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File Pursuant to
Rule 424(b)(3)
File No. 333-72361
EXCHANGE OFFER
[LOGO] FOR [LOGO]
@ENTERTAINMENT, INC.
$256,800,000
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14 1/2% SERIES B SENIOR DISCOUNT NOTES DUE 2009
TERMS OF THE EXCHANGE OFFER
We offer to exchange your existing 14 1/2% Senior Discount Notes due 2009
for new 14 1/2% Series B Senior Discount Notes due 2009.
- - If you decide to participate in the exchange offer, the new notes issued to
you will have substantially the same terms as your existing notes, except
the new notes will be registered and will be able to be resold without
complying with the registration requirements of the Securities Act of 1933.
Any existing notes not exchanged will continue to have restrictions on their
transfer.
- - There is no existing public market for your existing notes, and there will
be no public market for the new notes issued in the exchange offer.
- - Your existing notes can be traded in the PORTAL Market.
- - We will exchange all of the existing notes that you validly tender and do
not withdraw.
- - You may withdraw tenders of your existing notes at any time before the
expiration of the exchange offer.
- - The exchange offer expires at 5:00 p.m. New York City time on June 17, 1999,
unless we extend the offer.
- - We will not receive any proceeds from the exchange offer.
- - The exchange of your existing notes into new notes will not be a taxable
exchange for U.S. federal income tax purposes.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE NEW NOTES OR DETERMINED THAT THIS PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS INVESTMENT INVOLVES RISKS. WE URGE YOU TO READ THE "RISK FACTORS"
SECTION OF THIS PROSPECTUS BEGINNING ON PAGE 14 WHICH DESCRIBES SPECIFIC RISKS
ASSOCIATED WITH THE EXCHANGE OFFER.
The date of this prospectus is May 13, 1999
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TABLE OF CONTENTS
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Where You Can Find More Information................................................... 3
Incorporation of Certain Documents by Reference....................................... 3
Prospectus Summary.................................................................... 4
Summary Consolidated Financial Data................................................... 12
Summary Operating Data................................................................ 13
Risk Factors.......................................................................... 14
The Exchange Offer.................................................................... 24
Use of Proceeds....................................................................... 32
Address; Exchange Rate and Statistical Data........................................... 33
Capitalization........................................................................ 34
Selected Consolidated Financial Data.................................................. 36
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 38
The Industry.......................................................................... 53
Business.............................................................................. 59
Regulation............................................................................ 88
Description of Indebtedness........................................................... 100
Description of the Indenture Governing the New Notes.................................. 105
Book Entry; Delivery and Form......................................................... 139
United States Tax Considerations...................................................... 142
Plan of Distribution.................................................................. 151
Legal Matters......................................................................... 152
Experts............................................................................... 152
Special Note Regarding Forward Looking Statements..................................... 152
Trademarks/Tradenames Used in the Prospectus.......................................... 153
Index to Financial Statements......................................................... F-1
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WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement with the Securities and Exchange
Commission under the Securities Act of 1933. This registration statement covers
the notes that we will issue to you if you exchange your existing notes for new
notes in this exchange offer. The rules and regulations of the Commission allow
us to omit some of the information in the registration statement from this
prospectus. This prospectus is a summary of information and any statements made
in this prospectus as to the contents of any contract, agreement or other
document are not necessarily complete. If we have filed such contract, agreement
or other document as an exhibit to the registration statement, we urge you to
read the exhibit carefully for a more complete understanding of the document or
the matter involved. We qualify all of our statements by reference to the
complete documents. The registration statement and its exhibits and schedules
may be read at no cost to you and copied at the public reference section of the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the Commission's regional offices at 7 World Trade Center, Suite 1300, New York,
New York 10048, and Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. You may call the Commission at 1-800-SEC-0330 for
further information on its public reference rooms or visit the Commission's web
site at http://www.sec.gov which contains the registration statement and its
schedules and exhibits, as well as reports, proxy and information statements and
other information that we have filed electronically with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following document filed by us with the Securities and Exchange
Commission is incorporated by reference into this prospectus:
@Entertainment's Annual Report on Form 10-K for the year ended December 31,
1998, dated March 30, 1999.
All documents that we file under Sections 13(a), 13(c), 14, or 15(d) of the
Securities Exchange Act of 1934 after the date of this prospectus and before the
termination of the exchange offer will be automatically incorporated by
reference into this prospectus and be a part of this prospectus. Later
statements in this prospectus or in documents incorporated by reference modify
or replace earlier statements on the same subject.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
IN THIS PROSPECTUS OR DELIVERED WITH THIS PROSPECTUS. WE WILL PROVIDE THESE
DOCUMENTS WITHOUT CHARGE TO EACH PERSON TO WHOM THIS PROSPECTUS IS DELIVERED
UPON THE REQUEST OF SUCH PERSON TO: DONALD MILLER-JONES, @ENTERTAINMENT, INC.,
ONE COMMERCIAL PLAZA HARTFORD, CT 06103-3585, (860) 549-1674. IN ORDER TO ENSURE
TIMELY DELIVERY OF DOCUMENTS, ANY REQUEST SHOULD BE NO LESS THAN FIVE DAYS PRIOR
TO THE EXPIRATION OF THE EXCHANGE OFFER.
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE "RISK FACTORS"
SECTION BEGINNING ON PAGE 14 AND THE FINANCIAL STATEMENTS AND THE NOTES TO THOSE
STATEMENTS.
THE COMPANY
We are the leading provider of pay television services in Poland and are
engaged principally in providing cable television services, providing satellite
television services and developing, packaging and delivering high-quality
Polish-language programming.
CABLE TELEVISION. We are the largest cable television operator in Poland in
terms of the number of subscribers. As of December 31, 1998, we owned and
operated cable networks running outside (referred to in the cable television
industry as "passing") 1,592,000 homes and serving 935,300 total subscribers.
DIGITAL SATELLITE DIRECT-TO-HOME BROADCASTING. We expanded our distribution
capacity when we launched our digital satellite direct-to-home (known in the pay
television business as "D-DTH") broadcasting service on September 18, 1998. This
service is targeted at homes that are not subscribers to our cable television
service. Our multi-channel Polish language D-DTH service was the first D-DTH
service available in Poland. This service is broadcast from our facilities in
the United Kingdom.
We have entered into an agreement with Philips Business Electronics B.V. for
Philips to supply us with D-DTH reception systems for up to 500,000 subscribers
to our D-DTH service. A reception system includes:
- a satellite dish
- a digital set top box
- all related hardware
Philips has also agreed to distribute, install and service these reception
systems through its authorized retailers in Poland.
As of December 31, 1998, we had sold to Philips' authorized retailers
approximately 125,000 D-DTH packages, which included the rental of the D-DTH
reception system, installation and a one-year subscription to our D-DTH service.
As of December 31, 1998, Philips had sold and installed approximately 95,400 of
these packages to consumers.
PROGRAMMING. We offer a package of 24 channels (22 channels primarily in
the Polish language) under the tradename "Wizja TV." We launched this package of
channels on our cable television networks on June 5, 1998 and on our D-DTH
system on September 18, 1998. We develop and own some of the channels and
programming ourselves, and we license the rest from programming and channel
suppliers. For a description of the channels offered both on our cable networks
and D-DTH system, you should read the sections entitled "Business--Cable
Operations--Services and Fees" and "Business--Programming-- The Wizja TV
Programming Package."
RISK FACTORS
Our operations, the pay television industry in which we operate and this
exchange offer are subject to risks. Before you tender your existing notes for
new notes in the exchange offer, you should consider the risks set forth in the
section entitled "Risk Factors."
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OUR STRENGTHS
We believe that we can compete successfully in the Polish pay television
market and take advantage of the significant viewer demand for multi-channel
high-quality Polish-language programming because:
- We have the leading market position as the largest cable television
operator and first Polish-language D-DTH service provider in Poland.
- We have secured exclusive Polish pay television rights to channels and
events we believe will be attractive to Polish consumers.
- Our advanced technology allows our cable networks to be cost-effectively
reconfigured to provide more channels and other services, such as voice
and data transmission.
- We have a strong D-DTH distribution network with Philips, which has agreed
to distribute, install and service D-DTH reception systems to up to
500,000 subscribers through its authorized retailers in Poland.
- Our cable systems currently reach a large number of subscribers as a
percentage of homes passed (known in the cable industry as "penetration"),
and we have had a low rate of termination by subscribers (known in the
cable industry as "churn").
- We have made a substantial investment in infrastructure, by developing our
production and transmission facility in Maidstone, United Kingdom and our
centralized call center in Katowice, Poland.
- We have a strong management team with extensive experience in the
television industry.
BUSINESS STRATEGY
Our principal objective is to enhance our position as the leading provider
of pay television in Poland by capitalizing on favorable opportunities that we
believe exist in Poland in the cable television, D-DTH and programming markets.
Our business strategy is designed to increase our market share and
subscriber base and to maximize revenue per subscriber. To accomplish our goals,
we intend to do the following:
- Develop and control the content of our programming;
- Increase our distribution capabilities through internal growth and through
acquisitions;
- Control our management of subscribers by using advanced information
systems; and
- Establish Wizja TV as the leading brand name in the Polish pay television
industry.
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FINANCING PLAN
The development of our businesses will require significant capital to fund
capital expenditures, working capital, debt service and operating losses,
including contractual commitments in connection with our D-DTH and programming
businesses.
- As of December 31, 1998, we had approximately $13 million in cash on hand.
- On January 20, 1999, we received approximately $9.5 million in net
proceeds from the sale of our Series C Senior Discount Notes due 2008.
- On January 27, 1999, we received approximately $96.0 million in net
proceeds from the sale of the existing notes held by you and other
investors and warrants, as well as approximately $48.2 million in net
proceeds from the sale of our Series A 12% Cumulative Preference Shares,
Series B 12% Cumulative Preference Shares and warrants.
We believe that the net proceeds of these three recent sales and cash on
hand will provide us with sufficient capital to fulfill our current business
plan and to fund our commitments until we achieve positive cash flow from
operations. However, for a description of situations when we may need additional
financing, see "Risk Factors--We May Need to Obtain Additional Financing if Our
Plans or Assumptions Change and the Terms of the Additional Financing May
Restrict Our Operations or Reduce Our Cash Flow."
RECENT DEVELOPMENTS
You should read the "Recent Developments" section in the "Business" section
of this prospectus for more details on the following recent developments related
to our company:
- Our April 17, 1998 letter of intent with a Polish pay television provider
regarding a potential joint venture and the arbitration proceedings that
resulted;
- Our first quarter results for 1999; and
- Possible sale of all or substantially all of our assets;
6
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SUMMARY OF THE EXCHANGE OFFER
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Securities Offered........... We are offering $256,800,000 in principal amount of our
14 1/2% Series B Senior Discount Notes due 2009 in exchange
for an equal aggregate principal amount of our existing
14 1/2% Senior Discount Notes due 2009 on a one for one
basis. These new notes have substantially the same terms as
the existing notes you hold, except these new notes have
been registered under the Securities Act of 1933 and will be
freely tradeable.
Registration Rights
Agreement.................. At the time we sold investors the existing notes, we entered
into a registration rights agreement which requires us to
make this exchange offer.
After the exchange offer is complete, you will no longer be
entitled to exchange your notes for registered notes. We
may, in limited circumstances, be required to file a shelf
registration statement under the Securities Act of 1933 with
respect to your existing notes if you do not accept our
exchange offer. We do not currently expect to have to file a
shelf registration statement.
If either an exchange offer registration statement or a
shelf registration statement is not completed within certain
time periods, we will be required to pay penalty interest on
the existing notes.
The Exchange Offer........... We are offering to exchange $1,000 principal amount of new
notes for each $1,000 principal amount of your existing
notes. In order to be exchanged, your notes must be properly
tendered and accepted. All existing notes that are validly
tendered and not withdrawn will be exchanged.
Ability to Resell New
Notes...................... We believe that new notes issued in the exchange offer may
be offered for resale, resold and otherwise transferred by
you without compliance with the registration and prospectus
delivery provisions of the Securities Act of 1933 if:
- the new notes issued in the exchange offer are being
acquired in the ordinary course of your business;
- you are not participating, do not intend to
participate and have no arrangement or understanding
with any person to participate in the distribution of
new notes issued to you in the exchange offer; and
- you are not an affiliate (as defined under the
Securities Exchange Act of 1934) of @Entertainment.
If this belief is inaccurate and you transfer any new notes
issued to you in the exchange offer without delivering a
prospectus which meets the requirements of the Securities
Act of 1933 or without an exemption from these requirements,
you may incur liability under the Securities Act of 1933. We
do not assume any liability if you do and we will not
indemnify you.
If you are a broker-dealer and wish to exchange existing
notes that you received as a result of market-making or
other trading activities,
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you must agree to deliver this propectus in connection with
the sale of new notes you receive in this exchange offer.
People Excluded from the
Exchange Offer............. You may not participate in the exchange offer if you are:
- A holder of existing notes in any jurisdiction in
which the exchange offer or your acceptance is not legal
under the applicable securities or blue sky laws of
that jurisdiction; or
- A holder of existing notes who is an affiliate (as
defined under the Securities Exchange Act of 1934) of
@Entertainment.
Consequences of Failure to
Exchange Your Notes........ If you do not exchange your existing notes for new notes in
the exchange offer, your existing notes will continue to
have restrictions on transfer contained in the existing
notes and in the indenture governing the existing notes. In
general, your existing notes may not be offered or sold
unless registered under the Securities Act of 1933, except
if there is an exemption from, or a transaction not governed
by, the Securities Act of 1933 and applicable state
securities laws. We have no current plans to register your
existing notes under the Securities Act of 1933 (except for
the requirement to file a shelf registration statement in
limited circumstances).
Expiration Date.............. The exchange offer expires at 5:00 pm, New York City time,
on June 15, 1999, the expiration date, unless we extend the
offer.
Conditions to the Exchange
Offer...................... The exchange offer has certain customary conditions that may
be waived by us. There is no minimum amount of existing
notes that must be tendered to complete the exchange offer.
Procedures for Tendering Your
Notes...................... If you wish to tender your existing notes for exchange in
the exchange offer you must send to Bankers Trust Company,
the exchange agent, on or before the expiration date of the
exchange offer either:
- a properly completed and executed letter of
transmittal, which has been provided to you with this
prospectus, or a facsimile of the letter of
transmittal, together with your existing notes and any
other documentation requested by the letter of
transmittal; or
- a computer generated message transmitted by means of
the Depository Trust Company's Automated Tender Offer
Program system and received by the exchange agent as a
part of a confirmation of book entry transfer in which
you acknowledge and agree to be bound by the terms of
the letter of transmittal.
If you execute the letter of transmittal or accept our offer
through the Automated Tender Offer Program, you will make
the representations described under "The Exchange
Offer--Purpose and Effect-- Representations We Need From You
Before You Participate in the Exchange Offer."
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Withdrawal Rights............ You may withdraw the tender of your existing notes at any
time prior to 5:00 pm, New York city time, on the expiration
date.
U.S. Tax Considerations...... The exchange of notes is not a taxable exchange for U.S.
federal income tax purposes. You will not recognize any
taxable gain or loss or any interest income as a result of
the exchange. For additional information regarding federal
income tax considerations, you should read the discussion
under the heading "United States Tax Considerations."
Use of Proceeds.............. @Entertainment will not receive any proceeds from the
issuance of the new notes in the exchange offer. We will pay
all expenses incident to the exchange offer, other than some
taxes.
Exchange Agent............... Bankers Trust Company is serving as the exchange agent. Its
address, telephone number and facsimile number are:
BY MAIL:
BT Services Tennessee, Inc
Reorganization Unit
P.O. Box 292737
Nashville, Tennessee 37229-2737
Fax: (615) 835-3701
BY OVERNIGHT MAIL OR COURIER:
BT Services Tennessee, Inc
Corporate Trust & Agency Group
Reorganization Unit
648 Grassmere Park Road
Nashville, Tennessee 37211
Confirm by Telephone
(615) 835-3572
BY HAND:
Bankers Trust Company
Corporate Trust and Agency Group
Attn: Reorganization Department
Receipt & Delivery Window
123 Washington Street, 1st Floor
New York, New York 10006
Information (800) 735-777
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Please review the information contained under the heading "The Exchange
Offer" for more detailed information concerning the exchange offer.
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SUMMARY OF THE TERMS OF THE NEW NOTES
The new notes to be issued to you in the exchange offer will evidence the
same obligations of @Entertainment as the notes you currently hold. The
indenture that currently governs your existing notes is the same indenture that
will govern the new notes. The terms of the new notes will be the same as the
existing notes, except that there will be no legends on the new notes
restricting their transfer and the new notes will be registered under the
Securities Act of 1933 instead of having registration rights. A more detailed
description of the indenture can be found under the section heading "Description
of the Indenture Governing the New Notes."
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Total Amount of New Notes
Offered.................... $256,800,000 in principal amount at maturity.
Maturity..................... February 1, 2009.
Interest Payment Dates....... February 1 and August 1 of each year, starting on August 1,
2004.
Redemption................... On or after February 1, 2004, we may redeem all or a portion
of the new notes, at the redemption prices described in the
section "Description of the Indenture Governing the New
Notes," plus any unpaid interest to the date of redemption.
Change of Control............ If a change of control occurs, you will have the right to
require us to repurchase all or any part of your notes at a
purchase price equal to 101% of the accreted value of the
notes repurchased, plus any accrued and unpaid interest to
the date of repurchase.
Guarantees................... None.
Ranking...................... The new notes:
- are senior unsecured obligations of @Entertainment;
- rank equally in right of payment with all existing and
future unsubordinated debt of @Entertainment; and
- rank senior in right of payment to any existing and
future debt expressly subordinated to the new notes.
As of December 31, 1998, we had approximately $264 million
of debt outstanding. Of this amount approximately $138
million was owed by our subsidiaries.
Certain Covenants............ The indenture under which the new notes will be issued
contains convenants for your benefit which restrict our
ability to, among other things:
- borrow additional money;
- pay dividends on or redeem our capital stock, or make
certain other restricted payments or investments;
- sell certain assets;
- enter into certain transactions with our affiliates;
- merge or consolidate with any other person;
- sell all or substantially all of our assets; or
- impose restrictions on the ability of our subsidiaries
to make certain payments to us and to other
subsidiaries.
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Form of the New Notes........ The new notes will be represented by one or more permanent
global securities, in fully registered form, deposited with
a custodian for, and registered in the name of a nominee of
the Depository Trust Company, or in the name of the
Depository Trust Company itself, as depository. You will not
receive notes in registered form unless one of the events
under the section heading "Book-Entry; Delivery and Form"
occurs. Instead, beneficial interests in the new notes will
be shown on records maintained in book-entry form by the
Depository Trust Company and its participants and transfers
of these interests will be effected in the same manner.
Absence of a Public Market... The new notes generally will be transferable without any
restrictions but will be new securities for which there
initially will not be a market. Accordingly, there may not
be a market where you can sell your new notes and, if a
market for the new notes starts, it may end at any time.
Market-making activity may be limited during the exchange
offer and during the effectiveness of a shelf registration
statement. Merrill Lynch and Deutsche Bank have advised us
that they currently intend to make a market in the new
notes. However, they have no obligation to make a market,
and any market-making with respect to the new notes may be
discontinued at any time without notice. While the existing
notes are eligible for trading in the PORTAL Market, we
currently do not intend to list the new notes on any
securities exchange or to seek approval for their
quotations.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data set forth below has been derived
from our consolidated financial statements. These financial statements and the
notes to those statements have been prepared in conformity with U.S. generally
accepted accounting principles ("GAAP") and audited by our independent auditors.
The consolidated financial statements as of December 31, 1998 and 1997 and for
each of the years in the three year period ended December 31, 1998 are included
elsewhere in this prospectus. The summary consolidated financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
included elsewhere in this prospectus.
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<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(IN THOUSANDS, EXCEPT RATIOS)
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CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue...................................................................................... $ 61,859 $ 38,138 $ 24,923
Depreciation and amortization................................................................ (26,304) (16,294) (9,788)
Operating loss............................................................................... (100,813) (42,670) (1,347)
Interest expense............................................................................. (21,957) (13,902) (4,687)
Net loss(1).................................................................................. (126,065) (54,824) (6,617)
Net loss applicable to holders of common stock(2)............................................ (126,065) (91,066) (7,676)
OTHER FINANCIAL DATA:
Consolidated EBITDA(3)....................................................................... $ (74,509) $ (8,274) $ 8,441
Poland Communications, Inc. EBITDA(4)........................................................ (1,431) 5,387 8,441
Expenditures for the purchase and construction of property, plant and equipment.............. 114,992 42,454 26,581
Ratio of earnings to fixed charges(5)........................................................ N/A N/A 0.21
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<CAPTION>
DECEMBER 31, 1998
---------------------------
ACTUAL AS ADJUSTED
----------- --------------
(IN THOUSANDS)
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CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents........................................................................ $ 13,055 $ 166,804
Property, plant and equipment, net............................................................... 213,054 213,054
Total assets..................................................................................... 348,374 506,878
Total notes payable.............................................................................. 263,954 366,320
Redeemable cumulative preferred stock............................................................ -- 28,704
Total stockholders' equity....................................................................... 33,656 60,591
</TABLE>
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(1) The year ended December 31, 1997 includes non-cash compensation expense of
$18,102,000 relating to the granting of certain management stock options.
See Note 15 to the consolidated financial statements included elsewhere in
this prospectus.
(2) The year ended December 31, 1997 includes a loss applicable to holders of
common stock of $33,806,000 representing the difference between the
consideration paid for redeemable preferred stock in excess of the carrying
value of such stock. See Note 1 to the consolidated financial statements
included elsewhere in this prospectus.
(3) EBITDA is an acronym for earnings before interest, taxes, depreciation and
amortization and consists of net loss adjusted for interest and investment
income, depreciation and amortization, interest expense, foreign currency
gains and losses, equity in losses of affiliated companies, income taxes,
extraordinary items, non-recurring items (e.g. compensation expense related
to stock options), gains and losses from the sale of assets other than in
the normal course of business and minority interest. The items excluded from
EBITDA are significant components in understanding and assessing our
financial performance. We believe that EBITDA and related measures of cash
flow from operating activities serve as important financial indicators in
measuring and comparing the operating performance of cable television
companies. EBITDA is not intended to represent cash flow from operations
under U.S. GAAP and should not be considered as an alternative to net loss
as an indicator of our operating performance or to cash flows from
operations as a measure of liquidity.
(4) Poland Communications, Inc. EBITDA reflects the EBITDA for Poland
Communications, Inc. and its subsidiaries, whose primary operations consist
of our cable television business. In 1996, consolidated EBITDA was entirely
attributable to Poland Communications, Inc. and its subsidiaries.
(5) For the purposes of determining the ratio of earnings to fixed charges,
earnings are defined as net loss before income taxes, plus fixed charges.
Fixed charges consist of interest expense on all indebtedness, amortization
of deferred financing costs and that portion of operating lease expense
deemed to be interest expense. For all periods presented, we incurred net
losses before income taxes and hence earnings to fixed charges indicate a
less than one to one coverage. Earnings were insufficient to cover fixed
charges by $125,855,000 for the year ended December 31, 1998, $55,799,000
for the year ended December 31, 1997, and $3,631,000 for the year ended
December 31, 1996.
(6) Adjusted to give effect to the offering of the existing notes and warrants,
the offering of the Series C Senior Discount Notes and the offering of the
Cumulative Preference Shares, and the receipt and application of the net
proceeds from those offerings.
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SUMMARY OPERATING DATA
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<CAPTION>
DECEMBER 31,
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<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
Homes passed by cable(1).................................. 1,591,981 1,408,099 1,088,540 711,545 298,316
Basic cable subscribers(2)................................ 698,342 636,283 460,625(5) 262,077 112,534
Basic cable penetration(3)................................ 43.9% 45.2% 42.3% 36.8% 37.7%
Annual cable churn rates(4)............................... 15.25% 12.2% 7.8% 9.2% 9.1%
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(1) We count as homes passed only those homes for which we have an active signal
and, in the case of a building or other residence consisting of multiple
apartment units, only those homes for which we have an agreement with the
cooperative authority that manages the building or residence.
(2) Includes only subscribers to our package with the largest number of
non-premium channels (referred to as the "basic package") and our package
with more limited programming offerings of 17 to 24 channels (referred to as
the "intermediate package"). For a description of these packages, 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 we have acquired) at the end of that
period.
(5) Includes approximately 15,000 subscribers served by a cable system we
acquired on January 1, 1997.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER
INFORMATION IN THIS PROSPECTUS BEFORE DECIDING TO TENDER YOUR EXISTING NOTES IN
THE EXCHANGE OFFER.
THIS PROSPECTUS ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS,
INCLUDING THE RISKS WE FACE DESCRIBED BELOW AND ELSEWHERE IN THE PROSPECTUS.
IF YOU DO NOT ELECT TO EXCHANGE YOUR EXISTING NOTES FOR NEW NOTES, YOU WILL HOLD
SECURITIES THAT ARE NOT REGISTERED AND THAT CONTAIN RESTRICTIONS ON TRANSFER
The existing notes not tendered or exchanged will remain restricted
securities. That means that if you wish to resell, pledge or otherwise transfer
your old notes at some future time, they may be resold, pledged or transferred
only:
- if the existing note is eligible for resale pursuant to Rule 144A under
the Securities Act of 1933 to a qualified institutional buyer that
purchases for its own account or for the account of a qualified
institutional buyer to whom notice is given that the resale, pledge or
transfer is being made in reliance on Rule 144A;
- in an offshore transaction in accordance with Regulation S under the
Securities Act of 1933;
- under an available exemption from registration provided by Rule 144 under
the Securities Act of 1933; or
- in reliance on another exemption from the registration requirements of the
Securities Act of 1933, but only upon the receipt by the registrar of a
certification from you and a satisfactory opinion of your counsel to the
effect that your transfer is in compliance with the Securities Act of
1933.
In addition, your sale, pledge or transfer of the existing notes must be done in
accordance with any applicable securities law of any state of the U.S. or other
local jurisdiction.
If you do not participate in the exchange offer you will only be entitled to
certain shelf registration rights and we do not currently expect to have to file
a shelf registration statement. For a description of these shelf registration
rights, see "The Exchange Offer--Purpose and Effect."
THERE IS NO PUBLICLY TRADED MARKET FOR THE NEW NOTES AND THERE IS NO CERTAINTY
THAT A MARKET WILL DEVELOP IN THE FUTURE
If an active market for the new notes does not develop, the market price and
liquidity of the new notes may be adversely affected. There may not be a market
where you can sell your new notes and, if a market for the new notes starts, it
may end at any time. Merrill Lynch and Deutsche Bank have advised us that they
currently intend to make a market in the new notes, but, they have no obligation
to do so and they may discontinue at any time without notice. Market-making
activity may be limited during the exchange offer or during the registration
process of a shelf registration statement. While the existing notes are eligible
for trading in the PORTAL Market, we currently do not intend to list the new
notes on any securities exchange or to seek approval for their quotation on the
National Association of Securities Dealers Automated Quotation or any other
automated quotation system.
OUR SUBSTANTIAL LEVERAGE POSES POTENTIAL FINANCIAL AND OPERATING PROBLEMS
We are, and will continue to be, highly leveraged. Assuming the sale of the
existing notes and warrants and the sale of the Series C Senior Discount Notes
due 2008 had taken place on December 31, 1998, our outstanding indebtedness
would have been approximately $366 million on that date. Also, on January 30,
2010, we will be required to redeem our Cumulative Preference Shares for $50
million, plus any unpaid dividends.
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We must generate substantial additional cash flow in order to pay interest
and repay principal on our indebtedness, including the existing notes and the
new notes. Our business may not generate sufficient cash flow that, together
with the financing available to us, will allow us to meet our anticipated
requirements for working capital, capital expenditures, minimum guaranteed
contractual commitments, interest payments and scheduled principal payments,
including the payments required on the existing notes and the new notes. We will
need to attract substantial numbers of additional subscribers beyond the 380,000
initial D-DTH subscribers in order to repay principal and pay interest on our
indebtedness, including the existing notes and the new notes.
We also expect that we may have to refinance all or a portion of the
existing and new notes at maturity, the Series C Senior Discount Notes and the
Series B Senior Discount Notes when they mature in July 2008, and the notes
issued by our cable television operating subsidiary Poland Communications, Inc.
("PCI") when they mature in November 2003. If our cash flow is less than
expected, we may need to refinance all or part of our existing indebtedness or
reduce the scope of our planned expansion or capital expenditures.
Such leverage poses the following risks:
- A significant portion of our cash flow from operations must be dedicated
to servicing our indebtedness.
- We may not be able to generate sufficient cash flow or obtain sufficient
additional financing to service your existing notes and the new notes, the
Series C Senior Discount Notes, the Series B Senior Discount Notes due
2008, and notes issued by PCI and any other outstanding indebtedness. A
more detailed description of the Series C Senior Discount Notes, the
Series B Senior Discount Notes due 2008, and the notes issued by PCI is
set forth in the section entitled "Description of Indebtedness."
- We may not be able to adequately fund our contractual commitments.
- We could be more vulnerable to changes in general economic conditions.
- Our ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes
may be impaired.
- Our operating and financial flexibility may be impaired by restrictions
imposed by various debt instruments.
- If interest rates increase, we will be subject to higher interest expenses
because at least part of our future borrowings may be at variable rates of
interest.
WE EXPECT OUR OPERATING LOSSES AND NEGATIVE CASH FLOWS TO CONTINUE
We must generate substantial additional cash flow in order to pay interest
and repay principal on our indebtedness, including your existing notes and the
new notes, and we may not be able to do so. We expect to experience substantial
operating losses and negative free cash flows for at least the next two years.
We may not be able to generate operating income or positive cash flows in the
future. We had operating losses of $1.3 million for 1996, $42.7 million for
1997, and $100.8 million for 1998.
For a detailed discussion of the factors we believe have influenced our
historical financial results and the factors we believe will affect our
financial performance in the near future, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
AS A RESULT OF OUR HOLDING COMPANY STRUCTURE, YOUR RIGHT TO PARTICIPATE IN THE
ASSETS OF OUR SUBSIDIARIES WILL BE SUBJECT TO CLAIMS OF OUR SUBSIDIARIES'
CREDITORS AND WE ARE DEPENDENT ON RECEIPT OF MONIES FROM OUR SUBSIDIARIES TO PAY
INTEREST ON OR REPAY THE EXISTING NOTES AND THE NEW NOTES OR TO PAY DIVIDENDS
In the event of liquidation or bankruptcy of any of our operating
subsidiaries, your existing notes and the new notes rank behind the holders of
any indebtedness for money borrowed (such as the holders of the
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notes issued by PCI), trade creditors of those subsidiaries, and other persons
granted priority claim rights under the laws applicable to those subsidiaries.
In addition, we may not be able to pay interest on our indebtedness,
including on your existing notes and the new notes (which are solely our
obligation), or to repay our indebtedness, including your existing notes and the
new notes, at maturity or otherwise, if the cash flows and earnings of our
subsidiaries and their payment of funds to us in the form of repayment of loans,
interest payments, dividends or otherwise are not sufficient. In addition, we
may not be able to pay interest on or repay our indebtedness, including your
existing notes and the new notes, if we cannot otherwise realize economic
benefits from equity interests in our subsidiaries.
Our subsidiaries have no obligation to pay dividends to us and may not be
able to make payments to us if funds are not available or if the terms of those
subsidiaries' indebtedness restrict payments, or if other various business
considerations limit payments. Further, we currently do not own a majority
interest in certain subsidiaries, and may not have operating control of other
entities in which we currently have or may in the future acquire direct or
indirect interests. In such cases, we may be unable, without the consent of the
relevant partners, to cause such entities to pay dividends or implement business
strategies that we may favor.
Our ability to pay dividends will be further restricted by regulatory and
contractual obligations, including the indenture governing the notes issued by
PCI, New York Business Corporation Law, Polish law, English company law, and
Dutch corporate law.
WE MAY NEED TO OBTAIN ADDITIONAL FINANCING IF OUR PLANS OR ASSUMPTIONS CHANGE
AND THE TERMS OF THE ADDITIONAL FINANCING MAY RESTRICT OUR OPERATIONS OR REDUCE
OUR CASH FLOW
Sources of financing or refinancing may not be available to us in the
future. We may need to obtain additional financing if one or more of the
following situations occur:
- Our plans change or the assumptions in our business development plan prove
inaccurate;
- We do not acquire sufficient subscribers to our D-DTH business;
- We enter into additional programming agreements;
- We make unanticipated investments in or acquisitions of other companies;
- We experience unexpected costs or competitive pressures;
- We continue to provide D-DTH reception systems to subscribers (other than
the 380,000 initial subscribers) at promotional prices; or
- Our actual cash flow is less than we expect.
We will need to attract a substantial number of additional subscribers
beyond the 380,000 initial subscribers in order to repay principal and interest
on the existing and new notes. Future sources of financing for us could include
public or private debt or equity offerings or bank financings or any combination
thereof.
Our ability to obtain sources of financing or refinancing may be limited
because certain of our lenders have taken security interests in some of our
assets. We have a $6.5 million credit facility with American Bank in Poland,
S.A., which was fully drawn as of June 1998, and which is secured. In addition,
our subsidiary PCI has pledged notes issued to PCI by a major subsidiary to the
holders of notes issued by PCI. The amount pledged, together with cash of PCI,
must equal 110% of the outstanding principal amount of the notes issued by PCI
and the interest payments due on those notes. Approximately $160.5 million of
the notes of the PCI subsidiary were pledged by PCI as of December 31, 1998.
Even if sources of financing or refinancing are available, we may only be
able to obtain such financing on less than favorable terms. In this case, we
might be forced to operate under terms that would restrict our operations and
reduce our cash flow. If for any reason additional financing is not available to
us when
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required, or is only available on less than favorable terms, we may not be able
to meet our minimum guaranteed contractual commitments. Our failure to meet
these commitments may require us to:
- reduce the scope of our presently anticipated expansion of operations;
- reduce capital expenditures (including expenditures related to
acquisitions);
- slow the development of our D-DTH business; and/or
- refinance all or a portion of our indebtedness (including the existing
notes and the new notes).
For a discussion of our liquidity and capital resources, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
OUR LIMITED EXPERIENCE WITH THE D-DTH BUSINESS AND UNCERTAINTIES ASSOCIATED WITH
THE D-DTH MARKET MAY LIMIT THE GROWTH OF OUR D-DTH BUSINESS OR CAUSE US TO LOSE
SUBSCRIBERS
We may face competition from D-DTH providers which have more experience than
we do in the D-DTH business, and this competition could hinder our ability to
develop our D-DTH business.
The roll out of our D-DTH business may not proceed as planned and our
service may not attract enough subscribers to be profitable and to generate
positive cash flow for us in future years. We also cannot assure you that the
market for D-DTH services in Poland will develop.
In addition, the Polish D-DTH market is subject to a developing regulatory
framework that may change as the market develops. Our broadcast of programming
from outside of Poland could become subject to the application of Polish laws
regulating television broadcasting if certain European Union or trans-European
broadcasting regulations are amended, which could prevent us from broadcasting.
Application of these laws may negatively impact our business.
Our D-DTH business is also subject to the following factors that are beyond
our control and difficult to predict:
- the size of the D-DTH service market in Poland;
- the rates of penetration of such market;
- the acceptance of our D-DTH service by subscribers and commercial
advertisers;
- the sensitivity of our potential subscribers to the price of installation
and subscription fees;
- the technical challenges of providing long-term D-DTH services;
- 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
- the immediate and long-term commercial viability of providing D-DTH
services in Poland.
We may not be able to establish a substantial subscriber base. In addition,
the investment required from subscribers (beyond our target of 380,000 initial
subscribers) may increase unless we decide to continue to provide D-DTH
reception systems at promotional prices. Accordingly, we may not be able to
attract or retain additional subscribers if we cease to provide DTH reception
systems at promotional prices. For a description of the D-DTH and analog
direct-to-home markets in Poland, see "The Industry" section.
IF PHILIPS FAILS TO SUPPLY THE CRITICAL COMPONENTS AND SERVICES USED IN OUR
D-DTH BUSINESS, THE DEVELOPMENT AND OPERATION OF OUR D-DTH BUSINESS COULD BE
DELAYED AND DAMAGED
If Philips fails to deliver D-DTH reception systems on schedule, or at all,
the development and operation of our D-DTH service could be interrupted or
delayed. In addition, failure by Philips' retail network to provide the desired
levels of service, quality and expertise (which are outside our control) could
have a material adverse impact on our operations and financial condition. Our
agreement with Philips provides a means by which we can obtain a second or third
supplier, in addition to Philips, of our D-DTH reception systems, but we may not
be able to secure these additional suppliers. For a detailed description of the
critical components and services Philips has agreed to supply to us after a
certain date. See "Business--D-DTH--Technology and Infrastructure."
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OUR D-DTH BUSINESS DEPENDS ON OUR ABILITY TO BROADCAST USING TRANSPONDERS ON
SATELLITES, WHICH ARE SUBJECT TO SIGNIFICANT RISKS AND WHICH WE HAVE NOT INSURED
Our D-DTH business depends on our ability to broadcast using satellites.
Satellites are subject to significant risks that may prevent or impair proper
commercial operations, including satellite defects, destruction and damage.
We are not a "protected customer" under our satellite transponder leases.
This means that if one or more of our transponders fails to operate, we would
not be able to pre-empt any other transponder customer. Due to the high cost of
insurance policies relating to satellite operations, we do not insure against
possible interruption of access to transponders. The operation of the Astra
satellites is outside of our control and a disruption of transmissions on those
satellites could pose significant operational problems depending upon the
duration of the disruption. For a more detailed discussion of our satellite
agreements and satellite technology, see the section entitled
"Business--D-DTH--Technology and Infrastructure."
The leases for our Astra satellite transponders will expire in 2007. Our
ability to transmit our programming following the termination of our leases of
the transponders (and following the expiration of the expected useful lives of
the Astra satellites in approximately 2015) will depend upon our ability to
extend our existing leases and/or to obtain rights to utilize additional
transponders on future Astra or other satellites.
THE ENCRYPTION TECHNOLOGY USED WITH OUR D-DTH SYSTEM MAY NOT PREVENT SIGNAL
THEFT OR PIRACY
The encryption technology, Philips' CryptoWorks-Registered Trademark-, used
with our D-DTH system to prevent signal theft or "piracy," may not remain
effective. If the encryption technology is compromised in a manner which is not
promptly corrected, we may not be able to enter into contracts or maintain
contracts for programming services from unrelated third parties and our revenues
could decrease. For a more detailed description of the encryption technology we
use in our D-DTH system, see "Business--D-DTH-- Technology and Infrastructure."
TERMINATION OF OUR CONDUIT AGREEMENTS WITH TPSA COULD RESULT IN THE LOSS OF OUR
PERMITS, THE TERMINATION OF AGREEMENTS WITH COOPERATIVE AUTHORITIES AND
PROGRAMMERS, AND AN INABILITY TO SERVICE OUR CUSTOMERS
Our ability to build out our existing cable television networks and to
integrate acquired systems into our cable television networks will depend on
many factors that are beyond our control including our ability to design and
obtain access to network routes and to secure other construction resources at a
reasonable cost and on satisfactory terms.
In addition, as of December 31, 1998, approximately 56.5% of our cable plant
was constructed utilizing pre-existing conduits of the Polish national telephone
company (known in the Polish telecommunications industry by the acronym "TPSA").
For a list of the reasons for which TPSA can terminate a conduit agreement,
and the proportion of subscribers served by conduits subject to immediate
termination, see "Business--Cable Operations-- Technology and Infrastructure."
Any termination by TPSA of these contracts could result in the loss of our
permits, the termination of our agreements with cooperative authorities and
programmers, and an inability to service customers in the affected areas. If
TPSA terminated our access to these conduits, we may not be able to replace or
locate a substitute for these conduits. In addition, we would incur significant
costs if we were forced to build our own conduits.
IF WE ARE UNABLE TO OBTAIN HIGH-QUALITY PROGRAMMING OR SUCCESSFULLY DEVELOP OUR
OWN PROGRAMMING, OUR GROWTH MAY BE LIMITED OR WE MAY LOSE SUBSCRIBERS
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We may lose subscribers or experience only limited growth in the number of
our subscribers if:
- Our competitors are able to produce or obtain Polish-language programming
at commercially reasonable costs and we are not able to do so;
- Our programming is less popular than our competitors' programming; or
- Our programming is non-exclusive to us.
If our existing programming agreements are canceled, are not renewed, or
otherwise become unenforceable, we will have to seek programming material from
other sources. We may not be able to create or obtain programs acceptable to our
subscribers on commercially favorable terms.
We have purchased exclusive Polish pay television rights from third parties
for programming on 11 of the 24 channels of Wizja TV. In some of the agreements,
there are restrictions that will limit our flexibility in the future to package
some of the channels together or in different combinations.
In addition, we are negotiating additional agreements with channel suppliers
and sports rights organizations that, if completed, may require us to pay
additional guaranteed minimum payments throughout the term of such agreements
and/or payments at the time of execution. The amounts of our programming and
sport rights commitments are set forth in "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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. Some or all of our programming projects may not be
successful or the programming to which we will have access may lose its audience
appeal more quickly than we anticipated. This loss may result in a portion of
costs not being recovered or expected profits not being realized. In addition,
we may not succeed in introducing into the Polish market our additional planned
channels based on specific thematic content.
Certain programming for the Polish market is subject to regulation by the
Polish authorities. For a discussion of the risks related to the regulation of
programming, see the section in "Risk Factors" entitled "Excessive Government
Regulation of the Cable Television and Direct-to-Home Industries Could Restrict
the Way We Operate Our Business" and the section in "Business" entitled "Legal
Proceedings."
OUR GROWTH MAY SUFFER FROM COMPETITION IN THE MULTI-CHANNEL PAY TELEVISION
INDUSTRY
We may be unable to increase our number of subscribers or may lose
subscribers as a result of competition for subscribers from other signal
delivery methods, from competitors with greater financial and operational
resources and from competitors with more experience in the D-DTH market. Also ,
we may not be able to compete with other alternative delivery systems if we are
not able to provide a greater variety of Polish-language programming at more
reasonable prices than those systems offer. In addition, the Polish market for
D-DTH services may not be sufficiently large to support competing D-DTH
businesses.
Our cable operations also face competitive threats from Poland's many small
cable operators, which incur lower capital expenditures and operating costs and
therefore have the ability to charge lower fees to subscribers.
Our programming operations compete with other television companies for the
acquisition of sports rights and other programming (particularly for the
exclusive rights to such programming), and also for the hiring of personnel with
creative and production talent.
A more detailed discussion of the competition we face in our cable
television, D-DTH and programming businesses is set forth in the section called
"Business--Competition."
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WE MAY INCUR SIGNIFICANT COSTS AND LOSE SUBSCRIBERS DUE TO CHANGES IN TECHNOLOGY
The changes in the digital compression technology used in our D-DTH business
may require us to expend substantial financial resources on the development or
implementation of new competitive technologies. In addition, we may from time to
time explore alternative technologies for delivering our programming and
alternative methods for allowing subscribers to receive signals from multiple
satellites.
If another satellite platform, encryption technology or decoder besides the
ones we use becomes the preferred standard in Poland, or if Poland enacts
regulations regarding such technology or decoders, we may not be able to attract
and retain subscribers. We may be required to switch our suppliers and replace
our reception systems and our encryption technology system. This switch would
cause confusion for existing and potential subscribers, delays in providing
subscribers with reception systems and access systems and significant unexpected
costs.
OUR GROWTH MAY SUFFER IF WE CANNOT MAKE STRATEGIC ACQUISITIONS
We may not be able to identify and acquire cable television networks that
either are located in reasonable proximity to our existing regional cluster
networks or are large enough to serve as the basis for new regional cluster
networks. In addition, if we are able to identify and enter into acquisition
agreements with such cable networks we may not be able to obtain the required
approvals from the Polish Anti-Monopoly Office for these acquisitions. We also
may face competition for the acquisition of cable networks from existing cable
television operators and also from financial investors.
OUR FAILURE TO SUCCESSFULLY MANAGE GROWTH AND TO INTEGRATE ACQUIRED BUSINESSES
MAY POSE OPERATING AND FINANCIAL PROBLEMS
If we fail to successfully manage our expected rapid growth and development
and if we experience difficulties in managing our expansion into the D-DTH
business and in integrating that business with our cable and programming
operations, our business, results of operations and financial condition could
suffer.
Our recent acquisitions have involved and other possible future acquisitions
will involve risks, including successful integration with our 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. We may also experience increased capital expenditure costs
as the acquired systems are rebuilt (if necessary) to upgrade the networks to
our standards. If we underestimate the costs of integrating and upgrading
acquired networks, these activities could harm our financial condition and
operating results. The integration of acquired systems may also lead to
diversion of management's attention from other ongoing business concerns. Our
short-term operating results have suffered from the costs of integrating some
acquisitions.
In addition, if we were to enter into capital-intensive businesses in which
we have limited experience (such as interactive television, pay per view,
near-video-on-demand, video-on-demand, data transfer, services related to
electronic banking, telephone services, internet access, sports clubs ownership,
publishing and other media), there is a risk that we would not be successful or
that the capital utilized in these businesses would decrease the amount of
capital available for use in our cable, D-DTH and programming businesses. We
have applied for a license to provide internet access services.
WE HAVE NO INSURANCE ON UNDERGROUND PORTIONS OF OUR CABLE TELEVISION NETWORKS
Any catastrophe affecting a significant portion of our cable television
networks could result in substantial uninsured losses and could disrupt our
business operations. While we carry general liability insurance on our
properties, we do not insure the underground portion of our cable television
networks.
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EXTENSIVE GOVERNMENT REGULATION OF THE CABLE TELEVISION AND DIRECT-TO-HOME
INDUSTRIES COULD RESTRICT THE WAY WE OPERATE OUR BUSINESS
We are subject to extensive regulatory controls and may have to comply with
amended or additional regulations in the future in each of the jurisdictions in
which we operate our business. Currently we are required to comply with
applicable regulations in Poland, the United Kingdom and the European Union,
which regulations address, but are not limited to, the following activities and
subjects:
- securing of and compliance with required permits and licenses related to
the operation of cable networks and digital direct-to-home systems;
- the construction and operation of cable networks in Poland;
- copyright and other intellectual property laws pertaining to programming
which is broadcast over our cable networks and our digital direct-to-home
system;
- restrictions on anti-competitive behavior regarding pricing, contracting
practices and acquisitions;
- restrictions on ownership and operation of cable networks in Poland by
foreign entities;
- protection against unfair competition and anti-monopoly practices; and
- content requirements and restrictions for programming which is broadcast
over our Polish cable networks and our digital direct-to-home system.
We have taken steps to structure the ownership and operation of our cable
networks, our D-DTH system and our programming businesses and other ventures so
as to attempt to comply with all applicable regulations in each of the
jurisdictions in which we operate our business. However, a number of our
acquired cable networks are not yet in full compliance with certain Polish
regulations. In addition, because our D-DTH service was the first such service
available in Poland, there are likely to be issues of first impression arising
under Polish law with respect to various aspects of the our digital
direct-to-home business and related programming arrangements. Furthermore, each
of the relevant governmental authorities may conclude that our operations and
ownership structure do not comply with all applicable regulations. Any
determination by one or more of the relevant governmental authorities which
regulate our business and operations that our operations or ownership structure
do not comply could have a material adverse effect on the way we conduct our
business or our ability to carry it on at all, and any fines or penalties which
may be imposed could have a material adverse effect on our business, financial
condition and results of operations.
Changes in laws or regulations (or in the interpretation of existing laws or
regulations), whether caused by changes in the Polish government or otherwise,
could harm our operations. For example, foreign exchange control restrictions,
taxes or limitations could be imposed or increased in the future with regard to
repatriation of earnings and investments from Poland. If these types of exchange
control restrictions, taxes or limitations are imposed, we may not be able to
receive dividends, interest payments, debt repayments or other payments from our
Polish subsidiaries.
We 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, 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, and numerous
uncertainties regarding the interpretation of these laws and regulations. These
types of violations could also restrict our operations.
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YOU MAY NOT BE ABLE TO ENFORCE U.S. COURT JUDGMENTS AGAINST OUR ASSETS, MOST OF
WHICH ARE HELD OUTSIDE THE U.S.
You may not be able to enforce judgments of U.S. courts against our assets.
Investors in the new notes will be able to effect service of process in the U.S.
upon us and may be able to effect service of process upon our directors.
However, we are primarily a holding company which holds stock in various
entities in Poland, the United Kingdom and the Netherlands, and all or a
substantial portion of our assets are located outside the U.S. As a result,
investors may not be able to enforce asset judgments of U.S. courts if those
judgments are based on the civil liability provisions of U.S. laws.
Awards of punitive damages in actions brought in the U.S. or elsewhere may
be unenforceable in Poland. Polish courts may not give judgment in your favor in
cases based solely on U.S. laws.
English courts may not give judgment to you in original actions or in
actions for the enforcement of judgments of U.S. courts, of certain civil
liabilities based upon the U.S. federal and state securities laws.
A Netherlands court will not recognize and enforce a judgment obtained in
actions brought in the U.S. and it will be necessary to bring the matter before
the competent Netherlands court. You may, in the course of these proceedings,
submit the judgment rendered by the U.S court. If 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 Dutch
principles of public policy.
WE ARE DEPENDENT ON OUR EXECUTIVE OFFICERS
If any of our key employees leaves our company, our business could suffer.
We are particularly dependent upon the skills and contributions of the following
individuals:
- Robert E. Fowler, III, Chief Executive Officer of @Entertainment;
- Donald Miller-Jones, Chief Financial Officer, Vice President and Treasurer
of @Entertainment;
- Przemyslaw Szmyt, Senior Vice President Business Development, General
Counsel and Secretary of @Entertainment;
- David Warner, Chief Executive Officer of At Entertainment Limited;
- David Keefe, Chief Executive Officer of Poland Communications, Inc.
("PCI");
- Dorothy Hansberry, Vice President and General Counsel of PCI; and
- Warren Mobley, Jr., Chief Operating Officer and Vice President of
Marketing and Sales of PCI.
This is because these individuals have significant experience in our
business and would be difficult to replace. In addition, our success will depend
in part on our ability to hire, train, and retain high-quality personnel.
OUR PRINCIPAL STOCKHOLDERS CAN CONTROL OR INFLUENCE CERTAIN MAJOR CORPORATE
ACTIONS
There is a concentration of ownership of our common stock among Polish
Investments Holding L.P., the Cheryl A. Chase Marital Trust and Advent
International Group. These three entities own approximately 47% of our
outstanding common stock. In addition, Morgan Grenfell Private Equity Limited as
the holder of the Series A 12% Cumulative Preference Shares has the right to
appoint two members of our Board of Directors and certain special voting rights.
This concentration of ownership of our common stock, their director appointment
rights and their special voting rights may delay or prevent transactions
involving an actual or potential change in control of @Entertainment.
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THE EXCHANGE RATE OF THE U.S. DOLLAR TO THE ZLOTY MAY AFFECT OUR FINANCIAL
CONDITION AND WE REMAIN EXPOSED TO CURRENCY RISK BECAUSE OUR REVENUES ARE IN
ZLOTY
Our business operations and financial condition may suffer if inflation and
currency exchange rates continue to fluctuate. Historical inflation rates are
provided in the "Industry" section, and historical exchange rates are provided
in the section called "Address; Exchange Rate and Statistical Data."
We may continue to encounter currency exchange rate risks in relation to our
debt obligations. Some of our operating expenses and capital expenditures are
expected to continue to be denominated in or indexed to U.S. dollars. By
contrast, substantially all of our revenue is denominated in zloty. Any
devaluation of the zloty against the U.S. dollar that we are unable to offset
through price adjustments will require us to use a larger portion of our revenue
to service our U.S. dollar denominated obligations. While we may consider
entering into transactions to hedge the risk of exchange rate fluctuations, it
is unlikely that we will be able to obtain hedging arrangements on commercially
satisfactory terms. Therefore, shifts in currency exchange rates may have an
adverse effect on our financial results and on our ability to meet our U.S.
dollar denominated debt obligations and contractual commitments.
YOU MAY FACE ORIGINAL ISSUE DISCOUNT AND APPLICABLE HIGH YIELD DISCOUNT
OBLIGATION CONSEQUENCES
The existing notes have been issued at a discount to their principal amount
at maturity. Although cash interest is not expected to accrue on the existing
notes prior to February 1, 2004, and periodic payments of interest are not
expected to be paid prior to August 1, 2004, original issue discount (I.E., the
difference between the "stated redemption price at maturity" and the "issue
price" of the notes, as defined by the Internal Revenue Code) ("OID") will
accrue from the issue date of the existing notes to the maturity date. You
generally will be required to accrue OID into gross income for United States
federal income tax purposes in advance of the receipt of the cash payments to
which the income is attributable. See "United States Tax Considerations" for a
more detailed discussion of the federal income tax consequences of the purchase,
ownership and disposition of the notes.
In the event a bankruptcy case is commenced by or against us under the
United States Bankruptcy Code, your claim as a holder of new or existing notes
may be limited to an amount equal to the sum of:
- the initial offering price of the existing notes, and
- that portion of the OID which is deemed to constitute "matured interest"
for the purposes of the Bankruptcy Code.
To the extent that the Bankruptcy Code differs from the Internal Revenue
Code in determining the method of accrual of OID, you may realize taxable gain
or loss on payment of your claim in bankruptcy.
For United States federal income tax purposes, because the yield to maturity
on the notes exceeds 10.14%, the notes will be classified as "applicable high
yield discount obligations" within the meaning of section 163(i) of the Internal
Revenue Code. As a result,
- We will never be entitled to deduct as interest expense for United States
federal income tax purposes the accrued OID to the extent of the
"disqualified portion."
- The "disqualified portion" is the portion of the accrued OID
attributable to the yield on the notes in excess of 11.14% per annum.
- We will not be entitled to deduct as interest expense for United States
federal income tax purposes the remaining portion of the accrued OID until
such time as the accrued OID is paid to you.
Therefore, our deduction for United States federal income tax purposes of
interest economically accrued under the notes will be deferred or denied
relative to other types of high yield debt instruments that pay stated interest
currently or that do not defer the payment of accrued OID for more than five
years.
23
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT
On January 27, 1999 we sold the existing notes to Merrill Lynch & Company
and Deutsche Bank Securities. In connection with the sale of the existing notes,
we entered into a registration rights agreement with Merrill Lynch and Deutsche
Bank. This agreement requires us to file a registration statement under the
Securities Act of 1933 offering to exchange the new notes for your existing
notes. Accordingly, we are offering you the opportunity to exchange your
existing notes for the same principal amount of new notes. The new notes will be
registered and issued without a restrictive legend. This means that, unlike your
existing notes, which contain restrictions on their transfer, the new notes may
be reoffered and resold by you to any potential buyer freely without further
registration under the Securities Act of 1933. This is beneficial to you since
in order to sell your existing notes you must find an available exemption from
the registration requirements of the Securities Act of 1933.
The registration rights agreement further provides that we must use our best
efforts to cause the registration statement to be declared effective on or
before June 6, 1999, or we will owe liquidated damages, in the form of a higher
rate of interest, to the existing note holders. Except as discussed below, upon
the completion of the exchange offer we will have no further obligations to
register your existing notes.
We want to advise you that a copy of the registration rights agreement has
been filed as an exhibit to the registration statement and you are strongly
encouraged to read the entire text of the agreement. We expressly qualify all of
our discussions of the registration rights agreement by the terms of the
agreement itself.
REPRESENTATIONS WE NEED FROM YOU BEFORE YOU PARTICIPATE IN THE EXCHANGE OFFER:
We need representations from you before you can participate in the exchange
offer.
These representations are:
- the new notes you acquire in an exchange offer are being obtained in the
ordinary course of your business;
- neither you nor any person you are acting for is engaging in or intends to
engage in a distribution of the new notes;
- neither you nor any person you are acting for has an arrangement or
understanding with any person to participate in the distribution of the
new notes;
- neither you nor any other person you are acting for is our "affiliate," as
defined under Rule 405 of the Securities Act of 1933; and
- if you or any other person you are you acting for is a broker-dealer, and
you receive new notes for your own account in exchange for your existing
notes which were acquired as a result of market-making activities or other
trading activities, you will deliver a prospectus in connection with any
resale of such new notes.
In accordance with the registration rights agreements, we are also required
to file a "shelf" registration statement for a continuous offering in accordance
with Rule 415 of the Securities Act of 1933 to register your notes if:
- we are not permitted to effect an exchange offer because of any change in
law or applicable interpretations of the staff of the Securities and
Exchange Commission;
- an exchange offer is not completed by July 6, 1999;
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<PAGE>
- you request, for any of the reasons included in the registration rights
agreement, for us to do so following the exchange offer;
- any applicable laws or interpretations do not permit you to participate in
an exchange offer;
- you do not receive freely transferable notes in exchange for your existing
notes; or
- we so elect.
In the event that we are obligated to file a "shelf" registration statement,
we will be required to keep such shelf registration statement effective for up
to 2 years. Other than as described above, no holder will have the right to
participate in the shelf registration or require that we register your existing
notes in accordance with the Securities Act of 1933.
If you participate in an exchange offer, you will be able to freely sell or
transfer your new notes if:
- the new notes issued in the exchange offer are being acquired in the
ordinary course of your business;
- you are not participating, do not intend to participate and have no
arrangement or understanding with any person to participate in the
distribution of the new notes issued to you in the exchange offer; and
- you are not an affiliate of @Entertainment.
We believe that the new notes issued to you in this exchange offer may be
offered for resale, sold and otherwise transferred by you, without compliance
with the registration and prospectus delivery provisions of the Securities Act
of 1933, only if you make the representations that we discuss above.
Our belief is based upon existing interpretations by the Securities and
Exchange Commission's staff contained in several "no-action" letters to
third-parties unrelated to us. If you tender your existing notes in an exchange
offer for the purpose of participating in a distribution of new notes you cannot
rely on these interpretations by the Securities and Exchange Commission's staff
and you must comply with the registration and prospectus delivery requirements
of the Securities Act of 1933 in connection with a secondary resale transaction.
Each broker-dealer that receives new notes for its own account in exchange for
its existing notes, whether the existing notes were acquired by that
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such new notes.
You may suffer adverse consequences if you fail to exchange your existing
notes. Following the completion of the exchange offer, except as set forth above
and in the registration rights agreement we refer to, you will not have any
further registration rights and your existing notes will continue to be subject
to certain restrictions on transfer. Accordingly, if you do not participate in
the exchange offer, your ability to sell your existing notes could be adversely
affected.
TERMS OF THE EXCHANGE OFFER
We will accept any validly tendered existing notes which are not withdrawn
prior to 5:00 p.m., New York City time, on the expiration date. We will issue
$1,000 principal amount of new notes in exchange for each $1,000 principal
amount of your existing notes tendered. Holders may tender some or all of their
existing notes in the exchange offer.
The form and terms of the new notes will be substantially the same as the
form and terms of your notes except that (1) interest on the new notes will
accrue from the last interest payment date on which interest was paid on your
existing notes, or, if no interest was paid, from the date of the original
issuance of your existing notes, and (2) the new notes have been registered
under the Securities Act of 1933 and will
25
<PAGE>
not bear a legend restricting their transfer. The new notes will be issued
under, and entitled to the benefits of, the same indenture governing your
existing notes.
This prospectus, together with the letter of transmittal you received with
this prospectus, is being sent to you and to others believed to have beneficial
interests in the existing notes. You do not have any appraisal or dissenters'
rights under the General Corporation Law of the State of Delaware or the
indenture governing your existing notes as a result of the exchange offer. We
intend to conduct the exchange offer in accordance with the applicable
requirements of the Securities Exchange Act of 1934 and the rules and
regulations of the Securities and Exchange Commission.
We will have accepted your validly tendered existing notes when we have
given oral or written notice to Bankers Trust. Bankers Trust will act as agent
for you for the purpose of receiving the new notes from us. If any tendered
existing notes are not accepted for exchange because of an invalid tender, the
occurrence of certain other events, or otherwise, certificates sent to Bankers
Trust will be returned, without expense, to you as promptly as practicable after
the expiration date.
You will not be required to pay brokerage commissions, fees, or transfer
taxes in the exchange of your existing notes. We will pay all charges and
expenses in connection with the exchange offer except for any taxes you may
incur in effecting the transfer of your existing notes or new notes to some
other plan.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time, on, June
17, 1999 unless we extend the exchange offer, in which case the exchange offer
shall terminate at 5:00 p.m., New York City time on the last day of the
extension. In any event, the exchange offer will be held open for at least 30
days. In order to extend the exchange offer, we will issue a notice by press
release or other public announcement.
We reserve the right, in our sole discretion:
- to delay accepting your existing notes;
- to extend the exchange offer;
- to terminate the exchange offer, if any of the conditions shall not have
been satisfied; or
- to amend the terms of the exchange offer in any manner.
If we delay, extend, terminate or amend the exchange offer, we will give notice
to the exchange agent and issue a press release or other public announcement.
PROCEDURES FOR TENDERING YOUR EXISTING NOTES
Only you may tender your existing notes in the exchange offer. Except as
stated below under "The Exchange Offer--Book Entry Transfer," to tender in the
exchange offer, prior to the expiration date, you must:
1. complete, sign and date the enclosed letter of transmittal, or a copy of it;
2. have the signature on the letter of transmittal guaranteed if required by
the letter of transmittal; and
3. mail or otherwise deliver the letter of transmittal or copy to Bankers
Trust.
In addition, either:
1. certificates for your existing notes must be received by Bankers Trust along
with the letter of transmittal; or
2. a timely confirmation of a book-entry transfer of your existing notes, if
that procedure is available, into the account of Bankers Trust at the
Depository Trust Company ("DTC") under the procedure for
26
<PAGE>
book-entry transfer described below, must be received by Bankers Trust prior
to the expiration date; or
3. you must comply with the guaranteed delivery procedures described below.
To be tendered effectively, a letter of transmittal and other required
documents must be received by Bankers Trust at its address set forth under "The
Exchange Offer--Exchange Agent" prior to the expiration date.
If you do not withdraw your tender before the expiration date, it will
constitute an agreement between you and us in accordance with the terms and
conditions in this prospectus and in the letter of transmittal.
The method of delivery of your existing notes, a letter of transmittal, and
all other required documents to be delivered to Bankers Trust is at your
election and risk.
Instead of delivery by mail, it is recommended that you use an overnight or
hand delivery service. In all cases, you should allow sufficient time to assure
delivery to Bankers Trust before the expiration date. No letter of transmittal
or existing notes should be sent to us. You may request your brokers, dealers,
commercial banks, trust companies, or nominees to effect these transactions on
your behalf.
PROCEDURE IF THE EXISTING NOTES ARE NOT REGISTERED IN YOUR NAME
If your existing notes are registered in the name of a broker, dealer,
commercial bank, trust company, or other nominee and you wish to tender, then
you should contact the registered holder promptly and instruct the registered
holder to tender on your behalf. If you wish to tender on behalf of a registered
owner, you must, prior to completing and executing a letter of transmittal and
delivering the registered owner's existing notes, either make appropriate
arrangements to register ownership of the existing notes in your name or obtain
a properly completed bond power or other proper endorsement from the registered
holder. We strongly urge you to act immediately since the transfer of registered
ownership may take considerable time.
SIGNATURE REQUIREMENTS AND SIGNATURE GUARANTEES
Signatures on a letter of transmittal or a notice of withdrawal must be
guaranteed by any eligible guarantor institution that is a member of a
registered national securities exchange or a member of the National Association
of Securities, Inc. or by a commercial bank or trustee having an office or
correspondent in the U.S., or an "Eligible Guarantor Institution" within the
meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934 (each, an
"Eligible Institution") unless the existing notes are tendered (1) by a
registered holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the letter of transmittal or
(2) for the account of an Eligible Institution. If signatures on a letter of
transmittal or a notice of withdrawal are required to be guaranteed, the
guarantee must be by an Eligible Institution.
If a letter of transmittal or any notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations, or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to us of
their authority to so act must be submitted with such letter of transmittal
unless waived by us.
CONDITIONS TO THE EXCHANGE OFFER
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, and withdrawal of tendered notes will be determined by us
in our sole discretion, and our determination will be final and binding. We
reserve the absolute right to reject any and all existing notes not properly
tendered or any existing notes the acceptance of which would be unlawful in the
opinion of our counsel. We also reserve the right to waive any defects,
irregularities, or conditions of tender as to particular existing notes. Our
27
<PAGE>
interpretation of the terms and conditions of an exchange offer (including the
instructions in a letter of transmittal) will be final and binding on all
parties. Any defects or irregularities in connection with tenders of existing
notes must be cured within such time as we shall determine, unless waived by us.
Although we intend to notify you of defects or irregularities with respect to
tenders of existing notes, we (or Bankers Trust, or any other person) shall not
incur any liability for failure to give such notification. Tenders of existing
notes will not be deemed to have been made until such defects or irregularities
have been cured or waived. Any existing notes received by Bankers Trust that are
not properly tendered and as to which the defects or irregularities have not
been cured or waived will be returned by Bankers Trust as soon as practicable
following the expiration date to you, unless you request in the letter of
transmittal that the notes be sent to someone else.
In addition, we reserve the right in our sole discretion to purchase or make
offers for any existing notes that remain outstanding after the expiration date
or to terminate the exchange offer and, to the extent permitted by applicable
law, purchase existing notes in the open market, in privately negotiated
transactions, or otherwise. The terms of any such purchases or offers could
differ from the terms of this exchange offer.
These conditions are for our sole benefit and may be asserted by us at any
time or for any reason or may be waived by us in whole or in part at any time in
our sole discretion. The failure by us to exercise any of our rights shall not
be a waiver of our rights.
In addition, we will not accept for exchange any existing notes tendered,
and no new notes will be issued in exchange for any existing notes, if at such
time any stop order shall be threatened or in effect with respect to the
registration statement or the qualification of the indenture relating to the new
notes under the Trust Indenture Act of 1939. We are required to use reasonable
efforts to obtain the withdrawal of any stop order at the earliest possible
time.
In all cases, issuance of new notes for tendered existing notes that are
accepted for exchange in the exchange offer will be made only after timely
receipt by Bankers Trust of certificates for existing notes or a timely
confirmation from DTC of such existing notes into Bankers Trust's account at
DTC, a properly completed and duly executed letter of transmittal (or, with
respect to DTC and its participants, electronic instructions in which the
tendering holder acknowledges its receipt of and agreement to be bound by the
letter of transmittal for such exchange offer) and all other required documents.
If we do not accept your tendered existing notes or if you submitted
existing notes for a greater aggregate principal amount than you desire to
exchange, then the unaccepted or unexchanged existing notes will be returned
without expense to you (or, in the case of notes tendered by book-entry transfer
into Bankers Trust's account at DTC pursuant to the book-entry transfer
procedures described below, such non-exchanged notes will be credited to an
account maintained with DTC) as promptly as practicable after the expiration or
termination of the exchange offer.
BOOK-ENTRY TRANSFER
Bankers Trust will make requests to establish accounts with respect to the
new notes at DTC for purposes of the exchange offer within two business days
after the date of this prospectus. Any financial institution that is a
participant in DTC's system may make book-entry delivery of existing notes being
tendered by causing DTC to transfer the existing notes into Bankers Trust's
account at DTC in accordance with the appropriate procedures for transfer.
However, although delivery of notes may be effected through book-entry transfer
at DTC, a letter of transmittal or copy thereof, with any required signature
guarantees and any other required documents, must, except as set forth in the
following paragraph, be transmitted to and received by Bankers Trust at its
address set forth under "The Exchange Offer--Exchange Agent" on or before the
expiration date or the guaranteed delivery procedures as below must be complied
with.
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DTC's Automated Tender Offer Program ("ATOP") is the only method of
processing exchange offers through DTC. To accept the exchange offer through
ATOP, participants in DTC must send electronic instructions to DTC through DTC's
communication system instead of sending a signed, hard copy letter of
transmittal. DTC is obligated to communicate those electronic instructions to
Bankers Trust. To tender existing notes through ATOP, the electronic
instructions sent to DTC and transmitted by DTC to Bankers Trust must contain
the participant's acknowledgment of its receipt of and agreement to be bound by
the letter of transmittal for such notes.
GUARANTEED DELIVERY PROCEDURES
If you wish to tender your existing notes and the existing notes are not
immediately available, or time will not permit your existing notes or other
required documents to reach Bankers Trust before the expiration date, or the
procedure for book-entry transfer cannot be completed on a timely basis, a
tender may be effected if:
- the tender is made through an Eligible Institution;
- before the expiration date, Bankers Trust received from such Eligible
Institution a properly completed and duly executed letter of transmittal
(or a facsimile thereof) and Notice of Guaranteed Delivery, substantially
in the form provided by us (by telegram, telex, facsimile transmission,
mail or hand delivery). The Notice of Guaranteed Delivery shall state your
name and address and the amount of the existing notes tendered, that the
tender is being made thereby and guaranteeing that within five New York
Stock Exchange ("NYSE") trading days after the date of execution of the
Notice of Guaranteed Delivery, the certificates for all physically
tendered existing notes, in proper form for transfer, or a confirmation
from DTC and any other documents required by the applicable letter of
transmittal, will be deposited by the Eligible Institution with Bankers
Trust; and
- the certificates for all physically tendered existing notes, in proper
form for transfer, or a confirmation from DTC and all other documents
required by the applicable letter of transmittal, are received by Bankers
Trust within three NYSE trading days after the date of execution of the
Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
You may withdraw your tender of existing notes at any time prior to 5:00
p.m., New York City time, on the expiration date.
For a withdrawal of tendered notes to be effective, a written or, for a DTC
participant, electronic ATOP transmission, notice of withdrawal must be received
by Bankers Trust (at its address set forth in the next section of this
prospectus entitled "Exchange Agent") prior to 5:00 p.m., New York City time, on
the expiration date.
Any such notice of withdrawal must:
- specify your name;
- identify the existing notes to be withdrawn (including the certificate
number or numbers and principal amount of such existing notes);
- be signed by you in the same manner as the original signature on the
letter of transmittal by which your existing notes were tendered
(including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the trustee of your existing
notes register the transfer of those notes into the name of the person
withdrawing the tender; and
- specify the name in which you want the withdrawn existing notes to be
registered in, if different from your name.
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<PAGE>
All questions as to the validity, form, and eligibility (including time of
receipt) of such notices will be determined by us and our determination shall be
final and binding on all parties. Any existing notes withdrawn will be
considered not to have been validly tendered for exchange for purposes of the
exchange offer. Any notes which have been tendered for exchange but which are
not exchanged for any reason will be returned to you without cost to such holder
as soon as practicable after withdrawal, rejection of tender, or termination of
the exchange offer relating to such existing notes. Properly withdrawn existing
notes may be retendered by following one of the procedures described in "The
Exchange Offer--Procedures for Tendering Your Existing Notes" at any time on or
prior to the expiration date.
EXCHANGE AGENT
All executed letters of transmittal should be directed to the exchange
agent. We have appointed Bankers Trust Company as the exchange agent for the
exchange offer. Questions, requests for assistance and requests for additional
copies of the prospectus or a letter of transmittal should be directed to the
exchange agent addressed as follows:
<TABLE>
<S> <C> <C>
BY MAIL: BY OVERNIGHT MAIL OR COURIER: BY HAND:
BT Services Tennessee, Inc. BT Services Tennessee, Inc. Bankers Trust Company
Reorganization Unit Corporate Trust & Agency Group Corporate Trust and Agency Group
P.O. Box 292737 Reorganization Unit Attn: Reorganization Department
Nashville, Tennessee 37229-2737 648 Grassmere Park Road Receipt & Delivery Window
Nashville, Tennessee 37211 123 Washington Street, 1(st)
Fax: (615) 835-3701 Floor
Confirm by Telephone New York, New York 10006
(615) 835-3572 Information (800) 735-7777
</TABLE>
FEES AND EXPENSES
We will not make any payments to brokers, dealers, or others soliciting
acceptances of the exchange offer. The principal solicitation is being made by
mail. However, additional solicitations may be made in person or by telephone by
our officers and employees.
The estimated cash expenses to be incurred in connection with the exchange
offer will be paid by us and are estimated in the aggregate to be $265,000 (plus
any out-of-pocket expenses, including without limitation to legal fees and
expenses incurred by the exchange agent).
TRANSFER TAXES
If you tender existing notes for exchange you will not be obligated to pay
any transfer taxes unless you instruct us to register new notes in a different
name. If you request that your existing notes not tendered or not accepted in
the exchange offer be returned to a different person, you will be responsible
for the payment of any applicable transfer tax.
REGULATORY MATTERS
We are not aware of any additional governmental or regulatory approvals
required in order to complete the exchange offer.
CONSEQUENCES OF FAILURE TO EXCHANGE
Your participation in the exchange offer is voluntary. You are urged to
consult your financial and tax advisors in making your own decisions on what
actions to take and should read the "United States Tax Considerations" section.
If you do not exchange your existing notes in the exchange offer, your notes
may be resold only
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- to a person whom you reasonably believe is a qualified institutional buyer
(as defined in Rule 144A under the Securities Act of 1933) in a
transaction meeting the requirements of Rule 144A;
- in a transaction meeting the requirements of Rule 144 under the Securities
Act of 1933;
- in accordance with another exemption from the registration requirements of
the Securities Act of 1933 (and based upon an opinion of your counsel if
we so request);
- to us; or
- under an effective registration statement.
In each case, you must comply with any applicable securities laws of any
state of the U.S. or any other applicable jurisdiction. Under certain
circumstances, we are required to file a shelf registration statement. We do not
currently expect to have to file a shelf registration statement.
PAYMENT OF ADDITIONAL INTEREST UPON REGISTRATION DEFAULT
We will be required to pay a penalty interest on the existing notes in the
event that:
- the exchange offer registration statement is not declared effective on or
before June 6, 1999;
- the exchange offer is not completed on or before July 6, 1999, or a shelf
registration statement is not declared effective on or before July 6,
1999; or
- the exchange offer registration statement or the shelf registration
statement is declared effective but then ceases to be effective or usable
(except in certain limited periods).
Each of these events is a "Registration Default." In the case of a
Registration Default, we will be required to pay additional interest in cash on
each interest payment date in an amount equal to one-half of one percent (0.5%)
per year of the applicable accreted value of the existing notes with respect to
the first 90-day period following the Registration Default. The amount of this
additional interest will increase by an additional one-half of one percent
(0.5%) per year for each subsequent 90-day period until the Registration Default
has been cured, up to a maximum of one and one-half percent (1.5%) per year.
Once the Registration Default is cured, the additional interest will cease to
accrue.
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<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the issuance of the new notes or the
completion of the exchange offer or any sale of the new notes to any
broker-dealer.
We intend to use:
- the net proceeds of our sale of the existing notes, which was
approximately $96.0 million,
- the net proceeds of our sale of the Series A 12% Cumulative Preference
Shares, the Series B 12% Cumulative Preference Shares and warrants, which
was approximately $48.2 million, and
- the net proceeds of our sale of the Series C Senior Discount Notes, which
was approximately $9.5 million
for the following purposes:
- to fund capital expenditures, operating losses and working capital
primarily related to the development and operation of our D-DTH business,
and
- for general corporate purposes and certain other investments, including
the possible acquisition of cable television networks and certain minority
interests in our subsidiaries which are held by unaffiliated third
parties.
In the event that we are able to reach an agreement with Telewizyjna
Korporacja Partycypacyna S.A. ("TKP"), a Polish pay television provider,
regarding a joint venture, investment or some other form of cooperation,
our use of net proceeds from these three recent sales may be reallocated
and some portion of these proceeds of the offerings may be used to fund
our participation in the joint venture.
On December 31, 1998, we were committed to pay at least approximately $550.1
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 nine
years, of which at least approximately $238 million was committed through the
end of 2000. These payments may increase if we enter into additional programming
agreements.
We believe that the net proceeds of these three recent sales and cash on
hand will provide us with sufficient capital to fulfill our current business
plan and to fund our commitments until we achieve positive cash flow from
operations. For a description of situations when we may need additional
financing, see "Risk Factors--We May Need to Obtain Additional Financing if Our
Plans or Assumptions Change and the Terms Of The Additional Financing May
Restrict Our Operations Or Reduce Our Cash Flow."
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ADDRESS; EXCHANGE RATE AND STATISTICAL DATA
Our principal executive office and legal address are located at One
Commercial Plaza, Hartford, Connecticut 06103-3585. Our telephone number is
(860) 549-1674.
In this prospectus, references to "U.S. dollars" or "$" are to U.S.
currency, references to "Deutsche-Marks" or "DM" are to German currency, and
references to "zloty" or "PLN" are to Polish currency. We have presented our
primary consolidated financial statements in accordance with generally accepted
accounting principles in the U.S. in U.S. dollars. Amounts originally measured
in zloty for all periods presented have been translated into U.S. dollars.
For your convenience, this prospectus contains certain zloty amounts not
derived from the consolidated financial statements which have been translated
into U.S. dollars. You should not assume that the 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 3.504 = $1.00, the exchange rate quoted by the
National Bank of Poland at noon on December 31, 1998. This rate may differ from
the actual rates in effect during the periods covered by the financial
information discussed in this prospectus. The Federal Reserve Bank of New York
does not certify for customs purposes a noon buying rate for zloty.
The following table sets forth, for the periods indicated, the noon exchange
rate quoted by the National Bank of Poland.
<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>
1998
---------
<S> <C>
Exchange rate at end of period.............................. 3.50
Average exchange rate during period(1)...................... 3.51
Highest exchange rate during period......................... 3.82
Lowest exchange rate during period.......................... 3.36
</TABLE>
- ------------------------
(1) The average of the exchange rates on the last day of each month during the
applicable period.
This prospectus contains statistical data about the Polish, U.K., U.S.,
German, Czech, and Hungarian pay television industries, which were obtained from
various sources, including industry publications, and are based on our
experience in the Polish, European, and U.S. pay television markets. These
sources generally indicate that they have obtained information from sources
believed to be reliable, but do not guarantee the accuracy and completeness of
such information. While we believe these industry publications to be reliable,
we have not independently verified such data.
Amounts and percentages appearing in this prospectus may not total due to
rounding.
33
<PAGE>
CAPITALIZATION
The following table sets forth our consolidated cash and cash equivalents
and capitalization as of December 31, 1998: (1) on an actual basis, and (2) as
adjusted to reflect the completion of the sale of (A) the existing notes and
warrants, (B) the Cumulative Preference Shares and warrants and (C) the Series C
Senior Discount Notes, and the receipt and application of the estimated net
proceeds from the sales as described under "Use of Proceeds."
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------
ACTUAL AS ADJUSTED
----------- ------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents........................................................... $ 13,055 $ 166,804
----------- ------------
----------- ------------
Long-term liabilities:
Notes issued by Poland Communications, Inc.(1).................................... $ 129,627 $ 129,627
14 1/2% Senior Discount Notes due 2008(2)......................................... 125,513 125,513
Series C Senior Discount Notes due 2008........................................... -- 9,815
14 1/2% Series B Senior Discount Notes due 2009(3)................................ -- 92,551
Other notes payable(1)............................................................ 8,814 8,814
----------- ------------
Total notes payable............................................................. 263,954 366,320
Redeemable Cumulative Preference Shares; liquidation value $50,000,000(5)........... -- 28,704
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(4)................................................ 333 333
Paid-in capital
Warrants accompanying the 14 1/2% Senior Discount Notes due 2008(2)............. 7,615 7,615
Warrants accompanying the 14 1/2% Senior Discount Notes due 2009(3)............. -- 7,452
Warrants accompanying the Cumulative Preference Shares(5)....................... -- 19,483
Other paid-in capital........................................................... 230,339 230,339
----------- ------------
Total paid-in capital......................................................... 237,954 264,889
----------- ------------
Accumulated other comprehensive income............................................ (467) (467)
Accumulated deficit............................................................... (204,164) (204,164)
----------- ------------
Total stockholders' equity...................................................... 33,656 60,591
----------- ------------
Total capitalization.......................................................... $ 297,610 $ 455,615
----------- ------------
----------- ------------
</TABLE>
- ------------------------
(1) See "Description of Indebtedness."
(2) Of the $125.1 million gross proceeds from the issuance of the units offered
by us on July 14, 1998 (each consisting of one Senior Discount Note due 2008
and four warrants, each warrant initially entitling the holder thereof to
purchase 1.81 shares of common stock at an exercise price of $13.20 per
share), $117.5 million was allocated to the initial accreted value of the
Senior Discount Notes and $7.6 million was allocated to the warrants.
(3) Of the approximately $100 million gross proceeds from the sale of 256,800
units (each unit consisting of a $1,000 principal amount at maturity
existing note and four warrants), approximately $92.6 million was allocated
to the initial accreted value of the notes and approximately $7.5 million
was allocated to
34
<PAGE>
the warrants. No assurance can be given that the value allocated to the
existing notes and warrants will be indicative of the price at which these
notes and warrants may actually trade.
(4) Does not include 1,813,665 shares of common stock reserved for issuance upon
exercise of the warrants in connection with the offering of existing notes,
1,824,514 shares of common stock reserved for issuance upon exercise of the
warrants in connection with the units offering in July 1998, 5,500,000
shares of common stock reserved for issuance upon exercise of the warrants
in connection with the Cumulative Preference Shares offering in January
1999, 2,548,900 shares subject to options which were exercisable within
sixty days of the date of this prospectus and 1,887,100 additional shares of
common stock reserved for issuance in connection with options granted to
some of our employees and directors.
(5) Of the $50 million gross proceeds from the sale of the Series A 12%
Cumulative Preference Shares and warrants, approximately $28.7 million was
allocated to the Cumulative Preference Shares (net of commissions and
offering costs payable by us of approximately $1.8 million) and $19.5
million was allocated to the warrants.
35
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below has been derived
from our consolidated financial statements. These financial statements and the
notes to those statements have been prepared in conformity with U.S. generally
accepted accounting principles ("GAAP") and have been audited by our independent
auditors. The consolidated financial statements as of December 31, 1998 and 1997
and for each of the years in the three year period ended December 31, 1998 are
included elsewhere in this prospectus. The selected consolidated financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues.................................................. $ 61,859 $ 38,138 $ 24,923 $ 18,557 $ 8,776
Operating expenses:
Direct operating expenses............................... (61,874) (14,621) (7,193) (5,129) (2,119)
Selling, general and administrative
expenses (1).......................................... (74,494) (49,893) (9,289) (4,684) (2,818)
Depreciation and amortization........................... (26,304) (16,294) (9,788) (5,199) (3,459)
---------- ---------- --------- --------- ---------
Operating (loss)/income................................... (100,813) (42,670) (1,347) 3,545 380
Interest and investment income............................ 3,355 5,754 1,274 174 78
Interest expense.......................................... (21,957) (13,902) (4,687) (4,373) (2,327)
Equity in losses of affiliated companies.................. (6,310) (368) -- -- --
Foreign exchange loss, net................................ (130) (1,027) (761) (17) (27)
Loss before income taxes,
minority interest and extraordinary item.............. (125,855) (52,213) (5,521) (671) (1,896)
Income tax (expense)/ benefit............................. (210) 975 (1,273) (600) (803)
Minority interest......................................... -- (3,586) 1,890 (18) 316
---------- ---------- --------- --------- ---------
Loss before extraordinary item............................ (126,065) (54,824) (4,904) (1,289) (2,383)
Extraordinary item--loss on early extinguishment of debt
(2)..................................................... -- -- (1,713) -- --
---------- ---------- --------- --------- ---------
Net loss................................................ (126,065) (54,824) (6,617) (1,289) (2,383)
Accretion of redeemable preferred stock................... -- (2,436) (2,870) -- --
Preferred stock dividend.................................. -- -- (1,738) -- (1,811)
(Excess)/deficit of carrying value of preferred stock
(over)/ under consideration paid(3)..................... -- (33,806) 3,549 -- --
---------- ---------- --------- --------- ---------
Net loss applicable to holders of common stock............ $ (126,065) $ (91,066) $ (7,676) $ (1,289) $ (4,194)
---------- ---------- --------- --------- ---------
---------- ---------- --------- --------- ---------
Basic and diluted loss per common share................... $ (3.78) $ (3.68) $ (0.44) $ (0.10) $ (0.31)
---------- ---------- --------- --------- ---------
OTHER FINANCIAL DATA:
Consolidated EBITDA(4).................................. (74,509) $ (8,274) $ 8,441 $ 8,744 $ 3,839
Poland Communications, Inc. EBITDA(5)................... (1,431) 5,387 8,441 8,744 3,839
Expenditures for the purchase and construction of
property, plant and equipment(6)...................... 114,992 42,454 26,581 16,715 11,695
Net cash (used in)/provided by operating activities..... (70,668) (18,773) 6,112 3,839 1,599
Net cash used in investing activities................... (147,210) (64,842) (74,861) (21,985) (12,341)
Net cash provided by financing activities............... 125,242 120,823 134,889 17,996 12,686
Ratio of earnings to fixed charges(7)................... N/A N/A 0.21 0.86 0.37
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents.................................... $ 13,055 $ 105,691 $ 68,483 $ 2,343 $ 2,493
Property, plant and equipment, net........................... 213,054 117,579 84,833 52,320 33,235
Total assets................................................. 348,374 307,096 217,537 68,058 47,376
Total notes payable.......................................... 263,954 130,110 130,074 59,405 35,988
Redeemable preferred stock................................... -- -- 34,955 -- --
Total stockholders' equity................................... 33,656 152,355 31,048 190 1,479
</TABLE>
- ------------------------
(1) The year ended December 31, 1997 includes a non-cash compensation expense of
$18,102,000 relating to the granting of certain management stock options.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and note 15 to the consolidated financial statements.
(2) See Note 11 to the consolidated financial statements.
(3) Represents the amount paid to preferred stockholders in excess of or less
than the carrying value of such shares.
(4) EBITDA means earnings before interest, taxes, depreciation and amortizations
and consists of net loss adjusted for interest and investment income,
depreciation and amortization, interest expense, foreign currency
translation gains and losses, equity in losses of affiliated companies,
income taxes, extraordinary items, non-recurring items (e.g., compensation
expense related to stock options), gains and losses from the sale of assets
other than in the normal course of business and minority interest. The items
excluded from EBITDA are significant components in understanding and
assessing our financial performance. We believe that EBITDA and related
measures of cash flow from operating activities serve as important financial
indicators in measuring and comparing the operating performance of cable
television companies. EBITDA is not intended to represent cash flow from
operations under U.S. GAAP and should not be considered as an alternative to
net loss as an indicator of our operating performance or to cash flows from
operations as a measure of liquidity.
(5) PCI EBITDA reflects the EBITDA for PCI and its subsidiaries, whose primary
operations consist of our cable television business. For the years 1994
through 1996, consolidated EBITDA was entirely attributable to PCI and its
subsidiaries.
(6) Expenditures in 1994 include the costs of construction of cable television
systems and exclude the costs of acquiring cable systems and other property,
plant and equipment.
(7) For the purposes of determining the ratio of earnings to fixed charges,
earnings are defined as net loss before income taxes, plus fixed charges.
Fixed charges consist of interest expense on all indebtedness, amortization
of deferred financing costs and that portion of operating lease expense
deemed to be interest expense. For all periods presented, we incurred net
losses before income taxes and hence earnings to fixed charges indicate a
less than one to one coverage. Earnings were insufficient to cover fixed
charges by $125,855,000 for the year ended December 31, 1998, $55,799,000
for the year ended December 31, 1997, $3,631,000 for the year ended December
31, 1996, $689,000 for the year ended December 31, 1995, and $1,580,000 for
the year ended December 31, 1994.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
@Entertainment generated operating income of $3.5 million in 1995, but had
operating losses of $1.3 million for 1996, $42.7 million for 1997 and $100.8
million for 1998, primarily due to the significant costs associated with the
development and launch of its D-DTH and programming businesses, promotion of
those businesses, and the development, production and acquisition of programming
for Wizja TV.
@Entertainment divides operating expenses into (i) direct operating
expenses, (ii) selling, general and administrative expenses, and (iii)
depreciation and amortization expenses. Direct operating expenses consist of
programming expenses, maintenance and related expenses necessary to service,
maintain and operate @Entertainment's cable systems, D-DTH programming platform,
billing and collection expenses and customer service expenses. Selling, general
and administrative expenses consist principally of administrative costs,
including office related expenses, professional fees and salaries, wages and
benefits of non-technical employees, advertising and marketing expenses, bank
fees and bad debt expense. Depreciation and amortization expenses consist of
depreciation of property, plant and equipment and amortization of intangible
assets.
SEGMENT RESULTS OF OPERATIONS
@Entertainment classifies its business into three fundamental areas: (1)
cable television, (2) digital direct-to-home television and programming, and (3)
corporate and other. Information about the operations of @Entertainment in
different business segments is set forth below based on the nature of the
services offered.
The following table presents the segment results of @Entertainment's
operations for the years ended December 31, 1998, 1997 and 1996. In addition to
other operating statistics, @Entertainment measures its financial performance by
EBITDA, an acronym for earnings before interest, taxes, depreciation and
amortization. @Entertainment defines EBITDA to be net loss adjusted for interest
and investment income, depreciation and amortization, interest expense, foreign
currency gains and losses, equity in losses of affiliated companies, income
taxes, extraordinary items, non-recurring items (e.g., compensation expense
related to stock options), gains and losses from the sale of assets other than
in a normal course of business and minority interest. The items excluded from
EBITDA are significant components in understanding and assessing
@Entertainment's financial performance. @Entertainment believes that EBITDA and
related measures of cash flow from operating activities serve as important
financial indicators in measuring and comparing the operating performance of
media companies. EBITDA is not a U.S. GAAP measure of loss or cash flow from
operations and should not be considered as an alternative to cash flows from
operations as a measure of liquidity.
38
<PAGE>
SEGMENT RESULTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
REVENUES OPERATING LOSS EBITDA
------------------------------- --------------------------------- ---------
YEAR ENDED DECEMBER 31, 1998 1997 1996 1998 1997(3) 1996 1998
- ------------------------------------------------ --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Cable(1)........................................ 52,971 38,138 24,923 (23,066) (20,308) (1,347) (1,431)
D-DTH and Programming........................... 22,320 -- -- (69,047) (10,210) -- (64,378)
Corporate and Other............................. -- -- -- (8,700) (12,152) -- (8,700)
Inter Segment Elimination(2).................... (13,432) -- -- -- -- -- --
--------- --------- --------- --------- ----------- --------- ---------
Total........................................... 61,859 38,138 24,923 (100,813) (42,670) (1,347) (74,509)
--------- --------- --------- --------- ----------- --------- ---------
--------- --------- --------- --------- ----------- --------- ---------
<CAPTION>
YEAR ENDED DECEMBER 31, 1997 1996
- ------------------------------------------------ --------- ---------
<S> <C> <C>
Cable(1)........................................ 5,387 8,441
D-DTH and Programming........................... (10,186) --
Corporate and Other............................. (3,475) --
Inter Segment Elimination(2).................... -- --
--------- ---------
Total........................................... (8,274) 8,441
--------- ---------
--------- ---------
</TABLE>
- ------------------------
(1) In 1997, the cable segment included the activities of Mozaic Entertainment,
Inc., a subsidiary which provided programming content for the cable
business. In 1998, @Entertainment's programming activities related solely to
the development of the Wizja TV platform and have been included solely in
the D-DTH and programming segment. For the year ended December 31, 1997,
Mozaic Entertainment, Inc. revenues were $563,000, operating loss was
$2,071,000 and EBITDA was $(2,071,000). For the year ended December 31,
1998, Mozaic Entertainment, Inc. was dormant.
(2) Includes $12,932,000 of Wizja TV programming fees charged to the cable
segment by the D-DTH and programming segment in 1998.
(3) The year ended December 31, 1997 included a nonrecurring non-cash
compensation expense charge relating to the granting of certain management
stock options of $9,425,000, in the cable segment and $8,677,000 in the
corporate and other segment.
Unless otherwise indicated, the separate business discussions that follow
provide comparisons of actual 1998 results with the actual results for 1997.
CABLE SEGMENT OVERVIEW
@Entertainment's revenues in its cable segment have been and will continue
to be derived primarily from monthly subscription fees for cable television
services and one-time installation fees for connection to its cable television
networks. @Entertainment charges cable subscribers fixed monthly fees for their
choice of service packages and for other services, such as premium channels,
tuner rentals and additional outlets, all of which are included in monthly
subscription fees. Through its cable segment, @Entertainment currently offers
broadcast, intermediate (in limited areas) and basic packages of cable service.
At December 31, 1998, approximately 74.7% of @Entertainment's cable subscribers
received its basic package. For the year ended December 31, 1998, approximately
89% of @Entertainment's cable revenue was derived from monthly subscription
fees. Revenue from installation fees is deferred to the extent it exceeds direct
selling costs and the amortized to income over the estimated average period that
new subscribers are expected to remain connected to the @Entertainment's cable
system.
When @Entertainment began operations in 1990, revenue from installation fees
exceeded revenue from monthly subscription fees because of the significant
number of new installations and the high amount of the installation fees
relative to the small existing subscriber base. As @Entertainment's cable
subscriber base has grown, aggregate monthly subscription revenue has increased
and installation fees, while currently increasing on an absolute basis, have
declined as a percentage of total revenue. @Entertainment expects that
installation fees will continue to constitute a declining portion of
@Entertainment revenue.
During 1998, management completed several strategic actions in support of
its cable business and operating strategy. On June 5, 1998, @Entertainment began
providing the Wizja TV programming package to its basic cable subscribers. Since
that date, the basic Wizja TV package has been expanded to 24 channels.
Management believes that this selection of high quality primarily
Polish-language programming will provide it with a significant competitive
advantage in increasing its cable subscriber penetration rates.
39
<PAGE>
@Entertainment has implemented a pricing strategy designed to increase
revenue per cable subscriber and to achieve real profit margin increases in U.S.
dollar terms. @Entertainment has increased the monthly price for the "basic"
package service to reflect the increased channel availability. Premium channels
such as HBO Poland service (a Polish-language premium movie channel owned in
part by Home Box Office) are offered to cable customers for an additional
monthly charge. @Entertainment expects that it may continue to experience
increases in its churn rate above historical levels during the implementation of
its current pricing strategy. For the year ended December 31, 1998,
@Entertainment's churn rate increased to 15.25%. For the year ended December 31,
1998, @Entertainment experienced churn in the HBO Poland service with
penetration falling by 8,494 subscribers or 18.8% from December 31, 1997.
@Entertainment is planning to encrypt the HBO Poland service on cable and
install analog decoders for all premium channel subscribers during 1999.
The cable segment generated operating losses of $1.3 million for 1996, $20.3
million for 1997 and $23.1 million for 1998, primarily due to the purchase of
Wizja TV programming in 1998 from @Entertainment's D-DTH and programming segment
for $12.9 million, increased levels of acquisitions and related costs, increases
in depreciation and amortization due to the growth in cable systems and goodwill
from acquisitions. In addition, for the year ended December 31, 1997
@Entertainment recorded a one-time charge in the cable segment for non-cash
compensation related to stock options of $9.4 million.
An analysis of cable subscriber growth is presented in the table below:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Homes passed.......................................................... 1,591,981 1,408,099 1,088,540
Basic subscribers..................................................... 698,342 606,630 437,999
Subscriber growth
Organic........................................................... 196,714 135,019 98,213
Through acquisitions.............................................. 7,478 110,919 108,657
Churn............................................................. (112,480)(1) (77,307)(1) (25,747)
------------ ------------ ------------
Total net growth.................................................. 91,712 168,631 181,123
------------ ------------ ------------
Basic penetration..................................................... 43.9% 43.1% 40.2%
Intermediate subscribers.............................................. 40,037 29,653 22,626
------------ ------------ ------------
Basic and intermediate subscribers.................................... 738,379 636,283 460,625
------------ ------------ ------------
Broadcast subscribers................................................. 196,961 132,618 78,717
------------ ------------ ------------
Total Subscribers..................................................... 935,340 768,901 539,342
------------ ------------ ------------
Premium subscribers--HBO.............................................. 36,615 45,109 --
Premium penetration--HBO.............................................. 5.2% 7.4% 0.0%
Basic revenue / basic subscribers/month............................... $ 5.69 $ 4.99 $ 4.36
Total revenue/ basic subscribers/month................................ $ 6.75 $ 6.08 $ 6.35
</TABLE>
- ------------------------
(1) The increases in churn were mainly due to: increases in subscription rates
and the disconnection of non-paying customers.
D-DTH AND PROGRAMMING SEGMENT OVERVIEW
D-DTH. The principal objectives of @Entertainment for the D-DTH and
programming segment is to develop, acquire and distribute high-quality
Polish-language programming that can be commercially exploited throughout Poland
through D-DTH and cable television exhibition, and to develop and maximize
advertising sales.
40
<PAGE>
@Entertainment's D-DTH roll-out strategy was to lease D-DTH reception
systems to up to 380,000 initial subscribers at promotional prices in the
start-up phase of its D-DTH service. The launch of its D-DTH service has been
supported by @Entertainment's development of the Wizja TV programming package,
which @Entertainment believes addresses the demand for high-quality
Polish-language programming in Poland.
As of December 31, 1998, @Entertainment had sold to Philips' authorized
retailers approximately 125,000 D-DTH packages, which included the rental of the
D-DTH reception system, installation and a one-year subscription to
@Entertainment's D-DTH service. As of December 31, 1998, Philips had sold and
installed approximately 95,400 of these packages to consumers. Subsequent to
March 31, 1999, @Entertainment began selling, instead of leasing, D-DTH
reception systems to consumers. In September 1998, the number of Philips
authorized electronics retailers distributing the Wizja TV package increased
from 70 to 550, and since November more than 1,200 retailers have been
distributing the Wizja TV package. Each store is staffed with personnel
specifically trained by @Entertainment to provide information on the Wizja TV
packages. Installation personnel are also trained to complete each customer's
installation within 48 hours of order placement.
PROGRAMMING. @Entertainment, both directly and through joint ventures,
produces television programming for distribution. @Entertainment has developed a
multi-channel, primarily Polish-language programming platform under the brand
name Wizja TV. To promote the launch of Wizja TV, @Entertainment has
substantially completed a $20 million nationwide marketing campaign which
@Entertainment believes is 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
@Entertainment, and 20 channels that are produced by third parties, 11 of which
are broadcast under exclusive agreements for pay television in Poland.
@Entertainment currently distributes Atomic TV and intends to distribute the
Wizja TV programming package to third party cable operators in Poland on a
per-subscriber fee basis. @Entertainment exchanged letters and continues
negotiations with two major cable associations in Poland, representing an
aggregate of approximately 2.6 million subscribers (including @Entertainment's
cable subscribers), with the objective of making the Wizja TV programming
package available for distribution within the cable networks of other providers
which are members of the associations.
@Entertainment expects to incur substantial operating losses and negative
cash flows related to the launch of its D-DTH business for at least the next two
fiscal years while it develops and expands its D-DTH subscriber base. To date,
@Entertainment has relied primarily on funds raised in its initial public equity
offering in August 1997, its 14 1/2% Senior Discount Notes offering in July
1998, its Series C Senior Discount Notes offering in January 1999, its 14 1/2%
Senior Discount Notes offering in January 1999, and its Cumulative Preference
Shares offering in January 1999 to fund the development of its D-DTH business.
@Entertainment's D-DTH business plan requires substantial capital expenditures
to fund, among other things, the promotional incentives that are anticipated to
be required to expand its D-DTH business. @Entertainment's business plan
anticipates spending up to approximately $150 million to provide D-DTH reception
systems to the 380,000 initial subscribers at promotional prices, in order to
increase the number of subscribers.
41
<PAGE>
An analysis of D-DTH subscribers is presented in the table below:
<TABLE>
<CAPTION>
DECEMBER 31,
D-DTH 1998
- ---------------------------------------------------------------------------------------------------- ------------
<S> <C>
Boxes sold to dealers............................................................................... 125,167
Installed subscribers............................................................................... 95,378
Churn............................................................................................... --
Total Subscribers................................................................................... 95,378
Premium subscribers--HBO--promotional (1)........................................................... 76,633
Premium subscribers--HBO--paying.................................................................... 15,555
HBO churn (2)....................................................................................... 3,190
HBO churn (2)....................................................................................... 20.5%
</TABLE>
(1) @Entertainment currently offers a one-month trial period of the HBO Poland
service to each new D-DTH subscriber.
(2) The churn figures relate only to paying subscribers.
1998 COMPARED TO 1997
CABLE SEGMENT
CABLE TELEVISION REVENUE. Revenue increased $14.9 million or 39.1% from
$38.1 million in the year ended December 31, 1997 to $53.0 million in the year
ended December 31, 1998. This increase was primarily attributable to a 16%
increase in the number of basic and intermediate subscribers from approximately
636,300 at December 31, 1997 to approximately 738,000 at December 31, 1998, as
well as an increase in monthly subscription rates. @Entertainment introduced the
Wizja TV programming package on its cable systems for basic subscribers on June
5, 1998, and after an initial free period, increased prices significantly in
September 1998. Approximately 91.85% of the increase in basic subscribers was
the result of build-out of @Entertainment's existing cable networks and the
remainder was due to acquisitions.
Revenue from monthly subscription fees represented 84.0% of cable television
revenue for the year ended December 31, 1997 and 88.9% for the year ended
December 31, 1998. During the year ended December 31, 1998, @Entertainment
generated approximately $3.1 million of additional premium subscription revenue
as a result of providing the HBO Poland service and Canal+ premium movie
channels to cable subscribers as compared to $1.0 million for the year ended
December 31, 1997.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $23.0
million, or 194.9 %, from $11.8 million for the year ended December 31, 1997 to
$34.8 million for the year ended December 31, 1998, principally as a result of
the purchase in 1998 of the Wizja TV programming package from @Entertainment's
D-DTH and programming segment, higher levels of technical personnel and
increased maintenance expenses associated with recently acquired networks as
well as the increased size of @Entertainment's cable television system. Direct
operating expenses increased from 31.0% of revenues for the year ended December
31, 1997 to 65.7% of revenues for the year ended December 31, 1998. However,
without considering the intersegment charge for the Wizja TV programming
package, direct operating expenses as a percentage of revenue would have been
41.0% in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $10.7 million or 35.3% from $30.3 million for
the year ended December 31, 1997 to $19.6 million for the year ended December
31, 1998. A portion of this decrease was attributable to non-recurring, non-cash
compensation expense of approximately $9.4 million recorded in the year ended
December 31, 1997 in connection with stock options granted to certain key
executives. Selling, general and administrative expenses decreased from 79.5% of
revenues for the year ended December 31, 1997 to 37% for the year ended December
31, 1998. However, without considering the non-cash compensation expense related
to
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the stock options described above, selling, general and administrative expenses
as percentage of revenues would have been 54.9% in 1997. This percentage
decrease was attributable to operating efficiencies realized by @Entertainment
in 1998.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose
$5.3 million, or 32.5%, from $16.3 million for the year ended December 31, 1997
to $21.6 million for the year ended December 31, 1998 principally as a result of
depreciation and amortization of additional cable television systems and related
goodwill acquired and the continued build-out of @Entertainment's cable
networks. Depreciation and amortization expense as a percentage of revenues
decreased from 42.8% for the year ended December 31, 1997 to 40.8% for the year
ended December 31, 1998.
Each of these factors contributed to an operating loss of $20.3 million for
the year ended December 31, 1997 and $23.1 million for the year ended December
31, 1998.
D-DTH AND PROGRAMMING SEGMENT
D-DTH AND PROGRAMMING REVENUE. D-DTH and programming revenue amounted to
$22.3 million for the year ended December 31, 1998. Revenue from the supply of
the Wizja TV programming package to @Entertainment's cable systems, which
eliminates on consolidation, represented $12.9 million or 57.8% of D-DTH revenue
for the year ended December 31, 1998.
Since @Entertainment only commenced the broadcast of its Wizja TV
programming package over its cable systems on June 5, 1998 and through its D-DTH
service in July 1998, there were no revenues related to this segment in 1997.
Revenue from subscription fees, after elimination of revenue from the cable
segment represented 88.6% of D-DTH revenue for the year ended December 31, 1998.
Advertising and other revenue for the year ended December 31, 1998 represented
11.3% of D-DTH revenue after elimination of inter-segment revenues.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $37.6
million, from $2.8 million for the year ended December 31, 1997 to $40.4 million
for the year ended December 31, 1998. These costs principally were the result of
the following: programming costs for the Wizja TV platform of $22.6 million,
expenses associated with the establishment of a satellite up-link and studio
facility located in Maidstone, U.K., the $4.1 million in costs for the
development of the Wizja TV brand name, and costs associated with the lease of
three transponders on the Astra satellites which provide the capability to
deliver @Entertainment's Polish-language programming platform to cable and D-DTH
customers in Poland. Direct operating expenses amounted to 181.2% of revenues
for the year ended December 31, 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $38.9 million or 525.7% from $7.4 million for
the year ended December 31, 1997 to $46.3 million for the year ended December
31, 1998. As a percentage of revenue, selling, general and administrative
expenses amounted to approximately 207.6% for the year ended December 31, 1998.
The increase in selling, general and administrative expenses was attributable
mainly to an increase in sales and marketing expenses incurred in preparation
for launch and operation of @Entertainment's D-DTH service and Wizja TV
programming package, installation and distribution costs associated with the
sale of Wizja TV programming packages, an increase in the number of
administrative staff associated with the Maidstone facility, a $5 million
payment to Philips to compensate it for costs incurred as a result of a
temporary suspension of production of the D-DTH reception systems, as well as an
increase in professional fees associated with obtaining long-term programming
contracts and broadcast/exhibition rights, and negotiations with TKP, a Polish
pay television provider, regarding a potential joint venture.
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DEPRECIATION AND AMORTIZATION. @Entertainment incurred $4.7 million in
depreciation and amortization for the year ended December 31, 1998. Depreciation
and amortization expense as a percentage of revenues amounted to 21.1% for the
year ended December 31, 1998.
Each of these factors contributed to an operating loss of $69.1 million for
the year ended December 31, 1998 compared to an operating loss of $10.2 million
for the year ended December 31, 1997.
CORPORATE AND OTHER SEGMENT
Corporate and other consists of corporate overhead costs which primarily
include remuneration of corporate employees, costs associated with operation of
@Entertainment's corporate offices, consulting fees and certain legal costs.
Corporate expenses amounted to $8.7 million for the year ended December 31, 1998
compared with $12.2 million for the year ended December 31, 1997. Included in
1997 costs is an $8.7 million non-cash compensation expense relating to stock
options granted to certain key executives.
NON OPERATING RESULTS
INTEREST EXPENSE. Interest expense increased $8.1 million, or 58.3%, from
$13.9 million for the year ended December 31, 1997 to $22.0 million for the year
ended December 31, 1998 mainly as a result of the accretion of interest on the
$252 million aggregate principal amount at maturity of @Entertainment's 14 1/2%
Senior Discount Notes due 2008, which were issued on July 14, 1998.
INTEREST AND INVESTMENT INCOME. Interest and investment income decreased
$2.4 million, or 41.4%, from $5.8 million for the year ended December 31, 1997
to $3.4 million for the year ended December 31, 1998, primarily due to reduction
of cash balances resulting from the increased payments and expenses described
above and decrease in interest rates.
EQUITY IN LOSSES OF AFFILIATED COMPANIES. @Entertainment recorded $6.3
million of equity in losses of affiliated companies for the year ended December
31, 1998. The amount relates to the equity accounting of @Entertainment's 50%
investment in Twoj Styl, a publishing company, and its 20% investment in Fox
Kids Poland Ltd., a channel content provider.
FOREIGN EXCHANGE LOSS, NET. For the year ended December 31, 1998, foreign
exchange loss amounted to $0.1 million. For the year ended December 31, 1997,
foreign exchange loss amounted to $1.0 million.
MINORITY INTEREST. No minority interest was recorded for the year ended
December 31, 1998, compared to minority interest expense of $3.6 million for the
corresponding period in 1997. The 1997 expense represents a fourth quarter
adjustment to write-off certain receivable balances that were not recoverable.
All minority interests were eliminated in 1998 as the minority interest share of
the losses exceeded the value of the minority interest investments.
NET LOSS. For the year ended December 31, 1997, @Entertainment had a net
loss of $54.9 million and for the year ended December 31, 1998, @Entertainment
had a net loss of $126.1 million. These losses were the result of the factors
discussed above.
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders increased from a loss of $91.1 million for the year ended December
31, 1997 to a loss of $126.1 million for the year ended December 31, 1998 due to
the factors discussed above. For the year ended December 31, 1997, net loss
applicable to common stockholders included the excess of consideration paid for
preferred stock over the carrying amount of such stock of $33.8 million and $2.4
million related to the accretion of redeemable preferred stock.
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1997 COMPARED TO 1996
CABLE SEGMENT
CABLE TELEVISION REVENUE. Revenue increased $13.2 million or 53.0% from
$24.9 million in the year ended December 31, 1996 to $38.1 million in the year
ended December 31, 1997. This increase was primarily attributable to a 45.2%
increase in the number of basic and intermediate subscribers from approximately
460,000 at December 31, 1996 to approximately 636,000 at December 31, 1997, as
well as an increase in monthly subscription rates. Approximately 69.3% of the
increase in basic subscribers was the result of acquisitions and the remainder
was due to expansion of @Entertainment's existing cable networks.
Revenue from monthly subscription fees represented 87.2% of cable television
revenue for the year ended December 31, 1996 and 90.1% of cable television
revenue in 1997. Installation fee revenue for the year ended December 31, 1997
decreased by 6.3% compared to the year ended December 31, 1996, from $3.2
million to $3.0 million. During the year ended December 31, 1997, @Entertainment
generated approximately $56,000 of additional premium subscription revenue and
approximately $941,000 of additional premium channel installation revenue as a
result of providing the HBO Poland service pay movie channel to cable
subscribers.
DIRECT OPERATING EXPENSES. Direct operating expenses increased $4.6
million, or 63.9%, from $7.2 million in 1996 to $11.8 million in 1997,
principally as a result of higher levels of technical personnel and increased
maintenance expenses associated with recently acquired networks as well as the
increased size of @Entertainment's cable television system. Direct operating
expenses increased from 28.9% of revenues for the year ended December 31, 1996
to 30.9% of revenues for the year ended December 31, 1997.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $21.0 million or 225.8% from $9.3 million for
the year ended December 31, 1996 to $30.3 million for the year ended December
31, 1997. A portion of this increase was attributable to the non-recurring,
non-cash compensation expenses of $9.4 million recorded in the year ended
December 31, 1997 related to stock options granted to key executives. The
remainder of the increase was attributable to an increase in sales and marketing
expenses incurred in newly acquired networks, costs associated with the
agreement relating to sale of advertising on Atomic TV, and the cost of
launching the distribution of the HBO Poland service premium pay movie channel.
Compensation expense also increased as @Entertainment established in 1997 a
management team of senior executives who have significant experience in the
cable television and programming business.
As a percentage of revenue, selling, general and administrative expenses
increased from 37.3% for 1996 to approximately 79.5% for 1997. However, without
considering the non-cash compensation expense related to the stock options
described above, selling, general and administrative expenses as a percentage of
revenues would have been 54.8% in 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense rose
$6.5 million, or 66.3%, from $9.8 million for the year ended December 31, 1996
to $16.3 million for the year ended December 31, 1997 principally as a result of
depreciation and amortization of additional cable television systems and the
continued build-out of @Entertainment's cable networks. Depreciation and
amortization expense as a percentage of revenues increased from 39.3% for the
year ended December 31, 1996 to 42.7% for the year ended December 31, 1997.
Each of these factors contributed to an operating loss of $1.3 million for
the year ended December 31, 1996 and $20.3 million for the year ended December
31, 1997.
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D-DTH AND PROGRAMMING SEGMENT
D-DTH AND PROGRAMMING REVENUE. @Entertainment generated no D-DTH and
programming revenue for the years ended December 31, 1997 and 1996 since
@Entertainment only commenced the broadcast of its Wizja TV programming package
over its cable systems on June 5, 1998 and through its D-DTH service in July
1998.
DIRECT OPERATING EXPENSES. The D-DTH and programming segment incurred
direct operating expenses of approximately $2.8 million for the year ended
December 31, 1997. There were no direct operating expenses related to this
segment in 1996.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The D-DTH and programming
segment incurred selling, general and administrative expenses of approximately
$7.4 million for the year ended December 31, 1997. There were no selling,
general and administrative expenses related to this segment in 1996.
DEPRECIATION AND AMORTIZATION. The D-DTH and programming segment incurred
$24,000 of depreciation and amortization charges of D-DTH tangible assets in the
year ended December 31, 1997. There was no depreciation and amortization expense
related to this segment in 1996.
Each of these factors contributed to an operating loss which amounted to
$10.2 million for the year ended December 31, 1997. There was neither operating
loss nor gain related to this segment in 1996.
CORPORATE AND OTHER SEGMENT
Corporate and other consists of corporate overhead costs. Corporate expenses
for the year ended December 31, 1997 amounted to $12.2 million which included
$8.7 million of non-cash compensation expense relating to stock options granted
to certain key executives.
NON OPERATING RESULTS
INTEREST EXPENSE. Interest expense increased $9.2 million, or 195.7%, from
$4.7 million for the year ended December 31, 1996 to $13.9 million for the year
ended December 31, 1997 mainly due to the inclusion of a full year's interest on
Poland Communications, Inc.'s 9 7/8% Senior Notes due 2003 which were issued in
October 1996.
INTEREST AND INVESTMENT INCOME. Interest and investment income increased
$4.5 million, or 346.2%, from $1.3 million for the year ended December 31, 1996
to $5.8 million for the year ended December 31, 1997, primarily due to the
income derived from the investment of a portion of the net proceeds from the
issuance of Poland Communications, Inc.'s 9 7/8% Senior Notes in October 1996
and @Entertainment's initial public equity offering in August 1997.
FOREIGN EXCHANGE LOSS, NET. For the year ended December 31, 1997 foreign
exchange loss amounted to $1.0 million compared to a foreign exchange loss of
$761,000 for the year ended December 31, 1996, primarily due to less favorable
exchange rate fluctuations.
MINORITY INTEREST. Minority interest in subsidiary loss was $3.6 million
for the year ended December 31, 1997, resulting from a fourth quarter adjustment
to write off certain receivable balances that were not recoverable, compared to
minority interest in subsidiary income of $1.9 million for the corresponding
period in 1996.
EXTRAORDINARY ITEM. During 1996 @Entertainment prepaid a loan from Overseas
Private Investment Corporation ("OPIC"), resulting in an extraordinary loss of
$1.7 million, consisting of a prepayment penalty of $147,000 and non-cash charge
of $1,566,000 to write off deferred financing costs.
NET LOSS. For the year ended December 31, 1996 and 1997, @Entertainment had
net losses of $6.6 million and $54.8 million, respectively. These losses were
the result of the factors discussed above.
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NET LOSS APPLICABLE TO COMMON STOCKHOLDERS. Net loss applicable to common
stockholders increased from a loss of $7.7 million for the year ended December
31, 1996 to a loss of $91.1 million for the year ended December 31, 1997 due to
the excess of consideration paid for preferred stock over the carrying amount of
such stock of $33.8 million and the factors discussed above. For the year ended
December 31, 1997, net loss applicable to common stockholders included $2.4
million related to the accretion of redeemable preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
@Entertainment has met its cash requirements in recent years primarily with:
- capital contributions and loans from certain principal stockholders;
- borrowings under available credit facilities;
- cash flows from operations;
- the sale of $130 million aggregate principal amount of 9 7/8% Senior Notes
issued by Poland Communication Inc. ("PCI") in the October 1996 offering;
- the sale of approximately $200 million of common stock through
@Entertainment's initial public equity offering in August 1997;
- the sale in July 1998 of $252 million aggregate principal amount at the
maturity of the 14 1/2% Senior Discount Notes and warrants with gross
proceeds of approximately $125 million;
- the sale of $36,001,321 principal amount at maturity of its Series C
Discount Notes in January 1999 with gross proceeds of approximately $9.8
million;
- the sale in January 1999 of $256.8 million principal amount at maturity of
its 14 1/2% Senior Discount Notes due 2009 and warrants with gross
proceeds of approximately $100.0 million; and
- the sale of Series A 12% Cumulative Preference Shares, Series B 12%
Cumulative Preference Shares and warrants in January 1999 with gross
proceeds of approximately $50.0 million.
FINANCING. During 1996, PCI issued common and preferred stock to certain
principal stockholders for approximately $82 million. On March 29, 1996, PCI
consummated a transaction in which ECO Holdings III Limited Partnership
purchased shares of common and preferred stock of PCI for a price of $65
million. On March 29, 1996, Polish Investment Holdings L.P. purchased additional
shares of preferred and common stock of PCI for an aggregate purchase price of
approximately $17 million. PCI applied approximately $55 million of the proceeds
of these transactions to repay indebtedness owed to Chase American Corporation,
which is beneficially owned by the Chase family, and approximately $8.5 million
to redeem preferred stock held by Polish Investment Holding L.P., which is
beneficially owned by the Chase family.
PCI has entered into an agreement with American Bank in Poland, S.A. which
provides for a credit facility of approximately $6.5 million. All amounts under
this facility were drawn in June 1998. Interest, based on LIBOR plus 3%, is due
quarterly. All advances under the loan must be repaid by August 20, 1999. Under
the American Bank in Poland, S.A. credit facility, PCI is subject to certain
informational and notice requirements but is not subject to restrictive
covenants.
On October 31, 1996, $130 million aggregate principal amount of 9 7/8%
Senior Notes were sold by PCI to initial purchasers pursuant to a purchase
agreement. The initial purchasers subsequently completed a 144A placement of
these notes. These notes were issued pursuant to an indenture.
Under the PCI indenture, PCI is subject to certain restrictions and
covenants, including, without limitation, covenants with respect to the
following matters:
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- limitation on additional indebtedness;
- limitation on restricted payments;
- limitation on issuances and sales of capital stock of subsidiaries;
- limitation on transactions with affiliates;
- limitation on liens;
- limitation on guarantees of indebtedness by subsidiaries;
- purchase of the notes issued by PCI upon a change of control;
- limitation on sale of assets;
- limitation on dividends and other payment restrictions affecting
subsidiaries;
- limitation on investments in unrestricted subsidiaries;
- limitation on lines of business; and
- consolidations, mergers, and sale of assets.
PCI is in compliance with these covenants.
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 @Entertainment as of December 31, 1998 because certain financial
ratios did not meet the minimums provided in the PCI indenture.
In August 1997, @Entertainment raised approximately $200 million through its
initial public equity offering. @Entertainment used $60 million to purchase all
of PCI's outstanding Series A Preferred Stock and its Series C Preferred Stock
held by affiliates of the principal stockholders.
On July 14, 1998, $252 million principal amount at maturity of 14 1/2%
Senior Discount Notes were sold by @Entertainment to initial purchasers pursuant
to a purchase agreement, with gross proceeds to @Entertainment of approximately
$125 million. The initial purchasers subsequently completed a private placement
of the 14 1/2% Senior Discount Notes. The 14 1/2% Senior Discount Notes were
issued pursuant to an indenture.
On January 19, 1999, @Entertainment sold $36,001,321 principal amount at
maturity of its Series C Senior Discount Notes to an initial purchaser pursuant
to a purchase agreement for gross proceeds of approximately $9.8 million. The
Series C Senior Discount Notes were issued pursuant to an indenture.
On January 22, 1999, @Entertainment sold $256.8 million principal amount at
maturity of its 14 1/2% Senior Discount Notes due 2009 and warrants to initial
purchasers pursuant to a purchase agreement for gross proceeds of approximately
$100 million. The 14 1/2% Senior Discount Notes were issued pursuant to an
indenture.
Under the indentures governing the 14 1/2% Senior Discount Notes sold on
July 14, 1998, the Series C Senior Discount Notes sold on January 19, 1999 and
the 14 1/2% Senior Discount Notes sold on January 22, 1999. @Entertainment is
subject to certain restrictions and covenants, including, without limitation,
covenants with respect to the following matters:
- limitation on indebtedness;
- limitation on restricted payments;
- limitation on issuances and sale of capital stock of restricted
subsidiaries;
- limitation on transactions with affiliates;
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- limitation on liens;
- limitation of guarantees of indebtedness by subsidiaries;
- purchase of the notes upon change of control;
- limitation on sale of assets;
- limitation on dividends and other payment restrictions affecting
restricted subsidiaries;
- limitation on investments in unrestricted subsidiaries;
- consolidations, mergers, and sale of assets; and
- limitation on lines of business.
@Entertainment is in compliance with these covenants.
On January 22, 1999 @Entertainment also sold Series A 12% Cumulative
Preference Shares, Series B 12% Cumulative Preference Shares and warrants to
Morgan Grenfell Private Equity Ltd. and to certain members of the Chase family,
with gross proceeds of approximately $50 million.
On December 31, 1998, on a pro forma basis after giving effect to the sales
of the existing notes and the Series C Senior Discount Notes and the application
of the net proceeds from the sales, @Entertainment would have had, on a
consolidated basis, approximately $366 million aggregate principal amount of
indebtedness outstanding.
@Entertainment had positive cash flows from operating activities in 1996 of
$6.1 million, primarily due to the increase of cash received from subscribers
and the deferral of the payment of interest expense.
@Entertainment had negative cash flows from operating activities of $18.8
million for the year ended December 31, 1997 and $70.7 million for the year
ended December 31, 1998, primarily due to the significant operating costs
associated with the development of its D-DTH service and the Wizja TV
programming platform.
Cash used for the purchase and build-out of @Entertainment's cable
television networks, purchase of D-DTH equipment including set top decoders, and
the purchase of other property, plant, and equipment was $42.5 million in 1997
and $115.0 million in 1998. The increase primarily relates to @Entertainment's
acquisition of additional cable networks and capital expenditures associated
with the expansion of its existing cable networks and the development of its
D-DTH service and Wizja TV programming platform. @Entertainment spent $7.9
million in the year ended December 31, 1997 and $72.4 million in the year ended
December 31, 1998 to acquire D-DTH equipment.
On December 31, 1998, @Entertainment was committed to pay at least $550.1
million in guaranteed payments (including but not limited to payments for D-DTH
reception systems and payments of guaranteed minimum amounts due under
programming agreements and satellite transponder leases) over the next nine
years of which at least approximately $238.0 million was committed through the
end of 2000.
Cash used for the acquisition of subsidiaries, net of cash received, was
$13.3 million in 1996, $18.0 million in 1997 and $27.0 million for the year
ended December 31, 1998. @Entertainment spent approximately $3.9 million in
1996, $5.9 million in 1997 and $8.1 million in the year ended December 31, 1998,
to upgrade major acquired networks to meet @Entertainment's technical standards.
You should read "Use of Proceeds" to understand how @Entertainment intends
to use the proceeds from the three recent sales.
Also, for a description of situations when @Entertainment may need
additional financing, see "Risk Factors--We May Need to Obtain Additional
Financing if our plans or Assumptions Change and the Terms of the Additional
Financing May Restrict Our Operations or Reduce Our Cash Flow."
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YEAR 2000 COMPLIANCE
@Entertainment's cable television, D-DTH and programming operations are
dependent upon computer systems and other technological devices with imbedded
microprocessor chips that are intended to utilize dates and process data beyond
December 31, 1999. In January 1997, @Entertainment developed a plan to address
the impact that potential year 2000 problems may have on its operations and to
implement necessary changes to address such problems. During the course of the
development of its Y2K plan, @Entertainment has identified certain critical
operations, which need to be Y2K compliant for @Entertainment to operate
effectively. These critical operations include accounting and billing systems,
customer service and service delivery systems, and field and headend devices.
Largely as a result of its high rate of growth over the past few years,
@Entertainment has entered into an agreement to purchase a new system to replace
its current accounting system and an agreement to purchase specialized billing
software for its new customer service and billing center. The vendors of the new
accounting system and of the billing software have confirmed to @Entertainment
that these products are Y2K compliant. @Entertainment has completed the testing
phase of the new accounting system, and the implementation phase was
substantially completed at the end of 1998. @Entertainment has implemented the
new billing software for D-DTH subscribers and expects implementation of the
billing software to be completed for the majority of its cable subscribers by
the end of 1999.
@Entertainment believes that its most significant Y2K risk is its dependency
upon third party programming, software, services and equipment, because
@Entertainment does not have the ability to control third parties in their
assessment and remediation procedures for potential Y2K problems. Should these
parties not be prepared for Y2K conversion, their products or services may fail
and may cause interruptions in, or limitations upon, @Entertainment's provision
of the full range of its D-DTH and/or cable service to its customers. In an
effort to prevent any such interruptions or limitations, @Entertainment is in
the process of communicating with each of its material third party suppliers of
programming, software, services and equipment to determine the status of their
Y2K compliance programs. @Entertainment expects to complete this process by
September 30, 1999, and it anticipates that all phases of its Y2K plan will be
completed by December 31, 1999.
@Entertainment has not yet developed a contingency plan to address the
situation that may result if @Entertainment or its third party suppliers are
unable to achieve Y2K compliance with regard to any products or services
utilized in @Entertainment's operations. @Entertainment does not intend to
decide on the development of such a contingency until it has gathered all of the
relevant Y2K compliance data from its third party suppliers.
@Entertainment has not yet determined the full cost of its Y2K plan and its
related impact on its financial condition. @Entertainment has to date not
incurred any replacement or remediation costs for equipment or systems as a
result of Y2K non-compliance. Rather, due to the rapid growth and development of
its cable system and its D-DTH service, @Entertainment had made substantial
capital investments in equipment and systems for reasons other than Y2K
concerns. The total cost of @Entertainment's new accounting system and billing
software package is estimated to be approximately $2,400,000.
@Entertainment believes that any Y2K compliance issues it may face can be
remedied without a material financial impact on @Entertainment, but no assurance
can be made in this regard until all of the data has been gathered from
@Entertainment's third party suppliers. Today, @Entertainment cannot predict the
financial impact on its operations if Y2K problems are caused by products or
services supplied to @Entertainment by such third parties.
CURRENT OR ACCUMULATED EARNINGS AND PROFITS
For the fiscal year ended December 31, 1998, @Entertainment had no current
or accumulated earnings and profits. Therefore, none of the interest which
accreted during the fiscal year ended
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December 31, 1998 with respect to @Entertainment's 14 1/2% Senior Discount Notes
due 2008 and its 14 1/2% Series B Discount Notes due 2008, will be deemed to be
a "Dividend Equivalent Portion" as such term is defined in Section 163(e)(5)(B)
of the Internal Revenue Code.
IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
@Entertainment adopted SFAS No. 130, "Reporting Comprehensive Income," which
establishes standards for the reporting and presentation of comprehensive income
and its components in a full set of financial statements. Comprehensive income
encompasses all changes in stockholders' equity (except those arising from
transactions with owners) and includes net income, net unrealized capital gains
or losses on available for sale securities and foreign currency translation
adjustments. As this new standard only requires additional information in
financial statements, it does not affect @Entertainment's financial position or
results of operations.
SFAS No. 131, "Disclosures about Segment of an Enterprise and Related
Information," established standards for the reporting of information relating to
operating segments in annual financial statements, as well as disclosure of
selected information in interim financial reports. This statement supersedes
SFAS No. 14, "Financial Reporting for Segments of a Business Enterprise." which
requires reporting segment information by industry and geographic area (industry
approach). Under SFAS No. 131, operating segments are defined as components of a
company for which separate financial information is available and used by
management to allocate resources and assess performance (management approach).
This statement is effective for year-end 1998 financial statements.
@Entertainment (effective for the year ended December 31, 1998), has adopted
SFAS No. 131 "Disclosures About Segment of an Enterprise and Related
Information". Pursuant to the provisions of this statement, @Entertainment has
reported information relating to operating segments within its annual financial
statements and will provide comparative interim financial information beginning
in 1999.
IMPACT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" which establishes
standards of accounting for these transactions. SFAS No. 133 is effective for
@Entertainment beginning on July 1, 1999. @Entertainment currently has no
derivative instruments or hedging activities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal market risk (I.E.,the risk of loss arising from adverse
changes in market rates and prices) to which @Entertainment is exposed is
foreign exchange rate risk from fluctuations in the Polish zloty currency
exchange rate. @Entertainment's long term debt is primarily subject to a fixed
rate, and therefore variations in the interest rate do not have a material
impact on net interest expense.
FOREIGN EXCHANGE AND OTHER INTERNATIONAL MARKET RISKS
Operating in international markets involves exposure to movements in
currency exchange rates. Currency exchange rate movements typically affect
economic growth, inflation, interest rates, governmental actions and other
factors. These changes, if material, can cause @Entertainment to adjust its
financing and operating strategies. The discussion of changes in currency
exchange rates below does not incoporate these other important economic factors.
International operations constitute 100% of @Entertainment's 1998
consolidated operating loss. Some of @Entertainment's operating expenses and
capital expenditures are expected to continue to be denominated in or indexed in
U.S. dollars. By contrast, substantially all of @Entertainment's revenues are
denominated in zloty. Any devaluation of the zloty against the U.S. dollar that
@Entertainment is unable
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to offset through price adjustments will require it to use a larger portion of
its revenue to service its U.S. dollar denominated obligations and contractual
commitments.
@Entertainment estimates that a 10% change in foreign exchange rates would
impact reported operating loss by approximately $3.7 million. In other terms a
10% depreciation of the Polish zloty and British pound against the U.S. dollar,
would result in a $3.7 million decrease in the reported operating loss. This was
estimated using 10% of @Entertainment's operating loss after adjusting for
unusual impairment and other items including U.S. dollar denominated or indexed
expenses. @Entertainment believes that this quantitative measure has inherent
limitations because, as discussed in the first paragraph of this section, it
does not take into account any governmental actions or changes in either
customer purchasing patterns or @Entertainment's financing or operating
strategies.
@Entertainment does not generally hedge translation risk. While
@Entertainment may consider entering into transactions to hedge the risk of
exchange rate fluctuations, there is no assurance that it will be able to obtain
hedging arrangements on commercially satisfactory terms. Therefore, shifts in
currency exchange rates may have an adverse effect on @Entertainment's financial
results and on its ability to meet its U.S. dollar denominated debt obligations
and contractual commitments.
Poland has historically 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 20% in 1996, approximately 14.9% in 1997, and
approximately 11.8% in 1998. 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 by approximately 0.4% for the year
ended December 31, 1998. For the first quarter of 1999 the zloty has depreciated
against the U.S. dollar by approximately 13%. Inflation and currency exchange
fluctuations have had, and may continue to have, a material adverse effect on
the business, financial condition and results of operation of @Entertainment.
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THE INDUSTRY
GENERAL
With approximately 39 million people and 12.3 million televison households
(as we estimated on December 31, 1997), we believe that Poland represents a
highly attractive and dynamic market for pay television services. 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 average television viewing rates in 1996 of
approximately 240 minutes per day per adult in the U.S. and 215 minutes per day
per adult in the U.K. In addition, as there are only approximately 11 free
(broadcast) television channels generally available in Poland that contain
primarily Polish-language programming, we believe 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% in 1995, 6.1%
in 1996, and 6.0% in 1997, 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 to 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. Following a period of rising
unemployment, unemployment in Poland declined to 10.5% on December 31, 1997. In
part due to these factors, the sovereign credit rating of Poland was upgraded in
early 1996 to investment grade by Moody's Investors Service (Baa3) and Standard
& Poor's Corporation (BBB-). We believe 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% in 1995, 7% in 1996, and 10% in 1997.
Furthermore, in certain urban markets where we operate our 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% on 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 we estimated on December 31, 1997).
Poland is also the largest single-language market in Central Europe. We believe
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. We believe 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.
We also believe that, as the leading cable operator in Poland, our
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 our estimates only
approximately 33% of television households had a television cable running
outside their dwelling as of December 31, 1997. Such houses are frequently
referred to as "passed by cable" or simply "homes passed" in the cable
television industry. We believe this provides a substantial market opportunity
for cable operators.
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Once homes were passed by our cable, approximately 59% of these homes
subscribed to our cable services, as of December 31, 1998. In certain areas
where we have operated our networks for an extended period of time, such as
portions of Gdansk, 64% of the homes passed subscribe.
In addition, we have experienced low churn rates since our inception. Our
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. We believe that our churn rates are low
because of our customer care program, the high technical quality of our cable
television networks and our desirable program offerings. In addition, we benefit
from a shortage of housing in Poland that results in low move-related churn. In
1997, our annual churn rate increased to 12.2%, though it would have been 9.8%
had we not disconnected approximately 17,000 non-paying subscribers in one of
our acquired and rebuilt networks. We expect, however, that we may continue to
experience increases in our churn rate above historical levels during the
implementation of our 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. For the year ended December 31, 1998, our
churn rate was 15.25%.
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
buildings with multiple apartments or units which are typically owned or
controlled by cooperative authorities. These cooperative authorities often
control more than 2,000 apartments each, and in our experience, individual
apartments often house multiple generations of families and multiple wage
earners. In many of our markets, housing densities exceed 645 homes per
kilometer of cable plant, which significantly exceeds the average in the U.S. of
48 homes per kilometer of cable plant. Such densities provide significant
advantages for cable operators, including extremely low costs per subscriber to
build cable network. From our existing cable network infrastructure base, our
incremental costs to add an adjacent building with multiple apartments or
additional subscribers to existing networks average approximately $200 per
subscriber. (Subscribers in buildings with multiple apartments represent more
than 96% of our total cable subscribers.) In addition, the number and density of
buildings with multiple apartments offer marketing and other cost benefits in
terms of targeting, attracting and servicing customers.
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COOPERATIVE 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 cooperative authorities and is not
dependent upon issuance of a franchise for a particular region by a governmental
authority. Reaching an agreement with the cooperative authority provides the
cable operator with the right to connect its system to dwellings within the
cooperative authority's jurisdiction. Our contracts with cooperative 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. Cooperatives are legal entities created
under Polish law which resemble corporations. Cooperatives are run by management
boards which are appointed, pursuant to their statutes, by either their
supervisory board or their general assembly of members. There is no requirement
that a member of the management board be a resident of the cooperative. Members
of the management boards of cooperatives are generally university graduates and
have some managerial experience.
Although contracts with cooperative 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 cooperative authority. We own all of our network plant in the
ground and, in almost all cases, in the buildings of the cooperative authorities
with which we have contracts. Therefore, any potential competitor would be
required to build a network parallel to ours in order to compete with us during
or after the term of such contracts. In the Polish cable television industry,
this process is called "overbuilding." Accordingly, we believe it would be
difficult for competitors to successfully compete in buildings with multiple
apartment units with which we have contracts due to the cost of overbuilding,
pricing discounts likely to be necessary to attract our subscribers and the low
likelihood of achieving significant numbers of subcribers.
Although the financial costs and subscription rates generally do not favor
building systems parallel to large cable operators, the lack of contractual
exclusivity provides an opportunity for well-capitalized operators to overbuild
their weaker competitors. In situations where a smaller, poor-quality operator
has a contract with a cooperative authority, the cooperative authority will
often encourage a large, professional operator such as us to develop systems in
order to improve the quality of service to its residents. In these
circumstances, this type of 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. We believe that this
consolidation will continue as small operators face the burden of compliance
with 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. We have
actively pursued acquisitions, acquiring approximately 47 cable television
operators since 1992. These acquisitions have added approximately 350,000 of our
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, buildings with
multiple apartments 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 we believe 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 buildings with multiple apartments to deliver satellite
programs. Primarily targeting these buildings with multiple apartments 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 building of their systems. Currently, there
are over 400 small cable operators in Poland, and they are generally
characterized by small subscriber bases, poor-
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quality signals, failure to comply with technical standards, lack of customer
service and limited channel capacity and programming offerings that are often
obtained from satellites without paying full copyright fees to the program
producers.
As part of the Polish government's efforts to encourage rapid infrastructure
and economic development, it has begun to establish a regulatory framework for
the cable television industry that is similar, in many respects, to that of the
U.S. 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. We believe 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. We believe that this will improve our 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 our 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.
Despite the strong recent growth in the cable television industry, we
estimate only approximately 33% of the households with televisions in Poland had
cables running outside their dwellings on December 31, 1997, which we believe
provides a substantial market opportunity for cable operators. We believe 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.
ANALOG DIRECT-TO-HOME
Until our full-scale launch of our D-DTH service in September 1998, the only
multi-channel distribution method widely available in Poland other than cable
television was analog direct-to-home satellite services. The analog
direct-to-home (known in the pay television business as "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
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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. We believe that this trend will
continue particularly in urban markets because of A-DTH 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
cooperative authorities to permit the use of satellite dishes, particularly the
larger 36" diameter dishes used for A-DTH.
The following chart shows the relative market shares of A-DTH and cable in
Poland as measured by the number of subscribers for the years 1991 through 1997.
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 20/80% ratio in 1991 to a
70/30% ratio in 1997.]
Source: Baskerville Communications Corp., TV International Sourcebook 1997
(1991-1995 data), AGB Polska (1996 and 1997 data).
D-DTH
We believe that a digital direct-to-home satellite television ("D-DTH")
service offers Polish consumers significant advantages over the current A-DTH
offerings, due to, among other factors:
- wider range of Polish-language programming available due to the
compression ability of digital technology from a single satellite
position;
- less expensive, smaller non-motorized dishes;
- the improved signal quality of D-DTH; and
- the increasing availability of premium services.
We believe 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 A-DTH satellite
dishes. 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, we believe that our D-DTH service
serves as an attractive and affordable entertainment alternative. We believe
that our D-DTH system, when combined with the continued expansion of our cable
television and programming businesses, will enhance our position as the leading
provider of pay television in Poland.
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BUSINESS
INTRODUCTION
@Entertainment 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 Polish-language programming.
Over the past three years, @Entertainment has experienced rapid growth in
revenues and subscribers, both through acquisitions and through expansion of its
own cable networks, resulting in an average increase in revenues of 42% and an
average increase in total cable subscribers of 33% per year. @Entertainment also
has increased average revenue per subscriber by 10.2% per year during the past
three years. On June 5, 1998, @Entertainment launched its Wizja TV programming
package, originally consisting of 11 channels of primarily Polish-language
programming, over its cable networks. @Entertainment believes that Wizja TV will
provide it with a significant competitive advantage for attracting new
subscribers and increasing revenue per subscriber. Wizja TV will also be 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, on September 18, 1998 @Entertainment launched
a complementary digital satellite direct-to-home (known in the pay television
business as "D-DTH") television service allowing subscribers to receive Wizja TV
via a satellite dish. @Entertainment's multi-channel Polish-language D-DTH
service was the first D-DTH service available in Poland. @Entertainment has
entered into an agreement with Philips to supply the satellite dish, digital set
top box and related hardware and to distribute @Entertainment's D-DTH service
through the Philips retail network in Poland. As of December 31, 1998
@Entertainment had sold to Philips' authorized retailers approximately 125,000
D-DTH packages, which included the rental of the D-DTH reception system,
installation and a one-year subscription to @Entertainment's D-DTH service. As
of December 31, 1998, Philips had sold and installed approximately 95,400 of
these packages to consumers. Subsequent to March 31, 1999, @Entertainment began
selling, instead of leasing, D-DTH reception systems to consumers. With the
launch of @Entertainment's D-DTH service, @Entertainment has started the
transmission of Wizja TV, which currently consists of 24 channels (22 channels
primarily in the Polish language), on both its D-DTH system and its cable
networks.
OUR STRENGTHS
@Entertainment 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:
- leading market position;
- compelling programming;
- advanced technology;
- strong D-DTH distribution network; and
- high cable penetration and low churn.
LEADING MARKET POSITION. @Entertainment is currently the largest cable
television operator in Poland. On December 31, 1998, its cable television
networks served approximately 935,300 subscribers, representing approximately
30% of all cable subscribers in Poland and approximately 54% 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 a relatively large number of subscribers as
a percentage of homes passed (known in the cable industry as "penetration").
@Entertainment believes that there are opportunities to acquire, at attractive
prices, or to displace these smaller cable operators. In addition, since cable
operators' agreements with cooperative authorities are often non-exclusive, it
is easier for @Entertainment to build larger systems parallel to these smaller
cable operators. In the cable television industry, this process is called
"overbuilding."
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With the launch of its D-DTH service, @Entertainment's strategy is to
achieve rapid penetration of the Polish market by distributing D-DTH reception
systems to 380,000 initial subscribers at promotional prices. @Entertainment's
D-DTH service was 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 @Entertainment's position as the leading
provider of pay television in Poland.
COMPELLING PROGRAMMING. @Entertainment has secured exclusive Polish pay
television rights to channels and events covering what it believes are the most
important types of programming for viewers in the Polish market, including
movies, sports, children's programming, documentaries and music. @Entertainment
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. @Entertainment's cable television networks (other than
those it has acquired and is in the process of rebuilding to its standards) have
bandwidths of at least 550MHz which allows it to offer many television channels.
In most cases, these networks have the capacity to be cost-effectively
reconfigured to provide services such as voice and data transmission.
@Entertainment believes that in the future it will be able to provide its
customers with additional value-added services, including interactive
television, pay per view television, near-video-on-demand, video-on-demand data
transfer, services related to electronic banking, telephone services, internet
access, sports club ownership, publishing and other media should @Entertainment
decide to pursue such ancillary sources of revenue. @Entertainment has applied
for a license to provide internet access services.
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 1,200 Philips authorized electronics retailers located
throughout Poland. @Entertainment believes this distribution network through
Poland's largest electronics retailer provides @Entertainment with a competitive
advantage for distributing its D-DTH service into the Polish market.
HIGH CABLE PENETRATION AND LOW CHURN. @Entertainment's cable systems are
currently achieving premise penetration of approximately 59% of homes with cable
running outside ("homes passed"). In certain areas where @Entertainment has
operated its networks for an extended period of time, such as portions of the
Gdansk regional cluster, the penetration rate is approximately 64%.
@Entertainment believes that its offering of Wizja TV across its cable networks
will improve its penetration by expanding its program offering from 10 primarily
Polish-language channels not available on terrestrial frequencies to 33
channels.
In addition, @Entertainment has historically experienced annual rates at
which subscribers are terminated ("churn rates") of less than 10%, which compare
favorably to other markets such as the U.K., where in 1997 churn rates were
approximately three times this figure. In 1997, @Entertainment's churn rate
increased to 12.2%, though it would have been 9.8% had @Entertainment not
disconnected approximately 17,000 non-paying subscribers in one of its acquired
and rebuilt networks. For the year ended December 31, 1998, @Entertainment's
churn rate was 15.25% due primarily to 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.
@Entertainment expects that it will continue to experience churn rates above
historical levels during the implementation of its current pricing strategy.
SUBSTANTIAL INFRASTRUCTURE INVESTMENT. @Entertainment has developed an
advanced facility in Maidstone, U.K. for the production and transmission of
Wizja TV. In addition, @Entertainment has created a centralized call center to
handle sales and service for both its cable and D-DTH customers. @Entertainment
believes that the call center is among the most sophisticated in Poland.
@Entertainment believes that its facilities provide it with a competitive
advantage in terms of subscriber management services and cost efficiency.
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EXPERIENCED MANAGEMENT. @Entertainment has established a strong management
team, with extensive experience in the television industry. In addition,
@Entertainment 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, which is the leading pay
television broadcasting service in the U.K. and Ireland. In addition to
providing consulting services, Messrs. Chisholm and Chance serve on
@Entertainment's Board of Directors.
RECENT DEVELOPMENTS
- LETTER OF INTENT WITH TKP.
On April 17, 1998, @Entertainment 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 @Entertainment'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 @Entertainment to invest approximately
$112 million in TKP, and to sell substantially all of @Entertainment's D-DTH and
programming assets to TKP for approximately $42 million. The TKP joint venture
was to be owned 40% by @Entertainment, 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 @Entertainment 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, @Entertainment 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
required date set forth in the letter of intent. Therefore, @Entertainment
terminated the letter of intent on June 1, 1998. @Entertainment has informed TKP
and its shareholders that @Entertainment 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 of the sale of the
existing notes may be used for this purpose. TKP and its shareholders have
informed @Entertainment that they believe @Entertainment did not have the right
to terminate the letter of intent, and have initiated arbitration proceedings
against @Entertainment. For a general description of the arbitration
proceedings, you should read the "Legal Proceedings" section at the end of the
"Business" section.
- SERIES C SENIOR DISCOUNT NOTES OFFERING.
On January 20, 1999, @Entertainment sold $36,001,321 aggregate principal
amount at maturity of Series C Senior Discount Notes due 2008 for gross proceeds
of approximately $9.8 million.
- UNITS OFFERING.
On January 27, 1999, @Entertainment sold 256,800 units, each unit consisting
of a $1,000 principal amount at maturity 14 1/2% Senior Discount Note due 2009
and four warrants each entitling the holder of the warrant to purchase 1.7656
shares of common stock, for gross proceeds of approximately $100 million. These
notes are the existing notes we are offering to exchange for new notes.
- CUMULATIVE PREFERENCE SHARE OFFERING.
On January 27, 1999, @Entertainment sold 45,000 shares of its Series A 12%
Cumulative Preference Shares, 5,000 shares of its Series B 12% Cumulative
Preference Shares, and warrants to purchase an aggregate of 4,450,000 shares of
common stock for gross proceeds of approximately $50 million.
- FIRST QUARTER 1999 RESULTS
On May 6, 1999, @Entertainment announced its operating and financial results
for the quarter ended March 31, 1999, including the following:
- Increase in total cable and D-DTH subscribers to 1,078,000;
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- D-DTH launch on plan (137,6000 package sales through March 31, 1999
with 130,000 connected subscribers);
- First quarter revenues of $18.8 million, increased by 48%
year-over-year;
- EBITDA of ($15.5 million) for the first quarter of 1999;
- Net loss of $34.2 million for the first quarter of 1999;
- Net loss per share of $1.05 for the first quarter of 1999; and
- Cash balance of $128 million at March 31, 1999.
- POSSIBLE SALE OF ALL OR SUBSTANTIALLY ALL OF ITS ASSETS.
@Entertainment has retained an investment advisor to advise its Board of
Directors in discussions it is having with potential strategic investors. These
discussions could entail the sale of all or part of the company.
CABLE OPERATIONS
@Entertainment operates the largest cable television system in Poland with
approximately 1,592,000 homes passed and approximately 935,300 total subscribers
as of December 31, 1998. @Entertainment's cable subscribers are located in
regional clusters encompassing eight of the ten largest cities in Poland,
including those cities which @Entertainment believes provide the most favorable
demographics for cable television in the country. @Entertainment believes that
additional subscriber growth can be achieved through a combination of increased
penetration, new network expansion and acquisitions. On December 31, 1998,
@Entertainment had invested more than $144 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 U.S. The networks
constructed by @Entertainment provide excess channel capacity and are designed
to maximize reliability. It is @Entertainment's policy to upgrade as rapidly as
possible substandard networks that it has acquired.
CABLE OPERATING STRATEGY
With the fall of Communist rule in 1989, @Entertainment believed that it
could gain significant market advantages by becoming one of the first cable
operators to establish a high-quality cable television system in Poland.
@Entertainment 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, @Entertainment's current strategic objective is to increase cash flow
and enhance the value of its cable networks. To accomplish this objective,
@Entertainment's business and operating strategy in the cable television
business is to:
<TABLE>
<S> <C>
- - PROVIDE COMPELLING @Entertainment currently provides the Wizja TV programming
PROGRAMMING. package, which currently has 22 television channels of
primarily Polish-language programming, to its cable
subscribers. @Entertainment 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 @Entertainment has implemented a pricing strategy designed
MAXIMIZE REVENUE PER to increase revenue per subscriber and to achieve real
CABLE SUBSCRIBER. profit margin increases in U.S. dollar terms. In connection
with this pricing strategy, @Entertainment intends to
continue to introduce new program offerings and to improve
its services. As a result, @Entertainment has experienced
and expects that it will continue to experience subscriber
termination rates above historical levels resulting from the
implementation of its pricing strategy. @Entertainment
generally
</TABLE>
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<TABLE>
<S> <C>
receives a premium for its cable television services over
the prices charged by its competitors, particularly
poor-quality small operators. Despite its generally higher
price levels, @Entertainment has achieved significant growth
in penetration and market share while maintaining relatively
low annual cable television subscriber termination rates.
@Entertainment believes its ability to successfully command
higher prices reflects its higher levels of customer
service, broader selection of quality programming and the
greater technical quality of its cable television networks.
- - EXPAND REGIONAL CLUSTERS. @Entertainment's strategy is to continue to expand the
coverage areas of its regional clusters, both through
selected building out of its existing networks and
acquisitions. @Entertainment 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 building out of its existing networks.
@Entertainment also plans to expand its regional clusters
through the continued acquisition of smaller cable
television operators. In addition, in markets where
@Entertainment has established operations, it intends to
selectively build its system in parallel to competitors
("overbuild') in an effort to consolidate the market. By
implementing this strategy for expanding its regional
clusters, @Entertainment 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 @Entertainment 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 revenue generated through
the addition of subscribers to its existing regional
clusters.
- - INCREASE SUBSCRIBER @Entertainment believes the most profitable means of
PENETRATION. expanding its cable television business is to leverage its
investment in its cable networks by increasing the
percentage of homes passed which subscribe ("subscriber
penetration") in its regional clusters. Once a building with
multiple apartments is passed by @Entertainment's cable
television networks, @Entertainment can add subscribers who
generate average annual subscription revenue of
approximately $80 in return for an average capital
investment of approximately $20 per subscriber.
@Entertainment plans to increase subscriber penetration by
(A) executing an aggressive sales, marketing and promotional
strategy using @Entertainment's highly trained and
commissioned Polish sales force, with particular emphasis on
company-wide quarterly remarketing campaigns, (B) continuing
to enhance @Entertainment's program offerings, particularly
through expanding Wizja TV's channel line-up, and (C)
applying prompt, courteous and professional customer service
standards.
- - REALIZE ADDITIONAL @Entertainment aggressively seeks to realize operating
OPERATING EFFICIENCIES. efficiencies in both its acquired as well as its existing
cable networks by, among other things, eliminating redundant
satellite receivers, combining customer service offices and
reducing administrative personnel. @Entertainment generally
has been able to eliminate personnel in its acquired cable
television systems by managing the systems with
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
experienced personnel from one of its existing regional
clusters. @Entertainment can also generally reduce the
technical personnel necessary to operate acquired systems
after connecting them to @Entertainment's existing satellite
signal receivers or, if required, rebuilding them to
@Entertainment's standards. @Entertainment also intends to
reduce the number of employees through consolidation of its
existing clusters of regional operations from eight to four,
and through centralizing its 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 all D-DTH customers and is
expected to be operational for all cable customers by the
end of 1999. The call center is located in Katowice, a low
cost area of Poland, and will consolidate the functions of
@Entertainment's existing regional customer service centers.
Moreover, @Entertainment believes the centralization of
service functions will improve the general level of customer
service available to subscribers. @Entertainment 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. @Entertainment believes that its size and
market share give it a competitive advantage by creating
economies of scale, including minimized building and reduced
operating costs per subscriber and volume price discounts
for programming and construction expenditures.
@Entertainment'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.
</TABLE>
REGIONAL CLUSTERS
@Entertainment has established eight regional clusters for its cable
television business encompassing eight of the ten largest cities in Poland,
which @Entertainment believes are among those with the strongest economies and
most favorable demographics for cable television in the country.
The following table illustrates certain operating data of each of
@Entertainment's existing regional clusters.
OVERVIEW OF @ENTERTAINMENT'S EXISTING CABLE SYSTEMS(1)
<TABLE>
<CAPTION>
BASIC AVERAGE MONTHLY
SUBSCRIBERS BASIC SUBSCRIPTION REVENUE PER
REGION TOTAL HOMES HOMES PASSED TOTAL SUBSCRIBERS (2) PENETRATION (2) BASIC SUBSCRIBER
- ----------------------- ----------- ------------- ----------------- ----------- ----------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
Gdansk................. 280,000 239,856 154,315 121,846 50.80% $ 7.80
Szczecin............... 160,000 76,050 64,714 48,639 63.96% 5.90
Katowice............... 1,200,000 498,903 252,954 204,249 40.94% 6.61
Krakow................. 400,000 144,114 71,866 62,179 43.15% 7.41
Warsaw................. 800,000 259,050 127,485 103,536 39.97% 7.63
Lublin................. 120,000 90,244 74,160 38,536 42.70% 7.25
Wrochaw................ 624,000 222,300 145,698 119,239 53.64% 5.05
Bydgoszcz.............. 134,000 61,464 44,148 40,155 65.33% 4.90
----------- ------------- ------- ----------- ----- -----
TOTAL.................. 3,718,000 1,591,981 935,340 738,379 46.38% $ 6.68(3)
----------- ------------- ------- ----------- ----- -----
----------- ------------- ------- ----------- ----- -----
</TABLE>
- ------------------------------
(1) All data at or for the year ended December 31, 1998.
(2) Includes "basic" and "intermediate" packages. For a description of these
packages, see the section entitled "Service and Fees" that follows.
(3) Represents a weighted average for @Entertainment based on the total number
of basic subscribers at December 31, 1998.
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ACQUISITIONS
@Entertainment regularly evaluates potential acquisitions of cable networks.
@Entertainment currently has no definitive agreement with respect to any
material acquisition, although from time to time it has discussions with other
companies and assesses opportunities on an ongoing basis. @Entertainment may be
required to apply for the approval of the Polish Anti-Monopoly Office or the
Polish Minister of Communications with respect to any acquisitions it wishes to
consummate. @Entertainment's ability to enter into definitive agreements
relating to material acquisitions, and on what terms, and its ability to obtain
the necessary antimonoply approvals, cannot be assured.
SERVICES AND FEES
@Entertainment charges cable television subscribers an initial installation
fee and fixed monthly fees for their choice of service packages and for other
services such as premium channels and rental of remote control devices.
@Entertainment currently offers three packages of cable television service: a
"basic package" throughout its cable television systems, and "broadcast" and
"intermediate" packages in selected areas of Poland. On December 31, 1998,
approximately 74.7% of @Entertainment's subscribers received the "basic
package", approximately 4.3% received the "intermediate package" and
approximately 21% received the "broadcast package" of service.
BASIC PACKAGE. The "basic package" includes approximately 30 to 70
channels. This package generally includes 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, Wizja TV,
including @Entertainment's proprietary Polish-language channel, Atomic TV.
@Entertainment's "basic package" offerings vary by location. In most of
@Entertainment's major markets, the "basic package" includes the following types
of channels:
- 32 primarily Polish-language channels (including most channels on Wizja
TV);
- 9 English-language channels (including certain channels on Wizja TV);
- 12 German-language channels;
- 5 French-language channels;
- 1 Spanish-language channel;
- 1 Italian-language channel;
- 1 Russian-language channel; and
- 1 Swedish-language channel.
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The following table sets forth the programming currently or proposed to be
offered in @Entertainment's "basic package":
<TABLE>
<CAPTION>
CHANNEL DESCRIPTION LANGUAGE
- --------------------------- ------------------------------------------------------ ---------------------------
<S> <C> <C>
Wizja TV(1)(2)(3) 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
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
Planete(4) Satellite documentaries French/Polish
NBC Satellite general entertainment English
CNBC Satellite general entertainment English
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
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
CHANNEL DESCRIPTION LANGUAGE
- --------------------------- ------------------------------------------------------ ---------------------------
<S> <C> <C>
MUZZIK(4) Satellite music French/Polish
TVE Satellite general entertainment Spanish
RAI UNO Satellite general entertainment Italian
Ostankino Satellite general entertainment Russian
TV 4 Satellite general entertainment Swedish
La Cinq Satellite general entertainment French
</TABLE>
- ------------------------
(1) The channels offered on Wizja TV became available to @Entertainment's cable
subscribers beginning June 5, 1998. As part of the Wizja TV programming
platform for cable, VH-1 was launched in April 1999 to @Entertainment's
cable subscribers.
(2) Including Atomic TV, which became available as a separate digitally
delivered satellite channel during the second quarter of 1997.
(3) The Discovery Channel-Europe has been distributed to cable subscribers since
March 1994 and Animal Planet was launched in April 1999 to @Entertainment's
cable subscribers.
(4) Limited amount (at least three hours per day) of Polish-language commentary,
with audio encryptions.
All of the Wizja TV programming, other than the HBO Poland service, a
Polish-language premium movie channel owned in part by Home Box Office, are part
of the "basic package."
INTERMEDIATE PACKAGE. The "intermediate package" includes approximately 17
to 24 channels. This package is offered for monthly fees equal to approximately
one-half of the amount charged for the "basic package." The "intermediate
package" is designed to compete with small cable operators on a basis of price,
using a limited programming offering. @Entertainment's "intermediate package"
offerings vary by location.
BROADCAST PACKAGE. The "broadcast package" includes 6 to 12 broadcast
channels with clear reception for monthly fees which are substantially less than
the amounts charged for the "intermediate package." 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. @Entertainment often uses the "broadcast package" to establish a
relationship with cooperative authorities. In some cases, @Entertainment will
offer the "broadcast package" at a nominal monthly charge to all residents
within a cooperative authority's jurisdiction in return for a long-term
exclusive contract to provide cable services. In such cases, @Entertainment uses
the "broadcast package" as a marketing vehicle to attract subscribers to its
cable networks and subsequently to convert them to subscribers who will
subscribe for a package of cable television service that includes more channels
than the "broadcast package". There are Polish regulations on the order in which
channels can be added to cable systems. As a result, most "broadcast packages"
include public television programs, which Polish law requires to be the first
channels carried on any Polish cable television system.
PREMIUM AND OTHER SERVICES. For an additional monthly charge, certain of
@Entertainment's cable networks currently offer two premium television
services--the HBO Poland service (a Polish-language premium movie channel owned
in part by Home Box Office) and Canal+ Polska--to customers on a monthly basis.
For 1998, @Entertainment experienced churn in the HBO Poland service with
penetration falling by 8,464 subscribers or 18.8% from 1997. @Entertainment is
planning to encrypt the HBO Poland service on its cable and install analog
decoders for all premium channel subscribers during 1999. @Entertainment 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
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receive certain of @Entertainment'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 $21 for buildings with multiple apartments and
approximately $42 for single family dwellings, but such fees may be subject to
reductions as a result of promotional campaigns.
PRICING STRATEGY. Prior to December 1996, @Entertainment'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. @Entertainment 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 @Entertainment not disconnected approximately
17,000 non-paying subscribers in one of its acquired and rebuilt networks. For
the year ended December 31, 1998, @Entertainment's churn rate was 15.25% due
primarily to the implementation of its current pricing strategy. This pricing
strategy commenced in January 1997 and is designed to increase revenue per
subscriber and to achieve real profit margin increases in U.S. dollar terms.
@Entertainment expects that it will continue to experience churn rates above
historical levels during the implementation of its current pricing strategy.
@Entertainment expects to offer promotional incentives in certain areas of the
country from time to time in connection with its marketing campaigns.
Although operators of small, poor quality cable networks often offer
services at lower prices than @Entertainment, @Entertainment 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.
Cable television subscribers are billed monthly in advance and, as is
customary in Poland, most of @Entertainment's customers pay their bills through
their local post office or bank. @Entertainment 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. @Entertainment'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. @Entertainment does not consider bad debt to be material to its
operations. @Entertainment's bad debt expense has historically averaged
approximately 1.3% of revenue.
SALES AND MARKETING
@Entertainment's sales and marketing process is divided into the following
four parts:
- 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 cooperative authorities rather than upon the issuance of an
operating area development permit for a region by the government. The
cooperative authorities make decisions on behalf of the residents, including
decisions as to the carriers of cable television. @Entertainment's operating
area development process begins with targeting a building with multiple
apartments, is followed by negotiations with the relevant cooperative authority,
and ultimately involves reaching an agreement with the cooperative authority to
allow construction and installation of the cable television network.
@Entertainment's strategy is to identify those geographic areas and housing
estates
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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 cooperative authority has been
reached and construction of the cable network infrastructure has been completed,
@Entertainment focuses its efforts on direct, door-to-door sales to individual
households. While @Entertainment utilizes advertising in a variety of media
(including television, radio, newspapers, magazines, cooperative 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 its marketing efforts. The
distribution of promotional materials (via direct mail, leaflets and door
hangers) begins several days in advance of the arrival of @Entertainment's sales
force. The materials provide for telephone and mail response, but are designed
so that the potential customer expects a direct sales visit. @Entertainment'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 @Entertainment 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, @Entertainment's
remarketing efforts focus on attracting new subscribers and selling additional
products and services, such as premium channels and stereo services, to existing
subscribers. Direct door-to-door remarketing sales are enhanced through
advertising on @Entertainment'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, @Entertainment has
introduced a quality of service generally not found in Polish consumer markets.
@Entertainment generally guarantees service within 24 hours of a subscriber
request. @Entertainment has established a customer service facility within the
call center for both the cable and D-DTH businesses. The call center provides
telemarketing and sales and service support and includes specialized billing
software with on-line real time access to customer accounts, designed to provide
better access to customer information and to improve customer service. The call
center is operational for cable customers in the Katowice regional cluster and
for all D-DTH customers and is expected to be operational for all cable
customers by the end of 1999. @Entertainment believes this will allow it to
offer a high level of customer service at relatively low cost to its cable
customers.
@Entertainment believes that its customer care program gives it a distinct
competitive advantage over other cable providers in the Polish market, has
contributed to @Entertainment's low churn rate and has been a primary motivation
for consumers to select @Entertainment as their cable television provider when
provided with a choice.
TECHNOLOGY AND INFRASTRUCTURE
@Entertainment believes the fiber-optic cable television networks that it
has constructed, which serve approximately 67% of its subscribers, are among the
most technologically advanced in Poland and are comparable to modern cable
television networks in the U.S. All of @Entertainment's networks that have been
constructed by @Entertainment 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.
@Entertainment'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 satellite
receivers and parts inventory required in the networks.
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@Entertainment uses fiber-optic and coaxial cables, electronic components and
connectors supplied by leading Western firms in its cable television networks.
@Entertainment's cable television networks, in most cases, use a combination
of fiber optic and coaxial cables in groupings of 2,000 homes. @Entertainment
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 @Entertainment 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. @Entertainment intends to introduce set-top
decoders for all premium service subscribers during 1999, allowing premium
channel signals to be encrypted for increased security.
@Entertainment's cable television networks were constructed with the
flexibility and capacity to be cost-effectively reconfigured. These networks
could be 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
@Entertainment decides to pursue such ancillary sources of revenue in the
future. @Entertainment's systems provide excess channel capacity and are
designed to maximize reliability. Most of @Entertainment's cable networks
currently have the ability to carry 40 to 70 television channels. @Entertainment
operates its systems at approximately 49% to 69% of channel/bandwidth capacity.
Two-way capability can be added to most of @Entertainment's networks at limited
cost to provide addressable and interactive services in the future. The cable
television networks constructed by @Entertainment meet or exceed the technical
standards established by Polish regulatory authorities, and @Entertainment's
policy is to upgrade as rapidly as possible substandard cable television
networks obtained in acquisitions. @Entertainment is considering teaming
arrangements with certain Western telecommunication companies in order to create
one or more consortia to bid on regional telephone licenses, utilizing excess
capacity from @Entertainment's cable networks.
@Entertainment has been able to avoid constructing its own underground
conduits in certain areas by entering into a series of agreements with regional
and local branches of the Polish national telephone company (known in the Polish
telecommunications industry as "TPSA") which permit @Entertainment to use TPSA's
conduit infrastructure for an indefinite period of time or for fixed periods up
to 20 years. @Entertainment 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 @Entertainment since they permit
@Entertainment 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. As of December 31, 1998, approximately 56.5% of
@Entertainment's cable television plant had been constructed utilizing
pre-existing conduits of TPSA. A substantial portion of @Entertainment's
contracts with TPSA permit termination by TPSA without penalty at any time
either immediately upon the occurrence of certain conditions or upon provision
of three to six months' notice without cause.
Generally speaking, TPSA may terminate a conduit agreement immediately (and
without penalty) if:
- @Entertainment does not have a valid permit from the Polish State Agency
of Radio Communications 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;
- @Entertainment's cable network serviced by the conduit does not meet the
technical specifications required by the Polish Communications Act of
1990;
- @Entertainment does not have a contract with the cooperative authority
allowing for the installation of the cable network; or
- @Entertainment does not pay the rent required under the conduit agreement.
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As of December 31, 1998, TPSA was legally entitled to terminate conduit
agreements covering approximately 74,000 or 8% of @Entertainment's cable
subscribers.
@Entertainment estimates that at the end of December 1998 it had over 4,378
kilometers of cable television plant constructed and that the fiber-optic
backbone of its networks was substantially complete. @Entertainment expects that
its future capital expenditures for the cable business will consist primarily of
capital needed for the incremental addition to its existing networks of new
buildings with multiple apartment units and cable television subscribers, for
building 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, @Entertainment's incremental build cost to add
an adjacent building with multiple apartments or additional subscribers in
buildings with multiple apartments to existing networks averages approximately
$200 per subscriber (subscribers in buildings with multiple apartments represent
more than 96% of @Entertainment's total subscribers). @Entertainment believes
that several primary factors contribute to its favorable cost structure. The
significant density of homes per kilometer of cable plant in @Entertainment's
core markets and @Entertainment's conduit agreements substantially reduce its
build costs. Moreover, @Entertainment believes that the size of its construction
program allows it to negotiate attractive construction labor contracts and
discounts on materials.
D-DTH
@Entertainment has expanded its distribution capacity with the launch of its
D-DTH broadcasting service for Poland, targeted at homes that are not
subscribers to @Entertainment's cable service. The programming provided is Wizja
TV. @Entertainment's multi-channel Polish-language D-DTH service, which was the
first D-DTH service available in Poland, is being broadcast to Poland from its
transmission facilities in Maidstone, U.K. As of December 31, 1998,
@Entertainment had sold to Philips' authorized retailers approximately 125,000
D-DTH packages, which included the rental of the D-DTH reception system,
installation and a one-year subscription to @Entertainment's D-DTH service. As
of December 31, 1998, Philips had sold and installed approximately 95,400 of
these packages to consumers.
D-DTH ROLL OUT STRATEGY
@Entertainment's D-DTH roll out strategy was to lease D-DTH reception
systems to up to 500,000 targeted initial subscribers. Subsequent to March 31,
1999, the Company began selling, instead of leasing, D-DTH reception systems to
consumers. @Entertainment will make D-DTH reception systems available to the
first 380,000 subscribers at promotional prices. This strategy is designed to
achieve high penetration of the Polish market. The launch of the D-DTH service
is supported by @Entertainment's development of Wizja TV, which @Entertainment
believes responds to the demand for high-quality Polish-language programming in
Poland.
@Entertainment broadcasts digital programming from its Maidstone facility
through its satellite transmission facilities to one of three transponders
leased by it on the Astra 1E and 1F satellites. These satellites then retransmit
the signals to the D-DTH reception systems of the Polish subscribers and to
@Entertainment's cable networks. In the future, @ Entertainment will also
transmit the signals to other Polish cable operators, if any, having
distribution agreements with @Entertainment.
@Entertainment believes that its multi-channel D-DTH service is among the
first digital television platforms launched in Europe. D-DTH systems use medium
or high-power satellites to deliver signals to satellite dish antennae at homes,
hotels and apartment buildings. Unlike locally transmitted signals from
multi-channel multi-point distribution systems ("MMDS"), which allow for a
one-way radio transmission of television channels over microwave frequencies
from a fixed station to multiple receiving facilities located at fixed points,
transmissions from D-DTH satellites can cover large land areas.
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The advantages of a D-DTH system are:
- A D-DTH system significantly decreases the cost of transmitting a channel,
because of its ability to transmit more channels from one transponder;
- Additional capacity available from digital compression enables
@Entertainment to offer a much wider range of programming, sports and film
channels, which @Entertainment believes will lead to increased demand for
its services;
- Digital technology also provides enhanced picture and sound quality and
allows interactive features, such as an electronic programming guide,
which is not available using A-DTH technology; and
- A D-DTH system allows @Entertainment to reach homes in the Polish market
that are not passed by @Entertainment's cable networks.
The disadvantages of D-DTH systems presently include:
- Limited ability to tailor local programming packages to serve different
geographic markets in Poland;
- The satellite dish must be able to "see" the satellite which limits the
system's ability to reach subscribers (although less than for MMDS
systems);
- Interference from atmospheric conditions and radio frequency noise on
earth; and
- Risk of losing a satellite.
D-DTH SERVICES AND FEES
@Entertainment began broadcasting to Poland from its transmission facilities
in Maidstone, U.K. and retransmitting Wizja TV across its cable networks on June
5, 1998, and on its D-DTH system on a full-scale basis on September 18, 1998.
For the channel-line up on Wizja TV, see the "Programming" section that follows.
@Entertainment expects to be able to offer an event pay per view service to
its D-DTH subscribers by late 1999. @Entertainment also expects to offer certain
recently released feature films and sports and other live events on such a
service.
@Entertainment expects that its D-DTH services will also include an
electronic programming guide, an interactive service which will allow
@Entertainment to communicate with subscribers with respect to movie, sports
event and channel promotions and subscriptions. In addition, this guide will be
linked to @Entertainment's subscriber magazine, "Twoja Wizja," which is
described in the "Programming" section that follows. The digital nature of
@Entertainment's D-DTH signals will also allow @Entertainment to offer stereo
audio channels to its subscribers in the future. @Entertainment believes that in
the future it will be able to provide its D-DTH customers with additional
value-added services, should @Entertainment decide to pursue such ancillary
sources of revenue in the future.
@Entertainment currently charges its D-DTH subscribers an up-front fee of
approximately $135 plus applicable taxes. This fee includes the D-DTH reception
system sale, installation, and a one year's subscription for all channels (other
than any premium channels). Subscribers to @Entertainment's premium channel pay
$5 per month for the HBO Poland service and prior to March 31, 1999 paid $1 per
month for Wizja 1. 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.
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SALES AND MARKETING
To promote the launch of Wizja TV on its D-DTH system, @Entertainment has
substantially completed a $20 million nationwide marketing campaign, which
@Entertainment believes is the largest single-year product launch expenditure to
date in Poland. The marketing campaign primarily utilizes terrestrial
television, press, radio and outdoor poster sites. @Entertainment's paid
advertising spots began on September 1, 1998 and @Entertainment launched its
D-DTH service on a full-scale basis on September 18, 1998, with an aim to
establishing a base of approximately 500,000 targeted initial subscribers.
@Entertainment 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 has agreed to supply @Entertainment with D-DTH reception systems for
up to 500,000 initial subscribers to @Entertainment's D-DTH service. Philips has
also agreed to distribute, install and service @Entertainment's D-DTH reception
systems through more than 1,200 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 used in @Entertainment's D-DTH service.
@Entertainment 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, @Entertainment has established a customer service
facility within the call center for both its cable and D-DTH businesses. The
call center provides telemarketing and sales and service support and includes
specialized billing software with on-line real time access to all D-DTH customer
accounts, designed to provide better access to customer information and to
improve customer service. @Entertainment believes the call center will allow it
to offer a high level of customer service at relatively low cost to its D-DTH
subscribers.
@Entertainment's D-DTH service targets homes that are not subscribers to its
cable television service. @Entertainment does not believe that there is much
incentive for @Entertainment's existing cable subscribers to switch from
@Entertainment's cable service to its 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 @Entertainment's D-DTH
service offers, at a monthly cost that will, in most cases, be comparable to
that of @Entertainment's D-DTH service and without the need for investing any
funds for installation of D-DTH reception systems. However, @Entertainment will
be disadvantaged to the extent that any existing cable subscribers switch to the
D-DTH service, particularly if they are subscribers who will receive D-DTH
reception systems at the promotional prices @Entertainment is now charging and
they do not substantially increase the amount of their monthly fees payable to
@Entertainment.
TECHNOLOGY AND INFRASTRUCTURE
@Entertainment's D-DTH service is 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 Maidstone, U.K. to geosynchronous satellites ("uplinked") 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
@Entertainment's D-DTH service include @Entertainment's own proprietary channels
and channels from third parties originating from a number of sources in Poland,
the U.K. and elsewhere. Most of the tailoring of programs for the local market
("localization") is undertaken by @Entertainment, which principally consists of
adding voiceovers or dubbing into Polish for @Entertainment's proprietary
channels on Wizja TV, occurs 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
are delivered in tape
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format, through a landline or will be backhauled (i.e., transmitted via
satellite or other medium) to @Entertainment's transmission facility in
Maidstone for broadcasting to Poland.
@Entertainment has a 5 year contract with British Telecommunications plc
("BT") for the provision and maintenance of uplink equipment at Maidstone. Other
than the BT uplink equipment, @Entertainment owns all the required broadcasting
equipment at its facility in Maidstone. @Entertainment's programming is
currently transmitted to @Entertainment's transponders on Astra satellites 1E
and 1F.
@Entertainment'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 @Entertainment to
its D-DTH service as subscribers. The signal is currently received by
@Entertainment's own cable networks, and will also be received by the cable
networks of other cable operators, if any, having distribution agreements with
@Entertainment. Once the D-DTH signal has been received at the cable networks,
the signal is transmitted by cable to those who have been connected by
@Entertainment to its cable service as subscribers or connected by such other
cable operators, if any, to their own cable systems.
Philips will initially provide the following critical components and
services used in @Entertainment's D-DTH satellite transmission system and will
be the primary point of contact for subscribers to @Entertainment's D-DTH
service:
- the Philips' digital integrated receiver decoders;
- a smartcard-based proprietary conditional access system which uses Philips
CryptoWorks-Registered Trademark- technology;
- a satellite receiving dish and related equipment;
- installation; and
- support services.
@Entertainment's agreement with Philips provides for the following:
- Philips will be the exclusive supplier of the first 500,000 D-DTH
reception systems in connection with the launch of @Entertainment's D-DTH
business in Poland.
- Philips has granted @Entertainment an exclusive license of its
CryptoWorks-Registered Trademark-technology in Poland for the term of the
agreement, which will terminate when @Entertainment 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 @Entertainment.
- Philips will not be able to distribute any other IRDs under the Philips'
trademark in Poland until December 31, 1999 or any earlier date on which
@Entertainment has secured 500,000 initial subscribers to its D-DTH
service in Poland. After such period @Entertainment 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. However, there can be no assurance that
@Entertainment will be able to secure such additional suppliers, if
necessary.
Any new D-DTH broadcaster wishing to commence the operation of an encrypted
pay television service within Poland that would access @Entertainment's set top
boxes 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 @Entertainment 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 @Entertainment for access to the installed encryption decoder base utilized
by @Entertainment.
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Transmissions using conditional access technology are encrypted prior to
being transmitted to satellites. The signal from the satellite is received by a
subscriber through an antenna and integrated receiver decoder, and is decrypted
via a smartcard inserted into a decoder, which is usually integrated with a
receiver into the integrated receiver decoder 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 analog direct-to-home satellite television
industries has been widely reported. To @Entertainment'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, @Entertainment will
take countermeasures, including over-the-air measures, and if necessary the
replacement of smartcards. Although @Entertainment 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 @Entertainment's D-DTH
system will remain effective.
@Entertainment believes that the Astra satellites,
CryptoWorks-Registered Trademark- encryption technology and the integrated
receiver decoder together constitute a reliable, end-to-end cost-effective D-DTH
system. However, certain other large European providers of D-DTH services have
selected different satellites, encryption technology and decoders. For the risks
involved if another satellite encryption technology or decoder becomes the
preferred standard in Poland, see "Risk Factors--We May Incur Significant Costs
and Lose Subscribers Due to Changes in Technology."
SATELLITES. @Entertainment currently broadcasts and expects to broadcast
all of its proprietary programming and that of most third party programmers from
its transmission facility in the U.K. by cable to an earth station transmitting
antenna, located at its Maidstone site. The uplink facility transmits
@Entertainment's programming signal via a transponder on an orbiting satellite
transponder to the cable system receiving antennae and also to D-DTH
subscribers' reception equipment throughout Poland. @Entertainment 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, @Entertainment entered into contracts with Societe Europeenne
des Satellites S.A. ("SES") for the lease of three transponders on two
satellites, Astra 1E and 1F. The leases for the one transponder on the Astra 1E
satellite and two transponders on the Astra 1F satellite will expire in 2007.
All three transponders are currently operational and available to
@Entertainment. 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 term of the contracts remaining after December 31,
1998. @Entertainment's transponder leases provide that @Entertainment's rights
are subject to termination in the event that SES's franchise is withdrawn by the
Luxembourg Government.
@Entertainment 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, @Entertainment'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. @Entertainment does not, however, have the right to pre-empt
other customers if its transponders stop
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working. A "protected customer" would have pre-emption rights if its
transponders stop working and its service would be moved on to the transponder
carrying a pre-emptible customer's service.
While @Entertainment 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,
@Entertainment's ability 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. Due to the
high cost of insurance policies relating to satellite operations, @Entertainment
does not insure against possible interruption of access to the transponders
leased by it for satellite transmission of its programming platform. For the
risks involved in the event of a failure of one or more of the transponders
leased by @Entertainment, see "Risk Factors--Our D-DTH Business Depends on Our
Ability to Broadcast Using Transponders in Satellites, Which Are Subject to
Significant Risks and Which We Have Not Insured."
PROGRAMMING
@Entertainment believes that there is 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 @Entertainment 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. @Entertainment 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. @Entertainment 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,
voiced-over or dubbed into Polish) and limited local broadcasting alternatives.
PROGRAMMING STRATEGY
@Entertainment's programming strategy is focused on the development and
acquisition of high-quality Polish-language programming. Its programming
strategy is based upon four elements.
<TABLE>
<S> <C>
- - ESTABLISH AND EXPAND
PROGRAMMING PACKAGE....... 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 @Entertainment, and 20 channels that
are produced by third parties, 11 of which are broadcast
under exclusive agreements for pay television in Poland.
@Entertainment expects to expand Wizja TV's channel line-up
to include additional basic and premium channels, including
@Entertainment's proprietary Wizja Sport channel, and
eventually to introduce tiered packages containing a variety
of combinations of 21 or more channels.
- - DEVELOP AND EXPAND
PROPRIETARY CHANNELS...... @Entertainment intends to develop and expand its sports
programming through Wizja Sport. In addition to developing
its own proprietary programming, @Entertainment has entered
into and intends to enter into joint ventures and other
similar arrangements with other programming companies.
- - CONTROL CONTENT........... @Entertainment believes that the programming on Wizja TV
will provide it with a significant advantage over
competitors, and therefore @Entertainment's strategy is to
secure exclusive rights to as much
</TABLE>
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<TABLE>
<S> <C>
high-quality Polish-language programming as is commercially
feasible. @Entertainment 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.
@Entertainment intends to continue to use exclusive
agreements, where practicable, in expanding the programming
available on Wizja TV.
- - USE PROGRAMMING TO DRIVE
DISTRIBUTION.............. @Entertainment intends to use its programming to increase
penetration of its cable distribution business. Wizja TV is
intended to be the primary selling point of @Entertainment's
D-DTH service. @Entertainment 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.
</TABLE>
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THE WIZJA TV PROGRAMMING PACKAGE
The Wizja TV channels offered to @Entertainment's D-DTH and cable
subscribers include the following:*
<TABLE>
<CAPTION>
CHANNEL DESCRIPTION LANGUAGE HOURS PER DAY TERMS OF DISTRIBUTION**
- --------------------- --------------------------- -------------------- -------------- ------------------------
<S> <C> <C> <C> <C>
Wizja 1 General entertainment Polish(1) 20 Proprietary channel
channel including movies, (Sunday to
series, exclusive sport Thursday)
and documentaries 24
(Friday and
Saturday)
Atomic TV Music Polish(1) 24 Proprietary channel
BET Music Polish/English(2) 12 Exclusive in Poland** -
on Jazz 5 year term
Wizja Pogoda Weather Channel Polish(1) 24 Proprietary channel
Twoja Wizja Programming Directory Polish(1) 8 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.
Cartoon Network Cartoons and other Polish/English(3) 18 Exclusive in Poland** -
programming 5 year term
Turner Classic Films and other programming Polish/English(5) 6 Exclusive in Poland** -
Movies(4) 5 year term
Fox Kids Poland Children's programming Polish(6) 14 Exclusive in Poland** -
5 year term
Hallmark Movies and Mini Series Polish(1) 24 Exclusive in Poland** -
Entertainment 5 year term
Channel
National Geographic Documentary Programming Polish/English(7) 12 Exclusive in Poland** -
Channel 5 year term
QuesTV Documentary programming Polish/English(8) 16 Exclusive in Poland** -
with themes of speed, 5 year term
action, and adventure
Romantica Channel Latin American romantic Polish(9) 12 Exclusive in Poland** -
series 5 year term
Travel Travel related and vacation Polish/English(10) 12 Exclusive in Poland** -
programming 5 year term
CNN International International news and English 24 Non-exclusive in Poland
feature programming - 5 year term
</TABLE>
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<TABLE>
<CAPTION>
CHANNEL DESCRIPTION LANGUAGE HOURS PER DAY TERMS OF DISTRIBUTION**
- --------------------- --------------------------- -------------------- -------------- ------------------------
<S> <C> <C> <C> <C>
MTV: Music Television Music and youth- oriented English 24 Exclusive D-DTH in
entertainment Poland.
Non-exclusive cable in
Poland-5-year term
Discovery Channel Documentary Programming Polish/English(12) 18 Exclusive D-DTH in
Poland
Animal Planet Documentary Programming Polish/English(12) 18 Exclusive D-DTH in
Poland
Eurosport Sports Programming Polish/English (13) at least 17 Non-exclusive D-DTH in
Poland-5-year term.
Wizja Le Cinema European Films Polish 12 Exclusive in Poland** -
5 year term.
E! Entertainment Entertainment Programming Polish 24 Exclusive in Poland** -
2 year term.(14)
TVN General entertainment Polish 24 Exclusive D-DTH in
Poland - 6 month term.
Polsat General entertainment Polish 24 Non-exclusive
D-DTH in Poland -- 1.5
year term.(15)
Polsat 2 General entertainment Polish 24 Non-exclusive
D-DTH in Poland -- 1.5
year term.(15)
</TABLE>
(1) @Entertainment is responsible for localizing programming into Polish.
(2) @Entertainment is responsible for localizing into Polish a level of the
programming determined by @Entertainment.
(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 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 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
endeavors 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) The channel supplier is contractually required to use its reasonable
endeavors to localize the majority of programming into Polish and the level
of localization will continue to grow in 1999.
(13) The channel supplier is contractually required to localize 70% of
programming content into Polish by June 1, 1999 and to localize 80% of
programming content into Polish by January 1, 2000, subject to being able
to clear the Polish language rights.
(14) Term of contract is eligible for extension to five years based on the
achievement of certain viewing figures.
(15) Subject to certain regulatory approvals.
* 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. @Entertainment 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.
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@Entertainment has also entered into long-term exclusive agreements to
broadcast to Poland live coverage of certain sports events, including the
following:
- certain of the Polish national soccer team's games;
- games of Warsaw's Legia Daewoo, a Polish soccer club;
- 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;
- Speedway Grand Prix World Championships;
- 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.
These events have been initially carried on Wizja 1 or Twoja Wizja, and they
will be carried on Wizja Sport when it is established. When established, Wizja
Sport will initially provide approximately 12 hours of local and international
sporting events per week. @Entertainment 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 late 1999.
@Entertainment's ability to broadcast certain of these sporting events on an
exclusive basis may be limited by pending regulatory changes.
Several of the sports rights contracts give @Entertainment 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 @Entertainment 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 or highlights basis. @Entertainment is currently in negotiations with
other sports rights holders to purchase the rights to additional local and
international sports events.
@Entertainment has purchased exclusive rights from third parties for
programming on 11 of the current 24 channels on Wizja TV. In some of the
agreements, however, the channel supplier may terminate the agreement and/or
eliminate the exclusivity rights if @Entertainment 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 @Entertainment in determining
program tiering in the future, and also include provisions whereby
@Entertainment 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. On December 31, 1998,
@Entertainment was committed to pay approximately $214.3 million in guaranteed
minimum payments over the next seven years in respect of broadcasting and
programming agreements, of which approximately $37.2 million was committed
through the end of 1999. In addition, @Entertainment is continuing to negotiate
additional agreements with channel and program suppliers and sports rights
organizations, which agreements if consummated may require @Entertainment to pay
additional guaranteed minimum payments and/or payments at the time of execution.
In most of @Entertainment'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, @Entertainment 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.
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In addition, some of the agreements impose certain limitations, including:
- the channel must be received by 100% of subscribers to @Entertainment's
D-DTH service and by all "basic package" subscribers of @Entertainment's
cable system or by most of its cable subscribers;
- 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;
- the programming @Entertainment may purchase for Wizja TV may be
restricted;
- distribution of other channels as part of @Entertainment'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 @Entertainment from entering into
agreements with other potential channel suppliers);
- suppliers of programming to a channel supplier may require @Entertainment
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 @Entertainment's existing agreement with the channel supplier;
- @Entertainment may be required to install encryption decoder-based
technology in homes of cable subscribers receiving premium services; and
- if @Entertainment undertakes certain investments or enters into certain
transactions, certain minimum guarantees payable under the agreement would
increase and @Entertainment would lose certain rights.
As opportunities permit, @Entertainment intends to expand the channel
offerings on Wizja TV. @Entertainment is considering adding more thematic
channels to its programming package. These channels may be based on themes such
as sports, movies, news, weather, lifestyle, gameshows or childrens'
programming. @Entertainment expects it will own and develop certain of these
additional thematic channels.
PROPRIETARY PROGRAMMING
Wizja TV contains four channels, Atomic TV, Wizja 1, Wizja Pogoda and Twoja
Wizja, that are owned and operated by @Entertainment. @Entertainment intends to
create additional proprietary channels, including Wizja Sport, to be added to
the Wizja TV line-up. In addition, @Entertainment has established and intends to
continue to establish entities to engage in the production of programming either
to be included on @Entertainment's proprietary channels, or to be licensed to
@Entertainment for distribution as part of the Wizja TV line-up.
@Entertainment has established entities to engage in the development and
production of Polish-language thematic television channels. Those entities plan
to develop programming designed to drive subscriber growth on @Entertainment's
cable television networks and on its D-DTH system and increase revenue per cable
subscriber. In December 1996, @Entertainment 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, an independent production
company. In February and March 1998, @Entertainment acquired the remaining 55%
interest in GZM from the GZM stockholders. GZM's 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 @Entertainment and
other cable operators. Atomic TV is currently distributed to more than 900,000
cable subcribers, and @Entertainment believes that based on distribution it is
the leading cable television channel in the Polish market.
In addition, @Entertainment 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 intends to
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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. A
description of @Entertainment's sports programming is set forth in "Business--
Programming--The Wizja TV Programming Package."
@Entertainment has entered into additional program license agreements for
high-quality programming for exhibition on Wizja 1. These agreements are with
leading international film production companies for certain television rights in
Poland to films, mini-series and documentaries. @Entertainment is also acquiring
local Polish programming and is in negotiations to purchase rights for other
high-quality programming. It is also investing in new Polish productions.
In November 1997, @Entertainment 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.
@Entertainment believes that the combination of its television expertise and
Twoj Styl's publishing experience will result in the production of high quality
lifestyle television programming, targeting primarily female audiences.
In February 1998, @Entertainment 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 expired in February 1999 and @Entertainment
does not intend to extend this option.
In late February 1999, @Entertainment purchased for approximately $1.8
million a 30% interest in Mazowiecki Klub Sportowy Sportowa S.A., a joint stock
company which owns Hoop Pekaes Pruszkow, a Polish basketball team. In connection
with this purchase @Entertainment has agreed to act as a sponsor for Hoop Pekaes
Pruszkow.
As opportunities arise in the rapidly developing pay television market in
Poland, @Entertainment intends to consider adding more thematic channels to its
programming package. In particular, @Entertainment 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.
@Entertainment will use Wizja 1 as an anchor channel to introduce entertainment
and sports programming to the Polish market. Concepts that are well received may
become the basis for new channels. For example, Atomic TV, which debuted on a
proprietary cable channel in the spring of 1996, generated substantial cable
television viewer and advertising interest, and was offered as a separate
channel in April 1997.
In certain instances, @Entertainment has acquired equity interests in
programming produced by third parties and included on Wizja TV. Such an equity
investment allows @Entertainment access to the programming in exchange for
@Entertainment sharing the costs incurred in the creation of the Polish-language
version of the programming. For example, @Entertainment purchased an equity
interest in Fox Kids Poland, a children's entertainment channel aimed at an
audience in the 4 to 12 age group. @Entertainment 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. @Entertainment has introduced its own premium
channel as well as premium channels supplied by third parties. On July 1, 1998,
@Entertainment introduced Wizja 1 as a premium channel, and as of April 1, 1999
reclassified it as a basic channel. @Entertainment has also introduced a
Polish-language version of premium movie channels to its cable subscribers for
an additional monthly fee. Currently, two premium movie channels are available
in Poland, Canal+ and the HBO Poland service. Both feature movies and also
carry, or will carry, live sports and other entertainment. @Entertainment has
distributed Canal+ on a non-exclusive basis on its cable networks since entering
into a preliminary distribution agreement with Canal+ in October 1995.
@Entertainment currently has approximately 7,800 subscribers to the Canal+
service.
@Entertainment 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 premium
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movie channel owned in part by Home Box Office. 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 @Entertainment's cable network in
September 1996. To date, the service has generated significant subscriber
interest. As of December 31, 1998, the service had achieved a penetration rate
of 5.2% across @Entertainment's cable networks. @Entertainment began
distribution of the HBO Poland service in Warsaw in April and in Gdansk and
Krakow in May 1997, and rolled out this service to most of @Entertainment's
remaining cable systems by the end of 1997. The HBO Poland service was launched
on @Entertainment's D-DTH system in September 1998.
ADVERTISING. @Entertainment expects to attract significant advertising to
its channels as part of the Polish television advertising market, which
@Entertainment 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. @Entertainment believes that this market is dominated by TVP and Polsat.
@Entertainment expects that its channels will provide advertisers new and better
targeted outlets in Polish television. In particular, @Entertainment believes
that its channels will be attractive to advertisers because of the relatively
affluent demographic profile of @Entertainment's anticipated subscribers, the
focus of @Entertainment on large, high economic growth areas, and the
opportunity to target viewers of particular thematic channels with
advertisements for goods and services. Furthermore, @Entertainment'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, @Entertainment 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. @Entertainment is responsible for selling the advertising for most of
the channels. This arrangement will enable @Entertainment 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, @Entertainment 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
@Entertainment to implement a comprehensive promotional strategy reinforcing the
Wizja TV brand. In addition, @Entertainment 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.
In October 1998, @Entertainment established At Media Sp. z o.o. in Poland, a
wholly owned subsidiary, to develop advertising opportunities for the Wizja TV
programming package. At Media currently offers commercial airtime on 13 of
@Entertainment's 24 channels on Wizja TV to major advertising agencies and
advertisers in the Polish market. At Media also offers advertising spots in its
monthly subscriber magazine "Twoja Wizja". At Media is also in the process of
developing a database of Wizja TV subscribers, which is being marketed to major
advertisers and advertising agencies.
COMPETITION
The multi-channel pay television industry in Poland has been, and is
expected to remain, highly competitive. @Entertainment competes with other cable
television operators, as well as with companies employing numerous other methods
of delivering television signals to subscribers. The extent to which
@Entertainment's multi-channel pay television services are competitive with
alternative delivery systems depends, in part, upon @Entertainment's ability to
provide a greater variety of Polish-language programming at a more reasonable
price than the programming and prices available through alternative delivery
systems.
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 this type of
competition depends upon, among other things, the price, variety and quality of
programming offered by pay television services and the popularity of television
itself.
CABLE TELEVISION. In the cable television industry, @Entertainment believes
that competition for subscribers is primarily based on price, program offerings,
customer service, and quality and reliability of cable networks.
Operators of small cable networks, which are active throughout Poland, pose
a competitive threat to @Entertainment because they often incur lower capital
expenditures and operating costs and therefore have the ability to charge lower
fees to subscribers than does @Entertainment. While these operators often do not
meet the technical standards for cable systems under Polish law, enforcement of
regulations governing technical standards has historically been poor. Regardless
of the enforcement of these laws and regulations, @Entertainment expects that
operators of small cable networks will continue to remain a competitive force in
Poland.
In addition, certain of @Entertainment'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 @Entertainment. The largest competitors of
@Entertainment in Poland include Bresnan Communications, which owns at least
three cable systems (including Aster City Cable Sp. z o.o.) and Multimedia
Polska S.A., a Polish entity. In addition, @Entertainment 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.
@Entertainment understands that Bresnan International Partners (Poland) LP
has entered into a letter of intent with Electrim S.A., a diversified
conglomerate in Poland, to sell its cable operations.
@Entertainment's cable television business also competes with companies
employing other methods of delivering television signals to the subscribers,
such as terrestrial broadcast television signals and analog direct-to-home
("A-DTH") television services, and with a multi-channel multi-point distribution
system and D-DTH services (including @Entertainment's own D-DTH service).
D-DTH. @Entertainment'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 multi-channel multi-point distribution system
services. TKP, which is partially owned by Canal+ S.A., currently offers a
single channel Polish-language pay television service (including A-DTH). TKP, in
conjunction with other Polish broadcasting entities such as Aster City Cable (a
Warsaw-based cable television operator), launched a multi-channel D-DTH service
in Poland in November 1998 under the name Cyfra+. Polsat S.A. and Polskie Media
S.A. have withdrawn from their participation in Cyfra+, and Polsat S.A. intends
to create its own thematic channels.
@Entertainment cannot predict whether other European or Polish broadcasters,
such as BSkyB, Bertelsmann, Kirch or Polsat, will choose to enter the Polish
D-DTH market. Some of @Entertainment'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
@Entertainment's current and potential competitors have significantly greater
financial, managerial and operational resources and more experience in the DTH
business than @Entertainment.
PROGRAMMING. In the programming business, @Entertainment competes with
other television companies, both free (broadcast) television 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.
@Entertainment also competes with other programming creators for the hiring of
personnel with creative and production talent for the development of
programming. If @Entertainment is precluded from creating or obtaining
programming due to exclusive agreements entered into between programming
creators and @Entertainment's competitors, @Entertainment will face difficulty
in creating or acquiring sufficient
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high-quality programming to attract and retain subscribers and commercial
advertising customers for its cable and D-DTH services. If @Entertainment cannot
negotiate exclusive agreements with suppliers of its programming or these
agreements become unenforceable, @Entertainment will not be able to preclude its
competitors from obtaining access to such programming. If @Entertainment's
competitors have access to the same programming as @Entertainment,
@Entertainment's programming line-up will be less unique and less attractive to
subscribers.
PROPERTIES
As of December 31, 1998, @Entertainment owned equipment used for its cable
television business, including 108 satellite receivers for cable networks, and
approximately 4,378 kilometers of cable plant. @Entertainment has approximately
210 lease agreements for offices, storage spaces and land adjacent to the
buildings. The total area leased amounts to approximately 30,100 square meters
(most of which is land adjacent to buildings). The areas leased by
@Entertainment range from approximately 10 square meters up to more than 1,800
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.
@Entertainment has entered into conduit leases with TPSA (the Polish
national telephone company) and, in certain cases, with other entities. The
majority of the TPSA leases require @Entertainment to bear the costs of the
maintenance of the cable. @Entertainment 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
@Entertainment'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
@Entertainment 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. For a list of the reasons for which TPSA can terminate a
conduit agreement, the proportion of @Entertainment's cable subscribers serviced
by conduits leases subject to immediate termination and the consequences to
@Entertainment of the loss of those conduit leases, see "Risk
Factors--Termination of Our Conduit Agreements with TPSA Could Result in the
Loss of Our Permits, the Termination of Agreements with Cooperative Authorities
and Programmers, and an Inability to Service Our Customers" and "Business--Cable
Operations--Technology and Infrastructure."
@Entertainment believes that its existing owned properties, lease agreements
and conduit agreements are adequate for purposes of @Entertainment's cable
television operations, although additional space and conduits will be needed in
the future if @Entertainment acquires other cable television networks.
In connection with the establishment of its D-DTH service and the
development of its programming business, @Entertainment has leased office space
and premises providing satellite receiving (to receive programs from suppliers),
production, post-production and program packaging facilities. This space is
located in Maidstone, U.K..
@Entertainment believes that its existing owned properties, lease agreements
and conduit agreements are adequate for @Entertainment's D-DTH and programming
operations, although additional space may be needed in the future for
@Entertainment's programming production activities.
TRADEMARKS
@Entertainment, 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
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of PTK trademarks. Also, numerous trademark applications have been filed in
Poland for the various Wizja trademarks, including but not limited to Atomic TV,
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.
EMPLOYEES
On December 31, 1998, @Entertainment had approximately 1,385 permanent
full-time employees and approximately 49 part-time employees. In addition, as of
that date @Entertainment employed approximately 91 salesmen who received both
commissions and a nominal salary, and from time to time @Entertainment 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, @Entertainment expects to hire 56 more employees by the end of 1999,
the majority of whom will be administrative, post-production and technical
personnel located at @Entertainment's facility in the U.K. and customer service
representatives in the call center in Poland. @Entertainment expects that
certain functions, such as satellite transmission and receiving and program
production, will be performed by employees of third parties pursuant to medium-
and long-term service agreements with @Entertainment. @Entertainment believes
that its relations with its employees are good.
LEGAL PROCEEDINGS
@Entertainment is involved in litigation from time to time in the ordinary
course of business. In management's opinion, the litigation in which
@Entertainment is currently involved, individually and in the aggregate, is not
material to @Entertainment's business, financial condition or results of
operations.
Two of @Entertainment'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 HBO television programming in Poland
without a license from the Polish National Radio and Television Council as
required by the Polish 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 Polish National Radio and Television
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 Polish National Radio and
Television 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. @Entertainment does not believe that the lawsuit will have a
material adverse effect on its business operations.
On April 17, 1998, @Entertainment signed a letter of intent with Telewizyjna
Korporacja Partycypacyjna S.A. ("TKP") and the shareholders of TKP, namely Canal
+ S.A., Agora S.A., and PolCom Invest S.A., which provided for bringing together
@Entertainment'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. For the general terms of the letter of intent, you should
read the "Recent Developments" section at the beginning of the "Business"
section. The letter of intent contained a standstill provision whereby neither
@Entertainment 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,
@Entertainment 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 to and executed by the parties by
the date set forth in the letter of intent (the "signature date"). Therefore,
@Entertainment terminated the letter of intent on
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June 1, 1998. TKP and its shareholders have informed @Entertainment that they
believe @Entertainment did not have the right to terminate the letter of intent.
Under the terms of the letter of intent, TKP is obligated to pay
@Entertainment 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 @Entertainment's breach of any of
its obligations under the letter of intent. If there was any such breach by
@Entertainment, @Entertainment 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 @Entertainment a
total of $10 million (including the $5 million break-up fee). In the event that
TKP fails to pay @Entertainment any of the above-referenced amounts owed to
@Entertainment, TKP's shareholders are responsible for the payment of such
amounts.
@Entertainment has demanded TKP to pay @Entertainment the $5 million
break-up fee as a result of the failure to execute the definitive agreements by
the signature date. While @Entertainment 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
the arbitration proceedings TKP and its shareholders contend that @Entertainment
breached the letter of intent, that such breach was the cause of the parties'
failure to agree and execute the definitive agreements, and that @Entertainment
is therefore liable for $10 million in damages under the letter of intent. In
its response @Entertainment denies these allegations and claims that TKP is
liable for at least $15 million in damages pursuant to the letter of intent.
This $15 million figure is composed of a claim for a $5 million break-up fee, $5
million in damages due to the claim that TKP and its shareholders breached the
letter of intent, thereby causing the parties' failure to agree and execute the
definitive agreements, and at least $5 million as an indemnification for
liabilities incurred by @Entertainment as a result of certain actions taken with
respect to assets to be acquired or contracts to be assumed by TKP.
@Entertainment does not believe that the arbitration proceedings will have a
material adverse effect on @Entertainment's business, financial condition or
results of operations.
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REGULATION
We are subject to regulation in Poland, the U.K. and the European Union.
POLAND
GENERAL
The operation of cable and digital satellite direct-to-home broadcasting
("D-DTH") television systems in Poland is regulated under the Polish
Communications Act of 1990 (the "Communications Act") and the Polish Radio and
Television Act of 1992 (the "Television Act"). These are regulated by:
- The Polish Minister of Communications;
- The Polish State Agency of Radio Communications ("PAR"); and
- The Polish National Radio and Television Council (the "Council").
Cable television operators in Poland are required to obtain permits from PAR
to install and operate cable television systems and must register certain
programming that they transmit over their networks with the Council.
In contrast to cable television regulatory schemes in the U.S. and in
certain other Western nations, neither the Minister of Communications nor PAR
currently has the authority to regulate the rates charged by operators of cable
television and D-DTH services. However, excessive rates could be challenged by
the Polish 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 Law on Copyright and Neighboring Rights of 1994
(the "Copyright Act") which provides intellectual property rights protection to
authors and producers of programming. Under the terms of the Television Act,
broadcasters in Poland are regulated by, and must obtain a broadcasting license
from, the Council.
Because our D-DTH service was the first D-DTH service available in Poland,
there are likely to be issues of first impression not currently addressed under
Polish law with respect to certain aspects of our 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.
COMMUNICATIONS ACT
PERMITS. The Communications Act and the required permits issued by PAR set
forth the terms and conditions for providing cable television services,
including:
- the terms of the permits;
- the area covered by the permits;
- technological requirements for cable television networks; and
- restrictions on ownership of cable television operators.
If a cable operator breaches the terms of its permits or the provisions of
the Communications Act, or if such operator 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 cable 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.
FOREIGN OWNERSHIP RESTRICTIONS. The Communications Act and applicable
Polish regulatory restrictions provide that permits may only be issued to and
held by Polish citizens, 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
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be comprised of Polish citizens residing in Poland. These restrictions do not
apply to any permits issued prior to July 7, 1995.
OUR PERMITS AND NEW CORPORATE ORGANIZATIONAL STRUCTURE. Prior to the
creation of PAR and the permit system, one of our subsidiaries, Polska Telewizja
Kablowa S.A. ("PTK S.A."), received a license to operate cable television
systems in Warsaw, Krakow and the areas surrounding these cities under the
Polish Foreign Commercial Activity Act.
To comply with the foreign ownership requirements discussed above, we
created a new entity, Polska Telewizja Kablowa Operator Sp. z o.o. ("PTK
Operator"), which does and will operate our new or existing cable networks whose
permits are subject to the foreign ownership restrictions discussed above. Our
operating subsidiary Poland Communications Inc. ("PCI") will hold a 49%
ownership stake in PTK Operator while the remaining 51% will be held by a Polish
entity. PCI will, in turn, hold 49% of the Polish entity, and the remaining 51%
interest in the Polish entity is expected to be owned by a Polish financial
company. In the case of existing cable networks not covered by permits or the
acquisition or construction of cable networks not covered by permits, we intend
to own, through one or more of our subsidiaries, all of the cable network assets
and are leasing or intend to lease the assets to PTK Operator, which does and
will operate the networks. In this arrangement, PTK Operator does and will hold
the permits to operate the cable networks, receive all of the revenues from
subscribers, pay all operating expenses, and through the lease arrangements pay
fair market rental fees. We believe that this ownership and operating structure
complies with the requirements of Polish law. PAR has granted several permits to
us and our competitors, based on the lease of assets, for networks using an
ownership and operating structure substantially similar to the one described
above.
The following chart outlines the organizational structure that we are
currently implementing.
[Chart shows our ownership in certain of our principal subsidiaries in our
D-DTH, programming, and cable businesses. D-DTH: We own 100% of AT Entertainment
Limited 100% of Wizja TV Sp. z o.o. and 100% of At Media Sp. z o.o. PROGRAMMING:
We own 100% of Sereke Holding B.V., 50% of WPTS Sp. z o.o., 100% of Ground Zero
Media Sp. z o.o., and 100% of @Entertainment Programming, Inc. CABLE: We own
100% of Poland Communications, Inc. PCI owns 92.3% of Polska Telewizja Kablowa
S.A., and has an ownership interest in other cable subsidiaries. PCI will own
49% of Cable Television Newco (in formation) and 49% of PTK Operator Sp. z o.o.
('PTK Operator') (structure to be implemented).]
* Certain of the cable television operating subsidiaries are owned directly by
Poland Cablevision (Netherlands) B.V., of which 92.3% is owned by Poland
Communications, Inc., our major operating subsidiary.
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Specifically, our subsidiaries have received approximately 106 permits from
PAR, covering approximately 674,200 of our approximately 738,400 basic and
intermediate subscribers at December 31, 1998, including approximately 11,701
subscribers for whom our permits are deemed extended under Polish law pending
PAR's response to our permit renewal applications. However, certain of our
subsidiaries do not have valid permits covering certain of the areas in which we
operate cable networks. Of the approximately 64,200 basic and intermediate
subscribers at December 31, 1998 located in areas for which our subsidiaries do
not currently have valid permits, approximately 78% 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 cooperative authorities and the upgrade of
the acquired network to meet technical standards where necessary and satisfying
foreign ownership limitations), and approximately 22% are located in areas
serviced by networks for which our subsidiaries have permit applications
pending. These subsidiaries of ours have 9 permit applications pending. There
can be no assurance that PAR will issue any or all of the permits for which we
have applied.
We may be subject to penalties if PAR or other Polish regulatory authorities
determine that all or part of our ownership and operating structure violates
Polish regulatory restrictions on foreign ownership. We would also be subject to
penalties if PAR chooses to take action against us for operating cable
television networks in areas not covered by valid permits.
Any such actions by PAR or other Polish regulatory authorities would have a
material adverse effect on our business, financial condition and results of
operations.
TELEVISION ACT
THE POLISH NATIONAL RADIO AND TELEVISION 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.
REGISTRATION OF PROGRAMMING. Under the Television Act, cable television
operators must register each channel and the programming which will be aired on
that channel with the Chairman of the Council prior to transmission. In general,
the Chairman of the Council will refuse registration of programming if:
- the applicant is not legally entitled to use the cable network over which
the programming will be distributed (i.e., does not have a PAR permit
covering the network);
- 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
- the transmission of the programming over the cable network would violate
the Television Act or other provisions of applicable Polish law.
Our subsidiaries 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. The Chairman of the Council may revoke the
registration of any of our programming, or may not register all additional
programming that we desire to transmit over our networks. In addition, the
Council may take action regarding unregistered programming that we transmit over
cable networks for which we do not yet have PAR permits. Such actions could
include the levying of monetary fines against us, and the seizure of equipment
involved in transmitting such unregistered programming as well as criminal
sanctions against our management. These actions could have a material adverse
effect on our business, financial condition and results of operations.
RESTRICTIONS ON FOREIGN OWNERSHIP OF POLISH 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%
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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 company holding a
broadcasting license must be comprised of Polish citizens residing in Poland.
Companies that engage in broadcasting in Poland are required to obtain a
broadcasting license from the Chairman of the Council under the Television Act.
The Council may revoke a broadcasting license for, among other things:
- violations of the Television Act;
- violations of the terms of the broadcasting license; or
- violations of restrictions on foreign ownership of broadcasters.
If the Polish regulatory authorities were to conclude that our ownership or
distribution structure is not in compliance with Poland's regulatory
restrictions on foreign ownership, we could be forced to incur significant costs
in order to bring our ownership structure and distribution system into
compliance with the applicable regulations and we may be forced to dispose of
our ownership interests in various entities. These regulatory restrictions may
materially adversely affect our ability to enter into relationships with other
entities that produce, broadcast and distribute programming in Poland, which in
turn would have a material adverse effect on our business, results of operations
and financial condition.
REQUIREMENTS CONCERNING PROGRAMS BROADCAST FROM OUTSIDE OF POLAND AND THEIR
POSSIBLE IMPACT ON US. 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
transmission to the satellite for the broadcasting of such program is made by a
foreign broadcaster from outside of Poland. We believe that the Television Act
does not apply to such broadcasting and that such activity is not subject to
Polish broadcasting requirements. A subsidiary of Canal+ has filed suit against
HBO Polska Sp. z o.o. and certain Polish cable operators (including our
subsidiaries) alleging violations of the Television Act. For more information on
this proceeding, you should read "Business--Legal Proceedings."
We have established and intend to continue to establish entities to engage
in the development and production of Polish-language thematic television
programming outside of Poland. While all of the content and programs which we
distribute across our cable networks and our D-DTH system are distributed via
satellite systems which are located outside of Poland, much of the programming
is produced or assembled entirely in Poland. We believe that the ownership
structure of our entities as well as the operating strategy discussed above, are
not subject to Poland's regulatory restrictions on foreign ownership, licencing
requirements, restrictions and regulations on the operation of cable networks
and the broadcasting of programming.
We could become subject to significantly increased regulations and
restrictions with respect to our business in the event that the Polish
regulatory authorities were to:
- determine that Polish regulations apply to the satellite broadcasting of a
program directed at a Polish audience, if the transmission is made by a
foreign broadcaster from outside of Poland;
- determine that the ownership and operation structure that we have
implemented with respect to the development, production and transmission
of programming across our cable networks and our D-DTH system does not
comply with applicable regulations regarding the ownership and operation
of Polish broadcasters and cable operators;
- determine that an entity which produces or assembles programming entirely
in Poland, and which provides such programming to a third-party for
transmission from abroad, is a broadcaster for purposes of the Television
Act;
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- undertake to regulate the D-DTH market in general or by attempting to
impose standards on encryption technology or integrated reception systems;
- adopt regulations specifying requirements for Polish or European content
of programs distributed by non-Polish broadcasters through cable networks
or D-DTH systems in Poland; or if
- the 1989 European Convention on Transfrontier Television is changed so
that Polish regulatory authorities would be able to waive the protection
of freedom of reception of programs broadcast from outside of Poland by
foreign broadcasters.
Such a determination or determinations could require us to:
- secure additional licences from the Chairman of the Council and permits
from PAR;
- modify the nature and content of our programming;
- pay fines or other penalties for lack of compliance with these
regulations; and
- comply with Polish regulations governing the production and transmission
of programming across cable networks and across a D-DTH system.
The burden of complying with any such future regulations or any failure to
so comply could have a material adverse effect on our business, results of
operations and financial conditions.
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 Polish Copyright Act, which governs
the 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"), 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 collective rights of organizations such as ZAIKS and ZASP and
the individual cable television operator or D-DTH operator. Most of our cable
subsidiaries operate under a contract with ZASP and all of our cable
subsidiaries operate under a contract with ZAIKS. In the event that a cable or
D-DTH operator transmits programming in violation of a Polish copyright, either
the copyright holder or the collective rights organization which the copyright
holder is a member of may sue the cable or D-DTH operator for an injunction
preventing further violations or an accounting for profits or damages. 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" for a discussion of the penalties and consequences
associated with violations of the Communications Act and of a television
operator's permits.
PROTECTION OF RIGHTS OF FOREIGN AUTHORS AND PRODUCERS OF
PROGRAMMING. Foreign authors of programming receive protection under the
Copyright Act for programming that is either:
- originally published in Poland;
- originally published simultaneously in Poland and abroad; or
- originally published in Polish-language form.
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In addition, foreign authors of programming receive Polish copyright
protection under the terms of the Berne Convention of 1886 as amended in Paris
in 1971 (the "Berne Convention"), which was adopted by Poland in 1994.
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. We currently make copyright payments to foreign programmers requiring
these types of payments, such as CNN, Eurosport and the Cartoon Network.
ANTI-MONOPOLY ACT
Competition in Poland is governed by the Anti-Monopoly Act. The
Anti-Monopoly Act established the Anti-Monopoly Office which is responsible for
the detection and regulation of monopolistic and other anti-competitive
practices. The current Polish anti-monopoly laws with respect to the cable,
D-DTH and programming industries are not well established, and the Anti-Monopoly
Office has not articulated comprehensive standards that may be applied in an
antitrust review in such industries. In general, the Anti-Monopoly Act prohibits
such anti-competitive arrangements and practices as:
- monopolistic agreements;
- abuse of dominant market position;
- price-fixing arrangements;
- division of market arrangements; and
- creation of market entry barriers.
If detected, the Anti-Monopoly Office may deem agreements which employ such
practices as null and void. A finding by the Anti-Monopoly Office that our past,
present or future operations, agreements or strategic actions constituted
violations of the anti-monopoly laws could adversely impact our business,
strategy, financial condition and results of operations.
EXCLUSIVE PROGRAMMING AGREEMENTS. An important factor in determining the
commercial value of programming which is distributed by a cable or D-DTH
operator, is whether such programming is widely available or if such programming
is only available on a limited or exclusive basis. Many of the programming
agreements that we have entered into for our cable networks and our D-DTH
service contain exclusivity clauses which restrict or prohibit the provider of
such programming from providing such programming to other cable or D-DTH
operators. Although such exclusivity clauses are not specifically 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. A decision by the Anti-Monopoly Office
to deem one or more of these programming agreements as void due to the fact that
it contains an illegal exclusivity clause could have a material adverse effect
on our business and financial results in that such a decision would potentially
reduce the commercial value of these contracts and could reduce the consumer
appeal of the programming offered on our cable networks and our D-DTH system.
MARKET DOMINANCE. Although the Anti-Monopoly Act does not preclude an
enterprise from occupying a dominant market position, any activities by such
enterprise are subject to detailed scrutiny by the Anti-Monopoly Office. Market
dominance is often defined as a company's ability to act independently of
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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. The Anti-Monopoly
Office has been granted the power to review a company's past and present
activities, including its pricing policies, for potential anti-competitive
behavior.
PRE-NOTIFICATION OF TRANSACTIONS. The Anti-Monopoly Act requires parties to
certain types of transactions to notify the Anti-Monopoly Office prior to the
consummation of the proposed transaction. 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. Sanctions for failure to notify the Anti-Monopoly Office include the
imposition of fines on parties to the transaction at issue. We may be required
to obtain the Anti-Monopoly Office's approval for future acquisitions and
dispositions, but the Anti-Monopoly Office might not approve such transactions.
RECENT ANTI-MONOPOLY OFFICE FINDINGS WITH RESPECT TO OUR COMPANY AND OUR
SUBSIDIARIES. From time to time, we receive inquiries from and are subject to
review by various divisions of the Anti-Monopoly Office. The Anti-Monopoly
Office recently issued a decision that PCI, our major cable operating
subsidiary, 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
a different frequency. A number of PCI's subscribers, whose television sets are
not equipped to receive the new frequency, received several different channels
to replace the channels which had been moved. We appealed both the finding of
dominance and the finding that PCI acted improperly by moving certain channels
to another frequency. The Anti-Monopoly Court modified the Anti-Monopoly
Office's decision by ruling that PCI had abused its dominant position by moving
certain channels to the new frequency without termination of its agreements with
subscribers whose television sets are not equipped to receive the new frequency.
The Anti-Monopoly Court did not impose a fine on us or our subsidiaries. We
estimate that less than 1% of our subscribers in the area under review have such
television sets and would be affected by the ruling if, in the future, we find
it necessary for technical reasons to move channels to another frequency. We are
appealing both the finding of dominance and the finding that we must terminate
some of our agreements with certain subscribers before moving channels to
another frequency.
In another market, the Anti-Monopoly Office recently issued a decision that
PCI had achieved a dominant position and abused that dominant position by: (1)
failing to create a uniform system for customer complaints, (2) increasing rates
without providing subscribers a detailed basis for the price increases, and (3)
changing the programming line-up without sufficient notice to subscribers. The
Anti-Monopoly Office did not impose a fine in connection with its decision. We
are appealing both the finding of dominance and the finding that we acted
improperly in our relations with subscribers.
In another market, the Anti-Monopoly Office recently issued a decision that
PCI had achieved a dominant position and abused that dominant position by
issuing to subscribers an offer for the extended basic package in a certain
form. The Anti-Monopoly Office imposed a fine of 26,700 zloty (approximately
$7,600 at the December 31, 1998 conversion rate). We are appealing the fine, the
finding of dominance, and the finding that the form of our offer to subscribers
was improper.
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UNITED KINGDOM
BROADCASTING REGULATION
Most of the channels in our D-DTH service are or will be regulated by U.K.
authorities (primarily the Independent Television Commission) as satellite
television services ("STS"). Under the U.K. Broadcasting Act 1990 (the
"Broadcasting Act"), satellite broadcasters established in the U.K. are required
to obtain an STS license. We have received an STS license for Atomic TV, Wizja
1, Twoja Wizja, Wizja Sport, and Wizja Pogoda. For most of the other channels on
Wizja TV, the relevant channel supplier is required to obtain an STS license
from the Independent Television Commission. The Independent Television
Commission has wide discretion to vary the conditions of licenses issued under
the Broadcasting Act or amend its codes (including codes on electronic
programming guides, advertising and content) to which U.K.-licensed broadcasters
are subject. Under the terms of our Astra transponder agreements, we cannot
carry programming if the channel supplier does not have a valid broadcast
license for that programming. An STS license is issued for an initial period of
10 years but can be renewed.
The Independent Television Commission has issued a direction to all STS
license holders following its investigation into competition issues relating to
the practice of channel bundling in the U.K. and has concluded that a number of
anti-competitive factors exist in the current pay television market which
restrict viewer choice. Under the direction, STS licensees are not allowed (in
specified circumstances) to:
- maintain or enter into certain agreements which contain minimum carriage
guarantees (where the licensee is required to carry the channel to a
minimum percentage of subscribers); or
- maintain certain tiering obligations (where the licensee requires a
channel to be included in a certain tier) or arrangements with similar
effects.
The Independent Television Commission has not explicitly prohibited the
practice of requiring subscribers to buy basic channel packages before being
allowed to buy premium channels. However, it is requiring licensees to permit
subscribers to buy all available premium channels available from any basic
package. We believe that the Independent Television Commission will not apply
the direction to the channels in our Wizja TV package.
The Broadcasting Act classifies some persons as "disqualified persons" who
are not permitted to hold STS licenses, including (A) any bodies whose objects
are wholly or mainly of a political or religious nature and advertising
agencies, or (B) any person owned more than 5% by a disqualified person or
otherwise associated with a 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. If any person with an interest in
excess of 5% of our issued capital stock is or becomes a disqualified person or
is or becomes associated with such a disqualified person, or if we or any person
with an interest in our capital stock does or were to fall within the scope of
the restriction, then we may not be entitled to hold STS licenses.
In issuing STS licenses, the Independent Television Commission follows the
"establishment" test set out in the European Union ("EU") Television Without
Frontiers Directive which provides that each EU broadcaster should be regulated
primarily by the authorities in the member state of the EU where that
broadcaster is established, without regard to the country or countries within
the EU in which its signal is received. Meanwhile, the 1989 European Convention
on Transfrontier Television currently provides that the country in which a
broadcaster transmits its programming to a satellite (or the country which
grants the broadcast frequency or satellite capacity) has jurisdiction over that
broadcaster. However, the 1989 European Convention on Transfrontier Television
was recently amended and if this amendment is implemented, the 1989 European
Convention on Transfrontier Television would conform to the "establishment" test
and authorities in the member state of the EU where that broadcaster is
established would invariably have the power to regulate that broadcaster.
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REGULATION OF COMPETITION
Today, U.K. law controls agreements which affect competition through the
Restrictive Trade Practices Act 1976 (the "Restrictive Trade Practices Act"),
resale price maintenance through the Resale Price Act 1973 (the "RPA"),
monopolies and mergers through the Fair Trading Act 1973 (the "Fair Trading
Act"), and unilateral anti-competitive practices through the Competition Act of
1980 (the "CA"). We are not involved in any current proceedings relating to
competition law before the U.K. courts, nor are any investigations which involve
us underway before any authority exercising powers under the Restrictive Trade
Practices Act, the RPA, the CA or the Fair Trading Act.
A new Competition Act which substantially reforms U.K. competition law,
replacing most of the current legislation except the Fair Trading Act, was given
royal assent on November 9, 1998. Under this act, companies have until March 1,
2000 to prepare for the new regime to come into effect. The new regime will
introduce provisions based on Articles 85 and 86 of the European Commission
Treaty and will give the U.K. authorities broad investigative powers. For a more
detailed description of Articles 85 and 86, see the discussion in "European
Union--Regulation of Competition" that follows.
EUROPEAN UNION
BROADCASTING REGULATION
TELEVISION WITHOUT FRONTIERS DIRECTIVE. The Television Without Frontiers
Directive sets forth the following basic principles for broadcasting activity in
the EU:
- Each EU broadcasting service should be regulated by the authorities of one
member state (the "home member state") and some minimum standards should
be required by each member state of all broadcasting services which that
state's authorities regulate. (The U.K., which is regarded as our "home
member state" for the purposes of our D-DTH services because At
Entertainment Limited is established in the U.K. and is the licensed
broadcaster of our proprietary channels, has adopted a variety of
statutory and administrative measures based on the Directive to give
effect to the requirements of the Directive.)
- Each member state is required to ensure "where practicable and by
appropriate means" that broadcasters reserve "a majority proportion of
their transmission time" for European works. The Directive does not define
the term "where practicable and by appropriate means" and the European
Commission has been receiving comments on the interpretation of this
Directive.
- Each member state is required to 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. (Polish-language programming
that we produce or commission will be counted as European works for the
purposes of determining whether any service broadcast by us complies with
these quotas.)
- There are restrictions on advertising including restrictions on the timing
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.
- There are restrictions on the content of programs to the extent necessary
(A) to protect minors and (B) to prevent the incitement of hatred on the
grounds of race, sex, religion or nationality.
1989 EUROPEAN CONVENTION ON TRANSFRONTIER TELEVISION. In addition to the
Television Without Frontiers Directive, the 1989 European Convention on
Transfrontier Television is the other primary source of European regulation
affecting television broadcasting in Europe. The 1989 European Convention on
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Transfrontier Television contains provisions that are substantially similar to
the Television Without Frontiers Directive. The 1989 European Convention on
Transfrontier Television is effective in those countries which have ratified it,
including the U.K. and Poland. The 1989 European Convention on Transfrontier
Television currently provides that the country in which a broadcaster transmits
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 Television Without Frontiers Directive nor the 1989 European
Convention on Transfrontier Television contains any requirements or restrictions
regarding foreign ownership of broadcasters.
A change to the 1989 European Convention on Transfrontier Television was
agreed by member states of the 1989 European Convention on Transfrontier
Television on September 9, 1998. This amendment will be effective if and when
all member states have signed the amendment or automatically on October 1, 2000,
unless a member state objects to the amendment coming into force. The amendment,
if it becomes effective, would have three significant effects:
- First, it would bring the 1989 European Convention on Transfrontier
Television into conformity with the Television Without Frontiers
Directive's "establishment" test, providing that a broadcaster should be
regulated primarily by the authorities in the 1989 European Convention on
Transfrontier Television country in which the broadcaster is established.
- Second, this amendment would provide that when a broadcaster engages in
conduct that constitutes an "abuse of rights", the broadcaster would
become subject to the laws of the country of reception. Under this
amendment, an "abuse of rights" would occur when 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 of that country in the
areas covered by the 1989 European Convention on Transfrontier Television.
(We believe that our broadcasting into Poland from the U.K. would not
constitute an "abuse of rights" under this amendment because we have valid
business reasons for broadcasting from the U.K. and we have not
established our broadcasting facilities in the U.K. in order to evade
Polish laws in the areas covered by the 1989 European Convention on
Transfrontier Television. However, an adverse decision on this issue, if
this amendment becomes effective and Poland decides to invoke it against
our broadcasts emanating from the U.K., could prevent us from broadcasting
our programming package.)
- Third, this amendment would allow parties to the 1989 European Convention
on Transfrontier Television 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 1989 European Convention on Transfrontier Television country from
seeing the event live or on a deferred coverage basis on free (broadcast)
television, and also to ensure that broadcasters under the jurisdiction of
one 1989 European Convention on Transfrontier Television country cannot
purchase exclusive rights to major events specified by another 1989
European Convention on Transfrontier Television country which would
deprive a large proportion of the public in such member countries from
seeing the specified event on a live or deferred coverage basis on free
(broadcast) television. (If this amendment becomes effective and if it
were applied to the Polish pay television rights to certain sporting
events purchased on an exclusive basis by us, we may lose the right to
broadcast such events in Poland on an exclusive basis and may not be able
to acquire the exclusive Polish pay television rights to such events and
to similar events in the future.)
The 1989 European Convention on Transfrontier Television currently provides
that where a broadcaster under the jurisdiction of one member country of the
1989 European Convention on Transfrontier Television transmits advertisements
which are directed specifically at audiences in another member country, such
advertisements must comply with the advertising rules of the receiving member
state. This rule will require advertisements inserted in the channels we
distribute to comply with both Polish advertising rules as well as the rules
applicable in the U.K.
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TELEVISION WITHOUT FRONTIERS DIRECTIVE ON THE USE OF STANDARDS IN
TRANSMISSION OF TELEVISION SIGNALS. The EU Directive on the Use of Standards in
Transmission of Television Signals 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 electronic programming guides can be made competitively
neutral, and potential operation of more than one smartcard by competing
broadcasters. Although the EU Directive on the Use of Standards in Transmission
of Television Signals and the CAC License do not currently apply to our D-DTH
broadcasting services since they are not transmitted to viewers in the EU,
Poland would be required to implement the provisions of that the Directive if it
joined the EU. In addition, because At Entertainment Limited (as our license
holding company) will be subject to the jurisdiction of the Independent
Television Commission and will be established in the U.K., it is possible that,
in the future, Oftel may seek to assert jurisdiction over the activities of this
subsidiary in these areas including in relation to conditional access services.
TELEVISION WITHOUT FRONTIERS DIRECTIVE ON THE LEGAL PROTECTION OF
CONDITIONAL ACCESS SERVICES. In November 1998, the European Commission adopted
a 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. It requires EU member states to
prohibit the manufacture, import, distribution, rental, sale, possession,
installation, maintenance, replacement or marketing of illicit devices. 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 member states of
the European Community/European Economic Area. Article 85 (2) voids the
offending provision or the entire agreement, if the offending parts are not
severable. Article 85 (3) allows for exemption from the provisions of Articles
85 (1) and 85 (2) for agreements whose beneficial effects in improving
production or distribution or promoting technical or economic progress outweigh
their restrictive effects, provided that consumers receive a fair share of the
benefit, that competition will not be eliminated and that no unnecessary
restrictions are accepted. Such an exemption may only be granted by the European
Commission and notification to that body is essential to secure this protection.
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. Generally speaking, a market
share of as little as 40% can raise concern that a company may be dominant.
However, dominance is not unlawful PER SE; only the abuse of a dominant position
is prohibited by Article 86. 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 power to fine heavily (up to 10% of a
group's annual worldwide turnover) in relation to a breach of Article 85 or in
relation to abusive conduct under Article 86. Agreements or practices that
breach these provisions will be void and unenforceable in national courts and
third parties that suffer loss as a result of a breach of Article 85 or Article
86 can sue for damages and/or seek injunctive relief.
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We do not believe that any of our current agreements infringe Article 85(1)
or Article 86 and therefore do not intend to bring them to the attention of the
European Commission. If the European Commission were to find that any of our
agreements infringe Article 85(1) or Article 86, those agreements would be void
and unenforceable, and we could be fined and liable to damages to third parties.
POLAND'S EU MEMBERSHIP APPLICATION
In 1994 Poland made an official application for membership in the EU. The
terms of an Accession Partnership were agreed in June 1998 between the
Commission of the European Communities and Poland. This partnership sets out a
framework for additional work needed on Poland's application for membership in
the EU, available funding and the conditions which will apply to that funding.
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
Television Without Frontiers Directive and EC competition laws in their then
current versions.
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DESCRIPTION OF INDEBTEDNESS
JULY 1998 UNITS OFFERING
On July 14, 1998, @Entertainment sold 252,000 units to two initial
purchasers pursuant to a purchase agreement. Each unit consisted of a $1,000
principal amount at maturity 14 1/2% Senior Discount Note due 2008 and four
warrants. Each warrant entitles the holder to purchase 1.81 shares of common
stock at an exercise price of $13.20 per share, which exercise price is subject
to adjustment. In August 1998, @Entertainment exchanged most of the notes issued
in its July 1998 units offering for an equal aggregate principal amount at
maturity of its 14 1/2 Series B Senior Discount Notes due 2008 which had been
registered.
The notes issued in the July 1998 units offering were issued at a discount
to their aggregate principal amount at maturity. The July 1998 units offering
generated gross proceeds to @Entertainment of approximately $125,100,000. Of
this amount, $117,485,000 was allocated to the initial accreted value of the
notes and approximately $7,615,000 was allocated to the warrants. The portion of
the proceeds allocated to the warrants was accounted for as part of paid-in
capital. This allocation was based on the relative fair values of the two
securities at the time of issuance. After deducting the initial purchasers'
discount and offering expenses, net proceeds to @Entertainment from the July
1998 units offering were approximately $120,000,000.
Both the notes issued in the July 1998 units offering and the exchange notes
issued in the August 1998 exchange offer are unsubordinated and unsecured
obligations of @Entertainment. Cash interest on the old notes and the exchange
notes will not accrue prior to July 15, 2003. After that cash interest on the
old notes and the exchange notes will accrue at a rate of 14.5% per year and
will be payable semiannually in arrears on January 15 and July 15 of each year,
beginning on January 15, 2004. The notes will mature on July 15, 2008. At any
time prior to July 15, 2001, @Entertainment may redeem up to a maximum of
approximately $64 million of the old notes and exchange notes at a redemption
price equal to 114.5% of the accreted value of the notes at the date of the
redemption, plus any accrued and unpaid interest to the date of such redemption,
with some or all of the net cash proceeds of one or more public equity
offerings. However, if @Entertainment chooses to engage in this type of
redemption, at least approximately $192 million of old notes and exchange notes
must remain outstanding immediately after giving effect to such redemption.
The warrants issued in connection with the July 1998 units offering
initially entitle their holders to purchase a total of 1,824,514 shares of
common stock, representing, in the aggregate, approximately 5% of
@Entertainment's outstanding common stock on a fully-diluted basis immediately
after giving effect to the sale of the units. The warrants are exercisable at
any time and will expire on July 15, 2008.
Pursuant to the indenture governing the notes which were issued in the July
1998 units offering, @Entertainment is subject to certain restrictions and
covenants, including, without limitation, covenants with respect to the
following matters:
- limitation on additional indebtedness;
- limitation on restricted payments;
- limitation on issuance and sales of capital stock of restricted
subsidiaries;
- limitation on transactions with affiliates;
- limitation on liens;
- limitation on guarantees of indebtedness by restricted subsidiaries;
- purchase of notes and exchange notes upon a change of control;
- limitation on sale of assets;
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- limitation on dividends and other payment restrictions affecting
restricted subsidiaries;
- limitation on investments in unrestricted subsidiaries;
- limitation on lines of business; and
- provision of financial statements and reports.
SERIES C SENIOR DISCOUNT NOTES OFFERING
On January 20, 1999, @Entertainment sold $36,001,321 aggregate principal
amount at maturity of its Series C Senior Discount Notes. The Series C Senior
Discount Notes are senior unsecured obligations of @Entertainment ranking
equally with the right of payment for all other existing and future
unsubordinated obligations of @Entertainment. The Series C Senior Discount Notes
were issued at a discount to their aggregate principal amount at maturity and
generated gross proceeds to @Entertainment of approximately $9.8 million. After
deducting the initial purchaser's discount and offering expenses, net proceeds
to @Entertainment were approximately $9.4 million. Original issue discount will
accrete from January 20, 1999 until July 15, 2008, the date of maturity of the
Series C Senior Discount Notes. In addition, cash interest on the Series C
Senior Discount Notes will accrue from July 15, 2004 at a rate of 7.0% per year
on the principal amount at maturity, and will be payable semiannually in arrears
on July 15 and January 15 of each year beginning January 15, 2005. Before July
15, 2004 cash interest on the Series C Senior Discount Notes will not accrue.
The Series C Senior Discount Notes will mature on July 15, 2008.
Under the indenture governing the Series C Senior Discount Notes,
@Entertainment is subject to certain restrictions and covenants, including,
without limitation, covenants with respect to the following matters:
- limitation on additional indebtedness;
- limitation on restricted payments;
- limitation on issuance and sales of capital stock of restricted
subsidiaries;
- limitation on transactions with affiliates;
- limitation on liens;
- limitation on guarantees of indebtedness by restricted subsidiaries;
- purchase of Series C Senior Discount Notes upon a change of control;
- limitation on sale of assets;
- limitation on dividends and other payment restrictions affecting
restricted subsidiaries;
- limitation on investments in unrestricted subsidiaries;
- limitation on lines of business; and
- provision of financial statements and reports.
POLAND COMMUNICATIONS, INC. NOTES OFFERING
On October 31, 1996, Poland Communications, Inc. ("PCI"), @Entertainment's
major operating subsidiary, sold $130 million aggregate principal amount of
9 7/8% Series B Senior Notes to an initial purchaser pursuant to a purchase
agreement. In June 1997 PCI exchanged most of these outstanding notes issued in
October 1996 for an equal aggregate principal amount of publicly-registered
9 7/8% Series B Senior Notes due 2003. The terms of the new notes were
substantially the same as the notes issued by PCI in October 1996.
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The old notes issued in October 1996 and the publically-registered notes
issued in the exchange offer in June 1997 have an interest rate of 9 7/8% and a
maturity date on November 1, 2003. Interest is paid on the old notes and the
exchange notes on May 1 and November 1 of each year. Before November 1, 1999,
PCI may redeem up to approximately $42.9 million of the notes with some or all
of the net proceeds from one or more public equity offerings at a redemption
price equal to 109.875% of the principal amount of the public offering, plus any
accrued and unpaid interest until the redemption date. However, if PCI redeems
its notes, at least $87 million aggregate principal amount of the notes must
remain outstanding immediately after giving effect to such redemption.
Upon the occurrence of a change in control (as defined in the indenture
governing the notes issued by PCI in October 1996 and the exchange notes issued
by PCI in the exchange offer in June 1997), each holder of the notes will have
the right to require PCI to purchase such notes, in whole or in part, at a
purchase price in cash in an amount equal to 101% of the principal amount of
such notes, plus any accrued and unpaid interest 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 old notes and new notes at
a price of 100% of the principal amount of such notes, plus any accrued and
unpaid interest, to the date of redemption. PCI has pledged to State Street
Bank, the trustee for the old notes and the exchange notes, for the benefit of
the holders of such notes, intercompany notes issued by Poland Cablevision
(Netherlands) B.V. These intercompany notes equal 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 existing notes and the new exchange
notes and will, 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 such notes.
Under the indenture governing the old notes and the exchange notes, PCI is
subject to certain covenants, including, without limitation, covenants with
respect to the following matters:
- limitation on additional indebtedness;
- limitation on restricted payments;
- limitation on issuance and sales of capital stock of subsidiaries;
- limitation on transactions with affiliates;
- limitation on liens;
- limitation on guarantees of indebtedness by subsidiaries;
- purchase of notes and exchange notes upon a change of control;
- limitation on sale of assets;
- limitation on dividends and other payment restrictions affecting
restricted subsidiaries;
- limitation on investments in unrestricted subsidiaries;
- limitation on lines of business; and
- consolidations, mergers and sale of assets.
CREDIT AGREEMENTS WITH THE AMERBANK IN POLAND, S.A.
In addition, in August 1996, PCI entered into a credit agreement
establishing a revolving loan facility allowing 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 the 1996 loan facility with a portion of the
proceeds of the notes offering which it completed in October 1996. All amounts
under the 1996 loan facility were fully drawn in June 1998.
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PCI was required to pay an arrangement fee of approximately $50,000 for the
revolving loan facility, which was established in August 1996, and is required
to pay an annual charge of 0.25% of the undrawn funds under this revolving loan
facility. In addition, PCI is required to pay interest on any outstanding
principal amount under the revolving loan facility established in August 1996 at
a rate equal to the three-month London Interbank Offered Rate ("LIBOR") on the
date of disbursement plus 3%. The outstanding principal amount under the
revolving loan facility established in August 1996 and the accrued interest on
this loan facility is due in full on August 20, 1999. Acceleration of repayment
of amounts outstanding under this loan facility may be triggered by certain
conditions of default, which include customary terms associated with revolving
loan facilities. In the event of a default, PCI is required to pay an additional
penalty of 15% per year on the outstanding principal amount under the loan
facility.
Amounts outstanding under the revolving loan facility established in August
1996 are secured by:
- promissory notes from three subsidiaries of @Entertainment (Polska
Telewizja Kablowa Warszawa S.A., Polska Telewizja Kablowa Krakow S.A., and
Polska Telewizja Kablowa Lublin S.A.);
- pledges of up to all of the shares of Polska Telewizja Kablowa Warszawa
S.A. and Polska Telewizja Kablowa Krakow S.A., which are owned by Poland
Cablevision (Netherlands) B.V.; and
- all of the shares of Polska Telewizja Kablowa Lublin S.A., owned by
Poltelkab Sp. z o.o. (Poltelkab is another subisidary of @Entertainment).
CREDIT AGREEMENTS WITH BRE BANK S.A.
One of @Entertainment's subsidiaries (Szczecinska Telewizja Kablowa Sp. z
o.o.) has entered into two agreements with Polski Bank Rozwoju S.A., which in
July 1998 was bought by BRE Bank S.A. (formerly named Bank Rozwoju Eksportu).
These agreements 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 =
$0.29, on December 31, 1998) and a deutsche-mark denominated facility in the
amount of DM 3,948,615 (approximately $2,370,000 based on an exchange rate of DM
1.00 = $0.60 on December 31, 1998). Each of these loan facilities are to be used
for the development of two cable television networks operated by Szczecinska
Telewizja Kablowa Sp. z o.o. These 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 Szczecinska
Telewizja Kablowa Sp. z o.o. shares, which are owned by Polska Telewizja Kablowa
Szczecin Sp. z o.o. (a subsidiary of @Entertainment). The loan facilities must
be repaid by December 27, 2002.
The zloty-denominated loan facility bears interest at the Warsaw Interbank
Offering Rate for 3 months deposits plus 3%. The deutsche-mark denominated loan
facility currently bears interest at the London Interbank Offering Rate for 1
month deposits plus 2.5%. The total amount payable with respect to the zloty
denominated loan facility on December 31, 1998 was PLN 226,000 (approximately
$65,500 based on an exchange rate of PLN 1.00 = $0.29 on December 31, 1998). The
total amount payable with respect to the deutsche-mark denominated loan facility
on December 31, 1998 was DM 3,204,000 (approximately $1,912,000 based on an
exchange rate of DM 1.00 = $0.60 on December 31, 1998).
INTER-COMPANY INDEBTEDNESS
As of December 31, 1998, @Entertainment had loaned approximately $8.4
million to At Entertainment Limited (a subsidiary of @Entertainment) and
approximately $80.5 million to Wizja TV Sp. z o.o. (a subsidiary of
@Entertainment). The loan agreement between @Entertainment and At Entertainment
Limited calls for the borrower to pay 10% interest, payable quarterly. This
agreement contains standard events of default for related-party indebtedness.
The loan agreement between @Entertainment and Wizja TV Sp. z o.o. calls for the
borrower to pay 10% interest and, effective July 14, 1998, 12% interest payable
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on the principal amount. This agreement also contains standard events of default
for related-party indebtedness.
Poland Communications, Inc. has entered into a series of grid notes under
which, as of December 31, 1998 it had loaned approximately $160.5 million to
Poland Cablevision (Netherlands) B.V., $10.5 million to Polska Telewizja Kablowa
Szczecin Sp. z o.o., and $13.0 million to Poltelkab Sp. z o.o. The notes between
Poland Communications, Inc. and Poland Cablevision (Netherlands) B.V. 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 Poland
Communications, Inc. and Poland Cablevision (Netherlands) B.V. mature before
December 31, 1999. The grid notes between Poland Communications, Inc. and Polska
Telewizja Kablowa Szczecin Sp. z o.o., and the grid note between Poland
Communications, Inc. and Poltelkab Sp. z o.o., are revolving credit facilities
on which 10% interest compounds monthly and which mature on June 30, 2001. The
grid notes between Poland Communications, Inc. and Poland Cablevision
(Netherlands) B.V. have been pledged for the benefit of holders of the notes
issued by Poland Communications, Inc. in October 1996 and the publicly
registered exchange notes issued by Poland Communications, Inc. in June 1997.
Poland Cablevision (Netherlands) B.V., in turn, entered into a series of 10%
grid notes under which, as of December 31, 1998, Poland Cablevision
(Netherlands) B.V. had loaned approximately $131.4 million to Polska Telewizja
Kablowa S.A., Polska Telewizja Kablowa Warszawa S.A., Polska Telewizja Kablowa
Operator Sp. z o. o. and Polska Telewizja Kablowa Krakow S.A.. The grid notes
issued by Poland Cablevision (Netherlands) B.V. 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 the grid notes issued by Poland Cablevision
(Netherlands) B.V. will become due on June 10, 2001, the other is due on demand
on June 30, 2001. The grid notes between Poland Cablevision (Netherlands) B.V.
and Polska Telewizja Kablowa Operator Sp. z o. o., Polska Telewizja Kablowa
Warszawa S.A. and Polska Telewizja Kablowa Krakow S.A. all become due on June
30, 2001.
Poland Communications, Inc. has also entered into a loan agreement under
which it loaned $1.1 million to Telewizja Kablowa GOSAT Sp. z o.o. All amounts
under this loan agreement are due July 1, 2000.
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DESCRIPTION OF THE INDENTURE GOVERNING THE NEW NOTES
You can find the definitions of certain capitalized terms used in this
description under the subheading "Certain Definitions." In this description,
"notes" means both the existing notes of @Entertainment and the new notes we
will issue to you in the exchange offer. References to a "holder" or "holders"
mean you or all holders of the notes.
We will issue the new notes under an indenture, dated as of January 27,
1999, between us and Bankers Trust Company, as trustee (the "Trustee"). The
terms of the new notes include those stated in the indenture and those made part
of the indenture by reference to the Trust Indenture Act of 1939.
The following description is a summary of the material provisions of the
indenture. It does not restate the indenture in its entirety. We urge you to
read the indenture because it, and not this description, defines your rights as
holders of the notes. We have filed a copy of the indenture as an exhibit to the
registration statement which includes this prospectus.
BRIEF DESCRIPTION OF THE NEW NOTES
The new notes:
- are senior unsecured obligations of our company;
- rank equally in right of payment with all existing and future
unsubordinated debt of our company;
- are senior in right of payment to any existing and future debt expressly
subordinated to the new notes (as of December 31, 1998, we had no
subordinated indebtedness); and
- will effectively be subordinated to all indebtedness for money borrowed by
and trade payables of our subsidiaries.
PRINCIPAL, MATURITY AND INTEREST
We will issue new notes with a maximum aggregate principal amount of
$256,800,000. The notes are issued at a discount to their aggregate principal
amount at maturity. We will issue the new notes in fully registered form only,
without coupons, in denominations of $1,000 and integral multiples of $1,000.
The notes will mature on February 1, 2009.
Interest on the new notes will accrue at the rate of 14 1/2% per year and
will be payable twice a year in cash on February 1 and August 1, commencing on
August 1, 2004. We will make each interest payment to the holders of record of
the new notes at the close of business on the immediately preceding January 15
or July 15. Based on the issue price of the notes, the actual yield of an
investment unit (consisting of one note and four warrants) issued on January 27,
1999 is 17 1/2% calculated from January 27, 1999, due to the fact that the notes
were originally issued at a discount.
Interest on the new notes will accrue from February 1, 2004, or from the
most recent date to which interest has been paid. Interest will be computed on
the basis of a 360-day year comprised of twelve 30-day months.
If a Registration Default (discussed under the section "The Exchange
Offer--Payment of Additional Interest Upon Registration Default") occurs--and
for as long as one exists--relating to the timing of this exchange offer, we
will be required to make additional interest payments.
METHODS OF RECEIVING PAYMENTS ON THE NOTES
The Trustee maintains a corporate trust office in The City of New York.
Principal, premium and interest payments on the notes will be payable from this
office. At our option, we may pay interest by check mailed to the holder's
registered address.
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PAYING AGENT AND REGISTRAR FOR THE NOTES
The Trustee will initially act as paying agent and registrar for the notes.
We may change the paying agent or registrar without giving you prior notice.
TRANSFER AND EXCHANGE
You may transfer or exchange your notes in accordance with the indenture.
Any of your notes that you do not exchange in the exchange offer, together with
the new notes issued in connection with the exchange offer, will be treated as a
single class of securities under the indenture. There will continue to be
restrictions on the transfer of those notes not exchanged in the exchange offer.
REDEMPTION
On or after February 1, 2004, we may redeem all or a portion of the new
notes upon not less than 30 days nor more than 60 days' prior notice, at the
redemption prices (expressed as percentages of the principal amount at maturity)
set forth below, plus any unpaid interest, if redeemed during the twelve-month
period beginning on February 1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- --------------------------------------------------------------------------------- -----------
<S> <C>
2004............................................................................. 108.750%
2005............................................................................. 105.833%
2006............................................................................. 102.917%
2007 and thereafter.............................................................. 100.000%
</TABLE>
OPTIONAL REDEMPTION UPON PUBLIC EQUITY OFFERINGS
Prior to February 1, 2002, we may on one or more occasions redeem up to 35%
of the aggregate principal amount of notes originally issued with the net cash
proceeds of one or more Public Equity Offerings; provided that
a) at least 65% in aggregate principal amount of notes remain outstanding
immediately after the occurrence of such redemption; and
b) the redemption must occur within 30 days of the closing of such Public
Equity Offering.
The redemption price is 117.5% of the Accreted Value of the notes, plus any
accrued and unpaid interest to the date of redemption.
REPURCHASE AT THE OPTION OF HOLDERS
If a Change of Control occurs, you will have the right to require us to
repurchase all or any part of your notes (in integral multiples of $1,000)
pursuant to the Change of Control offer. In the Change of Control offer, we will
offer you a payment equal to 101% of the Accreted Value of the notes repurchased
plus any accrued and unpaid interest to the date of repurchase.
If an Asset Sale occurs, each holder of notes may be able to require us to
repurchase all or any part of that holder's notes at a purchase price of 100% of
the aggregate principal amount of the notes plus any accrued and unpaid interest
to the date of purchase.
SELECTION AND NOTICE OF REDEMPTION
If less than all the notes are to be redeemed at any time, the Trustee will
select the particular notes to be redeemed by a method it deems fair and
appropriate.The Trustee will make this selection not more than
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60 days before the redemption date. A partial redemption will not reduce the
principal amount at maturity of any note to less than $1,000.
Notice of redemption will be mailed by first-class mail at least 30 but not
more than 60 days before the redemption date to each holder of notes to be
redeemed at its registered address. If any note is to be redeemed in part only,
the notice of redemption will state the portion of the principal amount to be
redeemed. A new note in a principal amount equal to the unredeemed portion will
be issued in the name of the holder upon cancellation of the original note.
CERTAIN COVENANTS
The indenture contains, among others, the following covenants:
LIMITATION ON ADDITIONAL INDEBTEDNESS.
(a) We will not, and will not permit any Restricted Subsidiary, directly or
indirectly, to incur, contingently or otherwise, any Indebtedness, except for
Permitted Indebtedness; PROVIDED that we may incur Indebtedness if after giving
pro forma effect to such Indebtedness (including the application of the net
proceeds), the ratio of (x) Total Consolidated Indebtedness outstanding as of
the date of such incurrence of Indebtedness to (y) Annualized Pro Forma
Consolidated Operating Cash Flow would be greater than zero and less than or
equal to 6 to 1.
(b) We will not incur any Subordinated Indebtedness unless such Indebtedness
by its terms expressly prohibits the payment by us of any assets or securities
(including Common Stock) to the holders of such Subordinated Indebtedness prior
to the payment in full of the notes in the event of a bankruptcy or
reorganization.
LIMITATION ON RESTRICTED PAYMENTS.
(a) We will not, and will not permit any Restricted Subsidiary to:
(1) declare or pay any dividend or any other distribution on Capital
Stock of our company or any payment made to the direct or indirect holders
(in their capacities as such) of our Capital Stock (other than dividends or
distributions payable solely in our Capital Stock (other than Redeemable
Capital Stock) of our company;
(2) purchase, redeem or otherwise acquire or retire for value any
Capital Stock of our company (other than any such Capital Stock owned by us
or a Restricted Subsidiary) or any Affiliate of our company (other than any
Restricted Subsidiary);
(3) make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated Indebtedness of
our company (other than any Subordinated Indebtedness held by a Restricted
Subsidiary);
(4) make any Investment (other than a Permitted Investment) in any
Person (other than an Investment by us or a Restricted Subsidiary in either
(1) a Restricted Subsidiary or (2) a Person that becomes a Restricted
Subsidiary as a result of such Investment);
(5) create or assume any guarantee of Indebtedness of any Affiliate of
our company (other than guarantees of any Indebtedness of any Restricted
Subsidiary by us or any Restricted Subsidiary); or
(6) declare or pay any dividend or any other distribution on any Capital
Stock of any Restricted Subsidiary to any Person (other than (1) dividends
or distributions paid to us or a Restricted Subsidiary or (2) PRO RATA
dividends or distributions on Common Stock of Restricted Subsidiaries held
by minority stockholders, provided that such dividends or distributions do
not in the aggregate exceed
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the minority stockholders' PRO RATA share of such Restricted Subsidiaries'
net income from the first day of the fiscal quarter beginning immediately
following the Issue Date);
(such payments or other actions described in (but not excluded from) clauses (1)
through (5) are collectively referred to as "Restricted Payments"), unless at
the time of, and immediately after giving effect to, the proposed Restricted
Payment (A) no Default or Event of Default shall have occurred and be
continuing, (B) we would be able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under the proviso to the
covenant "LIMITATION ON ADDITIONAL INDEBTEDNESS"; and (C) the aggregate amount
of all Restricted Payments declared or made after the Issue Date would not
exceed an amount equal to the sum of:
(A) the difference between (x) the Cumulative Available Cash Flow
determined at the time of such Restricted Payment and (y) the product of (I)
1.5 and (II) the cumulative Consolidated Interest Expense of our company
determined for the period commencing on the Issue Date and ending on the
last day of the latest fiscal quarter for which our consolidated financial
statements are available preceding the date of such Restricted Payment (or
if such difference shall be a negative number, minus 100% of such number),
PLUS (B) the aggregate Net Cash Proceeds received by us from the issue or
sale (other than to a Restricted Subsidiary) of our Capital Stock (other
than Redeemable Capital Stock) on or after the Issue Date, excluding any Net
Cash Proceeds that are, promptly following receipt, invested in accordance
with clause (ii), (iii) or (v) of clause (b) hereof and except to the extent
such Net Cash Proceeds are used to incur Indebtedness pursuant to clause
((i)) of the definition of Permitted Indebtedness, PLUS (C) the aggregate
Net Cash Proceeds received by us on or after the Issue Date from the
issuance or sale (other than to a Restricted Subsidiary) of debt securities
or our Redeemable Capital Stock that have been converted into or exchanged
for our Capital Stock (other than Redeemable Capital Stock) to the extent
such securities were originally sold for cash, together with the aggregate
net cash proceeds received by us (other than from a Restricted Subsidiary)
at the time of such conversion or exchange, PLUS (D) in the case of the
disposition or repayment of any Investment (other than through share leasing
arrangements) constituting a Restricted Payment made after the Issue Date
(other than in the case contemplated by clause (E) hereof) an amount equal
to the lesser of the return of capital with respect to such Investment and
the cost of such Investment, in either case, less the cost of the
disposition of such Investment, PLUS (E) in the case of Investments (other
than through share leasing arrangements) made in any Person other than a
Restricted Subsidiary, an amount equal to the lesser of the Fair Market
Value of such Investment and the total amount of such Investments
constituting Restricted Payments if and when such Person becomes a
Restricted Subsidiary less any amounts previously credited pursuant to
clause (D).
For purposes of determining the amount expended for Restricted Payments,
cash distributed shall be valued at the face amount thereof and property other
than cash shall be valued at its Fair Market Value.
(b) So long as, with respect to clauses (2) through (9) below, no Default or
Event of Default has occurred and is continuing, the preceding provisions
concerning limitations on Restricted Payments will not prohibit:
(1) the payment of any dividend or other distribution within 60 days
after the date of declaration thereof if at such date of declaration such
payment complied with the provisions of the indenture;
(2) the purchase, redemption, retirement or other acquisition of any
shares of our Capital Stock in exchange for, or out of the net cash proceeds
of the substantially concurrent issue and sale (other than to a Restricted
Subsidiary) of, shares of our Capital Stock (other than Redeemable Capital
Stock);
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(3) the purchase, redemption, retirement, defeasance or other
acquisition of Subordinated Indebtedness made by exchange for, or out of the
net cash proceeds of, a substantially concurrent issue or sale (other than
to a Restricted Subsidiary) of:
(A) our Capital Stock (other than Redeemable Capital Stock), or
(B) other Subordinated Indebtedness so long as:
(X) the principal amount of such new Indebtedness does not exceed
the principal amount (or, if such Subordinated Indebtedness being
refinanced provides for an amount less than the principal amount
thereof to be due and payable upon a declaration of acceleration
thereof, such lesser amount as of the date of determination) of the
Subordinated Indebtedness being so purchased, redeemed, defeased,
acquired or retired, PLUS the lesser of the amount of any premium
required to be paid in connection with such refinancing pursuant to
the terms of the Subordinated Indebtedness being refinanced or the
amount of any premium reasonably determined by us as necessary to
accomplish such refinancing, plus, in either case, the amount of
expenses we incurred in connection with such refinancing,
(Y) such new Subordinated Indebtedness is subordinated to the
notes to the same extent as such Subordinated Indebtedness so
purchased, redeemed, defeased, acquired or retired, and
(Z) such new Subordinated Indebtedness has an Average Life longer
than the Average Life of the notes and a final Stated Maturity of
principal later than the Stated Maturity of principal of the notes;
(4) the extension by us and the Restricted Subsidiaries of trade credit
to Unrestricted Subsidiaries, represented by accounts receivable, extended
on usual and customary terms in the ordinary course of business;
(5) Investments (other than through share leasing arrangements) in any
Person promptly made with the proceeds of a substantially concurrent issue
or sale of our Capital Stock (other than Redeemable Capital Stock) ;
(6) payments made pursuant to the Shareholder Registration Rights
Agreement;
(7) the payment of reasonable and customary regular compensation and
fees to directors of our company or any Restricted Subsidiary who are not
employees of our company or any Restricted Subsidiary;
(8) any "Restricted Payment" as defined in and permitted by the PCI
Indenture made by PCI or any Subsidiary thereof in accordance with the terms
of the PCI Indenture; and
(9) any other Restricted Payments in an aggregate amount not to exceed
$1.0 million (or, if non-U.S. dollar denominated, the U.S. Dollar Equivalent
thereof) at any one time outstanding.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (1), (6), (7), (8) and (9) above
shall be included as Restricted Payments.
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED SUBSIDIARIES.
(a) We will not and will not permit any Restricted Subsidiary to issue or
sell any shares of Capital Stock of a Restricted Subsidiary (other than to us or
a Restricted Subsidiary); PROVIDED, HOWEVER, that this covenant shall not
prohibit:
(1) the issuance and sale of all, but not less than all, of the issued
and outstanding Capital Stock of any Restricted Subsidiary in compliance
with the other provisions of the indenture,
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(2) issuances or sales of Common Stock of a Restricted Subsidiary if:
(x) the proceeds of such issuance or sale are applied in accordance
with the "LIMITATION ON SALE OF ASSETS" covenant, and
(y) immediately after giving effect thereto, we and our other
Restricted Subsidiaries own no less than 51% of the outstanding Voting
Stock of such Restricted Subsidiary,
(3) issuances or sales of Capital Stock of Restricted Subsidiaries that
are subsidiaries of PCI that are permitted by the terms of the PCI
Indenture, or
(4) the ownership by directors of directors' qualifying shares or the
ownership by foreign nationals of Capital Stock of any Restricted
Subsidiary, to the extent mandated by applicable law.
(b) we will not permit the direct or indirect ownership of our company or
any Restricted Subsidiary in the Capital Stock of any Management Company to fall
below the lesser of:
(1) the maximum ownership percentage permitted by applicable law, and
(2) 51% of the outstanding Capital Stock of such Management Company,
PROVIDED that any increase in such ownership of the Capital Stock of any
Management Company required by any change in applicable law shall not be
required to be completed prior to 365 days from the effective date of such
change in applicable law, PROVIDED FURTHER that we and the Restricted
Subsidiaries may sell all, but not less than all, of their Capital Stock of
any Management Company in accordance with the provisions of the "LIMITATION
ON SALE OF ASSETS" covenant.
LIMITATION ON TRANSACTIONS WITH AFFILIATES.
(a) We will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, enter into or suffer to exist any transaction or series of
related transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or services) with, or for the benefit of,
any Affiliate of ours (other than us or a Majority Owned Restricted Subsidiary)
unless
(1) such transaction or series of related transactions is on terms that
are no less favorable to us or such Restricted Subsidiary, as the case may
be, than those that could have been obtained in an arm's-length transaction
with unrelated third parties who are not Affiliates,
(2) with respect to any transaction or series of related transactions
involving aggregate consideration equal to or greater than $10 million, we
shall have delivered an officers' certificate to the Trustees certifying
that such transaction or series of related transactions complies with clause
(i) above and such transaction or series of related transactions has been
approved by a majority of the Directors of our Board of Directors, or we
have obtained a written opinion from a nationally recognized investment
banking firm to the effect that such transaction or series of related
transactions is fair to us or such Restricted Subsidiary, as the case may
be, from a financial point of view (or if an investment banking firm is
generally not qualified to give such an opinion, by a nationally recognized
appraisal firm or accounting firm), and
(3) with respect to any transaction or series of related transactions
including aggregate consideration in excess of $20 million, we shall have
delivered an officers' certificate to the Trustees certifying that such
transaction or series of related transactions complies with clause (1) above
and such transaction or series of related transactions has been approved by
a majority of the Disinterested Directors of the Board of Directors
(assuming that at least two such directors exist), or in the event that at
least two members of our Board of Directors are not Disinterested Directors
with respect to any transaction or series of transactions included in this
clause (3), we shall obtain an opinion from a nationally recognized
investment banking firm (or if an investment banking firm is generally not
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qualified to give such an opinion, by a nationally recognized appraisal firm
or accounting firm) as described above; PROVIDED, HOWEVER, that this
provision will not restrict:
(A) any transaction by us or any Restricted Subsidiary with an
Affiliate directly related to the purchase, sale or distribution of
products in the ordinary course of business, including, without
limitation, transactions related to the purchase, sale or distribution of
programming, subscriber management services, transmission services and
services related to the publication of programming guides,
(B) us from paying reasonable and customary regular compensation and
fees to directors of ours or any Restricted Subsidiary who are not
employees of our company or any Restricted Subsidiary, including, without
limitation, any such fees which we have agreed to pay to any director
pursuant to an agreement in effect on the Issue Date and listed on a
schedule to the indenture,
(C) the payment of compensation (including stock options and other
incentive compensation) to officers and other employees the terms of
which are approved by the Board of Directors,
(D) any transactions pursuant to a Management Agreement,
(E) us or any Restricted Subsidiary from making any Restricted
Payment in compliance with the "LIMITATION ON RESTRICTED PAYMENTS"
covenant,
(F) (x) transactions pursuant to any Management Contract, Overhead
Agreement or Service Agreement that is entered into prior to the Issue
Date and is listed in an exhibit to the indenture; or (y) transactions
pursuant to any Organizational Contract, Overhead Agreement or Service
Agreement that is entered into after the Issue Date and has substantially
identical terms as, and is no less favorable to us or any Restricted
Subsidiary than, the Organizational Contracts, Overhead Agreements or
Service Agreements, as the case may be, listed in the exhibit to the
indenture, or
(G) amendments, modifications or alterations of Management
Agreements, Organizational Contracts, Overhead Agreements and Service
Agreements under (b) below.
(b) we will not, and will not permit any Restricted Subsidiary to, amend,
modify, or in any way alter the terms of any Management Agreement,
Organizational Contract, Overhead Agreement or Service Agreement in a manner
materially adverse to us other than:
(1) by adding new Restricted Subsidiaries to a Management Agreement,
(2) substituting one Restricted Subsidiary in place of another Restricted
Subsidiary under an Organizational Contract,
(3) amendments, modifications or alterations required by applicable law,
(4) amendments, modifications or alterations made to increase our control
over, or interest in, any Management Company, or
(5) amendments, modifications or alterations that are approved by a majority
of the Disinterested Directors of our Board of Directors as not materially
adverse to us.
LIMITATION ON LIENS.
We will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, create, incur, assume or suffer to exist any Lien of any kind,
except for Permitted Liens, on or with respect to any of its
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property or assets, whether owned at the date of the indentures or thereafter
acquired, or any income, profits or proceeds therefrom, or assign or otherwise
convey any right to receive income thereon, unless:
(x) in the case of any Lien securing Subordinated Indebtedness, the notes
are secured by a Lien on such property, assets or proceeds that is senior in
priority to such Lien, and
(y) in the case of any other Lien, the notes are equally and ratably
secured.
LIMITATION ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS BY RESTRICTED
SUBSIDIARIES.
(a) We will not permit any Restricted Subsidiary, directly or indirectly, to
guarantee, assume or in any other manner become liable with respect to any
Indebtedness of ours unless such Restricted Subsidiary simultaneously executes
and delivers a supplemental indenture providing for the guarantee of payment of
the notes by such Restricted Subsidiary on a basis senior to any guarantee of
Subordinated Indebtedness or at least equally with any guarantee of Pari Passu
Indebtedness; PROVIDED that this paragraph (a) shall not be applicable to:
(1) any guarantee of any Restricted Subsidiary that existed at the time
such Person became a Restricted Subsidiary, or
(2) any guarantee of any Restricted Subsidiary of Senior Bank
Indebtedness.
(b) Notwithstanding the foregoing, any guarantee of the notes created
pursuant to the provisions described in the foregoing paragraph (a) shall
provide by its terms that it shall be automatically and unconditionally released
and discharged upon:
(1) any sale, exchange or transfer, to any Person who is not an
Affiliate of our company, of all of our Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the indenture),
(2) the occurrence of any default or breach of any covenant or agreement
under any Indebtedness of ours arising as a result of the creation of such
guarantee, or
(3) the release by the holders of the Indebtedness of ours described in
the preceding paragraph of their guarantee by such Restricted Subsidiary
(including any deemed release upon payment in full of all obligations under
such Indebtedness, except by or as a result of payment under such
guarantee), at a time when:
(A) no other Indebtedness of ours has been guaranteed by such
Restricted Subsidiary, or
(B) the holders of all such other Indebtedness which is guaranteed by
such Restricted Subsidiary also release their guarantee by such
Restricted Subsidiary (including any deemed release upon payment in full
of all obligations under such Indebtedness).
PURCHASE OF NOTES UPON A CHANGE OF CONTROL.
If a Change of Control occurs, each holder of notes will have the right to
require us to purchase all or a part of that holder's notes pursuant to the
Change of Control offer described in "Description of the Indenture Governing the
New Notes--Repurchase at the Option of Holders" above and in the following
paragraph.
Within 30 days following any Change of Control, we will mail a notice to
each holder describing the terms of the Change of Control. This notice will
state the purchase price and the purchase date, which will be a business day no
earlier than 30 days nor later than 60 days from the date the notice is mailed,
unless otherwise required by applicable law.
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If a Change of Control offer is made, we cannot assure that we will have
sufficient funds to pay the purchase price for all of the notes that might be
delivered by holders seeking to accept the Change of Control offer. Our failure
to make or consummate the Change of Control offer or pay the Change of Control
purchase price when due would result in an Event of Default and would give the
Trustee and the holders of the notes the rights described under "Events of
Default."
One of the events which constitutes a Change of Control under the indenture
is the sale, lease, exchange or other transfer of "all or substantially all" of
our assets. Although there is a limited body of case law interpreting the phrase
"substantially all", there is no precise established definition of the phrase
under New York law. Accordingly, the ability of a holder of notes to require us
to repurchase notes as a result of a sale, lease, transfer or other disposition
of less than all of our assets is uncertain.
We will comply with the tender offer rules including Rule 14e-l under the
Exchange Act, and any other applicable securities laws and regulations in
connection with repurchase of notes as a result of a Change of Control.
LIMITATION ON SALE OF ASSETS.
(a) We will not, and will not permit any Restricted Subsidiary to, directly
or indirectly, engage in any Asset Sale unless
(1) the consideration received by us or such Restricted Subsidiary for
such Asset Sale is not less than the Fair Market Value of the shares or
assets sold (as determined by our Board of Directors, whose determination
shall be conclusive and evidenced by a Board resolution), and
(2) the consideration received by us or the relevant Restricted
Subsidiary in respect of such Asset Sale consists of at least 75% cash or
Cash Equivalents.
Notwithstanding the preceding sentence, we and our Restricted Subsidiaries
may consummate an Asset Sale without complying with clause (2) of the
immediately preceding sentence if at least 75% of the consideration for such
Asset Sale consists of any combination of cash, Cash Equivalents and those items
described in clause (b)(2) or (b)(3) below.
(b) If we or any Restricted Subsidiary engages in an Asset Sale, we may use
the Net Cash Proceeds thereof, within 12 months after the later of such Asset
Sale or the receipt of such Net Cash Proceeds,
(1) to permanently repay or prepay any then outstanding Senior Bank
Indebtedness of ours or a Restricted Subsidiary, any then outstanding
Indebtedness of a Restricted Subsidiary or any other then outstanding
unsubordinated Indebtedness of ours,
(2) to invest in any one or more businesses (including, without
limitation, in the Capital Stock of any Person that becomes a Restricted
Subsidiary as a result of such investment or that is received in connection
with a Permitted Investment made under clause (g), (h) or (i) of the
definition thereof), make capital expenditures (including lease payments for
one or more capital assets) or invest in other tangible assets of ours or
any Restricted Subsidiary, in each case, engaged, used or useful in the
Cable/ Telecommunications Business, the DTH Business or the
Entertainment/Programming Business of ours and our Restricted Subsidiaries
(or enter into a legally binding agreement to do so within six months of the
date on which such agreement is executed), or
(3) to invest in properties or assets that replace the properties and
assets that are the subject to such Asset Sale (or enter into a legally
binding agreement to do so within six months of the date on which such
agreement is executed).
If any such legally binding agreement to invest such Net Cash Proceeds is
terminated, then we may, within 90 days of such termination or within 12 months
of such Asset Sale, whichever is later, apply or invest such Net Cash Proceeds
as provided in clause (2) or (3) (without regard to the parenthetical
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contained in clauses (2) or (3)) above. The amount of such Net Cash Proceeds not
so used as set forth above in this paragraph (b) constitutes "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds exceeds $15 million we
shall, within 30 business days, make an offer to purchase (an "Excess Proceeds
Offer") from all holders of the notes, on a PRO RATA basis (together with and
including any notes that may be outstanding pursuant to the Series C indenture),
in accordance with the procedures set forth below, the maximum Accreted Value of
notes that may be purchased with the Excess Proceeds less the amount of Excess
Proceeds, if any, required to be applied under the PCI indenture for the
repurchase of PCI notes and applied under the Old indenture or the Series C
indenture for the repurchase of the Old notes and Series C notes, respectively.
The offer price shall be payable in cash in an amount equal to 100% of the
Accreted Value of the notes, plus accrued and unpaid interest, if any (the
"Offered Price"), to the date such Excess Proceeds Offer is consummated (the
"Offer Date"). To the extent that the aggregate Accreted Value of notes tendered
pursuant to an Excess Proceeds Offer is less than the Excess Proceeds relating
thereto, we may use such additional Excess Proceeds for general corporate
purposes. If the Accreted Value of notes validly tendered and not withdrawn by
holders thereof exceeds the Excess Proceeds, notes to be purchased will be
selected on a pro rata basis (together with and including any Series C notes
that may be outstanding). Upon completion of such offer to purchase, the amount
of Excess Proceeds shall be reset to zero.
(d) If we become obligated to make an Offer pursuant to clause (c) above,
the notes shall be purchased by us, at the option of the holder thereof, in
whole or in part in integral multiples of $1,000 on a date that is not earlier
than 30 days and not later than 60 days from the date the notice is given to
holders, or such later date as may be necessary for us to comply with the
requirements under the Exchange Act, subject to proration in the event the
amount of Excess Proceeds is less than the aggregate Offered Price of all notes
tendered.
(e) We will comply with the applicable tender offer rules, including Rule
14e-1 under the Exchange Act, in connection with an Excess Proceeds Offer.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES.
We will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to:
(a) pay dividends, in cash or otherwise, or make any other distributions to
us or any Restricted Subsidiary on or in respect of our Capital Stock,
(b) pay any Indebtedness owed to us or any other Restricted Subsidiary,
(c) make loans or advances to us or any other Restricted Subsidiary, or
(d) transfer any of its properties or assets to us or any other Restricted
Subsidiary, except in all such cases for such encumbrances or restrictions
existing under or by reason of:
(1) any agreement or instrument in effect on the Issue Date and listed
on a schedule attached to the indenture,
(2) applicable law or regulation (including corporate governance
provisions required by applicable law and regulations of the National Bank
of Poland),
(3) customary non-assignment provisions of any lease governing a
leasehold interest of us or any Restricted Subsidiary,
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(4) any agreement or other instrument of a Person acquired by us or any
Restricted Subsidiary in existence at the time of such acquisition (but not
created in contemplation thereof), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other
than the Person, or the property or assets of the Person, so acquired,
(5) any mortgage or other Lien on real property acquired or improved by
us or any Restricted Subsidiary after the Issue Date that prohibits
transfers of the type described in (d) above with respect to such real
property,
(6) with respect to a Restricted Subsidiary, an agreement that has been
entered into for the sale or disposition of all or substantially all of our
Capital Stock in, or substantially all the assets of, such Restricted
Subsidiary,
(7) the refinancing of Indebtedness incurred under the agreements listed
on a schedule attached to the indenture or described in clause (5) above, so
long as such encumbrances or restrictions are no less favorable in any
material respect to us or any Restricted Subsidiary than those contained in
the respective agreement as in effect on the date of the indenture,
(8) any such customary encumbrance or restriction contained in a
security document creating a Lien permitted under the indenture to the
extent relating to the property or asset subject to such Lien,
(9) any agreement or instrument governing or relating to Senior Bank
Indebtedness (an "Indebtedness Instrument") if such encumbrance or
restriction applies only (X) to amounts which at any point in time (other
than during such periods as are described in the following clause (Y)) (A)
exceed amounts due and payable (or which are to become due and payable
within 30 days) in respect of the notes or the indenture for interest,
premium and principal (after giving effect to any realization by us under
any applicable Currency Agreement), or (B) if paid, would result in an event
described in the following clause (Y) of this sentence, or (Y) during the
pendency of any event that causes, permits or, after notice or lapse of
time, would cause or permit the holder(s) of the Senior Bank Indebtedness
governed by the Indebtedness Instrument to declare any such Indebtedness to
be immediately due and payable or require cash collateralization or cash
cover for such Indebtedness for so long as such cash collateralization or
cash cover has not been provided, or (Z) arising or agreed to in the
ordinary course of business, not relating to any Indebtedness and that do
not individually, or together with all such encumbrances or restrictions,
detract from the value of property or assets of us or any Restricted
Subsidiary in any manner material to us or any Restricted Subsidiary, and
(10) with respect to clause (d) above, any license agreement entered in
the ordinary course of business whereby we or any other Restricted
Subsidiary grant a license of programming or other intellectual property to
any other Person and such license agreement prohibits or encumbers the
transfer of the licensed property.
LIMITATION ON INVESTMENTS IN UNRESTRICTED SUBSIDIARIES.
We will not make, and will not permit any of our Restricted Subsidiaries to
make, any Investments in Unrestricted Subsidiaries (other than Permitted
Investments) if, at the time thereof, the amount of such Investment would exceed
the amount of Restricted Payments then permitted to be made pursuant to the
"LIMITATION ON RESTRICTED PAYMENTS" covenant. Any Investments in Unrestricted
Subsidiaries permitted to be made pursuant to this covenant:
(a) will be treated as the making of a Restricted Payment in calculating the
amount of Restricted Payments made by us or a Restricted Subsidiary (without
duplication under the provisions of clause (a) of paragraph (4) of the
"LIMITATION ON RESTRICTED PAYMENTS" covenant), and
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(b) may be made in cash or property (if made in property, the Fair Market
Value thereof as determined by our Board of Directors (whose determination shall
be conclusive and evidenced by a Board Resolution) shall be deemed to be the
amount of such Investment for the purpose of clause (a)).
LIMITATION ON LINES OF BUSINESS.
We will not and will not permit any Restricted Subsidiary to engage in any
business other than the Cable/Telecommunications Business, the
Entertainment/Programming Business or the DTH Business or any business or
activity reasonably related thereto, including the operation of a subscriber
management or service business.
PROVISION OF FINANCIAL STATEMENTS AND REPORTS.
(a) Whether or not subject to the reporting requirements of Section 13(a) or
15(d) of the Exchange Act, we will timely file with the Commission, to the
extent permitted, annual reports, quarterly reports and other documents required
to be filed with the Commission pursuant to such Section 13(a) or 15(d). We will
also provide the holders and the Trustee with these same reports and documents.
(b) We will disclose our current and accumulated earnings and profits, if
any, for each fiscal year in its annual report on Form 10-K so long as it is
required to file such report. Thereafter, we will provide such information to
any holder upon receipt of a written request from such holder.
CONSOLIDATION, MERGER AND SALE OF ASSETS
We will not in a single transaction or a series of related transactions:
- consolidate with or merge with or into any other Person, or
- sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its properties and assets as an entirety to any
Person or Persons, and
- we will not permit any Restricted Subsidiary to enter into any such
transaction, or series of transactions, if such transaction or series of
transactions, in the aggregate, would result in the sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially
all of the properties and assets of us and our Restricted Subsidiaries on
a consolidated basis to any Person or Persons, unless:
(a) either (1) we shall be the surviving corporation or (2) the Person (if
other than us) formed by such consolidation or into which we or we and our
Restricted Subsidiaries is merged or the Person which acquires by sale,
conveyance, transfer, lease or other disposition, all or substantially all of
the properties and assets of our company or our company and our Restricted
Subsidiaries, as the case may be, (the "Surviving Entity") (x) shall be a
corporation organized and validly existing under the laws of the United States
of America, any state thereof or the District of Columbia and (y) shall
expressly assume, by an indenture supplemental to the indenture executed and
delivered to the Trustee, in form satisfactory to the Trustee, our obligations
for the due and punctual payment of the principal of (or premium, if any, on)
and interest on all the notes and the performance and observance of every
covenant of the indenture to be performed or observed;
(b) immediately before and after giving effect to such transaction or series
of transactions on a PRO FORMA basis (and treating any obligation of our company
or any Restricted Subsidiary in connection with or as a result of such
transaction as having been incurred at the time of such transaction), no Default
or Event of Default shall have occurred and be continuing;
(c) immediately after giving effect to such transaction or series of
transactions on a PRO FORMA basis (on the assumption that the transaction or
series of transactions occurred on the first day of the latest fiscal quarter
for which our consolidated financial statements are available prior to the
consummation of such
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transaction or series of transactions with the appropriate adjustments with
respect to the transaction or series of transactions being included in such PRO
FORMA calculation), the ratio of our Total Consolidated Indebtedness to
Annualized Pro Forma Consolidated Operating Cash Flow or the Surviving Entity if
we are not the continuing obligor under the indenture) would be less than or
equal to such ratio of our company immediately before such transaction;
(d) if any of the property or assets of our company or any of our Restricted
Subsidiaries would thereupon become subject to any Lien, the provisions of the
"LIMITATION ON LIENS" covenant are complied with; and
(e) we or the Surviving Entity shall have delivered to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that such
consolidation, merger, sale, assignment, conveyance, transfer, lease or other
disposition and such supplemental indenture comply with the terms of the
indenture.
Upon any consolidation or merger, or any sale, assignment, conveyance,
transfer, lease or other disposition of all or substantially all of the
properties and assets of our company in accordance with the immediately
preceding paragraph in which we are not the continuing obligor under the
indenture, the Surviving Entity shall succeed to, and be substituted for, and
may exercise every right and power of ours under the indenture, with the same
effect as if such successor had been named as us therein. When a successor
assumes all the obligations of its predecessor under the indenture and the
notes, the predecessor shall be released from those obligations; PROVIDED that
in the case of a transfer by lease, the predecessor shall not be released from
the payment of principal and interest on the notes.
EVENTS OF DEFAULT
Each of the following is an "Event of Default":
(a) default for 30 days in the payment of interest on any note when due
and payable;
(b) default in the payment of the principal of or premium, if any, on
any note at its Maturity;
(c) default in the performance, or breach, of the provisions described
in "Consolidation, Merger and Sale of Assets," the failure to make or
consummate a Change of Control offer in accordance with the provisions of
the "PURCHASE OF NOTES UPON A CHANGE OF CONTROL" covenant or the failure to
make or consummate an Excess Proceeds Offer in accordance with the
provisions of the "LIMITATION ON SALE OF ASSETS" covenant;
(d) default in the performance, or breach, of any covenant or agreement
of ours contained in the indenture (other than a default in the performance,
or breach, of a covenant or agreement which is specifically dealt with
elsewhere in the indenture) and continuance of the default or breach for 30
days after written notice is given to us by the Trustee or to us and the
Trustee by the holders of at least 25% in aggregate principal amount at
maturity of the notes, as the case may be, then outstanding;
(e) (1) one or more defaults in the payment of principal of or premium,
if any, on Indebtedness of our company or any Significant Subsidiary
aggregating $15 million or more, when the same becomes due and payable at
the stated maturity thereof, and such default or defaults shall have
continued after any applicable grace period and shall not have been cured or
waived or (2) Indebtedness of our company or any Significant Subsidiary
aggregating $15 million or more shall have been accelerated or otherwise
declared due and payable, or required to be prepaid or repurchased (other
than by regularly scheduled required prepayment) prior to the stated
maturity thereof;
(f) any holder or holders (or any Person acting on any such holder's
behalf) of any Indebtedness in excess of $15 million in the aggregate of our
company or any Significant Subsidiary shall, subsequent to the occurrence of
a default with respect to such Indebtedness, notify the Trustee of the
intended sale or disposition of any assets of our company or any Restricted
Subsidiary that have been pledged to or for the benefit of such Person to
secure such Indebtedness or shall commence
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proceedings, or take action to retain in satisfaction of any such
Indebtedness, or to collect on, seize, dispose of or apply, any such assets
of our company or any Restricted Subsidiary pursuant to the terms of any
agreement or instrument evidencing any such Indebtedness of our company or
any Restricted Subsidiary or in accordance with applicable law;
(g) one or more final judgments, orders or decrees of any court or
regulatory agency shall be rendered against us or any Significant Subsidiary
or their respective properties for the payment of money, either individually
or in an aggregate amount, in excess of $15 million and either (1) an
enforcement proceeding shall have been commenced by any creditor upon such
judgment or order or (2) there shall have been a period of 30 consecutive
days during which a stay of enforcement of such judgment or order, by reason
of a pending appeal or otherwise, was not in effect; and
(h) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to us or any Significant Subsidiary.
If an Event of Default (other than an Event of Default arising from an event
of bankruptcy, insolvency or reorganization with respect to us or any
Significant Subsidiary) shall occur and be continuing, the Trustee or the
holders of not less than 25% in aggregate principal amount of the notes then
outstanding, by written notice to us (and to the Trustee if such notice is given
by the holders), may, and the Trustee upon the written request of such holders,
shall declare the principal of, premium, if any, and accrued interest on all of
the outstanding notes immediately due and payable, and upon any such declaration
all such amounts payable in respect of the notes shall become immediately due
and payable. If an Event of Default arising from an event of bankruptcy,
insolvency or reorganization with respect to us or any Significant Subsidiary
occurs and is continuing, then the principal of, premium, if any, and accrued
interest on all of the outstanding notes shall IPSO FACTO become and be
immediately due and payable without any declaration or other act on the part of
either Trustee or any holder of notes.
At any time after a declaration of acceleration under the indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the holders of a majority in aggregate principal amount of the
outstanding notes by written notice to us and the Trustee, may rescind such
declaration and its consequences if
(a) We have paid or deposited with the Trustee a sum sufficient to pay:
(1) all overdue interest on all outstanding notes,
(2) all unpaid principal of and premium, if any, on any outstanding
notes that have become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by such notes,
(3) to the extent that payment of such interest is lawful, interest upon
overdue interest and overdue principal at the rate borne by such notes,
(4) all sums paid or advanced by the Trustee under the indenture and the
reasonable compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel and
(b) all Events of Default, other than the non-payment of amounts of
principal of, premium, if any, or interest on the notes that has become due
solely by such declaration of acceleration, have been cured or waived. No such
rescission shall affect any subsequent default or impair any right consequent
thereon.
The holders of at least a majority in principal amount of the notes may
waive any existing defaults under the indenture, except a default in the payment
of the principal of, premium, if any, or interest on any such note, or in
respect of a covenant or provision which under the indenture can not be modified
or amended without the consent of the holder of each note.
If a Default or an Event of Default occurs and is continuing and is known to
the Trustee, the Trustee will mail to each holder of notes, notice of the
Default or Event of Default within 90 days after the
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occurrence thereof. Except in the case of a Default or an Event of Default in
payment of principal of, premium, if any, or interest on any notes, the Trustee
may withhold the notice to the holders of such notes if a committee of its trust
officers in good faith determines that withholding the notice is in the
interests of the holders of such notes.
We are required to furnish to the Trustee annual and quarterly statements as
to our performance of our obligations under the indenture and as to any default
in such performance. We are also required to notify the Trustee within five
business days of the occurrence of any Default.
DEFEASANCE OR COVENANT DEFEASANCE
We may, at our option and at any time, elect to have our obligations with
respect to the outstanding notes discharged ("defeasance"). Such defeasance
means that we will be deemed to have paid and discharged the entire Indebtedness
represented by the outstanding notes and to have satisfied all our other
obligations under the notes and the indenture, except for
(a) the rights of holders to receive payments in respect of the principal of
(and premium, if any, on) and interest on the notes when such payments are due,
(b) our obligations to issue temporary notes, register the transfer or
exchange of any notes, replace mutilated, destroyed, lost or stolen notes,
maintain an office or agency for payments in respect of the notes and segregate
and hold such payments in trust,
(c) the rights, powers, trusts, duties and immunities of the Trustee, and
(d) the defeasance provisions of the indenture.
In addition, we may, at our option and at any time, elect to have our
obligations released with respect to certain covenants described in the
indenture ("covenant defeasance"), and thereafter, any omission to comply with
such obligations shall not constitute a Default or an Event of Default with
respect to the related notes.
In order to exercise either defeasance or covenant defeasance:
(a) we must irrevocably deposit or cause to be deposited with the Trustee,
in trust, specifically pledged as security for, and dedicated solely to, the
benefit of the holders of the notes, cash in U.S. dollars, or U.S. Government
Obligations (as defined in the indenture), or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, or a nationally recognized investment banking
firm, to pay and discharge the principal of, premium, if any, and interest on
the relevant outstanding notes on the Stated Maturity (or upon redemption, if
applicable) of such principal, premium, if any, or installment of interest;
(b) no Default or Event of Default with respect to the relevant notes will
have occurred and be continuing on the date of such deposit or, insofar as an
event of bankruptcy under clause (h) of "Events of Default" above is concerned,
at any time during the period ending on the 91st day after the date of such
deposit;
(c) such defeasance or covenant defeasance shall not result in a breach or
violation of, or constitute a default under any material agreement or instrument
(other than the indenture) to which we are a party or by which we are bound;
(d) in the case of defeasance, we will have delivered to the Trustee an
Opinion of Counsel in the U.S. stating that we have received from, or there has
been published by, the Internal Revenue Service a ruling, or since the effective
date of the Registration Statement, there has been a change in applicable
federal income tax law, in either case to the effect that, and based thereon
such opinion shall confirm that, the holders of the outstanding notes will not
recognize income, gain or loss for federal income tax purposes as
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a result of such defeasance and will be subject to federal income tax on the
same amounts, in the same manner and at the same times as would have been the
case if such defeasance had not occurred;
(e) in the case of covenant defeasance, we will have delivered to the
Trustee an Opinion of Counsel in the U.S. to the effect that the holders of the
notes outstanding will not recognize income, gain or loss for federal income tax
purposes as a result of such covenant defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such covenant defeasance had not occurred;
(f) in the case of defeasance or covenant defeasance, we will have delivered
to the Trustee an Opinion of Counsel in the U.S. to the effect that after the
91st day following the deposit or after the date such opinion is delivered, the
trust funds will not be subject to the effect of any applicable bankruptcy,
insolvency, reorganization or similar laws affecting creditors' rights
generally;
(g) we will have delivered to the Trustee an Officers' Certificate stating
that the deposit was not made by us with the intent of preferring the holders of
the applicable notes over our other creditors with the intent of hindering,
delaying or defrauding our creditors; and
(h) we will have delivered to the Trustee an Officers' Certificate and an
Opinion of Counsel, each stating that all conditions precedent provided for
relating to either the defeasance or the covenant defeasance, as the case may
be, have been complied with.
SATISFACTION AND DISCHARGE
The indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the notes as expressly
provided for in the indenture and the rights, powers, trusts, duties and
immunities of the Trustee) and the Trustee, at our request and expense, will
execute proper instruments acknowledging satisfaction and discharge of the
indenture when:
(a) either
(1) all the notes theretofore authenticated and delivered (other than
destroyed, lost or stolen notes which have been replaced or paid) have been
delivered to the Trustee for cancellation, or
(2) all notes not theretofore delivered to the Trustee for cancellation
(x) have become due and payable, (y) will become due and payable at their
Stated Maturity within one year or (z) are to be called for redemption
within one year under arrangements satisfactory to the Trustee for the
giving of notice of redemption by the Trustee in our name, and at our
expense, and we have irrevocably deposited or caused to be deposited with
the Trustee, in trust, for such purpose an amount sufficient to pay and
discharge the entire Indebtedness on such notes not theretofore delivered to
the Trustee for cancellation, for principal of, premium, if any, and
interest on such notes to the date of such deposit (in the case of notes
which have become due and payable) or to the Stated Maturity or Redemption
Date, as the case may be;
(b) we have paid or caused to be paid all sums payable under the indenture
by us; and
(c) we have delivered to the Trustee an Officers' Certificate and an Opinion
of Counsel, each stating that all conditions precedent provided in the indenture
relating to the satisfaction and discharge of the indenture have been complied
with.
AMENDMENTS AND WAIVERS
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting holder):
(a) change the Stated Maturity of the principal of, or any installment of
interest on, any note, or reduce the Accreted Value or the rate of interest on
any note or any premium payable upon the
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redemption thereof, or change the coin or currency in which any note or any
premium or the interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment after the Stated Maturity thereof
(or, in the case of redemption, on or after the Redemption Date);
(b) reduce the percentage in principal amount at maturity of outstanding
notes, the consent of whose holders is required for any waiver of compliance
with certain provisions of, or certain defaults and their consequences provided
for under, the indenture;
(c) modify any provisions described under "--Amendments and Waivers" or
"--Events of Default," except to increase the percentage of outstanding notes
required for such actions or to provide that certain other provisions of the
indenture cannot be modified or waived without the consent of the holder of each
outstanding note; or
(d) amend, change or modify the redemption provisions of the indenture or
the notes or our obligation to make and consummate a Change of Control offer in
the event of a Change of Control or an Excess Proceeds offer in connection with
any Asset Sale or modify any of the provisions or definitions with respect
thereto.
The holders of a majority in aggregate principal amount at maturity of the
notes outstanding may waive compliance with certain restrictive covenants and
provisions of the indenture.
THE TRUSTEE
Except during the continuance of an Event of Default, the Trustee will
perform only such duties as are specifically set forth in the indenture. During
the existence of an Event of Default, the Trustee will exercise such rights and
powers vested in it under the indenture and use the same degree of care and
skill in its exercise as a prudent Person would exercise under the circumstances
in the conduct of his/her own affairs.
The indenture and provisions of the Trust Indenture Act incorporated therein
contain limitations on the rights of the Trustee, should it become a creditor of
our company to obtain payment of claims in certain cases or to realize on
certain property received by it in respect of any such claims, as security or
otherwise. The Trustee is permitted to engage in other transactions, but if it
acquires any conflicting interest (as defined) it must eliminate such conflict
or resign.
GOVERNING LAW
The indenture and the notes will be governed by, and construed in accordance
with, the laws of the State of New York.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
indenture. Please refer to the indenture for the full definition of such terms.
"Accreted Value" as of any date (the "Specified Date") means, with respect
to each $1,000 principal amount at maturity of the notes:
(1) if the Specified Date is one of the following dates (each a
"Semi-Accrual Date"), the amount set forth opposite such date below:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRETED
ACCRUAL DATE VALUE
- ----------------------------------------------------------------------- ----------
<S> <C>
Issue Date............................................................. $ 389.43
August 1, 1999......................................................... 428.75
February 1, 2000....................................................... 471.05
August 1, 2000......................................................... 517.53
February 1, 2001....................................................... 568.59
August 1, 2001......................................................... 624.69
February 1, 2002....................................................... 686.33
August 1, 2002......................................................... 754.05
February 1, 2003....................................................... 828.45
August 1, 2003......................................................... 910.19
February 1, 2004....................................................... $ 1,000.00
</TABLE>
(2) if the Specified Date occurs between two Semi-Annual Accrual Dates,
the sum of (a) the Accreted Value for the Semi-Annual Accrual Date
immediately preceding the Specified Date and (b) an amount equal to the
product of (x) the Accreted Value for the immediately following Semi-Annual
Accrual Date less the Accreted Value for the immediately preceding
Semi-Annual Accrual Date and (y) a fraction, the numerator of which is the
number of days actually elapsed from the immediately preceding Semi-Annual
Accrual Date to the Specified Date and the denominator of which is 180: and
(3) if the Specified Date is on or after February 1, 2004, $1,000.
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at the
time such Person becomes a Restricted Subsidiary or (b) assumed in connection
with the acquisition of assets from such Person, in each case, other than
Indebtedness incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or such acquisition; PROVIDED THAT, for
purposes of the "LIMITATION ON ADDITIONAL INDEBTEDNESS", covenant, such
Indebtedness shall be deemed to be incurred on the date of the related
acquisition of assets from any Person or the date the acquired Person becomes a
Restricted Subsidiary.
"Affiliate" of any specified Person means:
(a) any other Person directly or indirectly controlling or controlled by or
under direct or indirect common control with such specified Person, or
(b) any other Person that owns, directly or indirectly, 5% or more of such
specified Person's Voting Stock or any executive officer or director of any such
specified Person or other Person or, with respect to any natural Person, any
Person having a relationship with such Person by blood, marriage or adoption not
more remote than first cousin.
For the purposes of this definition, "control," when used with respect to
any specified Person, means the power to direct the management and policies of
such Person, directly or indirectly, whether through the
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ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Annualized Pro Forma Consolidated Operating Cash Flow" means Consolidated
Operating Cash Flow for the latest fiscal quarter for which our consolidated
financial statements are available multiplied by four. For purposes of
calculating "Consolidated Operating Cash Flow" for any fiscal quarter for
purposes of this definition,
(a) all our Restricted Subsidiaries on the date of the transaction giving
rise to the need to calculate "Annualized Pro Forma Consolidated Operating Cash
Flow" (the "Transaction Date") shall be deemed to have been Restricted
Subsidiaries at all times during such fiscal quarter, and
(b) any Unrestricted Subsidiary of ours on the Transaction Date shall be
deemed to have been an Unrestricted Subsidiary at all times during such fiscal
quarter.
In addition to and without limitation of the foregoing, for purposes of this
definition, "Consolidated Operating Cash Flow" shall be calculated after giving
effect on a PRO FORMA basis for the applicable fiscal quarter to, without
duplication, any Asset Sales or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of us or a Restricted Subsidiary (including any Person
who becomes a Restricted Subsidiary as a result of the Asset Acquisition)
incurring, assuming or otherwise being liable for Acquired Indebtedness)
occurring during the period commencing on the first day of such fiscal quarter
to and including the Transaction Date (the "Reference Period"), as if such Asset
Sale or Asset Acquisition occurred on the first day of the Reference Period.
"Asset Acquisition" means:
(a) any capital contribution (by means of transfers of cash or other
property to others or payments for property or services for the account or use
of others, or otherwise) by us or any Restricted Subsidiary in any other Person,
or any acquisition or purchase of Capital Stock of any other Person by us or any
Restricted Subsidiary, in either case pursuant to which such Person shall become
a Restricted Subsidiary or shall be merged with or into us or any Restricted
Subsidiary, or
(b) any acquisition by us or any Restricted Subsidiary of the assets of any
Person which constitute substantially all of an operating unit or line of
business of such person or which is otherwise outside of the ordinary course of
business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer or
lease (that has the effect of a disposition and is not for security purposes) or
other disposition (that is not for security purposes) to any Person other than
us or a Restricted Subsidiary in one transaction or a series of related
transactions, of:
(a) any Capital Stock of any Restricted Subsidiary,
(b) any material governmental license or other governmental authorization of
us or any Restricted Subsidiary pertaining to a Cable/Telecommunications
Business, a DTH Business or an Entertainment/ Programming Business,
(c) any assets of our company or any Restricted Subsidiary which constitute
substantially all of an operating unit or line of business of our company and
our Restricted Subsidiaries or
(d) any other property or asset of our company or any Restricted Subsidiary
outside of the ordinary course of business.
For the purposes of this definition, the term "Asset Sale" shall not
include:
(a) any disposition of our properties and assets governed under
"Consolidation, Merger and Sale of Assets",
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(b) sales of property or equipment that have become worn out, obsolete or
damaged or otherwise unsuitable for use in connection with our business or that
of a Restricted Subsidiary, as the case may be,
(c) for purposes of the covenant "LIMITATION ON SALE OF ASSETS," any sale,
conveyance, transfer, lease or other disposition of any property or asset,
whether in one transaction or a series of related transactions, either (1)
involving assets with a Fair Market Value not in excess of $500,000 (or, if
non-U.S. dollar denominated, the U.S. Dollar Equivalent thereof) or (2) as part
of a Capitalized Lease Obligation, and
(d) any transfer by us or a Restricted Subsidiary of property or equipment
to a Person who is not an Affiliate of our company in exchange for property or
equipment that has a fair market value at least equal to the fair market value
of the property or equipment so transferred; PROVIDED THAT, in the event of a
transfer described in this clause (d), we shall deliver to the Trustee an
Officer's Certificate certifying that such exchange complies with this clause
(d).
"Average Life" means, as of the date of determination with respect to any
Indebtedness, the quotient obtained by dividing:
(a) the sum of the products of (1) the number of years from the date of
determination to the date or dates of each successive scheduled principal
payment (including, without limitation, any sinking fund requirements) of such
Indebtedness multiplied by (2) the amount of each such principal payment by
(b) the sum of all such principal payments.
"Bankruptcy Law" means Title 11 of the United States Code, as amended, or
any similar U.S. federal or state law, or any similar law of any other
jurisdiction, relating to bankruptcy, insolvency, receivership, winding-up,
liquidation, reorganization or relief of debtors or any amendment to, succession
to or change in any such law.
"Cable Television Newco" means any Person:
(a) of whom we or a Restricted Subsidiary owns the greater of 49% of the
outstanding Capital Stock or the maximum amount of outstanding Capital Stock
that we or such Restricted Subsidiary may own under applicable law, and
(b) that holds Capital Stock in a Management Company.
"Cable/Telecommunications Business" means any business operating a cable or
telephone or telecommunications or broadcasting system (other than an
Entertainment/Programming Business or a DTH Business), including, without
limitation, any business (other than an Entertainment/ Programming Business or a
DTH Business) conducted by us or any Restricted Subsidiary on the Issue Date and
any programming guide or telephone directory business.
"Capital Stock" of any Person means any and all shares, interests, rights to
purchase, warrants, options, participations, rights in or other equivalents
(however designated) of such Person's capital stock or other equity
participations, including partnership interests, whether general or limited, in
such Person, including any Preferred Stock, and any rights (other than debt
securities convertible into capital stock), warrants or options exchangeable for
or convertible into such capital stock, whether now outstanding or issued after
the date of the indenture.
"Capitalized Lease Obligation" of any Person means any obligation of such
Person and its subsidiaries on a consolidated basis under a lease of (or other
agreement conveying the right to use) any property (whether real, personal or
mixed) that is required to be classified and accounted for as a capital lease
obligation under GAAP, and, for the purpose of the indenture, the amount of such
obligation at any date shall be the capitalized amount thereof at such date,
determined in accordance with GAAP.
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"Cash Equivalents" means:
(a) any evidence of Indebtedness with a maturity of 180 days or less issued
or directly and fully guaranteed or insured by the United States of America or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States of America is pledged in support thereof);
(b) certificates of deposit or acceptances with a maturity of 180 days or
less of any financial institution that is a member of the Federal Reserve
System, in each case having combined capital and surplus and undivided profits
of not less than $500,000,000;
(c) commercial paper with a maturity of 180 days or less issued by a
corporation that is not an Affiliate of ours and is organized under the laws of
any state of the United States or the District of Columbia and rated at least
A-1 by S&P or at least P-l by Moody's; and
(d) any Capital Stock of any mutual funds at least 95% of the assets of
which are invested in the foregoing.
"Change of Control" means the occurrence of any of the following events:
(a) any "person" or "group" (as such terms are used in Sections 13(d) and
14(d) of the Exchange Act), other than Permitted Holders, is or becomes the
"beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a Person shall be deemed to have "beneficial ownership" of all
securities that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of our total outstanding Voting Stock;
(b) we consolidate with, or merge with or into another Person or conveys,
transfers, leases or otherwise dispose of all or substantially all of our assets
to any Person, or any Person consolidates with or merges with or into us, in any
such event pursuant to a transaction in which our outstanding Voting Stock is
converted into or exchanged for cash, securities or other property, other than
any such transaction where:
(1) our outstanding Voting Stock is not converted or exchanged at all
(except to the extent necessary to reflect a change in the jurisdiction of
incorporation of our company) or is converted into or exchanged for (A)
Voting Stock (other than Redeemable Capital Stock) of the surviving or
transferee corporation or (B) Voting Stock (other than Redeemable Capital
Stock) of the surviving or transferee corporation and cash, securities and
other property (other than Capital Stock of the Surviving Entity) in an
amount that could be paid by us as a Restricted Payment as described under
the "LIMITATION ON RESTRICTED PAYMENTS" covenant, and
(2) immediately after such transaction, no "person" or "group" (as such
terms are used in Sections 13(d) and 14(d) of the Exchange Act), other than
Permitted Holders, is the "beneficial owner" (as defined in Rules 13d-3 and
13d-5 under the Exchange Act, except that a Person shall be deemed to have
"beneficial ownership" of all securities that such Person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time), directly or indirectly, of more than 50% of the total
outstanding Voting Stock of the surviving or transferee corporation;
(c) during any consecutive two year period, individuals who at the beginning
of such period constituted our Board of Directors (together with any new
directors whose election to such Board of Directors, or whose nomination for
election by our stockholders, was approved by a vote of 66 2/3% of the directors
then still in office who were either directors at the beginning of such period
or whose election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board of Directors then in
office; or
(d) we are liquidated or dissolved or a special resolution is passed by our
shareholders approving the plan of liquidation or dissolution other than in a
transaction which complies with the provisions described under "Consolidation,
Merger and Sales of Assets."
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"Common Stock" means, with respect to any Person, any and all shares,
interests or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of such Person's common stock or ordinary
shares, whether outstanding at the Issue Date, and includes, without limitation,
all series and classes of such common stock or ordinary shares.
"Consolidated Income Tax Expense" means, with respect to any period, the
provision for our U.S. corporation, local, foreign and other income taxes and
that of the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, for any period, without duplication,
the sum of:
(a) the interest expense of our company and its Restricted Subsidiaries for
such period, including, without limitation,
(1) amortization of original issue discount,
(2) the net cost of Interest Rate Agreements (including amortization of
discounts),
(3) the interest portion of any deferred payment obligation,
(4) accrued interest,
(5) the consolidated amount of any interest capitalized by us and the
Restricted Subsidiaries, PROVIDED that such amount will be limited for
purposes of this definition to the amount that would have been obtained if
such interest had been capitalized at the interest rate for the notes, and
(6) all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing,
PLUS
(b) the interest component of Capitalized Lease Obligations of our company
and our Restricted Subsidiaries paid, accrued or scheduled to be paid or accrued
during such period, in each case as determined on a consolidated basis in
accordance with GAAP.
"Consolidated Net Income" means, for any period, the consolidated net income
(or loss) of our company and all Restricted Subsidiaries for such period as
determined in accordance with GAAP, adjusted by excluding, without duplication,
(a) any net after-tax extraordinary gains or losses (in each case less all
fees and expenses relating thereto),
(b) any net after-tax gains or losses (in each case less all fees and
expenses relating thereto) attributable to asset dispositions other than in the
ordinary course of business,
(c) the portion of net income (or loss) of any Person (other than us or a
Restricted Subsidiary), including Unrestricted Subsidiaries, in which we or any
Restricted Subsidiary has an ownership interest, except to the extent of the
amount of dividends or other distributions actually paid to us or any Restricted
Subsidiary in cash dividends or distributions during such period,
(d) net income (or loss) of any Person combined with us or any Restricted
Subsidiary on a "pooling of interests" basis attributable to any period prior to
the date of combination,
(e) except with respect to any encumbrance or restriction described in
clause (ii) of the "Limitation on Dividend and Other Payment Restrictions"
covenant, the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such Restricted
Subsidiary is not at the date of determination permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary or its stockholders, and
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(f) any non-cash items of ours and any Restricted Subsidiary (including
monetary corrections) increasing or decreasing Consolidated Net Income for such
period (other than items that will result in the receipt or payment of cash).
"Consolidated Operating Cash Flow" means, with respect to any period, the
Consolidated Net Income of our company and our Restricted Subsidiaries for such
period increased by (in each case to the extent included in computing
Consolidated Net Income) the sum of:
(a) the Consolidated Income Tax Expense of our company and our Restricted
Subsidiaries accrued according to GAAP for such period (other than taxes
attributable to extraordinary, unusual or non-recurring gains or losses);
(b) Consolidated Interest Expense for such period;
(c) depreciation of our company and our Restricted Subsidiaries for such
period, and
(d) amortization of our company and our Restricted Subsidiaries for such
period, including, without limitation, amortization of capitalized debt issuance
costs for such period, all determined on a consolidated basis in accordance with
GAAP PROVIDED that, if any Restricted Subsidiary is not a Wholly Owned
Restricted Subsidiary, Consolidated Operating Cash Flow shall be reduced (to the
extent not otherwise reduced in accordance with GAAP) by an amount equal to
(1) the amount of Consolidated Net Income attributable to such
Restricted Subsidiary multiplied by
(2) the quotient of
(A) the number of shares of outstanding Common Stock of such
Restricted Subsidiary not owned on the last day of such period by our
company or any of our Restricted Subsidiaries divided by
(B) the total number of shares of outstanding Common Stock of such
Restricted Subsidiary on the last day of such period.
"Cumulative Available Cash Flow" means, as at any date of determination, the
positive cumulative Consolidated Operating Cash Flow realized during the period
commencing on the Issue Date and ending on the last day of the most recent
fiscal quarter immediately preceding the date of determination for which our
consolidated financial information is available or, if such cumulative
Consolidated Operating Cash Flow for such period is negative, the negative
amount by which cumulative Consolidated Operating Cash Flow is less than zero.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement entered into by a Person
that is designed to protect such Person against fluctuations in currency values.
"Default" means any event that after notice or passage of time or both would
be an Event of Default.
"Disinterested Director" means, with respect to any transaction or series of
transactions in respect of which the Board of Directors is required to deliver a
resolution of the Board of Directors under the indenture, a member of the Board
of Directors who does not have any material direct or indirect financial
interest in or with respect to such transaction or series of transactions.
"DTH Business" means the business of:
(a) developing, managing, operating or providing services relating to direct
to home satellite systems for the distribution of subscription programming
services directly to homes and cable systems in areas covered by the "footprint"
of the satellites utilized by us and our Restricted Subsidiaries, and activities
to
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accomplish the foregoing (other than the Cable/Telecommunications Business or
the Entertainment/ Programming Business), or
(b) evaluating, participating or pursuing any other activity or opportunity
that is primarily related to those identified above.
"Entertainment/Programming Business" means a business engaged primarily in
the management, ownership, operation, acquisition, development, production,
distribution or syndication of general entertainment, sports, movies, children's
or other programming or publishing.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing
buyer, as determined by our Board of Directors and evidenced by a resolution
thereof.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in effect in the United States on the Issue Date.
"Guarantee", as applied to any obligation, means:
(a) a guarantee (other than by endorsement of negotiable instruments for
collection in the ordinary course of business), direct or indirect, in any
manner, of any part or all of such obligation, and
(b) an agreement, direct or indirect, contingent or otherwise, the practical
effect of which is to assure in any way the payment or performance (or payment
of damages in the event of non-performance) of all or any part of such
obligation, including, without limiting the foregoing, the payment of amounts
drawn down by letters of credit.
"Incur" or "incur" means, with respect to any Indebtedness, to create,
issue, assume, guarantee or in any manner become directly or indirectly liable
for the payment of, or otherwise incur such Indebtedness; provided that neither
the accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness and provided further that the
incurrence of any particular Indebtedness by the Company or any Restricted
Subsidiary shall occur only once and any obligation of any Restricted Subsidiary
arising under any guarantee supporting such Indebtedness shall be disregarded.
"Indebtedness" means, with respect to any Person, without duplication:
(a) all liabilities of such Person for borrowed money (including overdrafts)
or for the deferred purchase price of property or services, excluding any trade
payables and other accrued current liabilities (including outstanding
disbursements) incurred in the ordinary course of business (whether or not
evidenced by a note), but including, without limitation, all obligations,
contingent or otherwise, of such Person in connection with any letters of credit
and acceptances issued under letter of credit facilities, acceptance facilities
or other similar facilities,
(b) all obligations of such Person evidenced by bonds, notes, debentures or
other similar instruments,
(c) all indebtedness of such Person created or arising under any conditional
sale or other title retention agreement with respect to property acquired by
such Person (even if the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such
property), but excluding trade accounts payable arising in the ordinary course
of business,
(d) all Capitalized Lease Obligations of such Person,
(e) all Indebtedness referred to in (but not excluded from) the preceding
clauses of other Persons and all dividends of other Persons, the payment of
which is secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien upon or with
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respect to property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or become
liable for the payment of such Indebtedness (the amount of such obligation being
deemed to be the lesser of the value of such property or asset or the amount of
the obligation so secured),
(f) all guarantees by such Person of Indebtedness referred to in this
definition of any other Person,
(g) all Redeemable Capital Stock of such Person valued at the greater of its
voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid
dividends, and
(h) any liability of such Person under or in respect of Interest Rate
Agreements or Currency Agreements. For purposes hereof, the "maximum fixed
repurchase price" of any Redeemable Capital Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Redeemable Capital Stock as if such Redeemable Capital Stock were purchased on
any date on which Indebtedness shall be required to be determined pursuant to
the indenture, and if such price is based upon, or measured by, the fair market
value of such Redeemable Capital Stock, such fair market value shall be
determined in good faith by our board of directors. For purposes of the
covenants "LIMITATION ON ADDITIONAL INDEBTEDNESS" and "LIMITATION ON RESTRICTED
PAYMENTS" and the definition of "EVENTS OF DEFAULT," in determining the
principal amount of any Indebtedness to be incurred by our company or a
Restricted Subsidiary or which is outstanding at any date, (x) the principal
amount of any Indebtedness which provides that an amount less than the principal
amount at maturity thereof shall be due upon any declaration of acceleration
thereof shall be the accreted value thereof at the date of determination and (y)
effect shall be given to the impact of any Currency Agreement with respect to
such Indebtedness.
"Interest Rate Agreements" means any interest rate protection agreements and
other types of interest rate hedging agreements or arrangements (including,
without limitation, interest rate swaps, caps, floors, collars and similar
agreements) designed to protect against or manage exposure to fluctuations in
interest rates in respect of Indebtedness.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan or other extension of credit or capital contribution to such
Person (by means of any transfer of cash or other property to others or any
payment for property or services for the account or use of others), or any
purchase, acquisition or ownership by such Person of any Capital Stock
(including ownership of Capital Stock through share leasing arrangements),
bonds, notes, debentures or other securities or evidences of Indebtedness issued
or owned by any other Person and all other items that would be classified as
investments on a balance sheet prepared in accordance with GAAP. In addition,
the Fair Market Value of the net assets of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary shall
be deemed to be an "Investment" made by us in such Unrestricted Subsidiary at
such time. "Investments" shall exclude extensions of trade credit on
commercially reasonable terms in accordance with normal trade practices.
"Issue Date" means the date of original issuance of your notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any property
of any kind, real or personal, movable or immovable, now owned or hereafter
acquired. A Person shall be deemed to own subject to a Lien any property which
such Person has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement.
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"Majority Owned Restricted Subsidiary" means a Restricted Subsidiary (a) at
least 66.66% of the outstanding Capital Stock of which is beneficially owned
directly or indirectly by us or Poland Cablevision (Netherlands) B.V. and one or
more Wholly Owned Restricted Subsidiaries and (b) no outstanding Capital Stock
of which is owned, directly or indirectly (except through us), by any
shareholder or Affiliate of a shareholder of our company.
"Management Agreement" means:
(a) any agreement between our company or a Restricted Subsidiary and a
Management Company pursuant to which the Management Company shall lease or
otherwise employ assets of our company or a Restricted Subsidiary to operate a
Cable/Telecommunications Business, a DTH Business or an
Entertainment/Programming Business, and
(b) any agreement or instrument (1) governing Indebtedness of a Management
Company to our company or a Restricted Subsidiary, or (2) governing corporate
procedures or control of a Management Company.
"Management Company" means any Person, a portion of whose Capital Stock is
held by us or a Restricted Subsidiary, that:
(a) holds or has applied for a license or permit to operate a
Cable/Telecommunications Business, a DTH Business or an
Entertainment/Programming Business in the Republic of Poland or elsewhere in
Continental Europe, and
(b) manages the operations of a Restricted Subsidiary pursuant to a
Management Agreement.
"Maturity" means, with respect to any note, the date on which any principal
of such note becomes due and payable as therein or herein provided, whether at
the Stated Maturity with respect to such principal or by declaration of
acceleration, call for redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means:
(a) with respect to any Asset Sale, the proceeds thereof in the form of cash
or Cash Equivalents including payments in respect of deferred payment
obligations or escrowed funds, but only when received in the form of, or stock
or other assets when disposed for, cash or Cash Equivalents (except to the
extent that such obligations are financed or sold with recourse to us or any
Restricted Subsidiary), net of--
(1) brokerage commissions and other fees and expenses (including fees
and expenses of legal counsel, accountants, consultants and investment
banks) related to such Asset Sale,
(2) provisions for all taxes payable as a result of such Asset Sale,
(3) payments made to retire Indebtedness where payment of such
Indebtedness is secured by the assets or properties the subject of such
Asset Sale,
(4) amounts required to be paid to any Person (other than us or any
Restricted Subsidiary) owning a beneficial interest in the assets subject to
the Asset Sale, and
(5) appropriate amounts to be provided by us or any Restricted
Subsidiary, as the case may be, as a reserve required in accordance with
GAAP against any liabilities associated with such Asset Sale and retained by
us or any Restricted Subsidiary, as the case may be, after such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities
under any indemnification obligations associated with such Asset Sale, all
as reflected in an Officers' Certificate delivered to the Trustee, and
(b) with respect to any capital contribution or issuance or sale of Capital
Stock as referred to under the "LIMITATION ON RESTRICTED PAYMENTS" covenant and
the definition of Permitted Indebtedness, the
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proceeds of such capital contribution, issuance or sale in the form of cash or
Cash Equivalents, including payments in respect of deferred payment obligations
when received in the form of, or stock or other assets when disposed for, cash
or Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to us or any Restricted Subsidiary of our company), net of
attorney's fees, accountant's fees and brokerage, consultation, underwriting and
other fees and expenses actually incurred in connection with such capital
contribution, issuance or sale and net of taxes paid or payable as a result
thereof.
"Old Indenture" means the indenture dated as of July 14, 1998 between
@Entertainment, Inc. and Bankers Trust Company, as trustee, as in effect on the
Issue Date.
"Old Notes" means our 14 1/2% Senior Discount Notes due 2008 issued under
the Old Indenture.
"Organizational Contract" means any agreement to which we or any Restricted
Subsidiary are a party pursuant to which, among other things, fees are paid to
us or a Restricted Subsidiary in exchange for organizational, consulting or
similar services, including, without limitation, the agreements listed on a
schedule to the indenture under the subheading "Organizational Contracts."
"Overhead Agreement" means any agreement to which we or any Restricted
Subsidiary are a party pursuant to which, among other things, costs are
allocated among the parties thereto, including, without limitation, the
agreements listed on a schedule to the indenture under the subheading "Overhead
Agreements."
"PCI" means Poland Communications, Inc., a New York corporation and a Wholly
Owned Subsidiary of @Entertainment, Inc.
"PCI Indenture" means the indenture dated as of October 31, 1996 between PCI
and State Street Bank and Trust Company, as trustee, as in effect on the Issue
Date.
"Permitted Holders" means, as of the date of determination:
(a) David T. Chase, Arnold L. Chase and Cheryl A. Chase,
(b) the family members, estates and heirs of David T. Chase Arnold L. Chase
and Cheryl A. Chase and any trust, partnership, corporation, limited liability
company or other investment vehicle principally for the benefit of any such
persons or their respective family members or heirs (including, without
limitation, Polish Investments Holding LP for so long as beneficial ownership
thereof is held by Persons meeting the requirements of clause (a) and (b) of
this definition),
(c) ECO Holdings III Limited Partnership ("ECO III") and any successor
thereto that is owned by the Persons who beneficially own, directly and
indirectly, ECO III on the Issue Date,
(d) Advent International Corp., and
(e) any Person that is controlled by the Persons, individually or as a
group, described in clauses (a) through (d) above.
"Permitted Indebtedness" means any of the following:
(a) Indebtedness under the notes (or any guarantee thereof) and the
indenture;
(b) Indebtedness of our company or any Restricted Subsidiary outstanding
on the Issue Date and listed on a schedule to the indenture;
(c) Indebtedness of our company or any Restricted Subsidiary (including
PCI and any subsidiary of PCI that is a Restricted Subsidiary) to the extent
such Indebtedness constitutes "Permitted Indebtedness" as defined in the PCI
indenture or the Old indenture;
(d) (1) Indebtedness of any Restricted Subsidiary owed to and held by
us or a Restricted Subsidiary, and
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(2) Indebtedness of our company owed to and held by any Restricted
Subsidiary that is Subordinated Indebtedness; PROVIDED that an incurrence
of Indebtedness shall be deemed to have occurred upon (x) any sale or
other disposition (excluding assignments as security to financial
institutions) of any Indebtedness of our company or Restricted Subsidiary
referred to in this clause (e) to a Person (other than @Entertainment,
Inc. or a Restricted Subsidiary) or (y) any sale or other disposition of
Capital Stock of a Restricted Subsidiary which holds Indebtedness of our
company or another Restricted Subsidiary such that such Restricted
Subsidiary, in any such case, ceases to be a Restricted Subsidiary;
(e) Obligations under any Interest Rate Agreement of our company or any
Restricted Subsidiary to the extent relating to (i) Indebtedness of our
company or such Restricted Subsidiary, as the case may be (which
Indebtedness (x) bears interest at fluctuating interest rates and (y) is
otherwise permitted to be incurred under the "LIMITATION ON ADDITIONAL
INDEBTEDNESS" covenant), or (ii) Indebtedness for which a lender has
provided a commitment in an amount reasonably anticipated to be incurred by
us or a Restricted Subsidiary in the following 12 months after such Interest
Rate Agreement has been entered into, but only to the extent that the
notional principal amount of such Interest Rate Agreement does not exceed
the principal amount of the Indebtedness (or Indebtedness subject to
commitments) to which such Interest Rate Agreement relates;
(f) Indebtedness of our company or any Restricted Subsidiary under
Currency Agreements to the extent relating to (1) Indebtedness of our
company or a Restricted Subsidiary (which Indebtedness is otherwise
permitted to be incurred under the "LIMITATION ON ADDITIONAL INDEBTEDNESS"
covenant) or (2) obligations to purchase assets, properties or services
incurred in the ordinary course of business of our company or any Restricted
Subsidiary; provided that such Currency Agreements do not increase the
Indebtedness or other obligations of our company and our Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder;
(g) Indebtedness of our company or any Restricted Subsidiary in respect
of performance bonds of our company or any Restricted Subsidiary or surety
bonds provided by us or any Restricted Subsidiary incurred in the ordinary
course of business in connection with the construction or operation of a
Cable/ Telecommunications Business, a DTH Business or an
Entertainment/Programming Business;
(h) Indebtedness of our company or any Restricted Subsidiary to the
extent it represents a replacement, renewal, refinancing or extension of
outstanding Indebtedness of our company or of any Restricted Subsidiary
incurred or outstanding pursuant to clause (b) of this definition or the
proviso of the covenant "LIMITATION ON ADDITIONAL INDEBTEDNESS"; PROVIDED
that:
- Indebtedness of our company may not be replaced, renewed, refinanced
or extended to such extent under this clause (h) with Indebtedness of
any Restricted Subsidiary and
- any such replacement, renewal, refinancing or extension (x) shall not
result in a lower Average Life of such Indebtedness as compared with
the Indebtedness being replaced, renewed, refinanced or extended, (y)
shall not exceed the sum of the principal amount (or, if such
Indebtedness provides for a lesser amount to be due and payable upon a
declaration of acceleration thereof, an amount no greater than such
lesser amount) of the Indebtedness being replaced, renewed, refinanced
or extended plus the amount of accrued interest thereon and the amount
of any reasonably determined prepayment premium necessary to
accomplish such replacement, renewal, refinancing or extension and
such reasonable fees and expenses incurred in connection therewith,
and (z) in the case of any replacement, renewal, refinancing or
extension by us of indebtedness that ranks equally with your existing
notes or Subordinated Indebtedness, such new Indebtedness is made
equal with with or subordinate to the existing notes, at least to the
same extent as the Indebtedness being replaced, renewed, refinanced or
extended;
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(i) Indebtedness of our company having an aggregate principal amount not
to exceed, at any one time outstanding, two times (1) the Net Cash Proceeds
received by us on or after the Issue Date from the issuance and sale of its
Capital Stock (other than Redeemable Capital Stock) to a Person that is not
a Subsidiary, to the extent such Net Cash Proceeds have not been used
pursuant to clause (a)(3)(B), (b)(2), (b)(3) or (b)(5) of the "Limitation on
Restricted Payments" covenant to make a Restricted Payment and (2) 80% of
the Fair Market Value of property (other than cash or Cash Equivalents)
received by us on or after the Issue Date from a sale of its Capital Stock
(other than Redeemable Capital Stock) to a Person that is not a Subsidiary,
the extent such sale of Capital Stock has not been used pursuant to clause
(b)(2), (b)(3) or (b)(5) of the "Limitation on Restricted Payments" covenant
to make a Restricted Payment; PROVIDED, HOWEVER, that in determining the
Fair Market Value of property, if the estimated Fair Market Value of such
property exceeds $10.0 million, we will deliver to the Trustee a written
appraisal as to the fair market value of such property prepared by an
internationally recognized investment banking or public accounting firm (or,
if no such investment banking or public accounting firm is qualified to
prepare such an appraisal, by an internationally recognized appraisal firm)
and; PROVIDED FURTHER that such Indebtedness does not mature prior to the
Stated Maturity of the notes and has an Average Life longer than the notes;
(j) Subordinated Indebtedness of our company not to exceed $150 million
(or, if non-U.S. dollar denominated, the U.S. Dollar Equivalent thereof) at
any one time outstanding; and
(k) in addition to the items referred to in clauses (a) through (j)
above, Indebtedness of our company having an aggregate principal amount not
to exceed $125 million (or, if non-U.S. dollar denominated, the U.S. Dollar
Equivalent thereof) at any time outstanding less the aggregate principal
amount of any outstanding Indebtedness incurred after the Issue Date under
clause (c) of this definition of Permitted Indebtedness.
"Permitted Investments" means:
(a) Cash Equivalents;
(b) Investments in prepaid expenses, negotiable instruments held for
collection and lease, utility and workers' compensation, performance and
other similar deposits;
(c) loans and advances to directors or employees made in the ordinary
course of business;
(d) Interest Rate Agreements and Currency Agreements;
(e) bonds, notes, debentures or other securities received as a result of
Asset Sales permitted under the covenant "LIMITATION ON SALE OF ASSETS,"
PROVIDED that we or the Restricted Subsidiaries, as the case may be, have
received at least 75% of the aggregate consideration therefrom in cash or
Cash Equivalents;
(f) Investments made in the ordinary course of business as partial
payment for constructing a network relating principally to a
Cable/Telecommunications Business or for supplying equipment used or useful
in the Cable/Telecommunications Business or the DTH Business;
(g) Investments (other than through share leasing arrangements) in any
Person engaged in any business in which we or any Restricted Subsidiary are
engaged on the Issue Date not to exceed $90 million (or, if non-U.S. dollar
denominated, the U.S. Dollar Equivalent thereof) outstanding at any time;
PROVIDED that immediately after giving effect to any Investment made under
this clause (g), we and our Restricted Subsidiaries shall own at least 25%
of the outstanding Capital Stock of the Person in which the Investment was
made;
(h) Investments (other than through share leasing arrangements) in any
Person engaged in any business in which we or any Restricted Subsidiary is
engaged on the Issue Date not to exceed
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$10 million (or, if non-U.S. dollar denominated, the U.S. Dollar Equivalent
thereof) outstanding at any time;
(i) Investments (other than through share leasing programs) in the
Capital Stock of any Person to the extent the consideration therefor paid by
us or any Restricted Subsidiary consists of a lease or other right to use
the capacity of a cable television network of our company or such Restricted
Subsidiary and so long as the capacity leased or used is used by such Person
solely to provide telephony or Internet access services; provided that our
Board of Directors shall have determined (as evidenced by a Board
Resolution) that any such capacity is in excess of the cable television
network capacity required to operate the Cable/Telecommunications Business
of our company or such Restricted Subsidiary in the area in which such cable
television network is located;
(j) Investments by any Restricted Subsidiary in our company; and
(k) to the extent not covered in clauses (a) through (j) above, any
"Permitted Investment" as defined in the PCI indenture made by PCI or any
subsidiary thereof in accordance with the terms of the PCI indenture.
"Permitted Liens" means the following types of Liens:
(a) Liens on any property or assets of a Restricted Subsidiary granted
in favor of us or any Restricted Subsidiary;
(b) Liens securing the notes;
(c) Liens securing Acquired Indebtedness created prior to (and not in
connection with or in contemplation of) the incurrence of such Indebtedness
by us or any Restricted Subsidiary; PROVIDED that such Lien does not extend
to any property or assets of our company or any Restricted Subsidiary other
than the assets acquired in connection with the incurrence of such Acquired
Indebtedness;
(d) statutory Liens of landlords and carriers, warehousemen, mechanics,
suppliers, material men, repairmen or other like Liens arising in the
ordinary course of business of our company or any Restricted Subsidiary and
with respect to amounts not yet delinquent or being contested in good faith
by appropriate proceeding;
(e) Liens for taxes, assessments, government charges or claims that are
being contested in good faith by appropriate proceedings promptly instituted
and diligently conducted;
(f) easements, rights-of-way, restrictions and other similar charges or
encumbrances not interfering in any material respect with the business of
our company or any Restricted Subsidiary incurred in the ordinary course of
business;
(g) Liens arising by reason of any judgment, decree or order of any
court so long as such Lien is adequately bonded and any appropriate legal
proceedings that may have been initiated for the review of such judgment,
decree or order shall not have been finally terminated or the period within
which such proceedings may be initiated shall not have expired;
(h) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security;
(i) any extension, renewal or replacement, in whole or in part, of any
Lien described in the foregoing clauses (a) through (h); PROVIDED that any
such extension, renewal or replacement shall be no more restrictive in any
material respect than the Lien so extended, renewed or replaced and shall
not extend to any additional property or assets;
(j) any interest or title of a lessor under any Capitalized Lease
Obligation or seller under any Purchase Money Obligation;
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(k) Liens securing up to $45.0 million of Indebtedness of PCI incurred
after the Issue Date under clause (c) of the definition of Permitted
Indebtedness at any one time outstanding;
(l) Liens securing Indebtedness of our company incurred pursuant to
clause (i) of the definition of Permitted Indebtedness in an amount having
an aggregate principal amount not to exceed, at any one time outstanding,
100% of the Net Cash Proceeds received by us after the Issue Date from the
issuance and sale of its Capital Stock;
(m) Liens in favor of Polish governmental fiscal authorities created
without the knowledge of and without fault on the part of our company;
(n) Liens existing on the Issue Date and listed on a schedule to the
indenture;
(o) Liens in favor of the Screen Actors Guild, the Writers Guild of
America, the Directors Guild of America or any other unions, guilds or
collective bargaining units under collective bargaining agreements, which
Liens are incurred in the ordinary course of business solely to secure the
payment of residuals and other collective bargaining obligations required to
be paid by us or any of our Restricted Subsidiaries under any such
collective bargaining agreement;
(p) Liens arising in connection with completion guarantees entered into
in the ordinary course of business and consistent with then current industry
practices, securing obligations (other than Indebtedness for borrowed money)
of our company or any of our Restricted Subsidiaries not yet due and
payable;
(q) Liens in favor of suppliers and/or producers of any programming that
are incurred in the ordinary course of business solely to secure the
purchase or license price of such programming and such directly related
rights or the rendering of services necessary for the production of such
programming; PROVIDED, HOWEVER, that no such Lien shall extend to or cover
any property or assets other than the programming or license and the rights
directly related thereto being so acquired or produced; and PROVIDED FURTHER
that any payment obligations secured by such Liens shall by their terms be
payable solely from the revenues that are derived directly from the
exhibition, syndication, exploitation, distribution or disposition of such
item of programming and/or such directly related rights;
(r) Liens on assets of PCI or any subsidiary of PCI securing the PCI
notes; and
(s) Liens on assets or Capital Stock of a Special Purpose Vehicle.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, S.A., Sp. z o.o.,
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock whether now outstanding, or issued after
the Closing Date, and including, without limitation, all classes and series of
preferred or preference stock of such Person.
"Public Equity Offering" means an issuance, offer and sale of Common Stock
(which is Qualified Capital Stock) of our company for cash pursuant to a
registration statement that has been declared effective by the Commission
pursuant to the Securities Act (other than a registration statement on Form S-8
or otherwise relating to equity securities issuable under any employee benefit
plan of @Entertainment, Inc.).
"Purchase Money Obligation" means Indebtedness of our company or any
Restricted Subsidiary (a) issued to finance or refinance the purchase or
construction of any assets of our company or any Restricted Subsidiary or (b)
secured by a Lien on any assets of our company or any Restricted Subsidiary
where the lender's sole recourse is to the assets so encumbered, in either case
to the extent the purchase or
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construction prices for such assets are or should be included in "addition to
property, plan or equipment" in accordance with GAAP.
"Qualified Capital Stock" of any person means any and all Capital Stock of
such person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise, is, or upon the happening of an
event or passage of time would be, required to be redeemed prior to the final
Stated Maturity of the notes or is redeemable at the option of the holder
thereof at any time prior to such final Stated Maturity, or is convertible into
or exchangeable for debt securities at any time prior to such final Stated
Maturity; PROVIDED, HOWEVER, that Redeemable Capital Stock shall not include any
Common Stock the holder of which has a right to put to us upon certain
terminations of employment.
"Restricted Subsidiary" means a Subsidiary other than an Unrestricted
Subsidiary.
"S&P" means Standard and Poor's Ratings Group, a division of McGraw-Hill,
Inc. and its successors.
"Senior Bank Indebtedness" means Indebtedness of our company or any
Restricted Subsidiary under one or more term loans or revolving credit or
similar facilities (which may include any guarantee, bonding or letter of credit
facility) with a bank or other financial institution which is not subordinated
to any other Indebtedness of us or any Restricted Subsidiary.
"Series C indenture" means the indenture dated as of January 20, 1999
between @Entertainment, Inc. and Bankers Trust Company, as trustee, as in effect
on the Issue Date.
"Series C notes" means our Series C Senior Discount Notes due 2008 issued
under the Series C indenture.
"Service Agreement" means any agreement to which we or any Restricted
Subsidiary are a party pursuant to which, among other things, we or a Restricted
Subsidiary provide various services, which may include administrative,
technical, managerial, financial, operational and marketing services, to the
other party or parties thereto, including, without limitation, the agreements
listed on a schedule to the indenture under the subheading "Service Agreements."
"Shareholder Registration Rights Agreement" means the Registration Rights
Agreement dated as of June 27, 1997 among Polish Investments Holding L.P., ECO
Holdings Limited Partnership, Roger M. Freedman, The Steele LLC, The AESOP Fund
L.P. and The Cheryl Anne Chase Marital Trust in the form existing on the Issue
Date.
"Significant Subsidiary" means, at any particular time, any Subsidiary that,
together with the subsidiaries of such Subsidiary:
(a) accounted for more than 5% of the consolidated revenues of our company
and our Subsidiaries for their most recently completed fiscal year, or
(b) is or are the owner(s) of more than 5% of the consolidated assets of our
company and our Subsidiaries as at the end of such fiscal year, all as
calculated in accordance with GAAP and as shown on the consolidated financial
statements of our company and our Subsidiaries for such fiscal year.
"Special Purpose Vehicle" means a Person which is, or was, established:
(a) with separate legal identity and limited liability; and
(b) for the sole purpose of a single transaction, or series of related
transactions, and which has no assets and liabilities other than those directly
acquired or incurred in connection with such transaction(s).
"Stated Maturity" means, when used with respect to any note or any
installment of interest thereon, the date specified in such note as the fixed
date on which the principal of such note or such installment of
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interest is due and payable, and, when used with respect to any other
Indebtedness, means the date specified in the instrument governing such
Indebtedness as the fixed date on which the principal of such Indebtedness, or
any installment of interest thereon, is due and payable.
"Subordinated Indebtedness" means Indebtedness of our company that is
expressly subordinated in right of payment to the notes.
"Subsidiary" means:
(a) any Person a majority of the equity ownership or Voting Stock of which
is at the time owned, directly or indirectly, by us or by one or more other
Subsidiaries or by our company and one or more other Subsidiaries and
(b) Poltelkab Sp. z o.o., PTK Operator Sp. z o.o., Cable Television Newco
and any other Management Company.
"Total Consolidated Indebtedness" means, at any date of determination, an
amount equal to the aggregate amount of all Indebtedness of our company and our
Restricted Subsidiaries outstanding as of the date of determination.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Unrestricted Subsidiary" means:
(a) any Subsidiary that at the time of determination shall be an
Unrestricted Subsidiary (as designated by our Board of Directors, as provided
below) and
(b) any subsidiary of an Unrestricted Subsidiary. Our Board of Directors,
subject to the foregoing, may designate any newly acquired or newly formed
Subsidiary (other than a Management Company) to be an Unrestricted Subsidiary so
long as:
(1) neither we nor any Restricted Subsidiary is directly or indirectly
liable for any Indebtedness of such Subsidiary,
(2) no default with respect to any Indebtedness of such Subsidiary would
permit (upon notice, lapse of time or otherwise) any holder of any other
Indebtedness of our company or any Restricted Subsidiary to declare a
default on such other Indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity,
(3) any Investment in such Subsidiary made as result of designating such
Subsidiary an Unrestricted Subsidiary will not violate the provisions of the
"LIMITATION ON INVESTMENTS IN UNRESTRICTED SUBSIDIARIES" covenant,
(4) neither we nor any Restricted Subsidiary have a contract, agreement,
arrangement, understanding or obligation of any kind, whether written or
oral, with such Subsidiary other than those that might be obtained at the
time from persons who are not Affiliates of our company and
(5) neither we nor any Restricted Subsidiary have any obligation (A) to
subscribe for additional shares of Capital Stock or other equity interest in
such Subsidiary or (B) to maintain or preserve such Subsidiary's financial
condition or to cause such Subsidiary to achieve certain levels of operating
results. Any such designation by our Board of Directors shall be evidenced
to the Trustee by filing a board resolution with the Trustee giving effect
to such designation. Our Board of Directors may designate any Unrestricted
Subsidiary as a Restricted Subsidiary if immediately after giving effect to
such designation, there would be no Default or Event of Default under the
indentures and we could incur $1.00 of additional Indebtedness (other than
Permitted Indebtedness) pursuant to the "LIMITATION ON ADDITIONAL
INDEBTEDNESS" covenant.
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"U.S. Dollar Equivalent" means with respect to any monetary amount in a
currency other than U.S. dollars, at any time for the determination thereof, the
amount of U.S. dollars obtained by converting such foreign currency involved in
such computation into U.S. dollars at the spot rate for the purchase of U.S.
dollars with the applicable foreign currency as quoted by the National Bank of
Poland at approximately noon (New York City time) on the date two business days
prior to such determination.
"Voting Stock" means, with respect to any Person, any class or classes of
Capital Stock pursuant to which the holders thereof have the general voting
power under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of such Person (irrespective of whether or not,
at the time, stock of any other class or classes shall have, or might have,
voting power by reason of the happening of any contingency).
"Wholly Owned" means, with respect to any Restricted Subsidiary, such
Restricted Subsidiary if all the outstanding Capital Stock of such Restricted
Subsidiary (other than any directors' qualifying shares) is owned directly by
our company or Poland Cablevision (Netherlands) B.V. and one or more Wholly
Owned Restricted Subsidiaries.
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BOOK ENTRY; DELIVERY AND FORM
The certificates representing the existing notes which were issued in
connection with @Entertainment's January 1999 units offering were issued in
fully registered form without interest coupons. Except as described in the next
paragraph, the notes which were offered and sold to "qualified institutional
buyers" in reliance on Rule 144A under the Securities Act are currently
represented by a single, permanent global note in definitive, fully registered
book-entry form. This global note was registered in the name of a nominee of
Depository Trust Company ("DTC") and deposited on behalf of purchasers of such
notes 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. New notes which will be issued in exchange for the existing notes will be
issued in the form of one global exchange note and deposited with a custodian
for DTC for credit to the respective accounts of the purchasers (or such other
accounts as they may direct) at DTC.
The existing notes which are currently held by qualified institutional
buyers who elected to take physical delivery of their certificates instead of
holding their interest through a global note (and which are thus ineligible to
trade through DTC), were issued notes in registered form without interest
coupons. Subject to the conditions described in the next sentence, upon transfer
of such notes to another qualified institutional buyer, such notes will be
exchanged for an interest in a global note upon delivery of the appropriate
certifications to the trustee for the existing notes that were issued. However,
if the global notes representing the existing notes have previously been
exchanged in whole for certificated notes or unless the transferee (if such
transferee is a qualified institutional buyer) requests otherwise, such
transferred notes will be represented by certificates in registered form without
interest coupons.
Except as described in the next paragraph, the new notes initially will be
represented by one or more new permanent global certificates in definitive,
fully registered form. The global exchange notes will be deposited on their date
of issue with, or on behalf of, DTC and registered in the name of a nominee of
DTC.
THE GLOBAL EXCHANGE NOTE. @Entertainment expects that under the procedures
established by DTC: (a) upon the issuance of the new global exchange note and
the deposit of such new global exchange note with DTC, DTC or its custodian will
credit on its internal system to the accounts of persons who have accounts with
such depositary portions of the new global exchange note which correspond to the
portions of the principal amount of the new global exchange note equal to the
total amount owned by such persons and (b) ownership of the new global exchange
note 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 entities or individuals who have accounts with
DTC) or through records maintained by entities or individuals who have accounts
with DTC. Such accounts initially will be designated by or on behalf of Bankers
Trust Company and ownership of beneficial interests in the new global exchange
note(s) will be limited to persons who have accounts with and are therefore
"participants" in the DTC system or persons who hold interests through
participants. Qualified institutional buyers may hold their interests in the new
global exchange note 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
existing notes or new global exchange notes, DTC or such nominee will be
considered the sole owner or holder of the notes represented by the global note
or the new global exchange note for all purposes under the indenture governing
these notes. No beneficial owner of an interest in the global note or the new
global exchange note will be able to transfer such interest except in accordance
with the applicable procedures of DTC, the Euroclear System and Cedel Bank,
SOCIETE ANONYME, in addition to those provided for under the indenture governing
these notes.
Payments of the principal of (or premium, if any, on) and interest on the
global note or the new global exchange note will be made to DTC or its nominee,
as the case may be, as the registered owner of the note.
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Neither @Entertainment, the trustee or any paying agent under the indenture has
any responsibility or liability for any aspect of the records relating to, or
payments made on account of, beneficial ownership interests in the new global
exchange note or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
@Entertainment expects that DTC or its nominee, upon receipt of any payment
of the principal of (or premium, if any, on) and interest on the new global
exchange note, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of the new global exchange note(s) as shown on the records of DTC or its
nominee. @Entertainment also expects that payments by participants to owners of
beneficial interests in the new global exchange note held through such
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 a certificated note for any reason, including to
sell notes to persons in states which require physical delivery of such
securities or to pledge such securities, such holder must transfer its interest
in the new global exchange note(s) in accordance with the normal procedures of
DTC and in accordance with the procedures set forth in the indenture.
DTC has advised @Entertainment that DTC will take any action permitted to be
taken by a holder of notes (including the presentation of notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in the new global exchange note are credited and only
in respect of the aggregate principal amount of new global exchange note as to
which such participant or participants has or have given such direction.
However, if there is an event of default under the indenture governing the
notes, DTC will exchange the new global exchange note for certificated notes,
which it will distribute to its participants.
DTC has advised @Entertainment as follows:
- DTC is a limited purpose trust company organized under the laws of the
State of New York, 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.
Although DTC, the Euroclear System and Cedel Bank, SOCIETE ANONYME are
expected to follow the foregoing procedures in order to facilitate transfers of
interests in the new global exchange note among participants of DTC, the
Euroclear System and Cedel Bank, SOCIETE ANONYME, they are under no obligation
to follow such procedures, and such procedures may be discontinued at any time.
Neither @Entertainment nor the trustee nor any paying agent has any
responsibility for the performance by DTC, the Euroclear System or Cedel Bank,
SOCIETE ANONYME or the participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
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CERTIFICATED NOTES. Subject to certain conditions, any person having a
beneficial interest in the new global exchange note(s) may, upon request to the
trustee, exchange such beneficial interest for new notes in the form of
certificated notes. Upon any such issuance, the trustee is required to register
such certificated notes 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
new global exchange note(s) will be exchangeable or transferable, as the case
may be, for certificated new notes, if (1) DTC notifies @Entertainment that it
is unwilling or unable to continue as depositary for such new global exchange
note(s), or DTC ceases to be a "Clearing Agency" registered under the Exchange
Act, and a successor depositary is not appointed by @Entertainment within 90
days or (2) an event of default has occurred and is continuing with respect to
such new global exchange note(s). Upon the occurrence of any of the events
described in the preceding sentence, @Entertainment will cause the appropriate
certificated notes to be delivered. Certificated notes may only be transferred
on the books and records of the transfer agent.
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UNITED STATES TAX CONSIDERATIONS
The following summary contains a description of the principal United States
federal income tax consequences of purchase, ownership and disposition of new or
existing notes acquired at a price equal to their adjusted issue price at the
time of acquisition.
For purposes of this summary, the term "holder" refers to you if you acquire
a beneficial ownership interest in the existing notes. This summary deals only
with notes held as capital assets and does not deal with special tax situations
such as:
- dealers in securities or currencies or traders in securities that elect to
mark to market such securities;
- banks, financial institutions and life insurance companies;
- regulated investment companies;
- tax exempt organizations and individual retirement and other tax-deferred
accounts;
- persons holding notes as a hedge against currency risk;
- persons holding notes as part of a straddle, "synthetic security" or other
integrated financial transaction, including a "conversion transaction;" or
- United States holders (as defined below) whose functional currency is not
the U.S. dollar.
This summary is based on U.S. federal income tax law, including the United
States Internal Revenue Code of 1986, as amended (the "Code"), Treasury
regulations, rulings, administrative pronouncements and judicial decisions, all
as in effect on the date of this prospectus. Subsequent developments in U.S.
federal income tax law, which may be applied retroactively, could have a
material effect on the U.S. federal income tax consequences of the exchange of
existing notes for new notes and of the ownership and disposition of the new
notes as set forth in this summary. BEFORE YOU EXCHANGE EXISTING NOTES FOR NEW
NOTES, YOU SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT HOW U.S. FEDERAL INCOME TAX
LAW OR ANY OTHER LAWS, INCLUDING THE EFFECT OF ANY STATE OR LOCAL TAX LAWS OR
THE LAWS OF ANY JURISDICTION OTHER THAN THE UNITED STATES, WILL APPLY TO YOUR
PARTICULAR SITUATION.
We will characterize new and existing notes as indebtedness in registered
form for all United States federal income tax purposes. This characterization
will be binding on you, unless you disclose your inconsistent characterization
on your federal income tax return. The United States Internal Revenue Service is
not bound by the characterization of the notes by us or you. In the event the
Internal Revenue Service successfully challenges the characterization of the
notes, the United States income tax consequences to you would differ from those
described below.
EXCHANGE OF EXISTING NOTES FOR NEW NOTES
In the opinion of Baker & McKenzie, special U.S. federal income tax counsel
to our company:
- you will not recognize gain or loss on the exchange of an existing note
for a new note;
- your U.S. federal income tax attributes for the new note (including your
tax basis and the adjusted issue price (as described below) of the new
note) will be the same as your U.S. federal income tax attributes for the
existing note exchanged in the exchange offer; and
- your holding period for a new note will include the holding period of the
existing note exchanged for it in the exchange offer.
UNITED STATES HOLDERS
If you are a United States holder (as defined below), the following summary
applies to you.
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DEFINITION OF A UNITED STATES HOLDER. You are a "United States holder" of a
note if you are a United States person. You are a "United States person" if:
- you are a citizen or resident of the United States;
- you are a corporation or a partnership organized under the laws of the
United States or of any state (unless, in the case of a partnership,
future Treasury regulations otherwise provide);
- you are an estate, the income of which is subject to U.S. federal income
taxation regardless of the source of that income; or
- you are a trust and (a) a United States court is able to exercise primary
supervision over the trust's administration and (b) one or more United
States persons has the authority to control all of the trust's substantial
decisions.
For these purposes, you are a "resident" of the United States if you are an
individual who:
- is lawfully admitted for permanent residence in the United States;
- is present in the United States for 183 days or more during a calendar
year; or
- (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.
PAYMENTS OF INTEREST AND ORIGINAL ISSUE DISCOUNT. Each note has been issued
with original issue discount ("Original Issue Discount") of $1,364.58, which is
an amount equal to the difference between the issue price of a note and the
stated redemption price at maturity of a note. The stated redemption price at
maturity of a note is $1,725.00, which is an amount equal to the sum of the
principal amount of the note and all periodic interest amounts payable under the
note. The issue price of a note is $360.42.
The issue price of a note is an allocable portion of the issue price
($389.42) of an investment unit (consisting of one existing note and 4 warrants)
that was issued by our company on January 27, 1999. This allocation of the issue
price will be binding on you, unless you disclose your inconsistent allocation
on your U.S. federal income tax return. The United States Internal Revenue
Service (the "Service") will not be bound by the allocation made by us or by
you. If the Service successfully challenged the allocation of the issue price
made by us or by you, the accrual of Original Issue Discount and the calculation
of gain or loss on a sale or other disposition of a note would be affected by
the resulting redetermination of the issue price of the note.
You will be required to include in gross income, as ordinary interest
income, in each taxable year during which you own a note, a portion of the
Original Issue Discount calculated on a yield to maturity basis, regardless of
your method of accounting for tax purposes. You should be aware that because of
these Original Issue Discount rules, you generally will be required to include
increasingly greater portions of the Original Issue Discount in your gross
income over time before you receive the cash attributable to the Original Issue
Discount income.
You must include in your gross income the sum of the daily portions of the
Original Issue Discount for each day you own the note during the taxable year.
To determine the daily portion of the Original Issue Discount, you must select
accrual periods, subject to the following restrictions:
- accrual periods may be any length, but no longer than one year;
- accrual periods may vary in length over the term of the note; and
- each scheduled payment of principal or interest must occur on either the
final day of an accrual period or on the first day of an accrual period.
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The daily portion is determined by allocating to each day during the
selected accrual period a ratable portion of the Original Issue Discount
determined for the period. The amount of the Original Issue Discount determined
for an accrual period equals the product of:
- the adjusted issue price (I.E., the issue price of the note, PLUS the
amount of Original Issue Discount accrued during all prior accrual
periods, MINUS the amount of any payment received under the note); and
- the yield to maturity for the note (computed based upon the accrual period
selected and assuming the compounding of interest at the close of each
accrual period), properly adjusted for the length of the accrual period.
For example, if you select an accrual period of 6 months ending on August 1
and February 1 of each year, and given that the issue date of the existing note
was January 27, 1999, the yield to maturity of the note will be 18.4744% per
annum (assuming a 360 day year and semi-annual compounding). Under the above
accrual rules, the amount of Original Issue Discount to be taken into by you for
each accrual period during the term of the note would be as follows:
<TABLE>
<CAPTION>
OID ACCRUED
FOR
PERIOD PER
PERIOD NOTE
- --------------------- --------------
<S> <C>
01/27/99--08/01/99 $ 34.1009
08/02/99--02/01/00 $ 36.4427
02/02/00--08/01/00 $ 39.8090
08/02/00--02/01/01 $ 43.4862
02/02/01--08/01/01 $ 47.5031
08/02/01--02/01/02 $ 51.8911
02/02/02--08/01/02 $ 56.6843
08/02/02--02/01/03 $ 61.9204
02/02/03--08/01/03 $ 67.6401
08/02/03--02/01/04 $ 73.8882
02/02/04--08/01/04 $ 80.7134
08/02/04--02/01/05 $ 81.4720
02/02/05--08/01/05 $ 82.3008
08/02/05--02/01/06 $ 83.2061
02/02/06--08/01/06 $ 84.1951
08/02/06--02/01/07 $ 85.2754
02/02/07--08/01/07 $ 86.4555
08/02/07--02/01/08 $ 87.7445
02/02/08--08/01/08 $ 89.1527
08/02/08--02/01/09 $ 90.6987
Total OID Accrued $ 1,364.5800
</TABLE>
The daily portion of Original Issue Discount for each day during an accrual
period is the amount of the Original Issue Discount for such period divided by
the number of days in the period (I.E., 180 days in the above example, except
for the first period which is 184 days).
Because the yield to maturity on the notes (of 18.4744% per year) is in
excess of the sum of the long-term applicable federal rate for January 1999
(I.E., the month in which the notes were issued) plus five percentage points (or
10.14% per year), the notes are classified as "applicable high yield discount
obligations" within the meaning of section 163(i) of the Code. Consequently, if
you are a corporation, you may treat the dividend equivalent portion of the
Original Issue Discount included in gross income for a
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period as a "dividend" for purposes of the dividends received deduction
provisions of sections 243, 246 and 246A of the Code. The "dividend equivalent
portion" for a period will be an amount equal to the portion of the accrued
Original Issue Discount that (a) is attributable to the yield on a note in
excess of 11.14% per year (I.E.,the sum of the long-term applicable federal rate
for January 1999 plus six percentage points) and (b) would be treated as a
dividend if it had been distributed by @Entertainment with respect to stock in
@Entertainment (I.E., an amount not in excess of the available earnings and
profits of @Entertainment for such period).
Under the above rules, therefore, the potential dividend equivalent portion
of the Original Issue Discount to be taken into for each accrual period during
the term of a note would be as follows for the example above:
<TABLE>
<CAPTION>
PERIOD
-----------
<S> <C>
01/27/99--08/01/99 $ 13.5382
08/02/99--02/01/00 $ 14.4679
02/02/00--02/01/00 $ 15.8043
08/02/00--02/01/01 $ 17.2642
02/02/01--08/01/01 $ 18.8589
08/02/01--02/01/02 $ 20.6009
02/02/02--08/01/02 $ 22.5039
08/02/02--02/01/03 $ 24.5826
02/02/03--08/01/03 $ 26.8534
08/02/03--02/01/04 $ 29.3339
02/02/04--08/01/04 $ 32.0435
08/02/04--02/01/05 $ 32.3447
02/02/05--08/01/05 $ 32.6737
08/02/05--02/01/06 $ 33.0331
02/02/06--08/01/06 $ 33.4257
08/02/06--02/01/07 $ 33.8546
02/02/07--08/01/07 $ 34.3231
08/02/07--02/01/08 $ 34.8349
02/02/08--08/01/08 $ 35.3939
08/02/08--02/01/09 $ 36.0071
Total Potential
Dividend Equivalent
Portion $ 541.7424
</TABLE>
We will disclose our current and accumulated earnings and profits, if any, for
any fiscal year in our annual report on Form 10-K so long as we are required to
file such report. Thereafter, we will provide such information to you upon
receipt of your written request.
If you have purchased or will purchase a note for a price that is different
than the adjusted issue price of the note on such date, then the timing of your
income inclusion with respect to that note may be subject to special rules
applicable to notes with acquisition premium or market discount. IF YOU HAVE
PURCHASED OR WILL PURCHASE A NOTE FOR A PRICE THAT IS DIFFERENT THAN THE THEN
ADJUSTED ISSUE PRICE, YOU SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT HOW THE U.S.
FEDERAL INCOME TAX RULES APPLICABLE TO NOTES WITH ACQUISITION PREMIUM OR MARKET
DISCOUNT WILL AFFECT YOU.
The face of each note will set forth the following information:
- issue date,
- issue price,
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- yield to maturity,
- amount of Original Issue Discount, and
- any other information required by Treasury regulations.
We will furnish to the Service the amount of Original Issue Discount, the issue
date and any additional information required by Treasury regulations. You must
determine for yourself the amount of Original Issue Discount income that you
must report to the Service each year.
Because the notes are classified as "applicable high yield discount
obligations," our deduction for U.S. federal income tax purposes of the portion
of the accrued Original Issue Discount under the notes attributable to the yield
in excess of 11.14% per year will be denied, while our deduction for the
remainder of the accrued Original Issue Discount under the notes will be
deferred until such amounts are paid. For a more complete discussion of the U.S.
federal income tax consequences to our company of the notes, see "Risk
Factors--You May Face Original Issue Discount and Applicable High Yield Discount
Obligation Consequences."
PURCHASE, SALE AND REDEMPTION OF NOTES. Generally, your initial tax basis
in a note will be its U.S. dollar cost. However, your tax basis in a new note
received in the exchange offer will be the same as your tax basis in the
existing note exchanged. Your initial tax basis in a note will increase by the
amount of accrued Original Issue Discount you include in income and will
decrease by payments you receive with respect to a note, including the
semiannual payments of stated interest commencing August 1, 2004 received by you
(if any) under a note.
You will recognize capital gain or loss when you sell, exchange or otherwise
dispose of your note, or when we redeem or retire your note (including a
redemption following an occurrence of a Change of Control), equal to the
difference between:
- the amount realized on the sale, exchange, redemption, retirement or other
disposition (less any amount attributable to accrued Original Issue
Discount, which will be taxable as such); and
- your tax basis in the note.
Your gain or loss will be long-term capital gain or loss if at the time of
the sale, payment or other disposition, you have held the note for more than one
year. Under current law, if you are a non-corporate taxpayer (including an
individual), your net long-term capital gain is generally taxed at a lower U.S.
federal income tax rate than is an item of ordinary income. The deductibility of
your capital losses, however, is subject to limitations.
If you have purchased or will purchase a note for a price that is different
than the adjusted issue price of the note on such date, then the character and
amount of gain or loss taken into account on a sale, exchange or other
disposition of that note may be subject to special rules applicable to notes
with acquisition premium or market discount. IF YOU HAVE PURCHASED OR WILL
PURCHASE A NOTE FOR A PRICE THAT IS DIFFERENT THAN THE THEN ADJUSTED ISSUE
PRICE, YOU SHOULD CONSULT YOUR OWN TAX ADVISER ABOUT HOW THE U.S. FEDERAL INCOME
TAX RULES APPLICABLE TO NOTES WITH ACQUISITION PREMIUM OR MARKET DISCOUNT WILL
AFFECT YOU.
PAYMENT UPON REGISTRATION DEFAULT. As more fully described under the
heading "The Exchange Offer--Payment of Additional Interest Upon Registration
Default," we may be required to pay additional interest to holders of existing
notes under certain circumstances if the exchange offer registration statement
or shelf registration statement is not declared effective by a specified date or
if the exchange offer is not consummated by a specified date (each a
"Registration Default"). Although the issue is not free from doubt, because we
believe that the occurrence of a Registration Default is remote, we intend to
take the position that a holder of an existing note is not required to report
any additional interest as ordinary income for U.S. federal income tax purposes
until such time as a Registration Default occurs. Upon the occurrence of such an
event, therefore, a holder of an existing note would be required to take
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<PAGE>
into account the additional interest as it accrues or is received in accordance
with the holder's method of accounting for tax purposes.
It is noted, however, that the Service may take a different position as to
the likelihood that a Registration Default will occur or that additional
interest will be required to be paid, in which case the timing and amount of
income taken into account with respect to the additional interest may be
different. Holders of existing notes should consult their own tax advisers as to
the tax considerations relating to the potential payment of additional interest
upon the occurrence of a Registration Default.
NON-UNITED STATES HOLDERS
If you are not a United States holder (as defined above), the following
summary applies to you.
UNITED STATES WITHHOLDING TAX. Subject to the discussion below, U.S.
federal withholding tax will not apply to payments by us or any paying agent of
our company (in its capacity as such) of principal of and interest (including
payments of Original Issue Discount) on your note in accordance with the
"portfolio interest" exception of the Code, provided in the case of interest
(including payments of Original Issue Discount) that:
- you, or a partnership you are a member of, do not actually or
constructively own 10 percent or more of the total combined voting power
of all classes of stock of our company entitled to vote;
- you are not a controlled foreign corporation for U.S. federal income tax
purposes with respect to which our company is a "related person" as
defined under the Code; and
- you provide a signed written statement, under penalties of perjury, that
can reliably be related to you, certifying that you are not a United
States person and providing your name and address to:
(a) our company or our agent;
(b) a securities clearing organization, bank (including, after December 31,
2000, certain regulated United States branches of a foreign bank or a
foreign insurance company) or other financial institution that holds
customers' securities in the ordinary course of its trade or business (a
"Financial Institution"), if that institution:
- holds the note on your behalf,
- provides an intermediary certificate to us or our agent under
penalties of perjury confirming that the institution (or a
Financial Institution between you and the institution) has received
your signed written statement, and
- furnishes a copy of your signed written statement to us or our
agent; or
(c) after December 31, 2000, a specified withholding partnership or
qualified intermediary that provides a duly completed withholding
certificate to us or our agent.
Your signed written statement will be generally effective only with respect
to interest payments made to you after you signed the statement in the calendar
year in which you sign it and the two (or, for statements provided after
December 31, 2000, the three) immediately following calendar years.
If you do not qualify for the "portfolio interest" exception described
above, the rate of the U.S. federal withholding tax (generally imposed at a rate
of 30%) may be reduced or eliminated with respect to payments of interest
(including payments of Original Issue Discount) on a note if you provide to us
or our paying agent a duly completed Internal Revenue Service Form 1001 or Form
W-8BEN (or substitute form), establishing that a tax treaty applies to reduce
the rate of, or eliminate, the U.S. federal withholding tax.
147
<PAGE>
UNITED STATES INCOME TAX. Except for the possible application of U.S.
federal withholding tax (see "United States Tax Considerations--Non-United
States Holders--United States Withholding Tax") and backup withholding tax (see
"United States Tax Considerations--Backup Withholding and Information
Reporting"), you will not have to pay U.S. federal income tax on payments of
principal of and interest (including accrued Original Issue Discount) on your
note, or on gains from the sale, redemption or other disposition of your note,
provided you (or the fiduciary, settlor, or beneficiary of, or a person holding
a power over you, if you are an estate or trust; or any of your partners, if you
are a partnership):
- are not and have not been engaged in a trade or business in the United
States;
- do not have and have not had a permanent establishment in the United
States;
- do not have and have not had a present or former connection with the
United States, including, without limitation, the status as a citizen or
former citizen or resident or former resident of the United States for
U.S. federal income tax purposes; and
- are not and have not been, for U.S. federal income tax purposes, (a) a
personal holding company, (b) a corporation that accumulates earnings to
avoid U.S. federal income tax, or (c) a person treated as making an
election that subjects your payments of principal of and interest
(including accrued Original Issue Discount) on your note subject to U.S.
federal income tax.
However, if you are an individual and are present in the United States for
183 days or more during the taxable year of the sale or other disposition of
your notes, any gain you realize on the sale or other disposition may be subject
to a 30% U.S. federal income tax if your gain is attributable to an office or
fixed place of business in the United States or you have a tax home in the
United States.
If you are engaged in a trade or business in the United States and interest
(including accrued Original Issue Discount), gain or any other income in respect
of your note is effectively connected with the conduct of your trade or
business, you may be subject to United States income tax on the interest, gain
or income even though it is exempt from the withholding tax discussed in the
preceding paragraphs (provided you furnish to us or our paying agent a duly
completed Internal Revenue Service Form 4224 or Form W-8ECI (or substitute form)
or otherwise establish your exemption from withholding tax). You will have to
pay this income tax at the statutory rates provided for United States persons
after you deduct any deductible expenses allocable to your effectively connected
interest (including accrued Original Issue Discount), gain or income. In
addition, if you are a foreign corporation, you may be subject to a branch
profits tax equal to 30% of your effectively connected earnings and profits for
the taxable year, as adjusted for certain items, unless a lower rate (which may
be zero) applies to you under a United States income tax treaty with your
country of residence.
BACKUP WITHHOLDING AND INFORMATION REPORTING
GENERAL RULES. If you do not provide a correct taxpayer identification
number and other information, or do not comply with certain other requirements
or otherwise establish an exemption, our company, our paying agent, or a broker,
as the case may be, will be required to withhold from payments to you a tax
equal to 31% of each payment. This "backup" withholding tax applies to certain
payments of principal of and interest (including payments of Original Issue
Discount) on a note and to the proceeds from the sale or disposition of a note
before maturity.
If you are a United States person, you can avoid the imposition of backup
withholding tax by reporting your taxpayer identification number to your broker
or paying agent on Internal Revenue Service Form W-9 (or substitute form) or by
otherwise establishing an exemption. If you are not a United States person, you
can avoid the imposition of backup withholding tax by providing a duly completed
Internal Revenue Service Form W-8 (or substitute form) to your broker or paying
agent or by otherwise establishing an exemption.
148
<PAGE>
Treasury regulations generally effective for payments made on or after
January 1, 2001, modify certain of the certification requirements for exemption
from backup withholding. It is possible that we and other paying agents may
request a new withholding exemption form from you in order to qualify for
continued exemption from backup withholding under the Treasury regulations when
they become effective.
If you provide the Service with the information it requires, you will
receive a refund or a credit against your U.S. federal income tax liability for
any amounts withheld from your payments under the backup withholding rules.
Our company, our paying agent, or a broker, as the case may be, will also be
required to report certain information relating to their payments of principal
of and interest (including payments of Original Issue Discount) on notes and of
proceeds from the sale or disposition of notes before maturity.
EXCEPTIONS APPLICABLE TO NON-UNITED STATES PERSONS AND EXEMPT
RECIPIENTS. Temporary Treasury regulations, which are currently effective,
provide that backup withholding and information reporting will not apply to
payments of principal of and interest (including payments of Original Issue
Discount) on notes by us or our paying agents to you if you certify under
penalties of perjury that you are not a United States person or otherwise
establish an exemption, provided neither we nor our paying agents have actual
knowledge that you are a United States person or that the conditions of any
other exemption are not in fact satisfied.
If a foreign office of a custodian, nominee or other agent collects your
payment on your behalf, that custodian, nominee or other agent will not be
required to apply backup withholding to its payments to you. However, if such
custodian, nominee or other agent is a United States person, a controlled
foreign corporation for U.S. federal income tax purposes, or a foreign person
50% or more of whose gross income is from a United States trade or business for
a specified three-year period, that custodian, nominee or other agent will be
subject to certain information reporting requirements with respect to such
payment unless:
- the custodian, nominee or other agent has evidence in its records that you
are not a United States person and does not have actual knowledge that the
evidence is false;
- you are an exempt recipient, such as a bank, corporation or Financial
Institution; or
- you otherwise establish an exemption.
In addition, payments to you on a note by the United States office of a
custodian, nominee or other agent on your behalf will be subject to information
reporting and backup withholding, unless:
- you certify under penalties of perjury that you are not a United States
person and you provide your name and address, or
- you otherwise establish an exemption.
Final and temporary Treasury regulations, which are currently effective,
provide that backup withholding will not apply to payments of the proceeds of
your sale of a note if:
- you are not a United States person; and
- you sell your note to or through a foreign office of a broker.
Certain information reporting requirements will apply to payments of such
proceeds by foreign offices of a broker that is a United States person, a
controlled foreign corporation for U.S. federal income tax purposes or a foreign
person 50% or more of whose gross income is from a United States trade or
business for a specified three-year period, unless:
- you are an exempt recipient; or
149
<PAGE>
- the broker has evidence in its records that you are not a United States
person and no actual knowledge that the evidence is false.
In addition, payments to you of the proceeds of a sale to or through the
United States office of a broker will be subject to information reporting and
backup withholding, unless:
- you certify under penalties of perjury that you are not a United States
person and provide your name and address; or
- you otherwise establish an exemption.
Final Treasury regulations, which are effective January 1, 2001, provide
that backup withholding and information reporting will not apply to payments of
principal of and interest (including payments of Original Issue Discount) on
notes to you if you are not a United States person and you qualify for the
"portfolio interest" exception to U.S. federal withholding tax as described in
"United States Tax Considerations--Non-United States Holders--United States
Withholding Tax" above, regardless of the identity of the payor and regardless
of whether the payment is collected by a United States or foreign office of a
custodian, nominee or other agent acting on your behalf.
Final Treasury regulations, which are effective January 1, 2001, provide
that information reporting and backup withholding will generally apply to
payments to you, even if you are not a United States person, of the proceeds of
the sale of your note to or through a foreign office of a broker that is a "U.S.
payor" or a "U.S. middleman" (including (a) a person who is a United States
person, (b) a controlled foreign corporation for U.S. federal income tax
purposes, (c) a foreign partnership that is either controlled by United States
persons or engaged in a United States trade or business, or (d) a foreign person
50% or more of whose gross income is from a United States trade or business for
a specified three-year period), unless:
- you are an exempt recipient; or
- the broker has evidence in its records that you are not a United States
person and has no actual knowledge or reason to believe that the evidence
is unreliable.
150
<PAGE>
PLAN OF DISTRIBUTION
Based on an interpretation by the staff of the Securities and Exchange
Commission set forth in no-action letters issued to third parties in similar
transactions, we believe that new notes issued in the exchange offer in exchange
for the existing notes may be offered for resale, resold and otherwise
transferred by you (other than if you are our "affiliate" within the meaning of
Rule 405 under the Securities Act of 1933) without compliance with the
registration and prospectus delivery provisions of the Securities Act of 1933.
However, this applies only if new notes are acquired in the ordinary course of
your business and you have not arranged with any person to participate in the
distribution of these new notes. We refer you to the "Morgan Stanley & Co. Inc."
SEC No-Action Letter (available June 5, 1991), "Exxon Capital Holdings
Corporation" SEC No-Action Letter (available May 13, 1988) and "Shearman &
Sterling" SEC No-Action Letter (available July 2, 1993) for support of this
belief.
Each broker-dealer that receives new notes for its own account must
acknowledge that it will deliver a prospectus in connection with any resale of
such new notes. This prospectus, including any amendments or supplements to the
prospectus which may be issued from time to time, may be used by a broker-dealer
in connection with resales of new notes which were received in exchange for
existing notes where the existing notes were acquired as a result of
market-making activities or other trading activities. We have agreed that for a
period of 180 days after the exchange offer expires, we will make available a
prospectus which meets the requirements of the Securities Act of 1933 to any
broker-dealer for use in this type of resale.
We will not receive any proceeds from any sale of new notes by any
broker-dealer. New notes received by brokers-dealers for their own account in
the exchange offer may be sold from time to time in one or more transactions in
the over-the-counter market, in negotiated transactions, through the writing of
options on the new notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or at negotiated prices. Any type of resale of new notes may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or from the purchasers of the new notes. Any broker-dealer that
resells new notes that were received by it for its own account in the exchange
offer and any broker or dealer that participates in a distribution of these new
notes may be deemed to be an "underwriter" within the meaning of the Securities
Act of 1933 and any profit on any such resale of new notes and any commissions
or concessions received by these persons may be deemed to be underwriting
compensation under the Securities Act of 1933. The Letter of Transmittal states
that by acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act of 1933.
We have agreed to pay all expenses incident to our performance of, or
compliance with our registration rights agreement with Merrill Lynch and
Deutsche Bank. In addition, we will indemnify holders of the existing notes
(including any broker-dealers) against certain liabilities, including certain
liabilities under the Securities Act of 1933.
151
<PAGE>
LEGAL MATTERS
The validity of the new notes will be passed upon for @Entertainment by
Baker & McKenzie, Washington, District of Columbia and New York, New York with
respect to matters of United States law. Certain matters of Polish law will be
passed upon for @Entertainment by Baker & McKenzie, Warsaw, Poland.
EXPERTS
The consolidated financial statements of @Entertainment as of December 31,
1998, 1997 and 1996, and for each of the years in the three-year period ended
December 31, 1998 have been included in the prospectus and in the registration
statement in reliance upon the report of KPMG Polska Sp. z o.o., independent
auditors, appearing elsewhere in this prospectus, and upon the authority of KPMG
Polska Sp. z o.o. as experts in accounting and auditing.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements
involve risks and uncertainties. Words such as "believe," "expect," "intend,"
"plan," "anticipate," "likely," "will" and similar expressions are intended to
identify such forward-looking statements. Our actual results may differ
significantly from the results discussed in these forward-looking statements.
The risks, uncertainties and other factors that might cause such differences
include, but are not limited to:
- general economic conditions in Poland and in the pay television business
in Poland;
- changes in regulations we operate under;
- actions by competitors;
- uncertainties inherent in new business strategies, including our satellite
television business, new product launches and development plans, which we
have not used before;
- rapid technology changes;
- changes in the acquisition, development and/or financing of
telecommunications networks and services;
- the development and provision of programming;
- the continued strength of competitors in the multi-channel video
programming distribution industry and satellite services industry and the
growth of satellite delivered programming;
- future financial performance, including availability, terms and deployment
of capital;
- the ability of vendors to deliver required equipment, software and
services on schedule at the budgeted cost;
- our ability to attract qualified personnel;
- changes in, or failure or inability to comply with government regulations;
- changes in the nature of strategic relationships with third parties;
- competitor responses to our products and services;
- the overall market acceptance of those products and services, including
acceptance of the pricing of those products and services;
152
<PAGE>
- possible interference by satellites in adjacent orbital positions with the
satellites currently being used for our satellite television business; and
- acquisition opportunities.
TRADEMARKS/TRADENAMES USED IN THE PROSPECTUS
In this prospectus we refer to many trademarks and tradenames which are
owned by other people. These trademarks and tradenames include:
<TABLE>
<CAPTION>
TRADEMARK OR TRADENAME OWNER
- -------------------------------------------------------- --------------------------------------------------------
<S> <C>
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
CryptoWorks-Registered Trademark- Koninklijke Philips Electronics N.V.
Twoj Styl WPTS Sp. z o.o. (in which we hold a 50% interest)
HBO Time Warner Entertainment Company, L.P.
The Discovery Channel-Europe Discovery Communications, Inc.
Animal Planet Discovery Communications, Inc.
Canal+ Canal+ S.A.
Eurosport Societie Europenne De Teletransmissions Sportives S.A.
MTV MTV Networks Europe
E! E! Entertainment Television, Inc.
Wizja Le Cinema Zone Broadcasting (EMC) Limited
TVN TVN Sp z o.o.
Polsat Telewizja Polsat S.A.
</TABLE>
153
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Audited Consolidated Financial Statements
Independent Auditors' Report............................................................................ F-2
Consolidated Balance Sheets............................................................................. F-3
Consolidated Statements of Operations................................................................... F-5
Consolidated Statements of Comprehensive Loss........................................................... F-6
Consolidated Statements of Changes in Stockholders' Equity.............................................. F-7
Consolidated Statements of Cash Flows................................................................... F-8
Notes to Consolidated Financial Statements.............................................................. F-19
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
@ Entertainment, Inc.:
We have audited the accompanying consolidated balance sheets of @
Entertainment, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, comprehensive loss, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of @
Entertainment, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally accepted
accounting principles in the United States of America.
KPMG
Warsaw, Poland
March 29, 1999
F-2
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 13,055 $ 105,691
Accounts receivable, net of allowance for doubtful accounts of $1,095,000 in 1998 and
$766,000 in 1997 (note 4)............................................................. 7,408 4,544
Programming and broadcast rights (note 6)............................................... 9,030 894
Other current assets (note 7)........................................................... 21,063 13,104
---------- ----------
Total current assets................................................................ 50,556 124,233
---------- ----------
Property, plant and equipment:
Cable television systems assets......................................................... 175,053 134,469
D-DTH equipment......................................................................... 68,419 --
Construction in progress................................................................ 2,739 6,276
Vehicles................................................................................ 2,792 2,047
Other................................................................................... 16,119 7,940
---------- ----------
265,122 150,732
Less accumulated depreciation........................................................... (52,068) (33,153)
---------- ----------
Net property, plant and equipment................................................... 213,054 117,579
Inventories for construction.............................................................. 8,869 8,153
Intangible assets, net (note 8)........................................................... 43,652 26,318
Notes receivable from affiliates.......................................................... -- 691
Investment in affiliated companies (note 9)............................................... 19,956 21,628
Other assets, net (note 7)................................................................ 12,287 8,494
---------- ----------
Total assets.............................................................................. $ 348,374 $ 307,096
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses................................................... $ 40,464 $ 14,721
Accrued interest (note 11).............................................................. 2,140 2,175
Deferred revenue........................................................................ 4,366 1,257
Income taxes payable.................................................................... 3,794 1,765
Current portion of notes payable (note 11).............................................. 6,500 --
---------- ----------
Total current liabilities............................................................. 57,264 19,918
---------- ----------
Notes payable, less current portion (note 11)............................................. 257,454 130,110
---------- ----------
Total liabilities..................................................................... 314,718 150,028
---------- ----------
Minority interest......................................................................... -- 4,713
Commitments and contingencies (notes 18 and 19)
Stockholders' equity (note 1):
Preferred stock, $.01 par value; Authorized 20,000,000 shares; none issued and
outstanding........................................................................... -- --
Common stock, $.01 par value; Authorized 70,000,000 shares in 1998 and 1997; issued and
outstanding 33,310,000 shares in 1998 and 1997........................................ 333 333
Paid-in capital......................................................................... 237,954 230,339
Accumulated other comprehensive income.................................................. (467) (218)
Accumulated deficit..................................................................... (204,164) (78,099)
---------- ----------
Total stockholders' equity............................................................ 33,656 152,355
---------- ----------
Total liabilities and stockholders' equity............................................ $ 348,374 $ 307,096
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ---------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C>
Revenues...................................................................... $ 61,859 $ 38,138 $ 24,923
Operating expenses:
Direct operating expenses (note 13)......................................... 61,874 14,621 7,193
Selling, general and administrative expenses (note 15)...................... 74,494 49,893 9,289
Depreciation and amortization............................................... 26,304 16,294 9,788
----------- ---------- ---------
Total operating expenses...................................................... 162,672 80,808 26,270
----------- ---------- ---------
Operating loss.............................................................. (100,813) (42,670) (1,347)
Interest and investment income................................................ 3,355 5,754 1,274
Interest expense (note 11).................................................... (21,957) (13,902) (4,687)
Equity in losses of affiliated companies...................................... (6,310) (368) --
Foreign exchange loss, net.................................................... (130) (1,027) (761)
----------- ---------- ---------
Loss before income taxes, minority interest and
extraordinary item........................................................... (125,855) (52,213) (5,521)
Income tax (expense)/benefit (note 10)........................................ (210) 975 (1,273)
Minority interest............................................................. -- (3,586) 1,890
----------- ---------- ---------
Loss before extraordinary item................................................ (126,065) (54,824) (4,904)
Extraordinary item-loss on early extinguishment of debt (note 11)............. -- -- (1,713)
----------- ---------- ---------
Net loss.................................................................... (126,065) (54,824) (6,617)
Accretion of redeemable preferred stock....................................... -- (2,436) (2,870)
Preferred stock dividends (note 1)............................................ -- -- (1,738)
(Excess)/deficit of consideration paid for preferred stock (over)/under
carrying amount (note 1).................................................... -- (33,806) 3,549
----------- ---------- ---------
Net loss applicable to holders of common stock................................ $ (126,065) $ (91,066) $ (7,676)
----------- ---------- ---------
----------- ---------- ---------
Basic and diluted loss per common share:
Loss before extraordinary item.............................................. $ (3.78) $ (3.68) $ (0.34)
Extraordinary item.......................................................... -- -- (0.10)
----------- ---------- ---------
Net loss (note 14).......................................................... $ (3.78) $ (3.68) $ (0.44)
----------- ---------- ---------
----------- ---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ---------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss...................................................................... $ (126,065) $ (54,824) $ (6,617)
Other comprehensive income:
Translation adjustment...................................................... (249) (218) --
----------- ---------- ---------
Comprehensive loss............................................................ $ (126,314) $ (55,042) $ (6,617)
----------- ---------- ---------
----------- ---------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
PREFERRED STOCK COMMON STOCK OTHER
------------------------ ---------------------- PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPTIAL INCOME DEFICIT
----------- ----------- --------- ----------- --------- ----------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance January 1, 1996............... 985 $ 10,311 11,037 $ 4,993 $ 1,544 $ -- $ (16,658)
Net loss............................ -- -- -- -- -- (6,617)
Stock dividend...................... 166 1,738 -- -- (1,738) -- --
Proceeds from issuance of common and
preferred stock (note 1).......... -- -- 7,911 (4,992) 87,021 -- --
Cost of issuance (note 1)........... -- -- -- -- (1,028) -- --
Allocation of proceeds to preferred
(note 1).......................... -- -- -- -- (32,156) -- --
Preferred stock redemption (note
1)................................ (1,151) (12,049) -- -- 3,549 -- --
Accretion of redeemable preferred
stock (note 1).................... -- -- -- -- (2,870) -- --
Reorganization (note 1)............. -- -- 18,929,052 188 (188) --
----------- ----------- --------- ----------- --------- ------ ------------
Balance December 31, 1996............. -- -- 18,948,000 189 54,134 -- (23,275)
Translation adjustment.............. -- -- -- -- -- (218) --
Net loss............................ -- -- -- -- -- -- (54,824)
Net proceeds from initial public
offering (note 1)................. -- -- 9,500,000 95 183,197 -- --
Purchase of PCI series A and C
redeemable preferred stock (note
1)................................ -- -- -- -- (33,806) -- --
Accretion of redeemable preferred
stock (note 1).................... -- -- -- -- (2,436) -- --
Conversion of series B redeemable
preferred stock (note 1).......... -- -- 4,862,000 49 11,148 -- --
Stock option compensation expense
(note 15)......................... -- -- -- -- 18,102 -- --
----------- ----------- --------- ----------- --------- ------ ------------
Balance December 31, 1997............. -- -- 33,310,000 333 230,339 (218) (78,099)
Translation adjustment.............. -- -- -- -- -- (249) --
Net loss............................ -- -- -- -- -- -- (126,065)
Warrants attached to Senior Discount
Notes (note 11)................... -- -- -- -- 7,615 -- --
----------- ----------- --------- ----------- --------- ------ ------------
Balance December 31, 1998............. -- $ -- 33,310,000 $ 333 $ 237,954 $ (467) $ (204,164)
----------- ----------- --------- ----------- --------- ------ ------------
----------- ----------- --------- ----------- --------- ------ ------------
<CAPTION>
TOTAL
---------
<S> <C>
Balance January 1, 1996............... $ 190
Net loss............................ (6,617)
Stock dividend...................... --
Proceeds from issuance of common and
preferred stock (note 1).......... 82,029
Cost of issuance (note 1)........... (1,028)
Allocation of proceeds to preferred
(note 1).......................... (32,156)
Preferred stock redemption (note
1)................................ (8,500)
Accretion of redeemable preferred
stock (note 1).................... (2,870)
Reorganization (note 1)............. --
---------
Balance December 31, 1996............. 31,048
Translation adjustment.............. (218)
Net loss............................ (54,824)
Net proceeds from initial public
offering (note 1)................. 183,292
Purchase of PCI series A and C
redeemable preferred stock (note
1)................................ (33,806)
Accretion of redeemable preferred
stock (note 1).................... (2,436)
Conversion of series B redeemable
preferred stock (note 1).......... 11,197
Stock option compensation expense
(note 15)......................... 18,102
---------
Balance December 31, 1997............. 152,355
Translation adjustment.............. (249)
Net loss............................ (126,065)
Warrants attached to Senior Discount
Notes (note 11)................... 7,615
---------
Balance December 31, 1998............. $ 33,656
---------
---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
@ ENTERTAINMENT, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $ (126,065) $ (54,824) $ (6,617)
Adjustments to reconcile net loss to net cash (used in)/ provided by
operating activities:
Minority interest.......................................................... -- 3,586 (1,890)
Depreciation and amortization.............................................. 26,304 16,294 9,788
Amortization of notes payable discount and issue costs..................... 9,182 1,040 166
Non-cash portion of extraordinary item..................................... -- -- 1,566
Gain on sale of investment securities...................................... -- (358) --
Non-cash stock option compensation expense................................. -- 18,102 --
Equity in profits of affiliated companies.................................. 6,310 368 --
Other...................................................................... 2,196 -- --
Changes in operating assets and liabilities:
Accounts receivable...................................................... (2,780) (3,191) (796)
Other current assets..................................................... (7,959) (2,101) (1,862)
Programming and broadcast rights......................................... (8,136) (894) --
Accounts payable and accrued expenses.................................... 25,185 5,757 3,379
Income taxes payable..................................................... 2,026 (2,707) 334
Accrued interest......................................................... (35) -- 2,175
Deferred revenue......................................................... 3,104 155 (131)
---------- --------- ---------
Net cash (used in)/ provided by operating activities................... (70,668) (18,773) 6,112
---------- --------- ---------
Cash flows from investing activities:
Construction and purchase of property, plant and equipment............... (114,992) (39,643) (26,581)
Repayment of notes receivable from affiliates............................ -- 2,521 --
Issuance of notes receivable from affiliates............................. -- (721) (2,491)
Purchase of investment securities........................................ -- -- (25,940)
Proceeds from maturity of investment securities.......................... -- 25,473 --
Purchase of other assets................................................. -- (10,200) (6,000)
Investments in affiliated companies...................................... (5,228) (21,420) (580)
Purchase of subsidiaries, net of cash received (note 5).................. (26,990) (20,852) (13,269)
---------- --------- ---------
Net cash used in investing activities.................................. (147,210) (64,842) (74,861)
---------- --------- ---------
Cash flows from financing activities:
Net proceeds from issuance of stock...................................... -- 183,292 81,001
Redemption of preferred stock............................................ -- (60,000) (8,500)
Costs to obtain loans.................................................... (5,960) (1,749) (6,513)
Proceeds from issuance of notes payable.................................. 123,985 -- 136,074
Repayment of notes payable............................................... (398) (720) (27,893)
Proceeds from issuance of warrants....................................... 7,615 -- --
Repayments to affiliates................................................. -- -- (39,280)
---------- --------- ---------
Net cash provided by financing activities.............................. 125,242 120,823 134,889
---------- --------- ---------
Net (decrease)/increase in cash and cash equivalents................... (92,636) 37,208 66,140
Cash and cash equivalents at beginning of year................................. 105,691 68,483 2,343
---------- --------- ---------
Cash and cash equivalents at end of year....................................... $ 13,055 $ 105,691 $ 68,483
---------- --------- ---------
---------- --------- ---------
Supplemental cash flow information:
Cash paid for interest....................................................... $ 13,014 $ 12,873 $ 2,338
---------- --------- ---------
Cash paid for income taxes................................................... $ 589 $ 1,732 $ 1,184
---------- --------- ---------
---------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND FORMATION OF HOLDING COMPANY
@ Entertainment, Inc. ("@ Entertainment") was established as a Delaware
corporation in May 1997. @ Entertainment succeeded Poland Communications, Inc.
("PCI") as the group holding company to facilitate an initial public offering of
stock in the United States and internationally. PCI was founded in 1990 by David
T. Chase, a Polish-born investor.
@ Entertainment, Inc. and its subsidiaries (the "Company") offer pay
television services to business and residential customers in Poland. Its
revenues are derived primarily from monthly basic and premium service fees for
cable and digital satellite direct-to-home ("D-DTH") television services
provided primarily to residential, rather than business, customers. In September
1998, the Company launched its D-DTH broadcasting service throughout Poland. In
addition to developing and acquiring programming for distribution on its cable
and D-DTH television networks, the Company commenced distribution of a branded
digital encrypted package of Polish-language programming under the brand name,
Wizja TV in June and September 1998 on its cable and D-DTH television networks,
respectively.
At December 31, 1998, @ Entertainment wholly owned PCI, @ Entertainment
Programming, Inc. ("@EPI")--United States corporations, At Entertainment Limited
("@EL"), At Entertainment Services Limited ("@ES")--United Kingdom corporations,
Sereke Holding B.V. ("Sereke")--a Netherlands corporation and Wizja TV Sp. z
o.o., Gound Zero Media Sp. z o.o. ("GZM") and Wizja TV Spoka Produkcyjna Sp. z
o.o., which are Polish corporations. PCI owns 92.3% of the capital stock of
Poland Cablevision (Netherlands) B.V. ("PCBV"), a Netherlands corporation and
first-tier subsidiary of PCI. @ Entertainment, PCI and PCBV are holding
companies that directly or indirectly hold controlling interests in a number of
Polish cable television companies, collectively referred to as the "PTK
Companies". As of December 31, 1998, substantially all of the assets and
operating activities of the Company were located in Poland and the United
Kingdom.
The following is a description of the events leading up to the formation of
@Entertainment.
PCI had outstanding at December 31, 1995, 985 shares of preferred stock,
which were convertible into 812 shares of Class A common stock. PCI had the
option of redeeming the preferred stock in whole or in part from January 1, 1996
through December 31, 2002. However, as discussed below, the preferred stock was
exchanged for new series D preferred stock during March 1996.
During February 1996, PCI issued to certain stockholders an additional 2,437
shares of Class A common stock in accordance with the provisions of the
Shareholder Agreement dated June 27, 1991. The shares were issued at a nominal
value of $.01 each. Also during February 1996, PCI issued a stock dividend of
166 shares of series A preferred stock to the preferred stock stockholder.
During March 1996, PCI completed several transactions including restating
its certificate of incorporation, issuing new shares of stock, redeeming
preferred stock, and the repayment of affiliate debt. The restated certificate
of incorporation of PCI authorized a new class of $.01 par common stock, $1 par
series A preferred stock, $.01 par series B preferred stock, $.01 par series C
preferred stock, and $.01 par series D preferred stock. All shares of Class A
and Class B common stock previously issued and outstanding were exchanged for
new common stock. All issued and outstanding shares of preferred stock were
exchanged for new series D preferred stock, which were subsequently redeemed for
$8,500,000. Only common stock and series B preferred stock retained voting
rights and only holders of common stock were entitled to receive dividends. Each
series of preferred stock had redemption provisions; the series B preferred
stock were also convertible into common stock.
F-9
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND FORMATION OF HOLDING COMPANY (CONTINUED)
During March 1996, PCI issued 4,662 shares of common stock, 4,000 shares of
series A preferred stock, and 2,500 shares of series B preferred stock to ECO
Holdings III Limited Partnership ("ECO") in exchange for $65,000,000; and 2,000
shares of series C preferred stock and 812 shares of common stock were issued to
Polish Investments Holding Limited Partnership ("PIHLP") in exchange for
$17,029,000.
The PCI series A, series B and series C preferred stock have a mandatory
redemption date of October 31, 2004. At the option of the Company, the PCI
series A, series B and series C preferred stock may be redeemed at any time in
whole or in part at a redemption price per share of $10,000. Prior to the
mandatory redemption of the PCI series B preferred stock, the holders of any
shares of PCI series B preferred stock had the option to convert their shares to
4,862 shares of PCI common stock. The preferred stock was recorded at its
mandatory redemption value on October 31, 2004, discounted at 12%, of
$32,156,000.
On June 22, 1997, all the holders of shares of PCI's common stock and
@Entertainment entered into a Contribution Agreement. Pursuant to the
Contribution Agreement, each holder of shares of PCI's common stock transferred
all shares of PCI common stock owned by it to @Entertainment. In addition, ECO
transferred all of the outstanding shares of PCI's series B preferred stock to
@Entertainment. All of these transfers (the "Share Exchange") were designed to
qualify as a tax-free exchange under section 351 of the Internal Revenue Code of
1986, as amended. 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's series B preferred stock. @Entertainment's series B
preferred stock has identical rights and preferences to those of PCI's series B
preferred stock, except that the ratio for conversion of such shares into common
stock increased from 1:1.9448 to 1:1,944.80 in order to reflect the Capital
Adjustment. The 2,500 outstanding shares of @Entertainment's series B preferred
stock automatically converted into 4,862,000 shares of common stock of
@Entertainment upon the closing of the initial public offering. The formation of
@Entertainment has been accounted for at historical cost in a manner similar to
pooling of interest accounting.
On June 20, 1997, PIHLP transferred all of the outstanding shares of PCI's
series C preferred stock to an entity owned by certain of the beneficial owners
of PIHLP and members of their families (the "Chase Entity"). The Chase Entity,
ECO and @Entertainment entered into a Purchase Agreement dated June 22, 1997
(the "Purchase Agreement"). Among other matters, the Purchase Agreement
obligated @Entertainment to purchase all of the outstanding shares of PCI's
series A preferred stock and series C preferred stock for cash from ECO and the
Chase Entity, respectively, at the closing of the IPO. The aggregate purchase
price of $60,000,000 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 purchase resulted in a loss applicable
to common stockholders of $33,806,000 representing the excess of the
consideration paid for the preferred stock over the carrying amount of those
shares as of the date of the Reorganization (as defined hereinafter). The
aforementioned purchase was funded with a portion of the net proceeds of the
IPO.
The Company periodically accreted, until the date of the purchases described
above, from paid-in capital an amount that would provide for the redemption
value of the PCI series A, B and C preferred
F-10
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND FORMATION OF HOLDING COMPANY (CONTINUED)
shares at October 31, 2004. The total amounts recorded for accretion for the
years ended December 31, 1996 and 1997 were $2,870,000 and $2,436,000,
respectively.
In June 1997, @Entertainment acquired all of the outstanding stock of @EL, a
new corporation organized under the laws of England and Wales (the "@EL
Incorporation").
In June 1997, certain employment agreements for the executive officers of
@Entertainment who were employed by PCI and their employee stock option
agreements were assigned to @Entertainment by PCI (the "Assignment"). As part of
the Assignment and the Capital Adjustment, the employment agreements were
amended to provide that each option to purchase a share of PCI's common stock
was exchanged for an option to purchase 1,000 shares of @Entertainment's common
stock with a proportionate reduction in the per share exercise price.
The Share Exchange, Capital Adjustment, @EL Incorporation and the Assignment
are collectively referred to as the "Reorganization". As a result of the
Reorganization, @Entertainment owns 100% of the outstanding shares of common
stock and preferred stock of PCI and 100% of @EL.
On August 5, 1997, the Company consummated an initial public offering of
9,500,000 shares of common stock at a price of $21 per share. Net proceeds to
the Company were approximately $183,292,000 after deduction of the underwriting
discount and other expenses of the offering.
2. FINANCIAL POSITION AND BASIS OF ACCOUNTING
The Company generated an operating loss of $100,813,000 and negative cash
flows from operations of $70,668,000 for the year ended December 31, 1998,
primarily due to the significant costs associated with the development and
launch of the Company's D-DTH and programming businesses, promotion of those
businesses, and the development, production and acquisition of programming for
Wizja TV. Furthermore, the Company expects to experience substantial operating
losses and negative cash flows for at least the next two years in association
with the expansion of the D-DTH and programming businesses, and the continued
development of the cable business. As at December 31, 1998, the Company was
committed to pay at least $550,100,000 in guaranteed payments over the next nine
years of which at least approximately $254,200,000 million was committed through
the end of 2000. As at December 31, 1998 the Company had cash of $13,055,000.
Given the above noted factors at December 31, 1998, management planned and
successfully completed debt and equity offerings in January, 1999 which
generated net proceeds to the Company of approximately $154,000,000 (see note
20). The Company believes that the net proceeds of these three recent offerings
and cash on hand will provide the Company with sufficient capital to fulfill its
current business plan and to fund guaranteed payments until it achieves positive
cash flow from operations. The Company's current business plan include the
following key assumptions:
(a) achieve rapid penetration of the Polish market by distributing D-DTH
Reception Units to 380,000 initial subscribers at prices significantly
decreased by promotional incentives. The Company continues to review its
business plan with respect to the level of promotional incentives it will
provide. During 1998 the Company reduced its plans with respect to the
initial subscribers receiving significant promotional incentives from
500,000 to 380,000.
(b) the requirement to purchase 500,000 D-DTH Reception Units from Philips prior
to June 30, 2000. The Company continues to re-negotiate the terms of their
agreement with Philips, and during 1998
F-11
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
2. FINANCIAL POSITION AND BASIS OF ACCOUNTING (CONTINUED)
negotiated an extension of the date by which the 500,000 Reception Units
must be purchased, from December 31, 1999 to June 30, 2000.
(c) a change in the cable strategy focus from acquisition and build-out of cable
networks to increased subscriber penetration in existing networks. While the
Company still plans build-out of the cable network in strategic areas, the
Company believes the most profitable means of expanding its cable television
business is to leverage its investment in its cable networks by increasing
the percentage of homes passed which subscribe in its regional clusters.
Should management decide to change their business plan, including changes in
the above noted assumptions, they are confident that they can raise additional
financing. Future sources of financing for the Company could include public or
private debt or equity offerings or bank financing or any combination thereof,
subject to the restrictions contained in the indentures governing the Company's
senior outstanding indebtedness. However, there can be no assurance that the
Company will be able to do so on satisfactory terms, if at all.
Based on the above noted financial position and business plans, management
is confident that they will be able to continue as a going concern through June
30, 2000. Accordingly, these consolidated financial statements have been
prepared on a going concern basis which contemplates the continuation and
expansion of trading activities as well as the realization of assets and
liquidation of liabilities in the ordinary course of business.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America ("U.S. GAAP").
The consolidated financial statements include the financial statements of @
Entertainment, Inc. and its wholly owned and majority owned subsidiaries. Also
consolidated is a 49% owned subsidiary for which the Company maintains control
of operating activities and has the ability to influence the appointment of
members to the Managing Board. All significant intercompany balances and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and other short-term investments
with original maturates of less than three months.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with U.S. GAAP. Actual results could differ from those estimates.
F-12
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
CABLE TELEVISION REVENUES:
Revenue from subscription fees is recognized on a monthly basis as the
service is provided. Installation fee revenue for connection to the Company's
cable television system, is recognized to the extent of direct selling costs and
the balance is deferred and amortized to income over the estimated average
period that new subscribers are expected to remain connected to the systems.
D-DTH SUBSCRIPTION REVENUES:
During 1998, the Company commenced sale of its Wizja TV Package (consisting
of a one-year rental of a D-DTH reception system, installation and a one-year
subscription to the Company's D-DTH service) to retail customers for one
up-front payment at the time of installation. The Company recognizes
subscription revenues at the time of installation to the extent of direct
selling costs incurred, and the balance is deferred and amortized to income over
the remaining term of the subscription.
OTHER REVENUES:
Advertising revenues are recognized when advertisements are aired under
broadcast contracts.
TAXATION
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
U.S. TAXATION:
The Company and PCI are subject to U.S. federal income taxation on their
worldwide income. The Polish, United Kingdom and Netherlands corporations are
foreign corporations which are not expected to be engaged in a trade or business
within the U.S. or to derive income from U.S. sources and accordingly, are not
subject to U.S. income tax.
FOREIGN TAXATION:
The Polish companies are subject to corporate income taxes, value added tax
(VAT) and various local taxes within Poland, as well as import duties on
materials imported by them into Poland. Under Polish law, the Polish companies
are exempt from import duties on certain in-kind capital contributions.
The Polish companies' income tax is calculated in accordance with Polish tax
regulations. Due to differences between accounting practices under Polish tax
regulations and those required by U.S. GAAP, certain income and expense items
are recognized in different periods for financial reporting purposes and income
tax reporting purposes which may result in deferred income tax assets and
liabilities.
F-13
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment includes assets used in the development and
operation of the Company's D-DTH and cable television systems and set-top boxes.
During the period of construction, plant costs and a portion of design,
development and related overhead costs are capitalized as a component of the
Company's investment in D-DTH and cable television systems. When material, the
Company capitalizes interest costs incurred during the period of construction in
accordance with SFAS No. 34, "CAPITALIZATION OF INTEREST COST". During 1998, the
Company capitalized approximately $664,000 in interest. During 1997 and 1996, no
interest costs were capitalized.
Cable and D-DTH subscriber related costs and general and administrative
expenses are charged to operations when incurred.
Depreciation is computed for financial reporting purposes using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Cable television system assets................................... 10 years
D-DTH system assets.............................................. 5 years
Settop boxes..................................................... 5 years
Vehicles......................................................... 5 years
5-10
Other property, plant and equipment.............................. years
</TABLE>
INVENTORIES FOR CONSTRUCTION
Inventories for construction are stated at the lower of cost, determined by
the average cost method, or net realizable value. Inventories are principally
related to construction in the various cable television systems.
GOODWILL AND OTHER INTANGIBLES
Goodwill, which represents the excess of purchase price over fair value of
net assets acquired, is amortized on a straight-line basis over the expected
periods to be benefited, generally ten years, with the exception of amounts paid
relating to non-compete agreements. The portion of the purchase price relating
to the non-compete agreements is amortized over the term of the underlying
agreements, generally five years.
Through its subsidiaries, the Company has entered into lease agreements with
the Polish national telephone company ("TPSA"), for the use of underground
telephone conduits for cable wiring. Costs related to obtaining conduit and
franchise agreements with housing cooperatives and governmental authorities are
capitalized and amortized generally over a period of ten years. In the event the
Company does not proceed to develop cable systems within designated cities,
costs previously capitalized will be charged to expense.
PROGRAMMING AND BROADCAST RIGHTS
During 1997 and 1998, the Company entered into contracts for the purchase of
certain exhibition or broadcast rights. Broadcast or exhibition rights consist
principally of rights to broadcast syndicated programs, sports and feature films
and are accounted for as a purchase of rights by the licensee. The
F-14
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
asset and liability for the rights acquired and obligations incurred under a
license agreement are reported by the Company, at the gross amount of the
liability, when the license period begins and certain specified conditions have
been met, in accordance with the guidelines established within SFAS No. 63,
"FINANCIAL REPORTING BY BROADCASTERS".
DEFERRED FINANCING COSTS
Costs incurred to obtain financing have been deferred and amortized over the
life of the loan using the effective interest method. The amortization of
deferred financing costs is included in interest expense.
INVESTMENTS IN AFFILIATED COMPANIES
Investments in affiliated companies are accounted for using the equity
method. Where the purchase price exceeds the fair value of the Company's
percentage of net assets acquired, the difference is amortized over the expected
period to be benefited as a charge to equity in profits of affiliated companies.
Where the expected period to be benefited is limited by licensing agreements,
the difference is amortized over the term of the licensing agreement.
MINORITY INTEREST
Recognition of the minority interests' share of losses of consolidated
subsidiaries is limited to the amount of such minority interests' allocable
portion of the equity of those consolidated subsidiaries.
STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, "ACCOUNTING FOR STOCK-BASED
COMPENSATION", which gives companies the option to adopt the fair value based
method for expense recognition of employee stock options and other stock-based
awards or to account for such items using the intrinsic value method as outlined
under APB Opinion No. 25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES", with pro
forma disclosure of net loss and loss per share as if the fair value method had
been applied. The Company has elected to apply APB Opinion No. 25 and related
interpretations for stock options and other stock-based awards.
FOREIGN CURRENCIES
Foreign currency transactions are recorded at the exchange rate prevailing
at the date of the transactions. Assets and liabilities denominated in foreign
currencies are remeasured at the rates of exchange at balance sheet date. Gains
and losses on foreign currency transactions are included in the consolidated
statement of operations.
The financial statements of foreign subsidiaries are translated to U.S.
dollars using (i) exchange rates in effect at period end for assets and
liabilities, and (ii) average exchange rates during the period for results of
operations. Adjustments resulting from translation of financial statements are
reflected in accumulated other comprehensive income as a separate component of
stockholders' equity.
Effective January 1, 1998, Poland is no longer deemed to be a highly
inflationary economy. In accordance with this change, the Company established a
new functional currency basis for non-monetary items of its Polish subsidiaries
in accordance with guidelines established within EITF
F-15
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Issue 92-4, "ACCOUNTING FOR A CHANGE IN FUNCTIONAL CURRENCY WHEN AN ECONOMY
CEASES TO BE CONSIDERED HIGHLY INFLATIONARY". That basis is computed by
translating the historical reporting currency amounts of non-monetary items into
the local currency at current exchange rates. As a result of this change, the
Company's functional currency bases exceeded the local currency tax bases of
nonmonetary items. The difference between the new functional currency and the
tax bases have been recognized as temporary differences.
Prior to January 1, 1998 the financial statements of foreign subsidiaries
were translated into U.S. dollars using (i) exchange rates in effect at period
end for monetary assets and liabilities, (ii) exchange rates in effect at
transaction dates (historical rates) for non monetary assets and liabilities,
and (iii) average exchange rates during the period for revenues and expenses,
other than those revenues and expenses that relate to non monetary assets and
liabilities (primarily amortization of fixed assets and intangibles) which are
translated using the historical exchange rates applicable to those non monetary
assets and liabilities. Adjustments resulting from translation of financial
statements were reflected as foreign exchange gains or losses in the
consolidated statements of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value Of Financial Instruments"
requires the Company to make disclosures of fair value information of all
financial instruments, whether or not recognized on the consolidated balance
sheets, for which it is practicable to estimate fair value.
The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable and accrued expenses and notes payable.
At December 31, 1998 and 1997, the carrying value of cash and cash
equivalents, accounts receivable, and accounts payable and accrued expenses on
the accompanying consolidated balance sheets approximates fair value due to the
short maturity of these instruments.
At December 31, 1998, the fair value of the Company's notes payable balance
approximates $230,194,000 based on the last trading price of the notes payable
in 1998.
At December 31, 1997, the fair value of the Company's notes payable
approximated $128,420,000 based on the last trading price of the notes payable
in 1997.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the recoverability of long-lived assets (mainly
property, plant and equipment, intangibles and certain other assets) on a
regular basis by determining whether the carrying value of the assets can be
recovered over the remaining lives through projected undiscounted future
operating cash flows, expected to be generated by such assets. If an impairment
in value is estimated to have occurred, the assets carrying value is reduced to
its estimated fair value. The assessment of the recoverability of long-lived
assets will be impacted if estimated future operating cash flows are not
achieved.
COMMITMENTS AND CONTINGENCIES
Liabilities for loss contingencies arising from claims, assessments,
litigation, fines and penalties, and other sources are recorded when it is
probable that a liability has been incurred and the amount of the assessment can
be reasonably estimated.
F-16
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING COSTS
All advertising costs of the Company are expensed as incurred.
RECLASSIFICATIONS
Certain amounts have been reclassified in the prior year consolidated
financial statements to conform to the 1998 consolidated financial statement
presentation.
4. VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO AMOUNTS BALANCE AT
JANUARY 1 EXPENSE WRITTEN OFF DECEMBER 31
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
1996
Allowance for Doubtful Accounts........... $ 510 $ 358 $ 323 $ 545
1997
Allowance for Doubtful Accounts........... $ 545 $ 494 $ 273 $ 766
1998
Allowance for Doubtful Accounts........... $ 766 $ 1,383 $ 1,054 $ 1,095
</TABLE>
5. ACQUISITIONS
During 1998, the Company made several acquisitions of which details follow.
In each case, the acquisition was accounted for using the purchase method,
whereby the purchase price was allocated to the underlying assets and
liabilities based on their proportionate share of fair values on the date of
acquisition and any excess to goodwill. The results of operations of each of the
businesses acquired are included in the Company's consolidated financial
statements since the date of acquisition.
In February 1998, PCI acquired a cable television business for an aggregate
consideration of approximately $1,574,000. The purchase price exceeded the fair
value of the net liabilities acquired by approximately $2,041,000. In
association with this acquisition, the Company assumed a $2,150,000 loan from
Bank Rozwoju Exportu S.A. (refer to note 11).
In February and March 1998, the Company acquired the remaining 55% equity
interest in an affiliated company for approximately $9,389,000. The purchase
price exceeded the fair value of the net liabilities acquired by approximately
$9,945,000.
On July 16, 1998, the Company purchased the remaining 45.25% interest in a
subsidiary of the Company which was held by unaffiliated third parties for an
aggregate purchase price of approximately $10,655,000, of which approximately
$9,490,000 relates to non-compete agreements. The purchase price, excluding the
amount paid relating to the non-compete agreements, exceeded the fair value of
the assets acquired by $604,000. The portion of the purchase price relating to
the non-compete agreements will be amortized over the five-year term of the
agreements.
On August 15, 1998, PCI purchased the remaining approximately 50% minority
interest in a subsidiary of the Company which was held by unaffiliated third
parties for aggregate consideration of
F-17
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
5. ACQUISITIONS (CONTINUED)
approximately $5,372,000. The purchase price exceeded the fair value of the
assets acquired by $1,104,000.
Additionally, during 1998 the Company acquired certain cable television
system assets and subscriber lists for aggregate consideration of approximately
$2,000,000. The purchase price did not materially exceed the fair value of the
assets acquired.
Had these acquisitions occurred on January 1, 1997, the Company's pro-forma
consolidated results for the years ended December 31, 1998 and 1997, would not
be materially different from those presented in the consolidated statements of
operations.
Effective January 1, 1997, PCI acquired the remaining 51% of a subsidiary
company for aggregate consideration of approximately $9,927,000. The acquisition
has been accounted for as a purchase with the purchase price allocated among the
assets acquired and liabilities assumed based upon the fair values at the date
of acquisition and any excess to goodwill. The purchase price exceeded the fair
value of the net assets acquired by approximately $5,556,000.
In May 1997, PCI acquired a 54.75% ownership interest in a cable television
company for aggregate consideration of approximately $10,925,000. The
acquisition has been accounted for as a purchase with the purchase price
allocated among the assets acquired and liabilities assumed based upon the fair
values at the date of acquisition and any excess as goodwill. The results of the
acquired company have been included with the Company's results since the date of
acquisition. The purchase price exceeded the fair value of the net assets
acquired by approximately $9,910,000. Included in minority interest at December
31, 1997 is approximately $450,000 relating to the acquisition of this
subsidiary.
During 1997, the Company acquired certain cable television system assets and
subscriber lists for aggregate consideration of approximately $3,200,000. The
acquisitions have been accounted for as fixed asset purchases with the purchase
price allocated among the fixed assets acquired based upon their fair values at
the dates of acquisition and any excess to goodwill. The purchase prices
exceeded the fair value of the assets acquired by approximately $548,000.
During 1996, the Company acquired substantially all of the cable television
system assets of twenty-six cable television companies for aggregate
consideration of approximately $15,600,000. The acquisitions have been accounted
for as purchases with the purchase price allocated among the assets acquired and
liabilities assumed based upon their fair values at the date of acquisition and
any excess as goodwill. The results of the acquired companies have been included
with the Company's results since their dates of acquisition. The purchase prices
exceeded the fair value of the net assets acquired by approximately $5,800,000.
6. PROGRAMMING AND BROADCAST RIGHTS
Programming and broadcast rights include approximately $9,030,000 and
$894,000 related to certain broadcast rights purchased as of December 31, 1998
and 1997, respectively, but not yet available for viewing.
7. OTHER CURRENT AND NON-CURRENT ASSETS
Included in other current assets are $8,785,000 and $1,322,000 of VAT
receivables as of December 31, 1998 and 1997, respectively.
F-18
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
7. OTHER CURRENT AND NON-CURRENT ASSETS (CONTINUED)
Also included in other current assets at December 31, 1998 and 1997 are
prepayments of $8,300,000 and $9,000,000, respectively, to Philips Business
Electronics B.V. ("Philips") toward the supply of decoders, satellite dishes and
services used in the Company's D-DTH satellite transmission system ("Reception
Systems").
Included in other non-current assets at December 31, 1998 and 1997 are
deferred financing costs of $12,146,000 and $7,122,000, respectively relating to
the Company's notes payable (refer to note 11).
Included in other non-current assets at December 31, 1997 is a prepayment of
approximately $1,200,000 toward the formation of a programming related joint
venture with World Shopping Network Plc. As a final agreement was never
consummated, the amount was expensed in 1998.
8. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Conduit and franchise agreements........................................ $ 5,409 $ 5,391
Goodwill................................................................ 27,510 13,338
Non-compete agreements.................................................. 19,006 9,406
Other................................................................... 1,336 1,543
--------- ---------
53,261 29,678
Less accumulated amortization........................................... (9,609) (3,360)
--------- ---------
Net intangible assets................................................... $ 43,652 $ 26,318
--------- ---------
--------- ---------
</TABLE>
9. INVESTMENTS IN AFFILIATED COMPANIES
Investment in affiliated companies at December 31, 1998 consist of 20% of
the common stock of Fox Kids Poland Ltd. ("FKP") and 50% of the common stock of
Twoj Styl Sp. z o.o. ("Twoj Styl"). At December 31, 1997 investments in
affiliated companies also included 45% of the common stock of GZM. During 1998,
the Company acquired the remaining interest in GZM (refer to note 5).
In December 1997, the Company acquired a 20% interest in FKP, a joint
venture formed to provide programming to the Company for an aggregate purchase
price of approximately $10,000,000. The purchase price exceeded the fair value
of the Company's ownership percentage of net assets by approximately
$10,000,000. This difference is being amortized over five years as a charge to
equity in profits of affiliated companies. During 1998, the Company contributed
an additional $4,926,000 to the joint venture which was accounted for as an
additional investment in affiliated companies. For the years ended December 31,
1998 and 1997, the Company recorded losses related to this investment of
$6,343,000 and $0, respectively.
In December 1997, the Company acquired a 50% interest in Twoj Styl, a
magazine publishing company for an aggregate purchase price of approximately
$11,100,000. In 1998, the Company paid approximately $302,000 for stamp duty and
professional fees, which was added to the cost of the investment. The purchase
price exceeded the fair value of the Company's ownership percentage of net
F-19
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
9. INVESTMENTS IN AFFILIATED COMPANIES (CONTINUED)
assets by approximately $9,600,000. This difference is being amortized over ten
years as a charge to equity in profits of affiliated companies. For the years
ended December 31, 1998 and 1997, the Company recorded a (loss)/profit related
to this investment of $(181,000) and $152,000, respectively. In addition, the
Company agreed to provide additional future financing to Twoj Styl, either debt
or equity, of up to $7,700,000 to develop Polish- language programming and
ancillary services. As of December 31, 1998, no additional financing had been
provided.
It was not practicable to estimate the market value of the investments in
affiliated companies due to the nature of these investments, the relatively
short existence of the affiliated companies and the absence of quoted market
price for the affiliated companies.
10. INCOME TAXES
Income tax (expense)/benefit consists of:
<TABLE>
<CAPTION>
CURRENT DEFERRED TOTAL
--------- ---------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Year ended December 31, 1998:
U.S. Federal............................................... $ -- $ -- $ --
State and local............................................ -- -- --
Foreign.................................................... (210) -- (210)
--------- ---------- ---------
$ (210) $ -- $ (210)
--------- ---------- ---------
--------- ---------- ---------
Year ended December 31, 1997:
U.S. Federal............................................... $ 1,438 $ -- $ 1,438
State and local............................................ -- -- --
Foreign.................................................... (463) -- (463)
--------- ---------- ---------
$ 975 $ -- $ 975
--------- ---------- ---------
--------- ---------- ---------
Year ended December 31, 1996:
U.S. Federal............................................... $ (714) $ -- $ (714)
State and local............................................ (531) -- (531)
Foreign.................................................... (28) -- (28)
--------- ---------- ---------
$ (1,273) $ -- $ (1,273)
--------- ---------- ---------
--------- ---------- ---------
</TABLE>
Sources of loss before income taxes and minority interest are presented as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ---------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic loss............................................. $ (52,341) $ (20,628) $ (2,602)
Foreign loss.............................................. (73,154) (31,585) (4,632)
----------- ---------- ---------
$ (125,855) $ (52,213) $ (7,234)
----------- ---------- ---------
----------- ---------- ---------
</TABLE>
F-20
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
10. INCOME TAXES (CONTINUED)
Income tax (expense)/benefit for the years ended December 31, 1998, 1997,
and 1996 differed from the amounts computed by applying the U.S. federal income
tax rate of 34 percent to pretax loss as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax benefit............................. $ 43,061 $ 17,752 $ 2,460
Non-deductible expenses..................................... (1,635) (101) (17)
Change in valuation allowance............................... (30,299) (15,424) (3,504)
Adjustment for change in functional currency bases.......... (11,311) -- --
Adjustment to deferred tax asset
for enacted changes in tax rates.......................... (695) (789) --
Foreign tax rate differences................................ 606 (463) (184)
Other....................................................... 63 -- (28)
---------- ---------- ---------
$ (210) $ 975 $ (1,273)
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
The tax effects of temporary differences that give rise to deferred tax
assets and deferred tax liabilities are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
<S> <C> <C>
1998 1997
---------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Foreign net operating loss carryforward............................... $ 27,930 $ 6,471
Domestic net operating loss carry forward............................. 7,459 --
Interest income....................................................... 2,650 1,946
Service revenue....................................................... 2,101 1,948
Accrued liabilities................................................... 4,061 2,964
Deferred costs........................................................ 6,447 2,001
Stock options......................................................... 2,950 2,950
Deferred interest..................................................... 2,183 --
Unrealized foreign exchange losses.................................... 9,066 5,614
Other................................................................. 1,393 139
---------- ---------
Total gross deferred tax assets......................................... 66,240 24,033
Less valuation allowance................................................ (54,332) (24,033)
---------- ---------
Net deferred tax assets................................................. $ 11,908 $ --
---------- ---------
---------- ---------
Deferred tax liabilities:
Fixed assets depreciation............................................. $ (11,786) $ --
Other................................................................. (122) --
---------- ---------
Total gross deferred tax liabilities.................................. $ (11,908) $ --
---------- ---------
---------- ---------
Net deferred tax liability............................................ $ -- $ --
---------- ---------
---------- ---------
</TABLE>
F-21
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
10. INCOME TAXES (CONTINUED)
The net increase in the valuation allowance for the years ended December 31,
1998, 1997 and 1996 was $30,299,000, $3,504,000 and $667,000, respectively. In
assessing the realiability of deferred tax assets, management considers whether
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers
projected future taxable income and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods which the deferred tax assets are
deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the existing
valuation allowances at December 31, 1998.
Subsequently recognized tax benefits relating to the valuation allowance for
deferred tax assets as of December 31, 1998 will be reported in the consolidated
statement of operations.
Foreign loss carryforwards can be offset against the PTK Companies' taxable
income and utilized at a rate of one-third per year in each of the three years
subsequent to the year of the loss. If there is no taxable income in a given
year during the carryforward period, the portion of the loss carryforward to be
utilized is permanently forfeited. For losses incurred in U.S. taxable years
prior to 1998, loss carryforwards can be applied against taxable income three
years retroactively and fifteen years into the future. For losses incurred in
U.S. taxable years from 1998, loss carryforwards can be applied against taxable
income two years retroactively and twenty years into the future.
At December 31, 1998, the Company has foreign net operating loss
carryforwards of approximately $104,087,000, which will expire as follows:
<TABLE>
<CAPTION>
(IN
YEAR ENDING DECEMBER 31, THOUSANDS)
- ----------------------------------------------------------------------------------- -------------
<S> <C>
1999............................................................................... $ 28,066
2000............................................................................... 26,814
2001 and thereafter................................................................ 49,207
-------------
$ 104,087
-------------
-------------
</TABLE>
11. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
@ Entertainment Notes, net of discount....................................................... $ 125,513 $ --
PCI Notes, net of discount................................................................... 129,627 129,578
American Bank in Poland S.A. ("AmerBank") revolving credit loan.............................. 6,500 --
Bank Rozwoju Exportu S.A. Deutsche--Mark facility............................................ 1,912 --
Other........................................................................................ 402 532
--------- ---------
263,954 130,110
less: current portion........................................................................ 6,500 --
Notes payable, net of current portion........................................................ $ 257,454 $ 130,110
</TABLE>
F-22
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
@ ENTERTAINMENT NOTES
On July 14, 1998, the Company sold 252,000 units (collectively, the "Units")
to two initial purchasers pursuant to a purchase agreement, each Unit consisting
of $1,000 principal amount at maturity of 14 1/2% Senior Discount Notes (the
"Notes") due 2008 and four warrants (each a "Warrant"), each initially entitling
the holder thereof to purchase 1.81 shares of common stock, par value $0.01 per
share (the "Common Stock") at an exercise price of $13.20 per share, subject to
adjustment.
The Notes were issued at a discount to their aggregate principal amount at
maturity and, together with the Warrants generated gross proceeds to the Company
of approximately $125,100,000 of which $117,485,000 has been allocated to the
initial accreted value of the Notes and approximately $7,615,000 has been
allocated to the Warrants. The portion of the proceeds that is allocable to the
Warrants was accounted for as part of paid-in capital. The allocation was made
based on the relative fair values of the two securities at the time of issuance.
Net proceeds to the Company after deducting initial purchasers' discount and
offering expenses were approximately $118,972,000.
The Notes are unsubordinated and unsecured obligations. Cash interest on the
Notes will not accrue prior to July 15, 2003. Thereafter cash interest will
accrue at a rate of 14.5% 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 mature on July 15, 2008. At any time prior to July 15, 2001, the Company
may redeem up to a maximum of 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 thereof at the redemption date, plus accrued and unpaid interest,
if any, to the date of redemption with some or all of the net cash proceeds of
one or more public equity offerings; provided, however, that not less than 75%
of the originally issued aggregate principal amount at maturity of the Notes
remains outstanding immediately after giving effect to such redemption. The
effective interest rate of the Notes is approximately 16.5%.
The Warrants initially entitle the holders thereof to purchase an aggregate
of 1,824,514 shares of Common Stock, representing, in the aggregate,
approximately 5% of the outstanding Common Stock on a fully-diluted basis
immediately after giving effect to the sale of the Units. The Warrants are
exercisable at any time and will expire on July 15, 2008.
Pursuant to the Indenture governing the Notes (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 dividends and other payment restrictions affecting restricted subsidiaries;
(x) limitation on investments in unrestricted subsidiaries; (xi) limitation on
lines of business; and (xii) consolidations, mergers and sales of assets. The
Company is in compliance with these covenants.
PCI NOTES
On October 31, 1996, PCI sold $130,000,000 aggregate principal amount of
Senior Notes ("PCI Notes") 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.
F-23
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
The PCI Notes have an interest rate of 9 7/8% and a maturity date of
November 1, 2003. Interest is paid on the PCI Notes on May 1 and November 1 of
each year. As of December 31, 1998 and 1997 the Company accrued interest expense
of $2,140,000 and $2,175,000, respectively.
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 redemption; provided that immediately after
giving effect to such redemption, at least $87 million aggregate principal
amount of the PCI Notes remains outstanding.
The PCI Notes are net of unamortized discount of $373,000 and $422,000 at
December 31, 1998 and 1997, respectively. The effective interest rate of the PCI
Notes is approximately 11.3%.
PCI has pledged to State Street Bank and Trust Company, 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. Notes payable from PCBV to
PCI were $160,450,000 and $134,509,000 at December 31, 1998 and 1997,
respectively.
Pursuant to the PCI Indenture, PCI 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 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
restricted subsidiaries; (x) limitation on investments in unrestricted
subsidiaries; (xi) limitation on lines of business; and (xii) consolidations,
mergers and sales of assets. The Company is in compliance with these covenants.
Condensed parent only financial statements of @ Entertainment, Inc. are
provided in Note 12 in compliance with the requirements of Rules 5-04 and 12-04
of the Securities and Exchange Commission's Regulation S-X.
AMERICAN BANK IN POLAND S.A. REVOLVING CREDIT LOAN
The revolving credit loan allowing the Company to borrow up to a maximum
principal amount of $6,500,000 on or before December 31, 1998, was fully drawn
as of December 31, 1998. The facility bears interest at LIBOR plus 3.0% (8.0% as
at December 31, 1998), is repayable in full on August 20, 1999, and is secured
by promissory notes en blanc from certain of the Company's subsidiaries, and
pledges of the shares of certain of the Company's subsidiaries.
BANK ROZWOJU EKSPORTU S.A. DEUTSCHE-MARK FACILITY
The Deutsche-Mark facility represents a credit facility of DM 3,948,615 of
which approximately DM 3,204,000 was outstanding at December 31, 1998. The
facility bears interest at LIBOR plus 2.0% (5.3% as at December 31, 1998), is
repayable in full on December 27, 2002, and is ultimately secured by a pledge of
the common shares of one of the Company's subsidiaries.
Interest expense relating to notes payable was in the aggregate
approximately $21,535,000, $13,902,000 and $4,687,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
F-24
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
During 1996, the Company recorded an extraordinary loss related to the early
retirement of debt. The extraordinary loss was comprised of a $147,000
prepayment penalty and a $1,566,000 write-off of deferred financing costs.
12. CONDENSED PARENT ONLY FINANCIAL INFORMATION OF @ ENTERTAINMENT
The following parent only condensed financial statements were prepared in
accordance with generally accepted accounting principles in the United States of
America in a manner consistent with the consolidated financial statements except
that all subsidiaries have been accounted for under the equity method. The
parent only condensed financial statements as of and for periods prior to the
Reorganization represent those of PCI.
CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
--------- ------------- ---------
<S> <C> <C> <C>
(IN THOUSANDS)
Operating costs and expenses:
Selling, general and administrative expenses................................... $ 8,700 $ 14,662 $ 1,061
--------- ------------- ---------
Operating loss................................................................. (8,700) (14,662) (1,061)
Interest and investment income................................................. 8,458 2,489 1,076
Interest expense............................................................... (8,608) -- (2,612)
Foreign exchange gain, net..................................................... 36 -- --
Equity in losses of affiliated companies....................................... (117,251) (42,651) (2,775)
--------- ------------- ---------
Loss before income taxes....................................................... (126,065) (54,824) (5,372)
Income tax expense............................................................. -- -- (1,245)
--------- ------------- ---------
Net loss....................................................................... (126,065) (54,824) (6,617)
Accretion of redeemable preferred stock........................................ -- (2,436) (2,870)
Preferred stock dividend....................................................... -- -- (1,738)
(Excess)/ deficit of carrying value of preferred
stock (over)/ under consideration paid......................................... -- (33,806) 3,549
--------- ------------- ---------
Net loss applicable to holders of common stock................................. $(126,065) $ (91,066) $ (7,676)
--------- ------------- ---------
--------- ------------- ---------
</TABLE>
CONDENSED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net loss......................................................................... $(126,065) $ (54,824) $ (6,617)
Other comprehensive income:
Translation adjustment......................................................... (249) (218) --
--------- --------- ---------
$(126,314) $ (55,042) $ (6,617)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-25
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
CONDENSED BALANCE SHEETS
12. CONDENSED PARENT ONLY FINANCIAL INFORMATION OF @ENTERTAINMENT (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
<S> <C> <C>
1998 1997
----------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................................................ $ 3,070 $ 71,565
Accounts receivable, net................................................................. 168 290
Other current assets..................................................................... 1,123 74
----------- ----------
Total current assets................................................................. 4,361 71,929
Other assets............................................................................. 17,230 11,252
Net investment in restricted net assets of wholly-owned subsidiaries..................... 102,344 121,977
Net investment in unrestricted net assets of wholly-owned subsidiaries................... 37,312 (51,822)
----------- ----------
Total assets............................................................................. $ 161,247 $ 153,336
----------- ----------
----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses.................................................... $ 2,078 $ 981
Notes payable............................................................................ 125,513 --
----------- ----------
Total liabilities........................................................................ 127,591 981
Stockholders' equity:
Preferred stock, $0.01 par value; Authorized 20,000,000 shares; none issued and
outstanding.......................................................................... -- --
Common stock, $.01 par value; Authorized 70,000,000 shares in 1998 and 1997; issued and
outstanding 33,310,000 shares in 1998 and 1997....................................... 333 333
Paid-in capital........................................................................ 237,954 230,339
Accumulated other comprehensive income................................................. (467) (218)
Accumulated deficit.................................................................... (204,164) (78,099)
----------- ----------
Total stockholders' equity............................................................... 33,656 152,355
----------- ----------
Total liabilities and stockholders' equity............................................... $ 161,247 $ 153,336
----------- ----------
----------- ----------
</TABLE>
F-26
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
12. CONDENSED PARENT ONLY FINANCIAL INFORMATION OF @ENTERTAINMENT (CONTINUED)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ACCUMULATED OTHER
---------------------- ---------------------- PAID-IN COMPREHENSIVE ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL INCOME DEFICIT TOTAL
----------- --------- --------- ----------- --------- ----------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Balance January 1,
1996................. 985 $ 10,311 11,037 $ 4,993 $ 1,544 $ -- $ (16,658) $ 190
Net loss........... -- -- -- -- -- -- (6,617) (6,617)
Stock dividend..... 166 1,738 -- -- (1,738) -- -- --
Issuance of
stock............ -- -- 7,911 (4,992) 53,837 -- -- 48,845
Preferred stock
redemption....... (1,151) (12,049) -- -- 3,549 -- -- (8,500)
Accretion of
redeemable
preferred
stock............ -- -- -- -- (2,870) -- -- (2,870)
Reorganization..... -- -- 18,929,052 188 (188) -- -- --
----------- --------- --------- ----------- --------- ------ ------------ ---------
Balance January 1,
1997................. -- $ -- 18,948,000 $ 189 $ 54,134 $ -- $ (23,275) $ 31,048
Net loss........... -- -- -- -- -- -- (54,824) (54,824)
Translation
adjustment....... -- -- -- -- -- (218) -- (218)
Net proceeds from
initial public
offering......... -- -- 9,500,000 95 183,197 -- -- 183,292
Purchase of PCI
series A and C
redeemable
preferred
stock............ -- -- -- -- (33,806) -- -- (33,806)
Accretion of
redeemable
preferred
stock............ -- -- -- -- (2,436) -- -- (2,436)
Conversion of
series B
redeemable
preferred
stock............ -- -- 4,862,000 49 11,148 -- -- 11,197
Stock option
compensation
expense.......... -- -- -- -- 18,102 -- -- 18,102
----------- --------- --------- ----------- --------- ------ ------------ ---------
Balance December 31,
1997................. -- $ -- 33,310,000 $ 333 $ 230,339 $ (218) $ (78,099) $ 152,573
Net loss........... -- -- -- -- -- -- (126,065) (126,065)
Translation
adjustment....... -- -- -- -- -- (249) -- (249)
Warrants attached
to Senior
Discount Notes... -- -- -- -- 7,615 -- -- 7,615
----------- --------- --------- ----------- --------- ------ ------------ ---------
Balance December 31,
1998................. -- $ -- 33,310,000 $ 333 $ 237,954 $ (467) $ (204,164) $ 34,123
----------- --------- --------- ----------- --------- ------ ------------ ---------
----------- --------- --------- ----------- --------- ------ ------------ ---------
</TABLE>
F-27
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
12. CONDENSED PARENT ONLY FINANCIAL INFORMATION OF @ ENTERTAINMENT (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ---------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................................. $ (126,065) $ (54,824) (6,617)
Adjustments to reconcile net loss to
net cash (used in) provided by operating activities:
Amortization of notes payable discount and issue costs.................. 8,301 1,040 164
Loss of subsidiaries.................................................... 117,070 42,651 12,862
Gain on sale of investment securities................................... -- (358) --
Non-cash stock option compensation expense.............................. -- 8,677 --
Equity in losses of affiliated companies................................ (181) -- --
Changes in operating assets and liabilities:
Accounts receivable................................................... 122 (142) (35)
Other current assets.................................................. (1,049) 114 (1,300)
Other assets.......................................................... (121) -- --
Accounts payable and accrued expenses................................. 1,097 (2,008) 2,855
Income taxes payable.................................................. -- (4,472) 4,472
----------- ---------- -----------
Net cash (used in)/provided by operating activities................. (826) (9,322) 12,401
----------- ---------- -----------
Cash flows from investing activities:
Proceeds from maturity of investment securities....................... -- 25,473 (25,115)
Investment in, and loans and advances to affiliated companies......... (186,809) (111,670) (122,337)
Purchase of other assets.............................................. -- (11,252) (8,200)
----------- ---------- -----------
Net cash used in investing activities............................... (186,809) (97,449) (155,652)
----------- ---------- -----------
Cash flows from financing activities:
Net proceeds from issuance of stock................................... -- 183,292 81,001
Redemption of preferred stock......................................... -- (60,000) (8,500)
Costs to obtain loans................................................. (5,960) -- (6,513)
Proceeds from issuance of notes payable............................... 117,485 -- 136,074
Proceeds from issuance of warrants.................................... 7,615 -- --
Repayment of notes payable............................................ -- -- (10,000)
----------- ---------- -----------
Net cash provided by financing activities........................... 119,140 123,292 192,062
----------- ---------- -----------
Net (decrease)/increase in cash and cash equivalents................ (68,495) 16,521 48,811
Cash and cash equivalents at beginning of year.............................. 71,565 55,044 6,233
----------- ---------- -----------
Cash and cash equivalents at end of period.................................. $ 3,070 $ 71,565 55,044
----------- ---------- -----------
----------- ---------- -----------
Supplemental cash flow information:
Cash paid for interest................................................ $ -- $ -- $ 2,338
----------- ---------- -----------
----------- ---------- -----------
Cash paid for income taxes............................................ $ -- $ -- $ 1,184
----------- ---------- -----------
</TABLE>
F-28
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
13. RELATED PARTY TRANSACTIONS
During the ordinary course of business, the Company enters into transactions
with affiliated parties. The principal related party transactions are described
below.
PROGRAMMING
Programming is provided to the Company by certain of its affiliates. The
Company incurred programming fees from these affiliates of $418,000, $559,000
and $ 412,000 for the years ended December 31, 1998, 1997 and 1996.
PRINT MEDIA SERVICES
An affiliate of the Company provides print media services to the Company.
The Company incurred operating costs related to these services of $4,355,000 for
the year ended December 31, 1998. The Company did not incur any costs from this
affiliate prior to 1998.
14. PER SHARE INFORMATION
Basic loss per share has been computed by dividing net loss attributable to
common stockholders by the weighted average number of common shares outstanding
during the year. The effect of potential common shares (stock options and
warrants outstanding) is antidilutive, accordingly, dilutive loss per share is
the same as basic loss per share.
The Company has presented historical loss per common share information
assuming the common stock exchange of 1 to 1,000 shares occurred on January 1,
1995.
The following table provides a reconciliation of the numerator and
denominator in the loss per share calculation:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ---------- ----------
Net loss attributable to common stockholders (in thousands).................. $ (126,065) $ (91,066) $ (7,676)
----------- ---------- ----------
----------- ---------- ----------
Weighted average number of common shares outstanding (in thousands).......... 33,310 24,771 17,271
Nominal issuance (in thousands).............................................. -- -- 346
----------- ---------- ----------
Basic weighted average number of common shares outstanding (in thousands).... 33,310 24,771 17,617
----------- ---------- ----------
----------- ---------- ----------
Loss per share-basic and diluted............................................. $ (3.78) $ (3.68) $ (0.44)
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
15. STOCK OPTION PLAN
On June 22, 1997, the Company adopted a stock option plan (the "1997 Plan")
pursuant to which the Company's Board of Directors may grant stock options to
officers, key employees and consultants of the Company. The 1997 Plan authorizes
grants of options to purchase up to 4,436,000 shares, subject to adjustment in
accordance with the 1997 Plan. At December 31, 1998, options for 3,924,000
shares
F-29
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
15. STOCK OPTION PLAN (CONTINUED)
had been granted. Of this amount, 1,671,000 options became exercisable upon the
IPO but cannot be sold for a period of two years from July 30, 1997.
The Company granted 1,671,000 stock options in January 1997 at a price
substantially below the IPO price of $21.00 per share. Such options vested in
full upon the completion of the IPO. In accordance with generally accepted
accounting principles, the Company recognized approximately $18,102,000 of
compensation expense included in selling, general, and administrative expenses
for these options in 1997 representing the difference between the exercise price
of the options and the fair market value of the shares on the date of grant. All
other stock options were granted with exercise prices at or below the fair
market value of the shares on the date of grant.
Future stock options are granted with an exercise price that must be at
least equal to the stock's fair market value at 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 the Company, the exercise price of any incentive
stock option granted must equal at least 110% of the fair market value on the
grant date and the maximum term of an incentive stock option must not exceed
five years. The term of all other options granted under the 1997 Plan may not
exceed ten years. Options become exercisable at such times as determined by the
Board of Directors and as set forth in the individual stock option agreements.
Generally, all stock options vest ratably over 2 to 5 years commencing one year
after the date of grant.
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------ -----------------
<S> <C> <C>
Balance at January 1, 1996........................................................ -- $ --
Granted........................................................................... 241,000 $ 1.99
------------ ------
Balance at December 31, 1996 (none exercisable)................................... 241,000 $ 1.99
Granted........................................................................... 2,083,000 $ 5.98
------------ ------
Balance at December 31, 1997 (none exercisable)................................... 2,324,000 $ 5.57
Granted........................................................................... 1,600,000 $ 12.31
------------ ------
Balance at December 31, 1998 (2,643,000 exercisable).............................. 3,924,000 $ 8.32
------------ ------
</TABLE>
No options were exercised or forfeited during 1998.
At December 31, 1998 the range of exercise prices, weighted-average
remaining contractual life and number exercisable of outstanding options was as
follows:
<TABLE>
<CAPTION>
WEIGHTED- AVERAGE
WEIGHTED- CONTRACTUAL WEIGHTED-
RANGE OF NUMBER OF AVERAGE REMAINING LIFE NUMBER AVERAGE
EXERCISE PRICES SHARES EXERCISE PRICE (YEARS) EXERCISABLE EXERCISE PRICE
- ----------------------------------------- ---------- --------------- ----------------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
1.99-3.79................................ 1,912,000 3.51 5.44 1,912,000 3.51
12.00-15.24.............................. 2,012,000 12.89 8.98 731,900 12.46
---------- ----------
3,924,000 8.32 2,643,900 5.98
---------- ----------
---------- ----------
</TABLE>
F-30
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
15. STOCK OPTION PLAN (CONTINUED)
The per share weighted-average fair value of stock options granted during
1998 was $4.22 on the date of grant using the Black Scholes option-pricing model
with the following weighted-average assumptions: expected volatility 43.0%,
expected dividend yield 0.0%, risk-free interest rate of 5.72%, and an expected
life of 4 years.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss and
net loss per share would have increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ---------- ---------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Net loss-as reported...................................................... $ (126,065) $ (54,824) $ (6,617)
Net loss-pro forma........................................................ $ (131,511) $ (56,607) $ (6,617)
Basic and diluted net loss per share--as reported......................... $ (3.78) $ (3.68) $ (0.44)
Basic and diluted loss per share-pro forma................................ $ (3.95) $ (3.75) $ (0.44)
</TABLE>
16. LEASES
BUILDING LEASES
The Company leases several offices and warehouses within Poland under
cancelable operating leases. The Company has a noncancelable operating lease for
a building in the United Kingdom which houses the majority of its technical
equipment relating to the D-DTH network. The noncancelable lease expires in
2002, and contains a renewal option for an additional five years. Future minimum
lease payments as of December 31, 1998 are $2,725,000 in 1999, $2,806,000 in
2000, $2,890,000 in 2001 and $2,977,000 in 2002.
D-DTH TECHNICAL EQUIPMENT LEASE
The Company has an eight year agreement with British Telecommunications plc
("BT") for the lease and maintenance of certain satellite uplink equipment. The
agreement requires the payment of equal monthly installments of $50,000
approximating future minimum commitments of $600,000 in 1999, $576,000 in 2000,
$576,000 in 2001, $576,000 in 2002 and $1,728,000 in 2003 and thereafter. Other
than the BT uplink equipment, the Company owns all of the required broadcasting
equipment at its transmission facility in the United Kingdom.
CONDUIT LEASES
The Company also leases space within various telephone duct systems from
TPSA under cancelable operating leases. The TPSA leases expire at various times,
and a substantial portion of the Company's contracts with TPSA permit
termination by TPSA without penalty at any time either immediately upon the
occurrence of certain conditions or upon provision of three to six months notice
without cause. Refer to note 19 for further detail.
All of the agreements provide that TPSA is the manager of the telephone duct
system and will lease space within the ducts to the Company for installation of
cable and equipment for the cable
F-31
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
16. LEASES (CONTINUED)
television systems. The lease agreements provide for monthly lease payments that
are adjusted quarterly or annually, except for the Gdansk lease agreement which
provides for an annual adjustment after the sixth year and then remains fixed
through the tenth year of the lease.
Minimum future lease commitments for the aforementioned conduit leases
relate to 1999 only, as all leases are cancelable in accordance with the
aforementioned terms. The future minimum lease commitments related to these
conduit leases approximates $622,000 for the six months ending June 30, 1999.
TRANSPONDER LEASES
During 1997, the Company entered into certain operating leases pursuant to
which the Company is liable for charges associated with each of its three
transponders on the Astra satellites, which can amount to a maximum of
$6,750,000 per year for each transponder and up to $182 million for all three
transponders for the term of their leases. The future minimum lease payments
applicable to the transponders approximate $20,250,000 in 1999, $20,250,000 in
2000, $20,250,000 in 2001, $20,250,000 in 2002 and $101,250,000 in 2003 and
thereafter. 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's
transponder leases provide that the Company's rights are subject to termination
in the event that the lessor's franchise is withdrawn by the Luxembourg
Government.
Total rental expense associated with the aforementioned operating leases for
the years ended December 31, 1998, 1997 and 1996 was $10,521,000, $3,696,000 and
$892,000, respectively.
17. SEGMENT INFORMATION
@Entertainment and its subsidiaries operate in three business segments: (1)
cable television, (2) digital direct-to-home television and programming, and (3)
corporate functions. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies. The Company
accounts for intersegment sales and transfers as if the sales or transfers were
to third parties, that is, at current market prices. In addition to other
operating statistics, the Company measures its financial performance by EBITDA,
an acronym for earnings before interest, taxes depreciation and amortization.
The Company defines EBITDA to be net loss adjusted for interest and investment
income, depreciation and amortization, interest expense, foreign currency gains
and losses, equity in losses of affiliated companies, income taxes,
extraordinary items, non-recurring items (e.g., compensation expense related to
stock options), gains and losses from the sale of assets other than in a normal
course of business and minority interest. The items excluded from EBITDA are
significant components in understanding and assessing the Company's financial
performance. The Company believes that EBITDA and related measures of cash flow
from operating activities serve as important financial indicators in measuring
and comparing the operating performance of media companies. EBITDA is not
F-32
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
17. SEGMENT INFORMATION (CONTINUED)
a U.S. GAAP measure of loss or cash flow from operations and should not be
considered as an alternative to cash flows from operations as a measure of
liquidity.
<TABLE>
<CAPTION>
D-DTH AND
1998 CABLE PROGRAMMING CORPORATE TOTAL
- --------------------------------------------------------------- --------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues from external customers............................... $ 52,971 $ 8,888 $ -- $ 61,859
Intersegment revenues.......................................... -- 13,432 -- 13,432
Operating loss................................................. (23,066) (69,047) (8,700) (100,813)
EBITDA......................................................... (1,431) (64,378) (8,700) (74,509)
Depreciation and amortization.................................. (21,635) (4,669) -- (26,304)
Investment in equity method investees.......................... -- 8,533 11,373 19,956
Segment total assets........................................... 193,785 132,998 21,591 348,374
Expenditures for segment assets................................ 42,639 72,353 -- 114,992
1997
- ---------------------------------------------------------------
Revenues from external customers............................... $ 38,138 $ -- $ -- $ 38,138
Intersegment revenues.......................................... -- -- -- --
Operating loss................................................. (20,308) (10,210) (12,152) (42,670)
EBITDA......................................................... 5,387 (10,186) (3,475) (8,274)
Net loss....................................................... (35,087) (7,668) (12,069) (54,824)
Significant non-cash items:
Stock option compensation expense.............................. 9,425 -- 8,677 18,102
Investment in equity method investees.......................... -- 10,876 11,252 21,628
Segment total assets........................................... 187,449 36,466 83,181 307,096
Expenditures for segment assets................................ 33,786 5,857 -- 39,643
</TABLE>
In 1997, the cable segment includes the activities of Mozaic Entertainment,
Inc., a subsidiary which provided programming content for the cable business. In
1998, the Company's programming activity related solely to the development of
the Wizja TV platform and has been included in the D-DTH and programming
segment. For the year ended December 31, 1997, Mozaic Entertainment, Inc.
revenues and operating loss were $563,000 and $2,071,000, respectively. For the
year ended December 31, 1998, Mozaic Entertainment, Inc. was dormant. During
1996 the Company operated in one business segment (cable).
F-33
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
17. SEGMENT INFORMATION (CONTINUED)
Total long-lived assets for the years ended December 31, 1998 and 1997 for
the Company analyzed by geographical location is as follows:
<TABLE>
<CAPTION>
TOTAL REVENUES LONG-LIVED ASSETS
------------------------------- ----------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1998 1997
--------- --------- --------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Poland.................................................. $ 61,859 $ 38,138 $ 24,923 $ 257,625 $ 152,614
United Kingdom.......................................... -- -- -- 20,208 7,930
Other................................................... -- -- -- 29 --
--------- --------- --------- ---------- ----------
Total................................................... $ 61,859 $ 38,138 $ 24,923 $ 277,862 $ 160,544
--------- --------- --------- ---------- ----------
--------- --------- --------- ---------- ----------
</TABLE>
All of the Company's revenue is derived from activities carried out in
Poland. Long-lived assets consist of property, plant, and equipment, inventories
for construction, intangible assets, and other assets.
18. COMMITMENTS AND CONTINGENCIES
PURCHASE COMMITMENTS
The Company has concluded an agreement with Philips, whereby Philips will
supply reception systems, as well as retail, installation and support services
in connection with the launch of the Company's D-DTH business in Poland. Philips
will be the exclusive supplier to the Company of the first 500,000 D-DTH
reception systems and will not distribute any other digital integrated receiver
decoders 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. 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.
As of December 31, 1998, the Company had an aggregate minimum commitment toward
the purchase of the Reception Systems of approximately $129,213,000 up to June
30, 2000.
PROGRAMMING, BROADCAST AND EXHIBITION RIGHT COMMITMENTS
The Company has entered into long-term programming agreements and agreements
for the purchase of certain exhibition or broadcast rights with a number of
third party content providers for its D-DTH and cable systems. The agreements
have terms which range from one to seven years and require that the license fees
be paid either at a fixed amount payable at the time of execution or based upon
a guaranteed minimum number of subscribers connected to the system each month.
At December 31, 1998, the Company had an aggregate minimum commitment in
relation to these agreements of approximately $214,299,000 over the next seven
years, approximating $37,198,000 in 1999, $38,428,000 in 2000, $40,627,000 in
2001, $44,837,000 in 2002 and $53,209,000 in 2003 and thereafter.
F-34
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
18. COMMITMENTS AND CONTINGENCIES (CONTINUED)
CONSULTING AGREEMENTS
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.
REGULATORY APPROVALS
The Company is in the process of permits from the Polish State Agency for
Radiocommunications ("PAR") for several of its cable television systems. If
these permits are not obtained, PAR could impose penalties such as fines or in
severe cases, revocation of all permits held by an operator or the forfeiture of
the operator's cable networks. Management of the Company does not believe that
these pending approvals result in a significant risk to the Company.
LITIGATION AND CLAIMS
On April 17, 1998, the Company signed a letter of intent with Telewizyjna
Korporacja Partycypacyjna S.A. ("TKP") and the shareholders of TKP, namely,
Canal+ S.A., Agora S.A., and PolCom Invest S.A. which 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 intend 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 package 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
F-35
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
18. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 TKP to pay the Company the $5 million break-up fee
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 the arbitration
proceedings TKP and its shareholders contend that the Company breached the
letter of intent, that such breach was the cause of the parties' failure to
agree and execute the definitive agreements, and that the Company is therefore
liable for $10 million in damages under the letter of intent. In its response
the Company denies these allegations and claims that TKP is liable for at least
$15 million in damages pursuant to the letter of intent.
This $15 million figure is composed of a claim for a $5 million break-up
fee, $5 million in damages due to the claim that TKP and its shareholders
breached the letter of intent, thereby causing the parties' failure to agree and
execute the definitive agreements, and at least $5 million as an indemnification
for liabilities incurred by the Company as a result of certain actions taken
with respect to assets to be acquired or contracts to be assumed by TKP. The
Company does not believe that the arbitration proceedings will have a material
adverse effect on its business, financial condition or results of operations.
Two of the Company's cable television subsidiaries and four other unrelated
Polish cable operators and HBO Polska Sp. z o.o., have been made defendants in a
lawsuit instituted by Polska Korporacja Telewizyjna Sp. z o.o., a subsidiary of
Canal+. The primary defendant in the proceedings is HBO Polska Sp. z o.o. which
is accused of broadcasting the HBO television program in Poland without a
license from the Council as required by the Radio and Television Act of 1992, as
amended, and thereby undertaking an activity constituting an act of unfair
competition. The Company does not believe that the final disposition of the
lawsuit will have a material adverse effect on its consolidated financial
position or results of operations.
From time to time, the Company is subject to various claims and suits
arising out of the ordinary course of business. While the ultimate result of all
such matters is not presently determinable, based upon current knowledge and
facts, management does not expect that their resolution will have a material
adverse effect on the Company's consolidated financial position or results of
operations.
19. CONCENTRATIONS OF BUSINESS AND CREDIT RISK
D-DTH BUSINESS
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 380,000 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.
F-36
<PAGE>
@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
19. CONCENTRATIONS OF BUSINESS AND CREDIT RISK (CONTINUED)
SUPPLIER AGREEMENT
Certain critical components and services used in the Company's D-DTH
satellite transmission system, including 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, would delay or interrupt the development and operation of the Company's
D-DTH service and thereby could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's agreement with Philips provides for full distribution,
installation and servicing through more than 1,200 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 will therefore be the primary point of
contact for subscribers to the Company's D-DTH service. Failure by Philips'
retail network to provide the desired levels of service, quality and expertise
(which are outside the control of the Company) could have a material adverse
impact on the Company's operations and financial condition.
PIRACY
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 such as 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
F-37
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@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
19. CONCENTRATIONS OF BUSINESS AND CREDIT RISK (CONTINUED)
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.
USE OF TPSA CONDUITS
The Company's ability to build out its existing cable television networks
and to integrate acquired systems into its cable television networks depends 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 December 31, 1998, approximately
56.5% of the Company's cable 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 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.
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. 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.
YEAR 2000
The Company's cable television, D-DTH and programming operations are
dependent upon computer systems and other technological devices with imbedded
microprocessor chips that are intended to utilize dates and process data beyond
December 31, 1999. In January 1997, the Company developed a plan to address the
impact that potential year 2000 problems may have on Company operations and to
implement necessary changes to address such problems (the "Y2K Plan"). During
the course of the development of its Y2K Plan, the Company has identified
certain critical operations, which need to be year 2000 compliant for the
Company to operate effectively. These critical operations include accounting and
billing systems, customer service and service delivery systems, and field and
headend devices.
Largely as a result of its high rate of growth over the past few years, the
Company has entered into an agreement to purchase a new system to replace its
current accounting system and an agreement to purchase specialized billing
software for the Company's new customer service and billing center. The vendors
of the new accounting system and of the billing software have confirmed to the
Company that these products are year 2000 compliant. The Company has completed
the testing phase of the new accounting system, and the implementation phase was
substantially completed at the end of 1998. The Company has implemented the new
billing software for D-DTH subscribers and expects implementation of the billing
software to be completed for the majority of its cable subscribers by the end of
1999.
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@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
19. CONCENTRATIONS OF BUSINESS AND CREDIT RISK (CONTINUED)
The Company believes that its most significant year 2000 risk is its
dependency upon third party programming, software, services and equipment,
because the Company does not have the ability to control third parties in their
assessment and remediation procedures for potential year 2000 problems. Should
these parties not be prepared for year 2000 conversion, their products or
services may fail and may cause interruptions in, or limitations upon, the
Company's provision of the full range of its D-DTH and/or cable service to its
customers. In an effort to prevent any such interruptions or limitations, the
Company is in the process of communicating with each of its material third party
suppliers of programming, software, services and equipment to determine the
status of their year 2000 compliance programs. The Company expects to complete
this process by September 30, 1999, and it anticipates that all phases of its
Y2K Plan will be completed by December 31, 1999.
The Company has not yet developed a contingency plan to address the
situation that may result if the Company or its third party suppliers are unable
to achieve year 2000 compliance with regard to any products or services utilized
in the Company's operations. The Company does not intend to decide on the
development of such a contingency until it has gathered all of the relevant Year
2000 compliance data from its third party suppliers.
The Company has not yet determined the full cost of its Y2K Plan and its
related impact on the financial condition of the Company. The Company has to
date not incurred any replacement or remediation costs for equipment or systems
as a result of year 2000 non-compliance. Rather, due to the rapid growth and
development of its cable system and its D-DTH service, the Company had made
substantial capital investments in equipment and systems for reasons other than
year 2000 concerns. The total cost of the Company's new accounting system and
billing software package is estimated to be approximately $2,400,000.
The Company believes that any year 2000 compliance issues it may face can be
remedied without a material financial impact on the Company, but no assurance
can be made in this regard until all of the data has been gathered from the
Company's third party suppliers. At this date the Company cannot predict the
financial impact on its operations if year 2000 problems are caused by products
or services supplied to the Company by such third parties.
CREDIT WORTHINESS
All of the Company's customers are located in Poland. As is typical in this
industry, no single customer accounted for more than five percent of the
Company's sales in 1998 or 1997. The Company estimates an allowance for doubtful
accounts based on the credit worthiness of its customers as well as general
economic conditions. Consequently, an adverse change in those factors could
effect the Company's estimate of its bad debts.
20. SUBSEQUENT EVENTS
UNITS OFFERING
On January 22, 1999, the Company sold 256,800 Units to two initial
purchasers pursuant to a purchase agreement, each Unit consisting of $1,000
principal amount at maturity of 14 1/2% Senior Discount Notes due 2009 and four
warrants, each initially entitling the holder thereof to purchase
F-39
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@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
20. SUBSEQUENT EVENTS (CONTINUED)
1.7656 shares of common stock, par value $0.01 per share at an exercise price of
$19.125 per share, subject to adjustment.
The Notes were issued at a discount to their aggregate principal amount at
maturity and, together with the Warrants generated gross proceeds to the Company
of approximately $100,003,000 of which $92,551,000 has been allocated to the
initial accreted value of the Notes and approximately $7,452,000 has been
allocated to the Warrants. The portion of the proceeds that is allocable to the
Warrants will be accounted for as part of paid-in capital. The allocation was
made based on the relative fair values of the two securities at the time of
issuance. Net proceeds to the Company after deducting initial purchasers'
discount and offering expenses were approximately $96,000,000.
The Notes are unsubordinated and unsecured obligations. Cash interest on the
Notes will not accrue prior to February 1, 2004. Thereafter cash interest will
accrue at a rate of 14.5% per annum and will be payable semiannually in arrears
on August 1 of each year and February 1 of each year, commencing August 1, 2004.
The Notes will mature on February 1, 2009. At any time prior to February 1,
2002, the Company may redeem up to a maximum of 35% of the originally issued
aggregate principal amount at maturity of the Notes at a redemption price equal
to 117.5% of the accreted value thereof at the redemption date, plus accrued and
unpaid interest, if any, to the date of redemption with some or all of the net
cash proceeds of one or more public equity offerings; provided, however, that
not less than 65% of the originally issued aggregate principal amount at
maturity of the Notes remains outstanding immediately after giving effect to
such redemption.
The Warrants initially entitle the holders thereof to purchase 1,813,665
shares of Common Stock, representing, in the aggregate, approximately 5% of the
outstanding Common Stock on a fully-diluted basis (using the treasury stock
method) immediately after giving effect to the offering and Preference Offering.
The Warrants are exercisable at any time and will expire on February 1, 2009.
Pursuant to the Indenture governing the Notes, 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
issuance of guarantees of indebtedness by restricted subsidiaries; (vii)
purchase of Notes upon a change of control; (viii) limitation on sale of assets;
(ix) limitation on dividends and other payment restrictions affecting restricted
subsidiaries; (x) limitation on investments in unrestricted subsidiaries; (xi)
limitation on lines of business; and (xii) consolidations, mergers and sales of
assets. The Company is in compliance with these covenants.
Costs associated with the Notes offering of approximately $3,875,000,
including the initial purchasers' discount will be capitalized and amortized
over the term of the Notes.
Also on January 22, 1999 @Entertainment sold Series A 12% Cumulative
Preference Shares and Series B 12% Cumulative Preference Shares (collectively,
the "Cumulative Preference Shares") and warrants (each a "Preference Warrant")
for total gross proceeds of $50 million (before deducting commissions and
offering costs of approximately $1.8 million). Dividends (whether or not earned
or declared) will cumulate on a daily basis from the original issue date and
will be payable semi-annually in arrears on March 31, and September 30 of each
year, commencing on March 31, 1999 (each a
F-40
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@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
20. SUBSEQUENT EVENTS (CONTINUED)
"Dividend Payment Date") to holders of record on the fifteenth day immediately
preceding the relevant Dividend Payment Date. The Company at its option may, but
shall not be required to, redeem in US Dollars for cash the Cumulative
Preference Shares, including any Series B Cumulative Preference Shares, at any
time on or after March 31, 2000, in whole or in part, at the redemption price of
112% of the sum of (i) the Initial Liquidation Preference ($50 million in the
aggregate) and (ii) accumulated and unpaid dividends, if any, to the date of
redemption. On January 30, 2010, the Company will be required (subject to
contractual and other restrictions on the ability to redeem capital stock) to
redeem all outstanding Cumulative Preference Shares, including any Series B
Cumulative Preference Shares, at a price in US Dollars equal to the Initial
Liquidation Preference thereof plus all accumulated and unpaid dividends thereon
(if any) to the date of redemption. The Company will not be required to make
sinking fund payments with respect to the Cumulative Preference Shares. The
Preference Warrants initially entitle the holders thereof to purchase an
aggregate of 5.5 million shares of Common Stock at an exercise price of $10.00
per share. The preferred shares will be classified outside of stockholders'
equity.
SERIES C NOTES OFFERING
On January 20, 1999, the Company sold $36,001,321 aggregate principal amount
at maturity of its Series C Notes due 2008. The Series C Notes are senior
unsecured obligations of the Company ranking PARI PASSU in right of payment with
all other existing and future unsubordinated obligations of the Company. The
Series C Notes were issued at a discount to their aggregate principal amount at
maturity and generated gross proceeds to the Company of approximately $9.8
million. Net proceeds to the Company after deducting the initial purchaser's
discount and offering expenses were approximately $9.4 million. The original
issue discount will accrete from January 20, 1999 until the stated maturity of
the Series C Notes on July 15, 2008. In addition, cash interest on the Series C
Notes will accrue from July 15, 2004 at a rate of 7.0% per annum on the
principal amount at maturity, and will be payable semiannually in arrears on
July 15 and January 15 of each year commencing January 15, 2005. Prior to July
15, 2004 there will be no accrual of cash interest on the Series C Notes. The
Series C Notes will mature on July 15, 2008.
Pursuant to the Series C 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 dividends
and other payment restrictions affecting restricted subsidiaries; (x) limitation
on investments in unrestricted subsidiaries; (xi) limitation on lines of
business; and (xii) consolidations, mergers and sales of assets. The Company is
in compliance with these covenents.
21. SUBSEQUENT EVENTS (UNAUDITED)
On February 25, 1999, @Entertainment purchased for approximately $1.8
million a 30% interest in Mazowiecki Klub Sportowy Sportowa Spolka Akcyjna, a
joint stock company which owns Hoop Pekaes
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@ ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998, 1997 AND 1996
21. SUBSEQUENT EVENTS (UNAUDITED) (CONTINUED)
Pruszkow, a Polish basketball team. In connection with this purchase @
Entertainment has agreed to act as a sponsor for Hoop Pekaes Pruszkow.
In February 1999 a number of the Company's employees were granted options to
purchase 750,000 shares of common stock at a price of $14.30 per share, vesting
ratably over a three-year period starting from January 1, 2000. The exercise
price of such options exceeded the quoted market price for the Company's shares
on the date of grant.
In February 1999, a former employee of the Company exercised his options to
buy 96,000 shares of common stock at $1.99 per share.
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$256,800,000
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@ENTERTAINMENT, INC.
14 1/2% SERIES B SENIOR NOTES DUE 2009
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PROSPECTUS
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NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT RELY ON
ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS IS AN OFFER TO
EXCHANGE ONLY THE NOTES OFFERED HEREBY, BUT ONLY UNDER CIRCUMSTANCES AND IN
JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS CURRENT ONLY AS OF ITS DATE.
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MAY 13, 1999
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