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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
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(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, 1998
/ / 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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@ ENTERTAINMENT, 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)
ONE COMMERCIAL PLAZA 06103-3585
HARTFORD, CONNECTICUT (Zip Code)
(Address of Principal
Executive Offices)
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Registrant's telephone number, including area code (860) 549-1674
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock Nasdaq National Market
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK
____________________________________________________________________
(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. /X/
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.) At March 18, 1999, the aggregate market value was:
$162,971,763
The number of shares outstanding of @ Entertainment, Inc.'s common stock as of
December 31, 1998, was:
Common Stock 33,310,000
As of March 18, 1999 the aggregate market value of the shares of common
stock of the registrant outstanding was $309,005,000. This figure is based on
the closing price by the Nasdaq National Market for a share of the registrant's
common stock on March 18, 1999, which was $9 1/4 as reported in the Wall Street
Journal on March 19, 1999. The number of shares of the registrant's common stock
outstanding as of March 18, 1999 was 33,406,000 shares.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
@ Entertainment, Inc., a Delaware corporation whose common stock is listed
on the National Association of Securities Dealers Automated Quotation System
("Nasdaq") National Market and traded under the symbol ATEN ("@ Entertainment"),
was established in May 1997. References to the "Company" mean @ Entertainment
and its consolidated subsidiaries, including Poland Communications, Inc.
("PCI"), At Entertainment Limited ("@EL"), Sereke Holding B.V. ("Sereke"), Wizja
TV Sp. z o.o. ("Wizja TV Sp. z o.o."), Ground Zero Media Sp. z o.o. ("GZM"), At
Media Sp. z o.o. ("At Media") and @ Entertainment Programming, Inc.
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. Words
such as "believes," "expects," "intends," "plans," "anticipates," "likely,"
"will,""may," "shall" and similar expressions are intended to 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 attract and hold 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; and (xiv) acquisition opportunities.
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,
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.
For your convenience, this Annual Report contains certain zloty amounts not
derived from the consolidated financial statements which have been translated
into U.S. dollars. Readers should not assume that the zloty amounts actually
represent such U.S. dollar amounts or could be, or could have been,
1
converted into U.S. dollars at the rates indicated or at any other rate. Unless
otherwise stated, such U.S. dollar amounts have been derived by converting from
zloty to U.S. dollars at the rate of PLN 3.504 = $1.00, the exchange rate quoted
by the National Bank of Poland at noon on December 31, 1998. This rate may
differ from the actual rates in effect during the periods covered by the
financial information discussed herein. The Federal Reserve Bank of New York
does not certify for customs purposes a noon buying rate for zloty.
ITEM 1. 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
three years, the Company has experienced rapid growth in revenues and
subscribers, both through acquisitions and through expansion of its own cable
networks, resulting in an average increase in revenues of 42% and total cable
subscribers of 33% per year.
On June 5, 1998, the Company launched its Wizja TV programming package,
originally consisting of 11 channels of primarily Polish-language programming,
over its cable networks. The Company believes that Wizja TV will provide it with
a significant competitive advantage for attracting new subscribers and
increasing revenue per subscriber. Wizja TV will also be sold on a wholesale
basis to other cable operators in Poland.
In order to reach television households in Poland, which it does not expect
to cover with its cable networks, on September 18, 1998 the Company launched a
complementary digital satellite direct-to-home (known in the pay television
business as "D-DTH" television) service allowing subscribers to receive Wizja TV
via a satellite dish. The Company's multi-channel Polish-language D-DTH service
was the first D-DTH service available in Poland. The Company has entered into an
agreement with Philips Business Electronics B.V. to supply the reception system
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. As of December 31, 1998 the Company had sold retailers approximately
125,000 D-DTH packages, which include the rental of the D-DTH reception system,
installation and a one-year subscription to the Company's D-DTH service. As of
December 31, 1998, Philips had sold and installed approximately 95,400 of these
packages to consumers. With the launch of the Company's D-DTH service, the
Company has started the transmission of Wizja TV, which currently consists of 19
channels (of which 17 are primarily Polish language), on both its D-DTH system
and its cable networks.
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; and
- Establish Wizja TV as the leading brand name in the Polish pay television
industry.
CABLE TELEVISION
The Company operates the largest cable television system in Poland with
approximately 1,592,000 homes passed and approximately 935,300 total subscribers
as of December 31, 1998. The Company's cable subscribers are located in regional
clusters encompassing eight of the ten largest cities in Poland, including
2
those cities which the Company believes provide the most favorable demographics
for cable television in the country. The Company believes that additional
subscriber growth can be achieved through a combination of increased
penetration, new network expansion and acquisitions. On December 31, 1998 the
Company had invested more than $144 million to construct fiber-optic cable
networks which it believes are among the most technologically advanced in Poland
and are comparable to modern cable networks in the U.S. The networks constructed
by the Company provide excess channel capacity and are designed to maximize
reliability. It is the Company's policy to upgrade as rapidly as possible
substandard networks that it has acquired.
CABLE OPERATING STRATEGY
With the fall of Communist rule in 1989, the Company believed that it would
gain significant market advantages by becoming one of the first cable operators
to establish a high-quality cable television system in Poland. The Company
believes that it has achieved its initial goals of rapidly increasing its
coverage areas, establishing its business reputation, and providing a
high-quality signal, wide channel offerings and quality of service comparable to
that provided by world-class cable operators.
Having established itself as the leading cable television service provider
in Poland, the Company's current strategic objective is to increase cash flow
and enhance the value of its cable networks. To accomplish this objective, the
Company's business and operating strategy in the cable television business is
to:
PROVIDE COMPELLING PROGRAMMING. The Company provides the Wizja TV
programming package, which currently consists of 19 television channels of
primarily Polish-language programming, to its cable subscribers. The Company
believes that this selection of high-quality Polish-language programming will
provide it with a significant competitive advantage in increasing its cable
subscriber base.
INCREASE PRICING AND MAXIMIZE REVENUE PER CABLE SUBSCRIBER. The Company has
implemented a pricing strategy designed to increase revenue per subscriber and
to achieve real profit margin increases in U.S. dollar terms. In connection with
this pricing strategy, the Company intends to continue to introduce new program
offerings and to improve its services. As a result, the Company has experienced
and expects that it will continue to experience subscriber termination rates
above historical levels resulting from the implementation of its pricing
strategy. The Company generally receives a premium for its cable television
services over the prices charged by its competitors, particularly poor-quality
small operators. Despite its generally higher price levels, the Company has
achieved significant growth in penetration and market share while maintaining
relatively low annual cable television subscriber termination rates (also known
in the cable television industry as "churn"). The Company believes its ability
to successfully command higher prices reflects its higher levels of customer
service, broader selection of quality programming and the greater technical
quality of its cable television networks.
EXPAND REGIONAL CLUSTERS. The Company's strategy is to continue to expand
the coverage areas of its regional clusters, both through selected building of
its existing networks and acquisitions. The Company intends to expand primarily
in areas where it can fill-in existing regional clusters and into cities and
towns adjacent to its regional clusters through the continued building of its
existing networks. The Company also plans to expand its regional clusters
through the continued acquisition of smaller cable television operators. In
addition, in markets where the Company has established operations, it intends to
selectively build its system in parallel to competitors ("overbuild") in an
effort to consolidate the market. By implementing this strategy for expanding
its regional clusters, the Company believes it can limit its per-subscriber
building costs and realize significant synergies from leveraging its existing
infrastructure and asset base, both in terms of personnel and in terms of
capital costs. Because the Company has a management structure and operating
systems in place in each of its regional clusters, it is able to realize
significant cash flow margins from each dollar of revenue generated through the
addition of subscribers to its existing regional clusters.
3
INCREASE SUBSCRIBER PENETRATION. The Company believes the most profitable
means of expanding its cable television business is to leverage its investment
in its cable networks by increasing the percentage of homes passed which
subscribe ("subscriber penetration") in its regional clusters. Once a building
with multiple apartment units is passed by the Company's cable television
networks, the Company can add subscribers who generate average annual
subscription revenue of approximately $80.0 in return for an average capital
investment of approximately $20 per subscriber. The Company plans to increase
subscriber penetration by (A) executing an aggressive sales, marketing and
promotional strategy using the Company's highly-trained and commissioned Polish
sales force, with particular emphasis on Company-wide quarterly remarketing
campaigns, (B) continuing to enhance the Company's program offerings,
particularly through expanding Wizja TV's channel line-up, and (C) applying
prompt, courteous and professional customer service standards.
REALIZE ADDITIONAL OPERATING EFFICIENCIES. The Company aggressively seeks
to realize operating efficiencies in both its acquired as well as its existing
cable networks by, among other things, eliminating redundant satellite signal
receivers, combining customer service offices and reducing administrative
personnel. The Company generally has been able to eliminate personnel in its
acquired cable television systems by managing the systems with experienced
personnel from one of its existing regional clusters. The Company can also
generally reduce the technical personnel necessary to operate acquired systems
after connecting them to the Company's existing satellite signal receivers or,
if required, rebuilding them to the Company's standards. The Company also
intends to reduce the number of employees through consolidation of its existing
clusters of regional operations from eight to four, and through centralizing its
subscriber management and customer support services in the call center. The call
center is operational for cable customers in the Katowice regional cluster and
for all D-DTH customers and is expected to be operational for all cable
customers by the end of 1999. The call center is located in Katowice, a low cost
area of Poland, and will consolidate the functions of the Company's existing
regional customer service centers. Moreover, the Company believes the
centralization of service functions will improve the general level of customer
service available to subscribers. The Company is also in the process of
installing an integrated management information system for both its billing and
accounting systems, which is designed to further improve employee productivity
and customer service for both its cable and D-DTH businesses. The Company
believes that its size and market share give it a competitive advantage by
creating economies of scale, including minimized building and reduced operating
costs per subscriber and volume price discounts for programming and construction
expenditures. The Company's size also provides it with the operating leverage to
spread certain expenses (such as promotional materials, advertisements, local
programming and sales materials) over its large number of subscribers, which
economies of scale should continue to improve as its subscriber base increases.
REGIONAL CLUSTERS
The Company has established eight regional clusters for its cable television
business encompassing eight of the ten largest cities in Poland, which the
Company believes, are among those with the strongest economies and most
favorable demographics for cable television in the country. The following table
illustrates certain operating data of each of the Company's existing regional
clusters. The Company is planning to consolidate its existing eight clusters
down to four.
4
OVERVIEW OF THE COMPANY'S EXISTING CABLE SYSTEMS(1)
BASIC AVERAGE MONTHLY
TOTAL SUBSCRIBERS BASIC SUBSCRIPTION REVENUE PER
REGION TOTAL HOMES HOMES PASSED SUBSCRIBERS (2) PENETRATION (2) BASIC SUBSCRIBER
- ----------------------- ----------- ------------- --------------- ----------- --------------- -------------------------
Gdansk................. 280,000 239,856 154,315 121,846 50.80% $ 7.80
Szczecin............... 160,000 76,050 64,714 48,639 63.96% 5.90
Katowice............... 1,200,000 498,903 252,954 204,249 40.94% 6.61
Krakow................. 400,000 144,114 71,866 62,179 43.15% 7.41
Warsaw................. 800,000 259,050 127,485 103,536 39.97% 7.63
Lublin................. 120,000 90,244 74,160 38,536 42.70% 7.25
Wrochaw................ 624,000 222,300 145,698 119,239 53.64% 5.05
Bydgoszcz.............. 134,000 61,464 44,148 40,155 65.33% 4.90
----------- ------------- ------- ----------- ----- -----
TOTAL.................. 3,718,000 1,591,981 935,340 738,379 46.38% $ 6.68(3)
----------- ------------- --------------- ----------- ------ ------
----------- ------------- --------------- ----------- ------ ------
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(1) All data at or for the year ended December 31, 1998.
(2) Includes "basic" and "intermediate" packages. For a description of these
packages, see the section entitled "Service and Fees" that follows.
(3) Represents a weighted average for the Company based on the total number of
basic subscribers at December 31, 1998.
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.
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. The
Company currently offers three packages of cable television service: a "basic
package" throughout the Company's cable television systems, and "broadcast" and
"intermediate" packages in selected areas of Poland. On December 31, 1998,
approximately 74.7% of the Company's subscribers received the "basic package",
approximately 4.3% received the "intermediate package" and approximately 21.0%
received the "broadcast package" of service.
BASIC PACKAGE. The "basic package" includes approximately 30 to 70
channels. This package generally includes all Polish terrestrial broadcast
channels, most major European satellite programming legally available in Poland,
regional and local programming and, on most of its cable networks, Wizja TV,
including the Company's proprietary Polish-language channel, Atomic TV. The
Company's "basic package" offerings vary by location. With the launch of Wizja
TV across the Company's cable networks on June 5, 1998, all of the Wizja TV
programming, other than Wizja 1 and the HBO Poland service, a Polish-language
premium movie channel owned in part by Home Box Office, became part of the
"basic package."
INTERMEDIATE PACKAGE. The "intermediate package" includes approximately 17
to 24 channels. This package is offered for monthly fees equal to approximately
one-half of the amount charged for the "basic package." The "intermediate
package" is designed to compete with small cable operators on a basis of price,
using a limited programming offering. The Company's "intermediate package"
offerings vary by location.
5
BROADCAST PACKAGE. The "broadcast package" includes 6 to 12 broadcast
channels with clear reception for monthly fees, which are substantially less
than the amounts charged for the "intermediate package."
PREMIUM AND OTHER SERVICES. For an additional monthly charge, certain of
the Company's cable networks currently offer three premium television
services--Wizja 1, the HBO Poland service (a Polish-language premium movie
channel owned in part by Home Box Office) and Canal+ Polska--to customers on a
monthly basis. For 1998, the Company experienced churn in premium services with
penetration falling by 8,464 subscribers or 18.8% from 1997. The Company is
planning to encrypt the HBO service on cable and install analog decoders for all
premium channel subscribers during 1999. The Company plans to create additional
premium channels that will also be offered to cable customers for an additional
charge.
Other optional services include additional outlets and stereo service, which
enables a subscriber to receive 12 or more radio channels in stereo. Cable
television subscribers who require the use of a tuner to receive certain of the
Company's cable services are charged an additional fee of approximately $1.10
per month. Installation fees vary according to the type of connection required
by a cable television subscriber. The standard initial installation fee is
approximately $21 for buildings with multiple apartments and approximately $42
for single family dwellings, but such fees may be subject to reductions as a
result of promotional campaigns.
PRICING STRATEGY. Prior to December 1996, the Company's cable television
pricing strategy was designed to keep its profit margin relatively constant in
U.S. dollar terms in more mature systems and to increase rates in more recently
acquired or rebuilt systems. The Company has historically experienced annual
churn rates of less than 10%, and has been able to pass on the effects of
inflation through price increases. In 1997, the churn rate increased to 12.2%,
though it would have been 9.8% had the Company not disconnected approximately
17,000 non-paying subscribers in one of its rebuilt networks. For the year ended
December 31, 1998, the Company's churn rate was 15.25% due primarily to the
implementation of its current pricing strategy. This pricing strategy commenced
in January 1997 and is designed to increase revenue per subscriber and to
achieve real profit margin increases in U.S. dollar terms. 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 service to nonpaying customers and is
designed to reduce non-authorized use of its cable systems. The Company does not
consider bad debt to be material to its operations. The Company's bad debts
expense has historically averaged approximately 1.3% of revenue.
SALES AND MARKETING
The Company's sales and marketing process is divided into four parts:
- operating area development;
- new market sales;
- remarketing sales; and
- customer service.
OPERATING AREA DEVELOPMENT. The operating area development process in
Poland is very different from that in Western cable television markets, because
a Polish cable operator's geographic build is dependent on reaching agreements
with individual cooperative authorities rather than upon the issuance
6
of an operating area development permit for a region by the government. The
cooperative authorities make decisions on behalf of the residents, including
decisions as to the carriers of cable television. The Company's operating area
development process begins with targeting a multiple apartment complex, is
followed by negotiations with the relevant cooperative authority, and ultimately
involves reaching an agreement with the cooperative authority to allow
construction and installation of the cable television network. The Company's
strategy is to identify those geographic areas and apartment complexes with the
most favorable demographic characteristics, highest population densities and
lowest levels of competition from other cable operators.
NEW MARKET SALES. After an agreement with a cooperative authority has been
reached and construction of the cable network infrastructure has been completed,
the Company focuses its efforts on direct, door-to-door sales to individual
households. While the Company utilizes advertising in a variety of media
(including television, radio, newspapers, magazines, cooperative and association
publications, billboards, bus shelter posters and taxi placards) to build
general awareness and recognition of the advantages of its cable television
services, direct sales is the primary focus of the Company's marketing efforts.
The distribution of promotional materials (via direct mail, leaflets and door
hangers) begins several days in advance of the arrival of the Company's sales
force. The materials provide for telephone and mail response, but are designed
so that the potential customer expects a direct sales visit. The Company's sales
force consists of native Poles who are trained in professional sales skills,
personal interaction, product knowledge and appearance. All sales persons are
compensated by direct sales commissions and incentive bonuses. Such employees
are hired, trained and managed by Company managers whose incentive compensation
is tied directly to sales results. New market sales tend to be highly seasonal,
with the fourth calendar quarter being the most active sales period.
REMARKETING SALES. After new areas have been marketed, Company remarketing
efforts focus on attracting new subscribers and selling additional products and
services, such as premium channels and stereo services, to existing subscribers.
Direct door-to-door remarketing sales are enhanced through advertising on the
Company's proprietary channels, bill inserts, door hangers, coupons, prizes and
contests, as well as advertising in other media accessible to the general
public. Company-wide remarketing campaigns are conducted quarterly and seasonal
promotions coincide with holidays and cultural events. Sales people are entitled
to additional incentive commissions for remarketing sales.
CUSTOMER SERVICE. By implementing a Western-style customer care program
that includes such features as courteous customer service representatives,
prompt responses to service calls and overall reliability, the Company has
introduced a quality of service generally not found in Polish consumer markets.
The Company generally guarantees service within 24 hours of a subscriber
request. The Company has established a customer service facility within the call
center for both the cable and D-DTH businesses. The call center provides
telemarketing and sales and service support and includes a specialized billing
software with on-line real time access to customer accounts, designed to provide
better access to customer information and improve customer service. The call
center is operational for cable customers in the Katowice regional cluster and
for all D-DTH customers and is expected to be operational for all cable
customers by the end of 1999.
The Company believes that its customer care program gives it a distinct
competitive advantage over other cable providers in the Polish market, has
contributed to the Company's low churn rate and has been a primary motivation
for consumers to select the Company as their cable television provider when
provided with a choice.
TECHNOLOGY AND INFRASTRUCTURE
The Company believes the fiber-optic cable television networks that it has
constructed, which serve approximately 67% of its subscribers, are among the
most technologically advanced in Poland and are comparable to modern cable
television networks in the U.S. All of the Company's networks that have been
constructed by the Company have bandwidths of at least 550 MHz, with one network
as high as 1 GHz.
7
New portions of the networks, which are currently being constructed, are being
designed to have minimum bandwidths of 860 MHz. The Company's goal is to upgrade
any portions of its cable television networks that have bandwidths below 550 MHz
(generally acquired from other entities) to at least 860 MHz in an effort to
reduce the number of 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's cable television networks, in most cases, use a combination of
fiber optic and coaxial cables in groups of 2,000 homes. The Company uses a
"switched-star" configuration for its cable television networks by installing a
discreet drop cable which runs from a secure lockbox to each home (as opposed to
a loop system which feeds multiple homes from a single cable), allowing the
Company to more efficiently disconnect non-paying customers, add or remove
service options to individual homes and audit its systems to detect theft of
signal. Where required, high-quality tuners are used in cable television
subscriber homes. The Company intends to introduce set-top decoders for all
premium channel subscribers during 1999, allowing premium signals to be
encrypted for increased security.
The Company's cable television networks were constructed with the
flexibility and capacity to be cost-effectively reconfigured. These networks
could be reconfigured to offer an array of interactive and integrated
entertainment, telecommunications and information services, including combined
telephone and cable television services and digital data transmission, if the
Company decides to pursue such ancillary sources of revenue in the future. The
Company's systems provide excess channel capacity and are designed to maximize
reliability. Most of the Company's cable networks currently have the ability to
carry 40 to 60 television channels. The Company operates its systems at
approximately 49% to 69% of channel/ bandwidth capacity. Two-way capability can
be added to most of the Company's networks at limited cost to provide
addressable and interactive services in the future. The cable television
networks constructed by the Company meet or exceed the technical standards
established by Polish regulatory authorities, and the Company's policy is to
upgrade as rapidly as possible substandard cable television networks obtained in
acquisitions. The Company is considering teaming arrangements with certain
Western telecommunication companies in order to create one or more consortia to
bid on regional telephone licenses, utilizing excess capacity from the Company's
cable 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 TPSA and other utilities for new conduits in certain areas. These
agreements represent a major advantage to the Company since they permit the
Company to minimize the costly and time-consuming process of building new
conduit infrastructure where TPSA conduit infrastructure exists and provide for
joint construction with TPSA and other utilities of conduit infrastructure where
none currently exists. As of December 31, 1998, approximately 56.5% 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
permit termination by TPSA without penalty at any time either immediately upon
the occurrence of certain conditions or upon provision of three to six months'
notice without cause.
Generally speaking, TPSA may terminate a conduit agreement immediately (and
without penalty) if:
- the Company does not have a valid permit from the Polish State Agency of
Radio Communications authorizing the construction and operation of a cable
television network in a specified geographic area covering the subscribers
to which the conduit delivers the signal;
- the Company's cable network serviced by the conduit does not meet the
technical specifications required by the Polish Communications Act of
1990;
- the Company does not have a contract with the cooperative authority
allowing for the installation of the cable network; or
8
- the Company does not pay the rent required under the conduit agreement.
As of December 31, 1998, TPSA was legally entitled to terminate conduit
agreements covering approximately 74,000 or 8% of the Company's subscribers.
The Company estimates that at the end of December 1998 it had over 4,378
kilometers of cable television plant constructed and that the fiber-optic
backbone of its networks was substantially complete. The Company expects that
its future capital expenditures for the cable business will consist primarily of
capital needed for the incremental addition of new buildings with multiple
apartment units and cable television subscribers to its existing networks for
building or rebuilding associated with the acquisition of new cable television
systems, and for other capital costs in connection with such acquisitions. From
its existing infrastructure base, the Company's incremental build cost to add an
adjacent apartment building or additional subscribers in buildings with multiple
apartments to existing apartment networks averages approximately $200 per
subscriber (subscribers in apartment buildings represent more than 96% of the
Company's total subscribers). The Company believes that several primary factors
contribute to its favorable cost structure. The significant density of homes per
kilometer of cable plant in the Company's core markets and the Company's conduit
agreements substantially reduce its build costs. Moreover, the Company believes
that the size of its construction program allows it to negotiate attractive
construction labor contracts and discounts on materials.
9
D-DTH
The Company has expanded its distribution capacity with the launch of its
D-DTH broadcasting service for Poland, targeted at homes that are not
subscribers to the Company's cable service. The programming provided is the
Company's Wizja TV programming package. 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. As of December 31, 1998, the Company had sold to Philips'
authorized retailers approximately 125,000 D-DTH packages, which include the
rental of the D-DTH reception system, installation and a one-year subscription
to the Company's D-DTH service. As of December 31, 1998, Philips had sold and
installed approximately 95,400 of these packages to consumers.
D-DTH ROLL OUT STRATEGY
The Company's D-DTH roll out strategy is to lease D-DTH reception systems to
up to 500,000 targeted initial subscribers. The Company will make D-DTH
reception systems available to the first 380,000 subscribers at a promotional
price. This strategy is designed to achieve high penetration of the Polish
market. The launch of the D-DTH service is supported by the Company's
development of Wizja TV, which the Company believes, responds to the demand for
high-quality Polish-language programming in Poland.
The Company broadcasts digital programming from its Maidstone facility
through its satellite transmission facilities to one of three transponders
leased by it on the Astra 1E and 1F satellites. These satellites then retransmit
the signals to the D-DTH reception systems of the Polish subscribers and to the
Company's cable networks. In the future, the Company will also transmit the
signals to other Polish cable operators, if any, having distribution agreements
with the Company.
D-DTH SERVICES AND FEES
The Company began broadcasting to Poland from its transmission facilities in
Maidstone, U.K. and retransmitting Wizja TV across its cable networks on June 5,
1998, and on its D-DTH system on a limited basis on July 1, 1998, and on a
full-scale basis on September 18, 1998.
The Company expects to be able to offer event pay per view service to its
D-DTH subscribers by late 1999. The Company also expects to offer certain
recently released feature films and sports and other live events on such a
service.
The Company expects that its D-DTH services will also include an electronic
programming guide, an interactive service which will allow the Company to
communicate with subscribers with respect to movie, sports event and channel
promotions and subscriptions. In addition, this guide will be linked to the
Company's subscriber magazine, "Twoja Wizja," which is described in the
"Programming" section that follows. The digital nature of the Company's D-DTH
signals will also allow the Company to offer stereo audio channels to its
subscribers in the future. The Company believes that in the future it will be
able to provide its D-DTH customers with additional value-added services, should
the Company decide to pursue such ancillary sources of revenue in the future.
The Company currently charges its D-DTH subscribers an up-front fee of
approximately $135 plus applicable taxes. This fee includes the D-DTH reception
system rental, installation, and a one-year's subscription for all channels
(other than any premium channels). Subscribers to the Company's premium channels
pay $5 per month for the HBO Poland service and $1 per month for Wizja 1. After
the first year of service, subscribers will be required to pay a fee in advance
for the service plus separate amounts to receive premium channels.
SALES AND MARKETING
To promote the launch of Wizja TV on its D-DTH system, the Company has
substantially completed a $20 million nationwide marketing campaign, which the
Company believes is the largest single-year product
10
launch expenditure to date in Poland. The marketing campaign primarily utilizes
terrestrial television, press, radio and outdoor poster sites. The Company's
paid advertising spots began on September 1, 1998 and the Company launched its
D-DTH service on a full-scale basis on September 18, 1998, with an aim to
establishing a base of approximately 500,000 targeted initial subscribers. The
Company believes that it will be able to draw upon its extensive internal
experience in the Polish cable television business to support the introduction,
development and marketing of its D-DTH service.
Philips has agreed to supply the Company with D-DTH reception systems for up
to 500,000 initial subscribers to the Company's D-DTH service. Philips has also
agreed to distribute, install and service the Company's D-DTH reception systems
through more than 1,200 Philips authorized electronics retailers located
throughout Poland. Philips has operated in Poland since 1991 and has experience
introducing new products to the Polish market through its extensive retail
network. In addition, Philips has supplied an end-to-end product package for
MEASAT's D-DTH service in Malaysia, utilizing CryptoWorks-Registered Trademark-
technology similar to that used in the Company's D-DTH service.
The Company has designed a customer service program, which is intended to
produce a high level of customer satisfaction and to minimize churn rates. As
part of this strategy, the Company has established a customer service facility
within the call center for both its cable and D-DTH businesses. The call center
provides telemarketing and sales and service support and includes specialized
billing software with on-line real time access to all D-DTH customer accounts,
designed to provide better access to customer information and to improve
customer service. The Company believes the call center will allow it to offer a
high level of customer service at relatively low cost to its D-DTH subscribers.
The Company's D-DTH service targets homes that are not subscribers to its
cable television service. The Company does not believe that there is much
incentive for the Company's existing cable subscribers to switch from the
Company's cable service to its D-DTH service, because with their cable service
they are able to enjoy equally good signal quality, access to the same Wizja TV
programming, and more total channels than the Company's D-DTH service offers, at
a monthly cost that will, in most cases, be comparable to that of the Company's
D-DTH service and without the need for investing any funds for installation of
D-DTH reception systems. However, the Company will be disadvantaged to the
extent that any existing cable subscribers switch to the D-DTH service,
particularly if they are subscribers who will receive D-DTH reception systems at
the promotional prices the Company is now charging, and they do not
substantially increase the amount of their monthly fees payable to the Company.
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 the 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 for the local market ("localization") of the
Company's proprietary programs on Wizja TV undertaken by the Company will occur
in Poland. Localization principally consists of adding voices or dubbing into
Polish for the Company's proprietary channels on Wizja TV. 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 a 5-year contract with British Telecommunications plc ("BT")
for the provision and maintenance of uplink equipment at Maidstone. Other than
the BT uplink equipment, the Company owns
11
all the required broadcasting equipment at its facility in Maidstone. The
Company's Wizja TV programming is currently transmitted to the Company's
transponders on Astra satellites 1E and 1F.
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.
Philips will initially provide the following critical components and
services used in the Company's D-DTH satellite transmission system and will be
the primary point of contact for subscribers to the Company's D-DTH service:
- the Philips' digital integrated receiver decoders;
- a smartcard-based proprietary conditional access system which uses Philips
CryptoWork-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 will be 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 will terminate when the Company has purchased 500,000
D-DTH reception systems from Philips, unless terminated earlier in
accordance with the terms of the agreement or extended by mutual consent
of Philips and the Company.
- Philips will not be able to distribute any other IRDs under the Philips'
trademark in Poland until December 31, 1999 or any earlier date on which
the Company has secured 500,000 initial subscribers to its D-DTH service
in Poland. After such period the Company may license one or two suppliers
of IRDs in addition to Philips and Philips shall license its
CryptoWorks-Registered Trademark- technology to such additional suppliers
for the Polish market. However, there can be no assurance that the Company
will be able to secure such additional suppliers, if necessary.
Any new D-DTH broadcaster wishing to commence the operation of an encrypted
pay television service within Poland would need to obtain a license from Philips
to use CryptoWorks-Registered Trademark- (after the exclusive license of
CryptoWorks-Registered Trademark- for Poland granted to the Company ends), or
acquire an alternative encryption and conditional access technology and build
its own decoder base capable of receiving transmissions encrypted using such
technology. If a competitor obtained a license from Philips, it could contract
with the Company for access to the installed encryption decoder base utilized by
the Company.
Transmissions using conditional access technology are encrypted prior to
being transmitted to satellites. The signal from the satellite is received by a
subscriber through an antenna and integrated receiver decoder, and is decrypted
via a smartcard inserted into a decoder, which is usually integrated with a
receiver into the integrated receiver decoder and connected to a viewer's
television set. A smartcard is a plastic card, usually the size of a credit
card, carrying an embedded computer chip that implements the secure management
and delivery of decryption keys necessary to descramble pay television channels
and thereby enable and disable viewing according to whether the subscriber is
authorized to receive a particular service. The smartcard receives instructions
as to whether to enable, disable, upgrade or downgrade a subscriber's level of
service via the datastream sent to the decoder within the broadcast
12
signal. The encryption codes contained in the smartcards can be updated via
over-the-air addressing or physically replaced.
The delivery of subscription programming requires the use of encryption
technology to prevent signal theft or "piracy." Historically, piracy in the
cable television and European analog direct-to-home industries has been widely
reported. To the Company's knowledge, there has not been a breach of
CryptoWorks-Registered Trademark- since its introduction in Malaysia in 1996. To
the extent a breach occurs, however, the Company will take countermeasures,
including over-the-air measures, and if necessary the replacement of smartcards.
Although the Company expects its conditional access system, subscriber
management system and smartcard system to adequately prevent unauthorized access
to programming, there can be no assurance that the encryption technology to be
utilized in connection with the Company's D-DTH system will remain effective.
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 a transponder on an orbiting satellite
transponder to the cable system receiving antennae and also to D-DTH
subscribers' reception equipment throughout Poland. The Company has been
studying and discussing with relevant Polish authorities the feasibility of
locating its uplink and production facilities in Poland and applying for Polish
broadcasting licenses necessary to engage in such activities.
In March 1997, the Company entered into contracts with Societe Europeenne
des Satellites S.A. ("SES") for the lease of three transponders on two
satellites, Astra 1E and 1F. The leases for the one transponder on the Astra 1E
satellite and two transponders on the Astra 1F satellite will expire in 2007.
All three transponders are currently operational and available to the Company.
Aggregate charges for each transponder are capped at $6.75 million per year for
each transponder and approximately $182 million for all three transponders for
the remaining term of the contracts remaining after December 31, 1998. The
Company's transponder leases provide that the Company's rights are subject to
termination in the event that SES's franchise is withdrawn by the Luxembourg
Government.
The Company has been designated a "non-pre-emptible customer" under each of
its relevant transponder leases. As a result, in the event of satellite or
transponder malfunction, the Company's use of its transponders cannot be
suspended or terminated by a broadcaster which has pre-emption rights permitting
it to gain access to additional transponders in preference to certain other
Astra customers. The Company 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.
While the Company has sufficient channel capacity to broadcast its D-DTH
service and to add approximately 10 additional channels to its initial Wizja TV
channel line-up on the three transponders to which it currently has access, the
Company's ability to add channels to its D-DTH programming platform beyond that
point will depend upon its ability to obtain access to additional transponder
capacity on the Astra satellites or other favorably positioned satellites or an
improvement in the digital compression techniques. Due to the high cost of
insurance policies relating to satellite operations, the Company does not insure
against possible interruption of access to the transponders leased by it for
satellite transmission of its programming platform.
13
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. The Company also expects to
distribute Wizja TV on a wholesale basis to other cable operators in Poland.
The Polish television industry, like those in many emerging markets,
currently relies primarily on programming from foreign sources (translated or
dubbed into Polish) and limited local broadcasting alternatives.
PROGRAMMING STRATEGY
The Company's programming strategy is focused on the development and
acquisition of high-quality Polish-language programming. Its programming
strategy is based upon four elements.
ESTABLISH AND EXPAND PROGRAMMING PACKAGE. Wizja TV's current channel
line-up includes four channels, Atomic TV, Wizja1, Wizja Pogoda, and Twoja
Wizja, that are owned and operated by the Company and 15 channels that are
produced by third parties, 9 of which are broadcast under exclusive agreements
for pay television in Poland. The Company expects to expand Wizja TV's initial
channel line-up to include additional basic and premium channels, and eventually
to introduce tiered packages containing a variety of combinations of 21 or more
channels.
CONTROL CONTENT. The Company believes that the programming on Wizja TV will
provide it with a significant advantage over competitors, and therefore the
Company's strategy is to secure exclusive rights to as much high-quality
Polish-language programming as is commercially feasible. The Company has secured
certain exclusive Polish pay television rights to channels and events covering
what it believes are the most important programming genres to viewers in the
Polish market, including movies, sports, children's programming, documentaries
and music. The Company intends to continue to use exclusive agreements, where
practicable, in expanding the programming available on Wizja TV.
USE PROGRAMMING TO DRIVE DISTRIBUTION. The Company intends to use its
programming to increase penetration of its cable television business. Wizja TV
is intended to be the primary selling point of the Company's D-DTH service. The
Company believes that its programming will be a significant factor in increasing
the penetration of its cable and D-DTH systems and in increasing per-subscriber
revenue from its cable networks.
DEVELOP AND EXPAND PROPRIETARY CHANNELS. The Company intends to develop and
expand its sports programming through Wizja Sport. In addition, to developing
additional proprietary programming, the Company has entered into and intends to
enter into joint ventures and other similar arrangements with other programming
companies.
WIZJA TV PROGRAMMING PACKAGE
The Company has also entered into long-term exclusive agreements to
broadcast to Poland live coverage of certain sports events, including the
following:
- certain of the Polish national soccer team's games;
- certain European matches of Lech Poznan, a Polish Premier League soccer
team;
14
- European soccer matches, including matches from the Dutch and Portuguese
leagues;
- Polish Speedway League events;
- Speedway Grand Prix World Championships;
- International Skating Union Champion Series ice skating;
- games of three leading teams in the Polish Premier Hockey League; and
- certain boxing events including local Polish boxing.
These events have been initially carried on Wizja 1 or Twoja Wizja, and they
will be carried on Wizja Sport when it is established. When established, Wizja
Sport will initially provide approximately 12 hours of local and international
sporting events 7 days a week. The Company believes that Wizja Sport will be the
first channel in the Polish market principally dedicated to Polish sports
programming. Wizja Sport is expected to be launched by late 1999. The Company's
ability to broadcast certain of these sporting events on an exclusive basis may
be limited by pending regulatory changes.
Several of the sports rights contracts give 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 9 of the current 19 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 of subscribers, and some require
payments at the time of execution. On December 31, 1998, the Company was
committed to pay approximately $214.3 million in guaranteed minimum payments
over the next seven years in respect of broadcasting and programming agreements,
of which approximately $37.2 million was committed through the end of 1999. In
addition, 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 of Wizja TV. In
most of its programming agreements, the Company is required to make payments to
the channel supplier on a monthly basis based on the number of subscribers to
whom the programming is made available.
In 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;
15
- 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.
As opportunities permit, the Company intends to expand the channel offerings
on Wizja TV. The Company is considering adding more thematic channels to its
programming package. These channels may be based on themes such as sports,
movies, news, weather, lifestyle, gameshows or children's programming. The
Company expects it will own and develop certain of these additional thematic
channels.
PROPRIETARY PROGRAMMING
Wizja TV contains four channels, Atomic TV, Wizja 1, Wizja Pogoda and Twoja
Wizja, that are owned and operated by the Company. The Company intends to create
additional proprietary channels, including Wizja Sport, to be added to the Wizja
TV line-up. In addition, the Company has established and intends to continue to
establish entities to engage in the production of programming either to be
included on the Company's proprietary channels, or to be licensed to the Company
for distribution as part of the Wizja TV line-up.
The Company has established entities to engage in the development and
production of Polish-language thematic television channels. Those entities plan
to develop programming designed to drive subscriber growth on the Company's
cable television networks and on its D-DTH system and increase revenue per cable
subscriber. In December 1996, the Company acquired 45% of Ground Zero Media
Sp. z o.o. ("GZM"), a joint venture with Polygram, the recording company, Atomic
Entertainment LLC, and Planet 24 Productions Limited, an independent production
company. In February and March 1998, the Company acquired the remaining 55%
interest in GZM from the GZM stockholders. GZM's only business is the
development and production of Atomic TV, a Polish-language music television
channel aimed at the 14-29 year old audience. Atomic TV began to be broadcast
via satellite on April 7, 1997 across the cable systems of the Company and other
cable operators. Atomic TV is currently distributed to more than 900,000 cable
subcribers, and the Company believes that based on distribution it is the
leading cable television channel in the Polish market.
In addition, the Company is developing Wizja 1 as the primary channel for
entertainment, Wizja Pogoda as the weather channel, and Twoja Wizja as the
programming directory channel, and intends to develop Wizja Sport as the sports
channel for its programming platform. Wizja 1 offers a wide range of
Polish-language programming, including full-length feature films, music,
lifestyle and childrens' programs, and sports events. A description of the
Company's sports programming is set forth in "Business-- Programming--The Wizja
TV Programming Package."
16
The Company has entered into additional program license agreements for
high-quality programming for exhibition on Wizja 1. These agreements are with
leading international film production companies, including Channel 4
International, Minotaur, Capitol, Eaton, Itel, IMP, and BBC Worldwide for
exclusive first run pay television rights in Poland to films, mini-series and
documentaries. The Company is also acquiring local Polish programming and is in
negotiations to purchase rights for other high-quality programming. It is also
investing in new Polish productions.
In November 1997, the Company purchased 50% of WPTS Sp. z o.o. ("Twoj
Styl"), a Polish company producing, among others, the leading Polish lifestyle
magazine, for the purpose of producing Polish lifestyle programming. The Company
believes that the combination of its television expertise and Twoj Styl's
publishing experience will result in the production of high quality lifestyle
television programming, targeting primarily female audiences.
In February 1998, the Company purchased, for approximately $500,000, an
option to buy a 50% plus one share interest in "Polonia" Sportowa S.A., a soccer
club in Poland. The purchase option expired in February 1999 and the Company has
no intention of extending this option.
As opportunities arise in the rapidly developing pay television market in
Poland, the Company intends to consider adding more thematic channels to its
programming package. In particular, the Company currently intends to create
additional thematic channels, such as sports, movies, news, weather, lifestyle,
gameshows and childrens' programming. Thematic channels permit subscribers to
choose easily the theme of the programming to be viewed at any particular time.
The Company will use Wizja 1 as an anchor channel to introduce entertainment and
sports programming to the Polish market. Concepts that are well received may
become the basis for new channels. For example, Atomic TV, which debuted on a
proprietary cable channel in the spring of 1996, generated substantial cable
television viewer and advertising interest, and was offered as a separate
channel in April 1997.
In certain instances, the Company has acquired equity interests in
programming produced by third parties and included on Wizja TV. Such an equity
investment allows the Company access to the programming in exchange for the
Company sharing the costs incurred in the creation of the Polish-language
version of the programming. For example, the Company purchased an equity
interest in Fox Kids Poland, a children's entertainment channel aimed at an
audience in the 4 to 12 age group. The Company expects to continue this
practice, and intends to acquire equity interests in a number of programming
providers in order to secure additional proprietary programming.
PREMIUM TELEVISION CHANNELS. The Company has introduced its own premium
channel as well as premium channels supplied by third parties. On July 1, 1998,
the Company introduced Wizja 1 as a premium channel. The Company has also
introduced a Polish-language version of premium movie channels to its cable
subscribers for an additional monthly fee. Currently, two 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 its cable networks since
entering into a preliminary distribution agreement with Canal+ in October 1995.
The Company currently has approximately 7,800 subscribers to the Canal+ service.
The Company has signed agreements for the exclusive distribution on its
D-DTH system, and non-exclusive distribution across its cable networks, for the
HBO Poland service, a Polish-language 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 HBO Poland service was launched on the Company's cable network in
September 1996. To date, the service has generated significant subscriber
interest. On December 31, 1998, the service had achieved a penetration rate of
5.2% across the Company's cable networks. The Company began distribution of the
HBO Poland service in Warsaw in April and in Gdansk and Krakow in May 1997, and
rolled out this service to most of the Company's remaining cable systems by the
end of 1997. The HBO Poland service
17
was launched on the Company's D-DTH system in July 1998 and on December 31, 1998
the service had experienced a churn rate of 20.5% for non-promotional
subscribers of the Company's D-DTH system.
ADVERTISING
The Company expects to attract significant advertising to its channels as
part of the Polish television advertising market, which the Company believes is
still relatively underdeveloped, with television advertising expenditures on a
per capita basis being lower than in comparable European markets. According to
the TV International Sourcebook, the current size of the Polish television
advertising market was approximately $795 million in 1995. The Company believes
that this market is dominated by TVP and Polsat. The Company expects that its
channels will provide advertisers new and better targeted outlets in Polish
television. In particular, the Company believes that its channels will be
attractive to advertisers because of the relatively affluent demographic profile
of the Company's anticipated subscribers, the focus of the Company on large,
high economic growth areas, and the opportunity to target viewers of particular
thematic channels with advertisements for goods and services. Furthermore, the
Company's channels will give advertisers local customer access that cannot
easily be replicated through any other advertising media. In the majority of the
programming agreements, the Company is entitled to at least a 50% share of the
net advertising revenue generated in connection with the particular channel, and
the channel supplier is required to contribute to the cost of marketing its
channel in Poland. The Company is responsible for selling the advertising for
most of the channels. This arrangement will enable the Company to market a
package of channels to advertisers in the Polish market and offer them a
selection of advertising opportunities for different market segments. In most of
the agreements with the channel suppliers, the Company has the right to include
on that particular channel, for at least one minute per hour, segments promoting
the Wizja TV platform and the other Wizja TV channels. This will enable the
Company to implement a comprehensive promotional strategy reinforcing the Wizja
TV brand. In addition, the Company will produce and mail to its subscribers a
monthly subscriber magazine, announcing channel line-ups, programming schedules
and special events, and providing further opportunities for promoting Wizja TV
and for obtaining revenues from commercial advertisers.
In October 1998, the Company established At Media Sp. z o.o. in Poland, a
wholly owned subsidiary, to develop advertising opportunities for the Wizja TV
programming package. At Media, currently offers commercial airtime on 12 of the
Company's 19 channels on Wizja TV to major advertising agencies and advertisers
in the Polish market. At Media also offers advertising spots in its listing
magazine "Twoja Wizja". At Media is also in the process of developing a database
of Wizja TV subscribers, which is being marketed to major advertisers and
advertising agencies.
COMPETITION
The multi-channel pay television industry in Poland has been, and is
expected to remain, highly competitive. 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 depends upon,
among other things, the price, variety and quality of programming offered by pay
television services and the popularity of television itself.
18
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
greater experience in the cable television industry and have significantly
greater resources (including financial resources and access to international
programming sources) than the Company. The largest competitors of the Company in
Poland include Bresnan Communications, which owns at least three cable systems
(including Aster City Cable Sp. z o.o.) and Multimedia Polska S.A., a Polish
entity. In addition, the Company understands that a number of cable operators in
Poland (led by Bresnan Communications) have formed, or are in the process of
forming, a consortium for the joint creation and production of Polish-language
programming.
The Company's cable television business also competes with companies
employing other methods of delivering television signals to the subscribers,
such as terrestrial broadcast television signals and 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 will compete with traditional cable
systems, including its own, and terrestrial broadcast and analog direct-to-home
("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, in conjunction
with other Polish broadcasting entities such as Polsat S.A. (a Polish private
broadcaster), Telewizja Polska S.A. (the Polish national public broadcaster),
Polskie Media S.A. (a Polish regional broadcaster) and Aster City Cable (a
Warsaw-based cable television operator owned by Bresnan), launched a
multi-channel D-DTH service in Poland in November 1998 under the name Cyfra+.
The Company cannot predict whether other European or Polish broadcasters,
such as BSkyB, Bertelsmann, Kirch or Polsat, will choose to enter the Polish
D-DTH market. 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 have significantly 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. If the Company is precluded from creating or obtaining programming
due to exclusive agreements entered into between programming creators and the
Company's competitors, the Company will face difficulty in creating or acquiring
sufficient high-quality programming to attract and retain subscribers and
commercial advertising customers for its cable and D-DTH services. If the
Company cannot negotiate exclusive agreements with suppliers of its programming
or these agreements become unenforceable, the Company will not be able to
preclude its competitors from obtaining access to such programming. If the
Company's competitors have access to the same programming as the Company, the
Company's programming line-up will be less unique and less attractive to
subscribers.
19
TRADEMARKS
The Company, either itself or through its subsidiaries, has filed or is in
the process of filing for registration of its various trademarks. The PTK logo
was registered for use in connection with television and programming services in
July 1997. Trademark applications are pending in Poland for other variations of
PTK trademarks. Also, numerous trademark applications have been filed in Poland
for the various Wizja trademarks, including but not limited to Atomic TV, Wizja,
Wizja TV and Wizja 1 logos. Additional applications for other Wizja trademarks
and related trademarks will be filed in Poland in the near future.
EMPLOYEES
At December 31, 1998, the Company had approximately 1,385 permanent
full-time employees and approximately 49 part-time employees. In addition, as of
that date the Company employed approximately 91 salesmen who received both
commissions and a nominal salary, and from time to time the Company employs
additional salesmen on an as needed, commission only basis. In connection with
the establishment of its D-DTH business and the development of its programming
business, the Company expects to hire a further 56 employees by the end of 1999,
the majority of whom will be administrative, post-production and technical
personnel located at the Company's facility in the U.K. and customer service
representatives in the call center in Poland. The Company expects that certain
functions, such as satellite transmission and receiving and program production,
will be performed by employees of third parties pursuant to medium-and long-term
service agreements with the Company. None of the Company's employees are
unionized. The Company believes that its relations with its employees are good.
20
REGULATION
The Company is subject to regulation in Poland, the U.K. and the European
Union
POLAND
GENERAL
The operation of cable and digital satellite direct-to-home broadcasting
("D-DTH") television systems in Poland is regulated under the Polish
Communications Act of 1990 (the "Communications Act") and the Polish Radio and
Television Act of 1992 (the "Television Act"). These are administered by:
- The Polish Minister of Communications;
- The Polish State Agency of Radio Communications ("PAR");
- The Polish National Radio and Television Council (the "Council"); and
Cable television operators in Poland are required to obtain permits from PAR
to install and operate cable television systems and must register certain
programming that they transmit over their networks with the Council.
In contrast to cable television regulatory schemes in the U.S. and in
certain other Western nations, neither the Minister of Communications nor PAR
currently has the authority to regulate the rates charged by operators of cable
television and D-DTH services. However, excessive rates could be challenged by
the Polish Anti-Monopoly Office should they be deemed to constitute monopolistic
or other anti-competitive practices. Cable television and D-DTH operators in
Poland also are subject to the Law on Copyright and Neighboring Rights of 1994
(the "Copyright Act") which provides intellectual property rights protection to
authors and producers of programming. Under the terms of the Television Act,
broadcasters in Poland are regulated by, and must obtain a broadcasting license
from the Council.
Because the Company's D-DTH service was the first D-DTH service available in
Poland, there are likely to be issues of first impression not currently
addressed under Polish law with respect to certain aspects of its D-DTH business
and related programming arrangements. In addition, the Polish D-DTH market is
subject to a developing regulatory framework that may change as the market
develops. Such regulatory changes could have a material adverse effect on the
Company's business, financial condition and results of operations.
COMMUNICATIONS ACT
PERMITS. The Communications Act and the required permits issued by PAR set
forth the terms and conditions for providing cable television services,
including:
- the terms of the permits;
- the area covered by the permits;
- technological requirements for cable television networks; and
- restrictions on ownership of cable television operators.
If a cable operator breaches the terms of its permits or the provisions of
the Communications Act, or if such operator fails to acquire permits covering
areas serviced by its networks, PAR can impose penalties on such operator,
including:
- fines;
- the revocation of all permits covering the cable networks where such
breach occurred; or
- the forfeiture of the cable operator's cable networks.
21
In addition, the Communications Act provides that PAR may not grant a new
permit to, or renew an expiring permit held by, any applicant that has had, or
that is controlled by an entity that has had, a permit revoked within the
previous five years.
FOREIGN OWNERSHIP RESTRICTIONS. The Communications Act and applicable
Polish regulatory restrictions provide that permits may only be issued to and
held by Polish citizens, or companies in which foreign persons hold no more than
49% of the share capital, ownership interests and voting rights. In addition, a
majority of the management and supervisory board of any cable television
operator holding permits must be comprised of Polish citizens residing in
Poland. These restrictions do not apply to any permits issued prior to July 7,
1995.
THE COMPANY'S PERMITS AND NEW CORPORATE ORGANIZATIONAL STRUCTURE. Prior to
the creation of PAR and the permit system, one of the Company's subsidiaries,
Polska Telewizja Kablowa S.A. ("PTK S.A."), received a license to operate cable
television systems in Warsaw, Krakow and the areas surrounding these cities
under the Polish Foreign Commercial Activity Act.
To comply with the foreign ownership requirements discussed above the
Company created a new entity, Polska Telewizja Kablowa Operator Sp. z o.o. ("PTK
Operator"), which does and will operate the Company's new or existing cable
networks whose permits are subject to the foreign ownership restrictions
discussed above. The Company's operating subsidiary Poland Communications Inc.
("PCI") will hold a 49% ownership stake in PTK Operator while the remaining 51%
will be held by a Polish entity. PCI will, in turn, hold 49% of the Polish
entity, and the remaining 51% interest in the Polish entity is expected to be
owned in part by a Polish financial company. The Company believes that this
ownership and operating structure complies with the requirements of Polish law.
PAR has granted several 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 106
permits from PAR, covering approximately 674,200 of the Company's approximately
738,400 basic and intermediate subscribers at December 31, 1998, including
approximately 11,701 subscribers for whom the Company's permits are deemed
extended under Polish law pending PAR's response to the Company's permit renewal
applications. However, certain subsidiaries of the Company do not have valid
permits covering certain of the areas in which it operates cable networks. Of
the approximately 64,200 basic and intermediate subscribers at December 31, 1998
located in areas for which subsidiaries of the Company do not currently have
valid permits, approximately 78% are located in areas serviced by recently
acquired or constructed cable networks for which permit applications cannot be
made until all permit requirements are satisfied (including obtaining agreements
with cooperative authorities and the upgrade of the acquired network to meet
technical standards where necessary and satisfying foreign ownership
limitations), and approximately 22% are located in areas serviced by networks
for which subsidiaries of the Company have permit applications pending. These
subsidiaries of the Company have 9 permit applications pending. There can be no
assurance that PAR will issue any or all of the permits for which such
subsidiaries have applied.
The Company may be subject to penalties if PAR or other Polish regulatory
authorities determine that all or part of the Company's ownership and operating
structure violates Polish regulatory restrictions on foreign ownership. The
Company would also be subject to penalties if PAR chooses to take action against
it for operating cable television networks in areas not covered by valid
permits.
Any such actions by PAR or other Polish regulatory authorities would have a
material adverse effect on the Company's business, financial condition and
results of operations.
TELEVISION ACT
THE POLISH NATIONAL RADIO AND TELEVISION COUNCIL. The Council, an
independent agency of the Polish government, was created under the Television
Act to regulate broadcasting in Poland. The Council has
22
regulatory authority over both the programming that cable television operators
transmit over their networks and the broadcasting operations of broadcasters.
REGISTRATION OF PROGRAMMING. Under the Television Act, cable television
operators must register each channel and the programming, which will be aired on
that channel with the Chairman of the Council prior to transmission. In general,
the Chairman of the Council will refuse registration of programming if:
- the applicant is not legally entitled to use the cable network over which
the programming will be distributed (i.e., does not have a PAR permit
covering the network);
- the broadcasting of the programming in Poland would violate Polish law,
including provisions of the Television Act governing sponsorship,
advertising and minimum Polish and European content requirements for
programming broadcast by Polish broadcasters; or
- the transmission of the programming over the cable network would violate
the Television Act or other provisions of applicable Polish law.
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 PAR permits. 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 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 and applicable
Polish regulatory restrictions provide that the majority of the management and
supervisory boards of any broadcaster company holding a broadcasting license
must be comprised of Polish citizens residing in Poland. Companies that engage
in broadcasting in Poland are required to obtain a broadcasting license from the
Chairman of the Council under the Television Act. The Council may revoke a
broadcasting license for, among other things:
- violations of the Television Act;
- violations of the terms of the broadcasting license; or
- violations of restrictions on foreign ownership of broadcasters.
If the Polish regulatory authorities were to conclude that the Company's
ownership or distribution structure is not to in compliance with Poland's
regulatory restrictions on foreign ownership, the Company could be forced to
incur significant costs in order to bring its ownership structure and
distribution system into compliance with the applicable regulations and the
Company may be forced to dispose of its ownership interests in various entities.
These regulatory restrictions may materially adversely affect the Company's
ability to enter into relationships with other entities that produce, broadcast
and distribute programming in Poland, which in turn would have a material
adverse effect on the Company's business, results of operations and financial
condition.
REQUIREMENTS CONCERNING PROGRAMS BROADCAST FROM OUTSIDE OF POLAND AND THEIR
POSSIBLE IMPACT ON THE COMPANY. 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
23
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. The Council has not officially adopted an
interpretation of this issue. While there have been no court rulings on this
issue, a subsidiary of Canal+ has filed suit against HBO Polska Sp. z o.o. and
certain Polish cable operators (including subsidiaries of the Company) alleging
violations of the Television Act. See "Item 3. Legal Proceedings."
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 entities involved in the process
described in the preceding sentence, as well as the operating strategy discussed
above, 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.
The Company could become subject to significantly increased regulations and
restrictions with respect to its business in the event that the Polish
regulatory authorities were to:
- determine that Polish regulations apply to the satellite broadcasting of a
program directed at a Polish audience, if the transmission is made by a
foreign broadcaster from outside of Poland;
- determine that the ownership and operation structure that the Company has
implemented with respect to the development, production and transmission
of programming across its cable networks and its D-DTH system does not
comply with applicable regulations regarding the ownership and operation
of Polish broadcasters and cable operators;
- determine that an entity which produces or assembles programming entirely
in Poland, and which provides such programming to a third-party for
transmission from abroad is a broadcaster for purposes of the Television
Act;
- undertake to regulate the D-DTH market in general or by attempting to
impose standards on encryption technology or integrated reception systems;
- adopt regulations specifying requirements for Polish or European content
of programs of distributed by non-Polish broadcasters through cable
networks or D-DTH systems in Poland; or
- change the 1989 European Convention of Transfrontier Television so that
Poland would be able to waive the protection of freedom of reception of
programs broadcast from outside of Poland by foreign broadcasters in order
to avoid Polish broadcasting regulations.
Such a determination or determinations could require the Company to:
- secure additional licenses from the Chairman of the Council and permits
from PAR;
- modify the nature and content of its programming;
- pay fines or other penalties for lack of compliance with these
regulations; or
- comply with Polish regulations governing the production and transmission
of programming across cable networks and across a D-DTH system.
The burden of complying with any such future regulations or any failure to
so comply could have a material adverse effect on the Company's business,
results of operations and financial conditions.
24
COPYRIGHT PROTECTION
PROTECTION OF RIGHTS OF POLISH AUTHORS AND PRODUCERS OF
PROGRAMMING. Television operators, including cable and D-DTH operators, in
Poland are subject to the provisions of the Polish Copyright Act, which governs
the enforcement of intellectual property rights. Polish copyright law
distinguishes between authors, who are the creators of programming, and
producers, who acquire intellectual property rights in programs created by
others. In general, the holder of a Polish copyright for a program transmitted
over the cable networks of a cable television operator or the system of a D-DTH
operator has a right to receive compensation from such operator or to prevent
transmission of the program.
The rights of Polish copyright holders are generally enforced by
organizations for collective copyright administration and protection such as
Zwiazek Autorow i Kompozytorow Scenicznych ("ZAIKS") and Zwiazek Artystow Scen
Polskich ("ZASP"), and can also be enforced by the holders themselves. In
practice, the compensation paid to the holder of a Polish copyright on
programming that is transmitted over a cable television system is usually set by
contract between collective rights organizations such as ZAIKS and ZASP and the
individual cable television operator or D-DTH operator. Most of the Company's
cable subsidiaries operate under a contract with ZASP and all of its cable
subsidiaries operate under a contract with ZAIKS. In the event that a cable or
D-DTH operator transmits programming in violation of a Polish copyright, either
the copyright holder or the collective rights organization which the copyright
holder is a member of may sue the cable or D-DTH operator for an injunction
preventing further violations or an accounting for profits or damages. In
addition, a violation of the Copyright Act by a cable television operator also
constitutes a violation of the Communications Act and of the operator's permits.
See "--Communications Act" for a discussion of the penalties and consequences
associated with violations of the Communications Act and of a television
operator's permits.
PROTECTION OF RIGHTS OF FOREIGN AUTHORS AND PRODUCERS OF
PROGRAMMING. Foreign authors of programming receive protection under the
Copyright Act for programming that is either:
- originally published in Poland;
- originally published simultaneously in Poland and abroad; or
- originally published in Polish-language form.
In addition, foreign authors of programming receive Polish copyright
protection under the terms of the Berne Convention of 1886 as amended in Paris
in 1971 (the "Berne Convention"), which was adopted by Poland in 1994.
Under the Berne Convention, authors of programming located in other
signatory countries must be extended the same copyright protection over their
programming that Polish authors receive under the Copyright Act. Polish cable
television operators must thus make copyright payments to foreign authors
holding copyrights in programming that is transmitted over the cable networks of
such operators. The Berne Convention, however, does not grant any protection to
foreign producers of programming.
Poland has adopted the Rome Convention, which extends copyright protection
to programs of foreign producers. Poland became bound by its terms on June 13,
1997. The Company currently makes copyright payments to the foreign programmers
requiring these types of payments, such as CNN, Eurosport and the Cartoon
Network.
ANTI-MONOPOLY ACT
Competition in Poland is governed by the Anti-Monopoly Act. The
Anti-Monopoly Act established the Anti-Monopoly Office which is responsible for
the detection and regulation of monopolistic and other anti-competitive
practices. The current Polish anti-monopoly laws with respect to the cable,
D-DTH and programming industries are not well established, and the Anti-Monopoly
Office has not articulated
25
comprehensive standards that may be applied in an antitrust review in such
industries. In general, the Anti-Monopoly Act prohibits such anti-competitive
arrangements and practices as:
- monopolistic agreements;
- abuse of dominant market position;
- price-fixing arrangements;
- division of market arrangements; and
- creation of market entry barriers.
If detected, the Anti-Monopoly Office may deem agreements which embody or
employ such practices, as null and void. A finding by the Anti-Monopoly Office
that the Company's past, present or future operations, agreements or strategic
actions constituted violations of the anti-monopoly laws could adversely impact
its business, strategy, financial condition or results of operations.
EXCLUSIVE PROGRAMMING AGREEMENTS. An important factor in determining the
commercial value of programming which is distributed by a cable or D-DTH
operator is whether such programming is widely available or if such programming
is only available on a limited or exclusive basis. Many of the programming
agreements that 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. Although the Anti-Monopoly Act does not preclude an
enterprise from occupying a dominant market position, any activities by such
enterprise is subject to detailed scrutiny by the Anti-Monopoly Office. Market
dominance is often defined as a company's ability to act independently of
competitors, contractors, and consumers. Companies that have 40% or more of the
market share of the relevant market and do not face significant competition are
usually deemed to have market dominance, and therefore face greater scrutiny
from the Anti-Monopoly Office. The Anti-Monopoly Office has been granted the
power to review a company's past and present activities, including its pricing
policies, for potential anti-competitive behavior.
PRE-NOTIFICATION OF TRANSACTIONS. The Anti-Monopoly Act requires parties to
certain types of transactions to notify the Anti-Monopoly Office prior to the
consummation of the proposed transaction. Pursuant to the current interpretation
of the Anti-Monopoly Office, transactions between non-Polish parties affecting
market conditions in Poland may also require notification to the Anti-Monopoly
Office. Sanctions for failure to notify the Anti-Monopoly office include the
imposition of fines on parties to the transaction at issue. The Company believes
that it may be required to obtain the Anti-Monopoly Office's approval for future
acquisitions, but the Anti-Monopoly Office may not approve the Company's future
acquisitions and dispositions.
RECENT ANTI-MONOPOLY OFFICE FINDINGS WITH RESPECT TO THE COMPANY AND ITS
SUBSIDIARIES. From time to time, the Company receives inquiries from and is
subject to review by various divisions of the Anti-Monopoly Office. The
Anti-Monopoly Office recently issued a decision that PCI, the Company's major
cable operating subsidiary, had achieved a dominant position and abused that
dominant position in one of the areas in which it operates by moving certain
satellite channels to a different frequency. A
26
number of PCI's subscribers, whose television sets are not equipped to receive
the new frequency, received several different channels to replace the channels
which had been moved. The Company appealed both the finding of dominance and the
finding that PCI acted improperly by moving certain channels to another
frequency. The Anti-Monopoly Court modified the Anti-Monopoly Office's decision
by ruling that PCI had abused its dominant position by moving certain channels
to the new frequency without termination of its agreements with subscribers
whose television sets are not equipped to receive the new frequency. The
Anti-Monopoly Court did not impose a fine on the Company or its subsidiaries.
The Company estimates that less than 1% of its subscribers in the area under
review have such television sets and would be affected by the ruling if, in the
future, the Company finds it necessary for technical reasons to move channels to
another frequency. The Company is appealing both the finding of dominance and
the finding that the Company must terminate some of its agreements with certain
subscribers before moving channels to another frequency.
In another market, the Anti-Monopoly Office recently issued a decision that
PCI had achieved a dominant position and abused that dominant position by: (1)
failing to create a uniform system for customer complaints, (2) increasing rates
without providing subscribers a detailed basis for the price increases, and (3)
changing the programming line-up without sufficient notice to subscribers. The
Anti-Monopoly Office did not impose a fine in connection with its decision. The
Company is appealing both the finding of dominance and the finding that it acted
improperly in its relations with subscribers.
In another market, the Anti-Monopoly Office recently issued a decision that
PCI had achieved a dominant position and abused that dominant position by
issuing to subscribers an offer for the extended basic package in a certain
form. The Anti-Monopoly Office imposed a fine of 26,700 zloty (approximately
$7,600 at the December 31, 1998 conversion rate). The Company is appealing the
fine, the finding of dominance, and the finding that the form of its offer to
subscribers was improper.
UNITED KINGDOM
BROADCASTING REGULATION
All of the channels in the Company's D-DTH service are or will be regulated
by U.K authorities (primarily the Independent Television Commission) as
satellite television services ("STS"). Under the U.K. Broadcasting Act 1990 (the
"Broadcasting Act"), satellite broadcasters established in the U.K. are required
to obtain an STS license. The Company has received an STS license for Atomic TV,
Wizja 1, Twoja Wizja, Wizja Sport, and Wizja Pogoda. For most of the other
channels on Wizja TV, the relevant channel supplier is required to obtain an STS
license from the Independent Television Commission. The Independent Television
Commission has wide discretion to vary the conditions of licenses issued under
the Broadcasting Act or amend its codes (including codes on electronic
programming guides, advertising and content) to which U.K.-licensed broadcasters
are subject. Under the terms of its Astra transponder agreements, the Company
cannot carry programming if the channel supplier does not have a valid broadcast
license for that programming. An STS license is issued for an initial period of
10 years but can be renewed.
The Independent Television Commission has issued a direction to all STS
license holders following its investigation into competition issues relating to
the practice of channel bundling in the U.K. and has concluded that a number of
anti-competitive factors exist in the current pay television market which
restrict viewer choice. Under the direction, STS licensees are not allowed (in
specified circumstances) to:
- maintain or enter into certain agreements which contain minimum carriage
guarantees (where the licensee is required to carry the channel to a
minimum percentage of subscribers); or
- maintain certain tiering obligations (where the licensee requires a
channel to be included in a certain tier) or arrangements with similar
effects.
27
The Independent Television Commission has not explicitly prohibited the
practice of requiring subscribers to buy basic channel packages before being
allowed to buy premium channels. However, it is requiring licensees to permit
subscribers to buy all available premium channels available from any basic
package. The Company believes that the Independent Television Commission will
not apply the direction to the channels in the Wizja TV package.
The Broadcasting Act classifies some persons as "disqualified persons" who
are not permitted to hold STS licenses, including (A) any bodies whose objects
are wholly or mainly of a political or religious nature and advertising
agencies, or (B) any person owned 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 European Union's ("EU") Television Without
Frontiers Directive which provides that each EU broadcaster should be regulated
primarily by the authorities in the member state of the EU where that
broadcaster is established, without regard to the country or countries within
the EU in which its 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 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 would invariably have
the power to regulate a broadcaster whose services are intended to be received
in that state.
REGULATION OF COMPETITION
Today, U.K. law controls agreements which affect competition through the
Restrictive Trade Practices Act 1976 (the "Restrictive Trade Practices Act"),
resale price maintenance through the Resale Price Act 1973 (the "RPA")
monopolies and mergers through the Fair Trading Act 1973 (the "Fair Trading
Act"), and unilateral anti-competitive practices through the Competition Act of
1980 (the "CA"). The Company 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
Restrictive Trade Practices Act, the RPA, the CA or Fair Trading Act.
A new Competition Act which substantially reforms U.K. competition law,
replacing most of the current legislation except the Fair Trading Act was given
royal assent on November 9, 1998. Under this act, companies have until March 1,
2000 to prepare for the new regime to come into effect. The new regime will
introduce provisions based on Articles 85 and 86 of the EC Treaty and will give
the U.K. authorities broad investigative powers. For a more detailed description
of Articles 85 and 86, see the discussion in "European Union--Regulation of
Competition" that follows.
EUROPEAN UNION
BROADCASTING REGULATION
TELEVISION WITHOUT FRONTIERS DIRECTIVE. The Television Without Frontiers
Directive sets forth the following basic principles for 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
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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 At Entertainment Limited 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. The Directive does not define
the term "where practicable and by appropriate means" and the European
Commission has been receiving comments on the interpretation of this
Directive.
- Each member 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 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. In addition to the
Television Without Frontiers Directive, the 1989 European