Company entered into an agreement with American Bank
in Poland S.A. for a Polish currency denominated revolving credit loan and a
U.S. dollar denominated promissory note, of which approximately $2,482,000 was
outstanding at December 31, 1995. These loans were repaid in full during 1996.
During August 1995, the Company entered into a $10,000,000 loan agreement
with the Bank of Boston Connecticut which was subsequently repaid in February
1996.
In August 1996, the Company entered into a $6,500,000 revolving credit loan
agreement with American Bank in Poland, S.A. of which $550,000 was outstanding
at December 31, 1996. Funds are available under the credit agreement through
December 31, 1998 and interest is based on LIBOR plus 3% (8.60% in aggregate at
December 31, 1996) and is due quarterly. All advances under the loan must be
repaid by August 20, 1999.
During October 1996, the Company issued $130,000,000, 9.875% unsecured
Senior Notes that become due November 1, 2003. The Senior Notes are net of
$476,000 of unamortized discount at December 31, 1996. Interest is due
semi-annually commencing May 1, 1997 and the Company has accrued $2,175,000 of
interest expense for the year ended December 31, 1996. The Senior Notes include
certain covenants which include the limitation on additional indebtedness, the
limitation on restricted payments, the limitation on issuances of capital stock
of subsidiaries, the limitation on transactions with affiliates, the limitation
on liens, the limitation on issuances of guarantees of indebtedness by
subsidiaries, the purchase of Senior Notes upon a change of control, the
limitation on sale of assets, the limitation on dividends and other payment
restrictions affecting subsidiaries, the limitation on investments in
unrestricted subsidiaries and a limitation on lines of business. The Company is
in compliance with these covenants.
Interest expense relating to the above notes payable was $3,380,000,
$850,000 and $159,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
8. OTHER CURRENT LIABILITIES
The Company has compensation agreements with certain employees to defer a
portion of their annual bonus and salary. The deferred compensation liability
associated with these agreements was approximately $922,000 and $518,000 as of
December 31, 1996 and 1995, respectively. The deferred compensation expense
associated with these agreements was $357,000, $250,000 and $234,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
F-24
<PAGE> 150
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company entered into a repayment agreement with a supplier of cable
television system materials allowing the Company to repay amounts owed to the
supplier in consecutive monthly installments. The Company repaid the supplier in
full in April 1996 and had a balance of $1,004,000 outstanding at December 31,
1995.
9. STOCKHOLDERS' EQUITY
The Company had outstanding at December 31, 1995, 985 shares of Preferred
Stock, which was convertible into 812 shares of Class A common stock. The
Company had the option of redeeming the preferred stock in whole or in part from
January 1, 1996 through December 31, 2002. However, as discussed below, the
Preferred Stock was exchanged for new Series D Preferred Stock during March
1996.
During February 1996, the Company issued to certain stockholders an
additional 2,437 shares of Class A Common Stock in accordance with the
provisions of the Stockholder Agreement dated June 27, 1991. The shares were
issued at a nominal value of $.01 each. Also during February 1996, the Company
issued a stock dividend of 166 shares of Series A Preferred Stock to the
preferred stock stockholder.
During March 1996, the Company completed several transactions including
restating its certificate of incorporation, issuing new shares of stock,
redeeming preferred stock, and the repayment of affiliate debt.
The Restated Certificate of Incorporation of the Company authorized a new
class of $.01 par Common Stock, $1 par Series A Preferred Stock, $.01 par Series
B Preferred Stock, $.01 par Series C Preferred Stock, and $.01 par Series D
Preferred Stock. All Class A and Class B Common shares previously issued and
outstanding were exchanged for new Common Stock. All issued and outstanding
shares of Preferred Stock were exchanged for new Series D Preferred Stock, which
was subsequently redeemed for $8,500,000. Only Common Stock and Series B
Preferred Stock retain voting rights and only holders of Common Stock are
entitled to receive dividends. Each Series of Preferred Stock has redemption
provisions; the Series B Preferred Stock is also convertible into Common Stock.
During March 1996, the Company issued 4,662 shares of Common Stock, 4,000
shares of Series A Preferred Stock, and 2,500 shares of Series B Preferred Stock
to ECO Holdings III Limited Partnership in exchange for $65,000,000; and 2,000
shares of Series C Preferred Stock and 812 shares of Common Stock were issued to
Polish Investments Holding L.P. in exchange for $17,029,000.
10. REDEEMABLE PREFERRED STOCK
The Series A, Series B and Series C Preferred Stock have a mandatory
redemption date of October 31, 2004. At the option of the Company, the Series A,
Series B and Series C Preferred Stock may be redeemed at any time in whole or in
part. The redemption price per share of the Series A, Series B and Series C
Preferred Stock is $10,000.
Prior to the mandatory redemption of the Series B Preferred Stock, the
holders of any shares of Series B Preferred Stock have the option to convert
their shares to 4,862 shares of Common Stock.
The Preferred Stock has been recorded at its mandatory redemption value on
October 31, 2004, discounted at 12% to December 31, 1996. The Company
periodically acretes from paid-in capital an amount that will provide for the
redemption value at October 31, 2004.
11. PENSION PLANS
The Company maintains a savings plan that is intended to meet the
requirements of a profit sharing plan under Sections 401(a) and 401(k) of the
Internal Revenue Code. The profit sharing plan covers substantially all U.S.
employees and provides for employee/participant contributions up to 10% of their
annual compensation and employer matching contributions of 100% of employee
contributions up to 5% of the employee's annual compensation subject to certain
vesting requirements and statutory limita-
F-25
<PAGE> 151
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
tions. The Company has funded its matching obligation of $9,000, $11,000 and $0
under the profit sharing plan for the years ended December 31, 1996, 1995 and
1994, respectively.
12. RELATED PARTY TRANSACTIONS
During the ordinary course of business, the Company enters into
transactions with entities under common control of the stockholders and
affiliated parties. When appropriate, outstanding balances bear interest until
settlement. The principal related party transactions are described below.
Due from Affiliate
Amounts due from affiliate primarily represented advances and payments made
on behalf of a stockholder of a PTK Company.
Notes Receivable from Affiliates
During 1996, the Company made $6,000,000 of non-interest bearing advances
to the 51% shareholder of one of the PTK Companies pursuant to an agreement for
the purchase of his interest in the PTK Company. These loans will offset the
purchase price upon the transfer of 95.5% of his 51% interest in the PTK
Company, The remaining interest will be held by another subsidiary in which the
Company owns a 49% interest.
The Company loaned $2,491,000 to Pro Cable Sp. z o.o., which is 33% owned
by PCI, in December 1996. Under terms of the demand note, interest shall accrue
at 10% per annum beginning January 1, 1997.
Notes Payable to Affiliates
Notes payable to affiliates consisted of unsecured demand notes due to
Chase American Corporation, an affiliate of one of the stockholders of PCI.
Interest expense associated with these notes was $1,040,000, $3,284,000 and
$2,164,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Programming
Pro Cable Sp. z o.o. provides programming to the PTK Companies. The Company
incurred programming fees from Pro Cable Sp. z o.o. of $412,000, $186,000 and
$91,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
Corporate Administration
During 1994 the Company reimbursed an affiliate of the stockholders of PCI
$75,000 per quarter for certain general overhead costs. In addition, legal and
financial services provided by the affiliate at the request of the Company are
reimbursed and are not material.
13. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases several offices and warehouses within Poland. The
Company also leases space within various telephone duct systems from TPSA that
expire at various times. A substantial portion of the Company's contracts with
TPSA permit termination by TPSA without penalty at any time either immediately
upon the occurrence of certain conditions or upon provision of three to six
months notice without cause. Generally speaking, TPSA may terminate a conduit
agreement if the Company does not have a valid Permit covering the subscribers
to which the conduit delivers the signal; the Company's network serviced by the
conduit does not meet the required technical specifications; the Company does
not have a contract with the Co-op authority or the Company fails to pay the
required rent. Minimum future lease commitments for the aforementioned leases is
$894,000 for the year ended December 31, 1997. Rent expense for the years ended
December 31, 1996, 1995 and 1994 was $892,000, $711,000 and $299,000,
respectively, related to these leases.
F-26
<PAGE> 152
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has entered into various lease agreements with TPSA. All of the
agreements provide that TPSA is the manager of the telephone duct system and
will lease space within the ducts to the Company for installation of cable and
equipment for the cable television systems. The lease agreements provide for
monthly lease payments that are adjusted quarterly or annually, except for the
Gdansk lease agreement which provides for an annual adjustment after the sixth
year which then remains fixed through the tenth year of the lease. Based upon
the lease rates currently in effect, the Company is charged approximately $1 to
$12 per month for each 100 meters of duct space utilized.
Programming Commitments
The Company has entered into programming agreements with its significant
programming suppliers. The programming agreements have terms which range from
one to five years and require that the payments for the programs be paid either
at a fixed amount or based upon the number of subscribers connected to the
system each month. For the years ended December 31, 1996, 1995 and 1994, the
Company incurred programming fees of approximately $1,758,000, $1,318,000, and
$681,000, respectively, pursuant to these agreements.
Some of the programming suppliers the Company entered into agreements with
are located outside of Poland. The categorization by the Polish tax authorities
of the payments to be paid under such agreements as a royalty rather than a
payment for services has yet to be determined. Should the payments made be
determined by Polish tax authorities to be royalties (license payments) rather
than payments for services, the PTK Companies making such payments would be
required to withhold and pay over to the Polish tax authorities certain portions
of such payments. The portions would vary depending upon the country of
residence of each programming supplier and the provisions of the international
tax treaty (if any) between such country and Poland. The maximum amount that
could be due is approximately $350,000. PCI has not recorded any amounts related
to this in the accompanying financial statements due to the uncertainties
involved.
Regulatory Approvals
The Company is in the process of obtaining permits from the Polish State
Agency for Radiocommunications ("PAR") for several of its cable television
systems. If these permits are not obtained, PAR could impose penalties such as
fines or in severe cases, revocation of all permits held by an operator or the
forfeiture of the operator's cable networks. Management of the Company does not
believe that these pending approvals result in a significant risk to the
Company.
One of the PTK Companies was not able to register several capital increases
that were filed in 1995, for an aggregate amount of PLN 2 million (approximately
$695,000 at the December 31, 1996 conversion rate). The capital increases were
rejected by the relevant Registration Court, and the court's decision was upheld
on appeal. Since the PTK Company received an in-kind contribution of equipment
in respect of the proposed capital increases, the non-recognition of the capital
increases by the Polish courts means that the contribution could be treated as
income in the hands of the PTK Company. As a result, part or all of the
contribution could be subject to corporate income tax of 40%. The PTK Company
had enough tax net operating loss in 1995 to offset any additional taxable
income resulting from an unfavorable treatment. The Company has not recorded any
amounts related to this in the accompanying financial statements due to the tax
net operating loss and uncertainties involved.
General Litigation
From time to time, the Company is subject to various claims and suits
arising out of the ordinary course of business. While the ultimate result of all
such matters is not presently determinable, based upon its current knowledge,
management does not expect that their resolution will have a material adverse
effect on the Company's consolidated financial position or results of
operations.
F-27
<PAGE> 153
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSEQUENT EVENTS
The Company entered into agreements during 1996 to purchase during 1997
three cable television systems for approximately $1,900,000, of which $1,400,000
has been prepaid at December 31, 1996, and 66.57% of a cable television company
for approximately $18,500,000.
During 1996, the Company and the other stockholder of PTK-Ryntronik (a 49%
owned subsidiary) entered an agreement for the Company to purchase the remaining
51% ownership of PTK-Ryntronik for $9,000,000. Pursuant to the agreement, the
Company advanced $6,000,000 of the purchase price as of December 31, 1996. This
transaction will be accounted for using the purchase method. On March 4, 1997,
the Company entered into an addendum to the agreement regarding the acceleration
of the Company's purchase of the remaining 51% ownership of PTK-Ryntronik. In
the addendum and annex, the parties agreed to transform PTK-Ryntronik into a
limited liability company, at which time the other stockholder will transfer all
of its shares of PTK-Ryntronik to PCI or its nominee. PCI agreed to pay the
stockholder $700,000 within three days of the signing of the addendum,
$1,000,000 on March 28, 1997 and $1,750,000 upon the transfer of shares to PCI.
In addition, another subsidiary of PCI subscribed
and became the owner of 4.5% of the capital stock of PTK-Ryntronik.
In 1997, PCIP entered into ten-year contracts for the lease of three
transponders on the Astra satellite system. Aggregate charges for each
transponder are capped at $6,750,000 per annum, but either party may terminate
any or all of the transponder leases on 6 months prior notice if PCIP has not
targeted the Polish DTH market prior to January 1, 1999. If all of the leases
were so terminated the maximum aggregate charges under the leases would
approximate $8.6 million.
15. THE REORGANIZATION
The Company is in the process of an initial public offering of stock in the
United States and internationally (the "Offerings"). Before the Offerings, all
the holders of shares of PCI's common stock and @Entertainment, Inc. entered
into a Contribution Agreement dated as of June 22, 1997 (the "Contribution
Agreement"). Pursuant to the Contribution Agreement, each holder of shares of
PCI's common stock transferred all shares of PCI common stock owned by it to
@Entertainment, Inc. In addition, ECO transferred all of the outstanding shares
of PCI's voting Series B Preferred Stock (the "PCI Series B Preferred Stock") to
@Entertainment, Inc. All of these transfers (the "Share Exchange") were designed
to qualify as a tax-free exchange under section 351 of the Internal Revenue Code
of 1986, as amended (the "Code"). Each holder of PCI's common stock received
1,000 shares of common stock of @Entertainment, Inc. in exchange for each share
of PCI's common stock transferred by it (the "Capital Adjustment"). ECO also
received an equivalent number of shares of @Entertainment, Inc.'s Series B
Preferred Stock ("@Entertainment, Inc. Series B Preferred Stock") in exchange
for its shares of PCI Series B Preferred Stock. The @Entertainment, Inc. Series
B Preferred Stock has identical rights and preferences to those of the PCI
Series B Preferred Stock, except that the ratio for conversion of such shares
into common stock increased from 1:1.9448 to 1:1,944.80 in order to reflect the
Capital Adjustment. The 2,500 outstanding shares of @Entertainment, Inc. Series
B Preferred Stock will automatically convert into 4,862,000 shares of Common
Stock of @Entertainment, Inc. upon the closing of the Offerings (the "Automatic
Conversion").
On June 20, 1997, Polish Investments Holding L.P. ("PIHLP"), transferred
all of the outstanding shares of PCI's Series C Preferred Stock to an entity
owned by certain of the beneficial owners of PIHLP and members of their families
(the "Chase Entity"). The Chase Entity, ECO and @Entertainment, Inc. entered
into a Purchase Agreement dated as of June 22, 1997 (the "Purchase Agreement").
Among other matters, the Purchase Agreement obligates @Entertainment, Inc. to
purchase all of the outstanding shares of PCI's Series A Preferred Stock and
Series C Preferred Stock for cash from ECO and the Chase Entity, respectively,
at the closing of the Offerings (the "Cash Purchases"). The aggregate purchase
price of $60.0 million for PCI's Series A Preferred Stock and Series C Preferred
Stock
F-28
<PAGE> 154
@ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
equals the aggregate redemption price of such shares as set forth in PCI's
certificate of incorporation. The Cash Purchases will be funded with a portion
of the net proceeds of the Offerings.
In June 1997, @Entertainment, Inc. acquired all of the outstanding stock of
@EL, a new corporation organized under the laws of England and Wales (the "@EL
Incorporation"). @EL will be responsible for the Company's D-DTH business.
In June 1997, certain employment agreements for the executive officers of
@Entertainment, Inc. who were employed by PCI and their employee stock option
agreements were assigned to @Entertainment, Inc. by PCI (the "Assignment"). As
part of the Assignment and the Capital Adjustment, the employment agreements
were amended to provide that each option to purchase a share of PCI's common
stock was exchanged for an option to purchase 1,000 shares of @Entertainment,
Inc. Common Stock with a proportionate reduction in the per share exercise
price.
The Share Exchange, Capital Adjustment, @EL Incorporation and the
Assignment are collectively referred to as the "Reorganization". As a result of
the Reorganization, @Entertainment, Inc. owns all of the outstanding shares of
voting stock of PCI and all of the outstanding shares of common stock of @EL.
The Automatic Conversion and the Cash Purchase will occur upon the closing of
the Offerings.
PCI's consolidated assets and liabilities were transferred to
@Entertainment, Inc. using PCI's historical cost.
16. PER SHARE INFORMATION
The Company has presented historical loss per common share information
assuming the common stock exchange of 1 to 1,000 shares outlined in Note 15
occurred on January 1, 1992. Pursuant to Securities and Exchange Commission
Staff Accounting Bulletin Topic 4:D stock and stock options granted during the
12-month period preceding the date of the Company's initial public offering
(IPO) have been included in the calculation of weighted average common shares
outstanding for periods prior to the IPO including where the impact is
anti-dilutive. The computation of weighted average common shares and equivalent
outstanding follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Weighted average common shares outstanding exclusive
of issuances within 12 months of IPO.............. 17,271,000 11,037,000 10,880,000
Incremental shares assumed to be outstanding related
to stock options granted within 12 months prior to
IPO............................................... 526,800 526,800 526,800
----------- ----------- -----------
Weighted average common shares and equivalents
outstanding....................................... 17,797,800 11,563,800 11,346,800
========== ========== ==========
</TABLE>
17. PRO FORMA INFORMATION (UNAUDITED)
The pro forma net loss per share has been calculated on the assumption that
the outstanding shares of PCI Series A Preferred Stock and PCI Series C
Preferred Stock were repurchased on January 1, 1996. The pro forma weighted
average number of shares of Common Stock outstanding includes the number of
shares of Common Stock required to be sold at $20.25 per share (the mid-point of
the estimated range specified on the cover page of the Prospectus) to pay the
difference between the liquidation values of the PCI Series A Preferred Stock
and PCI Series C Preferred Stock and their historical carrying values. Such
difference of $35,614,000 will be shown as an increase in the net loss
applicable to common stockholders in the period of redemption.
F-29
<PAGE> 155
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
The Board of Directors and Stockholders
Poland Cablevision (Netherlands) B.V.:
We have reviewed the accompanying consolidated balance sheet of Poland
Cablevision (Netherlands) B.V. and subsidiaries as of March 31, 1997, and the
related consolidated statements of operations and cash flows for the three-month
periods ended March 31, 1997 and 1996. These consolidated financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
June 23, 1997
F-30
<PAGE> 156
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 5,878
Accounts receivable, net of allowances of $459................................. 611
Other current assets........................................................... 1,088
--------
Total current assets................................................... 7,577
--------
Investment in cable television systems, at cost:
Property, plant and equipment:
Cable television system assets.............................................. 88,569
Construction in progress.................................................... 81
Vehicles.................................................................... 1,131
Other....................................................................... 2,615
--------
Total property, plant and equipment....................................... 92,396
Less accumulated depreciation............................................. (20,973)
--------
Net property, plant and equipment......................................... 71,423
Inventories for construction................................................... 5,715
Intangibles, net............................................................... 10,544
--------
Net investment in cable television systems............................. 87,682
--------
Other investments................................................................ 1,409
--------
Total assets........................................................... $96,668
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-31
<PAGE> 157
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED BALANCE SHEET, CONTINUED
MARCH 31, 1997
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 2,590
Deferred revenue............................................................... 754
Other current liabilities...................................................... 560
--------
Total current liabilities.............................................. 3,904
Due to affiliate................................................................. 12,941
Notes payable to affiliate....................................................... 110,576
--------
Total liabilities...................................................... 127,421
--------
Minority interest................................................................ 2,699
Stockholders' equity:
Common stock ($.50 par, 200,000 shares authorized, issued and
outstanding)............................................................... 100
Cumulative translation adjustment.............................................. (804)
Accumulated deficit............................................................ (32,748)
--------
Total stockholders' equity............................................. (33,452)
--------
Total liabilities and stockholders' equity............................. $ 96,668
========
</TABLE>
See accompanying notes to consolidated financial statements.
F-32
<PAGE> 158
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cable television revenue............................................... $ 6,279 $ 5,499
-------- -------
Operating expenses:
Direct operating expenses............................................ 1,722 1,466
Selling, general and administrative.................................. 2,152 1,758
Depreciation and amortization........................................ 2,716 1,687
-------- -------
Total operating expenses..................................... 6,590 4,911
-------- -------
Operating income (loss)...................................... (311) 588
Interest and investment income......................................... 57 35
Interest expense....................................................... (2,699) (2,233)
Foreign currency translation gain (loss)............................... (460) (80)
-------- -------
Loss before income taxes and minority interest.................... (3,413) (1,690)
Income tax expense..................................................... (49) --
Minority interest in subsidiary (income) loss.......................... 222 (194)
-------- -------
Net loss.......................................................... $ (3,240) $ (1,884)
======== =======
Net loss per share................................................ $ (16.20) $ (9.42)
======== =======
Weighted average number of common and common equivalent shares
outstanding.......................................................... 200,000 200,000
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-33
<PAGE> 159
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................. $(3,240) $(1,884)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Minority interest in subsidiary income (loss)..................... (222) 194
Depreciation and amortization..................................... 2,716 1,687
Other............................................................. -- 20
Interest expense added to notes payable to affiliate.............. 2,727 767
Changes in operating assets and liabilities:
Accounts receivable............................................. 95 281
Other current assets............................................ 194 2,120
Accounts payable................................................ (95) (387)
Amounts due to affiliate........................................ 2,142 (391)
Deferred revenue................................................ (69) (64)
Other current liabilities....................................... 21 6
------- -------
Net cash provided by operating activities.................... 4,269 2,349
------- -------
Cash flows from investing activities:
Construction of cable television systems............................. (5,060) (6,924)
Purchase of other capital assets..................................... (346) (232)
Other investments.................................................... -- (71)
------- -------
Net cash used by investing activities............................. (5,406) (7,227)
------- -------
Cash flows from financing activities:
Repayment of notes payable........................................... -- (614)
Borrowings from affiliates........................................... -- 4,718
------- -------
Net cash provided by financing activities.................... -- 4,104
------- -------
Net decrease in cash and cash equivalents.................... (1,137) (774)
Cash and cash equivalents at beginning of period....................... 7,015 2,278
------- -------
Cash and cash equivalents at end of period............................. $ 5,878 $ 1,504
======== ========
Supplemental cash flow information:
Cash paid for interest............................................ $ -- $ 1,346
Cash paid for income taxes........................................ $ 34 $ 443
</TABLE>
See accompanying notes to consolidated financial statements.
F-34
<PAGE> 160
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
The information furnished in the accompanying unaudited Consolidated
Balance Sheet, Statements of Operations and Statements of Cash Flows reflects
all adjustments (consisting only of items of a normal recurring nature) which
are, in the opinion of management, necessary for a fair statement of the
Company's results of operations and financial position for the interim periods.
The financial statements should be read in conjunction with the audited
financial statements and notes for the year ended December 31, 1996. The interim
financial results are not necessarily indicative of results for the full year.
The computation of net loss per share is based on the weighted average
number of shares of common stock outstanding.
F-35
<PAGE> 161
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Poland Cablevision (Netherlands) B.V.:
We have audited the accompanying consolidated balance sheets of Poland
Cablevision (Netherlands) B.V. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, changes in
stockholders' deficiency and cash flows for each of the years in the three-year
period ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Poland
Cablevision (Netherlands) B.V. and subsidiaries as of December 31, 1996 and
1995, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996, in conformity with U.S.
generally accepted accounting principles.
KPMG Peat Marwick LLP
Hartford, Connecticut
March 26, 1997
F-36
<PAGE> 162
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash (note 6)....................................................... $ 7,015 $ 2,278
Accounts receivable, net of allowances of $437 in 1996 and $510 in
1995............................................................. 706 654
Due from affiliate (note 7)......................................... -- 1,660
Other current assets (note 4)....................................... 1,282 1,678
-------- --------
Total current assets........................................ 9,003 6,270
-------- --------
Investment in cable television systems, at cost (note 3):
Property, plant and equipment:
Cable television system assets................................... 84,511 57,242
Construction in progress......................................... 9 6,052
Vehicles......................................................... 1,095 880
Other............................................................ 2,519 1,738
-------- --------
Total property, plant and equipment......................... 88,134 65,912
Less accumulated depreciation............................... (18,779) (11,841)
-------- --------
Net property, plant and equipment........................... 69,355 54,071
Inventories for construction........................................ 4,974 4,503
Intangibles, net.................................................... 10,534 4,307
-------- --------
Net investment in cable television systems.................. 84,863 62,881
-------- --------
Other investments (note 2)............................................ 1,409 331
-------- --------
Total assets................................................ $ 95,275 $ 69,482
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-37
<PAGE> 163
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED BALANCE SHEETS, CONTINUED
DECEMBER 31, 1996 AND 1995
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable................................................... $ 2,685 $ 2,931
Notes payable (note 6)............................................. -- 2,893
Deferred revenue................................................... 823 1,133
Other current liabilities.......................................... 9 210
-------- --------
Total current liabilities.................................. 3,517 7,167
Due to affiliate (note 7)............................................ 11,159 5,371
Notes payable to affiliates (note 7)................................. 107,891 67,587
Notes payable (note 6)............................................... -- 8,777
-------- --------
Total liabilities.......................................... 122,567 88,902
Minority interest.................................................... 2,920 (1,200)
-------- --------
Stockholders' deficiency:
Capital stock par value ($2 par, 200,000 shares authorized,
issued and outstanding)......................................... 100 100
Cumulative translation adjustment.................................. (344) 594
Accumulated deficit................................................ (29,968) (18,914)
-------- --------
Total stockholders' deficiency............................. (30,212) (18,220)
-------- --------
Commitments and contingencies (notes 7 and 8)........................ -- --
-------- --------
Total liabilities, minority interest and stockholders'
deficiency............................................... $ 95,275 $ 69,482
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-38
<PAGE> 164
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cable television revenue.................................. $ 22,882 $ 18,156 $ 8,776
--------- --------- ---------
Operating expenses:
Direct operating expenses............................... 6,427 4,986 2,119
Selling, general and administrative (note 7)............ 7,885 5,542 3,619
Depreciation and amortization........................... 9,003 5,229 3,308
--------- --------- ---------
Total operating expenses........................ 23,315 15,757 9,046
--------- --------- ---------
Operating income (loss)......................... (433) 2,399 (270)
Interest income........................................... 183 99 78
Interest expense.......................................... (10,058) (6,534) (4,458)
Foreign currency translation loss......................... (938) (22) (27)
--------- --------- ---------
Loss before income taxes, minority interest and (11,246) (4,058) (4,677)
extraordinary item.................................
Income tax expense (note 5)............................... (21) -- (23)
Minority interest in subsidiary loss...................... 988 41 180
--------- --------- ---------
Loss before extraordinary loss on early extinguishment of (10,279) (4,017) (4,520)
debt....................................................
Extraordinary loss on early extinguishment of debt (note (1,713) -- --
6)......................................................
--------- --------- ---------
Net loss............................................. $(11,992) $ (4,017) $ (4,520)
========= ========= =========
Loss per common share before extraordinary item........... $ (51.39) $ (20.09) $ (22.60)
Extraordinary loss per share.............................. (8.57) -- --
--------- --------- ---------
Net loss per common share............................ $ (59.96) $ (20.09) $ (22.60)
========= ========= =========
Weighted average number of capital shares outstanding..... 200,000 200,000 200,000
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-39
<PAGE> 165
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIENCY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
CUMULATIVE
CAPITAL STOCK TRANSLATION ACCUMULATED
PAR VALUE ADJUSTMENT DEFICIT TOTAL
------------- ---------- ----------- --------
<S> <C> <C> <C> <C>
Balance January 1, 1994...................... $ 100 $ 643 $ (10,426) $ (9,683)
Translation adjustment..................... -- (27) 27 --
Net loss................................... -- -- (4,520) (4,520)
---- ----- -------- --------
Balance December 31, 1994.................... 100 616 (14,919) (14,203)
Translation adjustment..................... -- (22) 22 --
Net loss................................... -- -- (4,017) (4,017)
---- ----- -------- --------
Balance December 31, 1995.................... 100 594 (18,914) (18,220)
Translation adjustment..................... -- (938) 938 --
Net loss................................... -- -- (11,992) (11,992)
---- ----- -------- --------
Balance December 31, 1996.................... $ 100 $ (344) $ (29,968) $(30,212)
==== ===== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-40
<PAGE> 166
POLAND CABLEVISION (NETHERLANDS) B.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................ $(11,992) $ (4,017) $ (4,520)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Minority interest in subsidiary loss................. (988) (41) (180)
Depreciation and amortization........................ 9,003 5,229 3,308
Write off of deferred financing costs................ 1,566 -- --
Other................................................ (162) 356 107
Interest expense added to notes payable to
affiliates......................................... 7,844 5,139 4,231
Changes in operating assets and liabilities:
Accounts receivable................................ (439) (723) 49
Other current assets............................... (166) (263) (573)
Accounts payable................................... (246) 1,349 525
Deferred revenue................................... (310) 52 458
Amounts due to affiliates.......................... 8,589 (4,918) (1,664)
Other current liabilities.......................... (201) (203) 24
------- ------- -------
Net cash provided by operating activities....... 12,498 1,960 1,765
------- ------- -------
Cash flows from investing activities:
Construction of cable television systems................ (19,925) (15,094) (11,695)
Purchase of other capital assets........................ (1,140) (694) (244)
Other investments....................................... 171 (1,686) (402)
Purchase of subsidiaries, net of cash received.......... (7,657) (3,104) --
------- ------- -------
Net cash used by investing activities................ (28,551) (20,578) (12,341)
------- ------- -------
Cash flows from financing activities:
Costs to obtain loans................................... -- (956) (1,142)
Proceeds from (repayment of) notes payable.............. (11,670) 4,590 7,000
Borrowings from affiliates.............................. 32,460 14,770 6,661
------- ------- -------
Net cash provided by financing activities....... 20,790 18,404 12,519
------- ------- -------
Net increase (decrease) in cash................. 4,737 (214) 1,943
Cash at beginning of year................................. 2,278 2,492 549
------- ------- -------
Cash at end of year....................................... $ 7,015 $ 2,278 $ 2,492
======= ======= =======
Supplemental cash flow information:
Cash paid for interest............................... $ 2,067 $ 1,120 $ 138
Cash paid for income taxes........................... 282 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-41
<PAGE> 167
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
Reporting Entity
Poland Cablevision (Netherlands) B.V. ("PCBV" or the "Company"), a
Netherlands corporation, is a holding company that holds controlling interest in
a number of Polish cable television companies, collectively referred to as the
"PTK Companies". The Company is 92.3% owned by Poland Communications, Inc.
("PCI"). All significant assets and operating activities of the Company are
located in Poland.
Principles of Consolidation
The consolidated financial statements include the financial statements of
PCBV and its wholly owned and majority owned foreign subsidiaries. Also
consolidated is a 49% owned subsidiary for which the Company maintains control
of operating activities and has the right to control the appointment of members
to the Managing Board. All significant intercompany balances and transactions
have been eliminated in consolidation.
Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
Revenue
Revenue is primarily derived from the sale of cable television services to
retail customers in Poland. Revenue from subscription fees is recognized on a
monthly basis, as the service is provided. Installation fee revenue, for
connection to the Company's cable television systems, is recognized to the
extent of direct selling costs and the balance is deferred and amortized into
income over the estimated average period that new subscribers are expected to
remain connected to the system.
Taxation
The Kingdom of the Netherlands generally imposed a corporate income tax at
a rate of 40% on the first 250,000 Dfl ($150,000) of income and 35% on income
thereafter. Effective July 1, 1994 only the first 100,000 Dfl ($60,000) is
subject to the 40% rate. The income tax treaty currently in force between the
Netherlands and the United States provides that the Netherlands may impose a
withholding tax at a maximum rate of 5% on dividends paid by PCBV to its
stockholders.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to temporary differences between the financial
statement carrying amounts of assets and liabilities and their respective tax
bases using enacted tax rates expected to apply in the years in which temporary
differences are expected to be recovered or settled.
The PTK Companies are subject to corporate income taxes, value added tax
(VAT) and various local taxes within Poland, as well as import duties on
materials imported by them into Poland. Under Polish law, the PTK Companies are
exempt from import duties on certain in-kind capital contributions.
The PTK Companies' income tax is calculated in accordance with Polish tax
regulations. Due to differences between accounting practices under Polish tax
regulations and those required by U.S. GAAP, certain income and expense items
are recognized in different periods for financial reporting
F-42
<PAGE> 168
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purposes and income tax reporting purposes which may result in deferred income
tax assets and liabilities.
Investment in Cable Television Systems
The investment in the Company's cable television systems includes property,
plant and equipment used in the development and operation of the various cable
television systems. During the period of construction, plant costs and a portion
of design, development and related overhead costs are capitalized as a component
of the Company's investment in cable television systems. The Company capitalizes
interest costs incurred during the period of construction in accordance with
Statement of Financial Accounting Standards No. 34 "Capitalization of Interest
Cost". Interest is not capitalized for short-term construction projects.
Subscriber related costs and general and administrative expenses are charged to
operations when incurred. Depreciation is calculated for financial reporting
purposes using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Cable television system assets.................................. 10 years
Vehicles........................................................ 5 years
Other property, plant and equipment............................. 5-40 years
</TABLE>
Inventories for Construction
Inventories for construction are stated at the lower of cost, determined by
the average cost method, or net realizable value. Inventories are principally
related to work-in-progress in the various cable television systems.
Goodwill
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally eight to ten years. The Company assesses the
recoverability of this intangible asset by determining whether the amortization
of the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The
assessment of the recoverability of goodwill will be impacted if estimated
future operating cash flows are not achieved.
Intangibles
The Company has entered into agreements with the Polish telephone company
("TPSA"), for the use of underground telephone conduits for cable wiring. Costs
related to obtaining conduit and franchise agreements with housing cooperatives
and governmental authorities are capitalized and amortized generally over a
period of ten years. In the event the Company does not proceed to develop cable
systems within designated cities, costs previously capitalized will be charged
to expense.
Organization costs are capitalized and amortized over a one-year period.
Costs incurred to obtain financing have been deferred and amortized over the
life of the loan using the straight-line method.
Foreign Currency Translation
Translation of the Polish foreign currency accounts into U.S. dollars has
been performed in accordance with SFAS No. 52 (Foreign Currency Translation).
This standard requires that entities operating in countries with economies
deemed to be highly inflationary translate all monetary assets and liabilities
into U.S. dollars at the exchange rate in effect at year end and non-monetary
assets and liabilities at historical or transaction date rates. Revenues and
expenses are translated at the average exchange rate over the reporting period.
For 1996, 1995 and 1994 inflation was 19.9%, 26.8% and 33.3%, respectively
yielding a three-year cumulative inflation rate of 102.7%.
F-43
<PAGE> 169
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 1, 1995, the Polish monetary denomination (old zffioty)
was redenominated at a rate of 10,000 old zffioty to one new zffioty and one
hundred old zffioty to one groszy. The new and old Polish zffioty had an
exchange rate of 2.875 PLN, 2.468 PLN and 24,372zl to one U.S. dollar at
December 31, 1996, 1995 and 1994, respectively.
Computation of Net Loss per Share
The net loss per share computation is based on the weighted average number
of shares of common stock outstanding.
Fair Value of Financial Instruments
SFAS No. 107 (Disclosures about Fair Value of Financial Instruments)
requires the Company to make disclosures of fair value information of all
financial instruments, whether or not recognized on the consolidated balance
sheets for which it is practicable to estimate fair value.
The Company's financial instruments include cash, accounts receivable,
other current assets, other investments, accounts payable, notes payable, and
due to affiliate. The carrying value of the cash, accounts receivable and
payable, the other current assets and other investments on the consolidated
balance sheets approximates fair value due to the short maturity of these
instruments.
It was not practicable to estimate the fair value of amounts due from
affiliates and notes payable to affiliates due to the nature of these
instruments, the circumstances surrounding their issuance, and the absence of
quoted market prices for similar financial instruments.
Impairment of Long-Lived Assets
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of " on January 1, 1996. This statement
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceed the fair value of
the assets. Adoption of this statement did not have an impact on the Company's
financial position, results of operations or liquidity.
Advertising Costs
All advertising costs of the Company are expensed as incurred.
Reclassifications
Certain 1994 and 1995 amounts have been reclassified to conform to the 1996
presentation.
2. ACQUISITIONS
During 1995, the Company acquired two cable television companies for
aggregate consideration of $3.2 million. The acquisitions have been accounted
for as purchases with the purchase price allocated among the assets acquired and
liabilities assumed based upon their fair values at date of acquisition. The
results of the acquired companies have been included in the Company results
since January 1,
F-44
<PAGE> 170
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1995. Had the 1995 acquisitions occurred on January 1, 1994, the Company's pro
forma consolidated results for the year ended December 31, 1994 would have been
as follows:
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
<S> <C>
Revenue.................................................................. $14,783
Loss before income taxes and minority interest........................... (4,503)
Net loss................................................................. (4,346)
Net loss per share....................................................... $(21.73)
</TABLE>
During 1996, the Company acquired substantially all of the cable television
system assets of eighteen cable television companies for aggregate consideration
of approximately $9.4 million. The acquisitions have been accounted for as
purchases with the purchase price allocated among the assets acquired and
liabilities assumed based upon their fair values at date of acquisition and any
excess as goodwill. The results of the acquired companies have been included
with the Company since their dates of acquisition. Had the 1996 acquisitions
occurred on January 1, 1996 and January 1, 1995, the Company's pro forma
consolidated results for the years ended December 31, 1996 and 1995 would have
been as follows:
<TABLE>
<CAPTION>
1996 1995
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Revenue....................................................... $ 27,168 $22,845
Loss before income taxes and minority interest................ (12,810) (3,830)
Net loss...................................................... (11,943) (4,070)
Net loss per share............................................ $ (59.71) $(20.35)
</TABLE>
During December 1996, the Company entered into a preliminary purchase
agreement for a cable television system operating in the Opole area and prepaid
the approximately $1.4 million purchase price, which is included in other
investments in the accompanying consolidated balance sheet at December 31, 1996.
The agreement provides that it becomes legally effective on the date of
regulatory approval by the Anti-Monopoly Office.
Included in minority interest on December 31, 1996 is approximately $5.1
million relating to the acquisition of one subsidiary.
3. INTANGIBLES
Intangible assets at December 31, 1996 and 1995 are carried at cost and
consist of the following (in thousands of dollars):
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Conduit and franchise agreements................................ $ 4,418 $ 1,700
Goodwill........................................................ 5,999 --
Deferred financing costs........................................ 2,145 2,131
Organization costs.............................................. 986 986
Other........................................................... 112 92
------- ------
13,660 4,909
Less accumulated amortization................................... (3,126) (602)
------- ------
Net intangible assets........................................... $ 10,534 $ 4,307
======= ======
</TABLE>
4. OTHER CURRENT ASSETS
Included in other current assets is $822,000 and $584,000 of VAT
receivables as of December 31, 1996 and 1995, respectively.
F-45
<PAGE> 171
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES
PCBV is required to file a separate Netherlands tax return which does not
reflect the operating results of the PTK Companies. Income tax expense for the
years ended December 31, 1996, 1995 and 1994 is as follows (in thousands of
dollars):
<TABLE>
<CAPTION>
1996 1995 1994
--- --- ---
<S> <C> <C> <C>
Netherlands income tax expense.................................. $ 9 $-- $23
Foreign jurisdictions........................................... 12 -- --
--- --- ---
Income tax expense............................................ $21 $-- $23
=== === ===
</TABLE>
Because there are no significant temporary differences between the
financial statement carrying values of the Company's assets and liabilities
compared to their respective tax bases, no provision for deferred taxes has been
included in the accompanying consolidated financial statements.
The significant item of the PTK Companies which gives rise to Polish
deferred tax assets at December 31, 1996 and 1995 is the taxable loss
carryforwards from prior years. Loss carryforwards can be offset against the PTK
Companies' taxable income and utilized at a rate of one-third per year in each
of the three years subsequent to the year of the loss. If there is no taxable
income in a given year during the carryforward period, the portion of the loss
carryforward to be utilized is permanently forfeited. The PTK Companies had net
operating loss carryforwards of approximately $2.5 million, which will expire as
follows (in thousands of dollars):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
--------------------------------------------------------------------
<S> <C>
1997................................................................ $1,389
1998................................................................ 954
1999 and thereafter................................................. 192
------
$2,535
======
</TABLE>
Due to uncertainties regarding the recoverability of the Polish deferred
tax benefits, a 100% valuation allowance was recognized by the PTK Companies for
the deferred tax benefit at December 31, 1996 and 1995.
6. NOTES PAYABLE
The Company signed a $13,500,000 financing agreement with Overseas Private
Investment Corporation ("OPIC") of which $8,600,000 was outstanding at December
31, 1995. The loan was repaid in full during 1996. Accordingly, the Company
recorded an extraordinary loss of $1,713,000 related to the early retirement of
debt. The extraordinary loss was comprised of a $147,000 prepayment penalty and
a $1,566,000 write off of deferred financing costs. There was no tax effect of
this transaction due to foreign jurisdiction net operating loss carryforwards.
Under terms of the financing agreement, the Company maintained a restricted
compensating cash balance of $983,000 at December 31, 1995.
In October 1995, the Company entered into an agreement with American Bank
in Poland S.A. for a Polish currency denominated revolving credit loan and a
U.S. dollar denominated promissory note, of which approximately $2,482,000 was
outstanding at December 31, 1995. These loans were repaid in full during 1996.
During 1995, the Company entered into a revolving credit loan with Bank
Polska Opieki S.A. of which approximately $588,000 was outstanding at December
31, 1995. This loan was repaid in full during 1996.
F-46
<PAGE> 172
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest expense relating to the above loans was $992,000, $654,000 and
$159,000 for the years ended December 31, 1996, 1995 and 1994, respectively.
7. RELATED PARTY TRANSACTIONS
During the ordinary course of business, the Company enters into
transactions with entities under common control of the stockholders and
affiliated parties. When appropriate, outstanding balances bear interest until
settlement. The principal related party transactions are described below.
Due from Affiliate
Amounts due from affiliate primarily represent advances and payments made
on behalf of a stockholder of a PTK Company.
Notes Payable to Affiliates
Note payable to affiliates of $107,891,000 at December 31, 1996 consists of
an unsecured demand note and unpaid interest due to PCI. Notes payable to
affiliates of $67,587,000 at December 31, 1995 consist of unsecured demand notes
and unpaid interest due to PCI and Chase American Corporation ("CAC"), an
affiliate of one of the stockholders of PCI. The CAC loans were repaid during
1996. The notes bear interest at 10% per annum, and represent advances and
purchases on behalf of PCBV and the PTK Companies.
Interest expense of $7,844,000, $5,777,000 and $4,296,000 was incurred by
the Company in connection with these affiliate borrowings during the years ended
December 31, 1996, 1995 and 1994, respectively. Of this expense, $7,844,000,
$5,139,000 and $4,231,000 has been added to the loan balance for the years ended
December 31, 1996, 1995, and 1994, respectively.
PCI has agreed not to seek current repayment of the above referenced
affiliate loan and advances until the Company generates sufficient cash flow or
liquidity to support such repayments.
Due to Affiliate
Amounts due to affiliate of $11,159,000 and $5,371,000 at December 31, 1996
and 1995, respectively, are noninterest bearing and primarily represent amounts
owed to PCI for management fees, purchases and services received on or prior to
December 31, 1996 and 1995, respectively. Payment of management consulting fees
are contingent until such time as net income of the PTK Companies' is sufficient
to service the fee.
Service Agreement
The PTK Companies entered into five-year Service Agreements dated January
1, 1994 with PCBV and PCI in order to mitigate logistical and economic
constraints it was experiencing in obtaining and maintaining the necessary
supply of qualified personnel, materials and other services and products
required to achieve the PTK Companies' business objectives in Poland. The
Service Agreements replaced a similar agreement dated March 31, 1990 among PTK,
PCBV and PCI.
Pursuant to the Service Agreements, PCBV and PCI, as PCBV's agents, agreed
to provide services on behalf of the PTK Companies relating to technical,
managerial, supervisory, purchasing, operational, financial and administrative
functions required to develop and operate the cable television systems within
Poland. The PTK Companies reimburse PCBV and PCI for all costs incurred in
connection with providing these services. During 1994, the PTK Companies also
reimbursed David T. Chase Enterprises, Inc., an affiliate of the stockholders of
PCI, $75,000 per quarter for certain general
F-47
<PAGE> 173
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
overhead costs associated with providing the services described above, including
the costs of supplying phone systems, office space, supplies and equipment, and
computers. In addition, legal and financial services requested are reimbursed
and are not material.
Pursuant to SFAS No. 51, certain reimbursed overhead costs of $950,000 and
$942,000 at December 31, 1996 and 1995, respectively, have been capitalized and
are included in investment in cable television system assets. The remaining
overhead costs allocated to the Company of $1,162,000, $395,000 and $86,000
during the years ended December 31, 1996, 1995 and 1994, respectively, are
included in corporate administration and operating expenses.
Management Consulting Agreement
The PTK Companies entered into management consulting agreements with PCI to
recommend, advise, and consult the PTK Companies as to design, construction,
development, and operation of the cable television systems. Management
consulting fees charged to corporate administration expense were $1,520,000,
$1,280,000 and $1,280,000 for the years ended December 31, 1996, 1995 and 1994,
respectively. Payment of management consulting fees are contingent until such
time as net income of the PTK Companies' is sufficient to service the fee.
Contingent management consulting fees payable to PCI are reflected in amounts
due to affiliate in the accompanying consolidated balance sheets.
Programming
An affiliate of PCI provides programming to the PTK Companies. The Company
incurred programming fees from this affiliate of $412,000, $186,000 and $91,000
for the years ended December 31, 1996, 1995 and 1994, respectively.
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases several offices and warehouses within Poland. The
Company also leases space within various telephone duct systems from TPSA. The
TPSA leases expire at various times. A substantial portion of the Company's
contracts with TPSA permit termination by TPSA without penalty at any time
either immediately upon the occurrence of certain conditions or upon provision
of three to six months notice without cause. Generally speaking, TPSA may
terminate a conduit agreement if the Company does not have a valid Permit
covering the subscribers to which the conduit delivers the signal; the Company's
network serviced by the conduit does not meet the required technical
specifications; the Company does not have a contract with the Co-op authority or
the Company fails to pay the required rent. Minimum future lease commitments for
the aforementioned leases is $752,000 for the year ended December 31, 1997. Rent
expense for the years ended December 31, 1996, 1995 and 1994 was $738,000,
$701,000 and $299,000 respectively, related to these leases.
The Company has entered into various lease agreements with TPSA. All of the
agreements provide that TPSA is the manager of the telephone duct system and
will lease space within the ducts to the Company for installation of cable and
equipment for the cable television systems. The lease agreements provide for
monthly lease payments that are adjusted quarterly or annually, except for the
Gdansk lease agreement which provides for an annual adjustment after the sixth
year which then remains fixed through the tenth year of the lease. Based upon
the lease rates currently in effect, the Company is charged approximately $1 to
$12 per month for each 100 meters of duct space utilized.
Programming Commitments
The Company has entered into programming agreements with its significant
programming suppliers. The programming agreements have terms which range from
one to five years and require that the payments for the programs paid either at
a fixed amount or based upon the number of subscribers
F-48
<PAGE> 174
POLAND CABLEVISION (NETHERLANDS) B.V.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
connected to the system each month. For the years ended December 31, 1996, 1995
and 1994, the Company incurred programming fees of approximately $1,685,000,
$1,298,000 and $681,000, respectively, pursuant to these agreements.
Some of the programming suppliers the Company entered into agreement with
are located outside of Poland. The categorization by the Polish tax authorities
of the payments to be paid under such agreements as a royalty rather than a
payment for services has yet to be determined. Should the payments made be
determined by Polish tax authorities to be royalties (license payments) rather
than payments for services, the PTK Companies making such payments would be
required to withhold and pay over to the Polish tax authorities certain portions
of such payments. The portions would vary depending upon the country of
residence of each programming supplier and the provisions of the international
tax treaty (if any) between such country and Poland. The maximum amount that
could be due under these laws is approximately $350,000. PCBV has not recorded
any amounts related to this in the accompanying financial statements due to the
uncertainties involved.
Regulatory Approvals
The Company is in the process of obtaining permits from the Polish State
Agency for Radiocommunications ("PAR") for several of its cable television
systems. If these permits are not obtained, PAR could impose penalties such as
fines or in severe cases, revocation of all permits held by an operator or the
forfeiture of the operator's cable networks. Management of the Company does not
believe that these pending approvals result in a significant risk to the
Company.
One of the PTK Companies was not able to register several capital increases
that were filed in 1995, for an aggregate amount of PLN 2 million (approximately
$695,000 at the December 31, 1996 conversion rate). The capital increases were
rejected by the relevant Registration Court, and the court's decision was upheld
on appeal. Since the PTK Company received an in-kind contribution of equipment
in respect of the proposed capital increases, the non-recognition of the capital
increases by the Polish courts means that the contribution could be treated as
income in the hands of the PTK Company. As a result, part or all of the
contribution could be subject to corporate income tax of 40%. The PTK Company
had enough tax net operating loss in 1995 to offset any additional taxable
income resulting from an unfavorable treatment. PCBV has not recorded any
amounts related to this in the accompanying financial statements due to the tax
net operating loss and uncertainties involved.
General Litigation
From time to time, the Company is subject to various claims and suits
arising out of the ordinary course of business. While the ultimate result of all
such matters is not presently determinable, based upon its current knowledge,
management does not expect that their resolution will have a material adverse
effect on the Company's consolidated financial position or results of
operations.
9. SUBSEQUENT EVENTS
The Company entered into agreements during 1996 to purchase two cable
television systems in 1997 for approximately $1.9 million, of which $1.4 million
had been prepaid at December 31, 1996.
F-49
<PAGE> 175
ANNEX A
GLOSSARY
ADDRESSABLE TECHNOLOGY: A technology which enables a cable television
operator to activate or deactivate, from the headend site or another central
location, the cable television services delivered to each customer.
BASIC PENETRATION RATE: The measurement of the take-up of cable services.
The penetration rate as of a given date is calculated by dividing the number of
the Company's basic and intermediate subscribers connected to a system on such
date by the total number of homes passed in such system.
BASIC SUBSCRIBERS: Subscribers receiving the Company's basic and
intermediate tier of cable television services.
BASIC-TIER: Package with the largest number of non-premium channels.
BUILD-OUT: The process of digging, filling and covering underground
trenches in the streets which pass by the homes in a service area, constructing
wiring conduits within the trenches, laying cable in the conduits and installing
and connecting the necessary electronic equipment.
BROADCAST TIER: Company's package with the smallest number of non-premium
channels.
CABLE TELEVISION: A cable television network employs electromagnetic
transmission over coaxial and/or fiber-optic cable to transmit multiple channels
carrying images, sound and data between a central facility and individual
subscribers' television sets. Networks may allow one-way transmission (from a
headend to a residence and/or business) or two-way transmission (from a headend
to a residence and/or business with a data return path to the headend).
CENTRAL EUROPE: As used in this Prospectus, Central Europe refers to the
region comprised by Poland, the Czech Republic, the Slovak Republic, Austria and
Hungary.
CHURN RATE: The discontinuance of cable television service to a basic
subscriber, either voluntarily or involuntarily, commonly measured as a rate
from period to period. The Company calculates its churn rate by dividing the
number of disconnected basic cable television subscribers during a period by the
number of basic subscribers (including basic subscribers in networks acquired by
the Company) at the end of that period.
COAXIAL CABLE: Cable consisting of a central conductor surrounded by and
insulated from another conductor. It is the standard material used in
traditional cable systems. Signals are transmitted through it at different
frequencies, giving greater channel capacity than is possible with twisted pair
cable, but less channel capacity than is allowed by fiber-optic cable.
DISH: An antenna shaped like a dish used to receive line-of-sight
terrestrial signals or television signals from a satellite.
DTH (DIRECT-TO-HOME): A satellite multichannel television service to
single dwellings, each served by a single satellite dish, as distinct from a
cable or SMATV system.
FIBER-TO-THE-FEEDER: Cable TV system design that incorporates fiber-optic
cable transmission of cable TV signals to a fiber-optic receiver which then
converts the fiber-optic signal to an analog signal carried over coaxial cable
to the subscriber's home.
FIBER-OPTIC CABLE: Cable made of glass fibers through which signals are
transmitted as pulses of light. Fiber-optic cable has the capacity to carry
large amounts of data and a large number of channels.
FOOTPRINT: The area on the earth's surface where the signals from a
specific satellite can be received.
A-1
<PAGE> 176
HEADEND: The originating point of a signal in cable television systems
comprised of a collection of hardware, typically including satellite receivers,
modulators, amplifiers and video cassette playback machines. Signals, when
processed, are then combined for distribution within the cable network.
HOMES: The Company's estimate of the number of homes within its service
areas.
HOMES PASSED: Homes which have active signals, are covered by contracts
with a co-op authority and can be connected to a cable distribution system
without further extension of the distribution network.
INTERACTIVE SERVICES: Cable-based services which both send signals to the
subscribers and utilize or require responses or other signals from the
subscriber. Typical interactive services include telephony, pay-on-demand,
shop-at-home, video games and ATM services. Interactive services can be more
easily provided with high-capacity hybrid fiber-optic/coaxial distribution
networks.
INTERMEDIATE TIER: A package, with limited programming offerings, of 17 to
24 channels for monthly fees of approximately $1.32 to $3.40.
MMDS (MULTI-CHANNEL MULTI-POINT DISTRIBUTION SYSTEM): A one-way radio
transmission of television channels over microwave frequencies from a fixed
station transmitting to multiple receiving facilities located at fixed points.
MULTIPLE DWELLING UNIT (MDU): A housing estate, cooperative apartment
building or other residence consisting of multiple apartment units.
OVER-BUILD: The construction and operation of cable systems in the same
geographic location or area by more than one cable operator which compete for
the same subscribers.
PPV: Pay-per-view
PREMIUM SERVICE: Cable programming service available only for additional
subscription fees over and above fees for the basic service.
REVENUE PER SUBSCRIBER: Total revenue derived from a cable television
system during a given period divided by the system's average number of
subscribers for that period.
SMATV (SATELLITE MASTER ANTENNA TELEVISION): A television delivery system
to multiple dwelling units that utilizes one or more satellite dishes and a
distribution network linking MDUs.
SMARTCARD: A plastic card, the size of a credit card, carrying an embedded
computer chip that implements the secure management and delivery of decryption
keys necessary to descramble pay-TV channels.
STAR ARCHITECTURE: A design of cable plant in a cable television system
providing an independent path from an individual subscriber to the system
headends or another central control point, facilitating the provision of and
charging for separate tiers of programming, disconnection of non-paying
customers and the provision of addressable service.
TELEPHONY: The provision of telephone service.
TOTAL SUBSCRIBERS: The total number of households which receive the
Company's cable television services.
TUNERS: Electronic devices that connect to a subscriber's television set
to allow the set to receive channels in frequencies provided by cable
television.
A-2
<PAGE> 177
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement (U.S.
Version) (the "U.S. Underwriting Agreement"), @Entertainment has agreed to sell
to each of the U.S. Underwriters named below, and each of such U.S. Underwriters
has severally agreed to purchase from @Entertainment, the respective number of
shares of Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES OF
COMMON
UNDERWRITER STOCK
---------------------------------------------------------------------- ---------
<S> <C>
Goldman, Sachs & Co...................................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................................
---------
Total............................................................... 6,175,000
=========
</TABLE>
Under the terms and conditions of the U.S. Underwriting Agreement, the U.S.
Underwriters are committed to take and pay for all of the shares offered hereby,
if any are taken.
The U.S. Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession of $ per share. The U.S. Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share to
certain brokers and dealers. After the shares of Common Stock are released for
sale to the public, the offering price and other selling terms may from time to
time be varied by the representatives.
@Entertainment has entered into an underwriting agreement (the
"International Underwriting Agreement") with the underwriters of the
International Offering (the "International Underwriters" and together with the
U.S. Underwriters, the "Underwriters") providing for the concurrent offer and
sale of 3,325,000 shares of Common Stock in an international offering outside
the United States. The offering price and aggregate underwriting discounts and
commissions per share for the two offerings are identical. The closing of the
offering made hereby is a condition to the closing of the International
Offering, and vice versa.
Of the 3,325,000 shares of Common Stock being offered outside the United
States, Handlowy Investments S.ar.l. ("Handlowy Investments") is purchasing
shares of Common Stock at the initial public offering price set forth on the
cover page of this Prospectus. @Entertainment has entered into an advisory
services agreement (the "Advisory Agreement") with Handlowy Investments pursuant
to which @Entertainment has agreed to pay Handlowy Investments an advisory fee
of $750,000 for certain financial and banking advisory services to be rendered
by Handlowy Investments or its affiliates to @Entertainment.
Pursuant to an Agreement between the U.S. and International Underwriting
Syndicates (the "Agreement Between") relating to the two offerings, each of the
U.S. Underwriters named herein has agreed that, as a part of the distribution of
the shares offered hereby and subject to certain exceptions, it will offer, sell
or deliver the shares of Common Stock, directly or indirectly, only in the
United States of America (including the States and the District of Columbia),
its territories, its possessions and other areas subject to its jurisdiction
(the "United States") and to U.S. persons, which term shall mean, for purposes
of this paragraph: (a) any individual who is a resident of the United States or
(b) any corporation, partnership or other entity organized in or under the laws
of the United States or any political subdivision thereof and whose office most
directly involved with the purchase is located in the United States. Each of the
International Underwriters has agreed pursuant to the Agreement Between that, as
a part of the distribution of the shares offered as a part of the international
offering, and subject to certain exceptions, it will (i) not, directly or
indirectly, offer, sell or deliver shares of Common Stock (a) in the United
States or to any U.S. persons or (b) to any person who it believes intends to
reoffer, resell or deliver the shares in the United States or to any U.S.
persons, and (ii) cause any dealer to whom it may sell such shares at any
concession to agree to observe a similar restriction.
U-1
<PAGE> 178
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters of such number of shares of
Common Stock as may be mutually agreed. The price of any shares so sold shall be
the initial public offering price, less an amount not greater than the selling
concession.
@Entertainment has granted the U.S. Underwriters an option exercisable for
30 days after the date of this Prospectus to purchase up to an aggregate of
926,250 additional shares of Common Stock solely to cover over-allotments, if
any. If the U.S. Underwriters exercise their over-allotment option, the U.S.
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of shares to be
purchased by each of them, as shown in the foregoing table, bears to the
6,175,000 shares of Common Stock offered hereby. @Entertainment has granted the
International Underwriters a similar option to purchase up to an aggregate of
498,750 additional shares of Common Stock.
@Entertainment has agreed that during the period beginning from the date of
the U.S. Underwriting Agreement and continuing to and including the date 180
days after the date of this Prospectus, not to offer, sell, contract to sell or
otherwise dispose of, except as provided under the U.S. Underwriting Agreement
and under the International Underwriting Agreement, any securities of
@Entertainment that are substantially similar to the shares of Common Stock,
including but not limited to any securities that are convertible into or
exchangeable for, or that represent the right to receive, shares of Common Stock
or any such substantially similar securities (other than pursuant to employee
stock option plans existing on, or upon the conversion or exchange of
convertible or exchangeable securities outstanding as of, the date of the U.S.
Underwriting Agreement), without the prior written consent of Goldman, Sachs &
Co., except for the shares of Common Stock offered in connection with the
concurrent U.S. and International offerings.
Each of Messrs. Robert E. Fowler, III, John S. Frelas, George Makowski,
Przemyslaw Szmyt and David Warner has agreed not to offer, sell, contract to
sell or otherwise dispose of, any securities of @Entertainment that are
substantially similar to the shares of Common Stock, including but not limited
to any securities that are convertible into or exchangeable for, or that
represent the right to receive, shares of Common Stock or any such substantially
similar securities, without the prior written consent of Goldman, Sachs & Co.,
during the period beginning from the date of the U.S. Underwriting Agreement and
continuing to and including the date 728 days (two years) after the date of this
Prospectus.
Each stockholder of the Company and each holder of options or warrants in
securities of the Company has agreed not to offer, sell, contract to sell or
otherwise dispose of, any securities of @Entertainment that are substantially
similar to the shares of Common Stock, including but not limited to any
securities that are convertible into or exchangeable for, or that represent the
right to receive, shares of Common Stock or any such substantially similar
securities (other than upon the conversion or exchange of convertible or
exchangeable securities outstanding as of the date of the U.S. Underwriting
Agreement), without the prior written consent of Goldman, Sachs & Co., during
the period beginning from the date of the U.S. Underwriting Agreement and
continuing to and including the date 180 days after the date of this Prospectus.
In connection with the Offerings, the Underwriters may purchase and sell
the Common Stock in the open market. These transactions may include
over-allotment and stabilizing transactions and purchases to cover syndicate
short positions created in connection with the Offerings. Stabilizing
transactions consist of certain bids or purchases for the purpose of preventing
or retarding a decline in the market price of the Common Stock, and syndicate
short positions involve the sale by the Underwriters of a greater number of
shares of Common Stock than they are required to purchase from @Entertainment in
the Offerings. The Underwriters also may impose a penalty bid, whereby selling
concessions allowed to syndicate members or other broker-dealers in respect of
the securities sold in the Offerings for their account may be reclaimed by the
syndicate if such shares of Common Stock are repurchased by the syndicate in
stabilizing or covering transactions. These activities may stabilize, maintain
or otherwise affect the market price of the Common Stock, which may be higher
than the price that might otherwise
U-2
<PAGE> 179
prevail in the open market; and these activities, if commenced, may be
discontinued at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The Underwriters have informed @Entertainment that they do not expect sales
to accounts over which the Underwriters exercise discretionary authority to
exceed five percent of the total number of shares of Common Stock offered by
them.
Prior to these Offerings, there has been no public market for the shares.
The initial public offering price will be negotiated among @Entertainment and
the representatives of the U.S. Underwriters and the International Underwriters.
Among the factors to be considered in determining the initial public offering
price of the Common Stock, in addition to prevailing market conditions, will be
the Company's historical performance, estimates of the business potential and
earnings prospects of the Company, an assessment of the Company's management and
the consideration of the above factors in relation to market valuation of
companies in related businesses.
Application has been made for quotation of the Common Stock on the Nasdaq
National Market under the symbol "ATEN".
The Company is currently investigating the possibility of seeking a listing
of the Common Stock on the Warsaw Stock Exchange.
@Entertainment has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
This Prospectus may be used by underwriters and dealers in connection with
offers and sales of the Common Stock, including shares initially sold in the
International Offering, to persons located in the United States.
U-3
<PAGE> 180
======================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF @ENTERTAINMENT, INC. SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 14
The Reorganization.................... 34
Use of Proceeds....................... 35
Dividend Policy....................... 35
Dilution.............................. 36
Exchange Rate Data.................... 37
Capitalization........................ 38
Selected Consolidated Financial
Data................................ 39
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 41
The Industry.......................... 50
Business.............................. 56
Regulation............................ 81
Management............................ 93
Executive Compensation................ 98
Principal Stockholders................ 103
Certain Relationships and
Related Transactions................ 104
Description of Capital Stock.......... 112
U.S. Federal Income Tax
Considerations...................... 116
Shares Eligible for Future Sale....... 119
Legal Matters......................... 121
Experts............................... 121
Enforceability of Certain
Civil Liabilities................... 121
Additional Information................ 122
Index to Consolidated Financial
Statements.......................... F-1
Glossary.............................. A-1
Underwriting.......................... U-1
</TABLE>
THROUGH AND INCLUDING , 1997 (THE 25TH DAY AFTER THE DATE OF THIS
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
9,500,000 SHARES
@ENTERTAINMENT, INC.
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
LOGO
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
======================================================
<PAGE> 181
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the expenses of issuance and distribution of the shares
of Common Stock registered hereunder on Form S-1, other than underwriting
discounts and commissions. All amounts except the Registration Fee are
estimated:
<TABLE>
<S> <C>
Registration Fee................................................ $ 72,834
NASD Fee........................................................ $ 6,250
Nasdaq National Market Fee...................................... $ 50,000
Blue Sky Fees and Expenses...................................... $ 12,500
Legal Fees and Expenses......................................... $ 500,000
Accounting Fees and Expenses.................................... $ 275,000
Printing and Engraving Expenses................................. $ 550,000
Registrar and Transfer Agent's Fees............................. $ 5,000
Miscellaneous................................................... $ 36,104
----------
Total................................................. $1,500,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("GCL") permits a
corporation to indemnify its directors, officers, employees and other agents in
terms sufficiently broad to permit indemnification (including reimbursement for
expenses) under certain circumstances for liabilities arising under the
Securities Act of 1933.
The Registrant's Bylaws provide for the indemnification of directors and
executive officers to the fullest extent not prohibited by the GCL and authorize
the indemnification by the Registrant of other officers, employees and other
agents as set forth in the GCL. The Registrant has entered into, or will enter
into, indemnification agreements with its directors and executive officers, in
addition to the indemnification provided for in the Registrant's Bylaws.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act of 1933 or otherwise.
Upon completion of the Offerings, officers and directors of the Registrant
will be covered by insurance which (with certain exceptions and within certain
limitations) indemnifies them against losses and liabilities arising from any
alleged "wrongful act" including any alleged error or misstatement or misleading
statement, or wrongful act or omission or neglect or breach of duty.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
All the holders of shares of common stock of Poland Communication, Inc.
("PCI") and the Registrant entered into a Contribution Agreement dated as of
June 22, 1997 (the "Contribution Agreement"). Pursuant to the Contribution
Agreement, each holder of shares of PCI's common stock transferred all shares
common stock owned by it to the Registrant. In addition, ECO transferred all of
the outstanding shares of PCI's voting Series B Preferred Stock (the "PCI Series
B Preferred Stock") to the Registrant. All of these transfers were designed to
qualify as a tax-free exchange under section 351 of the Internal Revenue Code of
1986, as amended (the "Share Exchange"). Each holder of PCI's common stock
received 1,000 shares of Common Stock of the Registrant in exchange for each
share of PCI's common stock transferred by it (the "Capital Adjustment"). ECO
also received an equivalent number of shares of the Registrant's Series B
Preferred Stock in exchange for its shares of PCI Series B Preferred Stock. The
Series B Preferred Stock has identical rights and preferences to those of the
PCI Series B
II-1
<PAGE> 182
Preferred Stock, except that the ratio for conversion of such shares into common
stock increased from 1:1.9448 to 1:1,944.80 in order to reflect the Capital
Adjustment. These transfers were made pursuant to Section 4(2) of the Securities
Act of 1933.
In addition, the Registrant has granted options for 2,174,000 shares of the
Registrant's Common Stock to certain of its executive officers. In some cases,
these options were original issued by PCI and assumed by the Registrant. These
grants were made pursuant to Section 4(2) of the Securities Act of 1933.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ------------------------------------------------------------------------------------
<C> <S>
1.1* Form of Underwriting Agreement.
2.1* Contribution Agreement among Polish Investment Holdings, LP ("PIHLP"), ECO Holdings
III Limited Partnership ("ECO"), Roger M. Freedman, Steele LLC, the AESOP Fund, LP,
the Cheryl Anne Chase Marital Trust (the "CACMT") and @Entertainment, Inc. dated at
June 22, 1997.
2.2* Purchase Agreement among ECO, @Entertainment, Inc. and L. Ciesffia International,
Inc. dated at June 22, 1997.
3.1* Amended and Restated Certificate of Incorporation of @Entertainment, Inc. dated at
June 22, 1997.
3.2* Bylaws of @Entertainment, Inc. as amended through July 14, 1997.
3.3* Shareholders Agreement among ECO, PIHLP, Roger M. Freedman, Steele LLC, the CACMT,
the AESOP Fund, LP and @Entertainment, Inc. dated at June 22, 1997.
3.4* Termination Agreement among PCI, PIHLP, ECO, Roger M. Freedman, Steele LLC, the
AESOP Fund, LP, and the CACMT dated at June 22, 1997.
3.5* Registration Rights Agreement among @Entertainment, PIHLP, ECO, Roger Freedman,
Steele LLC, the AESOP Fund, LP, and the CACMT dated at June 22, 1997 (the
"Registration Rights Agreement").
3.6* Amendment to Registration Rights Agreement.
4.1* Form of Common Stock Certificate.
5* Opinion of Baker & McKenzie with respect to the legality of the securities being
registered.
8* Opinion of Baker & McKenzie with respect to the certain tax matters.
9.1* Voting Agreement by and among PIHLP, Roger M. Freedman, Steele LLC, and the CACMT
dated at June 22, 1997.
9.2* Side Letter dated June 22, 1997 regarding the Voting Agreement.
10.1* Indenture dated at October 31, 1996 between PCI and State Street Bank and Trust
Company relating to PCI's 9 7/8% Senior Notes due 2003 and its 9 7/8% Series B
Senior Notes due 2003. (Incorporated by reference to Exhibit 4.11 of PCI's Form S-4
Registration Statement, Registration No. 333-20307).
10.2* Form of Management Agreement among PCI and subsidiaries.
10.3* Form of Service Agreement among PCI and subsidiaries.
10.4* Corporate Overhead Allocation Agreement among PCI and subsidiaries. (Incorporated by
reference to Exhibit 10.4 of PCI's Form S-4 Registration Statement, Registration No.
333-20307).
</TABLE>
II-2
<PAGE> 183
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ------------------------------------------------------------------------------------
<S> <C>
10.5* Amendment to Service Agreement. (Incorporated by reference to Exhibit 10.5 of PCI's
Form S-4 Registration Statement, Registration No. 333-20307).
10.6* Side Letter regarding Service Agreement. (Incorporated by reference to Exhibit 10.6
of PCI's Form S-4 Registration Statement, Registration No. 333-20307).
10.7* Employment Agreement, dated at January 1, 1997, between PCI and Robert E. Fowler,
III, including Stock Option Agreement. Assigned to @Entertainment (See Exhibits
10.22 and 10.25). (Incorporated by reference to Exhibit 10.7 of PCI's Form S-4
Registration Statement, Registration No. 333-20307).
10.8* Deferred Compensation Agreement, dated at January 1, 1991, between Chase
International Corporation (merged into World Cable Communications, Inc. ("WCCI"),
now PCI) and Arnold L. Chase. Assigned to @Entertainment (See Exhibits 10.22 and
10.25). (Incorporated by reference to Exhibit 10.8 of PCI's Form S-4 Registration
Statement, Registration No. 333-20307).
10.9* Employment Agreement, dated at January, 1997, between PCI and George Makowski,
including Stock Option Agreement. Assigned to @Entertainment (See Exhibits 10.22 and
10.25). (Incorporated by reference to Exhibit 10.10 of PCI's Form S-4 Registration
Statement, Registration No. 333-20307).
10.10* Employment Agreement, dated at September 1, 1996, between WCCI, and John Frelas,
including Stock Option Agreement. Assigned to @Entertainment (See Exhibit 10.22 and
10.25). (Incorporated by reference to Exhibit 10.11 of PCI's Form S-4 Registration
Statement, Registration No. 333-20307).
10.11* Employment Agreement, dated at February 7, 1997, between PCI and Przemyslaw A.
Szmyt, as amended. Assigned to @Entertainment (See Exhibit 10.22 and 10.25).
10.12* Stock Option Agreement dated June 23, 1997 between @Entertainment and Przemyslaw A.
Szmyt.
10.13* Employment Agreement, dated at January 1, 1997, between PCI and Marek Sowa, as
amended. Assigned to @Entertainment (See Exhibit 10.22).
10.14 Employment Agreement, dated April 7, 1997, between PCI and David Warner Assigned to
@Entertainment (See Exhibit 10.22).
10.15* Stock Option Agreement dated at June 23, 1997 between @Entertainment and David
Warner.
10.16* Stock Option Plan of @Entertainment.
10.17* Employment Agreement, dated at January 1, 1996, between PTK-Warszawa S.A. and
Andrzej Muras. (Incorporated by reference to Exhibit 10.15 of PCI's Form S-4
Registration Statement, Registration No. 333-20307).
10.18* Form of Agreement for Lease of Cable Conduits with Telekomunikacja Polska S.A.
10.19+ Agreement for Digital Transmission on the Astra System between Societe Europeene des
Satellites S.A. ("SES") and PCI Programming, Inc. (Mozaic Entertainment, Inc.
(formerly, PCI Programming, Inc., "Mozaic") (ASTRA 1F Satellite) dated March 26,
1997.
10.20+ Agreement for Digital Transmission on the Astra System between SES and Mozaic (ASTRA
1F Satellite) dated March 26, 1997.
10.21+ Agreement for Digital Transmission on the Astra System between SES and Mozaic (ASTRA
1E Satellite) dated March 27, 1997.
10.22* Form of Assignment and Assumption Agreement related to employment contracts with
certain of the executive officers of @Entertainment.
</TABLE>
II-3
<PAGE> 184
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ------------------------------------------------------------------------------------
<S> <C>
10.23* Shareholders Agreement between Chase International Corporation, Frank N. Cooper,
Rutter-Dunn Communications, Inc., Poland Cablevision U.S.A., Inc., and Poland
Cablevision B.V. ("PCBV"), dated at March 8, 1990.
10.24* Form of Assignment and Assumption Agreement related to stock option agreements with
certain of the executives of @Entertainment.
10.25 Advisory Services Agreement between @Entertainment and Handlowy Investments S.ar.l.
dated at July 29, 1997.
11.1* Statement Regarding Calculation of Per Share Earnings.
15* Letter from KPMG Peat Marwick LLP regarding unaudited interim financial information.
21* List of subsidiaries of @Entertainment.
23.1 Consent of KPMG Peat Marwick LLP with respect to @Entertainment.
23.2 Consent of KPMG Peat Marwick LLP with respect to Poland Cablevision (Netherlands)
B.V.
23.5* Consent of Baker & McKenzie with respect to the legality of the securities being
registered (contained in Exhibit 5).
23.6* Consent of Baker & McKenzie with respect to the certain tax matters (contained in
Exhibit 8).
25 Power of Attorney (included on the signature page in Part II of this Registration
Statement).
27* Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
+ Confidential treatment requested. Confidential Portions of Schedule VI of
Exhibits 10.19, 10.20 and 10.21 (noted by "*") have been omitted pursuant to a
request for confidential treatment and filed separately with the Commission.
(b) Financial Statement Schedules
The following are included in Part II of this Registration Statement.
Schedule II -- Valuation and Qualifying Accounts*
-- @Entertainment, Inc.
-- Poland Cablevision (Netherlands) B.V.
- ---------------
* Previously filed.
II-4
<PAGE> 185
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The Registrant hereby undertakes:
(a) to provide to the U.S. Underwriters at the closing specified in
the U.S. Underwriting Agreement certificates in such denominations and
registered in such names as required by the U.S. Underwriters to permit
prompt delivery to each purchaser;
(b) for purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or Rule 497(h) under the Securities Act of 1933 shall be deemed to be
part of this registration statement as of the time it was declared
effective; and
(c) for the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 186
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Pre-Effective Amendment to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in London,
England, on the 29th day of July, 1997.
@Entertainment, Inc.
By: /s/ ROBERT E. FOWLER, III
------------------------------------
Robert E. Fowler, III
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Pre-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates stated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------- ------------------------------------- --------------
<S> <C> <C>
* Chairman of the Board of Directors July 29, 1997
- -------------------------------------
David T. Chase
* Director July 29, 1997
- -------------------------------------
Arnold L. Chase
* Director July 29, 1997
- -------------------------------------
Scott A. Lanphere
* Director July 29, 1997
- -------------------------------------
Jerzy Z. Swirski
/s/ ROBERT E. FOWLER, III Chief Executive Officer and Director July 29, 1997
- ------------------------------------- (Principal Executive Officer)
Robert E. Fowler, III
* Chief Financial Officer July 29, 1997
- ------------------------------------- (Principal Financial and Principal
John S. Frelas Accounting Officer)
*By: /s/ ROBERT E. FOWLER, III
- -------------------------------------
Robert E. Fowler, III
</TABLE>
<PAGE> 187
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- ------ ---------------------------------------------------------------------- ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement.
2.1* Contribution Agreement among Polish Investment Holdings, LP ("PIHLP"),
ECO Holdings III Limited Partnership ("ECO"), Roger M. Freedman,
Steele LLC, the AESOP Fund, LP, the Cheryl Anne Chase Marital Trust
(the "CACMT") and @Entertainment, Inc. dated at June 22, 1997.
2.2* Purchase Agreement among ECO, @Entertainment, Inc. and L. Ciesffia
International, Inc. dated at June 22, 1997.
3.1* Amended and Restated Certificate of Incorporation of @Entertainment,
Inc. dated at June 22, 1997.
3.2* Bylaws of @Entertainment, Inc. as amended through July 14, 1997.
3.3* Shareholders Agreement among ECO, PIHLP, Roger M. Freedman, Steele
LLC, the CACMT, the AESOP Fund, LP and @Entertainment, Inc. dated at
June 22, 1997.
3.4* Termination Agreement among PCI, PIHLP, ECO, Roger M. Freedman, Steele
LLC, the AESOP Fund, LP, and the CACMT dated at June 22, 1997.
3.5* Registration Rights Agreement among @Entertainment, PIHLP, ECO, Roger
Freedman, Steele LLC, the AESOP Fund, LP, and the CACMT dated at June
22, 1997 (the "Registration Rights Agreement").
3.6* Amendment to Registration Rights Agreement.
4.1* Form of Common Stock Certificate.
5* Opinion of Baker & McKenzie with respect to the legality of the
securities being registered.
8* Opinion of Baker & McKenzie with respect to the certain tax matters.
9.1* Voting Agreement by and among PIHLP, Roger M. Freedman, Steele LLC,
and the CACMT dated at June 22, 1997.
9.2* Side Letter dated June 22, 1997 regarding the Voting Agreement.
10.1* Indenture dated at October 31, 1996 between PCI and State Street Bank
and Trust Company relating to PCI's 9 7/8% Senior Notes due 2003 and
its 9 7/8% Series B Senior Notes due 2003. (Incorporated by reference
to Exhibit 4.11 of PCI's Form S-4 Registration Statement, Registration
No. 333-20307).
10.2* Form of Management Agreement among PCI and subsidiaries.
10.3* Form of Service Agreement among PCI and subsidiaries.
10.4* Corporate Overhead Allocation Agreement among PCI and subsidiaries.
(Incorporated by reference to Exhibit 10.4 of PCI's Form S-4
Registration Statement, Registration No. 333-20307).
10.5* Amendment to Service Agreement. (Incorporated by reference to Exhibit
10.5 of PCI's Form S-4 Registration Statement, Registration No.
333-20307).
10.6* Side Letter regarding Service Agreement. (Incorporated by reference to
Exhibit 10.6 of PCI's Form S-4 Registration Statement, Registration
No. 333-20307).
10.7* Employment Agreement, dated at January 1, 1997, between PCI and Robert
E. Fowler, III, including Stock Option Agreement. Assigned to
@Entertainment (See Exhibits 10.22 and 10.25). (Incorporated by
reference to Exhibit 10.7 of PCI's Form S-4 Registration Statement,
Registration No. 333-20307).
</TABLE>
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10.8* Deferred Compensation Agreement, dated at January 1, 1991, between
Chase International Corporation (merged into World Cable
Communications, Inc. ("WCCI"), now PCI) and Arnold L. Chase. Assigned
to @Entertainment (See Exhibits 10.22 and 10.25). (Incorporated by
reference to Exhibit 10.8 of PCI's Form S-4 Registration Statement,
Registration No. 333-20307).
10.9* Employment Agreement, dated at January, 1997, between PCI and George
Makowski, including Stock Option Agreement. Assigned to @Entertainment
(See Exhibits 10.22 and 10.25). (Incorporated by reference to Exhibit
10.10 of PCI's Form S-4 Registration Statement, Registration No.
333-20307).
10.10* Employment Agreement, dated at September 1, 1996, between WCCI, and
John Frelas, including Stock Option Agreement. Assigned to
@Entertainment (See Exhibit 10.22 and 10.25). (Incorporated by
reference to Exhibit 10.11 of PCI's Form S-4 Registration Statement,
Registration No. 333-20307).
10.11* Employment Agreement, dated at February 7, 1997, between PCI and
Przemyslaw A. Szmyt, as amended. Assigned to @Entertainment (See
Exhibit 10.22 and 10.25).
10.12* Stock Option Agreement dated June 23, 1997 between @Entertainment and
Przemyslaw A. Szmyt.
10.13* Employment Agreement, dated at January 1, 1997, between PCI and Marek
Sowa, as amended. Assigned to @Entertainment (See Exhibit 10.22).
10.14 Employment Agreement, dated April 7, 1997, between PCI and David
Warner Assigned to @Entertainment (See Exhibit 10.22).
10.15* Stock Option Agreement dated at June 23, 1997 between @Entertainment
and David Warner.
10.16* Stock Option Plan of @Entertainment.
10.17* Employment Agreement, dated at January 1, 1996, between PTK-Warszawa
S.A. and Andrzej Muras. (Incorporated by reference to Exhibit 10.15 of
PCI's Form S-4 Registration Statement, Registration No. 333-20307).
10.18* Form of Agreement for Lease of Cable Conduits with Telekomunikacja
Polska S.A.
10.19+ Agreement for Digital Transmission on the Astra System between Societe
Europeene des Satellites S.A. ("SES") and PCI Programming, Inc.
(Mozaic Entertainment, Inc. (formerly, PCI Programming, Inc.,
"Mozaic") (ASTRA 1F Satellite) dated March 26, 1997.
10.20+ Agreement for Digital Transmission on the Astra System between SES and
Mozaic (ASTRA 1F Satellite) dated March 26, 1997.
10.21+ Agreement for Digital Transmission on the Astra System between SES and
Mozaic (ASTRA 1E Satellite) dated March 27, 1997.
10.22* Form of Assignment and Assumption Agreement related to employment
contracts with certain of the executive officers of @Entertainment.
10.23* Shareholders Agreement between Chase International Corporation, Frank
N. Cooper, Rutter-Dunn Communications, Inc., Poland Cablevision
U.S.A., Inc., and Poland Cablevision B.V. ("PCBV"), dated at March 8,
1990.
10.24* Form of Assignment and Assumption Agreement related to stock option
agreements with certain of the executives of @Entertainment.
10.25 Advisory Services Agreement between @Entertainment and Handlowy
Investments S.a.r.l. dated at July 29, 1997.
11.1* Statement Regarding Calculation of Per Share Earnings.
15* Letter from KPMG Peat Marwick LLP regarding unaudited interim
financial information.
21* List of subsidiaries of @Entertainment.
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23.1 Consent of KPMG Peat Marwick LLP with respect to @Entertainment.
23.2 Consent of KPMG Peat Marwick LLP with respect to Poland Cablevision
(Netherlands) B.V.
23.5* Consent of Baker & McKenzie with respect to the legality of the
securities being registered (contained in Exhibit 5).
23.6* Consent of Baker & McKenzie with respect to the certain tax matters
(contained in Exhibit 8).
25 Power of Attorney (included on the signature page in Part II of this
Registration Statement).
27* Financial Data Schedule.
</TABLE>
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* Previously filed.
+ Confidential treatment requested. Confidential Portions of Schedule VI of
Exhibits 10.19, 10.20 and 10.21 (noted by "*") have been omitted pursuant to a
request for confidential treatment and filed separately with the Commission.
(b) Financial Statement Schedules
The following are included in Part II of this Registration Statement.
Schedule II -- Valuation and Qualifying Accounts*
-- @Entertainment, Inc.
-- Poland Cablevision (Netherlands) B.V.
- ---------------
* Previously filed.
<PAGE> 1
Exhibit 10.14
POLAND COMMUNICATIONS, INC.
One Commercial Plaza
Hartford, Connecticut
06103-3585 U.S.A.
STRICTLY PRIVATE AND CONFIDENTIAL
EFFECTIVE AS OF APRIL 7, 1997
Mr. David Warner
Millbank House
Cranbrook Road
Tenterden
Kent
TN30 8UN
This contract sets forth the understanding between you and Poland
Communications, Inc. (hereinafter, together with its Polish subsidiaries and
affiliates collectively referred to as the "Company") with respect to your
employment with the Company.
I. TITLE/SALARY EMPLOYMENT INFORMATION.
A. Your employment with the Company will be for a 5 year period commencing
April 7, 1997.
B. You shall hold the position of Chief Operating Officer with respect to
Direct-to-Home ("DTH") broadcasting.
C. Your base gross remuneration shall amount to ninety five thousand
(95,000) U.K. Pounds annually (hereinafter referred to as the "Base
Salary"), paid either directly by Poland Communications Inc. and/or one
or more of its affiliates. The Base Salary shall be paid in 12 equal
monthly installments, on the last working day of each calendar month.
The amount of your Base Salary will be subject to annual performance
evaluation in January of each year.
D. In addition to your salary, you shall be eligible to receive an annual
bonus in the amount of 45,000 U.K. Pounds ("Bonus"). The criteria to
receive the Bonus or a portion thereof shall be determined by the Chief
Executive Officer of the Company.
The Bonus shall be paid out until the end of April of the following year
after drawing up the balance sheet of the Company. In the event the
contract is not renewed, your Bonus for the last period applicable shall
be paid out within one month from the last day of your employment with
the Company.
1
<PAGE> 2
You shall not be eligible for any Bonus if you leave voluntarily or are
terminated for cause, as defined in Section II (B) herein, prior to the
end of the period for which the Bonus is applicable.
E. In addition to your Base Salary and Bonus, you shall be eligible for an
additional bonus in the amount of one hundred fifty five (155,000) U.K.
Pounds upon successful completion of an initial Public Offering of common
stock of the Company or its holding company.
F. You shall receive medical and life Insurance coverage, as well as a
contribution to pension plan. The detailed terms thereof are set forth in
Schedule B hereto.
G. You shall accrue vacation pursuant to the laws of the United Kingdom.
H. The location of your office shall be in London. You shall travel for
business purposes as required.
I. Unless specifically stated otherwise, and unless you will become an
employee of a Company's UK subsidiary or affiliate, all amounts paid to
you by the Company shall be paid gross without deduction or withholding
of income taxes, social contributions or other taxes unless required by
the laws of the United States, and thereafter the Company shall have no
further liability with respect to such amounts. You shall be fully and
exclusively responsible for arranging your tax affairs with all relevant
authorities in all jurisdictions which may be applicable to you,
including (i) all tax fillings, registrations and similar declarations
required of you, and (ii) payment of all and any taxes, duties or similar
charges payable by you. The Company will attempt, wherever practicable at
no additional cost to the Company, to provide you with assistance with
regard to tax matters in the form of access to outside tax advisers or
accountants.
II. TERM AND TERMINATION OF EMPLOYMENT.
A. The term of this contract shall be for five (5) years commencing as of
April 7, 1997. However, and except as set forth in Section II (B) below,
you or the Company may terminate your employment upon six (6) month's
written notice at any time during the term.
B. Notwithstanding Section II (A) above, the Company may terminate your
employment at any time, without further obligation of any kind or nature,
in the event that:
(i) The Company determines in its reasonable judgment that you are engaging
or have engaged in conduct or activities injurious to the reputation
and/or affairs of the Company; or
(ii) That you are convicted for activity of a criminal or illegal nature under
the laws of the Country of Poland; and/or
2
<PAGE> 3
(iii) The Company determines that you have violated any substantive policies
and procedures of the Company, or any substantive personnel, financial or
other policies and procedures established by the Company; and/or
(iv) You have violated the Conflict of interest policy of the Company as
referenced in Section V of this contract.
Subsections (i) through (iv) above shall be considered "termination for
cause".
III. TRADE SECRETS AND CONFIDENTIAL INFORMATION: NON-COMPETITION.
During the term of your employment, you will acquire knowledge of
confidential and proprietary information regarding, among other things,
the Company's present and future operations, its customers and suppliers,
pricing and bidding strategies, and the methods used by the Company and
its employees. Therefore, you hereby agree to the following:
A. During your employment and after your employment ends with the Company
you will hold in a fiduciary capacity for the benefit of the Company, and
shall not directly or indirectly use or disclose any Trade Secret, as
defined hereinafter, that you may acquire during the term of your
employment by the Company for so long as such information remains a Trade
Secret. The term "TRADE SECRET" as used in this contract shall mean
information including, but not limited to, technical or non-technical
date, a formula, a pattern, a compilation, a program, a device, a method,
a technique, a drawing, a process, financial data, financial plans,
product plans or a list of actual or potential customers or suppliers
which:
(1) derives economic value, actual or potential from not being generally
known to, and not being readily ascertainable by proper means by,
other persons who can obtain economic value from its disclosure or
use; and
(2) is the subject of reasonable efforts by the Company to maintain its
confidentiality.
B. In addition to the foregoing and not in limitation thereof, you agree
that, during your employment with the Company and for a period of two (2)
years after your termination/separation from the Company, you will hold
in a fiduciary capacity for the benefit of the Company, and shall not
directly or indirectly use or disclose, any Confidential or Proprietary
Information, as defined hereinafter, that you may have acquired (whether
or not developed or compiled by you and whether or not you were
authorized to have access to such information) during the term of, in the
course of or as a result of your employment by the Company. The term
"Confidential or Proprietary Information" as used in this contract means
any secret, confidential or proprietary information of the Company not
otherwise included in the definition of "TRADE SECRET" above. The term
"Confidential and Proprietary Information" does not include information
that has become generally available to
3
<PAGE> 4
the public by the act of one who has the right to disclose such
information without violating any right of the client to which such
information pertains.
C. You agree that for a period of twelve (12) months after
termination/separation of your employment you will not hire or attempt to
hire for any purpose whatsoever (whether as an employee, consultant,
adviser, independent contractor or otherwise) any employee of the Company
or any affiliate thereof or any person who was an employee of the Company
or any affiliate thereof at any time during the one year period prior to
the termination of your employment.
D. You agree that for a period of twelve (12) months after
termination/separation of your employment you will not, directly or
indirectly, for any purpose whatsoever (whether as employee, consultant,
advisor, independent contractor or otherwise) engage in or solicit the
same or substantially similar business conducted by the Company i.e.
cable television, direct-to-home television and/or television
programming, in each case related to the country of Poland. As
compensation for potential income lost as a result of this provision,
within one month from termination/separation of your employment you will
receive a one-time payment from the Company in the amount of ten thousand
(10,000) UK Pounds.
E. You agree and acknowledge that, if a violation of any covenant contained
in this Section III occurs is threatened, such violation or threatened
violation will cause irreparable injury to the Company, that the remedy
at law for any such violation or threatened violation will be inadequate
and that the Company shall be entitled to appropriate equitable relief.
F. The covenants contained in this Section shall inure to the benefit of the
Company, any successor of it and every subsidiary and affiliate.
IV. REASONABLE RESTRICTIONS.
You agree and acknowledge that, to the extent required by law, the
covenants specified in Section III contain reasonable limitations as to
time, geographical area and scope of activities to be restricted and that
such covenants do not impose a greater restraint on you than is necessary
to protect the good will, confidential information and other legitimate
business interests of the Company.
V. COMPANY POLICIES: CONFLICT OF INTEREST.
You agree to execute and abide by the Company's Conflict of Interest and
Integrity Policy attached to this contract as Schedule A and made a part
of this contract.
4
<PAGE> 5
VI. RIGHTS TO MATERIALS.
All records, files, memorandum, reports, drawings, documents, and the
like (together with all copies thereof) relating to the business of the
Company, which you will use or prepare or come into contact within the
course of, or as a result of, your employment shall, as between the
parties hereto, remain the sole property of the Company. Upon your
termination/separation from the Company you shall return all such
materials to the Company and agree that you shall not thereafter cause
removal of such materials from the premises of the Company.
VII. COMPLETE AGREEMENT.
This contract contains the entire understanding of the parties with
respect to the subject matter contained herein and replaces any prior
understandings, whether written or oral. This contract may not be
modified or amended in any way unless in writing and signed by you and
the Chief Executive Officer of the Company.
VIII. MISCELLANEOUS PROVISIONS.
A. You and the Company agree that this contract and the terms and conditions
of your employment shall be governed by the laws of England. You and the
Company agree to submit to the exclusive jurisdiction of the courts of
England for any disputes arising out of your employment or termination of
this contract.
B. If any portion of this contract is deemed invalid or unenforceable, such
determination shall not effect the validity or enforceability of the
remaining provisions of the Agreement.
C. This contract shall be terminated automatically upon and coincidentally
with your death, except for the rights and obligations of either party
accrued up to your death.
If you are in agreement with the provisions of this contract, please sign
in the space provided below. Please retain one fully executed copy for
your records.
Poland Communications, Inc.
By: /s/Robert E. Fowler III Date: June 22, 1997
---------------------------- ----------------------------
Robert E. Fowler III
Chief Executive Officer
I, David Warner, acknowledge that I have received this contract and I agree to
the terms and information contained herein.
By: /s/ David Warner Date: July 10, 1997
---------------------------- ----------------------------
5
<PAGE> 6
SCHEDULE A
CONFLICT OF INTEREST AND INTEGRITY POLICY
A. All employees of the Company must conduct their business and personal
affairs with such ethics and integrity that no conflict of interest with
the Company's business, real or implied, can be construed. A conflict of
interest shall be deemed to exist if an employee or an Affiliate
(as defined in (F) below) of the employee has any interest (including,
but not limited to equity ownership, interest arrangement, commission,
gift, etc.) direct or indirect, in a client, supplier, contractor,
or other principal dealing with the Company or its affiliates, and that
interest is of such extent or nature that it might reasonably be
perceived by management to affect or tend to affect the employee's
judgment or decisions exercised on behalf of the Company.
B. An employee or any Affiliate of the employee shall not personally or on
behalf of the Company receive or be involved with any kickbacks, bribes,
gratuities, reciprocal arrangements or other improper or illegal
arrangements, or benefit personally from any rebates or discounts, with
any other organizations and personnel conducting or soliciting, currently
or prospectively, the business with the Company and its affiliates.
C. It is the Company's policy to comply with the Foreign Corrupt Practices
Act or any other similar law or regulation affecting the Company's
business which prohibits bribes, kickbacks, or any other type of illegal
and unethical business dealings. An employee of the Company shall abide
by and shall not violate any such laws or regulations and agree to
conduct him/herself in accordance with such laws. More specifically, an
employee or any Affiliate of an employee shall not permit or be involved
in any direct or indirect pay, award, commission, or other compensation
to any person or organization for purposes of improperly or illegally
inducing action of any kind whatsoever.
D. Where any questionable outside business activity is contemplated, an
employee must obtain prior Company approval.
E. Any violation of this policy shall subject an employee to immediate
termination for cause.
F. For purposes of this policy, Affiliate shall include, but not be limited
to, any relative by blood or by marriage or any entity in which the
employee or any such relative may have any financial, voting, controlling
and/or management interest.
ACKNOWLEDGMENT & REPRESENTATION OF EMPLOYEE
As an employee of the Company, I acknowledge that I have read and understand the
Company Conflict of Interest Policy, and represent that I will abide by the
terms of the Policy.
By: /s/ David Warner July 10, 1997
----------------------- ------------------------
David Warner Date
6
<PAGE> 1
EXHIBIT 10.25
ADVISORY SERVICES AGREEMENT
THIS ADVISORY SERVICES AGREEMENT (the "Agreement") is made and entered
into as of the 29th day of July 1997, by and between @Entertainment, Inc., a
Delaware corporation (the "Company"), and Handlowy Investments S.ar.l., a
Luxembourg corporation (the "Advisor").
W I T N E S S E T H:
WHEREAS, the Company is in the process of accessing the international
capital markets;
WHEREAS, the Company is seeking to rationalise the banking services
provided to it in Poland;
WHEREAS, the Company has engaged and continues to be engaged in seeking
acquisitions in the cable television and related markets in Poland;
WHEREAS, the Company desires to retain the Advisor to act as a
financial and banking advisor to the Company; and
WHEREAS, the Advisor is ready and willing to act as a financial and
banking advisor to the Company in accordance with the provisions set out below.
NOW THEREFORE, in consideration of the foregoing, the parties hereto
hereby agree as follows:
1. Appointment
The Company hereby appoints the Advisor to act as a financial and
banking advisor to the Company pursuant to the terms and conditions of
this Agreement. The Advisor
<PAGE> 2
accepts such appointment and agrees to render the services set forth as
herein provided and as further or more specifically agreed between the
Company and the Advisor.
2. Duties of Advisor
The Advisor shall act as a financial and banking advisor to the Company
and shall provide a broad range of financing, banking and strategic
advice to the Company with respect to the Company's Polish operations.
The areas in which the Advisor shall provide advice include: (i)
obtaining a listing of the Company's shares of common stock on the
Warsaw Stock Exchange; (ii) obtaining bank financing; (iii) acquisition
strategies and deal structures in general and with regard to particular
acquisitions and other transactions, and (iv) consolidating the
Company's various administrative banking relationships in Poland. In
addition, the Advisor will provide the Company with corporate banking
services in Poland.
3. Remuneration
For the services provided to the date of this Agreement and for the
services to be provided pursuant to this Agreement, the Company shall
pay the Advisor an advisory fee of Seven Hundred and Fifty Thousand
United States Dollars (US$750,000) on the same day that the Company
receives the funds from its initial public offering of shares of common
stock.
4. Governing Law
This Agreement shall be governed in all respects by the laws of the
State of Delaware without regard to principles of conflicts of
interest.
5. Counterparts
This Agreement may be executed in any number of counterparts, each of
which shall be an original, but all of which together shall constitute
one instrument.
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<PAGE> 3
6. Assignment
This Agreement shall not be assignable by either party to an unrelated
third party, without the prior written consent of the other party
hereto. Notwithstanding the foregoing, either party may assign any or
all of its obligations hereunder, without the consent of the other
party hereto, to any business entity that controls, is controlled by or
is under common control with such assigning party; provided, however,
that the assigning party shall remain responsible for the fulfilment of
all of its obligations hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Advisory
Services Agreement on the date first above written.
@ENTERTAINMENT, INC.
By: /s/ Robert E. Fowler, III
-----------------------------------
Name: Robert E. Fowler, III
Title: Chief Executive Officer
HANDLOWY INVESTMENTS S.AR.L.
By: /s/ Przemyslaw Krych
----------------------------------
Name: Przemyslaw Krych
Title: President of the Board
3
<PAGE> 1
Exhibit 23.1
The Board of Directors
@Entertainment, Inc.:
The audits referred to in our report dated March 26, 1997, except as to
Notes 1, 15 and 16 which are as of June 23, 1997, included the related financial
statement schedule as of and for each of the years in the three-year period
ended December 31, 1996, included in the registration statement. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
We consent to the use of our report dated March 26, 1997, except as to
Notes 1, 15 and 16 which are as of June 23, 1997 on the consolidated financial
statements of @Entertainment, Inc. and subsidiaries as of December 31, 1996 and
1995 and for each of the years in the three-year period ended December 31, 1996
included herein and to the references to our firm under the heading "Experts"
and "Selected Consolidated Financial Data" in the prospectus.
KPMG PEAT MARWICK LLP
Hartford, Connecticut
July 28, 1997
<PAGE> 1
Exhibit 23.2
The Board of Directors
Poland Cablevision (Netherlands) B.V.:
The audits referred to in our report dated March 26, 1997, included the
related financial statement schedule as of and for each of the years in the
three-year period ended December 31, 1996, included in the registration
statement. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We consent to the use of our report dated March 26, 1997, on the
consolidated financial statements of Poland Cablevision (Netherlands) B.V. and
subsidiaries as of December 31, 1996 and 1995 and for each of the years in the
three-year period ended December 31, 1996 included herein and to the references
to our firm under the heading "Experts" and "Selected Consolidated Financial
Data" in the prospectus.
KPMG PEAT MARWICK LLP
Hartford, Connecticut
July 28, 1997
