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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 000-22877
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UPC POLSKA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1487156
(State or Other Jurisdiction (I.R.S. Employer of Identification No.)
Incorporation or Organization)
4643 ULSTER STREET 80237
SUITE 1300 (Zip Code)
Denver, Colorado
(Address of Principal Executive Offices)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (303) 770-4001
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NOT APPLICABLE
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(Title of Class)
Indicate by check mark (X) whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing. (See definition of affiliate in
Rule 405.) ZERO
The number of shares outstanding of UPC Polska, Inc.'s common stock as of
December 31, 2000, was:
COMMON STOCK 1,000
DOCUMENTS INCORPORATED BY REFERENCE
NONE.
The Registrant meets the conditions set forth in General Instructions
(I)(1)(a) and (b) of Form 10-K and is therefore filing this Form with the
reduced disclosure format.
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UPC POLSKA, INC.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE NUMBER
-----------
PART I
ITEM 1. Business.................................................... 3
ITEM 2. Properties.................................................. 23
ITEM 3. Legal Proceedings........................................... 24
PART II
ITEM 5. Market for Company's Common Equity and Related Stockholder
Matters..................................................... 26
ITEM 6. Selected Financial Data..................................... 26
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 27
ITEM 7A. Quantitative and Qualitative Disclosure About Market Risk... 40
ITEM 8. Financial Statements and Supplementary Data................. 42
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 82
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 83
1
PART I
UPC Polska, Inc. (previously @Entertainment, Inc.), a Delaware corporation
which is wholly-owned by United Pan-Europe Communications N.V. ("UPC"), was
established in May 1997. References to the "Company" mean UPC Polska, Inc. and
its consolidated subsidiaries, including Poland Communications, Inc. ("PCI"),
UPC Broadcast Centre Limited (previously At Entertainment Limited then Wizja TV
Limited) ("UPC Broadcast Centre Ltd"), Medialne Towarzystwo Akcyjne S.A., Wizja
TV B.V. (previously Sereke Holding B.V.) ("Wizja TV B.V."), Wizja TV
Sp. z o.o. ("Wizja TV Sp. z o.o."), Atomic TV Sp. z o.o. (previously Ground Zero
Media Sp. z o.o.) ("Atomic TV"), At Media Sp. z o.o. ("At Media"), and
@Entertainment Programming, Inc. ("@EP").
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, that are not historical facts but rather reflect
the Company's current expectations concerning future results and events. The
words "believes," "expects," "intends," "plans," "anticipates," "likely,"
"will," "may," "shall" and similar expressions identify such forward-looking
statements. Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of the Company (or entities in which the Company has
interests), or industry results, to differ materially from future results,
performance or achievements expressed or implied by such forward-looking
statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements which reflect management's view only as of the date of this Annual
Report on Form 10-K. The Company undertakes no obligation to publicly release
the result of any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events, conditions or circumstances.
The risks, uncertainties and other factors that might cause such differences
include, but are not limited to: (i) general economic conditions in Poland and
in the pay television business in Poland; (ii) changes in regulations the
Company operates under; (iii) uncertainties inherent in new business strategies,
including the Company's satellite television business, new product launches and
development plans, which the Company has not used before; (iv) rapid technology
changes; (v) changes in, or failure or inability to comply with government
regulations; (vi) the development and provision of programming for new
television and telecommunications technologies; (vii) the continued strength of
competitors in the multichannel video programming distribution industry and
satellite services industry and the growth of satellite delivered programming;
(viii) future financial performance, including availability, terms and
deployment of capital; (ix) the ability of vendors to deliver required
equipment, software and services on schedule at the budgeted cost; (x) the
Company's ability to and hold and attract qualified personnel; (xi) changes in
the nature of strategic relationships with joint ventures; (xii) the overall
market acceptance of those products and services, including acceptance of the
pricing of those products and services; (xiii) possible interference by
satellites in adjacent orbital positions with the satellites currently being
used for the Company's satellite television business; (xiv) acquisition
opportunities; and (xv) the Company's new ownership structure.
EXCHANGE RATE
In this Annual Report on Form 10-K, references to "U.S. dollars" or "$" are
to U.S. currency, references to "Deutsche-Marks" or "DM" are to German currency,
references to "Euros" or "EUR" are to EU currency, references to "French francs"
or "FF" are to French currency and references to "zloty" or "PLN" are to Polish
currency. The Company has presented its 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.
2
For your convenience, this Annual Report contains certain zloty, Euro and
Deutsche-Mark amounts not derived from the consolidated financial statements
which have been translated into U.S. dollars. Readers should not assume that the
zloty, Euro, and Deutsche-Mark 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 4.1432 = $1.00, the exchange rate quoted by the National Bank of Poland
at noon on December 29, 2000, and by converting from Euro to U.S. dollars at the
rate of EUR 1.156 = $1.00, the exchange rate quoted by OANDA.com on
December 29, 2000, and by converting from Deutsche-Marks to U.S. dollars at the
rate of DM 2.1024 = $1.00, the exchange rate quoted by the National Bank of
Poland at noon on December 29, 2001. These rates may differ from the actual
rates in effect during the periods covered by the financial information
discussed herein. The Federal Reserve Bank of New York does not certify for
customs purposes a noon buying rate for zloty.
ITEM 1. BUSINESS
BUSINESS
GENERAL
The Company is the leading provider of pay television in Poland and is
engaged principally in the provision of cable television services and in the
development, packaging and delivery of high-quality programming. Over the past
four years, the Company has experienced rapid growth in revenues and
subscribers, through acquisitions, through expansion of its own cable and
digital satellite direct-to-home ("D-DTH") networks, resulting in an average
increase in revenues of 52% and total subscribers of 29% per year. The Company
has also increased its average revenue per subscriber by 18% per year during the
past four years.
The Company has an agreement with Philips Business Electronic B.V. to supply
the reception systems which include a satellite dish, digital set top box and
related hardware, and to distribute the Company's D-DTH service through the
Philips retail network in Poland.
The Company transmits its Wizja TV programming package, which currently
consists of 28 channels (of which 25 are primarily Polish language), on both its
D-DTH system and its cable networks. The Company believes that Wizja TV has
provided it with a significant competitive advantage for attracting new
subscribers and increasing revenue per subscriber. During the fourth quarter of
the year 2000, the Company began providing Internet services to its cable and
D-DTH customers.
During the year 2000, UPC Broadcast Centre began providing D-DTH
transmission services and purchased and sold programming rights to other
subsidiaries of UPC in Hungary, the Czech Republic and Slovakia.
BUSINESS STRATEGY
The Company's principal objective is to enhance its position as the leading
provider of pay television in Poland by capitalizing on favorable opportunities
that it believes exist in Poland in the cable television, D-DTH and programming
markets.
The Company's business strategy is designed to increase its market share and
subscriber base and to maximize revenue per subscriber. To accomplish its goals,
the Company intends to do the following:
- Develop and control the content of its programming;
- Increase its distribution capabilities through internal growth and through
acquisitions;
- Control its management of subscribers by using advanced information
systems;
- Establish Wizja TV as the leading brand name in the Polish pay television
industry; and
- Provide additional revenue generating services to its customers.
3
CABLE TELEVISION
The Company operates the largest cable television system in Poland with
approximately 1,851,000 homes passed and approximately 1,064,000 total
subscribers as of December 31, 2000. The Company's cable subscribers are located
in regional clusters encompassing eight of the ten largest cities in Poland,
including those cities which the Company believes provide the most favorable
demographics for cable television in the country. The Company's cable television
networks have been constructed with the flexibility and capacity to be
cost-effectively reconfigured to offer an array of interactive and integrated
entertainment, telecommunications and information service.
REGIONAL CLUSTERS
The Company has established five regional clusters for its cable television
business encompassing eight of the ten largest cities in Poland, which the
Company believes, are among those with the strongest economies and most
favorable demographics for cable television in the country. The following table
illustrates certain operating data of each of the Company's existing regional
clusters.
OVERVIEW OF THE COMPANY'S EXISTING CABLE SYSTEMS (1)
AVERAGE
MONTHLY
SUBSCRIPTION
REVENUE PER
BASIC AND BASIC AND BASIC AND
TOTAL INTERMEDIATE INTERMEDIATE INTERMEDIATE
REGION TOTAL HOMES HOMES PASSED SUBSCRIBERS SUBSCRIBERS PENETRATION SUBSCRIBER (2)
- ------ ----------- ------------ ----------- ------------ ------------ --------------
North......................... 574,000 441,041 302,285 229,926 52.13% 6.00
South......................... 400,000 237,172 119,536 97,370 41.05% 8.10
Central....................... 920,000 447,596 254,328 168,429 37.63% 9.28
West.......................... 624,000 246,068 131,459 115,432 46.91% 6.58
Katowice...................... 1,200,000 478,815 256,662 187,075 39.07% 7.18
--------- --------- --------- ------- ------ ----
TOTAL................... 3,718,000 1,850,692 1,064,270 798,232 43.13% 7.31
========= ========= ========= ======= ====== ====
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(1) All data at or for the year ended December 31, 2000.
(2) Represents a weighted average for the Company based on the total number of
basic subscribers at December 31, 2000.
ACQUISITIONS
The Company regularly evaluates potential acquisitions of cable networks.
The Company currently has no definitive agreement with respect to any material
acquisition, although from time to time it has discussions with other companies
and assesses opportunities on an ongoing basis. The Company may be required to
apply for the approval of the Polish Anti-Monopoly Office with respect to any
acquisitions it wishes to consummate. The Company's ability to enter into
definitive agreements relating to material acquisitions and their potential
terms, as well as its ability to obtain the necessary anti-monopoly approvals,
cannot be assured.
SERVICES AND FEES
The Company 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.
Throughout its cable television systems, the Company currently offers three
packages of cable television service: basic ("basic package"), broadcast
("broadcast package") and
4
intermediate ("intermediate package") packages of service in selected areas of
Poland. On December 31, 2000, approximately 752,900 or 70.7% of the Company's
subscribers received the basic package, approximately 45,400 or 4.3% received
the intermediate package and approximately 266,000 or 25.0% received the
broadcast package of service.
During the fourth quarter of the year 2000, the Company began providing
Internet services to its cable television customers and has been upgrading its
network to provide this service. Individual and home office Internet subscribers
are charged a monthly subscription fee of $48.00 and $60.00, respectively. The
standard installation fee is approximately $59.00 for buildings with multiple
apartments and approximately $120.00 for single family dwellings.
BASIC PACKAGE. The basic package includes approximately 32 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 Wizja TV. The Company's basic package offerings vary by
location. All of the Wizja TV programming is part of the basic package except
for the HBO Poland service, a Polish-language premium movie channel owned in
part by Home Box Office, and Wizja Sport, a Polish-language premium sport
channel. However, as of March 24, 2001, the Wizja Sport channel was expanded
into the basic package.
INTERMEDIATE PACKAGE. The intermediate package includes approximately 19 to
34 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. The Company's intermediate package offerings vary
by location.
BROADCAST PACKAGE. The broadcast package includes 5 to 14 broadcast
channels with clear reception for monthly fees, which are substantially less
than the amounts charged for the intermediate package.
PREMIUM AND OTHER SERVICES. For an additional monthly charge, certain of
the Company's cable networks have offered two premium television services--the
HBO Poland service and Wizja Sport, although Wizja Sport was expanded into the
basic package as of March 24, 2001.
Other optional services include additional outlets and stereo service, which
enable a subscriber to receive from 4 to 28 radio channels in stereo. Cable
television subscribers who require the use of a tuner to receive certain of the
Company's cable services are charged an additional fee of approximately $1.10
per month. Installation fees vary according to the type of connection required
by a cable television subscriber. The standard initial installation fee is
approximately $24, but such fee may be subject to reductions as a result of
promotional campaigns.
PRICING STRATEGY. Prior to 1999, the Company experienced annual churn rates
of less than 10%, and was able to pass on the effects of inflation through price
increases. For the years ended December 31, 2000 and 1999, the churn rate was
21.5%. This pricing strategy of passing on the effects of inflation through
price increases commenced in January 1997 and is designed to increase revenue
per subscriber and to achieve real profit margin increases in U.S. dollar terms.
The Company expects that it will continue to experience churn rates above
historical levels during the implementation of its current pricing strategy. The
Company expects to offer promotional incentives in certain areas of the country
from time to time in connection with its marketing.
Cable television subscribers are billed monthly in advance and, as is
customary in Poland, most of the Company's customers pay their bills through
their local post office or bank. The Company has strict enforcement policies to
encourage timely payment. Such policies include notices of late payment, visits
from service personnel, and ultimately, disconnection for nonpaying customers 90
days after a bill becomes past due. The Company's system architecture in most
networks enables it to promptly shut off
5
service to nonpaying customers and is designed to reduce non-authorized use of
its cable systems. The Company's bad debts expense has averaged 4.75% and 3.84%
of revenue for the years 2000 and 1999, respectively.
TECHNOLOGY AND INFRASTRUCTURE
The Company believes the fiber-optic cable television networks that it has
constructed, which serve approximately 877,000 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 the Company's networks that have been
constructed by the Company have bandwidths of at least 550 MHz. New portions of
the networks, which have recently been constructed, are being designed to have
minimum bandwidths of 860 MHz. The Company's goal is to upgrade any portions of
its cable television networks that have bandwidths below 550 MHz (generally
acquired from other entities) to at least 860 MHz in an effort to reduce the
number of satellite receivers and parts inventory required in the networks. The
Company uses fiber-optic and coaxial cables, electronic components and
connectors supplied by leading Western firms in its cable television networks.
The Company 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 the Company to use TPSA's
conduit infrastructure for an indefinite period of time or for fixed periods up
to 20 years. The Company also has agreements to undertake joint construction
with another company for new conduits in certain areas. These agreements
represent a major advantage to the Company since they permit the Company to
minimize the costly and time-consuming process of building new conduit
infrastructure where TPSA conduit infrastructure exists. As of December 31,
2000, approximately 74.5% of the Company's cable television plant had been
constructed utilizing pre-existing conduits of TPSA. A substantial portion of
the Company's contracts with TPSA allows for 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:
- the Company does not have a valid permit from the Chairman of the Office
for Telecommunication Regulation ("URT") (which replaced the Polish State
Agency of Radio Communications as of January 1, 2001) 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;
- the Company's cable network serviced by the conduit does not meet the
technical specifications required by the New Telecommunication Law
(formerly the Polish Telecommunication Act of 1990);
- the Company does not have a contract with the cooperative authority
allowing for the installation of the cable network; or
- the Company does not pay the rent required under the conduit agreement.
The Company is in compliance with all of the conditions of the TPSA
agreements. However, any termination by TPSA of such contracts could result in
the Company losing its permits, termination of agreements with co-op authorities
and programmers, and an inability to service customers with respect to areas
where its networks utilize the conduits that were the subject of such TPSA
contracts.
In addition, some conduit agreements with TPSA provide that cables can be
installed in the conduit only for the use of cable television. If the Company
uses the cables for a purpose other than
6
cable television, such as data transmission, telephone, or Internet access, such
use could be considered a violation of the terms of certain conduit agreements,
unless this use is expressly authorized by TPSA. There is no guarantee that TPSA
would give its approval to permit other uses of the conduits. The Company is
currently in the process of introducing Internet services to its cable and D-DTH
customers and renegotiating certain conduit agreements with TPSA.
D-DTH
The Company'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. The programming provided is Wizja TV.
During the year 2000, the Company distributed to Philips' authorized retailers
approximately 265,000 D-DTH packages and sold and installed approximately
252,000 of these packages to consumers.
SERVICES AND FEES
The Company currently charges its D-DTH subscribers a monthly fee of
approximately $13 for all channels (other than any premium channels).
Subscribers to the Company's premium channels pay $5.31 per month for the HBO
Poland service or Wizja Sport (although Wizja Sport was expanded into the basic
package as of March 24, 2001).
During the fourth quarter of the year 2000, the Company began providing
Internet services to its D-DTH customers. Internet subscribers are charged a
subscription fee of $29.00 per month. The standard activation and installation
fees are approximately $72.00 and $96.00, respectively.
TECHNOLOGY AND INFRASTRUCTURE
The Company'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 Astra satellites in geosynchronous orbits ("uplinked").
The satellites receive, convert and amplify the digital signals and retransmit
them to earth in a manner that allows individual subscribers to receive and be
billed for the particular program services to which they subscribe.
TRANSMISSION AND UPLINK FACILITIES. The channels available on the Company's
D-DTH service include the Company's own proprietary channels and channels from
third parties originating from a number of sources in Poland, the U.K. and
elsewhere. Most of the tailoring of programs for the local market
("localization") to be undertaken by the Company, which will principally consist
of adding voice or dubbing into Polish for the Company's proprietary channels on
Wizja TV, will occur in Poland. For most of the channels on Wizja TV,
localization, editorial control and program packaging will be the responsibility
and at the cost of the channel supplier. The channels provided by third parties
will be delivered in tape format, through a landline or will be backhauled
(i.e., transmitted via satellite or other medium) to the Company's transmission
facility in Maidstone for broadcasting to Poland.
The Company has an 8-year contract with British Telecommunications plc
("BT") for the provision and maintenance of uplink equipment at Maidstone. Other
than the BT uplink equipment, the Company owns all the required broadcasting
equipment at its facility in Maidstone. The Company's programming is currently
transmitted to the Company's transponders on Astra 1F and 1G.
The Company's D-DTH signal is beamed by these satellites back to earth and
may be received in Poland by those who have the appropriate dedicated satellite
reception equipment and who have been connected by the Company to its D-DTH
service as subscribers. The signal is currently received by the Company's own
cable networks, and will also be received by the cable networks of other cable
operators, if any, having distribution agreements with the Company. 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 the Company to its cable service as
subscribers or connected by such other cable operators, if any, to their own
cable systems.
7
Philips provides the following critical components and services used in the
Company's D-DTH satellite transmission system and is the primary point of
contact for subscribers to the Company's D-DTH service:
- the Philips' digital integrated receiver decoders ("IRDs");
- 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.
The Company's agreement with Philips provides for the following:
- Philips is the exclusive supplier 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 may be terminated or renegotiated when the Company has
purchased 500,000 D-DTH reception systems from Philips. The Company had
purchased more than 500,000 D-DTH reception systems from Philips as of the
end of the year 2000. The Company and Philips are currently negotiating a
variation to the agreement.
The delivery of subscription programming requires the use of encryption
technology to prevent signal theft or "piracy." Although the Company expects its
conditional access system, subscriber management system and smartcard system to
adequately prevent unauthorized access to programming, there can be no assurance
that the encryption technology to be utilized in connection with the Company's
D-DTH system will remain effective. The Company and Philips are actively
cooperating in combatting piracy issues.
The Company 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.
SATELLITES. The Company currently broadcasts and expects to broadcast all
of its proprietary programming and that of most of 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 the
Company's programming signal via 4 Astra transponders to the cable system
receiving antenna and also to D-DTH subscribers' reception equipment throughout
Poland. The Company has been studying and discussing with relevant Polish
authorities the feasibility of locating its uplink and production facilities in
Poland. In November 2000, one of the Company's subsidiaries was issued a
satellite platform license which will enable the Company to begin uplinking
certain programming in Poland.
In March 1997, the Company 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,
which is operationally activated on the Astra 1G satellite, and two transponders
on the Astra 1F satellite will expire in 2009. All three transponders are
currently operational and available to the Company. Aggregate charges for each
transponder are capped at $5.68 million per year for each transponder and
approximately $153.3 million for all three transponders for the remaining term
of the contracts remaining after December 31, 2000.
8
In July 2000, the Company entered into another contract with SES for the
lease of a fourth transponder on Astra 1G. The lease will expire in 2010.
Aggregate charges for the fourth transponder are capped at $5.68 million per
annum and approximately $54.9 million for the remaining term of the contract
remaining after December 31, 2000. The Company's transponder leases provide that
the Company's rights are subject to termination in the event that SES's
franchise is withdrawn by the Luxembourg Government.
The Company has been designated a "non-pre-emptible customer" under each of
its relevant transponder leases. As a result, in the event of satellite or
transponder malfunction, the Company's use of its transponders cannot be
suspended or terminated by a broadcaster which has pre-emption rights permitting
it to gain access to additional transponders in preference to certain other
Astra customers. The Company does not, however, have the right to pre-empt other
customers if its transponders stop working. A "protected customer" has
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.
PROGRAMMING
The Company 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 the Company is to develop and acquire
high-quality Polish-language programming that can be commercially exploited
throughout Poland through D-DTH and cable television exhibition and advertising
sales. The Company intends to use Wizja TV to increase the penetration rate for
its cable television networks and its D-DTH system and to increase per
subscriber revenue from its cable systems.
During the year 2000, UPC Broadcast Centre began providing D-DTH
transmission services and purchased and sold programming rights to other
subsidiaries of UPC in Hungary, the Czech Republic and Slovakia.
WIZJA TV PROGRAMMING PACKAGE
Wizja Sport provides approximately 10 hours of local and international
sporting events per day. The Company believes that Wizja Sport is the first
channel in the Polish market principally dedicated to Polish sports programming.
The Company's ability to broadcast certain of these sporting events on an
exclusive basis may be limited by the provisions of the Polish Radio and
Television Act of 1992.
Several of the sports rights contracts give the Company the ability to
obtain additional seasons of those sports events, either by way of a right of
first refusal or a right of first offer. Most of the sports rights agreements
grant the Company exclusive rights to broadcast the sports events live in
Poland. The exclusivity in some cases is subject to the ability of the rights
owner to grant limited rights to other broadcasters to show the events on a
delayed or highlights basis. The Company is currently in negotiations with other
sports rights holders to purchase the rights to additional local and
international sports events.
The Company has purchased exclusive rights from third parties for
programming on 7 of the current 28 channels on Wizja TV. In some of the
agreements, however, the channel supplier may terminate the agreement and/or
eliminate the exclusivity rights if the Company does not achieve specified
milestones for subscriber numbers by certain specified dates. In addition, most
of the agreements impose certain restrictions on the tiering of the particular
channel, which will limit the flexibility of the Company in determining program
tiering in the future, and also include provisions whereby the Company agrees to
indemnify the channel supplier against any claims, including claims made by
governmental authorities, resulting from the exclusive nature of the rights
granted or from the tiering restrictions. Some of the agreements require
payments based on a guaranteed minimum number
9
of subscribers, and some require payments at the time of execution. On December
31, 2000, the Company was committed to pay approximately $267.8 million in
guaranteed minimum payments in respect of broadcasting and programming
agreements, of which approximately $65.2 million was committed through the end
of 2001. In addition, the Company is continuing to negotiate additional
agreements with channel and program suppliers and sports rights organizations,
which agreements if consummated may require the Company to pay additional
guaranteed minimum payments and/or payments at the time of execution. In most of
the Company's programming agreements, the channel supplier, at its own expense,
must localize its programming into the Polish language prior to the launch on
Wizja TV platform. In most of its programming agreements, the Company is
required to make payments to the channel supplier on a monthly basis based on
the number of subscribers to whom the programming is made available.
In addition, some of the agreements impose certain limitations, including:
- the channel must be received by 100% of subscribers to the Company's D-DTH
service and by all "basic package" subscribers of the Company'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 the Company may purchase for Wizja TV may be restricted;
- distribution of other channels as part of the Company's programming
package may be limited (consequently, the consummation of an agreement
with one channel supplier has had, and will in the future continue to
have, the effect of precluding the Company from entering into agreements
with other potential channel suppliers);
- suppliers of programming to a channel supplier may require the Company to
assume the channel supplier's obligations to license the programming on
financial terms which are more favorable to the program provider than
those under the Company's existing agreement with the channel supplier;
- the Company may be required to install encryption decoder-based technology
in homes of cable subscribers receiving premium services; and
- if the Company undertakes certain investments or enters into certain
transactions, certain minimum guarantees payable under the agreement would
increase and the Company would lose certain rights.
The terms of the Company's agreements with third parties for programming on
Wizja TV range from 2 to 7 years.
PROPRIETARY PROGRAMMING
Wizja TV contains three channels, Wizja Jeden, Wizja Pogoda and Wizja Sport,
that are owned and operated by the Company, although the Company intends to
discontinue Wizja Jeden as of April 2001. The Company has established and
intends to continue to establish entities to engage in the production of
programming either to be included on the Company's proprietary channels, or to
be licensed to the Company for distribution as part of the Wizja TV line-up.
In addition, the Company has developed Wizja Pogoda as the weather channel,
and Wizja Sport as the sports channel for its programming platform. Wizja Jeden
is a Polish-language general entertainment channel. Wizja Sport offers a wide
range of international and Polish sports events.
In November 1997, the Company purchased 50% of WPTS Sp. z o.o. ("Twoj
Styl"), a Polish company producing, among others, the leading Polish lifestyle
magazine. The Company outsourced the
10
publishing of a TV guide for its subscribers to Twoj Styl. During the year 2000,
the Company decided to discontinue the TV guide service and consequently has
terminated the arrangement with Twoj Styl for publishing the TV guide.
On March 1, 2000, UPC Programming B.V., an affiliate of the Company, entered
into joint a venture with MTV Networks B.V. for a 50% equity interest in MTV
Polska for the purpose of producing a localized Polish MTV programming channel
for distribution in Poland. The Company has agreed to sell certain assets of its
subsidiary, Atomic TV, to UPC Programming B.V., which would in turn contribute
these assets to the joint venture. As a result of the joint venture, MTV Polska
has licensed the right to distribute the MTV Polska and VH1 programming channels
in Poland to UPC Programming B.V. In turn, UPC Programming B.V. intends to
novate such rights to Wizja TV B.V. Those carriage rights are used by UPC
Telewizja Kablowa (previously Polska Telewizja Kablowa) and UPC Broadcast Centre
Limited for distribution in Poland. As a result of the joint venture with MTV,
the Atomic TV channel was discontinued as of July 2000.
PREMIUM TELEVISION CHANNELS. The Company has introduced its own premium
channel, Wizja Sport (although Wizja Sport was expanded into the basic package
as of March 24, 2001), as well as premium channels supplied by third parties.
The Company 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. The Company has distributed Canal+ on a non-exclusive basis
on some of its cable networks since entering into a preliminary distribution
agreement with Canal+ in October 1995.
The Company has signed agreements for the exclusive distribution on its
D-DTH system, and non-exclusive distribution across its cable networks, for the
HBO Poland service, a Polish-language premium 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 Company offers the HBO Poland service on a promotional basis to D-DTH
subscribers for a period of one to three months and offers the HBO Poland
service to its cable subscribers through promotional campaigns. However, after
this promotional period, the Company charges approximately $5.31 per month for
this service. Only a limited number of subscribers continue the HBO Poland
service past the expiration of the promotional period.
ADVERTISING
At Media, a wholly-owned subsidiary established to develop advertising
opportunities for the Wizja TV programming package, currently offers commercial
airtime on 14 of the Company's 28 channels on Wizja TV to major advertising
agencies and advertisers in the Polish market.
COMPETITION
The multi-channel pay television industry in Poland has been, and is
expected to remain, highly competitive. The Company competes with other cable
television operators, as well as with companies employing numerous other methods
of delivering television signals to subscribers. The extent to which the
Company's multi-channel pay television services are competitive with alternative
delivery systems depends, in part, upon the Company's ability to provide a
greater variety of Polish-language programming at a 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 video products such as
videocassette recorders. The extent of this type of competition
11
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, the Company 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 the Company because they often incur lower capital
expenditures and operating costs and therefore have the ability to charge lower
fees to subscribers than does the Company. While 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, the Company expects that
operators of small cable networks will continue to remain a competitive force in
Poland.
In addition, certain of the Company's competitors or their affiliates have
substantial experience in the cable television industry and have significant
resources (including financial resources and access to international programming
sources). The largest competitors of the Company in Poland include Elektrim
S.A., which owns at least two cable systems (including Aster City Cable
Sp. z o.o.) and Multimedia Polska S.A., a Polish entity.
The Company'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 the Company's own D-DTH service).
D-DTH. The Company's D-DTH business competes with traditional third party
cable systems, and terrestrial broadcast and A-DTH services as well as other
potential D-DTH and MMDS services. TKP, which is partially owned by Canal+ S.A.,
currently offers a single channel Polish-language pay television service
(including A-DTH). TKP operates a multi-channel D-DTH service in Poland under
the name Cyfra+. In addition to this, Polsat S.A. (a Polish private broadcaster)
launched its own D-DTH service in autumn 2000.
The Company cannot predict whether other European or Polish broadcasters,
such as BSkyB, Bertelsmann or Kirch, will choose to enter the Polish D-DTH
market. Some of the Company's current and potential competitors, either alone or
in joint ventures with other competitors, have either launched or announced
plans to launch D-DTH systems for other European countries. Many of the
Company's current and potential competitors may have greater financial,
managerial and operational resources and more experience in the DTH business
than the Company.
PROGRAMMING. In the programming business, the Company 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. The
Company also competes with other programming creators for the hiring of
personnel with creative and production talent for the development of
programming.
TRADEMARKS
The Company, either itself, through its subsidiaries or its parent, 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. Variations of PTK, Wizja, and Wizja TV have
been registered in Poland, including but not limited to Wizja Kids, Wizja Sport
and Wizja Movies. Also, numerous trademark applications have been filed in
Poland for the various other Wizja trademarks.
12
Trademarks for UPC have been registered internationally. Additional applications
for other Wizja trademarks and related trademarks will be filed in Poland in the
near future.
EMPLOYEES
At December 31, 2000, the Company had approximately 1,647 permanent
full-time employees and approximately 42 part-time employees. In addition, as of
that date the Company employed approximately 90 salesmen, some of whom may have
received both commissions and a nominal salary, and from time to time the
Company employs additional salesmen on an as needed, commission only basis. In a
division of one of the Company's subsidiaries, a trade union, which has
approximately 3 members, was formed in mid-1999. The Company believes that its
relations with its employees are good.
REGULATION
The Company is subject to regulation in Poland, the U.K. and the European
Union
POLAND
GENERAL
In connection with negotiating its membership in the EU, Poland has started
to adjust its legal system to EU requirements and currently is in the process of
revising its telecommunications, broadcasting and copyright regulation. On July
21, 2000 the Polish Parliament passed the new Telecommunications Law (the "NTL")
which changed the regulatory framework of telecommunications activities in
Poland. The NTL replaced the Communications Act of 1990 (the "Communications
Act") and became effective as of January 1, 2001.
Until the end of the year 2000, the operation of cable and D-DTH television
systems was regulated primarily by the Communications Act. As of January 1,
2001, the operation of those television systems has been regulated by the NTL.
Operators are also subject to the provisions of the Polish Radio and Television
Act of 1992 (the "Television Act").
Currently the Polish telecommunications and media sector is regulated by:
- The Polish Minister of Communications;
- The Chairman of the Office for Telecommunications Regulation ("URT")
(which replaced the Polish State Agency of Radiocommunications ("PAR"),
established under the Communications Act); and
- The Polish National Radio and Television Council (the "Council").
Cable television operators in Poland are required to obtain permits from the
Chairman of the URT to operate public radio and television networks and must
register certain programming that they transmit over their networks with the
Council.
Neither the Minister of Communications nor the Chairman of the URT 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. The cable television and D-DTH operators in Poland
are also 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.
13
All of the Wizja proprietary channels and all channels on the Wizja platform
are currently licensed in the United Kingdom by the Independent Television
Commission as satellite television services. As such, they are then
retransmitted under the European Convention on Transfrontier Broadcasting to
Poland and then distributed via cable and D-DTH in Poland. As its regulatory
regime develops, Poland may seek to regulate the reception of D-DTH signals.
Poland's regulatory environment is undergoing constant change. The Company does
not know how such change will impact its business.
COMMUNICATIONS ACT
PERMITS. Until the end of the year 2000, the cable television operators
were required to obtain permits from PAR to install and operate cable television
systems. The Communications Act and the required permits issued by PAR had set
forth the terms and conditions for providing cable television services.
If a cable operator breached the terms of its permits or the provisions of
the Communications Act, or if such operator has failed to acquire permits
covering areas serviced by its networks, PAR could impose penalties on such
operator, including:
- fines;
- the revocation of all permits covering the cable networks where such
breach occurred; and
- the forfeiture of the cable operator's cable networks.
In addition, the Communications Act provided that PAR may not grant a new
permit to, or renew an expiring permit held by, any applicant that has had, or
that was controlled by an entity that has had, a permit revoked within the
previous five years.
On July 26, 2000, the Polish Ministry of Telecommunication issued a 15-year
data transmission license to a subsidiary of the Company, authorizing that
company to provide data transmission service to its customers throughout the
territory of Poland, using its own networks and those leased from other licensed
operators. This license allowed that subsidiary to provide Internet services to
its customers. This license expired automatically with the entry of the NTL into
force, i.e. as of January 1, 2001. The subsidiary may continue the provision of
the services covered by the license. It must, however, notify the Chairman of
the URT about the provision of the data transmission services by the end of
March 2001 as described below. In certain cases listed below, the Chairman of
the URT may object to the provision of the services by the subsidiary. In March
2001, the Company's subsidiary notified the Chairman of the URT of its
activities concerning the provision of data transmission services and access to
Internet.
As of December 31, 2000, approximately 74.5% of the Company's cable plant
runs through conduits leased from the Polish national telephone company
("TPSA"). If the Company uses the cables for a purpose other than cable
television, such as data transmission, telephone, or Internet access, such use
could be considered a violation of the terms of certain conduit agreements,
unless this use is expressly authorized by TPSA There is no guarantee that TPSA
would give its approval to permit other uses of the conduits. The Company is
currently in the process of introducing Internet services to its cable and D-DTH
customers and renegotiating certain conduit agreements with TPSA.
FOREIGN OWNERSHIP RESTRICTIONS. The Communications Act, which was in effect
until January 1, 2001, provided that permits may only be issued to and held by
Polish citizens, or companies in which foreign persons held 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 have been comprised of Polish citizens residing in
Poland. These restrictions did not apply to any permits issued prior to July 7,
1995.
14
THE COMPANY'S PERMITS AND NEW CORPORATE ORGANIZATIONAL STRUCTURE.
To comply with the foreign ownership requirements discussed above, the
Company restructured UPC Telewizja Kablowa Sp. z o.o. (formerly Polska Telewizja
Kablowa Sp. z o.o.) ("UPC TK"), which operates most of the Company's cable
networks. UPC TK owns many of the cable networks but certain networks are owned
by UPC TK's affiliates and leased to UPC TK. The Company's subsidiary holds a
47% ownership stake in UPC TK while the remaining 53% are held by a Polish
entity. PCI in turn, holds 49% of the Polish entity, and the remaining 51%
interest in the Polish entity is owned by a Polish company. The Company believes
that this ownership and operating structure complies with the requirements of
Polish law. PAR has granted permits to the Company and its competitors, based on
the lease of assets, for networks using an ownership and operating structure
substantially similar to the one described above.
Specifically, subsidiaries of the Company have received approximately 99
permits from PAR, covering all of the Company's basic subscribers at December
31, 2000, including subscribers for whom the Company's permits are deemed
extended under Polish law pending the authority's response to the Company's
permit renewal applications.
NEW TELECOMMUNICATION LAW
Since January 1, 2001, the operation of cable and other television systems
in Poland has been regulated under the NTL, which replaced the Communications
Act.
The NTL changes the licensing regime and the competency of telecommunication
authorities. The NTL introduces a new authority--the Chairman of the URT. The
Chairman of the URT has assumed most of the administration tasks previously
performed by the Polish Minister of Communications and PAR. The Chairman of the
URT is responsible for regulating telecommunication activities, including
exercising control over operators and managing frequencies. The duties of the
Minister of Communications are limited primarily to issuing secondary
regulations. PAR along with the Polish State Telecommunications and Postal
Inspection (PITiP) were liquidated as of January 1, 2001.
Under the NTL, cable television operators are required to obtain a permit
from the Chairman of the URT to operate public radio and television networks.
The Chairman of the URT shall grant the permit to any interested entity
authorized to do business in Poland and which complies with the conditions set
forth in the NTL. Applications for renewals of permits may be refused only if
during the validity of the permit there have been circumstances justifying the
refusal, revocation or limitation of the scope of the permit.
Under the NTL, an NTL permit must be revoked if:
- a final court order prohibits the operator from conducting the business
covered by the permit;
- the operator fails to meet the legal requirements for the grant of the
permit; or
- the operator has failed to remedy a violation of the law within the
designated time limit.
The NTL permit may be revoked, if the operator breaches the provisions of
the NTL, the permit or other decisions issued under the NTL in any way, does not
pay the required fees, or a decision on the liquidation or declaration of
bankruptcy of the operator has been made.
Except for the operation of radio and television networks and public
telephone networks, the performance of all other telecommunications activities
requires only notification to the Chairman of the URT. The Chairman of the URT
may disallow the performance of such activities within 21 days of the receipt of
the notification if:
- the notification violates the NTL;
15
- the notification is incomplete; or
- the information provided in the notification is false.
Permits issued under the Communications Act are automatically transformed
into NTL permits, if such permits are still required under the NTL. Thus, the
permits for the installation and operation of cable television systems, granted
to the Company's subsidiaries will become NTL permits. This rule does not apply
to the provisions of the permits issued under the Communications Act, the
exercise of which would constitute a violation of the NTL. All other licences,
authorizations and assignments expired by force of the law as of January 1,
2001.
Operators, who had obtained rights expiring automatically under the NTL may
continue their telecommunications activities within their current scope,
provided that they apply for NTL permits by the end of 2001, if these activities
require an NTL permit. For telecommunications activities that only require
notification, such as data transmission, operators may continue to provide these
services, provided that they notify the Chairman of the URT by the end of March
2001, and the Chairman does not object.
The NTL has eliminated most of the foreign ownership restrictions relating
to telecommunications. However, the NTL does prohibit the provision of
international telecommunications services using networks operated by foreign
entities or companies with participation of foreign entities until December 31,
2002. Until this date, UPC TK will be subject to this restriction. UPC TK may,
however, provide international telecommunication services using the networks of
other authorized Polish operators. It may also provide these services, with the
exception of international telephony services, by using its own
radiocommunication networks. Such services may, until December 31, 2002, only be
provided by TPSA.
Under the NTL all operators are required to make their networks available to
users who intend to commercially gather, process, storage, use or grant access
to information for others.
Operators that perform their activities on the basis of an NTL permit are
required to allow other operators operating public networks to use their
buildings, lines, conduits, poles, towers and masts, in particular, allowing
them to use telecommunications equipment, where these activities would be
impossible without such infrastructure sharing or would involve a significant
cost. Operators are required to specify the conditions of the joint use in an
agreement. If the parties cannot agree to specific conditions, either party may
request the Chairman of the URT to issue a decision on joint use.
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. The
Company's 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 the Company's programming, or may not register all
additional programming that the Company desires to transmit over the Company's
networks. In addition, the Council may take action regarding unregistered
programming that the Company transmits over cable networks for which the Company
does not yet have NTL permits. This pertains to areas for which permit
applications cannot be made until all permit requirements are satisfied
(including obtaining agreements with the cooperative authorities, upgrading of
the acquired networks to meet technical standards where necessary and satisfying
foreign ownership
16
limitations). Such actions could include the levying of monetary fines against
the Company, and the seizure of equipment involved in transmitting such
unregistered programming as well as criminal sanctions against the Company's
subsidiaries' management. These actions could have a material adverse effect on
the Company's 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% of the share capital, ownership
interest and voting rights. In addition, the Television Act provides 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.
REQUIREMENTS CONCERNING PROGRAMS BROADCAST FROM OUTSIDE OF POLAND.
The Television Act does not include regulations directly applicable to the
broadcasting of programs being broadcast from abroad and received in Poland.
Specifically, there are no regulations in force concerning satellite
broadcasting of a program directed to a Polish audience if the transmission to
the satellite for the broadcasting of such program is made by a foreign
broadcaster from outside of Poland. The Company believes that the Television Act
does not apply to such broadcasting and that such activity is not subject to
Polish broadcasting requirements. A subsidiary of Canal + has filed suit against
HBO Polska Sp. z o.o. and certain Polish cable operators (including the
Company's subsidiaries) alleging violations of the Television Act in connections
with HBO's broadcasting activity from outside of Poland.
The Company has established and intends to continue to establish entities to
engage in the development and production of Polish-language thematic television
programming outside of Poland. While all of the content and programs which the
Company distributes across its cable networks and its 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. The Company
believes that the ownership structure of its entities, as well as its operating
strategy, are not subject to Poland's regulatory restrictions on foreign
ownership, licensing requirements, restrictions and regulations on the operation
of cable networks and the broadcasting of programming.
If the Polish regulatory authorities determine otherwise, the Company would
be required to:
- secure additional licenses from the Chairman of the Council and permits
from URT;
- modify the nature and content of its programming;
- pay fines or other penalties for lack of compliance with these
regulations; and
- comply with Polish regulations governing ownership structure and the
production and transmission of programming across a D-DTH system.
REQUIREMENTS CONCERNING PROGRAMS BROADCAST FROM POLAND
The Television Act requires broadcasters intending to broadcast TV programs
from Poland to obtain a broadcast license. The licenses are granted by the
Chairman of the Council. The applicant in
17
order to obtain such a license must be, inter alia, in compliance with the above
foreign ownership restrictions. The broadcaster shall comply with the
requirements of the Television Act regarding the programming, inter alia,
pertaining to Polish productions, commercials, and others.
The acquisition or take over of the licenced broadcaster's shares or rights
thereof by a foreign entity or a dependent entity thereof requires the consent
of the Chairman of the Council. An acquisition or take over executed without the
necessary approval is invalid.
In November 2000, Polska Telewizja Cyfrowa Sp. z o.o., owned in part by a
subsidiary of the Company, was issued broadcasting licenses for Wizja Sport and
Wizja Jeden by the National Broadcast Council. The National Broadcast Council
has also issued a satellite platform license to Polska Telewizja Cyfrowa
Sp. z o.o. for Wizja Sport, Wizja Jeden and certain third party programming.
Polska Telewizja Cyfrowa Sp. z o.o. is considered to be a broadcaster under the
Polish law, although these licenses have not yet been used.
COPYRIGHT PROTECTION
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. 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. A
bill currently pending in the Parliament regarding copyrights, if adopted, would
abolish the statutory license for cable operators for simultaneous transmissions
of programs broadcasted by other broadcasters. The new act is expected to be
passed by the Parliament by the end of the year 2001. The adoption of this act
may result in an increase of the fees paid by cable operators.
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. Most of
the Company's cable subsidiaries operate under a contract with ZASP and all of
its cable subsidiaries operate under a contract with ZAIKS. 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 "--Television Act" for a
discussion of the penalties and consequences associated with violations of the
Television Act and "--Communications Act" and "--New Telecommunications Law" for
a discussion of the penalties and consequences associated with violations of the
Communications Act or the New Telecommunications Law and of a television
operator's permits.
ANTI-MONOPOLY ACT
EXCLUSIVE PROGRAMMING AGREEMENTS. Some of the programming agreements that
the Company has entered into for its cable networks and its 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 the
Company's business and financial results in that such a decision would
potentially reduce the commercial value of these contracts and could reduce the
consumer of appeal of the programming offered on the Company's cable networks
and its D-DTH system.
MARKET DOMINANCE. Companies that obtain control of 40% or more of the
relevant market and do not encounter significant competition may be deemed to
have market dominance, and therefore face greater scrutiny from the
Anti-Monopoly Office.
18
From time to time, the Company receives inquiries from and are subject to
review by various divisions of the Anti-Monopoly Office.
RECENT ANTI-MONOPOLY OFFICE FINDINGS WITH RESPECT TO THE COMPANY AND ITS
SUBSIDIARIES.
The Anti-Monopoly Office 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. The Company
appealed both the finding of dominance and the finding that it acted improperly
in its relations with subscribers. In another decision, the Anti-Monopoly Court
agreed with the Company's position and overturned the Anti-Monopoly Office's
decision. The Anti-Monopoly Office is appealing the Anti-Monopoly Court's
decision.
In another market, the Anti-Monopoly issued a decision that PCI had achieved
a dominant position and abused that dominant position by: increasing rates
without providing subscribers a detailed basis for the price increases; and
changing the programming offer. The Anti-Monopoly Office imposed a fine of
50,000 zloty (the equivalent of $12,068). The Company is appealing both the
finding of dominance and the finding that it acted improperly in its relations
with subscribers.
UNITED KINGDOM
BROADCASTING REGULATION
Most of the channels in the Company's D-DTH service are 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") (as amended), satellite broadcasters established in the U.K.
are required to obtain an STS license. UPC Broadcast Centre has received an STS
license for Atomic TV (discontinued as of July, 2000), Wizja Jeden (to be
discontinued as of April 2001), Wizja Sport, and Wizja Pogoda (although only the
licenses for Wizja Jeden, Wizja Sport and Wizja Pogoda are being used). 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 or another
competent authority. 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
sponsorship and content) to which U.K.-licensed broadcasters are subject. Under
the terms of its Astra transponder agreements, the Company cannot carry
programming if the channel supplier does not have a valid broadcast license for
that programming from a competent authority. An STS license is issued for an
initial period of 10 years but can be renewed.
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 by 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 the Company's issued capital stock is or becomes a disqualified
person or is or becomes associated with such a disqualified person, or if the
Company or any person with an interest in the Company's capital stock does or
were to fall within the scope of the restriction, then the Company may not be
entitled to hold STS licenses.
In issuing STS licenses, the Independent Television Commission follows the
"establishment" test set out in the EU's Television Without Frontiers Directive
which provides that each (European Union "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 transmits 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
19
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 a
receiving state should have less right to seek to regulate a broadcaster whose
services are intended to be received in that state. In the event of
inconsistency between the Television Without Frontiers Directive and the 1989
European Convention of Transfrontier Television, the provisions of the directive
apply in member states of the EU (e.g. the U.K.).
REGULATION OF COMPETITION
In the U.K., the Competition Act 1998 ("CA 1998") came into force on March
1, 2000 and repeals the Respective Trade Practices Acts 1976 and 1977, the
Resale Prices Act 1976 and certain parts of the Competition Act 1980. It
introduces into U.K. law a system of controls based on EC competition law.
Anti-competitive agreements and conduct amounting to the abuse of a dominant
position are prohibited (closely following Articles 81 and 82).
The CA 1998 provides the Director General of Fair Trading ("DGFT") with
enhanced powers to investigate potential anti-competitive agreements and
conduct, including the power to require the production of any document or other
information which the DGFT considers relevant to the investigation and wide
powers of entry and search. The DGFT can impose fines for the infringement of
the CA of up to 10 per cent of U.K. turnover per annum for each year of
infringement, up to a maximum of three years. Competition rulings made by the
DGFT are subject to appeal to the Competition Commission and Restrictive
Practices Court. UPC Broadcast Centre is not involved in any current proceedings
relating to competition law before the U.K. courts nor are any investigations
which involve the Company underway before any authority exercising powers under
the CA 1998. For a more detailed description of Articles 81 and 82, see the
discussion in "--European Union--Regulation of Competition".
EUROPEAN UNION
BROADCASTING REGULATION
TELEVISION WITHOUT FRONTIERS DIRECTIVE. The Television Without Frontiers
Directive sets forth the following basic principles for the regulation of
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 the
Company's "home member state" for the purposes of its D-DTH services
because UPC Broadcast Centre is established in the U.K. and is the
licensed broadcaster of its 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 (excluding time covering news,
sports events, games, advertising, teleshopping and teletext services).
The Directive does not define the term "where practicable and by
appropriate means" and its precise ambit is unclear.
- Each member states 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
the Company produces or commissions will be counted for
20
the purposes of determining whether any service broadcast by the Company
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 he
grounds of race, sex, religion or nationality.
1989 EUROPEAN CONVENTION ON TRANSFRONTIER TELEVISION. 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 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. Both the U.K. and Poland have ratified the 1989 European
Convention on Transfrontier Television. 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 on September 9, 1998. This amendment would have been effective if and
when all member states have signed the amendment or automatically on October 1,
2000, unless a member state objects to such amendment coming into force.
Following the France objection this amendment has not yet entered into force.
This 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.
The Company believes that its broadcasting into Poland from the U.K. would
not constitute an "abuse of rights" under this amendment because it has
valid business reasons for broadcasting from the U.K. and it has not
established its broadcasting facilities in the U.K. in order to evade
Polish laws in the areas covered by the 1989 European Convention on
Transfrontier Television. An adverse decision on this issue, if this
amendment becomes effective and Poland decides to invoke it against the
Company's broadcasts emanating from the U.K. could prevent the Company
from broadcasting its 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
21
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 of the 1989 European Convention on Transfrontier
Television 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, the Company 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 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 of the 1989
European Convention on Transfrontier Television, such advertisements must comply
with the advertising rules of the receiving member state. This rule requires
that advertisements inserted in the channels the Company distributes comply with
both Polish advertising rules as well as the rules applicable in the
jurisdiction in which the broadcaster is licensed.
REGULATION OF COMPETITION
EC competition law governs agreements which prevent, restrict or distort
competition and prohibits the abuse of dominant market positions through
Articles 81 and 82 of the EC Treaty.
Article 81 (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 81 (2) voids the
offending provision or the entire agreement, if the offending parts are not
severable. Article 81 (3) allows for exemption from the provisions of Articles
81 (1) and 81 (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. Article 82 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 firm may be dominant.
However, dominance is not unlawful per se; only the abuse of a dominant position
is prohibited by Article 82. Any action that is designed to, or could, seriously
injure competitors, suppliers, distributors, or consumers is likely to raise
issues under Article 82.
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 81 or in
relation to abusive conduct under Article 82. Agreements or practice 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 81 or Article 82 can
sue for damages and/or seek injunctive relief. The Company does not believe that
any of its current agreements infringe Article 81(1) or Article 82 and therefore
does not intend to bring them to the attention of the European Commission. If
the European Commission were to find the agreements infringed Article 81(1) or
Article 82, the agreements would be void and unenforceable. The parties could
also be fined and liable to damages to third parties.
POLAND'S EU MEMBERSHIP APPLICATION
In 1994 Poland made an official application for membership of the EU.
Negotiations on the terms of Poland's proposed admission to the EU commenced in
March 1998. Poland has announced 2006 as a
22
target date for accession. 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 law in their then current versions.
ITEM 2. PROPERTIES
On December 31, 2000, the Company owned equipment used for its cable
television business, including 93 headends for cable networks, and approximately
4,924 kilometers of cable plant. The Company has approximately 179 lease
agreements for offices, storage spaces and land adjacent to the buildings. The
total area leased amounts to approximately 34,000 square meters. The areas
leased by the Company range from 1.25 square meters up to 6,582 square meters.
The agreements are for specified and unspecified periods of time and those for
an unspecified period may be terminated with relatively short notice periods by
either party, usually three months.
The Company has entered into conduit leases with TPSA (the Polish national
telephone company) and, in certain cases, with other entities. The majority of
the TPSA leases require the Company to bear the costs of the maintenance of the
cable. The Company may not sublease the conduit or cables or allow a third party
to use the conduits or cables free of charge without TPSA's consent. The rental
charge for the conduit is usually determined on each 100 meters of conduit
occupied. The agreements also contain indexation clauses for rent adjustment
purposes (based on the change of U.S. dollar exchange rates or on the increase
of real maintenance costs). A substantial portion of the Company's contracts
with TPSA for the use of such conduits permit termination by TPSA without
penalty at any time either immediately upon the occurrence of certain conditions
or upon provision of three to six months' notice without cause. Any termination
by TPSA of such contracts could result in the Company losing its permits, the
termination of agreements with cooperative 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
the Company's cable subscribers serviced by conduits leases subject to immediate
termination and the consequences to the Company of the loss of those conduit
leases, see "Business--Cable Television--Technology and Infrastructure."
During 2000, the Company entered into a 5 year office lease for a new head
office in Warsaw. The Company's cable operations and main headend have been
located in this space as of February 2001.
The Company believes that its existing owned properties, lease agreements
and conduit agreements are adequate for purposes of the Company's cable
television operations, although additional space and conduits will be needed in
the future if the Company acquires other cable television networks.
In connection with its D-DTH service and the development of its programming
business, the Company has leased office space and premises providing satellite
receiving (to receive programs from suppliers), production, post-production and
program packaging facilities. This space is in aggregate approximately 1,637
square meters and is located in Maidstone, U.K.
The Company believes that its existing owned properties, lease agreements
and conduit agreements are adequate for the Company's D-DTH and programming
operations, although additional space may be needed in the future for the
Company's programming production activities.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation from time to time in the ordinary
course of business. In management's opinion, the litigation in which the Company
is currently involved, individually and in the aggregate, is not material to the
Company's business financial condition or results of operations.
Two of the Company's cable television subsidiaries, Telewizja Kablowa
Gosat-Service Sp. z o.o. and PTK S.A., and four unrelated Polish cable operators
and HBO Polska Sp. z o.o. ("HBO Polska") have been made defendants in a lawsuit
instituted by Polska Korporacja Telewizyjna Sp. z o.o., an indirect
23
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 encoding systems and systems of controlled access to the HBO Polska
programming. The Company does not believe that the lawsuit will have a material
adverse effect on its business operations.
On April 17, 1998, the Company signed a binding letter of intent with
Telewizyna Korporacja Partycypacyjna ("TKP"), the parent company of Canal+
Polska, 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 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 was 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).
The Company demanded monies from TKP as a result of the failure to execute
the definitive agreements by the Signature Date. While the Company was waiting
for the expiration of the 10-day period for payment of the break-up fee, TKP
initiated arbitration proceedings before a three member-arbitration panel in
Geneva, Switzerland. In their claim, TKP and its shareholders alleged that the
Company breached its obligation to negotiate in good faith and to use its best
efforts to agree and execute the definitive agreements and claimed the Company
was obligated to pay TKP $10 million pursuant to the letter of intent. The
Company answered and brought counterclaims against TKP and its shareholders. The
arbitration hearings were conducted in Geneva in June 1999. On June 26, 2000,
the arbitration tribunal awarded TKP $10 million plus interest and costs and
dismissed the Company's request for damages against TKP and its shareholders.
Following the award, the Company decided not to appeal. During the second
quarter of the year 2000, the Company accrued $12.0 million related to the
arbitration. The award of $12,218,100 was paid on October 27, 2000.
24
On or about July 8, 1999, certain minority shareholders ("the minority
shareholders") of Poland Cablevision (Netherlands) B.V. (PCBV), an indirect
subsidiary of the Company, filed a lawsuit against the Company, Poland
Communications, Inc. ("PCI") and certain other defendants, in United States
District Court, Southern District of Ohio, Eastern Division, Civil Action No.
C2-99-621.
The relief sought by the minority shareholders includes: (1) unspecified
damages in excess of $75,000, (2) an order lifting the restrictions against
transfer of shares set forth in the Shareholders' Agreement among PCBV's
shareholders, as amended (the "Shareholders' Agreement") so that the minority
shareholders can liquidate their shares in PCBV, (3) damages in the amount of
1.7 percent of the payment made by UPC for the shares of the Company as set
forth in the Agreement and Plan of Merger between the Company and UPC dated June
2, 1999, and (4) attorneys' fees and costs incurred in prosecuting the lawsuit.
The amended complaint sets forth eight claims for relief based on
allegations that the defendants, including the Company and PCI, committed the
following wrongful acts: (1) breached a covenant not to compete contained in the
Shareholders' Agreement relating to the shareholders of PCBV, (2) breached a
covenant in the Shareholders' Agreement requiring that any contract entered into
by PCBV with any other party affiliated with PCI be commercially reasonable or
be approved by certain of the minority shareholders, (3) breached a provision in
the Shareholders' Agreement that allegedly required co-defendant Chase
International Corp. ("CIC") to offer the minority shareholders the right to
participate in certain sales of PCBV shares and that required CIC to give
written notice of any offer to purchase the minority shareholders' shares in
PCBV, (4) breached their fiduciary duties to the minority shareholders, (5)
breached the agreement between PCBV and CIC, which allegedly limited the amount
of management fees that could be paid annually by PCBV, (6) made false and
misleading statements in various documents filed with the Securities and
Exchange Commission, (7) colluded to defraud the minority shareholders by
failing to make reference in certain Forms 8-K, 8-KA and 14D-1 to the minority
shareholders or their alleged rights and claims, (8) colluded to divert assets
of PCBV to affiliates of PCI and PCBV, including the Company, that allegedly
compete with PCI and PCBV.
On or about March 31, 2000 the parties to the lawsuit reached a settlement.
In accordance with the settlement, on June 2, 2000 Wizja TV B.V., an affiliate
of PCI, purchased approximately 1.4% of the outstanding shares of PCBV for a
price of approximately $2.2 million. The case has been dismissed and releases
exchanged. The aforementioned settlement does not include the remaining minority
shareholders.
In addition to the Ohio lawsuit, other minority shareholders of PCBV
(representing an additional approximately 6% of the shares of PCBV, hereinafter
the "Reece Group") have asserted claims against the past and present directors
or officers of, or members of the Board of Managers of, PCI, PCBV and the
Company or one or more controlling shareholders of the Company but have not yet
filed suit.
The claims by the Reece Group consist of allegations previously made by
Reece Communications, Inc. ("RCI"). RCI's allegations were premised on, among
other things, alleged acts, errors, omissions, misstatements, misleading
statements or breaches of duty by the aforementioned officers, directors, or
controlling shareholders. Although the Company has defenses to the Reece Group's
allegations, the Company is presently attempting to negotiate a settlement of
those claims and a simultaneous purchase of the Reece Group's PCBV shares.
On January 27, 2000, the Groupe Jean-Claude Darmon ("Darmon"), a French
company, commenced legal proceedings against Wizja TV Sp. z o.o., a subsidiary
of the Company, and SPN Widzew SSA Sportowa Spolka Akcyjna (Lodz Football Club)
in the Paris Commercial Court ("Tribunal de Commerce de Paris").
Wizja TV Sp. z o.o. has been accused of infringing broadcast and advertising
rights which Darmon purports to hold. Darmon has accused Wizja TV Sp. z o.o. of
interrupting the broadcast signal of the UEFA Cup match on October 21, 1999
between Lodz Football Club and AS Monaco. Darmon seeks damages in the amount of
13,025,000 French francs (approximately $1,760,674) from Wizja Sp. z o.o. The
Company is unable to predict the outcome of this case.
25
For a discussion of certain Anti-Monopoly Office's findings relating to the
Company, see "Business--Regulation--Poland--Anti-Monopoly Act."
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
UPC Polska, Inc.'s common stock is owned by UPC and is not traded on any
public trading market.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below are selected consolidated financial data of the Company for
each of the periods in the five years period ended December 31, 2000. The
Company for the three years ended December 31, 1998 and the period from January
1, 1999 through August 5, 1999 prior to the Company's acquisition by UPC
("Acquisition"), is herein referred to as "Predecessor" and the Company from
August 6, 1999 through December 31, 1999 and the year ended December 31, 2000
after Acquisition is referred to as the "Successor". The selected consolidated
financial data set forth below have been derived from the consolidated financial
statements of the Company and the notes thereto prepared in conformity with
generally accepted accounting principles as applied in the United States, which
have been audited by the Company's independent accountants (the "Consolidated
Financial Statements") during the respective periods. The selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included herein:
PREDECESSOR SUCCESSOR
------------------------------------------------ -----------------------------
PERIOD FROM PERIOD FROM
JANUARY 1, AUGUST 6, 1999
YEAR ENDED DECEMBER 31, 1999 THROUGH THROUGH YEAR ENDED
--------------------------------- AUGUST 5, DECEMBER 31, DECEMBER 31,
1996 1997 1998 1999 1999 2000
-------- --------- ---------- ------------ -------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Revenues................................ $ 24,923 $ 38,138 $ 61,859 $ 46,940 $ 38,018 $ 133,583
Operating expenses:
Direct operating expenses............. (7,193) (14,621) (61,874) (70,778) (69,351) (132,154)
Selling, general and administrative
expenses (1) ....................... (9,289) (49,893) (74,494) (51,034) (46,874) (63,156)
Depreciation and amortization......... (9,788) (16,294) (26,304) (23,927) (40,189) (109,503)
-------- --------- ---------- ---------- ---------- ----------
Operating loss.......................... (1,347) (42,670) (100,813) (98,799) (118,396) (171,230)
Interest and investment income.......... 1,274 5,754 3,355 2,823 731 1,329
Interest expense........................ (4,687) (13,902) (21,957) (28,818) (24,459) (73,984)
Equity in losses of affiliated
companies............................. -- (368) (6,310) (1,004) (291) (895)
Foreign exchange gain / (loss), net..... (761) (1,027) (130) (2,188) (2,637) 3,397
Non-operating income.................... -- -- -- -- 1,977 591
Impairment.............................. -- -- -- -- (1,091) (7,734)
Loss before income taxes, minority
interest and extraordinary item....... (5,521) (52,213) (125,855) (127,986) (144,166) (248,526)
Income tax (expense)/ benefit........... (1,273) 975 (210) (30) (11) (285)
Minority interest....................... 1,890 (3,586) -- -- -- --
-------- --------- ---------- ---------- ---------- ----------
Loss before extraordinary item.......... (4,904) (54,824) (126,065) (128,016) (144,177) (248,811)
Extraordinary item - loss on early
extinguishment of debt................ (1,713) -- -- -- -- --
-------- --------- ---------- ---------- ---------- ----------
Net loss.............................. (6,617) (54,824) (126,065) (128,016) (144,177) (248,811)
Accretion of redeemable preferred
stock................................. (2,870) (2,436) -- (2,436) -- --
Preferred stock dividend................ (1,738) -- -- -- -- --
(Excess)/deficit carrying value of
preferred stock (over)/under
consideration paid (2)................ 3,549 (33,806) -- -- -- --
-------- --------- ---------- ---------- ---------- ----------
Net loss applicable to holders of common
stock................................. $ (7,676) $ (91,066) $ (126,065) $ (130,452) $ (144,177) $ (248,811)
======== ========= ========== ========== ========== ==========
Basic and diluted loss per common
share................................. $ (0.44) $ (3.68) $ (3.78) $ (3.90) N/A N/A
======== ========= ========== ========== ========== ==========
26
PREDECESSOR SUCCESSOR
------------------------------- ---------------------------
AS OF AS OF
DECEMBER 31, DECEMBER 31,
1996 1997 1998 1999 2000
-------- --------- -------- ------------ ------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents.......... $ 68,483 $105,691 $ 13,055 $ 35,520 $ 8,879
Property, plant and equipment,
net.............................. 84,833 117,579 213,054 218,784 291,512
Total assets....................... 217,537 307,096 348,374 1,218,871 1,235,154
Total notes payable................ 130,074 130,110 263,954 534,696 721,442
Redeemable preferred stock......... 34,955 -- -- -- --
Total stockholders' equity......... 31,048 152,355 33,656 606,960 403,222
- ------------------------
(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 note 17 to the Consolidated Financial Statements.
(2) Represents the amount paid to preferred stockholders in excess of or less
than the carrying value of such shares.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
On August 6, 1999, Bison Acquisition Corp., UPC's wholly-owned subsidiary,
was merged with and into the Company with the Company continuing as the
surviving corporation (the "Merger"). Accordingly, the Company became a
wholly-owned subsidiary of UPC. UnitedGlobalCom, Inc. is the majority
stockholder of UPC.
Until the limited launch of the Company's D-DTH business on July 1, 1998 and
subsequent full-scale launch on September 18, 1998, the Company's revenues were
derived entirely from its cable television business and programming related
thereto. The Company's revenue has increased 57.2% from $85.0 million in the
year ended December 31, 1999 to $133.6 million in the year ended December 31,
2000. This increase was due primarly to internal growth in subscribers through
increased penetration, increases in subscription rates, further development of
the Wizja TV programming package, sales of programming and up link services, and
advertising sales.
Prior to June 1997, the Company's expenses were primarily incurred in
connection with its cable television business and programming related thereto.
Since June 1997, the Company has been incurring, in addition to expenses related
to its cable television and programming businesses, expenses in connection with
the operation of its D-DTH business and Wizja TV.
The Company generated an operating loss of $171.2 million for the year ended
December 31, 2000, primarily due to the significant costs associated with the
development of the Company's D-DTH and programming businesses, promotion of
those businesses, the development, production and acquisition of programming for
Wizja TV, the amortization of additional goodwill pushed down to the Company as
a result of the Merger and fees paid for services in connection with the
acquisition by UPC.
The Company divides operating expenses into (i) direct operating expenses,
(ii) selling, general and administrative expenses, and (iii) depreciation and
amortization expenses. Direct operating expenses consist of programming
expenses, maintenance and related expenses necessary to service, maintain and
operate the Company's cable systems, and 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
27
expense. Depreciation and amortization expenses consist of depreciation of
property, plant and equipment and amortization of intangible assets.
SEGMENT RESULTS OF OPERATIONS
The Company classifies its business into four segments: (1) cable
television, (2) D-DTH television, (3) programming, and (4) corporate.
Information about the operations of the Company in these different business
segments is set forth below based on the nature of the services offered.
During 1999 and in prior years, the Company presented its operations in
three business segments: (1) cable television, (2) D-DTH television and
programming, and (3) corporate. Due to the increasing size of the D-DTH segment,
in January 2000, management decided to separate its D-DTH operations into two
distinct segments, satellite television and programming.
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, gains and losses of fixed assets disposals
and impairment results, 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 a U.S. GAAP measure of profit and loss or cash flow from operations and
should not be considered as an alternative to cash flows from operations as a
measure of liquidity.
The following table presents an aggregation of the Company's segment results
of operations for the year ended December 31, 2000 with comparatives for the
seven and five months of 1999, aggregate year ended December 31, 1999 and year
ended December 31, 1998.
28
SEGMENT RESULTS OF OPERATIONS
SUCCESSOR PREDECESSOR
-------------------------- ------------------------------------------
AGGREGATE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, FIVE MONTHS SEVEN MONTHS DECEMBER 31, DECEMBER 31,
2000 OF 1999 OF 1999 1999 1998
------------ ----------- ------------ ------------ ------------
REVENUES
Cable............................ 68,781 27,027 35,434 62,461 52,971
D-DTH............................ 51,239 8,230 10,675 18,905 9,048
Programming...................... 68,697 14,910 15,926 30,836 13,819
Corporate and Other.............. -- -- -- -- --
Intersegment elimination......... (55,134) (12,149) (15,095) (27,244) (13,979)
--------- --------- -------- --------- ---------
TOTAL............................ 133,583 38,018 46,940 84,958 61,859
OPERATING LOSS
Cable............................ (44,581) (26,923) (11,936) (38,859) (23,066)
D-DTH............................ (47,284) (40,846) (44,832) (85,678) (35,247)
Programming...................... (71,858) (45,859) (28,094) (73,953) (33,800)
Corporate and Other.............. (7,507) (4,768) (13,937) (18,705) (8,700)
--------- --------- -------- --------- ---------
TOTAL............................ (171,230) (118,396) (98,799) (217,195) (100,813)
EBITDA
Cable............................ 1,203 (8,765) 1,883 (6,882) (1,431)
D-DTH............................ (6,932) (28,184) (37,753) (65,937) (34,012)
Programming...................... (48,491) (36,507) (25,083) (61,590) (30,366)
Corporate and Other.............. (7,507) (4,751) (13,919) (18,670) (8,700)
--------- --------- -------- --------- ---------
TOTAL............................ (61,727) (78,207) (74,872) (153,079) (74,509)
The period from January 1, 1999 through August 5, 1999 and the period from
August 6, 1999 through December 31, 1999 are referred to herein as the "seven
months of 1999" and "five months of 1999", respectively. All other references to
the period ended July 31, 1999 or balances as of July 31, 1999 should be
construed as relating to the period from January 1, 1999 th