<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
@ENTERTAINMENT, INC.
(Exact name of Registrant as Specified in Its Charter)
<TABLE>
<S> <C> <C>
DELAWARE 4841 06-1487156
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION CODE IDENTIFICATION NO.)
INCORPORATION OR NUMBER)
ORGANIZATION)
</TABLE>
------------------------
ONE COMMERCIAL PLAZA
HARTFORD, CT 06103-3585
(860) 549-1674
Address, including zip code and telephone number, including area
code, or registrant's principal executive offices)
------------------------------
ROBERT E. FOWLER, III
@ENTERTAINMENT, INC.
ONE COMMERCIAL PLAZA
HARTFORD, CT 06103-3585
(860) 549-1674
(Name, address, including zip code and telephone number, including area code, of
agent for service)
------------------------------
COPIES TO:
MARC R. PAUL, ESQ.
BAKER & MCKENZIE
815 CONNECTICUT AVENUE, N.W.
WASHINGTON, D.C. 20006
(202)452-7034
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this form are to be offered on
a delayed or a continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED UNIT PRICE FEE
<S> <C> <C> <C> <C>
Warrants.................................... 1,008,000 N/A(1) N/A(1) N/A(1)
Common Stock, par value $.01 per share(2)... 1,824,514(3) $13.20(4) $24,083,585(5) $7,105(6)
</TABLE>
(1) In accordance with Rule 457(g) under the Securities Act of 1933, as amended
(the "Securities Act"), no separate registration fee is payable in respect
of the warrants (the "Warrants") to purchase shares of the common stock, par
value $.01 per share, of @Entertainment, Inc. (the "Common Stock").
(2) Represents the shares of Common Stock issuable upon the exercise of the
Warrants.
(3) Pursuant to Rule 416 under the Securities Act, there are also being
registered hereby such indeterminate number of additional shares of Common
Stock and other securities as may become issuable from time to time pursuant
to the adjustment provisions of the Warrants.
(4) Represents the price at which the Warrants may be exercised.
(5) Estimated in accordance with Rule 457(g) of the Securities Act, solely for
the purpose of computing the amount of the registration fee.
(6) The registration fee for the Common Stock offered hereby, $7,105, is
calculated under Rule 457(g) of the Securities Act as follows: the product
of .000295 and $24,083,585, which represents the proposed maximum aggregate
offering price, based on the price at which the Warrants may be exercised.
------------------------------
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, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Filed Pursuant to Rule 424(b)(3)
File No. 333-60659
SUBJECT TO COMPLETION, SEPTEMBER 29, 1998
@ENTERTAINMENT, INC.
1,008,000 WARRANTS
1,824,514 SHARES OF COMMON STOCK
This Prospectus relates to (i) 1,008,000 warrants (the "Warrants") to
purchase shares of common stock, par value $.01 per share (the "Common Stock")
of @Entertainment, Inc., a Delaware corporation ("@Entertainment" or the
"Issuer" or the "Company"), and (ii) 1,824,514 shares of Common Stock that may
be issued from time to time by the Company upon the exercise of the Warrants.
The Common Stock and other securities issuable or deliverable upon exercise of
the Warrants are collectively referred to as "Warrant Shares." The Warrants were
originally issued as a part of the Issuer's offering of 252,000 units (the
"Units"), each consisting of $1,000 principal amount of its 14 1/2% Senior
Discount Notes due 2008 (the "Old Notes") and four Warrants, which offering was
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act"), pursuant to Rule 144A thereunder. The Old Notes
and Warrants became separable on August 11, 1998. The Issuer is hereby
registering the Warrants and the Warrant Shares under the Securities Act, as
required pursuant to the terms of the Warrant Registration Rights Agreement,
dated as of July 14, 1998 (the "Warrant Registration Rights Agreement") among
the Issuer and Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch") and J.P. Morgan Securities Inc. ("J.P. Morgan" and together with Merrill
Lynch the "Initial Purchasers").
Each Warrant will initially entitle the holder thereof to purchase, during
the period beginning on the exercise date, which will be no later than November
16, 1998 (the "Exercise Date"), and ending on July 15, 2008 (the "Expiration
Date"), 1.81 shares of Common Stock at the exercise price of $13.20 per share
(subject to adjustment from time to time as described herein) (the "Exercise
Price"). Unless exercised, the Warrants will expire on the Expiration Date. See
"Description of the Warrants."
The Warrants offered hereby may be sold from time to time by the holders
named herein or their transferees, pledgees, donees or successors (collectively,
the "Selling Warrant Holders") pursuant to this Prospectus. The Warrants may be
sold by the Selling Warrant Holders from time to time directly to purchasers or
through agents, underwriters or dealers. See "Plan of Distribution" and "Selling
Warrant Holders." To the extent required, the names of any agents or
underwriters and the applicable commissions and discounts and any other required
information with respect to a particular offer or sale will be set forth in an
accompanying supplement to this Prospectus. See "Plan of Distribution."
The Shares are being offered by the Company to the Selling Warrant Holders
in connection with the exercise of the Warrants pursuant to the Warrant
Agreement, dated as of July 14, 1998 (the "Warrant Agreement") between
@Entertainment and Bankers Trust Company (the "Warrant Agent").
The Common Stock is traded on the Nasdaq National Market under the symbol
"ATEN." On September 28, 1998, the last reported sale price of the Common Stock
on the Nasdaq National Market was $9.00 per share. Prior to this offering, there
has been no public market for the Warrants, and the Company does not intend to
apply for listing or quotation of the Warrants on any securities exchange or
automated quotation system.
The Issuer will not receive any proceeds from the sale of the Warrants or
the Warrant Shares by the Selling Warrant Holders. To the extent that any
Warrants are exercised, the Issuer will receive the exercise price for the
Warrant Shares. See "Use of Proceeds."
The Issuer is organized under the laws of the State of Delaware. Although
investors in the Warrants and Warrant Shares will be able to effect service of
process in the United States upon the Issuer and may be able to effect service
of process upon its directors, due to the fact that the Issuer 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 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 U.S.
courts predicated upon the civil liability provisions of U.S. laws.
(CONTINUED ON NEXT PAGE)
SEE "RISK FACTORS" FROM PAGES 10 TO 31 FOR A DISCUSSION OF CERTAIN FACTORS
TO BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE WARRANTS OR THE WARRANT
SHARES OFFERED HEREBY.
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.
The date of this Prospectus is , 1998.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Issuer 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.
The Issuer 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.
The Issuer 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.
------------------------------
In this Prospectus, references to "U.S. Dollars" or "$" are to United States
currency, and references to "zloty" or "PLN" are to Polish currency. The Issuer
has presented its primary consolidated financial statements in accordance with
generally accepted accounting principles in the United States ("U.S. GAAP") in
U.S. Dollars. Amounts originally measured in zloty 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 certain zloty amounts
not derived from the consolidated financial statements which have been
translated into U.S. Dollars which should not be construed as a representation
that such zloty 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 zloty to U.S. Dollars at the rate of PLN 3.45 = $1.00, the
exchange rate quoted by the National Bank of Poland ("NBP") at noon on March 31,
1998. 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 zloty.
See "Exchange Rate Data."
------------------------------
Amounts and percentages appearing in this Prospectus may not total due to
rounding.
------------------------------
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains statements which constitute forward-looking
statements regarding the intent, belief or current expectations of the Issuer or
its officers with respect to, among other things, (i) the Issuer's financing
plans, (ii) trends affecting the Issuer's financial condition or results of
operations, (iii) the impact of competition, (iv) the start up of certain
operations, (v) acquisition opportunities, and (vi) regulatory matters.
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 "Prospectus Summary-Recent Developments," "Risk Factors," "The Industry,"
"Business" and "Regulation," as well as information contained in documents
incorporated in this Prospectus by reference, identifies important factors that
could cause such differences.
------------------------------
Reference is made to the following trademarks/tradenames owned by third
parties and used with the permission of the entity shown in parentheses: BET on
Jazz (Black Entertainment Television, Inc), Cartoon Network (The Cartoon
Network, Inc), CNN International (Cable News Network, Inc), Fox Kids (Twentieth
Century Fox Film Corporation), Hallmark (Hallmark Entertainment Network, Inc),
QuesTV (QTV Communications, LLC), National Geographic (National Geographic
Society), Romantica (Zone Broadcasting (Romantica) Limited), Turner Classic
Movies (Turner Classic Movies, Inc), Travel (Landmark Travel Channel Limited),
MTV (MTV Networks Europe), and VH-1 (MTV Networks Europe). In addition to the
trademarks listed above, reference is made to the following
trademarks/tradenames which are owned by third parties:
CryptoWorks-Registered Trademark- (Koninklijke Philips Electronics N.V.), Twoj
Styl (WPTS Sp. z o.o. in which the Company holds a 50 percent interest), HBO
(Time Warner Entertainment Company, L.P.), Discovery Channel (Discovery
Communications--Europe), Animal Planet (Discovery Communications--Europe) and
Canal+ (Canal+ S.A.).
<PAGE>
AVAILABLE INFORMATION
The Issuer has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-3 under the Securities Act with
respect to the Warrants and the Warrant Shares 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 the Issuer and the Exchange
Notes 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 Room 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 Room
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. Members of the public may obtain information on the operation of the
Public Reference Room by calling the Commission at 1-800-SEC-0330. 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.
@Entertainment is subject to the information and reporting requirements of
the Securities Exchange Act of 1934, as amended (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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, previously filed by the Issuer with the Commission
pursuant to the Exchange Act, are hereby incorporated by reference in this
Prospectus:
(a) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1997;
(b) The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1998 and June 30, 1998;
(c) The description of the Common Stock offered hereby contained in the
Issuer's Registration Statement on Form 8-A which was declared effective by the
Commission on July 30, 1997; and
(d) The Company's Current Reports on Form 8-K dated as of March 19, 1998,
April 21, 1998, June 1, 1998, June 16, 1998, July 15, 1998, August 10, 1998 and
September 21, 1998.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
(other than, in the case of the Issuer's Proxy Statement, portions thereof not
deemed to be "filed" for the purposes of Section 18 of the Exchange Act) and
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the securities to be made hereunder shall be
deemed to be incorporated herein by reference and shall be a part hereof from
the date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of the
Registration Statement or this Prospectus.
<PAGE>
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered, upon the written or oral request of such person, a
copy of any and all documents incorporated herein by reference, other than
certain exhibits to such documents (unless such exhibits are specifically
incorporated by reference into the documents that this Prospectus incorporates).
Written or telephone requests for such documents should be directed to Donald
Miller-Jones, Chief Financial Officer, @Entertainment, Inc., One Commercial
Plaza, Hartford, CT 06103, telephone (860) 549-1674.
<PAGE>
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. AS USED IN THIS PROSPECTUS
REFERENCES TO "@ENTERTAINMENT" OR THE "ISSUER" MEAN @ENTERTAINMENT, INC., A
DELAWARE CORPORATION WHOSE COMMON STOCK IS LISTED ON THE NASDAQ NATIONAL MARKET
AND TRADED UNDER THE SYMBOL ATEN, AND TO THE "COMPANY" MEAN @ENTERTAINMENT AND
ITS CONSOLIDATED SUBSIDIARIES, INCLUDING POLAND COMMUNICATIONS, INC. ("PCI") AND
AT ENTERTAINMENT LIMITED ("@EL"). @ENTERTAINMENT PREPARES ITS CONSOLIDATED
FINANCIAL STATEMENTS IN ACCORDANCE WITH U.S. GAAP AND IN U.S. DOLLARS. FOR THE
CONVENIENCE OF THE READER, AMOUNTS IN THIS PROSPECTUS THAT ARE NOT DERIVED FROM
THE CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN TRANSLATED TO U.S. DOLLARS. DATA
REGARDING THE COMPANY'S CABLE TELEVISION SUBSCRIBERS ARE AT MAY 31, 1998, UNLESS
OTHERWISE NOTED. CERTAIN TERMS USED IN THIS PROSPECTUS ARE DEFINED IN THE
GLOSSARY INCLUDED HEREIN AS ANNEX A. PROSPECTIVE INVESTORS IN THE WARRANTS AND
THE WARRANT SHARES SHOULD CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER
"RISK FACTORS."
THE COMPANY
GENERAL
The Company is the leading provider of pay television in Poland and is
engaged principally in the provision of cable television services and in the
development, packaging and delivery of high-quality programming. The Company is
the largest cable television operator in Poland, with approximately 865,000
total subscribers, which the Company estimates is more than two and a half times
as many subscribers as the next largest cable television operator. Over the past
three years, the Company has experienced rapid growth in revenues and
subscribers, both through acquisitions and through the build-out of its own
cable networks, resulting in an average increase in revenues and total cable
subscribers of 66% and 56% per annum, respectively. The Company also has
increased its average revenue per subscriber by 12% per annum during this same
period. The Company generated operating income of $3.5 million in 1995, but had
operating losses of $1.3 million, $42.7 million and $14.4 million for 1996, 1997
and the first three months of 1998, respectively. On June 5, 1998, the Company
launched a proprietary programming platform (the "Programming Platform") branded
Wizja TV, consisting of 11 channels of primarily Polish language programming,
over its cable networks. The Company believes that Wizja TV will provide it with
a significant competitive advantage for driving subscriber growth and increasing
revenue per subscriber. Wizja TV is also sold on a wholesale basis to other
cable operators in Poland.
In order to reach television households in Poland which it does not expect
to cover with its cable networks, the Company launched on September 18, 1998
(the "Launch Date") a complementary digital satellite direct-to-home
broadcasting ("D-DTH") service allowing subscribers to receive Wizja TV via a
satellite dish. The Company's multi-channel Polish-language D-DTH service is the
first D-DTH service available in Poland.
At the Launch Date the Company had sold approximately 31,400 Wizja TV
packages (consisting of the rental of a D-DTH Reception System (as defined
herein), installation and one-year subscription to the Company's D-DTH Service
(collectively, a "Wizja TV Package")) through 70 Philips Business Electronics
B.V. ("Philips") authorized retailers. With the launch of the Company's D-DTH
service, the Company has commenced the transmission of an expanded version of
Wizja TV on both its D-DTH system and its cable networks. The Company has also
entered into an agreement with Philips to supply the satellite dish, digital set
top box and related hardware and to distribute the Company's D-DTH service
through more than 1,000 Philips authorized retailers located throughout Poland.
See "Business--D-DTH."
POTENTIAL MARKET OPPORTUNITY
With approximately 39 million people and 12.3 million television households
(as estimated by the Company at December 31, 1997), the Company believes that
Poland represents a highly attractive and dynamic market for the provision of
pay television. Television viewing rates in Poland are among the
1
<PAGE>
highest in Europe with an average television viewing rate in 1996 of
approximately 252 minutes per day per adult. This rate compares favorably to the
1996 U.S. and U.K. average television viewing rates of approximately 240 minutes
and 215 minutes per day per adult, respectively. In addition, as there are only
approximately 12 free-to-air television channels generally available in Poland
that contain primarily Polish-language programming, the Company believes that
significant opportunities exist to provide high-quality Polish-language
programming on a multi-channel basis.
CABLE TELEVISION MARKET. The Company believes the market for cable
television in Poland is attractive with growth opportunities coming both
from homes passed by cable that are not cable subscribers and homes
currently not passed by cable. Of the approximately 4.0 million homes in
Poland currently passed by cable, the Company estimates that approximately
1.0 million households do not subscribe to cable. In addition, approximately
8.3 million homes are currently not passed by cable.
D-DTH MARKET. The Company believes that significant opportunity exists
for a D-DTH service in Poland. Approximately 8.3 million homes currently are
not passed by cable and approximately 1.6 million homes currently are
equipped with an analog direct-to-home service ("A-DTH") satellite dish.
Based on Polish consumers' willingness to spend disposable income on
television entertainment, evidenced in part by the country's 53% VCR
penetration rate at an average cost of $225 per VCR, the Company believes
that its D-DTH service represents an attractive and affordable entertainment
alternative.
COMPANY OPERATIONS
CABLE TELEVISION. The Company operates the largest cable television system
in Poland with approximately 1,530,000 homes passed and approximately 865,000
total subscribers. The Company's cable subscribers are located in 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 believes additional subscriber
growth can be achieved through a combination of increased penetration, new
network build-out and acquisitions. In addition, the Company believes that its
offering of Wizja TV on its cable networks, which began June 5, 1998, will
increase its number of subscribers and increase revenue per subscriber. At March
31, 1998, the Company had invested more than $121 million to construct
fiber-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
as rapidly as possible substandard networks that it has acquired.
DIGITAL SATELLITE DIRECT-TO-HOME BROADCASTING. The Company has expanded its
distribution capacity with its September 18, 1998 launch of a complementary
D-DTH broadcasting service for Poland, targeted at homes that are not
subscribers to the Company's cable service. The programming provided is Wizja
TV. The Company believes that its multi-channel Polish-language D-DTH service is
the first D-DTH service available in Poland. The Company's D-DTH service is
being broadcast to Poland from its transmission facilities in Maidstone, United
Kingdom. At the Launch Date the Company had sold approximately 31,400 Wizja TV
Packages.
Philips, a leading electronics manufacturer and, through its Polish
affiliates, the largest electronics retailer in Poland, has agreed to supply the
Company with D-DTH reception systems, which include the satellite dish, the
digital set top box and all related hardware (each a "D-DTH Reception System"),
for up to 500,000 initial subscribers to the Company's D-DTH service. Philips
has also agreed to distribute, install and service the Company's D-DTH Reception
Systems through more than 1,000 Philips authorized electronics retailers located
throughout Poland. Philips has operated in Poland since 1991 and has experience
introducing new products to the Polish market through its extensive retail
network. In addition,
2
<PAGE>
Philips has supplied an end-to-end product package for MEASAT's D-DTH service in
Malaysia, utilizing CryptoWorks-Registered Trademark- technology similar to that
to be used in the Company's D-DTH service.
Because the Company's D-DTH service is the first D-DTH service available in
Poland, there are likely to be issues of first impression arising under Polish
law with respect to certain aspects of the Company's D-DTH business and related
programming arrangements and there can be no assurance that these issues will be
decided favorably for the Company. In addition, the Polish and European Union
broadcasting regulations are part of a developing regulatory framework that may
change adversely to the Company as the Polish D-DTH market develops. See "Risk
Factors--Limited D-DTH Experience and Uncertainties Associated with the D-DTH
Market," "--Polish Regulation of the D-DTH Market", "--European Union Regulation
of D-DTH Business," "--Dependence on Philips as Principal Supplier,"
"Business--D-DTH--Technology and Infrastructure," and "Regulation."
PROGRAMMING. The Company began broadcasting to Poland from its transmission
facilities in Maidstone, United Kingdom and retransmitting Wizja TV across its
cable networks on June 5, 1998, and on its D-DTH system on a limited basis on
July 1, 1998 and on a full-scale basis on September 18, 1998. To promote the
launch of Wizja TV, the Company has commenced a $20 million nationwide marketing
campaign which the Company believes will be the largest single-year product
launch expenditure to date in Poland. Wizja TV's current channel line-up
includes four channels, Atomic TV, Wizja 1, Wizja Pogoda, and Twoja Wizja, that
are owned and operated by the Company, and 14 channels that are produced by
third parties, 9 of which are broadcast under exclusive agreements for pay
television in Poland. Atomic TV is a Polish-language music television channel,
targeting 14 to 29 year olds. Atomic TV began to be broadcast via satellite in
April 1997 across the cable networks of the Company and other cable operators.
Atomic TV is currently distributed to more than 900,000 cable subscribers, and
the Company believes that based on distribution it is the leading music
television channel in the Polish market. Wizja 1, a general entertainment
channel showing movies, sports, series and children's programming, Wizja Pogoda,
a weather channel, and Twoja Wizja, a programming directory channel, were
launched on July 1, 1998, July 21, 1998, and July 1, 1998, respectively, across
the Company's cable networks and on its D-DTH system. The Company expects to
expand Wizja TV's initial channel line-up to include additional basic and
premium channels, including the Company's proprietary Wizja Sport channel, and
eventually to introduce tiered packages containing a variety of combinations of
21 or more channels. Wizja Sport, a sports channel, is expected to be launched
by the middle of 1999.
Wizja TV includes certain exclusive Polish pay television rights to channels
and events covering what the Company believes are the most important programming
genres to viewers in the Polish market, including movies, sports, children's
programming, documentaries and music.
The Company has signed license agreements for the exclusive distribution on
its D-DTH system, and amended its existing agreement for non-exclusive
distribution across its cable networks, of the HBO Poland service, a
Polish-language version of HBO's premium movie channel.
The Company has also entered into long-term exclusive agreements to
broadcast to Poland live coverage of certain sports events, including the Polish
national soccer team's away games, certain European matches of Lech Poznan, a
Polish Premier League soccer team, European soccer matches, including matches
from the Dutch and Portuguese leagues, Polish Speedway League events, European
Grand Prix Speedway events, International Skating Union Champion Series ice
skating, games of three leading teams in the Polish Premier Hockey League, and
certain boxing events including local Polish boxing and fights involving Prince
Naseem. The Company has also entered into an exclusive agreement to broadcast
the Wimbledon tennis tournament to Poland. These events will initially be
carried on Wizja 1, and when it is established, on Wizja Sport. When
established, Wizja Sport will initially provide 12 hours of local and
international sporting events per week. The Company believes that Wizja Sport
will be the first channel in the Polish market principally dedicated to Polish
sports programming.
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In addition, the Company has signed license agreements for exclusive pay
television distribution to Poland of the following channels: BET on Jazz, The
Cartoon Network, Turner Classic Movies, Fox Kids Poland, The Hallmark
Entertainment Channel, the National Geographic Channel, QuesTV, Romantica and
Travel. The Company has also signed a license agreement for distribution in
Poland of CNNI, and has entered into a binding heads of agreement for the
exclusive distribution on its D-DTH system of MTV and the non-exclusive
distribution across its cable networks of VH-1. The Company expects to launch
VH-1 in the fourth quarter of 1998. The Company is also in the process of
negotiating license agreements for exclusive pay television distribution to
Poland of additional channels.
COMPANY STRENGTHS
The Company has certain strengths that it believes position it to compete
successfully in the Polish pay television market and to take advantage of the
significant viewer demand for multi-channel high-quality Polish-language
programming. These strengths include the following:
LEADING MARKET POSITION. The Company is currently the largest cable
television operator in Poland and estimates that it has more than two and a
half times as many subscribers as the next largest operator in Poland. Its
cable television networks serve approximately 865,000 total subscribers,
representing approximately 29% of all cable subscribers in Poland and
approximately 52% of all cable subscribers in Poland to systems offering
approximately 20 or more channels. 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 to acquire, at attractive prices, or displace these smaller
cable operators. In addition, frequent lack of exclusivity of cable
operators' agreements with co-operative housing authorities ("co-op
authorities") facilitates overbuilding of these smaller cable operators.
With the launch of the Company's D-DTH service, its strategy is to
achieve rapid penetration of the Polish market by distributing D-DTH
Reception Systems to 500,000 targeted initial subscribers at a price
significantly decreased by promotional incentives. The Company believes that
its service is the first Polish-language D-DTH service available in Poland
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 pay television in Poland.
COMPELLING PROGRAMMING. The Company has secured for Wizja TV certain
exclusive Polish pay television rights to channels and events covering what
it believes are the most important programming genres to viewers in the
Polish market, including movies, sports, children's programming,
documentaries and music. The Company provides Wizja TV to both its cable and
D-DTH subscribers. The Company believes that this selection of high-quality
Polish-language programming will provide it with a significant competitive
advantage in increasing its cable subscriber base and establishing its D-DTH
subscriber base.
ADVANCED TECHNOLOGY. The Company's own 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 incremental channel
capacity as well as additional services such as voice and data transmission.
The Company believes that its multi-channel Polish-language D-DTH service is
among the first digital television platforms launched in Europe. The Company
believes that in the future it will be able to provide its D-DTH customers
with additional value-added services, including interactive television, pay
per view, near-video-on-demand, data transfer, and services related to
electronic banking, should the Company decide to pursue such ancillary
sources of revenue.
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STRONG D-DTH DISTRIBUTION NETWORK. Philips has agreed to distribute,
install and service D-DTH Reception Systems to up to 500,000 initial
subscribers through more than 1,000 Philips authorized retailers located
throughout Poland. The Company believes this widespread distribution network
through Poland's largest electronics retailer provides the Company with a
competitive advantage for distributing its D-DTH service into the Polish
market.
HIGH CABLE PENETRATION AND LOW CHURN. The Company's cable systems are
currently achieving premise penetration of approximately 57% 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 62%. The Company believes that its
offering of Wizja TV across its cable networks, which began June 5, 1998,
will improve its penetration by expanding its program offering from 10
primarily Polish-language channels not available on terrestrial frequencies
to 18 channels. In addition, the Company has historically experienced annual
churn rates of less than 10%, which compare favorably to other markets such
as the United Kingdom, where in 1996 churn rates were approximately three
times this figure. In 1997, the Company's churn rate increased to 12.2%,
though it would have been 9.8% had the Company not disconnected
approximately 17,000 non-paying subscribers in one of its acquired and
rebuilt networks. The Company expects that it may continue to experience
increases in its churn rate above historical levels during the
implementation of its current pricing strategy, which commenced in January
1997 and is designed to increase revenue per subscriber and to achieve real
profit margin increases in U.S. Dollar terms.
SUBSTANTIAL INFRASTRUCTURE INVESTMENT. The Company has developed an
advanced production facility in Maidstone, United Kingdom for the production
and transmission of Wizja TV. In addition, the Company has created a
centralized call center (the "Call Center") to handle sales and service for
both its cable and D-DTH customers. The Company believes that the Call
Center is among the most sophisticated in Poland. The Company believes that
its facilities provide it with a competitive advantage in terms of
subscriber management services and cost efficiency.
EXPERIENCED MANAGEMENT. The Company has established a strong management
team, with extensive experience in the television industry. In addition, the
Company has executed consulting agreements with Samuel Chisholm and David
Chance, who were formerly Chief Executive Officer and Deputy Managing
Director, respectively, of British Sky Broadcasting Group plc ("BSkyB"),
which is the leading pay television broadcasting service in the United
Kingdom and Ireland. In addition to providing consulting services, Messrs.
Chisholm and Chance serve on @Entertainment's Board of Directors.
BUSINESS STRATEGY
The Company's principal objective is to enhance its position as the leading
provider of 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 advanced cable television and D-DTH systems. The
Company's business strategy is designed to increase its market share and
subscriber base and to maximize revenue per subscriber. To accomplish its
objectives and to capitalize on its competitive advantages, the Company intends
to (i) develop and control content, (ii) grow its distribution capabilities
through organic growth and through acquisitions, (iii) control its own
subscriber management with advanced integrated management information systems,
and (iv) establish Wizja TV as the leading brand name in the Polish pay
television industry.
FINANCING PLAN
The development of the Company's businesses will require significant capital
to fund capital expenditures, working capital, debt service and operating
losses, including contractual commitments in connection with its D-DTH and
programming businesses. The Company believes that in addition to cash on hand
and
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cash from operations, it will need additional funding of at least $150 million
to fulfill its current business plan and to fund these commitments through the
end of 1999. The Company expects that it will obtain such funding either through
public or private debt or equity offerings or bank financings or a combination
thereof. See "Risk Factors--Need for Additional Financing."
The Company is highly leveraged. At March 31, 1998, on a pro forma basis
after giving effect to the sale of the Issuer's 14 1/2% Senior Discount Notes
due 2008 (the "Old Notes") and the application of the proceeds therefrom and the
drawdown of the $6.5 million credit facility with American Bank in Poland, S.A.
("AmerBank"), @Entertainment and its subsidiaries, on a consolidated basis,
would have had approximately $256 million of outstanding indebtedness,
approximately $139 million of which would have been indebtedness of subsidiaries
of @Entertainment (including approximately $130 million of PCI's 9 7/8% Senior
Notes due 2003 and 9 7/8% Series B Senior Notes due 2003 (collectively, the "PCI
Notes"). The indenture (the "Indenture") governing the Old Notes and the
Issuer's 14 1/2% Series B Senior Discount Notes due 2008 (the "New Notes" and
together with the Old Notes, the "Notes") and the indenture governing the PCI
Notes ("PCI Indenture") limit, but do not prohibit, the incurrence of additional
indebtedness by @Entertainment and its subsidiaries and by PCI and its
subsidiaries, respectively. See "Risk Factors--Substantial Leverage; Ability to
Service Debt."
RECENT DEVELOPMENTS
On April 17, 1998, the Company signed a letter of intent with Telewizyjna
Korporacja Partycypacyjna S.A. ("TKP"), a Polish company that currently operates
an A-DTH and terrestrial single channel premium pay television service in
Poland, and the shareholders of TKP, namely, Canal+ S.A., Agora S.A., and PolCom
Invest S.A. The letter of intent provided for bringing together the Company's
Wizja TV programming platform and the Canal+ Polska premium pay television
channel and for the joint development and operation of a D-DTH service in
Poland. The letter of intent called for the Company to invest approximately $112
million in TKP, and to sell substantially all of the Company's D-DTH and
programming assets to TKP for approximately $42 million. The TKP joint venture
was to be owned 40% by the Company, 40% by Canal+ S.A., 10% by Agora S.A. and
10% by PolCom Invest S.A. The letter of intent also contained a standstill
provision whereby neither the Company nor TKP could, for a period of 45 days
after the execution of the letter of intent, launch any digital pay television
service. As a result, the Company postponed its launch of the Wizja TV
programming platform and its D-DTH service, which was originally scheduled for
April 18, 1998. The establishment of the joint venture was subject to the
execution of definitive agreements, regulatory approvals and certain other
closing conditions.
The definitive agreements were not agreed and executed by the parties by the
date set forth in the letter of intent. Therefore, the Company terminated the
letter of intent on June 1, 1998. The Company has informed TKP and its
shareholders that the Company remains willing to discuss other joint marketing
arrangements which may include some form of joint venture, investment, or
cooperation in the future. A portion of the net proceeds, if any, from the
exercise of Warrants may be used for such purpose. TKP and its shareholders have
informed the Company that they believe the Company did not have the right to
terminate the letter of intent and have initiated arbitration proceedings
against the Company. The Company has submitted its answer and counterclaims. See
"Business--Legal Proceedings."
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CORPORATE ORGANIZATIONAL STRUCTURE
The chart on this page outlines the organizational structure of the Issuer
and certain of its principal subsidiaries that is currently being implemented.
[Chart shows @Entertainment, Inc.'s (the "Issuer") ownership in certain of
its principal subsidiaries in its D-DTH, programming, and cable businesses.
D-DTH: The Issuer owns 100% of At Entertainment Limited ("@EL") and 100% of
Wizja TV Sp. z o.o. PROGRAMMING: The Issuer owns 100% of Sereke Holding B.V.
("Sereke"), 50% of WPTS Sp. z o.o. ("Twoj Styl"), 100% of Ground Zero Media Sp.
z o.o. ("GZM"), and 100% of @Entertainment Programming, Inc. ("@EP"). CABLE: The
Issuer owns 100% of Poland Communications, Inc ("PCI"). PCI owns 100% of Polska
Telewizja Kablowa S.A. ("PTK S.A."), and has an ownership interest in other
cable subsidiaries. PCI will own 49% of Cable Television Newco ("CATV") (in
formation) and 49% of PTK Operator Sp. z o.o. ("PTK Operator") (structure to be
implemented). CATV will own 51% of PTK Operator (structure to be implemented).]
* Certain of the cable television operating subsidiaries are owned directly
by Poland Cablevision (Netherlands) B.V. ("PCBV"), of which 92.3% is
owned by PCI. See "Certain Relationships and Related Transactions--PCBV
Stockholders' Agreement."
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<TABLE>
<S> <C>
THE OFFERING
Securities Offered.............. 1,008,000 Warrants and 1,824,514 shares of Common Stock
issuable upon the exercise of the Warrants.
Warrants Offered................ The Warrants initially will entitle the holders thereof to
acquire an aggregate of 1,824,514 shares of Common Stock,
representing in the aggregate approximately 5.0% of the
outstanding Common Stock on a fully diluted basis. See
"Description of Capital Stock."
Expiration Date................. The Warrants will expire on July 15, 2008 (the "Expiration
Date").
Exercise........................ Each Warrant will entitle the holder to acquire, during
the period beginning on the earlier of (i) the date hereof
or (ii) November 16, 1998 (the "Exercise Date"), and
ending on the Expiration Date, 1.81 shares of Common Stock
at the Exercise Price of $13.20 per share (subject to
adjustment from time to time as described herein). The
Common Stock and any other securities issuable or
deliverable upon exercise of the Warrants are collectively
referred to as "Warrant Shares."
Rights as Stockholders.......... Holders of Warrants will not, by virtue of being Warrant
Holders, have any rights of stockholders of the Issuer.
Listing or Quotation of
Common Stock.................. The Common Stock is traded on the Nasdaq National Market
under the symbol "ATEN."
Use of Proceeds................. The Company will not receive any proceeds from the sale of
Warrants by holders of Warrants. The proceeds, if any,
received by the Company from the exercise of Warrants will
be used for general corporate purposes.
Registration Rights............. The Issuer is registering the Warrants and the Warrant
Shares as required pursuant to the Warrant Registration
Rights Agreement. Under the terms of the Warrant
Registration Rights Agreement the Issuer is required to
use its reasonable efforts to maintain the effectiveness
of the Registration Statement on Form S-3 (the "Warrant
Shelf Registration Statement"), of which this Prospectus
forms a part, until the expiration, redemption (if
applicable) or exercise of all of the applicable Warrants.
In addition, the holders of the Warrants will be entitled
to "piggy-back" registration rights for the Warrant Shares
in connection with certain public offerings of shares of
Common Stock or other securities for which the Warrants
are exercisable. See "Description of the
Warrants--Registration Rights."
</TABLE>
ABSENCE OF PUBLIC MARKET
There has been no public market for the Warrants. The Issuer has been
advised by the Initial Purchasers that they presently intend to make a market in
the Warrants, however, they are not obligated to do so and any market-making may
be discontinued at any time. Therefore, there can be no assurance that an active
market for the Warrants will develop or as to the liquidity of any such market.
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RISK FACTORS
Prospective investors in the Warrants and the Warrant Shares should consider
all the information contained in this Prospectus. In particular, prospective
participants should consider the factors set forth herein under "Risk Factors."
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
AT DECEMBER 31, AT MAY 31,
------------------------------------------ ----------
<S> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998
--------- --------- --------- --------- ----------
Homes passed by cable(1)............................... 298,316 711,545 1,088,540 1,408,100 1,530,262
Basic cable subscribers(2)............................. 112,534 262,077 460,625(5) 636,283 701,907
Basic cable penetration(3)............................. 37.7% 36.8% 42.3% 45.2% 45.9%
Annual cable churn rates(4)............................ 9.1% 9.2% 7.8% 12.2% N/A
</TABLE>
- ------------------------
(1) 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.
(2) Includes only subscribers to the Company's package with the largest number
of non-premium channels (the "Basic Tier") and the Company's package with
more limited programming offerings of 17 to 24 channels (the "Intermediate
Tier"). See "Business--Cable Operations--Services and Fees."
(3) Basic cable subscribers as a percentage of homes passed by cable at period
end.
(4) 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.
(5) Includes approximately 15,000 subscribers served by a cable system the
Company acquired on January 1, 1997.
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RISK FACTORS
AN INVESTMENT IN THE WARRANTS AND THE WARRANT SHARES IS SUBJECT TO A NUMBER
OF RISKS. POTENTIAL INVESTORS IN THE WARRANTS AND THE WARRANT SHARES SHOULD
CONSIDER CAREFULLY ALL THE INFORMATION SET FORTH HEREIN AND, IN PARTICULAR, THE
FOLLOWING RISKS IN CONNECTION WITH AN INVESTMENT IN THE WARRANTS OR THE WARRANT
SHARES. 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. THIS PROSPECTUS CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS. ACTUAL RESULTS AND
THE TIMING OF CERTAIN EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED IN THE
FORWARD-LOOKING STATEMENTS DUE TO A NUMBER OF FACTORS, INCLUDING THOSE SET FORTH
BELOW AND ELSEWHERE IN THIS PROSPECTUS. SEE "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS."
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company is highly leveraged. At March 31, 1998, on a pro forma basis
after giving effect to the issuance of the Notes and the application of the
proceeds therefrom and the drawdown of the $6.5 million AmerBank facility,
@Entertainment and its subsidiaries, on a consolidated basis, would have had
approximately $256 million of outstanding indebtedness, approximately $139
million of which would have been indebtedness of subsidiaries of @Entertainment
(including approximately $130 million of PCI Notes). The Indenture and the PCI
Indenture limit, but do not prohibit, the incurrence of additional indebtedness
by @Entertainment and its subsidiaries and by PCI and its subsidiaries,
respectively.
The Company's ratio of earnings to fixed charges indicate a less than one to
one coverage. For the years ended December 31, 1995, 1996, 1997 and the three
months ended March 31, 1998, earnings were insufficient to cover fixed charges
by $0.7 million, $3.6 million, $55.8 million and $17.0 million, respectively.
The Company anticipates that, in light of the amount of its existing
indebtedness and the possible incurrence of additional indebtedness to finance
acquisitions and to fund and expand its cable, D-DTH, 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, the PCI Notes,
and any other outstanding indebtedness and to adequately fund its planned
capital expenditures and operations, including its committed contractual
obligations, (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 incurrence of additional indebtedness, the payment of
dividends and on operations, and (vi) because all or part 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. The Company must generate
substantial additional cash flow in order to pay interest and repay principal on
the Notes, the PCI Notes, and any other outstanding indebtedness, and there can
be no assurance 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, minimum guaranteed contractual commitments, interest payments and
scheduled principal payments. If the Company is unable to generate sufficient
cash flow from operations in the future it may be required to reduce the scope
of its presently anticipated expansion of operations, reduce capital
expenditures (including expenditures related to acquisitions), refinance all or
a portion of its existing indebtedness, or obtain additional financing. While it
is the Company's intention to only enter into financing arrangements that it
considers advantageous,
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there can be no assurances that the Company will be able to obtain financing on
satisfactory terms, if at all. In the event the Company obtains any future
financing on less than favorable terms, the Company might be forced to operate
under terms that would restrict its operations and reduce its cash flow.
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. The
Indenture and the PCI Indenture contain certain restrictive covenants. Such
restrictions will affect, and in many respects will significantly limit or
prohibit, among other things, the ability of the Company to incur indebtedness,
make prepayments of certain indebtedness, pay dividends, make investments,
engage in transactions with stockholders and affiliates, issue capital stock of
subsidiaries, create liens, sell assets and engage in mergers and
consolidations.
HISTORICAL AND ANTICIPATED FUTURE OPERATING LOSSES AND NEGATIVE CASH FLOW
Pay television operators typically experience losses and negative cash flow
in their initial years of operation due to the large capital investment required
for the construction or acquisition of their programming and distribution
systems 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, $42.7 million and $14.4
million for 1996, 1997 and the first three months of 1998, respectively.
The Company expects to experience substantial operating losses and negative
free cash flows for at least the next two years due to (i) the large investments
required for the acquisition of equipment and facilities for its D-DTH business,
including providing D-DTH Reception Systems to the 500,000 initial subscribers
at a price significantly decreased by promotional incentives pursuant to the
Company's business strategy, and the administrative costs required in connection
with commencing its D-DTH business operations and (ii) the large investments
required to develop, produce and acquire the programming for Wizja TV. There can
be no assurance that the Company will be able to generate operating income or
positive cash flows in the future or that its operating losses and negative cash
flows will not increase.
ABSENCE OF PUBLIC MARKET
The Warrants are securities for which there currently is no market. The
Issuer does not currently intend to list the Warrants on a national securities
exchange or to seek the admission thereof to trading in the National Association
of Securities Dealers Automated Quotation System. Accordingly, no assurance can
be given that an active market will develop for the Warrants or as to the
liquidity of the trading market for the Warrants. If a trading market does not
develop or is not maintained, holders of the Warrants may experience difficulty
in reselling such Warrants or may be unable to sell them at all. If a market for
the Warrants develops, any such market may be discontinued at any time. If a
trading market develops for the Warrants, future trading prices of such Warrants
will depend on many factors, including, among other things, the Issuer's results
of operations and the market for similar securities.
ABILITY TO EXERCISE WARRANTS
Holders of Warrants will be able to exercise their Warrants only if a
registration statement relating to the Warrant Shares is then in effect or the
exercise of such Warrants is exempt from the registration requirements of the
Securities Act and such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states or other
jurisdictions in which the various holders of the Warrants reside. The holders
of the Warrants will be entitled to certain "piggy-back" registration rights for
the Warrant Shares in connection with certain public offerings, if any, of
shares of Common Stock or other
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<PAGE>
securities for which the Warrants are exercisable. In addition, the Issuer is
required, under the terms of the Warrant Registration Rights Agreement, to use
its reasonable best efforts to maintain the effectiveness of the Warrant Shelf
Registration Statement until the expiration, redemption (if applicable) or
exercise of all of the applicable Warrants. There can be no assurance that the
Issuer will be able to keep a registration statement continuously effective
until all of the Warrants have expired, have been redeemed (if applicable) or
have been exercised. See "Description of the Warrants--Registration Rights."
VOLATILITY OF STOCK PRICE
The market price of the Issuer's Common Stock has been volatile and may be
volatile in the future. Future announcements concerning the Issuer or its
competitors, including, but not limited to, technological innovations, new
commercial products, status of network implementation, government regulations,
proprietary rights, litigation, available satellite transponder capacity,
programming availability, customer acceptance, operating results and general
market and economic conditions may have a significant impact on the market price
of the Issuer's Common Stock and, consequently, the Warrants. In addition, any
delays or difficulties in establishing the Issuer's networks or attracting
network subscribers are likely to result in pronounced fluctuations in the
market price of the Issuer's Common Stock and, consequently, the Warrants.
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. Further,
@Entertainment currently does not own, directly or indirectly, a majority
interest in certain subsidiaries, and may not have operating control of other
entities in which it may currently have or 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.
The PCI Indenture limits, but does not prohibit, the payment of dividends by
PCI and the ability of PCI to incur additional indebtedness. PCI could not pay
dividends to the Issuer as of March 31, 1998 because certain financial ratios
did not meet the minimum amounts provided in the PCI Indenture. Accordingly, any
cash flow of PCI in 1997 and the first three months of 1998 would not have been
available to @Entertainment to service its indebtedness. To the extent that PCI
is prohibited from paying dividends or other distributions to @Entertainment by
the terms of the PCI Indenture, any cash flow of PCI will not be available to
service indebtedness of @Entertainment. There can be no assurance that PCI's
performance will ever permit it to pay dividends or other distributions to
@Entertainment under the terms of the PCI Indenture.
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
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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, and
to the extent that it can continue to pay its debts as they mature in the usual
course after such payment.
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, 1998), 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 spolka
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, the Company's Dutch subsidiaries may
only distribute profits to stockholders insofar as their equity exceeds the
paid-up and called-up capital increased by 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.
NEED FOR ADDITIONAL FINANCING
The Company believes that, in addition to cash on hand and cash from
operations, it will need additional funding of at least $150 million to fulfill
its current business development plan through the end of 1999. This additional
financing will be required to fund ongoing development and expansion of the
Company's D-DTH business and its programming business, and such businesses are
expected to incur operating losses and negative cash flow for at least the next
two years. At July 21, 1998, the Company was committed to pay at least
approximately $380 million in guaranteed payments (including but not limited to
payments for the D-DTH Reception Systems and payments of guaranteed minimum
amounts due under programming agreements and satellite transponder leases) over
the next seven years, of which at least approximately $235 million was committed
through the end of 1999. These payments may increase if the Company enters into
additional programming agreements. If the Company is unable to make these
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payments, it will have a material adverse effect on the Company's business,
financial condition and results of operations. The Company expects that it will
also require additional external funding for its business development plan in
years subsequent to 1999 if the Company continues to provide promotional
incentives to subscribers (other than the 500,000 initial subscribers) with
respect to the D-DTH Reception Systems. Future sources of financing for the
Company could include public or private debt or equity offerings or bank
financings or any combination thereof. There can be no assurance that such
additional financing will be available to the Company or, if available, that it
could be obtained on acceptable terms within the limitations contained in the
Company's financing arrangements (including the Indenture and the PCI
Indenture). Moreover, if the Company's plans or assumptions change, if its
assumptions prove inaccurate, if it consummates unanticipated investments in or
acquisitions of other companies, if it experiences unexpected costs or
competitive pressures, or if existing cash or projected cash flow from
operations prove to be insufficient, the Company may need to obtain greater
amounts of additional financing. PCI maintains a credit facility of
approximately $6.5 million, under which all amounts were drawn in June 1998.
@Entertainment is currently negotiating to enter into an agreement with one or
more banks to provide a larger liquidity facility. In the event that the Company
and TKP are able to reach an agreement regarding a joint venture, investment or
some other form of cooperation, the Company's use of net proceeds from the sale
of the Notes and from the net proceeds, if any, from the exercise of Warrants
may be reallocated and some portion thereof may be used by the Company to fund
the Company's participation therein.
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. 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. 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 not be able to make its minimum guaranteed
contractual commitments, which would have a material adverse affect on the
Company's business, financial condition and results of operations. In addition,
in such a case the Company 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, and as
a result the business, results of operations and prospects of the Company could
be adversely affected.
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 had no experience
delivering D-DTH services prior to the July 1, 1998 limited launch and September
18, 1998 full-scale launch of its D-DTH business. 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 digitalizing 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, particularly the larger 36" diameter dishes used for A-DTH. 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 from a single satellite position, (ii) the improved signal quality of
D-DTH, and (iii) the increased capacity for premium services, there can be no
assurance 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, or
that it will not face competition from other D-DTH businesses in Poland. In view
of these challenges, the prospects for the Company's D-DTH
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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 experience in a
comparable business. In addition, the Polish D-DTH market is subject to a
developing regulatory framework that may change as the market develops. In this
regard, although the Company has been discussing with the Polish National Radio
and Television Council (the "Council") the feasibility of applying for a Polish
broadcasting license, there can be no assurances that the Company's broadcast of
programming from outside of Poland will not become subject to the application of
Polish laws regulating television broadcasting or that certain European Union
broadcasting regulations will not be amended, which could have a material
adverse effect on the Company's ability to broadcast into Poland programming
uplinked from the United Kingdom and on the Company's business, financial
condition and results of operation. See "--Polish Regulation of the DTH Market,"
"--European Union Regulation of D-DTH Business" and "Regulation."
EXPECTED LOSSES. The Company expects that its D-DTH business will incur
substantial operating losses for at least two years of operation while it is
developed and expanded. The Company plans to spend up to approximately $200
million to provide 500,000 targeted initial subscribers with D-DTH Reception
Systems at a price significantly decreased by promotional incentives. In
addition, 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 for each transponder and up to $182 million for all three
transponders for the remaining term of their leases. The leases for the two
transponders on the Astra 1F satellite and the transponder on the Astra 1G
satellite will expire in 2007. The Company has incurred and will continue to
incur capital expenditures and operating expenses related to its transmission,
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 and maintain a successful programming platform for the Polish
market and its ability to control other costs which do not vary with the number
of subscribers. Holders of the Warrants and the Warrant Shares 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
competitive characteristics of the pay television industry in Poland. There can
be no assurance that the roll out of the Company's D-DTH business will proceed
as planned, or that if achieved, the Company's D-DTH service will attract enough
subscribers to 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 difficult to
predict, including (i) the size of the D-DTH service market, (ii) the rates of
penetration of such market, (iii) the acceptance of the D-DTH service 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 multi-channel alternatives, including the continued
expansion of cable television and competition from other D-DTH services in
Poland, and (vii) the immediate and long-term viability of D-DTH services to
Poland.
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 provide the D-DTH Reception System to the
initial subscribers at a price significantly decreased by promotional incentives
of up to approximately $400 per subscriber or an aggregate of up to
approximately $200 million for the 500,000 targeted initial subscribers.
Although the Company believes that the price at which the initial subscribers
acquire the subscription package (including the D-DTH Reception System rental,
installation, and a one year's subscription for all channels (other than any
premium channels)), which is approximately $135 plus applicable taxes 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 required
from subsequent subscribers may increase
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unless the Company decides to continue to provide promotional incentives to
subscribers for the D-DTH Reception Systems. Accordingly, there can be no
assurance that the Company will attract or retain additional subscribers if it
ceases to provide promotional incentives to subscribers of the D-DTH Reception
System. See "--Need for Additional Financing."
DEPENDENCE ON PHILIPS AS PRINCIPAL SUPPLIER
Certain critical components and services used in the Company's D-DTH
satellite transmission system, including the Philips' digital integrated,
receiver decoders ("IRD"), a smartcard-based proprietary conditional access
system which uses Philips CryptoWorks-Registered Trademark- technology, and a
satellite receiving dish and related equipment (the outdoor unit or "ODU"),
which together constitute the D-DTH Reception System, as well as retail,
installation and support services, are initially to be provided exclusively by
Philips. The Company has concluded an agreement 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. Philips has granted the Company an exclusive license of its
CryptoWorks-Registered Trademark- technology in Poland for the term of the
agreement, which will terminate when the Company has purchased 500,000 D-DTH
Reception Systems from Philips, unless terminated earlier in accordance with the
terms of the agreement or extended by mutual consent of Philips and the Company.
Philips has agreed not to distribute any other IRDs under the Philips' trademark
in Poland until December 31, 1999 or any earlier date on which the Company has
secured 500,000 initial subscribers to its D-DTH service in Poland. The
Company's agreement with Philips provides that after such period the Company may
license one or two suppliers of IRDs in addition to Philips and Philips shall
license its CryptoWorks-Registered Trademark- technology to such additional
suppliers for the Polish market. Although the agreement with Philips provides a
means by which the Company could obtain a second and third supplier for all or
part of its future requirements for D-DTH Reception Systems, there can be no
assurance that the Company will be able to secure such additional suppliers.
The failure of Philips to deliver D-DTH Reception Systems on schedule, or at
all, 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's agreement with Philips provides for full distribution,
installation and servicing through more than 1,000 Philips authorized
electronics retailers located throughout Poland. Philips has agreed to
distribute a complete subscription package, comprising the D-DTH Reception
System, as well as the necessary installation and support services through
Philips' retail network in Poland, and is therefore 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. See
"Business--D-DTH--Technology and Infrastructure."
DEPENDENCE UPON SATELLITES
The Company's D-DTH business will depend on its ability to broadcast using
transponders on the Astra 1F and 1G satellites, both of which have been
successfully launched, are currently operational and are located at 19.2 degrees
east. Satellites are subject to significant risks that may prevent or impair
proper commercial operations, including satellite defects, destruction and
damage. To date, the Company is not aware of significant disruption of
transmissions on the Astra 1F or 1G 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 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. The leases for the two transponders on the
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Astra 1F satellite and the transponder on the Astra 1G satellite will expire in
2007. The ability of the Company to transmit its programming following the
termination of the Company's leases of the transponders on the Astra 1F and 1G
satellites (and following the expiration of the expected useful lives of the
Astra 1F and 1G satellites in approximately 2015) 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 incorporate Philips' CryptoWorks-Registered Trademark-
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 either 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. To
the Company's knowledge, there has not been a breach of
CryptoWorks-Registered Trademark- since its introduction in Malaysia in 1996. To
the extent a breach occurs, the Company will take countermeasures, including
over-the-air measures and if necessary the replacement of smartcards. Although
the Company expects its conditional access system, subscriber management system
and smartcard system 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 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 or maintain
contracts 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 to 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, 1998,
approximately 57% 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, 1998, approximately 69,000, or 8%, 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 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
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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
Operations--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
costs 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.
The Company obtains significant programming from sources on which it depends
to provide it with additional high-quality programming that appeals to mass
audiences in Poland. Although the Company has no reason to believe that any of
its existing programming agreements will be canceled, will not be renewed upon
expiration or will not otherwise become unenforceable, if such agreements are
canceled, are not renewed, or otherwise became unenforceable 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.
The Company has purchased exclusive Polish pay television rights from third
parties for programming on 9 of the current 18 channels on Wizja TV. In some of
the agreements, however, the channel supplier may terminate the agreement and/or
eliminate the exclusivity rights if the Company does not achieve specified
milestones for subscriber numbers by certain specified dates. In addition, most
of the agreements impose certain restrictions on the tiering of the particular
channel, which will limit the flexibility of the Company in determining program
tiering in the future, and also include provisions whereby the Company agrees to
indemnify the channel supplier against any claims, including claims made by
governmental authorities, resulting from the exclusive nature of the rights
granted or from the tiering restrictions.
Some of the Company's programming and sports rights agreements require
payments based on a guaranteed minimum number of subscribers, and some required
payments at the time of execution. At July 21, 1998, the Company was committed
to pay at least approximately $156 million in guaranteed minimum payments over
the next seven years in respect of broadcasting and programming agreements, of
which at least approximately $39 million was committed through the end of 1999.
In addition, the Company is continuing to negotiate additional agreements with
channel suppliers and sports rights organizations, which agreements if
consummated may require the Company to pay additional guaranteed minimum
payments and/or payments at the time of execution.
As part of its strategy to create more programming content, and in
particular to develop high-quality Polish-language programming, the Company
recently established entities to create programming, either directly or through
joint ventures, for inclusion on Wizja TV. 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 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 programming to which the Company will have access will
lose its audience appeal more quickly than anticipated, possibly resulting in a
portion of costs not being recovered or expected profits not being
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realized. In addition, the Company intends to create additional 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, or if
introduced, that such channels will be successful. See "Business--Programming--
Proprietary Programming."
Certain programming for the Polish market is subject to regulation by the
Polish authorities. See "--Regulation of the Polish Cable Television Industry,"
"--Limitations on Foreign Ownership of Multi-Channel Pay Television Operators
and Broadcasters" and "Business--Legal Proceedings."
COMPETITION IN THE MULTI-CHANNEL PAY TELEVISION INDUSTRY
The multi-channel pay 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
multi-channel pay television services are competitive with alternative delivery
systems depends, 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 multi-channel pay television industry in Poland. See "The Industry--The
Polish Multi-Channel Pay Television Industry" and "Regulation."
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 expenditures and operating costs and therefore have the
ability to charge lower fees to subscribers than does the Company. In addition,
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 business also competes 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 multi-channel multipoint distribution systems
("MMDS") and D-DTH television services (including the Company's D-DTH service).
The Company's D-DTH business will compete with traditional cable systems,
including its own, and terrestrial broadcast and A-DTH services as well as other
potential D-DTH and MMDS services. TKP, which is partially owned by Canal+ S.A.,
currently offers a single channel Polish-language pay television service
(including A-DTH) and has announced plans to introduce thematic D-DTH channels
in Poland in October 1998, possibly in connection with one or more Polish
broadcasting entities such as Polsat and TVP, and one or more cable television
operators such as Aster City. 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 the DTH business than the Company. If competing D-DTH services are
successfully launched in Poland, they could have a material adverse impact on
the Company. There can be no assurance that the Polish market for D-DTH services
will be sufficiently large to support competing D-DTH businesses.
With respect to its programming business, the Company competes with other
television companies, both free-to-air and pay television (including Canal+ and
HBO) for the acquisition of sports rights and most other programming, including
the rights to feature films and television series and the right to participate
in joint ventures with other creators of programming. With respect to the
creation of its
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proprietary programming, the Company competes with other programming creators
for the hiring of personnel with creative and production talent. To the extent
that the Company is precluded from creating or obtaining programming due to
exclusive agreements entered into between programming creators and the Company's
competitors, the Company will face difficulty in creating or acquiring
sufficient high-quality programming to attract and retain subscribers and
commercial advertising customers for its cable and D-DTH services. To the extent
that the Company is unable to negotiate exclusive agreements with suppliers of
its programming or such agreements become unenforceable, the Company will not be
able to preclude its competitors from obtaining access to such programming,
which would make the Company's programming line-up less unique and less
attractive to subscribers. There can be no assurance that in the future the
Company will be able to continue to create or will be able to acquire sufficient
high-quality programming, either through exclusive or non-exclusive
arrangements.
CHANGES IN TECHNOLOGY
The multi-channel pay television 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 multi-channel pay television industry is uncertain. The Company will use
digital compression technology in its D-DTH business. 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 multi-channel pay 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 on 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.
Although the Company believes that the Astra satellites, Philips'
CryptoWorks-Registered Trademark- proprietary conditional access system and
compression system and the Philips' IRDs together constitute a reliable cost-
effective D-DTH system, certain other large European providers of D-DTH services
have selected different satellites, encryption technology and decoders. If
another satellite platform, 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 promotional incentive basis, thus
causing confusion for existing and potential subscribers, delays in providing
subscribers with IRDs and conditional access systems, and significant unexpected
costs.
ACQUISITION STRATEGY
A significant element of the Company's growth strategy is expansion by
acquisition of cable television networks that either are located in reasonable
proximity to the Company's existing networks 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 networks on satisfactory terms, if at all,
or that it will be able to obtain required approvals from the Polish
Anti-Monopoly Office (the "Anti-Monopoly Office") with respect to any such
acquisitions. See "--Regulation of the Polish Cable Television Industry." In
addition, the Company encounters competition for the acquisition of cable
networks from existing cable television operators and also from financial
investors. See "Business--Competition."
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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 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 expected growth and expansion, particularly in its new D-DTH
business. Failure to successfully manage its expected 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 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, may require regulatory approvals and in which it has limited
experience, such as interactive television, pay per view, near-video-on-demand,
data transfer, services related to electronic banking, telephony, internet
access, sports clubs ownership, publishing and other media. If the Company were
to enter into such businesses, there can be no assurance that the Company would
be successful or that the capital utilized in such businesses would not decrease
the amount of capital available for use in its cable, D-DTH and programming
businesses.
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.
REGULATION OF THE POLISH CABLE TELEVISION INDUSTRY
The operation of a cable television system in Poland is regulated by various
governmental bodies, including the Minister of Communications ("MOC") and PAR
under the Communications Act, and the Council under the Radio and Television Act
of 1992, as amended (the "Television Act"). Cable television 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
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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 Multi-Channel Pay Television Operators
and Broadcasters" and "Regulation--Poland--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 109 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 76,600
basic subscribers at May 31, 1998 located in the areas for which subsidiaries of
PCI do not currently have valid Permits, approximately 76% are located in areas
serviced by recently acquired or constructed 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), and approximately 24% are located in areas
serviced by networks for which certain subsidiaries of PCI have Permit
applications pending. These subsidiaries of PCI have 12 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--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 Chairman of the Council will not revoke the
registration of any of the Company's programming (including the programming that
the Company has begun transmitting on Wizja TV), or that the Chairman of the
Council will register all additional programming that the Company desires to
transmit over its networks, although the Company believes that any such
revocation or refusal to register would violate the Convention. Also, there can
be no assurance that the Council will not take action regarding unregistered
programming the Company transmits over its cable networks for which it does 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 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, inter alia, enforcement of intellectual
property rights of 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. Poland has ratified the Rome Convention,
resulting 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. See "Regulation--Poland--Copyright Protection."
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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."
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 distribution of programs on cable networks. The Council has not
issued any regulations that would be applicable to programming broadcast from
outside Poland, such as the Company's Wizja TV programming (though it has issued
regulations relating to Polish broadcasters), 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 and there have been no court rulings on this issue.
There can be no assurance that the Company's interpretation will not be
challenged or that the Company's D-DTH broadcasts from outside of Poland will
not be required to comply, and, if so, that it will be able to comply, with the
requirements of the Television Act, which, among other things, requires a
broadcasting license and imposes foreign ownership restrictions. 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. In this
regard, a Polish affiliate of Canal+ S.A. has commenced a lawsuit in Poland
alleging HBO Polska Sp. z o.o. of broadcasting the HBO television programming in
Poland without a broadcasting license as required by the Television Act. See
"Business--Legal Proceedings." While the Company believes that its activities in
producing programs in and outside of Poland, transmitting the programs to the
Company's transmission facility in the United Kingdom and distributing the
programs to 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 has
been studying and discussing with relevant Polish authorities the feasibility of
locating its transmission and production facilities in Poland and applying for
the Polish broadcasting licenses necessary to engage in such activities.
Although the Company has been discussing with the Council the feasibility of
applying for a Polish broadcasting license, there can be no assurance that such
license would be granted if applied for, and failure to have any required
broadcasting license could have a material adverse effect on the Company's
business, financial condition and results of operations. See "--Limitation on
Foreign Ownership of Multi-Channel Pay Television Operations and Broadcasters,"
and "Regulation."
Currently Poland has not sought to regulate foreign DTH broadcasters who
uplink outside of Poland. There can be no assurances, however, 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,
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IRDs or other activities were not to 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.
Poland is a party to the 1989 European Convention on Transfrontier
Television (the "Convention"), which requires the Polish authorities to
guarantee freedom of reception and retransmission on Polish territory of program
services which meet the requirements of the Convention. The Company believes
that the content of its Programming Platform will comply with the terms of the
Convention. See "--European Union Regulation of D-DTH Business."
D-DTH operators in Poland are subject to substantially the same copyright
restrictions under Polish law as are cable television operators. See
"--Regulation of the Polish Cable Television Industry" and
"Regulation--Poland--Copyright Protection."
Because the Company's D-DTH service is the first D-DTH service available in
Poland, there are likely to be issues of first impression arising under Polish
law with respect to various aspects of the Company's D-DTH business and related
programming arrangements. For example, the Anti-Monopoly Office has not
articulated comprehensive standards that may be applied in an antitrust review
in the D-DTH industry. There can be no assurance that such issues, if decided
unfavorably to the Company, would not have a material adverse effect on the
Company's business, financial condition and results of operations.
LIMITATIONS ON FOREIGN OWNERSHIP OF MULTI-CHANNEL PAY 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, ownership
interests and voting rights. In addition, a majority of the management and
supervisory board of any cable television operator holding Permits must be
comprised of Polish citizens residing in Poland. These restrictions do not apply
to any Permits issued prior to July 7, 1995 ("Grandfathered Permits"). See
"Regulation--Poland--Communications Act." At May 31, 1998, approximately 23% 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 Polska Telewizja Kablowa, S.A. ("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").
PTK S.A. will own all cable network assets and operate in the areas covered
by Grandfathered Permits. To comply with foreign ownership requirements for
Permits for networks not covered by Grandfathered Permits, the Company intends
to enter into contractual arrangements with Polska Telewizja Kablowa Operator
Sp. z o.o. (formerly PTK Ryntronik, S.A.) ("PTK Operator"), a Polish entity of
which 49% is expected to be owned by PCI and the remaining 51% is expected to be
owned by a Polish entity of which 49% is expected to be owned by PCI and the
remaining 51% is expected to be owned by a Polish financial institution. See
"Corporate Organizational Structure." In the case of existing cable networks not
covered by Grandfathered Permits or the acquisition or construction of cable
networks not covered by Grandfathered Permits, the Company intends to own,
through PTK S.A., all of the cable network assets and intends to lease the
assets to PTK Operator, which is expected to operate the networks. In the
Company's contemplated leasing arrangements with PTK Operator, it is expected
that PTK Operator will hold the Permits to operate the cable networks, receive
all of the revenues from subscribers, pay all operating expenses relating to the
operation of the networks, and through the lease arrangements pay PTK S.A. rent
equal to substantially all of the cash flows generated by the networks. The
Company believes that this ownership and operating structure does not contradict
the requirements of Polish law. PAR has granted several permits to the Company
and the Company's competitors, based on the lease of assets, for networks using
an ownership and operating structure substantially similar to the one described
above. There can be no assurance that Polish regulatory authorities will not
determine that all or part of this
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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 networks and could
result in the denial or loss of Permits applied for or 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. See
"Regulation--Poland--Communications Act" and "Regulation--Poland--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, ownership interest and voting rights. In December 1997, the Polish
government proposed an amendment to the Television Act by which the maximum
foreign ownership interest in a Polish broadcasting company would be increased
to 49%, but there can be no assurance that the Polish parliament will accept
this proposal. 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 has established and intends to continue
to establish entities to engage, directly or indirectly through joint ventures,
in the development and production of Polish-language thematic television
programming outside of Poland, which the Company plans to distribute throughout
Poland via satellite systems from outside of Poland. The Company believes that
the ownership structure of such entities is not subject to 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 ownership or distribution structure
to be established for such future entities, violates Polish regulatory
restrictions on foreign ownership. If the ownership or distribution structure
for such entities or such future entities 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 also be
forced to dispose of its ownership interests in such entities or such future
entities. These regulatory restrictions may materially adversely affect the
Company's ability to enter into relationships with such entities or such future
entities, 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--Television Act."
UNITED KINGDOM REGULATION OF D-DTH BUSINESS
The Company has established broadcast transmission facilities in the United
Kingdom for the production, post-production and packaging of programming, from
which it broadcasts via uplink to the transponders the Company has leased on
Astra satellites for onward broadcasting to its cable subscribers and from which
it broadcasts to its D-DTH subscribers and other cable operators in Poland. All
of the Company-owned channels, including Wizja l, Wizja Sport, Wizja Pogoda,
Atomic TV and Twoja Wizja, and the majority of the other channels forming Wizja
TV are or will be, at least initially, regulated by the U.K. authorities
(primarily the Independent Television Commission ("ITC")) as satellite
television services ("STS"). Under the U.K. Broadcasting Act 1990, as amended
(the "Broadcasting Act"), satellite broadcasters established in the United
Kingdom are required to obtain an STS license. STS licenses are granted by the
ITC if certain criteria are satisfied. The Company has received an STS license
from the ITC in the United Kingdom for Wizja 1, Wizja Sport, Wizja Pogoda,
Atomic TV and Twoja Wizja. For most of the other channels on Wizja TV, the
relevant channel supplier is under a contractual obligation with the Company to
obtain an STS license. Under the terms of the Company's Astra transponder
agreements, the Company will be prohibited from carrying on Wizja TV programming
for which a channel supplier does not have a valid license. The ITC has wide
discretion to vary the conditions of licenses issued under the Broadcasting Act
or amend codes (such as the code on advertising time limits and electronic
programming
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guides ("EPG")) with which all U.K. licensed broadcasters must comply. There is
no assurance that the Company or its channel suppliers will be able to secure
the necessary STS licenses, or if obtained, that the Company or its channel
suppliers 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 roll out its D-DTH service
or to add channels to its D-DTH service 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 primarily by the
authorities in the member state of the EU where it is established, without
regard to the country or countries within the EU in which its broadcast signal
is received. Currently, the 1989 European Convention on Transfrontier Television
(the "Convention") to which Poland is a party, provides that the country in
which a broadcaster uplinks its programming to the satellite (or, if this is not
the case, the country which grants the broadcast frequency or satellite capacity
to the broadcaster) has jurisdiction over that broadcaster. Neither the
Directive nor the Convention contains any requirements or restrictions regarding
foreign ownership of broadcasters. 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 received in
such state, or to impose restrictions on foreign ownership of broadcasters.
The Company understands that a change to the Convention (the "Amendment")
was agreed by member states of the Convention on September 9, 1998. The
Amendment will be open for signature by member states from October 1, 1998 and
will be effective when all member states have signed the Amendment or
automatically on October 1, 2000, unless a member state objects by January 1,
1999 to the Amendment coming into force. The Amendment, if it becomes effective,
would have three significant effects. First, it would bring the Convention into
conformity with the Directive's establishment test, providing that a broadcaster
should be regulated primarily by the authorities in the Convention country in
which the broadcaster is established.
Second, the Amendment would provide that where a broadcaster's channel is
wholly or principally directed at a country, other than that where it is
established, for the purpose of evading the laws in the areas covered by the
Convention which would have otherwise applied to it in the country of reception,
this shall constitute an "abuse of rights." Where such an abuse is alleged,
representatives from the country where the broadcaster is established and from
the country of reception would meet to attempt to resolve the dispute. If they
are unable to do so, a dispute resolution process (which would eventually
involve arbitration) could be invoked. The country of reception could not take
measures against the broadcaster unless and until the arbitration procedure has
been completed in favor of the country of reception. The Company believes that
the broadcasting of its channels into Poland from the United Kingdom would not
constitute an "abuse of rights" under the Amendment, though there can be no
assurance that the relevant authority would so decide. An adverse decision on
this issue, if the Amendment becomes effective and Poland decides to invoke it
against the Company's broadcasts emanating from the United Kingdom, would have a
material adverse effect on the Company's ability to broadcast its Programming
Platform and its business, financial condition and results of operations.
Third, the Amendment would allow parties to the Convention to designate that
certain important events (e.g., major sporting events) cannot be broadcast
exclusively by a single television station so as to deprive a large proportion
of the public of that Convention country from seeing the event live or on a
deferred coverage basis on free-to-air television, and also to ensure that
broadcasters under the jurisdiction of one Convention country cannot purchase
exclusive rights to major events specified by another Convention country which
would deprive a large proportion of the public in such Convention countries from
seeing the specified event on a live or deferred coverage basis on free-to-air
television. In this regard, the
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Amendment would be largely consistent with changes recently made to the
Directive. If the Amendment becomes effective and if it were applied to the
Polish pay television rights to certain sporting events purchased on an
exclusive basis by the Company, it could eliminate the Company's right to
broadcast such events in Poland on an exclusive basis and could have an adverse
effect on the ability of the Company to acquire the exclusive Polish pay
television rights to such events and to similar events in the future.
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-European) ownership restrictions
on broadcasters or regulate digital television services in a way which may be
detrimental to the Company (such as requiring (i) a common interface for all
encryption services used within a particular pay television market, (ii) that
all conditional access providers must allow simulcrypt of their programming or
(iii) that third parties must be given access to the Company's subscriber
management service), 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.
In 1994 Poland made an official application for membership of the EU.
Negotiations on the terms of Poland's proposed admission to the EU commenced in
March 1998. If Poland joins the EU, it would be required to implement and obey
all of the laws and regulations emanating from the European Commission,
including the Directive and EU competition law in their then current versions.
The Company believes that this would require Poland to acknowledge the
establishment test and to recognize the Company's D-DTH broadcast services as
falling under the jurisdiction of the ITC in the United Kingdom. However, there
can be no assurance that such would be the case, nor can there be any assurance
that the Company would be able to comply with all of the various EU laws and
regulations. The burden of complying with any such laws and regulations or any
failure to so comply could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Regulation--European Union."
REGULATION OF COMPETITION
The Company is regulated by competition law in the jurisdictions in which it
carries on business. At the present time this requires the Company to comply
with competition law in Poland, the UK and the EU.
The current Polish anti-monopoly body of law with respect to the cable,
D-DTH and programming industries is not well established, and the Anti-Monopoly
Office has not articulated comprehensive standards that may be applied in an
antitrust review in such industries. As a general rule, the Anti-Monopoly Act
prohibits, among other things, monopolistic agreements, abuse of dominant market
position, price-fixing arrangements, division of market arrangements, and the
creation of market entry barriers. The Anti-Monopoly Act may deem any such
agreements null and void. Although the Anti-Monopoly Act does not preclude an
enterprise from occupying a dominant market position, any activities by such
enterprise face detailed scrutiny by the Anti-Monopoly Office. Market dominance
is often defined as a company's ability to act independently of competitors,
contractors, and consumers. Companies that obtain control of 40% or more of the
relevant market are usually deemed to have market dominance, and therefore face
greater scrutiny from the Anti-Monopoly Office. There is no assurance that the
exclusivity clauses in the Company's programming agreements will not be
scrutinized by the Anti-Monopoly Office. Although such exclusivity clauses are
not prohibited under the Anti-Monopoly Act, such agreements may be found
unlawful, and therefore unenforceable, if they restrict or hinder competition or
otherwise involve the abuse of a dominant position. The Company does not believe
such agreements have an anti-competitive effect, though there can be no
guarantee that the Anti-Monopoly Office would reach the same conclusion.
The Anti-Monopoly Office recently issued a decision that PCI had achieved a
dominant position and abused that dominant position in one of the areas in which
it operates by moving certain satellite channels to the hyperband frequency. As
a result, a number of subscribers, whose television sets are not equipped to
receive the hyperband frequency, received several different channels to replace
the channels which had
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been moved. The Company has appealed both the finding of dominance and the
finding that it acted improperly by moving certain channels to the hyperband
frequency.
Several types of concentrations between undertakings, including acquisitions
of privately held stock and also stock that is traded on a stock exchange, 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 or members of their governing bodies. The Company
believes that it may be required to obtain the Anti-Monopoly Office's approval
for future acquisitions. In addition, the Anti-Monopoly Office can review a
company's past and present activities, including its pricing policies, for
potential anti-competitive behavior. The Company receives inquiries from and is
subject to review by various divisions of the Anti-Monopoly Office from time to
time. 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. There can be no
assurance that the Anti-Monopoly Office will approve the Company's future
acquisitions and dispositions or that a review of the Company's past, present or
future operations and acquisitions, will not otherwise adversely impact the
Company's business, strategy, financial condition or results of operations.
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 ("Fair Trading Act"), and unilateral
anti-competitive practices through the Competition Act of 1980 (the "CA"). 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. The Company has
filed with the OFT certain of its exclusive programming license agreements, and
these have been deemed not registrable.
The Company is also subject to the competition law provisions of the EC
Treaty, namely Articles 85 and 86. Article 85(1) prohibits as incompatible with
the common market agreements between undertakings and concerted practices which
may affect trade between member states of the EC and which have as their object
or effect the prevention, restriction or distortion of competition within the
EC. A prohibited agreement (or at least those provisions which fall within
Article 85(1)), if severable from the remainder of the agreement, will be
unenforceable before national courts and the parties thereto are liable to be
fined by the European Commission if the agreement is not notified to it.
Article 86 prohibits undertakings from abusing a dominant market position
which they hold in the whole or a substantial part of the EC. A company may be
dominant in several Member States or indeed part of a single Member State.
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. Article 85 and 86 are considered
in greater detail in the section on Regulation below. The Company does not
consider that at the present time that any of the agreements to which it is
party infringes Articles 85 and 86, but there can be no assurance that this is
the case. If such agreements were found to infringe Articles 85 and 86 then any
restrictions in the agreements, such as the grant of exclusivity, would be void
and unenforceable. See "Regulation--Poland--Anti-Monopoly
Act," "--United Kingdom--Regulation of Competition," and "--European
Union--Regulation of Competition."
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
28
<PAGE>
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, antitrust and corporate laws and requirements to obtain
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 a material adverse effect
on the market value and liquidity of the Warrants and the Warrant Shares. 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 the holders of the Warrants and the Warrant Shares 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 asset 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 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.
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; Donald Miller-Jones, Chief
Financial Officer, Vice President and Treasurer of @Entertainment; Przemyslaw
Szmyt, Vice President, General Counsel and Secretary of @Entertainment; David
Warner, Chief Operating Officer of @EL; David Keefe, Chief Executive Officer of
PCI; and Dorothy Hansberry, Vice President and General
29
<PAGE>
Counsel 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, Miller-Jones, Szmyt, Warner, and
Keefe, and Ms. Hansberry, which expire on dates ranging from December 31, 1999
to April 7, 2002 and are terminable in certain circumstances. See "Employment
Agreements."
CONTROL BY EXISTING STOCKHOLDERS
At August 10, 1998, Polish Investments Holding L.P. ("PIHLP"), the Cheryl
Anne Chase Marital Trust ("CAC Trust" and, together with PIHLP, the "Chase
Entities") and Advent International Group ("Advent", and together with the Chase
Entities, the "Principal Stockholders") owned in the aggregate approximately
48.8% of the outstanding common stock of @Entertainment ("Common Stock"). Such
concentration of ownership may have the effect of delaying or preventing
transactions involving an actual or potential change in control of
@Entertainment. See "Principal Stockholders" and "Description of Capital Stock."
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 zloty.
The Polish government has adopted policies that slowed the annual rate of
inflation from approximately 250% in 1990 to approximately 27% in 1995,
approximately 20% in 1996, and approximately 14.9% in 1997. The exchange rate
for the zloty has stabilized and the rate of devaluation of the zloty has
generally decreased since 1991 and the zloty has appreciated against the U.S.
Dollar in the three months ended March 31, 1998. Inflation and currency exchange
fluctuations have had, and may continue to have, a material adverse effect on
the business, 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 zloty. Any
devaluation of the zloty 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 business, financial condition and results of operations.
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 "--Holding Company Structure and Restrictions on Payment of
Dividends."
ANTITAKEOVER PROVISIONS; POSSIBLE FUTURE ISSUANCES OF PREFERRED 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, proxy
contest or other change of control involving @Entertainment, including Section
203 of the Delaware General Corporation Law ("DGCL"), 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
30
<PAGE>
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 and the Warrants. The rights of the
holders of Common Stock and the Warrants 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 By-Laws 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. 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 and the Warrants. See "Description of Capital Stock."
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the Warrants by
the Selling Warrant Holders. To the extent that the Warrants are exercised, the
Company will receive the exercise price for the Warrant Shares, which is
currently $13.20 per share. Any proceeds received from the exercise of Warrants
will be used by the Company for general corporate purposes. However, there can
be no assurance that any Warrants will be exercised.
EXCHANGE RATE DATA
The following table sets forth, for the periods indicated, the noon exchange
rate quoted by the NBP. Such rates are set forth as zloty per U.S. Dollar. At
March 31, 1998, such rate was PLN 3.45 = $1.00. The Federal Reserve Bank of New
York does not certify for customs purposes a noon buying rate for zloty.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1992 1993 1994 1995 1996 1997
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Exchange rate at end of period................... 1.58 2.13 2.44 2.47 2.88 3.51
Average exchange rate during period(1)........... 1.39 1.84 2.27 2.43 2.71 3.31
Highest exchange rate during period.............. 1.58 2.13 2.45 2.54 2.89 3.56
Lowest exchange rate during period............... 1.15 1.58 2.14 2.32 2.47 2.86
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1998
-------------------
<S> <C>
Exchange rate at end of period................... 3.45
Average exchange rate during period(1)........... 3.49
Highest exchange rate during period.............. 3.56
Lowest exchange rate during period............... 3.42
</TABLE>
- ------------------------
(1) The average of the exchange rates on the last day of each month during the
applicable period.
31
<PAGE>
SELLING WARRANT HOLDERS
The Warrants were originally issued and sold by the Company in July 1997 to
the Initial Purchasers in a private placement, and were resold by the Initial
Purchasers in transactions exempt from the registration requirements of the
Securities Act within the United States to qualified institutional buyers (as
defined in Rule 144A under the Securities Act).
The following table sets forth as of September 28, 1998, the number of
Warrants and Warrant Shares beneficially owned by each of the Selling Warrant
Holders and the number of Warrants being offered by such Selling Warrant Holders
pursuant to this Prospectus.
Except as set forth below, none of the Selling Warrant Holders has, or
within the past three years has had, any position, office or material
relationship with the Company or any of its predecessors or affiliates. The
table has been prepared based upon information furnished to the Company by or on
behalf of the Selling Warrant Holders. Because the Selling Warrant Holders may
sell all, some or none of and may elect to exercise or hold the Warrants shown
in the table below, no estimates can be provided as to the number of Warrants or
Warrant Shares that will be held by the Selling Warrant Holders in the future.
<TABLE>
<CAPTION>
SECURITIES BENEFICIALLY
OWNED NUMBER OF
PRIOR TO OFFERING (1) WARRANTS
------------------------------------------ BEING OFFERED
NAME OF SELLING NUMBER OF NUMBER OF --------------
WARRANT HOLDER WARRANTS WARRANT SHARES PERCENT (2) NUMBER
- -------------------------------------------------------- ----------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Bank of New York 99,900 -- * 99,900
Bankers Trust Company 18,080 -- * 18,080
Bear Stearns Security Corporation 13,680 -- * 13,680
Bank of New York BZW Securities Limited 226,000 -- * 226,000
Boston Safe Deposit and Trust Company 33,100 -- * 33,100
Goldman, Sachs & Co. 100,000 -- * 100,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated 4,600 -- * 4,600
Northern Trust Company 27,500 -- * 27,500
State Street Bank and Trust Company 387,540 -- 1.04% 387,540
Swiss American Securities, Inc. 8,000 -- * 8,000
Chase Manhattan Bank 82,000 -- * 82,000
ING Baring International 7,600 -- * 7,600
</TABLE>
- ------------------------
* Less than 1%
(1) Reflects beneficial ownership of Warrants and Warrant Shares prior to
giving effect to the sale by Selling Warrant Holders of the Warrants or the
exercise thereof.
(2) Reflects the percentage of the outstanding shares of Common Stock
beneficially owned by the Selling Warrant Holders, based on a total number
of outstanding shares of 37,102,164, which includes 33,310,000 shares
outstanding at June 8, 1998, 1,824,514 shares subject to the Warrants which
are exercisable on the date hereof, and 1,967,650 shares subject to options
which are exercisable within sixty days of the date hereof.
32
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents and actual
capitalization of the Company on a consolidated basis as of March 31, 1998 and
as adjusted to reflect the completion of the sale of the Notes and the receipt
and application of the estimated net proceeds therefrom and the drawdown of the
$6.5 million AmerBank facility as described under "Use of Proceeds."
<TABLE>
<CAPTION>
MARCH 31, 1998
-------------------------
ACTUAL AS ADJUSTED
------------ -----------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS OF U.S.
DOLLARS)
<S> <C> <C>
Cash and cash equivalents........................................................... $ 58,589 $ 184,624
------------ -----------
------------ -----------
Long-term liabilities:
PCI Notes(1)...................................................................... $ 129,666 $ 129,666
Old Notes(2)...................................................................... -- 117,485
Other notes payable(1)............................................................ 2,631 9,131
------------ -----------
Total long-term liabilities..................................................... 132,297 256,282
Stockholders' equity:
Preferred stock, par value $.01 per share; Authorized 20,002,500 shares; none
issued and outstanding.......................................................... -- --
Common stock, par value $.01 per share; Authorized 70,000,000 shares; issued and
outstanding 33,310,000 shares(3)................................................ 333 333
Warrants(2)....................................................................... -- 7,615
Paid-in capital................................................................... 230,339 230,339
Cumulative translation adjustment................................................. 2,549 2,549
Accumulated deficit............................................................... (95,395) (95,395)
------------ -----------
Total stockholders' equity...................................................... 137,826 145,441
------------ -----------
Total capitalization.......................................................... $ 270,123 $ 401,723
------------ -----------
------------ -----------
</TABLE>
- ------------------------
(1) See "Description of Indebtedness."
(2) Of the $125.1 million gross proceeds from the sale of 252,000 units, each
consisting of $1,000 principal amount at maturity of the Old Notes and four
warrants (each a "Warrant"), each initially entitling the holders thereof to
purchase 1.81 shares of Common Stock at an exercise price of $13.20 per
share, subject to adjustment, $117.5 million has been allocated to the
initial Accreted Value (as defined in the Indenture) of the Old Notes and
$7.6 million has been allocated to the Warrants. No assurance can be given
that the value allocated to the Notes and Warrants will be indicative of the
price at which the Notes and Warrants may actually trade.
(3) Does not include 1,824,514 shares of Common Stock reserved for issuance upon
exercise of the Warrants, 1,967,650 shares subject to options which are
exercisable within sixty days of the date hereof and 2,509,600 additional
shares of Common Stock reserved for issuance in connection with options
granted to certain employees of the Company. See "Executive Compensation"
and "Option Grants in Last Fiscal Year."
33
<PAGE>
THE INDUSTRY
GENERAL
With approximately 39 million people and 12.3 million television households
(as estimated by the Company at December 31, 1997), the Company believes that
Poland represents a highly attractive and dynamic market for the provision of
pay television. Television viewing rates in Poland are among the highest in
Europe with an average television viewing rate in 1996 of approximately 252
minutes per day per adult. This rate compares favorably to the 1996 U.S. and
U.K. average television viewing rates of approximately 240 minutes and 215
minutes per day per adult, respectively. In addition, as there are only
approximately 12 free-to-air television channels generally available in Poland
that contain primarily Polish-language programming, the Company believes that
significant opportunities exist to provide high-quality Polish-language
programming on a multi-channel basis.
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 7.0%, 6.1%, and
6.0% in 1995, 1996, and 1997 respectively, which were the highest growth rates
in Europe for 1995 and one of the highest in Europe in 1996. In recent years,
the government has encouraged foreign private investment, which has risen from
approximately $0.1 billion in 1990 to approximately $6.1 billion in 1996, and
approximately $6.6 billion in 1997. Poland has also successfully reduced its
annual inflation rate from approximately 250% in 1990 to approximately 27% in
1995, approximately 20% in 1996, and approximately 14.9% in 1997, and following
a period of rising unemployment, unemployment in Poland declined to 10.5% at
December 31, 1997. 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%,
7%, and 10% in 1995, 1996, and 1997, respectively. Furthermore, in certain urban
markets where the Company operates its cable networks, including Warsaw, Krakow,
Wroclaw and Katowice, disposable income levels are significantly higher and
unemployment is significantly lower than the national average. For example,
unemployment in Warsaw was approximately 2.8% at December 31, 1997.
THE POLISH MULTI-CHANNEL PAY TELEVISION INDUSTRY
POLISH CABLE MARKET
Poland is the fifth-largest television market in Europe, with approximately
12.3 million television households (as estimated by the Company at December 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 multi-channel 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 1996 Poland had one of the highest television viewing rates in
Europe, with an average of approximately 252 minutes of television viewing per
day per adult as compared with averages of approximately 240 minutes, 195
minutes and 215 minutes of television viewing per day per adult for the United
States, Germany and the United Kingdom, respectively. The Company believes that
several factors contribute to such high television viewing and indicate Polish
consumers' willingness to allocate disposable income for multi-channel pay
television. These factors include limited entertainment alternatives, strong
demand for high-quality programming, a long and generally cold winter season and
a low telephone penetration rate of approximately 15 telephones per 100 persons.
The Company also believes that, as the leading cable operator in Poland, its
subscriber penetration rates and relatively low churn rates are further
indicators of the potential demand for cable television services by large
operators in Poland. There is a relatively low percentage of television homes
for which cable service is available in Poland (based on Company estimates only
approximately 33% of television households were passed by cable at December 31,
1997), which the Company believes provides a
34
<PAGE>
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, 1998 of approximately 45% for the
Company's cable systems as 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 low churn rates since its
inception. The Company's annual churn rates have historically averaged less than
10%, which compare favorably to other markets such as the U.K. where in 1996
churn rates were approximately three times this figure. 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. In 1997, the Company's annual churn rate increased to
12.2%, though it would have been 9.8% had the Company not disconnected
approximately 17,000 non-paying subscribers in one of its acquired and rebuilt
networks. The Company expects, however, that it may continue to experience
increases in its churn rate above historical levels during the implementation of
the pricing strategy, which commenced in January 1997 and was designed to
increase revenue per subscriber and to achieve real profit margin increases in
U.S. Dollar terms. See "Business--Cable Operations-- 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 for 1996 except where
indicated.
<TABLE>
<CAPTION>
AVERAGE TV
NUMBER OF VIEWING
TELEVISION MINUTES
HOUSEHOLDS PER DAY PER COLOR TV VCR
(IN MILLIONS) ADULT PENETRATION PENETRATION(1)
--------------- ------------- --------------- -------------------
<S> <C> <C> <C> <C>
Poland.............................................. 12.0 252 88% 53%
United States....................................... 97.0 240 99% 81%
United Kingdom...................................... 23.4 215 99% 81%
Germany............................................. 33.7 195 99% 63%
Czech Republic...................................... 4.1 197 93% 32%
Hungary............................................. 3.9 N/A 81% 39%
<CAPTION>
HOMES
PASSED BY
CABLE AS A %
OF TELEVISION
HOUSEHOLDS
-----------------
<S> <C>
Poland.............................................. 23%
United States....................................... 97%(2)
United Kingdom...................................... 35%
Germany............................................. 72%
Czech Republic...................................... 56%
Hungary............................................. 44%
</TABLE>
- ------------------------
(1) VCR households as a percentage of television households.
(2) 1995 figure.
Sources: Baskerville Communications Corp., TV International Sourcebook 1997,
ZenithMedia, European Market and MediaFact (1998) and ZenithMedia, Americas
Market and Mediafact (1997).
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 645 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
35
<PAGE>
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 twenty 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 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 47 cable television
operators since 1992. These acquisitions have added approximately 350,000 of the
Company's 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.
36
<PAGE>
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 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 has also ratified the Rome Convention, extending copyright
protection to programs of foreign producers. 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.
GROWTH IN THE CABLE INDUSTRY
(IN THOUSANDS)
[CHART]
[CHART SHOWS THE 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.
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Despite the strong recent growth in the cable television industry, the
Company estimates only approximately 33% of the television households in Poland
were passed by cable at May 31, 1998, 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
networks and the provision of cable television services.
A-DTH
The only multi-channel 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 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 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 had 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 multi-channel pay
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, particularly the
larger 36" diameter dishes used for A-DTH.
The chart on the following page outlines the relative market shares of A-DTH
and cable in Poland as measured by the number of subscribers for the years 1991
through 1997.
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MARKET SHARE OF CABLE OPERATORS
VERSUS A-DTH PROVIDERS IN POLAND
[CHART]
[CHART SHOWS THE RELATIVE MARKET SHARE OF CABLE OPERATORS VERSUS A-DTH PROVIDERS
IN POLAND FROM 1991 TO 1997 DEMONSTRATING THAT THE MARKET SHARE OF CABLE
OPERATORS AGAINST A-DTH PROVIDERS HAS GROWN FROM A 20/80% RATIO IN 1991 TO A
70/30% RATIO IN 1997.]
Source: Baskerville Communications Corp., TV International Sourcebook 1997
(includes 1991-1995 data), AGB Polska (includes 1996 and 1997 data).
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 from a single satellite position, (ii)
less-expensive, smaller non-motorized dishes, (iii) the improved signal quality
of D-DTH, and (iv) the increasing availability of premium services.
The Company has expanded its distribution capacity with its September 18,
1998 launch of a complementary D-DTH broadcasting service for Poland, targeted
at homes that are not subscribers to the Company's cable service. The
programming provided is Wizja TV. The Company believes that its multi-channel
Polish-language D-DTH service is the first D-DTH service available in Poland.
The Company believes that significant opportunity exists for a D-DTH service in
Poland. Approximately 8.3 million homes currently are not passed by cable and
approximately 1.6 million homes currently are equipped with an A-DTH satellite
dish. Based on Polish consumers' willingness to spend disposable income on
television entertainment, evidenced in part by the country's 53% VCR penetration
rate at an average cost of $225 per VCR, the Company believes that its D-DTH
service serves as an attractive and affordable entertainment alternative. 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 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
service, or that it will not face competition from other D-DTH businesses in
Poland. See "Risk Factors-- Limited D-DTH Experience and Uncertainties
Associated with the D-DTH Market."
39
<PAGE>
BUSINESS
GENERAL
The Company is the leading provider of pay television in Poland and is
engaged principally in the provision of cable television services and in the
development, packaging and delivery of high-quality programming. The Company is
the largest cable television operator in Poland, with approximately 865,000
total subscribers, which the Company estimates is more than two and a half times
as many subscribers as the next largest cable television operator. Over the past
three years, the Company has experienced rapid growth in revenues and
subscribers, both through acquisitions and through the build-out of its own
cable networks, resulting in an average increase in revenues and total cable
subscribers of 66% and 56% per annum, respectively. The Company also has
increased its average revenue per subscriber by 12% per annum during this same
period. The Company generated operating income of $3.5 million in 1995, but had
operating losses of $1.3 million, $42.7 million and $14.4 million for 1996, 1997
and the first three months of 1998, respectively. On June 5, 1998, the Company
launched the Programming Platform branded Wizja TV, consisting of 11 channels of
primarily Polish language programming, over its cable networks. The Company
believes that Wizja TV will provide it with a significant competitive advantage
for driving subscriber growth and increasing revenue per subscriber. Wizja TV is
also sold on a wholesale basis to other cable operators in Poland.
In order to reach television households in Poland which it does not expect
to cover with its cable networks, the Company launched on September 18, 1998 a
complementary D-DTH service allowing subscribers to receive Wizja TV via a
satellite dish. The Company believes that its multi-channel Polish-language
D-DTH service will be the first D-DTH service available in Poland.
At the Launch Date the Company had sold approximately 31,400 Wizja TV
Packages through 70 Philips authorized retailers. With the launch of the
Company's D-DTH service, the Company has commenced the transmission of an
expanded version of Wizja TV on both its D-DTH system and its cable networks.
The Company has also entered into an agreement with Philips to supply the
satellite dish, digital set top box and related hardware and to distribute the
Company's D-DTH service through more than 1,000 Philips authorized retailers
located throughout Poland.
POTENTIAL MARKET OPPORTUNITY
With approximately 39 million people and 12.3 million television households
(as estimated by the Company at December 31, 1997), the Company believes that
Poland represents a highly attractive and dynamic market for the provision of
pay television. Television viewing rates in Poland are among the highest in
Europe with an average television viewing rate in 1996 of approximately 252
minutes per day per adult. This rate compares favorably to the 1996 U.S. and
U.K. average television viewing rates of approximately 240 minutes and 215
minutes per day per adult, respectively. In addition, as there are only
approximately 12 free-to-air television channels generally available in Poland
that contain primarily Polish-language programming, the Company believes that
significant opportunities exist to provide high-quality Polish-language
programming on a multi-channel basis.
CABLE TELEVISION MARKET. The Company believes the market for cable
television in Poland is attractive with growth opportunities coming both
from homes passed by cable that are not cable subscribers and homes
currently not passed by cable. Of the approximately 4.0 million homes in
Poland currently passed by cable, the Company estimates that approximately
1.0 million households do not subscribe to cable. In addition, approximately
8.3 million homes are currently not passed by cable.
D-DTH MARKET. The Company believes that significant opportunity exists
for a D-DTH service in Poland. Approximately 8.3 million homes currently are
not passed by cable and approximately 1.6 million homes currently are
equipped with an A-DTH satellite dish. Based on Polish consumers'
willingness to spend disposable income on television entertainment,
evidenced in part by the country's
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<PAGE>
53% VCR penetration rate at an average cost of $225 per VCR, the Company
believes that its D-DTH service represents an attractive and affordable
entertainment alternative.
COMPANY OPERATIONS
CABLE TELEVISION. The Company operates the largest cable television system
in Poland with approximately 1,530,000 homes passed and approximately 865,000
total subscribers. The Company's cable subscribers are located in 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 believes additional subscriber
growth can be achieved through a combination of increased penetration, new
network build-out and acquisitions. In addition, the Company believes that its
offering of Wizja TV on its cable networks, which began June 5, 1998, will
increase its number of subscribers and increase revenue per subscriber. At March
31, 1998, the Company had invested more than $121 million to construct
fiber-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
as rapidly as possible substandard networks that it has acquired.
DIGITAL SATELLITE DIRECT-TO-HOME BROADCASTING. The Company has expanded its
distribution capacity with its September 18, 1998 launch of a complementary
D-DTH broadcasting service for Poland, targeted at homes that are not
subscribers to the Company's cable service. The programming provided is Wizja
TV. The Company believes that its multi-channel Polish-language D-DTH service is
the first D-DTH service available in Poland. The Company's D-DTH service is
being broadcast to Poland from its transmission facilities in Maidstone, United
Kingdom.
Philips, a leading electronics manufacturer and, through its Polish
affiliates, the largest electronics retailer in Poland, has agreed to supply the
Company with D-DTH Reception Systems, for up to 500,000 initial subscribers to
the Company's D-DTH service. Philips has also agreed to distribute, install and
service the Company's D-DTH Reception Systems through more than 1,000 Philips
authorized electronics retailers located throughout Poland. Philips has operated
in Poland since 1991 and has experience introducing new products to the Polish
market through its extensive retail network. In addition, Philips has supplied
an end-to-end product package for MEASAT's D-DTH service in Malaysia, utilizing
CryptoWorks-Registered Trademark- technology similar to that to be used in the
Company's D-DTH service.
Because the Company's D-DTH service will be the first D-DTH service
available in Poland, there are likely to be issues of first impression arising
under Polish law with respect to certain aspects of the Company's D-DTH business
and related programming arrangements, and there can be no assurance that these
issues will be decided favorably for the Company. In addition, the Polish and
European and Union broadcasting regulations are part of a developing regulatory
framework that may change adversely to the Company as the Polish D-DTH market
develops. See "Risk Factors--Limited D-DTH Experience and Uncertainties
Associated with the D-DTH Market," "--Polish Regulation of the D-DTH Market",
"--European Union Regulation of D-DTH Business," and "--Dependence on Philips as
Principal Supplier."
PROGRAMMING. The Company began broadcasting to Poland from its transmission
facilities in Maidstone, United Kingdom and retransmitting Wizja TV across its
cable networks on June 5, 1998, and on its D-DTH system on a limited basis on
July 1, 1998 and on a full-scale basis on September 18, 1998. To promote the
launch of Wizja TV, the Company has commenced a $20 million nationwide marketing
campaign which the Company believes will be the largest single-year product
launch expenditure to date in Poland. Wizja TV's current channel line-up
includes four channels, Atomic TV, Wizja 1, Wizja Pogoda, and Twoja Wizja, that
are owned and operated by the Company, and 14 channels that are produced by
third parties, 9 of which are broadcast under exclusive agreements for pay
television in Poland. Atomic TV is a Polish-language music television channel,
targeting 14 to 29 year olds. Atomic TV began to be broadcast via satellite in
April 1997 across the cable networks of the Company and other cable operators.
Atomic TV
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<PAGE>
is currently distributed to more than 900,000 cable subscribers, and the Company
believes that based on distribution it is the leading music television channel
in the Polish market. Wizja 1, a general entertainment channel showing movies,
sports, series and children's programming, Wizja Pogoda, a weather channel, and
Twoja Wizja, a programming directory channel, were launched on July 1, 1998,
July 21, 1998 and July 1, 1998, respectively, across the Company's cable
networks and on its D-DTH system. The Company expects to expand Wizja TV's
initial channel line-up to include additional basic and premium channels,
including the Company's proprietary Wizja Sport channel, and eventually to
introduce tiered packages containing a variety of combinations of 21 or more
channels. Wizja Sport, a sports channel, is expected to be launched by the
middle of 1999.
Wizja TV includes certain exclusive Polish pay television rights to channels
and events covering what it believes are the most important programming genres
to viewers in the Polish market, including movies, sports, children's
programming, documentaries and music.
The Company has signed license agreements for the exclusive distribution on
its D-DTH system, and amended its existing agreement for non-exclusive
distribution across its cable networks, of the HBO Poland service, a
Polish-language version of HBO's premium movie channel.
The Company has also entered into long-term exclusive agreements to
broadcast to Poland live coverage of certain sports events, including the Polish
national soccer team's away games, certain European matches of Lech Poznan, a
Polish Premier League soccer team, European soccer matches, including matches
from the Dutch and Portuguese leagues, Polish Speedway League events, European
Grand Prix Speedway events, International Skating Union Champion Series ice
skating, games of three leading teams in the Polish Premier Hockey League, and
certain boxing events including local Polish boxing and fights involving Prince
Naseem. The Company has also entered into an exclusive agreement to broadcast
the Wimbledon tennis tournament to Poland. These events will initially be
carried on Wizja 1, and when it is established, on Wizja Sport. When
established, Wizja Sport will initially provide 12 hours of local and
international sporting events per week. The Company believes that Wizja Sport
will be the first channel in the Polish market principally dedicated to Polish
sports programming.
In addition, the Company has signed license agreements for exclusive pay
television distribution to Poland of the following channels: BET on Jazz, The
Cartoon Network, Turner Classic Movies, Fox Kids Poland, The Hallmark
Entertainment Channel, the National Geographic Channel, QuesTV, Romantica and
Travel. The Company has also signed a license agreement for distribution in
Poland of CNNI, and has entered into a binding heads of agreement for the
exclusive distribution on its D-DTH system of MTV and the non-exclusive
distribution across its cable networks of VH-1. The Company expects to launch
VH-1 in the fourth quarter of 1998. The Company is also in the process of
negotiating license agreements for exclusive pay television distribution to
Poland of additional channels.
COMPANY STRENGTHS
The Company has certain strengths that it believes position it to compete
successfully in the Polish pay television market and to take advantage of the
significant viewer demand for multi-channel high-quality Polish-language
programming. These strengths include the following:
LEADING MARKET POSITION. The Company is currently the largest cable
television operator in Poland and estimates that it has more than two and a
half times as many subscribers as the next largest operator in Poland. Its
cable television networks serve approximately 865,000 total subscribers,
representing approximately 29% of all cable subscribers in Poland and
approximately 52% of all cable subscribers in Poland to systems offering
approximately 20 or more channels. 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 to acquire, at attractive prices, or displace these
42
<PAGE>
smaller cable operators. In addition, frequent lack of exclusivity of cable
operators' agreements with co-op authorities facilitates overbuilding of
these smaller cable operators.
With the launch of the Company's D-DTH service, its strategy is to
achieve rapid penetration of the Polish market by distributing D-DTH
Reception Systems to 500,000 targeted initial subscribers at a price
significantly decreased by promotional incentives. The Company believes that
its service is the first Polish-language D-DTH service available in Poland
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 pay television in Poland.
COMPELLING PROGRAMMING. The Company has secured for Wizja TV certain
exclusive Polish pay television rights to channels and events covering what
it believes are the most important programming genres to viewers in the
Polish market, including movies, sports, children's programming,
documentaries and music. The Company provides Wizja TV to both its cable and
D-DTH Subscribers. The Company believes that this selection of high-quality
Polish-language programming will provide it with a significant competitive
advantage in increasing its cable subscriber base and establishing its D-DTH
subscriber base.
ADVANCED TECHNOLOGY. The Company's own 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 incremental channel
capacity as well as additional services such as voice and data transmission.
The Company believes that its multi-channel Polish-language D-DTH service is
among the first digital television platforms launched in Europe. The Company
also believes that in the future it will be able to provide its D-DTH
customers with additional value-added services, including interactive
television, pay per view, near-video-on-demand, data transfer, and services
related to electronic banking, should the Company decide to pursue such
ancillary sources of revenue.
STRONG D-DTH DISTRIBUTION NETWORK. Philips has agreed to distribute,
install and service D-DTH Reception Systems to up to 500,000 initial
subscribers through more than 1,000 Philips authorized retailers located
throughout Poland. The Company believes this widespread distribution network
through Poland's largest electronics retailer provides the Company with a
competitive advantage for distributing its D-DTH service into the Polish
market.
HIGH CABLE PENETRATION AND LOW CHURN. The Company's cable systems are
currently achieving premise penetration of approximately 57% 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 62%. The Company believes that its
offering of Wizja TV across its cable networks, which began June 5, 1998,
will improve its penetration by expanding its program offering from 10
primarily Polish-language channels not available on terrestrial frequencies
to 18 channels. In addition, the Company has historically experienced annual
churn rates of less than 10%, which compare favorably to other markets such
as the United Kingdom, where in 1996 churn rates were approximately three
times this figure. In 1997, the Company's churn rate increased to 12.2%,
though it would have been 9.8% had the Company not disconnected
approximately 17,000 non-paying subscribers in one of its acquired and
rebuilt networks. The Company expects that it may continue to experience
increases in its churn rate above historical levels during the
implementation of its current pricing strategy, which commenced in January
1997 and is designed to increase revenue per subscriber and to achieve real
profit margin increases in U.S. Dollar terms.
SUBSTANTIAL INFRASTRUCTURE INVESTMENT. The Company has developed an
advanced production facility in Maidstone, United Kingdom for the production
and transmission of Wizja TV. In addition, the Company has created the Call
Center to handle sales and service for both its cable and D-DTH customers.
The Company believes that the Call Center is among the most sophisticated in
Poland. The
43
<PAGE>
Company believes that its facilities provide it with a competitive advantage
in terms of subscriber management services and cost efficiency.
EXPERIENCED MANAGEMENT. The Company has established a strong management
team, with extensive experience in the television industry. In addition, the
Company has executed consulting agreements with Samuel Chisholm and David
Chance, who were formerly Chief Executive Officer and Deputy Managing
Director, respectively, of BSkyB, which is the leading pay television
broadcasting service in the United Kingdom and Ireland. In addition to
providing consulting services, Messrs. Chisholm and Chance serve on
@Entertainment's Board of Directors.
RECENT DEVELOPMENTS
On April 17, 1998, the Company signed a letter of intent with TKP, a Polish
company that currently operates an A-DTH and terrestrial single channel premium
pay television service in Poland, and the shareholders of TKP, namely, Canal+
S.A., Agora S.A., and PolCom Invest S.A. The letter of intent provided for
bringing together the Company's Wizja TV programming platform and the Canal+
Polska premium pay television channel and for the joint development and
operation of a D-DTH service in Poland. The letter of intent called for the
Company to invest approximately $112 million in TKP, and to sell substantially
all of the Company's D-DTH and programming assets to TKP for approximately $42
million. The TKP joint venture was to be owned 40% by the Company, 40% by Canal+
S.A., 10% by Agora S.A. and 10% by Polcom Invest S.A. The letter of intent also
contained a standstill provision whereby neither the Company nor TKP could, for
a period of 45 days after the execution of the letter of intent, launch any
digital pay television service. As a result, the Company postponed its launch of
the Wizja TV programming platform and its D-DTH service, which was originally
scheduled for April 18, 1998. The establishment of the joint venture was subject
to the execution of definitive agreements, regulatory approvals and certain
other closing conditions.
The definitive agreements were not agreed and executed by the parties by the
date set forth in the letter of intent. Therefore, the Company terminated the
letter of intent on June 1, 1998. The Company has informed TKP and its
shareholders that the Company remains willing to discuss other joint marketing
arrangements which may include some form of joint venture, investment, or
cooperation in the future. A portion of the net proceeds, if any, from the
exercise of Warrants may be used for such purpose. TKP and its shareholders have
informed the Company that they believe the Company did not have the right to
terminate the letter of intent, and have initiated arbitration proceedings
against the Company. The Company has submitted its answer and counterclaims. See
"--Legal Proceedings."
CABLE OPERATIONS
The Company operates the largest cable television system in Poland with
approximately 1,530,000 homes passed and approximately 865,000 total
subscribers. The Company's cable subscribers are located in 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 believes that additional subscriber
growth can be achieved through a combination of increased penetration, new
network build-out and acquisitions. In addition, the Company believes that its
offering of Wizja TV on its cable networks, which began June 5, 1998, will
increase its number of subscribers and increase revenue per subscriber. At March
31, 1998, the Company had invested more than $121 million to construct
fiber-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
as rapidly as possible substandard networks that it has acquired.
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<PAGE>
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 service 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) provide compelling programming, (ii) increase pricing and maximize revenue
per cable subscriber, (iii) expand its regional clusters, (iv) increase
subscriber penetration, and (v) realize additional operating efficiencies.
PROVIDE COMPELLING PROGRAMMING. The Company currently provides the Wizja TV
programming platform, with its current 18 channel primarily Polish-language
programming, to its cable subscribers. The Company believes that this selection
of high-quality Polish-language programming will provide it with a significant
competitive advantage in increasing its cable subscriber base.
INCREASE PRICING AND MAXIMIZE REVENUE PER CABLE SUBSCRIBER. The Company has
implemented a pricing strategy designed to increase revenue per subscriber and
to achieve real profit margin increases in U.S. Dollar terms. In connection with
this pricing strategy, the Company intends to continue to introduce new program
offerings and to improve its services. As a result, the Company has experienced
and may continue to experience increases in churn rate above historical levels
resulting from the implementation of its pricing strategy. 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. See "Risk Factors--Regulation of the Polish Cable Television
Industry."
EXPAND 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 cable television 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
$20 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
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offerings, particularly through expanding Wizja TV's channel line-up, and (iii)
applying prompt, courteous and professional customer service standards.
REALIZE ADDITIONAL OPERATING EFFICIENCIES. The Company aggressively seeks
to realize operating efficiencies in both its acquired as well as its existing
cable networks by, among other things, rationalizing headends, combining
customer service offices and reducing administrative personnel. 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 intends to reduce headcount through consolidation of
its existing clusters of regional operations from eight to four, and through the
centralization of subscriber management and customer support services in the
Call Center. The Call Center is operational for cable customers in the Katowice
regional cluster and for D-DTH customers and is expected to be operational for
all cable customers by the end of 1998. The Call Center is located in Katowice,
a low cost area of Poland, and will consolidate the functions of the Company's
existing regional customer service centers. Moreover, the Company believes the
centralization of service functions will improve the general level of customer
service available to subscribers. The Company is also in the process of
installing an integrated management information system for both its billing and
accounting systems, which is designed to further improve employee productivity
and customer service for both its cable and D-DTH businesses. The Company
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.
REGIONAL CLUSTERS
The Company has established eight regional clusters for its cable television
business encompassing eight of the ten largest cities in Poland, which the
Company believes are among those with the strongest economies and most favorable
demographics for cable television in the country. The table on the following
page illustrates certain operating data of each of the Company's existing
regional clusters.
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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........................ 280,000 233,361 148,118 119,943 51.40% $5.87
Szczecin...................... 160,000 65,032 56,741 42,082 64.71% 4.86
Katowice...................... 1,200,000 467,601 210,634 182,963 39.13% 5.68
Krakow........................ 400,000 147,889 78,467 67,287 45.50% 5.30
Warsaw........................ 800,000 228,780 113,738 95,019 41.53% 5.82
Lublin........................ 120,000 79,228 69,750 35,017 44.20% 4.64
Wroclaw....................... 624,000 222,250 136,715 112,237 50.50% 4.06
Bydgoszcz..................... 134,000 86,121 50,751 47,359 54.99% 4.47
------------ ------------ ----------- ------------- ------------- ------
Total..................... 3,718,000 1,530,262 864,914 701,907 45.87% $5.26
------------ ------------ ----------- ------------- ------------- ------
------------ ------------ ----------- ------------- ------------- ------
</TABLE>
- ------------------------
(1) All subscriber data at May 31, 1998.
(2) Includes Basic and Intermediate Tiers. See "--Services and Fees."
(3) Represents a weighted average for the Company based on the total number of
basic subscribers for the four months ended April 30, 1998.
OVERVIEW
The Company has organized its eight regional clusters into four geographic
operating divisions--the Northern, Southern, Central, and National Divisions.
The Northern Division encompasses the Gdansk and Szczecin regional clusters, the
Southern Division encompasses the Katowice and Krakow regional clusters, and the
Central Division encompasses the Warsaw and Lublin regional clusters. The
National Division is comprised of certain of the Company's smaller cable
systems, which are generally under technological development or are not
affiliated with a specific regional cluster. The National Division also contains
the Company's cable operations in which the Company has minority shareholders.
Each operating division has its own management team which is responsible for the
profitability of its respective division. This management structure is designed
to create a goal-oriented culture and to increase efficiency and productivity in
the Company's cable business at the divisional level. The Northern, Southern,
and Central Divisions are managed from the Gdansk, Katowice, and Warsaw regional
clusters, respectively, where there are the largest concentrations of the
Company's cable subscribers.
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.
NORTHERN DIVISION
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 1.5 million. The Gdansk regional cluster accounted for
approximately 34% and 23% of the Company's revenue in 1996 and 1997,
respectively. The Gdansk regional cluster is generally 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.
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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 campaigns. 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 package with the smallest number of non-premium channels
("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.
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.
SOUTHERN DIVISION
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% and 30% of the Company's revenue in 1996 and 1997,
respectively. 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 multi-channel
pay television markets in Poland, the Katowice regional cluster offers the
Company significant growth prospects.
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 Krakow regional cluster accounted
for approximately 11% and 12% of the Company's revenue in 1996 and 1997,
respectively.
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.
CENTRAL DIVISION
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 14% and 15% of the Company's revenue in 1996 and 1997,
respectively. The Company began operations in the Warsaw regional cluster in
1991.
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<PAGE>
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 two 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 network by building-out single family housing areas in Warsaw, extending
its network into the suburbs and surrounding towns and by continuing to
overbuild a competitor's system in several MDU areas that are adjacent to the
Company's operating areas.
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 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.
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.
NATIONAL DIVISION
WROCLAW. The Wroclaw regional cluster is located primarily in and around
the county of Wroclaw in the south-west of Poland. The population of the county
of Wroclaw is approximately 1.1 million. The Company commenced operations in the
Wroclaw regional cluster in May 1997 with an acquisition of a small local
operator, followed in June 1997 with the acquisition of a 51% interest in a
cable system with approximately 98,000 total subscribers in approximately twenty
locations throughout the region.
The Company believes that Wroclaw 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 Wroclaw, the acquisitions provided
the Company with a number of other locations in southwest and central Poland,
with combined potential of approximately 624,000 television homes.
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.
ACQUISITIONS
The Company regularly evaluates potential acquisitions of cable networks.
The Company currently has no definitive agreement with respect to any material
acquisition, although from time to time it has
49
<PAGE>
discussions with other companies and assesses opportunities on an ongoing basis.
The Company may be required to apply for the approval of the Anti-Monopoly
Office with respect to any acquisitions it wishes to consummate. There can be no
assurance as to whether or on what terms definitive agreements with respect to
any material acquisition can be reached or necessary Anti-Monopoly Office
approvals can be obtained.
SERVICES
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, 1998, approximately
77% of the Company's subscribers received the Basic Tier, approximately 4%
received the Intermediate Tier and approximately 19% received the Broadcast Tier
of service.
BASIC TIER. The Company currently delivers approximately thirty to
sixty-two 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, and Wizja TV, including its
proprietary Polish-language channel, Atomic TV. The channels currently offered
or proposed to be offered by the Company to its Basic Tier subscribers vary by
location and in most of the Company's major markets include twenty primarily
Polish-language channels (including most channels on Wizja TV), seventeen
English-language channels (including certain channels on Wizja TV), twelve
German-language channels, five French-language channels, one Spanish-language
channel, one Italian-language channel, one Russian-language channel, and one
Swedish-language channel as follows:
<TABLE>
<CAPTION>
CHANNEL DESCRIPTION LANGUAGE
- --------------------------- ------------------------------------------------------ ---------------------------
<S> <C> <C>
Wizja TV(1)(2) Programming platform Primarily Polish
TVP1 State-owned terrestrial general entertainment Polish
TVP2 State-owned terrestrial general entertainment Polish
Formula 11 Regional state-owned terrestrial general entertainment Polish
Polsat Terrestrial and satellite general entertainment Polish
TVN Terrestrial and satellite general entertainment Polish
NASZA TV Terrestrial general entertainment Polish
TV Niepokalanow and Other Terrestrial religious and/or general entertainment Polish
Local Stations(3)
TV Polonia State-owned satellite general entertainment Polish
Polsat 2 Satellite general entertainment Polish
Polonia 1 Satellite general entertainment Polish
RTL7 Satellite general entertainment Polish
PTK 1 Cable information Polish
Eurosport Satellite sports English/Polish(5)
Planete Satellite documentaries French/Polish(5)
NBC Satellite general entertainment English
CNBC Satellite general entertainment English
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
CHANNEL DESCRIPTION LANGUAGE
- --------------------------- ------------------------------------------------------ ---------------------------
<S> <C> <C>
ONYX Satellite music German
TNT Satellite general entertainment English
Euronews Satellite news English
BBC World Satellite news and information English
BBC Prime Satellite general entertainment English
ARD 1 Satellite general entertainment German
SAT 1 Satellite general entertainment German
RTL Satellite general entertainment German
RTL 2 Satellite general entertainment German
3 SAT Satellite general entertainment German
PRO 7 Satellite general entertainment German
NTV Satellite news and information German
Deutsche Welle Satellite news and information German
DSF Satellite sports German
VIVA 2 Satellite music German
VIVA Satellite music German
M6 Satellite general entertainment French
TV 5 Satellite general entertainment French
MCM(4) Satellite music French/Polish(5)
MUZZIK Satellite music French/Polish(5)
TVE Satellite general entertainment Spanish
RAI UNO Satellite general entertainment Italian
Ostankino Satellite general entertainment Russian
FEM Satellite general entertainment Swedish
</TABLE>
(1) The channels offered on Wizja TV became available to the Company's cable
subscribers beginning June 5, 1998. As part of the Wizja TV programming
platform for cable, VH-1 is expected to become available to the Company's
cable subscribers in the fourth quarter of 1998. See "Programming--The Wizja
TV Programming Platform."
(2) Including Atomic TV, which became available as a separate digitally
delivered satellite channel during the second quarter of 1997.
(3) Small terrestrial coverage, available in selected cable systems only.
(4) Limited amounts of Polish subtitles.
(5) Limited amount (at least three hours per day) of Polish-language commentary,
with audio encryptions.
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<PAGE>
With the launch of Wizja TV across the Company's cable networks on June 5,
1998, all of the Wizja TV programming became part of the Basic Tier. See
"Programming--The Wizja TV Programming Platform."
INTERMEDIATE TIER. The Intermediate Tier offers approximately 17 to 24
channels for monthly fees of approximately one-half of the amount charged for
the Basic Tier. 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 Tier subscribers
vary by location.
BROADCAST TIER. The Broadcast Tier offers 6 to 12 broadcast channels with
clear reception for monthly fees which are substantially less than the amounts
charged for the Intermediate Tier. 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 networks currently offer three premium television
services--Wizja 1, the HBO Poland service, (a Polish-language version of HBO's
premium movie channel) and Canal+ Polska--to customers on a monthly basis. The
Company plans to create additional premium channels that will also be offered to
cable customers for an additional 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 $23 to $46 in MDUs and approximately $82 to $144 for single family
dwellings, but such fees may be subject to reductions as a result of promotional
campaigns.
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 experienced annual
churn rates of less than 10%, and has been able to pass on the effects of
inflation through price increases. In 1997, the churn rate increased to 12.2%,
though it would have been 9.8% had the Company not disconnected approximately
17,000 non-paying subscribers in one of its acquired and rebuilt networks. The
Company expects that it may continue to experience increases in its churn rate
above historical levels during the implementation of its current pricing
strategy, which commenced in January 1997 and is designed to increase revenue
per subscriber and to achieve real profit margin increases in U.S. Dollar terms.
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
52
<PAGE>
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 monthly in advance and, as is
customary in Poland, most of the Company's customers pay their bills 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 in most
networks enables it to promptly shut off service to nonpaying customers and is
designed to reduce non-authorized use of its cable systems. The Company does not
consider bad debt to be material to its operations. 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 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
53
<PAGE>
stereo services, to existing subscribers. Direct door-to-door remarketing sales
are enhanced through advertising on the Company's proprietary 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.
The Company generally guarantees service within 24 hours of a subscriber
request. The Company is in the process of establishing a customer service
facility within the Call Center for both the cable and D-DTH businesses. The
Call Center will provide telemarketing and sales and service support and will
include a specialized billing software with on-line real time access to customer
accounts, designed to provide better access to customer information and improve
customer service. The Call Center is operational for cable customers in the
Katowice regional cluster and for D-DTH customers and is expected to be
operational for all cable customers by the end of 1998.
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 subscribers, 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 860 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 860 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
hybrid-fiber-coax, 500 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. Most of the Company's cable networks
currently have the ability to carry 40 to 60 television channels. The 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 networks 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 as rapidly as possible substandard cable television networks
obtained in acquisitions. The Company is considering teaming arrangements with
certain Western telecommunication companies in order to create one or more
54
<PAGE>
consortia to bid on regional telephony licenses, utilizing excess capacity from
the Company's cable networks.
The Company has been able to avoid constructing its own underground conduit
in certain areas by entering into a series of agreements with regional and local
TPSA branches which permit the Company to use TPSA's conduit infrastructure for
an indefinite period of time or for periods up to 20 years. 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, 1998,
approximately 57% 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 from 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 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, 1998, approximately 69,000, or 8%, 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--Agreements with TPSA" and "Business--Properties."
The Company estimates that at the end of May 1998 it had over 3,774
kilometers of cable television plant constructed and that the fiber-optic
backbone of its networks was substantially complete. The Company expects that
its future capital expenditures for the cable business will consist primarily of
capital needed for the incremental addition of new MDUs and cable television
subscribers to its existing networks for the build-out or rebuilding associated
with the acquisition of new cable television systems, and for other capital
costs in connection with such acquisitions. 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.
D-DTH
The Company has expanded its distribution capacity with its September 18,
1998 launch of a complementary D-DTH broadcasting service for Poland, targeted
at homes that are not subscribers to the Company's cable service. The
programming provided is Wizja TV. At the Launch Date the Company had sold
approximately 31,400 Wizja TV Packages through 70 Philips authorized retailers.
The Company's multi-channel Polish-language D-DTH service is the first D-DTH
service available in Poland. The Company's D-DTH service is being broadcast to
Poland from its transmission facilities in Maidstone, United Kingdom.
55
<PAGE>
D-DTH ROLL OUT STRATEGY
The Company's D-DTH roll out strategy is to lease D-DTH Reception Systems to
up to 500,000 targeted initial subscribers at a price significantly decreased by
promotional incentives. This strategy is designed to achieve high penetration of
the Polish market. The launch of the D-DTH service is supported by the Company's
development of Wizja TV, which the Company believes will respond to the strong
demand for high-quality Polish-language programming in Poland. At the Launch
Date the Company had sold approximately 31,400 Wizja TV Packages through 70
Philips authorized retailers.
The Company broadcasts digital programming from its Maidstone transmission
facility in the United Kingdom through the Company's uplink facilities to one of
three transponders leased by it on the Astra 1F and 1G satellites, which then
transmit the signals back to the D-DTH Reception Systems of the Polish
subscribers and to the Company's cable networks, and in the future will transmit
the signals to the cable headends of other cable operators, if any, having
distribution agreements with the Company.
The Company believes that its multi-channel D-DTH service is among the first
digital television platforms launched in Europe and is the first D-DTH service
available in Poland. 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 a D-DTH
system are: (i) it significantly decreases the cost of transmitting a channel,
because of its ability to transmit more channels from one transponder, (ii) the
additional capacity available from digital compression enables the Company to
offer a much wider range of programming, sports and film channels, which the
Company believes will lead to increased demand for its services, (iii) digital
technology also provides enhanced picture and sound quality and allows
interactive features, such as an EPG, which are not available using A-DTH
technology, and (iv) it allows the Company to reach homes in the Polish market
that are not passed by the Company's cable networks. 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.
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 the Company's D-DTH service to provide
potential subscribers with an attractive alternative to A-DTH services and cable
offerings.
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The Company began broadcasting to Poland from its transmission facilities in
Maidstone, United Kingdom and retransmitting Wizja TV across its cable networks
on June 5, 1998 and on its D-DTH system on a limited basis on July 1, 1998 and
on a full-scale basis on September 18, 1998. Wizja TV's current channel line-up
includes four channels, Atomic TV, Wizja 1, Wizja Pogoda and Twoja Wizja, that
are owned and operated by the Company, and 14 channels that are produced by
third parties, 9 of which are broadcast under exclusive agreements for pay
television in Poland.
Atomic TV is a Polish-language music television channel, targeting 14 to 29
year olds. Atomic TV began to be broadcast via satellite in April 1997 across
the cable networks of the Company and other cable operators. Atomic TV is
currently distributed to more than 900,000 cable subscribers, and the Company
believes that based on distribution it is the leading music television channel
in the Polish market. Wizja 1, a general entertainment channel showing movies,
sports, series and children's programming, Wizja Pogoda, a weather channel, and
Twoja Wizja, a programming directory channel, were launched on July 1, 1998,
July 21, 1998 and July 1, 1998, respectively, across the Company's cable
networks and on its D-DTH system. The Company expects to expand Wizja TV's
initial channel line-up to include additional basic and premium channels,
including the Company's proprietary Wizja Sport channel, and eventually to
introduce tiered packages containing a variety of combinations of 21 or more
channels. Wizja Sport, a sports channel, is expected to be launched by the
middle of 1999.
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 continue to secure rights
to high-quality, high-demand programming (either produced by the Company or
obtained 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-- Limited D-DTH Experience and
Uncertainties Associated with the D-DTH Market," "--Dependence on Philips as
Principal Supplier," "--Dependence Upon Satellites," "--Availability of
Programming and Dependence on Third Party Programmers; Program Development
Risk," and "Business--Programming."
The Company expects to be able to offer an event pay per view service to its
D-DTH subscribers by early 1999. The Company expects to offer certain recently
released feature films and sports and other live events on such a service.
The Company's D-DTH services also include an EPG, an interactive service
which allows the Company to communicate with subscribers with respect to movie,
sports event and channel promotions and subscriptions. In addition, the EPG is
linked to the Company's subscriber magazine, "Twoja Wizja." See
"--Programming--Advertising." 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. The Company believes that in the future it will be able to provide
its D-DTH customers with additional value-added services, including interactive
television, pay per view, near-video-on-demand, data transfer and services
related to electronic banking, should the Company decide to pursue such
ancillary sources of revenue in the future.
PRICING STRATEGY. The Company currently charges its D-DTH subscribers an
up-front fee of $135 plus applicable taxes, which includes the D-DTH Reception
System rental, installation, and a one year's subscription for all channels
(other than any premium channels). After the first year of service, subscribers
will be required to pay a fee in advance for the service plus separate amounts
to receive premium channels. The Company will retain ownership of the D-DTH
Reception Systems.
SALES AND MARKETING
To promote the launch of Wizja TV on its D-DTH system, the Company has
commenced a $20 million nationwide marketing campaign, which the Company
believes will be the largest single-year product launch expenditure to date in
Poland. The marketing campaign primarily utilizes terrestrial television, press,
radio and outdoor poster sites. The Company's paid advertising spots began on
September 1, 1998 and the Company launched its D-DTH service on a full-scale
basis on September 18, 1998, with an aim to
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establishing a base of approximately 500,000 initial subscribers by December 31,
1999. 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.
Philips, a leading electronics manufacturer and, through its Polish
affiliates, the largest electronics retailer in Poland, has agreed to supply the
Company with D-DTH Reception Systems for up to 500,000 initial subscribers to
the Company's D-DTH service. Philips has also agreed to distribute, install and
service the Company's D-DTH Reception Systems through more than 1,000 Philips
authorized electronics retailers located throughout Poland. Philips has operated
in Poland since 1991 and has experience introducing new products to the Polish
market through its extensive retail network. In addition, Philips has supplied
an end-to-end product package for MEASAT's D-DTH service in Malaysia, utilizing
CryptoWorks-Registered Trademark- technology similar to that to be used in the
Company's D-DTH service. See "Risk Factors--Limited D-DTH Experience and
Uncertainties Associated with the D-DTH Market" and "--Dependence on Philips as
Principal Supplier."
The Company has designed a customer service program which is intended to
produce a high level of customer satisfaction and to minimize churn rates. As
part of this strategy, the Company is in the process of establishing a customer
service facility within the Call Center for both its cable and D-DTH businesses.
The Call Center will provide telemarketing and sales and service support. The
Call Center is currently operational for cable customers in the Katowice
regional cluster and for D-DTH customers, and is expected to be operational for
all cable customers by the end of 1998. The Company believes this will allow it
to offer a high level of customer service at relatively low cost to its new
D-DTH subscribers.
The Company's D-DTH service targets homes that are not subscribers to the
Company's cable television service. The Company does not believe that there is
much incentive for the Company's existing cable subscribers to switch from the
Company's cable service to the Company's D-DTH service, because with their cable
service they are able to enjoy equally good signal quality, access to the same
Wizja TV programming, and more total channels than the Company's D-DTH service
offers, at a monthly cost that is in most cases comparable to that of the
Company's D-DTH service and without the need for investing any funds for
installation of D-DTH Reception Systems. However, the Company will be
disadvantaged to the extent that any existing cable subscribers switch to the
D-DTH service, to the extent that they are among those subscribers who will
receive promotional incentives from the Company to significantly decrease the
price of the D-DTH Reception Systems, and to the extent that they do not
substantially increase the amount of their monthly fees payable to the Company.
TECHNOLOGY AND INFRASTRUCTURE
The Company's D-DTH service, digital video, audio and data are 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 broadcast from its transmission facilities in
Maidstone, United Kingdom 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.
TRANSMISSION AND UPLINK FACILITIES. The channels available on the Company's
D-DTH service include the Company's own proprietary channels and channels from
third parties originating from a number of sources in Poland, the United Kingdom
and elsewhere. Most program localization to be undertaken by the Company, which
will principally consist of adding voiceovers or dubbing into Polish for the
Company's proprietary channels on Wizja TV, will occur in Poland. For most of
the channels on Wizja TV, localization, editorial control and program packaging
will be the responsibility and at the cost of the channel supplier. The channels
provided by third parties will be delivered in tape format, through a landline
or will be backhauled (i.e., transmitted via satellite or other medium) to the
Company's transmission facility in Maidstone for broadcasting to Poland.
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The Company has a 5 year agreement with British Telecommunications plc
("BT") for the provision and maintenance of uplink equipment at Maidstone. Other
than the BT uplink equipment, the Company owns all the required broadcasting
equipment at its transmission facility in Maidstone. The Company's programming
is currently uplinked to the Company's transponders on Astra satellites 1F and
1G.
The Company's D-DTH signal is beamed by these satellites back to 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 signal is currently received by the Company's own
cable headends, and will also be received by the cable headends of other cable
operators, if any, having distribution agreements with the Company. Once the
D-DTH signal has been received at the headends, the signal is transmitted by
cable to those who have been connected by the Company to its cable service as
subscribers or connected by such other cable operators, if any, to their own
cable systems.
The Company has concluded an agreement 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 service in Poland,
and for Philips not to distribute any other IRDs under the Philips' trademark in
Poland until December 31, 1999 or any earlier date on which the Company has
secured 500,000 initial subscribers to its D-DTH service in Poland. The
Company's agreement with Philips provides that after such period the Company may
license one or two suppliers of IRDs in addition to Philips, and Philips shall
license its CryptoWorks-Registered Trademark- technology to such additional
suppliers for the Polish market. Although the agreement with Philips provides a
means by which the Company could obtain a second and third 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, and there can be no
assurance that the Company will be able to secure such additional suppliers for
all or part of its future D-DTH Reception Systems requirements.
Any new D-DTH broadcaster wishing to commence the operation of an encrypted
pay television service within Poland would need to obtain a license from Philips
to use CryptoWorks-Registered Trademark- (after the exclusive license of
CryptoWorks-Registered Trademark- for Poland granted to the Company ends), 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 license 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 an ODU and IRD, and is decrypted via a smartcard inserted
into a decoder, which is usually integrated with a receiver into the IRD and
connected to a viewer's television set. A smartcard is a plastic card, usually
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. The encryption codes contained in the smartcards
can be updated via over-the-air addressing or physically replaced.
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 IRD's incorporate Philips' CryptoWorks-Registered Trademark-
proprietary encryption technology as part of its conditional access system.
These IRDs use smartcard technology, making it possible in the event of a
security breach to change the conditional access system either 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. To
the Company's knowledge, there has not been a breach of
CryptoWorks-Registered Trademark- since its introduction in Malaysia in 1996. To
the extent a breach occurs, however, the
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Company will take countermeasures, including over-the-air measures, and if
necessary the replacement of smartcards. Although the Company expects its
conditional access system, subscriber management system and smartcard system 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 or maintain contracts for programming services from
unrelated third parties would be adversely affected. See "Risk Factors--Risk of
Signal Theft."
Although the Company believes that the Astra satellites,
CryptoWorks-Registered Trademark- encryption technology and the IRDs together
constitute a reliable, end-to-end cost-effective D-DTH system, 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, thus causing
confusion for existing and potential subscribers, delays in providing
subscribers with decoders and significant unexpected costs. See "Risk
Factors--Changes in Technology."
SATELLITES. The Company currently broadcasts and expects to broadcast all
of its proprietary programming and that of third party programmers from its
transmission facility in the United Kingdom by cable to an earth station
transmitting antenna (an "uplink"), which is located at its Maidstone site. The
uplink facility transmits the Company's programming signal over an orbiting
satellite transponder to cable system headend receiving antennae and also to
D-DTH subscribers' reception equipment throughout Poland. The Company has been
studying and discussing with relevant Polish authorities 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 contracts with Societe Europeenne
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 1F and 1G. Although the Company originally leased a
transponder on the Astra 1E satellite, SES has exercised its right to provide
the Company with a transponder on another Astra satellite provided the
replacement transponder has the same polarization, bandwidth and uplink and
downlink frequencies. Accordingly, the Company believes the change from the
transponder on Astra 1E to Astra 1G will have no material effect on its
business. The leases for the two transponders on the Astra 1F satellite and the
transponder on the Astra 1G satellite will expire in 2007. All three
transponders are currently operational and available to the Company. Aggregate
charges for each transponder are capped at $6.75 million per year for each
transponder and approximately $182 million for all three transponders for the
remaining 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 had been so terminated at December 31, 1997, the aggregate charges
under the leases would have approximated $8.7 million. However, the Company has
satisfied these criteria with the launch of its D-DTH service throughout Poland
on September 18, 1998. 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 a broadcaster which has pre-emption rights permitting
it to gain access to additional transponders in preference to certain other
Astra customers. The Company is not, however, a "protected customer" under the
relevant transponder leases and, in the event
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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 broadcast its D-DTH
Service and to add approximately 10 additional channels to its initial Wizja TV
channel line-up on the three transponders to which it currently has access, the
ability of the Company to add channels to its D-DTH programming platform beyond
that point will depend upon its ability to obtain access to additional
transponder capacity on the Astra satellites or other favorably positioned
satellites or an improvement in the digital compression techniques. See "Risk
Factors--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 Programming Platform. See "Risk Factors-- Limited Insurance
Coverage."
PROGRAMMING
The Company believes that there is significant unsatisfied demand in the
Polish market for high-quality Polish-language programming and that the quality
and variety of Polish-language programming offered is a critical factor in
building and maintaining successful multi-channel pay television systems in
Poland. The principal programming objective of the Company is to develop and
acquire high-quality Polish-language programming that can be commercially
exploited throughout Poland through D-DTH and cable television exhibition and
advertising sales. The Company intends to use Wizja TV to increase the
penetration rate for its cable television networks and its D-DTH system and to
increase per subscriber revenue from its cable systems. The Company also expects
to distribute Wizja TV on a wholesale basis to other cable operators in Poland.
The Polish television industry, like those in many emerging markets,
currently relies primarily on programming from foreign sources (translated or
dubbed into Polish) and limited local broadcasting alternatives.
PROGRAMMING STRATEGY
The Company's programming strategy is focused on the development and
acquisition of high-quality Polish-language programming. The Company's
programming strategy is based upon four elements.
ESTABLISH AND EXPAND PROGRAMMING PLATFORM. The Company began broadcasting
to Poland from its transmission facilities in Maidstone, United Kingdom and
retransmitting Wizja TV across its cable networks on June 5, 1998, and on its
D-DTH system on a limited basis on July 1, 1998 and on a full-scale basis on
September 18, 1998. Wizja TV's current channel line-up includes four channels,
Atomic TV, Wizja 1, Wizja Pogoda, and Twoja Wizja, that are owned and operated
by the Company, and 14 channels that are produced by third parties, 9 of which
are broadcast under exclusive agreements for pay television in Poland. The
Company expects to expand Wizja TV's initial channel line-up to include
additional basic and premium channels, including the Company's proprietary Wizja
Sport channel, and eventually to introduce tiered packages containing a variety
of combinations of 21 or more channels. See "--The Wizja TV Programming
Platform."
DEVELOP AND EXPAND PROPRIETARY CHANNELS. Wizja TV's current channel line-up
includes four channels, Atomic TV, Wizja 1, Wizja Pogoda, and Twoja Wizja, that
are owned and operated by the Company. Atomic TV is a Polish-language music
television channel, targeting 14 to 29 year olds. Atomic TV began to be
broadcast via satellite in April 1997 across the cable networks of the Company
and other cable operators. Wizja 1, a general entertainment channel showing
movies, sports, series and children's programming, Wizja Pogoda, a weather
channel, and Twoja Wizja, a programming directory channel, were launched on July
1, 1998, July 21, 1998, and July 1, 1998, respectively, across the Company's
cable networks
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and on its D-DTH system. The Company also intends to add Wizja Sport, a sports
channel, by the middle of 1999. The Company intends to develop and expand its
sports programming through Wizja Sport. In addition, to develop additional
proprietary programming, the Company has entered into and intends to enter into
joint ventures and other similar arrangements with other programming companies.
CONTROL CONTENT. The Company believes that the programming on Wizja TV will
provide it with a significant advantage over competitors, and therefore the
Company's strategy is to secure exclusive rights to as much high-quality
Polish-language programming as is commercially feasible. The Company has secured
certain exclusive Polish pay television rights to channels and events covering
what it believes are the most important programming genres to viewers in the
Polish market, including movies, sports, children's programming, documentaries
and music. See "--The Wizja TV Programming Platform." The Company intends to
continue to use exclusive agreements, where practicable, in expanding the
programming available on Wizja TV, which the Company is currently distributing
across its cable networks and its D-DTH systems, and which the Company intends
to distribute on a wholesale basis to other cable operators in Poland.
USE PROGRAMMING TO DRIVE DISTRIBUTION. The Company intends to use its
programming to increase penetration of its cable distribution business. Wizja TV
is intended to be the primary selling point of the Company's D-DTH service. The
Company believes that its programming will be a significant factor in increasing
the penetration of its cable and D-DTH systems and in increasing per-subscriber
revenue from its cable networks.
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THE WIZJA TV PROGRAMMING PLATFORM
The channels offered to the Company's D-DTH and cable subscribers since the
September 18, 1998 launch of Wizja TV include the following:*
<TABLE>
<CAPTION>
TERMS OF
CHANNEL DESCRIPTION LANGUAGE HOURS PER DAY DISTRIBUTION**
- ------------------------- ---------------------- ---------------------- -------------- ----------------------
<S> <C> <C> <C> <C>
Wizja 1*** General entertainment Polish(1) 20 Proprietary channel
channel including (Sunday to
movies, series, Thursday)
exclusive sport and 24
documentaries (Friday and
Saturday)
Atomic TV Music Polish(1) 24 Proprietary channel
Wizja Pogoda Weather channel Polish(1) 8 Proprietary channel
Twoja Wizja Programming directory Polish(1) 24 Proprietary channel
channel
HBO Poland service*** Premium movie channel Polish(11) 18 Exclusive D-DTH in
Poland
- 7 year term.
Non-exclusive cable
in Poland
- 7 year term
BET on Jazz Music Polish/English(2) 12 Exclusive in Poland -
5 year term
Cartoon Network Cartoons and other Polish/English(3) 18 Exclusive in Poland -
programming 5 year term
Turner Classic Movies(4) Films and other Polish/English(5) 6 Exclusive in Poland -
programming 5 year term
Fox Kids Poland Children's programming Polish(6) 14 Exclusive in Poland -
5 year term
Hallmark Entertainment Movies and Mini Series Polish(1) 24 Exclusive in Poland -
Channel 5 year term
National Geographic Documentary Polish/English(7) 12 Exclusive in Poland -
Channel Programming 5 year term
QuesTV Documentary Polish/English(8) 16 Exclusive in Poland -
programming with 5 year term
themes of speed,
action, and
adventure
Romantica Channel Latin American Polish(9) 12 Exclusive in Poland -
romantic series 5 year term
Travel Travel related and Polish/English(10) 12 Exclusive in Poland -
vacation programming 5 year term
CNN International International news and English 24 Non-exclusive in
feature programming Poland - 5 year term
MTV: Music Television Music and youth- English 24 Exclusive D-DTH in
oriented Poland. Non-
entertainment Exclusive cable in
Poland
- 5 year term
Discovery Channel Documentary Polish/English(12) 18 Exclusive D-DTH in
Programming Poland. Non-
Exclusive cable in
Poland
- 2 year term
Animal Planet Documentary Polish/English(12) 18 Exclusive D-DTH in
Programming Poland. Non-
Exclusive cable in
Poland
- 2 year term
</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)
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(1) The Company is responsible for localizing programming into Polish.
(2) The Company is responsible for localizing a minimum of 30% of the
programming into Polish.
(3) The channel supplier is contractually required to localize a minimum of 14
hours per day of programming.
(4) TNT has been rebranded as Turner Classic Movies.
(5) The channel supplier is contractually required to localize an average of
three films per night or two films where the films are longer than two hours
and film related programs which must be a minimum of 6 hours of programming
content per day.
(6) The channel supplier is contractually required to have the programming
content completely localized into Polish.
(7) The channnel supplier is contractually required to localize 50% of the
programming content into Polish until October 1998, 75% of the program
content into Polish beginning in October 1998 and 85% of the program content
beginning in January 1999.
(8) The channel supplier is contractually required to have a minimum of 75% of
the programming content into Polish beginning on July 19, 1998, and a
minimum of 95% of the programming content into Polish beginning in January
1999.
(9) The channel supplier is contractually required to localize all programming
into Polish.
(10) The channel supplier is contractually required to use its reasonable
endeavours to localize a minimum of 50% of the qualifying programming into
Polish until October 18, 1998, to localize a minimum of 80% of the
qualifying programming into Polish beginning October 18, 1998 and to
localize a minimum of 85% of the qualifying programming into Polish
beginning January 18, 1999.
(11) The channel supplier is contractually required to localize a substantial
amount of the programming into Polish.
(12) Amount of localization is to be determined.
* The information contained in this chart summarizes only some of the
contractual terms and is not a complete description of the agreements with
the channel suppliers. The Company is continuing to negotiate license
agreements for distribution to Poland of additional channels.
** Exclusive in Poland means exclusive DTH distribution rights and exclusive
cable distribution and agency rights in Poland
*** Premium channel
Wizja TV includes certain exclusive Polish pay television rights to channels
and events covering what it believes are the most important programming genres
to viewers in the Polish market, including movies, sports, children's
programming, documentaries and music.
The Company has signed license agreements for the exclusive distribution on
its D-DTH system, and amended its existing agreement for non-exclusive
distribution across its cable networks, of the HBO Poland service, a
Polish-language version of HBO's premium movie channel.
The Company has also entered into long-term exclusive agreements to
broadcast to Poland live coverage of certain sports events, including the Polish
national soccer team's away games, certain European matches of Lech Poznan, a
Polish Premier League soccer team, European soccer matches, including matches
from the Dutch and Portuguese leagues, Polish Speedway League events, European
Grand Prix Speedway events, International Skating Union Champion Series ice
skating games of three leading teams in the Polish Premier Hockey League, and
certain boxing events including local Polish boxing and fights involving Prince
Naseem. The Company has also entered into an exclusive agreement to broadcast
the Wimbledon tennis tournament to Poland. These events will initially be
carried on Wizja 1, and when it is established, on Wizja Sport. When
established, Wizja Sport will initially provide 12 hours of local and
international sporting events per week. The Company believes that Wizja Sport
will be the first channel in the Polish market principally dedicated to Polish
sports programming.
In addition, the Company has signed license agreements for exclusive pay
television distribution to Poland of the following channels: BET on Jazz, The
Cartoon Network, Turner Classic Movies, Fox Kids Poland, The Hallmark
Entertainment Channel, the National Geographic Channel, QuesTV, Romantica and
Travel. The Company has also signed a license agreement for distribution in
Poland of CNNI, and has entered into a binding heads of agreement for the
exclusive distribution on its D-DTH system of MTV and the non-exclusive
distribution across its cable networks of VH-1. The Company expects to launch
VH-1 in the fourth quarter of 1998. The Company is also in the process of
negotiating license agreements for exclusive pay television distribution to
Poland of additional channels.
The Company has purchased exclusive rights from third parties for
programming on 9 of the current 18 channels on Wizja TV. In some of the
agreements, however, the channel supplier may terminate the agreement and/or
eliminate the exclusivity rights if the Company does not achieve specified
milestones for
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subscriber numbers by certain specified dates. In addition, most of the
agreements impose certain restrictions on the tiering of the particular channel,
which will limit the flexibility of the Company in determining program tiering
in the future, and also include provisions whereby the Company agrees to
indemnify the channel supplier against any claims, including claims made by
governmental authorities, resulting from the exclusive nature of the rights
granted or from the tiering restrictions. Some of the agreements require
payments based on a guaranteed minimum number of subscribers, and some require
payments at the time of execution. At July 21, 1998, the Company was committed
to pay approximately $156 million in guaranteed minimum payments over the next
seven years in respect of broadcasting and programming agreements, of which
approximately $39 million was committed through the end of 1999. In addition,
the Company is continuing to negotiate additional agreements with channel
suppliers and sports rights organizations, which agreements if consummated may
require the Company to pay additional guaranteed minimum payments and/or
payments at the time of execution. In most of the Company's programming
agreements, the channel supplier, at its own expense, must localize its
programming into the Polish language prior to the launch of Wizja TV. In most of
its programming agreements, the Company is required to make payments to the
channel supplier on a monthly basis based on the number of subscribers to whom
the programming is made available.
In some of the agreements, the channel supplier may terminate the agreement
and/or eliminate the exclusivity rights if the Company does not achieve
specified subscriber numbers by certain specified dates. In addition, some of
the agreements impose certain limitations, including: (i) the channel must be
received by 100% of subscribers to the Company's D-DTH service and by all
subscribers in the Basic Tier of the Company's cable system or by most of the
Company's cable subscribers; (ii) the channel must be provided, under certain
restricted circumstances, on a stand alone basis as well as part of a package of
programming in certain situations; (iii) the programming which the Company may
purchase for Wizja TV may be restricted; (iv) distribution of other channels as
part of the Company's programming package may be limited (Consequently, the
consummation of an agreement with one channel supplier has had, and will in the
future continue to have, the effect of precluding the Company from entering into
agreements with other potential channel suppliers); (v) suppliers of programming
to a channel supplier may require the Company, in certain circumstances, to
assume the channel supplier's obligations to license the programming on
financial terms which are more favorable to the program provider than those
under the Company's existing agreement with the channel supplier; (vi) the
Company may be required to install encryption decoder-based technology in homes
of cable subscribers receiving premium services; and (vii) if the Company
undertakes certain investments or enters into certain transactions, certain
minimum guarantees payable under the agreement would increase and the Company
would lose certain rights.
As opportunities permit, the Company intends to expand the channel offerings
on Wizja TV. One option under consideration by the Company is adding more
thematic channels to its programming platform. Such channels may be based on
such themes as sports, movies, news, weather, lifestyle, gameshows or childrens'
programming. The Company expects that certain of the additional thematic
channels will be proprietary. See "--Proprietary Programming."
PROPRIETARY PROGRAMMING
Wizja TV contains four channels, Atomic TV, Wizja 1, Wizja Pogoda and Twoja
Wizja, that are owned and operated by the Company. The Company intends to create
additional proprietary channels, including Wizja Sport, to be added to the Wizja
TV line-up. In addition, the Company has established and intends to continue to
establish entities to engage in the production of programming either to be
included on the Company's proprietary channels, or to be licensed to the Company
for distribution as part of the Wizja TV line-up.
The Company has established entities to engage in the development and
production outside of Poland of Polish-language thematic television channels.
Those entities plan to develop programming designed to drive subscriber growth
on the Company's cable television networks and on its D-DTH system and increase
revenue per cable subscriber. In December 1996, the Company acquired 45% of
Ground Zero Media Sp. z o.o. ("GZM"), a joint venture with Polygram, the
recording company, Atomic Entertainment LLC, and Planet 24 Productions Limited
("Planet 24"), an independent production company. In February and March 1998,
the Company acquired the remaining 55% interest from the GZM stockholders. GZM's
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only business is the development and production of Atomic TV, a Polish-language
music television channel aimed at the 14-29 year old audience. Atomic TV began
to be broadcast via satellite on April 7, 1997 across the cable systems of the
Company and other cable operators. Atomic TV is currently distributed to more
than 900,000 cable subcribers, and the Company believes that based on
distribution it is the leading cable television channel in the Polish market.
The Company has agreed in principle to cause GZM to issue twenty percent of its
equity shares to Planet 24 in return for the provision by Planet 24 of
management and programming consultation services. The agreement in principle
does not call for the payment of any cash consideration to Planet 24.
In addition, the Company is developing Wizja 1 as the primary channel for
entertainment, Wizja Pogoda as the weather channel, and Twoja Wizja as the
programming directory channel, and it intends to develop Wizja Sport as the
sports channel for its programming platform. Wizja 1 offers a wide range of
Polish-language programming, including full-length feature films, music,
lifestyle and childrens' programs, and sports events.
The Company has also concluded for exhibition on Wizja 1 program license
agreements for high-quality programming from leading international film
production companies, including Channel 4 International, Minotaur, Capitol,
Eaton, Itel, IMP, and BBC Worldwide for exclusive first run pay television
rights in Poland to films, mini-series and documentaries. The Company is also
acquiring local Polish programming and is in negotiations to purchase rights for
other high-quality programming.
The Company intends to develop its sports programming through Wizja Sport.
The Company has entered into long-term exclusive agreements to broadcast to
Poland on Wizja TV certain sports events, including live coverage of the Polish
national soccer team's away games, certain European matches of Lech Poznan, a
Polish Premier League soccer team, European soccer matches, including matches
from Dutch and Portuguese leagues, Polish Speedway League events, European Grand
Prix Speedway events, International Skating Union Champion Series ice skating,
games of three leading teams in the Polish Premier Hockey League, and certain
boxing events including local Polish boxing and fights involving Prince Naseem.
The Company has also entered into an exclusive agreement to broadcast the
Wimbledon tennis tournament to Poland. These events will be carried on Wizja 1,
and when it is established, on Wizja Sport. When established, Wizja Sport will
initially provide 12 hours of local and international sporting events per week.
The Company believes that Wizja Sport will be the first channel in the Polish
market principally dedicated to Polish sports programming. Wizja Sport is
expected to be launched by the middle of 1999.
Several of the agreements entered into by the Company to secure broadcast
rights to sports events give the Company the ability to obtain additional
seasons of those sports events, either by way of a right of first refusal or a
right of first offer. Most of the sports rights agreements grant the Company
exclusive rights to broadcast the sports events live in Poland. The exclusivity
in some cases is subject to the ability of the rights owner to grant limited
rights to other broadcasters to show the events on a delayed basis. The Company
is currently in negotiations with other sports rights holders to purchase the
rights to additional local and international sports events.
In November 1997, the Company purchased 50% of WPTS Sp. z o.o. ("Twoj
Styl"), a Polish company producing, among others, the leading Polish lifestyle
magazine, for the purpose of producing Polish lifestyle programming. The Company
believes that the combination of its television expertise and Twoj Styl's
experience will result in the production of high quality lifestyle television
programming, targeting primarily female audiences.
In February 1998, the Company purchased, for approximately $500,000, an
option to buy a 50% plus one share interest in "Polonia" Sportowa S.A., a soccer
club in Poland. The purchase option will expire in February 1999. If the Company
exercises the option, the purchase price will approximate $4.4 million.
As opportunities arise in the rapidly developing pay television market in
Poland, the Company intends to consider adding more thematic channels to its
Programming Platform. In particular, the Company currently intends to create
additional 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.
The Company will use Wizja 1 as an anchor channel to introduce entertainment and
sports programming to the Polish market. Concepts that are well
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received may become the basis for new channels. For example, Atomic TV, which
debuted on a Company-owned proprietary cable channel in the spring of 1996, had
generated substantial cable television viewer and advertising interest, and it
began to be offered as a separate channel in April 1997.
In certain instances, the Company has acquired an equity interest in the
programming that is produced by third parties and included on Wizja TV. Such an
equity investment allows the Company access to the programming in exchange for
the Company sharing the costs incurred in the creation of the Polish-language
version of the programming. For example, the Company purchased an equity
interest in Fox Kids Poland, a children's entertainment channel aimed at an
audience in the 4 to 12 age group. The Company expects to continue this
practice, and intends to acquire equity interests in a number of programming
providers in order to secure additional proprietary programming.
PREMIUM TELEVISION CHANNELS. The Company has introduced its own premium
channel as well as premium channels supplied by third parties. On July 1, 1998
the Company introduced Wizja 1, a general entertainment channel showing movies,
sports, series and children's programming, as a premium channel. The Company has
also introduced a Polish-language version 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 7,800 subscribers to the Canal+ service.
The Company has signed agreements for the exclusive distribution on its
D-DTH system, and non-exclusive distribution across its cable networks, for the
HBO Poland service, a Polish-language version of HBO's premium movie channel.
HBO currently has exclusive rights in Poland to movies from Warner Bros.,
Columbia TriStar International Television and Buena Vista International.
The HBO Poland service was launched on the Company's cable network in
September 1996. To date, the service has generated significant subscriber
interest. At April 30, 1998, the service had achieved a penetration rate of 6.2%
across the Company's cable networks. The Company began distribution of the HBO
Poland service in Warsaw in April and in Gdansk and Krakow in May 1997, and had
rolled out such service to most of the Company's remaining cable systems by the
end of 1997. The HBO Poland service was launched on the Company's D-DTH system
in July 1998.
ADVERTISING. The Company expects to attract significant advertising to its
channels as part of the Polish television advertising market, which the Company
believes is still relatively underdeveloped, with television advertising
expenditures on a per capita basis being lower than in comparable European
markets. According to the TV International Sourcebook, the current size of the
Polish television advertising market was approximately $795 million in 1995. The
Company believes that this market is dominated by TVP and Polsat. The Company
expects that its channels will provide 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 anticipated subscribers, the focus of the
Company on large, high economic growth areas, and the opportunity to target
viewers of particular thematic channels with advertisements for goods and
services. Furthermore, the Company's channels will give advertisers local
customer access that cannot easily be replicated through any other advertising
media. In the majority of the programming agreements, the Company is entitled to
at least a 50% share of the net advertising revenue generated in connection with
the particular channel, and the channel supplier is required to contribute to
the cost of marketing its channel in Poland. The Company is responsible for
selling the advertising for most of the channels. This arrangement will enable
the Company to market a package of channels to advertisers in the Polish market
and offer them a selection of advertising opportunities for different market
segments. In most of the agreements with the channel suppliers, the Company has
the right to include on that particular channel, for at least one minute per
hour, segments promoting the Wizja TV platform and the other Wizja TV channels.
This will enable the Company to implement a comprehensive promotional strategy
across the Programming Platform reinforcing the Wizja TV brand. In addition, the
Company will produce and mail to its subscribers a monthly subscriber magazine,
announcing channel line-ups, programming schedules and special events, and
providing further opportunities for promoting Wizja TV and for obtaining
revenues from commercial advertisers.
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COMPETITION
The multi-channel pay 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
multi-channel pay television services are competitive with alternative delivery
systems depends, 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 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 multi-channel pay television industry in Poland. See "The Industry--The
Polish Multi-Channel Pay Television Industry" and "Regulation."
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 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. In addition,
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
Bresnan Communications, which owns three cable systems aggregating an estimated
329,000 subscribers (including Aster City Cable Sp. z o.o.) at March 31, 1998,
and Multimedia Polska S.A., a Polish entity, with an estimated 115,000
subscribers at March 31, 1998. In addition, the Company understands that a
number of cable operators in Poland (led by Bresnan Communications) have formed,
or are in the process of forming, a consortium for the joint creation and
production of Polish-language programming.
The Company's cable television business also competes 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 MMDS systems and D-DTH services (including the
Company's D-DTH service).
The Company's D-DTH business will compete with traditional cable systems,
including its own, and terrestrial broadcast and A-DTH services as well as other
potential D-DTH and MMDS services. TKP, which is partially owned by Canal+ S.A.,
currently offers a single channel Polish-language pay television service
(including A-DTH) and has announced plans to introduce thematic D-DTH channels
in Poland in October 1998, possibly in connection with one or more Polish
broadcasting entities such as Polsat and TVP, and one or more cable television
operators such as Aster City. 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 the DTH business than the Company. If competing D-DTH services are
successfully launched in Poland, they could have a material adverse impact on
the Company. There can be no assurance that the Polish market for D-DTH services
will be sufficiently large to support competing D-DTH businesses.
Pay television services 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
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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 pay television services and the popularity of television itself.
With respect to its programming business, the Company competes with other
television companies, both free-to-air and pay television (including Canal+ and
HBO), for the acquisition of sports rights and most other programming, including
the rights to feature films and television series and the right to participate
in joint ventures with other creators of programming. With respect to the
creation of its proprietary programming, the Company competes with other
programming creators for the hiring of personnel with creative and production
talent. To the extent that the Company is precluded from creating or obtaining
programming due to exclusive agreements entered into between programming
creators and the Company's competitors, the Company will face difficulty in
creating or acquiring sufficient high-quality programming to attract and retain
subscribers and commercial advertising customers for its cable and D-DTH
services. To the extent that the Company is unable to negotiate exclusive
agreements with suppliers of its programming or such agreements become
unenforceable, the Company will not be able to preclude its competitors from
obtaining access to such programming, which would make the Company's programming
line-up less unique and less attractive to subscribers. There can be no
assurance that in the future the Company will be able to continue to create or
acquire sufficient high-quality programming, either through exclusive or
non-exclusive arrangements.
PROPERTIES
At May 31, 1998, the Company owned equipment used for its cable television
business, including 109 headends, and approximately 3,774 kilometers of cable
plant. The Company has approximately 187 lease agreements for offices, storage
spaces and land adjacent to the buildings. The total area leased amounts to
approximately 28,100 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 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 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--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 establishment of its D-DTH service and the
development of its programming business, the Company has leased additional
office space and premises providing backhauling, production, post-production and
program packaging facilities. This space is in aggregate approximately 6,500
square meters and is located in Maidstone, United Kingdom. The Company has been
studying and discussing with relevant Polish authorities the feasibility of
locating its uplink and production facilities in Poland and applying for Polish
broadcasting licenses necessary to engage in such activities. The Company
believes that its existing owned properties, lease agreements and conduit
agreements are adequate for purposes of the
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Company's cable television operations, although additional space may be needed
in the future for the Company's programming production activities.
TRADEMARKS
The Company, either itself or through its subsidiaries, has filed or is in
the process of filing for registration of its various trademarks. The PTK logo
was registered for use in connection with television and programming services in
July 1997. Trademark applications are pending in Poland for other variations of
PTK trademarks. Also, numerous trademark applications have been filed in Poland
for the various Wizja trademarks, including but not limited to Wizja, Wizja TV
and Wizja 1 logos. Additional applications for other Wizja trademarks and
related trademarks will be filed in Poland in the near future.
The Company has also filed a U.K. application for Wizja TV logo and intends
to file additional applications for the Wizja trademarks and other related
trademarks in the United Kingdom and other jurisdictions if applicable. The
United Kingdom Trademark Office has raised a preliminary objection to the
application for Wizja TV based on a European Community trademark application for
a logo mark which incorporates the words "TELEWIZJA WISLA". Applications for
similar marks have been filed in Poland by the same entity. The word "Wizja"
means "vision" in Polish, while the word "Wisla" refers to the longest river in
Poland. The Company believes that it will be able to overcome such objection by
the United Kingdom Trademark Office, though there can be no assurance that such
will be the case.
EMPLOYEES
At May 31, 1998, the Company had approximately 1,081 permanent full-time
employees and approximately 72 part-time employees. In addition, as of such date
the Company employed approximately 53 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. In connection with the establishment of
its D-DTH business and the development of its programming business, the Company
expects to hire a further 259 employees by the end of 1998, the majority of whom
will be administrative, post-production and technical personnel located at the
Company's facility in the United Kingdom and customer service representatives in
the Call Center in Poland. 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 business, financial condition or results of operations.
Two of the Company's cable television subsidiaries, Telewizja Kablowa
Gosat-Service Sp. z o.o. and PTK S.A., and four unrelated Polish cable operators
and HBO Polska Sp. z o.o. ("HBO Polska") have been made defendants in a lawsuit
instituted by Polska Korporacja Telewizyjna Sp. z o.o., an indirect
partially-owned subsidiary of Canal+ S.A. The lawsuit was filed in the
Provincial Court in Warsaw, XX Economic Division (Sad Wojewodzki w Warszawie,
Wydzial XX Gospodarczy) (the "Court"). The main defendant in the proceedings is
HBO Polska which is accused of broadcasting the HBO television program in Poland
without a license from the Council as required by the Television Act and thereby
undertaking an activity constituting an act of unfair competition. The plaintiff
has asked the Court to order HBO Polska to cease broadcasting of its programming
in Poland until it has received a broadcasting license from the Council, and
that the defendant cable operators be ordered (i) to cease carrying the HBO
Polska programming on their cable networks in Poland until HBO Polska has
received a broadcasting license from the Council, (ii) not to use their current
filters for the purpose of unscrambling the HBO Polska programming, and (iii) in
the future, to use effective endcoding systems and systems of controlled access
to the HBO Polska programming. The Company does not believe that the lawsuit
will have a material adverse effect on its business operations.
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On April 17, 1998, the Company signed a letter of intent with TKP, a Polish
company that currently operates an A-DTH and terrestrial single channel premium
pay television service in Poland, and the shareholders of TKP, namely, Canal+
S.A., Agora S.A., and PolCom Invest S.A. The letter of intent provided for
bringing together the Company's Wizja TV programming platform and the Canal+
Polska premium pay television channel and for the joint development and
operation of a D-DTH service in Poland. The letter of intent called for the
Company to invest approximately $112 million in TKP, and to sell substantially
all of the Company's D-DTH and programming assets to TKP for approximately $42
million. The TKP joint venture was to be owned 40% by the Company, 40% by Canal+
S.A., 10% by Agora S.A. and 10% by PolCom Invest S.A. The letter of intent also
contained a standstill provision whereby neither the Company nor TKP could for a
period of 45 days after the execution of the letter of intent, launch any
digital pay television service. As a result, the Company postponed its launch of
the Wizja TV programming platform and its D-DTH service, which was originally
scheduled for April 18, 1998. The establishment of the joint venture was subject
to the execution of definitive agreements, regulatory approvals and certain
other closing conditions.
The definitive agreements were not agreed and executed by the parties by the
date set forth in the letter of intent (the "Signature Date"). Therefore, the
Company terminated the letter of intent on June 1, 1998. TKP and its
shareholders have informed the Company that they believe the Company did not
have the right to terminate the letter of intent.
Under the terms of the letter of intent, TKP is obligated to pay the Company
a $5 million break-up fee within 10 days of the Signature Date if the definitive
agreements were not executed by the Signature Date, unless the failure to obtain
such execution was caused by the Company's breach of any of its obligations
under the letter of intent. If there was any such breach by the Company, the
Company would be obligated to pay TKP $10 million. However, if any breach of the
letter of intent by TKP caused the definitive agreements not to be executed, TKP
would be obligated to pay the Company a total of $10 million (including the $5
million break-up fee). In the event that TKP fails to pay the Company any of the
above-referenced amounts owed to the Company, TKP's shareholders are responsible
for the payment of such amounts.
The Company has demanded monies from TKP as a result of the failure to
execute the definitive agreements by the Signature Date. While the Company was
waiting for the expiration of the 10-day period for payment of the break-up fee,
TKP initiated arbitration proceedings before a three-member arbitration panel in
Geneva, Switzerland. In their claim, TKP and its shareholders have alleged that
the Company breached its obligations to negotiate in good faith and to use its
best efforts to agree and execute the definitive agreements and claimed the
Company is obligated to pay TKP $10 million pursuant to the letter of intent.
The Company has submitted its answer and counterclaims against TKP and its
shareholders. The Company does not believe that the arbitration proceedings will
have a material adverse effect on the Company's business, financial condition or
results of operations.
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REGULATION
GENERAL
The operation of cable and D-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 that regulate international
transmission and retransmission of television programs. The operation of a D-DTH
service in Poland uplinked from facilities in the United Kingdom also will be
subject to regulation in the United Kingdom and 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 and
D-DTH 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 and D-DTH operators in Poland also
are subject to the Copyright Act, which provides intellectual property rights
protection to 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.
Because the Company's D-DTH service will, it believes, be the first D-DTH
service available in Poland, there are likely to be issues of first impression
not addressed under Polish law with respect to certain aspects of the Company's
D-DTH business and related programming arrangements. In addition, the Polish
D-DTH market is subject to a developing regulatory framework that may change as
the market develops. There can be no assurances that regulatory changes will not
have a material adverse effect on the Company's business, financial condition
and results of operations.
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
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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."
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, to
anti-monopoly restrictions 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, or companies in which foreign persons hold no more
than 49% of the share capital, ownership interests and voting rights. In
addition, a majority of the management and supervisory board of any cable
television operator holding Permits must be comprised of Polish citizens
residing in Poland. These restrictions do not apply to any Permits issued prior
to July 7, 1995.
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. At May 31, 1998,
approximately 23% 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."
PTK S.A. will own all cable network assets and operate in the areas covered
by Grandfathered Permits. To comply with foreign ownership requirements for
Permits for networks not covered by Grandfathered Permits, the Company intends
to enter into contractual arrangements with PTK Operator, a Polish entity of
which 49% is expected to be owned by PCI and the remaining 51% is expected to be
owned by a Polish entity of which 49% is expected to be owned by PCI and the
remaining 51% is expected to be owned by a Polish financial institution. See
"Corporate Organizational Structure." In the case of existing cable networks not
covered by Grandfathered Permits or the acquisition or construction of cable
networks not covered by Grandfathered Permits, the Company intends to own,
through PTK S.A., all of the cable network assets and intends to lease the
assets to PTK Operator, which is expected to operate the networks. In the
Company's contemplated leasing arrangements with PTK Operator, it is expected
that PTK Operator will hold the Permits to operate the cable networks, receive
all of the revenues from subscribers, pay all operating expenses relating to the
operation of the networks, and through the lease
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arrangements pay PTK S.A. rent equal to substantially all of the cash flow
generated by the networks. The Company believes that this ownership and
operating structure does not contradict the requirements of Polish law. PAR has
granted several permits to the Company and the Company's competitors, based on
the lease of assets, for networks using an ownership and operating structure
substantially similar to the one 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 networks and could
result in the denial or loss of Permits applied for or 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. See "Risk
Factors--Limitations on Foreign Ownership of Multi-Channel Pay Television
Operators and Broadcasters."
THE COMPANY'S PERMITS. Subsidiaries of PCI have received approximately 109
Permits from PAR, covering approximately 625,200 of the Company's approximately
701,900 basic subscribers at May 31, 1998, including approximately 16,000
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 76,600 basic subscribers at May 31, 1998 located
in areas for which subsidiaries of PCI do not currently have Valid Permits,
approximately 76% are located in areas serviced by recently acquired or
constructed 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 and satisfying foreign ownership limitations), and approximately
24% are located in areas serviced by networks for which subsidiaries of the
Company have Permit applications pending. These subsidiaries of the Company have
12 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 action by PAR to
restrict or revoke the Permits of, or to refuse to grant Permits to, 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 "Risk
Factors--Regulation of the Polish Cable Television Industry."
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 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.
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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 and European 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 of 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.
The relevant subsidiaries of the 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
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 (including
the programming that the Company transmits or intends to transmit on Wizja TV,
the initial programming for which an application for registration has been
filed) 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. Any such action could have a material adverse effect on the
Company's business, financial condition and results of operations.
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, and minimum
Polish and European content, and whether the applicant will be able to secure
the required investments and financing for the planned broadcasting operations.
Even if the foregoing criteria were satisfied in a broadcasting license
application, there can be no assurance that such a license would be granted. In
November 1997 the Council issued a regulation, effective January 1, 1998,
requiring the share of European works in the broadcast of Polish broadcasters to
be not less than 50% of the yearly broadcast. See "--Requirements Concerning
Programs Broadcast From Outside of Poland."
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
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
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broadcasting license or of the restrictions on foreign ownership of broadcasters
described below. See "--Restrictions on Foreign Ownership of Broadcasters."
RESTRICTIONS ON FOREIGN OWNERSHIP OF BROADCASTERS. 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, ownership
interest and voting rights. 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. In December 1997 the
Polish government proposed an amendment to the Television Act by which the
maximum foreign ownership interest in a Polish broadcasting company would be
increased to 49%, but there can be no assurance that the Polish parliament will
accept this proposal.
The Company has established and intends to continue to establish entities to
engage in the development and production of Polish-language thematic television
programming outside of Poland. The Company distributes Wizja TV via satellite
systems from outside of Poland and the Company believes that the ownership
structure of such entities is not subject to Poland's regulatory restrictions on
foreign ownership. There can be no assurance that Polish regulatory authorities
will not determine that all or part of this ownership or distribution structure,
or the ownership or distribution structure to be established for the Company's
future subsidiaries or joint entities, violates Polish regulatory restrictions
on foreign ownership. If the ownership or distribution structure for such
entities or such future entities 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 also be forced to dispose of its
ownership interests in such entities or such future entities. These regulatory
restrictions may materially adversely affect the Company's ability to enter into
relationships with such future entities, 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.
REQUIREMENTS CONCERNING PROGRAMS BROADCAST FROM OUTSIDE OF POLAND. 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 directed to a Polish audience if the uplink for the
broadcasting of such program is made by a foreign broadcaster from outside of
Poland. The Company believes that the Television Act does not apply to such
broadcasting and that such activity is not subject to Polish broadcasting
requirements. The Council has not officially adopted an interpretation of this
issue and there have been no court rulings on this issue. As different
interpretations of the application of the Television Act to broadcasting from
outside of Poland have been made, there can be no assurance that the Company's
interpretation will not be challenged or that the Company's D-DTH broadcasts
from outside of Poland will not be required to comply, and, if so, that it will
be able to comply, with requirements of the Television Act, which, among other
things, requires a broadcasting license and imposes foreign ownership
restrictions. 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. While the Company believes that its activities in
producing programs in and outside of Poland, transmitting the programs to the
Company's transmission facility in the United Kingdom and distributing the
programs to 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 has
been studying and discussing with relevant Polish authorities the feasibility of
locating its transmission 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 license would be granted if applied for and
failure to have any required broadcasting license would have a
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material adverse effect on the Company's business, financial condition and
results of operations. See
"-- Limitation on Foreign Ownership of Multi-Channel Pay Television Operations
and Broadcasters."
Currently Poland has not sought to regulate foreign DTH broadcasters who
uplink outside of Poland. There can be no assurances, however, 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.
Poland is a party to the 1989 European Convention on Transfrontier
Television (the "Convention"), which requires the Polish authorities to
guarantee freedom of reception and retransmission on Polish territory of program
services which meet the requirements of the Convention. The Company believes
that the content of its Programming Platform will comply with the terms of the
Convention. "See--European Union--Broadcasting Regulation."
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 distribution of programs on cable networks. The Council has not
issued any regulations that would be applicable to Wizja TV programming
broadcast from outside of Poland (though it has issued regulations relating to
Polish broadcasters), 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.
COPYRIGHT PROTECTION
PROTECTION OF RIGHTS OF POLISH AUTHORS AND PRODUCERS OF
PROGRAMMING. Television operators, including cable and D-DTH operators, in
Poland are subject to the provisions of the Copyright Act, which governs, inter
alia, enforcement of intellectual property rights. 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 or the system of a D-DTH
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 also 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 or D-DTH operator. Most of the
Company's cable subsidiaries operate under a contract with ZASP and all of them
under a contract with ZAIKS. In the event that a cable or D-DTH 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 of the operator's Permits. See "--Communications Act."
PROTECTION OF RIGHTS OF FOREIGN AUTHORS AND PRODUCERS OF
PROGRAMMING. Foreign authors of programming 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
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adopted by Poland in 1994. In addition, foreign programming producers 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. The Berne Convention, however, does not grant any protection to
foreign producers of programming.
Poland has adopted the Rome Convention, which extends copyright protection
to programs of foreign producers. Poland became bound by its terms on June 13,
1997. The Company currently makes copyright payments to the foreign programmers
requiring such payments, such as CNN, Eurosport and the Cartoon Network.
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, D-DTH and programming industries is not well established, and the
Anti-Monopoly Office has not articulated comprehensive standards that may be
applied in an antitrust review in such industries. As a general rule, the
Anti-Monopoly Act prohibits, among other things, monopolistic agreements, abuse
of dominant market position, price-fixing arrangements, division of market
arrangements, and the creation of market entry barriers. The Anti-Monopoly Act
may deem any such agreements null and void. Although the Anti-Monopoly Act does
not preclude an enterprise from occupying a dominant market position, any
activities by such enterprise face detailed scrutiny by the Anti-Monopoly
Office. Market dominance is often defined as a company's ability to act
independently of competitors, contractors, and consumers. Companies that obtain
control of 40% or more of the relevant market are usually deemed to have market
dominance, and therefore face greater scrutiny from the Anti-Monopoly Office.
There is no assurance that the exclusivity clauses in the Company's programming
agreements will not be scrutinized by the Anti-Monopoly Office. Although such
exclusivity clauses are not prohibited under the Anti-Monopoly Act, such
agreements may be found unlawful, and therefore unenforceable, if they restrict
or hinder competition or otherwise involve the abuse of a dominant position. The
Company does not believe such agreements have anti-competitive effect, though
there can be no guarantee that the Anti-Monopoly Office would reach the same
conclusion.
The Anti-Monopoly Office recently issued a decision that PCI had achieved a
dominant position and abused that dominant position in one of the areas in which
it operates by moving certain satellite channels to the hyperband frequency. As
a result, a number of subscribers, whose television sets are not equipped to
receive the hyperband frequency, received several different channels to replace
the channels which had been moved. The Company has appealed both the finding of
dominance and the finding that it acted improperly by moving certain channels to
the hyperband frequency.
Several types of concentrations between undertakings, including acquisitions
of privately held stock and also stock that is traded on a stock exchange, 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 (up to 1% of revenue as defined in the Copyright
Act) on members of their governing bodies. The Company believes that it may be
required to obtain the Anti-Monopoly Office's approval for future acquisitions.
In addition, the Anti-Monopoly Office can review a company's past and present
activities, including its pricing policies, for potential anti-competitive
behavior. The Company receives inquiries from and is subject to review by
various divisions of the Anti-Monopoly Office from time to time. 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. There can be no assurance that the
Anti-Monopoly Office will approve the Company's future acquisitions and
dispositions or that a review of the Company's past, present or future
operations will not otherwise adversely impact the Company's business, strategy,
financial condition or results of operations.
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UNITED KINGDOM
BROADCASTING REGULATION
Most of the channels to be included as part of the D-DTH services to be
launched by the Company are or will be regulated by the ITC as satellite
transmission services ("STS"). The ITC is the body responsible for regulation of
substantially all commercial television in the United Kingdom. Under the
Broadcasting Act, as amended by the Satellite Television Service Regulations, a
satellite television broadcaster will be licensed as an STS if certain criteria
are satisfied. The principal criteria are that the broadcaster is established in
the United Kingdom or, if the broadcaster is not established in the United
Kingdom or in any other member state of the EU, 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
Company's Atomic TV channel.
The Company understands that the ITC follows the "establishment" test set
out in the recently adopted revision to the Directive (the "New Directive") to
determine whether a broadcaster falls within its jurisdiction.
The New Directive became effective in June 1997. The New Directive provides
that each EU broadcaster should be regulated primarily by the authorities in the
member state of the EU where it is established, without regard to the country or
countries 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 (or, if this is not the case, the country which
grants the broadcast frequency or satellite capacity to the broadcaster) has
jurisdiction over that broadcaster, but an amendment to the Convention was
recently agreed, which if implemented would bring the Convention into conformity
with the Directive's establishment test in the fall of 1998. 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 received in such state.
The Company has received an STS license from the ITC in the United Kingdom
for Atomic TV, Wizja 1, Wizja Sport, and Wizja Pogoda. For most of the other
channels on Wizja TV, the relevant channel supplier is under a contractual
obligation with the Company to obtain an STS license from the ITC. Under the
terms of the Company's Astra transponder agreements, the Company will be
prohibited from carrying on Wizja TV programming for which a channel supplier
does not have a valid license. The ITC has wide discretion to vary the
conditions of licenses issued under the Broadcasting Act or amend the codes
(such as the code on advertising time limits and EPGs) with which all U.K.
licensed broadcasters must comply. There is no assurance that the Company or its
channel suppliers will be able to secure the necessary STS licenses it requires,
or if obtained, that the Company or its channel suppliers 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 roll out its D-DTH service or to add channels to its D-DTH
service in the future, and as a result, would have a material adverse affect on
the Company's business, results of operations and financial condition.
The STS license permits 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 are granted for a period of ten
years and are renewable for one or more further 10 year periods. The ITC has the
authority to impose fines, shorten the license period or revoke licenses if the
licensee fails to remedy a breach of any license condition or fails to comply
with any direction which the ITC lawfully gives to the STS licensee. Where the
broadcaster has breached the license condition prohibiting the broadcast of
programs likely to encourage crime or lead to disorder which the ITC believes
justifies revocation of the STS license, the ITC may immediately suspend such
license prior to considering any representations from the licensee. The ITC may
also revoke a license if any change in the nature or characteristics of the
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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 STS licenses. The ITC has
wide discretion to vary the conditions of licenses issued under the Broadcasting
Act. License conditions can be varied by the ITC only with the consent of the
licensee except where there is a change to the license period, unless such
license period is being shortened because the licensee has breached a license
condition or failed to comply with a direction of the ITC. In the case of any
other license variation, the ITC may amend the license after considering any
representations from the licensee.
In common with all television licenses issued by the ITC, any licenses
awarded to the Company would impose on the Company 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 pay per view
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, among other things,
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 U.K. 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 March 31, 1998) 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 ITC has issued a direction (the "Direction") to all STS licence holders
following its investigation into competition issues relating to the practice of
channel bundling in the retail pay television market in the United Kingdom. The
ITC has concluded that a number of anti-competitive factors exist in the current
market which restrict viewer choice. The Direction prohibits STS licensees, in
specified circumstances, from maintaining or entering into certain agreements
which contain minimum carriage guarantees (whereby the licensee imposes an
obligation to carry the channel to a minimum percentage of subscribers) or
maintaining certain tiering obligations (such as a licensee requiring a channel
to be included in a certain tier, such as the basic tier) or arrangements with
similar effects. The ITC has not prohibited per se the buying through to premium
channels from basic channels, however, it is requiring licensees to make buy-
through to premium channels available from any basic package. The focus of the
ITC's investigations was on the effect of these practices in the pay television
market in the United Kingdom. The ITC has stated that its interest lies in the
choice available to viewers in the United Kingdom and it is not seeking to
regulate the terms on which channels are provided to distributors for
broadcasting in overseas markets, including Poland, where the range of different
services, competitive structure of the market, competitive behavior and
practices may be different from those in the United Kingdom pay television
market. The Company believes that the Direction will not be applied by the ITC
in relation to the channels in the Wizja TV package which are provided under STS
licenses. There is no guarantee, however, that the ITC will not change its
position and that the impact of the Direction will not have a material adverse
impact on the Company's operations. If the Direction is applied by the ITC to
the channels distributed by the Company in the future it could affect the
Company in the wholesale market (including the sale of Wizja TV to third party
cable operators), have an adverse impact on its agreement with certain channel
providers and have an adverse impact on its sale of Wizja TV to subscribers. The
Direction is the subject of a legal challenge in the United Kingdom courts.
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
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disqualified person in any manner specified in the relevant provisions of the
Broadcasting Act. There are no foreign ownership restrictions which apply to STS
licensees.
The Broadcasting Act sets forth 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
Channel 3 services, Channel 5 services, licensable program services, another STS
license, certain foreign services or digital program services (to provide
digital terrestrial television programs in the United Kingdom) 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 @Entertainment's issued
capital stock 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 (i.e., a disqualified person), or if @Entertainment or any
person with an interest in capital stock of @Entertainment (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
@Entertainment's entitlement to continue 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 ("Fair Trading Act"), and unilateral
anti-competitive practices through the Competition Act of 1980 (the "CA"). 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. The Company has
filed with the OFT certain of its exclusive programming license agreements, and
these have been deemed not registrable.
There are no current proceedings relating to competition law involving the
Company before the courts, nor are any investigations which involve the Company
underway before any authority exercising powers under the RTPA, CA or Fair
Trading Act.
In August 1997, the Department of Trade and Industry published a
consultation document and draft Competition Bill (the "Bill") setting out the
Government's proposals for the reform of U.K. competition law. The Bill was
introduced into the House of Lords in November 1997 and, if passed, could become
law in the fall of 1998. Under the provisions of the Bill as currently drafted,
companies would then have a further period of up to 12 months to prepare for the
new regime to come into effect. The new regime takes a prohibition approach and
is based on Articles 85 (which prohibits agreements which have the effect of
preventing, restricting or distorting competition) and 86 (a prohibition dealing
with abuse of a dominant market position) of the EC Treaty. The Company believes
that the Bill is likely to be passed into law, though there can be no assurance
that this will be the case. The Company envisages that this will provide a
stronger framework than hitherto for addressing anti-competitive behavior by
dominant firms.
EUROPEAN UNION
BROADCASTING REGULATION
The Directive sets forth 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
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member state of all broadcasting services which the state's authorities
regulate. The United Kingdom, which is regarded as the Company's "home member
state" for the purposes of its D-DTH services because the Company's license
holding subsidiary, @EL, is established in the United Kingdom, has 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, teleshopping 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
United Kingdom regulates compliance with the European program content
requirements administratively for STS licensees but other U.K. licensed services
(e.g., Channel 3 licensees) are required to comply with such quotas by means of
a condition set forth in their license.
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, teleshopping 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-language programming produced or
commissioned by the Company will be counted for the purposes of determining
whether any service broadcast by the Company complies with these quotas.
European programming consists broadly of programs that (i) originate from an EU
member state or a Convention country that is party to the Convention or from
another eligible European country, (ii) are written and staffed mainly by
European residents and (iii) are produced or co-produced mainly by European
producers.
The Directive also imposes restrictions on advertising including
restrictions on the timing and frequency of commercial breaks, restrictions on
the content of advertising, limitations or prohibitions on tobacco,
non-prescription drug and alcohol advertising and restrictions limiting
commercials to a maximum of 20% of transmission time per hour, subject to an
overall limit of 15% per day. In addition, the Directive restricts the content
of programs to the extent necessary to protect minors and to prevent the
incitement of hatred on the grounds of race, sex, religion or nationality.
Certain amendments have been 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 the promulgation of the 1992 European Community ("EC") 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 organization
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
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considerable opposition and the Company believes it is unlikely to be adopted,
though there can be no assurance that such will be the outcome.
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 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
Convention provides that the country in which a broadcaster uplinks its
programming to the satellite (or, if this is not the case, the country which
grants the broadcast frequency or satellite capacity to the broadcaster) has
jurisdiction over that broadcaster. Neither the Directive nor the Convention
contains any requirements or restrictions regarding foreign ownership of
broadcasters. 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 received in such state, or to
impose restrictions on foreign ownership of broadcasters.
The Company understands that a change to the Convention (the "Amendment")
was agreed by member states of the Convention on September 9, 1998. The
Amendment will be open for signature by member states from October 1, 1998 and
will be effective when all member states have signed the Amendment or
automatically on October 1, 2000, unless a member state objects by January 1,
1999 to the Amendment coming into force. The Amendment, if it becomes effective,
would have three significant effects. First, it would bring the Convention into
conformity with the Directive's establishment test, providing that a broadcaster
should be regulated primarily by the authorities in the Convention country in
which the broadcaster is established.
Second, the Amendment would provide that where a broadcaster's channel is
wholly or principally directed at a country, other than that where it is
established, for the purpose of evading the laws in the areas covered by the
Convention which would have otherwise applied to it in the country of reception,
this shall constitute an "abuse of rights." Where such an abuse is alleged,
representatives from the country where the broadcaster is established and from
the country of reception would meet to attempt to resolve the dispute. If they
are unable to do so, a dispute resolution process (which would eventually
involve arbitration) could be invoked. The country of reception could not take
measures against the broadcaster unless and until the arbitration procedure has
been completed in favor of the country of reception. The Company believes that
the broadcasting of its channels into Poland from the United Kingdom would not
constitute an "abuse of rights" under the Amendment, though there can be no
assurance that the relevant authority would so decide. An adverse decision on
this issue, if the Amendment becomes effective and Poland decides to invoke it
against the Company's broadcasts emanating from the United Kingdom, would have a
material adverse effect on the Company's ability to broadcast its Programming
Platform and its business, financial condition and results of operations.
Third, the Amendment would allow parties to the Convention to designate that
certain important events (e.g., major sporting events) cannot be broadcast
exclusively by a single television station so as to deprive a large proportion
of the public of that Convention country from seeing the event live or on a
deferred coverage basis on free-to-air television, and also to ensure that
broadcasters under the jurisdiction of one Convention country cannot purchase
exclusive rights to major events specified by another Convention country which
would deprive a large proportion of the public in such Convention countries from
seeing the specified event on a live or deferred coverage basis on free-to-air
television. In this regard, the
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Amendment would be consistent with changes recently made to the Directive. If
the Amendment becomes effective and if it were applied to the Polish pay
television rights to certain sporting events purchased on an exclusive basis by
the Company, it could eliminate the Company's right to broadcast such events in
Poland on an exclusive basis and could have an adverse effect on the ability of
the Company to acquire the exclusive Polish pay television rights to such events
and to similar events in the future.
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-European) ownership restrictions
on broadcasters or regulate digital television services in a way which may be
detrimental to the Company (such as requiring (i) a common interface for all
encryption services used within a particular pay television market, (ii) that
all conditional access providers must allow simulcrypt of their programming or
(iii) that third parties must be given access to the Company's subscriber
management service, 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. See "Risk Factors--European Union Regulation of D-DTH
Business."
The Convention currently provides that where a broadcaster under the
jurisdiction of one Convention country transmits advertisements which are
directed specifically at audiences in another Convention country, such
advertisements must comply with the advertising rules of the receiving member
state. This rule will require advertisements inserted in the channels
distributed by the Company as part of Wizja TV to comply with both Polish
advertising rules as well as the rules applicable in the jurisdiction in which
the broadcaster is licensed.
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
License ("CAC License") which are enforced by the U.K. Office of
Telecommunications ("Oftel"). The CAC License addresses several issues relating
to digital television, including pricing of conditional access services and set
top box subsidies, how EPGs can be made competively neutral, and potential
operation of more than one smartcard by competing broadcasters. Although the
Directive and the CAC License do not currently apply to the DTH broadcasting
services planned by the Company as they are not to be transmitted to viewers in
the EU, Poland would be required to implement the provisions of that Directive
if it joined the EU. In addition, as the Company's license-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 assert
jurisdiction over the activities of @EL in these areas including in relation to
conditional access services.
In July 1997, the European Commission issued a draft directive on the Legal
Protection of Conditional Access Services which, among other things, aims to
protect legitimate pay television services against abusive practice, such as pay
television piracy. If adopted, EU member states would be required to prohibit
the sale, marketing, or use of devices designed to allow illicit access to such
services. If Poland joins the EU, it would also have to implement such
protections.
REGULATION OF COMPETITION
EC 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 EC Treaty.
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 European Community/ European Economic Area
("EC/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
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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 EC Treaty.
The European Commission is entrusted with the principal enforcement powers
relating to Articles 85 and 86, 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 European 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.
Article 86 prohibits undertakings from abuse of a dominant market position
in the EC 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, distributors, or
consumers is likely to raise issues under Article 86. The European 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 an exemption.
It is possible that a third party, which suffers loss as a result of the
performance by an entity of an agreement that infringes Article 85(1), could
claim damages against such entity to compensate it for its quantifiable loss or
could seek an injunction. The position in relation to infringement of Article 86
is similar.
The Company does not believe that any of its current agreements infringe
Article 85(1) or Article 86 and therefore does not intend to notify them to the
European Commission. There can be no assurance that the European Commission
would consider that the agreements do not infringe Article 85(1) or Article 86.
If the European Commission were to find the agreements infringed Article 85(1)
or Article 86, the agreements would be void and unenforceable. The parties could
also be fined and liable to damages to third parties.
POLAND'S EU MEMBERSHIP APPLICATION
In 1994 Poland made an official application for membership of the EU.
Negotiations on the terms of Poland's proposed admission to the EU commenced in
March 1998. If Poland joins the EU, it would be required to implement and obey
all of the laws and regulations emanating from the European Commission,
including the Directive and EC competition law in their then current versions.
There can be no assurance that the Company would be able to comply with any such
laws and regulations. The burden of complying with any such laws and regulations
or any failure to so comply could have a material adverse effect on the
Company's business, financial condition and results of operations.
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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)............................ 69 Chairman of the Board of Directors
Robert E. Fowler, III(1)(2).................. 39 Chief Executive Officer and Director
Arnold L. Chase(1)........................... 47 Director
Samuel Chisholm.............................. 58 Director
David Chance................................. 41 Director
Agnieszka Holland............................ 49 Director
Scott A. Lanphere(3)......................... 32 Director
Jerzy Z. Swirski(3).......................... 41 Director
Donald Miller-Jones.......................... 53 Chief Financial Officer, Vice President and Treasurer
Dorothy E. Hansberry......................... 45 Vice President and General Counsel of PCI
David Keefe.................................. 49 Chief Executive Officer of PCI
Przemyslaw A. Szmyt.......................... 35 Vice President, General Counsel and Secretary
David Warner................................. 51 Chief Operating Officer of @EL
</TABLE>
- ------------------------
(1) Appointed as a director by the Chase Group (as hereinafter defined) under
the Stockholders' Agreement (as hereinafter defined) which terminated upon
the completion of the Initial Public Equity Offering. 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, which terminated upon the completion of the Initial Public Equity
Offering, 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,
which terminated upon the completion of the Initial Public Equity Offering.
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. He has been a director of PCI since its
inception in 1990, and was the Chairman of the Board of Directors of PCI from
March 1996 until December 1997. 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. 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 has served as a director of
@Entertainment since its inception and of PCI since March 1996. Mr. Fowler has
served as Chairman of the Board of Directors of PCI since December 1997, and he
served as its Chief
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Executive Officer from December 1996 to December 1997, its Vice President 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. From March 1995 to late 1996, Mr. Fowler served as a director
of ACCEL. Since April 1, 1998, Mr. Fowler has served on the Supervisory Board of
Twoj Styl. During the period of 1994 to 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 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 has been a director of
International Bancorp, Inc. (the parent company of First National Bank of New
England) since 1985, and has been a director of First National Bank of New
England since 1972.
SAMUEL CHISHOLM has served as a director of @Entertainment since January
1998. From September 1990 to November 1997, Mr. Chisholm served as the Chief
Executive and Managing Director of BSkyB. Mr. Chisholm has also been an
Executive Director of The News Corporation Limited since December 1993, a
director of Star Television since July 1993, a director of BSkyB (U.K.) since
1990, and a director of Sky New Zealand since 1997. Previously, he was chief
executive of the Nine Network Australia.
DAVID CHANCE has served as a director of @Entertainment since January 1998.
From January 1994 to December 1997, Mr. Chance served as the Deputy Managing
Director of BSkyB. From 1989 to January 1994, he served as Marketing
Distribution Manager of BSkyB. From 1987 until 1989, Mr. Chance served as the
U.K. Marketing Manager for the Astra System for SES. Mr. Chance has also been a
director of BSkyB (U.K.) since February 1995 and Modern Times Group Stockholm
since March 1998.
AGNIESZKA HOLLAND has served as a director of @Entertainment since January
1998. Since October 1995, Ms. Holland has also served as President and as a
director of the Lato Productions Company, a company providing writing and
directing services for the motion picture and television industry. Prior to
October 1995, Ms. Holland worked as an internationally known feature film writer
and director.
SCOTT A. LANPHERE has served as a director of @Entertainment since its
inception and of PCI since March 1996. He served as a Managing Director of PCBV
from May 1996 to October 1997. 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.
DONALD MILLER-JONES has served as Chief Financial Officer of @Entertainment
since June 1998, and as Vice President and Treasurer of @ Entertainment since
July 1998. From November 1995 through January 1998 Mr. Miller-Jones served as
the Finance Director of United Philips Communications N.V. From January 1988
through October 1995, Mr. Miller-Jones served as the Vice President of Treasury
and Investor Relations of PolyGram N.V.
DOROTHY E. HANSBERRY has served as Vice President and General Counsel of PCI
since January 1998. Since May 1996, Ms. Hansberry has served as the President of
Hansberry Consultants, Inc. From July 1997 to January 1998, she worked as an
attorney at Dewey Ballantine Sp. z o.o., a Warsaw law firm. From May 1996 to
July 1997, Ms. Hansberry was an attorney at Beata Gessel and Partners, a Warsaw
law firm, and was of-counsel to Bondurant, Mixson & Elmore, an Atlanta, Georgia
law firm. From December 1991 to October 1996, she served as legal advisor to
Eastern European anti-monopoly offices. From March 1994
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to August 1995, Ms. Hansberry acted as resident legal advisor to the Polish
Anti-Monopoly Office. From October 1980 to May 1996, she worked as a senior
trial attorney in the Antitrust Division of the U.S. Department of Justice.
DAVID KEEFE has served as Chief Executive Officer and director of PCI since
January 1998. From December 1995 to December 1997, Mr. Keefe was Chief Executive
Officer of Kabelkom Hungary, a Hungarian cable company. From January 1994 to
December 1995, Mr. Keefe served as Cable Operations Director and a member of the
Board of Directors of Wharf Cable, a cable company in Hong Kong.
PRZEMYSLAW A. SZMYT has served as Vice President, General Counsel and
Secretary of @Entertainment since its inception, and as Vice President and
General Counsel of PCI from February 1997 until December 1997. Mr. Szmyt has
served as director of PCI since December 1997 and as a member of the Supervisory
Board of Twoj Styl since April 1998. From September 1995 to February 1997, Mr.
Szmyt was a 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 Soltysinski, Kawecki &
Szlezak, a law firm in Warsaw. From October 1994 to late 1996, Mr. Szmyt served
on the Management Board of TKP, a holding company of Canal+ Polska. Mr. Szmyt is
also a Board Member of United Way Poland and of Litewska Childrens' Hospital
Foundation.
DAVID WARNER has served as the Chief Operating Officer of @EL since April
1997. He was a Vice President of @Entertainment from its inception until March
1998. 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 to and a board member of the
Ravensbourne Communication College.
BOARD OF DIRECTORS
@Entertainment's Bylaws (the "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 eight. All of the current
members of the Board of Directors, except for Messrs. Chisholm and Chance and
Ms. Holland, were elected pursuant to the Stockholders' Agreement, which
automatically terminated upon the successful completion of the Initial Public
Equity Offering. Under the Stockholders' Agreement, the ECO Group (as
hereinafter defined) had the right to designate two directors and the Chase
Group (as hereinafter defined) had the right to designate the remaining three
directors, one of whom was to 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 consisted of ECO, any limited partner of
ECO to whom ECO permissibly transferred shares of stock of @Entertainment and
any Affiliate (as hereinafter defined). Pursuant to the Stockholders' Agreement,
the Chase Group consisted of PIHLP, Mr. Freedman, the CAC Trust 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 were made by David T. Chase. David T. Chase, Arnold L. Chase and Robert E.
Fowler, III were 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 were designated as
directors by the ECO Group. See "Certain Relationships and Related
Transactions--Stockholders' Agreement" and "Certain Relationships and Related
Transactions--Voting Agreement." Messrs. Chisholm and Chance and Ms. Holland
were appointed as directors, pursuant to the Bylaws, by the Board of Directors
in connection with the expansion of the Board of Directors from five to eight
members.
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@Entertainment's Certificate of Incorporation (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. The first class of directors consists of two directors (Messrs.
Swirski and A. Chase) whose terms shall expire in 2001; the second class
consists of three directors (Messrs. D. Chase and Lanphere and Ms. Holland)
whose terms shall expire in 1999; and the third class consists of three
directors (Messrs. Fowler, Chisholm and Chance), whose terms shall expire in
2000. 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
to be 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 defined in the Certificate) vote to
recommend to the stockholders the removal of a director with or without cause
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 elected Messrs. Chisholm and Chance
(the "Business Independent Directors") and Ms. Holland (the "Artistic
Independent Director") to serve as three 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 Board of Directors of @Entertainment currently maintains an Audit
Committee and a Compensation Committee.
The Audit Committee is comprised of Messrs. Chisholm and Chance. The Audit
Committee's function is to recommend to the Board of Directors the independent
public accountants to be employed by @Entertainment, to confer with the
independent public accountants concerning the scope of their audit, to review
the accountants' findings and recommendations and to review the adequacy of
@Entertainment's
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internal accounting controls. KPMG Polska Sp. z o.o. presently serves as the
independent public accountants of @Entertainment. The Audit Committee meets as
necessary, but at least once a year. The Audit Committee was formed in January
1998 and therefore did not meet in 1997.
The Compensation Committee is comprised of Messrs. Fowler, D. Chase,
Lanphere, Chisholm and Chance. The Compensation Committee's function is to
approve, and in some instances to recommend to the Board of Directors of
@Entertainment, compensation arrangements involving the executive officers and
certain other employees of the Company. The Compensation Committee meets as
necessary. The composition of the Compensation Committee was not finalized until
December 31, 1997, so it did not meet in 1997.
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. Each Business Independent Director receives $5,000 for
attendance at each of the five regular meetings of the Board of Directors, and
an additional $5,000 for attendance at any special meetings of the Board of
Directors. Each Artistic Independent Director receives $5,000 for attendance at
each of the five regular meetings of the Board of Directors.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding all
compensation awarded to, earned by or paid to the Company's Chief Executive
Officer, each of the other four most highly compensated executive officers of
the Company and a former executive officer who would have been one of the four
most highly compensated executive officers at the end of the fiscal year 1997
(collectively, the "Named Executive Officers") for services rendered in all
capacities to the Company for the last three fiscal years, to the extent that
those officers were in the employ of the Company. Columns relating to long-term
compensation have been omitted from the table as the Company did not have
capital stock-related award plans and there has been no compensation arising
from long-term incentive plans during the years reflected in the table.
<TABLE>
<CAPTION>
SECURITIES ALL OTHER
SALARY BONUS OTHER ANNUAL UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) COMPENSATION($) OPTIONS/SAR ($)
- ------------------------------- --------- ------------ ----------- ---------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Fowler, III ......... 1997 337,500 381,250 25,872(1) 1,268,000 --
Chief Executive Officer and 1996 66,000(2) 66,000(2) -- -- --
Director 1995 66,000(2) 66,000(2) -- -- --
Richard B. Steele(3)........... 1997 207,595 -- -- -- 156,000(4)
1996 356,000(2) 250,000(2) -- -- 5,000(5)
1995 356,000(2) -- -- -- 7,500(5)
John S. Frelas(10) 1997 155,746 350,000(6) 39,000(7) -- --
1996 46,153(8) -- 6,000(7) 241,000 --
1995 -- -- -- -- --
George Z. Makowski(11) 1997 156,000 175,000(6) 68,400(9) 385,000 --
1996 -- -- -- -- --
1995 -- -- -- -- --
David Warner .................. 1997 120,708 248,500(6) -- 131,000 --
Chief Operating Officer of 1996 -- -- -- -- --
@EL 1995 -- -- -- -- --
Przemyslaw Szmyt .............. 1997 146,667 70,000(6) -- 131,000 --
Vice President, General 1996 -- -- -- -- --
Counsel, Secretary 1995 -- -- -- -- --
</TABLE>
- ------------------------
(1) Represents amounts paid or reimbursed by the Company for personal travel
related expenses.
(2) 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.
(3) Mr. Steele was the President of PCI. He resigned on June 23, 1997.
(4) Represents amounts earned as deferred compensation.
(5) Represents portion of 401(k) plan paid pursuant to matching contribution.
(6) Represents one-time bonus paid upon completion of @Entertainment's Initial
Public Equity Offering.
(7) Represents amounts paid pursuant to housing allowance.
(8) Represents compensation for partial year of service beginning in September
1996.
(9) Represents amounts paid pursuant to housing and tuition allowances.
(10) Mr. Frelas was the Chief Financial Officer, Vice President and Treasurer of
@Entertainment and Chief Financial Officer and Treasurer of PCI. Mr. Frelas
resigned effective as of June 8, 1998.
(11) Mr. Makowski was the Chief Operating Officer of PCI. Mr. Makowski's
employment with PCI has been terminated, effective as of May 1998.
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<PAGE>
COMPENSATION PLANS
EMPLOYMENT AGREEMENTS
@Entertainment has employment agreements with each of Messrs. Fowler, Szmyt,
Warner and Miller-Jones. PCI has employment agreements with each of Mr. Keefe
and Ms. Hansberry. @Entertainment has entered into consultancy arrangements with
Messrs. Chisholm and Chance and Ms. Holland.
Mr. Fowler entered into a three-year employment agreement with PCI effective
at January 1, 1997. The employment agreement was assigned to @Entertainment in
June 1997 in connection with the Reorganization, as defined herein. Pursuant to
such agreement, Mr. Fowler serves as the Chief Executive Officer of
@Entertainment. Mr. Fowler receives a base annual salary of $325,000, plus a
travel allowance of approximately $30,000 per annum and an unspecified annual
incentive bonus. 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's written notice (with an obligation to pay
Mr. Fowler an additional two months' base salary). In addition, @Entertainment
may terminate the agreement immediately without further obligation to Mr. Fowler
for cause (as defined in the employment agreement).
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 and was amended effective January 1, 1998. Pursuant to such
agreement, Mr. Szmyt serves as Vice President, General Counsel and Secretary of
@Entertainment. Pursuant to an employment agreement with Wizja TV Sp. z o.o. and
a services agreement with PCI, Mr. Szmyt receives annual remuneration totaling
$180,000. He is eligible to receive an annual performance-based bonus of $40,000
per year. 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. In addition, @Entertainment may
terminate the contract without further obligation for cause (as defined in the
agreement). Mr. Szmyt's employment agreement with Wizja TV Sp. z o.o. may be
terminated by either party upon one month's written notice.
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 and was amended effective January 1, 1998.
Pursuant to such agreement, Mr. Warner serves as Chief Operating Officer of @EL.
Mr. Warner receives an annual salary of L115,000 (approximately $193,200, based
on the exchange rate of L1.00 =$1.68 at March 31, 1998), and receives an annual
performance-based bonus of up to L45,000 (approximately $75,600 based on the
exchange rate of L1.00 = $1.68 at March 31, 1998). Mr. Warner and @Entertainment
may terminate the contract at any time with six months' written notice. In
addition, @Entertainment may terminate the contract without further obligation
for cause (as defined in the agreement).
Mr. Miller-Jones entered into a three-year employment agreement with
@Entertainment effective at June 8, 1998. Pursuant to such agreement, Mr.
Miller-Jones serves as the Chief Financial Officer of @Entertainment and
receives a base annual remuneration of L122,700 (approximately $200,000 based on
the exchange rate of L1.00=$1.63 at June 8, 1998), and an allowance of L30,000
(approximately $48,900 based on the exchange rate of L1.00=$1.63 of June 8,
1998) for the purchase of an automobile. Mr. Miller-Jones is also eligible to
receive an annual performance based bonus during his first year of up to L30,500
(approximately $50,000, based on the exchange rate of L1.00=$1.63 at June 8,
1998). Of such amount, Mr. Miller-Jones is guaranteed to receive at least
L18,300 (approximately $30,000, based on the exchange
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<PAGE>
rate of L1.00=$1.63 at June 8, 1998). In subsequent years, Mr. Miller-Jones will
be eligible to receive a discretionary performance bonus, the amount of which
shall be determined by the Board of Directors of the Company.
Mr. Keefe entered into a two-year employment agreement with PCI effective at
January 1, 1998. Pursuant to such agreement, Mr. Keefe serves as the Chief
Executive Officer of PCI. Mr. Keefe receives a base annual salary of
approximately $220,000, a monthly allowance for additional housing and cost of
living expenses of $5,000, an allowance for relocation expenses of up to
$20,000, and reimbursement of educational and tax planning expenses of up to an
aggregate amount of $23,000 per year. Mr. Keefe also receives a guaranteed bonus
of $100,000 in the first year of his employment and unspecified incentive
bonuses thereafter. He received an additional bonus of $200,000 upon the signing
of the employment agreement. Mr. Keefe may terminate the employment agreement at
any time upon three months' written notice, and PCI may terminate the agreement
at any time upon one month's written notice (with an obligation to pay Mr. Keefe
an additional five months' salary). In addition, PCI may terminate the agreement
immediately without further obligation to Mr. Keefe for cause (as defined in the
employment agreement). Mr. Keefe has been granted options to purchase up to
250,000 shares of Common Stock at a price of $12 per share, subject to the terms
and conditions of a stock option agreement with @Entertainment. Options to
purchase 31,250 shares of Common Stock shall vest at the end of each fiscal
quarter on March 31, June 30, September 30 and December 31 of 1998 and 1999,
provided that the options shall vest in full on the date of a change in control
(as defined in the employment agreement) in @Entertainment or PCI.
Ms. Hansberry entered into a two-year employment agreement with PCI
effective at January 1, 1998. Pursuant to such agreement, Ms. Hansberry serves
as Vice President and General Counsel of PCI and receives an annual remuneration
totaling $150,000. She is eligible to receive annual performance-based bonuses
of up to $40,000 per year. Ms. Hansberry's initial year bonus of $40,000 is
guaranteed. Ms. Hansberry or PCI may terminate the agreement at any time upon
six months' written notice. In addition, PCI may terminate the agreement without
further obligation to Ms. Hansberry for cause (as defined in the agreement).
The Company has entered into a two-year consultancy arrangement with Samuel
Chisholm and David Chance (each individually a "Consultant"), pursuant to which
the Company will pay to a Consultant a fee of $10,000 per consultancy day, which
shall be a single day of at least seven hours during which a Consultant provides
consulting services to the Company ("Consultancy Day"), based on a minimum, on
average over each 12 month period, of a total of 4 Consultancy Days per month,
and the Company will pay an additional fee of $10,000 to a Consultant for any
additional days in any month on which a Consultant provides consulting services
to the Company. The consultancy agreement is not subject to cancellation by
either party except as a result of a breach of the consultancy agreement.
The Company has entered into a two-year consultancy arrangement with
Agnieszka Holland, pursuant to which the Company will pay to Ms. Holland a fee
of $25,000 per year, in 12 equal prorated amounts, for artistic consultancy
services.
1997 STOCK OPTION PLAN
@Entertainment's 1997 Stock Option Plan, as amended (the "1997 Plan") was
adopted on May 22, 1997 and approved by a majority of the stockholders. The 1997
Plan provides for the grant to employees of the Company (including officers,
employee directors, and non-employee directors) of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), and for the grant of qualified stock options to employees
and consultants of the Company (collectively, the "Options"). The 1997 Plan is
currently administered by the Board of Directors 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. The Board of
Directors may also appoint a Stock
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<PAGE>
Option Committee to perform such functions in the future. Currently,
approximately 11 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, Messrs. Szmyt and
Warner, whose option agreements became subject to the 1997 Plan pursuant to a
resolution of the Board of Directors of @Entertainment, and Messrs. Chisholm,
Chance, Keefe and Miller-Jones) participate in the 1997 Plan.
In addition, the Board of Directors has the authority to interpret the 1997
Plan and to prescribe, amend and rescind rules and regulations relating to the
1997 Plan. The Board of Directors' interpretation of the 1997 Plan and
determinations pursuant to the 1997 Plan are 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 4,436,000 shares,
subject to adjustment in accordance with the terms of the 1997 Plan. At June 8,
1998 options for 3,924,000 shares had been granted and 512,000 shares remained
available for future grants (subject to stockholder approval). 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 options granted under the 1997 Plan may not exceed ten
years. Options become exercisable at such times as determined by the Board of
Directors 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 Board of Directors, 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 outstanding Options 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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<PAGE>
The following table lists all grants of Options under the 1997 Plan to the
Named Executive Officers during 1997 and contains certain information about
potential value of these Options based upon certain assumptions as to the
appreciation of the Common Stock over the life of the Options.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL
SECURITIES OPTIONS/SARS EXERCISE
UNDERLYING GRANTED TO OR GRANT DATE
OPTIONS/SARS EMPLOYEES IN BASE PRICE EXPIRATION PRESENT VALUE
NAME GRANTED(#) FISCAL YEAR (%) ($) DATE ($)(1)
- ------------------------------------------- ------------- --------------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Robert E. Fowler, III...................... 1,286,000 55.12% 3.707 1/1/07 16,576,540
Richard B. Steele.......................... -- -- -- -- --
John S. Frelas............................. -- -- -- -- --
George Z. Makowski......................... 385,000 16.50% 3.70808 1/1/07 2,964,500
David Warner............................... 131,000 5.62% 15.24 6/23/07 652,380
Przemyslaw Szmyt........................... 131,000 5.62% 15.24 6/23/07 652,380
</TABLE>
- ------------------------
(1) Calculated based upon a variation of the Black-Scholes option pricing model
in which the following assumptions were used: the expected volatility of the
Common Stock was 39.0%; the risk-free rate of return was 6.25%, 6.25%,
6.31%, and 6.31% for Messrs. Fowler, Makowski, Warner and Szmyt,
respectively; the dividend yield was 0.0%; and the expected time of exercise
was four (4) years from the month of the grant.
The following table provides certain information with respect to the number
of shares of Common Stock represented by outstanding Options held by the Named
Executive Officers at December 31, 1997. Also reported are the values for
"in-the-money" options which represent the position spread between the exercise
price of any such existing stock options and the price of the Common Stock at
December 31, 1997.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS/SARS OPTIONS/SARS
SHARES AT FISCAL AT FISCAL
ACQUIRED ON VALUE YEAR-END (#) YEAR-END ($)
NAME EXERCISE (#) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- --------------------------------------- ----------------- ------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Robert E. Fowler, III.................. -- -- 1,286,000/0 9,539,548/--
Richard B. Steele...................... -- -- -- --
John S. Frelas......................... -- -- 48,000/193,000 430,398/1,762,727
George Z. Makowski..................... -- -- 385,000/-- 2,855,514/--
David Warner........................... -- -- --/131,000 --
Przemyslaw Szmyt....................... -- -- --/131,000 --
</TABLE>
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of @Entertainment's capital stock at September 28, 1998 and 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 Exchange Act.
At September 28, 1998, the Principal Stockholders beneficially owned in the
aggregate approximately 43.8(1)% of the outstanding Common Stock. See "Risk
Factors--Control by Existing Stockholders."
<TABLE>
<CAPTION>
PERCENTAGE OF
SHARES OF COMMON STOCK
NAME OF BENEFICIAL OWNER COMMON STOCK OUTSTANDING(1)
- --------------------------------------------------------------------------------- -------------- ---------------
<S> <C> <C>
FIVE PERCENT STOCKHOLDERS:
Arnold L. Chase(2)
One Commercial Plaza
Hartford, Connecticut 06103.................................................... 10,303,000 27.8%
Chase Polish Enterprises, Inc(2)
One Commercial Plaza
Hartford, Connecticut 06103.................................................... 10,303,000 27.8%
Cheryl A. Chase(2)(3)
One Commercial Plaza
Hartford, Connecticut 06103.................................................... 11,036,000 29.7%
Polish Investments Holding L.P.(2)
One Commercial Plaza
Hartford, Connecticut 06103.................................................... 10,303,000 27.8%
Advent International Group(4)
75 State Street
Boston, MA 02109............................................................... 5,216,431 14.1%
Goldman, Sachs & Co.(16)
85 Broad Street
New York, NY 10004............................................................. 2,811,706 7.6%
The Goldman Sachs Group, L.P.(16)
85 Broad Street
New York, NY 10004............................................................. 2,811,706 7.6%
DIRECTORS AND EXECUTIVE OFFICERS:
David T. Chase................................................................... -- --
Robert E. Fowler, III(5)(6)...................................................... 1,286,000 3.5%
Arnold L. Chase(7)............................................................... 10,303,000 27.8%
Scott A. Lanphere(8)............................................................. -- --
Jerzy Z. Swirski(9).............................................................. -- --
Samuel Chisholm(10).............................................................. -- --
David Chance(11)................................................................. -- --
Agnieszka Holland................................................................ -- --
Przemyslaw Szmyt(6)(13).......................................................... 28,200 *
David Warner(6)(14).............................................................. 26,200 *
Donald Miller-Jones(12).......................................................... -- --
ALL DIRECTORS AND OFFICERS AS A GROUP (14 PERSONS(15)):.......................... 13,253,400 35.7%
</TABLE>
- ------------------------
* less than 1%.
(1) Based on a total number of outstanding shares of 37,102,164, which includes
33,310,000 shares outstanding at June 8, 1998, 1,824,514 shares subject to
the Warrants which are exercisable on the date hereof, and 1,967,650 shares
subject to options which are exercisable within sixty days of the date
hereof.
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<PAGE>
(2) Pursuant to Schedules 13G filed on February 13, 1998 by PIHLP, Chase Polish
Enterprises, Inc. ("CPEI"), Arnold L. Chase and Cheryl A. Chase. This amount
includes 10,303,000 shares of Common Stock owned directly by PIHLP. As a
result of their control over the management of PIHLP, Arnold L. Chase, CPEI
and Cheryl A. Chase may be deemed to beneficially own the 10,303,000 shares
of Common Stock owned by PIHLP. CPEI is the sole general partner of PIHLP.
As general partner, CPEI manages PIHLP, which includes directing the voting
and disposition of shares of Common Stock owned by PIHLP. Arnold L. Chase
and Cheryl A. Chase each own 50% of the outstanding capital stock of CPEI
and are its sole directors and executive officers.
(3) Pursuant to the Schedule 13G filed on February 13, 1998 by Cheryl A. Chase.
This amount includes 733,000 shares of Common Stock owned by the Cheryl Anne
Chase Marital Trust, a trust of which Cheryl A. Chase is a trustee. Cheryl
A. Chase may be deemed to be a beneficial owner, as defined by Rule 13d-3(a)
under the Exchange Act, of the shares of Common Stock owned by the Cheryl
Anne Chase Marital Trust.
(4) Includes the ownership by the following venture capital funds managed by
Advent International Corporation; 206,019 shares owned by Advent
Euro-Italian Direct Investment Program Limited Partnership, 838,856 shares
owned by Advent Private Equity Fund-Central Europe Limited Partnership,
1,447,024 shares owned by Advent Global GECC Limited Partnership, 2,110,420
shares owned by Global Private Equity II Limited Partnership, 239,522 shares
owned by Global Private Equity II-Europe Limited Partnership, 324,308 shares
owned by Global Private Equity II-PGGM Limited Partnership, and 50,282
shares owned by Advent Partners Limited Partnership. In its capacity as
manager of these funds, Advent International Corporation exercises sole
voting and investment power with respect to all shares held by these funds.
(5) Mr. Fowler has been granted options 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. All of Mr. Fowler's options are exercisable.
(6) Messrs. Fowler, Frelas, Makowski, Szmyt and Warner, in connection with the
Initial Public Equity Offering, entered into an agreement with Goldman,
Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated that
during the two year period beginning July 30, 1997, such individuals 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. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
(7) Includes 10,303,000 shares of Common Stock owned by PIHLP which may be
deemed to be beneficially owned by Arnold Chase.
(8) Mr. Lanphere disclaims beneficial ownership of the shares held by Advent.
(9) Mr. Swirski disclaims beneficial ownership of the shares held by Advent.
(10) Mr. Chisholm has been granted options to purchase 500,000 shares of Common
Stock, vesting ratably over a two year period, at an exercise price of
$12.00 per share. None of Mr. Chisholm's options are exercisable within 60
days of the date hereof.
(11) Mr. Chance has been granted options to purchase 500,000 shares of Common
Stock, vesting ratably over a two year period, at an exercise price of
$12.00 per share. None of Mr. Chance's options are exercisable within 60
days of the date hereof.
(12) Mr. Miller-Jones has been granted options to purchase 200,000 shares of
Common Stock at a price of $14.30 per share, subject to the terms and
conditions of a stock option agreement, which options vest ratably over a
three year period. None of Mr. Miller-Jones' options are exercisable within
60 days of the date hereof.
(13) Mr. Szmyt has been granted options 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. Additionally, on January 26, 1998, Mr. Szmyt was granted
options to purchase 75,000 shares of Common Stock at a price of $12.2375 per
share, which options vest ratably over a three year period. Mr. Szmyt's
options with respect to 26,200 shares have vested and are immediately
exercisable as of the date hereof.
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<PAGE>
(14) Mr. Warner has been granted options 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. Additionally, on January 26, 1998, Mr. Warner was granted options to
purchase 75,000 shares of Common Stock at a price of $12.2375 per share,
which options vest ratably over a three year period. Mr. Warner's options
with respect to 26,200 shares have vested and are immediately exercisable as
of the date hereof.
(15) Includes 1,129,000 shares held by Steele LLC and beneficially owned by
Richard B. Steele, who resigned as President of PCI on June 23, 1997. Also
includes 96,000 Shares beneficially owned by John S. Frelas. Mr. Frelas
resigned as Chief Financial Officer, Vice President and Treasurer of
@Entertainment effective as of June 8, 1998. Also includes 385,000 shares
beneficially owned by George Z. Makowski. Mr. Makowski was the Chief
Operating Officer of PCI. Mr. Makowski's employment has been terminated,
effective as of May 1998.
(16) Pursuant to a Schedule 13G jointly filed on February 13, 1998 by Goldman
Sachs & Co. and The Goldman Sachs Group, L.P., Goldman Sachs & Co. and The
Goldman Sachs Group, L.P. may be deemed to share the power to direct the
vote and disposition of 2,630,706 shares of Common Stock, beneficially owned
by Goldman Sachs & Co. and The Goldman Sachs Group, L.P.
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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.
THE REORGANIZATION
In June 1997, the Company effected a reorganization (the "Reorganization")
to facilitate the development of its D-DTH business and the expansion of its
cable television and programming businesses. All the holders of shares of PCI's
common stock and @Entertainment entered into a Contribution Agreement dated at
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 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. All of these transfers (the "Share Exchange") were designed to
qualify as a tax-free exchange under section 351 of 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 2,500 outstanding shares of Series B Preferred
Stock automatically converted into 4,862,000 shares of Common Stock of
@Entertainment upon the closing of the Initial Public Equity Offering (the
"Automatic Conversion").
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").
The Chase Entity, ECO and @Entertainment entered into the Purchase Agreement.
Pursuant to the Purchase Agreement, @Entertainment purchased 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 Initial Public Equity Offering (the "Cash Purchases"). 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
equaled the aggregate redemption price of such shares as set forth in PCI's
certificate of incorporation. The Cash Purchases were funded with a portion of
the net proceeds of the Initial Public Equity Offering.
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 by PCI (the "Assignment"). 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 "Compensation Plans-- Employment Agreements."
In June 1997, @Entertainment subscribed for all of the outstanding stock of
@EL, a corporation organized under the laws of England and Wales (the "@EL
Incorporation"). @EL is responsible for the Company's D-DTH business.
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 100% of the outstanding shares of voting
stock of PCI and @EL. After giving effect to the Reorganization and after
completion of the Initial Public Equity Offering, the Chase Family and ECO
beneficially owned approximately 31.3% and 27.0%, respectively, of the
outstanding shares of Common Stock of @Entertainment. ECO is an affiliate of
Advent, and in August 1998 it transferred to Advent certain shares of Common
Stock of @Entertainment. At September 28, 1998 PIHLP, CAC Trust and Advent owned
in the aggregate
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approximately 48.8% of the outstanding common stock of @Entertainment. See "Risk
Factors--Control by Existing Stockholders" and "Principal Stockholders."
STOCKHOLDERS' AGREEMENT
In connection with the Reorganization, at June 22, 1997, a stockholders'
agreement (the "Stockholders' Agreement") was entered into by and among ECO,
PIHLP, Roger Freedman, Steele LLC, The AESOP Fund L.P. ("AESOP"), CAC Trust and
@Entertainment in order to govern the conduct of the business of @Entertainment
and relations among its stockholders. ECO, PIHLP, Mr. Freedman, Steele LLC,
AESOP and CAC Trust were the holders of all of the outstanding shares of capital
stock of @Entertainment prior to the Initial Public Equity Offering. Parties to
the Stockholders' Agreement, other than @Entertainment, are hereinafter referred
to as the "Stockholders."
@Entertainment currently has an eight-member Board of Directors. Pursuant to
the Stockholders' Agreement, the ECO Group had the right to designate two
directors, and the Chase Group had the right to designate two directors in
addition to a Chief Executive Officer acceptable to the ECO Group, who was also
a member of the Board of Directors. The ECO Group consisted of ECO. The Chase
Group consisted of PIHLP, Mr. Freedman, the Cheryl Anne Chase Marital Trust and
Steele LLC. The ECO Group chose Scott Lanphere and Jerzy Swirski as its
designated directors of @Entertainment. Pursuant to the Stockholders' Agreement
and a voting agreement, the Chase Group chose David T. Chase, @Entertainment's
Chairman, as the Chase Group Representative, and thereafter chose David Chase
and Arnold Chase as its designated directors of @Entertainment, and selected
Robert Fowler as Chief Executive Officer and director of @Entertainment, which
selection was accepted by the ECO Group. Both the Stockholders' Agreement and
the voting agreement terminated at the successful completion of the Initial
Public Equity Offering.
@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 CAC Trust (collectively,
the "Rightsholders") on June 22, 1997. ECO, PIHLP, Mr. Freedman, Steele LLC,
AESOP and CAC Trust are the holders of all of the outstanding shares of capital
stock of @Entertainment prior to the Initial Public Equity Offering. Pursuant to
the Stockholder Registration Rights Agreement, PIHLP and Advent (as a permitted
assignee of 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 Advent
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. In
addition, if @Entertainment proposes to register any of its securities under the
Securities 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 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 Advent.
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 46.8% of the
issued and outstanding capital stock of PTK Operator, as well as approximately
98% of the issued and outstanding capital stock of PTK S.A.
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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,
though there can be no assurance that an agreement can be reached with any of
the Minority Stockholders on satisfactory terms.
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 Sp. z o.o. ("Poltelkab"), Telkat Sp.
z o.o. ("Telkat"), PTK-Szczecin Sp. z o.o. ("PTK-Szczecin"), PTK-Lublin S.A.
("PTK-Lublin"), ETV Sp. z o.o. ("ETV"), PTK S.A., PTK-Operator, 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
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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, Telkat, PTK-Szczecin, PTK-Lublin, ETV, PTK S.A., PTK-Operator,
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 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 $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-Operator, PTK-Krakow, PTK-Szczecin, PTK-Lublin, ETV,
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 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
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(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.
CONSULTING ARRANGEMENTS
The Company has entered into a two-year consultancy arrangement with Samuel
Chisholm and David Chance (each individually a "Consultant"), pursuant to which
the Company will pay to a Consultant a fee of $10,000 per consultancy day, based
on a minimum, on average over each 12 month period, of a total of 4 Consultancy
Days per month, and the Company will pay an additional fee of $10,000 to a
Consultant for any additional days in any month on which a Consultant provides
consulting services to the Company. The consultancy agreement is not subject to
cancellation by either party except as a result of a breach of the consultancy
agreement.
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DESCRIPTION OF INDEBTEDNESS
UNITS OFFERING
On July 14, 1998, 252,000 Units (the "Units") consisting of $252,000,000
aggregate principal amount at maturity of 14 1/2% Senior Discount Notes due 2008
(the "Old Notes") of the Issuer and 1,008,000 Warrants to purchase an aggregate
of 1,824,514 shares of Common Stock were sold to the Initial Purchasers pursuant
to a purchase agreement. The Initial Purchasers subsequently completed a private
placement of the Units. In September 1998 substantially all of the outstanding
Old Notes were exchanged for an equal aggregate principal amount at maturity of
publicly registered 14 1/2% Series B Senior Discount Notes due 2008 (the "New
Notes" and collectively with the Old Notes, the "Notes").
The Notes were issued at a discount to their aggregate principal amount at
maturity. The yield to maturity of the Notes is 14 1/2% (computed on a
semiannual bond equivalent basis), calculated from July 14, 1998. Cash interest
will not accrue prior to July 15, 1998. Thereafter, cash interest on the Notes
will accrue at a rate of 14 1/2% per annum and will be payable semiannually in
arrears on January 15 and July 15 of each year, commencing January 15, 2004. The
Notes will be redeemable at the option of the Issuer, in whole or in part, on or
after July 15, 2003 at the redemption prices set forth in the Indenture, plus
accrued and unpaid interest thereon to the date of redemption. In addition, on
or prior to July 15, 2001, the Issuer may redeem up to 25% of the originally
issued aggregate principal amount at maturity of the Notes at a redemption price
equal to 114.5% of the Accreted Value (as defined in the Indenture) thereof at
the redemption date, with the net cash proceeds of one or more Public Equity
Offerings (as defined in the Indenture); provided, however, that not less than
75% of the originally issued aggregate principal amount at maturity of the Notes
remain outstanding immediately after giving effect to such redemption. Upon the
occurrence of a Change in Control (as defined in the Indenture), each holder of
Notes will have the right to require the Issuer to purchase all or a portion of
such holder's Notes at a purchase price in cash equal to 101% of the Accreted
Value of the Notes plus accrued and unpaid interest, if any, to the date of
purchase. The Issuer will be required in certain circumstances to make offers to
repurchase the Notes, on a pro rata basis, at 100% of the Accreted Value if the
Notes, plus accrued interest, if any, to the date of repurchase, with the net
cash proceeds of certain sales or dispositions of assets in one transaction or a
series of related transactions.
Pursuant to the Indenture, the Company is subject to certain restrictions
and covenants, including, without limitation, covenants with respect to the
following matters: (i) limitation on additional indebtedness; (ii) limitation on
restricted payments; (iii) limitation on issuance and sales of capital stock of
restricted subsidiaries; (iv) limitation on transactions with affiliates; (v)
limitation on liens; (vi) limitation on guarantees of indebtedness by restricted
subsidiaries; (vii) purchase of Notes upon a change of control; (viii)
limitation on sale of assets; (ix) limitation on dividend and other payment
restrictions affecting restricted subsidiaries; (x) limitation on investments in
unrestricted subsidiaries; (xi) limitation on lines of business; and (xii)
provision of financial statements and reports.
PCI NOTES OFFERING
On October 31, 1996, $130 million aggregate principal amount of PCI Notes
were sold by PCI to an initial purchaser pursuant to a purchase agreement. The
initial purchaser subsequently completed a private placement of the PCI Notes.
In June 1997 substantially all of the outstanding PCI Notes were exchanged for
an equal aggregate principal amount of publicly-registered PCI Notes. The PCI
Notes were issued pursuant to the PCI Indenture.
The PCI Notes have an interest rate of 9 7/8% and have a maturity date at
November 1, 2003. Interest is paid on the PCI Notes on May 1 and November 1 of
each year. Prior to November 1, 1999, PCI may redeem up to a maximum of 33% of
the initially outstanding aggregate principal amount of the PCI Notes with some
or all of the net proceeds of one or more public equity offerings at a
redemption price equal to 109.875% of the principal amount thereof, plus accrued
and unpaid interest, if any to the date of
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redemption; provided that immediately after giving effect to such redemption, at
least $87 million aggregate principal amount of the PCI Notes remains
outstanding. Upon the occurrence of a change in control (as defined in the PCI
Indenture), each holder of the PCI Notes shall have the right to require that
PCI purchase such holder's PCI Notes, in whole or in part, at a purchase price
in cash in an amount equal to 101% of the principal amount of such PCI Notes,
plus accrued and unpaid interest, if any, to the date of purchase. PCI may be
required to use the net cash proceeds of certain asset sales to make an offer to
purchase all or a portion of the outstanding PCI Notes at a price of 100% of the
principal amount of such Notes, plus accrued and unpaid interest, if any, to
date of redemption. PCI has pledged to State Street Bank, the trustee for the
PCI Notes, for the benefit of the holders of the PCI Notes intercompany notes
issued by PCBV, of a minimum aggregate principal amount together with cash and
cash equivalents of PCI, equal to at least 110% of the outstanding principal
amount of the PCI Notes and that, in the aggregate, provide cash collateral or
bear interest and provide for principal repayments, as the case may be, in
amounts sufficient to pay interest on the PCI Notes.
Pursuant to the PCI 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 PCI 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) consolidations, mergers and sale of
assets.
CREDIT AGREEMENTS WITH THE AMERBANK IN POLAND, S.A.
PTK-Warsaw has entered into two agreements with the AmerBank which
established a zloty-denominated revolving loan facility of up to $897,000 (the
"1995 Facility"), and a U.S. Dollar denominated $1.5 million loan (the "1995
Loan"). The principal outstanding on the 1995 Facility and 1995 Loan was repaid
during 1996. In addition, in August 1996, PCI entered into a credit agreement
establishing a revolving loan facility (the "1996 Facility") which allowed PCI
to borrow up to a maximum principal amount of $6.5 million in multiple
disbursements on or before December 31, 1998. PCI repaid the balance of 1996
Facility with a portion of the proceeds of the offering of the PCI Notes. All
amounts under the 1996 Facility were fully drawn in June 1998.
Amounts outstanding under the 1995 Facility bear interest at the Warsaw
Interbank Offering Rate plus 3.5%. The 1995 Loan bears interest at the
three-month London Interbank Offering Rate ("LIBOR") plus 3.0%. There is a 1%
prepayment penalty on amounts outstanding under the 1995 Loan.
In addition to an arrangement fee of approximately $50,000 and an annual
charge of 0.25% of the undrawn funds, @Entertainment is required to pay interest
on any outstanding principal amount under the 1996 Facility at a rate equal to
the three-month LIBOR on the date of disbursement plus 3%. The outstanding
principal amount under the 1996 Facility and accrued interest thereon amount is
due in full on August 20, 1999. Acceleration of repayment of amounts outstanding
under the 1996 Facility may be triggered by certain conditions of default, which
include customary terms associated with revolving loan facilities. In the event
of a default, @Entertainment shall pay an additional penalty of 15% per annum on
the outstanding principal amount under the 1996 Facility.
Amounts outstanding under the 1996 Facility are secured by promissory notes
en blanc from PTK-Warsaw, PTK-Krakow, PTK-Lublin, and pledges of up to all of
the shares of PTK-Warsaw and PTK-Krakow owned by PCBV and all of the shares of
PTK-Lublin owned by Poltelkab.
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CREDIT AGREEMENT WITH POLSKI BANK ROZWOJU
One of the Company's subsidiaries, Szczecinska Telewizja Kablowa Sp. z o.o.
("SzTK"), has entered into two agreements with Polski Bank Rozwoju S.A. (the
"Bank") which established a zloty-denominated loan facility in the amount of PLN
500,000 (approximately $145,000 based on an exchange rate of PLN 1.00 = $.29, at
May 31, 1998) (the "Polish Zloty Facility") and a Deutsche-Mark denominated
facility in the amount of DM 3,948,615 (approximately $2,132,252 based on an
exchange rate of DM 1.00 = $.56 at May 31, 1998) (the "Foreign Currency
Facility", and together with the Polish Zloty Facility, the "Loan Facilities").
The Loan Facilities are to be used for the development of two cable television
networks operated by SzTK. The Loan Facilities are secured by a mortgage on real
estate owned by two housing cooperatives, their bank accounts and insurance
policies. The cooperatives' mortgage is secured by a pledge of SzTK shares owned
by PTK-Szczecin Sp. z o.o. The Loan Facilities must be repaid by December 27,
2002.
The Polish Zloty Facility bears interest at the Warsaw Interbank Offering
Rate for 3 months deposits plus 3%. The Foreign Currency Facility currently
bears interest at the London Interbank Rate for 1 month deposits plus 2.5%. The
total amount payable with respect to the Polish Zloty Facility at May 31, 1998
was PLN 261,000 (approximately $74,568 based on an exchange rate of PLN 1.00 =
$.29 at May 31, 1998). The total amount payable with respect to the Foreign
Currency Facility at May 31, 1998 was DM 3,554,000 (approximately $1,993,439
based on an exchange rate of DM 1.00 = $.56 at May 31, 1998).
INTER-COMPANY INDEBTEDNESS
@Entertainment has entered into a loan agreement pursuant to which at March
31, 1998, it had loaned approximately $8.3 million to @EL. The loan agreement
between @Entertainment and @EL, a credit facility which calls for the borrower
to pay 10% interest, payable quarterly, contains standard events of default for
related-party indebtedness.
PCI has entered into a series of grid notes pursuant to which, at March 31,
1998 it had loaned approximately $137.5 million to PCBV, $7.9 million to
PTK-Szczecin and $12.1 million to Poltelkab (the "Grid Notes"). The Grid Notes
between PCI and PCBV are revolving credit facilities which call for the borrower
to pay 10% interest, payable monthly, on the outstanding principal amount and
contain standard events of default for related-party indebtedness. All of the
Grid Notes between PCI and PCBV mature before December 31, 1999. The Grid Notes
between PCI and PTK-Szczecin, the Grid Note between PCI and Poltelkab are
revolving credit facilities on which 10% interest compounds monthly and which
mature on June 30, 1999. The Grid Notes between PCI and PCBV have been pledged
for the benefit of holders of the PCI Notes.
PCBV, in turn, entered into a series of 10% grid notes pursuant to which, at
March 31, 1998, PCBV had loaned approximately $108.3 million to PTK S.A.,
PTK-Warsaw, PTK-Operator and PTK-Krakow (the "PCBV Grid Notes"). The PCBV Grid
Notes are revolving credit facilities which call for the borrower to pay
interest of 10% per annum, payable monthly, on the outstanding principal amount
and contain standard events of default for related-party indebtedness. One of
these PCBV Grid Notes will become due on June 10, 1999, the other is due on
demand on June 30, 1999. The PCBV Grid Notes between PCBV and PTK-Operator,
PTK-Warsaw and PTK-Krakow all become due on June 30, 1999.
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DESCRIPTION OF THE WARRANTS
GENERAL
The Warrants were issued under a Warrant Agreement dated as of July 14, 1998
(the "Warrant Agreement") between @Entertainment, as issuer, and Bankers Trust
Company, as Warrant Agent (the "Warrant Agent"). The following summary of
certain provisions of the Warrants and the Warrant Agreement does not purport to
be complete and is subject to, and qualified in its entirety by reference to,
all the provisions of the Warrants and the Warrant Agreement, including the
definitions of certain terms contained therein. Copies of the Warrant Agreement
are available upon request from the Issuer or the Warrant Agent. Capitalized
terms used herein but not defined have the meanings attributed to them in the
Warrants or the Warrant Agreement.
EXERCISE
Each Warrant entitles the registered holder thereof, subject to and upon
compliance with the provisions thereof and of the Warrant Agreement, at such
holder's option, during the period beginning on the earlier of (i) the date
hereof or (ii) November 16, 1998 (the "Exercise Date") and ending at 5:00 P.M.,
New York City time, on July 15, 2008 (the "Expiration Date") to purchase from
the Issuer 1.81 shares of Common Stock at an exercise price (the "Exercise
Price") of $13.20 per share of Common Stock issuable upon exercise of the
Warrants (the "Warrant Shares")(both the Exercise Price and securities issuable
upon exercise of the Warrants being subject to adjustments as provided in the
Warrant Agreement). Holders of Warrants, however, will be able to exercise their
Warrants only if the Warrant Shelf Registration Statement relating to the Common
Stock underlying the Warrants is effective or the exercise of such Warrants is
exempt from the registration requirements of the Securities Act, and such
securities are qualified for sale or exempt from qualification under the
applicable securities laws of the states or other jurisdictions in which such
holders reside. The Warrants may also be exercised pursuant to an effective
Piggy-Back Registration Statement (as defined below). Unless earlier exercised,
the Warrants will expire on July 15, 2008 (the "Expiration Date"). The Issuer
will give notice of expiration not less than 90 nor more than 120 days prior to
the Expiration Date to the registered holders of the then outstanding Warrants.
If the Issuer fails to give such notice, the Warrants will nevertheless expire
and become void on the Expiration Date.
Warrants may be exercised by surrendering the Warrant Certificate evidencing
such Warrants with the form of election to purchase shares of Common Stock set
forth on the reverse side thereof duly completed and executed by the holder
thereof and by paying in full the Exercise Price for such Warrants at the office
or agency in The City of New York maintained for such purposes (which will
initially be the corporate trust office of the Warrant Agent located at Four
Albany Street, New York, New York 10006).
Each Warrant may only be exercised in whole and the Exercise Price may be
paid in full, at the option of the holder (i) in cash or by certified or
official bank check, (ii) by a Cashless Exercise or (iii) by any combination of
(i) and (ii). For purposes of the Warrant Agreement, a "Cashless Exercise" will
mean an exercise of a Warrant in accordance with the immediately following two
sentences. To effect a Cashless Exercise, the holder may exercise a Warrant or
Warrants without payment of the Exercise Price in cash by surrendering such
Warrant or Warrants (represented by one or more Warrant Certificates) and, in
exchange therefor, receiving such number of shares of Common Stock equal to the
product of (1) the number of shares of Common Stock for which such Warrant or
Warrants are exercisable and which would be issuable in the event of an exercise
with payment in cash of the Exercise Price and (2) the Cashless Exercise Ratio
(as defined below). For purposes of the Warrant Agreement, the "Cashless
Exercise Ratio" will equal a fraction, the numerator of which is the excess of
the Current Market Value (calculated as set forth in the Warrant Agreement) per
share of Common Stock on the date of exercise over the Exercise Price per share
of Common Stock as of the date of exercise, and the denominator of which is the
Current Market Value per share of the Common Stock on the date of exercise. Upon
surrender of a Warrant Certificate representing more than one Warrant in
connection with a holder's option to elect a Cashless Exercise, such holder must
specify the number of Warrants for which such Warrant Certificate is to be
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exercised (without giving effect to such Cashless Exercise). All provisions of
the Warrant Agreement shall be applicable with respect to a Cashless Exercise of
a Warrant Certificate for less than the full number of Warrants represented
thereby. No fractional share of Common Stock will be issued upon exercise of the
Warrants. The Issuer will pay to the holders of the Warrants at the time of
exercise an amount in cash equal to the current market value of any such
fractional share of Common Stock. No payment or adjustment shall be made on
account of any dividends on the Common Stock issued upon exercise of a Warrant.
The holders of exercised Warrants are not entitled, by virtue of being such
holders, to receive dividends, to vote, to consent, to exercise any preemptive
rights or to receive notice as stockholders of the Issuer in respect of any
stockholders meeting for the election of directors of the Issuer or any other
purpose, or to exercise any rights whatsoever as stockholders of the Issuer.
No service charge will be made for registration of transfer or exchange upon
surrender of any Warrant Certificate at the office of the Warrant Agent
maintained for that purpose. The Issuer may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration or transfer or exchange of Warrant Certificates.
In the event a bankruptcy or reorganization is commenced by or against the
Issuer, a bankruptcy court may hold the unexercised Warrants are executory
contracts which may be subject to rejection by the Issuer with approval of the
bankruptcy court. As a result, holders of the Warrants may not, even if
sufficient funds are available, be entitled to receive any consideration or may
receive an amount less than they would be entitled to receive if they had
exercised their Warrants prior to the commencements of any such bankruptcy or
reorganization.
ADJUSTMENTS
The number of shares of Common Stock issuable upon the exercise of the
Warrants and the Exercise Price will be subject to adjustment in certain
circumstances, including:
(i) the payment by the Issuer of dividends and other distributions on
its Common Stock payable in Common Stock or other equity of the Issuer;
(ii) subdivisions, combinations and certain reclassifications of the
Common Stock;
(iii) the issuance to all holders of Common Stock of rights, options or
warrants entitling them to subscribe for additional shares of Common Stock,
or of securities convertible into or exercisable or exchangeable for
additional shares of Common Stock, at an offering price (or with an initial
conversion, exercise or exchange price plus such offering price) which is
less than the Current Market Value per share of Common Stock;
(iv) the distribution to all holders of Common Stock of any assets of
the Issuer (including cash), debt securities of the Issuer or any rights or
warrants to purchase any securities (excluding those rights and warrants
referred to in clause (iii) above and cash dividends and other cash
distributions from current or retained earnings);
(v) the issuance of shares of Common Stock for a consideration which is
less than the Current Market Value per share of Common Stock; and
(vi) the issuance of securities convertible into or exercisable or
exchangeable for Common Stock for a conversion, exercise or exchange price
per share which is less than the Current Market Value per share of Common
Stock.
The events described in clauses (v) and (vi) above are subject to certain
exceptions described in the Warrant Agreement, including, without limitation,
certain bona fide public offerings and private placements and certain issuances
of Common Stock pursuant to employee stock incentive plans.
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Notwithstanding the foregoing, no adjustment in the Exercise Price will be
required unless and until such adjustment would result, either by itself or with
other adjustments not previously made, in an increase or decrease of at least 1%
in the Exercise Price or the numbers of shares of Common Stock issuable upon
exercise of Warrants immediately prior to the making of such adjustment;
PROVIDED, HOWEVER, that any adjustment that is not made as a result of this
paragraph will be carried forward and taken into account in any subsequent
adjustment. In addition, the Issuer may at any time reduce the Exercise Price
(not to an amount that is less than the par value of the Common Stock) for any
period of time (but not less than 20 business days) as deemed appropriate by the
Board of Directors of the Issuer.
If the Issuer, in a single transaction or through a series of related
transactions, consolidates with or merges with or into any other person or
sells, assigns, transfers, leases, conveys or otherwise disposes of all or
substantially all of its properties and assets to another person or group of
affiliated persons or is a party to a merger or binding share exchange which
reclassifies or changes its outstanding Common Stock (a "Fundamental
Transaction"), as a condition to consummating any such transaction the person
formed by or surviving any such consolidation or merger if other than the Issuer
or the person to whom such transfer has been made (the "Surviving Person") shall
enter into a supplemental warrant agreement. The supplemental warrant agreement
shall provide (a) that the holder of a Warrant then outstanding may exercise it
for the kind and amount of securities, cash or other assets which such holder
would have received immediately after the Fundamental Transaction if such holder
had exercised the Warrant immediately before the effective date of the
transaction (regardless of whether the Warrants were then exercisable and
without giving effect to the Cashless Exercise option), assuming (to the extent
applicable) that such holder (i) made no election with respect to the form of
consideration payable in such transaction and (ii) was treated alike with the
plurality of non-electing holders, and (b) that the Surviving Person shall
succeed to and be substituted for every right and obligation of the Issuer in
respect of the Warrant Agreement and the Warrants. The Surviving Person shall
mail to holders of Warrants at the addresses appearing on the Warrant Register a
notice briefly describing the supplemental warrant agreement. If the issuer of
securities deliverable upon exercise of Warrants is an affiliate of the
Surviving Person, that issuer shall join in the supplemental warrant agreement.
Notwithstanding the foregoing, (i) if the Issuer enters into a Fundamental
Transaction and the consideration payable to holders of the Common Stock (or
other securities) issuable or deliverable upon exercise of the Warrants in
connection with such Fundamental Transaction consists solely of cash or (ii)
there is a dissolution, liquidation or winding up of the Issuer, then the
holders of Warrants shall be entitled to receive distributions on the date of
such event on an equal basis with holders of Common Stock (or other securities
issuable or delivered upon exercise of the Warrants) as if the Warrants had been
exercised immediately prior to such event, less the Exercise Price therefor.
Upon receipt of such payment, if any, the rights of a holder of a Warrant shall
terminate and cease and such holder's Warrants shall expire.
In the event of a taxable distribution to holders of Common Stock which
results in an adjustment to the number of shares of Common Stock or other
consideration for which such a Warrant may be exercised, the holders of the
Warrants may, in certain circumstances, be deemed to have received a
distribution subject to United States federal income tax as a dividend. See
"Certain Federal Income Tax Considerations."
PROVISIONS OF FINANCIAL STATEMENTS AND REPORTS
The Issuer will file the reports required to be filed by it under the
Exchange Act, and the rules, regulations and policies adopted by the Commission
thereunder, in a timely manner in accordance with the requirements of the
Exchange Act, and if at any time the Issuer is not required to file such
reports, it will, upon the request of any holder or beneficial owner of
Warrants, make available such information as necessary to permit sales pursuant
to Rule 144A under the Securities Act.
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The Issuer will also agree to comply with all applicable laws, including the
Securities Act and any applicable state securities laws, in connection with the
offer and sale of Common Stock (and other securities and property deliverable)
upon exercise of the Warrants.
REGISTRATION RIGHTS
The Issuer and the Initial Purchasers entered into the Warrant Registration
Rights Agreement, which provides that the holders of Warrants will have
registration rights and other rights and obligations with respect to the
Warrants and Warrant Shares. The following summary of the material provisions of
the Warrant Registration Rights Agreement does not purport to be complete and is
subject to, and qualified in its entirety by reference to, all of the provisions
of the Warrant Registration Rights Agreement.
Under the terms of the Warrant Registration Rights Agreement, the Issuer
will be required to use its best efforts to cause to be declared effective under
the Securities Act, no later than November 16, 1998, the Warrant Shelf
Registration Statement to provide for the resale of the Warrants and the Warrant
Shares. The Issuer is required to use reasonable efforts to maintain the
effectiveness of the Warrant Shelf Registration Statement until such time as all
Warrants have been exercised and the Warrant Shares have been resold. During any
consecutive 365-day period while the Warrants are exercisable, the Issuer will
have the ability to suspend the availability of such registration statement for
up to two 30-consecutive-day periods (except during (i) the 30 days immediately
after the Exercise Date and (ii) the 30 days immediately prior to the expiration
of the Warrants) if the Issuer's Board of Directors determines in good faith
that there is a valid purpose for the suspension and provides notice of such
determination to the holders at their addresses appearing in the register of
Warrants maintained by the Warrant Agent.
In the event that the (i) the Warrant Shelf Registration Statement has not
been declared effective by the Commission on or prior to the date specified for
such effectiveness or (ii) following the date such Warrant Shelf Registration
Statement is declared effective by the Commission, it shall cease to be
effective without being restored to effectiveness by amendment or otherwise
within the time period specified in the Warrant Registration Rights Agreement
(each such event referred to in clauses (i) and (ii), a "Shelf Registration
Default"), the Issuer shall pay as liquidated damages ("Liquidated Damages") to
each holder of Warrants or Warrant Shares an amount (the "Damage Amount") equal
to $.0025 per week per Warrant for each week that the Shelf Registration Default
continues. The amount of Liquidated Damages will increase by an additional
$.0025 per week per Warrant with respect to subsequent 90-day periods until all
Shelf Registration Defaults have been cured, up to a maximum amount of
Liquidated Damages of $.0125 per week per Warrant.
Holders of Warrant Shares also will have the right to include Warrant Shares
in any registration statement under the Securities Act filed by the Issuer for
its own account or for the account of any of its securityholders covering the
sale of Common Stock, other than (a) a registration statement on Form S-4 or S-8
or (b) a registration statement filed in connection with an offer of securities
solely to existing securityholders, for sale on the same terms and conditions as
the securities of the Issuer or any other selling securityholders included
therein ("a Piggy-Back Registration Statement"). In the case of a Piggy-Back
Registration Statement, the number of Warrant Shares requested to be included
therein is subject to pro rata reduction to the extent that the Issuer is
advised by the managing underwriter, if any, therefor that the total number or
type of Warrant Shares and other securities proposed to be included therein
pursuant to similar piggy-back registration rights of other holders is such as
to materially and adversely affect the success of the offering.
If the Issuer has complied with all its obligations under the Warrant
Registration Rights Agreement with respect to a Piggy-back Registration
Statement relating to an underwritten public offering, all holders of Warrants
or Warrant Shares, upon request of the lead managing underwriter with respect to
such underwritten public offering, will be required to not sell or otherwise
dispose of any Warrant or Warrant Shares owned by them for a period not to
exceed 30 days prior to or 180 days after the consummation of such underwritten
public offering.
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The Warrant Registration Rights Agreement contains customary covenants on
the part of the Issuer and provides that the Issuer will indemnify the holders
of Warrant Shares included in any registration statement and any underwriter
with respect thereto against certain liabilities, including liabilities under
the Securities Act and the Exchange Act.
Each holder of Warrants that sells such Warrants or Warrant Shares pursuant
to the Warrant Shelf Registration Statement or a Piggy-Back Registration
Statement generally is required to be named as a selling securityholder in the
related prospectus and to deliver a prospectus to the purchaser, is subject to
certain of the civil liabilities provisions under the Securities Act in
connection with such sales and is bound by certain provisions of the Warrant
Registration Rights Agreement which are applicable to such holder (including
certain indemnification obligations). In addition, each holder of Warrants or
Warrant Shares is required to deliver information to be used in connection with
any such registration in order to have its Warrants or Warrant Shares included
in such registration.
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 are preferred
stock of which 2,500 shares have been designated Series B Preferred Stock, par
value of $0.01 per share. The 2,500 shares of Series B Preferred Stock were
converted into 4,862,000 shares of Common Stock at the completion of the Initial
Public Equity Offering.
At March 31, 1998, there were 33,310,000 shares of Common Stock outstanding
and fully paid and no Shares of preferred stock outstanding.
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 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
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preferred stock in addition to the series described below. See "Risk
Factors--Control by Existing Stockholders" and "Risk Factors--Antitakeover
Provisions; Possible Future Issuances of Preferred Stock."
CERTAIN VOTING PROVISIONS
Stockholders' rights and related matters are governed by the DGCL, 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-- Control by Existing Stockholders."
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.
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.
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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
provisions exceed the usual majority vote requirement of the DGCL 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-- Control by Existing Stockholders."
CERTAIN CHANGE OF CONTROL PROVISIONS
In addition to the above provisions, as a Delaware corporation the Company
is subject to Section 203 of the DGCL, 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
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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--Control by Existing
Stockholders."
BOOK ENTRY; DELIVERY AND FORM
The certificates representing the Warrants were issued in fully registered
form. Except as described in the next paragraph, Warrants that were offered and
sold are represented by one or more permanent global Warrants (each a "Global
Warrant" and collectively, the "Global Warrants") which are registered in the
name of a nominee of The Depository Trust Company ("DTC") and which have been
deposited on behalf of purchasers of such Warrants represented thereby with a
custodian for DTC for credit to the respective accounts of the purchasers (or to
such other accounts as they may direct) at DTC.
Warrants held by purchasers who elected to take physical delivery of their
certificates instead of holding their interest through a Global Warrant (and
which are thus ineligible to trade through DTC) (referred to herein as the
"Non-Global Purchasers"), were issued in registered form ("Certificated
Warrants"). Upon the transfer of such Certificated Warrants to another entity,
such Certificated Warrants will, unless the Global Warrants have previously been
exchanged in whole for Certificated Warrants or unless the transferee requests
otherwise, be exchanged for an interest in a Global Warrant upon delivery of
appropriate certifications to the Trustee.
THE GLOBAL WARRANTS. The Issuer expects that pursuant to procedures
established by DTC (a) upon deposit of the Global Warrants, DTC or its custodian
will credit on its internal system portions of the Global Warrants to the
respective accounts of persons who have accounts with such depositary and (b)
ownership of the Global Warrants will be shown on, and the transfer of ownership
thereof will be effected only through, records maintained by DTC or its nominee
(with respect to interests of Persons other than Participants (as defined
below)). Ownership of beneficial interests in the Global Warrants will be
limited to persons who have accounts with DTC ("Participants") or persons who
hold interests through Participants. Investors may hold their interests in the
Global Warrants directly through DTC if they are Participants in such system, or
indirectly through organizations which are Participants in such system.
So long as DTC or its nominee is the registered owner or holder of any
Global Warrants, DTC or such nominee will be considered the sole owner or holder
of the Warrants represented by such Global Warrant for all purposes under the
Warrant Agreement and the Warrants. No beneficial owner of an interest in the
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Global Warrants will be able to transfer such interest except in accordance with
the applicable procedures of DTC, Euroclear and Cedel, in addition to those
provided for under the Warrant Agreement.
Payments and distributions in respect of the Global Warrants will be made to
DTC or its nominee, as the registered owner thereof. Neither the Issuer nor the
Warrant Agent will have any responsibility or liability for any aspect of the
records relating to, or payments made on account of, beneficial ownership
interests in the Global Warrants or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
The Issuer expects that DTC or its nominee, upon receipt of any payment of
any dividends or other distributions in respect of the Global Warrants, will
credit Participants' accounts with payments in amounts proportionate to the
number of Warrants represented by the Global Warrants as shown on the records of
DTC or its nominee. The Issuer also expects that payments by Participants to
owners of beneficial interests in the Global Warrants held through Participants
will be governed by standing instructions and customary practice as is now the
case with securities held for the accounts of customers registered in the names
of nominees for such customers. Such payments will be the responsibility of such
Participants.
Transfers between Participants in DTC will be effected in accordance with
DTC rules and will be settled in immediately available funds. If a holder
requires physical delivery of Certificated Warrants for any reason, including to
sell Warrants to persons in states which require physical delivery of such
securities or to pledge such securities, such holder must transfer its interest
in the Global Warrants in accordance with the normal procedures of DTC and in
accordance with the procedures set forth in the Warrant Agreement.
DTC has advised the Issuer that DTC will take any action permitted to be
taken by a holder of Warrants (including the presentation of Warrants for
exchange as described below) only at the direction of one or more Participants
to whose account the DTC interests in the the Global Warrants are credited and
only in respect of the aggregate number of Warrants as to which such Participant
or Participants has or have given such direction. However, if there is an Event
of Default under the Indenture, DTC will exchange the Global Warrants for
Certificated Warrants, which it will distribute to its Participants.
DTC has advised the Issuer as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking Law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "clearing agency" registered pursuant to the
provision of Section 17A of the Exchange Act. DTC was created to hold securities
for its Participants and facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry changes in
accounts of its Participants, thereby eliminating the need for physical movement
of certificates. Participants include securities brokers and dealers, banks,
trust companies and clearing corporations and certain other organizations.
Indirect access to the DTC system is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ("Indirect
Participants").
Although DTC, Euroclear and Cedel are expected to follow the foregoing
procedures in order to facilitate transfers of interests in the Global Warrants
among Participants of DTC, Euroclear and Cedel, they are under no obligation to
follow such procedures, and such procedures may be discontinued at any time.
Neither the Issuer nor the Warrant Agent will have any responsibility for the
performance by DTC, Euroclear or Cedel or the Participants or Indirect
Participants of their respective obligations under the rules and procedures
governing their operations.
CERTIFICATED NOTES AND CERTIFICATED WARRANTS. Subject to certain
conditions, any person having a beneficial interest in the Global Warrants may,
upon request to the Warrant Agent, exchange such beneficial interest for
Warrants in the form of Certificated Warrants. Upon any such issuance, the
Trustee is required to register such Certificated Warrants in the name of, and
cause the same to be delivered to, such person or persons (or any nominee
thereof). In addition, interests in the Global Warrants will be
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exchangeable or transferable, as the case may be, for Warrants in the form of
Certificated Warrants if DTC notifies the Issuer that it is unwilling or unable
to continue as depositary for such Global Warrants, or DTC ceases to be a
"Clearing Agency" registered under the Exchange Act, and a successor depositary
is not appointed by the Issuer within 90 days. Upon the occurrence of any of the
events described in the preceding sentence, the Issuer will cause the
appropriate Certificated Warrants to be delivered. Certificated Warrants may
only be transferred on the books and records of the transfer agent.
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UNITED STATES INCOME TAX CONSIDERATIONS
It is the opinion of Baker & McKenzie, counsel to the Company, that the
material United States federal income tax consequences to Holders of the
registration of the Warrants and Warrant Shares, and the purchase, ownership and
disposition of the Warrants and Warrant Shares, are as described herein, subject
to the limitations and qualifications set forth below. For purposes of this
discussion of United States federal income tax considerations, the term "Holder"
refers to the ultimate beneficial owner of a Warrant or Warrant Share. This
discussion is not a comprehensive description of all of the tax considerations
that may be relevant to a decision to purchase Warrants or Warrant Shares. In
particular, this summary of United States federal income tax matters deals only
with Holders that will hold the Warrants and Warrant Shares as capital assets
and does not address special tax situations, such as the United States tax
treatment of Holders that are (i) subject to special tax rules (E.G., financial
institutions, securities or currency dealers, brokers, insurance companies,
regulated investment companies and tax-exempt organizations), (ii) holding
Warrants or Warrant Shares as part of a hedging or larger integrated financial
transaction, or (iii) "United States Holders" (as defined below) with a currency
other than the U.S. Dollar as their functional currency, each of whom may be
subject to special United States federal income tax rules.
This discussion is based on United States federal income tax law, including
the United States Internal Revenue Code of 1986, as amended (the "Code"),
regulations, rulings, administrative pronouncements and judicial decisions as of
the date hereof. Subsequent developments in United States federal income tax
law, which may be applied retroactively, could have a material effect on this
discussion.
EACH HOLDER OF A WARRANT, AND EACH PROSPECTIVE PURCHASER OF A WARRANT OR
WARRANT SHARE SHOULD CONSULT HIS OR HER OWN TAX ADVISOR AS TO THE UNITED STATES
FEDERAL INCOME TAX CONSEQUENCES OF THE REGISTRATION OF A WARRANT OR WARRANT
SHARE, AS WELL AS OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF A WARRANT OR
WARRANT SHARE, IN ADDITION TO THE EFFECT OF ANY STATE OR LOCAL TAX LAWS OR THE
LAWS OF ANY JURISDICTION OTHER THAN THE UNITED STATES.
In the opinion of Baker & McKenzie, counsel to the Company, the Company will
be classified as a "corporation" for all United States federal income tax
purposes. In addition, the Warrants will be properly characterized as
contractual obligations of the Company and, when issued, the Warrant Shares will
be properly characterized as equity interests in the Company. The Company will
so characterize all such Warrants and Warrant Shares for all United States
federal income tax purposes. These characterizations by the Company of the
Warrants and Warrant Shares will be binding on every Holder, unless the Holder
discloses its inconsistent characterizations on such Holder's federal income tax
return. The United States Internal Revenue Service will not be bound by the
characterizations of the Warrants and Warrant Shares by the Company or the
Holders.
REGISTRATION OF WARRANTS AND WARRANT SHARES
The registration of the Warrants and Warrant Shares under the Securities
Act, as required pursuant to the terms of the Warrant Registration Rights
Agreement, will not be treated as a taxable "exchange" for United States federal
income tax purposes. As a result, no material United States federal income tax
consequences will result to Holders of the Warrants, and the Holders' respective
current tax bases in and holding periods for the Warrants will continue to be
their tax bases in and holding periods for the Warrants after registration.
UNITED STATES HOLDERS
As used herein, "United States Holder" means a Holder of a Warrant or
Warrant Share who is, or which is, a United States Person. A "United States
Person" is (i) a citizen or resident of the United States of America (including
the States and the District of Columbia), its territories, possessions and other
areas subject to its jurisdiction, including the Commonwealth of Puerto Rico
(the "United States"), (ii) a corporation or partnership created or organized in
the United States or under the laws of the United
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States or of any State (unless, in the case of a partnership, future Treasury
regulations presently authorized under the Code otherwise provide) and (iii) an
estate or trust the income of which is subject to United States federal income
taxation regardless of its source. A "resident" of the United States includes an
individual who (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.
WARRANTS
A Holder's initial tax basis in a Warrant will be equal to the Holder's
purchase price for such Warrant (or, in the case of an Initial Purchaser, an
allocable portion of the issue price of a Unit, see "Description of
Indebtedness--Units Offering"). Upon a sale, exchange or other disposition
(including a repurchase by the Company) of a Warrant other than the exercise of
the Warrant, a United States Holder will recognize capital gain or loss equal to
the difference between the amount realized on the sale, exchange or other
disposition and the Holder's adjusted tax basis (see below) in the Warrant. Such
gain or loss will be long-term capital gain or loss if at the time of the sale,
redemption or other disposition the Warrant has been held for more than one
year.
Upon the lapse of a Warrant, a United States Holder will recognize a capital
loss equal to such Holder's adjusted tax basis (see below) in the Warrant
assuming the shares of Common Stock to which the Warrant relates would have been
a capital asset in the hands of the Holder of such Warrant. Any such loss will
be long-term capital loss if the Warrant had been held by the Holder for more
than one year at the time of lapse.
Under current law, for non-corporate United States Holders, the United
States income tax rate applicable to the net long-term capital gain recognized
for a year will not exceed 20 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, however, is subject to limitations for both
non-corporate and corporate United States Holders.
Upon the exercise of a Warrant, a United States Holder will not recognize
gain or loss for United States federal income tax purposes, except to the extent
of any cash received in lieu of fractional shares. The initial tax basis of a
share of Common Stock acquired upon exercise of a Warrant will be equal to the
sum of (i) the adjusted tax basis (see below) of the exercised Warrant and (ii)
the exercise price. The holding period of shares of Common Stock acquired upon
exercise of a Warrant will commence on the day the Warrant is exercised.
The conversion ratio of the Warrants is subject to adjustment under certain
circumstances. See "Description of Warrants--Adjustments" above. For United
States federal income tax purposes, Holders of the Warrants will be treated as
having received a constructive distribution, resulting in ordinary income to the
extent of the Company's current and accumulated earnings and profits as
determined under United States federal income tax principles, if certain
adjustments in the conversion ratio occur (particularly an adjustment to reflect
a taxable dividend to holders of Common Stock) to increase the proportionate
interest of a Holder of a Warrant in the fully diluted Common Stock, whether or
not the Holder ever exercises the Warrant. Generally, a Holder's initial tax
basis in a Warrant will be increased by the amount of any such constructive
distribution. The rules with respect to such adjustments are complex and Holders
should consult their own tax advisors regarding the applicability of such rules.
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WARRANT SHARES
TAXATION OF DISTRIBUTIONS
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 the Company with respect to
the Warrant Shares (or any other shares of Common Stock) held by the Holder.
A distribution by the Company with respect to the Warrant Shares (or any
other shares of Common Stock), including certain pro rata redemptions of such
shares, will be treated first as a dividend of ordinary income includible in
gross income to the extent of the current and accumulated earnings and profits
of the Company 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 the Company may be eligible for the dividends received
deduction generally allowed to corporations under the Code.
TAXATION OF DISPOSITIONS OF WARRANT SHARES
A gain or loss realized by a United States Holder on the sale, exchange or
other disposition of a Warrant Share (or any other share of Common Stock),
including upon the liquidation or dissolution of the Company or as a result of
certain non-pro rata redemptions 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 Warrant Share will generally be equal to the initial tax basis of
the Warrant Share upon exercise of the Warrant as described above reduced (but
not below zero) by the amount of any distribution by the Company that is treated
as a tax-free return of basis.
Any capital gain or loss recognized upon the sale or other disposition of a
Warrant Share (or any other share of Common Stock) 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 20 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, however, is
subject to limitations for both non-corporate and corporate United States
Holders.
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 and backup withholding tax below,
dividends paid by the Company to a Holder other than a United States Holder (a
"non-United States Holder") with respect to Warrant Shares (or any other shares
of Common Stock) 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 above and backup
withholding tax below, a non-United States Holder will not be subject to United
States federal income tax on income derived by the Company, dividends paid to a
Holder by the Company or gains realized on the sale, redemption or other
disposition of Warrant Shares (or any other shares of Common Stock), 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
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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
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 of stock, including Warrant
Shares, and to proceeds from the sale of such shares, to a non-corporate 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.
Currently, dividends paid on Warrant Shares (or any other shares of Common
Stock) to a United States Holder or a non-United States Holder through a United
States or United States-related person (I.E., a person other than a "non-U.S.
payor" or "non-U.S. middleman" as defined in Treasury regulations under the
Code) will be subject to United States backup withholding tax and information
reporting, unless the Holder has provided the required certification of its
non-United States status or has otherwise established an exemption. In addition,
under currently effective Treasury regulations, the proceeds from the sale of
Warrants or Warrant Shares (or any other shares of Common Stock) by a United
States Holder or a non-United States Holder through a United States or United
States-related person will be subject to United States backup withholding tax
and information reporting, unless the Holder has provided the required
certification of its non-United States status or has otherwise established an
exemption.
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 a
non-United States 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
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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 by providing a duly completed Internal Revenue Service
Form W-9 to the Holder's broker or paying agent, reporting the Holder's taxpayer
identification number (which for an individual will be his or her social
security number), or by otherwise establishing its corporate or exempt status. A
nonUnited 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 the Holder's broker or paying agent or by otherwise
establishing the Holder's 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.
PLAN OF DISTRIBUTION
The Warrants offered hereby may be sold from time to time to purchasers
directly by the Selling Warrant Holders. Alternatively, the Selling Warrant
Holders may from time to time offer the Warrants to or through underwriters,
broker-dealers or agents, who may receive compensation in the form of
underwriting discounts, concessions or commissions from the Selling Warrant
Holders or the purchasers of Warrants. The Selling Warrant Holders and any
underwriters, broker-dealers or agents that participate in the distribution of
the Warrants may be deemed to be "underwriters" within the meaning of the
Securities Act and any profit on the sale of Warrants by them and any discounts,
commissions, concessions or other compensation received by any of them, may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Warrants offered hereby may be sold from time to time in one or more
transactions at fixed prices, at prevailing market prices at the time of sale,
at varying prices determined at the time of sale or at negotiated prices. Such
prices will be determined by the Selling Warrant Holders or by agreement between
the Selling Warrant Holders and underwriters and dealers who may receive fees or
commissions in connection therewith. The sale of the Warrants may be effected in
transactions (which may involve crosses or block transactions) (i) on any
national securities exchange or quotation service on which the Warrants may be
listed or quoted at the time of sale, (ii) in the over-the-counter market, (iii)
in transactions otherwise than on such exchanges or in the over-the-counter
market or (iv) through the writing of options. If required, at the time a
particular offering of Warrants is made, a Prospectus Supplement will be
distributed which will set forth the aggregate amount and type of Warrants being
offered and the terms of the offering, including the name or names of any
underwriters, broker-dealers or agents, any discounts, commissions and other
terms constituting compensation from the Selling Warrant Holders and any
discounts, commissions or concessions allowed or reallowed or paid to
broker-dealers.
The Warrant Shares are being offered by the Company to the Selling Warrant
Holders in connection with the exercise of the Warrants pursuant to the Warrant
Agreement.
The Company has filed the Registration Statement of which this Prospectus
forms a part with the Commission as required pursuant to the terms of the
Warrant Registration Rights Agreement. See "Description of
Warrants--Registration Rights."
The outstanding Common Stock is listed on the Nasdaq National Market, and
the Company has applied for listing the Warrant Shares on the Nasdaq National
Market. The Company does not intend to apply for listing of the Warrants on any
securities exchange or authorization for quotation of the Warrants on any
quotation system. There can be no assurance as to the liquidity of any trading
market that may develop for the Warrants.
To comply with the securities laws of certain jurisdictions, if applicable,
the Warrants may be offered or sold in such jurisdictions only through
registered or licensed brokers or dealers. In addition, in certain jurisdictions
the Warrants may not be offered or sold (unless they have been registered or
qualified for sale) in such jurisdictions or an exemption from registration or
qualification is available.
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LEGAL MATTERS
The validity of the Warrants and the Warrant Shares will be passed upon for
the Issuer by Baker & McKenzie, Washington, District of Columbia.
EXPERTS
The consolidated financial statements incorporated in this Prospectus by
reference to the annual report of Form 10-K or @Entertainment, Inc. for the year
ended December 31, 1997 have been incorporated herein and in the Registration
Statement in reliance upon the report of KPMG Polska Sp. z o.o., independent
certified public accountants, given on the authority of said firm as experts in
accounting and auditing.
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ANNEX A
GLOSSARY
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 Offering Memorandum, 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 multi-channel pay 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.
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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 when
compared to a basic tier package of 17 to 24 channels.
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.
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.
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.
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NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE ISSUER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE WARRANTS AND THE WARRANT SHARES
OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCE, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE ISSUER SINCE THE DATE HEREOF.
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Incorporation of Certain Documents by
Reference....................................
Prospectus Summary............................. 1
Risk Factors................................... 10
Use of Proceeds................................ 31
Exchange Rate Data............................. 31
Selling Warrant Holders........................ 32
Capitalization................................. 33
The Industry................................... 34
Business....................................... 40
Regulation..................................... 72
Management..................................... 86
Executive Compensation......................... 91
Compensation Plans............................. 92
Principal Stockholders......................... 96
Certain Relationships and Related
Transactions................................. 99
Description of Indebtedness.................... 104
Description of the Warrants.................... 107
Description of Capital Stock................... 111
Book Entry; Delivery and Form.................. 114
United States Income Tax
Considerations............................... 117
Plan of Distribution........................... 121
Legal Matters.................................. 122
Experts........................................ 122
Glossary....................................... A-1
</TABLE>
@ENTERTAINMENT, INC.
1,008,000 WARRANTS
1,824,514 SHARES OF COMMON STOCK
---------------------
PROSPECTUS
---------------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses (other than underwriting discounts
and commissions) of the issuance and distribution of the securities being
registered to be paid by the Company.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee............................... $ 7,105
---------
Printing and engraving expenses................................................... $ 50,000
Accounting fees and expenses...................................................... $ 5,000
Blue Sky fees and expenses........................................................ $ 1,500
Listing fees...................................................................... $ 17,500
Counsel Fees...................................................................... $ 25,000
Miscellaneous..................................................................... $ 5,000
---------
Total......................................................................... $ 111,105
---------
---------
</TABLE>
ITEM 15. 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 Purchase Agreement filed as Exhibit 1.1 to this Registration Statement
provides for indemnification by the Initial Purchasers of the Registrant and its
officers and directors for certain liabilities arising under the Securities Act
of 1933 or otherwise.
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 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a complete list of Exhibits filed as part of this
Registration Statement, which are incorporated herein.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Purchase Agreement dated as at July 8, 1998 between and among @Entertainment and Merrill, Lynch,
Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities Inc. (Incorporated by reference to
Exhibit 1.1 of @Entertainment's Registration Statement on Form S-4, Registration No. 333-60659)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ----------- -----------------------------------------------------------------------------------------------------
<C> <S>
2.1 Contribution Agreement among Polish Investment Holdings, LP, ECO Holdings Limited Partnership, Roger
M. Freedman, Steele LLC, the AESOP Fund LP, the Cheryl Anne Chase Marital Trust and @Entertainment,
dated as at June 22, 1997. (Incorporated by reference to Exhibit 2.1 of @Entertainment's Registration
Statement on Form S-1, Registration No. 333-29869)
2.2 Purchase Agreement among ECO, @Entertainment, and L. Ciesla International, Inc., dated as at June 22,
1997. (Incorporated by reference to Exhibit 2.2 of @Entertainment's Registration Statement on Form
S-1, Registration No. 333-29869)
4.1 Form of Warrant Agreement dated as at July 14, 1998 by and between @Entertainment, Inc. and Bankers
Trust Company relating to the Warrants and the Warrant Shares
4.2 Form of Warrant Registration Rights Agreement dated as at July 14, 1998 by and between
@Entertainment, Inc. and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated and
J.P. Morgan Securities, Inc.
4.3 Form of Warrant (contained in Warrant Agreement filed as Exhibit 4.1)
5 Opinion of Baker & McKenzie with respect to the legality of the securities being registered.
8 Opinion of Baker & McKenzie with respect to certain tax matters.
23.1 Consent of KPMG Polska Sp. z o.o. with respect to @Entertainment.
23.2 Consent of Baker & McKenzie with respect to the legality of the securities being registered
(contained in Exhibit 5).
23.3 Consent of Baker & McKenzie with respect to the certain tax matters (contained in Exhibit 8).
24 Power of Attorney (included on the signature page in Part II of this Registration Statement).
99.1 Indenture dated as at July 14, 1998 between the Issuer and Bankers Trust Company relating to the
Company's 14 1/2% Senior Discount Notes due 2008 and its 14 1/2% Series B Senior Discount Notes due
2008. (Incorporated by reference to Exhibit 4.11 of @Entertainment, Inc.'s Registration Statement on
Form S-4, Registration No. 333-60659)
</TABLE>
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) of the Securities Act if, in the
aggregate, the changes in volume and price represent no more than 20%
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective Registration
Statement;
II-2
<PAGE>
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the
Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement 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.
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 Act 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 Act and will be governed by the final adjudication of
such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Los
Angeles, state of California on the 27th day of September, 1998.
@ENTERTAINMENT, INC.
BY: /S/ ROBERT E. FOWLER, III
-----------------------------------------
Robert E. Fowler, III
CHIEF EXECUTIVE OFFICER
In accordance with the requirements of the Securities Act of 1933, as
amended, this Registration Statement has been signed by the following persons in
the capacities and on the dates stated. Each person whose signature to this
Registration Statement appears below hereby appoints Robert E. Fowler, III as
his attorney-in-fact to sign on his behalf, individually and in the capacities
stated below, and to file any and all amendments and post-effective amendments
to this Registration Statement, which amendment or amendments may make such
changes and additions as such attorney-in-fact may deem necessary or
appropriate.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ ROBERT E. FOWLER, III Chief Executive Officer and
- ------------------------------ Director (Principal September 27, 1998
Robert E. Fowler, III Executive Officer)
Chief Financial Officer
/s/ DONALD MILLER-JONES (Principal Financial and
- ------------------------------ Principal Accounting September 27, 1998
Donald Miller-Jones Officer)
/s/ DAVID T. CHASE Director
- ------------------------------ September 27, 1998
David T. Chase
/s/ ARNOLD L. CHASE Director
- ------------------------------ September 27, 1998
Arnold L. Chase
/s/ DAVID CHANCE Director
- ------------------------------ September 27, 1998
David Chance
/s/ SAMUEL CHISHOLM Director
- ------------------------------ September 27, 1998
Samuel Chisholm
/s/ AGNIESZKA HOLLAND Director
- ------------------------------ September 27, 1998
Agnieszka Holland
/s/ SCOTT A. LANPHERE Director
- ------------------------------ September 27, 1998
Scott A. Lanphere
/s/ JERZY Z. SWIRSKI Director
- ------------------------------ September 27, 1998
Jerzy Z. Swirski
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
- --------- ------------------------------------------------------------------------------------------ -----------
<C> <S> <C>
1.1 Purchase Agreement dated as at July 8, 1998 between and among @Entertainment and Merrill,
Lynch, Pierce, Fenner & Smith Incorporated and J.P. Morgan Securities Inc. (Incorporated
by reference to Exhibit 1.1 of @Entertainment's Registration Statement on Form S-4,
Registration No. 333-60659)...............................................................
2.1 Contribution Agreement among Polish Investment Holdings, LP, ECO Holdings Limited
Partnership, Roger M. Freedman, Steele LLC, the AESOP Fund LP, the Cheryl Anne Chase
Marital Trust and @Entertainment, dated as at June 22, 1997. (Incorporated by reference to
Exhibit 2.1 of @Entertainment's Registration Statement on Form S-1, Registration No.
333-29869)................................................................................
2.2 Purchase Agreement among ECO, @Entertainment, and L. Ciesla International, Inc., dated as
at June 22, 1997. (Incorporated by reference to Exhibit 2.2 of @Entertainment's
Registration Statement on Form S-1, Registration No. 333-29869)...........................
4.1 Warrant Agreement dated as of July 14, 1998 by and between @Entertainment, Inc. and
Bankers Trust Company relating to the Warrants and the Warrant Shares.....................
4.2 Warrant Registration Rights Agreement dated as at July 14, 1998 by and between
@Entertainment, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated and J.P.
Morgan Securities Inc.....................................................................
4.3 Form of Warrant (contained in Warrant Agreement filed as Exhibit 4.1).....................
5 Opinion of Baker & McKenzie with respect to the legality of the securities being
registered................................................................................
8 Opinion of Baker & McKenzie with respect to certain tax matters...........................
23.1 Consent of KPMG Polska Sp. z o.o. with respect to @Entertainment..........................
23.2 Consent of Baker & McKenzie with respect to the legality of the securities being
registered (contained in Exhibit 5).......................................................
23.3 Consent of Baker & McKenzie with respect to the certain tax matters (contained in Exhibit
8)........................................................................................
24 Power of Attorney (included on the signature page in Part II of this Registration
Statement)................................................................................
99.1 Indenture dated as at July 14, 1998 between the Issuer and Bankers Trust Company relating
to the Company's 14 1/2% Senior Discount Notes due 2008 and its 14 1/2% Series B Senior
Discount Notes due 2008. (Incorporated by reference to Exhibit 4.11 of @Entertainment,
Inc.'s Registration Statement on Form S-4, Registration No. 333-60659)
</TABLE>
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
Exhibit 4.1
EXECUTION COPY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WARRANT AGREEMENT
Dated as of July 14, 1998
By and Between
@ENTERTAINMENT, INC.
and
Bankers Trust Company,
Warrant Agent
--------------------
1,008,000 Warrants to Purchase an Aggregate of 1,824,514 Shares of Common Stock
(Par Value $0.01 Per Share)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I
ISSUANCE, FORM, EXECUTION, DELIVERY AND
REGISTRATION OF WARRANT CERTIFICATES
SECTION 1.01. Issuance of Warrants.................................. 2
SECTION 1.02. Form of Warrant Certificates.......................... 2
SECTION 1.03. Execution of Warrant Certificates..................... 3
SECTION 1.04. Authentication and Delivery........................... 3
SECTION 1.05. Separation of Warrants and Notes...................... 4
SECTION 1.06. Registration.......................................... 4
SECTION 1.07. Registration of Transfers or Exchanges................ 5
SECTION 1.08. Lost, Stolen, Destroyed, Defaced or Mutilated
Warrant Certificates................................. 10
SECTION 1.09. Offices for Exercise, etc............................. 10
ARTICLE II
DURATION, EXERCISE OF WARRANTS; EXERCISE PRICE
AND REPURCHASE OF WARRANTS
SECTION 2.01. Duration of Warrants.................................. 11
SECTION 2.02. Exercise, Exercise Price, Settlement and
Delivery............................................. 12
SECTION 2.03. Cancellation of Warrant Certificates.................. 14
SECTION 2.04. Notice of an Exercise Event........................... 14
ARTICLE III
OTHER PROVISIONS RELATING TO
RIGHTS OF HOLDERS OF WARRANTS
SECTION 3.01. Enforcement of Rights................................. 15
SECTION 3.02. Obtaining Stock Exchange Listings..................... 15
ARTICLE IV
CERTAIN COVENANTS OF THE COMPANY
SECTION 4.01. Payment of Taxes...................................... 16
SECTION 4.02. Rules 144 and 144A.................................... 16
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 4.03. Securities Act and Applicable State
Securities Laws...................................... 16
SECTION 4.04. Resolution of Preemptive Rights, if Any............... 16
ARTICLE V
ADJUSTMENTS
SECTION 5.01. Adjustment of Exercise Rate; Notices.................. 16
SECTION 5.02. Fractional Warrant Shares............................. 25
SECTION 5.03. Exceptions to Antidilution Provisions................. 26
ARTICLE VI
CONCERNING THE WARRANT AGENT
SECTION 6.01. Warrant Agent......................................... 27
SECTION 6.02. Conditions of Warrant Agent's Obligations............. 27
SECTION 6.03. Resignation and Appointment of Successor.............. 31
SECTION 6.04. Covenant to Notify The Depository Trust Company
of Separability Date................................. 33
ARTICLE VII
MISCELLANEOUS
SECTION 7.01. Amendment............................................. 33
SECTION 7.02. Notices and Demands to the Company and Warrant
Agent................................................ 34
SECTION 7.03. Addresses for Notices to Parties and for
Transmission of Documents............................ 34
SECTION 7.04. Notices to Holders.................................... 35
SECTION 7.05. Applicable Law........................................ 35
SECTION 7.06. Persons Having Rights Under Agreement................. 35
SECTION 7.07. Headings.............................................. 35
SECTION 7.08. Counterparts.......................................... 35
SECTION 7.09. Inspection of Agreement............................... 35
SECTION 7.10. Availability of Equitable Remedies.................... 36
SECTION 7.11. Obtaining of Governmental Approvals................... 36
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
EXHIBIT A - Form of Warrant Certificate................................ A-1
EXHIBIT B - Form of Legend for Global Warrant.......................... B-1
EXHIBIT C - Certificate to Be Delivered upon Exchange or
Registration of Transfer of Warrants...................... C-1
</TABLE>
-iii-
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Defined Term Page
- ------------ ----
<S> <C>
Agreement.............................................................. 1
Business Day........................................................... 12, A-7
Capital Stock.......................................................... 23
Cashless Exercise...................................................... 12
Cashless Exercise Ratio................................................ 12
Certificated Warrants..................................................
Common Stock........................................................... 2
Current Market Value................................................... 23
Distribution........................................................... 25
Distribution Rights.................................................... 25
Election to Exercise................................................... 12
Exercise Date.......................................................... 13
Exercise Price......................................................... 12
Exercise Rate.......................................................... 12
Expiration Date........................................................ 11
Global Shares.......................................................... 14
Global Warrants........................................................ 2
Indenture.............................................................. 1
Independent Financial Expert........................................... 24
Initial Purchasers..................................................... 1
Merrill Lynch.......................................................... 1
Notes.................................................................. 1
Officers' Certificate.................................................. 8
Private Placement Legend............................................... 9
Purchase Agreement..................................................... 1
Related Parties........................................................ 28
Requisite Warrant Holders.............................................. 33
Resale Restriction Termination Date.................................... 5
Securities Act......................................................... 4
Separability Date...................................................... 4
Separation............................................................. 4
Surviving Person....................................................... 20
Trustee................................................................ 1
Units.................................................................. 1
Warrant................................................................ 1
Warrant Agent.......................................................... 1
Warrant Agent Office................................................... 11
Warrant Certificates................................................... 1
</TABLE>
-iv-
<PAGE>
<TABLE>
<CAPTION>
Defined Term Page
- ------------ ----
<S> <C>
Warrant Exercise Office................................................ 11
Warrant Register....................................................... 4
Warrant Registration Rights Agreement.................................. 1
Warrant Shares......................................................... 2
</TABLE>
-v-
<PAGE>
WARRANT AGREEMENT
WARRANT AGREEMENT ("Agreement"), dated as of July 14, 1998 by and
between @ENTERTAINMENT, INC. (the "Company"), a Delaware corporation, and
Bankers Trust Company, as warrant agent (with any successor Warrant Agent, the
"Warrant Agent").
WHEREAS, the Company has entered into a purchase agreement (the
"Purchase Agreement") dated July 8, 1998 with Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and J.P. Morgan
Securities Inc. (together with Merrill Lynch, the "Initial Purchasers"),
severally, in which the Company has agreed to sell to the Initial Purchasers
252,000 units (the "Units"), each consisting of (i) $1,000 principal amount at
maturity of 14 1/2% Senior Discount Notes due 2008 (the "Notes") of the Company
to be issued under an indenture dated as of July 14, 1998 (the "Indenture"),
between the Company and Bankers Trust Company, as trustee (in such capacity, the
"Trustee"), and (ii) four warrants (the "Warrants"), each initially entitling
the holder thereof to purchase 1.81 shares of Common Stock (as defined herein)
of the Company, in amounts set forth opposite such Initial Purchaser's name on
Schedule A to the Purchase Agreement. The certificates evidencing the Warrants
are herein referred to collectively as the "Warrant Certificates"; and
WHEREAS, the Notes and the Warrants comprising the Units shall not be
separately transferable until the Separability Date (as defined herein); and
WHEREAS, the holders of the Warrants are entitled to the benefits of a
Warrant Registration Rights Agreement dated as of July 14, 1998 between the
Company and the Initial Purchasers (the "Warrant Registration Rights
Agreement"); and
WHEREAS, the Company desires the Warrant Agent as warrant agent to
assist the Company in connection with the issuance, exchange, cancellation,
replacement and exercise of the Warrants, and in this Agreement wishes to set
forth, among other things, the terms and conditions on which the Warrants may be
issued, exchanged, canceled, replaced and exercised;
NOW, THEREFORE, the parties hereto agree as follows:
<PAGE>
ARTICLE I
ISSUANCE, FORM, EXECUTION, DELIVERY AND
REGISTRATION OF WARRANT CERTIFICATES
SECTION 1.01. Issuance of Warrants. Warrants comprising part of the
Units shall be originally issued in connection with the issuance of the Units
and such Warrants shall not be separately transferable from the Notes until on
or after the Separability Date as provided in Section 1.05 hereof.
Each Warrant Certificate shall evidence the number of Warrants
specified therein. Each Warrant evidenced by a Warrant Certificate shall, when
it becomes exercisable as provided herein and therein, represent the right,
subject to the provisions contained herein and therein, to purchase from the
Company (and the Company shall issue and sell to the holder of such Warrant)
1.81 fully paid and non-assessable Warrant Shares at an exercise price of $13.20
per share. The number of shares of the Company's common stock, par value $0.01
per share (the "Common Stock") issuable upon exercise of a Warrant is subject to
adjustment as provided herein and in the Warrant. The shares of Common Stock
issuable upon exercise of a Warrant are hereinafter referred to as the "Warrant
Shares" and, unless the context otherwise requires, such term shall also include
any other securities issuable and deliverable upon exercise of a Warrant as
provided in Article V, subject to adjustment as provided herein and in the
Warrant.
SECTION 1.02. Form of Warrant Certificates. The Warrant Certificates
will initially be issued either in global form (the "Global Warrants") or in
registered form as Certificated Warrant Certificates (the "Certificated
Warrants"), in either case substantially in the form of Exhibit A attached
hereto. Any Global Warrants to be delivered pursuant to this Agreement shall
bear the legend set forth in Exhibit B attached hereto. The Global Warrants
shall represent such of the outstanding Warrants as shall be specified therein,
and each Global Warrant shall provide that it shall represent the aggregate
amount of outstanding Warrants from time to time endorsed thereon and that the
aggregate amount of outstanding Warrants represented thereby may from time to
time be reduced or increased, as appropriate. Any endorsement of a Global
Warrant to reflect the amount of any increase or decrease in the amount of
outstanding Warrants represented thereby shall be made by the Warrant Agent and
the Depositary (as defined below) in accordance with instructions given by the
holder thereof. The Depository Trust Company shall act as the "Depositary" with
respect to the Global Warrants until a successor shall be appointed by the
Company and the Warrant Agent. Upon written request, a holder of Warrants may
receive from the Warrant Agent or the Depositary Certificated Warrants as set
forth in Section 1.07 hereof.
2
<PAGE>
SECTION 1.03. Execution of Warrant Certificates. The Warrant
Certificates shall be executed on behalf of the Company by the chairman of its
board of directors, its president, its chief executive officer, its chief
financial officer or any vice president and attested by its treasurer, assistant
treasurer, secretary or assistant secretary. Such signatures may be the manual
or facsimile signatures of the present or any future such officers. The seal of
the Company may be in the form of a facsimile thereof and may be impressed,
affixed, imprinted or otherwise reproduced on the Warrant Certificates.
Typographical and other minor errors or defects in any such reproduction of any
such signature shall not affect the validity or enforceability of any Warrant
Certificate that has been duly countersigned and delivered by the Warrant Agent.
In case any officer of the Company who shall have signed any of the
Warrant Certificates shall cease to be such officer before the Warrant
Certificate so signed shall be authenticated and delivered by the Warrant Agent
or disposed of by the Company, such Warrant Certificate nevertheless may be
authenticated and delivered or disposed of as though the person who signed such
Warrant Certificate had not ceased to be such officer of the Company. Any
Warrant Certificate may be signed on behalf of the Company by such persons as,
at the actual date of the execution of such Warrant Certificate, shall be the
proper officers of the Company, although at the date of the execution and
delivery of this Agreement any such person was not such an officer.
SECTION 1.04. Authentication and Delivery. Subject to the immediately
following paragraph, Warrant Certificates shall be authenticated by manual
signature and dated the date of authentication by the Warrant Agent and shall
not be valid for any purpose unless so authenticated and dated. The Warrant
Certificates shall be numbered and shall be registered in the Warrant Register
(as defined in Section 1.06 hereof).
Upon the receipt by the Warrant Agent of a written order of the
Company, which order shall be signed by the chairman of its board of directors,
its president, its chief executive officer, its chief financial officer or any
vice president and attested by its treasurer, assistant treasurer, secretary or
assistant secretary, and shall specify the amount of Warrants to be
authenticated, whether the Warrants are to be Global Warrants or Certificated
Warrants, the date of such Warrants and such other information as the Warrant
Agent may reasonably request, without any further action by the Company, the
Warrant Agent is authorized, upon receipt from the Company at any time and from
time to time of the Warrant Certificates, duly executed as provided in Section
1.03 hereof, to authenticate the Warrant Certificates and upon the holder's
request deliver them. Such authentication shall be by a duly authorized
signatory of the Warrant Agent (although it shall not be necessary for the same
signatory to sign all Warrant Certificates).
3
<PAGE>
In case any authorized signatory of the Warrant Agent who shall have
authenticated any of the Warrant Certificates shall cease to be such authorized
signatory before the Warrant Certificate shall be disposed of by the Company or
the Warrant Agent, such Warrant Certificate nevertheless may be delivered or
disposed of as though the person who authenticated such Warrant Certificate had
not ceased to be such authorized signatory of the Warrant Agent; and any Warrant
Certificate may be authenticated on behalf of the Warrant Agent by such persons
as, at the actual time of authentication of such Warrant Certificates, shall be
the duly authorized signatories of the Warrant Agent, although at the time of
the execution and delivery of this Agreement any such person is not such an
authorized signatory.
The Warrant Agent's authentication on all Warrant Certificates shall
be in substantially the form set forth in Exhibit A hereto.
SECTION 1.05. Separation of Warrants and Notes. The Notes and the
Warrants will not be separately transferable until the Separability Date.
"Separability Date" shall mean the earliest to occur of: (i) the Exercise Date
(as defined below), (ii) the date on which a registration statement with respect
to a registered exchange offer for the Notes is declared effective under the
Securities Act of 1933, as amended (the "Securities Act"), (iii) the occurrence
of an Event of Default (as defined in the Indenture) or (iv) such earlier date
as determined by Merrill Lynch in its sole discretion and specified to the
Company and the Warrant Agent in writing. The separation of the Warrants and the
Notes is herein referred to as a "Separation."
SECTION 1.06. Registration. The Company will keep, at the office or
agency maintained by the Company for such purpose, a register or registers in
which, subject to such reasonable regulations as it may prescribe, the Company
shall provide for the registration of, and registration of transfer and exchange
of, Warrants as provided in this Article. Each person designated by the Company
from time to time as a person authorized to register the transfer and exchange
of the Warrants is hereinafter called, individually and collectively, the
"Registrar." The Company hereby initially appoints the Warrant Agent as
Registrar. Upon written notice to the Warrant Agent and any acting Registrar,
the Company may appoint a successor Registrar for such purposes.
The Company will at all times designate one person (which may be the
Company and which need not be a Registrar) to act as repository of a master list
of names and addresses of the holders of Warrants (the "Warrant Register"). The
Warrant Agent will act as such repository unless and until some other person is,
by written notice from the Company to the Warrant Agent and the Registrar,
designated by the Company to act as such. The Company shall cause each Registrar
to furnish to such repository, on a current basis, such information as to all
registrations of transfer and exchanges effected by such Registrar, as may
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be necessary to enable such repository to maintain the Warrant Register on as
current a basis as is practicable.
SECTION 1.07. Registration of Transfers or Exchanges.
(a) Transfer or Exchange of Certificated Warrants. When Certificated
Warrants are presented to the Warrant Agent with a request from the holder:
(i) to register the transfer of the Certificated Warrants; or
(ii) to exchange such Certificated Warrants for an equal number of
Certificated Warrants of other authorized denominations,
the Warrant Agent shall register the transfer or make the exchange as requested
if the requirements under this Warrant Agreement as set forth in this Section
1.07 for such transactions are met; provided, however, that the Certificated
Warrants presented or surrendered by a holder for registration of transfer or
exchange:
(x) shall be duly endorsed or accompanied by a written instruction of
transfer or exchange in form satisfactory to the Company and the
Warrant Agent, duly executed by such holder or by his attorney, duly
authorized in writing; and
(y) in the case of Warrants the offer and sale of which have not been
registered under the Securities Act and are presented for transfer or
exchange prior to (X) the date which is two years (or such shorter
period as may be prescribed by Rule 144(k) (or any successor provision
thereto)) after the later of the date of original issuance of the
Warrants and the last date on which the Company or any affiliate of
the Company was the owner of such Warrants, or any predecessor
thereto, and (Y) such later date, if any, as may be required by any
subsequent change in applicable law (the "Resale Restriction
Termination Date"), such Warrants shall be accompanied by the
following additional information and documents, as applicable:
(A) if such Warrants are being delivered to the Warrant Agent by a
holder for registration in the name of such holder, without
transfer, a certification from such holder to that effect (in
substantially the form of Exhibit C hereto); or
(B) if such Warrants are being transferred to a qualified
institutional buyer as such term is defined in Rule 144A under
the Securities Act (a "QIB") in accordance with Rule 144A under
the Securities Act, a certification from
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the transferor to that effect (in substantially the form of
Exhibit C hereto); or
(C) if such Warrants are being transferred in reliance on Rule 144
under the Securities Act, delivery by the transferor of (i) a
certification from the transferor to that effect (in
substantially the form of Exhibit C hereto), and (ii) an opinion
of counsel reasonably satisfactory to the Company to the effect
that such transfer is in compliance with the Securities Act; or
(D) if such Warrants are being transferred in reliance on another
exemption from the registration requirements of the Securities
Act, a certification from the transferor to that effect (in
substantially the form of Exhibit C hereto) and an opinion of
counsel reasonably satisfactory to the Company to the effect
that such transfer is in compliance with the Securities Act;
provided that the Company may, based upon the views of its
own counsel, instruct the Warrant Agent not to register such
transfer in any case where the proposed transferee is not a QIB.
(b) Restrictions on Transfer of a Certificated Warrant for a
Beneficial Interest in a Global Warrant. A Certificated Warrant may not be
transferred by a holder for a beneficial interest in a Global Warrant except
upon satisfaction of the requirements set forth below. Upon receipt by the
Warrant Agent of a Certificated Warrant, duly endorsed or accompanied by
appropriate instruments of transfer, in form satisfactory to the Warrant Agent,
together with:
(A) certification from such holder (in substantially the form of
Exhibit C hereto) that such Certificated Warrant is being
transferred to a QIB in accordance with Rule 144A under the
Securities Act; and
(B) written instructions directing the Warrant Agent to make, or to
direct the Depositary to make, an endorsement on the Global
Warrant to reflect an increase in the aggregate amount of the
Warrants represented by the Global Warrant,
then the Warrant Agent shall cancel such Certificated Warrant and cause, or
direct the Depositary to cause, in accordance with the standing instructions and
procedures existing between the Depositary and the Warrant Agent, the number of
Warrant Shares represented by the Global Warrant to be increased accordingly. If
no Global Warrant is then outstanding, the Company shall issue, and the Warrant
Agent shall upon written instructions from the Company authenticate, a new
Global Warrant in the appropriate amount.
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(c) Transfer or Exchange of Global Warrants. The transfer or exchange
of Global Warrants or beneficial interests therein shall be effected through the
Depositary, in accordance with this Section 1.07, the Private Placement Legend
(as defined below), this Agreement (including those restrictions on transfer set
forth herein) and the procedures of the Depositary therefor.
(d) Transfer or Exchange of a Beneficial Interest in a Global Warrant
for a Certificated Warrant.
(i) Any person having a beneficial interest in a Global Warrant may
transfer or exchange such beneficial interest for a Certificated
Warrant upon receipt by the Warrant Agent of written instructions (or
such other form of instructions as is customary for the Depositary)
from the Depositary or its nominee on behalf of any person having a
beneficial interest in a Global Warrant, including a written order
containing registration instructions and, in the case of any such
transfer or exchange prior to the Resale Restriction Termination Date,
the following additional information and documents:
(A) if such beneficial interest is being transferred to the person
designated by the Depositary as being the beneficial owner, a
certification from such person to that effect (in substantially
the form of Exhibit C hereto); or
(B) if such beneficial interest is being transferred to a QIB in
accordance with Rule 144A under the Securities Act, a
certification from the transferor to that effect (in
substantially the form of Exhibit C hereto); or
(C) if such beneficial interest is being transferred in reliance on
Rule 144 under the Securities Act, delivery by the transferor of
(i) a certification to that effect (in substantially the form of
Exhibit C hereto) and (ii) an opinion of counsel reasonably
satisfactory to the Company to the effect that such transfer is
in compliance with the Securities Act; or
(D) if such beneficial interest is being transferred in reliance on
another exemption from the registration requirements of the
Securities Act, a certification from the transferor to that
effect (in substantially the form of Exhibit C hereto) and an
opinion of counsel reasonably satisfactory to the Company to the
effect that such transfer is in compliance with the Securities
Act; provided that the Company may instruct the Warrant Agent not
to register such transfer in any case where the proposed
transferee is not a QIB;
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then, upon receipt of such written instructions and additional
information and documents, the Warrant Agent will cause, in accordance
with the standing instructions and procedures existing between the
Depositary and the Warrant Agent, the aggregate amount of the Global
Warrant to be reduced and, following such reduction, the Company will
execute and, upon receipt of an authentication order in the form of an
officers' certificate (a certificate signed by the chairman or a
co-chairman of the board, the president, the chief executive officer,
the chief financial officer, any executive vice president or any
senior vice president of the Company signing alone, or by any vice
president signing together with the secretary, any assistant
secretary, the treasurer, or any assistant treasurer of the Company)
(an "Officers' Certificate"), the Warrant Agent will authenticate and
deliver to the transferee a Certificated Warrant.
(ii) Certificated Warrants issued in exchange for a beneficial interest in
a Global Warrant pursuant to this Section 1.07(d) shall be registered
in such names and in such authorized denominations as the Depositary,
pursuant to instructions from its direct or indirect participants or
otherwise, shall instruct the Warrant Agent in writing. The Warrant
Agent shall deliver such Certificated Warrants to the persons in whose
names such Warrants are so registered and adjust the Global Warrant
pursuant to paragraph (h) of this Section 1.07.
(e) Restrictions on Transfer or Exchange of Global Warrants.
Notwithstanding any other provisions of this Agreement (other than the
provisions set forth in subsection (f) of this Section 1.07), a Global Warrant
may not be transferred or exchanged as a whole except by the Depositary to a
nominee of the Depositary; by a nominee of the Depositary to the Depositary or
another nominee of the Depositary; or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary.
(f) Authentication of Certificated Warrants in Absence of Depositary.
If at any time:
(i) the Depositary for the Global Warrants notifies the Company that the
Depositary is unwilling or unable to continue as Depositary for the
Global Warrant and a successor Depositary for the Global Warrant is
not appointed by the Company within 90 days after delivery of such
notice; or
(ii) the Company, at its sole discretion, notifies the Warrant Agent in
writing that it elects to cause the issuance of Certificated Warrants
for all Global Warrants under this Agreement,
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then the Company will execute, and the Warrant Agent will, upon receipt of an
Officers' Certificate requesting the authentication and delivery of Certificated
Warrants, authenticate and deliver Certificated Warrants, in an aggregate number
equal to the aggregate number of warrants represented by the Global Warrant, in
exchange for such Global Warrant.
(g) Private Placement Legend. Upon the transfer or exchange of Warrant
Certificates not bearing the legend set forth in the first paragraph of Exhibit
A attached hereto (the "Private Placement Legend"), the Warrant Agent shall
deliver Warrant Certificates that do not bear the Private Placement Legend. Upon
the transfer, exchange or replacement of Warrant Certificates bearing the
Private Placement Legend, the Warrant Agent shall deliver Warrant Certificates
that bear the Private Placement Legend unless, and the Warrant Agent is hereby
authorized to deliver Warrant Certificates without the Private Placement Legend
if, (i) there is delivered to the Warrant Agent an opinion of counsel reasonably
satisfactory to the Company to the effect that neither such legend nor the
related restrictions on transfer are required in order to maintain compliance
with the provisions of the Securities Act or (ii) there is delivered to the
Warrant Agent an Officers' Certificate stating that the Warrants to be
transferred or exchanged represented by such Warrant Certificates are being
transferred or exchanged pursuant to an effective registration statement under
the Securities Act.
(h) Cancellation or Adjustment of a Global Warrant. At such time as
all beneficial interests in a Global Warrant have either been exchanged for
Certificated Warrants, redeemed, repurchased or canceled, such Global Warrant
shall be returned to the Company or, upon written order to the Warrant Agent in
the form of an Officers' Certificate from the Company, retained and canceled by
the Warrant Agent. At any time prior to such cancellation, if any beneficial
interest in a Global Warrant is exchanged for Certificated Warrants, redeemed,
repurchased or canceled, the number of Warrants represented by such Global
Warrant shall be reduced and an endorsement shall be made on such Global Warrant
by the Warrant Agent to reflect such reduction.
(i) Obligations with Respect to Transfers or Exchanges of Certificated
Warrants.
(i) To permit registrations of transfers or exchanges completed in
accordance with the provisions hereof, the Company shall execute, at
the Warrant Agent's request, and the Warrant Agent shall authenticate,
Certificated Warrants and Global Warrants.
(ii) All Certificated Warrants and Global Warrants issued upon any
registration of transfer or exchange of Certificated Warrants or
Global Warrants, as the case may be, completed in accordance with the
provisions hereof, shall be the valid obligations of the Company,
entitled to the same benefits under this Warrant
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Agreement as the Certificated Warrants or Global Warrants surrendered
upon the registration of transfer or exchange.
(iii) Prior to due presentment for registration of transfer of any Warrant,
the Warrant Agent and the Company may deem and treat the person in
whose name any Warrant is registered as the absolute owner of such
Warrant, and neither the Warrant Agent nor the Company shall be
affected by notice to the contrary.
SECTION 1.08. Lost, Stolen, Destroyed, Defaced or Mutilated Warrant
Certificates. Upon receipt by the Company and the Warrant Agent (or any agent of
the Company or the Warrant Agent, if requested by the Company) of evidence
satisfactory to them of the loss, theft, destruction, defacement, or mutilation
of any Warrant Certificate and of indemnity satisfactory to them and, in the
case of mutilation or defacement, upon surrender thereof to the Warrant Agent
for cancellation, then, in the absence of notice to the Company or the Warrant
Agent that such Warrant Certificate has been acquired by a bona fide purchaser
or holder in due course, the Company shall execute, and an authorized signatory
of the Warrant Agent shall manually authenticate and deliver, in exchange for or
in lieu of the lost, stolen, destroyed, defaced or mutilated Warrant
Certificate, a new Warrant Certificate representing a like number of Warrants,
bearing a number or other distinguishing symbol not contemporaneously
outstanding. Prior to the issuance of any new Warrant Certificate under this
Section in a name other than the prior registered holder of the lost, stolen,
destroyed, defaced or mutilated Warrant Certificate, the Company may require the
payment from the holder of such Warrant Certificate of a sum sufficient to cover
any tax, stamp tax or other governmental charge that may be imposed in relation
thereto and any other expenses (including the fees and expenses of the Warrant
Agent and the Registrar or any agent thereof) in connection therewith. Every
substitute Warrant Certificate executed and delivered pursuant to this Section
1.08 in lieu of any lost, stolen or destroyed Warrant Certificate shall
constitute an additional contractual obligation of the Company, whether or not
the lost, stolen or destroyed Warrant Certificate shall be at any time
enforceable by anyone, and shall be entitled to the benefits of (but shall be
subject to all the limitations of rights set forth in) this Agreement equally
and proportionately with any and all other Warrant Certificates duly executed
and delivered hereunder. The provisions of this Section 1.08 are exclusive with
respect to the replacement of lost, stolen, destroyed, defaced or mutilated
Warrant Certificates and shall preclude (to the extent lawful) any and all other
rights or remedies notwithstanding any law or statute existing or hereafter
enacted to the contrary with respect to the replacement of lost, stolen,
destroyed, defaced or mutilated Warrant Certificates.
The Warrant Agent is hereby authorized to authenticate in accordance
with the provisions of this Agreement and deliver the new Warrant Certificates
required pursuant to the provisions of this Section 1.08.
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SECTION 1.09. Offices for Exercise, etc. So long as any of the
Warrants remain outstanding, the Company will designate and maintain in the
Borough of Manhattan, The City of New York: (a) an office or agency where the
Warrant Certificates may be presented for exercise (each a "Warrant Exercise
Office"), (b) an office or agency where the Warrant Certificates may be
presented for registration of transfer and for exchange, and (c) an office or
agency where notices and demands to or upon the Company in respect of the
Warrants or of this Agreement may be served. The Company may from time to time
change or rescind such designation, as it may deem desirable or expedient;
provided, however, that an office or agency shall at all times be maintained in
the Borough of Manhattan, The City of New York, as provided in the first
sentence of this Section. In addition to such office or offices or agency or
agencies, the Company may from time to time designate and maintain one or more
additional offices or agencies within or outside The City of New York, where
Warrant Certificates may be presented for exercise or for registration of
transfer or for exchange, and the Company may from time to time change or
rescind such designation, as it may deem desirable or expedient. The Company
will give to the Warrant Agent written notice of the location of any such office
or agency and of any change of location thereof. The Company hereby designates
the Warrant Agent at its principal corporate trust office identified in Section
7.03 in the Borough of Manhattan, The City of New York (the "Warrant Agent
Office"), as the initial agency maintained for each such purpose. In case the
Company shall fail to maintain any such office or agency or shall fail to give
such notice of the location or of any change in the location thereof,
presentations and demands may be made and notice may be served at the Warrant
Agent Office and the Company appoints the Warrant Agent as its agent to receive
all such presentations, surrenders, notices and demands.
ARTICLE II
DURATION, EXERCISE OF WARRANTS; EXERCISE PRICE
AND REPURCHASE OF WARRANTS
SECTION 2.01. Duration of Warrants. Subject to the terms and
conditions established herein, the Warrants shall expire at 5:00 p.m., New York
City time, on July 15, 2008. The applicable date of expiration of a particular
Warrant is referred to herein as the "Expiration Date" of such Warrant. Each
Warrant may be exercised as set forth in Section 2.02. The Company will give
notice of expiration to then registered holders of Warrants not less than 90 nor
more than 120 days prior to the Expiration Date. Failure to give such notice
however, will not prevent the Warrants from expiring and becoming void on the
Expiration Date.
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Any Warrant not exercised before 5:00 p.m., New York City time, on the
Expiration Date shall become void, and all rights of the holder under the
Warrant Certificate evidencing such Warrant and under this Agreement shall
cease.
"Business Day" shall mean any day on which (i) banks in The City of
New York, (ii) the principal U.S. securities exchange or market, if any, on
which any Common Stock is listed or admitted to trading and (iii) the principal
U.S. securities exchange or market, if any, on which the Warrants are listed or
admitted to trading, are open for business.
SECTION 2.02. Exercise, Exercise Price, Settlement and Delivery. (a)
Subject to the provisions of this Agreement, each Warrant shall entitle the
registered holder thereof to purchase from the Company on any Business Day
during the period beginning on the Exercise Date and ending at 5:00 p.m., New
York City time, on the Expiration Date 1.81 fully paid, registered and
non-assessable Warrant Shares (and any other securities purchasable or
deliverable upon exercise of such Warrant as provided in Article V), subject to
adjustment in accordance with Article V hereof, at the purchase price of $13.20
for each share purchased (the "Exercise Price"). The number and amount of
Warrant Shares issuable upon exercise of a Warrant (the "Exercise Rate") at the
Exercise Price shall be subject to adjustment from time to time as set forth in
Article V hereof.
"Exercise Date" means the earlier of (i) the date that a shelf
registration statement relating to the Common Stock underlying the Warrants is
declared effective under the Securities Act or (ii) November 16, 1998.
(b) Warrants may be exercised on or after the date they are
exercisable hereunder by (i) surrendering at any Warrant Exercise Office the
Warrant Certificate evidencing such Warrants with the form of election to
purchase Warrant Shares set forth on the reverse side of the Warrant Certificate
(the "Election to Exercise") duly completed and signed by the registered holder
or holders thereof or by the duly appointed legal representative thereof or by a
duly authorized attorney, and in the case of a transfer, such signature shall be
guaranteed by an eligible guarantor institution, and (ii) paying in full the
Exercise Price for each such Warrant exercised. Each Warrant may be exercised
only in whole.
(c) Simultaneously with the exercise of each Warrant, payment in full
of the aggregate Exercise Price may be made, at the option of the holder, (i) in
cash or by certified or official bank check, (ii) by a Cashless Exercise (as
defined below) or (iii) by any combination of (i) and (ii), to the office or
agency where the Warrant Certificate is being surrendered. For purposes of this
Agreement, a "Cashless Exercise" shall mean an exercise of a Warrant in
accordance with the immediately following two sentences. To effect a Cashless
Exercise, the holder may exercise a Warrant or Warrants without payment of the
Exercise Price in cash by surrendering such Warrant or Warrants (represented by
one or more Warrant Certificates) and,
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in exchange therefor, receiving such number of shares of Common Stock equal to
the product of (1) that number of shares of Common Stock for which such Warrant
or Warrants are exercisable and which would be issuable in the event of an
exercise with payment in cash of the Exercise Price and (2) the Cashless
Exercise Ratio (as defined below). The "Cashless Exercise Ratio" shall equal a
fraction, the numerator of which is the excess of the Current Market Value
(calculated as set forth in this Agreement) per share of Common Stock on the
date of exercise over the Exercise Price per share of Common Stock as of the
date of exercise and the denominator of which is the Current Market Value per
share of Common Stock on the date of exercise. Upon surrender of a Warrant
Certificate representing more than one Warrant in connection with a holder's
option to elect a Cashless Exercise, such holder must specify the number of
Warrants for which such Warrant Certificate is to be exercised (without giving
effect to such Cashless Exercise). All provisions of this Agreement shall be
applicable with respect to a Cashless Exercise of a Warrant Certificate for less
than the full number of Warrants represented thereby. No payment or adjustment
shall be made on account of any distributions of dividends on the Common Stock
issuable upon exercise of a Warrant. If the Company has not effected the
registration under the Securities Act of the offer and sale of the Warrant
Shares by the Company to the holders of the Warrants on or prior to the
Effective Exercise Date (as defined below), the Company may elect to require
that the holders of the Warrants effect the exercise thereof solely pursuant to
the Cashless Exercise option and may also amend the Warrants to eliminate the
requirement for payment of the Exercise Price with respect to such Cashless
Exercise option. The Warrant Agent shall have no obligation under this section
to calculate the Cashless Exercise Ratio.
(d) Upon surrender of a Warrant Certificate and payment and collection
of the Exercise Price at any Warrant Exercise Office (other than any Warrant
Exercise Office that also is an office of the Warrant Agent), such Warrant
Certificate and payment shall be promptly delivered to the Warrant Agent. The
"Effective Exercise Date" for a Warrant shall be the date when all of the items
referred to in the first sentence of paragraphs (b) and (c) of this Section 2.02
are received by the Warrant Agent at or prior to 11:00 a.m., New York City time,
on a Business Day and the exercise of the Warrants will be effective as of such
Effective Exercise Date. If any items referred to in the first sentence of
paragraphs (b) and (c) are received after 11:00 a.m., New York City time, on a
Business Day, the exercise of the Warrants to which such item relates will be
effective on the next succeeding Business Day. Notwithstanding the foregoing, in
the case of an exercise of Warrants on the Expiration Date, if all of the items
referred to in the first sentence of paragraphs (b) and (c) are received by the
Warrant Agent at or prior to 5:00 p.m., New York City time, on the Expiration
Date, the exercise of the Warrants to which such items relate will be effective
on the Expiration Date.
(e) Upon the exercise of a Warrant in accordance with the terms
hereof, the receipt of a Warrant Certificate and payment of the Exercise Price
(or election of the Cashless Exercise option), the Warrant Agent shall: (i)
except to the extent exercise of the Warrant has
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been effected through a Cashless Exercise, cause an amount equal to the
aggregate Exercise Price to be paid to the Company by crediting such amount in
immediately available funds to the account designated by the Company in writing
to the Warrant Agent for that purpose; (ii) advise the Company immediately by
telephone of the amount so deposited to the Company's account and promptly
confirm such telephonic advice in writing; and (iii) as soon as practicable,
advise the Company in writing of the number of Warrants exercised in accordance
with the terms and conditions of this Agreement and the Warrant Certificates,
the instructions of each exercising holder of the Warrant Certificates with
respect to delivery of the Warrant Shares to which such holder is entitled upon
such exercise, and such other information as the Company shall reasonably
request.
(f) Subject to Section 5.02 hereof, as soon as practicable after the
exercise of any Warrant or Warrants in accordance with the terms hereof, the
Company shall issue or cause to be issued to or upon the written order of the
registered holder of the Warrant Certificate evidencing such exercised Warrant
or Warrants, a certificate or certificates evidencing the Warrant Shares to
which such holder is entitled, in fully registered form, registered in such name
or names as may be directed by such holder pursuant to the Election to Exercise,
as set forth on the reverse of the Warrant Certificate. Such certificate or
certificates evidencing the Warrant Shares shall be deemed to have been issued
and any persons who are designated to be named therein shall be deemed to have
become the holders of record of such Warrant Shares as of the close of business
on the Effective Exercise Date; the Warrant Shares may initially be issued in
global form (the "Global Shares"). Such Global Shares shall represent such of
the outstanding Warrant Shares as shall be specified therein and each Global
Share shall provide that it represents the aggregate amount of outstanding
Warrant Shares from time to time endorsed thereon and that the aggregate amount
of outstanding Warrant Shares represented thereby may from time to time be
reduced or increased, as appropriate. Any endorsement of a Global Share to
reflect any increase or decrease in the amount of outstanding Warrant Shares
represented thereby shall be made by the registrar for the Warrant Shares and
the Depositary (referred to below) in accordance with instructions given by the
holder thereof. The Depository Trust Company shall (if possible) act as the
Depositary with respect to the Global Shares until a successor shall be
appointed by the Company and the registrar for the Warrant Shares. After
exercise of any Warrant or Warrant Shares, the Company shall also issue or cause
to be issued to or upon the written order of the registered holder of such
Warrant Certificate, a new Warrant Certificate, countersigned by the Warrant
Agent pursuant to written instruction, evidencing the number of Warrants, if
any, remaining unexercised unless such Warrants shall have expired.
SECTION 2.03. Cancellation of Warrant Certificates. In the event the
Company shall purchase or otherwise acquire Warrants, the Warrant Certificates
evidencing such Warrants may thereupon be delivered to the Warrant Agent, and if
so delivered, shall at the Company's written instruction be canceled by it and
retired. The Warrant Agent shall
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cancel all Warrant Certificates properly surrendered for exchange, substitution,
transfer or exercise. Upon the Company's written request, the Warrant Agent
shall deliver such canceled Warrant Certificates to the Company.
SECTION 2.04. Notice of an Exercise Event. The Company shall, as soon
as practicable after the occurrence of an Exercise Event, send or cause to be
sent to each holder of Warrants and to each beneficial owner of the Warrants
with respect to which such Exercise Event has occurred to the extent that the
Warrants are held of record by a depositary or other agent (with a copy to the
Warrant Agent), by first-class mail, at the addresses appearing on the Warrant
Register, a notice prepared by the Company advising such holder of the Exercise
Event which has occurred, which notice shall describe the type of Exercise Event
and the date of the occurrence thereof, as applicable, and, in either case, the
date of expiration of the right to exercise the Warrants prominently set forth
in the face of such notice.
ARTICLE III
OTHER PROVISIONS RELATING TO
RIGHTS OF HOLDERS OF WARRANTS
SECTION 3.01. Enforcement of Rights. (a) Notwithstanding any of the
provisions of this Agreement, any holder of any Warrant Certificate, without the
consent of the Warrant Agent, the holder of any Warrant Shares or the holder of
any other Warrant Certificate, may, in and for his own behalf enforce, and may
institute and maintain any suit, action or proceeding against the Company
suitable to enforce, his right to exercise the Warrant or Warrants evidenced by
his Warrant Certificate in the manner provided in such Warrant Certificate and
in this Agreement.
(b) Neither the Warrants nor any Warrant Certificate shall entitle the
holders thereof to any of the rights of shareholders of the Company, including,
without limitation, the right to vote or to receive any dividends or other
payments or to consent or to exercise any preemptive rights or to receive notice
as stockholders in respect of the meetings of stockholders or for the election
of directors of the Company or any other matter, or any rights whatsoever as
stockholders of the Company.
SECTION 3.02. Obtaining Stock Exchange Listings. The Company will use
its best efforts from time to time to list the Warrant Shares, immediately upon
their issuance upon the exercise of Warrants, on the Nasdaq National Market.
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ARTICLE IV
CERTAIN COVENANTS OF THE COMPANY
SECTION 4.01. Payment of Taxes. The Company will pay all documentary
stamp taxes attributable to the initial issuance of Warrants and of the Warrant
Shares upon the exercise of Warrants; provided, however, that the Company shall
not be required to pay any tax or other governmental charge which may be payable
in respect of any transfer or exchange of any Warrant Certificates or any
certificates for Warrant Shares in a name other than the registered holder of a
Warrant Certificate surrendered upon the exercise of a Warrant. In any such
case, no transfer or exchange shall be made unless or until the person or
persons requesting issuance thereof shall have paid to the Company the amount of
such tax or other governmental charge or shall have established to the
satisfaction of the Company that such tax or other governmental charge has been
paid or an exemption is available therefrom.
SECTION 4.02. Rule 144A. The Company covenants that it will file the
reports required to be filed by it under the Securities Act and the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and the rules, regulations
and policies adopted by the Securities and Exchange Commission thereunder in a
timely manner in accordance with the requirements of the Securities Act and the
Exchange Act and, if at any time prior to the Expiration Date the Company is not
required to file such reports, it will mail to each owner or beneficial owner of
Warrants upon request such information as is referred to in Rule 144A(d)(4)
under the Securities Act.
SECTION 4.03. Securities Act and Applicable State Securities Laws. The
Company will also agree to comply with all applicable laws, including the
Securities Act and any applicable state securities laws, in connection with the
offer and sale of Common Stock (and other securities and property deliverable)
upon exercise of the Warrants.
SECTION 4.04. Resolution of Preemptive Rights, if Any. The Warrant
Shares shall not be subject to, or enjoy the benefit of, any preemptive or
similar rights.
ARTICLE V
ADJUSTMENTS
SECTION 5.01. Adjustment of Exercise Rate; Notices. The Exercise Rate
is subject to adjustment from time to time as provided in this Section 5.01.
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(a) Adjustment for Changes in Common Stock. In the event that at any
time on or after the Issue Date or from time to time the Company shall (i) pay a
dividend or make a distribution on its Common Stock payable in shares of its
Common Stock or other equity interests of the Company, (ii) subdivide any of its
outstanding shares of Common Stock into a larger number of shares of Common
Stock, (iii) combine any of its outstanding shares of Common Stock into a
smaller number of shares of Common Stock or (iv) increase or decrease the number
of shares of Common Stock outstanding by reclassification of its Common Stock,
then the number of shares of Common Stock issuable upon exercise of each Warrant
immediately after the happening of such event shall be adjusted to a number
determined by multiplying the number of shares of Common Stock that such holder
would have owned or have been entitled to receive upon exercise had such
Warrants been exercised immediately prior to the happening of the events
described above (or, in the case of a dividend or distribution of Common Stock
or other shares of Capital Stock, immediately prior to the record date therefor)
by a fraction, the numerator of which shall be the total number of shares of
Common Stock outstanding immediately after the happening of the events described
above and the denominator of which shall be the total number of shares of Common
Stock outstanding immediately prior to the happening of the events described
above; and subject to Section 5.01(n), the Exercise Price for each Warrant shall
be adjusted to a number determined by dividing the Exercise Price immediately
prior to such event by the aforementioned fraction. An adjustment made pursuant
to this Section 5.01(a) shall become effective immediately after the effective
date of such event, retroactive to the record date therefor in the case of a
dividend or distribution in shares of Common Stock or other shares of the
Company's capital stock.
(b) Adjustment for Cash Dividends and Other Distributions. In the
event that at any time or from time to time the Company shall distribute to all
holders of Common Stock (i) any dividend or other distribution of cash,
evidences of its indebtedness, shares of its capital stock or any other assets,
properties or debt securities or (ii) any options, warrants or other rights to
subscribe for or purchase any of the foregoing (other than, in each case, (x)
any rights, options, warrants or securities described in Section 5.01(c) and (z)
any cash dividends or other cash distributions from current or retained
earnings), then the number of shares of Common Stock issuable upon the exercise
of each Warrant shall be increased to a number determined by multiplying the
number of shares of Common Stock issuable upon the exercise of such Warrant
immediately prior to the record date for any such dividend or distribution by a
fraction, the numerator of which shall be the Current Market Value per share of
Common Stock on the record date for such dividend or distribution and the
denominator of which shall be such Current Market Value per share of Common
Stock on the record date for such dividend or distribution less the sum of (x)
the amount of cash, if any, distributed per share of Common Stock and (y) the
fair value (as determined in good faith by the Board, whose determination shall
be evidenced by a board resolution filed with the Warrant Agent, a copy of which
will be sent to Holders upon request) of the portion, if any, of the
distribution applicable to one share of Common Stock consisting of evidences of
indebtedness, shares of stock,
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securities, other assets or property, warrants, options or subscription or
purchase rights; and, subject to Section 5.01(n), the Exercise Price shall be
adjusted to a number determined by dividing the Exercise Price immediately prior
to such record date by the aforementioned fraction. Such adjustments shall be
made whenever any distribution is made and shall become effective as of the date
of distribution, retroactive to the record date for any such distribution;
provided, however, that the Company is not required to make an adjustment
pursuant to this Section 5.01(b) if at the time of such distribution the Company
makes the same distribution to Holders of Warrants as it makes to holders of
Common Stock pro rata based on the number of shares of Common Stock for which
such Warrants are exercisable (whether or not currently exercisable). No
adjustment shall be made pursuant to this Section 5.01(b) which shall have the
effect of decreasing the number of shares of Common Stock issuable upon exercise
of each Warrant or increasing the Exercise Price.
(c) Adjustment for Rights Issued to All Holders of Common Stock. In
the event that at any time or from time to time the Company shall issue to all
holders of Common Stock without any charge, rights, options or warrants
entitling the holders thereof to subscribe for additional shares of Common
Stock, or securities convertible into or exchangeable or exercisable for
additional shares of Common Stock, entitling such holders to subscribe for or
purchase shares of Common Stock at a price per share that is lower at the record
date for such issuance than the then Current Market Value per share of Common
Stock, then the number of shares of Common Stock issuable upon the exercise of
each Warrant shall be increased to a number determined by multiplying the number
of shares of Common Stock theretofore issuable upon exercise of each Warrant by
a fraction, the numerator of which shall be the number of shares of Common Stock
outstanding on the date of issuance of such rights, options, warrants or
securities plus the number of additional shares of Common Stock offered for
subscription or purchase or into or for which such securities that are issued
are convertible, exchangeable or exercisable, and the denominator of which shall
be the number of shares of Common Stock outstanding on the date of issuance of
such rights, options, warrants or securities plus the total number of shares of
Common Stock which the aggregate consideration expected to be received by the
Company (assuming the exercise or conversion of all such rights, options,
warrants or securities) would purchase at the then Current Market Value per
share of Common Stock. Subject to Section 5.01(n), in the event of any such
adjustment, the Exercise Price shall be adjusted to a number determined by
dividing the Exercise Price immediately prior to such date of issuance by the
aforementioned fraction. Such adjustment shall be made immediately after such
rights, options or warrants are issued and shall become effective, retroactive
to the record date for the determination of stockholders entitled to receive
such rights, options, warrants or securities. No adjustment shall be made
pursuant to this Section 5.01(c) which shall have the effect of decreasing the
number of shares of Common Stock purchasable upon exercise of each Warrant or of
increasing the Exercise Price.
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(d) Adjustment for Other Issuances of Common Stock or Rights. In the
event that at any time or from time to time the Company shall issue (i) shares
of Common Stock (subject to the provisions below), (ii) rights, options or
warrants entitling the holder thereof to subscribe for shares of Common Stock
(provided, however, that no adjustment shall be made upon the exercise of such
rights, options or warrants), or (iii) securities convertible into or
exchangeable or exercisable for Common Stock (provided, however, that no
adjustment shall be made upon the conversion, exchange or exercise of such
securities (other than issuances specified in (i), (ii) or (iii) which are made
as the result of anti-dilution adjustments in such securities)), at a price per
share at the record date of such issuance that is less than the then Current
Market Value per share of Common Stock, then the number of shares of Common
Stock issuable upon the exercise of each Warrant shall be increased to a number
determined by multiplying the number of shares of Common Stock theretofore
issuable upon exercise of each Warrant by a fraction, the numerator of which
shall be the number of shares of Common Stock outstanding immediately after such
sale or issuance plus the number of additional shares of Common Stock offered
for subscription or purchase or into or for which such securities that are
issued are convertible, exchangeable or exercisable, and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such sale or issuance plus the total number of shares of Common Stock
which the aggregate consideration expected to be received by the Company
(assuming the exercise or conversion of all such rights, options, warrants or
securities, if any) would purchase at the then Current Market Value per share of
Common Stock, and subject to Sections 5.01(n) and 5.03 the Exercise Price shall
be adjusted to a number determined by dividing the Exercise Price immediately
prior to such date of issuance by the aforementioned fraction. Such adjustments
shall be made whenever such rights, options or warrants or convertible
securities are issued. No adjustment shall be made pursuant to this Section
5.01(d) which shall have the effect of decreasing the number of shares of Common
Stock issuable upon exercise of each warrant or of increasing the Exercise
Price. For purposes of this Section 5.01(d) only, any issuance of Common Stock,
or rights, options or warrants to subscribe for, or other securities convertible
into or exercisable or exchangeable for, Common Stock, which issuance (or
agreement to issue) (A) is in exchange for or otherwise in connection with the
acquisition of the property (excluding any such exchange exclusively for cash)
of any Person and (B) is at a price per share equal to the Current Market Value
at the time of signing a definitive agreement, shall be deemed to have been made
at a price per share equal to the Current Market Value per share at the record
date with respect to such issuance (the time of closing or consummation of such
exchange or acquisition) if such definitive agreement is entered into within 90
days of the date of such agreement in principle.
(e) Notice of Adjustment. Whenever the Exercise Price or the number of
shares of Common Stock and other property, if any, issuable upon exercise of the
Warrants is adjusted, as herein provided, the Company shall deliver to the
Warrant Agent a certificate of a firm of independent accountants selected by the
Board (who may be the regular accountants
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employed by the Company) setting forth, in reasonable detail, the event
requiring the adjustment and the method by which such adjustment was calculated
(including a description of the basis on which (i) the Board determined the fair
value of any evidences of indebtedness, other securities or property or
warrants, options or other subscription or purchase rights and (ii) the Current
Market Value of the Common Stock was determined, if either of such
determinations were required), and specifying the Exercise Price and the number
of shares of Common Stock issuable upon exercise of Warrants after giving effect
to such adjustment. The Company shall, by Company Order, promptly cause the
Warrant Agent to mail a copy of such certificate to each Holder in accordance
with Section 5.01(l). The Warrant Agent shall be entitled to rely on such
certificate and shall be under no duty or responsibility with respect to any
such certificate, except to exhibit the same from time to time, to any Holder
desiring an inspection thereof during reasonable business hours. The Warrant
Agent shall not at any time be under any duty or responsibility to any Holder to
determine whether any facts exist which may require any adjustment of the
Exercise Price or the number of shares of Common Stock or other stock issuable
on exercise of the Warrants, or with respect to the nature or extent of any such
adjustment when made, or with respect to the method employed in making such
adjustment or the validity or value of any shares of Common Stock, evidences of
indebtedness, warrants, options, or other securities or property.
(f) Reorganization of Company; Special Distributions. (i) If the
Company, in a single transaction or through a series of related transactions,
consolidates with or merges with or into any other person or sells, assigns,
transfers, leases, conveys or otherwise disposes of all or substantially all of
its properties and assets to another person or group of affiliated persons or is
a party to a merger or binding share exchange which reclassifies or changes its
outstanding Common Stock (a "Fundamental Transaction"), as a condition to
consummating any such transaction the person formed by or surviving any such
consolidation or merger if other than the Company or the person to whom such
transfer has been made (the "Surviving Person") shall enter into a supplemental
warrant agreement. The supplemental warrant agreement shall provide (a) that the
holder of a Warrant then outstanding may exercise it for the kind and amount of
securities, cash or other assets which such holder would have received
immediately after the Fundamental Transaction if such holder had exercised the
Warrant immediately before the effective date of the transaction (whether or not
the Warrants were then exercisable and without giving effect to the Cashless
Exercise option); it being understood that the Warrants will remain exercisable
only in accordance with their terms so that conditions to exercise will remain
applicable, such as payment of Exercise Price, assuming (to the extent
applicable) that such holder (i) was not a constituent person or an affiliate of
a constituent person to such transactions, (ii) no election with respect to the
form of consideration payable in such transaction, and (iii) was treated alike
with the plurality of non-electing holders, and (b) that the Surviving Person
shall succeed to and be substituted to every right and obligation of the Company
in respect of this Agreement and the Warrants. The supplemental warrant
agreement shall provide for adjustments which shall be as nearly equivalent as
may be
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practicable to the adjustments provided for in this Article V. The Surviving
Person shall mail to holders of Warrants at the addresses appearing on the
Warrant Register a notice briefly describing the supplemental warrant agreement.
If the issuer of securities deliverable upon exercise of Warrants is an
affiliate of the Surviving Person, that issuer shall join in the supplemental
warrant agreement.
(ii) Notwithstanding the foregoing, (a) if the Company enters into a
Fundamental Transaction with another Person (other than a subsidiary of the
Company) and consideration is payable to holders of shares of Common Stock (or
other securities) issuable or, deliverable upon exercise of the Warrants in
connection with such Fundamental Transaction which consists solely of cash or
(b) if there is a dissolution, liquidation or winding up of the Company, then
the holders of Warrants shall be entitled to receive distributions on the date
of such event on an equal basis with holders of such shares (or other securities
issuable upon exercise of the Warrants) as if the Warrants had been exercised
immediately prior to such event, less the aggregate Exercise Price therefor.
Upon receipt of such payment, if any, the rights of a holder of such Warrant
shall terminate and cease and such holder's Warrants shall expire.
(iii) If this paragraph (f) applies, it shall supersede the
application of paragraph (a) of this Section 5.01.
(g) Company Determination Final. Any determination that the Company or
the board of directors of the Company must make pursuant to this Article V shall
be conclusive.
(h) Warrant Agent's Adjustment Disclaimer. The Warrant Agent shall
have no duty to determine when an adjustment under this Article V should be
made, how it should be made or what it should be. The Warrant Agent shall have
no duty to determine whether a supplemental warrant agreement under paragraph
(f) need be entered into or whether any provisions of any supplemental warrant
agreement are correct. The Warrant Agent shall not be accountable for and makes
no representation as to the validity or value of any securities or assets issued
upon exercise of Warrants. The Warrant Agent shall not be responsible for the
Company's failure to comply with this Article V.
(i) Underlying Warrant Shares. The Company shall at all times reserve
and keep available, free from preemptive rights, out of its authorized but
unissued Common Stock or Common Stock held in the treasury of the Company, for
the purpose of effecting the exercise of Warrants, the full number of Warrant
Shares then deliverable upon the exercise of all Warrants then outstanding and
payment of the exercise price, and the shares so deliverable shall be fully paid
and nonassessable and free from all liens and security interests.
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(j) Specificity of Adjustment. Regardless of any adjustment in the
number or kind of shares purchasable upon the exercise of the Warrants, Warrant
Certificates theretofore or thereafter issued may continue to express the same
number and kind of Warrant Shares per Warrant as are stated on the Warrant
Certificates initially issuable pursuant to this Agreement.
(k) Notice of Voluntary Adjustment. In the event that the Company
shall propose to (a) pay any dividend payable in securities of any class to the
holders of its Common Stock or to make any other non-cash dividend or
distribution to the holders of its Common Stock, (b) offer the holders of its
Common Stock rights to subscribe for or to purchase any securities convertible
into shares of Common Stock or shares of stock of any class or any other
securities, rights or options, (c) issue any (i) shares of Common Stock, (ii)
rights, options or warrants entitling the holders thereof to subscribe for
shares of Common Stock, or (iii) securities convertible into or exchangeable or
exercisable for Common Stock (in the case of (i), (ii) and (iii), only if such
issuance or adjustment would result in an adjustment hereunder), (d) effect any
capital reorganization, reclassification, consolidation or merger, (e) effect
the voluntary or involuntary dissolution, liquidation or winding-up of the
Company or (f) make a tender offer or exchange offer with respect to the Common
Stock, the Company shall within five (5) days send the Holder and the Warrant
Agent a notice of such proposed action or offer. Such notice shall be mailed by
the Company to the Holders at their addresses as they appear in the Certificate
Register, which shall specify the record date for the purposes of such dividend,
distribution or rights, or the date such issuance or event is to take place and
the date of participation therein by the holders of Common Stock, if any such
date is to be fixed, and shall briefly indicate the effect of such action on the
Common Stock and on the number and kind of any other shares of stock and on
other property, if any, and the number of shares of Common Stock and other
securities, if any, issuable upon exercise of each Warrant and the Exercise
Price after giving effect to any adjustment pursuant to Article 5 which will be
required as a result of such action. Such notice shall be given by the Company
as promptly as possible and (x) in the case of any action covered by clause (a)
or (b) above, at least 10 days prior to the record date for determining holders
of the Common Stock for purposes of such action or (y) in the case of any other
such action, at least 20 days prior to the date of the taking of such proposed
action or the date of participation therein by the holders of Common Stock,
whichever shall be the earlier.
(l) Multiple Adjustments. After an adjustment to the Exercise Rate for
outstanding Warrants under this Article V, any subsequent event requiring an
adjustment under this Article V shall cause an adjustment to the Exercise Rate
for outstanding Warrants as so adjusted.
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(m) Definitions.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, partnership interests, participations, rights in or other equivalents
(however designated and whether voting or non-voting) of, such person's capital
stock, and any rights (other than debt securities convertible into capital
stock), warrants or options exchangeable for or convertible into such capital
stock whether outstanding on the Issue Date (as defined below) or issued after
the Issue Date.
"Current Market Value" per share of Common Stock of the Company or any
other security at any date shall mean (i) if the security is not registered
under the Exchange Act, (a) the value of the security, determined in good faith
by the board of directors of the Company and certified in a board resolution,
based on the most recently completed arm's-length transaction between the
Company and a person other than an affiliate of the Company and the closing of
which occurs on such date or shall have occurred within the six-month period
preceding such date, or (b) if no such transaction shall have occurred on such
date or within such six-month period, the fair market value of the security as
determined by a nationally or regionally recognized Independent Financial Expert
(as defined herein) (provided that in the case of the calculation of Current
Market Value for determining the cash value of fractional shares, any such
determination within six months that is, in the good faith judgment of the
Board, a reasonable determination of value, may be utilized) or (ii)(a) if the
security is registered under the Exchange Act, the average of the daily closing
sales prices of the securities for the 20 consecutive trading days immediately
preceding such date, or (b) if the security has been registered under the
Exchange Act for less than 20 consecutive trading days before such date, then
the average of the daily closing sales prices for all of the trading days before
such date for which closing sales prices are available, in the case of each of
(ii)(a) and (ii)(b), as certified by the president, the chief executive officer,
any vice president or the chief financial officer of the Company in a writing
delivered to the Warrant Agent. The closing sales price for each such trading
day shall be: (A) in the case of a security listed or admitted to trading on any
U.S. national securities exchange or quotation system, the closing sales price,
regular way, on such day, or if no sale takes place on such day, the average of
the closing bid and asked prices on such day, (B) in the case of a security not
then listed or admitted to trading on any U.S. national securities exchange or
quotation system, the last reported sale price on such day, or if no sale takes
place on such day, the average of the closing bid and asked prices on such day,
as reported by a reputable quotation source designated by the Company, (C) in
the case of a security not then listed or admitted to trading on any U.S.
national securities exchange or quotation system and as to which no such
reported sale price or bid and asked prices are available, the average of the
reported high bid and low asked prices on such day, as reported by a reputable
quotation service, or a newspaper of general circulation in the Borough of
Manhattan, The City and State of New York customarily published on each Business
Day, designated by the Company, or, if there shall be no bid and asked prices on
such day, the
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average of the high bid and low asked prices, as so reported, on the most recent
day (not more than 30 days prior to the date in question) for which prices have
been so reported and (D) if there are not bid and asked prices reported during
the 30 days prior to the date in question, the Current Market Value shall be
determined as if the securities were not registered under the Exchange Act.
"Independent Financial Expert" means a U.S. investment banking firm of
national standing in the United States (i) which does not, and whose directors,
officers and employees or affiliates do not have a direct or indirect material
financial interest for its proprietary account in the Company or any of its
affiliates and (ii) which, in the judgment of the board of directors of the
Company, is otherwise independent with respect to the Company and its affiliates
and qualified to perform the task for which it is to be engaged.
"Issue Date" means the date of the Indenture.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof or any other entity, including any predecessor of any such entity.
(n) When De Minimis Adjustment May Be Deferred. The adjustments
required by the preceding Sections of this Article V shall be made whenever and
as often as any specified event requiring an adjustment shall occur, except that
no adjustment of the Exercise Price or the number of shares of Common Stock
issuable upon exercise of Warrants that would otherwise be required shall be
made unless and until such adjustment either by itself or with other adjustments
not previously made increases or decreases by at least 1% the Exercise Price or
the number of shares of Common Stock issuable upon exercise of Warrants
immediately prior to the making of such adjustment. Any adjustment representing
a change of less than such minimum amount shall be carried forward and made as
soon as such adjustment, together with other adjustments required by this
Article V and not previously made, would result in a minimum adjustment. For the
purpose of any adjustment, any specified event shall be deemed to have occurred
at the close of business on the date of its occurrence. In computing adjustments
under this Article V, fractional interests in Common Stock shall be taken into
account to the nearest one-thousandth of a share.
(o) Adjustment of Exercise Price. In addition, notwithstanding any
other provisions of this Article V, the Company may reduce the Exercise Price
(to an amount not less than the par value of the Common Stock) for a period of
time not less then 20 business days as deemed appropriate and determined in good
faith by the Board.
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SECTION 5.02. Fractional Warrant Shares. The Company shall not be
required to issue fractional Warrant Shares upon exercise of the Warrants or
distribute Warrant Certificates that evidence fractional Warrant Shares. In
addition, in no event shall any holder of Warrants be required to make any
payment of a fractional cent. In lieu of fractional Warrant Shares, there shall
be paid to the registered holders of Warrant Certificates at the time Warrants
evidenced thereby are exercised as herein provided an amount in cash equal to
the same fraction of the Current Market Value per Warrant Share on the Business
Day preceding the date the Warrant Certificates evidencing such Warrants are
surrendered for exercise. Such payments shall be made by check or by transfer to
an account maintained by such registered holder with a bank in The City of New
York. If any holder surrenders for exercise more than one Warrant Certificate,
the number of Warrant Shares deliverable to such holder may, at the option of
the Company, be computed on the basis of the aggregate amount of all the
Warrants exercised by such holder.
SECTION 5.03. Exceptions to Antidilution Provisions. Without limiting
any other exception contained in this Article V, and in addition thereto, no
adjustment need be made for:
(i) grants or exercises of rights granted to employees of the Company
or any of its subsidiaries of shares of Common Stock issued or granted to
such employees under any stock incentive plan or otherwise, whether or not
upon the exercise, exchange or conversion of any such rights, issued in
good faith and, except for Section 5.01(c) and (d), at fair market value
(as determined in good faith by the Board of Directors of the Company);
(ii) grants or exercises of rights granted to employees of the Company
or any of its subsidiaries of shares of Common Stock issued or granted to
such employees under any employee stock purchase plan or otherwise, whether
or not upon the exercise, exchange or conversion of any such rights, issued
in good faith (as determined in good faith by the Board of Directors of the
Company);
(iii) options, warrants or other agreements or rights to purchase
capital stock of the Company entered into prior to the date of the issuance
of the Warrants and any issuance of shares of Common Stock in connection
therewith;
(iv) rights to purchase shares of Common Stock pursuant to a Company
plan for reinvestment of dividends or interest;
(v) a change in the par value of shares of Common Stock (including a
change from par value to no par value or vice versa); and
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(vi) bona fide public offerings or private placements pursuant to
Section 4(2) of the Securities Act, Rule 144A, Regulation D or Regulation S
thereunder of any security trading on any national securities exchange or
in the over the counter market, or of a security directly or indirectly
convertible or exchangeable for any such security, involving at least one
investment bank of national reputation.
ARTICLE VI
CONCERNING THE WARRANT AGENT
SECTION 6.01. Warrant Agent. The Company hereby appoints Bankers Trust
Company as Warrant Agent of the Company in respect of the Warrants and the
Warrant Certificates upon the terms and subject to the conditions set forth
herein and in the Warrant Certificates; and Bankers Trust Company hereby accepts
such appointment. The Warrant Agent shall have the powers and authority
specifically granted to and conferred upon it in the Warrant Certificates and
hereby and such further powers and authority to act on behalf of the Company as
the Company may hereafter grant to or confer upon it and it shall accept in
writing. All of the terms and provisions with respect to such powers and
authority contained in the Warrant Certificates are subject to and governed by
the terms and provisions hereof. The Warrant Agent may act through agents and
shall not be responsible for the misconduct or negligence of any such agent
appointed with due care.
SECTION 6.02. Conditions of Warrant Agent's Obligations. The Warrant
Agent accepts its obligations herein set forth upon the terms and conditions
hereof and in the Warrant Certificates, including the following, to all of which
the Company agrees and to all of which the rights hereunder of the holders from
time to time of the Warrant Certificates shall be subject:
(a) The Warrant Agent shall be entitled to compensation to be agreed
upon with the Company in writing for all services rendered by it and the
Company agrees promptly to pay such compensation and to reimburse the
Warrant Agent for its reasonable out-of-pocket expenses (including
reasonable fees and expenses of counsel) incurred without gross negligence
or willful misconduct on its part in connection with the services rendered
by it hereunder. The Company also agrees to indemnify the Warrant Agent and
any predecessor Warrant Agent, their directors, officers, affiliates,
agents and employees for, and to hold them and their directors, officers,
affiliates, agents and employees harmless against, any loss, liability or
expense of any nature whatsoever (including, without limitation, reasonable
fees and expenses of counsel) incurred without gross negligence or willful
misconduct on the part of the Warrant Agent, arising out of or in
connection with its acting as such Warrant Agent hereunder
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and its exercise of its rights and performance of its obligations
hereunder. The obligations of the Company under this Section 6.02 shall
survive the exercise and the expiration of the Warrant Certificates and the
resignation and removal of the Warrant Agent.
(b) In acting under this Agreement and in connection with the Warrant
Certificates, the Warrant Agent is acting solely as agent of the Company
and does not assume any obligation or relationship of agency or trust for
or with any of the owners or holders of the Warrant Certificates.
(c) The Warrant Agent may consult with counsel of its selection and
any advice or written opinion of such counsel shall be full and complete
authorization and protection in respect of any action taken, suffered or
omitted by it hereunder in good faith and in accordance with such advice or
opinion.
(d) The Warrant Agent shall be fully protected and shall incur no
liability for or in respect of any action taken or omitted to be taken or
thing suffered by it in reliance upon any Warrant Certificate, notice,
direction, consent, certificate, affidavit, opinion of counsel,
instruction, statement or other paper or document reasonably believed by it
to be genuine and to have been presented or signed by the proper parties.
(e) The Warrant Agent, and its officers, directors, affiliates and
employees ("Related Parties"), may become the owners of, or acquire any
interest in, Warrant Certificates, shares or other obligations of the
Company with the same rights that it or they would have if it were not the
Warrant Agent hereunder and, to the extent permitted by applicable law
including, but not limited to, the Trust Indenture Act of 1939, it or they
may engage or be interested in any financial or other transaction with the
Company and may act on, or as depositary, trustee or agent for, any
committee or body of holders of shares or other obligations of the Company
as freely as if it were not the Warrant Agent hereunder. Nothing in this
Agreement shall be deemed to prevent the Warrant Agent or such Related
Parties from acting in any other capacity for the Company.
(f) The Warrant Agent shall not be under any liability for interest
on, and shall not be required to invest, any monies at any time received by
it pursuant to any of the provisions of this Agreement or of the Warrant
Certificates.
(g) The Warrant Agent shall not be under any responsibility in respect
of the validity of this Agreement (or any term or provision hereof) or the
execution and delivery hereof (except the due execution and delivery hereof
by the Warrant Agent) or
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in respect of the validity or execution of any Warrant Certificate (except
its authentication thereof).
(h) The recitals and other statements contained herein and in the
Warrant Certificates (except as to the Warrant Agent's authentication
thereon) shall be taken as the statements of the Company and the Warrant
Agent assumes no responsibility for the correctness of the same. The
Warrant Agent does not make any representation as to the validity or
sufficiency of this Agreement or the Warrant Certificates, except for its
due execution and delivery of this Agreement; provided, however, that the
Warrant Agent shall not be relieved of its duty to authenticate the Warrant
Certificates as authorized by this Agreement. The Warrant Agent shall not
be accountable for the use or application by the Company of the proceeds of
the exercise of any Warrant.
(i) Before the Warrant Agent acts or refrains from acting with respect
to any matter contemplated by this Warrant Agreement, it may require and
may conclusively rely on:
(1) an Officers' Certificate (as defined in the Indenture)
stating on behalf of the Company that, in the opinion of the signers,
all conditions precedent, if any, provided for in this Warrant
Agreement relating to the proposed action have been complied with; and
(2) an opinion of counsel for the Company stating that, in the
opinion of such counsel, all such conditions precedent have been
complied with, provided that such matter is one customarily opined
upon by counsel.
Each Officers' Certificate or, if requested, an opinion of counsel
with respect to compliance with a condition or covenant provided for in
this Warrant Agreement shall include:
(1) a statement that the person making such certificate or
opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such person, he or she
has made such examination or investigation as is necessary to enable
him or her to express an informed opinion as to whether or not such
covenant or condition has been complied with; and
28
<PAGE>
(4) a statement as to whether or not, in the opinion of such
person, such condition or covenant has been complied with.
(j) The Warrant Agent shall be obligated to perform such duties as are
specifically set forth herein and in the Warrant Certificates, and no
implied duties or obligations shall be read into this Agreement or the
Warrant Certificates against the Warrant Agent. The Warrant Agent shall not
be accountable or under any duty or responsibility for the use by the
Company of any of the Warrant Certificates duly authenticated by the
Warrant Agent and delivered by it to the Company pursuant to this
Agreement. The Warrant Agent shall have no duty or responsibility in case
of any default by the Company in the performance of its covenants or
agreements contained in the Warrant Certificates or in the case of the
receipt of any written demand from a holder of a Warrant Certificate with
respect to such default, including, without limiting the generality of the
foregoing, any duty or responsibility to initiate or attempt to initiate
any proceedings at law or otherwise or, except as provided in Section 7.02
hereof, to make any demand upon the Company.
(k) Unless otherwise specifically provided herein, any order,
certificate, notice, request, direction or other communication from the
Company made or given under any provision of this Agreement shall be
sufficient if signed by the chairman or a co-chairman of the board, the
chief executive officer, the president, the chief financial officer, any
executive vice president or any senior vice president of the Company
signing alone, or by any vice president signing together with the
secretary, any assistant secretary, the treasurer, or any assistant
treasurer of the Company.
(l) The Warrant Agent shall have no responsibility in respect of any
adjustment pursuant to Article V hereof.
(m) The Company agrees that it will perform, execute, acknowledge and
deliver, or cause to be performed, executed, acknowledged and delivered,
all such further and other acts, instruments and assurances as may
reasonably be required by the Warrant Agent for the carrying out or
performing by the Warrant Agent of the provisions of this Agreement.
(n) The Warrant Agent is hereby authorized and directed to accept
written instructions with respect to the performance of its duties
hereunder from any one of the chairman or a co-chairman of the board, the
president, the chief executive officer, the chief financial officer, any
executive vice president or any senior vice president alone, or any vice
president together with the secretary, assistant secretary, the treasurer
or any assistant treasurer, of the Company or any other officer or official
of the Company reasonably believed to be authorized to give such
instructions and to apply to such
29
<PAGE>
officers or officials for advice or instructions in connection with its
duties, and it shall not be liable for any action taken or suffered to be
taken by it in good faith in accordance with instructions with respect to
any matter arising in connection with the Warrant Agent's duties and
obligations arising under this Agreement. Such application by the Warrant
Agent for written instructions from the Company may, at the option of the
Warrant Agent, set forth in writing any action proposed to be taken or
omitted by the Warrant Agent with respect to its duties or obligations
under this Agreement and the date on or after which such action shall be
taken and the Warrant Agent shall not be liable for any action taken or
omitted in accordance with a proposal included in any such application on
or after the date specified therein (which date shall be not less than 10
Business Days after the Company receives such application unless the
Company consents to a shorter period); provided that (i) such application
includes a statement to the effect that it is being made pursuant to this
paragraph (n) and that unless objected to prior to such date specified in
the application, the Warrant Agent will not be liable for any such action
or omission to the extent set forth in such paragraph (n) and (ii) prior to
taking or omitting any such action, the Warrant Agent has not received
written instructions objecting to such proposed action or omission.
(o) Whenever in the performance of its duties under this Agreement the
Warrant Agent shall deem it necessary or desirable that any fact or matter
be proved or established by the Company prior to taking or suffering any
action hereunder, such fact or matter (unless other evidence in respect
thereof be herein specifically prescribed) may be deemed to be conclusively
proved and established by a certificate signed on behalf of the Company by
any one of the chairman of the board of directors, the president, the chief
executive officer, the treasurer, the controller, any vice president or the
secretary or assistant secretary of the Company or any other officer or
official of the Company reasonably believed to be authorized to give such
instructions and delivered to the Warrant Agent; and such certificate shall
be full authorization to the Warrant Agent for any action taken or suffered
in good faith by it under the provisions of this Agreement in reliance upon
such certificate.
(p) The Warrant Agent shall not be required to risk or expend its own
funds in the performance of its obligations and duties hereunder.
SECTION 6.03. Resignation and Appointment of Successor. (a) The
Company agrees, for the benefit of the holders from time to time of the Warrant
Certificates, that there shall at all times be a Warrant Agent hereunder.
(b) The Warrant Agent may at any time resign as Warrant Agent by
giving written notice to the Company of such intention on its part, specifying
the date on which its desired resignation shall become effective; provided,
however, that such date shall be at least
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<PAGE>
60 days after the date on which such notice is given unless the
Company agrees to accept less notice. Upon receiving such notice of resignation,
the Company shall promptly appoint a successor Warrant Agent, qualified as
provided in Section 6.03(d) hereof, by written instrument in duplicate signed on
behalf of the Company, one copy of which shall be delivered to the resigning
Warrant Agent and one copy to the successor Warrant Agent. As provided in
Section 6.03(d) hereof, such resignation shall become effective upon the earlier
of (x) the acceptance of the appointment by the successor Warrant Agent or (y)
60 days after receipt by the Company of notice of such resignation. The Company
may, at any time and for any reason, and shall, upon any event set forth in the
next succeeding sentence, remove the Warrant Agent and appoint a successor
Warrant Agent by written instrument in duplicate, specifying such removal and
the date on which it is intended to become effective, signed on behalf of the
Company, one copy of which shall be delivered to the Warrant Agent being removed
and one copy to the successor Warrant Agent. The Warrant Agent shall be removed
as aforesaid if it shall become incapable of acting, or shall be adjudged a
bankrupt or insolvent, or a receiver of the Warrant Agent or of its property
shall be appointed, or any public officer shall take charge or control of it or
of its property or affairs for the purpose of rehabilitation, conservation or
liquidation. Any removal of the Warrant Agent and any appointment of a successor
Warrant Agent shall become effective upon acceptance of appointment by the
successor Warrant Agent as provided in Section 6.03(d). As soon as practicable
after appointment of the successor Warrant Agent, the Company shall cause
written notice of the change in the Warrant Agent to be given to each of the
registered holders of the Warrants in the manner provided for in Section 7.04
hereof.
(c) Upon resignation or removal of the Warrant Agent, if the Company
shall fail to appoint a successor Warrant Agent within a period of 60 days after
receipt of such notice of resignation or removal, then the holder of any Warrant
Certificate or the retiring Warrant Agent may apply to a court of competent
jurisdiction for the appointment of a successor to the Warrant Agent. Pending
appointment of a successor to the Warrant Agent, either by the Company or by
such a court, the duties of the Warrant Agent shall be carried out by the
Company.
(d) Any successor Warrant Agent, whether appointed by the Company or
by a court, shall be a bank or trust company in good standing, incorporated
under the laws of the United States of America or any State thereof and having,
at the time of its appointment, a combined capital surplus of at least $50
million. Such successor Warrant Agent shall execute and deliver to its
predecessor and to the Company an instrument accepting such appointment
hereunder and all the provisions of this Agreement, and thereupon such successor
Warrant Agent, without any further act, deed or conveyance, shall become vested
with all the rights, powers, duties and obligations of its predecessor
hereunder, with like effect as if originally named as Warrant Agent hereunder,
and such predecessor shall thereupon become obligated to (i) transfer and
deliver, and such successor Warrant Agent shall be entitled to receive, all
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<PAGE>
securities, records or other property on deposit with or held by such
predecessor as Warrant Agent hereunder and (ii) upon payment of the amounts then
due it pursuant to Section 6.02(a) hereof, pay over, and such successor Warrant
Agent shall be entitled to receive, all monies deposited with or held by any
predecessor Warrant Agent hereunder.
(e) Any corporation or bank into which the Warrant Agent hereunder may
be merged or converted, or any corporation or bank with which the Warrant Agent
may be consolidated, or any corporation or bank resulting from any merger,
conversion or consolidation to which the Warrant Agent shall be a party, or any
corporation or bank to which the Warrant Agent shall sell or otherwise transfer
all or substantially all of its corporate trust business, shall be the successor
to the Warrant Agent under this Agreement (provided that such corporation or
bank shall be qualified as aforesaid) without the execution or filing of any
document or any further act on the part of any of the parties hereto.
(f) No Warrant Agent under this Warrant Agreement shall be personally
liable for any action or omission of any successor Warrant Agent.
SECTION 6.04. Covenant to Notify to The Depository Trust Company of
Separability Date. The Warrant Agent undertakes that it shall, ten days prior to
the Separability Date, execute and deliver a notice of the Separability Date to
The Depository Trust Company, Attention: Manager, Conversions, in the
Reorganization Department.
ARTICLE VII
MISCELLANEOUS
SECTION 7.01. Amendment. This Agreement and the terms of the Warrants
may be amended by the Company and the Warrant Agent, without the consent of the
holder of any Warrant Certificate, for the purpose of curing any ambiguity, or
of curing, correcting or supplementing any defective or inconsistent provision
contained herein or therein, or to effect any assumptions of the Company's
obligations hereunder and thereunder by a successor corporation under certain
circumstances or in any other manner which the Company may deem necessary or
desirable and which shall not adversely affect the interests of the holders of
the Warrant Certificates.
The Company and the Warrant Agent may amend, modify or supplement this
Agreement and the terms of the Warrants, and waivers to departures from the
terms hereof and thereof may be given, with the consent of the Requisite Warrant
Holders (as defined below) for the purpose of adding any provision to or
changing in any manner or eliminating any of the provisions of this Agreement or
modifying in any manner the rights of the holders of the
32
<PAGE>
outstanding Warrants. "Requisite Warrant Holders" means (i) in the case of any
amendment, modification, supplement or waiver affecting only Warrant Holders as
such holders of a majority in number of the outstanding Warrants, voting
separately as a class, or (ii) in the case of any amendment, modification,
supplement or waiver affecting Warrant Shares, a majority in number of Warrant
Shares represented by the Warrants that would be issuable assuming exercise
thereof at the time such amendment, modification, supplement or waiver is voted
upon. Notwithstanding any other provision of this Agreement, the Warrant Agent's
consent must be obtained regarding any supplement or amendment which alters the
Warrant Agent's rights or duties (it being expressly understood that the
foregoing shall not be in derogation of the right of the Company to remove the
Warrant Agent in accordance with Section 6.03 hereof). For purposes of any
amendment, modification or waiver hereunder, Warrants held by the Company or any
of its Affiliates shall be disregarded.
Any modification or amendment made in accordance with this Agreement
will be conclusive and binding on all present and future holders of Warrant
Certificates whether or not they have consented to such modification or
amendment or waiver and whether or not notation of such modification or
amendment is made upon such Warrant Certificates. Any instrument given by or on
behalf of any holder of a Warrant Certificate in connection with any consent to
any modification or amendment will be conclusive and binding on all subsequent
holders of such Warrant Certificate.
SECTION 7.02. Notices and Demands to the Company and Warrant Agent. If
the Warrant Agent shall receive any notice or demand addressed to the Company by
the holder of a Warrant Certificate pursuant to the provisions hereof or of the
Warrant Certificates, the Warrant Agent shall promptly forward such notice or
demand to the Company.
SECTION 7.03. Addresses for Notices to Parties and for Transmission of
Documents. All notices hereunder to the parties hereto shall be deemed to have
been given when sent by certified or registered mail, postage prepaid, or by
facsimile transmission, confirmed by first class mail, postage prepaid,
addressed to any party hereto as follows:
To the Company:
@Entertainment, Inc.
c/o WIVJATV Sp.z.o.o./@Entertainment, Inc.
ul. Pawinskiego 5A, blok D
02-106 Warsaw
POLAND
Facsimile: 011 48 22 668 7200
Attention: Przemylslaw Szmyt
33
<PAGE>
with copies to:
Baker & McKenzie
815 Connecticut Avenue, N.W.
Washington, D.C. 20006-4078
Facsimile: (202) 452-7074
Attention: Marc R. Paul, Esq.
To the Warrant Agent:
Bankers Trust Company
Corporate Trust Office
Four Albany Street
New York, New York 10006
Facsimile: (212) 250-0933
Attention: Corporate Trust Manager
or at any other address of which either of the foregoing shall have notified the
other in writing.
SECTION 7.04. Notices to Holders. Notices to holders of Warrants shall
be mailed to such holders at the addresses of such holders as they appear in the
Warrant Register. Any such notice shall be sufficiently given if sent by
first-class mail, postage prepaid to the address of such holder.
SECTION 7.05. Applicable Law. THIS AGREEMENT AND EACH WARRANT
CERTIFICATE ISSUED HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
SECTION 7.06. Persons Having Rights Under Agreement. Nothing in this
Agreement expressed or implied and nothing that may be inferred from any of the
provisions hereof is intended, or shall be construed, to confer upon, or give
to, any person or corporation other than the Company, the Warrant Agent and the
holders of the Warrant Certificates and, with respect to Sections 4.03 and 4.04,
the holders of Warrant Shares issued pursuant to Warrants, any right, remedy or
claim under or by reason of this Agreement or of any covenant, condition,
stipulation, promise or agreement hereof; and all covenants (except for Section
4.03 which shall be for the benefit of all holders of Warrant Shares issued
pursuant to Warrants), conditions, stipulations, promises and agreements in this
Agreement contained shall be for the sole and exclusive benefit of the Company
and the Warrant Agent and their successors and of the holders of the Warrant
Certificates.
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<PAGE>
SECTION 7.07. Headings. The descriptive headings of the several
Articles and Sections of this Agreement are inserted for convenience only and
shall not control or affect the meaning or construction of any of the provisions
hereof.
SECTION 7.08. Counterparts. This Agreement may be executed in any
number of counterparts, each of which so executed shall be deemed to be an
original; but such counterparts shall together constitute but one and the same
instrument.
SECTION 7.09. Inspection of Agreement. A copy of this Agreement shall
be available during regular business hours at the principal corporate trust
office of the Warrant Agent, for inspection by the holder of any Warrant
Certificate. The Warrant Agent may require such holder to submit his Warrant
Certificate for inspection by it.
SECTION 7.10. Availability of Equitable Remedies. Since a breach of
the provisions of this Agreement could not adequately be compensated by money
damages, holders of Warrants shall be entitled, in addition to any other right
or remedy available to them, to an injunction restraining such breach or a
threatened breach and to specific performance of any such provision of this
Agreement, and in either case no bond or other security shall be required in
connection therewith, and the parties hereby consent to such injunction and to
the ordering of specific performance.
SECTION 7.11. Obtaining of Governmental Approvals. The Company will
from time to time take all action required to be taken by it which may be
necessary to obtain and keep effective any and all permits, consents and
approvals of governmental agencies and authorities and securities acts filings
under U.S. federal and state laws, and the rules and regulations of all stock
exchanges on which the Warrant Shares may become listed which may be or become
requisite in connection with the issuance, sale, transfer and delivery of the
Warrant Shares issued upon exercise of the Warrants.
[Signature Page Follows]
35
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto as of the day and year first above written.
@ENTERTAINMENT, INC.
By:___________________________________
Name: Robert E. Fowler, III
Title: Chief Executive Officer
BANKERS TRUST COMPANY,
Warrant Agent
By:___________________________________
Name:
Title:
<PAGE>
EXHIBIT A
[FORM OF WARRANT CERTIFICATE]
[FACE]
THE SECURITIES EVIDENCED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES
LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE
REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT IT
IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT), (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO
YEARS (OR SHORTER PERIOD AS MAY BE PRESCRIBED BY RULE 144(K) (OR ANY SUCCESSOR
PROVISION THEREOF) UNDER THE SECURITIES ACT) AFTER THE LATER OF THE ORIGINAL
ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DAY ON
WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY
OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE
REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER,
SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE ISSUER OR ITS
SUBSIDIARY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED
EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS
A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES
ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED
INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A OR (D) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND (3) AGREES THAT IT WILL GIVE
TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO
THE EFFECT OF THIS LEGEND. IN CONNECTION WITH ANY TRANSFER OF THESE SECURITIES
WITHIN THE TIME PERIOD REFERRED TO ABOVE, THE HOLDER MUST CHECK THE APPROPRIATE
BOX SET FORTH ON THE REVERSE HEREOF RELATING TO THE MANNER OF SUCH TRANSFER AND
SUBMIT THIS CERTIFICATE TO THE WARRANT AGENT. THIS LEGEND WILL BE REMOVED UPON
THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.
A-1
<PAGE>
CUSIP No. 045920 11 3
No. [ ] Warrants
----------------
WARRANT CERTIFICATE
@ENTERTAINMENT, INC.
This Warrant Certificate certifies that Cede & Co., or registered
assigns, is the registered holder of 1,008,000 Warrants (the "Warrants") to
purchase 1.81 shares of Common Stock, par value $0.01 per share, issuable upon
exercise of the Warrants (the "Warrant Shares") of @ENTERTAINMENT, INC., a
Delaware corporation (the "Company," which term includes its successors and
assigns). Each Warrant entitles the holder to purchase from the Company at any
time from 9:00 a.m. New York City time on or after the Exercise Date until 5:00
p.m., New York City time, on July 15, 2008 (the "Expiration Date"), 1.81 fully
paid, registered and non-assessable Warrant Shares, subject to adjustment as
provided in Article V of the Warrant Agreement, at an exercise price of $13.20
for each share purchased (the "Exercise Price"); upon surrender of this Warrant
Certificate and payment of the Exercise Price (i) in cash or by certified or
official bank check, (ii) by a Cashless Exercise or (iii) by any combination of
(i) and (ii), at any office or agency maintained for that purpose by the Company
(the "Warrant Exercise Office"), subject to the conditions set forth herein and
in the Warrant Agreement. For purposes of this Warrant, a "Cashless Exercise"
shall mean an exercise of a Warrant in accordance with the immediately following
two sentences. To effect a Cashless Exercise, the holder may exercise a Warrant
or Warrants without payment of the Exercise Price in cash by surrendering such
Warrant or Warrants (represented by one or more Warrant Certificates) and in
exchange therefor, receiving such number of shares of Common Stock equal to the
product of (1) that number of shares of Common Stock for which such Warrant or
Warrants are exercisable and which would be issuable in the event of an exercise
with payment of the Exercise Price and (2) the Cashless Exercise Ratio. The
"Cashless Exercise Ratio" shall equal a fraction, the numerator of which is the
excess of the Current Market Value (calculated as set forth in this Warrant) per
share of Common Stock on the date of exercise over the Exercise Price per share
of Common Stock as of the date of exercise and the denominator of which is the
Current Market Value per share of Common Stock on the date of exercise. Upon
surrender of a Warrant Certificate representing more than one Warrant in
connection with the holder's option to elect a Cashless Exercise, the holder
must specify the number of Warrants for which such Warrant Certificate is to be
exercised (without giving effect to the Cashless Exercise). All provisions of
the Warrant Agreement shall be applicable with respect to a Cashless Exercise of
a Warrant Certificate for less than the full number of Warrants represented
thereby. Capitalized terms used herein without being defined herein shall have
the definitions ascribed to such terms in the Warrant Agreement.
A-2
<PAGE>
"Current Market Value" per share of Common Stock of the Company or any
other security at any date shall mean (i) if the security is not registered
under the Exchange Act, (a) the value of the security, determined in good faith
by the board of directors of the Company and certified in a board resolution,
based on the most recently completed arm's-length transaction between the
Company and a person other than an affiliate of the Company and the closing of
which occurs on such date or shall have occurred within the six-month period
preceding such date, or (b) if no such transaction shall have occurred on such
date or within such six-month period, the fair market value of the security as
determined by a nationally or regionally recognized Independent Financial Expert
(as defined herein) (provided that in the case of the calculation of Current
Market Value for determining the cash value of fractional shares, any such
determination within six months that is, in the good faith judgment of the
Board, a reasonable determination of value, may be utilized) or (ii)(a) if the
security is registered under the Exchange Act, the average of the daily closing
sales prices of the securities for the 20 consecutive trading days immediately
preceding such date, or (b) if the security has been registered under the
Exchange Act for less than 20 consecutive trading days before such date, then
the average of the daily closing sales prices for all of the trading days before
such date for which closing sales prices are available, in the case of each of
(ii)(a) and (ii)(b), as certified by the president, the chief executive officer,
any vice president or the chief financial officer of the Company in a writing
delivered to the Warrant Agent. The closing sales price for each such trading
day shall be: (A) in the case of a security listed or admitted to trading on any
U.S. national securities exchange or quotation system, the closing sales price,
regular way, on such day, or if no sale takes place on such day, the average of
the closing bid and asked prices on such day, (B) in the case of a security not
then listed or admitted to trading on any U.S. national securities exchange or
quotation system, the last reported sale price on such day, or if no sale takes
place on such day, the average of the closing bid and asked prices on such day,
as reported by a reputable quotation source designated by the Company, (C) in
the case of a security not then listed or admitted to trading on any U.S.
national securities exchange or quotation system and as to which no such
reported sale price or bid and asked prices are available, the average of the
reported high bid and low asked prices on such day, as reported by a reputable
quotation service, or a newspaper of general circulation in the Borough of
Manhattan, The City and State of New York customarily published on each Business
Day, designated by the Company, or, if there shall be no bid and asked prices on
such day, the average of the high bid and low asked prices, as so reported, on
the most recent day (not more than 30 days prior to the date in question) for
which prices have been so reported and (D) if there are not bid and asked prices
reported during the 30 days prior to the date in question, the Current Market
Value shall be determined as if the securities were not registered under the
Exchange Act.
"Independent Financial Expert" means a U.S. investment banking firm of
national standing in the United States, (i) which does not, and whose directors,
officers and employees or affiliates do not have a direct or indirect material
financial interest for its proprietary account in the Company or any of its
affiliates and (ii) which, in the judgment of
A-3
<PAGE>
the board of directors of the Company, is otherwise independent with respect to
the Company and its affiliates and qualified to perform the task for which it is
to be engaged.
"Separability Date" shall mean the earliest to occur of: (i) the
Exercise Date, (ii) the date on which a registration statement, with respect to
a registered exchange offer for the Notes is declared effective under the
Securities Act of 1933, as amended (the "Securities Act"), (iii) the occurrence
of an Event of Default (as defined in the Indenture) or (iv) such earlier date
as determined by Merrill Lynch in its sole discretion and specified to the
Company and the Warrant Agent in writing. Notwithstanding the foregoing, in the
event a Change of Control (as defined in the Indenture) is proposed and the
Company commences a Change of Control Offer (as defined in the Indenture) prior
to the Separability Date, as determined by the preceding sentence, the
Separability Date shall be such earlier date of commencement.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof or any other entity, including any predecessor of any such entity.
The Company has initially designated the principal corporate trust
office of the Warrant Agent in the Borough of Manhattan, The City of New York,
as the initial Warrant Agent Office. The number of shares of Common Stock
issuable upon exercise of the Warrants ("Exercise Rate") is subject to
adjustment upon the occurrence of certain events set forth in the Warrant
Agreement.
Any Warrants not exercised on or prior to 5:00 p.m., New York City
time, on July 15, 2008 shall thereafter be void.
If the Company, in a single transaction or through a series of related
transactions, consolidates with or merges with or into, or sells all or
substantially all of its property and assets to, another Person (other than a
subsidiary of the Company) solely for cash, the holders of Warrants which are
then exercisable shall be entitled to receive distributions on the date of such
event on an equal basis with holders of shares of Capital Stock (or other
securities issuable upon exercise of the Warrants) as if the Warrants had been
exercised immediately prior to such event less the aggregate Exercise Price
therefor.
Reference is hereby made to the further provisions on the reverse
hereof which provisions shall for all purposes have the same effect as though
fully set forth at this place.
This Warrant Certificate shall not be valid unless authenticated by
the Warrant Agent, as such term is used in the Warrant Agreement.
THIS WARRANT CERTIFICATE SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
A-4
<PAGE>
A-5
<PAGE>
WITNESS the facsimile seal of the Company and facsimile signatures of
its duly authorized officers.
Dated:
@ENTERTAINMENT, INC.
By:____________________________________
Name:
Title:
Attest:
By:_________________________________
Name:
Title:
Certificate of Authentication:
This is one of the Warrants
referred to in the within
mentioned Warrant Agreement:
BANKERS TRUST COMPANY,
Warrant Agent
By:__________________________________
Authorized Signatory
A-6
<PAGE>
[FORM OF WARRANT CERTIFICATE]
[REVERSE]
@ENTERTAINMENT, INC.
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring at 5:00 p.m., New York City time, on July
15, 2008 (the "Expiration Date"), each of which represents the right to purchase
at any time on or after the Exercise Date (as defined in the Warrant Agreement)
and on or prior to the Expiration Date 1.81 Warrant Shares, subject to
adjustment as set forth in the Warrant Agreement. The Warrants are issued
pursuant to a Warrant Agreement dated as of July 14, 1998 (the "Warrant
Agreement"), duly executed and delivered by the Company to Bankers Trust
Company, Warrant Agent (the "Warrant Agent"), which Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Warrant Agent, the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
Warrants may be exercised by (i) surrendering at any Warrant Exercise
Office this Warrant Certificate with the form of Election to Exercise set forth
hereon duly completed and executed and (ii) to the extent such exercise is not
being effected through a Cashless Exercise by paying in full the Warrant
Exercise Price for each such Warrant exercised and any other amounts required to
be paid pursuant to the Warrant Agreement.
If all of the items referred to in the last sentence of the preceding
paragraph are received by the Warrant Agent at or prior to 11:00 a.m., New York
City time, on a Business Day, the exercise of the Warrant to which such items
relate will be effective on such Business Day. If any items referred to in the
last sentence of the preceding paragraph are received after 11:00 a.m., New York
City time, on a Business Day, the exercise of the Warrants to which such item
relates will be deemed to be effective on the next succeeding Business Day.
Notwithstanding the foregoing, in the case of an exercise of Warrants on July
15, 2008, if all of the items referred to in the last sentence of the preceding
paragraph are received by the Warrant Agent at or prior to 5:00 p.m., New York
City time, on such Expiration Date, the exercise of the Warrants to which such
items relate will be effective on the Expiration Date.
As soon as practicable after the exercise of any Warrant or Warrants,
the Company shall issue or cause to be issued to or upon the written order of
the registered holder of this Warrant Certificate, a certificate or certificates
evidencing such Warrant Share or Warrant Shares to which such holder is
entitled, in fully registered form, registered in such name or names as may be
directed by such holder pursuant to the Election to Exercise, as set forth on
the reverse of this Warrant Certificate. Such certificate or certificates
evidencing the
A-7
<PAGE>
Warrant Share or Warrant Shares shall be deemed to have been issued and any
persons who are designated to be named therein shall be deemed to have become
the holder of record of such Warrant Share or Warrant Shares as of the close of
business on the date upon which the exercise of this Warrant was deemed to be
effective as provided in the preceding paragraph.
The Company shall not be required to issue fractional Warrant Shares
upon exercise of the Warrants or distribute Warrant Certificates that evidence
fractional Warrant Shares. In lieu of fractional Warrant Shares, there shall be
paid to the registered Holder of this Warrant Certificate at the time such
Warrant Certificate is exercised an amount in cash equal to the same fraction of
the Current Market Value per share of Common Stock on the Business Day preceding
the date this Warrant Certificate is surrendered for exercise.
Warrant Certificates, when surrendered at any office or agency
maintained by the Company for that purpose by the registered holder thereof in
person or by legal representative or attorney duly authorized in writing, may be
exchanged for a new Warrant Certificate or new Warrant Certificates evidencing
in the aggregate a like number of Warrants, in the manner and subject to the
limitations provided in the Warrant Agreement, without charge except for any tax
or other governmental charge imposed in connection therewith.
Upon due presentment for registration of transfer of this Warrant
Certificate at any office or agency maintained by the Company for that purpose,
a new Warrant Certificate evidencing in the aggregate a like number of Warrants
shall be issued to the transferee in exchange for this Warrant Certificate,
subject to the limitations provided in the Warrant Agreement, without charge
except for any tax or other governmental charge imposed in connection therewith.
The Company and the Warrant Agent may deem and treat the registered
holder hereof as the absolute owner of this Warrant Certificate (notwithstanding
any notation of ownership or other writing hereon made by anyone) for the
purpose of any exercise hereof and for all other purposes, and neither the
Company nor the Warrant Agent shall be affected by any notice to the contrary.
The term "Business Day" shall mean any day on which (i) banks in The
City of New York, (ii) the principal U.S. securities exchange or market, if any,
on which any Common Stock is listed or admitted to trading and (iii) the
principal U.S. securities exchange or market, if any, on which the Warrants are
listed or admitted to trading, are open for business.
A-8
<PAGE>
[FORM OF ELECTION TO EXERCISE]
(To be executed upon exercise of Warrants on the Effective Exercise Date)
The undersigned hereby irrevocably elects to exercise [ ] of the
Warrants represented by this Warrant Certificate and purchase the whole number
of Warrant Shares issuable upon the exercise of such Warrants and herewith
tenders payment for such Warrant Shares as follows:
$____________ in cash or by certified or official bank check; or by
surrender of Warrants pursuant to a Cashless Exercise (as defined in the
Warrant Agreement) for [ ] shares of Common Stock at the current
Cashless Exercise Ratio.
The undersigned requests that a certificate representing such
Warrant Shares be registered in the name of ______________ whose address is
____________________ and that such shares be delivered to _________________
whose address is _____________________. Any cash payments to be paid in lieu
of a fractional share of Common Stock should be delivered to ______________
whose address is _______________ and the check representing payment thereof
should be delivered to ___________________ whose address is
______________________.
Dated ___________, ____
Name of holder of
Warrant Certificate:_________________________________________________
(Please Print)
Tax Identification or
Social Security Number:_____________________________________________
Address: _________________________________________________________
_________________________________________________________
Signature: _________________________________________________________
Note: The above signature must correspond with the name as
written upon the face of this Warrant Certificate in
every particular, without alteration or enlargement
or any change whatever and if the certificate
representing the Warrant Shares or any Warrant
Certificate representing Warrants not exercised is
to be registered in a name other than that in which
this Warrant Certificate is registered, or if any
cash payment to be paid in lieu of a fractional
share
A-9
<PAGE>
is to be made to a person other than the registered
holder of this Warrant Certificate, the signature of
the holder hereof must be guaranteed as provided in
the Warrant Agreement.
Dated ______________, ____
Signature:
---------------------------------------
Note: The above signature must correspond with the
name as written upon the face of this Warrant
Certificate in every particular, without
alteration or enlargement or any change
whatever.
Signature Guaranteed:
-----------------------------
[FORM OF ASSIGNMENT]
For value received __________________________ hereby sells, assigns
and transfers unto _____________________________ the within Warrant Certificate,
together with all right, title and interest therein, and does hereby irrevocably
constitute and appoint __________________ attorney, to transfer said Warrant
Certificate on the books of the within-named Company, with full power of
substitution in the premises.
Dated ________________, ____
Signature:
-----------------------------------------
Note: The above signature must correspond
with the name as written upon the
face of this Warrant Certificate in
every particular, without
alteration or enlargement or any
change whatever.
Signature Guaranteed:
------------------------------
A-10
<PAGE>
SCHEDULE OF EXCHANGES OF CERTIFICATED WARRANTS
The following exchanges of a part of this Global Warrant for certificated
Warrants have been made:
<TABLE>
<CAPTION>
Number of
Amount of Amount of Warrants of this
decrease in increase in Global Warrant Signature of
Number of Number of following authorized
Date of Warrants of this Warrants of this such decrease officer of
Exchange Global Warrant Global Warrant (or increase) Warrant Agent
- -------- ---------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
</TABLE>
A-11
<PAGE>
EXHIBIT B
FORM OF LEGEND FOR GLOBAL WARRANT
Any Global Warrant authenticated and delivered hereunder shall bear a
legend in substantially the following form:
THIS SECURITY IS A GLOBAL WARRANT WITHIN THE MEANING OF THE WARRANT
AGREEMENT HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A
DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS SECURITY IS NOT EXCHANGEABLE FOR
SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR
ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE WARRANT
AGREEMENT, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS
SECURITY AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY
A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE
DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED
IN THE WARRANT AGREEMENT.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE
ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND
ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH
OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF
FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE
REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
B-1
<PAGE>
EXHIBIT C
CERTIFICATE TO BE DELIVERED UPON EXCHANGE
OR REGISTRATION OF TRANSFER OF WARRANTS
Re: Warrants to Purchase Common Stock (the "Warrants") of @ENTERTAINMENT, INC.
This Certificate relates to ____ Warrants held in* ___ book-entry or*
_______ certificated form by ______ (the "Transferor").
The Transferor:*
/__/ has requested the Warrant Agent by written order to deliver in
exchange for its beneficial interest in the Global Warrant held by the
Depositary a Warrant or Warrants in definitive, registered form of authorized
denominations and an aggregate number equal to its beneficial interest in such
Global Warrant (or the portion thereof indicated above); or
/__/ has requested the Warrant Agent by written order to exchange or
register the transfer of a Warrant or Warrants.
In connection with such request and in respect of each such Warrant,
the Transferor does hereby certify that the Transferor is familiar with the
Warrant Agreement relating to the above captioned Warrants and the restrictions
on transfers thereof as provided in Section 1.07 of such Warrant Agreement, and
that the transfer of this Warrant does not require registration under the
Securities Act of 1933, as amended (the "Act") because*:
/__/ Such Warrant is being acquired for the Transferor's own account,
without transfer (in satisfaction of Section 1.07 (a)(y)(A) or Section 1.07
(d)(i)(A) of the Warrant Agreement).
/__/ Such Warrant is being transferred to a qualified institutional buyer
(as defined in Rule 144A under the Act), in reliance on Rule 144A.
- ----------
* Check applicable box.
C-1
<PAGE>
/__/ Such Warrant is being transferred in accordance with Rule 144 under
the Act.
/__/ Such Warrant is being transferred in reliance on and in compliance
with an exemption from the registration requirements of the Act.
------------------------------------
[INSERT NAME OF TRANSFEROR]
By:__________________________________
Date:_____________________
C-2
<PAGE>
Exhibit 4.2
WARRANT REGISTRATION RIGHTS AGREEMENT
This WARRANT REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made
and entered into as of July 14, 1998, between @ENTERTAINMENT, INC., (the
"Company") a Delaware corporation, and MERRILL LYNCH & CO., MERRILL LYNCH,
PIERCE, FENNER & SMITH INCORPORATED ("Merrill Lynch") and J.P. MORGAN SECURITIES
INC. (together with Merrill Lynch, the "Initial Purchasers").
This Agreement is made pursuant to the Purchase Agreement dated as of
July 8, 1998, between the Company and the Initial Purchasers (the "Purchase
Agreement"), with respect to the issue and sale by the Company and the purchase
by the Initial Purchasers, severally, of the respective number of the Company's
Units (the "Units"), each Unit consisting of $1,000 aggregate principal amount
at maturity of the Company's 14 1/2% Senior Discount Notes due 2008 (the
"Notes") and four warrants (the "Warrants"), each initially entitling the holder
thereof to purchase 1.81 shares of common stock, par value $0.01 per share (the
"Common Stock"), of the Company, set forth opposite such Initial Purchaser's
name on Schedule I to the Purchase Agreement. The execution of this Agreement is
a condition to the obligations of the Initial Purchasers under the Purchase
Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
SECTION 1. Definitions. As used in this Agreement, the following
defined terms shall have the following meanings:
"Advice" has the meaning ascribed to such term in Section 4 hereof.
"Agreement" shall have the meaning ascribed to such term in the
preamble hereto.
"Business Day" shall mean a day that is not a Legal Holiday.
"Capital Stock" shall mean, with respect to any Person, any and all
shares, interests, partnership interests, participations, rights in or
other equivalents (however designated and whether voting or non-voting) of
such person's capital stock, and any rights (other than debt securities
convertible into capital stock), warrants or options exchangeable for or
convertible into such capital stock whether outstanding on the Issue Date
or issued after the Issue Date.
"Change of Control" shall have the meaning ascribed to such term in
the Indenture.
"Company" shall have the meaning ascribed to such term in the preamble
of this Agreement and shall also include the Company's permitted successors
and assigns.
<PAGE>
"Common Stock" shall have the meaning ascribed to such term in the
preamble of this Agreement.
"Convertible Preferred Stock" shall mean any securities convertible or
exercisable or exchangeable into Common Stock of the Company, whether
outstanding on the date hereof or thereafter issued.
"Damage Amount" shall have the meaning ascribed to such term in
Section 2.1(d) hereof.
"DTC" shall have the meaning ascribed to such term in Section 4(i)
hereof.
"Effectiveness Period" shall mean the respective periods for which the
Company is obligated to keep a Registration Statement effective pursuant to
Sections 2.1(a) and 2.2(a).
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended from time to time.
"Exercise Date" shall mean the earlier of (i) the date that a shelf
Registration Statement covering the sale of Common Stock underlying the
Warrants is declared effective under the Securities Act and (ii) November
16, 1998.
"Holder" shall mean each holder (including the Initial Purchasers) of
any Registrable Securities, and each of their successors, assigns and
direct and indirect transferees who become registered owners of such
Registrable Securities.
"indemnified party" and "indemnifying party" shall have the respective
meanings ascribed to such term in Section 5(c).
"Indenture" shall mean the Indenture, dated as of the date hereof,
between the Company and Bankers Trust Company, as Trustee, pursuant to
which the Notes are issued.
"Initial Purchasers" shall have the meaning ascribed to such term in
the preamble hereof.
"Inspectors" shall have the meaning ascribed to such term in Section
4(m) hereof.
"Legal Holiday" shall mean a Saturday, a Sunday or a day on which (i)
banking institutions in The City of New York are required or authorized by
law or other government action to be closed and (ii) the principal U.S.
securities exchange or market,
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<PAGE>
if any, on which any Common Stock is listed or admitted to trading and the
principal U.S. securities exchange or market, if any, on which the Warrants
are listed or admitted to trading are closed for business.
"Liquidated Damages" shall have the meaning ascribed to such term in
Section 2.1(d) hereof.
"Merrill Lynch" shall have the meaning ascribed to such term in the
preamble hereto.
"Notes" shall have the meaning ascribed to such term in the preamble
hereto.
"Person" shall mean any individual, corporation, limited liability
company, partnership, joint venture, association, joint-stock company,
trust, unincorporated organization or government or any agency or political
subdivision thereof or any other entity, including any predecessor of any
such entity.
"Piggy-Back Registration" shall have the meaning ascribed to such term
in Section 2.2(a) hereof.
"Piggy-Back Registration Statement" shall have the meaning ascribed to
such term in Section 2.2(c) hereof.
"Prospectus" shall mean the prospectus included in any Registration
Statement (including, without limitation, any prospectus subject to
completion and a prospectus that includes any information previously
omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities Act),
as amended or supplemented by any prospectus supplement, and all other
amendments and supplements to the Prospectus, including post-effective
amendments, and all material incorporated by reference or deemed to be
incorporated by reference in such Prospectus.
"Purchase Agreement" shall have the meaning ascribed to such term in
the preamble hereof.
"Registrable Securities" shall mean any of (i) the Warrants, (ii) the
Warrant Shares and (iii) any other securities issued or issuable with
respect to the Warrants or Warrant Shares by way of stock dividend or stock
split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization or otherwise. As to any
particular Registrable Securities, such securities shall cease to be
Registrable Securities when (a) a registration statement with respect to
the offering of such securities by the holder thereof shall have been
declared effective under the Securities Act and such
3
<PAGE>
securities shall have been disposed of by such holder pursuant to such
registration statement, (b) such securities have been sold to the public
pursuant to, or are eligible for sale to the public without volume or
manner of sale restrictions under, Rule 144(k) (or any similar provision
then in force, but not Rule 144A) promulgated under the Securities Act, (c)
such securities shall have been otherwise transferred and new certificates
for such securities not bearing a legend restricting further transfer shall
have been delivered by the Company or its transfer agent and subsequent
disposition of such securities shall not require registration or
qualification under the Securities Act or any similar state law then in
force, or (d) such securities shall have ceased to be outstanding.
"Registration Expenses" shall mean all expenses incident to the
Company's performance of or compliance with this Agreement, including,
without limitation, all SEC and stock exchange or National Association of
Securities Dealers, Inc. registration and filing fees and expenses, fees
and expenses of compliance with securities or blue sky laws (including,
without limitation, reasonable fees and disbursements of counsel for the
underwriters and the Holders in connection with blue sky qualifications of
the Registrable Securities), printing expenses, messenger, telephone and
delivery expenses, fees and disbursements of counsel for the Company,
counsel for the underwriters, if any, the Warrant Agent and all independent
certified public accountants, and other reasonable out-of-pocket expenses
of Holders (it being understood that Registration Expenses shall not
include, as to the fees and expenses of counsel, the fees and expenses of
more than one counsel for the Holders and one counsel for the underwriters
as to securities and blue sky matters).
"Registration Statement" shall mean any appropriate registration
statement of the Company filed with the SEC pursuant to the Securities Act
which covers any of the Warrants, the Warrant Shares and any other
Registrable Securities pursuant to the provisions of this Agreement and all
amendments and supplements to any such Registration Statement, including
post-effective amendments, in each case including the Prospectus contained
therein, all exhibits thereto and all material incorporated by reference
therein.
"Rule 144" shall mean Rule 144 promulgated under the Securities Act,
as such Rule may be amended from time to time, or any similar rule (other
than Rule 144A) or regulation hereafter adopted by the SEC providing for
offers and sales of securities made in compliance therewith resulting in
offers and sales by subsequent holders that are not affiliates of an issuer
of such securities being free of the registration and prospectus delivery
requirements of the Securities Act.
"Rule 144A" shall mean Rule 144A promulgated under the Securities Act,
as such Rule may be amended from time to time, or any similar rule (other
than Rule 144) or regulation hereafter adopted by the SEC.
4
<PAGE>
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended
from time to time.
"Selling Holder" shall mean a Holder who is selling Registrable
Securities in accordance with the provisions of Section 2.2.
"Shelf Registration Default" shall have the meaning ascribed to such
term in Section 2.1(d).
"Suspension Period" shall have the meaning ascribed to such term in
Section 2.3(a).
"Units" shall have the meaning ascribed to such term in the preamble
of this Agreement.
"Warrant Agent" shall mean Bankers Trust Company and any successor
warrant agent for the Warrants pursuant to the Warrant Agreement.
"Warrant Agreement" shall mean the Warrant Agreement dated as of the
date hereof, between the Company and the Warrant Agent, as amended or
supplemented from time to time in accordance with the terms thereof.
"Warrant Shares" shall mean shares of Common Stock issuable upon
exercise of the Warrants at an exercise price of $13.20 per share.
"Warrant Shelf Registration Statement" shall mean the Registration
Statement filed with the SEC pursuant to Section 2.1.
5
<PAGE>
"Warrants" shall have the meaning ascribed to such term in the
preamble hereto.
Capitalized terms used herein but not defined shall have the meaning
ascribed thereto in the Warrant Agreement.
SECTION 2. Registration Rights.
2.1 (a) Warrant Shelf Registration Statement. The Company shall cause
to be filed pursuant to Rule 415 (or any successor provision) of the Securities
Act a shelf registration statement covering the issuance of Warrant Shares to
the Holders upon exercise of the Warrants by the Holders thereof and the resale
of the Warrants (the "Warrant Shelf Registration Statement") and shall use its
best efforts to cause the Warrant Shelf Registration Statement to be declared
effective under the Securities Act on or before November 16, 1998. Subject to
Section 2.3(a) hereof, the Company shall use reasonable efforts to maintain the
effectiveness of the Warrant Shelf Registration Statement until such time as all
Warrants have been exercised and the Warrant Shares resold. The Company will pay
all Registration Expenses in connection with the resale of Warrants and Warrant
Shares.
(b) Blue Sky. The Company shall use its reasonable efforts to register
or qualify the Warrant Shares under all applicable securities laws, blue sky
laws or similar laws of all jurisdictions in the United States and Canada in
which any Holder may or may be deemed to purchase Warrant Shares upon the
exercise of Warrants and shall use its reasonable efforts to maintain such
registration or qualification through such time as all Warrants have been
exercised and Warrant Shares have been resold; provided, however, that the
Company shall not be required to qualify generally to do business in any
jurisdiction where it would not otherwise be required to qualify but for this
Section 2.1(b) or to take any action which would subject it to general service
of process or to taxation in any such jurisdiction where it is not then so
subject.
(c) Accuracy of Disclosure. The Company represents and warrants to
each Holder and agrees for the benefit of each Holder that (i) the Warrant Shelf
Registration Statement and any amendment thereto will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements contained therein not
misleading; and (ii) each of the prospectuses furnished to such Holder for
delivery in connection with the exercise of Warrants or in connection with the
sale of Warrant Shares, as the case may be, and the documents incorporated by
reference therein will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements contained therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the Company shall have no
liability under clause (i) or (ii) of this Section 2.1(c) with respect to any
such untrue statement or omission made in the Warrant Shelf Registration
Statement in reliance upon and in conformity with information furnished to the
Company by or on behalf of the Holders specifically for inclusion therein.
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<PAGE>
(d) Liquidated Damages. In the event that (i) the Warrant Shelf
Registration Statement is not declared effective by the SEC on or prior to
November 16, 1998 or (ii) following the date such Warrant Shelf Registration
Statement is declared effective but thereafter ceases to be effective or usable
without being restored to effectiveness by amendment or otherwise, except during
such time periods indicated in Section 2.3(a) (each of the events referred to in
clauses (i) and (ii) above, a "Shelf Registration Default"), then the Company
shall pay liquidated damages ("Liquidated Damages") to each Holder of Warrants
or Warrant Shares an amount (the "Damage Amount") in an initial amount equal to
$.0025 per week per Warrant for each week that the Shelf Registration Default
continues for the first 90-day period following such Shelf Registration Default.
The Damage Amount shall be increased by an additional $.0025 per week per
Warrant with respect to each subsequent 90-day period until such Shelf
Registration Default has been cured, up to a maximum amount of Liquidated
Damages of $0.0125 per week per Warrant.
(e) Additional Acts. If the issuance or sale of any Warrant Shares or
other securities issuable upon the exercise of the Warrants requires
registration or approval of any governmental authority (other than the
registration requirements under the Securities Act), or the taking of any other
action under the laws of the United States of America or any political
subdivision thereof before such securities may be validly offered or sold in
compliance with such laws, then the Company covenants that it will, in good
faith and as expeditiously as reasonably possible, use all reasonable efforts to
secure and maintain such registration or approval or to take such other action,
as the case may be.
(f) Listing of Warrant Shares. The Company shall use its best efforts
to register the Warrant Shares on the Nasdaq National Market by the Exercise
Date.
2.2 (a) Piggy-Back Registration. If at any time the Company proposes
to file a Registration Statement under the Securities Act with respect to an
offering by the Company for its own account or for the account of any of its
securityholders of Common Stock (other than (i) a registration statement on Form
S-4 or S-8 (or F-4 or F-8) (or any substitute form that may be adopted by the
SEC) or any other publicly registered offering pursuant to the Securities Act
pertaining to the issuance of shares of Common Stock or securities exercisable
therefor under any benefit plan, employee compensation plan, or employee or
director stock purchase plan, or (ii) a registration statement filed in
connection with an offer of securities solely to the Company's existing
securityholders), then the Company shall give written notice of such proposed
filing to the Holders of Registrable Securities as soon as practicable (but in
no event fewer than 15 days before the anticipated filing date or 10 days if the
Company is subject to filing reports under the Exchange Act and able to use Form
S-3 (or F-3) under the Securities Act), and such notice shall offer such Holders
the opportunity to register such number of shares of Registrable Securities as
each such Holder may request in writing within eight days after receipt of such
written notice from the Company (which request shall specify the Registrable
Securities intended to be disposed of by such Selling Holder and the intended
method of distribution thereof) (a "Piggy-Back
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<PAGE>
Registration"). The Company shall use its best efforts to keep such Piggy-Back
Registration continuously effective under the Securities Act in the qualifying
jurisdictions until at least the earlier of (A) 60 days after the effective date
thereof or (B) the consummation of the distribution by the Holders of all of the
Registrable Securities covered thereby. The Company shall use its best efforts
to cause the managing underwriter or underwriters, if any, of such proposed
offering to permit the Registrable Securities requested to be included in a
Piggy-Back Registration to be included on the same terms and conditions as any
similar securities of the Company or any other securityholder included therein
and to permit the sale or other disposition of such Registrable Securities in
accordance with the intended method of distribution thereof. Any Selling Holder
shall have the right to withdraw its request for inclusion of its Registrable
Securities in any Registration Statement pursuant to this Section 2.2 by giving
written notice to the Company of its request to withdraw. The Company may
withdraw a Piggy-Back Registration at any time prior to the time it becomes
effective or the Company may elect to delay the registration; provided, however,
that the Company shall give prompt written notice thereof to participating
Selling Holders. The Company will pay all Registration Expenses in connection
with each registration of Registrable Securities requested pursuant to this
Section 2.2, and each Holder of Registrable Securities shall pay all
underwriting discounts and commissions and transfer taxes, if any, relating to
the sale or disposition of such Holder's Registrable Securities pursuant to a
Registration Statement effected pursuant to this Section 2.2.
No registration effected under this Section 2.2, and no failure to
effect a registration under this Section 2.2, shall relieve the Company of its
obligation to effect a registration upon the request of Holders of Registrable
Securities pursuant to Section 2.1 hereof, and no failure to effect a
registration under this Section 2.2 and to complete the sale of securities
registered thereunder in connection therewith shall relieve the Company of any
other obligation under this Agreement.
(b) Priority in Piggy-Back Registration. In a registration pursuant to
this Section 2.2 involving an underwritten offering, if the managing underwriter
or underwriters of such underwritten offering have informed, in writing, the
Company and the Selling Holders requesting inclusion in such offering that in
such underwriter's or underwriters' reasonable opinion the total number of
securities which the Company, the Selling Holders and any other persons desiring
to participate in such registration intend to include in such offering is such
as to materially and adversely affect the success of such offering, including
the price at which such securities can be sold, then the Company will be
required to include in such registration only the amount of securities which it
is so advised should be included in such registration. In such event: (x) in
cases only involving the registration for sale of Common Stock for the Company's
own account (which may include securities included pursuant to the exercise of
piggy-back rights herein and in other contractual commitments of the Company),
securities shall be registered in such offering in the following order of
priority: (i) first, the Common Stock which the Company proposes to register,
(ii) second, provided that no Common Stock sought to be included by the Company
have been excluded from such registration, the Common Stock which have been
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requested to be included in such registration by the Holders of Registrable
Securities pursuant to this Agreement (such securities for the account of the
Holders to be allocated among the Holders pro rata based on the amount of
securities sought to be registered by the Holder) and (iii) third, provided that
no Common Stock sought to be included by the Company or the Holders have been
excluded from such registration, the securities of other Persons entitled to
exercise "piggy-back" registration rights pursuant to contractual commitments of
the Company (pro rata based on the amount of securities sought to be registered
by such Persons); and (y) in cases not involving the registration for sale of
Common Stock for the Company's own account only, securities shall be registered
in such offering in the following order of priority: (i) first, Common Stock to
be sold for the account of the Company and the securities of any Person whose
exercise of a "demand" registration right pursuant to a contractual commitment
of the Company is the basis for the registration (provided that if such Person
is a Holder of Registrable Securities, as among Holders of Registrable
Securities there shall be no priority and Registrable Securities sought to be
included by Holders of Registrable Securities shall be included pro rata based
on the amount of securities sought to be registered by such Persons), (ii)
second, provided that no securities of the Company or such Person referred to in
the immediately preceding clause (i) have been excluded from such registration,
the securities requested to be included in such registration by the Holders of
Registrable Securities pursuant to this Agreement (such securities for the
account of the Holders to be allocated among the Holders pro rata based on the
total amount of securities sought to be registered by the Holders) and (iii)
third, provided that no securities of such Person referred to in the immediately
preceding clause (i) or of the Holders have been excluded from such
registration, securities of other Persons entitled to exercise "piggy-back"
registration rights pursuant to contractual commitments (pro rata based on the
amount of securities sought to be registered by such Persons).
If, as a result of the provisions of this Section 2.2(b), any Selling
Holder shall not be entitled to include all Registrable Securities in a
Piggy-Back Registration that such Selling Holder has requested to be included,
such Selling Holder may elect to withdraw his request to include Registrable
Securities in such registration.
(c) Restrictions on Sale by Holders. Each Holder of Registrable
Securities whose Registrable Securities are covered by a Registration Statement
filed pursuant to this Section 2.2 (a "Piggy-Back Registration Statement") and
are to be sold thereunder agrees, if and to the extent reasonably requested by
the managing underwriter or underwriters in an underwritten public offering, not
to effect any public sale or distribution of Registrable Securities or of
securities of the Company of the same class as any securities included in such
Piggy-Back Registration Statement, including a sale pursuant to Rule 144 (except
as part of such underwritten offering), during the 30-day period prior to, and
during the 180-day period beginning on, the closing date of each underwritten
offering made pursuant to such Piggy-Back Registration Statement, to the extent
timely notified in writing by the Company or such managing underwriter or
underwriters.
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The foregoing provisions of Section 2.2(c) shall not apply to any
Holders of Registrable Securities if such Holder is prevented by applicable
statute or regulation from entering into any such agreement; provided, however,
that any such Holder shall undertake, in its request to participate in any such
underwritten offering, not to effect any public sale or distribution of any
Registrable Securities commencing on the date of sale of such Registrable
Securities unless it has provided 45 days' prior written notice of such sale or
distribution to the managing underwriter or underwriters.
2.3 Limitations, Conditions and Qualifications to Obligations Under
Registration Covenants. The obligations of the Company set forth in Sections
2.1, 2.2 and 2.6 hereof are subject to each of the following limitations,
conditions and qualifications:
(a) Subject to the next sentence of this paragraph, the Company shall
be entitled to postpone, for a reasonable period of time, the filing of, or
suspend the effectiveness of, any registration statement or amendment
thereto, or suspend the use of any prospectus and shall not be required to
amend or supplement the registration statement, any related prospectus or
any document incorporated therein by reference (other than an effective
registration statement being used for an underwritten offering); provided
that the duration of such postponement or suspension (a "Suspension
Period") may not exceed up to two 30- day consecutive-day periods in any
12-month period and provided further, that the Suspension Period may not
occur during the 30-consecutive-day period immediately after the Exercise
Date and during the 30-consecutive-day period immediately prior to July 15,
2008. Such Suspension Period may be effected only if (i) the Company's
Board determines in its good faith that there is a valid business purpose
for such suspension and (ii) provides notice that such determination was
made by the Company's Board to the Holders of the Warrants; provided,
however, that in no event shall the Company be required to disclose the
business purpose for such suspension if the Company determines in good
faith that such business purpose must remain confidential; and provided
further, however, that the Effectiveness Period shall be extended by the
number of days in any Suspension Period. The Company may further suspend
effectiveness for a period not in excess of 5 Business Days to allow for
the updating of the financial statements included in a Registration
Statement to the extent required by law, such suspension for updating
financial statements not to exceed 45 calendar days in aggregate in any
12-month period. If the Company shall so postpone the filing of a
Registration Statement it shall, as promptly as possible, deliver a
certificate signed by the chief executive officer of the Company to the
Selling Holders as to such determination, and the Selling Holders shall (1)
have the right, in the case of a postponement of the filing or
effectiveness of a Registration Statement, upon the affirmative vote of the
Holders of not less than a majority of the Registrable Securities to be
included in such Registration Statement, to withdraw the request for
registration by giving written notice to the Company within 10 days after
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receipt of such notice or (2) in the case of a suspension of the right to
make sales, receive an extension of the registration period equal to the
number of days of the suspension.
(b) The Company's obligations shall be subject to the obligations of
the Selling Holders, which the Selling Holders acknowledge, to furnish all
information and materials and to take any and all actions as may be
required under applicable federal and state securities laws and regulations
to permit the Company to comply with all applicable requirements of the
SEC, if applicable, and to obtain any acceleration of the effective date of
such Registration Statement.
2.4 Restrictions on Sale by the Company and Others. The Company
covenants and agrees that (i) it shall not, and that it shall not cause or
permit any of its subsidiaries to, effect any public sale or distribution of any
securities of the same class as any of the Registrable Securities or any
securities convertible into or exchangeable or exercisable for such securities
(or any option or other right for such securities) during the 30-day period
prior to, and during the 90-day period beginning on, the commencement of any
underwritten offering of Registrable Securities pursuant to a Piggy-Back
Registration which has been scheduled, prior to the Company or any of its
subsidiaries publicly announcing its intention to effect any such public sale or
distribution; (ii) the Company will not, and the Company will not cause or
permit any subsidiary of the Company to, after the date hereof, enter into any
agreement or contract that conflicts with or limits or prohibits the full and
timely exercise by the Holders of Registrable Securities of the rights herein to
join in any Piggy-Back Registration subject to the other terms and provisions
hereof; and (iii) upon request of the Holders of not less than a majority of the
Registrable Securities to be included in such Registration Statement or any
underwriter, it shall use its reasonable best efforts to secure the written
agreement of each of its officers and directors to not effect any public sale or
distribution of any securities of the same class as the Registrable Securities
(or any securities convertible into or exchangeable or exercisable for an such
securities), or any option or right for such securities during the period
described in clause (i) of this Section 2.4.
2.5 Rule 144 and Rule 144A. The Company covenants that it will file
the reports required to be filed by it under the Securities Act and the Exchange
Act and the rules and regulations adopted by the SEC thereunder in a timely
manner and, if at any time the Company is not required to file such reports, it
will, upon the request of any Holder or beneficial owner of Registrable
Securities, make available such information necessary to permit sales pursuant
to Rule 144A under the Securities Act. The Company further covenants that it
will take such further action as any Holder of Registrable Securities may
reasonably request, all to the extent required from time to time to enable such
Holder to sell Registrable Securities without registration under the Securities
Act within the limitation of the exemptions provided by (a) Rule 144(k) and Rule
144A under the Securities Act, as such Rules may be amended from time to time,
or (b) any similar rule or regulation hereafter adopted by the SEC. Upon the
request of any Holder of Registrable Securities, the Company will in a timely
manner deliver to such Holder a written
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statement as to whether it has complied with such information requirements.
2.6 Underwritten Registrations. No Holder of Registrable Securities
may participate in any underwritten registration pursuant to a Registration
Statement filed under this Agreement unless such Holder (a) agrees to (i) sell
such Holder's Registrable Securities on the basis provided in and in compliance
with any underwriting arrangements approved by the Holders of not less than a
majority of the Registrable Securities to be sold thereunder and (ii) comply
with Rules 101, 102 and 104 of Regulation M under the Exchange Act and (b)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements.
If the Company has complied with all its obligations under this
Agreement with respect to a Piggy-Back Registration relating to an underwritten
public offering, all holders of Warrants or Warrant Shares, upon request of the
lead managing underwriter with respect to such underwritten public offering,
will be required to not sell or otherwise dispose of any Warrants or Warrant
Shares owned by them for a period not to exceed 30 days prior to and 180 days
after the consummation of such underwritten public offering.
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SECTION 3. [Reserved].
SECTION 4. Registration Procedures. In connection with the obligations
of the Company with respect to any Registration Statement pursuant to Sections
2.1, 2.2 and 2.6 hereof, the Company shall, except as otherwise provided:
(a) At least five days prior to the initial filing of a Registration
Statement or Prospectus and at least two days prior to the filing of any
amendment or supplement thereto (including any document that would be
incorporated or deemed to be incorporated therein by reference), furnish to
the Warrant Agent, the Holders and the managing underwriters, if any,
copies of all such documents proposed to be filed, which documents (other
than those incorporated or deemed to be incorporated by reference) shall be
subject to the review of such Holders, and such underwriters, if any, and
cause the officers and directors of the Company, counsel to the Company and
independent certified public accountants to the Company to respond to such
reasonable inquiries as shall be necessary, in the opinion of counsel to
such underwriters, to conduct a reasonable investigation within the meaning
of the Securities Act; provided that the foregoing inspection and
information gathering shall be coordinated on behalf of the Holders by
Merrill Lynch. The Company shall not file any such Registration Statement
or related Prospectus or any amendments or supplements thereto which the
Holders of a majority of the Registrable Securities included in such
Registration Statement shall reasonably object on a timely basis.
(b) Prepare and file with the SEC such amendments, including
post-effective amendments to each Registration Statement as may be
necessary to keep such Registration Statement continuously effective for
the applicable time period required hereunder; cause the related Prospectus
to be supplemented by any required Prospectus supplement, and as so
supplemented to be filed pursuant to Rule 424 (or any similar provisions
then in force) promulgated under the Securities Act; and comply with the
provisions of the Securities Act and the Exchange Act with respect to the
disposition of all securities covered by such Registration Statement during
such period in accordance with the intended methods of disposition by the
sellers thereof set forth in such Registration Statement as so amended or
in such Prospectus as so supplemented.
(c) Notify the Holders of Registrable Securities to be sold and the
managing underwriters, if any, promptly, and (if requested by any such
person) confirm such notice in writing, (i)(A) when a Prospectus or any
Prospectus supplement or post-effective amendment is proposed to be filed,
and (B) with respect to a Registration Statement or any post-effective
amendment, when the same has become effective, (ii) of any request by the
SEC or any other Federal or state governmental authority for amendments or
supplements to a Registration Statement or related Prospectus or for
additional information, (iii) of the issuance by the SEC, any state
securities commission, any other governmental agency or
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any court of any stop order suspending the effectiveness of such
Registration Statement or of any order or injunction suspending or
enjoining the use of a Prospectus or the effectiveness of a Registration
Statement or the initiation of any proceedings for that purpose, (iv) of
the receipt by the Company of any notification with respect to the
suspension of the qualification or exemption from qualification of any of
the Registrable Securities for sale in any jurisdiction, or the initiation
or threatening of any proceeding for such purpose, and (v) of the happening
of any event, the existence of any information becoming known that makes
any statement made in a Registration Statement or related Prospectus or any
document incorporated or deemed to be incorporated therein by reference
untrue in any material respect or omit to state any material fact required
to be stated therein or necessary to make the statements therein, not
misleading, and that in the case of the Prospectus, it will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(d) Use its best efforts to avoid the issuance of or, if issued,
obtain the withdrawal of any order enjoining or suspending the
effectiveness of the Registration Statement or the use of a Prospectus or
the lifting of any suspension of the qualification (or exemption from
qualification) of any of the Registrable Securities covered thereby for
sale in any jurisdiction described in Section 4(h) at the earliest
practicable moment.
(e) If requested by the managing underwriters, if any, or if none, by
the Holders of a majority of the Registrable Securities being sold pursuant
to such Registration Statement, (i) promptly incorporate in a Prospectus
supplement or post-effective amendment such information as the managing
underwriters, if any, or if none, such Holders reasonably believe should be
included therein, and (ii) make all required filings of such Prospectus
supplement or such post-effective amendment under the Securities Act as
soon as practicable after the Company has received notification of the
matters to be incorporated in such prospectus supplement or post-effective
amendment; provided, however, that the Company shall not be required to
take any action pursuant to this Section 4(e) that would in the opinion of
counsel for the Company, violate applicable law.
(f) Upon written request to the Company, furnish to each Holder of
Registrable Securities to be sold pursuant to a Registration Statement and
each managing underwriter, if any, without charge, at least one conformed
copy of the Registration Statement and each amendment thereto, including
financial statements and schedules, all documents incorporated or deemed to
be incorporated therein by reference, and all exhibits to the extent
requested (including those previously furnished or incorporated by
reference) as soon as practicable after the filing of such documents with
the SEC.
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(g) Deliver to each Holder of Registrable Securities to be sold
pursuant to a Registration Statement and each managing underwriter, if any,
without charge, as many copies of each Prospectus (including each form of
prospectus) and each amendment or supplement thereto as such Persons may
reasonably request; and the Company hereby consents to use of such
Prospectus and each amendment or supplement thereto and each document
supplemental thereto by each of the selling Holders of Registrable
Securities and the underwriters or agents, if any, in connection with the
offering and sale of the Registrable Securities covered by such Prospectus
and any amendment or supplement thereto.
(h) Prior to any offering of Registrable Securities, use its best
efforts to register or qualify or cooperate with the Holders of Registrable
Securities to be sold, the managing underwriter or underwriters, if any,
and their respective counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of
such Registrable Securities for offer and sale under the securities or Blue
Sky laws of such jurisdictions as any such Holder or underwriter reasonably
requests in writing; keep each such registration or qualification (or
exemption therefrom) effective during the period such Registration
Statement is required to be kept effective hereunder and do any and all
other acts or things necessary or advisable to enable the disposition in
such jurisdictions of the Registrable Securities covered by the applicable
Registration Statement; provided, however, that the Company shall not be
required to (i) qualify generally to do business in any jurisdiction where
it is not then so qualified or (ii) take any action that would subject it
to general service of process in any such jurisdiction where it is not then
so subject or to taxation in any jurisdiction where it is not so subject.
(i) In connection with any sale or transfer of Registrable Securities
that will result in such securities no longer being Registrable Securities,
cooperate with the Holders of Registrable Securities and the managing
underwriters, if any, to facilitate the timely preparation and delivery of
certificates representing Registrable Securities to be sold, which
certificates shall not bear any restrictive legends whatsoever and shall be
in a form eligible for deposit with The Depository Trust Company ("DTC");
and to enable such Registrable Securities to be in such denominations and
registered in such names as the managing underwriter or underwriters, if
any, or such Holders may reasonably request at least two business days
prior to any sale of Registrable Securities.
(j) Upon the occurrence of any event contemplated by Section 4(c)(v)
above, as promptly as practicable prepare a supplement or amendment,
including if appropriate a post-effective amendment to each Registration
Statement or a supplement to the related Prospectus or any document
incorporated or deemed to be incorporated therein by reference, and file
any other required document so that, as thereafter delivered, such
Prospectus will not contain an untrue statement of a material fact or omit
to state a material
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fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(k) Prior to the effective date of a Registration Statement, (i)
provide the registrar for the Warrants and Registrable Securities with
certificates for such securities in a form eligible for deposit with DTC
and (ii) provide CUSIP numbers for such securities.
(l) Enter into such agreement (including an underwriting agreement in
such form, scope and substance as is customary in underwritten offerings)
and take all such other reasonable actions in connection therewith
(including those reasonably requested by the managing underwriters, if any,
or the Holders of a majority of the Registrable Securities being sold) in
order to expedite or facilitate the disposition of such Registrable
Securities, and, whether or not an underwriting agreement is entered into
and whether or not the registration is an underwritten registration, (i)
make such representations and warranties to the Holders of such Registrable
Securities and the underwriter or underwriters, if any, with respect to the
business of the Company and the subsidiaries of the Company (including with
respect to businesses or assets acquired or to be acquired by any of them),
and the Registration Statement, Prospectus and documents, if any,
incorporated or deemed to be incorporated by reference therein, in each
case, in form, substance and scope as are customarily made by issuers to
underwriters in underwritten offerings, and confirm the same if any when
requested; (ii) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the managing underwriters, if any, addressed to
each selling Holder of Registrable Securities and each of the underwriters,
if any), covering the matters customarily covered in opinions requested in
underwritten offerings and such other matters as may be reasonably
requested by such underwriters; (iii) use their best efforts to obtain
customary "cold comfort" letters and updates thereof from the independent
certified public accountants of the Company (and, if necessary, any other
independent certified public accountants of any subsidiary of the Company
or of any business acquired by the Company for which financial statements
and financial data are, or are required to be, included in the Registration
Statement), addressed (where reasonably possible) to each Selling Holder of
Registrable Securities and each of the underwriters, if any, such letters
to be in customary form and covering matters of the type customarily
covered in "cold comfort" letters in connection with underwritten
offerings; (iv) if an underwriting agreement is entered into, the same
shall contain customary indemnification provisions and procedures no less
favorable to the Selling Holder and the underwriters, if any, than those
set forth in Section 5 hereof (or such other provisions and procedures
acceptable to Holders of a majority of Registrable Securities covered by
such Registration Statement and the managing underwriter, if any); and (v)
deliver such documents and certificates as may be reasonably requested by
the Holders of a majority of the Registrable
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Securities being sold and the managing underwriters or underwriters to
evidence the continued validity of the representations and warranties made
pursuant to clause (i) above and evidence compliance with any customary
conditions contained in the underwriting agreement or other agreements
entered into by the Company.
(m) Make available for inspection by a representative of the selling
Holders of Registrable Securities, any underwriter participating in any
such disposition of Registrable Securities, if any, and any attorney,
consultant or accountant retained by such representative of the selling
Holders of Registrable Securities or underwriter (collectively, the
"Inspectors"), at the offices where normally kept, during the reasonable
business hours, all financial and other records, pertinent corporate
documents and properties of the Company and the subsidiaries of the Company
(including with respect to businesses and assets acquired or to be acquired
to the extent that such information is available to the Company), and cause
the officers, directors, agents and employees of the Company and its
subsidiaries of the Company (including with respect to businesses and
assets acquired or to be acquired to the extent that such information is
available to the Company) to supply all information in each case reasonably
requested by any such Inspector in connection with such Registration
Statement; provided, however, that such persons shall first agree in
writing with the Company that any information that is reasonably and in
good faith designated by the Company in writing as confidential at the time
of delivery of such information shall be kept confidential by such Persons,
unless (i) disclosure of such information is required by court or
administrative order or is necessary to respond to inquiries of regulatory
authorities, (ii) disclosure of such information is required by law
(including any disclosure requirements pursuant to U.S. securities laws in
connection with the filing of the Registration Statement or the use of any
Prospectus), (iii) such information becomes generally available to the
public other than as a result of a disclosure or failure to safeguard such
information by such person or (iv) such information becomes available to
such person from a source other than the Company and its subsidiaries and
such source is not bound by a confidentiality agreement; provided, further
that the foregoing investigation shall be coordinated on behalf of the
selling Holders of Registrable Securities by Merrill Lynch.
(n) Comply with all applicable rules, regulations and policies of the
SEC and make generally available to its securityholders earnings statements
satisfying the provisions of Section 11(a) of the Securities Act and Rule
158 thereunder no later than 60 days after the end of any 12-month period
(or 135 days after the end of any 12-month period if such period is a
fiscal year) (i) commencing at the end of any fiscal quarter in which
Registrable Securities are sold to an underwriter or to underwriters in a
firm commitment or reasonable efforts underwritten offering and (ii) if not
sold to an underwriter or to underwriters in such an offering, commencing
on the first day of the first fiscal quarter of the Company after the
effective date of the relevant Registration Statement, which statements
shall cover
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said such period, consistent with the requirements of Rule 158 under the
Securities Act.
(o) Use its best efforts to cause all Warrant Shares relating to such
Registration Statement to be listed on each securities exchange, if any, on
which similar securities issued by the Company are then listed.
(p) Cooperate with each seller of Registrable Securities to facilitate
the timely preparation and delivery of certificates representing
Registrable Securities to be sold and not bearing any restrictive legends
and registered in such names as the Selling Holders may reasonably request
at least two business days prior to the closing of any sale of Registrable
Securities.
(q) Cooperate with each seller of Registrable Securities covered by
any Registration Statement and each underwriter, if any, participating in
the disposition of such Warrants or Registrable Securities and its
respective counsel in connection with any filings required to be made with
the National Association of Securities Dealers, Inc.
The Company may require a Holder of Registrable Securities to be
included in a Registration Statement to furnish to the Company such information
regarding (i) the intended method of distribution of such Registrable Securities
(ii) such Holder and (iii) the Registrable Securities held by such Holder as is
required by law to be disclosed in such Registrable Statement and the Company
may exclude from such Registration Statement the Registrable Securities of any
Holder who fails to furnish such information within a reasonable time after
receiving such request.
If any such Registration Statement refers to any Holder by name or
otherwise as the Holder of any securities of the Company, then such Holder shall
have the right to require (i) the insertion therein of language, in form and
substance reasonably satisfactory to such Holder, to the effect that the holding
by such Holder of such securities is not to be construed as a recommendation by
such Holder of the investment quality of the Company's securities covered
thereby and that such holding does not imply that such Holder will assist in
meeting any future financial requirements of the Company, or (ii) in the event
that such reference to such Holder by name or otherwise is not required by the
Securities Act, the deletion of the reference to such Holder in such amendment
or supplement to the Registration Statement filed or prepared subsequent to the
time that such reference ceases to be required.
Each Holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 4(c)(ii), 4(c)(iv) or
4(c)(v) hereof, such Holder will forthwith discontinue disposition of such
Registrable Securities covered by the Registration Statement or Prospectus until
such Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 4(j) hereof, or until it is advised in writing (the
"Advice") by the Company that the use
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of the applicable Prospectus may be resumed, and in either case has received
copies of any additional or supplemental filings that are incorporated or deemed
to be incorporated by reference in such Prospectus. If the Company shall give
any such notice, the Effectiveness Period shall be extended by the number of
days during such periods from and including the date of the giving of such
notice to and including the date when each seller of Registrable Securities
covered by such Registration Statement shall have received (x) the copies of the
supplemented or amended Prospectus contemplated by Section 4(j) hereof or (y)
the Advice, and, in either case, has received copies of any additional or
supplemental filings that are incorporated or deemed to be incorporated by
reference in such Prospectus.
Holders of the Registrable Securities shall be obligated to keep
confidential the existence of a Suspension Period or any confidential
information communicated by the Company to the Holder with respect thereto.
SECTION 5. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless each Initial Purchaser, each Holder, each
underwriter, if any, who participates in an offering of Registrable Securities,
their respective affiliates, and their respective directors, officers,
employees, agents and each Person, if any, who controls any of such parties
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in any Registration Statement
(or any amendment thereto) pursuant to which Registrable Securities were
registered under the 1933 Act, including all documents incorporated therein
by reference, or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact contained in any Prospectus (or any amendment
or supplement thereto) or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever, in each case, based upon any such untrue statement or omission,
or any such alleged untrue statement or omission; provided that (subject to
Section 5(d) below) any such settlement is effected with the written
consent of the Company; and
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(iii) against any and all expenses whatsoever, as incurred (including
the reasonable fees and disbursements of one counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any court or
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission, to the extent that any such expense
is not paid under subparagraph (i) or (ii) of this Section 5(a);
provided, however, that this indemnity agreement does not apply to any loss,
liability, claim, damage or expense to the extent (i) arising out of an untrue
statement or omission or alleged untrue statement or omission (A) made in or
omitted from a preliminary Prospectus or Registration Statement and corrected or
included in a subsequent Prospectus or Registration Statement or any amendment
or supplement thereto made in reliance upon and in conformity with written
information furnished to the Company by the Selling Holders of Registrable
Securities, any Holder, or any underwriter expressly for use in the Registration
Statement (or any amendment thereto) or the Prospectus (or any amendment or
supplement thereto) or (B) resulting from the use of the Prospectus during a
period when the use of the Prospectus has been suspended for sales thereunder in
accordance with Sections 2.1(b), 2.1(c), 2.2(c), 2.3, 2.4 or 2.6 hereof,
provided, in each case, that Holders received prior notice of such suspension or
other unavailability.
(b) In the case of any registration of Registrable Securities, each
Holder agrees, severally and not jointly, to indemnify and hold harmless the
Company, each Initial Purchaser, each underwriter, if any, who participates in
an offering of Registrable Securities and the other Selling Holders and each of
their respective directors and officers (including each officer of the Company
who signed the Registration Statement) and each Person, if any, who controls the
Company, any Initial Purchaser, any underwriter or any other Selling Holder
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act, against any and all loss, liability, claim, damage and expense
described in the indemnity contained in Section 5(a) hereof, as incurred, but
only with respect to untrue statements or omissions, or alleged untrue
statements or omissions, made in the Registration Statement (or any amendment
thereto) or the Prospectus (or any amendment or supplement thereto) in reliance
upon and in conformity with written information furnished to the Company by such
Holder expressly for use in the Registration Statement (or any amendment
thereto), or the Prospectus (or any amendment or supplement thereto); provided,
however, that no such Holder shall be liable for any claims hereunder in excess
of the amount of net proceeds received by such Holder from the sale of Warrants
and Registrable Securities pursuant to such Registration Statement.
(c) In case any action shall be commenced involving any Person in
respect of which indemnity may be sought pursuant to either paragraph (a) or (b)
above, such Person (the "indemnified party") shall give notice as promptly as
reasonably practicable to each Person against whom such indemnity may be sought
(the "indemnifying party"), but failure to so notify an
20
<PAGE>
indemnifying party shall not relieve such indemnifying party from any liability
hereunder to the extent it is not materially prejudiced as a result thereof and
in any event shall not relieve it from any liability which it may have otherwise
than on account of this indemnity agreement. An indemnifying party may
participate at its own expense in the defense of such action; provided, however,
that counsel to the indemnifying party shall not (except with the consent of the
indemnified party) also be counsel to the indemnified party. In no event shall
the indemnifying party or parties be liable for the fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 5 (whether or
not the indemnified parties are actual or potential parties thereof), unless
such settlement, compromise or consent (i) includes an unconditional release of
each indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of any
indemnified party.
(d) If at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement of the nature contemplated by Section 5(a)(ii) hereof effected
without its written consent if (i) such settlement is entered into more than 45
days after receipt by such indemnifying party of the aforesaid request, (ii)
such indemnifying party shall have received notice of the terms of such
settlement at least 30 days prior to such settlement being entered into and
(iii) such indemnifying party shall not have reimbursed such indemnified party
in accordance with such request prior to the date of such settlement.
(e) If the indemnification provided for in any of the indemnity
provisions set forth in this Section 5 is for any reason unavailable to or
insufficient to hold harmless an indemnified party in respect of any losses,
liabilities, claims, damages or expenses referred to therein, then each
indemnifying party shall contribute to the aggregate amount of such losses,
liabilities, claims, damages and expenses incurred by such indemnified party, as
incurred, in such proportion as is appropriate to reflect the relative fault of
such indemnifying party or parties on the one hand, and such indemnified party
or parties on the other hand, in connection with the statements or omissions
which resulted in such losses, liabilities, claims, damages or expenses, as well
as any other relevant equitable considerations. The relative fault of such
indemnifying party or parties on the one hand, and such indemnified party or
parties on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by such indemnifying party or parties or such indemnified party or
parties
21
<PAGE>
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company, the
Initial Purchasers and the Holders of the Registrable Securities agree that it
would not be just and equitable if contribution pursuant to this Section 5 were
determined by pro rata allocation (even if the Selling Holders of Registrable
Securities were treated as one entity, and the Holders were treated as one
entity, for such purpose) or by another method of allocation which does not take
account of the equitable considerations referred to above in Section 5. The
aggregate amount of losses, liabilities, claims, damages and expenses incurred
by an indemnified party and referred to above in this Section 5 shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by an governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission. No Person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any Person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 5, each Person, if
any, who controls an Initial Purchaser or Holder within the meaning of this
Section 15 of the Securities Act or Section 20 of the Exchange Act shall have
the same rights to contribution as such Initial Purchaser or Holder, and each
director of the Company, each officer of the Company who signed the Registration
Statement, and each Person, if any, who controls the Company within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have
the same rights to contribution as the Company.
SECTION 6. Miscellaneous.
(a) Remedies. In the event of a breach by the Company of any of its
obligations under this Agreement, each Holder, in addition to being entitled to
exercise all rights provided herein, in the Purchase Agreement or granted by
law, including recovery of damages, will be entitled to specific performance of
its rights under this Agreement. The Company agrees that monetary damages would
not be adequate compensation for any loss incurred by reason of a breach by it
of any of the provisions of this Agreement.
(b) No Inconsistent Agreements. The Company will not enter into any
agreement which is inconsistent with the rights granted to the Holders of
Registrable Securities in this Agreement or otherwise conflicts with the
provisions hereof. The rights granted to the Holders hereunder do not in any way
conflict with and are not inconsistent with the rights granted to the holders of
the Company's other issued and outstanding securities, if any, under any such
agreements.
(c) [Intentionally Omitted].
(d) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or
22
<PAGE>
consents to departures from the provisions hereof may not be given, otherwise
than with the prior written consent of the Holders of not less than a majority
of the then outstanding Warrants and each class and series of Registrable
Securities; provided, however, that, for the purposes of this Agreement,
Warrants and Registrable Securities that are owned, directly or indirectly, by
the Company or any of its affiliates are not deemed outstanding. Notwithstanding
the foregoing, a waiver or consent to depart from the provisions hereof with
respect to a matter that relates exclusively to the rights of one or more
Holders and that does not directly or indirectly affect the rights of other
Holders may be given by a majority of the Holders so affected; provided,
however, that the provisions of this sentence may not be amended, modified or
supplemented except in accordance with the provisions of the immediately
preceding sentence. Notwithstanding the foregoing, no amendment, modification,
supplement, waiver or consent with respect to Section 5 shall be made or given
otherwise than the prior written consent of each Person affected thereby.
(e) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand delivery, registered
first-class mail, facsimile, or any courier guaranteeing overnight delivery (i)
if to a Holder, at the most current address of such Holder as set forth in the
register for the Registrable Securities, which address initially is, with
respect to each Initial Purchaser, the address set forth with respect to such
Initial Purchaser in the Purchase Agreement; and (ii) if to the Company,
initially to @Entertainment, Inc., c/o WIVJATV Sp. z.o.o./@Entertainment, Inc.,
ul. Pawinskiego 5A, blok D, 02-106 Warsaw, Poland, Attention: Przemylslaw Szmyt,
facsimile no.: 011 48 22 668 7200, and thereafter at such other address, notice
of which is given in accordance with the provisions of this Section 6(e), with a
copy to Baker & McKenzie, 815 Connecticut, N.W., Washington, D.C. 20006-4078,
Attention: Marc R. Paul, Esq., facsimile no.: (202) 452-7074, and thereafter at
such other address notice of which is given in accordance with the provisions of
this Section 6(e).
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; five Business
Days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt is acknowledged, if telecopied; and on
the next Business Day, if timely delivered to an air courier guaranteeing
overnight delivery.
(f) Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the successors and permitted assigns of each of the
parties and shall inure to the benefit of each Holder. If any transferee of any
Holder shall acquire Registrable Securities, in any manner, whether by operation
of law or otherwise, such Registrable Securities shall be held subject to all of
the terms of this Agreement, and by taking and holding such Registrable
Securities such Person shall be conclusively deemed to have agreed to be bound
by and to perform all of the terms and provisions of this Agreement and such
Person shall be entitled to receive the benefits hereof. The Company may not
assign any of its rights or obligations hereunder without the prior written
consent of each Holder of Registrable Securities. Notwithstanding the foregoing,
no successor or assignee of the Company shall have any rights granted under the
Agreement until
23
<PAGE>
such person shall acknowledge its rights and obligations hereunder by a signed
written statement of such person's acceptance of such rights and obligations.
(g) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same Agreement.
(h) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
(j) Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.
(k) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(l) Entire Agreement. This Agreement, together with the Purchase
Agreement and the Warrant Agreement, is intended by the parties as a final
expression of their agreement, and is intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein and therein. This Agreement, the Purchase
Agreement and the Warrant Agreement supersede all prior agreements and
understandings between the parties with respect to such subject matter.
(m) Securities Held by the Company or Its Affiliates. Whenever the
consent or approval of Holders of a specified percentage of Registrable
Securities is required hereunder, Registrable Securities held by the Company or
by any of its affiliates (as such term is defined in Rule 405 under the
Securities Act) shall not be counted (in either the numerator or the
denominator) in determining whether such consent or approval was given by the
Holders of such required percentage.
[Signature Page Follows]
24
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
@ ENTERTAINMENT, INC.
By:
---------------------------------
Name:
Title:
Confirmed and accepted as of
the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
J.P. MORGAN SECURITIES, INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
---------------------------
Name:
Title:
<PAGE>
EXECUTION COPY
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
WARRANT
REGISTRATION RIGHTS AGREEMENT
Dated as of July 14, 1998
Between
@ENTERTAINMENT, INC.,
and
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED,
J.P. MORGAN SECURITIES, INC.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1. Definitions...........................................................................................1
Section 2. Registration Rights...................................................................................6
2.1 (a) Warrant Shelf Registration Statement.......................................................6
(b) Blue Sky...................................................................................6
(c) Accuracy of Disclosure.....................................................................6
(d) Liquidated Damages.........................................................................6
(e) Additional Acts........................................................................... 7
(f) Listing of Warrant Shares..................................................................7
2.2 (a) Piggy-Back Registration....................................................................7
(b) Priority in Piggy-Back Registration........................................................7
(c) Restrictions on Sale by Holders............................................................9
2.3 Limitations, Conditions and Qualifications to Obligations Under Registration
Covenants......................................................................................10
2.4 Restrictions on Sale by the Company and Others......................................................11
2.5 Rule 144 and Rule 144A..............................................................................11
2.6 Underwritten Registrations..........................................................................12
Section 3. [Reserved] ...........................................................................................12
Section 4. Registration Procedures..............................................................................12
Section 5. Indemnification and Contribution.....................................................................19
Section 6. Miscellaneous........................................................................................22
(a) Remedies.........................................................................................22
(b) No Inconsistent Agreements.......................................................................22
(c) [Intentionally Omitted]..........................................................................22
(d) Amendments and Waivers...........................................................................23
(e) Notices..........................................................................................23
(f) Successors and Assigns...........................................................................23
(g) Counterparts.....................................................................................23
(h) Governing Law....................................................................................23
(j) Severability.....................................................................................23
(k) Headings.........................................................................................24
(l) Entire Agreement.................................................................................24
(m) Securities Held by the Company or Its Affiliates.................................................24
</TABLE>
<PAGE>
Exhibit 5
[Baker & McKenzie Letterhead]
September 29, 1998
@Entertainment, Inc.
One Commercial Plaza
Hartford, Connecticut 06103-3585
Re: Securities and Exchange Commission-
Registration Statement on Form S-3
--------------------------------------------------------------------
Ladies and Gentlemen:
As counsel to @Entertainment, Inc., a Delaware corporation (the
"Company"), we have assisted in the preparation of the Company's Registration
Statement on Form S-3 (the "Registration Statement"), relating to: (i)
1,008,000 warrants (the "Warrants") to purchase shares of the Company's
common stock, par value $.01 per share (the "Common Stock"), issued pursuant
to the Warrant Agreement, dated as of July 14, 1998 (the "Warrant
Agreement"); and (ii) 1,824,514 shares of Common Stock (the "Warrant Shares")
that may be issued from time to time by the Company upon the exercise of the
Warrants.
In this connection, we have examined and considered the original or
copies, certified or otherwise identified to our satisfaction, of the
Company's Certificate of Incorporation, as amended to date, its By-laws,
resolutions of its Board of Directors, officers' certificates and such other
documents and corporate records relating to the Company and the issuance and
sale of the Common Stock, as we have deemed appropriate for purposes of
rendering this opinion.
<PAGE>
@Entertainment, Inc.
September 29, 1998
Page 2
In all examinations of documents, instruments and other papers, we have
assumed the genuineness of all signatures on original and certified documents
and the conformity to original and certified documents of all copies
submitted to us as conformed, photostat or other copies. As to matters of fact
which have not been independently established, we have relied upon
representations of officers of the Company.
Based upon the foregoing examination, and the information thus supplied,
it is our opinion that:
(i) The Warrants are duly authorized and validly issued; and
(ii) The issuance of the Warrant Shares has been duly authorized by all
necessary corporate action on the part of the Company, and when the
Warrant Shares are issued upon exercise of the Warrants in accordance with
the terms of the Warrant Agreement against payment of the consideration
therefor specified in the Warrant Agreement, they will be validly issued,
fully paid and nonassessable.
We hereby expressly consent to the reference to our Firm in the
Registration Statement (including any related Registration Statement filed
pursuant to the applicable Rule promulgated pursuant to the Securities Act of
1933, as amended) under the Prospectus caption "Legal Matters," to the
inclusion of this opinion as an exhibit to the Registration Statement
(including any such related Registration Statement), and to the filing of
this opinion with any other appropriate government agency.
Very truly yours,
/s/ Baker & McKenzie
--------------------
Baker & McKenzie
<PAGE>
Exhibit 8
[Baker & McKenzie Letterhead]
September 29, 1998
@Entertainment, Inc.
One Commercial Plaza
Hartford, CT 06103-3585
Dear Sirs:
We have acted as United States federal income tax counsel to
@Entertainment, Inc. (the "Company") in connection with the determination of the
material consequences under United States federal income tax law of the
Company's proposed registration of the Warrants and Warrant Shares, as more
completely described in the Registration Statement dated September 29, 1998 (the
"Registration Statement").
As counsel to the Company we have examined the Registration
Statement and such other documents and records as we deemed necessary and
relevant for rendering our opinion as to the material United States federal
income tax consequences of the registration of the Warrants and Warrant Shares,
and the purchase, ownership and disposition of the Warrants and Warrant Shares.
Unless otherwise defined herein, all capitalized terms shall have the meanings
assigned to them in the Registration Statement.
On the basis of the foregoing, and assuming that all relevant
documents have been, or will be, validly authorized, executed and delivered by
all the relevant parties, we are of the opinion that, under present United
States federal income tax laws, the material United States federal income tax
consequences to holders of the registration of the Warrants and Warrant Shares,
and the purchase, ownership and disposition of the Warrants and Warrant Shares,
are as described in the Registration Statement under the heading "United States
Income Tax Considerations," subject to the limitations and qualifications set
forth therein.
The foregoing is based on the United States Internal Revenue
Code of 1986, as amended, regulations, rulings, administrative pronouncements
and judicial decisions relating thereto, all as of the date hereof. Subsequent
developments in these areas could have a material effect on this opinion.
We hereby consent to the use of our opinion as herein set forth
as an exhibit to the Registration Statement and to the use of our name under the
heading "United States Income Tax Considerations" in the prospectus forming a
part of the Registration Statement. This consent is not
<PAGE>
@Entertainment, Inc.
September 29, 1998
Page 2
to be construed as an admission that we are a person whose consent is required
to be filed with the Registration Statement under the provisions of the
Securities Act.
Respectfully submitted,
/s/
BAKER & MCKENZIE
JOD/LGH
<PAGE>
[KPMG Letterhead]
The Board of Directors
@ Entertainment, Inc.:
We consent to the use of our reports incorporated herein by reference and to
the reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG Polske Sp. z o.o.
- --------------------------------
Warsaw, Poland
September 29, 1998
